An Introduction To Company Law in Malawi

University of
Malawi
I
l "U4-"
INTRODUCTION
I^"^r*;
a)
TO COMPANY LAW IN MALAWI - 1
An lntroduction
il
I to
Company Law
{
in
Malawi
^t
,t l' I
'-.iF'/.( -- /
',,I
CH Chilumpha, LLB, PhD

Head of Business Studies Department and Dean ol the Faculty of Commerce
Published by:
lnterlink Trade cc
University of Malawi
\
AN INTFODUCTION TO COMPANY LAW IN MALAWI
TO COMPANY LAW IN MALAWI
Directors' duties /0
Contents Directors' remuneration
Remedies against directors
.... ...' . 7B
80
Loan to directors 81
Preface The board of directors. 82
Termination of aPPointment . . 83
Table of cases
6 Company officers ({1,
I
CHAPTER The Company Auditor. '-' .
.
87
The Company Secretary 90
The Company Manager 90
1 The formation of a comPanY
Promoters 12
lncorporation. . . . . . . . 17
7 CompanY liabilitY
Classification of comPanies 19 92
Liability through directors' acts ' .
24 9B
The filing of documents. Liability through the company secretary's acts
Liability through the company manageds acts 99
2 The constitution of a company
The Memorandum of Association ' . ' 27
33
8 Enforcement of controllers' and directors' duties and minority
Alteration of the Memorandum
Articles of Association. . . . . . . .
Relation of Articles to the Memorandum
38
38
F; protection
The rule in Foss v Harbottle
Common law excePtions. . . ' .
101
102
Effect of the Articles 39 103
Statutory excePtions
Alteration of Articles 40
r(- \
i'y finance- Share capital
9 Company
3 The legal status of a comPanY
Corporate personalitY 43 ;+l
'\-)'
"
Share.
EL-'..*i-..
:tr' ' 110
111
45 lssue and allotment of shares
Lifting the corPorate veil 112
Share distinguishing number
r+
ta Slrare certificate 112
4 The management of a company
com ( / Share warrant 113
CompanymembershiP "" 49
113
"""' Share trust
Companymeetings 51
Classification of shares 114
Noticeatgeneral meetings """' 53
119
meetings '''' ' 56 Transfer of shares
Persons entitled to attend general 120
Proceedings at the generai meeting 57 Transmission of shares bY law
121
Offering shares to the Public
I
Directors ..'...;.
Considerationforshares ..... 127
ffi:,ilH1l-:::::: rr i! \t2'
'tt'l ----
67
'Fi
10 Maintenance of share capital 'ti
Alternatedirectors ...."" 69 ',
Prohibition of the return of capitalwhile the company is a going
Registerof directors """ 70 concern
AN INTRODUCTION TO COMPANY LAW IN MALAWI AN INTRODUCTION TO COMPANY LAW IN MALAWI -t!
Prohibition of financial assistance by a company for the purchase of A scheme involving reconstruciion or amalgamation 1gti
its shares 132 An arrangement between a company and its members under section 263 . 198
Prohibition of a company's acquisition of its ovrn shares 134 An arrangement between a company and its creditors under section 266. . 199
Redemption of redeemable shares 135 Directors Compensation . . . 200
Payment of commission or discount on shares 136 A take-over under section 201 2C1
Application of share premiums 139
Payment of dividends 140 15 Winding up and dissolution of a registered compan I
Reduction of share capital 143 Compulsory winding up by the court 208
,t" - Voluntary winding up by members . . . 219
11 Company finance- Loan capital q- ' Voluntary winding up by creditors. . . ?-23
Powertoborrow ....). 149 Special provisions for the protection of creditors'
Debentures and debenture stock 150 and members'interests 224
The issue of debentures . . . 150 Liability at members to contribute towards the settlement of debts . . ' ' . 235
The debenture trust deed . 151 Dissolution of a registered company 235
Liability of the trustees . . . 152
Classification of debentures . . . 152 15 Externalcompanies
The issue of debentures at a discount 156 Pegistration requirements. . . . . 240
Security for debentures. . . 157 Obligation to state name. 241
Registration of charges 161 Regulations as to localdirectors 242
Priority of charges 162 Accounting records and accounts . . . 243
Satisfaction of a charge 165 Registration of charges 244
Remedies for debentureholders 166 Public invitation {or debentures and shares 244
Cessation of business. 245
12 Company accounting records, accounts and financial reports i. j.ln Notification of winding uP . . . 245
'^175 246
Keeping accounting records Windingup...
Accounts 176 l
The directors' report 178

The company auditor's report 178 lndex 248 I
Circulation of accounts and reports 180

The annual return . 180
13 Company taxation
Filingof thecompanyconstitution.... .. 183
Thecompanypublicofficer. .....183
Returns ...184
Payabletax... ...185
Shareholders who are absent from Malawi . . . . ...... . 188
14 Schemes of arrangement and take-overs
A scheme of arrangement or compromise under section 198 . . . 190
.ur,{ \
6 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
DeBuschevAlt. """' 100
Table of Cases DerryvPeek.

DiamondvOreamuno
""
""'
130
75
Dimbula Valley Tea Co Ltd v Laurie ""' 141
DixonvKenniwaY&Coltd ""' 112
ACompany,Re(1983).. -.'..'.106 DoveyvCory ""' 72
AOompany,Re(1983).. ---"" 107 DuncanGilmour&Coltd,Re... """' 38
ACompany,Re(1984).. .......210
Allen, Craig & Co Ltd - ' '. 179 EbrahimivWestbourneGalleriesLtd... """' 1O7
AmmoniaSodaCoLtdvChamberlain ....- 142,215 Eddystone Marine lnsurance Co Ltd, Re . " " ' " 127
Andreae v Zinc Mines of Great Britain . . . 139 EldervElder. '"' 105

Anglo-African Shipping Co LtdvDharrap. ..... ' 194 EleyvPositiveGovernmentSecurityLifeAssuranceCoLtd " ' ' ' ' ' ' ' ' 39
Automatic Bottlemakers Ltd, Re ' ' 164 enjtisn, Scottish & Australian Chartered Bank, Re ' '' 195' 197'220
Automatic Self-Cleansing FilterSyndicatev Cunninghame. . .'. . 61 Ertinger v New Sombrero Phosphates 13' 14
EstmincoLtdvGreaterLondonCouncil """' 103
Baille v Oriental Telephone Company Ltd . . 102,208

BainbridgevSmith ......' 69 Foss v Harbottle 101,102,108
Barronvpotter .64,67
Bechuanaland Exploration Co Ltd v London Trading Co Ltd ... . 156 GeneralAuctionEstateLtdvSmith ""' 215
BedeSteamShippingCoLtd,Re... .'..129 GethingvKilner " 191
Benjamin Cope & Sons Ltd, Re . . . 163,216
Gilford-MotorCoLtdvHorne ""' 46
BisgoodvHendersonTransvaal Estates Ltd... .. ' '... 199
GlucksteinvBarnes """ 13
Bolton&CoLtdvGraham&SonsLtd... .."...93 Goy&Coltd,Re... "" 154
BondvBarrowHaematiteSteel . ...115,215 Greymouth-PointElizabethRailway&CoalCoLtd, Re' ' ' ' " ''' 75
Booth v New Afrikander Gold Mining Co Ltd . . . . 138 " " ' 202
Grierson, Oldham & Adams Ltd, Re
Boston Deep Sea Fishing Co Ltd v Ansell .. . 73,211
Brazilian Rubber Plantations & Estates Ltd, Re . ' ' 71 105
....'. Harmer Ltd, Re
British&AmericanTrusteeCorporationvCouper 146
Hedley Byrne & Co Ltd v Heller & Partners Ltd
.. 130
Brown v British Abrasive Wheel Co Ltd . . ' . . 40, 103 93, 95, 97
.....2O3 Hely-Hutchnison v BraYhead Ltd ' '
BuglePressltd,Re Hickman v Kent
39
ButlervBroadhead.... ..225 137
Hilder v Dexter
145,207
. 201 Holders lnvestment Trust Ltd, Re. ' '
Carlton Holdings Ltd, Re . 83
Holdsworth & Co Ltd v Caddies
Carruth v lmperial Chemical lndustries Ltd . . 52,197 58
.... 211 Horbury Bridge Coal, lron & Wagon Co Ltd, Re ' ' '
Centraf Associates Ltd, lnThe Matterof ... 97
. . . '144 Howard v Patent lvory Manufacturing Co Ltd
Chatterley-Whitfield Collieries Ltd, Re
ChoppingtonCollieriesLtdvJohnson .... ...... 54 159,168, 174
CityEquitable Fire lnsuranceCoLtd, Re... ..... 70 lndefund v Manguluti & Manguluti
73
CollenvWright ....80 lndustrial Development Consultants Ltd v Cooley
84
CookvDeeks ....103 lron ShiP Coating Co Ltd v Blunt
8 - AN INTFODUCTION TO COMPANY LAW IN MALAWI AN INTRODUCTION TO COMPANY LAW IN MALAWI - 9
JohnShaw&SonsltdvShaw. ...62 Parker-KnollLtdvKnoll lnternationalLtd ........ 30

PatridgevRhodesiaGoldfields ..154
Kumchenga lndustries Ltd, lnThe Matterof ... ... 174,210 Pendervlushington.... "."." 63
Kushlerltd,Re ...230 PercivalvWright "' 76
Potters Oils, Re ." 231
Labellndustries Ltd v SEDOM 16, 158
Leeds & Hanely Theatres of Variety Ltd, Re . . . . . 14
Lennards' Carrying Co Ltd v Asiatic Petroleum Co Ltd 48,92 RafsanjanPistachioProducersCo-operativevRice ..... 46
London Pressed Hinge Co Ltd, Re .... .. 168 RhyfieldvHands ...39
LongmanvBath ElectricTramways Ltd... ..... 120 Regal(Hastings)LtdvGulliver --..73
RepvJack&Ferret ..'...49
Ltd
Macaura v Nodhern Assurance Co .. . 43 Richmond Gate Property Co Ltd, Re . . . - . .. 78,211
MaceBuildersvlunn ...:.. ....228 Roith(W&M),Re ".'.".72
.......169 Rolled Steel Products Holding Ltd v British Steel Corporation. . . . 94
Makinsvlbbotson Royal British Bank v Turquand ' 77,97
Mapanga Estates Ltd, ln The Matter of . . . . 108,211 ....
Marquisof Bute'sOase,The .....71 RubenvGreatFingallConsolidated..... 93' 95
Mdinde Estate Ltd v Commercial Bank of Malawi Farm Services Ltd. . 171,174
MetalimpexvAGLeventisCoLtd .......63 SaltervleasHotelOoltd... ".169
Metropolitan Coal ConsumersAssociationvScrimgeour . . . . . . 139 Savoy Ltd, Re 163, 194, 197,207,220
MeuxBreweryCoLtd,Re... ....144 ScottishCo-operativeWholesaleSocietyvMeyer.'....'105
MiddlesboroughAssembly RoomsCo Ltd, Re... ...... 210 seddonvNESalt """' 124
MorrisvKansen ...95 SEDOM v Gep Shoe Co Ltd & lndefund . . . 164,217
MosleyvKofyffontein.... ...... 157 ShearervBercain .....140'214,215
MoxhamvGrant ....131,215 Shuttleworth v Cox Bros & Co Ltd ' . . 39' 212
Musselwhite v CH Musselwhite & Son Ltd 55, 65, 114 SidebottomvKershawLeesCoLtd... '..:.....41
Smith & Fawcett Ltd, Re ' . 129
Naidoo v Mazi lmport & Export & Tchongwe 43 SmithLtdvAmpol PetroleumLtd... .'...73
Nali Farms Ltd & Kholomana v National Seed Company of Malawi . . . . . 15 Smith, Stone & Knight Ltd v Birmingham Corp. . . . 47
NationalBank, Re 191 Societe Generale de ParisvTramways Union Co Ltd... ...... 114
NFU Development Trust, Re 193 Spearhead Enterprises Ltd, lnThe Matterof '... .. 196, 199
Nyasaland Civil Servant Co-operative Society Ltd, Re 220 Spencerv Kennedy . . 69' 208
Steenvlaw .....133
Old Silkstone Collieries Ltd, Re . . 145 Sussex Brick Co Ltd, Re . . . . 168,203
Ooregum Gold Mining Co of lndia v Roper .... . 136 Syston &ThurmastonGas, Light&CokeCoLtd. - - .... 115
OxfordBenefitBuildinglnvestmentSociety,Re... ..... 141
Nattrass
Tesco Supermarkets Ltd v 45, 92' 99
PacayaRubber&ProduceCoLtd,Re... ......124 TiessenvHenderson.... 53'54'193
Palmer's Decoration & Furnishing Co Ltd, Re ... ...... 155 Transvaal Lands Co Ltd v New Belgium Co Ltd . ' ' 74
Panorama Development Ltd v Fidelis Furnishing Fabrics Ltd . . . . . ., . . . 98 TrevorvWhitworth ...... 134
Parker&CoopervReading ......60 Twycross v Grant 12
1O - AN INTRODUCTION TO COMPANY LAW IN MALAWI AN INTRODUCTION TO COMPANY LAW IN MAI AWI lt
UnangoEstatesLtd&ChigambavMichael
Underwood Ltd v Bank of Liverpool& Martin Ltd . . .
.....174
. . 44,98
W^ T'.'-,1ulu-
UnitConstruction Co LtdvBullock..... ........ 47 F. t' - E'',,y F:t p 7
WallvExchangelnvestmentCorp. ......57 L!1.*-,,J'7,,:.
WallvLondon&NofthernAssetsCorp. ........56 Preface ' ( iJc G'ld
WallersteinervMoir(No. 1) ...... 46
WallersteinervMoir(No.2) .....132
WebbvShropshireColtd ......156 When this book was first published, the overriding idea was to provide a basic
WeltonvSaffery ..136 introduction to company law in Malawi to University and Malawi College of
WestCanadianCollieriesLtd,Re ........55 Accountancy students in the light of the Companies Act, 1984. Because of that,
WheatleyvSilkstone & Haigh MoorCoalCo Ltd ....... 163 many matters of detail and style were considered unimportant. However it has
WhitelayvChallis .......169 become clear in the course of the book's usethat itcannotcontinue in its original
Woodroffes (Musical lnstrumenls) Ltd, Re . . 159,216 form- both in terms of content as well as layout. And it is for this reason that less
WorcesterCorsetryLtdvWitting ........67 than a year on, I have decided to have it reprinted.
Wragg Ltd, Re 127,214
ln this reprint three major changes have been introduced. First, is the omission
Yorkshire Woolcombers Association, Re. ... . 136, 158, 163 of any reference to the ultra vires doctrine. lt is my view that the doctrine is a
historical relic which is of impofiance only to students of legal history. Conse-
quently I believe that there is no justification to continue devoting space to it in
a modern company law text book like this one. Second, major parts of chapters
5, 6,7 ,8, 9, 10, 12-14 have been rewritten. ln fact whole chunks have been
expunged from chapter 12. This is because in the light of my book entitled
COMPANY ACCOUNTING LAW lN MALAWI, I feel that they need no longer be
part of this book. And lastly, footnotes, an index and a preface have been added
to the book. The result therefore is that the book is now better than when
originally presented to the reader.
Having said that, let me take this opportunity to express my gratitude to RPC for
financially supporting production of this edition. I am also greatly indebted to
Ralph Mhone (Assistant Company Secretary for Brown & Clapperton) for
drawing my attention to matters which I had overlooked in the first publication.
Special mention should also be made of to my third year students over the last
three academic years for contributing in no small measure to the evolution of this
book.
O{ course although I share the pleasure of producing the book with all these
people, any shortcoming in the exposition of the law is entirely mine.
CHC, Chichiri, July, 1991
."4
12 _ AN INTRODUCTION TO COMPANY LAW IN MALAWI
(tt \
Chapter One
The Formation of a Company

Just like a co-operative and a partnership, a company is a means through which
business is carried on. The reason tor choosing it rather than the f irst two, is the
desire (inspired by advantages, such as limited liability, which will emerge in
later chapters of the book) to carry on the business through an organisation
which has an independent personality. ln other words, the idea behind the
choice will be to have the business run by an organisation which is distinct f rom
its own membership and management and which, therefore, trades in its own
right.
Such a business entity has been recognised for many years. The law not only
allows its creation but also confers on it the capacity of a natural person. As
shown more fully in Chapter 3, an incorporated company has perpetual
succession. Besides, subject to limitations inherent in its corporate characier,
it has full legalcapacity to employ and dismiss people, buy and sellgoods and
services, contract debts and other forms of legai liability, and own property of
all kinds. Moreover, it can be bought and sold.
1.1 Promoters
Persons who are forming a company occupy a very crucial position vis-a-vis the
nascent company. They will hold money or property for it; make statements in
respect of rnvitations for its shares and debentures; acquire property for its use
after incorporation and enter into transactions for its benef it. Undoubtedly these
activities create opportunities for the abuse of that position. And to prevent that
abuse, both the Companies Act and the common law impose duties on any
person who can be described as a'promoter'of a company.
Now although the Act uses the word 'promoters' in Sections 60(4), 173(2) (c)
(ii)and299 (1), itdoes notdefinetheword. However, atcommon law, apromoter
is the person who takes or participates in taking, steps necessary for the
formation of a company and to set it on its feet. As Cockburn C.J. said in
Twycross v Grant (1877):
AN INTBODUCTION TO COMPANY LAW IN MALAWI - 13
"A promoter ... is one who undertakes to farnr a company with reference to a
given praject and to set ii going, and who takes the necessary steps to
acco mpl i sh th at pu rpos e". ttl
Similarly, in the case of Erlanger v New Sombrero Phosphates Co. (1878)

Lord Cairns L.C. said:
"[Promoters] have their hands in the creation and rnoulding of the company;they
have the power cf defining how, and when, and in what shape, and under what
supervision, it shall start into existence and begin to act as a trading corpora-
tion". r2t
ln other words, a promoter wili conceive the company and its business, find
directors for it, make invitations {or its shares, pay its preliminary expenses and
do other things to ensure that it is ready to operate immediately after incorpo-
ration. He may later become either director or member of the company. Of
cgurse a legal practitioner who handles legal technicalities of the formation
process is not a promoter. This is because he is employed and paid to do that
job. On the other hand, the person who engages him will be a promoter.
1.1.1 Duty not to make secret prolits

A promoter owes a fiduciary duty to the company he is forming. As a result of
that duty, he is not allowed to make any secret profit from any transaction
between him and the company. lf he makes such a profit, he must disclose it to
an independent board of directors or to the company's existing and future
shareholders. Should he failto do that, the company can compel him to account
for the profit to it. in the case of Gluckstein v Barnes (1900)t31 a syndicate
bought property for t140,000 and resold it at e 1 80,000 to a company which had
been formed by the syndicate to purchase the property. A prospectus issued by
the company disclosed the sum of f40,000 earned on this sale as the only profit
made by the syndicate on the deal. lt tailed, however, to disclose that a further
profit of t20,000 had been made by the syndicate from the sale of charges on
the property which it had earlier bought at a discount and for which it was repaid
in full out of the t140,000 paid for the property. lt was held that the syndicate was
bound to pay to the company the secret profit of !20,000.
lf the profit is made from a sale by the promoters to the company, the latter will
also be entitled to rescind the contract of sale. This will involve refund of the
purchase price and return of the property sold. ln the case of Erlanger v New
1,
14 - AN INTROOUCTION TO COMPANY LAW IN MALAWI
Sombrero Phosphates Co. Ltd. (1826;trl the appellants formed a syndicate

which bought the lease of an island at f55,000. Subsequently, the syndicate
created a company to which it resold the lease at t1 10,000. No disclosure was
made of the profit made by the syndicate on the deal. lt was held that the
company was entitled to rescind the contract of sale.
Lastly, the promoters may also be sued by the company for damages for breach
of their fiduciary duty. This is illustrated by the case of Re Leeds and Hanley
Theatres of Variety Ltd. (1902;tst. ln this case a company acting through its
nominee, bought hallsfort24,000with the intention of re-selling them to another
company which it was intending to form. When this company was formed, the
halls were sold to it at e75,000. A prospectus was later issued by the new
company which showed the nominee as the seller oJ the halls but did not
disclose the first company's interest in the sale or the profit made out of the I
transaction. lt was held that because of the failure to make the disclosure, the I
first company was in breach of its fiduciary duty for which it was liable to pay
damages to the second company.
It should be noted that the fiduciary duty exists as long as the promotion
continues. ln other words, it will not cease simply because subsequent to the
commencement of the promotion but before its completion, the p.romoter
becomes director or member of the company. Similarly, if the process includes
the setting up of the company as well as procurement of its working capital, the
duty may continue even after the company has been incorporated.
1.1.2 Liability under pre-incorporation contracts

Apart f rom breach of the fiduciary duty, a promoter may also be liable because
of what are called 'Pre-incorporation Contracts'. These are contracts entered
into on behalf of a company not yet formed to procure some of the things such
as premises, office equipment and vehicles, which it will need to operate after
incorporation. Since the company will be non-existent at the time of such a
contract, it will obviously not be a party to the contract. Therefore, applying the
general principles of contract law, it cannot sue or be sued under the contract. J
This is re-enforced by the law of agency which states that where a person
purports to enter into a contract on behalf of a principalwho is non-existent, the
latter cannot, on coming into being, ratify that contract. Consequently, it is that
purported agent who will be liable to discharge the liability created by the
contract.
These principles of law have been incorporated into the Companies Act.
t
_\
AN INTROOUCTION TO COMPANY LAW IN MALAWI
Sectron 20(1) provides that any person who purports to enter tnto a contract in
the name of or on behalf of a company before incorporation will be personally
bound by the contract and be entitled to its benefits. The application of this
provision is illustrated by the case of Nali Farms Ltd & Kholomana v National
Seed Company ot Malawi (1 9Ba1.tot 11.re the second plaintiff who was the sole
owner of Nali Farms bought chilli seed from the defendant. Subsequently, he
formed a company, the first plaintiff of which he was the major shareholder a.nd
director, which took over all the assets of the farm. When the seed turned out
to be defective and caused loss of profit through poor yield, the second plaintitf
sued the defendant for the loss. A preliminary issue which had to be considered
was whether or not the plaintiff company could sue on the contract between him
and the defendant. lt was held that it could not because as Mbalame, J. said:
"[U]p to the time the company has been incorporated it cannot contract or enter
into any other act in law. Even after incorporation it cannot be held liable on or
be entitled under contracts purported to be made on its behalf prior to its
incorporation. lndeed ratification is not possible when the ostensible principal
did not exist at the time when the contract was entered into."
There are, however, two exceptions to this rule which apply to written pre-
incorporation contracts only. First, section 20(4) states that if there is an express
provision in the contract which excludes the liability of the person who con-
cluded the contract on behalf of a company before its incorporation, then he will
neither be bound by the contract nor be entitled to the benefit of it. Clearly, this
gives the promoter who is negotiating a contract on behalf of a company which
he intends to form a strong incentive to insist on the inclusion of a clause in the
contract terminating his liability, preferably as soon as the company is incorpo-
rated. The effect of that clause will be to put the company in his shoes so that
it is liability as if the contraci had been concluded by it. Second, under Section
20(2), a company is allowed to adopt a written contract concluded on its behalf
before it came into existence. Of course the contract must be adopted within a
reasonable time after the company's incorporation. The adoption may be
express or implied frorn conduct which signifies intention on the part of the
company to be bound by the contract.
There is, however, one disadvantage here. For, although one of the conse-
quences of the company's adoption of the contract is to release f rom liability the
promoter who concluded it on the company's behalf, the other party to the
contractcan havethatliability re-instated. Section 20(3)givesthe partythe right
to apply to court for an order which either:
(a) makes the company and the promoter jointly and severally liable for the
contract or
(b) apportions liability for the contract between the company and the
promoter.
Thus, it will be clear that the only way whereby a promoter can conclusively
escape liability for a contract concluded on behalf of a company which he is
promoting is to have a dause inserted in the contract which terminates his
liability under the contract as soon as the company comes into existence.
It should be noted that section 20(1) applies to a contract concluded by a

promoter on behalf of a company which is not yet incorporated. lt is not
concerned with a contract negotiated by him and concluded by the company
immediately after its incorporation. This seems to have been the view of the
High Court in Label lndustries Ltd v SEDOM.Ia There the proprietor of Label
lndustries borrowed K9,000 from the defendant to import business equipment.
However because of a currency devaluation, the money proved inadequate.
Consequently, he approached the defendant for a further K1 1 ,000 which he was
granted on the condition thatthe business should be incorporated into a limited
company. After that was done, the company signed the loan agreement for the
K20,000 adanced. ltwas held thatthe company should be regarded as the other
party to the agreement, and not the proprietor of the then Label lndustries who
had actually negotiated it.
Besides, since subsections (2) and (a) apply to written pre-incorporation

contracts only, where the contract is oral subsection (1)will apply. ln
other words, it will not be possible to exclude the promoter's liability
under the contract nor will the company (after being incorporated) be
able to ratify it. As a result only the promoter who concluded the contract
will be able to sue and be sued under it.
1.1.1.3 Liability under section 299(1)

A promoter may also be subject to civil liability under this provision if in the
course of the company's liquidation, the liquidator or any creditor or member of
the company applies to the court to enquire into his conduct because it appears
that during the formation or promotion of the company, he
(a) misapplied or retained the company's money or property;

AN INTRODUCTION TO COMPANY LAW IN MALAWI 17
(b) became liable or accountable for such money or property;
(c) was guilty of misfeasance or breach of trust or duty in relation to the

company.
lf the wrongdoing is proved, the court can compel him to repay or restore the
money or property or pay such compensation to the company as the court
deems just.
1.1.1.4 Liability by virtue of section 22(1)

As shown in para. 2.1 .2, where a company enters into a contract which is
within any restriction imposed on its business or outside its objects, the
contract can be prohibited by the court on application by any one of the
company's members or holders of a debenture secured by a f loating charge
on the company's assets. Arguably this means that a promoter should not
enter into such a contract. For should adoption of the contract by the
company after its incorporation be prohibited by the court, he may end up
shouldering liability under the contract.
1.1.1.5 Liability for statements in a prospectus

lf a promoter issues a prospectus in respect of the shares or debentures of the
company he is forming, he must ensure that statements made in it are correct.
For as shown in para. 9.'10.2, if they are not he will be subject to civil as well as
criminal liability.
1.2 lncorporation
It must be clear from the opening paragraph of this chapter that a company's
personality is a creature of the law. ln other words, it acquires the personality
through a legal process.
Section 2 of the Companies Act defines a company as a ,company

incorporated under the Act'. As this def inition shows, a company is born
after incorporation under the companies Act. To this end, section 324
of the Act creates the office of Registrar of companies, one of whose
responsibilities is the incorporation of companies.
The incorporation procedure is laid down by the Act itself. section 4 provides
that:
"Anytwo or more persons associated for any lawfulpurpose may by subscribing

the i r name s to a m e mo rand u m of associ atio n and othe rw i se co mpl y i ng w ith th e
requirements of this Act in respect of registration form an incorporated com-
pany".
Thusthe process of incorporation beginswith the memorandum of association.

More is said about it in the next chapter. Here suffice it to say that the
memorandum is the company's constitution which contains rules governing
mostly its corporate structure. This document must be prepared in accordance
with the form in Table B or C of the First Schedule to the Act depending on
whether the company is limited by shares or guarantee.tsl
Thereafter, those who are associating to form the company must subscribe their
names to the memorandum. As Section 4 shows, there must be at least two
subscribers, clearly indicating that a company must have a minimum of two
members. According to Section 7(1), the subscription involves signing of the
memorandum by the subscribers in the presence of a witness who attests each
signature. Once that is done, the memorandum must be delivered to the
registrar for registration tel either on its own or together with articles of
association. A document which must accompany the memorandum is a
statement in the prescribed form which shows:-
(a) the full name, residential and postal address, and the occupation of each
of the company's frrst directors;
(b) the {ull name, resrdential and postal address and the occupation of the
company's secretary; and
(c) the situation and postal address of the company's registered office. tl0l
According to Section 1 4(3), this stalement must be signed by or on behalf of the

subscribers. Besides, it must contain a signed consent to act by the directors
and secretary.
However, these documents will not be deemed to have been delivered to the
registrar for registration unless the appropriate registration fee is paid le Ii6.ttt)
Consequently, they must be accompanied by the fee. The Schedule to the
Companies (Fees) Regulations of 1986 provides that the registration fee for a
company with a share capital together with its memorandum, articles (if any
and all accompanying documents), is K65 plus K35 for the lirst K1 ,000, and
i
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 19
K10 for each additional K2,000, of that capital. On the other hand,for a
company limited by guarantee and all its registration documents, the fee is
a flat figure of K100.
After the company is registered, Section 19(1 1) requires the registrarto assign
to it a'designating number'. This will be used to identify the company if for any
-
reason it has no registered name. The registrar is also required to issue to the
company a certificate of incorporation t12l which will be conclusive evidence that
all the requirements of registration have been complied with and that the
company is duly registered. t131
1.3 Classification of companies

1.3.1 Limited and unlimited companies
A registered company may be limited or unlimited. According to Section 5(1)(c),
an unlimited company has no limit on the liability of its members. What this
means is that if the company is wound up with debts, its members will be
personally responsible to discharge those debts without any limit on their
liability.lnthecaseof alimitedcompanyontheotherhand,theamountof capital
to be contributed by a member to the company is fixed by agreement between
him and the company. As a result, he cannot generally be required to pay
anything towards the company's debts except the fixed agreed amount.
1.3.1.1 Conversion of a limited company to an unlimited company and

vice versa
A limited company can be converted to an unlimited one and vice versa.
Sections 25(1)and 26(1)providethat acompany limited by shares orguarantee
can be converted into an unlimited company. Similarly, an unlimited company
can be converted into a company limited by shares or guarantee. However, for
that to happen, two conditions must be fulfilled. First, all members of the
company must give a written consent to the conversion and the company must
adopt a memorandum and articles appropriate to its new status. Thereafter, the
following documents must be delivered to the registrar:-
(a) the company's certificate of incorporation;
(b) a copy of the new memorandum and articles;
(c) a copy of the special resolution sanctioning the company's adoption of

these two documents; and
20 - AN INTRODUCTION TO COilPAI'lY LAW lN llALAWl
(d) a statutory declai'ation by the company's directors and secretary

conf irming
that the company has fulfilled the two conditions mentioned above.l'nl ,,: i. f
Apparently an unlimited company cannot be converted into a limited one unless
it is solvent on the date of the conversion. Consequently there are two further
requirements in the case of such a conversion. First, the statutory declaration
in (d) must add that the company's directors and secretary are satisfied that the
company is solvent. Second, the four documents listed above must be accom-
panied by a certif icate by the company's auditor(s) certifying that the company
has been investigated, and that it is solvent. ( Jr-
After the registrar receives these documents, he must issue a new certificate
of incorporation to the company which reflects the change of status.
1.3.2 Gompanies limited by guarantee and those limited by shares

The iimit on the liability of company members may take two forms, depending
on whether or not the company has contributed capital. lf it has contributed
capital, the members' liability will be limited by shares. Section 5(1 )(a) provides
that a company limited by shares is one the liability of whose members is limited
to the amount, if any, unpaid on the shares respectively held by them. The most
common way whereby a company raises capital is to issue shares to its
members. Each share is assigned a nominal value which a member may pay
in full or in part. Where acompany is limited by shares, the liability of its members
will be limited to the amount not paid on their shares. Thus,_if they have f ully paid
forthe shares, theycannot, on the company's winding up, be askedto contribute
to the repayment of any debts incurred in its business operations.
But instead of a share capital, a company may simply get a promise from each
member to contribute a fixed amount, if necessary, to pay the company's debts
on winding up. Such a company will be limited by guarantee and, therefore,
cannot by virtue o{ Section 5(6), create or issue shares. The liability of the
members of such a company will be limited to the amount which they have
respectively undertaken to contribute towards the settlement of its debts on':) r'l',i.",
winding up. ttsl Sorrnis reason acompany limited byguarantee cannot have any
contributed capital until it is wound up. Accordingly, it will be ideal for a non-profit
making business. ln fact section 23(1 ) prohibits incorporating a company limited
by guarantee with the object of carrying on profit-making business. lf this
prohibition is contravened members and off icers of the company who are aware
of the contraventron will be jointly and severally liable to pay the debts which the
company incurs while carrying on the profit-making business.
L
AIiI INTRODUCTION TO COMPANY LAW IN MALAWI - 21
1.3.2.1 Conversion of a company limited by shares to a company limited

by guarantee
Again, a company registered as limited by shares can be changed into a
company limited by guarantee.liT,t"r the conversion to be effected:
1. The company's shares must be fully paid up;

2. Each member of the company must agree in writing to the conversion and
to voluntarily surrender to the company for cancellation all shares held by
/ him immediately before the conversion;
3. A new memorandum and articles appropriate to a company limited by

guarantee must be adopted by the company; and
4. Each member must agree in writing to contribute to the assets of the

company, in the event of its being wound up with debts, such sums as may
be required,
lf these conditions are satisfied, the company must deliver the following:
(a) the company's certificate of incorporation;
(b) a copy of the new memorandum and articles;
(c) a copy of the special resolution whereby the company adopted these
documents;and
(d) astatutorydeclaration bythe company's directors and secretaryconfirming

that the four conditions listed above have been complied with.
1.3.3 Public and private companies

Another distinction drawn by the Act is between a public and a private company.
Section 5(5) defines a'public' company as 'any company other than a private
company'. According to Section 5(3), a'private'company is one which by its
memorandum or articles :
(a) restricts the right to transfer its shares, if any;
(b) limits the total number of its members, t14 to 50 and

22 - AN INTROOUCTION TO COMPANY LAW IN MALAWT
(c) prohibits the company to invite the public to acquire any of its debentures or
shares.
Should a private company failto comply with any of these three requirements,
it willcease to be entitled to the privileges and exemptions conferred on it by the
Act. Some of these privileges and exemptions are:
1. Where a private company alters its memorandum under Section 10(1),

subsection (4) shows that any of its members and debentureholders or
their trustees who may have been given notice of the alteration under
subsection (2) can apply to the court under subsection (3) to have the
alteration annulled. However where the company is a public one and the
applicants are not trustees of holders of debentures secured by a floating
charge on the company's assets, then they must hold at least 5% of the
company's issued shares or debentures secured by a f loating charge over
\.-,
its assets . t18l i,*, 4
2. For a private company to be converted into a public company, it requires

a mere special resolution which alters its articles so that they no longer
comply with Section 5(3) ,tl,tlQn the other hand, under Section 27, lhe
process for the conversi6rioiHilublic company into a private one is rather
elaborate.
3. Under Section 182(1) (b), a private company is exempted from the

requirementto send to its members a report of rts directors on its profit and
loss account and balance sheet.
4. A private company is not obliged to accompany the annual relurn required

by Section 181(1)with every profit and loss account and balance sheet
circulated to its members and debentureholders during the period to which
the return relates. t2ot :l l.i 7 l:
1.3.3.1 Gonversion of a public company to a private company or vice

versa
Section 27(1)provides that a public company can by special resolution be
converted into a private company after compliance with allthe provisions of the
Act governing private companies. Similarly, under Section 28(1) after compli-
ance with the requirements of the Act in respect o{ public companies, a private
company may be converted into a public company by special resolution.
lndeed if a private company alters its articles by special resolution so that they
AN INTFODUCTION TO COMPANY LAW IN MALAWI - 23
no longer comply with Section 5 (3), the company will be deemed to have
been converted into a public company. Then within 21 days of passing the
resolution the company must send a copy of it and the company's certif icate
of incorporation to the registrar. Where the conversion is from a public
oompany to a private one, the company must accompany these documents
with a statutory declaration by its directors and secretary that Section 27(1)
has been complied with. On the other hand, where the company is being
converted from a private company to a public one and the conversion takes
place at least 1B months after the company's incorporation, Sectioru2ffi)S2*i?
requires that there be delivered to the registrar a certif ied copy of each of the
following additional docu ments :-
'1. A balance sheet;
2. A profit and loss account;
3. Group accounts, if any
4. A director's report; and
5. The auditors' report circulated to the company's members in the preceding

year.
After receipt of these documents the registrar will issue a new certificate of
incorporation to the company.
1.3.4 External company

This is defined by Section 306(2) as a body corporate formed outside Malawi
which establishes or maintains an established place of business in Malawi.
According to Section 306(3) 'established place of business' includes any fixed
place of business except an agency unless the agent has general authority to
negotiate and conclude contracts on behalf of that body corporate or maintains
a stock of its goods from which he regularly fulfils orders on its behalf. External
companies are discussed more fully in chapter 16.
1.3.5 Holding and subsidiary companies

Lastly, the Act distinguishes between a holding and a subsidiary company.
Section 2 provides that a company is a holding company of another company
or body corporate if the latter is its subsidiary. According to the Seventh
Schedule to the Act, a holding company is a rnember of its subsidiary and
1 . can appoint, remove or prevent the appointment or removal of at least half

of the latter's directors; or
2. holds more than half of the nominal value of the latter's equity share
caPital.t2ll
Besides, a company will be a subsidiary of another company if it is a subsidiary

ol the latter's subsidiary
Although a holding company relates to its subsidiary in the manner described

above, the two have legal personalities which are distinct from each other. ln
Banda v Cilcon 2'?the plainti{f was employed by the defendant as an accounts
clerk. However he also worked in the accounts ol the defendant's subsidiary.
Subsequently K5,000 was discovered missing from the subsidiary's office.
Becausethe plaintiff wasconsidered aprimesuspectforthetheft, thedefendant's
employees took him to the Police. Besides, he was later dismissed from his job.
ln an action against the defendant for wrongful dismissal, it was held that the
defendant and the subsidiary were two distinct legal persons and that since the
money stolen belonged to the latter, the de{endant had no just cause for
dismissing the plaintiff .
As shown in Chapter 2, a holding company must prepare group accounts which

give a true and fair view of its profit or loss and state of affairs as well as those
of its subsidiaries. Fu rthermore, its directors' report must show its state of affairs
and those of its subsidiaries, as a group. Finally, Section 57(1) restricts a
subsidiary's membership of its holding company and renders void a company's
allotment or transfer of its shares to its subsidiary.
1,4 The filing of documents

It will have been noticed from what has been said above that one of the
obligations which law imposes on companies is the filing of certain documents
with the registrar. The first document which must be filed is the memorandum
with or without articles of association. Thereafter, the company must also send
tothe registrarfor registration acopy of everyspecialresolution which it passes,
statutory declarations that certain requirements have been satisfied, financial
accounts and any new memorandum and articles which it may subsequently
adopt as a result of a change in its corporate structure. lt will be seen later that
a registered company must also register charges which it creates on its
property, a return of any allotment or transfer of its shares and an annual return
which gives certain information about the company during the year to which it
relates.
AN INTRODUCTION TO COMPANY LAVV IN MALAWI - 25
The objectof this requirement isto furnish the registrarwith as much information
about the company as possible and to apprise him of any changes in its
corporate and financial structures. But apart frorn that, the filing of these
documents also acts as a means of disclosing information aboutthe company's
affairs to the generai public. This is because Section 329(1) allows any person
to inspect any document registered by the registrar under the Act - of course
upon payment of the appropriate inspection fee.
lnformation contained in these documents will be useful to prospective inves-

tors who maywish to puttheir money in ihe company as eitherdebentureholders
or shareholders. lt will enable them to assess the company's performance and
viability, and therefore, facilitatethe decision asto whetheror notthe investment
would be profitable. Other members of the public who wish t<l have business
dealings vrith the company will also find this information useJul.
Previously, the rule was that mere filing of a document with the registrar gave
ccnstructive notice to the general public of not only the document itself but also
its contents. ln other words, a person was deemed to have notice of the
document and what it contained, irrespective of actual knowledge of them,
simply because the filing put the document in the public domain. However, that
rule has now been repealed by the Companies Act. Section 343 provides that
no person will be affected by or be deemed to have notice or knowledge of the
existence or contents of a document concerning a company by reason only that
the document has been registered with the registrar or is available for inspection
at any office of the company or elsewhere by virtue of the Act.
Chapter One
1. [1877] 2 CPD 46e.
2. [1878] 3 App Cas 1218.
3. [1900] 4C240.
4. Supra., note 2.
5^ [1902] 2 Ch 809.
6. Civ cas 469/1989.
7. Civ cas 52611987.
8. Section 6(2).
9. Section 14(1 ).
10 Section 14(2).
11. Section 325(2).
12. Section 15(1 ).
'13. Section 16.
14. Section 25(2\.
15. Section 5(1 Xb).
16. Section 24(1).
17 . This excludes bona fide employees of the company and former employees
who were, and have coniinued to be, members of the company.
18. Section 10(4Xb).
19. Section 2B(2).
20. Section 197(1).
21. The expression 'equity share capital' generally refers to ordinary share
capital unless there is a restriction on ordinary shareholders'participation in
any distribution to be made by the company. ln that case, the expression will
refer to deferred share capital.
22. Civ cas 2BG119B7.
_I
Ghapter Two ,;]
The Constitution
of a Company
Every organisation usually has a constitution which governs the way it is run.
The constitution will spell out the organisation's objects and explain how it will
obtain funds necessary for the achievement of those objects. Besides, it will
contain rules on the organisation's management and membership, and the
division of decision-making powers between the two. Finally, the constitution
will also make provision for the organisation's office-bearers, their election and
how its meetings are to be conducted. ln the case of companies, this function
is performed by the memorandum and afiicles, of association. lt is with these
two documents that this chapter is concerned.
2.1 The Memorandum of Association

According to Section 6(1), the memorandum of a company limited by shares
must comply with the form tn Table B of the First Schedule to the Act. Besides,
it must state:
1 . The name of the comPanY;
2. The restrictions, if any, imposed on the business which the company can
carry on;
3. The amount of share capitalwith which the company is registered, and the
number of shares into which the capital is divided;
4. Where the shares are divided into two or more classes, the rights
privileges, restrictions and conditions which attach to each class;
5. Whether the company is private or public;
6. That the liability of its members is limited; and

TO COMPT1NY LAW lN MALAWI
7. The full name, address and occupation of each subscriber to the memo-
randum.
Almost simiiar information must be contained in the memorandum of an

unlimited company and a company limited by guarantee. of course, addition-
ally, the memorandum of a company limited by guarantee must show the
maximum number, if any, of members with which it proposes to be registered
and state that:
1 . lts income and property will be appiied solely towards the promotion of its
objects;
2. Each member undertakes to contribute to its assets in the event of its

being wound up while he is still a member; and
3. Upon its winding up and after the discharge of all its debts and liabilities,
any property which remains will either be transferred to another company
limited by guarantee which has similar objects or be applied to some
charitable object.
Besides, whereasthe memorandum of acompany limited by shares mustshow

any restrictions imposed on the business which the company can carry on, the
memorandum of a company limited by guarantee must state the nature of the
object(s) for which the company is formed. And in the case of limited and
unlimited companies, Section 7(2) requires that each subscriberto the memo-
randum must write opposite his name the number of shares for which he
subscribes.
2.1.1 The company's name

Just like a natural person, a company is normally identifiable by name. smali
wonder, therefore, that the memorandum must show the name whereby the
company seeks to be registered. However, there are some legal restrictions on
the choice of the name under which a company can be registered. The registrar
can refuse to register a company by a name which in his opinion, is misleading"i 1,1
.f.lf?p, undesirable.Itl Similarly, if the Minister is of the opinion that the name under
which a company is registered is misleading or undesirable, he can direct the
l, company to change itJ2t e i"7 ,i'
Moreover, certain business names require registration under the Business

Names Registration Act. Section 4 of that Act provides that a corporation which
_
AN INTRODUCTIO}I TO COMPANY LAW IN MALAWI - A ./
has a place of business in Maiawi and operates as a nominee or trustee of any

person or corporation or acts as general agent for any foreign firm, mrrst be
registered under the Act. lf its name contains any expression or implication of
the approval, patronage or sanction of the President, the government or any
government officer, the registrar cannot register it without the approval of the
Minister.t3l
.;i Oncealimitedcompany is registered, the lastwordof its name mustbe'Limited'

which may legally be abbreviated 'Ltd'. t4lAn exception is where it is proved to
the Minister's satisfaction thatthe company has been incorporated as limited by
gLlarantee to promcte charity, education, art, science, religion or any other
usefulobject. ln such a case, Section 30(1 ) provides thatthe Minister may direct
by licence that the company be registered without the addition of the word
'Limited'to its name.
2.1.1.1 Publication of name

Section 130 requires that every company should publish its name. ln practice,
this means that it should:
(a) paint or affix the name in easily legible Floman letters above or adjacent
to the main entrance to its registered office and to every office or piace
in which it carries on business; and
(b) have the name accurately mentioned in the same type of letters in all its
business letters, invoices, receipis, notice or other publications and all
negotiabie instrumenis or order for money, goods or services purporting
to be signed or endorsed by or on its behalf .
Its seal must also bear the name in legible Roman letters. tsl * t ll t l',
According tc Section 130(3), il any officer of a company signs or endorses a
negotiable instrument or an order for money, goods or services on behalf of the
company without accurately mentioning ihe company's name on the instrument
or order, he will be personally responsible to discharge the liablilty thereby
incurred. Of course this responsibiliiy will not arise if the liability is duly
discharged by the company. lndeed even if he is liable, he can ciaim an
indemnity from the company. ln Rafsanjan Pistachio Producers Go-opera-
tive v Rice sathe plaintiffs who obtained a default judgement against a cornpany
reached a compromise with it whereby it paid them five post-dated cheques.
The defendant director signed the cheques on behalf of the company.
However there was no mention of the company's name on the cheques or the
capacity in which the defendant signed them. lnstead the cheques simply
showed the company's bank account number. lt was held that since the
company's name did not appear on the cheques, the defendant was personally
liable under the English equivalent of Section 1 30(3) to discharge the obligation
they created.
2.1.1.2 Change of name

A company may change its name under the companies Act either by a special
si ( fesolution approved in writing by the registrar t6l or if directed by the Minister to
..,ii,'do so because the name is misleading or undesirable. mwhere the change is
made in the first way, the company must within 21 days of passing tire
resolution, deliver to the registrar a copy of it and the company's certificate of
t; ;;,'' incorporation.
tsl The registrar will
then enter the new name on the register and
issue a new certificate of incorporation which will be conclusive evidence of the
1.., *ralteration to which it relates. tel Of course, this change will not affect the
company's rights or obligations or render defective any legal proceedings
;;,i;r, brought against it in its former name.tlol
2.1.1.3 Passing-off
A problem related to a company's name which may occur is that of passing off .
This will be the case where in order to take an unfair advantage of another
person's business goodwill, a company conducts itsbusiness in such a way as
to mislead the general public into taking it as that of the other person. Usually,
a company passes off by operating under a name which so closely resembles
that of another business as to make confusion of the businesses likely. Where
that happens, the offended business may seek an injunction to prevent further
trading under that name by the offending company. The former may also bring
an action to recover damages for any profit lost as a result of the passing off.
It should be emphasized that these remedies will be available only if the two
businesses are trading in the same line so that the offending company is in
effect taking advantage of the business reputation already established by the
other to gain custom. ln Parker-Knoll Ltd v Knoll International Ltd (19621 tttt
both parties were manufacturers of furniture, the plaintiff being a well-known
company in Britain and the defendant, an American company which had just
begun operating in England. lt was held that the defendants were guilty of
passing off and the court granted an injunction to restrain them from continuing
to usef their name on their f urniture without distinguishing the f urniture f rom
that made by the plaintiff company. The court reasoned that the name applied
by the defendants to their furniture was such as to create a likelihood that a
-----]
substantial section of the purchasing public would be misled into believing that
the furniture was that of the plaintiff.
2.1.2 The Business clause

It was stated in Chapter 1 that the distinctive attribute of a registered company
is its capacity to do business in its own name and right. The extent of that
capacity must be defined by the company's memorandum. Thus, where the
company is limited by guarantee, Section 6(2) requires its memorandum to
state the nature of the object(s) for which it is formed. However, if the company
is limited by shares or unlimited, there is no such requirement. ln that case what
is needed is simply a statement of whether or not the business which the
company can carry on is subject to any restrictions. r12l And if any restrictions
are imposed on the business, they must be enumerated in the memorandum.
What this means is that it is now possible to have companies limited by shares
with unlimited business capacity. For if no restrictions are imposed on the
business of such a company, it will be free to carry on any legal business which
it likes. lt is perhaps because of this that subject to limitations inherent in the
corporate personality, every company registered in Malawi now has, and must
always be deemed to have, the capacity of a natural person of full capacity.
tH:
l,t
Of course if the business of a company limited by shares is subject to
restrictions, the company is not allowed to encroach upon those restrictions.
Similarly, since every company limited by guarantee must state the objects for
which it is registered, itwillnotbe allowedto carry on any business outsidethose
objects. This is because according to section 22(1):
"A company shatt not carry on any business or pursue any obiect or exercise
any power that it is restricted by its memorandum or articles from carrying on
or pursuing or exercising".
But transactions which contravene Section 22(1) will not necessarily be void.
This is because the proviso to this provision States that an act of a company or
transfer of property to or by it will not be invalid simply because the act or transf er
contravenes Section 22(1). Thus subject to what is said below, such an act or
transfer is enforceable by or against the company.
Section 22(2) allows any member of the company or the holder of any
debenture secured by a floating charge over all the company's property or
a trustee for the holder of any such debenture to apply to the court for an
t:.
l
injunction prohibiting the doing of any act or the transfer of property which
contravenes subsection(1). To understand the significance of this provision, it
is important to bear in mind that creditors and shareholders put their money in
a company on the expectation that the money wiil not be dissipated on
unauthorised business activities. Now what section 22(2) does is to give these
persons the right to prevent the company from carrying on such activities
wherever that is feasible. When this is read together with the proviso to Section
22(1) what emerges is that a transaction which contravenes the business
clause of a company's mernorandum is voidable at the option of the company's
shareholders and creditors mentioned in subsection (2). But if they fail to avoid
the trarrsaction, the company can enforce it as if there is nothing wrong with it.
2.1.2.1 The third party and section 22

Successfulapplication by members orcreditors lorthe prohibition of aconnpany
transaction which c'cntravenes section 22(1) may prejudice the other party to
the transaction. For clearly he cannot enlorce ihe transaction against the
company. Howeverthat hardship is mitigated by two lactors. First, section 22(3)
allows the court, once it has prohibited the transaction, to make any order as to
compensation or otherwise as it may consiCer equitable.' lt is argued that the
effect of this provision rs to allow the court not only to order restoration of the
padies to the transaction to their status qito anfe but also to award the third party
(as long as he was unaware of the contravention of section 22(1\) damages for
any loss he may suffer as a result of the prohibition. Second, he can choose to
recover the damages at common law from the company's directors on the
ground of breach o{ warranty of authority.
2.1.3 Share capital

It will be recalled that it is allowed to form a company under the Companies Act
which has no share capital. as where the company is limited by guarantee. For
thal reason. where the company is intended to be registered with a share
capital, that must be shown in the company's memorandum. Besides, the
memorandum must indicate the amount of the capitaland how it is divided into
shares. The point here is that once the amount of contributed capital that the
company will need is fixed, that capital is then divided into parts called shares.
The legal nature of a share wili be discussed in Chapter 9. However, here it is
enough to say that the capital with which a company proposes to be registered
will represent the aggregate cf ttre nominal values of shares which it is
authorised to issue. Of course the actual share capital which the company does
eveniually have will depend on how many shares it issues.
AN INTROOUCTION TO COMPANY LAW IN
2.1.4 Type of company

Another thing which must be stated in the memorandum is whether the
company will be registered as private or public. As already noted, the company
can be i'egistered as one or the other. Therefore, whichever of these two the
subscribers choose must be disclosed in the company's memorandum.
2.1.5 Limited liability

The principal advantage which a trading company will seek to obtain from
incorporation under the Companies Act is limited liability. Now since the Act
does also allow the formation of unlimited companies, it should be indicated in
the memorandum that the liability of the company's members is limited. Again,
this disclosure will be vital to those who wish to contribute to the company's
capital. For the source ol attraction to a person to invest in a cornpany as a
member is the fact that he will not be personally liable for its debts and liabilities
beyond a certain pre-determined figure when it is wound up. Consequently, he
willwant to know that before he puts his money in the company.
2.1.6 The Association clause

According to Table B of the First Schedule to the Act, the memorandum of a
company limited by shares is supposed to end with a clause in which the
subscribers express their wish to be formed into a company. The subscribers
will also declare in that clause their agreement to take shares in the company.
Below the clause there will follow their names, addresses, occupations and the
number of shares taken by each one of them. Each subscriber must sign the
memorandum in the presence of a witness who must attest the signature.ll{:; 7 t '
2.2 Effect of the memorandum

Once registered, the memorandum hastheeffectof a legalagreement. Section
l Tsaysthat it hasthe effect of 'acontract undersealbetween the companyand
its members and between the members themselves'. The terms of the contract
are to observe and perform the provisions of the memorandum as altered from
time to time. More will be said about Section 17 later in this chapter. However,
it should just be noted here that this contract is subject to the provisions of the
Act relating to the company and its members.
2.3 Alteration of the memorandum

Section 8(1) allows a registered company to alter its memorandum of associa-
tion. The object of the alteration may be to remove any restriction imposed on
i!iri$,t;;;.
!;4ry-
r 34 - AN INTRODUCT]ON TO COMPANY LAW IN MALAWI
the business which the company can carry on or to impose such a restriction
or to change the situation of its registered office. But whatever the idea behind
it may be, the alteration can only be made by special resolution, and in
accordance with the Act. Furthermore, Section 8(2) provides that where a
memorandum contains provisions restricting or excluding the company's
powers to alter it or imposing conditions for the alteration of the memorandum,
then unless the company obtains the sanction of the court under a scheme of
arrangement pursuant to section 198, the memorandum can only be altered in
compliance with those provisions. Moreover, even wherethe memorandum is
validly altered, the alteration will not be binding on any member without his
written consent in the absence of a scheme of arrangement pursuant to section
198, il its effect is to either:
(a) require him to take more shares in the company than those held by him
at the time of the alteration; or
(b) increase his liability to pay money to the company or

t (c)
tt increase or impose restrictions on his right to transler shares held by him
I
I
at the time of the alteration. t151
t t',4\
!
i And finally, section 8(5) prohibits a company to make an alteration of its
!
memorandum which is in conflict with a court order under section 203. This
order is considered in detail in para.8.2.2.
2.3.1 Procedure for the alteration of the memorandum

Section 8(1) merely grants the power to alter the memorandum; it does not
providethe procedurewherebythe alteration may be made.Therelore, to know
that procedure, resort must be made to relevant provisions of the Act.
2.3.1.1 Alteration ol the company's name

As already stated, the company's name must be indicated in the company's
memorandum. Consequently, change of that name will necessarily entail
altering the memorandum. That alteration must be made in accordance with
Section 19(3) which requires that the change be approved by the registrar and
be made by special resolution. Then 21 days after passing the resolution, a
copy of it together with the company's certificate of incorporation, must be sent
to the registrar who will enter the new name on the register in place of the old
one and issue a new certificate of incorporation to the company.
2.3.1.2 Alteration of the company's share capital

Alteration of a registered company's share capital may take more than one
form. However, all the forms will inevitably involve alteration of the company's
memorandum. Forthat reason, they must be carried out in accordance with the
procedure laid down by the Act. Where the alteration is in the form of an
1 increase rn
Increase share capllal
in the company's snare beyond Ine
capital Deyono registered amounl,
the reglslereo amount, Ine
the
I| ;:,- i:company must send notice of the increase to the registrar within twenty-one
days of passing the resolution authorising it. tl6lAccording to section 66 (2), the
- notice must be accompanied by a copy of the resolution and must give
particulars of the class of shares affected by the increase and conditions
subject to which the additional shares have been or will be issued. Now
although the increase, just like most company actions, must be sanctioned by
a resolution, the Act does not show the type of resolution needed. Apparently
it is left to each company to specify that in its articles. And according to Article
I r 7, Table A a mere ordinary resolution will suffice to increase a company's
share capital by issuing new shares.
A registered company may also alter its share capital by either consolidating
and dividing the capital into shares of larger amounts, re-converting stock into
shares, subdividing its shares, redeeming redeemable preference shares or
>,.'r'r' cancelling unallotted shares. trTlAgain, this must be approved by a resolution
. (which according to Article 17, Table A is an ordinary resolution) ol the
):.- ' company in a general meeting. t18l Then twenty-one days after passing the
resolution, the company must send notice of the alterationtothe registrarunder
Section 65(1). The Act does not say whether or not a copy of the resolution
must also be sent to the registrar under Section 65(1). However, it requires the
notice to specify the shares which have been consolidated, divided, subdi-
vided, redeemed or cancelled, or the stock which has been re-converted.
, ;.'Lastly, share capital may also be altered by being reduced in any way,
trel
.,
except the cancellation of shares which have not been taken or agreed to be
;_.. *taken by any person. This type of alteration can only be made a special
t20l
resolution of the company. Of course the resolution will not be etfective unless
confirmed by a court order for which the company must apply under Section
68(1). Besides, if the resolution sanctioning the reduction varies rights at-
tached to any class of shares, it must comply with Section 48; otherwise it will
'
: , .: be ineffective.
t2rl
' 2.3.1.3 Alteration of rights attached to any class of shares

It will have been noted above that alteration of a company's share capital may
f 36 - AN INTRODUCTION TO COMPANY LAW IN MALAW
take the form of varying rights attached to certain classes of shares. According
to Section 8(1)(c) as read together with Section 67(3), such an alteration must
be made in accordance with Section 48. This provision stipulates two methods
whereby the variation may be made. lf a company's memorandum expressly
forbids variation of the rights of any class of shares or provides the procedure
wherebythe variation may be made and forbids anyalteration of that provision,
then the variation can be made either:
(a) in accordance with that provision; or
(b) with the written consent of all members of that class; or
(c) with the sanction of the court under Section 198.
Where, on the other hand, the memorandum is silent on this issue, the variation
may be made with either the written consent of three-quarters of the holders
of issued shares of that class or the approval of a special resolution passed at
a separate general meeting of those nolders*]fl But however the variation is
atfected, holders of at least 5% ol the issued bharels of the class allected can
apply to the court for cancellation of the variatiqn,,Sltr!n that case, unless the
variation is confirmed by the coun, it will have no effect.t24l
For the purpose of this procedure, the creation or issue of further shares does
notamounttoavariation of class rights. On the otherhand, a resolution willvary
class rights if its effect is to either:
1. diminish the proportion of the total votes exercisable at the company's

general meeting by holders of the existing shares of a class or
2. reduce the proportion ol dividends or other distributions payable to

holders of the existing shares of a class.Pstqrr\.
4.,
2.3.1.4 Alteration of objects or restrictions imposed on the business of

a company
According to Section 8(1) this alteration can only be made in accordance with
Section 10. Subsection (1) of this provision allows a registered company to
change, impose or remove by special resolution any restriction on its business
or to alter objects for which it was formed.
Within 28 days of passing the'esolution, the company must give notice of it to

holders of all debentures secured by a floating charge over the company's

j=,; .:property and to trustees ior those debentureholders. P6l These persons together
with the others mentioned below, have the right under subsection (3) to appiy to
court within 60 days of the passing of the resolution, to have the proposed
alteration annulled. Now unless they exercise that right, the alteration will be
effective. However, if the alteration is challenged, then it will be ineffective unless
confirmed by the court under subsection (6).
Subsection (4) gives the lollowing persons the right to apply to court to have
the proposed alteration cancelled:
(a) in the case of a private company, any member or debenttureholder or

trusteee of a debentureholder to whom notice of the resolution approving
the alteration is given under subsection (2); and
(b) where the comPanY is Public,
1. holders ol at least 5o/o ol the company's issued shares or, if the

company is not limited by shares, at least 5% of its members;
2. holders of at least 5o/o ol the company's debentures secured by a

floating charge over of the company's property; and
3. trustees for the holders of any debentures secured by a floating

charge over the company's property'
The significance of the right conferred by subsection (4) lies in this. Creditors
and shareholders will invest their money in a registered company on the
understanding that it will be used for purposes mentioned in the business
clauSe of the company's memorandum. For that reason, it is not unreasonable
that where it is intended to alter that clause, they should be notified and their
consent be sought.
Where an application is made by any of these persons, the court may confirm
r-'; tr,.the alteration in whole or in part or may cancel it altogether. PrThen within 21
days, the company must send a copy of the court order to the registrar for
registration. Ittll" t.:, ",
1
2.3.1.5 Change of the company's status

As already shown, a company must state in its memorandum whether it is being
r 38 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
registered as private or public, limited or unlimited, limited by shares or by

guarantee. Naturally, to change that will entail alteration of the memorandum.
To do that, the company must follow the procedure laid down in sections 24 to
28 which was discussed earlier in Chapter 1.
2,4 Articles of association

As stated in the last chapter when the memorandum is sent for registration, it
may be accompanied by articles of association. These are rules forthe internal
management of the company or as Section 11 puts it, 'regulations for the
conduct of the company's affairs', ln other words they will deal with such
matters as allotment of shares, the company's management, membership,
meetings and powers, and its directors, their appointment, meetings, remu-
neration and powers.
A company need not register any articles of association; it may send its
memorandum onlyfor registration.lzelAccording to Section 12(3), if it does that,
it will be deemed to have adopted the articles in Table A or C, depending on
whether it is limited by shares or by guarantee. The effect of this provision is
clearly that instead ol preparing its own articles, a company may adopt those
in Table A or C, and modily them wherever necessary to suit its own capital and
corporate slructures.
2.5 Relation of the articles to the memorandum

The memorandum takes precedence over the articles. For that reason, if there
is a conflict between the two, the memorandum will prevail. ln the case of Re
Duncan Gilmour & Co. Ltd. (1952) 1301the memorandum ol a company which
had ordinary and preference shares provided that preference shareholders
had priority in the distribution of the company's assets on winding up. The
articles, on the other hand, stipulated that in that event any surplus remaining
after repayment ol the paid-up share capital should be divided between the
company's members in proportion to sums paid on their shares, whether
ordinary or preference. lt was held that the preference shareholders were
entitled to preference in the distribution of the company's assets and not to
participate in any surplus left after the contributed share capital had been
repaid.
But in spite of this, because the two documents are contemporaneous, the
articles may be used to explain any ambiguity in the memorandum. Besides,
reference can be made to them to fill any gap in the memorandum.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 3t
2.6 Effect of the articles

Reference has already been made to Section 17 which provides that once
registered, the memorandum creates a contract between the company and its
members. ln fact, that provision governs both the memorandum and articles.
Consequently, the articles too have the same contractual effect as the
memorandum. ln the case of Hickman v Kent (1915) t3llthe company's articles
of association required disputes between the company and any of its members
to be referred to arbitration.There was a dispute between the plaintiff member
and the company. However, instead of referring it to arbitration, he sought to
sue the company. lt was held that since the articles created rights and
obligations between the plaintiff and the company, the latter could enforce the
arbitration clause and compel the plaintiff to refer the dispute to arbitration.
Similarly, in Rayfield v Hands (1958) t32l the plaintiff was a member of a

company of which the defendants were also members and directors. A
provision in the company's articles stated that any member who intended to
transfer his shares should inform the directors who would take them at a fair
price. When the plaintiff asked the directors to purchase his shares, they
refused on the ground that they were not obliged to do so. ln an action by the
plaintiff to compelthem to take the shares, it was held that the afticles created
a contract underwhich the defendants, as members, were obliged to purchase
the shares at a fair value.
As these two cases show, the contracl embodied in the articles is between the
company and its members, and not outsiders. ln other words, a person who,
as an outsider deals with the company, cannot rely on the articles to compel
it to refrain from breaking the deal even though the deal is sanctioned by the
articles. This is illustrated by the case of Eley v Positive Government
Security Life Association Co. Ltd (1876). t33l Here the articles provided that
the plaintiff should be the defendant company's solicitor for which he was to be
paid fees. The plaintiff served in that post for some time. When he was
subsequently dismissed, he sued the company for breach of the provision of
the articles which made him the company's solicitor. lt was held that as the
plaintiff was not a member of the company, the provision did not place the latter
under an obligation to keep him as its solicitor.
Moreover, since (as shown below) the articles are alterable the contract which
they create can be altered. As a result if they are altered no member who is
adversely affected by the alteration can sue the company for breach of that
contract. ln Shuttleworth v Cox Bros & Co Ltd (19271t34l the company's
40 - AN INTRODUCTION TO COMPANY LAW lN MALAWI
articles provided for five people to be its directors for lile unless disqualified in
accordance with certain contigencies . The articles were subsequenily altered
and a new contigency was added to them. By reason of this contigency one of
the directors was.asked to resign f rom his post. The director sued the company
for breach ol the provision in its articles which made him directorlor life. lt was
held that although articles do create a contract between a company and its
members, that contract was based on terms which were alterable. For that
reason, neither party to the contract had a cause for complaint if those terms
were altered.
2.7 Alteration of articles

Every registered company has power under Section 13(1) to alter its articles.
However, this power is subject to some restrictions. First, the articles can be
altered only by special resolution. Second, the alteration will be ineffective if it
brings the articles into conflict with certain provisions of the Act or renders any
one of the provisions inapplicable to the company. An example of such
provisions is Section 49(1) which provides that in spite of any stipulation to the
contrary in a company's articles, it will not be lawf ul for the company to register
any transfer of shares unless a proper instrument of transfer has been
delivered tc the company. Another is Section 161 which renders void any
provision in the articles purporting to empower an oflicer of the company to
assign his office to another person.
Third, as already noted, articles must comply with the memorandum. Conse-
quently any alteration which purports to make them superior to the memoran-
dum or introduces any conflict between the two, will not be effective.
Finally, at common law an alteration of the articles will be void if the majority
who approve it are not acting bona fide in what they deem to be the interest of
the company. ln the case of Brown v British Abrasive Wheel Co. Ltd. (1919)
l35l the defendant company needed more capital. The majority who held
98%
of its existing shares were willing to provide the extra capital but on the
condition that they should first buy up the 2/" minority. When the minority
refused to sell their shares, the majority proposed to alter the company's
articles to provide forcompulsoryacquisition of the shares atafairvalue. ltwas
held that the alteration was invalid since it was merely for the benefit of the
majority and was not directly concerned with the provision of the capital which
the company needed.
Enunciating the law here Evershed MR said: ". . . 'bona lide for the benefit of
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 'I1
the Company as a whole means not two things but one thing. lt means that the
shareholder must proceed upon what, in his honest opinion, is for the benefit
of the company as a whole. The second thing is that the phrase 'the company
as a whole', does not . . . mean the company as a Commercial entity, distinct
from the corporators: it means the corporators as a general body." t36l
Of course, if the majority are acting bona fidethen the alteration will be valid
and this is illustrated bythe case of Sidebottom v Kershaw Leese & Co. Ltd.
(1920) t37l Here the defendant company passed a resolution to alter its articles
by providing that its directors should have power to require any shareholder
who carried on business in competition with the companyto transfer his shares
tothem atafairvalue. The plaintitf whowas a minorityshareholderand carried
on a competing business sought to have the alteration declared invalid. lt was
held that the alteration was valid because the majority who supported it were
acting bona fidelor the benefit of the company as a whole by providing for the
removal from its membership of any person who abused his position as a
member to compete with the company.
Chapter Two
1. Section 19(2).
2. Section 19(5).
3. Section 17.
4. Section 19(1).
5. Section 131(1).
5a. [1990] BCLC 352.
6. Section 19(3).
7. Section 19(5).
8. Section 19(7).
9. Section 19(8).
10. Section 19(9).
11. [1962] RPC265.
12. Section 6(1Xb) and (3Xb).
13. Section 21(1).
14. Section 7(1).
15. Section 8(3).
16. Section 66(1).
17. Section 64(1).
18. Section 64(3).
19. Section 67(1).
20. section 64(4).- provides that this type of cancellation rs ,,ot a reduction
of share Capital within the meaning of the Act
21. Section 67(3).
22. Section 48(3).
23. Section 48(5).
24. Section Re Holders lnvestment Trust Ltd t19711 2 Ail ER 289.
25. Section 48(4).
26. Section 10(2).
27. Section 10(6).
28. Section 10(7).
29. Sections 11 and 14.
30. [19s2] 2 Ail ER 871.
31. [1915] 1 Ch 881.
32. [19s8] 2 Ail ER 194.
33. [1876] 1 Ex D 88.
34. 1192712 KB 9.
35. [191e] 1 Ch 2e0.
36. Greenhalgh v Arderne Cinemas Ltd [1950] 2 All ER 1120, p.1126
37. [1e20] 1 Ch 1s4.
4SIRODUCTION TOCOMP
Ghapter Three
{i-
The Legal Status of a

Registered Gompany
3.1 Corporatepersonality
The most important consequence of incorporation is that the company acquires
a corporate personality. As Section 15(2) says, after incorporation, the sub-
scribers to the company's memorandum together with such other persons as
mayf rom timeto time join the company as members, become'a bodycorporate,
capable of exercising all the functions of an incorporated company'. ln other
words the company becomes an entity which is distinct and separate from not
only its membership but also its management: Besides, it acquires what Section
21 (1) describes as lhe capacity of a natural person of full capacity' to carry on
business in its own name and right.
One of the effects of this is that generally members of the company are not
personally liable for its debts as long as it is still a going concern. ln the case of
Naidoo v Mazi lmport and Export and Tchongwe (1 985)nlthe plaintiff and the
second defendant formed a limited company of which they were both directors
.and shareholders. Subsequently, the plaintiff incurred some expenses in the
name of the company. When the matter came to court one of the issues to be
considered was whether or not he could recover those expenses f rom the first
and the second defendants. lt was held that since the company was a distinct
legal personality, the expenses could be recovered from it, and not from the
second defendant.
Besides, once a business organisation acquires the corporate personality, any

property which it acquires belongs to it and not to its members or creditors. ln
Macaura v Northern Assurance Go. Ltd. (1SZS1tzt the appellant who owned
a timber estate, assigned the timber to a company in return for the allotment by
the company of fully paid-up shares to him. He thereafter, insured the timber in
his own'name against fire. When the timber was later destroyed by fire, it was
held that the respondents were not obliged to compensate him since he had no
insurable interest in the timber which belonged to the company. As Lord
Summer said:
"He owned almost dllthe shares in the company, and the company owed him
., good deal of money, but neither as creditor nor as shareholder, could he
insure the company's assefs. The debt was not exposed to fire nor were the
shares, and the fact that he was virtually the company's only creditor, while the
timber was its only asset, seerns to me to make no difference".
Secondly, shareholders cannot validly pay money belonging to the company

into their personal accounts or draw money f rom its account for their personal
use. This is illustrated bythecase ol Underwood Ltd.vBankof Liverpool and
Martin Ltd (1924; tst*6"re the sole director and member of the plaintiff
company paid into his personal account (which he maintained at the defendant
bank) cheques payable to the company and endorsed by him on its behalf. lt
was held that the bank must compensate the company for the money paid into
,a his account because he was distinct from the company and the bank was not
t entitled to ignore that distinction.
Thirdly, since the company is an independent personality, it will not come to an

end because of the death ol its shareholders. Thus, unless it is wound up and
dissolved in accordance with the procedures discussed in Chapter 15, it will
continued to exist in spite of the death.
Fourthly, the Companies .Act distinguishes between a company and its

members in respect of schemes of arrangement. As shown in Chapter 14,lor
such a scheme to be sanctioned by the court, it must be between a company
and inter alia, its members. And for this purpose, the word 'company' means
the company as a legal personality which is separate from its members. talAs
a result if the members agree to the scheme but the company does not, the
scheme cannot be sanctioned by the court.
Lastly, another result of granting a company separate legal personality is that

the company is charged to'tax on its own income, and not as an agent for its
shareholders. Section 66 of the Taxation Act of Malawi provides that company
tax is payable at the rate specified by the Act on the company's income
received or accrued f rom sources within Malawi. And in computing this taxable
i
income, dividends paid or payable to shareholders are not deducted. On the
other hand, they are considered to be part of the shareholders' income on which
incometax is payable interms of Section26,27,71 and76 (A)of theAct. This point
is discussed more fully in Chapter 13.
AN INTBODUCTION TO COMPANY LAW IN MALAWI
3.2 Lifting the corporate veil

Generally, if a registered company does anything, the law will not go behind the
act to identifying the natural person(s) who did it. On the conlrary, the act will
be regarded asthe act of thecompanywhich hasfulllegalcapacityto act.lslThis
is because, according to Section 21(1), subject to limitations inherent in its
corporate nature, a registered company has and must always be deemed to
have the capacity of a natural person of full capacity. However, there are
instances where the law will depart from this rule. ln other words, it will go
behind the corporate facade to expose the real actors.Thus it will hold either
members or officers of the company liable for what, applying the concept of
corporate personality, should be regarded as company action.
3.2.1 Lifting the corporate veil by statute

Section 4 shows that a company must have at leasttwo members. lf the number
falls below that minimum and the company carries on business for more than
six months, every person who is a mernber or director of the company during
that period and is aware of this default, will be severally liable to pay all the debts
incurred by the company within that time. I tt!.4: \ t
Besides, under Section 1 19 of the Taxation Act, where a company is liable to

a penalty under the Act, every person who at the time of the offence was an
officer of the company will also be liable to the same penalty.
Similarly, il a company is accused ol an offence under the Trade Descriptions

Act, and the offence is the result of default on the part of one of the company's
SltpJo1geg, it is the latter who may be convicted of the otfence. ln Tesco
Supermarket Ltd. v Nattrass (1972) t6the appellant company was charged
with contravening Section 11(2) of the English Trade Description Act (this Act
isalmost similar to the Malawi statute which bears the same name) because
one of its shop managers allowed goods to be advertised for sale at a price
which was lower than that at which they were in fact offered. On the question
as to whether or not the company could plead the defence of 'default ol another
person' created by Section 2a ol lhe Act, it was held that as the shop manager
was not part of the company's directing mind, his default was, vis-a-vls the
company, the default of another person.
Moreover, if in the course of winding up a company it appears thatthe business

of the company has been carried on lor any f raudulent purpose, the court may
declare any person who was knowingly part ol the fraud personally liable,
without limitation, forthe debts or liabilities of the company.tsl< ..._. -/{t ,
Lastly, it has already bebn shown that acompany's name must appearon every
negotiable instrument or order for goods, money and services endorsed by or
on behalf of the ccjmpany. lf this is not done, the otficer in default wili be
personally liable to discharge the obligation(s) created by the negotiable
t,.. ':ynstrument or order.telThis is illustrated by the case of Rafsanjan Pistachio
-^:" Producers co-operative v Rice which was discussed in the last chapter
under para,2.1.1.1
3.2.2 Lifting the corporate veilat common law

Apart from the statutory provisions given above, there are instances where
cout'ts at common law have refused to accept the distinction between a
registered company and its membership. One such instance is where it was
thought that the corporate veil is being used to escape from a legally binding
obl(;ation. That happened in Gilford Motor Co. Ltd. v Horne (1933). 110l ln that
case an employee undertook in a covenant not to solicit his employer's
customers afterthe termination of his employment. Soon after his employment
was terminated, he formed a company of which his wife and another person
were directors and shareholders. ln violation of his covenantthe company sent
out circulars to customers of his former employer. lt was held that essentially,
he had formed the company as a charade to get around his obligation under
the covenant. For that reason an injunction requiring compliance with the
covenant was granted against him as well as the company.
where an individual controls a number of companies as if they were his

property, the court may ignore the distinction between him and the companies,
and hold him responsiblefortheiracts. ln Walterstelnerv Moir(No.1) (1974)
nrl the plaintiff was a financier who controlled a number of business concerns
such as the Rothschild Trust, Stawa A.G. and lnvestment Finance Trust Ltd.
He made contracts on behalf of these concerns without reference to anyone
else. For instance, he entered into an agreement whereby Stawa A G was
engaged as an agent to sell paper mills owned by a company called C.B. Ltd.
in which the latter agreed to sell all their shares in a subsidiary called H.B.
Limited to the Rothschild rrust. Moreover, when money was paid to him for
shares which he beneficiallyowne{ he banked it in the name of the lnvestment
Finance Trust Ltd. Besides, the concerns always used the merchant bank of
which he was chairman and controller, as their bankers. lt was held that
although the concerns were distinct legal entities, the court would pull aside the
corporate veil and treat them 'as being his creatures for whose doings he
should be responsible'.
AN INTRODUCTION TO COMPANY LAW IN MALAIYI . 47
The court may also rip open the corporate veil if it feels that the company's
corporate personality is being used to evade tax. ln Unit Construction Co.
Ltd. v Bullock (1959) lr2l three companies which were wholly-owned subsid-
iaries of a United Kingdom company were registered in Kenya. The boards of
the subsidiaries were distinct from the board of the parent company. Although
the constitutions of the companies required board meetings to be held in
Kenya, allthe three were in fact managed entirely by -that holding company in
Britiain. lt was held that as the companies were managed in the United
Kingdom, they were resident in that country, and, therefore, liable for taxation
in accordance with its laws.
Finally, if a wholly-owned subsidiary is in fact an agent or employee of its

holding company, the latterwillbetakento bethe realoccupierof the premises
where the former carries on its business. ln Smith, Stone & Knight Ltd v
Birmingham Corp (1939) n3l the plaintitf acquired a partnership business and
converted it into a company in which it held all but five shares. Although the
business was carried on by the compan)r, it was treated as the plaintitf's. When
the defendant later acquired the premises on which the business was being
carried on, the question arose as to who should claim compensation for the
expropriation. lt was held that the plaintiff, and not the company, was the
appropriate person to make that claim.
)
Ghapter Three
1. Civ cas 706/1985.
2. [1925] AC 61e.
3. [1e24] 1K8775.
4. See Re Savoy Ltd [1981] 3 Att ER 646.
5. See, forexample, Lennard's Carrying Co Ltd v Asiatic petroleum Co
Ltd [191s] AC 70s.
6. Section 42(1\.
7. [1971] 2 Ail ER 127.
L Section 337(1).
9. Section 130(3).
10. [1933]Ch 93s.
11. l1e74l1 Ail ER 217.
12. [1959] 3 Ail ER 831.
13. [1939] 4 Ail ER 116.
ti!
AN INTRODUCTION TO COMPANY LAW IN MALAWI
Chapter Four
The Management of a
Registered Company
4.1 Company membership
Every regist"r"O must have at least two memU#ftrl lf the company
"orp"nymust not exceed 50 whereas if it is public, there is no
is private, its membership
ceiling on the maximum number of members which it can have.
A person may become a member of a registered company by:
(a) subscribing to its memorandum;lzlf -3 li-ll

(b) agreeing to become a member of the company and having his name
registered in its register of members; t3l g j ,T ::)
(c) the transmission of the.company's shares to him under Section 54; and
(d) the tra'nsfer of the company's shares to him in accordance with Secti:ns
49 and 52.
Now unless a person becomes a member of a company by subscribing his

name to its memorandum of association, he must have his name recorded in the
company's register of members for him to,be a member of the company. This
is because entry ol the name in the rdgister is a condition precedent for such
membership. ln Rep v Jack and Ferret (1SZ+;trt a company which was
incorporated in Malawi but whose shares were held in Rhodesia wanted
overdraft facilities f rom the Commercial Bank of Malawi. Because the company
was controlled f rom outside Malawi provision of the overdraft would have been
illegal underthe Exchange Control Regulations. To get around that problem, the
company passed a resolution authorising the transfer of some ol its shares to
the second accused who was the company's managing director and resident
in Malawi. The resolution also approved the preparation of a share certif icate
to be issued to the second accused, which was done. Thereafter a trust deed
F*"
50 - AN INTRODUCTTON TO COMPANY LAW !N MALAWI
was prepared and executed by him in which he agreed to hold 51% of the
company's shares on trust. curiously he had not been registered as a
shareholder in the company's shareholder register when the share certilicate
was issued nor had the share transfer form been completed at the time. A
subsidiary issr"re which required decision at the trial was whether or not he was
in fact the holder ol5'1"/" of the company's shares. lt was held that he was not.
As Skinner C.J. put it:
"The terms'member' and'shareholder'when used in relation to a company

governed by the Act are synonymous. section 24 of the [1909 companies] Act
provides inter alia that persons who agree to be members and whose names
are entered in the register are members. A person becomes a shareholder by
taking a transfer of shares and being entered in the register of members ... such
entry is a condition precedent to membership". ot
4.1.1 Register of members

A registered company must keep a register of its members which shows:
(a) the full name, address and occupation of each member;
(b) the date on which he was entered on the register as a member;
(c) the date on which he ceases to be a member.

lf the company is unlimited or limited by shares, there must also be
entered in the register:
(d) a statement of shares held by each member; and
(e) the amount paid or agreed to be considered as paid on each share. ,y'' r:
According to section 37, the register is prima facie evidence of any matter
directed or authorised by the Act to be inserted in it. Therefore, subject to any
rectification under Section 35, it will be prima facie evidence of the particulars I
which have just been enumerated.
4.1.2 Benefits of company membership

ln return for his membership of a registered company a person will have three
basic rights. Firstly, he will be entitled to influence the conduct of the company's
atfairs by attending and voting at its general meetings. Secondly, he will be
entitled to receive back his contribution to the company's capital if, when the
company is wound up and its creditors are paid, there are some assets which
are left over. And thirdly, he will have the right to participate in the interim
distribution of its surplus property in the form of dividends. Of course, these
rights may be varied or removed altogether by the company's articles. Thus,
there may be some shares which do not have any voting rights or which have
more rights than others. r'1 ;+ 7 ".*,1 i
A, + , .1,- ,T.,L.:_^ A
4.2 Company meetings
As will be shown later, a company is administered and managed by its directors
and fulltime employees. For that reason, its members do not have any real
influence on its day to day business. However, this does not mean that they
have no influence on its decision-making. For if that were the position, the law
would have been deficient in that it would have denied them elfective means
of contributing to policies governing the use of the money which they had
invested in the company. Therefore, in fact, members do participate in their
company's decision-making. lndeed, there are some decisions e.g. alteration
of the memorandum and articles, and reduction of share capital, which must
be made by them in general meetings.
4.2.1 Annual General Meeting

The forum in which members contribute to theircompany's decrsion-making is
the general meeting. According to Section 104(1), every registered company
must hold at least one general meeting per year so that 15 months should not
pass between one such meeting and another. This is called the annual general
i. meeting.tst However, a company can dispense with an annual general meeting
in any year if all the members entitled to attend it and vote agree that it should
S i.r :/+{Jnot be held in that year. tel But except where that is the case, failure to hold an | ;q{s,
annual general meeting in any year is a criminal offence. Ir0l
i
4.2.2 Extraordinary General Meeting
Article 2 of Table A defines an eitraordinary general meeting as any meeting
of the company otherthan an annual general rneeting. Generally, the position
is that directors will convene this type of meeting whenever they think it fit to
i ;.;E, do se. trtl However, members too can call for the meeting as long as they hold
at least 5% of the total voting rights of all the members who have the right to
vote at the company's general meetings. Besides, the requisition for the
rneeting must:
(a) state the nature of the business to be transacted at the meeting;

rT-
(b) be signed by each requisitionist; and
(c) be tleposited at the registered-office of the company. ti2l.,t i ..')1.',
lf the directors do not within 21 days of the deposit of the requisition convene
the meeting, the requisitionists may convene it themselves. Of course, they
must do so within three months of depositing the requisition at the company'i
5i;"t,'jregistered office. tl3l,
4.2.3 Glass meetings

As shol,in in chapter 9, section 47 allows a registered company to create
different classes of shares by attaching certain rights or restrictions to some of
its shares. To vary these rights, the company may have to convene a meeting
of holders of the class of shares concerned. This is because according to
section 48(2), if the memorandum allows variation of the rights of any class of
i
:l shareholders but does not provide the procedure whereby the variation should
be made, the rights may be varied by a special resolution passed at a separate
,l general meeting of the holders of shares of that class. section'124(1) then
provides that provisions of the Act relating to general meetings will apply to
such a meeting. The major difference, however, between these two types of
meetings is that where a class of shareholders comprises one member, that
memberwill be deemed to constitute a meeting. on the other hand, the quorum
for company general meetings is usually two members.
It is perhaps worthy adding that a class meeting must be attended by holders

of the class of shares concerned only. lt holders of other types of shares are
also present, that may affect the validity of the meeting. However, if these
members come in after deliberations are over and voting is about to start, and
the legitimate participants do not object to their presence, the meeting wil! still
be valid. ln Carruth v lmperial Chemical lndustries Ltd. (1937)trar a class
meeting ol deferred shareholders was convened to consider a scheme of
arrangement under the English equivalent of Section 19g. The shareholders
approved the scheme. However, when the company applied to the court to
sanction the scheme, the appellant opposed the application on the ground that
inter alia ordinary shareholders were also present in the hall during the
meeting. Dismissing the objection, Lord Russellsaid that although ordinarily a
meeting of one class of shareholders in a hall where there are an equal or
greater number of holders of other classes of shares cannot be described as
a separate meeting of shareholders, the fact that in this case the deferred
shareholders proceeded with the meeting without objecting to the presence of
t
ordinary shareholders in the hall clearly showed that they had waivecj their
objection to that presence. Consequently the resolutions passed at the
meeting were valid.
;
4.3 Notice of general meetings

Since the general meeting is the forum through which shareholders contribute
to the formulation of their company's policies, it is necessary that they should
be informed of such meetings. This is because of the obvious reason that
unless a shareholder is aware ol the meeting, he cannot attend it and will,
therefore, not be able to contribute to policies fornrulated there. But for this
contribution to be effective and worthwhile, mere notification of the meeting is
not enough. On the contrary, he needs to be informed ol the meeting and its
agenda in good time. This will not only enable him to be aware of what the
meeting is about but also assist him to prepare his own contribution tro whatever
will be discussed there. Besides, the prior knowledge wiil help him in deciding
whether or not it is worthwhile for him to attend the meeting. As Kekewich J. said
in Tiessen v Henderson (1899);lrst
"A shareholder may properly and prudently leave matters in which he takes no
personal interest to the decision of the majority. But in that case he is conten,t
to be bound by the vote of the majority because he knows the matter about
which the majority are to vote at the meeting. lf he does not know that, he has
not a f air chance of determining his own interest whether he ought to attend the
me:ting, make further enquiries, or leave others to determine the matter for
him..."
4.3.1 Length of notice

The general rule is that a company must give 21 days' notice for an annual
general meeting and 14 day's notice for any other meeting. Consequently, any
provision in a company's articles will be void to the extent that it provides
, shorter notice for either type of meeting. tr6l However, an annual general
meeting can be called at shorter'notice if allthe members who are entitlecito
attend it and vote agree to that notice. Similarly, a company is allowed to give
less than 14 days' notice for any other meeting if members who hold at least
95 % of the total voting rights of all the members at the meeting agree to that
'7r
shoner notice. (r4
4.3.2 Contents of a valid notice

The Act does not say anything on the contents ol a valid notice, leaving it to the
afiicles of each company to make provision for that. Thus, Article 24 of Table
A stipulates that notice of a general meeting 'shall specify the place, the day
and the hour of meeting and, in the case of special business, the general nature
of that business'. The article does not define 'special business'. However it
would seem to mean business which will not ordinarily be part of the agenda
of a general meeting. The usual contents of such an agenda are consideration
ol financial statements and auditors' and directors' reports, appointment of
auditors, election of directors and declaration of dividends. Matters outside this
list would be special business.
Now, as far as the purpose of the general meeting is concerned, Article 24has
been construed as imposing a duty on the companyto say in broad, ratherthan
exact and specific, terms what the meeting is intended to discuss. Therefore,
a notice will comply with it if it states that the general meeting is called to
discuss, for instance, 'the reduction of the company's capital'.
I
This is illustrated by the case of choppington collieries Ltd v Johnson

(1944). tr81ln that case, the company's articles contained a provision similar to
,l
-i
Article 24 of rable A. Notice of the company's annual general meeting stated
I
that the meeting was being called lo inter alia'elect directors'. lt was held that
this disclosure sufficiently specified the business to be transacted at the adver-
tised meeting as required by the company's afiicles. As Uthwatt J. put it:
"The question ... is whether, reading the document you can properly say
that notice has been given of the general nature of the business. There
is no need to specify the exact nature of the business ... Ail you have to
do, to comply with the articles, is to specify the general nature of the
business. I think there is in this notice a sufficient specification of the
general nature of the business ..."
On the other hand, if the notice fails to give sufficient indication of the nature
of the special business to be transacted at the proposed meeting, then the
resolutions passed by the meeting will be invalid. ln Tiessen v Henderson.
(1899) trel a company issued notices of general meetings whose purpose was
stated to be to pass special resolutions forthe company's f inancial reconstruc-
tion. The company had a provision in its articles which was similar to Article 24
of rable A. Three of the company's directors had financial interest in the
reconstruction in that they were entitled to receive commissions if the proposed
scheme of reconstruction succeeded. Because the notices did not disclose this
point, some members petitioned the court to restrain the company and the
directors from implementing the reconstruction. lt was held that the notices'
LL
AN INTRODUCTION TO COMPANY LAW IN MALAWI
failureto disclosethedirectors'financialinterest in thesuccess of the proposed

reconstruction rendered the special resolutions approving it not binding.
4.3.3 Persons entitled to notice

The following persons are entitled to notice of general meetings:
(a) every member who has the right to vote at such a meeting. By virtue ol
Article 108(1) of Table A, this means every member who has supplied to
the company an address within Malawi where the notice can be sent to
him;
(b) every person upon whom ownership of a share devolves within the
meaning of Section 54;
(c) every director of the company; and
(d) every auditor lor the time being of the company 1201 g *:'7
lf any one of these persons does not receive the notice, any resolution passed
at the meeting will be of no etfect. ln Musselwhite v C H Musselwhite & Sons
Ltd. (1962) t211 the plaintiff agreed to sell his shares in a company to another
person. lt was agreed that the plaintiff should remain on the cc,mpany's
membership register until the price for the shares was fully paid. Before the
payment was completed, the company convened a general meeting. However,
no notice was sent to the plaintiff because the company's directors erroneously
believed that since he had executed transfers of the shares, he was no longer
a member of the company and, therefore, not entitled to receive notice of its
general meetings. lt was held that the omission prima facie invalidated the
general meeting and that as it was not accidental, it could not be cured by the
company's articles which provided that accidentalomission to give notice of a
meeting to any member will nst invalidate the proceedings of that meeting.
As this case shows, not every omission to give notice is fatal; there are other
omissions which are not. Normally, articles provide, as does Article 26 of Table
A, that'accidental omission to give notice of a meeting to, or the non-receipt
of notice of a meeting by, any person entitled to receive notice shall not
invalidate the proceedings at that meeting. Therefore, if a company which has
a similar provision in its articles omits, through inadvertence, to send notice to
any person who is entitled to that notice, the omission will not invalidate
proceedings at the meeting. ln Re West Canadian Collieries Ltd (1962)r,'?1
while a company was dispatching notice of an annual general meeting to its

members, address plates of some of the members were inadvertently left out
of the company's addressography. The company's articles oontained a provi-
sion similar to Article 26. lt was held that the omission to send notice to these
members was accidental within the meaning of that provision. Forthat reason,
it did not invalidate proceedings at the general meeting.
' 4.3.4 Notice of members' resolutions and proposals

The members' righf is not only to be notif ied of and discuss an agenda prepared
by the company's management. On the contrary, they too can suggest matters,
including resolutions, which should comprise that agenda. Therefore, if the
company is requested by any member entitled to attend, and vote at a general
meeting to include in the notice of that meeting, a resolution which he intends
to
f i1i.q i move at the meeting, the company must oblige.tzst Of course, the request
jrr?;rlr'lust be written and he must sign it. t2al After that he must deposit it at the
company's registered oflice together with the resolution, six weeks before the
general meeting.
)
Similarly, if so requested by a member who is entitled to attend and vote at a
general meeting, the company must circulate to its members a statement of
any business which he would like to be discussed at the meeting. Again, he
must sign the request and deposit it together with the statement, at the
company's registered office ten days prior to the meeting. t25lq r r.9, 1 'r
4.4 Persons entitled to attend general meetings

Section 1 1 1(1) gives all the persons who are entitled to notice of general
i meetings and the company secretary, the right to attend the company's general
meetings. Nevertheless, the company reserves the right to prohibit by its
articles any member from attending the meetings if sums payable by him in
respect of shares held by him in the company have not been paid. Moreover,
Afiicle 39 of Table A provides that a member cannot vote at his company's
general meeting if he owes the company some money on the shares which he
,tn:;,pblds in it. The articles may also prohibit a director to vote in respect ol any
ii'ri. .lltontr"ct or arrangement in which he is materially interested. I26t However, if
there is any objection at a general meeting to the qualif ication of any voter, that
must be raised at that meeting. This is because if his vote is not disallowed
l':+']here, it will be valid for all purposes.t2Tl ln other words, in the absence of f raud,
| i
' ' the court cannot impeach the chairman's decision to accept that vote. As North
J. said in Wall v London & Northern Assets Corp.('18991 tert which involved
tr
construction of an article bearing the same wording:
'"The article in question is not of very general application; it does not go to the
extentof making the chairman's decision final as to a resolution being passed.
lf he made a mistake in counting, for instance, the article would not apply ...1
do agree that such a provision ... would apply even in a case of fraud. Any
fraudulent ruling would ...be vacated by a competent court".
This was applied in Wall v Exchange lnvestment Corp. (1926) Ialwhere one
of the provisions in the defendant company's articles was similar to Article 40
of Table A. The company held a general meeting to pass a special resolution
forthe company's liquidation and the appointment of liquidators. One of the the
participants voted as a proxy under a power of attorney. The plaintiff objected
to his votes being counted on the ground that the power of attorney did not
authorise voting by proxy. The chairman refused to disallow the votes with the
result that the resolution was passed with the required majority. lt was held that
since there was no fraud involved and the chairman acted bona fide, his
decision to allow the votes was final and could not be reviewed by the court.
4.5 Proceedings at the general meetings

4.5.1 Quorum
Just like any other meeting held to pass binding resolutions, every company
general meeting requires a quorum. For that reason, no business can be
. . transacted at any general meeting unless a quorum of members is present
'I'*' -,. when the meeting proceeds to business. tot And according to Section 1 12, two
' ''' p"r.ons who are members or hold proxies are enough to form a quorum. This
means, therefore, that one person cannot constitute a meeting even if he
attends in more than one capacity. However, this is subject to the rules
governing class meetings. For where a class of shareholders has only one
! ;a gnember, that memberwillconstitute a meeting forthat class t3rl and the quorum
,
-- : for that meeting will be one member present in person or by proxy.t32l lf within
thirty minutes from the time of the meeting there is no quorum, the meeting will
usually be dissolved il it was requisitioned by members. On the other hand if
the meeting was convened.in the normal way by the company, it will stand
_ adjou rned to the same day, place and time in the following week or to such other
--L ^'Ady, place and time as the directors may fix.
t33t
q.S,.Z Voting
lssues presented for consideration at company general meetings are decided
by vote. The voting may be by show of hands or by poll. According to Article
7'-
32 of Table A, unless an poll is demanded, a resolution put to vote must be

decided by a show of hands. And subject to any restrictions or rights attached
to any class of shares, every member present in person (apparently proxies are
not considered forthis purpose) is entitled to one vote where voting is by show
.vr- T ) of hands. On the other hand, on a pollevery member is entitled to one vote for
ii, " ri each share held by him. tsrt
The application of these rules is illustrated by Re Horbury Bridge Coal, lron

& Wagon Co. (1897).l3s1ln that case, the company's articles contained a
ptouision similarto Adicle 37. At a meeting where five members of the company
i' were present a resolution was passed to wind up the company. The company
r then proceeded to elect its liquidator by a show of hands. Of the two candidates
Ii
ptoposed for the post, one got three votes while the other got two which were
cast by members who held more shares in the company. No poll was
i demanded by the members for this vote. The chairman decided that the
: candidate who got two votes was duly elected as the company's liquidator. ln
i an action to challenge this decision, it was held that the chairman erred
I because as no poll was demanded, election of the liquidator was supposed to
I U" by show of hands and that entitled each member to one vote, regardless ol
the number of shares which he held in the company. Now since according to
that method the first candidate had more votes, he should have been declared
the tiquidator.
Members can demand a poll on any issue except the election of the chairman,
i or. the adjournment, of the meeting and any article which removes this right is
i q,1ai,;,yoid. t36l The reason for this restriction would seem to be that these two issues
normally require prompt decision whereas decisions by poll tend to demand

i more time because of the counting of votes involved.
However, the chairman must accede to the demand for a poll on any
issue if it is made by at least three members or any number of members
who represent at least one-twentieth of the total voting rights of all the
members entitled to vote at the meeting. Any article which makes such
::rr'rLli€ demand ineffective is void. I37I
4.5.3 Proxies
Section 1 13(1) allows every member of a registered company who is entitled
to attend, and vote at, its meeting to appoint another person to attend the
meeting and vote in his stead. He can appoint more than one person, each
representing such number of his shares as he may specily in the instrument

,, 3 Z' of appointment t381 The appointee is known as a 'proxy' and is entitled to the
same rights at the meeting as his appointor.
To ensure that members are aware, and avail themselves, ol this right,
subsection (7) requires every notice of a general meeting of a company limited
by shares to contain a reasonably prominent statement that every member of
the company is entitled to appoint one or more persons (who need not be
members) to stand in and vote for him at the meeting. The appointment must
.; * be by a written instrument in the form prescribed by Table A or C l3el and be
; - s,signed by or on behalf of the appointor.(el lf the latter is a body corporate the
instrument must be under its seal or be signed by its authorised agent or officer.
Moreover, it must contain instructions by the appointor to the proxy on how to
, :
, : vote in respect of any resolution dealing with special business.tarl
4.5.5 The chairman
Usually, the chairman of the board of directors willpreside overthe company's
general meetings. However, if there is no such chairman or he is late for a
quarter of an hour or is unwilling to preside, the members present can choose
one of them to chair the meeting. to"t/\'+ 1t' f /\
The chairman's duties are to:
1. preserve order in the meeting
2. ensure that the meeting is conducted in accordance with legal procedure;

and
3. decide any incidental question which may arise during the meeting, e.g.
how a polldemanded by members may be taken.
Where there is an equality of votes on either side, the chairman is usually given
the power to decide the issue through his casting uo1".t43lr1r+ 'l+ r;+
4.5.5 Resolutions
Company action must be backed by two types of resolutions: ordinary or special.
For instance, as already shown, articles of association can be altered only by a
special resolution. Similarly, share capital can be reduced only by a special
1 resolution. tsl On the other hand, a company needs an ordinary resolution only,
\
to increase its share capi[a/f4o or to remove any of its directors from his post. t46li rE'
V
60 - AN |NT8ODUCT|ON TO COMPANY LAW tN MALAWT
4.5.5.1 Ordinaryresolution
This is a resolution passed by a simple majority of votes cast by members of
4s);)r.rthB company, who are entitled to vote, personally or by proxy. raTt Thus, if a
company has five members andthree of themvote infavourof a resolution, that
resolution will be duiy passed if it is an ordinary resolution. Besides, a company
is under no legal obligation to give special notice of an ordinary resolution
intended to be passed at any of its general meetings. ln other wordi, a general
meeting can pass an ordinary resolution even though members had no prior
notice of the intention to propose the resolution at that meeting.
4.5.5.2 Special resolution

Section 120(2) gives three requirements for this type of resolution. First, at
least 21 days' notice must have been given to members of the general meeting
where the resolution is passed. Second, the notice must show the intention to
proposethe resolution as a special resolution atthe generalmeeting. And third,
the resolution must be passed by at least three-quarters of the votes cast in
person or by proxy by members entitled to vote at the general meeting.
4.5.6 The principle of assent

As already pointed out, the object of requiring notice of general meetings is to
give members an opportunity to contribute to the formulation of policies
governing their company. The corollary to this is that where members entitled
to vote on an issue agree to a course of action, it is not necessary for them to
meet in one place to express that assent simultaneously. As long as their
decision is written and signed by all of them, it is valid and binding as if it had
been reached at a general meeting. As a result, if it is described as a special
resolution, it'shall be deemed to be a special resolution within the meaning of
this Act'. t*l!,e!,,_,
This is illustrated by Parker & Cooper Ltd. v Reading (1926) tlgt ln that case,
an arrangement was made that one of the company's directors (who was also
a member) should advance money to it and that the loan should be secured by
a debenture drawn in hisfavour. Thearrangementwas neversanctioned bythe
company's general meeting. However, members discussed it form time to time
and individually assented to it. Because of this, the company and its liquidator
subsequently brought an action to have the debenture declared invalid. lt was
held that the debenture was valid because:
"[W]here the transaction is intra vires and honest, and especialty if it is for the
benefit of the company, it cannot be upset if the assent of the corporators is
L
given to it. I do not think if matters in the least whether that assent is given at
different times or simultaneously ... I can find nothing ... to prevent all the
corporators from arranging to carry out an honest intra vires transaction
entered into for the benefit of the company, even if they do not meet together
in one room or place, but all of them merely discuss and agree to it one with
another separately''.
However, this assent cannot be a substitute to a general meeting in matters

1-,
,involving the removal of the company's auditor or director. t50l ln such cases,
the company must hold a general meeting and pass the necessary resolution
in accordance with the normal procedure.
4.6 Directors
As just shown, the function of the company in general meetings is to
formulate policy and shape the company's capital and corporate struc-
tures. ln other words, the general meeting does not generally have the
power to manage the company. Usually, that power is given to the
company's directors. Thus for instance, Article 53 of Table A declares
that the business of the company which adopts Table A as its articles
must be managed by the company's directors.
It is clearly because of this that directors are defined by the Act as 'persons
appointed to direct and administer the business and affairs of the company''[51]; 1,1i]r 1
More will be said about directors in Chapters 5 and 7. Here it is intended merely
to look at their powers of management and limits imposed on those powers.
4.6.1 Powers of management

Where a company has a provision in its articles which is similar to Article 53,
then only its directors will have the power to manage the company. lts general
meetings will, as a general rule, not be allowed to exercise that power or to
instruct directors on how to exercise it. ln Automatic Self-Cleansing Filter
Syndicate Co. Ltd. v Cunninghame (1906)t521the company's directors were
given power to control and manage the company, subject to any regulations
made bythe company by extraordinary resolution. Subsequently, the company
passed an ordinary resolution which required the directors to sellthe company.
The directors refused to comply. lt was held that as the power to manage the
company was vested in the directors, it was up to them to decide, subject to an
extra-ordinary resolution, whether or not the company should be sold and not
for the company's members to make that decision.
r-
Similarly, in John Shaw & Sons Ltd. v Shaw ( 1 935;tsst *5ere the general power
of the company's management had been delegated by the articles to the
directors and the company in general meeting passed a resolution that
proceedings which had been instituted by the directors in the company's name
be discontinued, it was held that the resolution was invalid. ln the words of
Greer, L.J:
"A company is an entity distinct alike from its shareholders and its directors;
some of its powers may, according to its articles, be exercised by directors;
certain other powers may be reseruedforthe shareholders in generalmeetings.
lf powers of management are vested in the directors, they and they alone can
exercise these powers".
The powers of management tend to be extensive. Forexample, Article 53 allows

directors 'to exercise all such powers of the company as are not, by the Act or
by these articles, required to be exercised by the company in general meeting'.
But more pafiicularly, they include the power to:
1. borrow money, issue debentures and charge company property as

security for the loan;tsr.1 ,
2. determine how negotiable instruments and receipts for money paid to the
company are to be executed;lssl
. .
3. appoint other directors;lsol -. ,.'
4. appoint the managing directol;tsn
5. pay interim dividends;tsel
6. ensure that accounting records are kept and that accounts are prepared
and laid before the company in general meeting;tssl. .
7. delegate their powers to committees of directors or the managing directo6t6ol
f. issue shares and determine the rights and restrictions which may be
attached to them 16rl and
9. convene general meetings. t62l
oI
AN INTBOOUCTION TO COMPANY LAW IN MALAWI - 63
4.6.2 Limits on director's powers

Although the directors' powers of management are wide, they are subject to
common law and statutory limits. As a result they cannot carry on certain
activities even though those activities are managerial in nature. Besides some
of their powers must be exercised with the sanction of the company in general
meeting. The elfect of these limits is to leave ultimate in the running of a
company in the hands of the general meeting.
First, directors'powers are subjecttotheAct and the company's articles. Thus.

for instance, the issuing of shares is subject to the Act and any ordinary
resolution of the company.(631 Similarly, directors cannot do any of the following
without the sanction of an ordinary resolution of the company:
1. sell, lease or otherwise dispose of the whole or substantially the whole of

the company's business or property;
2. lssue new or unissued shares in the company; and
3. create or grant any right or option which entitles the holder to acquire any
class of shares in the compdny.lsr)
Second, as shown fully in Chapter 8, if the directors exercise their powers in

an unfair way, those who are adversely affected by that conduct have common
law and statutory remedies against them and the company. For example, in
Penderv Lushington (1877) t65l in contravention of his company's articles, the
chairman rejected certain votes at the company's general meeting. The
shareholders who had cast the votes brought an action for an injunction to
restrain the company's directors from acting on the footing that the votes were
invalid. The action succeeded.
Third, these powers are conferred on the directors collectively as a board. This
is clear from the use of the word 'directors' in Article 53. For this reason,
generally the powers will be exercisable at board meetings ol which appropri-
ate notice has been given and at which a quorum is present. By the same token,
neither an individual director nor any group of directors can,as a general rule,
exercise the powers and create a binding obligation on the part of the company.
ln Metalimpex v AG Leventis & Co. Ltd t66l the defendant company had
powers under its memorandum of association to inter alia indorse and
r otherwise deal with bills ol exchange.The powers were conlerred on the
company's board of directors by its articles of association. Subsequently bills
L
r
64 - AN INTFODUCTION TO COMPANY LAW IN MALAWI
of exchange payabletothe plaintitf were indorsed byone of the directors. When

one of the bills was not paid in spite of presentment for payment, the plaintilf
brought an action against the company as an indorser, to recover the amount
of the bill. ltwas held that since the company's articles gave no powerto a single
director or group of directors to exercise any of the powers of the company,
indorsement of the bills by one of the directors did not bind the company as an
indorser.Therefore the company was not liable to pay the money sought.
Fourth, the company in general meeting has the residuary power to exercise
directors' power of management if they are unable or unwilling to exercise the
powers. ln Barron v Potter (1914) toTl a company's afticles gave the board ol
directors power to appoint an additional director. However, because of per-
sonal dilferences between existing directors, the board could not meet to make
the appointment. Consequently, the company in general meeting appointed
the director. lt was held that the appointment was valid.
And lastly, the company in general meeting maintains uJtimate control over
directors because of its powerovertheirtenure of office. lt has powerto appoint
them. Besides, section 146(1) empowers it to remove from office all or any of
them in spite of any provision to the contrary in afiicles. Clearly, this determines
the extent of the board of director's superiority over the company in general
meeting.
LI
AN INTRODUCT]ON TO COMPANY LAW IN MALAWI - 55
Chapter Four
1. Section 4.
2. Section 31(1).
3. Section 31(2).
4. 11s73-741MLR 416.
5. See also Musselwhite v Musselwhite & Sons Ltd [1962] 1 Ail ER 201
and Spencer v Kennedy [1926] Ch 125.
6. Section 32(1).
7. Section 47 and Article 2, Table A.
8. Section 2.
9. Section 104(6).
10. Section 104(5).
11. Section 105.
12. Section 106(2).
13. Section 106(3).
14. [1937] 2AilER422.
15. [1899] 1 Ch 861.
16. Section 108(1).
17. Section 108 (3).
18. [1941] 1 Ail ER 762.
19. Supra., note 15. See also Baille v Oriental Telephone & Electrical Co
Ltd [1915] 1 Ch 503.
20. Section 107.
21. Supra., note 5.
22. [1962] 1 Ail ER 26.
23. Section 117(1).
24. Section 117(2).
25. Section 118(3).
26. Section 150(5) and Article 55(2), Table A.
27. Article 40, Table A.
28. [1898]2 Ch 469.
29. [1e26]Ch 146.
31. Section 124(2).
32. Section 124(3\.
35. [1879] 11 Ch D 109.
36. Section 11a(1)(a).

38. Section 113(2).
39. Section 113(4).
40. Section 113(3).
41. Section 113(5).
44. Section 67.
45. Section 66.
46. Section 146(1).
47. Section 120(1).
48. Section 121(1).
49. [1e26] 1 Ch 975.
50. Section 121(2).
51. Section 140(1).
52. [1906] 2Ch34.
53. [1935] 2 KB 113.
57. tbid.
59. Articles 96 and 99, Table A.
60. Articles 72 and 85, Table A.
62. Sections 105 and 106.
63. Supra., note 59.
64. Section 149(1).
65. 118746ChD70.
66. [1e73] 3 ALR (Com) 153.
67. [1914] 1 Ch 8e5.
Chapter Five
Company Directors
5.1 Appointment
Section 141 (1) provides that a registered company must have a minimum of
three directors. But subject to that, each company can have as many
directors as it wishes to have. tllThus, Article 64 of Table A empowers the
company to increase or decrease from time to time the number of its
directors. The first directors are usually appointed by the subscribers to the
company's memorandum, t2l Appointment of additionaldirectors may be left
to the board of directors. I31 However, if the company's articles contain a
provision similar to Article 64, the company will also be deemed to have
power to make that appointment. ln Worcester Gorsetry Ltd. v Witting
(1 936) t4l the plaintiff company whose articles contained provisions similar to
Articles 64 and 65 held a general meeting where directors were appointed.
Some of the company's members then brought an action to have the
appointment declared invalid on the ground that only the board of directors
had the power to appoint 'additional' directors. lt was held that although the
power was clearly vested in the board, that did not exclude the power of the
company in general meeting to make the appointment.
But even if the articles expressly confer exclusive power on the board of
directors to appoint subsequent and additional directors that power will revert
to and be exercisable by the company in general meeting if the board is unable
or unwilling to exercise it. This follows f rom the case of Barron v Pottertslwhich
empowers the company in general meeting to assume the board's powers in
such a case.
Normally, the articles willalso provide that allfirst directors should retire at the
company's first annual general meeting and that one third of them must also
vacate their posts at every subsequent annual general meeting. t6l Where that
is the case, the company in general meeting can fillthe vacancy by electing
someone to each post at the same general meeting. rn lf the company fails to
do so and the retiring director offers himself for re-election, he will be deemed
to have been re-elected.
5.1.1 Eligibility for appointment

The following persons are ineligible to act, orto be appointed, as directorof any
registered company:
1. a body corporate;
2. an infant or any other person under legal disability;
3. any person prohibited or disqualilied lrom acting as director of any

registered company by 3. any court order; and
4. except with the court's permission, an undischarged bankrupt. Itl,, ,t,
Moreover, the court has power under section 160 to order any person not to
be inter alia, company director without court permission if
(a) he is convicted ol any offence involving fraud or dishonesty or of any

offence in connection with the promotion, formation or management of a
body corporate or
(b) he is found guilty of fraud or breach of duty in the course ol the winding
up of any body corporate.
Besides, even if a person is not disqualified under the above provision, he

cannot be appointed a director of a registered company unless he consents in
writing to the appointment.tel
5.1.2 Residential requirements

The maiority of directors representing not less than three, including the
managing director, must be resident in the country.nol lf the company contra-
venes this requirement for more than two months, it may be wound up on the
Attorney General's application.tt tt
5.1.3 Sharequalification
Generally, it is not necessary for a person to be a member of , or to hold shares
in, the company of which he is director.tr2l However, if the company's articles
require itsdirectorsto haveacertain sharequalification, each one of them must
obtain that qualification not later than two months after his appointment. lf the
share qualification is introduced while he is already serving as a director, he
must obtain it within the neld two months. Should he fail to do so, he must vacate
his office tr31 and cannot be re-appointed director of the company until he
acquires the stipulated shares. tral
Where a share qualification is imposed, the articles may require that the shares
should be held in the directo/s own right. ln that case, the qualificatioh will not be
satisfied unless the director is registered in the company's membership register
in respect of the shares and enjoys the rights attached to them. ln other words, it
will not be enough firstly, if he has a mere right to be registered in respect of the
shares. The case of Spencer v Kennedy (1926) Irsl illustrates this. Article 20 of
a company's articles empowered directors from time to time to appoint any other
'qualified person'to bedirectorof thecompany. Adicle T0addedthateach director
should hold at least one share in the company. The company held a board meeting
on a Saturday and elected the plaintiff as director. Before the election, one share
was transferred to him. lt was held that although the plaintiff had acquired an
absolute right to be registered in respect of this share, he was not a 'qualified
person'within the meaning of Article 20 untilthe following Monday when his name
was put on the company's membership register. Therefore, his election on
Saturday was invalid.
Secondly, the share qualification will not be satisfied if the director holds the
shares concerned for someone, and has no beneficial interest in them. ln
Bainbridge v Smith (1889) t16l where the articles ol a company contained a
provision requiring the managing director to hold 'in his own right' e25,000
worth of shares, Cotton L J said:-
"[ l]n my opinion holding in his own right is something more than holding, and
it must be shown that he was not only the legal title holder which being on the
register gives h!m, but that he is an independent holder, and has got the
beneficial ownership of the shares".
5.2 Alternate directors

According to Section 147(1), a director can appoint another person as an
alternate director. The appointment may be made generally for the period
during which the director is absent f rom Malawi or unable to act as director. As
long as that appointment subsists, the alternate director will be deemed to be
an officer of the company and not an agent of his appointor. I17l However, he
cannot appoint an alternate director nor can he be required to hold any shares
in the company, although all directors of the company may be required to do
so. Moreover, until the termination of the appointment, both the alternate
director and his appointor may act as directors of the company. But unless the
former is a director in his own right, he cannot attend, or vote at, any meeting
of the company where his appointor is present. ttal Finally, the company cannot
pay remuneration to both the alternate director and his appointor; on the
contrary, the alternate director can either receive the remuneration which the
latter would have received during the period of the appointment or be paid by
his appointor.
5.3 Register of directors

Every company must keep a register of its directors, excluding alternate
directors, at its'registered office. trel The register must be accessible to the
company's members and must contain the following information on each
director:-
1. his present forename(s) and surname;
2. his former forname(s) and surname;

3. his residential and postal address; and
4. his business occupation, if any.
These particulars must be sent to the registrar for registration. (201The registrar
must also be notified of any changes in the directors or the particulars. tztl
5.4 Directors' duties

5.4.1 The duty of care and skill
Law imposes certain basic duties on company directors as defined by Section
140(1) as well as on any person who is not duly appointed director but:
(a) holds himself out or knowingly allows himself to be held out as a director
of the company; or
(b) on whose directions or instructions (except advice given in his profes-

sional capacity) r22l duly appointed directors are accustomed to 4sl. tzol
The lirst of these relates to the care and skill which they must display in the
performance of their functions.Describing the extent of this duty in Re City
Equitable Fire lnsurance Co Ltd (1901) t2al Romer J. said:
1. ln the performance ol his functions, a director need not exhibit a greater

degree of skillthan may reasonably be expected lrom a person of his own
knowledge and experience. ln other words, if he is a lawyer, he is not
expected to show the skill of an accountant. On the other hand, he is
expected to exhibit the skill of a lawyer ol his experience and knowledge.
According to the judge, 'it is perhaps only another way of stating the same
proposition to say that directors are not liable for mere errors of judge-
ment'. ln Re Brazilian Rubber Plantations and Estate Ltd. (191 1) tzst
company formed with the object of purchasing rubber estates bought one"
such estate. lts directors issued a prospectus containing statements
about the estate which were false. The statements were culled from a
repoft by the previous owner of the estate. Although the directors, who
knew nothing about rubber estates, were informed by their manager who
was sent to the estate that the statements were untrue, they still went
ahead with the purchase. When the company was compulsorily wound up,
they were sued for breach of their duty of care in buying the estate without
adequate examination and in not repudiating the contract of purchase
when they discovered errors in the report on which the purchase was
based. Holding that the directors were not liable for the breach, Neville,
J. said:
"A director's duty has been laid down as requiring him to act with such care
as reasonably to be expected f romhim having regard to his knowledge and
experience. He is ... not bound to bring any special qualifiations to his
office. He may undertakethe management of a rubber company in com-
plete ignorance of everything connected with rubber without incurring
responsibility for the mistakes which may result from such ignorance;
while if he is acquainted with the rubber business he must give the
company the advantage of his knowledge when transacting the company's
business".
2. A director is not bound to give continuous attention to the affairs of his

company. His duties are of an intermittent nature to be performed at
periodical board meetings which he is expected to attend whenever he is
reasonably able to do so.
The application of this rule is illustrated by the Marquis of Bute's case (1892) t26l
where the Marquis became president of a bank when he was six months old. He
attended only one board meeting in 38 years. lt was held that he was not liable for
irregularities which occurred in the bank's lending operations in his absence
Of course, this rule applies to non-executive directors only. Where the director
is a f ull-time executive or managing director of the company, his duties will not
be intermittent. On the contrary, he will be expected to give continuous
attention to the eompany's business.
3. ln the absence of grounds of suspicion, a director is justified in trusting

management to perform functions which, having regard to the exigencies
of business and the company's articles, may properly be left to them and
in accepting the information which they provide, as long as they appear
to be honest and competent. ln Dovey v Cory (1 901) t2a the director of a
banking company assented to the payment of dividends out of capital and
to advances on improper security. The assent was given as a result of
reliance on the information and advice of the company's chairman and
general manager. lt was held that he was not liable in negligence for
assenting to the irregularities because his reliance on these two persons
was reasonable.
5.4.2 Fiduciary duties

Apart lrom the duty to exercise due care and skill in the performance of their
functions, directors also owe fiduciary duties to their company. The effect of
these duties is that they should display utmost good faith towards the company
in their dealings with it or on its behalf. ln practical terms this means that, tirstly,
they must exercise their powers for the purpose {or which those powers are
conferred, and bona fidelor the benefit of the company as a whole. Thus, for
instance, directors will be in breach ol their f iduciary duty to the company if they
use the power conferred on them by Article 2 of Table A to issue shares, to
silence a dissident majority of shareholders orto enhancetheircontroloverthe
company. This is because that power is theie for the purpose of enabling the
company to raise capital. On the other hand, the requirement that directors
should exercise their powers bona fide lor the benefit of the company as a
whole serves to ensure that they do not, for example, {avour one section of the
shareholders or are not motivated by self-interest in their actions. These two
elements are illustrated by the following two cases.
ln Re W & M Roith Ltd. (1967)t 8l the controlling shareholder and director of two
companies wished to make provision for his wife. He, therefore, entered into a
service agreement with one of them whereby on his death she would be entifled
to a pension for life. lt was held that since no thought was given to the question
whether the arrangement was for the benefit of the company, and its sole object
was to provide for the widow, the agreement was not binding on the company.
Similarly, in Howard Smith Ltd. v Ampol Petroleum Ltd. (19741wt share-

holders who held 55o/o ol a company's issued shares intended to reject a take-
over bid for the company. The directors honestly believed that it was in the
company's interest that the bid should succeed since the bidder was expected
to provide additional capital for the company if it obtained control. Therefore,
they allotted new shares to the prospective bidder so that the dissenters should
have less than 50% of the enlarged share capital and the bid should succeed.
It was held that as the directors used their power over the company's shares
purely for the purpose of destroying an existing majority or creating a new
majority which did not previously exist, the allotment was void.
Secondly, the directors must not put themselves in a position where their duties
to the company and their personal interests may conf lict. One implication of this
is that a director must not make a secret profit or appropriate his company's
opportunities by reason of his position. lf he does that, he must account for the
prof it to the company. ln Boston Deep Sea Fishing Co. Ltd. v Ansell (1888)
t3ol the director of a company contracted on its behall for the construction of
fishing smacks. Unknown to the company, he was paid a commission on the

contract by the other party to the contract. lt was held that he must account to
the company for the commission.
Similarly, in lndustrial Development Consultants Ltd v Gooley (1972) Fll the

plaintitf company provided consultancy services to gas boards. When one gas
board declined to award a contract to the company and the company's managing
directorrealisedthat he mightpersonallybe abletoclinchthecontract, he resigned
f rom.the company. Thereafter, he got the contract for himself. lt was held that he
should account for the benefit mafle under the contract to the company'
It should be noted that where a director misappropriates company opportuni-

ties or property in this way, it is immaterial that the company could not have
availed itself of them or acquired the property. What is material is that the
misappropriation has taken place. ln Regal (Hastings) v Gulliver where
directors of the company acquired shares in its subsidiaryforwhich itcould not
subscribe and sold them at a profit, it was held that they were in breach of their
f iduciary duty to the company. According to Lord Porter: (l 142\
"Directors... occupy a fiduciary position towards the company whose board
they form. Their tiabitity in this respect...[depends] upon the proposition that a
director must not make a profit out of propefi acquired by reason of his
relationship to the company of which he is director. lt matters not that he could
not have acquired the propertyforthe company itself- the prof itwhich he makes
is the company's even though the property by means of which he made itwas
not and could have been acquired on its behalf..." t3tel
According to this case, the director will have to account for the oppor-
tunity, profit or property if he obtains it for himself . ln other words, if he
obtains it as a nominee for someone else, he is not bound to account for
it to the company.
Another implication of the fiduciary duty is that a director must generally not have
an interest in a contract into which his company enters or intends to enter. Clearly
this will be the case where he has an interest in the other party to the contract by
being,lorexample, itsdirector, shareholder, proprietororwhere itis a partnership,
by being one of its partners. But f or this rule to apply, the interest m ust be'material'.
And what is material interest is a question of fact. According to Section 150(2), an
interest need not be direct for it to be material; it may be indirect as where the
directoCs son or wife is a proprietor of or a director, partner or shareholder in the
other party to the contract. Besides there may be material interest even though the
directormakes no profitfromthecontract. Howeverif the otherpartytothecontract
is a public company, the mere fact that he is its debentureholder or holds 5% of
its shares will not make his interest in the contract material. t32l
Of course, unless the company's articles provide otherwise, a director will not be
in breachof hisfiduciarydutynotto puthimself inapositionwherethereisaconflict
between his interests and those of his companysimply because he has a material
interest in such a contract. He will onty be in breach of the duty if he does not
disclose the interest to other directors or shareholders at the meeting where the
question of entering into the contract is lirst discussed.F3l ln that case, the contract
will be voidable by the company and he may be liable to account to the company
lor any profit made. ln Transvaal Lands Co. Ltd. v New Belgiqm Land Go. Ltd.
(1914) t34l the plaintifls bought shares in the defendant company. A person who
was a shareholderin both companies as wellas a directorof the plaintitf company
voted for the purchase without disclosing his interest in the defendant company
as required bythe articlesof theplaintitf company. ltwas heldthatthe contractwas
voidable at the plaintiff company's option.
Howevermeredisclosure of the interestis notenough. Section 150(5) provides

that in the absence of dnything to the eontrary in the company's articles, he witl
also need to abstaining f rom voting at, and to be reckoned in the quorum ol, the
meeting where the decision to enter into the contract is taken. lf he votes, his
I
vote should not be counted. ln Re Greymouth Point Elizabeth Railway &

Coal Co. Ltd. (1904), l35l a company's articles provided inter alialhat a director
should notvote in respectof anycontract in which he is interested orbe counted
in the quorum present at the meeting. Two of the company's directors
advanced money to it. Subsequently, it was resolved at the company's board
meeting that debentures should be issued to them in consideration of the
advances. The only persons present at the meeting were the two directors and
another director. lt was held that in accordance with the company's articles,
there was no quorum at the board meeting and the two directors were not
capable of voting on the issue of the debentures. As a result, the resolution to
issue the debentures to them was invalid.
A third implication of the requirement that directors should not put themselves
in a position where their duties to the company and their personal interests may
collide is that they must not exploit information which they have on the
company's debentures and shares for their benefit. ln the course of his job and
by virtue of his office, a director may acquire or become privy to data which may
atfect the value of these securities. The information may relate to an imminent
take-over bid or expectations of a rise or fall in the company's profits or a
probable purchase or sale of the debentures or shares at a high or low price.
l{, after acquiring such information, he buys or sells the securities, he is obliged
to disclose it to the purchaser or seller.l36l For the purpose of this provision a
director buys or sells company securities if he has or has had any beneficial
interest in them. tszl Clearly he will have such an interest if the purchase or sale
is made by him or on his behalf or on his advice or instructions or on the advice
or instructions of any person to whom he had imparted the information. lf he
f alls to make the disclosure, he will be liable to account to the company for the
profit made on the purchase or sale. Besides, the purchaser or seller of the
debentures or shares can avoid the transaction within twelve months of its
conclusion. l38l
ln the American case of Diamond v Oreamuno (1969) 3el realisinO that

their company's prof its had fallen drastically, directors sold their shares
on the market at $28 a share, before the fall was made public. Subse-
quently, the value of the shares dropped to $11 per share. lt was held
that although the company had suflered no loss from the directors'
conduct, they were liable to account to it the difference between $28 and
$11 per share. ln the words of Fuld, C.J.:
"lt is well established ... that a person who acquires special knowledge or
informafion by virtue of a confidential or fiduciary relationship with another is

not free to exploit that knowledge or information for his own personalbenefit
but must account to his principal for any profits derived therefrom'.
However, it would seem that if the sale is not initiated by the director, he is not
obliged to disclose the confidential information to the other party. This will be
even more so where the information relates to a mere overture, rather serious
negotiations, byathird partyfora possible purchase at a profit of the company's
undertaking. ln PercivalvWright (1902) I4ol the plaintiff offered their shares for
sale to their company's directors at a price fixed by the plaintiffs. Three of the
directors accepted the offer and bought the shares. Subsequently, however,
the plaintiff discovered that during the negotiations for the sale, the board of
directors had been approached by someone for a possible purchase of the.
entire undertaking of the company at a price per share which was considerably
higher than that paid for the plaintiffs' shares. They then brought an action
seeking to have the sale set aside on the ground that as the purchasers of the
shares were directors of the company, they ought to have disclosed this
information while considering the plaintiff's offer. Dismissing the action, Swinfen
Eady, J. held that directors are not obliged to disclose information premature
disclosure of which might well be against the best interest of the company.
Besides, he added:
'There is no question of unfair dealing in this case. The directors did nc!
approach the shareholders with the view of obtaining their shares. The
shareholders approached the directors , and named the price at which they
were desi rousof selling".
Apart from this duty of disclosure, if the securities are traded publicly, section
a3(1) of the Capital Market Development Act, 1990 imposes another duty on
company directors in respect of confidential information. lt prohibits every such
director to abuse the information by:
(a) effecting or causing to be effected any securities transaction based on

material information which has not been made public;
(b) disclosing any confidential information on the affairs ol a company which

he obtains by virtue of his otlice or employment in the company, before
the normaltime for publication ol that information by the company; and
(c) carrying out any securities transaction based on internal and confidential
knowledge of company inlormation before the normal time for publication

of that information by the company.
Section 2 of the Act defines material informalion as any information which can
reasonably be considered to be of interest to existing or potential parties in a
capital market or to any person engaged in the buying, selling or holding of
securities for investment purposes for his own account. This includes any
information which is likely to affect the price or value of securities.
The overall position can therefore be summarised as follows. ll a director has

got inside inlormation on his company's securities, he must disclose that
information to the purchaser or seller of the securities, if he initiates the
purchase or sale of the securities. However if the securities are traded publicly
on the securities market, he cannot buy or sell them until the information is
made public in accordance with the requirements of the Capital Market
Development Act.
5.4.3 The duty to act in conformity with the articles and memorandum
As shown in chapter 2, Section 22(1) prohibits a registered company to carry
on any business or exercise any power which the company is restricted by its
articles or memorandum from carrying on or exercising. Besides, it prohibits
the company to exercise its powers in a manner which is inconsistent with the
company's articles or memorandum. Since most company powers will be
delegated to the company's directors and the directors will also be given power
to decide which business the company can carry on, the effect of Section 22(1)
is to impose a duty on them to act in conformity with the company's articles and
memorandum. Examples ol the exercise of powers in a manner which does not
conform to the company's articles include:
1. declaration of dividends by directors where that power is conferred, as

done by Articles 89 of Table A, on the company in general meeting; or
2. borrowing on behalf of the company, sums ol money in excess of the limit

set by the article tarl without the prior sanction of the company in general
meeting;or
3. contravening any article (contemplated by Section 140(4) which limits di-

rectors' authority to do certain things on behalf of their company.
An illustration of these examples is Royal British Bank v Turquand (18561tn2t

where directors had power under their company's deed of settlement to

borrow, on behdlf of the company, such sums of money, as were from time to
time authorised by a resolution of the company in general meeting. However,
they borrowed money f rom the plaintiff bank without that authority. For reasons
which are given in paragraph 7.1 .3, the company was held to be bound to repay
the loan.
Clearly, this type of conduct on the part of company directors constitutes

exercising power in a manner which is inconsistent with the company's
constitution. For although the directors were exercising a legitimate power of
the company to borrow money for its business operations, they were doing so
in contravention of the clear provision in the company's constitution. As to what
would now be the legal effect ol such conduct, see para. 7.1.5. l43l
5.5 Directors'remuneration
Directors are not seruants of the company, on the other hand, they are, as already
indicated, its managers and controllers. For this reason, they are usually not
entitled to be paid a salary unless there is a service contract between them and
the company which entitles them to that payment. However, the articles do
sometimes provideforsome remuneration to be madetothem. Thus, forinstance,
Article 50 of Table A provides for such remuneration which accrues from day to
day as determined by the company in general meeting. The afticles also empower
the companyto reimbursethem alltravelling, hoteland otherexpenses which they
incur in connection with the business and meetings of the company.
As this provision shows, it is for the general meeting to determine f rom time to
time how much remuneration the directors should receive. Clearly, if no such
determination is made, they will not be able to receive anything. ln Re
Richmond Gate Ploperty Co Ltd. (1965)taala company's articles contained
a similar provision. When the company went into liquidation, the plaintiff who
was its managing director sought remuneration on a quantum meruit basis.
However, the company had not determined his remuneration. lt was held that
since his remuneration was to be determined by the company's directors, he
could not get anything if they had not determined to pay him.
Now generally the company is not under any legal obligation to disclose this
remuneration in its annual financial accounts. What is required is simply to
attach a note to the accounts which shows inter alia,lhe aggregate amount of
the directors' emoluments and pensions.t45l This aggregate must include fees,
salaries, expense, allowances, sums paid by way ol interest, contributions paid

under any pension scheme, and the estimate value of benefits in kind paid to
any director in respect of his services as an officer of the company. However,
it must not include reimbursemenls of expenses properly incurred by directors
in the pedormance of their functions.
5.5.1 Payments to directors for loss of office ortransfer of the company's

undertaking
Apart from the remuneration which has just been discussed, there are two
other forms of payment which a company may take to its directors. As noted
earlier, a registered company has power to remove any of its directors from
office. tsl However, that does not deprive a director who has a service
agreement with the company of the right to compensation under that agree-
ment on the termination of his directorship. IaTlThus where such an agreement
exists, the company will pay the dismissed director for his loss of of,fice.
Secondly, a company may also make a paym'ent to its directors in connection
with the transfer of the company's business or property to another person.
According to Section 155(4) where a payment (which is not remuneration) is
made to a director within a year before or two years after the agreement of Jhe
transfer and the company or the transferee is privy to the payment, that
payment will be deemed to have been made in connection with the.transfer.
Before either payment is made, its particulars must be disclosed to the
company in general meeting and be approved by an ordinary resolution.t4sl lf
this is not done, the payment will be deemed to have been received by
each director in trust for the company.t4el Of course the disclosure does
not apply to:
(a) the payment of damages awarded by any court for breach by the
company of a valid service agreement and
(b) lhe bonafidepayment by the company of any pension or superannuation

benefit in respect of past services rendered under a valid seruices
agreement.tsol
For the purpose of this exemption, a service agreement will not be deemed to
be valid if it is entered into in contemplation of the transfer or an offer to acquire
the comPanV's shares. tstt
5.5.2 Payments to directors in connection with take-over bids

Where there is an offer for the acquisition of a company's shares and payment
is made to directors in connection with the bid, the directors must disclose
particulars of the payment in the notice of the bid sent to the company's
shareholder. {521This will apply where the offer is made to:
(a) allthe company's shareholders or
(b) all holders of the class of shares to which the ofler applies or
(c) all holders of shares which, together with shares beneficiary owned by or
on behalf of the offeree confer on the latter the right to one:third of the
voting power at any general meeting of the company.
And again, payment will be deemed to be made to directors in connection with

a take-over bid if they receive it within a year before or two years after the bid
and either the company or the bidder is privy to the payment.ts3]
5.6 Remedies against directors

lf a director is in breach of any of the foregoing duties,
1. he may have to account to the company for the prolit made out of the
breach; ts{
2. he may have to indemnify the company against loss caused by the breach;
3. if he sells property to the company or buys or sells its securities without

making the disclosures required by Section 152(1), the contract may be
rescinded by the company or the buyer or the seller, as the case may be
and
4. he may also be liable to pay a fine. tssl
Of course, a person who without authority purports to enter into a contract on

behalf of acompanyas a directorcan be sued for breach of warrantyol authority
by the other party to the contract. ln Collen v Wright (1857) ts6l a person who
was purpoding to act on behalf of another granted the lease of the latter's land
to a third person. ln fact he had no authority to do that. lt was held that he was
liable to the third person for breach of warranty of authority.
Moreover, it is a criminal offence if a person who is not a duly appointed director

of a company:
1. holds himself out or knowingly allows himself to be held out as a director

of the company or
2. is held out by the company or knowingly allowed by it to hold himself out,

as its director. tsa
And according to section 163, a registered company cannot by its articles or

memorandum exempt its directors from liability tor inter a/ra, negligence or
breach of any of their duties or provide for their indemnification against such
liability. The practical effect of this would seem to be that a company cannot
waive compliance by its directors of the duties discussed above. This would
also seem to suggest that a company cannot take out an insurance policy to
insure its directors against loss arising from breach of their duties.
5.7 Loans to directors

It is not lawful for any registered company to:
(a) lend money to any of its dircctors or to any director of its subsidiary company or
(b) guarantee or give security for a loan to such a director or
(c) lend money to any other body corporate or guarantee or give security for a
loan to another body corporate if any director of the company is interested
in at least one-third of that body corporate's issued share capital. Isel
However, this does not atfect a loan by a company to its subsidiary or holding
company tsel or its provision of a guarantee or security for a loan to its holding
company or subsidiary. 160l Similarly, section 151(1) does not prohibit a loan,
guarantee or security by a company whose business is that of lending money
or giving guarantees or security for loans as long as the amount lent or
guaranteed does not exceed 1% of the company's net assets. ln other words,
section 151(1) does notprohibit a commercial bank t6rlto lend money to its
director. of course such a loan would be subject to the supervision of the
Reserve Bank of Malawi under section 29 ol the Banking Act. Moreover, a
company can lend money to its directors to meet expenses incurred by them
lor the purpose of the company or to enable them perform their functions
properly.t62lButforthis to be valid, priorapprovalmust be given bythe company
in general meeting after disclosure of the expenses and the amount of the loan
or the extent ol the guarantee sqcurity. lf the approval is not given at or before
the next annual general meeting, then the loan must be repaid or the liability
T
(
guaranteed or lor which security is given be discharged, within six months of

that meeting.
5.8 The board of directors

The powers of management which directors enjoy are not conferred on them
individually. On the contrary, the powers are vested in them as a body.
Collectively, directors of a company are referred to as the'board'of directors.
5.8.1 Conduct ol board meetings

The Act does not say how these meetings are supposed to be conducted.
Consequently, it is for each company to provide for the matter in its articles.
Article 68 of Table A gives the board freedom to regulale its meetings. But
subject to that,
(a) every director can summon a board meeting at any time;
(b) it is not necessary to give notice of board meetings to directors who are
absent from Malawi;
(c) questions arising at the meeting must be decided by a simple majority of

votes; and
(d) in the event of an equality ol votes, the chairman of the meeting is entitled
to a casting vote.
Similarly, the quorum for board meetings is left to the board's discretion. Where
none is fixed by the board, the quorum will be two directors 163) 65 in the case
of general meetings. A vacancy in the board cannot stop the board from
performing its functions. However, if the vacancy is such that it reduces the
number of directors below the quorum for board meetings, then the board is
only allowed to increase the number to the required quorum and to summon
the general meeting of the company. t61l lf the board does anything else while
the number of its members remains below the quorum, lhat action will be
invalid.
5.8.2 The chairman

The board of directors is empowered to elect a chairman for its meetings and to
determine the period f or the tenure ol his office. Fq Where no chairman is elected
or where one is elected but he is late lor any board meeting by five minutes, the
board can choose one of its members to preside over the meeting.
t
AN INTRODUCTION TO COMPANY LAW IN MALAWI _ 83
5.8.3 The managing director

The board also has power to appoint one or more of its member to be the
managing director tsl for such a period and on such terms as it thinks f it. As long
as the appointment subsists, the managing director is not subject to retirement
by rotation. However, he will cease to hold.that office if for any reason, he
vacates the post of director of the company.
The managing director is entitled to receive such remuneration as the board

may fix. 167l Besides, the board may confer any of its powers on him. tol Ol
course those powers may be revoked or varied from time to time. ln Harold
Holdsworth & Co Ltd v Caddies (1955) t6el the plaintiff was appointed
managing director of the defendant company lor a period of five years.
Subsequently, the company's board of directors resolved that the plaintiff
should confine his attention to one of the companies subsidiaries only. He
regarded this as a breach of the agreement under which he was appointed. lt
was held that the board was not in breach of the agreement because it was f ree
to appoint a managing director and then limit his duties as it wished.
5.9 Termination of appointment

5.9.1 Removal from office
Section 146(1) allows a company to remove from office all or any ol its
directors. The removal must be sanctioned by an ordinary resolution and is
valid in spite of any provision to the contrary in the companies articles or in any
agreement between it and the director(s) concerned. Of course where the
director has a service agreement with the company, he will be entitled to
compensation if he is removed in breach of that agreement. rtol
Section '146(2) requires special notice ol any resolution to remove a director

from office to be given to the company at least 35 days before the meeting
where it is to be passed. A copy of the notice must be sent to the director
concerned. Besides, he is entitled to speak on the resolution at the meeting.
The Act also gives him the right to have his writlen representations on the
resolution circulated by the company together with every notice of the meeting
to all those who are entitled to attend the meeting. t71l However the company is
not bound to circulate the representations if it receives them 7 days betore the
meeting or the court so orders because they are unreasonably long or
defamatory.
ln a vote to remove a director from office, the articles will often give him more
votes for each share which he holds in the company. tr2lThis weighted voting
r 84 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
is no longer allowed in Malawi. According to Section 146(5) on a resolution to

remove a director from office, no share can carry a greater number of votes
than it would carry on any matter to be voted on at any general meeting of the
company. Consequently, subject to the voting rights generally attaching to the
company's shares, the shares held by the director sought to be removed from
office will carry the same number of votes as they would carry at any other
general meeting.
5.9.2 Retirement
As already noted, all the first directors of a registered company must retire at
the company's first annual general meeting.It3lA third of them must also retire
at every subsequent annual general meeting.
5.9.3 Vacation of office

According to Section 145(1) a director must vacate his oflice if he
1. becomes incompetent to as director by virtue of Section 142 or

t
2. ceases to hold office by reason of Section 144 or
3. resigns from his post.
A director may also have to vacate his otfice il he accepts or holds any other
office in contravention ol his company's articles. ln the case of The lron Ship
Coating Co Ltd v Blunt (1868) ITal the company's articles provided that any
director who accepted or held any other office in the company than that of
manager should thereupon be disqualified f rom being and cease to be director.
A person who was the company's secretary was later appointed director. From
the time of his appointment, he ceased to receive a salary as secretary
although he continued to perform secretarial duties. lt was held that by
continuing to perform these duties, he did not contravene the company's
articles because in ceasing to receive a salary as secretary, he stopped holding
another office within the meaning of the article.
AN INTROOUCTION TO COMPANY LAW IN MALAWI - 85
Chapter Five
1. Section 141(3).
4, [1e36] Ch 640.
5. [1914] 1 Ch 895.
8. Section 142(1).
9. Section 142(5).
10. Section 143(1).
11. Section 143(2).
12. Section 144(1).
13. Section 144(2).
14. Section 144(3).
15. [1e26] Ch 125.
16. [1889] 41 Ch D 462.
17. Section 147(2).
18. Section 147(6.
19. Section 157(1).
20. Section 158(1).
21. Section 158(3).
22. Section 140(5).
23. Section 140(21.
24. [192s] Ch 407.
25. [1e11] 1 Ch 42s.
26. [1892] 2 Ch 100.
27. [1e01] AC 477.
28. [1967] 1 Ail ER 9.
29. [1e74] 1Ail ER 1126.
30. [1888] 39 Ch D 33e.
31. 119721 2 Ail ER 162.
31a. 119421 1 Ail ER 378.
32. Section 150(7).
33. Section 150(1X2X3).
34. [1e14] 2 Ch 488.
35. [1904] 1 Ch 32.
36. Section 152(1).
r"
37. Section 152(2\

38. Supra.,note 34.
39. 248 NE 2d 910.
40. [1902] 2 Ch 421.
41. The proviso to Article 52, Table A.
42. [1856] 119 ER 886.
43. As to what would now be the legal effect of such conduct, see paras 7.1
and 8.2.1.
44. [1964] 3 Ail ER 936.
45. Section 188(1XaXb).
46. Section 146(1).
47. Section 146(71.
48. Section 153(1X2).
49. Section 153(3).
50. Section 155(2).
51 . Supra., note 47.
52. Sectioh 154(1).
53. Section 154(4).
54. Boston Deep Sea Fishing Co Ltd v Ansell supra., note 2g.
55. Section 154(2).
56. [1857] 120 ER 241.
57. Section 140(3).
58. Section 151(1).
s9. Section 151(2)(a).
61. A commercial bank must be a registered company by reason of section
3(2) of the Banking Act.
62. Section 151(4).
67. Re Richmond Gate Property Co Ltd supra., note 42. \
69. [19s5] 1 Ail ER 925.
70. Section'146(7)
71. Section.t4s(3) HC(:)
72. See for example, Bushell v Faith [1970] zWlR 272.
74. [1868] LR 3 CP 484.
l--.
j
AN INTRODUCTION TO COMPANY LAW IN IIALAWI - r
Chapter Six
Company Officers
There are many instances where the companies Act lifts the corporate veil and
holds a company 'officef responsible for contravention by his company of
certain statutory requirements. For example, if a company fails within 2 months
of allotting its shares to send to the allottee a share certificate, the company and
the off icer responsible for the failure will be liable to a fine under section 52(3).
similarly, failure by a company to send to the registrar notice ol an application
to the court against a variation of class rights makes the company and its officer
who is in default liable under section 48(8) to a fine. Again section 156(7)
provides that should a company carry on business for more than 2 months
without a secretary, the company and every officerwho is in default will be liable
to a fine. For these reasons, it is important to determine who is a company
officer.
According to section 2 of the Companies Act, the expression 'company

officer' includes every director, company secretary, receiver appointed by a
debentureholder and the liquidator of the company. However it does not
include the company's auditor or receiver appointed by the court. ln this
chapter it is intended to discuss the legal position of the company secretary
and that of the auditor although he is not a company officer. On the other
hand discussion of the liquidator and receiver is reserved to chapters 15 and
1 1, respectively.
6.1 The Company auditor

It will be shown in chapter 12 that not later than eighteen months after its
incorporation and subsequently once every calendar year, a registered com-
pany must circulate to its debentureholders and members certain financial
statements and reports. One of those reports is an auditor's report on the
company's financial position. According to Section 190(1), that report must be
prepared by persons who are duly qualified and appointed as auditors.
6.1.1 Appointment
Under Section 191(1), within three months of its incorporation and thereafter at
each annual general meeting, every registered company must appoint an
LAW IN MALAWI
auditor or auditors to hold otf ice until the next annual general meeting. The f irst
appointment nl.y be made by subscribers to the companies memorandum.
However, if they do not make the appointment within one month of the
company's incorporation, the company's directors may appoint the auditor(s).
lll lf a company has no auditor for a continuous period of three months,
the
-registrar may appoint one for it. t2l within twenty one days of the appointment
or on the occurrence of any change in its auditors, the company must give
notice of the appointment or change, as the case may be, to the registrai for
registration.
6.1.2 Qualification
According to section 192(1) the person appointed as auditor of a registered
company must be eligible and entiiled to act as such under the public
Accountants and Auditors Act. But even if he is so qualified, he cannot be
appointed or act as an auditor unless prior to the appointment he gives written
consent to it.
6.1.3 Duties
section 194(1) requires company auditors to be faithful, diligent, carefuland
to show ordinary skill in the performance of their functions. ln other words, the
law does not impose any special standard of performance on them. on the
contrary, it expects no more than the duty of care of an ordinary auditor found
in similar circumstances. And just like in the case of directors, section 194 (2)
renders ineffective any provision in a company's articles or memorandum or
in any contract between a company and an auditor which exempts him from
that duty or indemnifies him against liability for its breach.
6.1.4 Powers
Every company auditor is entitled to have access at all tirnes to its place of
business and to all its accounts and accountirrg ;c;o;ds. t3r He is also entitled
to require from the company's officers such information and explanation as he
thinks necessary for the performance of his duties. Moreover, section 194(4)
allows him to attend any general meeting of the company and to be heard at
such meetings. talof course, this is additionalto his right to receive notice of
such meetings contained in section 107. company auditors do also have the
right to apply to court for directions in relation to any matter concerning the
performance ol their functions under the Act. Ist,
6.1.5 Remuneration
Generally, the auditor's remuneration may be fixed by the subscribers to the
-l
I
company's memorandum, the company's directors orthe registrar, dependrng

onwho appoints him.16lThe remuneration sofixed willbeforthe period expiring
atthe conclusion of the nextannualgeneral meeting of thecompany. However.
if or where none of the mentioned persons exercises the power, Section
191(7Xb) allows the general meeting to fix the remuneration by an ordinary
resolution.
6.1.6 Termination of Appointment

A company auditor's appointment will determine if he:
(a) ceases to be qualilied for appointment or
(b) resigns from office by written notice to the company or
(c) is removed from office by an ordinary resolution of the company or

another person is appointed in his place. rrl
However, this resolution will not be effective unless:
1. it is passed at a general meeting of the company;
2. written notice of the intention to move the resolution has been given to the
company at least thirty five days prior to that meeting;
3. on receipt of the notice, the company has sent a copy of it to the auditor
and
4. the company has given at least twenty one days' notice of the resolution
to its members. t8l
However this resolution will not be effective unless certain conditons are
satisfied. First, it must be passed ata general meeting of the company. Second,
special notice of the resolution must have been given to the company at least
35 days before the meeting. Third, after receiving the notice the company must
have sent a copy of it to the auditor. And lastly, the company must have given
notice of the resolution to its members.
Once he receives a copy of the resolution, he has the right to prepare a

statement on it and send it to the company for circulation to the company's
members together with notices of the meeting. At the meeting he is entitled to
r
TION TO COMPANY LAW IN
be heard on the resolution and to read the statement. lf the resolution is passed,
it can not take effect until after the conclusion of the meeting.
6.2 The Company secretary

section 156(1) requires every registered company to have a secretary. The
Secretary must be resident in Malawi tel and may be a body corporate. tror
Besides, two or more persons may jointly act as company secretary.
Unless the company's articles provide otherwise, the company secretary must
be appointed bythe directors who also have powerto remove him from office.
The appointment may be for such term and remuneration and on such terms
as the directors think f it. t11l once the appointment is made the company must
enter in the register of secretaries the secretary's particulars such as name,
occupation, and business and residential address.
The company secretary plays a more restricted role in the company than
directors. Forthat reason, he has no general authority to bind the company by
contract. Similarly, he cannot generally borrow money on the company's behalf
unless he is specifically empowered to do so.
Of course, this is not to say that he is a mere clerk. On the contrary, he is the
chiel administrative off icer of the company with extensive administrative duties
and responsibilities. As the man responsible for the day to day administration
ol the company, he makes decisions on behalf of the company and enters into
contracts in its name in matters relating to that area. Consequenfly, the
company is taken to hold him out as having authority to bind it in respect of
contracts connected with administration of its affairs.
6.3 The Company Manager

As the name suggests, a manager exercises supervisory control in the general
managementof the company. Generally, managers are mere employees of the
company with no policy-making powers. However, where a manager is senior,
as in the case of general manager or managing director, he will usually be part
of the company's directing will. For that reason, he will be subject to the same
fiduciary duties as the company's directors. Besides, he will have authority to
bind the company within certain respects.
Chapter Six
1. Section 191(4Xa).
2. Section 191(a)(c).
3. Section 194(3).
4. See also section 11 1.
5. Section 194(5).
6. Section 191(7)(a).
7. Section 191(5).
8. Section 193(1).
9. Section 156(5).
10. Section 156(3).
11. Section 157(1).
Ghapter Seven
Company Liability
A company can be convicted of crimes. trl lt can also be liable for torts. I2l And
in both cases the company's liability may be vicarious because the wrongs are
committed by its employees. Obviously this is not the place to discuss in detail
the basis on which an employer may be vicariously liable for the wrongs of his
employee. But as explained elsewere r3lthe liability will arise i{ the employee was
acting in the course cf his employment or the wrongf ul act was either calculated
to further the employer's interests or was a means of acheiving what the
employee was expressly or impliedly authorised to do. As long as these
requirements are satisfied, the company (as employer) will be liable even
though the act was beyond its capacity.tal However the object of this chapter is
to discuss how a company may be liable for wrongful acts committed by other
individuals who are not its employees. These indivduals may be its directors or
the company secretary.
7.1 Liability through directors' acts

A company may incur liability through the acts of its directors in two ways. First,
through the directors'control f its affairs. Because of that control, their acts are
sometimes treated as those of the company itself . As Lord Reid put in Tesco
Supermarkets Ltd. v Nattrass ('197'l);tsl
"A corporation ... must act through living persons ... then the person who acts
is not speaking or acting for the company. He is acting as the company and
hismind which directs his acts is the mind of the company. There is no question
ofthe company being vicariously liable. He is not acting as a seruant, represen-
tative, agent or delegate He is an embodiment of the company ..."
ln Lennard's Carrying Co. Ltd v Asiatic Petroleum Co. Ltd. (19t5;tst

company owned a ship which sank, causing her cargo to be lost. The managers"
of that company were another limited company whose managing director, Mr.
Lennard, managed the ship on behalf of the owners. Evidence showed that the
loss was the result oJ default by Mr. Lennard in that although he knew or ought
to have known of the ship's unseaworthiness, he did nothing to prevent the ship
from putting to sea. ln an action by the purchasers o{ the cargo for compensa-
tion, the company sought to take advantage of a shipping statute which

excused the owner of a sea-going ship from liability for'any loss or darnage
happening without his fault'. lt was held that the company was liable forthe loss
on the ground that:
"[A] corporation is an abstraction. lt has no mind of its own any more than it has
a body of its own; its active and directive will must consequently be sought in
the person of somebody who for some purposes may be called an agent, but
who is really the directing mind and will of the corporation, the very ego and
centre of the corporation ... if Mr Lennard was the directing mind of the
company, then his action must ... have been action which was the action of the
company itself ..."
Similarly in Bolton & Co. Ltd. v Graham & Sons Ltd. (1956) 14 the plaintiffs
who were tenants of certain business premises, were entitled to have the
tenancy renewed unless the landlord intended to occupy the premises them-
selves. The question was whether the defendant company which was the
landlord, had effectively formed that intention. No formal general or board
meeting had been held to considerthequestion butthe directors who managed
the company caused notice to vacate the premises to be given to the plaintiffs.
It was held that this was sufficient indication of the defendant company's
intention to oucupy the premises.
Second, a company may be liable for the acts of its directors because for
certain purposes, directors are regarded as agents of their company. As far as
those purposes are concerned, the company will be bound by their acts in
accordance with the principles of agency law as applied to companies.
Generally, a company as the principal will be bound by the acts of its agent
which are within his actual authority, whether that authority is express ol
implied. ln Hely-Hutchinson v Brayhead Ltd (1968) t8l R who was chairman
of company A negotiated with H as representative of company B in a certain
financial transaction, R acted as the chief executive and managing director of
company A although no such appointment had been made, and the company's
board was aware of and acquiesced in his activities on behalf of the company.
Subsequently R signed documents whereby company A agreed to indemnif ied
H against liabilities which the latter had incurred as part of the transaction.
Because R had no authority from his board to sign those documents, when H
claimed under them, company A denied that liability on the ground that the
documents had been signed without its authority. lt was held that although R
94 - AN INTBODUCTION TO COMPANY LAW IN MALAWI
had no express authority from the nature of his office to sign the documents,
the company had, by its acquiescence in his previous activities on its behalf,
implied that he had authority to bind it in the transaction.
A registered company may also be bound by the acts of its directors, as its
agents, because they have ostensible authority under its memorandum to bind
it in certain transactions, e.g. the issuing of shares, borrowing of money etc.
This was the view of Slade L.J. in the case of Rolled Steel Products Holding
Ltd. v British Steel Corporation (1986)tel where he said that a company holds
out its directors as having ostensible authority to bind the company to any
transactions which is within theirexpress orimplied powers. Of course if athird
party who deals with directors knows thatthey do not have powerto enter into
that transaction on behalf of the company, he cannot rely on this authority to
hold the company liable for that transaction. tt0l
What happened in this case was that the plaintitf company which was
empowered by its memorandum to lend moneyto and give guarantees lorsuch
persons, firms or companies and on such terms as may seem expedient
executed a guarantee and debenture for a debt owed by company C to a
company owned by the plaintiff's major shareholder. Company C was con-
trolled and later taken over, by the defendant. After the plaintitf paid the debt,
it sought a declaration that the debenture and the guarantee were void because
they were not in its interest and that the defendant was aware of that at the
material time. lt was held that as the transactions were authorised by the
plaintiff's memorandum, by entering into them, its directors were prima facie
acting within their ostensible authority.
7.1.1 Limitation of directors' authority

To protect itself from liability for the acts ol its directors done while exercising
their authority a company may insert a provision in its articles or memorandum
which restricts their authority in certain transactions. However, that limitation
will be effective only if the other party to the transaction is aware of it. This is
because, as just shown, Section 140(4) provides that a limitation upon the
authority of directors, whether imposed by the memorandum or articles or
otherwise, is not effective against any person who is unaware ol it. And in
determining the other party's knowledge of the limitation, it should be remem-
bered that according to Section 343, a person will not be deemed to be aware
of the contents of a document concerning a company simply because-$e
document has been registered with the registrar or is available for inspection
at any office of the company or elsewhere by virtue of the Act.
TO COMPANY LA
7.1.2 lrregularly appointed directors

lrregularity in the appointrnent of a directordoes not excuse the company f rom
liability for his acts which are within his actual or ostensible authority. This
follows from section 162 which provides that a director's (and secretary;s) acts
will be valid in spite of any defect which is afterwards discovered in his
appointment or qualif ication.
However, since this provision applies where the director has been appointed,
it is evident that it will not apply where the irregularity consists in the fact that
no such appointment was made. ln Morris v Kansen (1964) Ir{ K and C were
the first directors of a company. when differences arose between them, c and
s entered into a scheme to remove K f rom his post. To this end c and s falsely
claimed that the latter had been appointed a director and an entry was made
in the company's minute book to this effect. subsequenfly, after c's appoint-
ment as director had ceased, the two purporting to act as directors appointed
M a director and the three of them proceeded to allot shares to themselves. lt
was held that the English equivalent ol section 162 could not apply to validate
M's appointment and the allotment of shares. As Lord Simonds said:
'There is ... a vitaldistinction between (a) an appointment in which there is a

defect... and (b) noappointmentatall.lnthefirstcase, itis impliedthatsomeact
is done which purports to be an appointment but is by reason of some
defectinadequate for the purpose: in the second case, there is no defect, there
is no act at all. The section does not say that the acts of a person acting as
director shallbe valid notwithstanding that it is afterwards discovered that he
was not appointed a director ... tllt does not do so, and it woutd ... be doing
violence to plain language to construe the section as covering a case in which
there has been no genuine attemptto appoint at att. These obseruations apply
equally where the term of office of a directorhas expired, but he nevertheless
continues to act as director ..."
of course even if there has been no appointment, a company may still be bound
by the acts of a person who purports to act on its behalf as director if it holds
him out as having authority to act in its name. This follows from the holding in
the case of Hely-Hutchnson v Brayhead Ltd ti2r discussed above, and from
the wording of section 140(2\ which does not rule out this possibitity.
7.1.3 Forgery or fraud

The decision in Ruben v Great Fingall consolidated Ltd (discussed fully in
para. 9.4) would seem to suggest that at common law directors' action which
involves forgery or f raud can not create a binding obligation on their company.
However the posltion under the Companies Act is different. This is because of
section 139 which makes a company liable for the acts of its agent or officer
notwithstanding that he has acted lraudulently orforged a document. Of course
this can not prevent the company trom dismissing him or suing him to indemnify
it for the liability arising from his action. ln fact the company will be liable under
section 139 if it would be liable for the acts of that agent or officer. Therefore
if it included a provision in its articles excluding its liability for his acts, it will not
(subject to Section 343) be liable for his fraud or forgery.
7.1.4 Directors' collective authority

As pointed out in para. 4.6.3, powers o{ management are confered on
directors as a board, and not as individuals. Primafacielhis would suggestthat
only the board as a group has the authority to bind the company. However this
is not exactly correct because companies often delegate the board's powers
to committees of directors or the managing director. ln fact this practice is
recognised by Articles 72 and 85 of Table A. And legally speaking, there is
nothing wrong with this practice because although the directors' power of
management is delegated to them, and therefore should not be sub-delegated
to anybody else, the law of agency does not prohibit sub-delegation where it
is customary to do so or where the sub-delegation is sanctioned by the
principal. nqThis being the case the correct view of the law is probably
that if a company has provisions in its articles of association similar to
Articles 72 and 85 ol Table A, and the board sub-delegates its authority
to the managing director or any director of the company, the company
will be liabte if while exercising that authority he does something which
amounts to a crime or gives rise to civil liability. The argument is that
such sub-delegation would have been sanctioned by the company,
which is the board's principal, through the articles.
7.1.5 The rule in Turquand's case

It can be concluded f rom the loregoing discussion that a company will only be
bound by the acts ol a person who purports to act on its behalf as director if he
was appointed as such, and was acting within his authority. Thus if he was not
appointed as director and was not held out as having authority to bind the
company, it cannot be held liable for his acts. Similarly, if he is appointed but
lacks authority, his acts cannot bind the company.
However, this absence of appointment and authority will not aflect an outsider
who deals with such a person unless the outsider actually knew that the person
was not a director and/or that he did not have the authority to bind the company.
And the outsider's position is strengthened by the fact that he is not bound to
enquire intothe rules governing thecompany's internalmanagement belore he
enters into any transaction with a person purporting to act on its behalf. This
is illustrated by the case ol Royal British Bank v Turquand (1856) tlal from
which this rule derives its name. ln that case the company's board of directors
was authorised by the company's registered deed of settlement (the precursor
of the modern memorandum and articles of association) to borrow on bond
such amounts as should from time to time be authorised by a resolution of the
company in general meeting. The board borrowed money from a bank on a
bond bearing the company's seal. However, no resolution had been passed by
the company to authorise the amount borrowed. lt was held that since
externally the directors appeared to comply with the company's regulations,
the companywas bound bythe loan. The bankwas not bound to checkwhether
or not the resolution had been passed; on the contrary, it had 'a right to infer
the fact of a resolution authorising that which on the face ol the document
appeared to be legitimately done'.
But the rule has exceptions. First, it will not apply if the person dealing
with the company knew or ought to have known ol the non-compliance
with the company's rules of internal management.This would also seem
to be the effect ol section 140(4) which makes limitation of directors'
authority binding only on a third party who is aware of it. ln Howard v
Patent lvory Manufacturing Co. (1888;ttst the articles of a company
provided that its directors had power to borrow up to E1 ,000 on behalf of
the company without the consent of a general meeting and to borrow
above that limit with such consent. The directors themselves lent e3,500
to the company without the consent of the company's general meeting.
It was held that the loan was valid only to the extent of €1,000.
This exception is known as the'insider'exception. And here'insider'includes

all persons holding positions in the company.116l Clearly this excludes share-
holders. lt would also seem not to cover a director who is not responsible for
or does not take part in the conclusion of the transaction. ln Hely-Hutchinson
v Brayhead Ltd n7l where, as already seen, the plaintiff who was a director of
the defendant company sought to enforce a transaction into which he had
entered with the company in his capacity as directorof anothercompany, itwas
held that the 'insider' exception did not apply to him. According to Roskill, J. the
mere fact that a director of a company makes a contract with the company in
a capacity other than that of a director does not automatically affect him with
98 - AN INTFODUCTION TO COMPANY LAW IN MALAWI
knowledge of such disabilities and limitations as he might be deemed to

know were he also acting for the company in the transaction. ln other
words, since the transaction had nothing to do with his duties and
obligations as director of the defendant company, he could not be
considered as an insider. He was an outsider so that the rule in
Turquand's case applied in his favour.
Second, a person willnot beabletoavailhimself of the rule in Turquand's case
where there are suspicious circumstances which put him under a duty to make
an enquiry, and he fails to do so. In the case of Underwood Ltd. v Bank of
Liverpool & Martins Ltd(1924) tr81 it was held that the fact that the customer
endorsed the cheques on behalf of the company put the bank under a duty to
enquire whether or not he had the authority to pay them into his personal
account. Since it failed to make that enquiry, it could not rely on Turquand's
case to assume that he had the authority.
Of course the rule in Turquand's case must now be considered as being

subject to Section 22(11. As shown in Chapter 5, this provision places directors
of a registered company under a duty to exercise their powers in conformity
with the company's articles and memorandum. However, if they enter into any
transaction in breach of that duty, the transaction will not be void. On the
contrary, it will be up to the company's creditors or members to applyfor a court
injunction under Section 22(2) which prohibits the transaction. Clearly, if they
do not make the application or if they do but the court does not grant it, the
transaction can be enforced against the company in accordance with the rule
in Turquand's case. Conversely if the injunction is granted the transaction will
be unenforceable in spite of the rule.
7.2 Liability through the company secretary's acts

As indicated in the last chapter, the secretary's role in the company is less
pervasive than that of directors, it being confined generally to overseeing the
day to day administration of the company. But he too may cause the company
to become liability to third parties.This is because by virtue of his post, the
company is regarded as holding him out to have authority to bind it in respect
of contracts connected with its administration. ln Panorama Development
Ltd. v Fidelis Furnishing Fabrics Ltd. (1971)rel the defendant company's
secretary hired cars from the plaintiff apparently for use in the course of the
defendant's business. The hire agreements were in the secretary's name and
signed by him as 'Company Secretary'. ln fact the cars were used lor the
secretary's own purposes. When the plaintiff sued the defendant for the hire
charges, it was held that the latter was liable to pay because the secretary had
apparent or ostensible authority to enter into contracts, on behalf of the
defendant, which were connected with the administration side of its atfairs.
7.3 Liability through the company manager's acts

Because managers are not part of a company's directing will, they do not have the
authority that attaches to the directorship. Consequently, unless an ordinary
manager is held out as having authorityto bind his company, itcannot be held liable
for his acts. For the same reason too the company cannot be held responsible for
crimes which he commits within the scope of his employment. This is illustrated
by the case of Tesco Supermarkets Ltd. v Nattrass (1971) Pol where the
company was charged with a crime in respect of the fault of one of its shop
managers in advertising goods for sale at a price less than that at which they were
in fact offered. The question in court was whether or not the fault could be said to
bethecompany's defaultorthatof 'anotherperson'. ltwas heldthatthe manager's
job was not to act as the company's directing will and, therefore, the company
could not be held responsible for the otfence.
F
1OO - AN INTRODUCTION TO COMPANY LAW IN MALAWI
Chapter Seven
1. General Construction Co. Ltd v Rep (1971 - 72) ALR Mal 41.
2. Makwakwa v Oil Company of Malawi Ltd Civ Cas 7711981
3. Employment Law in Malawi, Chapter 9.
4. James v Mid-Motors Nigeria Co Ltd (1978) ALR Com 119.
5. [1971] 2 AIIER 127.
6. [1915] AC 205.
7. [19s7] 1 OB 159.
8. [1e67] 3 Ail ER 98.
9. [1985] 2 WLR e08.
10. Section 140(4).
11. [1946] 1 Ail ER 586.
12. Supra., note 8.
13. De Busche v Alt (1878) I Ch D 286.
14. [1856] 119 ER 886.
15. [1888] 38 Ch D 156.
16. Farrar's Company Law, 2nd ed., p. 316.
17. Supra., note 8.
18. [1924] 't K8775.
19. [1971] 3 Ail ER 16.
20. Supra., note 5.
AN INTRODUCTION TO COMPANY LAW IN MALATVI
..'.
Ghapter Eight ,, \t-i
Enforcement of Gontrollers'
and Directors' Duties and
Minority Protection
8.1 The Rule in Foss v Harbottle
Since directors owe their duties to the company, by definition it is the company
which will suffer if any of the duties is broken. Therefore, any action to seek
redress for the breach must be brought by it, and not by any of its creditors or
members. Similarly, where something (e.9. alteration of the memorandum,
reduction of the share capital or variation of class rights) is required to be done
by the company in general meeting, no single shareholder or group of share-
holders has the right to take that action alone. And once the action has been
taken by the majority in the meeting he must, as a general rule, abide by it even
if it is not in his interest. This is usually referred to as lhe rule in Foss v
Harbottle'(1843). nt ln that case directors of a company bought their own land
for the company and paid themselves an exorbitant price for it. Two members
brought an action on behalf of themselves and all the other members of the
company except the defendants, against the directors to compelthem to make
good the loss suffered by the company as a result of the transaction. lt was held
that as there was nothing to prevent the company f rom suing the directors if it
so wished, the action would fail.
The problem, however, is that strict application of this rule may lead to
remedial action not being taken for abuse of power by the controlling
shareholders or the board of directors. This may happen because the
perpetrators of the wrong controlthe company and will use their'muscle'
to prevent the commencement of any legal action to remedy the abuse.
And they can do that by either having their conduct ratified by the
company in general meeting or using their voting power in the meeting
to have any suit brought against them discontinued.
102 - AN INTFOOUCTION TO COMPANV LAW IN MALAWI
8.2 Common law exceptions

Because of this, exceptions to the rule in Foss v Harbottle have been evolved
at common law. One is where the abuse inlringes the personal rights of a
shareholder. An bxample would be contravention of any provision of the
articles of association t2l or their alteration which requires him to take more
shares in the company than those which he already holds.t3l Since in that case
he, as opposed to the company, will sutfer from the wrong, it is only right that
he should be allowed to bring the action for redress.
Second, where the abuse amounts to an illegal act, the rule in Foss v
Harbottle will also not apply. Such an act would be unratifiable by the
company and since ex hypothesi the culprits would not allow any
remedial action to be brought by the company, the redress will have to
be sought by individual shareholders.
Third, the rule in Foss v Harbottle will also not apply where the wrong amounts
to a non-@mpliance with the company's procedure, such as the requirement of
a special resolution. The argument here is that if the law insisted that remedial
action in such cases should be brought by the company alone, it would in effect
be giving licence tothose in control of companiestoviolate company procedure
with impunity. ln the case of Baille v Oriental Telephone & Electrical Co. Ltd
lal directors of the respondent company were also directors of a wholly owned
subsidiary of the company. Subsequently, exercising the company's voting

power in the subsidiary, they procured the passing of a resolution by the latter
altering its articles to increase their remuneration. An extraordinary general
meeting of the company was later convened to pass special resolutions to ratify
the alteration and allow the directors to retain the remuneration receivable by
them as a result of the alteration. The resolutions were passed by the requisite
majority. However notice of the meeting failed to give particulars of the
remuneration. For that reason, the appellant shareholder of the company, on
behalf of himself and other shareholders of the company, sought a court
declaration that the resolutions were invalid. Reversing the decision of the
lower court, it was held that the action was maintainable by him, and the
resolutipns were declared not to be binding on the company.
Fourth, a shareholder will also be allowed to bring an action for the controllers'
or directors' abuse which constitutes 'fraud on the minority'. Here 'fraud'
includes appropriation by wrongdoers of money, property or advantages
belonging to the company or in which other shareholders are entitled to
participate. And the plaintitf's case will be in a representative form (i.e., he will
be representing himself and the other aflected shareholders) in which the

company is joined as a co-defendant with the wrongdoers.
ln Cook v Deeks (1916) tsldirectors took in their own names a construction

contract which they should have taken up on behalf of the company. And by
virtue of their controlling interest they subsequently secured the passing of a
resolution in the company's general meeting ratifying and approving their
action. One of the company's shareholders brought an action to compelthem
to account to the company for the prof it made by the contract. lt was held that
the directors held the benefit which they obtained f rom the contract on trust for
the company.
It should be noted that the 'fraud' does not lie in the character of the act or
transaction giving rise to the cause of action but in the controlling shareholders'
or board of directors' use of their voting power. ln Estmanco Ltd v Greater
London Council t6l the defendant formed the plaintiff company to manage a
block of 60 flats. lt was agreed by the two that the flats would be disposed of
by sale. The company had 60 shares all of which were held by the defendant.
A sale of each flat entitled the purchaser to one of the shares. However all
voting rights remained with the defendant until allthe flats had been disposed
of . Subsequently after 12 of the flats had been sold the defendant unilaterally
ordered that the remainder should not be sold but be let out to tenants. When
the company sued it for breach of the agreement on the mode of disposing of
the flats, it used its voting power to direct the company's directors to discon-
tinue the action in the company's name. lt was held that this use of voting power
by the defendant to bring advantage to itself and disadvantage to the minority
12 shareholders represented fraud on the latter' According to Megarry, V-C,
'no right of a shareholder to vote in his own selfish interest entitles him with
impunity to injure his voteless fellow shareholders by depriving the company
of a cause of action and stultifying the purpose lor which the company was
formed'
Lastly, a majority decision which unjustifiably disadvantages minority share-

holders may also be challenged in court by the latter if it is not taken in the bona
fide interest of the company as a whole tll. As already noted in the case of
Brown v British Abrasive Wheel Co. Ltd.tsl discussed under paragraph2.7,
an alteration of the company's articles which was intended to benefit 98 % of
the company's Shareholders at the expense of the remaining2"/" was held to
be void, on application by the latter to have the alteration annulled.
10,1 - AN INTROOUCTION TO COMPANY LAW lN MALAU'I
8.3 Statutoryexceptions
8.3.1 Court injunction under Sections 22(2)
It was shown in Chapters 2 and 5 that section 22(1) prohibits a registered
company to:
(a) carry on any business or exercise any power which the company is
restricted by its articles or memorandum from carrying or exercising; and
(b) exercise its powers in a manner which is inconsistent with the company's
articles or memorandum.
Again since company directors exercise most of the powers of a registered

company,including management of the company, this provision is in effect
directed at them. But there can be no doubt that it also applies to majority
shareholders who exercise through the company in general meeting powers
not vested in the board of directors.
Now if while exercising those pov/ers they contravene Section 22(1),ilwill not
be open to the company to take remedial action; that right is available only to
individual members. Section 22(2) empowers any one of them to apply to the
court for an injunction to prohibit the act or contravention. ln other words,
although it is the company which may in fact suffer loss as a result of the
contravention, the company in general meeting cannot proceed against the
culprits. lt is up to individual shareholders to do that.
8.3.2 Court order under Section 203

Besides the minority can apply to the court for relief under Section 203. This
provision allows any member of a registered company to make the application
on the ground that:
(a) the affairs of the company are being conducted or the powers of directors
are being exercised in a manner which is oppressive to one or more or
the members or disregards his or their proper interests as members of
the company; or
(b) some act of the company has been done or is threatened or that some
resolution of the members or any class of them has been passed or is
proposed which unfairly discriminates against or is otherwise unfairly
prejudicial to one or more of the members.
Thus the court's jurisdiction here is very wide. But specifically, relief will be
granted under this provision if the conduct complained of is oppressive or
unfairlydiscriminatoryor prejudicial, to the minority ordisregardsthe minority's
interests as members of the company. And that may include anycontravention
of Sections 22(1). This is because according to Section 22(4), any breach of
that provision may be asserted in any proceedings under Section 203. Of
course for section 203(1)(a) to apply, there must be a continuous process, as
opposed to an isolated incident, of abuse. On the other hand, there is no such
constraint on the application of section 203(1Xb).
What is 'oppressive' conduct is not def ined by the Act. However at common law
it is taken to import that the complainant is being constrained to submit to
something which is unfair as a result of an overbearing act or attitude of the
defendants. As Lord President Cooper said in Elder v Elder t8t:
"[The conduct alleged to be oppressive must be] such as to warrant the

inference that there has been, at least, an unfair abuse of power and an
impairment of confidence in the probity with which the company's affairs are
being conducted... The ... conduct ... should at the lowest involve a visible
departure from the standards of fair dealing, and a violation of the conditions
of fair play onwhich every shareholderwho entrusts his moneytothe company
is entitled to rely..."
ln other words mere lack ol wisdom, inefficiency or carelessness on the paft

of thecontrolling shareholders orthe board of directors is notenuogh. However
there will clearly be oppression where a shareholder with a preponderance of
voting power proceeds on the strength of his control to act contrary to the
decisions of orwithout the authority ol the board of directors. An example of this
is Re H.R Harmer Ltd. (1 959).tel ln that case a father founded a firm which was
later incorporated as a company. Because he and his wife held the majority of
shares in the company carrying the right to vote, he ran the company as if it was
his exclusive property. ln particular, he disregarded resolutions of the board of
directors and the wishes of the other shareholders who included his sons.
Consequently, the sons brought a petition for relief on the ground that the
affairs of the company were being run in an oppressive manner. lt was held that
an order would be granted restraining the father from interfering in the
company's affairs expect in accordance with decisions of the board of direc-
tors.
Scottish Co-operative Wholesale Society v Meyer (1 959; not 1.

"nothercase
where similar relief was sought. What happened was that a holding company
and its subsidiary 6ngaged in the same class of business. Subsequently, the
- former started running down the subsidiary's business by cutting off supplies
to it. The result of this policy was that the business of the subsidiary came to
an almost complete standstill and the value of it shares declined. Consequently
the subsidiary petitioned for an order that the holding company should buy its
shares. lt was held that the holding company conducted the affairs of the
subsidiary in a manner which was oppressive to the minority and, therefore,
should buy their shares at fair price.
Again what amounts to 'unfairly prejudicial'conduct is not indicated by the Act.

But it clearly comprises conduct which is unjust and detrimental to the
petitioner's interests as a member of the company. ln other words, to constitute
unlair prejudice the board of directors' or controlling shareholders action must
adversely affect the quality or value of the complainant's interests in the
company. And these interests are essentially shares which he holds in the
company. As Nourse, J. said in Re RA Noble & Sons Ltd' nll
"[A] member of a company will be able to bring himself within the section if he
can show that the value of his shareholding in the company has been seriously
diminished or at least seriously jeopardised by a reason of a course of conduct
on the part of those persons who have had de facto controlof the company,
which has been unfair to the member concerned. The test of unfairness must
... be an objective, not a subjective, one. ln other words, it is not necessary for
the petitioner to show that the persons who have had de facto control of the
company have acted as they did in the conscious knowledge that this was
unfairto the petitionerorthatthey were acting in bad faith;the test... is whether
a reasonable bystander obseruing the consequences of their conduct, would
regard it as having unfairly prejudiced the petitioner's interests."
Now the fact that the prejudice must be caused by the conduct of the board or
the controlling shareholders means that if it arises from the petitioner's own
wrongdoing, section 203 will not be available to him. ln Re a Companyltztgye
of the directors of a private company oflered to buy out the petitioner who was
a shreholder and director of the company. He refused the offer and petitioned
for the winding up of the company on the ground that it was just and equitable
to do so. lt was held that even if he had been unfairly excluded lrom participating
in the affairs ol the company, his petition would not be granted because he had
acted unreasonably in refusing the olfer for his shares.
Besides, the action complained of must affect the petitioner in his capacity as
a member of the company. ln other words, for example, where the conduct
alleged to be unfairly prejudicial affects his interests in the company, those
interests must vest in him qua member and not arise ex contractu or by reason
of some principle of law or legal procedure. Thus in Re a Company trsl where
the company refused to buy the shares of a deceased minority shareholder or
to propound a reconstruclion scheme to facilitate realisation of the shares and
his excutors sought relief under the English equivalent of section 203(1)(b) on
the ground that the refusal was unfairly prejudicialto his interests, it was held
that the relief would not be granted at all. According to Lord Grantchester, the
right of a memberto have his shares bought by his company arises as a matter
of agreement between him and the company, and not by reason of his
membership. Similady, when a scheme is proposed it will confer certain rights
on a member as a party to it. Consequently refusalto propose a scheme cannot
prejudice him in his capacity as a member of the company.
As shown by the cases cited above, the relief which the court will grant under
Section 203 is generally to remedy the matter complained of by making such
order as it thinks fit Ilal More particularly, however, it may:
(a) direct or prohibit any act or cancel or vary any transaction or resolution;
or
(b) regul4te the future conduct of the company's affairs;trsl s1
(c) provide for the purchase of the shares of any member by the company
for other members. 116I
8.3.3 Compulsory winding up under Section 213(1)

The minority may also petition the court for an order under Section 213 (1Xf)
that it is just and equitable that the company should be compulsorily wound up.
ln Ebrahimi v Westbourne Galleries(1973) nathe plaintiff and N carried on
business as partners. Subsequently they converted the partnership into a
company, with the two of them as di rectors. Shortly afterwards, N's son, G, also
joined the company's board of directors. When disputes erupted between the
plaintiff and N, the latter and his son used their majority voting rights to remove
the plaintiff f rom his position as director. The plaintiff then petitioned the coutt
fora just and equitablewinding up of the company. ltwas heldthatthecompany
should be wound up because although N and G were within their legal rights
to removethe plaintiff fromthe board of directors, the past relationship between
r-
the plaintiff and N made it unjust or inequitable for N and G to rely on those
rights.
The minority could also invoke section 213(1) if the company contravenes
section 22(1). This is because section 22(4) allows any shareholder to assert
that contravention in any proceedings brought under Section 213.
However, it should be noted that the court will not grant the petition under
section 213(1) (f) if the petitioner has another remedy (either under any of the
exceptions to Foss v Harbottle or section 203) and it is unreasonable for him
to insist on the winding up of the company instead of pursuing that other
remedy. t18l ln The Matter of Mapanga Estates Ltd (1 988)nsl the company had
two shareholders who held 49% and 51% of its shares respectively. Subse-
quently serious differences arose between them so that it became impossible
to carry on the business of the company. As a result the minority shareholder
sought a court order for the winding up of the company on the ground that it
would be just and equitable if that was done. lt was held that since the court's
power under section 213 (i) (f) is discretionary, the court would not order the
winding up of the company. According to Mtegha, J. the company was viable
and prosperous so that it would not be in the shareholders' interest to wind it
up. lnstead he ordered the petitioner to sell her shares and gave the f irst option
to buy them to the other shareholder.
8.3.4 Annulment of the majority decision under sections I0 and 48

It will be recalled that the minority do also have a statutory remedy against a
majority decision to alter the business clause ol the company's memorandum
ol association or to vary rights attached to any class of the company's shares.
According to section 10(4) if the minority hold at least 5% of the company's
shares or any class of them, they can apply to the court to annulthe alteration
of the clause. Similarly, in the case of variation of class rights, they can, il they
hold at least the same percentage ol the issued shares of that class, petition
the court to cancelthe variation under section 48(5). lf that is done, the variation
will not be effective unless confirmed by the court.
AN INTRODUCTION TO COI'PANY LAW IN MALAWI - 109
Chapter Eight
1. [1843] 67 ER 18e.
2. Shuttleworth v Cox Bros Ltd 1192712 KB 9.
3. Section 8(3).
4. [1e1s] 1 Ch 503.
5. [1874] LR 9 Ch App 350.
6. [1982] 1 AIIER 437.
7. [1919] 1 Ch 290.
8. [1e52] SC 4e
L [1958] 3 Ail ER 689.
10. [1958] 3 Ail ER 66.
11. [1e83]BCLC273
12. [1983] 2 All ER 36
13. [1983] 2 Ail ER 854
14. Section 203(2\.
15. Supra., note 8.
17. 11972J 2 Ail ER 492.
18. Section 216(3).
19. Civ cas 109/1988.
Chapter Nine
Company Finance -
Share Capital
It is axiomatic that a company will need finance to carry out its business
activities. Usually, this will come from capital contributed in exchange for
shares, long-term loans, bank overdrafts, credit in the form of deferred payment
for goods and seruices, and retained profits. Of these, only share and loan
capital are specifically governed by the Companies Act. lt is, therefore, with the
two that this chapter and next are concerned.
9.1 Share
As indicated in Chapter 1, the capital of a company limited by shares must be
divided into shares of a f ixed amount. tll Section 2 def ines 'sl'iare' as share in the
share capital of a body corporate. But more simply a share can be described as
a unit of account for measuring a member's interest in a company which can be
transferred from one person to another gratuitously orforvalue. Each share will
have a monetary value assigned to it which shows the size of the unit of account.
This monetary value, also called the 'nominal value' of the share, is what
the company will be entitled to demand as contributed capital on that
share. ln other words, it is what the holder of the share is liable to
contribute to the company's capital. Consequently, if on the winding up
of he company the whole nominal value is paid up, he cannot be called
upon to pay anything towards the settlement of the company's debt and
liabilities. On the other hand if part of that money remains unpaid, it is
the outstanding amount which he must pay to the company lor the
settlement of the debts and liabilities.
The aggregate of the monetary values assigned to each share will

constitute the authorised or registered share capital which must be
indicated in the company's memorandum. That part of this capitalwhich
is actually paid by the members at any point in time is called the'paid up'
share capital. On the other hand, capital actually paid plus what is due
for payment is'called up' share capital.
Shares are convertible into stock. ln other words, instead of being issued in
single units they may be merged into one fund whose nominal value is the sum
of the nominal values of the combined shares. Thus, instead of holding, for
example, 500 K1 shares, a member will hold K500 stock after the conversion
of the shares into stock.
However, converting shares into stock is no longer permissible in Malawi.

Section 46(1) of the Companies Act prohibits every company limited by shares
to convert any of its shares into stock. Of course this does not mean that
company capital can no longer be in the form of share stock. According to
Section 2, 'share' includes'stock' so that any reference to a number of shares
must be construed as including an amount of stock. This clearly suggests that
company finance may be raised through the issue of share stock. And this
conclusion is supported by sections 46(2) and 64(2) which permit, rather than
compel, a company which had converted some ol its shares into slock before
the commencement of the Act, to re:convert that stock or any part of it into paid-
up shares of any denomination. Thus the overall position now is that if a
company wishes to have its contributed capital in share stock, it must issue the
stock as such right f rom the beginning, rather than issue shares in single units
and then merge them into one fund thereafter.
9.2 lssue and allotment of shares

Before a share is taken by anyone, it is 'unissued'. When it is taken by someone,
it is 'issued. This process of issuing of shares then culminates into 'allotment'
which is the definitive assignment of the shares to particular holdgrs. Thus, an
unissued share will be considered allotted when a person acquires the right to
be entered in the company's register as the holder of that share. For subscrib-
ers of the company's memorandum, this will be on the day when the company's
certificate of incorporation is issued whereas for the rest of the members, the
time will depend on the contract under which the shares are issued.
As shown below under paragraph 9.4, after allotting any of its shares, a
registered company is required to send to the registered holder of each share,
a share certificate. Besides, the company must send to the registrar for
registration a return of allotments a month after they are made. t2l The return
must show the number and amount of the shares allotted and the full name,
addresses and occupations of the allottees.
112 - AN INTBOOUCTTON TO COMPANY LAW IN MALAWI
9.3 Share distinguishing number

According to Section 44, each issued share in a company must be distin-
guished by a definitive number. The object of this requirement would seem to
be to provide a means of tracking these shares. Certain transactions in shares
depend for their validity on whether or not the shares are fully paid-up. For
instance, a company can have or claim a lien on shares only if there is unpaid
liability on them. tsl Similarly, no redeemable shares can be redeemed unless
they are fully paid. IalTherefore, unless there is a definitive way of establishing
which issued shares are fully paid-up and which ones are not, these provisions
will be difficult to comply with. And it is in order to underline this that the proviso
to Section 44 states that if all the issued shares of a company or of a pafticular
class in that company are fully paid-up, none of the shares need thereafter
have a distinguishing number.
9.4 Share certificate

Once shares have been allotted to an allottee, the company will issue to him
a certificate that he is the holder of those shares. This document will show the
number and class of shares of which he is the holder, give their distinguishing
numbers and the extent to which they are paid. Isl Now since this information
will be disclosed with the intention that it should be relied upon, the company
will not be allowed to deny its authenticity. ln Dixon v KennawaY Co. Ltd. tet 1:,-
a servant of the defendant company obtained money from the plaintiff for the
pufchase of shares in the company. The servant procured the issue of a share
certificate which showed that the plaintitf was the holder of certain shares in the
company. ln fact the shares were already owned by someone else. By the time
the fraud was discovered, the servant was bankrupt and it was not possible to
recoverlrom him the money paid forthe shares. lt was held that the company
should compensate the plaintiff because he was misled by the certificate until
it was too late to recover from the servant.
However, there is a limit to this rule. According to Section 53, the certificate is
only prima facie evidence of the holder's title to the shares shown on it. His
entitlement to the shares and his rights in respect of them depend not on the
certificate but on the entry of his name in the company's shareholder register.
ln other words, the certificate will merely represent that he is, as at the date of
the certificate, the holder of the shares with or without any outstanding liability
on them. Thus, it will not, for instance, say anything about his continued
ownership of the shares after the issue of the certificate. Consequently, if any
person wishes to act on it after that date, he does so at his own risk.
Besides, il the certificate is forged, the company can deny the holdeds title to
the shares shown on it. ln Ruben v Great Fingall Consolidated (1906) n 16s
defendant's secretary applied to the plaintiffs for a loan to buy shares tn the
defendant. The plaintiffs arranged with a bank to advance money to the
secretary after receiving a share certificate showing that they were registered
in the company's share register as transferees of shares transferred to them
by him. Although on the lace of it the certificate was in order, it was in fact a
forgery by the secretary. Since the company had never held him out as having
authority to do anything more than delivering share certificates when duly
processed to shareholders, it was held that the company was not estopped by
the certilicate lrom disputing the plaintiff's claim.
9.5 Share warrant

A company limited by shares may also issue a share warrant in respect of any
of its shares. The warrant will state that the bearer, and not the person named
in it, is entitled to the shares specilied in it.This is the first difference between
a share certificate and a share warrant. Another one is that whereas a share
certilicate transferee gets title to the shares shown on it after registration ol the
transfer under Section 49, a bona fide purchaser of a share warrant acquires
title which is f ree f rom equities f rom the purchase itself . ln other words, a share
warrant is a negotiable instrument which will pass good title to the transferee
by mere delivery.
Arguably, this second characteristic makes a share warrant an easy target for
the fraudulent. No wonder, therefore, that the Companies Act restricts the
issue of share warrants. According to Section 45, no company can issue bearer
share warrants.
9.6 Share trust

It will be seen in Chapter '11 that the issue ol company debentures (which are
another form of company security) must be supported by a trust. The function of
the trustees is to administer the debentures and take requisite action whenever
they feelthat the interests of the debentureholders are in danger. However, there
is no similar requirement in respect of shares. Section 36(2) provides that a
company is not obliged to ensure that a trust is created for its shares. lndeed even
if a trust is created, neither the company nor the registrar need receive notice of
it and if the company receives the notice it need not enter it on the register of
members. pl This means that a company can register a nominee as a holder of
its shares even though it knows who their beneficial owner is.
One result of this is that the receipt by a person in whose name a share stands
in the register of members, is a valid and binding discharge of the company's
responsibility for any dividend or other payments in respect of that share. tel
Another is that the company must send notice of its meetings to the shareholder
on its register of members, and not disregard him in favour of the beneficial
ownerof the shares concerned aswas done in Musselwhitev C.H. Musselwhite
& Son Ltd. t10l which was discussed in paragraph 4.3.3. This principle was
summerised by Lindley L.J. in Societe Generalede Paris vTramways Union
Co. Ltd. (1984) llrl where he said:
"lf a shareholder in a company governed by the Companies Act ... does not
transfer his shares, but agrees to transfer them or to hold them upon trust for
another ... there can be no doubt as to the validity of the agreement , nor as to
the effect of it as between the parties to it . As between them the agreement or
trust can be enforced; but as regards the company the shareholder on the
register remains shareholder still . He is the person to exercise the rights of a
shareholder, for example, to vote as such to receive dividend as such , and to
transfer the shares. On the other hand , he ... is liable for calls and to be put on
the list of contributories if the company is wound up. The person having the
benef icial interest in the shares has, as against the company, no right to them."
9.7 Classification of shares

Section 47 allows every registered company to provide for different classes of
shares by attaching to some ol its shares special rights or restrictions in regard
to dividend, voting, returning of capital or otherwise. These classes are formed
by grouping together shares carrying the same rights or restrictions. And as
section 47 further states, shares of the same class class rank pari passufor all
purposes.
Now although companies have the freedom to create more than one class of
shares, the shares cannot be issued unless the issue is authorised by the
company's memorandum or articles. lndeed where the shares are new, their
issue must be sanctioned by an ordinary resolution. lr2l Moreover, rights
attached to any class of shares can be varied by either the written consent ol
three-quarters of the holders of shares of that class or the sanction of a special
resolution passed at a separate general meeting of the holders of the shares
of that class. Ir3I
9.7.1 Ordinary shares

As the name shows these are the basic type of shares which a company limited
by shares can issue. Thus if a company has one class of shares, these will
necessarily be ordinary shares. ln fact even where the company has more than
one type of shares, it must have at least one ordinary share. Consequently,
unless a company issues deferred shares (which are discussed below),
ordinary shares willform the residuary class in which is vested everything after
the special rights of other classes have been satisfied.
9.7.2 Deferred shares

Occasionally, a company will also issue this type of shares to founders of its
business. lts distinctive characteristic is that no dividend can be paid to
deferred shareholders unless ordinary shares are paid a certain amount of
dividend in that financial yehr. ln other words, the deferred shareholder is
entitled to participate in the distribution of the company's profits only after a
fixed dividend has been paid on ordinary shares.
9.7.3 Preferenceshares
The essentialcharacteristic of a preference share is that its holder has priority
in the receipt of dividends in any linancial year. He may also have priority in the
return of capital on the company's winding up. However, this would have to be
expressly stated in the articles. This is because it does not automatically follow
that merely because a shareholder is entitled to priority in the distribution of
dividends, he will also have priority in the distribution of surplus assets on
winding up. ln Re Syston & Thurmaston Gas, Light & Coke Co Ltd (1937)1141
there was no provision in the company's memorandum or articles for the
distribution of surplus assets in the event of a winding up. Subsequently, when
the company's undertaking was sold and it was wound up, a question arose as
to the distribution of assets remaining after payment of the company's debts
and amounts paid up on shareholders' shares. lt was held that the assets
should be distributed paripassu between the shareholders.
And in the case of dividends he has priority if the company decides to pay a
dividend to its members; if it does not make that decision, he cannol compel
it to do so. ln Bond v Barrow Haematite Steel Co. Ltd. (1902;ttst16" company
decided not to pay its preference dividend because it had suffered losses and
the value of its assets had fallen. Preference shareholders contended that
since the company had reserves of f240,000 f rom which it could have declared
the dividend on their shares, it should make the payment. lt was held that the
court would not override the directors'decision.
Secondly, unless otherwise provided in the company's articles, the right of a

preference shareholder to a dividend is cumulative. Thus if the dividend is not
paid in one year, in the absence of anything to the contrary, the priority
entitlement will be carried forward to the following year. As a result, the
entitlement for this year will be twice that for the previous year. This will not
apply where the preference shares are non-cumulative.
Thirdly, if a company which has arrears of unpaid cumulative prelerence

dividends goes into liquidation, preference shareholders will generally cease
to be entitled to the arrears ldgEg
(a) the dividend is declared before the commencement of the company's

liquidation; or
(b) the company's articles expressly provide that in the eveni of the company
going into liquidation, the arrears are to be paid prior to the return of
capitalto the company's members.
9.7.4 Redeemable shares

Although generally a registered company cannot buy back its own shares f rom
its members, it can do so if the shares are redeemable. ln other words, after
the shares are issued, the company can, either at its option or on the expiry of
a certain period, repay to their holders their nominal values and, thereafter,
cancel them from its share capital account. Of course as shown in the next
chapter, the shares must be lully paid-up before the company redeems them.
9.7.5 Rights issue

A rights issue is an offer ol a company's shares to existing shareholders belore
the shares are open to the public. ln otherwords, the idea behind a rights issue
is to ensure that outsiders do not purchase shares in the company unless
existing members are unwilling to do so. This policy is usually adopted to avoid
diluting existing voting power in the company and to cut down on the expense
and paperuork involved in offering shares to the public.
Shareholders' entitlement to rights issues is not statutory; it is created by the

company's articles. Thus Article 18, Table A provides that in the absence of a
resolution to the contrary, all new shares must f irst be offered to all persons who
are entitled, as on the date of the issue,to receive notices of the company's
general meetings. The shares offered must be in proportion to the amount of
existing shares which each one holds. For this reason, each shareholder will
which his existing shares bear to the total number of the company's shares.
Besides, the offer must specily the number of shares offered and the duration
within which it is open for acceptance. After the lapse of that time, or on receipt
of an intimation f rom the offeree that he does not accept the offer, the directors
can dispose of the shares in any manner which they consider beneficial to the
company.
9.7.6 Bonus issue

A company can also issue f ully paid-up shares to its members as bonus shares
so long as its articles allow it to do so. The shares may be paid out of the capital
redemption reserve fund n6l or the share premium accountJlTl or any amount
available for distribution to the company's members. To underline this, Article
102, Table A provides that a company can capitalise any part of the amount
standing to the credit of any of the company's reserve accounts or prolit or loss
account or which is otherwise available for distribution by using that part to pay
in full for unissued shares or debentures of the company to be allotted to the
members pro rata to their respective shareholding in the company. Now
because shareholders do not pay for these shares, a bonus issue is not a
means of raising capital. On the contrary, it is simply a way of distributing
undistributed profits of a company by converting into share capital prof its which
had previously been retained by the company.
91.7 Rights and options to subscribe for shares

As long as it is allowed by its articles to do so, a company can creale and
issue to its directors, employees or off icers of the company or any of its
subsidiaries, or to trustees for these persons, rights or options entitling
holders to acquire shares ol any class in the company. The instrument
evidencing the rights or options must show the time when and the price
at which they may be exercised and any limitation on their transferabil-
ity.ttel16" rights or options may consist in a simple issue, or a scheme
to provide incentive to service with the company or the subsidiary
concerned. Of course the issue or scheme must be authorised or
adopted, as the case may be, by a special resolution trsl which specifies
terms and conditions upon which the rights or options are to be issued.
The resolution must also show inter alia:
(a) any restrictions on the number of shares which eligible individuals may
have the right or option to acquire;
(b) the method of administering the scheme if any;
(c) the terms and conditions of payment for the shares;
(d) any limitation on the transferability of the shares; and
(e) the voting and dividend rights to which holders of the shares may be
entitled.t2ol
However, the resolution must not authorise delivery of a certificate to an option

or right holder, nor confer on him the right to vote, in respect of the shares
before full payment for the shares. And if there are pre-emptive rights on any
of the shares the resolution authorising the issue must be approved by the
shareholders entitled to those rights. The etfect of that approval will be to
remove the pre-emptive rights from the shares I21l so that the holders of the
rights or options can easily acquire the shares.
It should be noted that although Section 50(3) prohibits a public company to

impose, by its articles, any restriction on the right to transfer any shares of the
company, it is allowed to restrict the transler of shares issued to its directors,
other officers or employees of the company in pursuance of the exercise of any
rights or options issued under Section 58. Similarly, in spite of section 50(3)
such shares can be issued subjecttothe rightof compulsoryacquisition, orfirst
refusal. tzl ln other words, the directors, officers or employees to whom the
shares are issued under Section 58 may be required to sell them to any
member ol the company or to olfer them to other members of the company
belore selling them to outsiders.
Now just like shares, these rights or options cannot be issued free of charge.
On the contrary, consideration must be paid forthem. According to the Act the
consideration can be lixed by either the company's directors or (if they are
interested in the issue) the general meeting. And in the absence of f raud, their
decision as to the adequacy of the consideration will be conclusive.t23l
9.7.8. Variation of class rights

As already stated above, a company will create different classes of shares by
attaching special rights to some of its shares and grouping together shares
carrying the same rights. According to Section 8 (1) (c), these rights can be
varied. The procedures for the variation are provided in Section 48 and were
discussed in para.-2€-# 2,
3, | , 3
AN INTROOUCTION TO COMPANY LAW IN MALAWI - 119
9.8 Transfer of shares

This is avoluntaryconveyanceof righls and duties of a memberas represented
in a share lrom a shareholder to a person who desires to become a member.
According to Section 43(1), shares of any member of a company limited by
shares are part of his personal estate, and movable property. Consequently,
he can transfer them to any other person. For this reason, any provision in the
articles which restricts the right to transfer shares in a company will be
inetfective unless the shares are not fully paid-up.1241 Of course this does not
deprive the company of the right to reluse registration of a transfer of shares
to an infant or to a person of unsound mind. I2sl Besides, since according to
section 5(3Xa) one characteristic of a private company is that its memorandum
or articles must restrict the transferability of its shares, that is unaffected by
Section 50(3). Usually such a restriction is imposed by empowering the
company's directors to refuse to register any share transfer if in their opinion
it is not in the interest of the company that the proposed transferee should be
a member of the company or by simply leaving to them the power to decide
whether or not to register any share transfer. Of course just like all other
powers, this one too would have to be exercised bona fidein what the directors
consider is in the company's interest. t26l
9.8.1 Transfer procedure

Shares can be transferred by a written instrument in the prescribed form or in
any other form approved by the company's directors.t2Tl What is important is
that the instrument must be executed by or on behall of the transferor.
Thereafter it must be registered bythe company because untilthe registration
and the entry of the transferee's name in the company's membership register
in respect of the shares the transferor remains their holder. 1281The instrument
may be lodged for registration by the transferor or the transferee.t2el
However, the transfer cannot be registered without the delivery of the instru-
ment of transfer to the company. Isl Moreover, Section 50(2) allows the
company to refuse to register any transfer which is not accompanied by the
appropriate share certif icate.
9.8.2 Gertification of transfers

lf the transfer is of part only of shares represented by a share certificate, the
instrument ol transfer together with the certificate can be delivered to the
company for certification. t31l Once the company receives the documents, it will
endorse on the instrument 'certificate lodged' or words to the same effect and
return to it to the transferor who will deliver it to the transferee for presentation
tothecompany. Thereafterthe companywillcancelthe retained certificate and

issue a new share certificate to the transferor in respect of shares of which he
remains the holder after the transfer.
This certification constitutes a representation by the company to anyone who

acts on it that there has been produced to and retained by the company a
certif icate showing prima facielitle to the shares in the transferor named in the
instrument of transfer. t32t lt does not say anything on the genuineness of the
certificate or that the transferor has conclusive title to the shares. lf the
certification is false any person who acts on the faith of it to his detriment is
entitled to claim compensation from the companv. tslln Longman v Bath
Electric Tramways [3rl a shareholder transferred his shares to someone else.
The company registered the transferee as the holder of the shares and
prepared a share certificate in his name in respect of the shares. Before the
certificate was issued to him, he re-translerred some of the shares to a sub-
transferee and lodged the instrument of transfer with the company lor certifi-
cation. After the certification was done the company returned the instrument
and the certificate to him. He then used the certificate as securing for a loan.
It was held that since the lender never saw the certification on the instrument
of transfer, he could not have relied on it. Therefore the company was not liable
for the borrower's f raud in using the cedificate as if he was still the holder of all
the shares indicated on it.
9.9 Transmission of shares by law

Apart f rom transfer, shares may change hands through the operation of
law. Section 5a(2) provides that on the death of a shareholder his
survivor, where he was a joint shareholder, or his legal representative
can be registered as shareholders in his place. Similarly, where a
receiving order is made against an individual under the Bankruptcy Act,
ownership of his shares will devolve on his trustee in bankruptcy. ln the
case of a company which is in receivership, ownership ol shares which
it held in another company will be transmitted to its receiver.
Prior to registration in the company's membership register as holders ol

the shares, these persons will be entitled to the same dividends; rights
and remedies as if they were already registered. t35l However, they will
not be allowed to vote at any meeting of the company without a court
order under Section 109.
9.10 Offering shares to the public

As already indicated, a public company is allowed to invite members of the
general public to make offers for its shares. lt may make the invitation because
either it needs capital or the Minister deems it to be in the economic interest of
the country under Section 3, that there should be local participation in the
company's capital structure. ln either case, there are certain legal require-
ments with which the company must comply.
9.10.1 Prospectus
The invitation to the public to take shares, in a company will involve issuing a
document which provides information abaut the company and shows the
advantages of investing in it. This document is called a'prospectus'. The Act
does not define the word. However, its meaning is generally regarded as
including any notice, circular, adveftisement or any other invitation offering
shares to the public.
Section 167 (1) renders unlawf ul any invitation to the public to take shares of
a registered Company unless six months before it is made a prospectus
relating to the invitation is registered by the registrar. Besides every person to
whom the invitation is made must be supplied with a copy of the prospectus.
Of course generally section 178(1) prohibits issuing a prospectus in respect of
equity shares of a company unless all such shares carry an unrestricted right
to vote at the company's general meetings and, on a poll, a constant number
of votes which is the same for each share.
Every prospectus issued by oron behalf of a registered company must contain

certain prescribed information. Some of the information is:
a) the full name of the company;
b) a full description of the securities which the public are invited to acquire;
c) the situation of the company's registered office;
d) the nature of the company's business(es) and
e) the company's authorised capital.
Moreover section 167(1) requires that the prospectus should be registered six
months before it is issued to the public. lf it is issued by or on behalf of a
company in respect of the company's shares or debentures, the copy sent for
registration must be signed by every person named in it as the company'
director or his agent.t$l Besides, it must be a true copy of the registered one
and show the date of registratiol.ts4. :
9.10.1.1 Invitation to the pubtic

section 164(1) prohibits making an invitation to the public to acquire any shares
or debentures of a company unless the company is a public one and the
relevant provisions in sections 160-172 of the Act have been complied with. lf
an invitation is made in contravention of this requirement all persons, and every
otficer of the body corporate, making the invitation will be guilty of a crime. r3ir
Besides any person who acquires any shares or debentures as a result of that
invitation can avoid the contract of acquisition and also claim from the person
liable lor the contravention, compensation for any loss suffered as a result of
the contravention.t3el However even if the invitation complies with section
1 64(1), no binding contract or legally enforceable obligation can be entered into
in response to it until the expiry of 10 ten days after the first publication of a
registered prospectus in respect of the invitation.torAnd any application, offer
or acceptance in response to the invitation is revocable at any time before the
end of that period.
According to section 165(1), an invitation will be deemed to be made to the

public if an offer or invitation to make an offer for shares is:
(a) published or otherwise disseminated in Malawi by newspaper, broad-

casting or another means or
(b) made to any section of the public comprising more than fifteen persons;
or
(c) made to any person so that he may renounce or assign his benefit of it
or of, any shares to be obtained under it to any other person.
similarly, the issue of any form of application for shares or debentures will be
deemed to be an invitation to acquire those shares.rarrAgain an allotment or
agreementto allot shares mayalsoconstitute an invitation tothe public to make
an offer lor shares if a company allots or agrees to allot the shares to any person
with the view that the public should be invited to acquire them. ln the absence
of evidence to the contrary, this will be considered to be the case where within
six months after the allotment or agreement he invites the public to acquire the
shares or he makes the invitation before the company has received the full
consideration forthe shares. ta2lon the other hand an invitation which in allthe
circumstances is of a domestic concern for those making and receiving it or is
made by or for a company exclusively to its existing shareholders,
debentureholders or employees on condition that they cannot renounce or
assign the benefit of it or of the shares to be obtained under it in favour of any
person, will not be deemed to be made to the public.lol :
9.10.2 Liability for staternents in prospectuses

9.10.2.1 Civil liability under the Act
The Act creates two forms of liability for mis-statements in prospectuses.
These are civil and criminal liability. Under section 173(1), a person who
acquires shares or debentures on the faith of a prospectus which contains false
or misleading information or omits to give any ol the prescribed particulars and
suffers loss thereby, is entitled to be compensated by:
(i) every person making the invitation contained in the prospectus;
(ii) every director of the body corporate making the invitation when the
prospectus was made;
(iii) if the invitation was made by the company to whose shares or debentures
the invitation relates,
(a) every person who has consented to be named in the prospectus as

director or prospective director of the company; and
(b) every promoter of the company who was a party to the preparation
of the prospectus; and
(iv) every person who consented to the publication in the prospectus of his
stalement as an expert.
9.10.2.2 Criminal liability under the Act

Besides, any person who authorises publication of a prospectus containing a
false statement will be committing a criminal offence. I14l lt is also a criminal
otfence underSection 177(1) to induce orattemptto induceany personto enter
or to offer to enter into:
(a) an agreement to acquire, dispose of or underwrite securities of any body

corporate; or
(b) an agreement to secure prolits to any of the parties from the yield of
securities or by reference to fluctuations in the value of securities.
For the inducement to amount to a crime here, it must comprise a deceptive,

false or misleading statement, promise or forecast which is either known to be
so when made or is recklessly made,
or a dishonest concealment of lacts. The word 'securities' is not defined in the
Act. However, it is generally taken to mean shares and debentures of a
registered company.
9.10.2.3 Civil liability under the common law

Apart from the statutory civil liability discussed above the defendant may also
be liable at common law for any mis-statement in the prospectus. The person
induced by the lalse statement to acquire shares or debentures in a company
can recover damages if he shows that the statement was fraudulently or
negligently r"6g.tlllBesides, the innocent party can rescind the contract
under which the sh#es or debentures were acquired. ln Re Pacaya Rubber
& Produce Co. Ltd (1 91+;trst issued a prospectus inviting subscrip-
".ompany
tions for shares for the purpose of buying a rubber estate. The prospectus
contained extracts f rom the report of an expert on the value of the estate. ln fact
the report was false. lt was held that since the accuracy of the report was the
basis of the contract to take shares in the company and the company did not
dissociate itself from it or warn the public that it did not vouch lor the report's
accuracy, the contract could be rescinded.
However, the plaintiff may be prevented from rescinding the contract by such
bars to rescission as lapse of time, aflirmation and impossibility ol restitutio in
integrum. ln Seddon v NE Salt (1905) t44 a company's net trading loss was
represented as not exceeding 8250. On the faith of this representation the
plaintifl bought shares in the company. Subsequently, however, he discovered
that the loss was much biggerthan €250. Yet instead ol taking immediate steps
to rescind the contract he continued to run the company for another three or
four months. lt was held that he could not rescind the contract because, rnler
alia, by continuing to run the company after he had information which should
have led him to rescind the contract, he affirmed the contract.
9.10.3 The Capital Market Development Act, 1990

Recently, the law in this area has been strengthened by Parts lV and lX of the
Capital Market Development Act, 1990 which require certain disclosures, and
prohibits a number of activities, relating to publicly traded company securities.
9.10.3.1 Disclosure of lnformation

The Act requires every is,suer of securities to disclose all material information
to the public and the capital market. I{l According to Section 2, security means:
(a) stock, shares, bills, notes, commercial paper,certificates of deposit,

bonds and debentures issued by the Government or any body which is
corporate or incorporate;
(b) any interest, privilege, right, option, warrant or receipt in respect of issues
referred to in (a); and
(c) any interest or instrument commonly known as security.
And as shown in paragraph 5.4.2, information is material in this respect if it can

reasonably be considered to be of interest to existing or potential parties in a
capital market or to investors.
Where the securities are traded in the capital market, the Act imposes
three more requirements. The disclosure referred to above must include
information about the issuer and the issuer's business.tael Of course the
issuer must ensure that no unauthorised person has access to that
information before it is made Public. tsot '
Secondly, the issuer must furnish true, complete, prompt and continuous
disclosures to th6 market by providing copies of the material information to
brokers, dealers, market makers, underwriters, investment advisers and
portfolio managers. tsrl The issuer must also prepare and file with the Reserve
Bank and every registered self-regulatory organisation trading in securities, of
any elections, resignation, vacancy or change in directors, chief executive
officers, managers or auditors. t52l
9.10.3.2 Disclosure of shareholding

The Act also imposes the duty of disclosure on shareholders. Section 20(1)
provides that every holder of at least 10"/" ol the shares of a public company
which are traded in the capital market should notify the Reserve Bank and the
self-regulatory,organisation of the amount of his shares within five days of
obtaining control or ownership of the shares. lf there is any change in that

amount, he must inform the Bank and the organisation of it within five days ol
its occurrence. The Bank willthen make this information public through such
media as it may determine. t531
Now because as stated in paragraph 9.6 a person can be registered by a

company as a holder of its shares although he is a mere nominee of the actual
owner of the shares, section 20 does not help the public to know the real owners
of companies whose shares are traded in the capital market. On the contrary, it
strengthens Section 36 by preventing disclosure ol that information.
9.10.3.3 Prohibited activities

Moreover, the Act prohibits:
1. The creation of false or misleading appearance of active trading in

securities by:
(a) etfecting a purchase or sale of any security which does not involve
any change in the beneficial ownership of the security in that a
person associated with the purchaser or seller in relation to the
security holds can interest in the security after the purchase or sale;
or
(b) Placing any orderlorthe purchase orsale of such securities knowing

that an order of substantially the same size and at substantially the
same price and time has been or will be placed by someone for the
purchase or sale of the securities. tsal
Of course this does not affect a transaction by a marketmaker in the normal

course of his business ellected in accordance with the requirements of the
Reserve Bank or the rules of any self-regulatory organisation.
2. Depressing or raising prices of any security by a series ol transactions in

that security which create actual or apparent active trading in it in order to
induce other persons to purchase or sell the security. t55l ; i
3. Any offeror, purchaser and seller of securities to induce for consideration,

the purchase or sale of any security by circulating or otherwise dissemi-
nating information to the eflect that the price will or is likely to rise or fall
because of the market operation of any person conducted to raise or
depress the price of that s€curity.tsal
the price, which is not in accordance with the requirements of the Reserve
Bank. Fa
9.11 Gonsideration for shares

Company shares cannot be allotted free of charge. On the contrary, the
company must receive some consideration forthem from the allottee. Accord-
ing to section 61 (1) the consideration must be in the form, of cash or othenruise,
i.e property, goodwill or an entire business undertaking. ln lact there is an
indication in section 60(2) thatthe consideration mayalso be intheform of work
to be executed lor the company. lf no consideration is given for an allotment
the allottee will be liable to pay the full nominal value of the shares plus any
premium payable on them. ln Re Eddyston Marine lnsurance Co (1893)rssr
a company passed a resolution to allot some of its shares to its directors and
original shareholders. The allotment was said to be in consideration of their
past services and expenses in forming the company and establishing its
business. when the company later went into liquidation, the directors and
shareholders were required by the liquidator to contribute to the settlement of
its debts on the ground that the shares allotted to them were unpaid. lt was held
that on the evidence no payment either in money or money's worth had been
made on the shares so that the directors and shareholders were liable for the
full nominal value of the shares. The court's argument was that the services
and expenses referred to never created any debt on the company's part to the
directors and shareholders. For that reason, they could no! be treated as
consideration for the allotment. I
Now where the consideration is not in the form of cash, the company's valuation
of the property, goodwill etc constituting the consideration will be considered
conclusive as to its adequacy. ln other words, the consideration will not be
inadequate (and therefore constituting an allotment of shareg at a discount)
because an independent valuerwould have placed a value on it which is lower
than the company's valuation. However if the inadequacy is apparent on the
face of the transaction or there is evidence of f riend or no attempt to determine
whether the consideration is adequate, the company's valuation will not be
conclusive and may be challenged. ln Re Wragg Ltd (1897)tsethrys people sold
their business and its assets to a newly-incorporated company at t46,300. The
company paid for the purchase partly by issuing €20,000 worth of shares and
partly bycash and debentures. when thecompanywas wound upthe liquidator
contended that the value of the business had been overstated because some
ol the assets valued at €27,000 were worth only c1 5,000 in the market. For that
reason, he argued, the sellers should be regarded as having failed to

provide adequate consideration for the shares allotted to them, and
therefore to have got them at a discount. lt was held that where a
company allots shares for property, its valuation of the property is
conclusive as to the adequacy of the consideration received and the
mere fact that the property has a market value which is lower than the
valuation does not mean that the allotment is at a discount. According
to Lindley, L.J.:
"lt has ...never yet been decided that a limited company can not buy property
or ...seruices at any price it thinks proper, and pay for them in fully-paid up
shares. Provided a limited company does so honestly and not colourably and
provided that, it has not been so imposed upon as to be entitled to be relieved
from its bargain, it appears to be settled ... that agreements by limited
companies to pay for property or seruices in paid-up shares are valid and
binding on the companies and their creditors". t60l
Further on he added:
"lt is not law that persons can not sell propefi to a limited company for fully
paid-up shares and make a profit by the transaction. We must not allow
ourselves to be misled by talk of value. The value paid to the company is
measured by the price at which the company agrees to buy what it thinks it
worth its while to acquire.'t6u
Chapter Nine
1. Section 6(1)(c).
2. Section 59(1).
3. Section 56.
4. Section 62(1Xb).
5. Section 52(1).
6. [1900] 1 Ch 833.
7. [1e06] AC 43e.
8. Section 36(1).
9. Section 36(3).
10. [1962] 1 Ail ER 201 .
11. [1884] 14 QBD 424.
12. Section 149(1)-1.)
13. Section 48(3).
14. [1937] 2 Ail ER 322.
15. [1e02] 1 Ch 3s3.
16. Section 62(5).
17. Section 61(2).q'
18. Section 58(2).
'19. Section 58(3).
20. Section 58(4).
23. Section 58(5).
24. Section 50(3).
25. Section 50(4).
26. Re Bede Stream Shipping Co Ltd [1917] j Ch 123 and Re Smith &
Fawcett Ltd [1924]Ch 304.
27 . Section 43(1).
29. Section 49(3).
30. Section 49(1).
31 . Section 51(1).
32. Section 51(2).
33. Section 51(3).
34. [1905] 1 Ch 646.
35. Section 54(3).
36. Section 170(2).
37 . Section 167(1)(c).
38. Section 164(2).

39. The proviso to section 164(3).
40. Section 171(2).
41. Section 165 (2).
42. Section 166(2).
43. Section 165(lXixii).
44. Section 176(1).
45.. Derry v Peek (1889) 14 App Cas 337 and Hedley Byrne & Heller
Partners Ltd [1963] 2 All ER 575.
46. [1914] 1 Ch 542.
47. [1905] 1 Ch 326.
48. Section 17.
49. Section 19(1).
50. Section 19(2).
51. Section 18.
52. Section 21.
53. Section 2O(2),
54. Section 36.
55. Section 37.
56. Section 38.
57. Section 39.
58. [1893] 3 Ch 9.
s9. [1897] 1 Ch 7e6.
60. lbid., p.830.
61. lbid., p. 831,
Aq V,ry v ft -L rt') {.'i-c

LtaY^'Lt 'o)"''l)
ttu: I -,.- .i'..t;",*''i dt' t.''/'"14{r'^ lo''-
''tJ rv*''i t
ij"rrl,-,i'
';:, ,-,*
-ht,;
!,'i::;, ,* ii?. i ,,,aL' l,ln*'t,,
t!
L t. -;u',*u-L ., rr/ '-'J l-rlau"4 l' ]*
k,; , e-,' , -''l-L i'.!.-7 , ,v. I t )/1ttz. '-i'"-l('" "l'
L J,.. ,- ry'
f^L--.
Chapter Ten
Maintenenance of
Share Capital
Apart from enabling a company to carry on its business activities, share capital
provides the means of discharging its debts and liabilities on winding up. As a
matter of fact, share capital may be the only fund available to a company's
creditors in that event. Forthese reasons, a company must handle and dealwith
its share capital in such a way that as much of it as possible is available to meet
theirfinancialclaims. ln effectwhatthis implies is that unless diminished through
the company's ordinary business operations, assets representing its shares
capital, including any outstanding liability on issued shares, must not generally
be reduced except as allowed by law. To ensure that, the law provides the
following devices.
10.1 Prohibition of the return of capital while the

company is a going concern
Generally, while the company is still a going concern it is not allowed to return
its paid-up capitalto its members or reduce their liability in respect of partly paid
shares. On the other hand, the capital can only be repaid on winding up afterthe
company's creditors have been paid. Thus, except where the company is
carrying out an authorised reduction of its share capital or redeeming its
redeemable shares (both of which are discussed below), any payment made by
a company to its members can only be by way of distributing profits in the form
of dividends. ln Moxham v Grant (1900) til directors of a company distributed
a portion of its capital among its shareholders. Subsequently, when the
company was wound up, the liquidatorapplied fora court orderthatthe directors
should repay the money. lt was held that the directors were liable to replace the
money and that since the members received the distributions knowing that they
were made out of capital, directors were entitled to be indemnified by them.
arF-
10.2 Prohibition of financial assistance by a

company for the purchase of its shares
It is unlawful under Section 72(1) lor a registered company to give
financial assistance for the purpose of or in connection with the pur-
chase by any person of its own shares or those of its holding company.
l{ere provision of linancial assistance includes giving a loan or guaran-
teeing somebody's repayment of a loan. Thus a company would be
giving financial assistance under Section 72(1) it it lends money to
someone who then gives it to the person who actually buys the company's
shares or if the former borrows the money elsewhere and the company
guarantees his repayment of the loan. A company would also be
providing prohibited financial assistance to a person if he had no money
with which to buy its shares and gave them to him gratuitously or on
condition that he should repay the money to it later. Similarly, there
would be a crime under Section 721J) rt a company gave a gift to a
person so that he can discharge his liability under an already existing
contract whereby he purchased the company's shares f rom either itself
or someone else.
The application of this provision is illustrated by the case of Wallersteiner

v Moir (1974). I2l Here the appellant acquired shares of a company
through a trust. The company lent money to him in the name of an
intermediate company. He then used the loans to acquire shares in the
lending company through the trust. lt was held that since he was 'the
moving spirit' behind both the trust and the intermediate company, the
lending company contravened the English equivalent of SectionT2(1).
The prohibition of a company to provide financial support for the

acquisition of its own shares would seem to be the idea behind Section
57(1). This provision makes it an off ence for a subsidiary conrpany to be
a member of its holding company and for the latter to allot or transfer its
shares to its subsidiary. As indicated in Chapter 1, a holding company
will be a member of its subsidiary, i.e. it will have paid money to the
subsidiary in exchange for the latter's shares. Clearly the fear is that if
the subsidiary is in turn allowed to acquire the holding company's shares
it may do so using the money paid by the holding company to acquire its
shares. And in this way Section 72(1) would be more diff icult to enforce.
But Section 72(11 may produce strange results if taken too f ar. For it may
AhI INTRODUCTION TO COMPANY LAW IN MALAWI - 133
mean that if a person enters tnto a genuine arm's length transaction with
a company whereby the latter pays money to him which he later uses to
buy its shares, it could be guilty of providing f inancial assistance to him
to purchase its shares contrary to Section 72(1). This absurdity is
highlighted by Belmont Finance Corporation v Williams (No. 2)tst
that case a person wished to purchase the shares of the plaintiff'n
company. Because he did not have the money to do so, the company's
directors arranged to buy f rom him issued shares of another company
of which he was a shareholder. He then used the money f rom the sale
of the shares to buy the f irst company's shares. lt was held that the first
cornpany had provided him f inancial assistance to purchase its shares
contrary to the English equivalent of Section 72(11.
However, it will not be an offence under Section 72('l) lor a registered

company to:
(a) lend money in the course of its business where money-lending is part of
that business. ln Steen v Law (1963)tal for reasons of tax, a company
decided to become a subsidiary of another company. Thereafter, the
subsidiary's shareholders sold their shares to the holding company which
got the money used to pay for the shares from the subsidiary. The coutt
found that the latter clearly gave financial assistance for the purchase of
its own shares. However, the question was whether the lending of the
money was part of the subsidiary's ordinary business so as to fall within
the English equivalent of the f irst proviso to Section 72(1).lt was held that
since the subsidiary did not in tact carry on the business of lending
money, the loan to its holding company was not covered by the proviso'
(b) provide money as part of a scheme for the purchase of fully paid-up
shares in the company by or for the benelit of employees of the company
and
(c) grant loans to its employees to enable them purchase fully paid up shares
in the company which they can hold as beneficial owners.
A company may also provide f inancial assistance in connection with the

purchase of its own shares without contravening Section 72(1) where il
pays a commission under Section 60(1). Of course as shown in para-
graph 10.5 below, the payment must be authorised by the company's
articles, as done by Article 6 of Table A.
-
10.3 Prohibition of the acquisition by a company

of its own shares
Section 73 (1) prohibits a registered Company which is limited by shares from
acquiring or holding an interest in its own shares. lt does not matter whether
the shares are held or acquired directly or indirectly through nominees.
The connection between this prohibition and maintenance of share capital is

shown by the case of Trevor v Whitworth (1887). Isl A shareholder sold his
shares to his company and received part of the price for them. Later when the
company went into liquidation, he brought an action to claim the balance. lt was
held that he could not recover the money because a registered company was
not allowed to buy its own shares except in the circumstances allowed by law.
Explaining the rationale of this rule, Lord Watson said:
"ln my opinion the effect of these statutory restrictions is to prohibit every

transaction between a company and a shareholder, by means of which the
money already paid to the company in respect of his shares is returned to him,
unless the court has sanctioned the transaction. Paid-up capital may be
diminished or lost in the course of the company's trading; that is a result which
no legislation can prevent; but persons who deal with, and give credit to a
limited company ... are entitled to assume that no part of capital which has been
paid into the coffers of the company has been subsequently paid out, except
in the legitimate course of its business".
This also accounts for the prohibition by Section 57(1) of a body corporate to be
a member, or to appoint a nominee as a member of its holding company and the
transfer or allotment of shares in the latter to the subsidiary. The idea behind it is
clearly to prevent a registered company circumventing Section 73(1) by having
a subsidiary to buy its shares. And here it should be recalled that a holding
company is a member of its subsidiary so that if the latter were allowed to buy
the lormer's shares, the subsidiary may abuse that permission to purchase its
own shares f rom its holding company. Of course notwithstanding the provision
in Section 57(1), a subsidiary company may become a member of its holding
company by reason of its being a personal representative of a deceased
member or trustee of the shares of the holding company. t6l
One exception to Section 73(1) is where a company purchases its own shares
lunder a court order to relieve an unfairly prejudiced minority.Pl Similarly, a
company may purchase its own shares without contravening Section 73(1)
where it redeems redeemable shares issued under Section 62(1). Of course

the company can only purchase its shares in this way il it does so out of a f resh
issue of shares or the company's distributable profits.t8l Moreover, a company
may be excused for acquiring or holding an interest in its own shares if the
interest arises as a result of acquiring a controlling interest in the shares of
another company or the enforcement ol security. This will happen where a
bank which has accepted a mortgage of shares for a loan enforces that
mortgage. lf the shares are its own, by doing that the bank will not be
contravening section 73(1). However, in either case, the shares or the interest
must be disposed of within twelve months of their being acquired.
10.4 Redemption of redeemable shares

Once redeemable shares are redeemed, they are cancelled and their nominal
value is deducted from the company's share capital account. lt is perhaps
because of this that no share can be redeemed unless it is fully paid-up.tel Now,
to bring its capital back to the amount authorised by the memorandum, the
company must make up for this reduction. And it may do that by either raising
more share capital or capitalising some of its profits which would otherwise
have been available for distribution to members as dividends. For this reason,
a registered company which has redeemed or is about to redeem preference
shares has power under Section 62(4) to issue fresh shares up to the
aggregate of the nominal value of the shares redeemed or sought to be
redeemed. These shares will replace those being redeemed. Where the
redemption is made lrom other than the proceed of a f resh issue of shares, the
company must transfer from its profit and loss account a sum equal to the
nominal value of the redeemed shares to the capital redemption reserve
funcl.ttol Once the transfer is made, the fund will be treated as if it were paid-
up capitalof the company. ln otherwords, thef und cannot generally be reduced
without compliance with the statutory procedure for the reduction of share
capital laid down in Sections 68 - 70, and no dividend can be paid out of it.
However, the company can use the fund to payfor its unissued shares and then
issue them to its members as fully paid-up bonus shares. trrl
lf the shares are redeemed at a premium, the premium must be paid out of the
company's profits or share premium account. Of course the premium will be
paid out of this account only if the shares were initially issued at a premium. ln
other words, il no premium was paid then on the shares, their redemption will
have to be paid out of the company's profits.
10.5 Payment of commission or discount on

shares
A company is considered as issuing its shares at a discount if the consideration
which it receives for them is less than their nominal value. ln other words, as
long as a company receives the nominalvalue of its shares, it cannot be said
to have issued them at a discount even if they are sold for an over-valued non-
cash consideration or at a price which is lower than their market value. At
common law a registered company is not allowed to issue its shares at a
discount. ln Welton v Saffery (1897) (121a company which was allowed by its
afticles to do so, issued some of its shares at a discount. lt was held that the
holders of those shares were liable to pay the amounts not paid on the shares.
Again in Ooregum Gold Mining Company of lndia v Roper (1892) ll3l.the
company issued shares whose nominalvalue turned out tq be more than their
market value. The resuit was that potential investors were reluctant to buy the
shares if offered at par. Since the company was in desperate need of money,
it decided to issue f 1 preference shares for which 5s only was payable and the
remaining 15s was credited as paid. ln an action by one o{ the company's
shareholders to challenge the validity of that decision, it was held that as the
shares were in effect being issued at a discount, the issue was beyond the
company's powers. Explaining the holding, Lord Macnaghten said:
'[A nmpny limited by shares] is fomd on the pnrrciple of having the liability of its
menhe rc limited to the amou nt u npaid upon tlei r shares. That musl mean that the liabi lity
of a membercontinues so bng as anything rcnnins unpid upon his shares. Nothing
but pynent, and pynent in full, an put an erd to the liability ..."
Moreover, the Companies Act generally prohibits a registered company to use

its contributed capital for the payment of a commission, discount or allowance
to any person as consideration for his subscription or agreement to subscribe,
orfor procuring oragreeing to procure subscription forthe compdny's shares.ll{
The prohibitionapplieswhetherornotthe payment is madedirectlyorindirectly
by adding to it the price of property acquired, or work to be done, for the
company or by deducting it f rom that price. And the use of the word'subscribe'
or'subscription' here clearly suggests that the shares must be unissu.ed. This
is because where a company offers unissued shares that is known as an 'offer
for subscription' and the persons who acquire them are known as 'subscribers'.
On the other hand, if such an ofler is made by existing members in respect of
issued shares, it is an 'offer for sale' and the persons who acquire the shares
are called'purchasers'.
ln this context words'discount or allowance' in effect mean the same thing, that
is, a rebate on what wouid justly be due from the allottee on the shares allotted to
him. Now so long as the allottee pays the full nominal value for the shares, they
will not have been allotted to him at a discount nor will the company have paid a
commission on them simply because their market price at the time of allotment is
higher than their nominal value. ln Hilder v Dexter (1902) Irsl a company offered
f 1 shares at par to the appellant and others, with an option to take fufther shares
at par within a cedain time. The appellant subscribed for the shares and when
subsequently their market price rose to a premium, he exercised his option to take
furthershares. On thequestion whetheror not by not allottingthesefurthershares
to him attheir market pricethecompany had applied its capital'directly orindirectly
in payment of a commission, discount or allowance' within the meaning of the
English equivalent of section 60(2), it was held that the company had not. ln the
words of Lord Davey:
'"The words'discount or allowance' seem to mean the same thing, namely, a

rebate on what would justly be due from the subscriber on his shares. The
advantage which the appellant will derive from the exercise of his option is
certainly not a'discount or allowance', because he will have to pay 20s ... for
every share. Nor is it ... a commission paid by the company, for the company
willnotpartwithanyportionof itscapitalwhich is receivedbyit... orindeed with
any money belonging to it".
However, there is a loophole in the law which can be exploited by a company

wishing to allot its shares at a discount. As already shown in Chapter 9, shares
can be allotted for non-cash consideration. Since there is no requirement lor
independent valuation of that consideration, the company can accept property
or services whose value is less than the nominal value of the allotted shares.
ln the absence of fraud, that can not be challenged as an improper allotment
of shares andthe allotteewould not subsequently be required bythecompany's
liquidator to pay lhe shortfall.
10.5.1 Allowablecommission
A company may have an offer of its shares underwritten by someone. The
effect of this will be that the underwriter will agree to take any of the shares
which are not taken by the offerees. ln exchange for that agreement the
company will normally pay the underwriter a percentage of the price at which
the shares are being offered. This payment is called an underwriting commis-
sion. Now according to section 60(1) such a commission is payable by the
company only if:
138 . AN INTROOUCTION TO COMPANY LAW IN MALAWI
(a) it is authorised by the company's memorandum or articles;

(b) it does not exceed the lesser between 1O% of the nominal value of the
shares, and the rate authorised by the memorandum or articles;
(c) the shares in respect of which the commission is paid are offered to the
public and the rate of the commission payable on them is disclosed in the
prospectus containing the offer;
(d) where the shares are not offered to the public, the rale of the commission
is disclosed in a statement sent to the registrar for registration before
payment of the commission and
(e) the number of shares in respect of which the commission is payable is

disclosed as in either (3) or (4), as the case may be.
Besides, as section 60(2) shows, the payment must comply with section 72.
Any commission which does not comply with these requirements is unenlorceable
and renders the paying company liable to a fine under section 60(5). ln Booth v
NewAfrikander Gold Mining Co (1 903;net" entered into an agreement
with certain persons for the sale to them of"ompany
the company's undertakings. The
purchasers were supposed to form acompanywhich would buythe undertakings
in retum for the allotment o{ its shares to members of the old company. As
consideration for the agreement, the purchasers agreed to accept allotment in the
new company of any shares which would not be required by the members, and
e 12,300 in cash. When the new company paid this sum to them the payment was
challenged onthe groundthatitamountedtoacommission whichcontravened the
English equivalent of Section 60(1). lt was held that the payment was indeed a
commission and that since there had been no offer of the new company's shares
to the public for subscription and the !12,300 was not a rate which had been
disclosed in any prospectus, the payment was caught by the prohibition in the
English equivalent of Section 60(2).
10.5.1.1 Treatment of commission paid or discount allowed

As already noted if a company gives a discount in respect of subscriptions for its
shares, the subscribers may be required by the company's liquidator on winding
up to pay to the company the amount allowed as a discount. To avoid this, the
company has two options. lt can use the share capital reduction procedure in
sections 67-70 to formally reduce its share capital by that amount. Altematively,
should it have a share premium account, it can, as shown in para. 10.6, use the
amount standing to the credit of that account to write off the discount. ln fact
according to section 61 (2) the account can also be applied to write off commission
paid on the issue of company shares.
10.5.2 Payment of brokerage

According to Section 60(3) the prohibition in sub-section (2) does not include
payment by the company of a reasonable brokerage for its shares. Brokerage
is a fee paid to a person who introduces a company to potential shareholders.
ln Metropolitan Coal Consumers' Association v Scrimgeour (1895) lrTl the
appellant's memorandum of association allowed it to pay out ol its funds all
brokerages, commissions, legal and other expenses for the issuing of its
shares. Subsequently the company's directors agreed with the defendant
stockbrokersto paythem acommission of 2.5% on the nominalvalue of shares
which it intended to issue if the defendants could procure applications for the
shares. After the applications were obtained the commission was paid.
However when the company went into liquidation, the liquidator brought an
action to recover the commission. lt was held that the action could not be
maintained because a company is allowed to pay a reasonable amount of
money as brokerage for its shares.
However, brokerage is payable only to a person carrying on business as a

broker. lf the payee is not a broker, the paymentwillbe illegaland no action can
be entertained to enforce the agreement to pay it. ln Andreae v Zinc Mines of
Great Britain Ltd. t18l the defendant company promised to pay to the plaintiff
a commission of 10% if she could introduce to the company any person who
might advance money to it. The amount or rate of the commission was not
disclosed as required by the English equivalent of Section 60(1)(b). Alter she
introduced a person to the company who advanced C4,600 to it, the company
paid her 8200 commission. When the company failed to pay her the remaining
€200, she brought an action against it to recover the money. lt was held that
the amount payable to the plaintiff was not brokerage within the English
equivalent of Section 60(3) because the plaintiff was not a broker but was a
commission within the meaning of Section 60(2). Since it was not disclosed as
required by Section 60(1Xb), the plaintiff could not recover the balance
claimed.
10.6 Application of share premiums

Although it is prohibited to issue shares at a discount, a registered company
can issue any of its shares at a premium if it is allowed to do so by its
memorandum or articles. Shares are issued at a premium if their allottees are
I4O . AN INTRODUCTION TO COMPANY LAW IN iIALAWI
required to pay for each one of them an amount which exceeds its nominal
value. Thus, where shares are issued for an overualued non-cash consider-
ation, the excess will be treated as a premium.trel
According to Section 61(1), a company which issues shares at a premium

whether for cash or otherwise, must transfer from its capital account to an
account called 'the share premium account', a sum equal to the aggregate of
the premiums. ln Shearer v Bercain Ltd (19801tmt the defendant company
acquired the share capital of two companies in exchange for its own
shares.Thereafter, itcreated a share premium account in respect of the excess
value of the acquired shares over the value of its own shares. lt was held that
the company was right in treating the excess as a premium because the English
equivalent of Section 61(1) clearly contemplated the issue of shares at a
premium otherwise than for cash.
Once the transfer is made, the share premium account wiltbe treated as if it
were the company's paid-up share capital. Thus, no dividend can be paid out
of it and unless the company complies with the prescribed procedure for the
reduction of share capital, it cannot reduce the account except if the purpose
is to:
1. pay for unissued shares of the company to be issued to its members as

fully paid-up bonus shares: or
2. write off the company's preliminary expenses or expenses incurred" in the

issue of any of its shares or debentures; or
3. provide the premium payable on the redemption of redeemable prefer-

ence shares or debentures of the company. I2u
10.7 Payment of dividends

A trading company is formed to make prof its for its members. These profits are
then distributed to them as dividends. The word dividend is not defined by the
Act but it is commonly used to describe a portion of a company's profits legalty
available for distribution among its members which is received by dach one of
them who is entitled to it. A dividend differs from interest payable on loan capital
because whereas the latter is a debt against the company (which is payable
out of its assets), it is generally not a debt until it has been declaredlzl and, as
shown below, can only be paid out of the company's profits which are available
for distribution to shareholders.
1O.7.1 Mode of payment

A company limited by guarantee cannot pay any dividend or make any
distribution to its members.t23l Forthis reason, onlycompanieswith contributed
capital can pay dividends on their shares. Of course if the company carries on
banking business, it may not pay any cash dividend on its shares unless it
maintainstheappropriatecapitalbaseforthebusiness.tr4l
The rules governing payment of dividends are usually contained in the

company's articlesof association. Thus article 89 of TableA givesthecompany
in general meeting power to declare dividends. Where that is the case, then
unless a dividend is declared, it is not payable bythe company.l2sl However, the
dividend so declared must not exceed the amount recommended by the
company's directors.
To ensure that the distribution does not involve unauthorised reduction of

share capital, it can only be made out ol profits. t6l ln Re Oxford Benefit
Building & lnvestment Societytzzt(1886) a company's articles provided that
dividends should not be paid except out of realised prolits arising from the
company's business. However, contrary to that, the company's directors paid
dividends out of whatever cash they happened to have in hand, without
ascertaining the f und f rom which the payment was actually being made. lt was
held that the dividends were in effect paid out of capital and that the directors
were, therefore, liable to the company for the paymentrs"j*l
,
Profits which are distributable as dividend may be of a capital or revenue

nature. According to Section 74, what is crucial is that the dividend should not
exceed 'unappropriated profits'shown in the most recenl audited accounts of
the company. Of course like many other expressions and words in the Act, this
one too is not defined. But in accounting usage, this refers to net profits less
any sums set aside out of the profits as a fixed asset reserye or capital
redemption reserve fund.
Section 74 also prohibits a registered company from dealing with any

unrealised capital prof its in its profit and loss account. Such profits will
arise f rom the revaluation upwards of the company's capital assets and
will, therefore, represent a mere paper again. For this reason they
cannot be distributed as a dividend. This being the case, Dimbula
Valley Tea Co. Ltd v Laurie (1961)t2el which allowed distribution by way
of dividend of capital surplus resulting f rom the appreciation in value of
unrealised fixed assets is not law in Malawi. However there is nothing
7
legally wrong with using an appreciation in the value of fixed capitalto

write off previous losses of paid-up capital.{301
Because this prohibition does not specifically mention unrealised rev-

enue profits, it can be concluded by implication that a registered
company can deal with those profits in its profit and loss account. Thus,
the unappropriated profits distributable as dividend may comprise
realised capital prof its and revenue prof its, whether realised or not. Now
if this interpretation is correct, then to this extent Section 74 goes
against the accounting prudence concept according to which prof it must
not be treated in the profit and loss account unless the profit is realised.
Lastly, although a registered company can pay dividends out of profits made
in previous years, it is not obliged to recoup losses from those years before
distributing a dividend in the current year. ln othei words, there is no legal
requirement to accumulate realised losses and deduct them f rom distributable
profits in any accounting period. For this reason, as long as in any given year
the company has distributable profits, it can pay out a dividend even though
there are unrecouped losses from previous years. Similarly, a company is not
required to ensure that there are no losses on its {ixed capital account before
it pays out a dividend. Consequently, it can make the distribution without
deducting such losses, if any, from its net realised profits in the year of
distribution. ln Ammonia Soda Co. Ltd. v Chamberlain (1918;tatt" manufac-
turing company which had been incurring losses on its trading account
subsequently made profits. lts directors set off the losses against an apprecia-
tion of the company's capital assets as ascertained by two of the directors who
were not expert valuers. The directors then paid dividends out of the subse-
quent net profit without any further provision for replacing the losses. lt was
held that there was no rule of law lorbidding a company lrom setting off an
appreciation in the value of its capital assets, as ascertained by a bona fide
valuation, against losses on the revenue account. Besides, the court went on,
company law does not impose any obligation on a limited company that it shall
not distribute as dividend the clear net profits of its trading unless its paid-up
capital is intact or until it has made good all losses incurred in previous year's.
According to Peterson J., this is because:
"lf during the year there is no balance to the credit of profit and loss, any
dividend which is paid must be provided out of the paid-up capital and any
payment must reduce the paid-up capital ... Such a payment is clearly a
reduction of the paid-up capitaland is ultra vires. But where a company had
made lasses in past years and then makes a profit out of which it pays a
dividend the question is a different one. Such a dividend is not paid out of paid-
up capital. lf it were, the paid-up capital would be still further reduced by the
payment. ln fact the assets representing the paid-up capital remain the same
or of the same value as before the payment of the dividend. lt may be that the
balance to the credit of profit and loss accaunt ought to be applied in making
up tost capital ...But such a payment does not involve a reduction of capital ..."
But although unrealised capital profits must be disregarded in the

computation of distributable prof its, foreseeable future losses (whether
of a capital or revenue nature) are relevant for that purpose. This is
because section 74 provides that unless otherwise stated by the Act, all
such losses must be provided for in the profit and loss account of the
company. The basis of this rule is clearly the accounting concept of
prudence which requires provision for losses which are sufficiently
f oreseeable to make them a present reality on the ground that to disregard such
losses might mislead the user of the accounting information.
10.8 Reduction of share capital

The devices discussed above are intended to ensure that a company does not
do certain things with its share capital, and not to prevent it from reducing the
capital. This is because the Act allows registered companies to reduce their
share capital in any way they like as long as the reduction is approved by a
special resolution. lttl Three ways which are specifically mentioned by this
provision are:
1. extinguishing or reducing outstanding liability on partly paid-up shares; or
2. cancelling paid-up share capital which is lost or not represented by

available assets; or
3. paying off excess paid-up share capital.
Once the capital is reduced, the share capitalclause in the company's memoran-
dum will have to be altered accordingly. Besides, the company must apply to the
High Court lor an order confirming the reduction. And unless confirmed, the
special resolution approving the reduction will not be effective.tsl
10.8.1 The court's role

When dealing with an application for the confirmation of a proposed share
capital reduction, the court's role is not simply to endorse the company's
decision. On the contrary, it is to considerwhetherthe reduction procedure has
been complied with and to determine the effect of the proposal on the rights of
the company's shareholders and creditors. lf the reduction involves either
diminution of liability in respect of partly paid-up shares or payment to any
shareholder ol paid-up share capital, its effect will be to reduce the amount
available for the settlement of the company's debts. Naturally the company's
creditors will be interested in the reduction. For that reason, the court will give
them an opportunity to express their objection, if any, to the proposal.lsAl Of
course if thecourt so wishes, it can dispense with any creditor's consent to a
reduction of share capital by securing the company's payment ol his debt or
claim.t3sl And even where the proposal does not entail a reduction of the
company's ability to pay its debts on winding up (i.e. because it involves mere
cancellation of paid-up share capital which is lost or not represented by
available assets) the court may allow the creditors to object to it. However for
that permission to be granted, they must give very strong reasons lor wishing
to object to the reduction.This is because such a reduction will not adversely
affect their interest in the company's share capital.
ln Re Meux Brewery Co. Ltd (1919) t36l a company resolved by special

resolution to reduce its share capital by writing off part of it which was lost.
Some of the company's debenture stockholders objected to the reduction.
Dismissing the objection, Astbury, J. said that although it was clear from the
wording of the English equivalent of section 68(2) that the court had power to
permit a creditor to object to a reduction of share capital which does not involve
diminution of the amount available for the settlement of the company's debts,
creditors have no interest in such a reduction. As a result if the court is to give
that permission, it is incumbent on the dissentient creditor to make out a strong
case in support of his bid to be allowed to make the objection.
As far as shareholders are concerned, the court will be interested to see that
the reduction does not violate their rights. Thus where the reduction is in the
form of paying off excess paid-up share capital it may not be confirmed if
preference shareholders are not paid in full before other shareholders.This is
because usually preference shareholders will be entitled to priority in the return
of contributed capital on the company's winding up and the court will not want
to see that deleated by a payment of the capital before winding up. ln Re
Chatterly-Whitfield Collieries Ltd (1948) t37150% of the company's share
capital comprised ordinary shares and the other 50%, preference shares. As
a result of the nationalisation of its colliery undertaking, the company decided
to reduce its capital which was now in excess of the company's capital needs.
The reduction which was approved by a special resolution involved returning
to preference shareholders the whole capital paid upon their shares. Some of
the preference shareholders objected to the reduction on the ground that by
singling thenn out for repayment first, it was unfair in that it deprived them of the
opportunity of participating in the distribution of surplus assets on the company's
winding up. lt was held that on the construction of the company's articles,
the preference shareholders were not entitled to participate in that
distribution; their entitlement was simply to priority in the repayment of
capital. For that reason, there was nothing unlair in the proposed
reduction since they were entitled under it to be repaid their contributed
capital before ordinary shareholders.
This case should be contrasted with Re Old Silkstone Collieries Ltd (1 954).p8l
Heretoo the company's colliery undertaking was nationalised.While waiting for
the assessment and payment of compensation, the company carried out two
reductions of its preference share capital. The reductions which involved
partial repayment to prelerence shareholders of their contributed capital were
approved by the shareholders on the company's assurance that once the
compensation was paid by the government for the nationalisation, they would
be entitled to claim the same adjustment of their interests as if there had been
no reduction of their capital. Subsequently, without their consent, the company
procured the passage of a resolution authorising repayment to them ol the
remainder of their contributed capital. lt was held that the court would not
sanction this third reduction because by completely extinguishing their share
capital in the company the proposal made them lose the right (given to them
by the two earlier reductions) to participate in the compensation awaited from
the government.
Similarly, where the reduction involves variation of anyclass rights the court may
not sanction it if it is not approved by that class of shareholders or if the approval
given is not in the bonafideinlerest of the class. ln Re Holders lnvestment Trust
Ltd (1971) t3et the company proposed a reduction of its capital by cancelling its
redeemable cumulative preference shares and allotting to their holders the same
nominal amount of unsecured loan stock redeemable later than when the shares
would have been redeemed. The scheme was authorised by a special resolution
of the company and approved by a special class meeting of preference sharehold-
ers. Many of the shareholders voted against the reduction while others abstained
from voting. Nevedheless it was approved by the requisite majority because
trustees of the trusts which held g0% of the shares supported it on the ground that
,T46 - AN INTRODUCTION TO COMPANY LAW IN MALAWI
as holders ol52Vo of the company's ordinary shares they stood to gain from the
reduction. lt was held that as the trustees did not vote forthe reduction in the bona
fide interest of the general body of preference shareholders (and the scheme was
unfair in that its advantages fell substantially short of compensating preference
shareholders for the postponement of the redemption date of their securities), the
court would not sanction it.
Of course the mere fact that the reduction does not provide equal treatment to all
shareholders of the same class in that it involves paying off some and leaving the
others unpaid, does not in itself mean that the reduction is unfair so that the court
should refuse to sanction it. This is because the reduction which requires the
court's confirmation under section 68(2) is one which involves inter alia 'lhe
payment to any shareholder of any paid-up share capital'. And these words do not
rule out confirmation by the court of a reduction which provides for differential
treatment of shareholders o{ the same class. ln British & American Trustee
Corporation v Couper (1894) tel a company which had been carrying on
business in England and the United States decided to discontinue its American
business. As part of the decision a special resolution was passed which provided
for the reduction of the company's share capital by paying otf the shares held by
the American shareholders. One ol the company's shareholders objected to the
proposal on the ground that it entailed unequaltreatment of shareholders with
similar rights. lt was held that although the reduction did not provide for uniform
treatment of shareholders whose rights were similar, it would nevertheless be
confirmed because there was nothing unfair about it. According to the court, the
correct interpretation of the quoted words in section 68(2) is that as long as there
is nothing unfair and inequitable in a share capital reduction, there is no reason why
a company limited by shares should not extinguish some of its shares without
dealing in the same manner with all other shares ol the same class.
Now once the court is satisfied that the reduction safeguards the shareholders'
and creditors' rights and is fair, it will confirm the proposal on such terms and
conditions as it thinks f it. tall Thereafter the company must send to the registrar lor
registrationthe courtorderconlirmingthe reduction and a minute approved bythe
court which shows:
1. the company's new share capital;

2. the number ol shares into which it will now be divided and
3. the amount to be deemed paid up on each share as at the dateof the
registration.trzl
Alter the registration of these two documents the reduction will take effect.ta3l
ANY LAW IN MALAWI
Chapter Ten
1. [1e00] 1 QB 88.
2. [1e75] 1 Ail ER 84e.
3. [1980] 1 Ail ER 393.
4. [1963] 3 Ail ER 770.
5. [1887] 12 App Cas 409.
6. Section 57(2).
7. Section 203(2)(c).
8. Section 62(1)(a).
9. Section 62(1Xd).
10. Section 62(5).
\l'
11. Re wragg Ltd [1897] 1 ch 796 and shearer v Bercain infra., note 20.
12. [1897] AC 2ee.
13. [1892] AC 125.
14. Section 60(2).
15. [1902] AC471.
16. [1903] 1 Ch 295.
't7. [1895] 2 QB 604.
18. [1918] 2KB 454.
19. Shearer v Bercain infra., nole 20.
20. [1e80] 3 Ail ER 29s.
21. Section 61(2).
22. Bond v Barrow Haematite Steel Co Lld infra., note 25.
23. Section 75(1).
24. Section '17 of the Banking Act.
25. see also Bond v Barrow Haematite steelco Ltd [1902] 1 ch 353.
27. [1886] 35 Ch D 502.
28. See also Moxham v Grant Supra. note 1.
29. [1961]Ch 335.
30. Ammonia Soda Co Ltd v Chambertain [1918] 1 Ch 266.

32. Section 67(1).
33. Section 68(1).
35. Section 68(2Xc).
36. [1e19] 1 Ch 28.
37. [1948] 2 Ail ER 593.
38. [1e54] Ch 16e.
39. [1971] 2 Ail ER 289.
40. [1894] AC707.
41. Section 69.
42. Section 70(1).
43. Section 7O(2).
,I-
Chapter Eleven \.e ./
Gompany Finance -
Loan Capital
11.1 Power to borrow
Apart from issuing shares, a company may also raise capital by borrowing
money. Previously, a registered company could not borrow money unless it had
express power under its memorandum to do so. The harshness of this rule was
later mitigated by granting a trading company implied power to borrow money
for the purpose of its business or trade.tll
However, all this is unnecessary now. For this reason, even if a company is
limited by guarantee and its objects do not give it power to borrow or it is limited
by shares and borrowing money is among the restrictions imposed on its
activities, it can still borrow money and the loan will not be void. on the corrtrary,
the lender can enforce it against the company as long as it is not prohibited by
an injunction under Section22(2).
of course in spite of this, directors cannot borrow money on behalf of their

company unless they are specifically empowered to do so by the company's
articles or memorandum. And usually the power does impose a limit on the
amount which they can borrow at any one time. Thus for instance, after
empowering directorsto raise loancapitalon behalf of theircompany, Article52
of Table A provides that except for temporary loans from the company's
bankers, the amount of any loan for the time being remaining undischarged
must not exceed, without prior approval of the company in general meeting, the
company's share capital at that time. Moreover, the powerwill also authorise the
directors to create charges over the company's property and undertaking as
security for the money borrowed. For this reason, Article 52 also empowers
them to mortgage or charge the company's property and undertaking 'as
security for any debt, liability or obligation of the company'.
-
I5O - AN INTRODUCTION TO COMPANY LAW IN MALAWI
11.2 Debentures and debenture stock

Section 76(1) provides that companies can borrow money by issuing deben-
tures or debenture stock to the lender. A debenture is a document issued by
a company which creates or acknowledges indebtedness on the part of the
company. Thus, generally, 'debenture' applies to the document, and not to the
indebtedness evidenced bythat document. However, the meaning attached to
the word by the Companies Act is wider. lt includes debenture stock, bonds and
any other security of a company'whether constituting a charge on the assets
of the company or not'. Clearly here the word applies to the document
evidencing indebtedness as well as security given for the indebtedness.
Accordingly, a modgage is as much a debenture as the loan agreement itself .
Debentures are always issued for specif ied amounts ol money, say K5000,which
can be transferred from one person to another as a unit. However, instead of
obtaining the money sought from a number of individuals and issuing a single
debenture to each one of them, the loan may be in the form of a fund to which
they contribute. tzl This lund is called 'debenture stock' and each of the lenders
is given a debenture stock certificate evidencing parts of it which he has
provided. ln this case the debenture stock is the indebtedness while the
certificate evidences the stockholder's interest in it.
The advantage of debenture stock over a debenture is that whereas the latter
can be transferred only as a unit, the former can be subdivided and be
transferred in any fractions which the holder wishes. To the company, the
advantage of debenture stock is that if it seeks to borrow a lot of money f rom
a number persons, it does not have to enter into separate agreements with
each one of them. Rather it simply has to consolidate the loan into one mass
as debenture stock and then issue to each lender a debenture stock certif icate
representing his part ol that loan.
11.3 The issue of debentures

The procedure for issuing debentures is the same as that for shares. Therelore
provisions of the Companies Act which govern invitations to acquire company
shares also apply to invitations for company debentures. For this reason, the
law discussed in paragraph 9.10 (including the Capital Market Development
Act) is relevant here. Once the invitation is made, persons can apply to the
company for the debentures. Directors will then allot the debentures to
applicants who must pay the agreed amount for each debenture. Within two
months of the allotment, the company must deliverthe debenture ordebenture.
stock certificate to the allottee.l3l
AN INTRODUCTION TO COMPANY LAW IN MALAIVI - 151
11.4 Debenture trust deed

Unlike in the case of shares, a company which issues debentures will set up
a trust on behalf of the debentureholders. This will be done where the holders
are many or the company issues a series of debentures. ln fact, it is unlawful
to invite the public to acquire debentures of a company unless their issue is
secured by a trust deed. tal Similarly, debenture stock can only be created by
a trust deed in favour of trustees for the debenture stockholders. tsl Once the
trust is created, every holder ol the debenture or debenture stock which it
secures must be sent a copy of the trust deed upon the payment of K5 or such
other sum as the company may prescribe. t6l
The elfect of creating the trust is that the debentureholders will not deal directly
with the company. On the other hand, between them and the company will be
interposed their trustees whose responsibility will be to safeguard the interests
of the debentureholders and to intervenewherethose interests arethreatened.
Another consequence is that the loan agreement - to pay principal and interest
- will be between the company and the trustees, and not between the former
and the debentureholders. Consequently, any security provided for the loan
will be given in favour of the trustees who will hold it on trust for the
debentureholders. Besides, where there is need to make any alterations in the
debenture or debenture stock certificate, instead of consulting all the holders,
the company can deal with the trustees. Moreover, il it becomes necessary to
enforce the security, the trustees will do that on the holders' behalf. From this
it will be apparent that the creation of a trust is a far more satisfactory nnethod
of protecting the interests of debentureholders than leaving that to the
individual holder who may not have the financial resources, inlerest, skill and
time required for him to take relevant action on his own.
Of course trustees will not act for debentureholders in every case where the
latter's interests require protection. ln some cases eitherthe debentureholders
or the trustees can take the requisite action. For example, as already noted,
where a company alters the business clause in its memorandum eithertrustees
for the company's debentureholders or the debentureholders themselves (as
long as they hold at least 5% of the company's debentures secured by a f loating
charge over the company's property) can apply to the court to have the
alteration annulled.lTl Similarly, the holder of any debenture secured by a
lloating charge over a company's property or the trustee for such a
debentureholder, may apply for a court injunction to prohibit any act on the part
of the company which contravenes Section 22(2\'trt And to facilitate such
applications the debenture or debenture trust d6ed will provide for the
J
152 - AN INTRODUCTION TO COMPANY LAW ]N MALAWI
convening of general meetings, ol debentureholders and the passing at

the meetings, of binding resolutions. tel Besides, the court is empowered
to direct at any time that a meeting of debentureholders be held and
conducted as the court thinks fit. 110l
11.5 Liability of the trustees

A lot of confidence reposes in trustees for debentureholders. For that reason
they will be expected to discharge their duty to the debentureholders with
reasonable diligence and skill. To underline that, any provision in a trust deed
or contract with holders of debentures secured by a trust deed will be void if its
elfect is to exempt 'a trustee thereof from or indemnify him against liability for
any breach of trust or failure to show the degree of care and diligence required
.. ,.snl of him as truslee'. tlll Secondly, the law is selective as to who can be a trustee
' fordebentureholders.
Under Section 79(1), none of the following persons is eligible for the appoint-
ment:
(a) an infant or any other person who is under a legal disability;
(b) any person who is prohibited or disqualified to act as a trustee by the

order of any court of competent jurisdiction;
(c) an undischarged bankrupt;
(d) any person convicted within the preceding ten years of an offence
involving fraud or dishonesty;
(e) any person removed within the preceding ten years from an office of trust
by a court of competent jurisdiction; or
(f) a director or other officer or auditor of the company.
11.6 Classification of debentures

11.6.1 Redeemable and irredeemable debentures
Just like shares, debentures may be redeemable or irredeemable. This follows
lrom the lact that the Act allows inclusion of a condition in a debenture or
debenture trust deed which rinakes the debenture irredeemable or redeemable
only on the happening of a remote contingency or the expiry of a very long
i I ui(''\
period.tl2l Where a debenture is redeemable, the redempticn may be at the
company's option or (as Section 76(6) shows) at a fixed date or on the
occurrence of a contingency. Of course where a company creates a charge to
secure an indeterminate or fluctuating amount advanced on a current account,
the charge cannot be considered redeemed simply because there is no amount
_*; due orowing orthe account has ceased to be in debit. tr3l ln otherwords, in such
cases there must be clear evidence that the charge has in fact been redeemed
by the company. And once a debenture has been redeemed, the company
.- i.,r r\c€rnnot re-issue it lral or issue a new debenture in its place on the condition that
the new debenture must have the same prioi'ities as it had. ,tt,(s+tl.
On the other hand, where a company issues an irredeemable debenture, the
intention is clearly that the debentureholder should not have the right to
demand repayment of the loan in respect of which the debenture is issued until
on the company's winding up. However, the company can at its option redeem
the debenture earlier. ln other words, an irredeemable debenture can be
redeemed before liquidation but only at the company's option.
11.6.2 Registered debentures

There is no general requirement to register company debentures. Only where
a company issues debentures in a series does the Act require it to maintain a
. ?:i) register of the holders of the debentures. 116lOf course according to section 49
debentures are bearer debentures. But as shown below, where the register of
debentures is kept, it will be relevant to the transfer of the debentures and
payment of the money thereby secured.
As already indicated in paragraph 11.3, within two months ol allotting or

registering the transfer of a debenture, the company must deliver to its
registered holder the debenture or debenture stock certificate under the
, -,lQpmpany's seal. t17l Sections 49, 51 ,52(2) and 53 to 55 which govern share
.-,'rj:efiificates also apply to these documents. t18t This means that except as
. I expressly provided in the company's articles and the Act, the debentures or
debenture stock are transferable without restriction by a written transfer in
---:;.>bccordance with section 43. ttel Any article of a public company which restricts
, 'j the right to transfer any debenture of the company is invalid. I20l And in the case
a " of a private company, if any restriction is imposed on the right to transfer its
debentures, notice ol the restriction must be endorsed on the face ol the
debenture or debenture stock certificate, otherwise, the restriction will be
inetfective as regards any transferee whether or not he has notice of the
TION TO COMPANY LAW IN
{.-t)t,',\restriction. t2rl of course such a restriction must be imposed before the

debentures are issued. This is because no restriction can be imposed on the
transferability of debentures or debenture stock after they have been issued
without the holder's consent. tr.b o riA
The second implication is that just like in the case of shares, it will be unlawf ul
for the company to register a transfer of the debenture or debenture stock
certificate unless a proper instrument of transfer has been delivered to the
54-ir!) company. tzsl16",ransfer may be lodgedfor registration byeitherthetransferor
,>4i, :l or transferee tzrl and unless it is otherwise provided in the company's articles
or the terms upon which the debentures are issued the company may refuse
to register the transfer if it is not accompanied by the appropriate debenture or
debenture stock certif ic6lg. Izsl lf the company ref uses to register the transfer,
notice of the refusal together with reasons which justify the refusal, must be
sent to the transferee and transferorwithin two months afterthe date when the
transfer was lodged. tzstr;4i0i"\
Lastly, these debentures and debenture stock certificates are not negotiable
inslruments. consequently, although they are transferable, the transferee
takes them subject to all claims which the company may have against prior
holders at the date of the transfer. ln Patridge v Rhodesian Goldlields Ltd
(1910) t27l a debenture stockholderwhowas also atrustee of the deed securing
the stock and director of the company transferred 810,000 worth of stock to
certain transferees. The trust deed did not contain any condition protecting the
transferees from any equity of the company against the transferor. Evidence
showed that assets which were subject to the trust deed comprised a debt
owed by the transf eror to the company. lt was held that the transferees took the
stock subject to this claim because generally the transferee ol a chose in action
stands in no better position than the transferor.
However, a clause can be inserted in the debenture providing for repayment

ol the loan and interest evidenced by the debenture, to the transleree without
regard to such claims. ln Re Goy & Co. Ltd (1900) t2slone of the company's
directors transferred some debentures to a certain transleree. lt was a term of
the debentures that the principal and interest secured by the debentures would
be paid without regard to any equities between the company and the original
or intermediate holder. After the transferee had taken the debentures it was
discovered that the transferor had been guilty of a misfeasance for which he
was ordered to pay money to the company's liquidator. when the transferee,
who had no notice of the transferor's liability, subsequently sought registration
of the transfer, the liquidator declined to do so and claimed to deduct the debt.
from the amount due on the debentures. lt was held that the transferee was
entitled to receivewithout deduction sums payable in respect of the debentures
because, according to Siirling J:
'"The company has for valuable consideration renounced any right it would
otherwise have had to object to transfers [of the debentures] on the ground of
equities subsisting between the company and the transferor ..."
Of course for the transferee to avail himself of this clause, he must be

registered by the company as the present holder of the transferred debenture.
lf he is not, he willtake the debenture subject to any claims which the company
may have against previous holders. That happened in Re Palmer's Decora-
tion & Furnishing Co. (1904).l2el ln this case the company issued debentures
each of which contained a covenant to pay the money thereby secured in
accordance with the conditions indorsed on the debentures. One of these
conditions was that every transfer of the debentures must be in writing and be
delivered at the company's registered office for registration. Another was that
the principal and interest would be payable without regard to any equities
between the company and the original or intermediate holder of each deben-
ture. Subsequently, the holder of the debentures transferred them for value to
a transferee who took them without notice of any delect in the former's title.
Although notice of the transfer was given to the company, no demand for
registration of the transler was made. When the iransferee sought to claim the
benefit of the debentures, ii was discovered that the transferor had obtained
them from the company by misrepresentation, without paying anything for
them. lt was held that in spite of lhe clause in the debentures the fact that the
transfer was not registered by the company meant that the company's rights
against the transferor prevailed over the transferee's title so that the latter was
not entitled to the benef it of the debentures. Elaborating on the holding Buckley
J. said:
"The objectof the conditions... r's that, if thetransferee becomesthe registered

holder of the debentures, the company is precluded as from the date of
registration from setting up as against the transferee any rights it may have
possessed as against the original holder... There may be a form of debenture
which excludes in favour of a transferee the company's rights against the
transferor although registration of the transfer has not yet taken place; but a
debenture in the form before us is oniy a protection to the transferee when he
has got upon the register."
11.6.3 Bearer debentures

A debenture may be issued to bearer. Such a debenture is transferable by mere
delivery to the transferee. ln other words, it is considered to be a negotiable
instrument so that the bearer is entitled to be paid the money thereby secured
although the transfer is not registered by the company. ln Bechuanaland
Exploration Co. v London Trading Bank (1 898) Isol16" plaintiff company was
in possession of debentures which were payable to bearer. The debentures
were kept in a safe whose key was entrusted to the company's secretary.
Subsequently, the secretary fraudulently took the debentures from the safe
and pledged them with the defendants for money advanced to him by them. The
defendants received the debentures in good faith and without notice of the
fraud. lt was held that although the plaintiff company was not estopped by its
conduct from denying the defendants' title to the debentures, the latter were
entitled to the debentures as against the plaintiff because the debentures were
negotiable instruments transferable by mere delivery to the transferee.
lnitially, Section 45 of the Companies Act 1984 made it unlawful for any
regislered company to issue bearer debentures. However, this has been
reversed by Section 60 of the Capital Market Development Act 1990. Conse-
quently, as long as a registered company is allowed by its articles or memo-
randum to do so, it can issue some of its debentures to bearer.
11.6.4 Gonvertible debentures

Subject to its articles or memorandum, a registered company can also issue
convertible debentures. This is because there is no provision in the Companies
Act which allows or prohibits the issue of such debentures. A convertible
debenture gives the debentureholder the option of exchanging it for f ully paid-
up shares of the company issuing it. ln other words, he can choose either to
demand repayment of the loan evidenced by the debenture or accept instead
shares in the company equivalent in nominal value to the loan and interest
payable on it. However, as explained below, the option may be illegal if it is a
means by the company of getting around the prohibition by Section 60(2) of
issuing shares at a discount.
11.7 lssue of debentures at a discount

Unlike shares, debentures may be issued at a discount. This follows f rom the
fact that there is no provision in the Companies Act which prohibits such an
issue. ln Webb v Shropshire Railway Co. Ltd. (1893) t3rl a company entered
into a series of agreements with bankers whereby in exchange for the latter
advancing money it undertook to issue its debentures to them. Because the

debentures would in effect be issued at a discount, the plaintiff sought a
declaration that the issue would be void. lt was held that the issue would not
be stopped because the law did not prohibit companies to issue their deben-
tures at a discount.
However, for debentures to be issued at a discount, they must noi be

convefiible to fully paid-up shares equal in nominalvalue to the parvalue of the
debentures. This is because that is tantamount to issuing shares at a discount
which is unlawful under Section 60(2). ln Mosley v Koffyfontein Mines Ltd.
(1904) t32l the defendant company proposed to issue to its shareholders
debentures al a 20"/" discount. Each debentureholder had the option of
exchanging his debentures forfully paid-up shares in the companyat atthe rate
of f 1 fully paid-up share for every 81 of the nominal amount of the debentures.
It was held that the proposed issue of debentures was void because it could
be used as a means of issuing shares at a discount since the debentures were
immediately convertible into shares. On the other hand, said Vaughan Williams
L.J., if the debentures had been issued at adiscountwithout any rightto convert
them into shares and subsequently the company had given the debentureholders
the option to conveft every t1 of the nominal amount of the debentures for a
t1 full paid-up share, the issue would have been valid.
11.8 Security for debentures ," ?rtl

A debenture may be secured or unsecured. t331 Where it is secured, the
company will grant the debentureholder a right of recourse against the
company's property (specified in the debenture) if the loan or interest payable
on it is in arrears or is not paid at all. This right is the debentureholder's security
for the company's repayment of the loan. The property thus put up is said to
be 'charged' with meeting the f inancial obligation created by the debenture. To
put it in another way, where property is put up as security for a loan, a 'charge'
is created over that property. The charge may be fixed or a floating one.
On the other hand, where a debenture is unsecured, the debentureholder has

no security on which to fall back should the company fail to repay the loan
evidenced by the debenture. Therefore, unless there was a guarantor who
undertook to be responsible for the loan in that eventuality, his only remedy is
to bring a contractual action against ihe company as a debtor.
Generally, a company is not required to disclose any information about the

debentures which it issues. However, where it issues an unsecured debenture
158 - AN INTBOOUCTION TO COMPANY LAW IN MALAWI
or debenture stock certificate or a prospectus relating to unsecured deben-

tures, the word 'debenture' or any term denoting it should be qualified by the
word'unsecrr"6'. ts+ti
1fl--
11.8.1 Fixed charge

This is a charge on specified and identifiable property of the company such as
land, ship, buildings, motor vehicles etc. Fixed charges are governed by the
Bills of Sale Act, the Deeds Registration Act, the Registered Land Act and the
common law relating to mortgages. However it should be noted that the Bills
of Sale Act does not apply to bills of sale created by registered companies. This
is because of section 23 which excludes its application
'to any debenture issued or charge created by a body incorporated by or used

any law, and secured upon the capital, stock , goods, chattels, elfects or other
assels of such incorporated body, which debenture or charge is required to be
registered under any written law relating to incorporated bodies."
The provision does not prohibit a registered company to create a bill of

sale nor does it render such a bill, if created, void. Rather what it
suggests is that the bill will be governed by common law and relevant
provisions of the Companies Act. However in the recent case of Label
lndustries Ltd v SEDOM t3slwhere the plaintiff borrowed money from
the defendant and created a bill of sale in favour o{ the latter, it has been
held by the High Court that the bill is void because of section 23 so that
the seizure by the defendant of the goods comprised in the bill when the
plaintiff failed to repay the loan amounted to conversion.
11.8.2 Floating charge

This is a charge on present or future property ol the company. lt is described
as'floating'because before crystallisation, it simply hovers overthe property on
which it is created wfiich is usually in the form of continually changing assets
such as raw materials, stocks, cash and debts. A floating charge confers a right
of recourse against the whole or part of the property or undertaking of the
company. However, while the charge is subsisting, the company has the right
to sale or otherwise deal with the property charged, in the ordinary course of
its business. The nature of a floating charge was defined by Re Yorkshire
Woolcomber Associationl$l as:
(a) a charge on a class of assets of a company, present and future;

(b) which is, in the ordinary course of the company's business, changing
from time to time; and
(c) until the holders enforce the charge, the company may carry on business
and dealwith the assets charged.
11.8.2.1 Crystallisation of floating charges

Although a floating charge hovers overthe assets on which it is created, it can
become fixed over them. When it does that, it is said to have 'crystallised'.On
crystallisation, afloating charge becomesafixed charge. Generally, as pointed
out by Mtegha J. in lndefund v Manguluti & Mangulutitsadiscussed below,
that will happen when an event has occurred which, in the terms of the
debenture, makes the security enforceable. However, more specifically, a
floating charge will crystallise if:
(a) the principal or interest payable on it is in arrears or
(b) the security is in jeopardy; or
(c) the company commences winding up proceedings; or
(d) the company ceases to operate.
This last ground is illustrated by Re Woodroffes (Musical lnstruments) Ltd

(1sAsl.test ln this casethe companycreated adebenture in favourof a bankand
secured it by a floating charge over the company's property. One term ol the
debenture was that no lurther charge could be created on the company's
property without the bank's consent. ln spite of this, the company created a
second debenture which was secured by a second floating charge ranking
immediately after the lirst charge. This charge was convertible into a specific
charge in relation to allthe company's undertakings and assets. Subsequently,
when the second debentureholder attempted to make the conversion and the
bank heard about it, the bank served a formal demand of repayment of its loan
to the company and appointed receivers of the company. lt was held that the
cessation of the company's business prompted by the appointment of receiv-
ers caused the automatic crystallisation of any floating charge over the
company's property.
11.8.3 Fixed and floating charges

Both of these charges have got advantages, depending on the angle from
which one looks at them. From the lnder's point o{ view the fixed charge is more
advantageous than the f loating for two main reasons. First, the former confers
on him an immediate right to the asset over which it is created. As a result if the
company disposes of the asset, it must repay to him the amount borrowed or
else the purchaser of the asset willtake it subject to the fixed charge. Second,
the fixed charge gives him certainty as to the assets which are his security. Cn
the other hand, as far as the company is concerned, a floating charge is better
than a fixed charge because the former allows it to put up its stock-in-trade as
security for a loan without losing the freedom to turn over the stocks in
the course cf its business to generate the money needed to settle its
indebtedness to the lender. ln other words, the floating charge allows it
to borrow money even where it has no fixed assets but a collection oi
current assets.
However in spite of this major advantage to the borrower-company, a floating

charge has the following major disadvantages to the lender:
1. as shown below, generally a floating charge ranks after a lixed charge

even if the latter is created or registered after it;
2. before crystallisation, the lender does not know for sure which assets
constitute his security;
3. according to section 95(1) if the security is realised, preferential debts of

the company must be paid out of the proceeds before the holder of a
floating charge is paid;
4. according to section 287(4), where a company's assets available for the

payment of general creditors on winding up are not enough to meet ils
preferential debts, these debts will have to be paid out of the company's
assets over which lloating charges have been created prior to the
payment of the claims of the debentureholders in respect of whom the
charges are created;
5. generally section 289 renders any floating charge created 12 months

before the commencement of a company's winding up invalid unless the
company was solvent immediately after the creation ol the charge and
6. a floating charge created on a company's stock-in-trade may lose priority

to the unpaid seller of the stock who has reserved his title to the goods.tral
11.9 Registration of charges

It will have been noticed from the discussion above that creation of a charge
over company property as security for a loan to the company does not
necessarily involve giving possession of the charged property to the chargee.
On the other hand, possession of the property will remain with the company
creating the charge. Because of this, there is always the danger that the
company may pretend to future lenders that its property is unencumbered and
then borrow money on the strength of that pretence. To deal with that problem,
the Act requires that where ceftain charges are created over company
propefiy, they must be registered by the registrar. Unless the registration is
effected by any person interested in the charges,-t.:l it is the company's duty
to cause them to be registered .. ;. tL t)
Jl;tu
11.9.1 Registrablecharges
Charges which are subject to compulsory registration are:
1. A charge securing any issue of a series of debentures;
2. A charge on uncalled share capital of a company;
3. A charge on the whole part of the business of a company;
4 A charge on land or any interest in land;
5. A charge on any present or future book debts of a company;
6. A charge on called but unpaid share capital;
7. A charge on a ship or aircraft or any share in that vessel;
8. A charge on shares in another body corporate; and
9. A charge which if executed by an individualwould require registration as

a bill of sale or farmer's stop order. Irtl
:" 4t" f l)
Furthermore, where a company acquires property which is already subject to
a charge of the type given above, the charge should be registered as if it was
created by the company i1self.t4,ff 71'jr
tr--
11.9.2 Registration procedure

Within twenty-one days of the creation of the charge, its particulars togeth€
with a certif ied copy of the instrument creating or evidencing it must be sent tr
the registrar for registration. tsl Where the instrument is already registera
under any Act ( such as the Deeds Registration Act or the Registered Land Act)
it is enough to send to the registrar particulars which can identify the instrumen
and such other particulars as may be prescribed. After entering details of the
charge, the registrar must issue a certificate of registration which is conclusive
evidence that the requirements of the Act relating to the registration of charges
have been complied with. 1441qg6
11.9.3 Effect of non-registration of a registrable chargC

Unlike under the Commercial Credits Act,t€l non-registration of a registrable
charge does not affect the validity of the charge. ln other words, as long as a
charge is properly created, it will be valid although it is not registered in
accordance with Section 86 and 87. However, if the company subsequently
creates other charges on the same property and gets them registered, it may
lose its priority to them in respect ol the repayment of the loans out of the.
charged property. This is because, a shown below, charges created over
company property may have priority in accordance with the dates of their
registration under Sections 86 and 87. Besides, the company and every olf icer
of the company who is responsible for the non-registration of the charge will be
liable to a fine of K10 for every day during which the charge remains
1a1-'4\unr€gistered.lsl Of course mere registration of acharge does notconferon any
l,ril,on" notice of either its existence or its terms or the registration itself.laTlAs a
result if there is a negative pledge in the charge, a subsequent chargee will not
have constructive notice of it lrom the mere registration of the first charge.
I
11 .10 Priority of charges

Where a company's debentures are not consolidated into debenture
stock, they may be issued singly or as a series of debentures. Now
where either by their terms or the terms of the resolution authorising
their creation or the terms of any trust deed, debentures are declared to
.be of the same series, they will rank pari passu (i.e. equally) in all
-have
51,a *espects although they may been issued on different dates. t4sl On
the other hand, if the debentures are issued singly, their priority will be
governed by the common law and the Companies Act.
11.10.1 At common law

Generally, the position at common law is that before crystallisation of a floating
AN INTRCDUCTION TO COMPANY LAW IN MALAWI - 163
charge, the company has powerto create a f ixed charge which has priority over
that floating charge. ln Wheatley v Silkstone & Haigh Moor Coal Co' Ltd'
(1885) directors of the defendant company issued debentures charging the
Iael
company's undertaking with repayment of the money borrowed under the

debentures. Subsequently, the plaintiff advanced money to the company
which in turn created a fixed charge over its colliery property as security forthe
loan. lt was held that this charge had priority over the debentures.
The reasoning behind this is that, f irstly, a fixed charge attaches to the property
over which it is created f rom the date of its creation whereas a floating charge
will become attached'to the property only after crystallisation. Secondly, as
shown by the case of Re YorkshireWoolcombers Association Ltd,t50l before
a f loating charge crystallises, the company has licence to dealwith and dispose
of the property charged in the ordinary course of its business. And that includes
the power to create further charges on the charged property. However, it is not
uncommon to insert in the instrument creating a floating charge a clause
prohibiting the company to create any charge ranking in priority to or pari passu
with the floating charge. tsll
On the other hand, in relation to one another, floating charges have priority in
accordance with the dates of their creation. For that reason, a company which
has created a floating charge cannot later on create another floating charge
over the same or some of the assets, which ranks pari passuwith or in priority
to the original floating charge. This is illustrated by the case of Re Beniamin
cope&SonsLtd(1914)'152]Herethecompanyissuedaseriesofdebentures
for E2,OOO which were said to rank pari passu. The debentures were secured
by a floating charge over the company's present and future property. A clause
in the debentures provided that notwithstanding the charge, the company
could, in the ordinary course of its business, dealwith thd charged property as
thought f it and in particular, could mortgage it or any part of it. Ten years later,
it
while these debentures were still subsisting, the company issued a second
series of debentures which were also said lo rank paripassuand were secured
by a floating charge over the company's existing and future property. lt was
held that the first series had priority over the second because although the
former allowed the company to use its property to secure further loans, it
to security in the form of mortgages rather than floating charges.
"referred
Of course as already noted (and confirmed bythiscase), where debentures are
issued in a series, they will rank paripassu. Besides, even if debentures are
created on different dates, they will rank pari passu if the holder of the first one
to be created consents that the subsequently created debenture should rank

equally with his.ts3r On the other hand, a subsequent floating charge created
over specific property will have priority over a floating charge hovering over the
entire property and undertaking of thecompany. ln ReAutomatic Bottlemakers
Ltd (1926) tsal a debenture trust deed created a generalfloating charge over all
the company's undertaking and assets both present and future. However, it
reserved to the company power to create in priority to that charge such
mongages or charges as the company should think proper by the deposit of
dock warrants, bills of lading or other similar commercial documents or on raw
materials, finished or partly finished goods and stocks. ln pursuance of this
power the company borrowed money by creating a floating charge over the
mentioned documents and items. lt was held lhat this charge ranked in priority
to the earlier generalfloating charge.
11 .10,2 Under the Companies Act

Generally company charges have priority in accordance with the times of their
tssl Consequently, a floating charge
=(iirYegistration under Sections 86 and 87.
could rank in priority to a f ixed charge as long as it is registered earlier than the
latter. Besides, if a company creates more than one floating charge over the
same property, the first one to be registered among them will have priority over
the rest although it was not the first to be created. However, Section 89(1)
provides that its application is 'subject to any consent given by the person who
would otherwise be entitled to priority'. Thus, whetherthe priority of any charge
is determined by the time of its registration under the Act will depend on
whether that person is agreeable that it should be so determined. lf he is not,
then priority of the charge will be determined otherwise than by the time of its
registration here. ln otherwords, the charge may have priorityaccording to the
date of its creation as is the case at common law or in accordance with any other
statute, e.g. the Deeds Registration Act or the Registered Land Act, governing
its registration. lndeed the debentureholder may agree that in spite ol being
entitled to priority, his debenture should rank equally with a sr,rbsequently
created or registered debenture
This is what happened in SEDOM v Gep Shoe Company Ltd & lndefund.ts6l
ln that case the first defendant obtained a loan f rom the second defendant and
issued a debenture to the latter which provided lor the appointment of a
receiver/manager in the event of the former's default under the debenture.
When the f irst defendant fell into financial diff iculties and failed to keep up with
repayments under the debenture, they approached the plaintiff for financial
assistance. However before the plaintiff could assist, they sought the second
defendant's opinion on the f irst defendant's f inancial position. ln their response

dated 8th May, 1990 the second defendant stated that they had no objection
to the assistance being granted provided that 'lndefund would share all
securities with Sedom pari passu'. On the basis of this response the plaintiff
granted a loan to the first defendant who in turn issued a second debenture to
the latter. Clause 7 of this debenture stipulated that the debenture would rank
equally with the Indefund debenture. However in spite of the second loan the
first defendant's financial position never improved. As a result the second
defendant informed the plaintiff of their intention to appoint a receiver over lhe
first defendant. The plaintiff answered that the receiver should be appointed
jointly by the second defendant and themselves but that in the meantime the
plaintiff should be allowed to explored means of saving the f irst defendant lrom
the receivership. Despite that the second defendant went ahead and appointed
a receiver/manager over the first defendant without consulting the plaintiff.
Consequently the plaintiff applied for a court order to set the appoint-
ment aside on the ground that it breached their agreement with the
second defendant to realise their securities jointly. lt was held that as
the second defendant's debenture was first in time, it should ordinai'ily
have been entitled to priority. However because the second defendant
had consented (through their letter of 8th May and their subsequent
dealings with the plaintiff) to realise their security jointly with the
plaintiff , section 89(1) made their debenture to rank pari passu with that
of the plaintiff. For that reason the second defendant's unilateral ap-
pointment of the receiver/manager was set aside.
And if the charge is fixed and requires registration undersome otherwritten law
which accords priority as between successive charges aflecting the same
property, its priority will be determined by that law. This is because Section
'>x.r 189(1) will not apply to that property.tsa Clearly this means that charges
governed by the Deeds Registration Act and the Registered Land Act will not
have priority in accordance with the Companies Act. Rathertheir priority will be
determined by their registration under these two statutes.
11.11 Satisfaction of charge or releasgof property

from charge
A charge is satisfied in this context il the debt for which it was given has been
paid in whole or in part. Similarly, where any part of the property or undefiaking
of a company which was charged ceases to be charged or to be part of the
company's property or undertaking, it is said to be released from the charge.
After that the company may send to the registrar a statement in the prescribed
form and signed by both the company and the person entitled to the charge
showing that the charge orthe propefty has been satisfied or released f rom the
charge respectively. And once the registrar receives the statement, he must
(_r -,r l€nter it on the register. rssl This statement is binding on that person and anyone
- t"'-claiming under him, in favour ol the liquidator and any creditor of the company,
i.rl $utlln other words, should the company be subsequently woud up neither him
nor his legal representative would be allowed to seize the property or under-
taking in satislaction of the debt.
11.12 Remedies for debentureholders

Every holder of a company debenture, whether secured or not, is a creditor of
the company and as such, he can avail himself of the remedies generally
available to creditors. Thus, if the company defaults in the repayment of the
can:
l
loan or interest payable on it, he

i
(a) sue the company for the sums in arrears as a debt. lf he obtains I
judgement, he can then seize its property as long as the judgement is not
I
satisfied; or I
I
(b) sue the guarantor, if any, of the loan for the arrears; t601 or I
(c) present a petition to the court for the compulsory winding up of the
company under Section 213(1Xd) on the ground that it is unable to pay
its debts.l6lj
Where the debenture is secured, additionally the debentureholder or his

trustee may:
(d) exercise powers conferred by the debenture or trust deed for the
appointment of a receiver; or
(e) apply to the court for the appointment of a receiver or for an ordel for the
sale or foreclosure of the security.
It should be noted that where the security is in the form of a charge on registered
land, sectionT4 ol the Registered Land Act does not allow the chargee to
foreclose or enter into possession of the land or to receive rents of the land,
merely because of the default by the chargor in the repayment of the secured
debt or interest payable on it. Rather according to section 68, if the default
continues lor a month the chargee should serve on him written notice to pay
the money owing. lf within three months of the notice the chargor fails to
comply, he can either appoint a receiver of the income of the charged property
or sell the property. lf he makes the former choice, he cannot exercise the
power of sale unless he has served a further notice of demand on the chargor
and the latter has failed, within three months of the date of service, to pay the
money owing.
Futhermore, although the chargee is entitled to bring an action for the secured
debt, section 71 allows that action only if:
1. without any wrongful act by the chargor or chargee, the charged property
is destroyed or the security is rendered insufficient and the chargor has
failed, after being given a reasonable oppodunity, to provide further
security to make the security sufficient or
2. the chargee is deprived of the security because of a wrongful act or default

of the chargor.
11.12.1 Appointment of a receiver

It has just been shown that one of the remedies of a debentureholder is to
appoint a receiver. The f unction of a receiver is to manage or realise the assets
which are given as securityforthe money borrowed by the company. His object
in so doing is to pay out of those assets what is due to the debentureholders
whom he represents. lf he manages to discharge the debt, he will vacate his
off ice and the directors will resume f ull control of the company again. However,
if the company is insolvent, it will have to be wound up. ln that case, a liquidator
will have to be appointed to dealwith that. The f undamental ditference between
the two is that whereas a receiver mereiy represents the secured
debentureholders and has control of the company's assets which are their
security with a view to obtaining payment of what is owed to them gnly, a
liquidator is appointed to realise all the assets of the company, to pay) all its
debts and distribute any surplus remaining thereafter to the company's
shareholders. More will be said aboutthe liquidator in Chapterl5.
Usually, the debenturewillcontain a provision empoweringthedebentureholder

or his trustee to appoint a receiver on the occurrence of the events given
paragraph 11.8.2.1. Once any of those events takes place and a receiver is
appointed, the company will surrender control of the security given for the
debenture (which may well be the entire business of the company) to the
T68 - AN INTFODUCTION TO COMPANY LAW IN MALAWI
receiver. ln lndefund v Manguluti & Manguluti, t62l the defendants who were
shareholders and directors of a limited company borrowed money from the
plaintiff to finance the business of the company and guaranteed to repay the
money if the company failed to do so. The company issued a debenture in
favour of the plaintiff which was secured by a floating charge over the
company's assets. ln the event of default bythe companyto repaythe loan, the
debenture empowered the plaintiff to appoint a receiver/manager. When the
company subsequently fell in arrears with the repayment of the loan, the
plaintiff proceeded to exercise this power and also sued the defendants as
guarantors, for the principal which was in arrears and interest. bn trial, the
defendants argued that the appointment of the receiverwas inappropriate and
premature. Dismissing the contention, Mtegha J., said:
"Generally,the position isthat a receiverwillbeappointedbyadebentureholder

in cases where the principal is in arrears or when interest is in arrears . .. or when
any other event has happened by which, under the terms and conditions of the
debenture, the security has become enforceable. Again it is normalto appoint
a receiver ....where the security is in jeopardy".
lf the debenture does not contain any power to appoint a receiver, the
debentureholdercan apply to have the appointment made bythe court. Section
94(1) empowers the court to appoint a receiver whenever a charge has
become enforceable which will be by reason of the occurrence of any of the
events enumerated by the learned judge in the above case. Moreover, where
a debenture is secured by a floating charge the court may appoint a receiver
even though the charge has not become enforceable, if it is satisfied that the
security is in jeopardy. Security will be deemed to be in jeopardy if the court is
satisfied that events have occurred or are about to occur which render it
unreasonable in the interests of the debentureholder that the company should
retain powerto dispose o{ its assets. ln practicethiswillbethecasewherethere
is a risk of the security being seized to pay claims which do not rank in priority
to the debentureholder's claims. ln Re London Pressed Hinge Co. Ltd.
(1905) t63l the company borrowed money under a debenture and created a
floating charge over its assets as securityforthe loan. Subsequently, a creditor
of the company obtained judgement against it which entitled him to seize its
assets if the judgement was not satisfied. At the time ot the judgement the
company had not defaulted under the debenture in the repayrnent of the loan
or interest payable on it. Nevertheless, it was held that the
debentureholder in whose favour the floating charge was created was
entitled to the appointment of a receiver because the imminent seizure
ii:r.1,;ffi.+-dlwm&.
INTRODUCTION TO COMPANY LAW IN MALAWI
of the company's assets put his security in jeopardy.
11.12.2 Receiver/manager
Under Section 94(1) the court has power, where a charge has become
enforceable, to appoint not only a receiver but also receiver or manager.
However, the Act does not define the word 'manager' as used in this context
nor does it give any indication as to the distinction between an ordinary receiver
and a receiver/manager.
At common law the duty of a receiver/manager is to manage the business of

the company with a view of selling it as a going concern. For this reason, the
court will appoint him where the charge includes the business of the company.
ln Salter v Leas Hotel Co. Ltd. (19021 tsrt the company issued some of its
debentures to the plaintiff . By each of the debentures the company charged all
its lands, buildings, property, stock-in-trade, furniture, chattels and effects
whatsoever, both present and future, with repayment of the principal and
interest. However, the charge did not mention the company's business or
goodwill. Subsequently, when the company defaulted in the repayment
of the loan, the plaintiff applied for the appointment of a receiver and
manager of the company. lt was held that since in effect the charge was
created over the company's business, the court would grant the application.
Explaining the holding Kekewich J. said that whether a receiver and
manager can be appointed
".... d e pe nds o n the q uestio n whethe r the goodwi ll o r b usi ness [of the company]
is expressly or by implication included in the properly charged, so as to make
it part of the security. [This is because] the duty of a manager is only to manage
for the purpose of realisation, and until he can conveniently realise."
Similarly, in Makins v lbbotson & Co. Ltd. (1891) t65l the company issued
debentures to the plaintiff which were secured by a charge on 'all its property...
both present and future'. When the company subsequently failed to repay the
loan, he applied for the appointment of a receiver and manager of the
company's business. lt was held that the application would be granted to
enable the business to be sold as a going concern as long as the plaintiff
undertook to realise the company's property as soon as possible.
Thus where the charge is created over specific and identifiable property the
cou rt can only appoint an ordinary receiver if the charge becomes enforceable.
This is illustrated by Whitelay v Challis (1892).1661ln that case, the defendant
r-
hoteliers who were about to rebuild their hotelcharged 'the hotel and buildings
to be erected' with repayment of the money borrowed to effect the construction.
Subsequently, after the hotel was rebuilt and the chargor defaulted in the
repayment of the loan, the chargee applied for the appointment of a receiver
of the hotel. The trial judge granted the application but went further and
appointed a receiver and manager. On appeal by the chargor, it was'held that
as the charge did not include the business or goodwill of the company but was
intended to be confined to the physical structures only, the court should not
have appointed a receiver/manager.
11.12.3 Eligibility for appointment as receiver

Section 96(1) renders the following persons ineligible for appointment as
receiver and manager on behalf of any debentureholder:
(a) a body corporate;
(b) an infant or any person under a legal disability;
(c) any person prohibited or disqualified from acting as receiver or receiver

and manager by an order of a court of competent jurisdiction;
(d) an undischarged bankrupt;
(e) a director or officer of the company or any person who has been in such
office within the preceding two years;
(0 a trustee under any trust deed for the benef it of debentureholders to which
the company is a party;
(g) any person convicted within the preceding two years of an olfence
involving fraud or dishonesty; or
(h) any person removed within the preceding ten years from an office of trust
by a court of competent jurisdiction.
11.12.4 Effect of the appointment of a receiver

The most important legal consequences of the appointment of a receiver are:-
1. Any floating charge created by the company will crystallise and become
lixed so that thereafter the company will not be allowed to deal with the
assets over which the charge was created without the receiver's consent.
2. The directors' powers of control over the company are suspended. Of

course in spite of that, they will still retain their inherent power to institute
proceedings on the company's behalf. ln Mdinde Estate Ltd. v Commer-
cial Bank of Malawi Farm Services Ltd. & Gommercial Bank of
Malawi Ltd. (1985; tszl by an agreement, the appellant appointed the first
respondent to develop, supervise and manage the appellant's tobacco
farm. Thereafter the appellant borrowed money from the second respon-
dent and issued a debenture in favour of the latter.When the appellant
failed to repay the loan, the appellant company was placed in receivership
by the second respondent. Thereupon the appellant's directors sued both
respondents for negligence and mismanagement of the estate. ln an
action whether or not after the appointment of a receiver/manager that
action could be maintained, it was held by the Malawi Supreme Court of
Appeal that since the receiver/manager was appointed out of court, his
powers depended on the terms of his appointment. On the construction
of the debenture under which he was appointed, it was found that the
directors and shareholders of the appellant company were not divested of
their inherent power to commence proceedings on the company's behalf
as long as the proceedings did not interfere with the receiver/manager's
functions or imperil the company's assets.tssl
3. lf the receiver is appointed by the couft, the company's employees are

automatical ly dismissed ;
4. Every invoice, order or business letter issued by or on behalf of the

company or the receiver on which the company's name appears must
state that the company is in receivership. t6el ,.
5. Where the receiver is appointed on behalf of a holder of a debenture

secured by a floating charge, prior ranking debts of the company must be
paid out of any assets which come into the hands of the receiver before
the repayment of principal or interest under the debenture.Pol ln other
words, the proceeds of any sale of the assets must go firstly, to paying off
the company's preferential creditors and secondly, to payment of debts
secured by the floating charge in respect of which the receiver has been
appointed.
F
6. Where the receiver is appointed over the whole or substantially the whole
property of the company on behalf of a holder of a debenture secured by
a floating charge, Section 101(1) requires that within fourteen days of his
appointment,lhere must be delivered to him a statement which shows:
(a) particulars of the company's assets, debts and liabilities;
(b) names and addresses ol its creditors;
(c) securities held by each creditor; and
(d) the dates when the securities were given.
It should also be noted that any person who appoints or obtains an order
for the appointment of a receiver or manager of any property of a
registered company must, within seven days, notify the registrar in
'r I : rwriting of the appointment or the order. tTtl Similarly, after the appointee
has ceased to act as a receiver or manager he must within fourteen days
notify the registrar accordingtY. ,t1L
i:rul
1 1.12.5 The legal position of the receiver
.-.r, ?A receiver appointed by the court is an officer of the coud. For that reason he
'must act in accordance with the court's instructions and directions. On the
other hand, a receiverappointed outof court undera provision in the debenture
I is an agent of the company. rsl Consequently, he must comply with the
instrument under which he is appointed. tralHowever, he can apply to the court
for directions in relation to any matter arising in connection with the perfor-
mance of his functions. tTsl Furthermore, every receiver is personally liable lor
anycontract into which he enters.176lOf coursewherethe contract is concluded
in the proper performance of his duties, he is entitled to be indemnified in
respect of any liability which may arise under it.
Chapter Eleven
1. General Auction Estate Ltd v Smith [1891] 3 Ch 432.
2. Section 76(4).
3. Section 77(1).
4. Section 79(2).
5. Section 76(4).
6. Section 80(1).
7. Section 1O(4xbxiii).
8. Section 22(2)(b).
L Section 83(1).
10. Section 83(2).
11. Section 78(1).
12. Section 76(6).
13. Section 85.
14.' Section 84(1).
15. Section 84(2).
16. Section 82(1).
17. Section 77(1).
18. Section 77(2).
19. Section 50(1).
20. Section 50(3).
21. Section 77(3).
22. Section 50(2).
23. Section 49(1).
24. Section 49(2).
26. Section 49(4).
27. [1910] 1 Ch 239.
28. [1eoo]2 Ch 149.
29. [1904] 2Ch743.
30. [1898] 2 QB 658.
31. [1893] 3 Ch D 307.
32. [1904] 2 Ch 108.
33. Section 76(2).
34. Section 81(1).
35. Civ cas 52611987
36. [1903] 24h248.
37. Civ cas 23211985.
38. [1985] 2 Ail ER e08.
38a See Aluminium lndustrie Vaasen BV v Romalpa Aluminium [1976]
1 All ER 552.
39. Section 86(8).
174 - AN INTRODUCTION TO COMPANY LAW IN i/IALAWI
40. Section 86(1).

41. Section 86(2).
42. Section 87(1).
44. Section 88.
45. See Chilumpha, Commercial Floating Charge: A Foray lnto The Legal
lmplications of Security for Stocking Finance of an Unincorporated
Business Seller of Goods, 17 CLB'1072.
46. Section 86(9).
47. Section 343.
48. Section 76(3). See also Re Beniamin Cope & Sons Lld infra., note 52.
49. [1885]29 Ch D 715.
s0. [1e03] 2ch248.
51. See Re Woodroffe Musical lnstruments supra., note 38.
52. [1914] 1 Ch 800.
53. See SEDOM v Gep Shoe Co Ltd & lndelund infra., note 56.
54. [1926] Ch 412.
55. Section 89(1).
56. Civ cas 42211991.
57. Section 89(2).
58. Section 90(1).
59. Section 90(2).
60. See lndefund v Manguluti & Mangululi infra., note 62.
61. See ln The Matter of Kumchenga lndustries Ltd Civ cas 33/1987
discussed in para. 1s.l.l.S.
62. Civ cas 232/1985.
63. [1e05] 1 Ch s76.
64. 'r
[1902] Ch 332.
65. [1891] 1 Ch D 133.
66. [1892] 1 Ch D 64.
67. Civ cas 67211983.
68. This has been followed in the recent Malawi Supreme Court of Appeal
case of Unango Estates Ltd & Chigamba v Michael MSCA Civ App 10/
1985
69. Section 100.
70. Section 95(1).
71 . Section 92(1).
72. Section 92(2).
73. Section 98 (1)
74. See Mdinde Estate Ltd v Commercial Bank of Malawi Farm Services
Ltd & Commercial Bank of Malawi supra., note 67.
75. Section 98(2).
76. Section 99(1).
Ghapter Twelve
Gompany Accounting
Records, Accounts and
Financial Reports
12.1 Keeping accounting records
Every registered company must keep accounting records which sufficiently
explain its operations and transactions. ttl Besides, the records must be
enough for the preparation in accordance with the Act of balance sheets and
profit and loss accounts which give a true and fair view of the company's
state of affairs, and profit or loss, respectively. For this reason, they must
contain entries of:
1. money received and expended daily by the company, including details of

the sources of the receipts and transactions in respect of which the
expenditures are incurred;
2. all goods sold and purchased by the company, other than ordinary retail
transactions; and
3. the company's assets and liabilities, including details of the identity,

location, cost and valuation of its fixed assets. t2l
Theaccounting records must be preserved forsevenyears fromthe date of their

preparation. I3l Besides, they must be open to inspection at all reasonable times
by the Minister, the registrar, the secretary, the auditors and any person who is
entitled to inspect them under any written law. tal Although shareholders are
excluded f rom this list, it is not uncorhmon for them to be given the right to have
access to the records by the company's articles of association. Thus for
instance, Table A gives directors powerto determine f rom time to time'whether
and to what extent and at what time and places and under what conditions or
regulations the accounts and books of the company shall be open to the
inspection of members not being directors'. tsl '
12.2 Accounts
Apart from keeping accounting records, every company must at least once
every calendar year prepare a profit and loss account, and a balance sheet.tsl
Where the company is a holding company at the end of its f inancial year, it must
prepare group accounts which are consolidated accounts comprising:-
(a) a profit and loss account showing the company's profit or loss as well as
that of its subsidiaries; and
(b) a balance sheet showing the company's state of affairs as well as those
of its subsidiaries.tTl
Besides complying with the main part of the Act the accounts must also meet
the requirements of the Third Scheduletsi which has effect in addition to the
provisions of the Act. tel Of course on the application or with the consent of the
company's directors, the registrar may adapt any requirement of the Schedule
to the circumstances of the company as long as the adaptation does not
derogate from the principle that company accounts should give a true and fair
view of the company's state of affairs.tlol
The Schedule requires the accounts to give a 'true and fair view' of the
company's state of affairs, its operations and the results of those
operalions.llll However, like many expressions used by the Act, 'true and fair
view' is not defined. But it suggests that the accounts should contain informa-
tion which gives to their expected readers an accurate and adequate picture
of what the accounts are supposed to deal with. ln other words, the accounts
must not be false or misleading. For that reason, the fact that they have been
prepared in accordance with accepted accounting standards and practice will
only be prima facie (and not conclusive) evidence that they give a true and fair
view.
Moreover, they must provide any matters which though not prescribed by the
Act or the Schedule have affected or are likely to affect the business of the
company. This must be done both by way of figures and narrative reporting
which complements and explains the figures. However, any matter required by
the Schedule to be stated in the accounts may be presented in the forms of a
note or annexe to the account, if that presentation would be more effective or
convenient. And any item which is not material may be lelt out because the
company is not obliged to disclose it in the accounts. trzl
ANY LAW IN MALAWI
12.12.1 The Profit and Loss account

The first profit and loss account which a registered company prepares after its
incorporation must cover the period from the date of the company's incorpo-
ration to the time when it is prepared. Any other profit and loss account,
however, must coverthe period since the preceding profit and loss account. ln
either case, the account must be made up to the end of the company's f inancial
year t13l which is a date not earlier by more than nine months from the date when
the account is to be sent to the company's members and debentureholders in
accordance with section 182. 114l Besides, the account must comply with the
Third schedule and give a true and fair view of the profit and loss of the
company for the period to which the account relates. trst Moreover, the
company cannot issue, publish or circulate any copy of the profit and loss
account unless the account has been approved by the company's board of
directors and signed on their behalf by two directors.tl6l I
12.2.2 The Balance Sheet

Just like the profit and loss account, the balance sheet must comply with the
Act. ln other words, it must meet the requirements of the Third schedule.
Besides, it must give a true and fair view of the company's state of affairs as
atthe end of thecompany'sfinancialyear.tlTl Again, the companycannot issue,
publish or circulate a copy of its balance sheet unless the balance sheet is
approved bythecompany's board of directors and signed on theirbehalf bytwo
directors. t18l
12.2.3 Statement of source and application of funds

This may be annexed to the balance sheet or be separately contained in it. But
however it is presented, it must show funds received by the company during the
financial year, their sources and how they have been used in its operations.rrer
12.2.4 Group annual accounts

Group accounts too must comply with the Act and The Third Schedule.r2or As
already indicated, these are consolidated profit and loss accounts, and
balance sheets, which give a true and fair view of the profit or loss and state
of affairs of a holding company and its subsidiaries. t2rr For that reason, unless
there are good reasons for not doing so, a holding company's financial year
must coincide with that of its subsidiaries. Izr where this is not possible, then
unless the Minister directs otherwise, the group accounts must deal with the
subsidiary's profit or loss and state of affairs as at the end of its financial year
which comes before that of its holding company. t23I
However, a registered company is not required to produce group accounts if

at the end of its financial year it is the wholly owned subsidiary t2al of another
Malawian company. t251 : l:
Similarly, even if at the end of its financial year it is a holding company, the
company's group accounts do not have to dealwith the affairs of its subsidiar-
ies if the company's directors are of the opinion that:
f . it is impracticable to do so or it would be of no realvalue to the company's

members and debentureholders lo do so because the amount involved is
insignificant or
2. to do so would involve expense and delay which is not proportional to the

value to the members and debentureholders of dealing with the subsidiary's
affairs in the group accounts, or
3. the result would be misleading or harmful to the company's business or

that of any of its subsidiaries or to the national interest, or
4. the holding company's business and that of its subsidiaries are so different
that they cannot reasonably be treated as a single undeftaking. lzsl
12.3 The directors' report

As shown in paragraph 12.5 below, a registered company must accompany its
accounls which it circulates to its members and debentureholders with reports
by its auditors and directors on the accounts. tzTlAccording to Section 189(1),
the directors' report must show the company's state of affairs and if the
company is a holding company, the state ol its affairs and those of its
subsidiaries. ln particular, it may have to deal with any change during the
f inancial year in the nature of the business or the classes of business in which
the company or any of its subsidiaries has an interest. resl Finally, the report
must be approved by the company's board of directors and be signed on their
behalf by at least two directors.
12.4 The company auditors' report

This report which will be on the company's books of accounts, aecounts and
where applicable, the directors' report, must be addressed to the company's
members. r2el lts principal function is to state whether or not, in the auditors'
opinion:
1. the company's accounts give a true and fair view of its state of affairs and
profit or loss for that financial year;
2. in the case of group accounts, the accounts give a true and fair view of the
state of affairs and profit or loss of the company and its subsidiaries;
3. proper accounting records have not been kept by the company;
4- proper returns adequate for their audit have not been received from
branches not visited by them; and
5. the prof it and loss account is not in agreement with the accounting records
and returns.
The auditors must also satisfy themselves that statements made in the
director's report do not distort the meaning, or conflict with a fair interpretation,
of the company's account. rsl where information given in the directors' report
is deemed to form part of the accounts the auditors must also report on it.
It should be noted that although the auditors' report must be addressed to the
company's members, the auditors are not obliged to actually send it to each
one of them. Their duty under section 190(1) will be discharged if they sign the
report and forward it to the company's secretary. ln Re Allen, Graig & co. Ltd.
(1934) t3rl after the auditors had prepared their report, they sent it to the
company's secretary. However, the report never got beyond the secretary and
a general meeting was never convened to discuss it. Holding that the auditors
were not in breach of the English equivalent of section 1go(1), Bennet J, said:
"fllt certainly has never been the practice ... for auditors to send their report to
every member of the company...ln my judgement the duty of the auditors, after
having affixed their signatures to the report ... is confined to forwarding the
reportto the secretary of the company, leaving the secretary ... or the directors
to perform the duties ... of convening a general meeting to considerthe report,,.
The report must at alltimes be open for inspection bythe company's members
and debentureholders at the registered office of the company. t32r Besides, it
must be read at the annual general meeting of the company held after its
circulation to the members and debentureholders.
'12.5 Girculation of accounts and reports to

creditors and members
Within eighteen months of a company's incorporation and subsequently at
least every calendar year, its directors must send to every member and
debentureholder the company's balance sheet, profit and loss account,
auditor's report and in the case of a public company or holding company, the
directors' report. p3l Unless the annual general meeting for that year has been
waived under Section 104(6)), these documents should also be laid before the
company in that meeting.t34l
12.6 The Annual Return

Every registered company must at least once a calendar year deliver to the
registrar for registration, an annual return. t3sl. The return must show as on the
date of the company's annual general meeting {or that year, inter alia:
1. the company's name
2. the nature of the company's business(es)
3. the address of the company's principal place of business in Malawi;
4. particulars of the company's directors and secretary on the date of the

return;
5. where the company's registers of members and debentureholders are

kept, if not at the company's registered office; and
6. particulars of the company's members and its shares.
lf the annual general meeting forthat year is waived, then the inlormation in the
return must be as it is twenty-one days after the dispatch of the company's
accounts and reports to its members and debentureholders under section
182(3).
ln the case of any public company other than a company limited by guarantee
the annual return must be accompanied by a certified copy of its accounts and
reports by its auditors and directors. t36l On the other hand, a private company
and a company limited by guarantee must send the annual return to the
registrar together with certificates showing, respectively, that since its incorpo-
poration or last return, as the case may be, the company has not invited
the public to acquire any of its shares or debentures and that the number
of its members does not exceed fifty. These certificates must be
accompanied by either a certificate that the company is not a holding
company or a subsidiary of a public company or a copy of its accounts,
directors' report, if any, and auditors' report circulated to its members
and debentureholders under Section 182. t371
Ghapter Twelve
1. section (2)' For a detaired discussion of the raw governing
.180 company
see generaily: chitumpha, company d;dilii;i'r_a.w
ftnT,:$l:'.n, ln
2. Section 180(1).
3. Section 180(5).
4. Section 180(3).
6. Section 182(1).
7. Section 185(4).
8.
!9ct51n 18_3(3Xb) and 184(1).
9. The Third Schedule, para.'Z.
10. Sections 183(4) and 184(2).
11. The Third Schedule, para. S.
12. lbid.
13. Section 183(1).
14. Section 183(2).
15. Section 183(3).
17. Section 184(1).
19. The Third Schedule, para. 43.
20. Section 185(8).
21. Section 185(4).
22. Section 185(10).
23. Section 185(12).
24. The expression 'wholly_.owned subsidiary' is not defined by the
Act.
However a company wiil.probabry be a wfiotty ffi;i ;ffiiiLrv
within
the meaning of the Act if it has nb members except that oth;iand
latter's ryh.olly owned subsidiaries or perions actirig on'itJ the
6ena-it or' on
behalf of those subsidiaries
', 26" Section Section 185(3Xb).
: 27' Section 182(1XbXc).
28. Section 189(3).
29. Section 190(1).
30. Section 190(2).
31. [1e34] Ch 438.
32. Section 190(3).
33. Section 182(1).
34. Section 182(2).
35. Section 181(1).
36. Section 196(1).
37. Section 197(1).
t*-
Chapter Thirteen
Gompany Taxation
Generally, the Taxation Act makes no distinction between natural persons and
registered companies. lt treats their income in more or less the same way.
However, a company is not similar to a natural person in all respects; there are
major differences between the two. For this reason, sorne provisions of the Act
apply exclusively to registered companies. lt is with those provisions that this
chapter is concerned. Consequently, for a more comprehensive approach to
taxation of companies in Malawi readers should refer to relevant materials on
the subject.
13.1 Filing of the company constitution

It was noted in Chapter 1 that for a company to be incorporated, it must send
its memorandum of association together with any adicles, to the registrar of
companies for registration, Under the Taxation Act too, every company is
required to file with the Commissioner of Taxes (hereinafter referred to as 'The
Commissioner') a copy of its memorandum and articles of association and
copies of all amendments to these documents, rtl Clearly, the aim of this
requirement is to ensure that the Commissioner has adequate information on
each registered company's business, capital, management, membership and
registered place of business.
13.2 Company public officer

It is by now clear beyond any doubt that although a company has a personality
of its own, it acts through natural person. For this reason, every company which
carries on a trade or has any office or other established place of business in
Malawi must be represented for tax purposes by an individual who is resident
in the country. t2l This individual, called 'the public off icer of the compdry' t3l
must be appointed by eitherthe company or its agent or its attorney who has
authority to make such an appointment, and must be approved by the
Commissioner. talWhere the company is in liquidation or receivership, the
liquidator or receiver will be required to assume and exercise the responsi-
bilities of a public o{ficer in respect of that company as long as the liquidation
or receivership lasts. The company must keep the off ice constantly f illed and
every change of the off icer must be reported to the commissioner within thirly
days of its taking effect. tsl lf the company fails to appoint a public officer, its
managing director, director secretary orany off icer of the company designated
by the Commissioner will occupv the office. Fl
13.2.1 Duties of the company public officer

According to Section 67(8) every notice, process or proceeding which under the
Act may be given to, serued upon or taken against any company must be given
to, serued upon or taken against the company's public officer. Secondly, every
public officerisanswerableforsuch actsand matters as are requiredof acompany
under the Act. Consequently, if there is any default by the company in respect of
thosethings, hewillbe liabletothepenalties providedforthedelauh.mThirdly, the
public officer is also considered to be 'representative taxpayer' in relation to a
company's assessable or taxable income. t8l As a result, he is subject to the same
duties, responsibilities and liabilities in respect of that income as if it were received
by or accruing to or in favour of him beneficially. tgl Fourthly, where the company
is incorporated in Malawi and declares a dividend within thirty days of the
declaration he must send to the Commissioner a copy of the resolution declaring
the dividend and a statement showing the name and address of each person to
whom a dividend has accrued, the amount of the dividend and the date on which
the dividend was declared.lrol
Everything which a public officer does under the Act in his representative
capacity must be taken as done by the company which he represents. Itrl
13.3 Returns
As a person chargeable with income tax under the Act, a company must
prepare and send to the Commissioner a return of its income not later than the
'lst day of May next following each year of assessment or such longer time as
the Commissioner may allow. n2l The Commissioner may also require it to
furnish him with returns of its employees and earnings, salary, wages allow-
ances or pensions paid or allowed to the employees. lr3l Where the company
carries on any trade in Malawi, it must also furnish the Commissioner with a
return showing:-
1. all payments made to any person in respect of any share or interest in the
trade;
2. all money received by it from any person or deposit and any amount of
interest received or paid by it; and
3. all such other information in its possession with regard to the income
received by or accruing to or in favour of itself or any other person, as may
be prescribed or required by the Commissioner. tlal
Besides, if it awards any bonus shares, debentures or securities or pays any

liquidation dividends to its shareholders in respect of shares held by them, it
must send to the commissioner a return which gives the f ull name and address
of each shareholder and the amount or value of the payment or 2yysJd. Itsr
13.4 Payable tax

A company just like an individual, pays tax on its income. This tax is charged,
levied and paid for each year of assessment on the income of a company at the
company rate of income tax upon the company's taxabie income received or
accrued f rom sources within or deemed to be within Malawi. t16t However, not
all income is taxable under the Taxation Act. on the contrary, what is taxable
is'assessable income' less any revenue expenditure and losses whoily and
exclusively incurred by the company for the purposes of its trade or in the
production of the income. t17l Assessable income is defined by section '11 as
the total amount in cash or otherwise, received by or accrued to or in favour of
the taxpayer in any year or period of assessment from a source within or
deemed to be within Malawi less any amount so received or accrued which is
of a capital nature and any amount exempted from tax under the Act. lt is,
therefore, clearfrom this that gains arising on the disposal of capital assets or
shares are not considered as income for tax purposes.
13.4.1 Rate of tax

A company must pay tax at the company rate as fixed by Parliament from time
to time. Currently the rate is 4O"/" of the company's taxable income. tisl
However, where the company carries on a life assurance business the rate is
30% ol that income. lf the company is not incorporated in Malawi, an additional
5% of its taxable income is chargeable to tax.
13.4.2 Allowable deductions

sections 31 - 45 specify deductions which must be made to a taxpaye/s
assessable income to arrive at his taxable income. These deductions includ e inter
alia capilal allowances, bad debts, doubtful debts, expenses on research or
scientific experiments, initial expenditure for new businesses and assessed
losses. According to section 2 of the Act, 'assessed loss' is any amount by which
allowable deductions exceed assessable income. Such a loss will be anallowable
deduction from the assessable income of a company if it arises solely out of the
company's trading operations in Malawi and to the extent that it has not been
allowed as a deduction in any previous year of assessment.tlel The loss is also
deductible f rom acompany's assessable income intwo othersituations. First if the
company is formed in Malawi to take over the entire undeftaking of an external
company in consideration of an allotment to the latter's members of its shares.lml
The assessed loss allowable as a deduction from the predator company's
assessable income in such circumstances is that of the target company. Besides
the allowance is made after the predator company's acquisition ol the target
company's undertaking, and only to the extent that the loss has not been
previously allowed as a deduction from the former's assessable income.
Second, if a company with an assessed loss buys a controlling shareholding

in another company which has an undistributed profit, any dividend declared
by the latter cannot be included in the taxable income of the purchasing
company. tttl Again, if after the purchase, the bought company declares a
dividend payable to the purchasing company and the former's shares are sold
by the latter at a loss, the dividend cannot be included in the taxable income
of the latter. t22l ln other words, in both cases the dividend is an allowable
deduction from the purchasing company's assessable income.
However, there is one situation where a company's assessed loss is not an

allowable deduction. This is where the company either has an assessed loss or
controls another company which has such a loss and changes its shareholding to
take advantage of the loss. l23l For this purpose a company will be deemed to be
controlled by another if the majority of the voting rights attaching to all classes of
its shares are held directly or indirectly by that other company. Pal 61""t1y, if the
change is made for any other business consideration, assessed losses incurred
before the change will be deductible from the company's taxable income.
13.4.3 The treatment of dividends

It is clear f rom Chapter 1 0 that dividends are a distribution to shareholders of their
company's profits. Since the distribution is made after the company has already
paid tax, the dividends are net of tax. Besides, once they have accrued to any
shareholder, they become partof histaxable income.This is because anydividend
attributable to taxable income of a company incorporated in Malawi is deemed to
arise f rom a source within Malawi. r2q Obviously, if they are also taxed in his hands,
they will sutfer double taxation. And that may encourage companies to capitdlise
their prof its and use them to pay for shares which are then distributed to members
as fully-paid up bonus shares. Being distribution ol a capital nature, these shares
will not be included in the member's taxable income by reason of Section 1 1 . Now
although this may solve the problem of double taxation, it may not satisfy those
shareholders who want a cash return from their shares.
To avoid this, the company pays income tax on the dividends so that what the
shareholder receives is net of tax. However, the tax so paid is Ceducted from the
tax payable on his taxable income. ln effect, therefore, the dividends are not an
allowable deduction to both the company and the shareholder but the company
pays tax on them on his behalf.
This result is achieved by grossing up the accrued dividend. According

to Section 26(1) a dividend attributable to taxable income of a company
incorporated in Malawi in the year of assessment accrued to or in favour
of an individual who is subject to tax and resident or engaged in business
in Malawi must be included in the income of the recipient shareholder.
However, the dividend must be grossed up by adding to the amount of
the accrued dividend an amount equal to the dividend. t26l The amount
so added must then be deducted from tax payable on the recipient
shareholder's taxable income. lf the amount exceeds the tax payable,
the excess must be refunded to the shareholder. t27l
ln otherwords, if we suppose the accrued dividend to be K50, then the grossed

dividend must be included in the recipient shareholder's taxable income will be
(K50 + KsO) K1OO. Out of this the amount which must be deducted from the
shareholder's payable tax is the difference between the grossed dividend and
the accrued dividend, i.e. K5O. And this K50 is subtracted f rom his payable tax
because the company will already have paid it on the dividend before
distributing the dividend to him. Now if the K50 is more than his payable tax (so
that by the company paying it, he is in effect over-taxed), the difference is a
rebate which must be repaid to him.
This method serves two major purposes. lt avoids double taxation of company
dividends by in effect requiring the company to pay income tax on them on
behalf of its shareholders. Besides, it protects the shareholders from being
over-taxed on account of receiving dividends by ensuring that any excess tax
paid by the company on each dividend is repaid to them as a tax rebate.
Of course the method does not apply to every company dividend. lts applica-
tion is only to dividends received by non-corporate shareholders. ln other
words, it does not apply to dividends accrued to corporate shareholders. Now
although the Act does not say how such dividends are to be treated to avoid
double taxation, the practice seems to be to tax them in the hands of the
distributing company and exclude them from the taxable income of the
recipient corporate shareholder.
13.5.1 Dividends paid to non-residents

Any income payable to a person who is not resident in Malawiwhich is from a
source within Malawi but not attributable to a permanent establishment of that
person in the country, is liable to a final tax at 15% of the gross amount of that
income. I28l 'Permanent establishment' includes an office or other fixed place
of business through which business activity is carried on whereas 'person
resident in Malawi'covers any:-
f . individual present in Malawi for an aggregate of at least 183 days in the

year of assessment;
2. trust, estate or partnership established or otherwise organised under any

written law in Malawi; and
3. company incorporated in Malawi. r2el
Since under Section 27(4) a dividend attributable to taxable income of a

company incorporated in Malawi is 'income arising from a source within
Malawi' (and therefore, taxable under Section 28),the effect of Section 764(1)
is clearly that every dividend payable to non-resident shareholders is taxable
at 15o/o. The tax must be deducted from the dividend on its remittance to the
recipient and the amount deducted be sent to the Commissioner. t30l Again, just
like in the case of dividends payable to resident non-corporate shareholders,
this tax is also payable on the grossed dividend.
13.6 Shareholders who are absent from Malawi

It will be clear from Chapter 3 that generally a company is not an agent for its
shareholders nor are they its agents. However, where a shareholder is absent
from Malawi, his company will be deemed to be his agent forthe purpose of the
Taxation 4s1. Iatl Therefore, it will have and exercise all the powers, duties and
responsibilities of an agent for a taxpayer who is absent f rom Malawi in respect
of any income received by or accruing to him or in his favour as a shareholder.
An important practical implication of this is that the company is entitled to
receive on his behalf any tax rebate payable to him under Section 26 on any
dividend of the company which has accrued to him or in his favour.
Chapter Thirteen
1. Section 68(2).
2. Section 67(1).
3. Section 67(3).
4. Section 67(2\.
5. Section 67(7).
6. Section 67(4).
7. Section 67(9).
8. Section 77(1Xa).
9. Section 78.
10. Section 69.
11. Section6T(10).
12. Section 84(1).
13. Section 85(1).
14. Section 85(2).
15. Section 68(1).
16. Section 66 as amended by section 6 of the Taxation (Amendment) Act,
1 990.
17. Section 28(1).
18. The Eleventh Schedule to the Act as amended by the Taxation (Amend-
ment) Act,'1991.
19. Section 42.
20. Section 44.
21. Section 70(1).
22. Section 70(2\.
23. Section 43(1).
24. Section 42(2).
25. Section 26(4\.
26. Section 26(2).
27. Section 26(3).
28. Section 764(1).
29. Section 2 of the Taxation (Amendment) Act, 1987.
30. Section 76A(2).
31. Section 80.
Ghapter Fourteen
Schemes of Arrangement
and Take-Overs
It was noted in para. 2.3 that a company requires a scheme of arrangement to
alter its memorandum where:
1. the memorandum excludes or restricts its power to make the alteration or

imposes conditions upon which the alteration can be made or
2. the alteration entails that its members should take more shares in the
company, increases their liability to pay money to the company or restricts
the transferability of their shares.
Similarly, according to section 48el rt a company's memorandum either

forbids variation of rights attached to any class of shares or provides a
procedure for the variation, the company can vary the rights by a scheme of
arrangement. However apart from these cases, generally a company will
have to make an arrangement with its creditors or members where it seeks
to alter its capital or corporate structures in a way which aflects its contrac-
tual relationship with them. Examples of such an alterarion are transfers of
its assets or controlto another company; consolidating, dividing or subdivid-
ing its shares; repayment to its members of contributed capital or conversion
of stock into shares.
There are two procedures which can be used to ellect these re-organisations.
One is a scheme ol arrangement between the company and its creditors or
members under section 198. Another is the procedure provided by section 201 .
Whichever of these two is adopted depends on whether it is intended to have
the company and the court involved. As shown below, although where variation
of members' rights in accordance with section 201 is unfair any member can
apply to the court against it, generally the court has no role to play in the
implementation of that variation. By contrast, it plays an important role where
section 198 is used instead. Besides, where it is intended to put one company
(the target) under the control of another (the predator) using section 201, the
matter will be between members of the target and the predator; the target itself
has no statutory role in the affair. On the other hand, if section 198 is used the
target, as a person, must be involved otherwise the scheme willbe inetfective.
Moreover, the procedure under section 198 is available to members as well as
creditors. However section 201 can only be used to adjust shareholders' rights.
Finally, variation of members' rights under section 201 needs to be approved
by a 90% majority of them whereas under section 198 it would require the
support of 75o/o of the members present and voting at the meeting where the
variation is considered.
The difference between the two procedures is illustrated by Re National

Bank.tll ln that case, a company whose head office was in London had72o/o
of its shareholders and 63% of its business in lreland. To dealwith the problems
which this caused, a scheme was proposed under the English equivalent of
section 198 whereby the lrish part of the business would be f reed f rom London
control and be transferred to the National Bank of lreland Ltd in lreland. A
meeting of shareholders called to consider the scheme where 61% of the
company's issued capitalwas represented, approved the scheme by over 90%
of the votes cast in person or by proxy. However when the company applied
to the court to sanction the scheme some of the shareholders argued that
because the arrangement was essentially a means for the purchase by an
outsider of all the company's issued shares the court should not confirm it
unless inter alia it was approved by a 90% majority of the company's
shareholders as required by the English equivalent of section 201. Rejecting
the contention Plowman, J. pointed out that the procedure under section 198
gives the couil the widest possible discretion to approve any type of arrange-
ment between a company and its shareholders. As a result to require that the
proposal here should have been approved by 90% of the company's members
involved imposing a restriction on the word 'arrangement' as used in section
198. Besides, the judge went on, whereas under section 198 a scheme cannot
be be effective unless the question of its fairness has f irst of all been submitted
to the couft, under section 201 the matter does not need to come to the court
at all. For these reasons, the scheme was confirmed.
However if the target company is involved in the variation of members' rights

in accordance with section 201, it is under a duty to be honest to the
shareholders and not to mislead them about it. ln Gething v Kilner t21s
company made an offer for the purchase of the shares of another company.
Directors of the latter were advised by stockbrokers that the offer was
inadequate and should not be recommended to its shareholders. ln spite of
that, the directors issued a circular to the shareholders in which they

made a brief reference to the stockbrokers' view and recommended
acceptance of the offer. lt was held that the directors had not broken
their duty to be honest to the shareholders because they honestly
believed that despite the stockbrokers' advice, the offer was adequate
and ought to be recommended to the shareholders.
Again, where the object is a variation of the company's legal relationship with
its creditors and members involving the company's voluntary winding up, there
are three options available. These are:
1. a scheme under section 198 between the company and either its creditors
or members;
2. a scheme under section 263 between the company and its members and
3. a scheme under section 266 between the company and its creditors.
The major differences between a scheme under section 198 and schemes
under sections 263 and 266 is that the latter do not require coufi confirmation
whereas the lormer does. Besides, although all these schemes need to be
approved by a meeting of the creditors or members, as the case may be, under
a section 198 scheme the holding of the meeting must have been previously
sanctioned by the court; if it was not, the coutt will subsequently refuse to
confirm the scheme even though the meeting supports it by the appropriate
majority. On the other hand, meetings of members or creditors under sections
under sections 263 and 266, respectively, require no prior coud approval.
14.1 A scheme of arrangement or compromise

under section 198
Although the word 'compromise' appears more than once in the Act, it is not
defined. But in common parlance, it describes a situation where one accepts
something different f rom what one expects or deserves. On the other hand, the
Act defines 'arrangement'as including a reorganisation of the share capital of
the company by the consolidation of shares of different classes or by the
division of shares into shares of different classes or by both those methods.
Howeverwhateverlorm the reorganisation may take, it must involve alteration
of the rights between a company and its creditors or shareholders. And as long
as there is give and take on both sides the alteration will be a scheme o{
arrangement. Conversely an alteration of the rights in which one side gives up

some of its rights without getting anything in exchange, cannot be a scheme
of arrangement or compromise.
ln Re NFU Development Trust (1Sz3;rst the trust was a company limited by

guarantee without a share capital. Every member of the company had a right
to vote at its general meetings. ln orderto reduce the expenses of administra-
tion, the company's board proposed a scheme to reduce membership of the
company to seven. At a meeting of the company's members ordered by the
couftto considerthe proposal, the scheme was approved by almost 85% of the
members. On an application to the court to sanction the scherne under the
English equivalent of section 198(2), dissentient members contended that
since the company had no share capital, it was impossible to show that the
majority represented 3/4 in value of those present and voting as required by
that provision. lt was held that since each member had precisely the same
stake in the company, the position was the same as if each one of them owned
a single share in the company so that the 3/4 majority was satisfied. However
the scheme could not be sanctioned because its terms did not qualify as a
'compromise orarrangement'between the company and its members because
it involved expropriation of the rights of members without any compensating
advantage. Speaking about this Brightman J. said:
"The word'compromise' implies some element of accommodation on each

side. lt is not aptto describe totalsurrender. Aclaimantwho abandons his claim
is not compromising it. Similarly, I think that the word 'arrangement' in this
section implies some element of give and take. Confiscation is not my idea of
an arrangement. A member whose rights are expropriated without any com'
pensating advantage is not ...having his rights rearranged in any legitimate
sense of that expression."
Once a scheme of arrangement is proposed between a company and its

creditors or members, the company or any one of the creditors or members,
as the case may be, may apply to the court for an order to summon a meeting
:( q"1 pf the creditors or members. tal lf the court grants the application, notices of the
meeting must be sent to the creditors or members. According to section 199(1)
(2) the notices must be accompanied by a statement showing whether or not
the company's directors (as creditors or members of the company) or
debentureholders have any material interest in the scheme which is different
f rom that of other persons who are affected by the scheme. This is because,
as shown by the case of Tiessen v Henderson Isl (discussed fully in

/+ 1.,2
para..fte€), failure to make that disclosure renders the scheme invalid. But if
the disclosure is made and a majority in number representing 314 in value of
the creditors cr in nominal value of the members present and voting either
personally or by proxy approve the proposal, the scheme will be binding on
ithem as well as the company. 16l However for the scheme to be effective, it must
be sanctioned by the cour4. For this reason, after the meeting, either party to
the scheme must apply to the court for the sanctioning order. And any creditor
or member of the company claiming to be affected by the schemeis entitled not
only to be represented at the hearing of the application but also to object to the
scheme during the hearing. nl*
, t {*)
Now because the scheme must be 'between the company and its creditors or
members', even if either of the latter approves it by the appropriate majority,
the court will not sanction the scheme if the company objects to it. ln Re Savoy
Ltd (1981)l8l a company (the predator) which was the beneficial owner of some
shares in another company (the target) wished to acquire control of the latter.
Consequently the predator proposed to the target a transfer scheme to be
sanctioned by the court under the English equivalent of section 198(2). The
scheme involved acquisition by the predator of all the target's shares except
those already held by the predator, in exchange lor shares in the predator. The
predator applied for a court order to convene meetings ol the target's share-
holders to obtain a 3/4 majority in favour ol the scheme, and thereby make it
binding on the target. However the target's board of directors objected to the
scheme. lt was held that the word 'arrangement'was to be interpreted widely
and since the proposed scheme would affect the contractual relationship
between the target and its members by requiring the former to register the
predator in place of the members as holders of the target's shares the scheme
qualified to be an arrangement within the English equivalent of section 198(1).
However, since this provision refers to an arrangement 'proposed
between a company' and inter a/ia its members, that assumes consent
to the scheme by the company as a legal personality separate f rom its
members. Now because here the company did not approve the scheme,
the court had no jurisdiction to sanction it.
Besides, the court will not sanction a scheme of arrangement agreed to by a

company and its creditors or members at a meeting not ordered by the court
under section 198(1). This is because courts consider absence of the order as
a f u ndamentaldeparture f rom the procedure laid down by sections 1 98 and'1 99
which divests them of the powerto sanction such a scheme. ln Anglo-African
Shipping Co. Ltd v Dharrap Ltd 1963 tel the respondent company called a
meeting of creditors to consider a scheme of arrangement. A majority in

number of the creditors present in person or by proxy representing 75% of the
creditors in value, approved the scheme. After the scheme had been put in
operation and substantial assets of the company had been distributed to some
of the creditors in accordance with it, an application was made by one of the
creditors to the court to sanction the scheme. lt was held that as the meeting
where the scheme was approved by the creditors was not ordered by the court
and the scheme was already operational, the court had no power lo ex post
facfo sanction the scheme. ln the words of Cram J:
"[T]he originating application envisaged by Parliament is for an order to hold a

meeting. Subsequently, the court may sanction an agreement made at such
meeting... the Actdoes notprovideforan applicationto sanction an agreement
made at a meeting not ordered by the cout7".
When the application is made forthe court to sanction the scheme, the court's
function is not simply to endorse what the creditors or members have already
approved. On the contrary, it is to determine whether or not:
1. the procedure laid down in sections 198 and 199 has been complied with;
2. the scheme has been approved by the majority in lhe bona frde interest
ol the entire affected group of creditors or members and
3. the scheme is made in good faith, and is fair.
Consequently, if these condilions are not satisfied, the court may not sanction
the scheme even if the creditors or members approve it by the appropriate
majority. ln Re English, Scottish & Australian Chartered Bank (18931tt0t16"
bank was ordered to wind up. As part ol the liquidation process, a scheme of
reconstruction was proposed whereby a new bank was to be established which
would defray the liabilities of the old bank. The court ordered a meeting of the
bank's creditors (in accordance with the English equivalent of section 198(1))
to be held to ascertain their views on the scheme. More than 3/4 of the creditors
approved the scheme. However when the court sanctioned it, some of
the creditors objected to the decision on the ground lhal inter alia lhe
scheme was improvident and unfair towards the creditors generally.
Explaining the court's function when asked to sanction a scheme of
arrangement, Lindley L.J. said on appeal:
"What the court has to do is to see, first of all, that the provisions of that statute
have been complied with; and secondly, that the minority is not being overriden
by a maiority having interests of its own clashing with thase of the minority
whom they seek to coerce. Fufther than that, the court has to look at the
scheme and see whether it is one as to which persons acting honestly, and
viewing the scheme laid before them in the interest of those whom they
represent, take a view which can be reasonably taken by businessmen".
Applying this test, it was found that the scheme was not unfair and therefore
the lower court's decision to sanction it was upheld.
ln determining whether the procedure in Sections 198 and 199 has been
complied with, the court will be particularly keen to see if at the creditors' or
members' meeting called to approve the scheme, the minority had an oppor-
tunity to be heard and voice its objection. lf there was that oppodunity, the court
will confirm the scheme. ln The Matter of Spearhead Enterprises t111 a
scheme of arrangement proposed between the company and its credi-
tors under section 266 was approved by all creditors except the Govern-
ment which abstained from voting at an unsecured creditors' meeting.
ln spite of that when confirmation of the scheme was sought, it was
given. ln the words of Skinner, C.J, (as he then was):
"lt is trite law that before a majority of creditors can make decisions binding
upon a minority, the minority must have an opportunity of being heard and voice
its obiection. Government had that opportunity, its representative was present
atthe meeting, hecould have been heard inopposition infact, therepresentative
was s i le nt d u e to m is u nde rstand i n 9 ... I am satisf ied that I should make an order
and I do so. I sanction the scheme..."
The court's sanction may be unconditional or may be made on such

terms as the court thinks fit, including granting any member of the
q c.!! Dompdny the right to require the company to buy his shares. t12l There-
after a copy of the order must be sent to the registrar for registration,
otherwise the scheme will not be effective. I13l
14.1.1 Where the scheme involves a reconstruction or an

amalgamation
A further question which the court will have to answer when called upon to
confirm a scheme of arrangement under section 198 is whether the scheme
involves a 'reconstruction' of the company or its 'amalgamation' with another
company. Again neither of these words is defined by the Act. However in its
radicalform, reconstruction will involve dissolving the company and transfer-

ring its undertaking and property to another company which takes them as
contributed capital for issue of its shares to members of the dissolved
company. An example here is the scheme in Re English, Scottish &
Austratian Chartered Bank tlal above. Of cou rse a reconstruction need not be
as drastic; sometimes it may simply involve reduction of the company's share
capital or variation of the rights attached to any class of shares or increasing,
consolidating, dividing or subdividing its shares as was proposed to be done
in the case of Carruth v lmperial Chemical lndustries Ltd n51 discussed in
paragraph 4.2.3. By contrast, an amalgamation is the merger of two or more
companies into one.This is effected by shareholders of the mei'ging companies
exchanging their shares for shares in one of the companies or a third
company.The scheme in Re Savorytl6lenvisaged a possible merger between
the target and predator companies.
According to section 2OO(1), where an application is made for an order to

sanction a scheme of arrangement under section 198(2) and the court is
satisfied that the scheme involves either reconstructing the company or
amalgamating it with another body corporate, and transferring the company's
undertaking or property to the body corporate, besides sanctioning the scheme
under section 198(5), the court may provide for:
(a) the transfer to the transferee of the whole or any part of the undertaking
or property or liabilities of the transferor
(b) the allotment or appropriation by the transferee ol the shares, deben-

tures, policies or similar interests which it must allot or appropriate under
the scheme;
(c) the continuation by or against the transferee of legal proceedings started

by or brought against the transferor;
(d) the dissolution without winding up of the transferor;
(e) any person who objects to the scheme and
(f) such matters as are necessary to ensure that the reconstruction or

amalgamation is fully and effectively carried out'
The companies in respect of which the order is made must, within 21 days,
198 AN INTROOUCTION TO COMPANY LAW IN MALAWI
ensure that a copy of it is sent to the registrar for registration.tl4
14,1.2 An arrangement between a company and its members under

section 263
A company which is in voluntary liquidation may, through its liquidator,
propose a scheme of arrangement for the sale or transfer of its under-
taking to another body corporate. ln lact the liquidation is usually part of
such a scheme. As a result, the resolution authorising the winding up
and that approving the sale or transfer are submitted together so that
should the general meeting reject the latter, the former should also be
dropped. That this is legally possible is clear f rom section 263(5) which
says that a special resolution will not be invalid for the purposes of this
section by reason that it is passed before or concurrently with a
resolution for voluntary winding up or for appointing liquidators.
The scheme requires the sanction of a special resolution of the company and
may be in consideration of:
1. fully-paid up shares, debentures or similar interests in the body corporate

for distribution among the company's members or
2. The members'participation in the body corporate's protits or receiving any

other benefit from it in lieu of or in addition to receiving cash, debentures
or similar interests in the body corporate ,lttr, :4 ir)
/z
Once the resolution is passed, the scheme will be binding on the company.
Besides, each member will be deemed to have agreed with the body corporate to
accept the fully-paid shares, debentures or similar interests to which he is entitled
t1el However, if within one year of the passing of the resolution
6.,, ,,.' il:nder the scheme.
)'v an orderis made bythecourt undersection 213forthe winding up of the company,
the scheme will not be valid unless sanctioned by the court. Moreover, any
member of the company who opposes the scheme may, within 28 days of the
passing of the resolution, write to the liquidator requiring him either to:
1. abstain from implementing the resolution or
2. purchase the member's shares in the company. t20l

XL t G\
lf the liquidator chooses to buy his shares, the price must be paid to him before
t2tl
the company's dissolution. (.ri.ikr)
Two major points must be noted about this scheme of arrangement. Unlike the
scheme under section 198, this scheme does not require court confirmation
and dissentient shareholders are not given a statutory right to object to the
scheme in court. As section 263 itself shows, any objection must be addressed
to the company's liquidator. Besides, the form which consideration for the
scheme musttake is expressly provided forbythe provision. Consequently any
scheme which provides for a diflerent lorm of consideration would be unen-
forceable under it. And although section 263 does not afford any shareholder
the right to apply to court against the scheme, he can make such an application
on this ground. ln Bisgood v Henderson Transvaal Estates Ltd I2a acting
under powers in its memorandum and articles of association a company
passed resolutions approving a scheme of reconstruction involving the
company's winding up. The scheme provided that the undertaking of the
company was to be sold to a new company, formed for that purpose, in
consideration of shares in the new company being issued to members of the
old company. lf any such member ref used to accept the scheme, the liquidator
of the old company was to sell the shares to which the member would have
been entitled and give him the proceeds. lt was held that the scheme
contravened the English equivalent of section 263. For although this provision
does allow consideration for a scheme of arrangement to be in the lorm of cash,
the cash element here was not intended to be consideration for the scheme;
rather it was intended to be a means of dealing with any dissentient member.
Clearly this was contrary to the legal position here which as already shown,
gives such a memberthe option of requiring the liquidatorto eitherabstain from
going ahead with ihe scheme or purchase his shares in the company sought
to be wound up.
14.1.3 An arrangement between a company and its creditors under

section 266
Similarly, a company which is about to be or is in the course of being voluntarily
wound up can make an arrangement with its creditors. Usually the scheme will
involve dissolution of the company and formation of a new company which
takes over the old company's assets and then issues shares to the creditors
in exchange for their debts. 123t t? 't ,€<- i-,-zt.'"1-. , S< f d,,.t" .*-.,"1
t-;*',,../;,lt.1i *,'.* t'Jrvl l',"ztl ii*,1-
An illustration of a scheme of arrangement under section 266 is what happened
In the Matter of Spearhead Enterprises Ltd(19841.t2r1 ln that case Spear-
head Enterprises Ltd owed K28,000,000 to its creditors comprising the
Government, National Bank, Commercial Bank and several unsecured credi-
tors. Because of this, the company was virtually insolvent. However it was
2OO - AN INTRODUCTION TO COMPANY LAW IN MALAWI
found that sale of ils assets or undertaking would not yield sufficient funds to
settle the debts. Besides there were a number of external companies who were
interested to enter into joint ventures with the company so long as it was
solvent. Consequently a scheme was arranged between the company and its
creditors. The essence of the scheme was that the company would transfer its
assets to a newly-incorporated company called Spearhead Holdings Ltd in
consideration ol the latter assuming full responsibility for all the former's
liabilities. For their part, the creditors would give up the debts owed to them by
Spearhead Enterprises Ltd in exchange for an allotment ol shares in the
new company equivalent in nominal value to 2OYo of each creditor's
debt. Moreover the creditors could appoint directors in the new com-
pany: the Government, up to three director; the banks, acting together,
one director and the unsecured creditors as a group, one director too.
As already noted, the scheme succeeded.
Now just like the scheme under section 263, this scheme too will be
binding on the 'old' company. However it will not be binding on the
creditors unless a majority in number representing314 ol them in value
; r,.i iuaccedes to it. t25l For the purpose of this provision, a creditor will be
considered a creditor for value for such as appears to be the balance to
be due to him after allowing for
1. the value of security or liens held by him and

2. the amount of any debt or set-off owing by him to the comp"nyi,ltl
. f
Of course in spite of the resolution, any creditor or member of the compJnl who
opposes the scheme may within 21 days of its completion apply to the court
against it. On such application the court may amend, vary or confirm the scheme.
t?4 However if the scheme amounts to a transler or assignment by the company
of all its propefi to trustees for the benefit of all its creditors under section 288(3),
it will be void. Consequently the court may refuse to confirm it.
14.1.4 Directors' compensation

According to section 153(2), it is unlawf ulto make any payment to any director
of a company in connection with the transfer of the undertaking or property of
the company, its subsidiary or holding company unless:
a) particulars of the proposed payment have been disclosed to members of

the company and
,) t
t_- I
r
I
Fl'it''''
b) the proposal is approved by an ordinary resolution of the company.
lf these requirements are not complied with, the payment will be deemed to
;i;.<.;iilhave been received on trust for the company't28l Here 'payment' includes any
I ri a.', benelit or advantage whether in cash or kind.l2elAnd section 155(4) provides
' that a payment will be deemed to have been received by a director in
connection with a transfer of undertaking or property if he receives it within one
year before or two years after the agreement for the transfer is made.
14.2 A take-over under section 201

This is a transaction or a series of transactions whereby one company obtains
control of the assets of another company. For that to happen, the predator
company must make an offer to shareholders of the target company to acquire
their shares. lf the following conditions are satisf ied, the predatorcompany has
the right to compulsorily acquire the shares:
1. the offer must be made to holders of all shares of the target company
except those which are already held by of for the predator company or its
subsidiaries or holding company;
2. consideration for the olfer must be either an allotment of shares in the

predator company or such an allotment or cash;
3. the same terms must be offered to all shareholders to whom the offer is
made or, where the shares to be acquired are of different classes, to all
holders of shares of the same class and
4. the offer must be accepted within 4 months in respect of at least 90% of

all the shares or each class of shares for which the offer is made. I30l
5;r, irr)F"t
lf in spite of the conditions being satisfied, some shareholders do not accept
the off er, then within 2 months thereafter the predator company can notify them
,. .. ,,.0( its intention to compulsorily acquire their shares.l3ll Any shareholders who
"'- ' tiieceives the notice may within that period apply to the court against it or if he
does not object to the offer, ask the predator company to acquire his
shares.Should the predatorcompany decideto acquire his shares, then it must
do so on the terms upon which the shares ol the approving shareholders have
been bought.ln Re Carlton Holdings Ltdt32l a f irm made an offer on behalf of
the offeror company to shareholders of the off eree company f or the acquisitiori
of the latter's shares. The offerwas for seven shares of the ofleror in exchange
for six shares of the offeree or a 'put option' of 60s for each offeree share. Over
90% of the offeree's shareholders accepted the offer except the applicant who
came to know ol the offer after the period within which the put option was
exercisable was over. Subsequently the offeror gave him notice under the
English equivalent of section 201(3), of its desire to acquire his shares. By this
time the market value of the ofleror's shares had fallen f rom 70s to 34s. For this
reason, the applicant accepted to sell his shares to the offeror at the cash price
of 60s per share. lt was held that the offeror was entitled and bound under the
English equivalent of section 201{3) to acquire the shares on the terms of its
offer which included a put optior, of 60s per share. Accordingto Brightman, J.,
if a company chooses to exercise its rights underthis provision, the dissentient
shareholder is entitled to receive the same terms as those upon which
approving shareholders sold their shares to the offeror.
On an application by the dissentient shareholder under section 201 the

court may order the predator company not to acquire his shares or to
, r-flcQUire them on such terms as it specif iss. t33l Clearly the court will make
the first ruling only if the offer is unfair to the general body of sharehold-
ers to whom the ofler is made. However since at this stage the offer will
already have been accepted in respect of at least 90% of the shares, it
will not be easy to prove the unfairness. This is more so because as long
as the offer is fair to the body as a whole, the fact that it is not fair to one
or two shareholders or is open to criticism, will not be enough for the
court to order the predator company not to acquire the dissentient
shareholder's shares. As Plowman, J., said in Re Grierson, Oldham
Ltd (1968),134lthe test of fairness is whether the offer is lair to the
offerees as a body and not whether it is unfair to a particular shareholder
in the peculiar circumstances of his own case. ln that case an offer was
made for a company's ordinary shares at 6s per share. The offer was
accepted by holders of more than 99% of the shares except the
applicants who held less than 0.1% of the shares. Thereafter the offeror
served notice on the applicants to the effect that it desired to acquire
their shares and that unless they applied to the court within one month
and the court ordered otherwise, the offeror would be entitled and bound
to acquire their shares on the terms of its offer. The applicants then
applied for a court declaration that the offeror was not entitled to acquire
their shares because its olf er was unfair. lt was held that the application
would not be granted because the offer price was above the market price
of the shares and over 99% of the ordinary shareholders had accepted
the offer.
Similarly, in Re Sussex Brick Co. Ltd ('1969;tost the applicant was a holder of
ordinary shares in a company. Anothercompany offered to acquire preference
and ordinary shares of the company. 90% of the shareholders of the target
company approved the offer. When the predator company notified the appli-
cant of its intention to acquire his shares, he sought a court declaration that the
company was neither bound nor entitled to acquire the shares because its offer
was unfair to him. lt was held that on the evidence submitted in the court, the
otfer was not unfair. Therefore his application was turned down. Speaking on
the question of fairness Vasey J. said:
"lt is diff icult to predicate unfairness in any case in which there has been
perfect good f aith on the side of the person who is alleged to have been
unfair. There being no suggestion of an intentional misleading of the
applicant, I think that he is faced with the very diff icult task of discharg-
ing an onus, which is undoubtedly a heavy one, of showing that he, being
the only man ... out of step, is the only man whose views ought to prevail
... I think that the scheme must be obviously unfair, patently unfair,
unf air to the meanest intelligence. I do not think that merely f inding items
in the scheme or details of the scheme which are open to valid criticism
is enough. A scheme can be effective to bind a dissenting shareholder
without complying to the extent of one hundred per cent with the highest
possible standard of fairness, equity and reason. Afterall,aman mayhave
an offer made to him and although he likes something better, may be prepared
to accept it, because it is good enough in allthe circumstances."
However, even if the offer is fair, the cout't will order the predator company not
to acquire the dissentient shareholder's shares if he shows that the company
and the 90% of the target company's shareholders who have accepted the
take-over offer are in substance the same. ln Re Bugle Press Ltd (19611t0et
90% of the target company's shares were held by two shareholders S and J
while T held 10% of the shares. Subsequently, the two major shareholders
formed the predator company which offered to buy the target company's
shares at €10 per share. S and J accepted the offer but T rejected it. When the
predator company sought to exercise its right to compulsorily acquire his
shares, T sought a court declaration that the company was not entitled to the
acquisition. lt was held that the declaration would be made because the
predator company and the holders of 90% of the target company were the
same so that the English equivalent of section 201 was being used not for a
scheme of arrangement properly so called but for the purpose of enabling
majority shareholders to expropriate the minority.
On the other hand, if the court orders the predator company to acquire the
dissentient shareholders shares on certain terms, then before the company
acquires the shares it must give notice of the terms to all the other sharehold-
S;titilrs, including those who may have accepted the originalterms. t37l Within 2
months of that notice, every such sharehoider can ask the predator company
to acquire his shares on the new terms and if he already accepted the original
terms, he can claim any additionalconsideration to which he would have been
entitled had his shares been acquired on the new terms.
Where no application is made against the acquisition offer under section

(201X4), orwhere it is made butthe court orders the acquisition to proceed, the
predator company must:
1. send to the target company a copy of the notice sent to the latter's
shareholders under section 201 (3), together with an instrument of transfer
of shares executed by or on behalf ol each of the shareholders and the
target company and
2. transfer to the target company the consideration (whether in cash or

shares) payable by the predator company for the shares which the latter
is entitled to acquire. ,ttL
:u ri!)
Thereafter the target company must register the predator company as the
holder of the acquired shares. The cash, if any, received in exchange for the
shares must be deposited in a separate bank account and together with any
shares paid by the predator company as consideration for the acquisition , will
be held by the target company on trust f or the slrareholders whose shares have
been acquired. l3elg
a; ;17)
14.2.1 Protection of the minority on a take-over

Where the acquired shares, together with any shares of the target company
which are held by or for the predator company, its subsidiaries.or holding
company at the date of ihe acquisition amount lo 75o/o of all the target
company's shares or of any class of those shares, the predator company must
give notice of the acquisition to holders of the remaining shares within 1 month
of the transfer of the shares to the predator company. Within 3 months of the
date of the notice any such shareholder may require the predator company to
..
o' , r,)dceuire all or any of his shares. t4ol The predator company must then acquire
th" shares on either the terms ol the acquisition offer or such terms as may be
agreed upon between him and the company or be ordered by the court on
application by the company or him. tnt.,l, ,-: r
14.2.2 Directors' compensation

without
The Act seeks to prevent di rectors of the target company f rom obtaini n g
the approval of the company's shareholders any benefit apart from the price
offered to the shareholders. Consequently section 154(1) provides that where
in connection with an offerforthe acquisition of any shares of a company which
is available for acceptance by:
(i) all shareholders of the company or all holders of shares of the class to
which the offer relates or
]
owned
l
(ii) holders of shares which, together with shares already benelicially ]
by the offeror or by any body corporate in which he is the controlling

shareholder, confer the right to at least 33.3"/o of the voting powers at any I
general meeting of the company, a payment is made or is proposed to be

made to any director of the company, its holding or subsidiary company,
the directors must take reasonable steps to have pafiiculars of the I
payment included in the notice of the offer given to shareholders. Here ]
payment includes any benefit or advantage whether in cash or kind. ta21- i , ]
And according to section 155(4) a payment will be deemed to have been

received in connection with an ofler if it is received within one year before
or two years after the offer is made and the offeror is privy to the making
of the payment. Now unless particulars of the payment are disclosed as
required by section 154(1) and before the transfer of the shares in respect
of which the offer is made, the making of the payment is approved by any
ordinary resolution of all holders of the shares, the payment must be
distributed among those who sell their shares as a result of the offer. il?lr.; . .'ii"i
'1. :''t-tr
lf any director receives the payment, he must hold it on trust for thebii
persons.,no,r, ,,,
Ghapter Fourteen
't. [1966] 1 Ail ER 1006
2. [1972] 1 Ail ER 1166
3. [1973] 1 Ail ER 135.
4. Section 198(1).
5. [1899] 1 Ch 861.
6. Section 198(2).
7. Section 198(4).
8. [1981] 3 Alt ER 646.
9. [1e61-63]ALR (Mat) 543.
10. [1892]2 QB 700.
11. lnfra., note 24.
12. Section 198(5).
13. Section 198(3).
15. [1e37] 2 Alt ER 422.
16. Supra., note 8.
17. Section 200(3).
18. Section 263(1).
19. Section 263(2).
20. Section 263(3).
21. Section 263(4).
22. [1908] 1 Ch743.
23. see Re English, scottish & Austratian chartered Banksupra., note 10.
24. Civ cas 238/1984.
25. Section 266(1).
26. Section 266(2).
27. Section 266(4).
28. Section 153(3).
29. Section 155(1).
30. Section 201(1X2).
31. Section 201(3).
32. [1971] 2 Ail ER 1082.
33. Section 2O1(4).
34. [1967] 1 Ail ER 1e2.
35. [1904] 1 Ch 598.

36. [1961] 1 Ch270.
37. Section 201(5).
38. Section 201(6).
39. Section 201(7).
40. Section 202(1).
41. Section 202(2).
42. Section 155(1).
43. Section 154(3X4).
44. Section 154(4).
Ghapter Fifteen
Winding Up and Dissolution of
a Registered Company
A registered company cannot be subject to bankruptcy proceedings like an
individual. tll On the contrary, if there are grounds for requiring that its property
should be realised to pay off its debts, and that the surplus be distributed among
its members, the company must be wound up. Thus the winding up of a
company can be described as the formal process whereby its assets are
realised, its creditors are paid off, the surplus is distributed among its members
and the company is thereafter dissolved.
A registered company may be wound up voluntarily or by a court order. I21
15.1 Compulsory winding up by the court

A registered company may be wound up by a court order on the application of :
(a) the company itself; or
(b) any creditor of the company; or
(c) a member or the personal representative of a deceased member or the

trustee in bankruptcy of a bankrupt member; or
(d) the Attorney General; or
(e) any liquidator of the company appointed in a voluntary liquidation. tal
Of course where a shareholder is petitioning forthe winding up o{ his company

then unless the shares he has in the company devolved on him by operation
of law, he must show that he has held them and been registered in respect of
them for at least six months. On the other hand where the petitioner is a
contingent or prospective creditor he must give reasonable security for cost
and prove to the court's satisfaction that there is a prima facie case lor winding
up the company. However, il the company is being voluntarily wound up, the
court will not grant an application for its compulsory winding up unless it is
satisfied that the voluntary winding up may prejudice the interests of the
creditors or members. tal
15.1.1 Grounds for winding up by the court

Under Section 213(1), the court may order a company to be wound up if :-
(a) the company has resolved by special resolution that it should be wound
up by the court; or
(b) the company does not commence its business within one year of its
incorporation or suspends its business for a whole year; or
(c) the number of members is reduced below two; or
(d) the company is unable to pay its debts; or
(e) the company has covered the period for which it was intended to last or
an event has occurred on whose occurrence it was provided that the
company should be dissolved; or
(f) The court is of the opinion that it is just and equitable that the company
should be wound up.
The court may also grant a compulsory winding up petition by the Attorney
General if in his opinion:-
(g) the business or objects of the company are unlawful; or
(h) the company is being operated for an illegal purpose; or
(i) the company has persistently failed to comply with any provision of the
Act. tsl
15.1.1 .2 Company not carrying on or suspending business

A petition for the winding up of a company on this ground will succeed only if
the court is satislied that the failure to commence or suspension of business
is temporary. ln other words the petition will not be granted if the company
intends to commence the business or resume it after that one year. ln
Middlesborough Assembly Rooms Co Ltd 16l the company was formed to

build and use assembly rooms. However, because of a depression in the trade,
building was suspended for over three years. lt was the company's intention
to resume its operations when business prospects improved. A shareholder
petitioned forthe companyto be wound up on the ground thatthecompany had
suspended its business for over ayear.lt was held that the petition should be
dismissed because it had not been shown that the business could not be
carried on or that the company had permanently abandoned the undertaking
to build assembly rooms.
15.1.1.3 Company unable to pay its debts

This is the commonest ground on which a petition for the compulsory winding up
of a company is based. However not every failure to pay debts justifies winding
up a company on this ground. Ct.he other hand according to section 213 (3) a
coud can order that a company be wound up for inability to pay debts only if:-
(a) a creditor who is owed more that K100 by the company serves on it a
written demand for payment of the debt and the company neglects, within
the next twenty-one days either to pay or to offer reasonable security for
the debt. This is illustrated by ln The Mafter of Kumchenga lndustries
Ltd(1987).rtl There the company owed the applicant K83,266. The latter
served on the company a notice demanding payment of the money.
However, atler 21days no payment had been made. Consequently, the
applicant petitioned forthecompany'swinding up undersection 21 3(3)(a).
It was held that since the company had neither paid the debt or offered
reasonable security, within 21 days of the notice of demand, it should be
wound up.
Of course if the company bona fide disputes the debt, it will not be heid
to have neglected to pay the debt within the.meaning of Section 213(3).
Therefore, the petition will be dismissed. ln Be a Company (194+;u16"
petitioner demanded twelve thousand, four hundred thirty five pounds
and seventy five pence as payment under a contract. The company
admitted liability for two thousand, two hundred thirty four pounds and
thirty eight pence only and paid this amount in response to the petitioner's
formal demand. On his petition for the company's winding up on the
ground that it was unable to pay its debts, it was held that the company's
refusal to pay the full amount claimed was not 'neglect' within the
meaning of the English equivalent of section 213(3) Consequently, the
petition was dismissed.
AN INTRODUCTION TO COMPANY LAW IN MALAWI - 21 1
(b) a creditor obtains judgement against the company, attempts to enforce

the judgement but is unable to obtain satisfaction of it in whole or in part.
This is what happened ln the Matter of Centraf Associates Ltd
(1989).te'There the company was indebted to the petitioner in the sum
K3,046.56. Judgement was obtained against the company for the sum
which together with costs came to K6,256.56. ln spite of several requests
to pay the debt the company failed to do so. A warrant of execution was
issued but was not executed because the company and its off icers could
not be traced. The petitioner then sought a court order to wind up the
company under section 213. Granting the order Unyolo, J. said:
"[S]ection 213 of the Companies Act empowers the count to order the
winding up of a company ... The matter is discretionary really. I have
given the matter considerable thought. Severalthings can be said. First,
the debt... is quite substantialand ... the same is not disputed in anyway.
It is also to be noted that the company has not tendered any payment at
all. And, finally, nobody has come forward to oppose the petition."
(c) a creditor proves to the satisfaction of the court that taking into account
the contingent and prospective liabilities of the company, it is unable to
pay its debts.
15.1.1.4 Just and equitable winding up

This ground was mentioned earlier in connection with the protection of minority
shareholders. There it was pointed out there that a shareholder who is
dissatisfied with the way in which the company is being managed may apply
under Section 213 to the court for a winding up order on the ground that it is
just and equitable that the company be wound up. However, in basing his
petition on this ground, the shareholder need not confine himself to conduct on
the part of those who control the company which is oppressive or prejudicial
to his interests and position in the company. He can also rely on evidence
showing contravention of Section 22(1 ) or that the company cannot effectively
carry on its business or that it is being operated for an illegal or fraudulent
purpose. Of course, since this remedy is discretionary, the court can grant it
only if it is of the opinion that the applicant deserves relief and that there is no
other appropriate remedy available to him. This is because under section
216(3) the coud can not make that order if the applicant has another remedy
so that it is unreasonable for him to insist on the winding up of the company
instead ol availing himself of that other remedy. ln the Matter of Mapanga
Estates Ltd (1988) nolthe company had two shareholders: one holding 51%
2.I2 - AN INTBODUCTIO}I TO COMPANY LAW IN MALAWI
of the cornpany's shares and the olher 41To. After running the company for
about thirty years, differences arose between the two so that they could not
even speak to each other. Because of that, the petitioner who held 49% of the
company's shares petitioned the court under 213(3)(f) to wind up the company
on the ground that it was just and equitable to do so. The court found the
company to be so viable and prosperous that it would not be in the
interest of both shareholders that it should be wound up. Therefore,
instead of making an order for the compulsory winding up of the
company it ordered the petitioner to sell her shares and gave the first
option to buy them be given to the other shareholder.
Once the winding up petition is presented, the court may dismiss it, adjourn its
hearing or make any such order as it thinks fit. IlllHowever, it cannot refuse to
make a winding up order simply because:-
(a) the company's assets have been put up as security lor loans equalto or
exceeding the value of those assets; or
(b) the company has not assets; or
(c) there will be no assets available lor distribution among members of the
company.
15.1.2 Commencement of the compulsory winding up

Generally, the compulsory winding up of a company commences when the
winding up petition is presented to the court. ti2l However, if the petition follows
a resolution by the company for its voluntary winding up, the compulsory
winding up will be deemed to have started at the time of the passing of that
resolution.li3l
15.1.3 Consequences of the commencement of the winding up l
A number of legal consequences will follow the commencement of the I
compulsory liquidation of a registered company. These are:
'1. The company or any of its creditors or members may apply to the court
to stay any action which is pending against the company;tr{
2. Unless the court otheruise orders, any disposition of the company's

proPertY is void; Itst
COMPANY LAW IN MALAWI
3. Any attachment, sequestration, distress or execution against the estate

of the company is void; n6l
4. The court may' appoint the official receiver or any other person to be a
provisional liquidator for the company until the winding up order is made;rr']
After the winding up order is made, there will be the following additional legal
consequences:-
5. The petitioner must send a copy of the winding up order to the registrar,
the secretary of the company and the liquidator within seven dayJ of the
court making it. And within fourteen days of receiving his copy, the
registrar must get notice of it purblished in the Gazette. rrsr
6. No proceedings or action can be commenced or continued against the

company without the court's consent; tret
7. All the property to which the company is or appears to be entitled will vest
in the liquidator or provisional liquidator;tr01
8. Unless the court otherwise orders, a statement of the company's affairs

as on the date of the order must be prepared and be submitted to the
liquidator. rnl The statement must show:
(a) particulars of the company's assets, debts and liabilities;
(b) names and addresses of its creditors;
(c) securities held by each creditor and the date when each securit! was
given; and
(d) such other information as may be prescribed oras the liquidator may
require.
o As soon as practicable after receiving the statement, the liquidator must

submit his preliminary report to the court. l2l The report must show:
(a) The amount ol the company's issued, subscribed and paid up

capital;
(b) the estimated amount of its assets and liabilities;
(c) if the company has failed, the causes of the failure; and
(d) whether, in his opinion, further enquiry is desirable as to any matter

relating to the company's promotion, formation, failure or the con-
duct of its business.
10. lt would also seem that once a liquidator or provisional liquidator is

appointed, the directors' control over the company ceases and its
employees are automatically dismissed; and
11. Every invoice, order for goods or business letter issued by or on behalf
of the company or liquidator must have the words 'in liquidation' added
after the first use of the company's name. t23l
15.1.4 The liquidator under a compulsory winding up

As just noted, one of the consequences of the commencement of the compul-
sory winding up of a registered company is the appointment of a liquidator. The
function ol a liquidator is to realise the company's assets, pay all its creditors
and distribute any surplus to the members of the company.
Where the couil appoints a provisional liquidator, he must continue to act until
a liquidator is appointed. t2al lf no provisional liquidator is appointed, the olficial
receiver must by vidue of his office become the provisional liquidator. t2ll The
court may appoint a liquidator or give directions for his appointment by creditors
or members of the company.t26l lf the coun does not make the appointment, the
official receiver must be the liquidator.l2Tl lt is a criminaloffence under Section
295 for any person to give or agree or offer to give any valuable consideration
in order to secure his own appointment or nomination or to secure or prevent
the appointment or nomination of some person otherthan himself , as liquidator
of the company.
lf a person otherthan the official receiver is appointed liquidator, he cannot act

as such until he has notif ied the registrar of his appointment and given security
to the satisfaction of the official receiver. Besides, he must give the official
receiver such information and assistance as is necessary to enable the latter
to perform his duties under the Act. I28l Furthermore, the official receiver will
take cognisance ol his conduct and enquire into it if he does not faithfully
perform his duties and duly observe allthe requirements imposed on him by
any written law or if any complaint is made against him to the official receiver
by any creditor or member of the company. t2sl After the official receiver has
made an enquiry, he may take such action on it as he feels expedient.
15.1.4.1 Eligibilitylgr,appointmenr as tiquidator

According to section#(1), whateverform the winding up of a company takes,
the following persons are ineligible to be appointed or to act as liquidator of any
registered company:-
1. A body corporate;
2. An infant or any person who is under legal disability;
3. Any person prohibited or disqualified from acting as liquidator by a court

order;
4. Except with the court's permission, an undischarged bankrupt;
5. Except with the court's permission, a director or secretary of the company

or its holding or subsidiary company;
6. Any person convicted at any time of an offence involving fraud or

dishonesty;and
7. Any person removed at any time by a court from an office of trust.
However, a company's auditor may be appointed its liquidator.[.ol ,., , ,,
15.1.4.2 Validity of the liquidator's acts

The liquidator's acts will be valid in spite of any defect which may afterwards be
discovered in his appointment or qualification. tgtl similarly, any conveyance,
assignment, transfer, mortgage, charge or any other disposition of a company's
property which he makes in favourof any person who takes il bonafidetorvalue
and without notice of any defect or irregularity in the liquidator's appointment or
in the winding up itself, is valid. t32l Besides, any person who makes or permits
any disposition of property to a liquidator is entitled to an indemnity in spite of
any defect or irregularity in the latter's appointment or in the winding up, of which
that person was unaware at the time of the disposition.tosl
15.1.4.3 Powers conferred by section 230

on the compulsory winding up of a company the liquidator has power to do the
216 - AN lN ANY LAW IN
following things with the authority of either the court or the committee of
inspection:
(a) carry on the business of the company to the extent necessary for its
beneficialwinding up;
(b) subject to Section 287, pay any class of creditors in full;
(c) make any compromise or arrangement with creditors or persons claiming

to be creditors or alleging to have any claim whereby the company may
be rendered liable; and
(d) compromise any debt, liability and claim subsisting or supposed to

subsist between the company and a member of any other person and all
questions relating to the assets or the winding up of the company. r34r
Besides, he may on his own authority:
(e) bring or defend any action in the narne of the company;
(f) sell the company's property;
(g) raise money on the security of the company,s assets;
(h) execute in the name of the company all deeds, receipts and other
documents;
(i) prove, rank and claim in the bankruptcy of any member or debtor for any
balance against his estate and receive dividends in the bankruptcy in
respect of that balance;
(i) draw, accept, make and endorse any billof exchange or promissory note
in the name of the company;
(k) take out letters of administration of the estate of any deceased member
or debtor and do anything necessary to obtain any money due from him
or his estate which cannot be convenienily done in the name ol the
company;
(t) appoint a legal practitioner to assist him in his duties;

(m) appoint an agent to do any business which the liquidator is unable to do;
and
(n) do all such other things as are necessary for the winding up and the
distribution of the company's assets. Issl
Furthermore, if he is satisfied that the nature of the estate or business

of the company or the interests of the creditors or members generally
require the appointment of a special manager, he can apply to the court
to make that appointment. t36l
ln theexercise of these powersthe liquidatoris subjecttothecontrolof thecourt.

For that reason, any creditor or member may apply to the court with respect to
any exercise or proposed exercise of the powers. t3zl
'|-5.1.4.4 Remuneration
A provisional liquidatorotherthan the official receiver is entitled to receive such
payment for his job as is determined by the court. t38r similady, a liquidator other
than the official receiver is entitled to receive payment for his job as is
determined by the court. t3el However, the remuneration of any other liquidator
who is not an official receiver must determined by either:
(a) agreement between him and the committee of inspection, if any; or
(b) if that is not possible, by a resolution passed at a meeting of the

company's creditors convened by the liquidator for that purpose; or
(c) if both these methods are not possible, by the court.
The official receiver too when acting as liquidator, is entiiled to such payment
as may be prescribed, unless the court otherwise orders. taol
15.1.4.5 Appointment of a special manager

section 237(1\ empowers the court to appoint a special manager of the estate
orbusiness of thecompanywhich is in compulsory liquidation. As shown above,
the appointment will be made on the application of the liquidator if he is satisfied
that the nature ol the estate or business or the interests of the company's
creditors or members requires that such an appointment be made.
The special manager will be an officer of the court. As a result he will receive
such remuneration as is fixed by the court. Besides, he must account for his
actions or property under his control in such a manner as the court directs. The
court will also direct how much sceurity he should give for his appointment. He
can vacate his office by resignation (of which a month's notice is given to the
liquidator) or being removed by the court.
15.1.4.6 Liquidator's release and dissolution of the company

According to Section 232, afler the liquidator has realised all the company's
property or so much as can, in his opinion, be realised without needlessly
protracting the liquidation and has distributed a final dividend, if any, to the
creditors and adjusted the rights of the members and made a final return, if any,
to them, he may apply to the court for his release and the dissolution of the
company. He can also make such an application if he has resigned or been
removed from his office. After he makes the application, the court may require
a report on his accounts to be prepared by the official receiver or any auditor
appointed by it. tall The official receiver or the auditor or any member or creditor
of the company may object to the application. And after taking into account the
report and the objection, the couft may grant orwithhold the liquidator's release.
ta2l However, if an order is made to release him it will discharge him lrom all
liability in respect of any act done or default made by him in the administration
of the company's affairs or in relation to his conduct as liquidator. t€l Of course
the order may be revoked if it is shown that it was obtained by fraud or
suppression or concealment of any material fact. Where the court makes an
order dissolving the company, the registrar must, on receipt of a copy of the
order, strike the name of the company off the register and publish notice of that
in the Gazette. l44l
15.1.5 Powers of the court

Apart from granting the winding up petition or appointing the liquidator and the
special manager, the court has other powers in the compulsory winding up of
a company. First, as shown under 15.1 .3.3, the coud has power to control the
liquidator in the performance of his functions. Second, if it is proved to its
satisfaction that all proceedings in relation to the winding up ought to be stayed,
it can make an order under Section 236(1) staying the proceedings altogether
orfora specified period. Third, itcan fix a date on orbefore which creditors must
prove their debts or claims or after which they will be excluded from the benef it
of any distribution made before those debts or claims are proved. Iasl ln this
respect the court will adjust the rights of members and distribute any surplus
among persons who are entitled to it. Fourth, the court can at any time after
making an order for the winding up ol a company make another order for the
inspection of the company's books and papers by its creditors and members.t46r
Fifth, it can summon before it and examine on oath an officer of the company
or any person known or suspected to have in his possession any property of the
company or who is supposed to be indebted to the company or whom it deems
to be capable of supplying information on the promotion, formation, trade,
dealings, alfairs or property of the company.l4Tl Besides, the court may also
require such a person to produce any books or papers relating to the company
which are in his custody or control.t4l And lasily, on proof that there is probable
cause for believing that a member or officer or former member or officer of the
company is about to leave Malawi or to remove or conceal any of his property
in orderto evade payment of moneyduetothecompanyorto avoid examination
in respect of the affairs of the company, the court may order his arrest and seize
his papers and personal property.tast
15.1.6 Committee of inspection

Accordingtosection 234(1),the liquidatormay, and if requested byanycreditor
or member must, summon separate meetings of the company's creditors and
members to determine whether or not they require the appointment of a
committee of inspection. The committee must consist of creditors and members
of the company or persons holding general powers of attorney or special
authorities from them. t501 lts function is to act with the liquidator, authorise his
exercise of powers'conferred by Section 230(1), supervise his accounts and
determine his remuneration under Section 226(2). Section 235 provides de-
tailed rules concerning meetings of the committee, how decisions may be
reached at the meetings, removal of any person from the committee and how
a vacancy so created may be filled.
15.2 Voluntary winding up by members

A registered company may be voluntarily wound up by its members.
However, where a petition has been presented to the court for the
compulsory winding up of a company on the ground that it is unable to
pay its debts, the company must obtain court permission before it can
resolve that it be voluntarily wound up.tsrl The voluntary winding up must
be approved by a resolution of the company and according to Section
246, will commence after that resolution is passed.
Section 245(1) provides that a company may be wound up voluntarily if:
(a) its duration expires or the event on the occurrence of which it was
intended that the company should be dissolved has occurred, and the
220 _ AN TNTBODUCTION TO COMPANY LAW IN MALAWI
company passed an ordinary resolution that it should be voluntarily

wound up or
(b) it resolves by a special resolution that it should be voluntarily wound up.
Within seven days of the passing of that resolution, the company must
send a copy of it to the registrar for registration. ts2l Moreover, within
fourteen days of the passing of the resolution, the company must get
notice ol it published in the Gazette. I53I
15.2.1 Consequences of the voluntary winding up of a company by its

members
Just like compulsory winding up, voluntary winding up too has its important
consequences. These are:
1. From the commencement of the winding up, the company will cease to
carry on its business except to the extent necessary for the winding up.
However, its corporate personality and powers will continue until its
dissolution. tsal
2. Any transfer of shares without the sanction of the liquidator and any
alteration in the status of the members made after the commencement of
the winding up is void. ts5l
3. The company is empowered to appoint one or more liquidators for the

purpose of the winding up. ts6l As soon as the appointment is made all the
powers of the company will cease except to the extent approved by the
liquidator or the company in general meeting. t57l This is illustrated by Re
Nyasaland Civil Servants Co-operative Society Ltd (1925).tssl ln that
case, a company's articles allowed the company's directors, with the
sanction of a general meeting, to pay the company's shareholders such
bonuses as the company's financialstate might permit. The directors then
resolved that the payment be made. However, before the resolution was
presented to the general meeting, the company went into voluntary
liquidation. At a shareholders' meeting which was subsequently called by
the liquidator, the resolution was approved. Thereafter, the liquidator
petitioned the court to declare whether or not he should sanction the
director's power to give effect to the resolution by paying the bonuses. lt
was held that although the power was. sanctioned by the company's
shareholders, it could not be exercised once the company had gone into
voluntary liquidation because to pay the bonuses would not be within'the
powers contemplated by the 1908 companies Act's equivalent of section
250(2)).
15.2.2 Declaration of solvency

Accordi ng to section 248(1) bef ore the dispatch of notices of the meetin g where
the resolution forthe voluntary liquidation of the company is to be proposed, its
directors can make a written declaration that:-
(a) they have made a full enquiry into the affairs of the company; and
(b) as a result of that enquiry they are of the opinion that the company will
be able to pay its debts and liabilities within twelve months of the
commencement of the winding up.
For this declaration to be effective, it must be:
1. made at a meeting of the company's board of directors;
2. made live weeks immediately prior to the passing of the resolution for the
voluntary winding up of the company; and
3. delivered to the registrar for registration on or before the date when

notices of the meeting where the resolution is to be proposed are
dispatched. tset
section 248(2) then requires a statement to be attached to the declaration,

showing the assets of the company and the total amount of money expected to
be realised from them, the company's liabilities and the estimated expenses of
the winding up.
15.2.3 The Liquidator in a voluntary winding up by members

As just noted, one of the legal consequences of the voluntary winding up of a
company by its members is the appointment of a liquidator. His functions are
the same as those of his counterpart under a compulsory winding up. on the
other hand, the position witl'r regard to his powers is slighily different. According
to section 262(1)(a), he can exercise the powers conferred by section 230 on
the liquidator in a compulsory winding up with the approval of a resolution of
the company. However, he is free to exercise any other powers conferred on
that liquidator by the Act. t60l Moreover, he can summon general meetings of
the company to obtain the company's approval on any matter or for any other
purpose.16llwhere it is proposed to sell or transfer the entire or part of the
company business or property to another body corporate, the liquidator
can with the approval of a special resolution of the company, either
receive fully paid-up shares, debentures or other similar interests in the
corporation or enter into any arrangement by which members of the
company may participate in the prof its of or receive any benef it f rom the
corporation, as compensation for the sale or transfer.162l Lastly, he can
apply to the court to determine any question arising in the winding up of
the company or exercise any power which the court might exercise if the
company were being wound up by it. 163l
Section 250(3) gives the company in general meeting power by special

resolution (of which notice is given to creditors and members) to remove the
liquidator. Of course the court may prevent the company from removing him.
15.2.3.1 Duties
A liquidator in a voluntary winding up by members is under the same duties as
the liquidator in the compulsory winding up of a company. Additionally,
however, the former has the following duties:-
1. To summon a meeting of the company's creditors and present to them a

statement of its assets and liabilities if he is of the opinion that the
company will not be able to pay or provide for the payment of its debts in
full within the period stated in the declaration made under Section 248; tsnt
2. lf the winding up takes more than a year, he must summon a general

meeting of the company at the end of the first year and of each year
thereafter and present before it an account of his acts, dealings and the
conduct of the winding up during the preceding year; tssl and
3. As soon as the company is fully wound up, he must prepare an account

showing how the property of the company has been disposed of and then
convene a general meeting of the company where that account must be
presented. 166l
15.3.4 Powers ol the court under section 261

lf there is no liquidator, the court may appoint one. Besides, it may remove a
liquidator and appoint another in his place. And lastly, on application by any
creditor or member of the company before its dissolution, the court can review
the liquidator's remuneration.
15.3 Voluntary winding up by creditors

Section 248(6) provides that where no declaration of solvency is made and
delivered to the registrar as required by subsection (3), the liquidation is a
creditors'voluntary winding up. Again, this winding up needs to be sanctioned
by a resolution. ln other words, just like a members'voluntary winding up, a
creditors'voluntary winding up requires the sanction of the company's mem-
bers. Forthat reason, the company must first hold a meeting of its members to
pass a resolution for the company's voluntary winding up. Thereafter it must
cause a meeting of its creditors to be summoned on the same day or the
following day. t6r Each creditor is entitled to seven days' written notice
of the meeting which must be sent simultaneously with notices of the
members' meeting and be accompanied by a list of all creditors and the
amounts of their claims. t58l The notice must be published by the
company in the Gazette and any national newspaper at least seven days
before the meeting.
But unlike the members' meeting, this meeting must be attended by one of the
company's directors together with the company secretary to explain the
circumstances leading to the winding up and present a statement of the
company's affairs. The statement must contain a list of the company's creditors,
the estimated amount of their claims and the value of the company's assets.
Besides, it must show how the value has been obtained.
15.3.1 The liquidator under a voluntary winding up by creditors

Section 255(1) allows creditors to nominate a person to be liquidator where the
company is being wqund qp by them. This liquidator, who wilt be appointed by
the company'sh#fi#K', has the same duties and powers as his counterpart
under a voluntary winding up by members ol the company. And once he is
appointed, he will assume all the powers of the company's board of directors,
and the powers and authority of every director will cease except to the extent
allowed by the committee of inspection or, in its absence, the creditors. lsel His
remuneration may bef ixed bythe committee of inspection or, in its absence, the
creditors themselves. tTol
15.3.2 The Committee of inspection

ln the voluntary winding up of a company by its creditors,they are
allowed to appoint a committee of inspection. t71l lts function will be the
same as those of a similar committee appointed in the compulsory
winding up of a registered company.
15.4 Special provisions for the protection of

creditors' and members interests
The Act contains a number of provisions for the protection of a company's
property and safeguarding its creditors' and members' interests during the
winding up. The provisions apply to every form of winding up.
15.4.1 Payment of debts

As noted above, one of the functions of the liquidator in the winding up a
company is to pay its debts. However, before any debt is paid, it must be proved
against the company. The rules for the proof of debts are contained in Section
286 of the Companies Act.
15.4.1.1 Proof of debts

Generally, all debts payable on a contingency, and all claims against the
company, present or future, certain or contingent, ascertained or sounding in
damages on ly are admissible to proof against the company. rt2l Where the claim
or debt does not bear a certain value, e.g. a debt payable on a contingency or
a claim for damages, a just estimate of it will be made as far as is possible.
However, where the company being wound up is insolvent section 286(2)
provides that the law of bankruptcy relating to the estates of bankrupt persons
'shall prevail and be observed with regard to the respective rights of secured
and unsecured creditors and debts provable'. ln so far as debts are concerned
what this means is that any debt which is not provable in bankruptcy cannot be
proved against an insolvent company on its winding up. Section 32(1) of the
Bankruptcy Act provides that any claim in the nature of unliquidated
damages which does not arise out of a contract, promise or breach of
contract is not provable in bankruptcy. Thus unliquidated damages in
tort, for instance, cannot be proved against an insolvent company which
is being wound up.
The Second Schedule to the Bankruptcy Act provides the manner ol proving
debts. lt stipulates that every creditor must prove his debts As soon as possible
after the commencement of the winding up by sending an aff idavit verifying the
debt to the liquidator. The affidavit must be made by or on behalf of the creditor
and must contain or refer to a statement of account which shows particulars of
the debt. Besides, it must specify vouchers, if any, which substantiate the
claim. The affidavit must also state whether or not the creditor is secured
because if he is secured but omits to say so, then unless the omission is
inadvertent, he will be required to surrenderthe securitytothe liquidatorforthe
general benelit of all the creditors.
lf a creditor fails to prove his debt until after a final distribution of the company's
assets, the debt is not repayable by eitherthe company or its contributories. P3r ln
Butler v Broadhead (1974) tTal a company conveyed a plot of land to D. Two years
later the company went into voluntary liquidation and in 1964 the liquidator
mistakenly purported to convey the same plot to the plaintiffs. Thereafter, the
liquidator paid the company's debts, distributed its surplus assets amongst its
contributories and the company was dissolved. ln 1971 the plaintiffs learnt for
the first time of the earlier conveyance to D and that in 1964 the company had
no title to convey to them. When they were dispossessed of the land by D, they
sued the company's contributorie slor inter aliacompensation for breach of the
covenants as to title in the'1964 conveyance. lt was held that since the
liquidator had duly advertised for claims against the company and the plaintiffs
had not put in a proof of debt, they were precluded from sharing in the benefit
of any distribution of the company's assets and could not recover from the
contributories the sums claimed. Moreover, since the court's right to call any
contributory to pay any money due from him to the company came to an end
with the company's dissolution, the plaintiffs could not be subrogated to the
company's position under that right.
15.4.1.2 Order of payment of debts

The general rule is that all debts proved in the winding up of a company are
payable pari passu. Psl However, this is subject to provisions of the Act which
give priority to some creditors and not to others.
15.4.1.2.1 Secured creditors

These creditors are entitled to payment out of their securities before all other
creditors. As stated when discussing debentures, the winding up of a company
which has given security makes theiecurity enforceable. Consequently, once
winding up proceedings commence a receiver may be appointed to realise the
security and pay off the secured creditors. lf the receiver is appointed after the
appointment of a liquidator, the latter must hand over the security (which may
be the entire business and assets of the company) to the receiver for the
payment of secured creditors. Of course the liquidator does not have to
relinquish the security. He can redeem it by paying the secured creditors'
claims. Besides, where the security is in the form of a floating charge, the
liquidator may retain it or, if he is appointed after the appointment of the
receiver, the latter must hand it over to him, if:-
(a) the charge has become void because of the commencement of the
winding up proceedings. Section 289 provides that a floating charge on
the business or properiy of a company created twelve months before the

commencement of the winding up is invalid unless the company was
solvent immediately after the charge was created. Where a floating
charge becomes invalid by reason of this provision, the creditor in whose
favour it was created will be treated as unsecured non-preferential
creditor in respect of the sum for which the charge was security.
(b) the debt in respect of which the security was given has lost priority.
Section 287(4) states that where the assets available for the payment of
general creditors are insufficient to meet the preferential debts enumer-
ated in subsections (1) and (3), those debts have priority over the claims
of holders of debentures secured by any floating charge created by the
company and must, therefore, be paid out of the property which is subject
to that charge in priority to the secured debt.
Now unless these two provisions apply, after the receiver has paid out the
secured creditors, any surplus must be paid overto the liquidator. On the other
hand, if the proceeds of the realisation of security cannot cover the secured
creditor's fullclaim, he will be treated as unsecured non-preferential creditor
in respect of the balance which remains unsatisfied.
Conversely, the liquidator may be appointed after the company is already in

receivership. ln that case, as long as the security agreement is valid, the
liquidator must wait until after the receiver has paid off the secured creditor.
Once that is done, any surplus must be handed over to the liquidator for the
settlement of the other debts of the company.
According to the rules governing proof of debts by secured creditors underthe

second Schedule to the Bankruptcy Act, a secured creditor has a number of
options whereby he can get satisfaction of his claim(s):
(a) he can surrender this security and prove for the debt just like any other
creditor;
(b) he can rely on the security and not prove his debt at all;
(c) he can realise the security and prove as unsecured creditor the balance
of the debt; or
(d) he can value the security and prove for any balance.
ln the case of options (b) and (d) the liquidatorcan elect to redeem the security
by paying the secured creditor from other sources.
15.4.1.2.2 Unsecured creditors

These must be paid out of the aggregate of any surplus remaining from the
realisation of securityaftersecured creditors have been paid ofl and any assets
which were not subject to any charge. Of course unsecured crediiors do not all
rank paripassu;there are some who rank in priority. Section 287(2) provides
that all unsecured debts must be paid in the following order:-
1. The costs and expenses of the winding up;
2. (a) all wages of any labourer or workman not exceeding K100 payable
in respect of services rendered to the company during twelve months
before the commencement oi the winding up;
(b) all wages or salary of any clerk or servant not exceeding K200
payable in respect of services rendered to the company during
twelve months before the commencement of the winding up; and
(c) all sums due in respect of workers' compensation under any written
law relating to workers' compensation accrued before the com-
mencement of the winding up. Of course this will not apply where the
company is being voluntarily wound up for the purpose of a recon-
struction or amalgamation with another company or where the
company has entered into a contract with an insurer in respect of its
liability under any written law relating to workers'compensatiep. P6l
3. (a) any tax, duty or rate payable by the company to the government in
respect of any period prior to the commencement of the winding up
and
(b) all government rents not more than five years in arrears.
4. All rates from the company to any local authority due and payable within
three years before the commencement ol the winding up.
Of course, where the company has given security for the payment or repay-
ment of the preferential debts in (3) and (4), the debts in this respect will be any
amount which remains outstanding after there has been deducted from it the
net amount realised from the security. rrzl
Any person who advances money for the payment of wages or salary to any
employee of the company has the same priority as the employee would have
had if the payment had not been made. rel Similarly, any sums received by the
company under a third pafiy insurance policy and payable to the third party to
discharge its liability to him is a preferential debt which must be paid belore
other unsecured debts but after the payment of the debts mentioned above.tTel
After all these preferential debts, the next in line are unsecured non-pre{eren-
tial debts. These will include bank overdrafts and other short-term debts such
as those incurred in the purchase of goods and services on credit. Any part of
a secured creditor's debt which remains unsatisfied after the realisation of
security will also fall in this category. lf the assets of the company are not
sufficient to pay these debts, its members will be called upon to contribute to
the assets. The rules relating to those contributions are contained in Sections
205 and 207 and are discussed below under para. 15.5.
Any assets which remain after creditors have been paid are distributable
among shareholders in accordance with their entitlements and priorities under
the company's articles. Thus preference shareholders will be paid firstfollowed
by ordinary shareholders and then deferred shareholders, il any. Should there
be any surplus, that wilt be distributable among ordinary shareholders unless
the company's articles allow other classes of shareholders to parlicipate in
such a distribution.
15.4.2 Avoidance of certaan lloating charges

As already noted above, generally a floating charge on the undertaking or
property of the company created within twelve months before the commence-
ment of the winding up is invalid. l80l The purpose of this provision would seem
to be to prevent an unsecured creditor of an insolvent company from getting
an advantage over other creditors by obtaining a floating charge to secure an
existing debt when the company is heading towards insolvent winding up.
Consequently, the provision will not apply if the company was solvent when the
charge was created. Besides, even if the company was then insolvent, the
floating charge will still be valid in respect of any cash paid to the company at
or subsequent to the creation of and in consideration of the charge. Moreover,
this provision does not invalidate realisation of the floating charge before the
commencement of the winding up. ln Mace Builders v Lunn (1985) Isrl the
plaintiff company granted to the defendant in consideration of money owed to

him, a debenture secured by a f loating charge over the company's assets and
undertaking. Five months later, the defendant made a formal demand for the
money. When the company failed to comply, he exercised his right under the
debenture to appoint himself as receiver of the company and sold its assets to
recover the money. Within seven months thereafter, the company went into
liquidation. The liquidator then sought repayment by the defendant of the
proceeds of the saie of the company's assets on the ground that since the
floating charge was created twelve months before the commencement of the
winding up and at a time when the company was insolvent, the f loating charge
was invalid by virtue of the English equivalent of Section 289. lt was held that
although on a winding up the provision renders invalid a floating charge to
which it applies, the provision does not invalidate repayment of the debt
secu red by the charge made by the company bef ore the commencement of the
winding up.
15.4.3 Avoidance of fraudulent preferences

Section 288(1) renders void or voidable any conveyance, transfer, mortgage,
delivery of goods, payment, execution or any other act relating to property by
or against the compa:ry which if done or made by or against an individual in his
bankruptcy would be void or voidable under the law of bankruptcy. Under
Section 46(1) of the Bankruptcy Act such a conveyance, transfer etc, is
fraudulent and, therefore, void against the trustee in bankruptcy if:
(a) it is made by a person who is adjudged bankrupt on a bankruptcy petition

presented within three months thereafter;
(b) in favour of any creditor; or
(c) it i5 made with a view to giving that creditor or any surety or guarantor for
the debt due to that creditor, preferences over other creditors.
ln the case of a compulsory winding up, the date which corresponds with the
date of the presentation ol a bankruptcy petition is whichever is earlier between
the date of the presentation of a winding up petition and the date on which the
resolution is passed to voluntarily wind up the company. t82l On the other hand,
where the company is voluntarily wound up the date corresponding to the date
of the presentation of a bankruptcy petition is the date when the resolution to
voluntarily wind up the company is passed. ts3lThus, for instance, the creation
of any charge over a company's property within three months from the
7_
presentation of a petition for its compulsory winding up is void as long as the

company was insolvent at the time and the charge was created to give
preference to one creditor over another. The position will be the same if the
company paid any of its creditors in similar circumstances and with the same
object. ln Re Kushler Ltd ts4l a company which was insolvent obtained an
overdraft from a bank. Subsequently, its directors were notified that the
company made payments to the bank to extinguish the overdraft. Soon
afterwards a resolution was passed for the company to be wound up. No trade
creditors were paid between the declaration of the insolvency and the passing
of the winding up resolution. lt was held that the payment to the bank was a
fraudulent preference which was void.
Section 47 of the Bankruptcy Act provides that a payment by a bankrupt to his

creditors or any contract, conveyance or assignment by him for value is valid
if it takes place before the date of the receiving order made against him and the
person to, by or with whom the payment, contract etc, is made does not have
notice at or before the time of any act ol bankruptcy by the bankrupt. Applying
that to companies, any such transaction by a registered company should not
also be void as long as it takes place before the commencement of the
company's winding up and the other party was not aware that the company was
insolvent at the time of the transaction. However, the position would seem to
be different in that Section 288(3) renders void any assignment or transler by
company of all its property to trustees lor the benefit of all its creditors. Here
it does not matter at what time (whether before or after the commencement ol
the company's winding up) the transfer or assignment is made and what its
object is. What is material is that a trust is created for the benefit of the
company's creditors by the assignment or transfer of its entire property to
trustees.
15.4.4 Disclaimer of onerous property

The liquidator is allowed to disclaim any property of the company which on the
balance is a liability rather than an asset. The object for so doing is to rid him
of property which hinders rather than facilities smooth and speedy winding up
of the company. According to Section 291 (1) property of a company is onerous
if it consists of:-
(a) any estate or interest in land which is burdened with onerous covenants;
(b) shares in any body corporate;
(c) unprofitable contracts; or

(d) any other property which is unsaleable or not easily saleable because it
binds the possessor to perform any onerous act or to pay any sum of
money.
ln Re PofterOits (198S)taqthe liquidatorof an insolventcompanysoughtthe leave

of the court to disclaim certain onerous property under the English equivalent of
Section 291(1). The properly was chlorinated waste oil with no commercial value
and was stored in three tanks on somebody's premises. lt was the liquidato/s
belief that the oil was hazardous. He sought to disclaim it to avoid the cost of
disposing it and the potential liability arising from its deterioration and possible
escape. His argument was that this liability and the company's duty to keep the
oil safe, made the company liable to an 'onerous act', within Section 291(1Xd)).
It was held that leave would not be granted because although the oil was
unsaleable that was not 'by reason ol binding the possessor to perform any
onerous act' since it was not on the company's land and no onerous act was called
for to keep it safe as the oil was presently harmless.
Thddisclaimer must be made in writing, with the permission of the court or the
committee of inspection and within twelve months or such other period as the
court allows after the commencement of the winding up. However, the
liquidator will not be allowed to make the disclaimer if:
(a) any person interested in the property has served him with a written
application to show whether or not he will disclaim the property and the
he has not within at least twelve days indicated that he intends to seek
permission to disclaim; or
(b) in the case of a contract, after that application, he has not within at least
twelve days of his receipt of the application disclaimed the contract. 186I
lf permission to disclaim is granted, its effect will be to terminate as from the

date of the disclaimer, the company's rights, interests and liabilities in respect
of the disclaimed propertY' t87l However the disclaimer will not affect the rights
or liabilities of any other person. Consequently, any person who is injured by its
operation will be deemed to be the company's creditor to the extent of his injury.
As a result, he can prove the amount of his injury as a debt in the winding up.
15.4.5 Restriction of the right of a creditor who levies execution or

makes an attachment
Where a person is owed money by a company, he may levy execution against
its goods or land or attach the debt to the goods or land. Section 292(1) says thal
where he doesthat andthecompany issubsequentlywound up, hecan only retain

the benefit of the attachment or executionif he completes it before the commence-
nent of the winding up or the date on which he receives notice of a meeting
proposed to pass a resolution for the voluntary winding up of the company.
However, if the goods against which executive has been levied are sold by the
sheriff, the person who purchases them in good faith acquires good title to them
against the liquidator. I88l For the purpose of this provision, execution against
goods is completed by their seizure and sale whereas attachment of a debt is
completed by recovery of the money owed. pel On the other hand, execution
against land is completed by sale or the appointment of a receiver. tsl
15.4.6 Liquidator's right to recover in certain purchases or sales

Section 290(1) provides that where a company acquires property or business
within two years before the commencement of its winding up from either a
person who was its director at the time of the acquisition or a company of which
one of its directors was director at the time of the acquisition, the liquidator can
recoverfrom that person orcompanythe difference between the consideration
given and the market value of the business or property at the time of the
acquisition. Similarly, where a company's business or property is sold to such
a person or company, the liquidator can recover from him or it the difference
between the market value ol the business or property at the time of the sale and
the consideration received by the company. tsil For this purpose, the value of
the business or property includes the value of goodwillor profits which might
have been made from the business or any similar consideration.te2l
15.4.7 Duties of the Sheriff with regard to goods taken in execution

Unless otherwise ordered by the court under Section 293(3), where any goods of
the company are taken in execution, and the sheriff is notified of the appointment
of a provisional liquidator or the granting of a winding up order or the passing of
a resolution to voluntarily wind up the company, he must, if so required, deliver the
goods and any money seized or received in part satisfaction of the execution, to
the liquidator. Furthermore, unless the court otherwise orders under Section
293(3) where the execution is in respect of a judgement of at least K100 and the
goods are sold or money is paid to avoid the sale, the sheriff must deduct the cost
of the execution from the proceeds of the sale or the money paid and keep the
balance for foudeen days. lf within that period he is notified of the presentation of
a petition to wind up the company or of a meeting to propose a resolution for the
voluntarywinding upof thecompanyand an orderis madeora resolution is passed
for the winding up, he must pay that balance to the liquidator who will be entitled
to retain it as against the execution creditor.
15.4.8 Proceeding against officerg of the company

15.4.8.1 Public examination of any officer of the company
Where the company is compulsorily wound up and the liquidator has
made a report as required by Section 229in which he states that in his
opinion:
(a) fraud has been committed or that any material fact has been suppressed
or concealed by any person in the promotion or formation of the company
or by any officer in relation to the company since its formation; or
(b) any officer of the company has failed to act honestly or diligently or has
been guilty of any impropriety or recklessness in relation to the affairs of
the company,
thecourt maydirectthat person orofficerto appearbefore it and be publicly

examined as to the promotion or formation or the conduct of the business
of the company. te31 lt may also make a similar directive to any person who:
(a) was previously an officer of the company; or
(b) is known or suspected to have in his possession any property of the

company; or
(c) is supposed to be indebted to the company; or
(d) it deems capable of giving rnformation about the promotion, forma-

tion, trade, dealings, affairs or property of the company.
Furthermore, if in the course of winding up a company it appears that any

person who has taken part in the formation or promotion of the company
or any past or present liquidator or off icer of the company has, within two
years before the commencement of the winding up,
(a) misapplied or retained or become liable or accountable for any money or

property of the company; or
(b) been guilty of any mis{easance or breach of duty or trust in relation to the
company,
the court may compel him to repay or restore the money or property or
contribute to the assets of the company. te4l
15.4.8.2 . Criminal offences

According to Section 298, any officer of a company who is knowingly a party
to the contracting of a debt without reasonable or probable ground for
expecting that the company will be able to repay the debt is guilty of a criminal
offence. Secondly, every officer of a company which is subsequently wound up
is criminally liable under Section 301 if while occupying that post, he:
1. by false pretences or any other fraud, induced any person to give credit
to the company; or
2. with intent to defraud creditors of the company made or caused to be

made any gift, transfer of or charges on, or caused or connived at the
levying of any execution against, the property of the company; or
3. with intent to def raud creditors of the company, concealed or removed any
part of the company's property within two months of the date of any
unsatisfied judgement or order lor payment of money made against the
company.
Thirdly, every past or present member or officer of a company which is being

wound up is guilty of a criminaloffence under Section 294(1) if he:-
1. does not deliver to the liquidator any property or books of the company in
his custody or under his control; or
2. makes any material omission in any statement relating to the company's

affairs; or
J. prevents the production of any book or paper affecting or relating to the

property or affairs of the company; or
4. conceals f rom the liquidator any false debt proved against the company; or
5. does not to the best of his knowledge and belief fully and truly disclose to
the liquidator all the whereabouts and sale of the company's property; or
b. within twelve months before the commencement of the winding up,

concealed any part of the property of the company of the value of at least
K20 or any debt due to or from the company or concealed, destroyed or
falsified any book or paper affecting or relating to the property or atfairs
of the company or made any false entry in such a book or paper.
t_
15.5 Liability of members to contribute towards

the settlement of debts
lf available assets are sufficient to pay off all creditors, there will be no need to
call upon members to contribute towards the settlement of the company's
debts. However if the assets are inadequate to meet the debts then the
members will have to make the contributions.
Generally the rule is that on the winding up of a company, all its members
(including past members) are liable to contribute to the payment of its debts,
liabilities and expenses incurred in the winding up.leslWhere the company is
limited by shares a member's contribution cannot exceed the amount, if any,
unpaid on his shares in the companyte6l unless the company was initially
registered as unlimited and it is wound up within three years of its conversion
into a limited company. ln that case the liability of its members will be
unlimited.tea On the other hand, if the company is limited by guarantee then
every member must pay the amount which he undertook to contribute to its
assets in the event of its being wound up with debts.tea .
Now although both existing and past members are liable to make the contribu-
tions, the latter's liability is confined to debts incurred by the company before
they ceased to be members. But even then, a past member is liable to
contribute only if:
(a) it appears to the court that existing members are unable to satisfy the
contributions required of them by the Act and
(b) the winding up commences within one year of his ceasing to be a member
of .the company.
15.6 Dissolution of a registered company

Section 303 empowers the registrar to dissolve a registered company by
striking it olf the register in three situations. First, if he has reasonable cause
to believe that it is not carrying on business or is not in operatiori. Second,
where the company is being wound up and he has reasonable cause to believe
that either:
(a) no liquidator is acting; or
(b) its affairs have been fully wound up and the liquidator has been in default
lor six months in lodging any return required of him by the Act; or
(c) its atfairs have been fully wound up under Section 232 and it cannot pay
for a court order for its dissolution; or
(d) its affairs have been fully wound up and it is not necessary to obtain a
court order dissolving the company.
Third, where the company passes any ordinary resolution requesting the
registrarto strike it off the register. This is most likely to happen after completion
of the company's winding up. ln that case the company will also need to file with
the registrar a copy of the resolution and a statutory declaration by at least two
of its directors showing the disposition of its assets and stating that it has no
debts or liabilities.
15.6.1 Procedure
lf the registrar has reasonable cause for believing in the existence of the first
ground, he will send a letter to the company notifying it of the belief and stating
that unless it shows cause to the contrary within one month, notice will be
published in the Gazette to strike its name off the register. ln the case of the
last two grounds, the notice sent to the company will state that unless it shows
cause to the contrary, its name will be struck off the register after three months
from the date of that notice. This notice will also be published in the Gazette.
ln all the three cases if the company fails to show cause te the contrary within
the stated period, the registrar must get notice of that published in the Gazette.
And once the notice is published, the company will be dissolved.
However, the dissolution will not affect the liability of any member or officer of
the company; that willcontinue and be enlorceable as if the company had not
been dissolved. Besides, in spite of the dissolution, the court will still have
power to wind up the company if it is dissolved before being compulsorily
wound up. Moreover, if had the company been existing it would have been
bound to carry out, complete or give effect to some dealing, transaction or
rnatter by doing a purely administrative act, that act may be done by the
registrar as representative ol the company or by its liquidator.
Chapter Fifteen
1. Section 1 16 of the Bankruptcy Act.
2. Section 204(1).
3. Section 212.
4. Section 212(2).
5. Section 213(2).
6. [1880] 14 Ch D 104.
7. Civ cas 33/1987.
8. [1984] 1 WLR 10e0.
9. Civ cas 434/1989.
10. Civ cas 109/1988.
11. Section2l6(1).
12. Section 214(2\.
13. Section 214(1).
14. Section 217.
15. Section 218.
16. Section 219.
17. Section 221 .
18. Section 220.

19. Section 222.
20. Section 227.
21. Section 228.
22. Section 229(1\.
23. Section 278(1).
24. Section 223(a).
25. Section 223(b\.
26. Section 223(c).
27. Section 223(d).
28. Section 224.
29. Section 225(1).
30. Section 271(2\.
31. Section 272(1).
32. Section 272(2).
33. Section 272(3).
34. Section 230(1).
35. Section 230(2).
36. Section 237(1).
37. Section 230(3).
38. Section 226(1),
39. Section 226(2).

40. Section 226(5).
41. Section 233(1)(a).
42. Section 233(1)(b)(c).
43. Section 233(3).
44. Section 233(6).
45. Section 238(1).
46. Section 239(1).
47. Section 240(1).
48. Section 240(3)
49. Section 242(1').
50. Section 235(1).
51. Section 269.
52. Section 245(2)(a).
54. Section 247(1).
55. Section 247(2).
56. Section 250(1).
57. Section 250(2).
58. [1e23-60]ALR (Mal) e.
59. Section 248(3).
61. Section 262(1)(c).
62. Section 263(1).
63. Section 267(1).
64. Section 251(1).
65. Section 264(1).
66. Section 265(1).
67. Section 254(1).
68. Section 254(2).
69. Section 257(2).
70. Section 257(1).
71, Section 256(1).
72. Section 286(1).
73. Section 68 of the Bankruptcy Act.
74. [1974] 2 All ER 401.
75. Section 287(10).
76. Section 287(8)(a).
78. Section 287(3).
79. Section 287(5).

80. Section 289.
81. [1e8s] 3 WLR 465.
82. Section 288(2)(a).
84. [1943] 2 All ER 22.
85. [1986] 1 Ail ER 890.
86. Section 291(4).
87. Section 291(2).
89. Section 292(2XaXb).
90. Section 292(2)(c).
91. Section 290(2).
92. Section 290(3).
93. Section 241(1).
94. Section 299(1).
95. Section 205.
96. Section 205(a)
97. Section 205(b).
Chapter Sixteen
External Companies
As pointed out in Chapter 1, the Companies Act recognises what it refers to as
the'external company'. This is delined by Section 306(2) as'a body corporate
formed outside Malawi which establishes or maintains an established place of
business' here. ln this respect an established place of business means 'a
branch, management, share transfer, or registration office or factory, mine or
other fixed place of business'. However, it does not include an agency unless
the agent has a general authority to negotiate and conclude contracts on behalf
of the body corporate or maintains a stock of merchandise for the body
corporate from which he regularly fills orders on its behalf. Similarly, a body
corporate will not be deemed to have an established place of business in Malawi
simply because it carries on business in the country through a broker or general
commission agent who acts as such in the ordinary course of his business.
Again, the fact that a body corporate has a subsidiary which is incorporated,
resident or carries on business in Malawi will not necessarily constitute the
latter's place of business in the country an established place of business for the
body corporate.
The Act seeks to treat external companies in almost the same way as internal
companies. Thus external companies must register their particulars and
charges which they create over their propefty in Malawi. Similarly, they must
have directors, some of whom must be local, and must have particulars of the
directors registered. External companies must also keep accounting records,
prepare annualfinancial statements and exhibit their names at every place of
business which they maintain. The rules controlling public invitations for
debentures and shares also apply to external companies. And lastly, the Act
also provides rules for the winding up and dissolution of these companies.
16.1 Registration requirements

Section 307(2) requires the registrar to maintain a register of external compa-
nies. Under subsection (1) every external company which establishes a place
of business in the country must within twenty eight days of establishing that
place send to the registrar for registration:-
aN TNTRODUCTION TO COMPANY LAW tN HALAWI _ 241
(a) a certified copy of the charter, statutes, regulations, memorandum and

articles or other instrument constituting or defining the company's
constitution;
(b) a statement in the prescribed form giving particulars of the company; and
(c) such particulars and copies of any charges on the company's property as
require registration in accordance with sections g6 and g7. lf there are
no charges, the company must send a statement in the prescribed form
to that effect.
Particulars which must be given in (b) above are:
1. the company's name;
2. the nature of its business(es) or main objects;
3. identification of the chairman of its local directors or local manager;
4. the former and present forename(s) and surname, residential and postal
address and business occupation of each local director;
5. the number and nominal value of its authorised and issued shares and the
amount paid on them;
6. the address of its registered or principal office in the country where it was
incorporated;
7. the address of its principal place of business in Malawi and the number of
its post office box; and
8. the full name, residential and postal address in Malawi of its documentary
agent, that is, the person authorised by the company to accept service of
process and other documents on its behalf.
The registrar must be notified of any alteration in these particulars under

Section 308.
16.2 Obligation to state name

Just like an internalcompany, an externalcompany is obliged to state its name.
Section 316(1) requires that it must conspicuously exhibit its name and the
name of the country where it was incorporated on every place where it carries
on business and on the head of all business correspondence, in Malawi. That
exhibition must also show whether or not the liability of the company's
members is limited. Where the company's name is in a foreign language, this
requirement will be fulfilled by exhibiting the name in English or any language
acceptable to the registrar, as translation of it. tu
16.3 Regulations as to local directors

Before delivery to the registrar of the documents referred to above, an external
company must appoint between three and nine individuals as its localdirectors,
one of whom must be designated as the chairman of the local directors. t2I
These directors will have powers and authority to conduct and manage
all the affairs, business, operations and property of the company.
Besides, every one of them will be deemed to be an officer of the
company with the same duties, liabilities and obligations as the director
of a company formed and incorporated in Malawi. t3l
According to section 310(1) no person can be appointed local director of an

external company or be named as such in any document sent to the registrar
under section 307 unless he is eligible for appointment in accordance with
Section 142 as director for a company formed and incorporated in Malawi. Of
course the acts of any person registered as a local director ol an external
company ostensibly done on its behalf in the course of carrying on its business
will bind it unless:
1. that director has no authority to do the act; and
2. the person with whom he is dealing actually knows of the absence of

authority or ought to know of it because ol his position or relationship with
the comPanY. trl
The majority, not less than three, of the local directors must be resident in
Malawi. t51 Besides, in all its trade circulars and business correspondence
where its name appears, the company must state the present and former
forename(s) and surname of each local director. t6l
After the appointment of directors has been made under Section 314 (1), the
company is free to vary the number of individuals appointed. m However, the
variation must not decrease or increasethe number of local directors beyond the
statutory limit imposed by subsection (1). lndeed, the number of local directors for
the time being appointed cannot be reduced if the Minister so directs.
16.4 Accounting records and accounts

Every external company other than one carrying on banking and insurance
business must, in relation to its operations in Malawi, keep proper accounting
records in English or any language acceptable to the registrar. t8l According to
subsection (2) accounting records will be 'proper' in this sense if:-
1. they give a true and fair view of the company's state of affairs in respect
of its operations in Malawi;
2. they are adequate for the preparation of proper balance sheets and profit
and loss accounts in accordance with the Act; and
3. they do explain the company's operations and transactions.
For these reasons, the records must show:
(a) all sums of money received and expended by the company in the course
of and for the purpose of its operations in Malawi, and the sources f rom
which the money was received and the transaction in respect of which the
expenses were incurred;
(b) all sales except ordinary retail sales and purchases, by the company in
the course of its operations in Malawi; and
(c) the assets and liabilities of the company relating to its operations in
Malawi and its members' interests in those assets and liabilities.
Section 312(1) also places every external company except those which carry
on banking and insurance business, under a duty to prepare and send to the
registrar f or registration at least once every calendar year, a balance sheet and
a prof it and loss account. lf the company is a holding company, it must prepare
group accounts instead. These accounts must contain the same particulars as
would be required in the company's country of incorporation.
Besides, the company must also send to the registrar for registration:
1 . a profit and loss account giving a true and fairview of its prof it or loss in respect
of its operations in Malawi as if those operations had been conducted by an

internalcompany during the period to which the account relates;
2. a balance sheet giving a true and fair view of the company's state of affairs
in respect of its assets and liabilities attributable to its operations and
properties in Malawi as if those assets and liabilities were of an internal
company at the end ol the period to which the balance sheet relates;
3. a statement as at the end of its financial year showing its assets which are
situated in Malawiand the nature and amount of any specific charges on
them. The assets must be classified, distinguished and valued in the
prescribed manner.
4. a report on the statement and the accounts made by an approved auditor.

The report must state whether or not in the auditor's opinion, the accounts
and records are in accordance with the company's books and records and
give the information required by the Act and a true and fair view of the
matters stated in them.
16.5 Registration of charges

External companies must also register charges which they create on their
property in Malawi. According to Section 317, Sections 86 to 95 apply to such
charges as if they were created by an internal company. However, charges
created before the company had established a place of business in Malawi will
be deemed to be registered if their particulars are delivered to the registrar for
registration in accordance with Section 307(1)(c).
16.6 Public invitations for debentures and shares

Section 322 provides that Sections 164 to 178 relating to prospectuses will also
apply to any invitation made in Malawito the public to either:
(a) acquire ordispose of any debentures or shares of an externalcompany or
(b) to deposit money with that company for a lixed period.
Any prospectus issued in respect of such an invitation may, in addition to

complying with Section 168, have to contain particulars with respect to:
1. the instrument constituting or defining the company's constitution;

2. the lawor legal provisions by or underwhich the companywas incorporated;
3. the address where these can be inspected; and
4. the date when and the country where the company was incorporated. tsl
The prospectus or any advertisement or circular published in connection with

the invitation must also state the company's principal established place of
business in Jvlal2 vi. Itol
16.7 Cessation of business

Section 320 allows the registrar to strike an external company off the register
in two situations. First, if the company ceases to have an established place of
business in Malawi and within twenty eight days thereafter, it delivers notice to
him to that effect. Second, if he has reasonable cause to believe that it has
ceased to have an established place of business in Malawi and after writing to
the company to enquire into the matter,
(a) he receives an answerto the effect that the company has ceased to have
an established place of business in Malawi; or
(b) he does not receive any reply within three months; or
(c) he receives a reply that the company is maintaining premises as an

established place of business in Malawi but he is not satisfied that the
premises qualify as such a place under the Act.
16.8 Notification of winding up

According to Section 318, local directors and the documentary agent of an
external company must notify the registrar of its winding up within twenty eight
days of the occurrence of the following events:
(a) the making of a winding up order by a court of the country of its

incorporation;
(b) the passing of a resolution or the taking of proceedings in that country

leading to the company's voluntary winding up; or
(c) the company's dissolution or cessation of business according to the law

of that country.
TO COMPANY LAW IN MALAWI
The local directors must also conspicuously state on every invoice, order or
business letter issued in Malawiwhere the company's name appears that it is
being wound up in the country of its incorporation. tril
of course on the company's winding up in Malawi under section 819, the court
may direct that its transactions be deemed valid although they were concluded
after it was dissolved or ceased to exist according tothe law of the country
where it was incorporated. tr2l
16.9 Winding up
An external company may be wound up whether or not it has been dissolved or
has ceased to exist in the country of its incorporation. r13r subject to section 319,
provisions of the Act governing the winding up of internal companies also apply
to the winding up of external companies. tlar However, unlike internal companies,
external companies can only be wound up by a court order. And afterthe order is
made, the company will be treated as if it were an internal company so that only
its assets and liabilities in Malawi will be affected by the winding up. nsr
16.9.1 Grounds for winding up

According to section 319(4), an extemalcompany may be wound up bythe court if:
(a) it is in the course of being compulsorily or voluntarily wound up in the

country where it was incorporated;
(b) it is dissolved in that country or ceases to carry on business in Malawi or

is carrying on business only to wind up it affairs;
(c) it is unable to pay its debts;ttsl
(d) the court is of the opinion that its business or objects are unlavyful or that it
is being operated in Malawi for purposes which are unlawful or that it is
carrying on business which is not authorised by its charter, memorandum
or constitution; or
(e) for three months immediately prior to the presentation of a winding up -

petition, the company has failed to deliver any document or notice
required by the Act to be sent to the registrar for registration; or
(f) the court is of the opinion that it is just and equitable that the company
should be wound up.
Chapter Sixteen
1. Subsection (2).
2. Section 314(1).
3. Subsection (4).
4. Section 310(2).
5. Section 314(3).
6. Subsection (5).
7. Subsection (2).
8. Section 313(1).
9. Section 322(3).
10. Subsection (4).
1 1. Section 318(2).
12. Section 319(6).
13. Section 319 (1).
14. Subsection (2).
15. Subsection (5).
16. ln determining whether the company is unable to pay its debts, the coufi
will apply section 213.
i rtF--*
248 - AN INTRODUCTION TO COMPANY LAW IN MALAWI AN INTRODUCTION TO COMPANY LAW IN MALAWI - 249
Class rights
Index alterationof .... ..... 33- 36, 38, 40, 51, 101, 103, 108, 192
Commission
... . 25,72,79,115,136,137,139 -141,143 - 145,151,
paymentof
Accounting records . 53, 60, 67, 17 1, 210, 2'lg, 222, 224 - 226, 229, 234, 235
1 1 1
keepingof .... .62,175,176,179,243 rateof .....138,139,157,185

Accounts treatmentof.... 138, 146, 1g6
preparationof .... .24,62,175 Committee of inspection
Amalgamation... ..'..196, 197,227 court .
under winding up by ... . 216,217, 219
Annual return undervoluntarywindingup.... ...229
delivery to the registrat . . . ' . . . . . . 180 Company
Articles of Association changeolname ....3O
alterationof.... ..... 33-36,38,40,51,101,103,108,192
effect of
.... . 97 ,1
15,32,33,38,39,63,72,77,78,81, 86,
4, 1 1 8, 134, 137, 144, 151, 162, 170' 188
":'l:1 l3 :?'?:'u;1;;,','.: ??;11;3li3l: i3;l?;?li13: llB:
1
169, 190, 193,235,242
meaning .of .... . . 42,55, 56, 60, 69, 84,'137, 139, 182,210 by guarantee. . . . 19 - 2'1, 28,29,31, 32,38, 141, 149, 180, 193, 295
relationtotheMemorandum. ......33 by shares . . 18, 19,21,27,28,31,33,37,38,50,59, 110, 1'll, 113,
Auditors . . . . 115, 119, 134, 136, 146, 149, 235
appointmentof .. ..... 54,57,67,95, 159, 164-'172 not carrying on business . . 2gs
dutiesof ... 119,ft4'232 passingoff ... .....30
powers of. .. 61 - 64, 82, 96, 1O4,171,218 - 220'222 private . 21 - 23, 27 , 33, 37 ,38, 49, 106, 19, 153, 180
1
remunerationof... .......217 procedurefordissolutionof .. ....208
terminationof appointment... ..83,89 public 21 - 23, 25, 27, 30,31 , 33, 37, 38, 49,74, - 77 , 88, 16, 18,
1 1
. 121 - 126, 139, 151, 153, 190, 191, 193, 194, 233, 240, 244
Balance sheet publicofficerof .... ...... 183
consolidated .... . ' 35,95, 113, 162,176,177 publicationof nahe. .......29
Bonusissue... 117 subsidiary ..... 23,24,46,47,50,73,81, 102, 106, 117,132- 134,
Brokerage 139 ...... .... 177,179, 191,200,205,215,240
Business clause 31,37,108,151 unable to pay its debts 209,210,219,246,247
unlimited 19, 20, 28,31, 33, 38, 50, 23S
Capital redemption reservefund . .... 117,135,'141 ( )ompulsory winding up
Charges commencementof . . . . . 14, 101, 111, 116, 160,212,214,225 - 234
effectof non-registrationof. ..."' 162 groundsfor... ..208,209,246
fixed .... .. 19, 20,29,32,76,82,88,'110, 115, 118, 141,142,153, equitable
just.and 106 - 108, 209, 211, 212,246
157 - 160, 163 - 165, 170,175,179, 185, 188,218, 223,240,244 personsentitledtoapplyfor... ...208
floating ... ' 17,22,31,37, 151,'158 - 160, 162 - 164, powerof thecourtin.... ..209
168, 170 - 172, 225, 226, 228' 229 ( )orporate veil
registrationof ... .. 113, 146,'154, 155, 161 ,'162,244 liftingof .....45
Class meetings by courts . 46,47
quorum of .... 52,57,63,74,75,82 bystatute ...45
"L 1-
250 _ AN INTRODUCTION TO COMPANY LAW IN MALAW] AN INTFODUCTION TO COMPANY LAW IN MALAWI - 251
Creditors removalfromofficeof .... ........83

objection to reduction of share capital '.. ' 131 remunerationof... ....78,217
secured 17,22,31,37,60,103,151 - 159,163, residentialrequirementsof .. ......68
166 - 169, 171,172,224-229 share qualification 68, 69
unsecured .. . 145,1 57, 1 96, 1 99, 200, 224, 226 - 228 vacationof officeby... ....84
Disclaimer of onerous property. . . 230
Debenture Discount
bearer ... 113, 153,156 debenturesata..
issueof .......156
convertible ...1.. 111,156, 1-57, 159 sharesata..
issueof ....140
irredeemable.... ... ' isz, tsg treatmentof.... 138, 146, 186
meaning of . . . . ... 42,55, 56, 60, 69, 84, 137, 139, 182,210 Dividends
redeemable 35,112,116,131,135,140,145,152,153 declaredbygeneralmeeting .....141
registered . . . 18, 19,21,24,25,27 -29,31 - 33,35 - 40, 43,45- 47, mode of payment of . . . ., . 14i
. . 49 - 52, 56, 58, 67 -70,77,79, 81,84,87,88, 90, 94,97,98, 104, paidtonon-residents... .. 188
110,111,113,114, 116, 119 -122,124- 126,132 - 136' 139'
141 - 1 49,149,153, 155, 156, 158, 160 - 1 62,164 - 166,172,
175, 177 - 1 80, 183, 208,212,214,215,219,223,230,235,
':Ii:il:i .
";,1?',11^: li3: l3?: 131: i33: lig:
. 210, 219, 222, 224, 225, 226, 229, 234, 235
lil:
240 - 242,244 treatmentof .... 138, 146, 186
security for 62,81, 149, 157, 160, 161,
1 63, 1 67, 168, 174,208,210, 212, 217
Debentureholders Fixedcharge.... .......158

challenge of alteration of memorandum by 151 Floating charges
remediesfor ... 166 avoidanceof .... ....228,229
i Debts crystallisation of . .
orderofpaymentof... "'225 nature of . . . . . . 28,31, 32, 51, 54, 94,121, 158, 178,
paymentol . . . . 25,72,79, 115, 136, 137, 139 - 141, 143' 145, 151' .... 190,217,224,241
. . . . tsg, 160, 167, 171,210,219,222,224,225,226,228,234,235 f raudu lent preferences
proof ol 224 - 226 avoidanceof .... ....228,229
Declaration of solvency. " " 221,223
Directors
(ieneral meetings
board of . . . ' 13, 47,59,63, 64, 67,76,82, 83, 97, 101
103 - 108, 177 , '178, 194, 22'1, 223 annual general meeting 51, 53, 54, 56, 67,81,84,
collectiveauthorityof ... .'.'.. "'82 87 - 89, 179, 180
as
eligibility for appointment '' 170' 215 extraordinary general meeting 5'l ,102
irrJgularlyappointed """' 95 noticeof ... ...22,25, 35,36,37,52-56,59,60,80
loans to .. . 81, 132' 133 . . . . 92,93, g7 - gg, 102, 113,114,153 - 156,
paymentsto ... 70,230 . . 1 62, 1 67, 204, 205, 21 0, 21 3, 21 5, 21 9, 220, 223, 232, 236
for loss of office "" 79 persons entitled to attend . . . 56
in connection with take-ove proceedingsat... 55-57
remedies against . . 63 ( accounts
ir{)up annual .. . 177
.i!4.- .,.
Profits
Liquidator
receiverand.. .;.... 169, 170 capitalisationof.. ..135
sales
right to recover in certain purchases and ''' 225 revenue .. 141, 143, 185
undercompulsorywindingup.... .--"..208 unappropriated... ...141,142
eligibility for appointment as - ' 170,215 unrealisedcapital ....14'1,'143
Promoters
powersof ... 61-64,82,96,104,171,218-220,222
releaseof ... .'...165 profits
duty to account for secret . . . 13
remunerationof... .......217 liabilityundersection299(1) .......16
--..' 215 Prospectus
validityof actsof ....
undervoluntarywinding up bycreditors... - - ' ' ' ' 223 ...
contentsof ..25,53,54,94
undervoluntarywinding upbymembersl .. .. ' ' ' 219 liabilityforstatementsin.. ....17,123
registrationof ... .. 113, 146,154,155, ,162,244
dutiesof ... 119,184,232 161
Proxies . s7, sB
Prudenceconcept. .......142
Members
call for an extraordinary general meeting by . . . '.. 51
Quorum .52,57,63,74,75,82
maximumnumberof.... ".49
minimumnumberof ... ....49 Receiver
registerof ... ..... 49,50,70,90, 113, 114,153,240 appointmentof .. ..... 54,57,67,95, 159, 164-172
Memorandu m of Association
72,77,78,81, 86, 97,
eligibility for appointment as . . '170,2'ls
effect of 15, 32, 33, 38, 39,63, legalpositionof... ....87,122
114, 118, 134, 137, 144, 151, 162, 170,'188 liquidatorand . . 87, 166, 218,220,222
procedureforalterationof ... ..33'34 receiver/managerand ..... 164
relationtoArticlesof Association.... .'' '. 38
Reconstruction . . .
Name Resolutions
changeof ...
publicationof....
Notice of general meeting
.....20,30,34,37,184
---- 29,76'122,123 "::'::1 : :: iu,i,?u1';fi,,33: ??; 91;3lil3: ?3;l?;31i33:
.'175, 201 - 203, 205, 220, 229, 236, 240, 243
contents of . . . '. 25,53,54, 94 special. . . . . 11 , 1 9, 21 , 22, 24,30, 34, 40, 52,54, 55, 57, 59, 60,71,
lengthof ... .-.....
personsentitledto... ..55'56
53
llrqhtsissue.
:::::::::: : : 1l il ll ll''ln';])u!;,')l;l,L;'j2;,'!f;
....116
Passingoff ... "" 30
Pre-emptive rights. . - -...
118 i ir:heme ol arrangement
't4-16 company'sconsentto.... .......194
Pre-incorporationcontracts..
promotersliabilitYunder. "' 14 courtsanctionof . ..191
Principleof assent ....." 60 definitionof .... ...192
Prof it and loss account . . . 22,23,135, 141 ' 143, 175 ' 177, 179, '180,243 directorscompensationfor. ......200
consolidated.... ..35,95, 113, 162'176,177 take-overand .. ... 2O1
*1." L /
.tF I
l'
254 - AN INTRODUCTION TO COMPANY LAW IN MALAWI AN INTRODUCTION TO COMPANY LAW IN MALAWI - 255
Secretary protectionof minorityon... ......2O4

appointmentof .. .. 54,57,67,90,95, 159,164-172 schemeof arrangementand .....190
roleof ....'.90 testof fairnessof ... .....2O2
Share capital Transfer of shares
alterationof.... ..... 33-36,38,40,51,101,103,108,192 certificationof .... .......119
paymentofcommission... -----.136 procedureof .... .. 119
paymentof dividendsoutof . .....131 restrictionsof ... .. 118
prohibitionof the returnof .......:.. ..'. ' 131 Turquand's case
roleof coudin reductionof .... . ' '.. 135' 140 the rule in . . . . 96, 98, 101, 102
Share premium account .. 117,135, 138, 140
l
l
Sharestock. .....111 Underwritingcommission .......137
Sharewarrant .... 113
i
Shareholders Voting 50 - 53, 57,58,74,75,80, 83,84, 101 - 103,
i.
,t absentfromMalawi .... ..69,82'188 . . 105, 107, 114,'116, 118, 145, 186, 191, 193, 194, 196, 205
i:lt e
challenge of alteration of the memorandum by . . ' 34 - 38
I
I
challengeof thecontraventionof the memorandum by... --.. '' ' 32 Whollyownedsubsidiary .....102,178,182
i
I Shareholding
i
,l
changeof ... ...'.20,30,34,37,184
lrl
rl disclosureof .... .74,76,81,125,126

I
Shares
I
i consideration for. . .. . 123, 127, 128, 136, 138, 199, 2O'1, 2O4
deferred
I
:
:l ' 26,52, 1'10,115,228
ordinary 26, 35, 38, 51 - 53, 59 - 61, 63, 79, 83, 88, 89, 99,
1 1 4, 1 1 5, 1 31 , 1 33, 144 - 146, 1 58, 1 59, 1 63, 1 69,
175. 201 - 203, 205, 220, 228, 236, 240, 243
offer for . . . 79, 106, 122,136, 191, 205
sale.. 13,14,45,75-77,99,103, 126, 133, 136, 138,
158, 161, 166, 167, 171, 198, 200,222,229,232,234
subscription - 18, 124, 136, 138
preference. 35, 38, 115, 116, 135, 136,
. . . . . 144 - 146,203,228 - 230
public invitation to make an offer for. . . ' ' ' 121
redeemable 35,112,116, 131,135, 140145,152, 153
rights and options to subscribe for ' . . " " 117
Source and application of funds
statementof ... ..... 31,50,56,177,213,222-224
Take-over
conditionsfor... 201
directors comPensation . . . 200
li(u
Published bY:
lnterlink Publishers
P.O. Box 49010, Qualbert 4078
South Africa
Fax: (031) 465-9688
Printed by:
lmpress
a (m1) 306-s785

An Introduction To Company Law in Malawi

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

An Introduction To Company Law in Malawi

Загружено:

Авторское право:

Доступные форматы

University of

TO COMPANY LAW IN MALAWI - 1

CH Chilumpha, LLB, PhD

The directors' report 178

Circulation of accounts and reports 180

DeBuschevAlt. """' 100

Table of Cases DerryvPeek.

ACompany,Re(1983).. -.'..'.106 DoveyvCory ""' 72

AOompany,Re(1983).. ---"" 107 DuncanGilmour&Coltd,Re... """' 38

Andreae v Zinc Mines of Great Britain . . . 139 EldervElder. '"' 105

Baille v Oriental Telephone Company Ltd . . 102,208

JohnShaw&SonsltdvShaw. ...62 Parker-KnollLtdvKnoll lnternationalLtd ........ 30

CHC, Chichiri, July, 1991

The Formation of a Company

Similarly, in the case of Erlanger v New Sombrero Phosphates Co. (1878)

1.1.1 Duty not to make secret prolits

Sombrero Phosphates Co. Ltd. (1826;trl the appellants formed a syndicate

1.1.2 Liability under pre-incorporation contracts

AN INTROOUCTION TO COMPANY LAW IN MALAWI

It should be noted that section 20(1) applies to a contract concluded by a

Besides, since subsections (2) and (a) apply to written pre-incorporation

1.1.1.3 Liability under section 299(1)

(a) misapplied or retained the company's money or property;

(b) became liable or accountable for such money or property;

(c) was guilty of misfeasance or breach of trust or duty in relation to the

1.1.1.4 Liability by virtue of section 22(1)

1.1.1.5 Liability for statements in a prospectus

Section 2 of the Companies Act defines a company as a ,company

"Anytwo or more persons associated for any lawfulpurpose may by subscribing

Thusthe process of incorporation beginswith the memorandum of association.

According to Section 1 4(3), this stalement must be signed by or on behalf of the

AN INTRODUCTION TO COMPANY LAW IN MALAWI - 19

1.3 Classification of companies

1.3.1.1 Conversion of a limited company to an unlimited company and

(a) the company's certificate of incorporation;

(b) a copy of the new memorandum and articles;

(c) a copy of the special resolution sanctioning the company's adoption of

(d) a statutory declai'ation by the company's directors and secretary

1.3.2 Gompanies limited by guarantee and those limited by shares

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

1. The company's shares must be fully paid up;

3. A new memorandum and articles appropriate to a company limited by

4. Each member must agree in writing to contribute to the assets of the

(a) the company's certificate of incorporation;

(b) a copy of the new memorandum and articles;

(d) astatutorydeclaration bythe company's directors and secretaryconfirming

1.3.3 Public and private companies

(a) restricts the right to transfer its shares, if any;

(b) limits the total number of its members, t14 to 50 and

1. Where a private company alters its memorandum under Section 10(1),

2. For a private company to be converted into a public company, it requires

3. Under Section 182(1) (b), a private company is exempted from the

4. A private company is not obliged to accompany the annual relurn required

1.3.3.1 Gonversion of a public company to a private company or vice

'1. A balance sheet;

2. A profit and loss account;

3. Group accounts, if any

4. A director's report; and

5. The auditors' report circulated to the company's members in the preceding

1.3.4 External company

1.3.5 Holding and subsidiary companies

1 . can appoint, remove or prevent the appointment or removal of at least half

Besides, a company will be a subsidiary of another company if it is a subsidiary