Exam Questns

Company Law in brief for examination preparation
QUESTION ON THE LEGAL PROCEDURAL STEPS FOR FORMING A PRIVATE/PUBLIC COMPANY.
The creator of the company has to decide a number of things, and having decided, has to
comply with the provisions of the Act before corporate personality can be achieved. He has to
determine:
(a). Whether a private company is more suitable to carry out his purpose or a public company.
(b). Whether the purpose is lawful
(c ). The scope of the proposed activities.
(d). Comply with the specific requirements of the Act in respect of registration as follows:
(i). Name search (CR 21)
(ii). Preparing Memorandum of Association
(iii). Preparing Articles of Association if any
(iv). Pre-incorporation contract if any
(v). Notice of situation and Postal address of registered office (CR 6)
(vi). Appropriate fees prescribed in Seventh Schedule of the Act.
Advantages and disadvantages of forming a company
Advantages
Members Limited liability

Members liability is only limited to the amount still outstanding on their shares.
Separate Legal Persona
This means a company may be held liable to its own activities it conducts as it do
business with third parties.
Increased borrowing powers
Companies performing well tend to lure investors more and have opportunities of
getting loans quite easy than any other business entity.
COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 1

Perpetual succession
Means, a change of members has no effect on the legal personality of the company, so no
special accounts need be drawn up, transfer of shares is simple and without interrupting the
business it can in effect be transferred by transferring the shares in the company.
Tax advantage
Companies pay corporate tax and there is a wider ray of allowances and tax deductable
costs that can be offset against a companys profits as opposed to Sole Proprietors and
Partnerships that pay income tax.
Protection of company names
The use of company names is restricted through the registrars office as no other
company may be allowed to use the same name with your companys name.
Disadvantages
Cost on registration
Annual returns to be lodged timeously and at a fee.
QUESTIONS ON PRIVATE AND PUBLIC COMPANIES
Compare and contrast a Private Company and a Public Company in terms of the Zimbabwean
Companies Act (Chapter 24:03 ) (20 marks)
PRIVATE COMPANY PUBLIC COMPANY
There must be a minimum of 1 member and a There must be a minimum of 1 member but
maximum of 50. S 8 and S 33 (1) (b) no maximum is laid down
The right to transfer shares must be restricted. The right to transfer shares is generally
In practice this is generally achieved by placing unrestricted.
the control of all transfers in the hands of
directors. (S 33(1) (a)
Invitation to the public to subscribe for any No such prohibition exists, although strict
shares or debentures of the company is controls surround the issuing of an invitation.
prohibited. S 33 (1) ( c)
It can commence business immediately upon Whether company has issued a prospectus
registration. inviting the public to subscribe for its shares,
or not, it may not commence business until all
the provisions of the Act have been complied
with, and the registrar has certified that the

company is entitled to commence business.
No prospectus or statement in lien need be A prospectus or a statement in lieu of a

registered. S 114 (1) prospectus has to be registered before it can
commence business. S 114 (2) and 3 (a)
NB: Directors are not required by the Act to hold shares in their company. If however, a
director either takes shares or contracts to take share for which he is liable to pay cash then:
The directors are not required by the Act to The company is not permitted to commence
pay a certain proportion on their shares business until every director has paid on each
before the company can commence business of such shares taken or contracted to be taken
a proportion equal to the proportion payable
on application and allotment on the shares
offered for public subscription
In some circumstances does not have to An Auditor has to be appointed. S 150 (1)
appoint an auditor. S 150 (7)
Loans can be made to directors provided Loans to directors are generally prohibited. S
members holding at least 9/10th of the issued 177 (1)
shares capital consent. S 177 (1) (c ) 9/10
Certified copies of the balance sheets, Certified copies of the balance sheet, auditors
auditors and directors reports need not be and directors reports must be filed annually
field with the registrar of companies except in with the registrar of companies
certain circumstances.
No statutory meeting need be held or A statutory meeting and statutory report are
statutory report furnished mandatory.
Certain formalities in respect of the Formalities in respect of the appointment of

appointment of directors are not required. directors are required.
No register of directors shareholdings need A register for directors shareholding must be

be kept. kept.
The amounts of loans to directors need not be The amount of any loan to a director or officer
shown in the accounts laid before the of the company must be shown in the account

company. laid before the company in general meeting.
Differences between Partnership and a Company
PARTNERSHIP COMPANY
Legal status It is not a distinct Persona and A company is a distinct

common law all the partners Persona.
have to be joined in a legal
suit; a cumbersome process.
Transferability interest One partner cannot transfer Shares are freely transferable,
his share without the consent except for private companies
of the others. which are bound to limit the
transferability of their shares.
Charter The partnership can do The activities of a company are

anything that the partners confined to its Charter. i.e
agree to do. In other words it is the Memorandum of
not bound by Charter while Association.
limits its activities.
Agency Each partner is an agent of the A member of company is not its

partnership. agent by reason solely of his
membership.
Liability Each active partner is liable The members liability is limited

personally for the debts of the to the amount unpaid on his
partnership, their liability is shares.
joint and several.
Perpetual A partnership has no perpetual The death or Insolvency of a

existence, the Insolvency or member does not dissolve the
the death of a partner ends the company.
firm, unless provision is made
to the contrary.

Capital The total amount of capital and The capital of the company is
each partners contribution governed by the memorandum
thereto can be altered by and the Act.
agreement.
Membership A partnership cannot consist of Provided it is registered in

more than 20 persons, unless terms of the Act company may
the members belong to a have an unlimited number of
designated calling or members, unless it is a private
profession. company, when in terms of the
Act the numbers are limited to
50.
Formation Partnership maybe formal, A company formation must be

written or verbal agreement interpreted in terms of the
among partners. companies Act.
Question
To qualify as a private company, the articles of a company must comply with the requirements
set out in S33 of the companies Act (Chapter 24: 03. List these requirements and explain the
consequences.
Answer
A restriction on the free transferability of shares.

A limitation on its member to 50.
A prohibition on invitations to the public to subscribe for its shares or debentures.
These requirements may not be altered without simultaneously converting into a public
company. Failure to comply with annual financial statements with the (registrar and to
issue interim reports and provisional annual financial statements like a public company
without becoming a public company .
UNDERWRITING
Question:
Discuss an underwriting contract and state its significance to the company.
Answer:

This refers to a situation where a company or its promoters or directors ask a financial institution eg. A
Merchant bank to give a financial guarantee that the company will have enough capital to start business.
The financial institution will make a promise or agrees that it will take up or buy any shares which have
not been subscribed for by the public. This ensures that the minimum subscription of share or
debentures to provide the company with enough capital to start business will be reached. Underwriters
make their income from the prize difference between the price they pay one issuer and what they
collect from investors or from broker-dealers who buy portions of the offering.
Its significance:
Importance of underwriting contract.
Assurance of adequate finance. Underwriting is a guarantee given by the underwriters to take up the
whole issue or remaining shares, not subscribed by the public. Thus underwriting contract ensures of
the required funds within a reasonable or agreed time frame.
Increased in goodwill of the company
Underwriter increases the goodwill of the company because of their financial integrity. They have
established reputation.
Benefit of expert advice
The issuing company gets the benefit of expert advice. An underwriter of repute would go into the
soundness of the plan put forward by the company before entering into an agreement and suggest
changes whenever necessary, enable the company to stop unnecessary mistakes.
Service to prospective buyers
Underwriters renders useful services to the perspective buyers of securities by giving them expert
advice regarding the safe investment in sound companies. Thus they render useful services to the
buyers of securities too.
QUESTIONS ON THE CONCEPT OF LEGAL PERSONALITY OF A COMPANY.
The principle of separation and control refers mostly to public companies where the shareholders are
not the same people as the directors. In the majority of private companies where shareholders and
directors are the same people this principle does not apply. The directors derive their authority to
manage the company from the Articles of Association. Table A article 81 states
The business of the company shall be managed by the directors The shareholders cannot interfere
with directors in their exercise of power. However, the directors powers are restricted by provisions of
the Articles of Association. Shareholders can only act in a general meeting by prescribing regulations

governing the manner in which directors exercise their power. This ensures the principle of separating
and control. Those who own the company and those who control it are separate.
Question
The separate legal personality of a company is to be recognized and upheld except in the most unusual
circumstances. A court has no general discretion simply to disregard the existence of a separate identity
whenever it considers it just or convenient to do so.
Discuss the above statements and the doctrine of piercing the corporate veil with reference to
relevant case law. (20)
Answer
PIERCING / LIFTING THE CORPORATE VEIL
It has always been recognized that the Legislature can forge a sledgehammer capable of cracking open
the corporate shell and even without the aid of a legislative sledgehammer the courts have sometimes
been prepared to have a crack.
In the cases where the veil is lifted, the law either goes behind the corporate personality to the
individual members, or ignores the separate personality of each company in favour of the economic
entity constituted by a group of associated companies.
It should be emphasized that the veil never means that the affairs of the company are completely
concealed from view. Parliament has always made it an essential condition of the recognition of
corporate personality with limited liability that it should be accompanied by wide publicity.
Although third parties dealings with the company will normally have no right to resort against its
members, they are nevertheless entitled to see who those members are, what shares they hold and, in
the case of a listed company, the beneficial interests in those shares if substantial. They are also entitled
to see who its officers are (so that they know with whom to deal), what its constitution is (so that they
know what the company may do and how it may do it), and what its capital is and how it has been
obtained (so that they know whether to trust it).
Unless it is an unlimited company, they are also entitled to see its accounts, or at least a modified
version of them again in order to know whether to trust it.
Normally, however, third are neither bound nor entitled to look behind such information as the law
provides shall be made public, in addition to the veil of incorporation, there is something in the nature
of a curtain formed by the companys public file, and what goes on behind it is concealed from the
public gaze.
The fiction of the separate corporate personality cannot, however be taken too far, there are occasions
when the court is entitled to peer behind the facade of a fictitious separate legal persona.

In Salomon Vs Salomon and Co. it was held that a company is legally separate from its members from its
inception. The personnel running or owning the company are distinct. A company can own assets and
liabilities. It may sue or be sued. The separate legal personality has to be observed. Even courts have no
freedom to disregard it.
The separate existence may however, be disregarded in exceptional cases. Disregarding the legal
personality to identify the persons behind the company is called piercing the corporate veil. It is an
exception to the rule of legal personality.
An inspector may be appointed to investigate the companys affairs, in which case he will have the
widest inquisitorial powers.
Indeed he may even be appointed for the purpose of going behind the companys registers to ascertain
who are its true owners.
The following are instances where the veil may be pierced:
If corporate personality is being used for fraud or some other illegal purpose.
Where it is necessary to determined matters such as residence, and whether the acts of agent
have been sufficiently recognized.
Where trust relationships are involved.
Where the interests of third parties are at state.
Where state interest are involved.
Question
(a. Discuss three examples where the separate existence of the corporate entity is disregarded by
the legislature. (10). ( answer as above)
(b). Mr. Chari is the only shareholder of Pine Apple (Pvt) and holder of 195 of the 200 issued
shares in the company. The company owes Mr. Chari US$300 000 and the debt is secured by a
mortgage over the companys factory. The company has recently been wound up because it is
unable to pay its debts. The liquidator asserts that Mr. Chari and the company is actually the
same person and Mr. Chari should not be dealt with as a secured creditor of the company but
should be personally liable for the debts of the company.
Advise Mr. Chari on his legal position with reference to case law. (5 marks)
Answers
(b).
In Salomon V. Salomon Co , the House of Lords held that accompany was legally separate from its
members from its inception and that , as there was no evidence of fraud or impropriety on the
part of Salomons shareholding in the company was irrelevant in the adjudication of the validity

of his secured claim against the company. There was , therefore no basis to hold Salomon
personally liable for the debts of the company .
As Mr. Chari is in a very similar situation as Mr. Salomon in the scenario, the separate legal
existence of the company will not be disregarded and he will not be held personally liable for
the debts of company unless there is evidence of fraud or impropriety on the part of Mr.
Chari. His secured position will be recognized.
Question
Mr. And Mrs. Fox have just returned home from overseas. Whilst they were aboard Air Zimbabwe ,
they discussed investment opportunities and decided to invest their savings / savings into retail
and transport business ventures . They advise you that they want to operate a company and to
secure their investment as well as property given the reports of high crime rate.
Advise Mr. And Mrs. Fox on the following:
(a. The legal status of the company as well as their legal relationship with the company . (10)
Answers
(a). The legal status of a company is such that once validly incorporated /registered, it become a
legal entity existing independent of its members and directors who manage and direct it, it is as alter
ego of the company. The company also acquires full legal capacity as that of an adult majority age,
having full contractual capacity, ability to own property and capable of suing and being sued in its own
right and name, the legal relationship between M and Mrs Fox and the company is contractual in so far
as the couple are the members of the company and subscribed to the Memorandum of Association of
the company. Further should the two be directors as well in the company they will be having a dual legal
relationship with company as both owners and managers of the company which may compromise good
corporate governance though acceptable and common under private companies in the event that the
two are directors they will be the lawful agents and employees of the company with entitlements of
directors remuneration and allowances.
Question
(a). Outline the relationship between the Members, Directors and Management of a company? (10)
(b). Outline the concept of legal persona. (10)
Answer
(a).The relationship between Members, Directors and Management is regulated by corporate

governance and the Companies Act and their roles are related and complementary vis--vis the
ownership and management of the company. The members are the owners of the company through
shareholding and are the ones who appoint the directors to manage their investment in the company.

The directors are therefore agents or employees of the members. It is the directors who in turn appoint
management or assemble a realm of professionals to run the day to day affairs of the company. Thus
the management reports to the Board of Directors and the Board reports to the members.
Note that in delegating management to the Directors, shareholders disqualify themselves from the day
to day management of the company and have no say in its running except where specifically provided in
the companys act.
(b ). The concept of legal persona refers to the separate legal existence of a company, independent of
the shareholders or members owning it. It is the cornerstone of company law to the effect that once the
company has been lawfully incorporated, it becomes a legal entity with full contractual capacity existing
independently of those owing and directing it. Accordingly, the company becomes capable of owning
property in its own name, dealing and suing, being sued in its own name.
The legal status of a company is such that once validly incorporated/registered, it becomes a
legal entry existing independent of its members and directors who managed and direct it. The
effects of a company having a separate juristic personality is that it can engage in any activity
and is entitled to the same rights and remedies as any other juristic person eg.
It acquires full legal capacity as that of an adult of majority age,

Having full contractual capacity,
It can sue or be sued in its own name,
It can hold property in its own name.
It can borrow on the security of its assets without jeopardizing the assets of the
members.
Circumstances in which this concept does not apply
Common situations:
If the Corporate Structure is being used to enable a person to evade his obligations.
Case: Gilford Motor Co Vs Horne (1933)
Where it is necessary to determine matters such as residence and whether the acts of
agents have been sufficiently recognized.
Case: Daimler Vs Continental Tyre Company (1916)
Where the interest of third parties are at stake.
If the corporate personality is being used for fraud or other illegal purpose.
Case: Cattle Breeders Farm (Pvt) Ltd Vs Veldman (1974)
Where trust relationships are an issue.
Case: Littlewood Stores Vs IRC (1969)
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COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc)
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DHN Vs Tower Hamlon
Statutory situation:
The Act itself provides other examples where the law refuse to give full recognition to the idea
of a separate legal persona.
Reference should be made to sections where it can be seen that although in the normal course
of events to company would be liable for its actions, the Act places personal responsibility upon
members or directors.
The act of an officer of a company is the act of the company itself i.e the organic theory.
Section 32 of the Companies Act: Personal liability where business is carried on with no
members.
Section 58 of the Companies Act: Civil liability for incorrect statement of the companys
name.
Section 113 (4) of the Companies Act : provides that if it appears that any business of
the company was being carried on;
(a). recklessly or
(b). with gross negligence or
(c ). With intent to defraud any person etc.
Section 385 of the Criminal procedure and Evidence Act liability for officers and servants
of a corporate body for omissions (errors/blunders).
Section 81 of the Income Tax Act: liability for officers in trying to evade or postpone
paying taxes.
NB: In order to justify the doctrine of separate legal persona, candidates are expected to quote
case authorities such as:
Salomon(Pauper) Vs Salomon & Co. Ltd (1897)

Gumede Vs Bandla Bakitar Ltd (1950)
Dadoo Vs Krugersdrop Municipality Council (1920)
The significance of the Ratio decidendi in Dadoo Vs Krugersdrop Municipality Council (1920)
In Dadoo Vs Krugersdrop Municipal Council (1920) Innes, C.J. pointed out that a company
could not have an enemy character. It has neither body, parts nor passions. It cannot be loyal or
disloyal; neither, of course can it possess any characteristics which belong to a race of people.
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The effect of a company having a separate juristic personality is that it can engage in any
activity and is entitled to the same rights and remedies as any other juristic person. For
instance, it can lawfully submit itself to arbitration.
PERPETUAL SUCCESSION
Means, a change of members has no effect on the legal personality of the company, so no special accounts
need be drawn up, transfer of shares is simple and without interrupting the business it can in effect be
transferred by transferring the shares in the company.
Transferability of shares encourages share ownership. That means that a shareholder can sell his shares to
the market called the STOCK EXCHANGE. Once he wishes to sell the shares they hold.
The life of a company is independent of the lives of its members, unlike sole proprietors and partnerships. If a
shareholder dies or sells his shares the company will continue to operate.
Ownership and control of company may be in different hands.
NB: this means that in large companies the management of firms is in the hands of a Board of Directors, the
owners are shareholders.
QUESTIONS ON PRE-INCORPORATION CONTRACTS
Question
What is a prospectus?
Answer
A Prospectus
It is a legal document that institutions and businesses use to describe the securities they are
offering for participants and buyers. A prospectus commonly provides investors with material
information about stocks, bonds and investments, such as description of the companys
business, financial statements, biographies of officers and directors, detailed information
about their compensation, any litigation that is taking place, a list of material properties and
any other material information.
Question
Davy wants to conclude a contract for the purchase of property on behalf of a company which
she intends to incorporate in the future. Advise Davy on the requirements that need to be
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complied with in terms of S47 of the Companies Act (Chap 24:03 ) in order for the contract to be
binding on the company after it s incorporation .
or
Question:
The rule in Kelner Vs Baxter (1866) is an authority for stating that a company cannot after incorporation,
ratify a contract purported to have been made on its behalf prior to its incorporation.
State the five (5) requirement provided in the Companies Act (chapter 24:03) that enable persons to
enter into a binding contracts capable of ratification by the company after it had been formed. (10)
Answer:
The general rule under common laws: is that a company cannot adopt or ratify a contract
entered into prior to its incorporation by a person who professes to act as an agent for an agent
cannot act on behalf of a non-existing principal.
Case: Kelner Vs Baxter (1866)
The case is further authority for stating that a company cannot after incorporation ratify a
contract purported have been made on its behalf prior to its incorporation.
The role in Kelner Vs Baxter is still part of our law subject to the following qualifications.
In terms of Statutory Laws Section 47, a company may after it has been formally formed, adopt
controls entered into by a promoter before its incorporation provided the following conditions
are met:
The contract must be in writing

The person making the contract, whether he describes himself as an Agent or
Trustee for the company not yet formed, must at least act as an agent for the
company to be formed.
The memorandum must contain, as one of its objects, the adoption of such contracts.
The contract must be delivered to register simultaneously with the delivery of the
memorandum in terms of Section 21.
The contract must be legally enforceable.
Thus provided, when one entered into say Hire Purchase agreements, followed all the
conditions of section 47. The newly formed company is bound by the contract.
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Meanwhile, Under Roman Dutch Laws it is accepted through the Stipuletio Alteri principle, as
illustrated by the case of McCullough Fernwood Estates 1920 a Company may by absorption or
notification also obtain the benefit of contract made on its behalf prior to its incorporation
provided the promoter acted in his individual capacity. This was designed so as to prevent the
contract from operating to the disadvantage of the company because in the event of the
company not wishing to ratify, the promoter will be personally liable on the contract.
Duties of the Promoter
Duty of care and skill
Duty to act Intra-vires
Duty of Disclosure
Duty of doing the best for the benefit of the company
Liabilities of promoters
Misleading statements in a prospectus
Both under common law and under the Companies Act an omission may amount to an untrue
statement, and a statement which is literally true may become an untrue statement by reason of its
form or content.
Tett and Chadwick (1986:32) argue that a positive untruth is, of course, a misleading statement. But a
mans liability for misleading statements is not confined to positive lies. To say of a coal mine that it is
producing 500 tons of coal a day and is therefore a good investment, but to omit the known fact that
the mine will be exhausted in a months time, is almost as much an untruth as to say that the mine is a
good long-term investment. In other words a half truth or a deliberate concealment of material facts is
just as misleading as a positive misrepresentation.
Section 62 of the Act gives us some assistance as to what are misleading statements. It states that a
statement in the prospectus shall be deemed to be an untrue if:
i) it is misleading in the form and context it is included.

ii) If any important facts which ought to have been inserted in the prospectus have been left
out or omitted
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Liability arising out of Prospectus
Source of liability:
- Defective prospectuses give rise to civil as well as criminal liability. In both instances the liability
may have its source in the rules of common law or in specific statutory provisions.
- Generally speaking, civil liability serves to protect individual investor interest by providing the
necessary remedies to enable him to redress any wrongs causing him loss. Criminal liability is
aimed at ensuring a certain course or standard of conduct in the interest of the community as a
whole.
- Both the civil and criminal liability contributes inter alia to ensuring that the information
disclosed to a prospective investor in a prospectus can be relied upon to be accurate by
providing substantial remedies and sanctions in the event of inaccuracies therein.
- Section 54(7) specifically states that nothing in this section shall limit or diminish any liability
which any person may incur under common law or this Act apart from this section.
Statutory Civil Liability

It must be noted that civil liability under the Companies Act is not comprehensive and is imposed only as
a supplement to liability imposed by common law. The Companies Act tries to make the burden of proof
easier for the plaintiff who under common law has to prove that the misleading statement in the
prospectus was made either fraudulently or negligently. Under the Act, the Burden of proof is shifted to
the person who is responsible for the misleading statements i.e. the defendant.
Criminal Liability for misstatement in the prospectus
It means that the Act makes the issuing of a false prospectus in some certain circumstances, an offence
punishable by the state. Section 59(1) imposes criminal liable on a person who is deemed to have
authorized the issue of a prospectus which contained false statements.
Remedies
Damages are meant to place the plaintiff in the same position he was if the contract was correct. If a
member sues a company for breach of warranty he cannot remain a member of the company. The
member can rescind the contract and claim damages if the company was responsible for the false
statement.
QUESTION ON ULTRA VIRES DOCTRINE AND TURQUAND RULE (MEMO & ARTICLES OF ASSOCIATIO)
Question
(a). Under what circumstances will the Turquand Rule apply?
What are the exceptions where a third party will not be protected by the Turquand Rule? (10)
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Answer
The Turquand Rule/Indoor Management Rule

The memorandum and articles of a company do influence its dealings with third parties, as these
documents are open for inspection in the Registrars Office by any member of the public, persons
contracting with the company are presumed to have knowledge of their contents. They should satisfy
themselves that the company is acting within its powers. But so long as the transaction contemplated
do not appear to contravene the memorandum and articles, third parties need not inquire further.
The position was clearly stated in the case of:
Royal British Bank vs Turquand (1956)
Facts :
The articles of the company gave the directors the power to exercise the companys borrowing powers
provided they first obtained approval of the members by ordinary resolution in general meetings. The
directors borrowed money for the company but did not get the ordinary resolution and the question
arose as to whether the loan was valid or not.
Held
The court said the bank could sue the company to recover its loan even though the directors were not,
as it happened, authorized to borrow. The bank was an outsider and was entitled to assume that an
ordinary resolution in general meeting had been passed; thus reading the constitution of the company, a
member of the public would see power to borrow and no prohibition.
Comment.
The rule exists because there is constructive notice of the memorandum and articles. The rule states
that when a transaction has been entered into by the directors as agents of the company without
authority, then provided the board might have an authority under provisions of memorandum and
articles; the outsider is entitled to assume that authority exists.
- Furthermore, he is not required to make enquiries of management to see whether proper
internal procedures have been carried out.
- He is not forced to go indoors of the management
- But if a third party knows that internal proceedings have not been followed, he contracts at his
own risk.
- The rule in Turquand was based on business convenience, for business could not be carried on if
everybody who had dealings with the company had to carefully examine its internal machinery
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in order to ensure that the officers with whom he dealt had actual authority. It was both
convenient and just.
- Creditors of the company would be seriously prejudiced if the company was able to escape
liability simply on the basis that the internal formalities had not been complied with.
Exceptions to the Rule.

The rule did not apply:
1) In favour of persons acting in bad faith (malafide). Thus a person who entered into a
transaction with another person acting on behalf of the company and who knew of the
irregularities of the transaction could not claim benefit of the rule.
2) Where the person (third party) dealing with the company had been put on inquiry but
through his own omission had not made reasonable enquiry.
3) When the irregularity resulted in the 3rd party relying on a forged document. A document is
forged when:
a) the seal is affixed without authority and the signatures are counterfeited
b) the seal is fixed without authority even if the signatures are genuine
Current position of the Rule i.e. (The Turquand Rule)
It has now become a statutory rule in terms of section 12. Any person dealing with the company is
entitled to presume that all internal regulations are complied with and that officers of the company had
authority to act in the way they did on behalf of the company. The doctrine of constructive notice is
now abolished by Section 11. The Turquand rule and its exceptions particularly (1) and (2) cited above
have now been confirmed by statute but as for exception (3) above in terms of section 12(c) and (d)
every person dealing with the company is now entitled to assume, unless acting in bad faith, that every
companys document has been sealed by it and attested by an officers of the company whose signature
appears on it.
This means even if the irregularity was as a result of a third party relying on a document which was
forged, the company will still be bound, in terms of section 12(d) and (e), notwithstanding that the
officer or agent concerned acted fraudulently or forged a document purported to be sealed or signed on
behalf of the company.
The Doctrine of Ultra Vires
The doctrine of ultra vires stated that a companys powers and objects are as defined in the
memorandum and articles, and a company is bound to follow the objects as specified therein. If
a company acts beyond the scope of the objects clause, it is said to have exceeded its powers
(or acted ultra vires i.e. beyond its powers). The result of the rule is that if a contract is made,
which is ultra vires, the objects clause is void and cannot be ratified even if all members agree
to it.
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Case: Ashbury Railway Co. Vs Richie (1875)
Question: How has its effects been avoided over the years?
Answer: This has been done by including many objects in the memorandum and taking each as
independent from the other. Companies were also allowed to do things which were reasonably
incidental or linked to the main objects. This greatly extended the scope of what companies
could do.
Question: Are there any remnants of this doctrine in Company Law?
Answer: There are still some residual remnants of the ultra vires rule as far as members are
concerned since they may apply to the court in terms of section 10 (2) (a) for an interdict to
prevent the company from entering into a transaction which is ultra vires, and in terms of
section 10 (2) (b), they may seek to recover compensation from any officer of the company who
took part in the ultra vires transaction which results in the loss to the company.
Question: Why is the Constructive Notice doctrine no longer part of Zimbabwean Law?
Answer: The constructive notice doctrine has been abolished in Zimbabwe company law.
Section 12 specifically states that the Constructive Notice doctrine shall not apply in our law.
Question
It is trite(used too often) law that current statutory provisions in the companies act (Chapter
24:03) on Ultra vires and constructive notice have drastically reduced the common law
approach adopted in the case: Ashbury Railway Carriage & Iron Co. Vs Richie (1865).
(a). Identify the three(3) specific provisions on these doctrines.
Answer: Refer to S 12
S11(a)
S10 (i).
S9
Refer to Bell Vs City Wall Properties Ltd 196
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Contractual Effects of articles of Association and Memorandum of Association
Section 27(1)
Section 27(1) provides that, Subject to this Act, the memorandum and articles shall, when registered
bind the company and members thereof to the same extent as if they respectively had been signed by
each member and contained undertakings on the part of each member to observe all the provisions of
the memorandum of the articles.
So provided they are in the framework of law, the memorandum and articles are binding on each and
every member of the company as fully and effectively as if all members have signed both these
documents.
Question: How far do the contents of memorandum and articles bind:
(a).The members to the company?

(b). The company to the members?
(c ). Members inter se (amongst themselves)?
(d). The company to the outsiders (third parties)?
a) if it follows that : all the members are bound to the provisions of the articles
Case : Hickman v Kent (1915)
Facts
The Articles of association provided that any dispute between a member and a company
must be taken first to arbitration. Hickman, a shareholder who was complaining that he
had been wrongfully expelled from the company took his case first to the high court.
Held
The court held that the action could not proceed in the High Court. Hickman was
contractually bound by the articles to take the dispute to arbitration first.
Atsbury J having cited a number of other cases (including Wood v Odessa Waterworks (1889), Eley v
positive Life Assurance Co. (1876), found the law clear on the following points:
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first, that no article can constitute a contract between the company and a third person; secondly, that
no right merely purporting to be given by an article to a person, whether a member or not, in a capacity
other than of a member, as for instance, as solicitor, promoter, can be enforced against the company;
and thirdly, that the articles regulating the rights and obligations of the members generally as such do
create rights and obligations between them and the company respectively.
(b). The Company is also bound to members in respect of their rights as members
- If by its articles a company gives certain class of members the right to receive dividends or to exercise
certain rights it is bound by those rights and failure to pay any dividend declared or to implement an
undertaking provides the members with grounds for action against the company.
Case :Pender Vs Lushington (1877)
Facts
The articles of the Direct United states Cable Company gave its members voting rights
but fixed a maximum amount of votes to one hundred (100) which each member could
cast no matter how many shares s/he held. Globe Telegraph held a large number of shares
in Direct United Co. To evade the 100 votes rule and increase its voting power, it
transferred some of its shares to Pender who agreed to be a nominee of Globe and vote
with it. Lushington who became Chairman of Direct United refused to allow Pender to
cast his votes and a resolution supported by Globe and Pender was lost. Pender asked the
court for an injunction to restrain the company and Lushington from declaring that
Penders votes were bad.
Held
The court granted the injunction, adding that Pender had a contractual right to vote given
to him by the articles and could enforce his right.
(c). Contract under Section 27 is enforceable on members inter se.
The principal occasion in which this question is likely to be important arises when the
articles confer on members a right of pre-emption (first refusal) when another member
wishes to sell his shares or more rarely when the articles place a duty on the remaining
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members to buy shares of a retiring member; A direct action between directors concerned
is here possible.
Case: In Rayfield vs Hands (1958)
A clause in the articles of the company provided that every member who wish to transfer shares shall
inform the directors who will take the said shares equal between them at a fair value. Rayfield, a
member told the defendant directors that he wanted to transfer his shares. The directors refused to
take and pay for them saying that they had no liability to do so.
Held
The court decided that the word will indicated an obligation to take shares and the clause imposed a
contractual obligation on the directors to take them. This was in the nature of collateral contract. When
a member bought shares he made a contract with the company and also a collateral contract with other
members to observe provisions of the articles. Thus members could sue each other and there was no
need for the company with whom the main contract was made to be part of the action.
NB:The judge construed directors to be acting in the capacity of members
d). Neither the members nor the company are bound to outsiders, as outsiders are
not part of the memorandum and articles.
It follows that those documents constitute no contract between third parties and company
or its members. Thus an undertaking or provision in the company articles to the effect
that members of the company will be entitled to subscribe pro-rata for the future issues of
shares is obligatory on the company and a member can demand his rights but if the same
members had been promised directorship of the company and a clause undertaking to
appoint him had been inserted in the articles, this will give him no claim against the
company should it refuse to appoint him. In this case he would be dealing with it not as
one of the body members but as separate individuals or independent individuals.
Case : Eley Vs Positive Government Life Assurance Company (1876)

Facts:
The articles of the company appointed Mr Eley as solicitor of the company and he acted as such for
sometime. During the course of the employment he became a member of the company. Later he was
dismissed and brought an action against the company for damages for breach of contract which he said
was contained in the articles.
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Held
However, his action failed. The court decided that there was no contract between the company and Mr
Eley. He was an outsider in his capacity as a solicitor. The articles only gave him rights in his capacity as a
member.
Difference between Contracts of Section 27 and Other Contracts
1) The contract does not guarantee future rights and duties of members since both memorandum and
articles may be altered. Thus when becoming a member, a person agrees to a contract which is
alterable by the other party (company) at the future date.
2) The normal remedy for damages for breach of contract is not available because the courts desire
to maintain the capital of the company.
A member may however obtain an injunction to prevent a breach by the company of any provision in
the memorandum or articles and he may sue for a liquidated sum due to him as a member, for example
unpaid dividends.
3) Thirdly, the member has only contracted with the company, and with his fellow members in his
capacity as a member.
QUESTIONS ON LIMITED LIABILITY
If a company can lawfully call itself LIMITED, it means that it is limited by shares. The fact that the liability of the
members is limited must be expressly set out in the memorandum .this means that in the case of winding-up due to
insolvency, no shareholders 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.
To put it in other way. In giving credit to a company a creditor knows that his remedy will be confined to the assets of
the company, i.e. its capital if all the shares are fully paid up, and if the shares are not fully paid up, its capital and
amounts still owing on the shares. He cannot, as in the case of a partnership, look to the personal assets of the
shareholder if the capital of the company is insufficient to pay his debt.
The limited liability of members can fall away.
If at any time the number of members of a company is reduced below two and the company carries no business for
more than six months while the number is so reduced, any person who is a member of the company during the time
that it is so carries on business after those six months and is cognizant of the fact that it is carrying on business with
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fewer that two members, shall be personally liable for the payment of the whole debts of the company contracted
during that time.
At first blush one tends to think of limited liability as being the most important aspect of a company. When a
partnership goes insolvent, grim visions of Sheriffs and liquidations selling houses and personal possessions spring to
mind.
In case of a company limited by shares, however, the vision is of the shareholders sitting smugly in their houses, while
the unfortunate creditors are confined to the assets of the company for redress. This is the sole advantage of turning
ones enterprise over to a company.
The whole basis of the protection afforded by the limitation of liability is contractual. The word LIMITED must be part
of the name of the company and be prominently displayed on the outside of its office, and on its notepaper.
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.
Use of the word Limited
It follows that disastrous results may visit the officers of a company which contracts without using the word limited
as laid down by the Act.
Firstly, Civil Liability arises. If any officer of the company, or any person on its behalf, uses or permits the use of a seal,
business letter, notice, or signs any bill exchange or letter of credit, without the name of the company (including the
word limited) being legibly correctly placed thereon, he shall be personally liable to the holder thereof, unless the
money is duly paid by the company.
Such a person also incurs Criminal Liability any may be liable to a certain fine.
Secondly, Common Law Liability may be incurred, and this because the basis of the limitation of liability is contractual;
a potential creditor knows he takes a risk. It follows that if he has no notice that the company to which he is giving
credit is limited in its liability he can hold the agent, and any other who allow this to happen without protest,
personally liable for any loss he may have suffered as a result of being misled.
However, on the other side of the coin, the Act also legislates against the person who trades under the name of a
business which includes the word limited when he is not in fact a registered company:
if any person trades or carries on business on business under any name or title of which limited or any contraction
or imitation of that word is the last word, he shall, unless duly incorporated with limited liability, be guilty of an offence
and liable to a certain fine calculated on every day on which that name or title has been used.
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QUESTION ON DIRECTORS, COMPANY SECRETARIES AND AUDITORS
Question
The duties and the obligations of a company Director arises both from the Common Law and Statute
Law.
Required:
Discuss the Directors duties and obligation under the common law and statute laws of Zimbabwe. (20)
Answer
Duties of the Directors
Fiduciary Duties
These are derived from the Law of Agency and Trust. It is the duty to act solely for their company and to
protect its rights.
The directors exercise of authority is granted to them as fiduciary and as they are employed by the
company they must act bonafide for the best interests of the company. That is, they must act in honesty
and good faith. They must exercise their power for which they were given. In exercising the power
directors have wide discretion subject to the Companies Act, Memorandum of Association and Articles
of Association.
Common Law Duties
Directors to exhibit honesty and integrity.
They owe this duty to the company and not to individual shareholders (Percival Vs Wright): They should
promote the interests of their company and not take business away from it (Horcol Vs Gatland). In terms
of this duty, directors should act in good faith. They must not be motivated by ulterior purposes.
They must be careful to engage in activities which result in a conflict of interest with the company. As a
general rule, directors should not compete with the company.
Duty to exercise an independent discretion.
This duty is closely related to the duty of directors to act in the interests of the company and the
company alone. Directors should be independent of external influence and should not dance to the tune
of any person other than the company. This applies even where the directors are nominees. They should
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exercise underrated discretion. They should not be dummies, puppets or stogies of any person (S Vs
Shaban)
Duties of care and skill
A director should exhibit in the performance of his duties a degree of skill reasonably expected from a
person of his knowledge and experience. They are however, not liable for more errors of judgment. The
extent of this duty will also depend on the nature of the companys business operation.
Duty not to competing with the company
One of the most obvious examples of a situation which might be expected to give rise to a conflict
between a directors interest and his duties is where he carries on or is associated with a business
competing with that of the company.
Statutory law Duties
Duty to Disclose
S.186 (1)(2) provides that a director who is directly or indirectly interested in an contract or proposed
contract with the company should declare the nature and full extent of his interest at the meeting of the
directors of the company. They are not prohibited but should declare their interest. This would exempt
him from voting on matters where he has interest.
Statutory duty to declare interests S186 (Disclosure by directors of interests in contracts)
Section 186 of the companies act places directors under a duty to declare their interests in a contract or
proposed contract with the company at a meeting of the directors.
The errant director is liable to a fine S186 (4) but nothing in the Section will prejudice the operation of
any rule of law restricting directors of a company from having any interest in contracts with the
company. Section 186 (5)
Duty to act intra vires. Section 10 (2)
A director has a duty to act within the confines of the companys Constitution.
The Powers of Board of Directors

As a general rule, the company acts through its agency in external dealing. Such organ, the directorate
has no power other than that which is conferred upon them by the Articles of the company.
The extent of the directors power is defined by the articles. Table A Article 81 provides that the
business of the company shall be managed by the directors who mayexercise all the powers of the
company.
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Thus in Automatic Self Cleaning Filter Syndicate Company Ltd v Cunningham (1906) the court held that
a resolution passed by a simple majority of shareholders (an ordinary resolution) was not effective. The
resolution purported to order the directors to go ahead with an agreement to sell the whole of the
assets of the company. The directors believed that this was an unwise course. The decision gave the
balance of power firmly in favour of directors.
Thus if the shareholders do not approve the directors acts they must either remove them under Section
175 or alter the articles to regulate their future conduct. (The alteration can have a retrospective
effect). They cannot simply take over the functions of the directors e.g. in Scot v Scott (1943) the
company in general meeting resolved, firstly to pay dividends to preference shareholders, and secondly
that the financial affairs of the company be investigated by a firm of accountants.
It was held that the resolutions were invalid as they usurped the powers which the articles had vested in
the directors.
If the directors exceed their powers, or exercise them improperly, their acts can be ratified by an
ordinary resolution of the company. Barnford v Barnford (1970).
It had been said that the directors represent the directing mind of the company. It has also been stated
that the directors state of mind is the state of mind of that company. They are entitled to transact the
ordinary business of the company. Members of the public dealing with a director are entitled to assume
that such a director has authority to do such acts as relating to the company.
Thus, in the case of H.L. Bolton (Engineering) Co Ltd v T.J. Graham and Sons Ltd (1957) Lord Justice
Denning said:
A company may in many ways be likened to a human body. It has a brain and nerve centre which
controls what it does. It also has hands which hold the tools and act in accordance with directions from
the centre. Some of the people in the company are mere servants and agents who are nothing more
than hands to do the work and cannot be aid to represent the mind or will. Others are directors and
managers who represent the directing mind and will of the company, and control what it does. The state
of mind of these managers is the state of mind of the company and is treated by the law as such.
Lastly, in Qauin and Axtens v Salmon (1909) it was established that where certain powers are granted
to the directors in the Articles and act, members in general meeting cannot interfere with the same.
Members can only interfere if such directors are acting contrary to the provisions of the act or articles.
The court however pointed to the difficulties of trying to determine the ultimate authority between
directors and members in general meeting.
Gower (1992) points out that apparently in law and in fact, the general meeting is no longer alone the
primary organ. The companys power is divided between the general meeting and the directors. The
directors can disregard the wishes of the shareholders in as far as acts which are not specifically stated
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in the act or articles. He bases this argument on the typical provisions in most articles conferring power
to manage the business of the company on the directors.
However, despite Gowers submission, the general meeting is still the principal or primary structure in a
company. They have the power to vote out high-handed directors when the time for voting comes. In
some extent then between the period of election of the directors and the AGM, any high-handed
directors can flout and disregard the wishes of the shareholders.
Protection of Shareholders
The protection given to the shareholders is that they can dismiss a director by virtue of section 175 of
the companies Act 24:03, by resolution of which special notice has been given.
If directors act outside the provisions of the Companies Act, it is only the shareholders that can ratify
their unauthorized acts. Ratification must be by way of special resolution passed in a general meeting
and this can only happen if the act was outside the companys objects. If the act was illegal there will be
no possibility to ratify.
If the directors will not or are unable to exercise their powers of management by reason of situations
such as deadlock or demise of the whole board, those powers of management will revert to the
shareholders who can then exercise them. Cases: Barron Vs. Potter (1914) 1 ch 895, Alexander Ward
and Co Ltd Vs. Sangang Navigation Co Ltd (1975) 1 WCR 673
The directors can also be liable for negligence. They have a duty of care and skill as enunciated in Re City
Equitable Fire Insurance Co. Ltd which states:
A director need not exhibit in the performance of his duties a greater degree of skill than may
reasonably be expected from a person of his knowledge and experience.
This duty of care and skill is a form of protection for shareholders. Directors who do not dispense this
duty properly become personally liable. However, in view of this duty, it is important to note that
directors are not required to have any specific qualifications but will be judged on the knowledge and
experience they actually have: Re Brazilian Rubber Plantation and Estates Ltd (1911) Ch. 425
The issues addressed by this area of law fall under what is referred to as corporate governance. This is to
do with how companies are directed and the relationship between the board of directors, management
and shareholders. These are many codes to this effect available depending on jurisdiction. In UK there is
the Cadbury Committee Report. While in South Africa there is the King Report. Zimbabwe has not so far
developed its own Code but best practices are borrowed from other jurisdictions. However, the Codes
are not legally binding, but just form part of self-regulating system that operates especially for listed
companies through the stock exchange. Although there are controls that exist as discussed above, they
do not go as far as Sharon and Tinos ideal situation.
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Question
The Memorandum of Association of Ping Pong (Pvt) Ltd states that the main objective of the company
is to make and sell railway carriages. The Articles of Association provide that only the board of directors
or any person authorized by the board has the power to conclude contracts on behalf of the company
and any transaction that exceeds $50 000, must first be authorized by the company in a general meeting
by way of an ordinary resolution.
Mr Ping, one of the directors is authorized by the board of directors to act on behalf of the company. Mr
Ping concludes a contract with Mr Zhing for the purchase of a holiday flat to the value of $100 000.
Do the other directors and shareholders have any recourse against Mr Ping?
Give reasons for your answer citing appropriate case law to support your reasons. (20)
Answer
A company has the legal capacity and powers of a natural person. Exceptions are the company is
incapable of exercising such powers or it memorandum of Association states otherwise. This means that
a companys memorandum of association may limit or qualify its objects and powers.
In the facts provided, even though Ping Pong (Pvt) Ltd memorandum of association is said to have
specified the companys object ( to make and sale railway carriages ), there is no mention of any
restrictions, limitations or qualifications being imposed on the company regarding pursuit of other
objects. Therefore there is nothing legally wrong with Mr. Pong, who had the requisite authority to act
on behalf of the company, concluding a contract to purchase a holiday flat for Mr. Zhing.
Furthermore, under Section 12 of the Companies Act, outsiders contracting with the company will not
be affected by the contents of the memorandum of association or other public document of the
company, unless they had actual knowledge thereof. Thus the section partly abolishes the doctrine of
constructive notice. It means that, even though Ping concluded a contract value $100 000, which is in
excess of $50 000 he was allowed without approval of a general meeting, the contract will remain valid
since Mr. Zhing had no knowledge of the restriction (the facts provided do not say that Mr. Zhing knew.)
In any case Mr. Zhing would still be protected in terms of the statutory Turquand rule as provided in
Section 12 of the Companies Act 21:03 of 1996. Thus a person dealing with the company in good faith is
entitled to presume that the company has compiled, with all the formal and procedural requirement, its
Memorandum of Association and any rules of the company. This section requires that third part ought
not to have reasonably known of the non-compliance of the company to be able to invoke the rule.
Directors legal relationship with the company.
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The legal relationship between the directors and the company is contractual in so far as they
are the members of the company and suitable to the Memorandum of Association of the
company.
Further, they will be having a dual legal relationship with the company as both owners and
managers of the company, which may compromise good corporate governance though
acceptable and common under private companies.
They will be also the lawful agents and employees of the company with entitlements of
directors remuneration and allowances.
The grounds for disqualifications to become a director of a company
There are no special qualifications for appointment as a director of a company. However, there
are disqualifications for such appointments.
The following persons are disqualified from being appointed directors of a company S 173 (1)
(i). a body corporate
(ii). A minor or any other person under a legal disability, a married woman in a community of
property if not given consent by husband.
(iii). Unrehabilitated insolvent.
(iv). Any person who has been convicted of theft, fraud, forgery or uttering a forged document
for perjury and has been sentenced therefore to serve a term of imprisonment without the
option of a fine.
(v). Any person who is the subject of any order under the Act disqualify him as a director.
Personal liabilities of Directors
The separate existence may be disregarded in the following cases:
Where a director purports to act on behalf of a company name which is not published as
required, the director becomes liable to a holder of a negotiable instrument in his
possession.
Where a provision in the memorandum of a private company provides that its directors
(past and present) be jointly and severally liable together with the company for debts
contracted during their periods of office.
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Where a public company carries on business without members for more than 6 months,
directors become personally liable.
Where a company with share capital commences business without the requisite
certificate to commence business, directors and subscribers become personally liable
for all liabilities arising from any business contracted prematurely.
Where during winding up or judicial management or otherwise, it appears that the
company business was carried on recklessly or with the intent to defraud creditors, the
persons may become personally liable.
It often happens in cases where the legislature renders persons other than the company
liable for the debts of the company as a sanction for no-compliance with statutory
obligation as according to Companies Act (Chapter 24:03)
Cases which may be cited:
Daimler Co. Vs Continental Tyre and Rubber.
Question:
Nicole, Bridget and Adeline wish to form a private company to carry on the business of Boxing
Agents. In pursuance of their aim, they form an incorporated company, Three Sisters (Pvt)
Ltd. Nicole and Adeline are both subscribers to the Memorandum and Articles of Three Sisters
(Pvt) Ltd. The Articles further provide for the appointment of Bridget as the Companys Legal
advisor.
The company commences trading and Bridget is appointed its Legal advisor. Bridget
subsequently acquires shares in the company. At a recent meeting of the company, the
members resolve to remove Bridget from the post of legal advisor. Bridget brings an action for
breach of contract for not employing him in terms of the articles.
Advise Nicole and Adeline on the legal position arising out of the above facts.
Answer:
The primary issue in this question is relating to the contractual effects of the Articles.
Candidates are required to explain that a party may rely on the contractual effect of the
Articles in his capacity as a member but not any other.
The facts of the question are similar to those considered in the case of Eley Vs Positve
Assurance Co (1876) where it was held that the Articles of association become a
covenant between the parties in their capacities as members.
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In the facts, Bridget seeks to rely on a provision in the Articles which can only bind
members. She is not seeking to rely on the Articles in her capacity as a member,
therefore the other members can validly remove her, in as much as the contractual
effects of the Articles is only between the members as such and cannot be used to
enforce outside rights.
Question
Nicole, Bridget and Adeline have recently got a golden handshake from their employer for
having rendered faithful services for a combined period of 45 years. They have teamed up with
their friends Esnath, Pauline and Vimbai to form a limited liability company. Nicole owns 40% of
the shares whilst Pauline her sister in law owns 15%. A clause in the Articles of Association gives
a director in any meeting to demand a vote by poll. They have decided to name the company
Bridge Veterans (Pvt) Ltd. Their prospectus was prepared by Nyadombo Consulting Services.
When the company started trading, it is found that it purchased two vehicles and a computer
from Pauline at above market price. It is also found that the prospectus contains
misstatements. Now the company is about to lose valuable business deals because of the way
Nicole is handling company affairs. Pauline has made it clear that she will always be behind
Nicole in company related issues. However, other shareholders would want to take action to
compact the problems.
Advise the shareholders on issues raised and possible courses of action available to them.
Answer:
Candidates must identify the following:
Liability of promoters for misstatements in the prospectus.

Directors duty to declare interest, to act in the best interest of the company and with
honesty.
Majority rule and the availability of an option against minority oppression in the form of
a poll vote.
Identify alternative methods of getting recompense against the majority outside the General
Meeting like the derivative action.
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Question:
Esnath is employed as a CEO at Nyadombo Enterprises (Pvt) Ltd. Esnath submitted a completed
application form shares on behalf of Nyadombo Enterprises Pension Fund seeking an allotment of one
hundred million shares in Woodwink Holdings.
The application form was accompanied by a cheque in favour of Woodwink Holdings in payment for the
shares and was countersigned by the companys accountant.
Upon hearing of the transaction, the directors of the Nyadombo Enterprises allege that they had not
been consulted on the investment which had serious implications for the rights of employees and as
such the purchase should be set aside.
They argue that the value of shares in Woodwink Holdings had since dropped by more than half their
original value due to very poor trading results in the last financial year and that they would not have
sanctioned such a purchase, even if they had been aware of it.
The shareholders of Nyadombo Enterprises (Pvt) Ltd have sought your legal advice on whether they can
have the agreement set aside on the basis that Esnath had acted ultra vires because she had not in fact
been authorized by the board of directors to apply for such share.
Advise the shareholders as to the legal sustainability of their intended action.
Answer:
Students should refer to:
(i). Powers of directors to contract for the company.
(ii). need for authority from board and or shareholders for certain transactions
(iii). Ultra vires actions by directors and ratification by shareholders
(iv). Liability for harm to company actions of directors.
APPOINTMENT OF AUDITORS
The first auditor(s) of a company, must be appointed by the directors within one month after
the issue of the certificate that the company is entitled to commence business or within one
month of the issue of the certificate of incorporation, as the case may be S 150 (1).
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Except in the above case, subsequent auditors are appointed by shareholders, who also fix the
remuneration of the auditors S 150 (6).
Liability of auditor towards the company
The auditor has a contractual relationship with the company and it is therefore to the company
to whom the basis duty of care skill is owed.
The auditors liability for failure to perform his duties properly is primarily a matter of common
law, the Companies Act merely stating in S 349, that the court has power to relieve him from
liability if he acted honestly and reasonably.
When the auditor has not displayed the standard duty certificate and skill, and is liable to the
company for any law suffered by reason of his lack of skill and must pay damages to restore the
company to its financial position it could have been no fault on his part.
Case: Re Thomas Geward (1968)
Rights of Auditors
In terms of S 154, the auditors have right
(i). of all access at all times to the books, accounts, vouchers and securities of the company and
its subsidiaries.
(ii). to require from directors and other officers of the company and its subsidiaries any
information and explanation necessary for proper performance of their duties.
(iii). to attend any general meeting of the company, and to receive all notices of and all
communication relating to any general meeting, which any member of the company is entitled
to secure.
(iv). To be heard at any general meeting he attends.
DUTIES OF THE COMPANY SECRETARY
(i). Ensure that the company documentation is in order, that the requisite returns are made to
the Registrar, and that the companys registers are maintained.
(ii).Taking minutes of meetings
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(iii). Sending notices to members
(iv). Countersigning documents to which the company seal is affixed.
Powers of the Company Secretary
(i). Recently, the companies Act has increasingly recognized the importance of the company
secretary. As far as the statutory provisions refer to Table A article 112.
(ii). the company secretary has the power to make certain contracts on behalf of the company.
e.g hiring cars for companys use.
(iii). Times have changed, a company secretary is a much more important person nowadays
than he was in 1887. He is an officer of the company with extensive duties and responsibilities.
He is no longer a mere clerk. He regularly makes representations on behalf of the company and
enters into contracts on its behalf which come within the day-to-day running of the companys
business. He is certainly entitled to sign contracts within the administrative side of the
companys affairs, such as employing staff, and ordering cars, and so forth.
(iv). It can therefore be argued that the company secretary has also graduated as an organ of
the company. Though appointed by the directors, he is not their servant but an officer of the
company with substantial authority in the administrative sphere and with powers and duties
derived directly from the articles and the Companies Acts.
(v). in the performance of his statutory duties he is clearly entitled to resist interference from
the members, board of directors or Managing director. Where he differs from them is that he
has no responsibility for corporate policy or for making managerial decisions, as opposed to
playing an administrative role in ensuring that the policy and managerial decisions are
implemented.
(vi). Although a secretary has extensive duties and responsibilities, there are a number of
decision where it has been held that he does not have authority for particular acts. Thus he may
not:
i) bind the company on trading contracts

ii) borrow money on behalf of the company
iii) issue a writ or lodge a defence in the companys name
iv) Register a transfer of shares
v) Strike a name off the register of members
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vi) Summon a general meeting on his own authority.
QUESTIONS ON THE MAJORITY RULE AND MINORITY PROTECTION.
The rule is that the majority of members, by which mean those who command more than 50% of the
votes in general meeting will be able to get the company to do what they want it to do, even if this does
not suit the other members. It is in other words principle of majority rule.
The courts are very reluctant to question the motives of the majority shareholder in respect of why he
voted the way he did. This is because they regard what the shareholders do with their votes as an
internal domestic affairs with their company to which they ought not in interfere.
The majority rule concept applies also when a wrong is done to the company. The rule is that when a
wrong is done to the company for example, by its directors failing to fulfill their duties of loyalty, care or
skill, the company alone, through its majority, can sue for the injury inflicted: thus the proper plaintiff is
the company itself.
Individual members cannot sue even though their shares have fallen in value because of the wrong done
to company. This rule is generally known as the rule in Foss Vs Harbottle because this case was one of
the earliest cases that considered it. In this case law, it was said the proper plaintiff was the company
itself; unless the act complained of was ultra vires. Thus the only possible plaintiff to stop an ultra vires
act was the corporate itself.
When a shareholder is contemplating action he has choice of 3 different claims, and these are:
(i). Personal claim
This is a claim made by a shareholder against the company in his own name to enforce his own rights. It
was said in Thomas Vs May (1952) that a minority shareholder can bring a personal action and if he
limits his claim to his own personal loss, then he is entitled to sue controlling shareholders for damages
arising out of his negligent conduct in the administration of the affairs of the companys shares
becoming valueless.
Minority shareholder may bring a personal action to:
(a). Restraint a company from acting ultra vires: Simpson Vs Westminster Palace Hotel (1860)
(b). Enforce a right to vote e.t.c. Pender Vs Lushington (1877)
In this case the wrong is done to the individual member in his capacity as a member and the company
would have broken a duty it owes him personally and this gives him a right of action.
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(ii). Representative
These claims are allowed only where numerous persons have the same interest in any proceedings, and
persons have the same interest when they have a common interest, and common grievance and their
relief sought is in its nature beneficial to all those whom the plaintiff represents. Any judgment given by
the court in a representative action binds all persons represented by the plaintiff though it may only be
enforced against a person other than the plaintiff with the courts leave.
It is often said, in support of the representative action, that justice requires that the majority of the
company should not appropriate to themselves the property of the minority, and to use their votes at
the general meeting of the company. In a case of that kind the shareholders who form the part of the
minority must be allowed to bring an action in court in their own behalf to get back property so illegally
appropriated.
iii) Derivative claim
This is a claim made by a shareholder on behalf of himself and all other similarly situated shareholders
against the company. However, in this case what happens is that the minority shareholders sues on
behalf of the company, the wrong doers and the company is joined as a nominal defendant so that it is
bound by the decision.
Exceptions to Foss (Right of minorities)
The rule in Foss v Harbottle has the effect of giving wide powers to the majority. In fact, this is the basic
philosophy behind all companies. A shareholder takes his shares subject to the rules contained in the
articles. Courts therefore do not listen kindly to complaints by shareholders who took shares knowing
full well the position. (Tett and Chadwick 1986:79)
But of course, the courts will not allow the rights to be altered unlawfully, and both under common law
and in terms of the Act, will give relief in cases when the rights of the minority have been damaged or
illegally interfered with.
a) Under Common Law

The main exceptions appear below:
1) Where the act of the majority is Ultra vires:
As we have seen, those who command simple majority in general meeting cannot ratify an ultra vires
transaction.
In Ashbury case, it was said by the court that not even all the members could agree to adopt an ultra
vires act. They must alter the object clause so that it covers the transactions and then let the company
enter into it again.
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So a member may ask the court to grant an injunction to stop the directors carrying out an ultra vires act
and Foss will not prevent this. The majority cannot resolve to act ultra vires in any case.
2) Fraud on the Minority
General meetings are regarded as the epitome of company democracy. The theory of corporate
practice is that general meetings provide the meeting place where views of shareholders are expressed
and taken into account.
Problems that arise stem from the fact that:
a) Shareholders are free to vote the way they like

b) Moneybag shareholders manipulate directors to act as puppets.
Gower (1992: 616) states that it is not easy to define what fraud on the minority means. However the
concept is used in a sense that touches on good conscience. It need not be any actual deceit on the
minority, for if there was a deceit a remedy would lie in delict. Fraud is used in this context to refer to
power. Nor is it necessary that those injured should be the minority, indeed the injured party will
normally be the company itself.
It covers certain acts of fraudulent character of which familiar examples are when the majority are
endeavouring directly or indirectly to appropriate to them money, property or advantages which belong
to the company or which shareholders are entitled to participate.
Most of the cases in which the principle has actually been applied appear to fall within one of the
following categories.
i) Expropriation of companys property i.e. when the company is defrauded

ii) Expropriation of other members property
iii) Mala fide breaches of duty
iv) Negligent acts that benefit the directors.
v) Use of powers for an improper purpose.
(b). Statutory Protection of the minority (Exceptions to Foss)
The rule in Foss v Harbottle (1843) was based on two fundamental concepts namely:
i)The majority non-interference rule

ii)The proper plaintiff rule
The Companies Amendment Act No 6 of 1993, later incorporated as sections 196 to 198 of Companies
Act 1 24:03, modified the rule in Foss v Harbottle by eliminating the Proper Plaintiff rule. In terms of
sections 196-8, legislature has conferred a legal right on a shareholder to petition for relief if the
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companys affairs are being conducted in a manner which is oppressive or unfairly prejudicial to the
interest of some part of the members including himself.
The conferment of this right on the individual shareholder effectively eliminates the proper plaintiff rule,
leaving the majority non-interference rule intact.
Formerly, the aggrieved party could obtain relief via common law exceptions to Foss v Harbottle. Now
the aggrieved party is given a substantive legal right. The effect is that the old remedies (fraud on the
minority) have now been scrapped.
Other Statutory provisions:
(i). Statutory Rights of dissenting members in Take over bids. S194
(Power to acquire shares of members dissenting from a scheme or contract approved by majority)
In terms of S194 of the Act where shareholders of 9/10 in the value of the shareholding in the company
agree to a scheme or contract involving the transfer of shares to another company, then the company
can require the other 1/10 dissenting members to transfer their shares on the same terms, subject
however to an application to the court by the minority to prevent the shares to be taken over or to
adjust the value.
(ii). Objection to alteration of memorandum of association. Sec 16
Sec 16 of the Act permits alteration of the memorandum by special resolution. In the case of any
change to the memorandum (and objects clause) in term of Sec 16(3) (a) and Sec 16 (3) (b) the holders
of not less than 15% in nominal value of the companys issued share capital, or any class, thereof, may
make an application to set aside the alteration.
In terms of Sec 16 (3) (b) 15% or more of debenture holder have the right to object to alternation of the
objects of the company.
(iii). Investigation of company affairs. S157
In terms of sec 157 of the Act a 100 or more members or holders of not less than 1/20th of the issue
shares of the company, can apply to the Minister to appoint an inspector or inspectors to investigate the
affairs of the company. Section 158(b) provides that the Minister may order investigation) even without
application if it appears to him that:
(a). that the business is being conducted with intent to defraud its creditors or;
(b). its affairs are being conducted in a manner oppressive of any part of its members.
(c). It was formed for any fraudulent or unlawful purpose
(d). that persons concerned with its formation or the management of its affairs have in connection
therewith been guilty of fraud or misconduct towards it or towards its members.
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(e). that its members have not been given all the information with respect to its affairs which they might
reasonably expect.
The Minister may, with or without application by the members of the company, appoint inspectors to
investigate the ownership of a company in terms of section 164(1)
(iv). The right to apply for winding up of the company as a contributory. Secs 206, 207 and 208
In terms of Secs 206, 207 and 208 of the Act application can be made by members of a company for
winding up in the grounds that it would be just and equitable to do so. However, this remedy should
not be taken, if then there is some other remedy available to the aggrieved persons and the court is of
the opinion that they are acting unreasonably in not pursuing that order remedy sec 208(2)
(v). The right to request an Extraordinary GM. S126
Sec 126 entitles the holders of 5% of the paid up capital, which carries voting rights to requisition an
extraordinary GM.
(vi). The right to object to variation of class rights. S91
Sec 91 permits holders of 15% of any class of shares to object to variation of their rights. They may
apply to the court to have the variation cancelled. The application should be confirmed by the court.
Question
Discuss the Rule in Foss Vs Harbottle, citing exceptions to the rule. (20)
Answer
Foss Vs Harbottle (1843) 67 ER 189 is a leading English precedent in Corporate Law. In any action which
a wrong is alleged to have been done to a company the proper claimant is the company itself. This is
known as the rule in Foss Vs Harbottle.
In this case, two minority shareholders, Richard Foss and the other alleged that the property of the
company had been misapplied and wasted. They asked that the guilty parties be held accountable to the
company.
The court dismissed the claim and held that when a company is wronged by its directors it is only the
company that has standing to sue. The court established two rules:
(i). the proper plaintiff rule: a wrong done to a company may be vindicated by the company alone;
(ii). The majority rule principle; if the alleged wrong can be confirmed or ratified by a simple majority of
members in a general meeting, then the court will not interfere.
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The argument by judge was that the conduct with which the Defendants were charged in this suit was
an injury not to the Plaintiffs exclusively; it was an injury to the whole corporation by individuals whom
the corporation entrusted with powers to be exercised only for the good of the corporation. Individual
members of a corporation cannot arrogate to themselves the right of suing in the name of the
corporation. The corporation is a legal persona distinct from its members and can sue in its own name or
in the name of someone whom the law appointed to be its representative.
The rule was extended to cover cases where what is complained of is some internal irregularity in the
operation of the company. However, the internal irregularity must be capable of being confirmed or
sanctioned by the majority.
The rule in Foss Vs Harbottle has another implication. A shareholder cannot generally bring claim to
recover any reflective loss a diminution in the value of his or her shares in circumstances where the
diminution arises because the company has suffered an actionable loss. The proper course is for the
company to bring the action and recoup the loss with the consequences that the value of the shares will
be restored.
Because Foss Vs Harbottle Leaves the minority in an unprotected position, exceptions arose where
litigation is allowed. The following exceptions protect basic minority rights which are necessary to
protect regardless of the majoritys vote:
(i). Ultra Vires and illegality
The directors of company or a shareholding majority may not use their control of the company to paper
over actions which would be ultra vires the company or illegal.
(ii). Actions requiring a special majority
If some special voting procedure would be necessary under the companys constitution or under the
companies Act, it would defeat both if that could be sidestepped by ordinary resolutions of a simple
majority and no redress for aggrieved minorities is allowed.
(iii). Invasion of individual rights.
(iv). Fraud on the minority.
QUESTIONS ON SECURITIES/SHARES AND DEBENTURES
Question.
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Distinguish between a Share and a Debenture. What are the rights and obligations that flow
from the two?
Answer
A Share is the interest of a shareholder in the company measured by a sum of money for the
purpose of liability in the 1st place and of interest in the 2nd but also consisting of a series of
mutual covenants entered into by all holders inter se, contract contained in the Articles.
A Share is not a sum of money settled in the way suggested but is an interest measured by a
sum of money and made up of various right contained in the contract including the right to sum
of money of more or less amount.
A Debenture is a formal acknowledgement of debt by a company.
The issue, of the two allotment, prospectus and transfer are in most respects subject to the
same rules as shares but unlike shares however debentures may be issued at a discount.
Debenture holders are creditors, not members of the company and interest on debentures is
payable even if the company has earned not profit.
Differences Between Shares And Debentures
Shareholder Debenture-holder
a) A shareholder owns a bundle of rights in a a) A debenture-holder is a person who lends
company e.g. right to vote, attend money to the company. He has a claim
meetings, receive dividends (if declared) against the company rather than interest.
etc
b) Debenture-holder carry less risk, since
b) Shares carry greater risk since dividends interest on debentures is a contract debt
are paid after debenture-holders have
been paid their interest.
c) A company may not purchase its own c) A companys purchase of its own
shares since shares are capital in the debenture is generally unrestricted
company law sense
d) A shareholder is an investor/member of d) A debenture-holder is a creditor to the

the company company
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e) Dividends may not be paid out of capital e) Interest on debentures may be paid out
but out of profits. of capital if no profits are available.
f) Shares may not be issued at a discount f) Debentures may be issued at a discount
g) Shares are never secured by the g) Debentures are usually secured by the
companys assets companys assets
h) Shares impose a liability on the holder to h) Does not apply to debenture-holder.

pay the cash or in kind a nominal value,
and, while the company remains a going
concern
Similarities between shares and debentures

Debentures resemble shares in that:
1) they are registered with the company
2) they are transferable by the same transfer form
3) they are in bearer form, in which case there is a judiciary recognized custom that they are
negotiable instalments
4) Where there is a floating charge, the interests of the debenture-holder are tied up with the
prosperity of the company, almost to the same extent as those of a shareholder for, if the
company trades unprofitably, the debenture-holders security will be placed in jeopardy,
whereas if it flourishes, his security will normally be enhanced.
MAIN CLASSES OF SHARES
The classes of shares generally encountered are:-

a) preference shares
b) redeemable preference shares;
c) ordinary shares and
d) deferred shares
A.Preference shares
The main distinguishing feature of preference shares is that they usually enjoy a preferential right to
dividends. This preferential right is generally expressed as a percentage of the nominal value of the
shares e.g. 8% preference shares of $1 each.
-Preference shares are accordingly attractive to the investor who desires a fixed income coupled with a
reasonable degree of security as to capital.
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-Shareholders are only entitled to claim these preference dividend from the company if both sufficient
profits are available for such distribution and such dividend has been declared in the manner provided
by the articles.
(Bond v Barrow Haematite Steel Co 1902)
Types Of Preference Shares
i) Cumulative Preference shares

In the ordinary course, however, preference shares are cumulative i.e. the shareholder has a
contractual right in the absence of a dividend in any particular year that his dividend shall be paid out of
subsequent profits before any other dividend is paid.
They are usually expressly stipulated and also reflected in the designation of the shares e.g. 7 %
cumulative preference shares
ii) Non-cumulative preference shares

Where, however, any deficiency in one year is expressly or impliedly made non-payable out of the
profits of a subsequent year, the preference shares are non-cumulative.
In Staples v Eastman Photographic Materials, (1896) where it was provided that the preference
dividend was payable out of the net profits of the year concerned, the court held that the preference
shares were non-cumulative.
iii) Participating preference shares

Where preference shares have, in terms of the articles of a company, additional participation rights
attached to them, i.e. rights to participate in profits after the payment of preference shareholders of
their preferential fixed dividend and to the ordinary shareholders of a fixed ordinary dividend or rights
to participate in surplus assets remaining after payment of creditors and repayment of capital on
winding up, the shares are known as participating preference shares.
Advantages of preference shares
1) preference shares are safe. They take precedence over holders of common shares (Ordinary shares)
as to:
a) dividends
b) assets in the event of the company being liquidated.
2) Preference shares tend to receive a modest fixed percentage in profits whilst there are far more
fluctuations in the market value of ordinary shares.
3) Preferred shares rarely has a maturity; the face value need never be repaid by the firm.
4) Preferred shares are usually preferred by several features commonly found in preferred stock
agreements i.e. protective covenants.
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Disadvantages
1) Usually carry limited voting rights, and often carry different ones from those of ordinary shares, or
none at all.
2) Preferred dividends are limited in amount to a fixed dividend rate. Nothing is more distressing than
to own preference shares in a well managed company which is making huge profits.
3) Can only receive dividends, if declared
B. Redeemable Preference Shares
-The companies Act makes special provision for redeemable preference shares, which from a financial
point of view may be regarded as a hybrid of shares and debentures incorporating features of both,
though in law they are treated as shares.
-These are shares which the company has authority to repay or redeem.
-Section 76 provides that a company which is so authorised by its articles may issue preferences shares
which are redeemable either at the option of the company or shareholder concerned.
The following provisions apply to the redemption of such preference shares
i) No redeemable shares shall be issued unless there are shares in issue which are not redeemable
ii) Shares may not be redeemed unless they are fully paid
iii) The terms of redemption must provide for payment on redemption.
Financing redemption Section 77

The preference shares can only be redeemed out of two possible sources:
a) Out of the proceeds of a fresh issue of shares

b) Out of the companys distributable profits (divisible profits)/
CAPITAL REDEMPTION RESERVE FUND (C.R.R.F)
Where shares are redeemed out of profits which would otherwise have been available for dividend, a
sum equal to the nominal value of shares redeemed, must be transferred from the income statement to
a non-distributable reserve, the capital redemption reserve fund.
The capital redemption reserve fund is subject to the same rules governing the reduction of share
capital as apply to paid-up share capital. The CRRF may, however, be applied to paying up unissued
shares to be issued to members of the company as fully paid capitalisation shares.
(c). Ordinary Shares
Ordinary shares normally carry the residue of distributed profits after preference shares, if any, have
received their fixed dividend.
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As a rule ordinary shares are the equity share capital of the company.
Advantages
(i). Voting rights have the right to elect board of directors,

have the right to vote on other important issues, AGMs
(ii). Control ownership rights

(iii). Entitled to all that remains if prior claims have been satisfied
(iv). Pre-emptive rights have a common law right to maintain their proportionate share of ownership
when the company raises new capital by selling common shares.
(v). Offers the greatest opportunities for rewards in dividends and capital appreciation
(vi). Flexibility If the firm encounters difficulties, can omit paying dividend without threat of legal
action including, bankruptcy
Disadvantages
(i). Stand behind all contractual claims of creditors and preference shareholders. If the company is not
doing well, they will not get dividends.
(ii). The most risky type of corporate investment not backed by specific assets that can be attached to
investment if the company fails
(iii). Do not carry a fixed rate of dividend and depend entirely on profits for a dividend,
(iv).Can only receive a dividend, if declared
(d). Deferred shares
They usually give the holders the right to the residue of distributed profits after a certain fixed dividend
has been paid on ordinary shares.
Advantages
(i). Carry heavy voting rights as compared with other shares in the company.
(ii). May participate to a high degree in the surplus assets on the companys liquidation
(iii). Control ownership rights
Disadvantages
(i). Risky type of investment

(ii). Stand behind all contractual claims
(iii). The exact level and rights of deferred shareholders (e.g. their voting rights_ depend upon the terms
of the issue.
Bonus Issues
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Also known as Scrip Issue are shares issued to existing shareholders from existing reserve e.g. share
premium, general reserve, retained profits, for no cash. The shares are given on a pro-rata basis such as
2 for every 3 already held, i.e a shareholder gets 2 shares for every 3 he/she already holds. There is no
cash flow and there is no dilution of ownership. The earnings per share do not change because the
equity remains the same.
Rights Issues
Shares issued to existing shareholders at a price below the marked price. There is a cash flow since the
shareholders actually paid for the shares. The share price is affected by the rights issue to give a
theoretical ex-rights price being the average price for the existing share at market price and the shares
from the rights issue. If one does not wish to exercise his rights he/she can sell the rights. There is no
need to issue a prospectus (which might be expensive) there is also no need for underwriting. Prices of
shares are at lower prices. No dilution of control from shareholders. Earnings per share, however,
maybe diluted because they are divided by more shares.
Question
Where a company issues shares with a norminal value of $1.00 at $1.10, the $0.10 is regarded as
premium. If the shares are issued at $ 0.90, the shares have been issued at a discount.
(a). state some of the uses for which the share premium account may be applied.
Answer
Some of the uses for which the share premium account may be applied
A company may apply its share premium account:
In paying up unissued shares to be allocated to its members, directors or employees or to a

trustee for such persons, as fully paid bonus shares.
In writing off:
The companys preliminary expenses
The expenses of, or the commission paid or discount allowed on, any issue of shares or
debentures of the company.
In providing for the premium payable, if any, on redemption of any redeemable preference
shares or of any debentures of the company.
Question
What are the conditions for issuing shares at a discount according to section 75 of the Companies Act
24:03?
Answer.
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Conditions for issuing shares at a discount according to section 75 of the Companies Act 24:03
Shares may be issued at a discount provided that:
The issue of the shares at a discount must be authorized by special resolution of the company
and must be sanctioned by the court.
The special resolution must specify the maximum rate of discount at which the shares are to be
issued.
Not less than one year must, at the date of issue, have elapsed since the date on which the
company was entitled to commence business.
The shares to be issued at a discount must be issued within such extended time as the court
may allow.
Question
Section 73 of the companies Act 24.03 prohibits a company to give directly or indirectly and whether by
means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the
purpose of or in connection with a purchase of share in the company.
(i). Explain exceptions to this provision (5)
Answer
Exceptions to this provision are;
Assistance given in accordance with a special resolution of the company

Immediately after such assistance is given the Company should satisfy the solvency and liquidity
test.
Question
(ii). What are the sanctions for violating the prohibition? (5)
Answer
Sanctions for violating the prohibition:
Transaction may be set aside by the court at the suit of the company, liquidator or any member
or creditor of the company.
Officers concerned may be required to compensate the company and any other party to the
transaction who entered into the transaction in good faith for losses resulting from the
transaction.
Question
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Explain whether a company may purchase its own shares. If so what requirements are to be met for the
transaction to be valid?
Answer
A company may purchase its shares:
Authority should be granted by the articles

After the purchase there must be other members holding the shares other than redeemable
shares.
Purchase to be authorized in advance by the company in a general meeting.
Authority to specify;-
The price or the maximum and minimum price at which the shares may be acquired.
Maximum number of shares, where they may be acquired and the class thereof.
Date the authority will expire.
Question
Davids father bequeathed a number of securities to him in his will in the will, these securities are
described as preference shares. However, when David receives the share certificate, he notices that the
terms of issue of the shares indicates that interest is payable on all preference dividends that are in
arrears at a specified rate. Furthermore the shares are redeemable at a certain date and they do carry
the right to vote at meetings of shareholders.
He is unsure whether to treat the income received from the securities as dividends or as interest
payments.
Required:
Advice David on the nature of securities. (20)
Answer
The securities discussed in this question are hybrid securities. They have characteristics of both equity
and debt instruments and are referred to as dual securities. There are two methods of rising capital for a
company i.e to issue equity securities or debt securities. Debentures and bonds are the most forms of
debt instruments whereas share represent equity holding.
Debt security
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The holder of a debt security (debentures) is a creditor of the company who receives interest at a
predetermined rate and predetermined date irrespective of whether or not profits have been declared
and also receives priority of payment to preference share-holders.
Equity Instrument
It is a share representing rights and duties flowing from the special legal relationship between the
shareholders and the company. Shareholders participate in the profits of the company available for
distribution in the form of dividends which have to be declared before the holder enjoys the right
thereto. Shareholders have a right to vote on issues pertinent to the company unless the Memorandum
of incorporation provides otherwise.
Preference Shares
They are a class of shares with respect to the payment of dividends and sometimes the return of capital.
Rights confirmed on preference shares are always dependent on the Memorandum of Incorporation
and/or the terms of their issue. They are given preference with respect to the payment of their dividend
before ordinary shareholders receive their dividend. Holders become entitled to payment of their
preferential dividend only when a company has made a profit and has declared a dividend.
Cumulative preference shares.
Cumulativeness in respect of dividends is a characteristic of preference shares. If the financial position of

the company is such that it can pay dividends, the dividends in respect of preference shares must first
be paid in respect of each financial year that these were not paid. The unpaid dividends in respect of
cumulative shares therefore accumulate, but unpaid dividends do not give the shareholder the
automatic right to claim them, as dividends must first be declared. Whether or not a share is cumulative
is usually expressly stated in the class rights of the shares, but if the class of rights do not indicate if the
shares are cumulative, there is a presumption in favour of cumulativeness.
Redemption of shares
One qualification that could be put on shares and which is especially used as a condition of preference
shares is the possibility to redeem the shares at a future date or on the occurrence of a specific event.
NB: A mark is given for a persuasive argument regarding the type of security David is dealing with.
Candidates must choose whether this is an equity instrument or a debt instrument and advance for their
choice.
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Question
(b). What is an equity Instrument?
An equity instrument refers to a document which serves as a legally applicable evidence of the
ownership right in a firm, like a share certificate. Equity instruments are, generally, issued to company
shareholders and are used to fund the business. It is, however, not necessary that the issued equity
must return a dividend for it is based on profits and the terms of business.
Categories of equity instrument
The equity instruments can be divided into numerous categories, the most common ones being:
Common stock is one of the equity instruments issued by a public company to raise funds from the
public. The shareholders have the privilege of being entitled to co-ownership of the company in
addition to having the right to vote at the shareholders meeting as per the proportion of shares.
Besides, they also have rights to take decision in important issues like raising capital to pay
dividends and merging business. Moreover, the shareholders can also apply for new shares when
the company has increased capital or issues a new allocation to the shareholders.
Convertible debenture is another type of equity instrument which is similar to common bonds, the
only difference being that a convertible debenture can be converted into common stock during the
particular rates and prices mentioned in the prospectus. Convertible debentures are quite popular
for profitable returns from converted stock are higher than those form common bonds.
Preferred stock, another equity instrument, involves shareholders participation as a business
owner as in common stock. The variation lies in that the preferred shareholders are entitled to
receive repayment of capital prior to the common shareholders.
Depository receipt is an equity instrument which entitles the rights to reference common bonds,
ordinary debentures, and convertible debentures. Investors holding a depository receipt get
benefits as shareholders of listed companies in every respects, be it the voting rights or financial
rights in the listed companies.
Transferable Subscription Rights (TSR) is an equity instrument issued by a company to all
shareholders in proporti8on numbers of shares already held by them. This instrument is used as
evidence in shares of the company. The existing shareholders can sell/transfer their rights to others
if they do not want to exercise their shares.
QUESTIONS ON MEMBERSHIP
(b). Give any five rights of the members of a company.
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Answer
(b). the members of a company have the following rights:-
To be issued with a share certificate

To be entered on the register of members
To be notified of a general meeting.
To attend meetings
To vote at meetings
To have access to information relating to company and how it is managed.
To receive their respective share of the companys profits even if this is only at winding up.
QUESTIONS ON THE PRINCIPLE OF MAINTENANCE OF CAPITAL
Methods of raising capital by a company
(i).Issue of share either:
(a). Rights issue to existing members at a price below marked price, with or without a share premium.
(b). Initial pulic offer to new shareholders with or without share premium and with new prospectus.
(c ). Venture capital to wealthy shareholders.
(ii). Issue of debentures which is debt capital either secured or not on assets of the firm.
(iii). Long term loans from banks.
(iv). Short term loans and bank over drafts.
The law relating to capital maintenance includes:
(i). Prohibition on payment of commission to any person who subscribes for shares e.g. Commission to
underwriters unless articles permit and it shall not exceed 5% of the share price in terms of Sec:72
(ii). Non payment of discount, allowance or commission, except as in terms of Sec:72(1), cite a case of
Oregum Gold Minning of India Vs Roper.
(iii). Purchase of a companys own shares in terms of Sec:73(2) (a)(b). cite a case of Wallen Steiner Vs
Moir.
(iv). Alteration of the companys share capital in terms of Sec:87
(v). Reduction of share capital in terms of Sec:92
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Maintenance of Capital
The principle of maintenance of capital requires that companies maintain capital by not returning cash
or assets to members thereby ensuring protection of creditors. It is because of this principle that
reduction of capital is regulated by the Companies Act.
Reduction of capital is covered by S92-96 of the Companies Act 24:03. The general rule as determined in
a very old English case: Trevor Vs Whitworth (1887) 12 App 409, is that a reduction of capital, but there
must be authority in the Articles of Association to do this and the court must sanction the reduction.
Although Section 92 gives them power to reduce the capital in various ways, the section sets out specific
acts that a company may do. It may extinguish or reduce liability on any of its shares in respect of unpaid
shares capital. It may cancel any paid up capital which is lost or not represented by the available assets
and it may pay off any paid-up share capital which is in excess of the wants of the company.
However, it is for the members to decide how the members to decide how the reduction in capital
should be carried out and the Court confirms any method that the shareholders propose. The court will
need to be satisfied that the interests of the existing creditors are protected by any proposals. Care
should be taken that the company does not enter into illegal transactions whilst reducing its share
capital.
The company will need to get a special resolution to reduce the capital and the court will need to be
assured that the reasons for the reduction were clearly explained to the members before they voted.
The question does not explain why Sunflower Ltd is carrying out these alterations. If it is because the
company has suffered a loss of capital then the preference shares should be the last group of shares to
be reduced. Because these alterations also vary the class rights of some of the shareholders, this
variation must be approved by three quarter majority of the class in question.
Once the special resolution for the reduction of the capital has been passed the company must send a
petition to the court for the reduction to be confirmed. It is possible that the court may require the
company to add and reduced to its title, although this is now very uncommon.
Once the court has confirmed the reduction, a copy of the order, showing how the capital has altered
must be lodged with the Registrar and the reduction of capital takes effect at the time the paperwork is
registered.
The Court will consider three factors before confirming the reduction. It needs to be satisfied that the
reduction is fair and equitable between the different classes of shareholders is the company, even
though there is no rule that a reduction of capital must affect different classes equally, and that the
proposals affects all shareholders of the same class in a similar way unless those who are treated
different are fully aware of what is happening and have agreed to it and finally, that the reasons for
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reduction were properly explained to the shareholders so that they were able to make an informed
decision.
If Sunflower Ltd is returning in excess of the companys requirements then the preference shares which
have priority on return of capital should be paid off first. Whereas if the reduction is because Sunflower
Ltd has suffered losses, it is the ordinary shares that should be paid off first. We are not told if the
preference shareholders have rights of participation in surplus assets on winding up, which might give
them a cause of action if their rights are not being strictly observed.
Where a variation on class rights has adversely affected a minority of shareholders provided that the
minority equals 15% of the issued shares of the class affected and they have not voted in favour of the
variations, they may apply to the court to have the variation cancelled, S 91(1) of the Companies Act
24:03
QUESTIONS ON MEETINGS AND RESOLUTIONS
Question
(a).Briefly list the requirements for a special resolution as set in the Companies Act Chapter
(24:03)
(b).The members of Haluba (PVT) Ltd passed a special resolution in a meeting that was held on
31 December 2009. Advise the members of Haluba (Pvt) Ltd on the procedure to be followed in
order for the special resolution if the procedure is not followed.
Answers
(a). Special Resolution
Notice convening the meeting must:
State the intention to propose the resolution as a special resolution , the terms and effect
, and the reasons .
The resolution must be passed at a general meeting at which members holding at least
of the total votes are present in person or by proxy .
The resolution must be passed by at least of the number of members present in

person or by proxy entitled to vote .
Becomes effective upon registration by the Registrar of companies.
The quorum consists of one fourth of the total votes of members, present in person, or
represented by proxy.
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The form of the resolution, together with reasons for the effect of requirement that the notice
of meeting include a statement entitling any member to appoint a proxy is required to be set
out in the notice of meeting.
Notice required is 21 days clear notice (which excludes the day of giving the notice and the day
of the meeting), which for all practical purposes should be calculated as 23 days.
Matters requiring a special resolution:

Converting one type or form of company into another
Alteration of objects and powers as of the articles of association
Alteration, removal or incorporation of conditions in the Memorandum
Alteration of share capital, other than reduction
Winding up by court
Voluntary winding up
Conversion of shares into stock and vice versa.
(b).
A special resolution must be lodged with the Registrar within one month after it was passed ,
following which penalties become payable . Any special resolution not lodged within 6 months
will lapse and be void .The Registrar may refuse to register a special resolution which appears to
be in conflict with the Act . Once the special resolution has been registered , a copy thereof must
be attached or embodied in every copy of the articles issued thereafter and every member .
Question
(a).What business is transacted at an AGM and Extra-Ordinary General Meeting of shareholders?
(b). what do you understand by a meeting in the concept of a company and when is a meeting validly
convened?
Answer
(a). The business is transacted at an Annual General Meeting (AGM) is either ordinary or special
business. Any business transacted at an AGM is deemed special by law except the following:
Declaring dividends
Consideration of accounts balance sheet and Directors and Audit reports
Election of Directors
Appointment of auditors
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Any resolution in respect of which notice is given.
It must be noted that there is no limitation as to the business that may be transacted at an AGM save
that it must be held in accordance with the provisions of the Companies.
(b ). A meeting is a lawful gathering of Directors or Members to receive and consider the business before
it as set out in the notice of that meeting. A meeting is validly convened if :
(i). It has been convened by a lawful authority/rightful person.
(ii). A notice as required by law has been duly sent and all concerned notified.
(iii). An agenda of business/items to be considered thereat has been circulated or agreed.
(iv). The rightful persons have been summoned either in person or by proxy.
(v). there is a quorum.
Ordinary resolutions
Is the normal method of securing the members approval for routine business transacted at a general
meeting, such as the approval of annual accounts. The Companys Act defines an ordinary resolution as
a resolution which is not a Special resolution. (Section 1aa)
The following can be passed by an ordinary resolution:
The authorization of directors to allot shares

The re-appointment of auditors.
Election of directors
An ordinary resolution is passed by a simple majority of votes and requires 21 days notice at an AGM or
14 days notice at a general meeting.
Ordinary resolution requiring special notice
Is at first an ordinary resolution with the following extra requirements:
Special notice of 28 days must be given

Special notice is required for an ordinary resolution to remove a director, before the expiration
of his period of office.
Purpose and Characteristics of Board Meetings
(i). To consider board resolution.
(ii). Attendance of board members recorded and agenda read out.
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(iii). Quorum should be present.
(iv). Resolutions are put to vote
(v). Accurate minutes are taken by Company Secretary.
(vi). A Chairperson shall lead proceedings.
QUESTIONS ON RECONSTRUCTION AND ARRANGEMENT
A scheme of compromise takes the following form:
Circumstances may arise whereby owing to recession, or viability constraints a company is unable to pay
its obligations.
A scheme of arrangement/ compromise with creditors as provided for in terms of Sec:193 may be
undertaken it must be agreed upon by at least 75% in value of creditors present in person by a special
resolution.
It must then be sanctioned by the court. Shares acquired are not transferred but cancelled by court
order, there is no stamp duty liability.
Documentation of the scheme must be settled by counsel and legal advisors of the company.
The court order must be lodged with the registrar. A copy must be annexed to the memo issued after
order.
QUESTIONS ON WINDING UP
Winding-up by the Court (Compulsory Liquidation)
Seven Grounds for Compulsory Liquidation (S206)
By section 206, there are seven grounds on which a company may be wound by the court;
i) if the company has by special resolution resolved that the company may be wound up by the
court.
ii) if default is made in lodging the statutory report or in holding the statutory meeting;
iii) if the company does not commence its business within a year from its incorporation or suspends
its business for a whole year;
iv) if the company ceases to have any members;
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v) if seventy-five per centum of the paid up share capital of the company has been lost or has
become useless for the business of the company;
vi) if the company is unable to pay its debts;
vii) if the court is of the opinion that it is just and equitable that the company should be wound up.
Effect of winding up order
Freezes company affairs e.g. legal proceedings and attachments and executions are
stayed.
Dispositions of property, share transfers and alterations in the status of members may
no longer be made, except with permission of the court.
The companys property is deemed to be in the custody or control of the Master until a
liquidator or provisional liquidator is appointed.
A statement of the companys affairs must be submitted to the Master.
The powers and duties of the directors cease, except that they are entitled to represent
the company in opposing the winding up.
Powers and duties of the Liquidator
To recover and reduce into possession all the companys property

Open a bank account
To raise money on the security of the company assets with creditors approval if a
provisional liquidator.
Acts under the general supervision of the Master to whom he must give all necessary
information.
May become personally liable if he operates with self-interest.
QUESTIONS ON JUDICIAL MANAGEMENT
Question
Tinoziva is the CEO of Hi-Tech Ltd. The company is involved in Information Communication Technology.
Their products are in high demand as every business or individual is trying to keep abreast with new
technology in this area.
Being motivated by the high response in the market, the company embarked on a growth strategy. They
opened branches in almost every town in Zimbabwe. To meet the expansion drive, the company heavily
borrowed from financial institutions and any others sources of loan capital they could access.
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The management of the company also bought top of the range vehicles. The vehicles were purchased on
credit. Management advanced loans to themselves for holidays in foreign countries, covering airfares
and accommodation in expensive hotels. The company is now failing to meet obligation as they fall due.
Discuss whether judicial management or liquidation should apply to Hi-Tech Ltd. Clearly show when
each of these is applicable. (20)
Answer
When by reason of mismanagement or for any other cause a company is unable or probably unable to
meet its obligations but it had not become or is prevented from becoming a successful concern and
there is reasonable probability that if it is placed under judicial management. It will recover, the court
may grant judicial management order is the act of substituting directors of the company with a judicial
manager who is appointed by the court on the application of an aggrieved interested person.
It is a stop gap measure which is meant to avoid liquidation because liquidation has drastic
consequences. Judicial management should enable the company to pay its debts or meet its obligations
and become a successful concern (S. 300 of the Companies Act) the question at hand in the given case
study is what the causes of Hi-Techs problems are, and whether there are any prospects that it will
become successful if it is put under judicial management.
It is evident from the scenario that Hi-Tech Ltd is being mismanaged. The failure of the company cannot
be attributed to the business environment. Their products are on high demand in the market. The
company had lines of credit open to them to finance the operations of the company. However, it was
lack of business astuteness by the management that brought the company down. An ambitious
expansion effort choked the otherwise thriving business. Purchase of non essentials such as expensive
vehicles were inappropriately given priority.
Since the market is receptive of the companys products, there are prospects that the company may be
revived. To revive it, the current management must be divested of their duties and a judicial manager
appointed.
The necessary applications should be made to court for the judicial management order. Liquidation
does not apply in the given scenario . A winding-up order is intended to bring about the dissolution of
the company ,whereas the purpose of judicial management order is to save the company from
dissolution .Dissolution (liquidation) is applied where it continued running of the company likely to
cause the company to incur more debts and obligations as approved to recovery. Because there are high
prospects to recovery by Hitech Ltd liquidation is not the best option.
It is also noteworthy that judicial management unlike liquidation, provides for a moratorium in respect
of the companys debts in the hope that it will lead ultimately to the payment of all creditors and the
resumption of normal trading. Contrary liquidation creates a Concursus Creditorum. Creditors are paid
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from liquidated resources following a preference order as per Companies Act. More often than not
some creditors will never be satisfied. So liquidation does not always benefit all the stakeholders.
A liquidation order is usually granted where a company is insolvent, whereas judicial management order
is usually granted where a solvent company has run into financial difficulties because of
mismanagement and because there is hope that with better management it will overcome its
difficulties.
Question
Write short notes on the following
Judicial management.
Answer
Judicial Management refers to a legal process provided for under the Companies Act in terms of which
the court, upon application, appoints a person to run the affairs of the company following the lawful
removal of the Board of Directors. The person so appointed is called the Judicial Manager. The court
places a company under Judicial Management where the company would have suffered
mismanagement and there are prospects of the fortunes being turned around and reverting to
profitability under judicial management. In essence judicial management is the company management
supervised by the court as the judicial manager reports to the court. It is an alternative to winding up a
company.
QUESTIONS ON INSOLVENCY
Question
(b). what is the legal effect of one being declared insolvent? (5 marks)
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Answer
(b). the legal effect of being declared insolvent by the High Court entails-
(i). The sequestration of the debtors estate.
(ii). The appointment of a Trustee to manage the affairs of the debtor.
(iii). Loss of contractual capacity by the debtor except for personal contracts.
(iv). The staying of all legal processes.
(v). Rendering void all transactions entered into after insolvency except by the Trustee.
(vi). Disqualification from holding certain posts e.g directorship.
Question
Mr. Nice a recently qualified Chartered Account joined Blaa and Blaa Chartered Accountants. As a
professional assistant, Mr. Nice earned US$10 000 per mouth. Mr. Nice decided that as an
accountant he deserved to live in a smart house in Borrow dale . He therefore borrowed US$400
000 from Pearls Bank for the purchase price of his new house. He borrowed US$250 000 from
City Motors to purchase his new Mercedes Benz. New suits and partying clothing where now
also essential so Mr. Nice purchased , on credit clothing , to the value of US$40 000 from
various clothing stores in Harare.
A few months down the line it became difficult for Mr. Nice to service all his debts. He owed
a friend some amount of money. When the friend pestered him, he negotiated to give the
friend his home theatre instead. Upon Failure to service the loan the bank attached his house.
When creditors started calling him on phone he resorted to switching his phone off and
sometimes pulling it on voice mail. However creditors starting calling at his workplace by phone
and physically. To same he gave his furniture and other small creditors even his clothing.
When the situation got worse , he moved to stay with a friend in a different suburb to avoid
nagging creditors. When this did not help either he skipped the border via South Africa, from
where he wrote some creditors that he is unable to pay them.
Before he left for South Africa he gave his sister in Mabvuku a fridge and stove lest some
creditor would have grabbed them.
List acts of insolvency committed by Mr. Nice in the scenario and others where he could have
committed. (20 marks)
Answer
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Acts of insolvency
The debtor leaves the country or being out of the country , remains absent from it or departs
from his dwelling of otherwise absents himself , with intent to evade or delay payments
of his debt
The debtor makes, or attempts to make , any disposition of any of his property which
has , or should have , the effects of prejudicing his creditors or of preferring one creditor
above another.
The debtor makes , or offers to make , any arrangement with any of his creditors for
releasing him wholly or in part from his debts .
The debtor gives notice in writing to any one of his creditors that he is unable to
pay all his debts .
After publishing a notice of surrender of his estate which has not lapsed or been
withdrawn in terms of Act , the debtor fails to comply with the requirements of the Act
or lodges a statement which is incorrect or incomplete.
The debtor removes or attempts to remove , any of his property with intent to prejudice
his creditors or to prefer one creditor above another .
A court has given judgment against the debtor and he fails , upon the demand of the
officer whose duty it is to execute the judgment , to satisfy it or it appears from the
return made by the officer that he has not found sufficient disposable property to satisfy
the judgment .
Question
Ruzai, an Insolvent, had given private music lessons to Toriro, before his estate was sequestrated. After
the sequestration of his estate and with the consent of the trustee Ruzai entered into a partnership
agreement with Lolo that sells cosmetics. Ruzai also entered into an agreement with Sasha, one of his
clients, that Sasha would buy his (Ruzais) Plasma TV for $4 000. Sasha is unaware that Ruzai is insolvent.
Toriros in arrears with two months of her tuition fees for the music lessons. Ruzai also has not received
his share of the profits in the partnership as agreed upon in the partnership agreement.
Ruzais trustee has resolved that it is necessary to sell Ruzais residence in order to pay creditors, but
Ruzai is of the opinion that his trustee wishes to sell his residence for far too little.
Ruzai approaches you for advice.
(a). May he collect the outstanding fees from Toriro and his share of the partnership profits due to him
for his personal benefit? (5)
(b). Explain to Ruzai whether he must inform his trustee that he (Ruzai)has sold his plasma TV to
Sasha.(5)
(c ). Argue, giving reasons whether, it would make a difference to your answer in (b) above if Ruzai had
received the Plasma TV as a birthday present after the date of sequestration of his estate.(5)
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(d). Briefly explain whether Ruzai may take any steps to prevent the sale of his residence. (5)
Answer
(a).An insolvent may exercise his or her trade or profession .Ruzai may therefore give music lessons. The
insolvent may for his or her own benefit recover remuneration for professional services which he
rendered after sequestration. Ruzai may therefore give instructions in his own name for the recovery of
the arrear tuition fees. A contract concluded by an insolvent is valid and binding on the parties.
(b). an insolvent may not conclude a contract for the alienation of assets belonging to the insolvent
estate. If the insolvent concluded a prohibited contract it will be voidable at the option of the trustee.
The trustee may decide that the contract is binding on both parties or he may withdraw from the
contract. The contract that Ruzai entered into with Sasha is therefore voidable.
(c).Yes it would make a difference to the answer if the other party proves that he or she was not aware
and had no reason whatsoever to suspect that the estate of the insolent was under sequestration, the
alienation will nevertheless be valid. Sasha may therefore retain the Plasma TV, if she can prove that she
was not aware that Ruzai was insolvent and that she purchased the TV for value.
(d). Ruzai, the insolvent, retains a reversionary interest in his estate. The insolvent may therefore
institute proceedings regarding the administration of the estate only if any irregularity took place or a
lack of bona fides on the party of trustee or the creditors is questionable. Ruzai may institute legal
proceedings to prevent the sale of his residence, only if he can show that some irregularity took place or
that his trustee is not acting in good faith. Ruzai will therefore not succeed in legal proceedings aimed at
stopping the sale merely because he thinks that the price is too low.
Question
Prior to the granting of order of sequestration of his estate. Tapiwa donated his vehicle to friend, sold
his house in an up-market suburb for $500. Paid John fully what he owed him, agreed with a neighbour
that the neighbour takes possession of some of Tapiwas valuable property as if he sold them to him.
(i).What are impeachable dispositions? (3)
(ii). State and briefly explain some common impeachable dispositions in terms of the Insolvency law. (8)
(iii). What kind of dispositions are outlined in this scenario. (4)
Answer
(i). Impeachable dispositions are transactions entered into by the insolvent prior to the sequestration of
his estate which may be set aside at the instance of the trustee or liquidator.
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(ii). Disposition not made for value
These are disposal of property by the insolvent without being adequately compensated resulting in his
estate subsequently being sequestrated. Examples of such dispositions are donations that result in the
insolvents liabilities exceeding the assets.
Voidable Preferences
These are dispositions that take place within 6 months before the date of sequestration with the effect
of preferring one of the insolvents creditors above the other when he knew he was insolvent.
Undue Preferences
These are dispositions that were made at a time when the insolvents liabilities exceeded his assets and
the disposition was made with the intention of preferring one of his creditors above another. Once this
is proven. Judgment must be granted in favour of the trustee i.e to set aside the disposition. The
difference of undue preference and voidable preference are that, on the former once the trustee has
proved the disposition, but in voidable preferences the beneficiary has defences which he can proffer
e.g that the disposition was made in the ordinary course of business.
Collusive Disposition
These are transactions entered into by the debtor before his sequestration in collusion with any other
person disposing property with the effect of prejudicing his creditors or preferring one above another.
(iii). the donation of the vehicle is a disposition made not for value. Selling the house for far less than the
market value is also disposition not for value.
Paying John fully is an undue preference above other creditors. His agreement with the neighbour
qualifies as collusive disposition. All these dispositions are impeachable and maybe set aside by the
trustee and values in question recovered.
Question
(a). (i). Argue, giving reasons, why an insolvent is prohibited from holding certain offices.
(ii). Can you find a common denominator among all the different offices which an insolvent may not
hold? (In other words do they have something in common?)
(iii). Do you think it is fair to prohibit a person from being, for example, a member of parliament if he or
she is insolvent? (10)
(b). Thomas neighbours are on holiday. One evening Thomas notices that the neighbours house is on
fire. He and his family put out the fire using their own fire extinguisher.
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Explain the relationship between Thomas and his neighbor with regard to the transaction above citing
any rights or obligations for each party. (10)
QUESTIONS ON ARBITRATION AND LITIGATION
Question
Compare and contrast Arbitration and Litigation as methods of Conflict resolution. (20)
Answer
Arbitration Vs Ligation
ARBITRATION LITIGATION
Private/Public Private between two parties Public in court room
Type of proceeding Civil - Private Civil and Criminal
Evidence allowed Relatively informal process Rules of evidence allowed

evidentiary
How arbitration/Judge selected Parties select arbitration State/Court appoints judge

parties have limited input.
Appeal available Usually binding, no appeal Appeal possible

possible
Use of attorneys At discretion of parties Extensive use of attorneys
Waiting time for case to be As soon as arbitrator is selected; Must wait for case to be
heard. short scheduled; long
costs Fee for arbitrator, Attoneys Court costs attorneys fee; costly
Question
KKC City Council contracted XYZ Ltd a construction company to construct a bridge over Mukuvisi River
on the main road. On completion of the bridge the City Council refuses to pay up the outstanding
balance citing poor workmanship. They are embroiled in a dispute which has hit a deadlock. XYZ Ltd
contemplating suing the City Council in a court of law. However, their lawyers have advised them that
such disputes, being of a technical nature, are better resolved through Arbitration.
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Advise XYZ Ltd on which route to take; Litigation or Arbitration giving reasons.
Answer using information on the table above.
QUESTIONS ON LAW OF TRUST
Question
Outline the legal status and purposes of Trusts under Zimbabwean law. (10)
Answer
A trust is s legal structure or arrangement whereby money or property one person or a group of persons
(trustees) are appointed to manage property/funds for the benefit of another or others (beneficiaries)
but such money or property is owned by the Trust. The Trust is a legal entity with limited liability,
separate from the founders and the Trustees as it is established under a legal document called, a Deed
of Trust. The Trust assumes legal status entitling it to own property and exercise such powers as a
company or other entities independent of the Trustees and beneficiaries. Examples of purposes are as
follows charity, protection against spendthrift tendencies, investment, protection of assets, communal
ownership, and provision of pension.
Question
Write short notes on
Trusts as legal entities. (5 marks)
Answer
A trust is a legal structure or arrangement whereby money or property in place under the control of a
person or a group of persons (trustees) who are appointed
To manage property / funds for the benefit of another or others (beneficiaries) but such money or
property is owned by the Trust. The Trustees manage the Trust, which is established under a legal
document called, a Deed of Trust. The Trust assumes legal status entitling it to own property and
exercise such powers as a company or other entitles independent of the Trustees and Beneficiaries, but
in accordance with the conditions imposed by the Trustee Deed. The essential factor is that the
beneficiaries do not have control of the Trust assets.
QUESTION ON CORPORATE GOVERNANCE
Question
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(a). What is corporate governance ? Define the term. (2 marks)
(b). Who are the parties to corporate governance? (5 marks)
(c). State the accepted principals of corporate governance. (5 marks)
(d). State the corporate governance mechanisms and controls. (8 marks)
Answer
(a).Corporate governance refers to a set of processes, practices, laws, principals, laws affecting the
manner in which a company is managed, directed and controlled. It also includes the relationships
between the company, shareholders, board of directors and management of that company and others.
In essence corporate governance provides for the process by which a company is directed and
controlled and is also a field of study which deals with the separation of ownership and
management/control of a company.
(b). the parties to corporate governance are those persons and institutions involved in the ownership
and management of a company, (viz chief executive officer/managing director, the board of directors,
management , shareholders) and those affected by its operations and stakeholders including customers,
suppliers, employees, creditors and communities within which the company operates.
(c). the accepted principals of corporate governance are as follows integrity and ethical behavior,
disclosure and transparency, role and responsibility of the Board rights and equitable treatment of
shareholders and interests of the shareholders and interests of the shareholders.
(d). the corporate governance mechanisms and controls are internal and external Board Committee,
remuneration monitoring by the board of directors, external audit, government regulation competition,
media pressure and takeovers.
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Company Law in brief for examination preparation

QUESTION ON THE LEGAL PROCEDURAL STEPS FOR FORMING A PRIVATE/PUBLIC COMPANY.

(b). Whether the purpose is lawful

(c ). The scope of the proposed activities.

(i). Name search (CR 21)

(ii). Preparing Memorandum of Association

(iii). Preparing Articles of Association if any

(iv). Pre-incorporation contract if any

(v). Notice of situation and Postal address of registered office (CR 6)

(vi). Appropriate fees prescribed in Seventh Schedule of the Act.

Advantages and disadvantages of forming a company

Members Limited liability

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 1

QUESTIONS ON PRIVATE AND PUBLIC COMPANIES

PRIVATE COMPANY PUBLIC COMPANY

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 2

No prospectus or statement in lien need be A prospectus or a statement in lieu of a

Certain formalities in respect of the Formalities in respect of the appointment of

No register of directors shareholdings need A register for directors shareholding must be

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 3

Differences between Partnership and a Company

Legal status It is not a distinct Persona and A company is a distinct

Charter The partnership can do The activities of a company are

Agency Each partner is an agent of the A member of company is not its

Liability Each active partner is liable The members liability is limited

Perpetual A partnership has no perpetual The death or Insolvency of a

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 4

Membership A partnership cannot consist of Provided it is registered in

Formation Partnership maybe formal, A company formation must be

A restriction on the free transferability of shares.

Discuss an underwriting contract and state its significance to the company.

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 5

Importance of underwriting contract.

Increased in goodwill of the company

Benefit of expert advice

Service to prospective buyers

QUESTIONS ON THE CONCEPT OF LEGAL PERSONALITY OF A COMPANY.

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 6

PIERCING / LIFTING THE CORPORATE VEIL

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 7

The following are instances where the veil may be pierced:

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 8

Advise Mr. And Mrs. Fox on the following:

(b). Outline the concept of legal persona. (10)

(a).The relationship between Members, Directors and Management is regulated by corporate

COMPANY LAW compiled by D Nyadombo (Mr.) 0773202991(HEXCO,CIS, IAC,SAAA, ACCA etc) 9

It acquires full legal capacity as that of an adult of majority age,

Circumstances in which this concept does not apply

Salomon(Pauper) Vs Salomon & Co. Ltd (1897)

Ownership and control of company may be in different hands.

QUESTIONS ON PRE-INCORPORATION CONTRACTS

Case: Kelner Vs Baxter (1866)

The contract must be in writing

Duties of the Promoter

Duty of care and skill

Duty to act Intra-vires

Duty of doing the best for the benefit of the company

Misleading statements in a prospectus

i) it is misleading in the form and context it is included.

Statutory Civil Liability

(a). Under what circumstances will the Turquand Rule apply?

The Turquand Rule/Indoor Management Rule

Royal British Bank vs Turquand (1956)

Exceptions to the Rule.