CORPORATE LAW

INTRODUCTION TO CORPORATE LAW

TYPES OF BUSINESS ORGANISATIONS

1) Sole trader - This is when one person owns and
runs the business alone.- It is very easy to run. - The
proprietor isn‟t obliged to keep any records. - He is
entitled to all the profits. *Thus if a sole trader draws
cash from a till without recording it in his drawings
account, he is considered not to have stolen from
anyone, having in effect done no more than take his
own cash from one pocket and put it in another.*The
risk involved in a sole proprietorship business is that
if the business fails and the proprietor is unable to
pay its debts (which are his debts) he faces the threat
of insolvency and the loss of all his property whether
or not it is connected with the business. - The
source of capital for sole trader‟s business is
himself.2)
to the business. - And the only way of limiting this
liability is by setting up a limited partnership
Partnership - Is made up of between 2 and 20
people. - The sharing of the losses to the business is
effective only as between the partners, since each
partner is jointly and severally liable to third parties
for the full debts in which the dormant partner takes
no part in the running to the business. - If the
business becomes insolvent the personal property of
the partners is at risk. *Therefore the sequestration of
the partnership estate necessarily involves the
sequestration of the personal estates of all the
partners other than dormant partners in a limited
partnership. Partners are agents and principals to
each other. Thus law imposes on partners a duty of
utmost good faith towards each other.
3) Companies *S22(2) of the Companies Act sums
up the characteristics of a company by saying that
from the date of incorporation a company becomes a
body corporate with perpetual succession. Salomon
v Salomon1 held that as a body corporate, a company
is a separate legal person in the eyes to the law,
separate from its members or shareholders and
directors. So the members may limit their own
liability (s7) may incur debts which, in the absence of
fraud or other special circumstances, neither the
members nor the directors are liable to
repay.*Perpetual succession means a change of
membership has no effect on the legal personality of
the company.
a)Private Company- S33 (1) to the Companies Act
defines a private company as one which by its articles
restricts the right to transfer its shares, limits the
1
1897 AC 22.
members to 50 excluding employees and ex-
employees and prohibits any invitation to the public
to subscribe for its shares or debentures.
b) Public Company - Here shares are offered to the
public. There is no limit to the size of the
membership of a public company. Since shares are
offered to the public, and the need for protection of
investors is at its greatest.
c) Company limited by guarantee- S7(b) as read
with S26 to the Companies Act provides that a
company limited by guarantee has no share capital
and the liability of its members is limited to the
amount they guarantee to contribute on winding up.-
The company must be licenced by the minister
provided it exist for public interest.
4) Private Business Corporation-
Is established by the Private Business Corporation
Act and enables a small business to become a body
corporate with limited liability and perpetual
succession. It may have a maximum of 20 members
who must be individual natural persons acting in their
own right excluding employees and ex-employees. -
It‟s members are in a similar position to partners,
owing each other and the Private Business
Corporation a duty of utmost good faith and being
agents of the business. - They must elect directors
and a secretary to represent and manage the
company.
(5) Co-orperative Company / Co-orporative
Society-
A Co-operative company is a public company which
has as its main object the co-operative production or
marketing of agricultural produce/livestock, or the
sale of goods to its members or both such objects.- A
co-operative society carries on the same business on
a small scale.- Working on the principle that unity is
strength, co-operative societies negotiate bulk sales
and bulk purchases for the benefit of their members,
whose shareholdings and voting rights are restricted
so as to maintain approximate equality.
(6) Statutory corporations / Chartered
Companies/ Parastatals –
These are created by a particular statute.- They are
mainly companies in which a majority of the shares
are owned by the state.- These are sometimes called
parastatals.- Chartered companies or corporations,
such as the Old BSAC and University College of
Rhodesia and Nyasaland, owed their existence to
royal charters. They have since been consigned into
the dust bin of company law history and are now only
of historical interest.
(7) Universitas/common law corporation
It is a body corporate having perpetual succession,
capable of acquiring rights, incurring obligations,
acquiring and holding property apart from its
members and suing or being sued in its own name.Its
aim is not profit making e.g. churches, charitable
societies and sporting, social clubs and associations.

FORMATION OF COMPANY (floatation)

** A Company is usually formed by promoters.
Promoters
must include those who convert their sole trade
businesses into companies; those who assist in raising
companies capital, preparation of company
documents except where they are statutorily excluded
and taking it upon themselves to get the company
going.Promoters are involved in the raising of capital,
including the issue of a prospectus inviting the
public to buy shares, composition of the Board
Directors etc.In re contributories of the Rosemond
Gold Mining Syndicate in liquidation Held –
Promoters aren‟t merely parents the companies they
promote but also creators. They provide it with ears
through which it can hear and eyes through which it
can see and hands through which it works.They can‟t
complain if the law obliges them as it does to protect
the companies through its infant life.
Duties *A duty not to make a secret profit out of the
promotion of the company. He must make full
disclosure of the profits he makes.*A duty to supply
the companies with an independent board of directors
capable of making unfettered decisions.*A duty to
make an accurate prospectus. Here ordinary
principles of contract as to misrepresentation will
apply. The promoter is liable for any
misrepresentation made in the prospectus.
Pre-Incorporation ContactsBefore incorporation, the
promoter may want to do certain things for the
benefit of the company he wants to promote e.g.
contracting for fixed assets / preparation of
requisite documents. Here, the company does not
have legal existence but the promoter doesn’t
want to attract personal liability.Newborn V
Sensolid and Kelner V BexterHeld – That under
English law, a person cannot act as an agent of a
non-existent principal / company.Mc Collough V
Fernard Held – Under Roman Dutch Law, a
person can contract as an agent or trustee of a
non-existence company especially for its benefit.
This is confirmed by Section 47 of the Companies
Act that provides for the ratification of pre-
incorporated contracts.Names ***Before
registration, a promoter should submit 3 names to
the Registrar for a name search. The Registrar
has a wide discretion on the use of a company
name.***Section 24 lists a number of names
which are prohibited /branded as undesirable e.g.
a name which is currently used by a registered
company or suggestive of state patronage /
patronage of the state president. The Registrar of
Companies may refuse to register a name which in
his opinion is likely to mislead the public, to cause
offence to any person / class of persons, or a name
suggestive of blasphemy, indecency or any name
which he considers to be undesirable for any other
purpose.The memorandum of association should
indicate the company name.The name must end
with the word ‘Limited’ as per Section 8 of the
Companies Act.Constitutional Issues- Promoters
must prepare the Memorandum and Articles of
Association.#The Memorandum the association
governs the relationship between the company
and the outside world whilst the articles govern
the indoor management structures of the
company. Section 8 provides that the
memorandum must be in English. It must
indicate the following:- The name of the company-
The objects of the company- That the liability of
members is limited - The amount of share capital
with which the company proposes to be registered
with and its division into shares of a fixed
amount**The provisions in the Memorandum and
Articles of Association can only be enforced by a
member in his capacity as a member and not
outsiders.*S27 Provides that when the
Memorandum and the Articles have been
registered, their provisions would bind the
companies and the members
contractually.*Where the provisions in the
Memorandum and the Articles are in
contradiction, then the provision of the
memorandum will prevailThe Ultra Vires
Doctrine States that the company should not carry
out any other activity than those indicated in the
objects clause (the Memorandum of Association).
Anything done beyond those objects was
invalid.*Ultra Vires Power – carrying out
activities beyond one’s power*Ultra Vires
Capacity – carrying out activities that are beyond
the provisions of the Memorandum Of
Association. NB the purpose of the Ultra Vires
Doctrine was to protect the shareholders and
creditors against the unauthorized use of their
capital. The argument was that those who
invested in companies wouldn’t want to see their
money used in activities they didn’t sanction. #As
time went on, creditors and companies themselves
discovered that a strict application of the Ultra
Vires rule prejudiced the company. In actual fact,
it was clear that investors especially Corporate or
Institutional investors weren’t so much concerned
with what the company did with its capital.
Rather, they were interested in a profitable use of
their investment and a return (profit)
thereof.Major parties in companies thus sought to
modify the effect of the Ultra Vires rule. This
took various forms namely:*Companies would
include in their objects clause an unlimited
number of objects which were sometimes
unrelated.*Companies would include main objects
and ancillary / subsidiary objects.*Companies
would include a concluding clause to the effect
that the company would carry out any activity
which in the opinion of directors would be for the
benefit of the company. Such a clause was held to
the permissible in the case of Bell House Ltd V
City Wall PropertiesHeld – It’s the opinions of
directors which is important here and not the
opinion of the Court.Semble – Directors were now
allowed to carry out any activity what so ever if
they believe that it was for benefit of the
company.# The court also allowed companies to
carry out activities which are ancilliary to the
main objects although these activities weren’t
specifically provided for in the memorandum.The
problem with the ancillary lever is that it’s
difficult to know with certainty what activities are
ancillary to others.*In the case of Parke V Daily
News , the court held that companies are allowed
to carry out those activities which largely benefit
the company. The difficulty with the corporate
benefit principle is to determine at which stage the
corporate benefit will be derived. However, there
was a realization that business enterprises play a
very important role in the societies in which they
are located. Thus where corporate gifts are for
societal development, the courts would hold them
to be valid.*The Articles of Association - contains
rights of members as members of the company
and against each other. E.g. the shareholder’s
right to proper notice of meetings, attend meeting
and vote thereat to receive a share certificate,
transfer shares, strict compliance with forfeiture
provisions.- The rights contained in the shares are
proprietary which the owner may exercise as he so
desires. In the exercise of his vote, he doesn’t owe
his brother shareholder a duty of care.NB At law,
shareholders aren’t per se entitled to dividends
but are only entitled where this is properly
declared. The right to declare dividends is given to
directors in the Articles of Association.
LEGAL PERSONALITY AND LIMITED
LIABILITY THROUGH SHARE CAPITAL
Corporate personality- If a company is properly
incorporated, it becomes a separate legal personal
and can therefore acquire rights and incur
obligations and perform duties which are capable
of being performed by a body corporate.- It can
sue and be sued in its own name and all the
property that it acquires belongs to it as a
company and not shareholders.*The property,
assets and liabilities of a corporate person are
separate from those of the shareholders. Even
where a person has got 100% shareholding in the
company, the assets and liabilities of the company
will still belong to the company and not the
shareholder.emerged. These theories seek to
define the concept of legal personality according
to their own interpretation. (i) Concession
theoryHolds that legal personality is just a
concession by the state or a privilege granted by
the state which the state may withdraw at any
time.Daimler Company V Continental Tyre
Company2 Facts- Daimler was a German
company and during the course of the business, it
came to be owed money by continental Tyre
Company. World War 1 broke out and D
Company claimed the money owed to it by
Continental Tyre Company which refused to pay
arguing that since D was a German Company and
German was at war with England, paying D the
money would be tantamount to trading with an
enemy. The court upheld the argument.(ii) Realist
theory Holds that legal personality does not exist
in actual fact and a companies is indeed a
separated legal person distinct from its members
in reality.Salomon V Salomon3 Facts – Salomon
ran a sole trading business which dealt in sales
and Salomon then decided to convert his sole
2
[1916] 2 AC 207
3
supra.
trading business to a company. He had 96%
shareholding in the company with the remaining
4% shares being owned by his wife and 3 children
one each. During the course of the business,
Salomon gave money to the company and become
a secured creditor of the company. The company
then became insolvent and was liquidated.
Solomon claimed payment first since he was a
secured creditor but the other creditors of the
company objected arguing that since Salomon had
96% shareholding in the company, he was in fact
the company himself and also that Salomon had
formed the company as a Sham to get the money
without paying it back. Held – Salomon’s
Company was a legal person separate from
Salomon and Since S had become a secured
creditor of the company, he had to be paid first
before all other creditors. Once legal personality
was established, the issue of shareholding couldn’t
be material.Dadoo Limited V Krugersdorp
Municipality Facts – there existed during the
apartheid regime legislation which prohibited
non-whites from owning land in a certain area
which was reserve for whites only. Mr Dadoo was
an Asian and he formed a company called Dadoo
Limited and it bought land in the white area and
set up business there. The municipality sought to
enforce the legislation and remove Dadoo from the
place.Held - that Dadoo Limited was a company
and enjoyed legal personality separate from its
members. A company could not be said to be
white or Asiatic. The race / colour and creed of
the owners did not have any effect on the legal
personality of the company.(iii) Fiction theory –
the company is a fictitious person created to
enable it to transact business. It exists in the
contemplation of the law.(iv) Juristic reality - the
company is a separate legal person because the
courts recognize it as such.(v) Organic Theory – A
company has different organs through which it
transacts business.NB The underlying theme of
these theories is that once properly incorporated,
a company becomes a separate legal person
distinct from its members.Gumede V Bandhla
Vhukani BakithiFacts – A law in South Africa
provided that natives could only sue each other in
the native courts. A native was suing a wholly –
owned native company in the magistrates court.
The court had to decide on the issue of
jurisdiction.Held – Once properly incorporated, a
company becomes a separate legal person apart
from its members. A company cannot be said to
be native or alien.Lee V Lee Air Farming Facts –
Mr Lee owned nearly all the shares in Lee Air
Farming Ltd. He was employed by the company
as a chief pilot. He died in a flying accident whilst
at work. The widow was claiming support under
the workman compensation Act.Held – Mr Lee
was an employee of the company although he
owned the majority of the shares in it. Once a
company is incorporated, it becomes a separate
legal person distinct from its members.Lifting the
Corporate VeilThis refers to situations where the
law ignores the corporate personality status given
on the company. This comes in two forms namely
(1) Judicial and (2) Statutory evasion.JUDICIAL
EVASIONCourts have not seen the concept of
corporate personality as a hard and fast rule.
They have given the following exceptions:-(1) The
courts will not apply the principle of corporate
personality if it is abused by one of the
parties.Gilford Motors V HorneFacts – Horne
had an employment contract with Gilford Motors
which had a restraint of trade clause to the effect
that the ex-employee would not solicit the
employer’s clients after leaving employment.
However, Horne left employment and formed a
company where he solicited the ex-employer’s
clients. He was then sued for breach of the
employment contract. In opposing this claim,
Horne argued that a company was a separate legal
entity which had no contract with the ex-
employers.Held – There was abuse of the principle
of separate legal personality. The court lifted the
corporate veil and saw Horne busy breaching the
contract.Leepman V JonnesFacts – Jonnes sold a
house to Leepman. Soon after prices skyrocketed
or increased and he regretted the sale. In order to
avoid delivery, Jonnes incorporated a company
which he owned many shares, sold the house to
the company and effected delivery. When sued
for specific performance, he argued that he could
no longer deliver because the house had been sold
to an innocent third party. He could pay for
damages instead.Held – The court rejected the
argument and treated the company as a sham and
façade. Jonnes had built the hut around himself
to avoid delivery through abusing the principle of
corporate personality. As such, he had to
deliver.Cattle Breeders Farm V Veldman Facts –
Mr and Mrs Veldman lived in a company house.
They no longer loved each other, Mr Veldman was
the majority shareholder in the company and also
director. The company wanted to evict Mrs
Veldman from the matrimonial home because the
property was now required by the Company for
use by its director (Mr Veldman). The court
ignored the corporate personality principle.Held –
The courts lifted the corporate veil because Mr
Veldman used the corporate personality to avoid
his duty to provide a matrimonial home to his
divorced wife.Note – From these cases, it is
apparent that courts lift the corporate Veil
whenever it is abused. Courts always take into
account the principle of justice, fairness and
equity in reaching their decisions.(2) Courts also
lift the Corporate veil where the principle of
corporate personality runs contrary to state
interests. This supports the concession
theory.(See Daimler V Continental Tyre Company
supra)(3) Courts may also apply the agency
construction to lift the corporate veil by holding
that a wholly owned subsidiary would be acting as
an agent of the holding company.DHN Food V
London Borough Of Tower HamletFacts – there
were 2 companies – one holding the other a
subsidiary.The subsidiary was wholly-owned but
using land which belonged to the holding
company.The municipality wanted to
compulsorily acquire land but it was supposed to
compensate the owner of the land if he disturbed
him in business.The question was whether the
holding company was disturbed in business.Held -
The holding company was entitled to
compensation since the subsidiary company was
acting as its agent. Statutory Evasion The
Companies Act lifts the corporate veil as follows:-
*Section 32 – imposes personal liability on a
member who knowingly allows a company to
carry on business for a period of more than 6
months without members.*Section 58 and 59 –
imposes civil and criminal liability for
misstatements contained in the
prospectus.*Section 124 – imposes liability on
directors who fail to properly hold statutory
meetings.*Section 126 – directors are liable for
failing to hold an extra-ordinary general
meeting.*Section 186 – directors are liable for
failing to disclose interests which they have in
company contracts.*Section 318 – directors are
liable for fraudulent conduct of the company
business.
NB In all these sections, individual members are
being made liable for the company’s affairs.
These are jointly and severally liable with the
company. Hence the lifting of the corporate veil.

Limitation of liability- If a company can lawfully

call itself “Ltd”, it means that it‟s limited by shares.-
This should expressly be provided for in the
memorandum.- This means that in the case of
winding-up due to insolvency, no shareholder is
liable to lose more than the capital he has already
paid in respect of his shares if they are fully paid up,
or the amount still owing thereon if they are not fully
paid up. (If not fully paid up, its capital and amounts
still owing on the shares).
The whole basis of the protection afforded by the
limitation of liability is contractual.The word “Ltd”
must be part of the name of the company (Section
9(1)) and must be prominently displayed on the
outside of its offices, and on its notepaper
(S90(1)).Any person giving credit to the company
therefore, has notice that if anything goes wrong, he
will be confined to the assets of the company in order
to obtain his money.In companies limited by
guarantee, the liability of members is limited to the
amount each member has respectively undertaken to
contribute to the assets of the company in the event
of its being wound up.*The Memorandum of such a
company must also state that the liability of the
members is limited.Exception (S28 of the Companies
Act)“If at any time the numbers of a company is
reduced below 2 and the company carries on
business for more than 6 months while the number is
so reduced, any person who is a member of the
company during the time that it so carries on business
after those 6 months and is cognizant of the fact that
it‟s carrying on business with fewer than 2 members,
shall be personally liable for the payment of the
whole debts of the company contracted during that
time”.
CAPITAL:-Can be raised either through shares
or debentures.
SHARES
Are bundles of rights which are measured in
monetary terms in the first instance and interest in the
second but also consisting of a series of mutual
covenants entered into by all shareholders (Borland
Trustees V Steel Brothers).
TYPES OF SHARES
1. Ordinary shares:-They form the bulk of shares
in the company.
Advantages
In most cases, they are in the majority and
shareholders participate in decision making.
Disadvantages- They do not have a priority of
payment of dividends.- They rank after preference
shares.- This may mean that ordinary shareholders
may fail to get anything if the dividend has been
consumed by preference shareholders.
2. Preference shares
They entitle the shareholders to a certain percentage
in terms of payment of dividends.The shareholders
are also entitled to be preferred in that payment.

3. Cumulative preference shares:- If a dividend is

not declared this year, this dividend becomes
cumulative to be paid when the next dividend is
declared.
4. Participatory preference shares
Shareholders participate in the sharing of profits
when dividends are declared.5.
Redeemable shares:-
To redeem is to buy back.Those types of shares are
those that a company reserves to buy back at a later
stage.

Debenture:-
Is an acknowledgement of debt by the company to
the shareholders or creditors.

Differences between shares and debentures-

A debenture holder is a creditor of the company
whilst a shareholder is a member who is entitled to
attend meetings.- The rights of a debenture holder
pertain largely to a receipt of interest calculated at a
predetermined rate and which is payable at fixed
times. This is despite making profits. With shares, a
dividend has to be declared when profits are made.-
On winding up, debenture holders get first preference
over shareholders because they are the secured
creditors of the company.*Once capital is raised, it
has to be maintained throughout the company‟s
trading period.It should not be unlawfully reduced
except in accordance with the provisions of the
Companies Act.

DIRECTORS
They are quasi – trustees of the assets of the
companyThey manage the company. Duties to
the company
1) Fiduciary Duties
Secret profits and benefits from office – generally- A
director must account to the company for any
personal profit he may make in the course of his
dealing with the company‟s property.*The rationale
for this is that there has been a conflict of interest.- A
director is supposed to negotiate for the company‟s
benefit. He can not obtain a contract for himself in
the course of employment.- He should also account
for any gifts received (either of money or shares)
from promotions, or persons selling property to it or
commission received from persons who supply goods
to the company.***Nkala and Nyapadi4 – A person
possesses fiduciary duties when he is in a position of
trust, or occupying a position of power and
confidence with respect to another person, such that
he is obliged by law to act solely in the interest of
that person whose rights he is to protect.NB Strictly
speaking, directors cannot be trustees because the
legal ownership of the property they administer is not
vested in them but in the company. The position of
trust emanates from the agency-principal relationship
between them and companies.- R V Milne and

4
in their book entitled “Company Law in Zimbabwe.”
Erleigh5, Centlivres CJ summed up the position in
these words:“It is, of course, clear that the duty of all
agents, including directors of companies, is to
conduct the affairs of their principals in the interests
of the principals and not their own benefit”.
CASES
- Industrial Dvt consultants V Cooley [1972] 2 All
ER 162.Facts – the Defendant was an architect of
considerable distinction and attainment in his own
sphere. He was appointed Managing Director of the
Plaintiff‟s construction company to help the company
obtain contracts in the public sector. He negotiated
to obtain for the company 4 contracts tentatively
planned by the Eastern Gas Board. The Board firmly
indicated that it was not prepared to award the
contracts to the company, but the company was
determined to pursue negotiations. Later, the Gas
Board decided to go ahead with the work in a
modified form and to undertake a new project. It
approached the Defendant privately in respect of one
of the contract provided he properly obtained his
release from the company. He was also given firm
details of the other contracts. The Defendant did not
inform the company of these talks, but obtained his
release from his position as Managing Director by
stating falsely that he was ill. He told the Gas Board
that he was very interested, not only in the contracts
5
1951 (1) SA 791 @ 828D
offered to him, but also in the others. Whilst still
Managing Director of the company he submitted
detailed proposals for undertaking the work. One
week after his release as Managing Director he
obtained the contracts. The company sought to make
the Defendant account for the profits from the
contract on the basis of his breach of fiduciary duty.
The Defendant denied any fiduciary duty as the
contracts had not been obtained by virtue of his
position as the Managing Director. The Gas Board
had approached him, not qua Managing Director of
the Plaintiff Company, but in his own capacity, and
consequently he was under no duty to pass the
information on to the company.Held – that the
Defendant should account. The Defendant had one
capacity, that of Managing Director.He was under a
fiduciary duty to pass on information acquired in his
dealings with the Gas Board which was of concern
to the Plaintiff. Further, in pursuing this contract for
himself, he had allowed his duty to the company and
his own interest to conflict.Roskill J held:-
“Therefore it can not be said that it is anything like
certain that the Plaintiffs would ever got the contract
… on the other hand, there was always the possibility
of Plaintiffs persuading the Eastern Gas Board to
change their minds and ironically enough, it would
have been the Defendant‟s duty to try and persuade
them to change their minds.It is a curious position
under which he should now say that Plaintiffs
suffered no loss because he would never have
succeeded in persuading them to change their
minds”.
1. Regal (Hastings) Ltd V Gulliver6 Held:by the
house of Lords – that directors were liable to account
to the company once it was established:-*That what
the directors did was so related to the affairs of the
company that it could properly be said to have been
done in the course of their management and in
utilization of their opportunities and special
knowledge as directors and.*That what they did
resulted in a profit to themselves.NB However, a
director may take advantage of a corporate
opportunity on his own account if his company has
considered the same proposition and rejected it in
good faith.Pesso Silver Mines V Cropper7Facts –
Pesso Company was offered an option on mineral
claims. The Board of Directors sat, considered the
opportunity and turned it down on reasonable
grounds. Subsequently, three Directors acquired the
claims personally and they made a profit. After a
change in the company management, the new
management sought to make the Directors account
for the profits they made.Held – that the Directors did
not take a corporate opportunity and therefore they
6
[1942] 1 ALLER 378.
7
[1967] 30 mlr 450
were not obliged to account.Master this – Nkala and
Nyapadi convincingly contend that it‟s not possible
for a director to contract out of his fiduciary duty.
Directors are not allowed to make secret
profits.Directors should exercise their independent
discretion and make decisions according to the best
interests of the company as his principal to the
exclusion of the interests of any such nominator,
employer etc.
2. Duty of care and skill
Directors should not act negligently in managing the
company‟s affairs. The degree of skill is that of a
reasonable person of their knowledge and skill and
experience In re City Equitable Insurance
CompanyHeld – (i) A director is not bound to give
continuous attention to the business of the company.
Neither is he obliged to attend all meeting though he
ought to attend when reasonably necessary. (ii) He is
not obliged to see to the security and efficiency of the
company personally. (iii) the test for negligence is
subjective.Re Brazillian RubberFacts – Directors
agreed to be directors of a Company where they had
no knowledge of the business itself. The court found
that one of the directors was ignorant in business
generally. The other director was of an advanced
age. The company made huge loses through
speculation of directors. The liquidator argued that
the directors were liable. *The court used the
subjective test of negligence and found the directors
not liable. NOTE – What can be concluded from the
common law position is that the fewer a director‟s
qualifications for the office are, the less time he
devotes to the business, the greater reliance he places
on others and the less legal responsibility he attracts.
Worse still, our Companies Act, unlike the English
Act, does not make any director unfit for office
because of glaring incompetence. This results in
companies incurring great losses because of too much
relaxation on the test for negligence. There is
however, great need at law to impose stricter
standards on directors to provide incentives for them
to perform their legal duties for the benefit of the
company, shareholders and the general public.
Duties of directors towards shareholdersDirectors do
not owe any contractual or fiduciary duties to
individual members of their company unless there is
an agency principal contract to this effect. They owe
them duties as a collective group.*Percival V Wright8
Facts – certain shareholders wrote to the secretary
enquiring if he knew anyone wishing to purchase
their shares. Negotiations ensued between the
shareholders and the chairman and the two other
directors. The Plaintiffs subsequently discovered that
the board had been approached by a 3rd party who
offered a very favourable price for the shares. At the
8
[1902] 2 Ch 421.
time Plaintiffs‟ discovery, they had already sold the
shares to the directors. The Plaintiffs requested that
the sale of their shares be put aside on the ground that
the Defendants should have disclosed the takeover to
them.Held – that the directors were not under a duty
to the shareholders to disclose this information even
though they knew that the shares were more than the
shareholders‟ selling price. It was stressed in the
judgement that there was no unfair dealing. The
court found that the directors did not approach the
shareholders with the view of obtaining their shares.
Instead the shareholders approached the directors,
and named the price at which they were desirous of
selling, hence there was no question of unfair dealing
in this case. Allen V Hyatt9Facts – directors
induced the shareholders to give them options for the
purchase of their shares so that the directors might
negotiate a sale of the shares to another company.
The directors used the options to buy the shares
themselves and then resold them at a profit to the
other company.Held - Privy council that the directors
had made themselves agents for the shareholders and
must consequently account for the profit which they
had obtained.Directors do not owe members any
duties because they are not servants of the
shareholders but of the company.Section 189 states
that “In the exercise of their functions, directors may
9
[1914] 30 TLR 444.
have regard to the interests and welfare of the
company‟s employees, the dependants of those
employees as well as the interests of the company‟s
members”.NB The use of the word „may‟ indicates
that this duty is discretionary. It is dependant on the
decision of an individual director.
Qualifications of Directors
The Companies Act does not give any qualifications
for directors. However, the following people are
disqualified from being directors:-- Unrehabilitated
insolvents.- Minors or any people under legal
disability.- Women married in community of
property need written consents of their husbands.- A
body corporate eg a company cannot be the director
of another company.- A person convicted in
Zimbabwe or outside for any case of commercial
immorality eg forgery, fraud, theft and uttering.- Any
person who is removed by a competent court from
the office of trust on account of his
conduct.*Directors are responsible for the
management of the company. Each company should
have not less than 2 directors, one of which should be
ordinarily resident in Zimbabwe.Every company
should also have a company secretary who is
ordinarily resident in Zimbabwe.
Meetings of members
The statutory meeting
Not less than one month and not more than 3 month
after it‟s entitled to commence business every public
company must hold a general meeting of members,
which is called the statutory meeting (S124(1)).The
object is to enable members to review, the initial
progress of the company. Company affairs should be
discussed fully (S124(7)).
Annual General Meeting
Must be held within 18 months of the company‟s
incorporation and thereafter within 6 months of the
end of each financial year and not more than 15
months after the previous AGM. The registrar is
empowered to extend these periods on good cause
shown or to arrange a meeting (even of one person)
which shall be deemed to be the AGM (S125).21
days‟ notice in writing of the meeting must be given,
but short notice may be accepted by all the members
entitled to attend and vote (S127).
Issues to be discussed include “declaring a dividend,
the consideration of the accounts, balance sheets and
reports of the directors and auditors, the election of
directors in the place of those retiring and the
appointment of and the fixing of the remuneration of
the auditors and any special business the general
nature of which has been given in the notice
convening the meeting.”
Extraordinary General Meetings
Deal with special business, the general nature of
which must be given in the notice convening the
meeting. This is to enable a member to attend the
meeting and to prepare himself to deal with the
special business.
S126 requires an extraordinary general meeting to be
convened by the directors.S127 requires 14 days‟
notice in writing to be given (7 days in the case of
private company) and permits this notice to be
waived by the holders of 95% of the shares giving a
right to attend and vote at the meeting.*An EGM
may also be requisitioned by notice to the company
from members holding not less than 5% of the paid-
up capital carrying the right to vote. The requisition
must state the objects of the meeting, and within 21
days the directors must issue a notice convening a
meeting not less than 14 days (21 days if a special
resolution is to be proposed) or more than 28 days
ahead.
If the directors do not act, half or more than the
requisitionists may convene the meeting, being
reimbursed by deductions from the fees of the
delinquent (or stubborn) directors: S126.
Conduct of meetings- Common law requires fair
warnings to be given to members of matters to be
considered at meeting.- There should be a quorum of
2, with an automatic adjournment of a week if the
quorum is not present.- The chairman of the Board
should chair meetings and should have a casting
vote.*Under common law, the chairman has a duty to
enable members to discuss the matters before them
fairly and reasonably – should keep order and prevent
time-wasting. He should exercise his powers in good
faith and with fairness.- Minutes of every meeting
must be kept in a minute book, if signed by the
chairman of the meeting or the next meeting, are
evidence of the proceedings and prima facie evidence
of their regularity (S138).
VOTING AT MEETINGS
The Act leaves it open to the articles to allocate
voting rights in any way. It‟s generally by show of
hands unless a poll is demanded.*S129 provides for
proxy voting. A proxy is entitled to speak as well as
vote on behalf of the member(s) appointing him and
need not himself be a member. Thus it‟s sometimes
convenient to appoint a lawyer, accountant or other
expert.
RESOLUTIONS- refers to decisions that are
reached at meetings.*All decisions at meetings of
members are taken by ordinary resolution i.e. a
simple majority of the votes cast. On the other hand,
a special resolution requires at least 75% of the total
number of votes cast at a meeting.
The Act requires a special resolution for the
following purposes: alteration of the memorandum
(S16(1)), alteration or the articles (S20), change of
name (S25(1)), conversion of public into private
company (S33(3)), issuing shares at a discount
(S75(1)), placing uncalled capital to reserve (S86),
alteration of share capital (S87(1)), reduction of
capital (S92), investigation of company affairs
(S158(a)(1)), winding up by the court at (S206(a)),
voluntary winding up (S242(b)), sale of bus or
property in voluntary winding up (S250),
arrangement with creditors in voluntary winding up
(S260), instructions of liquidator in voluntary
winding up (S263(1)), making provision for
employer and employees and their dependants on
cessation or transfer of the company business (S287).
SPECIAL 21 days notice should be given, specifying
the terms of the resolution and the intention to
propose it as a special resolution. The holders of not
less than 25% of the votes of the company must be
present in person or by proxy, the resolution must be
passed by not less than a 75% majority of the
members present (S133(1)). The resolution must be
transmitted of the registrar for registration within 1
month (S136).A resolution requiring special notice is
required for the removal of a director before
expiration of his term of office (S175) or for
replacing an auditor (S151) or for any other purpose
specified in the articles (S135(1)). 28 day‟s notice
must be given to the company, which must then give
21 days‟ notice of the resolution and send a copy to
any person whose status will be affected by the
resolution (S135).
WINDING UP
Is a process by which a company‟s existence is
brought to an end and may take the form of winding
up by the court or voluntary winding up.
Grounds for winding up by the courtS206 sets up
grounds on which a company may be wound up by
the court namely:- If the company has by special
resolution resolved that it be wound up by the court.-
If default is made in lodging the statutory report or in
holding a statutory meeting.- If the company does not
commence its business within a year from its
incorporation or suspends its business for a whole
year.- If the company ceases of have any members.-
If 75% of the paid-up share capital of the company
has been lost or has become useless for the business
of the company.- If the company is unable to pay its
debts.- If the court is of the opinion that it is just and
equitable that the company should be wound up e.g.
where the main objects have become impossible to
achieve and where the company is commercially
insolvent and winding up is the only means by which
credit can obtain payment.Ebrahimi V West bourne
GallariesFacts – Ebrahimi and Mr Nazar carried out a
partnership business where they had equal shares.
They converted this partnership into a private
company and were appointed its first directors. Soon
Mr Nazar‟s son was admitted into the company
through a donation of shares by both parties.
However, the father and son colluded to kick out
Ebrahimi from the company using a general
resolution. Mr Ebrahimi then petitioned the court to
make a winding up order. Held- Winding up was
ordered on just and equitable grounds because Mr
Nazar and his son had oppressed Ebrahimi.
Who may apply for winding up by the courtS207(1)
provides that an application for winding up by the
court may be made by the company, a creditor, a
contributory or the minster.S207(2) adds the master
of the High Court to the list if the application is to
convert a voluntary winding up into winding up by
the court.*Contributory – a person liable to
contribute to the assets of a company in winding up
(S202).
ProcedureThe applicant must proceed by way of
petition (S207) which must comply with companies
(winding up) rules S1841 of 1972 rule 5. It should be
served on the company and the court should grant an
order allowing the company ample time to prepare
and present its case. Upon presentation of evidence,
the court will consider the matter and decide whether
or not to grant a winding up order.Winding up is
deemed to commence at the time of presentation of
the petition (S210(2)) which means when it is filed
with the registrar of the High Court.
Effect of winding up order Its immediate effect is to
freeze the company‟s affairs in a number of respects -
legal proceedings, attachments and executions are
stayed, disposition of property, share transfers and
alterations in the status of members may no longer be
made, the company‟s property is deemed to be in the
custody or control of the master until a liquidator or
provisional liquidator is appointed, the powers and
duties of the directors also cease etc.LiquidatorHis 1st
duty is to recover and reduce into possession all the
company‟s property and open a bank account (S224).
He should take into account directions given by
meetings of creditors or contributories. He should
identify creditors and contributories and how much
they are owed by and owe the company
respectively.In the event of a company being unable
to pay its debts, creditors may proceed against
sureties of a company being wound up, without 1st
excusing the company.The process of liquidationThat
liquidation should ascertain the total of the
company‟s liabilities from the proofs of creditor‟s
claims (S220). He should sell company‟s assets with
the authority of a joint meeting of creditors and
contributories with leave of the court keeping a
proper account of all transactions.*He can calculate
the shortfall, and name the contributories that are able
to compensate the shortfall, if any.*He can open a
liquidator‟s account. He will then prepare the
necessary documents and hand them over to the
master. The master then applies to the court for
dissolution.
Voluntary winding up*Is by special resolution which
should be advertised and sent to the master. Winding
up commences from the passing of the resolution,
when the company is required to cease business
except in so far as may be necessary for its beneficial
winding up (S245).*If, before the special resolution,
the directors give security for payment of the
company‟s debts or furnish the master with the
prescribed proof that the company has no liabilities,
the winding up becomes a member‟s voluntary
winding up. Otherwise it‟s the creditors‟ voluntary
winding up (S246).*Since directors have no interest
in a members‟ voluntary winding up, the liquidator is
appointed, empowered, remunerated and if necessary
replaced (S249) by the company in a general
meeting.*In a creditors‟ voluntary winding up, the
special resolution must be followed by a creditors‟
meeting organised by the company to receive a
statement of the company‟s affairs and to nominated
a liquidator.*The liquidator must give notice of his
appointment to the master. Calling meeting between
the company and creditors every six months or
whenever necessary.On application by a creditor or
contributory (S265) or by the liquidator the court
may convert the voluntary winding up into a winding
up by the court.There appear to be 3 circumstances in
which a creditor can proceed against a company in
voluntary liquidation. These are:-- Where the action
was instituted prior to liquidation.- Where the claim
arose from expenses incurred in winding-up.- Where
despite the presentation of a claim of the liquidator,
he refuses to make a decision upon it.

CHAPTER 15
INSOLVENCY
Is governed by the Insolvency Act [Chapter 6.04]. As
was mentioned in Chapter 2, an insolvent is a person
who accrues more liabilities than what his assets can
pay for. Early Rome saw a debtor who was unable to
pay his debts surrendering himself to his creditor,
hoping for slavery rather than death1. But today, due
to the advent of human rights, a person now retains
his freedom but hands over his property in
accordance to the Insolvency Act [hereinafter
referred to as the Act. ***In a nutshell, the Act
provides that a debtor who cannot pay his debts may
be ordered by the High Court (either on his
application or that of the creditor) to hand over his
property to a trustee for sale and distribution among
his creditors. The debtor is relieved of liability for his
debts, but remains under certain legal disabilities

1
Scott – The Civil Law vol 1, pages 63-4
unless he successfully applies to court for
rehabilitation.
SEQUESTRATION AND ATTACHMENT OF
PROPERTY
The Act applies to every debtor except a company or
other association which may be wound up under the
Companies Act. According to section 2 of the Act,
the Act applies to individuals, partnerships or
associations of not more than 7 members, trusts
which are capable of owning property and clubs
which do not carry on business for profit2.
FORMS OF INSOLVENCY(1)
Voluntary surrender – this ensues when the debtor or
his agent surrenders his estate for sequestration (see
Section 3). Usually, this is done by way of petition to
the Master of the High Court [s 3(4)]. Ex Parte
Marais3 convincingly held that the information in the
petition must include “…the nature of the business,
the cause of insolvency and other matters connected
with the estate, as well as the financial position of the
applicant apart from the business and the prospect of
obtaining remunerative employment. It was
important to state whether he was now in a salaried
position or not and whether he had other sources of
income.” It should also include a statement of the
debtor‟s affairs.The petition must satisfy the court on
2
see Ex parte Milton 1959 (1) R &N 377 / 1959 (3) SA 347 and Ex Parte Matabeleland Club 1962 R
&N 4
3
1939 SR 25
the following 4 matters:- That the estate contains
sufficient free residue (i.e assets over which no
creditor has a particular right of preference) to meet
the costs of sequestration [s 4 (1)(a)].- That the estate
is insolvent [s 4(1)(b)] – ie that it has more liabilities
than assets.- That the surrender will be for the
benefit of creditors generally.- That the debtor has
made a full and honest disclosure of all relevant
facts4.*If the court is prima facie satisfied on all
these, it may grant a provisional order of
sequestration and issue a rule nisi calling on
interested parties to show cause why the provisional
order should not be made final [s 4(1)].The petitioner
must publish the rule nisi in the Government Gazette
and a circulating newspaper [s 5] and on the return
day the court may (if satisfied on all points including
publication) grant a final order of sequestration [s 6].
This procedure is not rigid. In Ex Parte Spence5, the
court held that any irregularity in procedure may, in
the court‟s discretion, be condoned is there could be
no prejudice of any interested party.
(2) Compulsory Sequestration – occurs when a
creditor(s) petition the High court to sequestrate the
debtor‟s estate owing to either non-payment of debts
or that the debtor‟s estate is insolvent or that he is
„commercially insolvent‟ in the sense that he cannot
4
Ex Parte Berman 1972 (1) RLR 230.
5
1959 (3) SA 933.
pay his debts without selling his assets. The
procedure is akin to that of voluntary surrender.
However, the creditor should satisfy the court that
sequestration will be to the advantage of
creditors.The provisional trustee.Should be appointed
by the High Court upon being petitioned by a creditor
who feels it desirable that the debtor‟s estate should
be placed under immediate control.Effect of
sequestration- It imposes legal disability on the
debtor. R v Etberg6 held that the status of insolvency
stops at international boarders and a person who is
insolvent or bankrupt in any foreign country will not
be regarded as insolvent in Zimbabwe.- The insolvent
is deprived of ownership of all his property, which
vests in the trustee [ss 23 & 39].- The insolvent is
also deprived of the power of acquiring ownership of
property [s 23 (2)(b)], but he may retain his clothes
and bedding and such furniture and tools as the
Master may decide to leave him. However, the High
Court has special jurisdiction at times to order the
insolvent to pass ownership to a 3rd party who
acquires property from him in good faith and for
value.- The insolvent is also disqualifies from
holding positions of trust like that of a Company
director.- The insolvent‟s contractual capacity is
unaffected. However, if the contracts affect estate
property, the insolvent must get the consent of the
6
1932 AD 142.
trustee.- The debtor‟s existing contracts at the time of
sequestration can be terminated. However, the trustee
has the discretion to either abide by the contracts
(which involves performance of the insolvent‟s
obligations) or to terminate them.Procedure up to the
2nd meeting of creditors.The 1st meeting of creditors –
one of the reasons why notice of every order of
sequestration must be given to the Master is to enable
him to call the 1st meeting of creditors of the
insolvent, which he does by notice in the Government
Gazette. The object of the meeting is to enable
creditors to prove their claims and elect a trustee [s
53(1)]. It will be presided by the Master or hs deputy
[s 52]. The insolvent is obliged to attend the 1st
meeting unless excused [s 67(1)] and may be
subjected to examination.Election of a trustee – no
professional qualification is required but the
candidate must not be:- Himself an insolvent- A
minor or other person under legal disability- Resident
outside Zimbabwe.- A body corporate.- Have been
once convicted of a commercially immoral crime
etc.He is elected by the creditors present at the 1st
meeting. If they do not, then the Master may appoint
one. If the trustee is appointed by the creditors, he
does not take office until he has given security to the
satisfaction of the Master and received from him a
certificate of appointment. He must then advertise his
appointment together with address in the Government
Gazette, calling upon debtors of the insolvent to pay
their debts to him [sections 75 and 91]. The
insolvent‟s property vests in him. He also opens a
bank account and safeguards the insolvent‟s books of
account.
Duties of the trustee- Taking necessary steps to
recover debts owed to the insolvent.- Paying off
creditors (with the permission of the Master) using
the proceeds of the insolvent‟s estate.- To uphold
some of the insolvent‟s contracts.- Performing legal
transactions on behalf of the insolvent.Impeachable
transactionsRefer to the power given to the trustee to
set aside certain transactions carried out by the
insolvent before he was sequestrated. Such
transactions include:
(a) Disposition without value – is any transfer or
abandonment of the insolvent‟s rights to property not
made for value, such as a gift7.
(b) A voidable preference – is any disposition of his
property made by the insolvent less than 6 months
before sequestration which has the effect of
preferring one creditor (in a surety) above another.
(c) An undue preference – is a disposition of his
property made by the insolvent at any time when his
liabilities exceeded his assets, with the intention of
preferring one creditor above another.

7
see Huizenga v Zwinoira 1987 (2) ZLR 276.
(d) A collusive dealing – is a transaction entered into
by the insolvent before sequestration in collusion
with another person for the disposal of any property
belonging to the insolvent which had the effect of
prejudicing his creditors or of preferring one creditor
above another.The 2nd meeting.Here, the trustee must
give a report of all the transactions carried out. The
report should include:- All matters relevant to
sequestration- The assets and liabilities- The cause of
the debtor‟s insolvency- The books relating to the
debtor‟s affairs- Whether the insolvent appears to
have contravened the Act or has committed any other
offence, with full particulars- Whether he has made a
subsistence allowance to the insolvent under section
93 and why- Whether he had carried on the
insolvent‟s business, with a list of purchases and the
trading results.- Whether any legal proceedings were
suspended by the sequestration and are pending or
threatened.- Whether the contract to buy immovable
property or any lease was affected by sequestration,
and what action he has taken.- Any matter in regard
to the administration or realization of the estate
requiring the directions of the creditors. The object
of this meeting is not only to give the fullest
information to the creditors but to enable them to
give instructions to the trustee on items (f) to (j).
Creditors may vote on any matter concerning the
administration of the estate, but not on matters
concerning its distribution. The insolvent should
attend either the 1st or 2nd meeting or both meetings,
failure of which attracts a criminal offence. The
insolvent should be examined especially on the 2nd
meeting.Procedure after the 2nd meeting.Composition
– the insolvent may submit to the trustee an offer of
composition anytime after the 1st meeting, the object
of which is to prevent the normal sale of all the
insolvent‟s assets and distribution of the proceeds
among creditors. The offer can come in the following
forms:*A scheme whereby the insolvent is allowed to
continue his business under the trustee‟s supervision
and a committee of creditors in exchange for regular
monthly payments to be paid to the trustee for
distribution.*Cash payment (provided by the
insolvent‟s friends and relatives) in return of all the
insolvent‟s assets to him.Sale of goods – where no
composition has been agreed, the trustee‟s primary
duty after the 2nd meeting is to proceed as rapidly as
possible with the selling of the estate‟s property and
the distribution of the proceeds.The Trustee‟s
accounts – must be produced within 6 months of
appointment [s 118] unless the Master grants him an
extension [s 119]. Sections 121-124 provide that the
nature of the accounts include:*A liquidation account
– showing the trustee‟s receipts and
disbursements.*A trading account – showing opening
and closing stock, daily totals of receipts and
payments and trading result.*A plan of distribution –
showing the amounts awarded to secured, preferent
and concurrent creditors or a plan of distribution
showing the amount each creditor is liable to
contribute.
REHABILITATION
Is a process whereby an insolvent applies to return to
normal. The application to the High Court for
rehabilitation may be made in 5 circumstances
namely:- If the insolvent has obtained a certificate
from the Master that his creditors have accepted a
composition [s 141(1)].- If 12 months have elapsed
since the confirmation of the trustee‟s 1st account or 2
years from the final sequestration order, whichever is
the earlier [s 141(2)(a)].- If the insolvent has been
sequestrated on a previous occasion and 3 years have
elapsed from the confirmation of the trustee‟s 1st
account, unless the insolvent has been convicted of a
fraudulent act in relation to the existing or any
previous insolvency [s 141(2)(b)].- If the insolvent
has been convicted of a fraudulent act in relation to
his existing or any previous insolvency and 5 years
have elapsed from the date of conviction [s
141(2)(c)].- At any time after confirmation of a plan
of distribution providing for payment in full of all
proved claims, with interest, and the costs of
sequestration [s 141(4)].A partnership cannot be
rehabilitated but individual partners can [s 145]. The
effect of a rehabilitation order is to put an end to
sequestration, to discharge all the insolvent‟s pre-
sequestration debts which did not arise out of any
fraud on his part and to relieve the insolvent of every
disability resulting from the
sequestration.Rehabilitation does not affect rights and
duties relating to a composition or to property not yet
distributed, nor the liability of a surety for the
insolvent nor any liability to pay a penalty or suffer
punishment under the Act [s 146].
ASSIGNMENTA debtor who wishes to obtain the
advantages of insolvency without the
corresponding disadvantages may agree with his
creditors to hand over his estate to a person
(called the assignee) to be administered for the
benefit of the creditors through a contract known
as a deed of assignment.The debtor must publish
the notice and registration of the assignment in
the Government Gazette and local newspaper. It
should be signed by at least ¾ of the majority of
creditors. The Master of the High Court
supervises whatever the parties agree to in the
Deed of Assignment.

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