CORPORATE LAW

CHAPTER 1

INTRODUCTION

Acts of Parliament (Statutes) are what the parliament passes as law. The
moment the Act is passed it becomes binding law in the country and is
enforceable. Acts of Parliament have the following characteristics:

1. They are drafted in a way which is only peculiar to them.

2. The language is couched in such a way as to cover almost every

eventuality; hence sometimes they may be all encompassing.

3. The expressions used are often archaic and not used in ordinary
conversation.

4. The language used is not intended for the “unlearned” layman. It should
be appreciated that every profession has its own way of communicating
peculiar to it.

What is the Companies Act?

It is a statute (Act of parliament) passed by Parliament with a specific

purpose which is to regulate companies, their registration, formation,
management and dissolution. The current Zimbabwean Companies Act is
Chapter 24:03 (hereinafter referred to as ‘the company’s Act).

It was passed on the 22nd of November 1951 and became operational the
following year. It has been amended several times so it is important to obtain
an up to date copy of the Act or amendments. They are obtainable from
Printflow (Pvt) Ltd formerly Government Printers. It is also important to keep
abreast of various judicial decisions, not only from Zimbabwe, but also from
South Africa and England.

At the time this text is being written there are company law reform
processes currently under way. This will have an impact on company law in
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Zimbabwe which may necessitate revision of the text. One should therefore
be on the lookout for such developments.

Definition of a company

A company is a registered corporation with limited liability formed with the

intention of benefiting its members. Nkala and Nyapadi (1995) at page 8-9
define a company as:

“…..a corporate with one or more persons formed for a lawful

purpose of carrying on business that has for its object the
acquisition of gain by that association, and which has been
incorporated under the Companies Act or any other law whose
liability is limited by shares or by guarantee.”

The main reason for forming a company is to provide the means of raising
sums of money from a number of investors who are referred to as
shareholders. The application of this large amount of money is left in the
hands of a few directors, who are may be shareholders themselves.
Shareholders invest their monies in shares to guard against personal liability.
Theoretically shareholders are not interested in the day to day running of the
company but in the return on investment when a dividend is declared. In the
event that the company fails and finds itself in debt, the shareholders will not
attract personal liability because of the concept of limited liability. A
company is through incorporation a separate and distinct entity from its
members or owners and as such it can be sued in its own name. It becomes
a legal person or a juristic person as opposed to a natural person. It assumes
corporate personality. It is this aspect or status which distinguishes a
company from other business entities.

The Companies Act (24:3) in section 2 defines a company as follows:

“means a company limited by shares or a company limited by

guarantee as in section seven described or an existing company.”

This definition is not helpful, unless one already knows what a company is.
The definitions given above better inform what a company is than this
definition. What a company is will become more apparent in ensuing

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chapters as the peculiar characteristics of this form of business are
discussed.

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 CHAPTER 2

LEGAL PERSONALITY

Upon registration, a company acquires a juristic personality and becomes a

juristic person. A juristic person is a body or association, other than a natural
person, that is endowed by law with the capacity to have rights and duties
apart from its members (Hahlo’s South African Company Law through cases
2001:7). It becomes a person in all respects serve for unique characteristics
which can only be exhibited by natural person, such as capacity to marry or
be sent to prison.

Companies are not the only juristic persons but other statutory bodies such
as State Corporations (parastatals), municipalities, trade unions and
employers’ associations, close corporations, co-operative societies and
universities are also juristic persons. However, for now the juristic or legal
personality of a registered company is explored.

A company has a separate legal existence from its members. As a juristic

person, a company is in other words, an entity apart from its members. It has
capacity to own property apart from its members. Its debts and liabilities are
not the debts and liabilities of its members. A company has what is referred
to as “perpetual succession” which means that its existence and identity is
not affected by a change in its shareholding or control (Stern v Vesta
Industries (Pty Ltd 1976 (1) SA 81 (W). The death of a member or
change in ownership composition has no effect to the continued existence of
the company. A company is therefore a distinct legal person in its own right.
However it is an artificial person in contrast to a natural person. The term
“body corporate” is also used to refer to a company and the term connotes
how it comes into being which is by incorporation.

Various company law gurus have attempted to describe in general terms the
concept of a company as a person with Ellison Kahn (1982) 99 SALJ 305
describing it in these terms:

“A company has neither a body that can be kicked, nor a soul that
can be damned”.

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This famous phrase by Ellison Kahn is an attempt to distinguish a company
from a natural person which has both body and soul. However, a company
may sue for defamation implying it has standing or reputation just like a
natural person which may be injured through defamation.

In the case of Webb & Co Ltd v Northern Rifles 1908 TS 462, a company
was described as:

“.......a legal fiction, an aggregation of individuals forming a

persona or entity, having the capacity of acquiring rights and
incurring obligations to a greater extent as a human
being.....distinguished from a mere association of individuals by the
fact that it is an entity distinct from the individuals forming it, that
its capacity to acquire rights or incur obligations is distinct from
that of its members, which are acquired or incurred for the body as
a whole, and not for individual members.”

Many years ago, the principle of legal personality was established in the
leading case of Salomon V Salomon Co. Ltd [1897] AC 22 (HL). The
facts of which briefly were as follows:

Mr Salomon sold his business as a leather merchant and wholesale boot

manufacturer to a limited company with a nominal capital of 40 000 shares
of £1 each. The only shareholders in the company were Mr Salomon himself,
his wife, a daughter and four sons, who subscribed for one £1 share each. In
part payment of the purchase money debentures were issued to Mr Salomon.
20 000 shares were also issued to him and paid for out of the purchase
money. He was appointed managing director.

When a year later the company was wound up, it was found that if the
amount realised from the assets of the company would be, in the first place,
applied in payment of Mr. Salomon’s debentures, there would be no funds
left for the payment of the ordinary creditors.

The liquidator, alleging that the company was a mere alias or agent of Mr
Salomon, claimed the vendor was liable to indemnify the company against
the claims of the ordinary creditors, and that no payment should be made on
the debentures held by him until ordinary creditors had been paid in full.

The appeal Court ruled that Mr. Salomon and the company were two
separate persons. Said Lord Halsbury LC

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……………………. “It seems to me impossible to dispute that once a
company is legally incorporated it must be treated like any other
independent person with rights and liabilities appropriate to it, and
that the motives of those who took part in the promotion of the
company are absolutely irrelevant in discussing what those rights
and liabilities are”

Lord Macnaghten who agreed with this view also had to say,

“When the memorandum is duly signed and registered, through

there be only seven shares taken, the subscribers are a body
corporate capable of exercising all the functions of an incorporated
company. Those are strong words. The company attains maturity on
its birth. There is no period of minority – no interval of incapacity”.

He went on to illustrate in vivid terms that:

“The company is at law a different person altogether from the

subscribers to the memorandum, and, though it may be that after
incorporation, the business is precisely the same as it was before,
and the same persons are managers and the same hands receive
the profits, the company is not in law the agent of the subscribers
or trustee for them. Nor are the subscribers as members liable, in
any shape or form, except to the extent and in the same manner
provided by the Act”.

The Appeal Court went on to explain briefly the reasons why people would
think of forming a company.

Said the court:-

“Among the principal reasons which induce people to form private

companies are the desire to avoid the risk of bankruptcy, and the
increased facility afforded for borrowing money. By means of a
private company, trade can be carried on with limited liability,
without exposing the persons interested in it in the event of failure
to the harsh provisions of bankruptcy law. A company, too, can raise
money on debentures as any outside creditor”.

Another interesting case which followed the Salomon decision was that of
Macaura V Northern Assurance Co. Ltd[1925]A.C.619 (HL(Ir)

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In that case, Macaura was a commercial farmer. He took out an insurance
policy with Northern Assurance Company to cover his timber. Subsequently,
he sold the timber to a company in which he was the majority shareholder.
However, he did not transfer the insurance policy to the company. The
timber was destroyed by a fire and Macaura claimed on the policy.
The court held that Macaura was not entitled to indemnity because he had
no insurable interest in the timber, which in any event, did not belong to him
but to the company. Said the court:

“It (the timber) was not his. He stood in no legal or equitable

relation to the timber at all. He had no concern in the subject
insured”.

The gravamen of this important case is that a company owns a property in

its name, as distinct from its members. No member therefore can purport to
insure the company’s property because it belongs to the company, and the
company alone.

In the case of Lee V Lee Air Farming Ltd [1961] A.C. 12; [1960] 3 All
ER420 (PC), Lee was a commercial farmer. He converted his farming business
into a company. He was then employed by the company as its chief pilot.
One day, while piloting the aircraft, he was killed in a crush. His widow
claimed for compensation. The question before the court was whether Lee
was a “Worker” for purposes of workmen’s compensation. The Privy Council
held that he was a worker even though he was the controlling shareholder in
the company. It was said by the court:

“Just as the company and the deceased were separate legal

entities so as to permit of contractual relationship being
established between them so also were they separate legal
entities”.

The case of DADOO LTD V KRUGERSDORP MUNICIPAL COUNCIL [1920]

AD 530 is another case in which the principle of legal personality was
affirmed.
The facts of this case were that there was a provision in a statute whose
effect was to prevent people of Asian extraction form forming a company and
carrying out business in a certain prohibited area. Dadoo and his colleagues
who were Asians formed a company and operated in the area. The
municipality sought to prevent them from operating arguing that they were
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Asians. It was held by the court that no law had been breached. Essentially,
the reasoning of the court was that, even though the company had been
formed by Asians, it was not Asian itself since a company has no race or
colour.

Even though most of the leading cases we have examined are English, it
should be noted that since ancient Roman times, jurists and Romans law
recognized some form of legal personality which involved inter alia perpetual
succession, a separation from the body’s members and the ability to
participate in legal transactions.

The Companies Act (24:03) itself recognizes the juristic personality of a

company. It provides in section 9 that:

“A company shall have the capacity and powers of a natural person

of full capacity in so far as a body corporate is capable of exercising
such powers”

A company is “veiled” or clothed with legal personality which technically

prevents people from seeing what is behind the façade. There are however
situations where the court has thrown aside the concept of legal personality
and looked to see what lay behind the façade. This is called lifting or piercing
the corporate veil and will be discussed in the following sections.

EFFECTS AND ADVANTAGES OF INCORPORATION

The incorporation of a company is the birth of the company and from the
date of incorporation separate legal personality is created. Incorporation has
consequences which flow from it. These are;
 Acquisition of a corporate name in which the company can be subject
to legal obligations or acquire legal rights.
 It acquires perpetual succession in that it continues to exist despite
changes in membership.
 Acquires contractual capacity: it obtains capacity and powers such as
of a natural person.
 Becomes a legal persona: the company becomes a person in the eyes
of the law distinct from members who formed it.
 Acquisition of limited liability: this is the biggest benefit of
incorporation. The liability of members is limited to the unpaid balance
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 due on his shares. The debts and obligations incurred in the course the
company business are those of the company, and the members are not
legally responsible to the company’s
Creditors.
 Acquisition of property rights: the company upon incorporation is
enabled to own, occupy and acquire or dispose of property.

PIERCING THE CORPORATE VEIL

We have observed that in the landmark decision in Salomon V Salomon Co

Ltd the House of Lords ruled that a company is a juristic person. This is the
rule, but to every rule there is an exception. There is rarely a law that applies
absolutely with no exceptions. The Salomon principle does not apply
absolutely.

JUDICARY EXCEPTIONS

a. ABUSE OF THE CORPORATE PRINCIPLE

There are situations where the courts are of the opinion that the
corporate principle has been abused or has been used simply to
hide from the eyes of equity such as when it is used to defeat public
convenience, justify wrong or protect fraud. In such circumstances,
the court will disregard the Salomon principle and hold that the
company and its members are one and the same. The court will not
hesitate to lift the corporate veil where it thinks that it is necessary
in order to do justice or “to frustrate some grave impropriety”
(Cattle Breeders Farm (Pvt) Ltd v Veldman R.L.J 1974 (2) 89;
1974 (1) S.A 169). This is called piercing or lifting the corporate
veil.

The locus classicus is the case of Gilford Motors Co. V Horne

1933 ALL ER Rep.109. The brief facts of which are that there was
a contract in restraint of trade which was to the effect that, Horne,
on leaving the employ of Gilford Motors would not solicit or take
away the latter’s customers. Horne subsequently left employment
with Gilford Motors and proceeded to form his own company.
Through that company, Horne was soliciting his former employers’
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customers. Gilford Motors was not impressed and sued Horne’s
company. Horne argued that he was not in breach of the covenant
in restraint of trade because it was not him, but his company which
was soliciting and in any event, he and the company were two
distinct personalities. The court came to the conclusion that this
was a shear case of abuse of the corporate principle. Horne was
using the company to evade an equitable obligation.

It is clear from this case that Horne was obviously, using the
Salomon case as a precedent .However, the court refused to accept
the argument because the legal personality principle was being
misused.

In the case of Jones V Hipman 1962 ALL ER 442 the issue

concerned a contract of sale of a house. The seller realized that the
prices were going up and he sought to avoid the contract. He
therefore decided to sell the house to a company he had formed.
When the dispute came to court, it was held that the company was
just a little house built by the seller to avoid the eyes of equity.

In Re Bugle Press Ltd [1961] Ch 270 the directors of the

company had fallen out with the third director. These directors held
over 90% of the shares of the company. They then formed a
company for the purposes of taking over the business of the first
company (in which they held 90% of the shares).Their intention was
therefore to exclude the third director. Pursuant to their plan, they
applied for a take-over scheme. The court refused to sanction their
intention and held that this was highly improper.

b. FRAUD SITUATION

Where there is a fraud, the court will not hesitate to lift the
corporate veil. Fraud situations are similar to situations where the
corporate principle is abused. This is where a person would have
acted to misrepresent or acted dishonestly. This was held so in the
same case of Salomon where Lord MacNghten stated that Mr.
Salomon would have been held personally responsible if he had
“acted fraudulently or dishonestly’. The same was held in the case
of S V Stead 1991(2) ZLR 54 (S).

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Where the company is used in a fraudulent manner the court is
loathe recognising its legal personality because it will have been
formed for that purpose hence will not be anything more than a
puppet or sham dancing to the bidding of the fraudster.

c. THE AGENCY CONSTRUCTION SITUATION

These are situations when the court may be prepared to consider a

company an agent of another.

In the case of Smith,Stone&Knight V Burmingham Corp

(1939)4 ALL ER 116, a holding company owned some business
premises but did not carry on business there. Its subsidiary
company did. Birmingham Corporation wanted to compulsorily
acquire the land. The holding company demanded compensation.
The corporation argued that the holding company was not carrying
on business on the premises and therefore suffered no loss. As the
subsidiary company, it was not entitled to compensation because
the land did not belong to it. (The corporation’s argument was
clearly that either way, none of the two companies could claim
compensation! The court decided that the holding company was
entitled to compensation because even though it was not carrying
on business at the premises, subsidiary company was doing so as
an agent.

4) STATE INTERESTS

The court can regard a company as an enemy where the majority

shares are held by an enemy company or by nationals of an enemy
country, especially where the two countries are at war. The leading
case is that of Daimler Co Ltd V Continental Tyre & Rubber
Co(Great Britain)Ltd[1916] 2 AC 307. The plaintiff company i.e.
Continental Tyre and Rubber Company was incorporated in England
for the purpose of selling in England tyres made in Germany by a
German company which held the bulk of the shares in the English
company. Except for one shareholder, the rest including all the
directors were Germans resident in Germany.
After the outbreak of war between England and Germany in 1914,
the plaintiff sued the defendant company, i.e. Daimler Company for
the payments of a trade debt. The defendant company alleged that
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the plaintiff company was an alien enemy company and that
payments of the debt would amount to trading with the enemy.
Although the plaintiff’s actions were dismissed on a procedural
issue, the court agreed with the argument that a company could be
an alien enemy.

STATUTORY EXCEPTIONS TO THE CORPORATE VEIL

Other than the common law or judicial exceptions to the corporate

veil, the legislature provided for situations where some of the
characteristics of a company may be ignored. The Companies Act is
fraught with situations where the legislature is prepared to ignore
the veil:

a. Section 32: Personal liability of a member where the business of

the company is carried on with no members:

‘If a company has no members and carries on the

business for more than six months without members, any
person who knowingly causes it to do so shall be liable,
jointly and severally with the company , for all debts
incurred by it under after the six months have elapsed’.

It should be noted that this section does not do away with the
legal personality of a company. It is only used to apportion
liability to individuals who would not have complied with the
statutory provision. This provision is couched in wide terms
because the personal liability in question does not attach only to
directors but to ‘any person’ who would have breached the
provision e.g. employees or family members.

However, for the provision to apply the person concerned must

have carried on business ‘knowingly’. This is a limitation to the
application of the provision because proof of knowledge would
need to be provided before one can personally be held liable.

b. Section 318: Civil Liability

The section provides as follows:

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 (1) If at any time it appears that the business of a
company was being carried on-
(a)recklessly, or
(b)with gross negligence; or
(c)with intent to defraud any person of for any fraudulent
purposes; the court may ,on the application of the
Master, or liquidator or judicial manager or any creditor
of, or contributory company, if it thinks it proper to do so,
declare that any of the past or present directors of the
company or any other person who were knowingly parties
to the carrying on of the business in the manner or
circumstances aforesaid shall be personally responsible,
without limitation of liability, for all or any of the debts or
other liabilities of the company as the court may direct.’’

The liability attaches to any person whether member, director or

officer of the company who knowingly was a party to the
fraudulent carrying on of the company’s business. Mere omission
would not amount to recklessness ( Re Maidstone Buildings
Provisions Ltd (1971 1 W.L.R1085).

The word “fraud” connotes dishonesty which has to be proved in

court by the applicant which can be a limitation in the application
of the provision where the said applicant has no resources to
research on the fraudulent activities of the other party in order to
discharge the burden.

c. In terms of section 113 (4) (b) any officer of the company who
signs a cheque or promissory note on behalf of the company
and the name of the company is not mentioned in legible form,
that officer shall be liable to injured third parties.

d. In terms of section 143, a holding company and a subsidiary

company may be treated as one economic unit. A consolidated
balance sheet and profit and loss account is usually presented in
the form of group accounts. The parent subsidiary relationship
therefore becomes essentially a matter of mere organization. See
also S.144-Obligation to lay group accounts before holding
company.

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In the case of Little Woods Mail Order Store V I.R.C. 1969.1. WCR
1241, the court had to decide whether a wholly owned subsidiary
company was a separate and independent entity from the parent
company for the purposes of group account. It was held that:-

“The doctrine laid down in Salomon V Salomon has often been

supposed to cast a veil over the personality of a limited company
through which the courts cannot see. But that is not true. The
courts can and often draw aside the veil. They can and often do
pull off the mask. The look to see what really lies behind. The
legislature has shown the way with group accounts and the rest,
and the courts should follow suit. I think we should look and see
it as it really is, the wholly owned subsidiary. It is a creature, a
puppet in point of fact and it should be so regarded in point of
law.”

e. In terms of the Criminal Procedure and Evidence Act, if any

offence has been committed for which a corporate body may be
liable to prosecution, any director etc. shall also be liable unless
it can be shown he was not party to the offence.

f. In terms of the Income Tax Act, the Commissioner of Taxes is

empowered to disregard the corporate form and tax members
individually.

g. Section 58 and 59 of the Companies Act provides for personal

liability for directors, both civilly and criminally for misstatements
in the prospectus. (This will be discussed in some detail later on
under “Prospectus”).

h. Section 115 (7) of the Companies Act provide for personal

liability for failure to keep a register and index of members.
i. Section 101 (2): liability for failure to send notice of refusal to a
member who wants to transfer his shares or debentures.
j. Section 66(4): liability of directors for allotments of shares
without issuing prospectus or statement in lieu of prospectus.

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CHAPTER 3

FORMATION OF THE COMPANY

Section 7 provides that:

“Any one or more persons associated for the lawful

purpose, may , by subscribing their names to the
memorandum of association and other wise complying
with the requirements of this Act in respect of
registration , form an incorporated
company………………………….”

It is therefore clear that, in terms of section 7 the minimum

number of members is one, but the maximum will depend, as we
will see later on, on whether the company is a private or public
company. The persons wishing to form a company can only do so
if their intended business is lawful. In addition, they must
subscribe to a memorandum which is the external constitution of
the company and governs the relationship between the company
and the outside world.

Forming a company is one of the many options which a person

wishing to go into business can exploit. For contrast purposes

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 other forms of businesses other than companies are considered
below.

SOLE TRADER

This is a person who operates single handedly in business. The

trader and the business are one and the same. There is no
limited liability which means that the trader is personally liable
for the debts and liabilities of the business. There is no legal
personality hence this is considered a risky form of business.

PARTNERSHIP

This is an unregistered association of two or more persons but not

exceeding twenty (section 6(I) of the Companies Act). The intention of the
partners must be to benefit from each other from the joint venture; hence
their intention must be to make a profit. They contribute in many ways; it
could be money, skill or labour. There is no limited liability and the
partners are jointly and severally liable. This is also a risky form of
business.

TYPES OF COMPANIES

When a person decides to form a company, he must choose between public

companies, private companies, companies limited by guarantee or
cooperative companies.

PRIVATE COMPANY

The formation of this type of company is provided for under section 33 of

the Companies Act. This type of company is suitable for establishing a
small business with few shareholders, usually a family business where
control has to be retained. The restriction on the transfer of shares in this
company ensures that control is retained within members that are closely
related, usually family members. This position is cemented by the fact
that members of the public may not subscribe for shares in this type of
company.

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The members themselves are usually involved in the daily management of
the business. The decision to form a private company usually depends on
the amounts and source of share capital. Usually the capital will have
come from closely related persons and will be of the magnitude that a
fairly large may be formed but not large enough to become a public
company.

The minimum number of members is one and the maximum is fifty. A private
company, unlike a public company can commence business as soon as it
is registered(Section 114).The company may appoint directors of its own
choice , even those who do not hold any shares in the company.

A private company does not have to appoint an auditor if its members do not
exceed ten. It does not have to file with the Registrar of Companies copies
of its balance sheets, auditors and directors reports. It does not have to
issue prospectus, neither is it under an obligation to hold a statutory
meeting (Section 123(3) (b); 124 (1) and33).

The less cumbersome requirements for starting a private company make it

the usual choice form of business where members enjoy limited liability. It
has characteristics of both a partnership and a public company all to the
advantage of members.

PUBLIC COMPANY

Section 2 defines a public company as “any company that is not a private

company”. The definition presupposes that one knows what a private
company is.

A promoter who wishes to form a company with a large share capital is likely
to form a public company. There are no restrictions imposed on a public
company as regards transferability of shares, subscription by the public to
the shares and the size of membership.
The exemptions given to private companies as explained above are not
enjoyed by public companies.
There are rigorous requirements that should be satisfied before a public
company comes into operation such the attainment of minimum
subscription and other requirements as set in the Companies Act.

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 COMPANY LIMITED BY GUARANTEE

This is a company created for a charitable purpose. Section 26 states that

the association must exist for purposes which are in the interest of the
public. It is not intended to generate profit for its members. It prohibits
the payment of any dividend to its members. A company limited by
guarantee enjoys all the privileges of a company and must also comply
with the provisions of the Act.

The company does not use “Limited” at the end of its name. The liabilities of
the members of such a company, is limited to the amounts they
guaranteed to contribute on the winding up of the company. There are no
shares held in such a company.

While it enjoys the privileges of a company and is subject to all the

obligations as such, there are certain exemptions that are extended to it.
The requirements regarding minimum subscription, registers and
allotment returns, annual returns, statutory meetings, balance sheets and
auditor’s report, and restriction on the appointment of directors do not
apply to this type of company.

COOPERATIVE SOCIETY

This is not the same as a cooperative company. Unlike a cooperative

company, the society is not formed in terms of the companies Act but in
terms of the Cooperative Society Act. This is a small enterprise catering
for people with limited financial means. Its object must include the
promotion of economic and social interests of its members in accordance
with government policy .A cooperative society is therefore an association
of persons who have voluntarily come together to promote their economic
and social interests. It is a legal person with limited liability. At least ten
people can form it but there is no maximum.

CO-OPERATIVE COMPANY
The formation of this company is provided for in section 36.This is a company
which in terms of its memorandum states that its main objects would be
provision for its members of a service facilitating the production or

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 marketing of agricultural produce or livestock and the sale of goods to its
members.

Its articles must restrict the right to transfer its shares; the creation of only
one class of ordinary shares; limiting the number of shares which may be
held by any one member; the regulation of the voting rights of its
members and the limiting of the dividend which may be paid on its
shares.

In terms of section 37 every co-operative company must maintain a reserve

fund which may be used for any purpose for which the share capital of the
co-operative company may be used but which shall not be available for
distribution to members except in the event of the winding up of the co-
operative company.

UNIVERSITAS

This is a common law corporation. It is a legal fiction .It is a legal person

with capacity to acquire rights or obligations separately from its members.
It also has perpetual succession. The members must draw up a
constitution. Examples are the Church, burial society, football club etc.
They are usually non-profit associations.

Whether or not an association is a universitas is a matter to be determined

by a court after considering the relevant constitutions, the nature of the
association, its objects and activities.

STATUTORY CORPORATION

These are basically parastatals created in terms of an enabling statute and

answerable to a relevant minister. They have no shareholders but are
financed by the government. Examples are Air Zimbabwe, ZESA, ZBC, and
NRZ.

THE COMPANY PROMOTER

A person who floats or forms a company is called a promoter.

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The promoter of a company is the one who is responsible for its formation.
He decides the scope of its business activity; he negotiates, if necessary, for
purchase of an existing business; he instructs solicitors to prepare the
necessary documents; he secures the services of directors; he provides the
registration fees and carries out duties involved in the formation of the
company.

It is important to distinguish the promoter from other professionals whom he

engages to handle certain aspects of the promotion business which
require special skills for example, accountants, legal practitioners, or
business consultants. These are not promoters but hired professionals.

A promoter is defined in Section 2 as follows:

“…………………………….in relation to a prospectus, means

any person who is party to the preparation of the
prospectus but does not include any person by reason of
his acting in a professional capacity for persons engaged
in procuring the formation of a company”

The term promoter is not a term of law, but a business term. The
definition in Section 2 is not exhaustive because it excludes other
persons who should be promoters and includes those who should
not be promoters.

Promoters include those people who convert their one man

business into companies such as Mr. Salomon (in Salomon V
Salomon).They would also include those who acquire shares in
other companies or issuing houses who underwrite company
shares, those who require services of directors and those who
acquire property for a company yet to be formed. It would
appear that under the Act, the most important function of the
promoter is in the preparation of the prospectus.

20
DUTIES OF THE PROMOTER

The promoter’s relationship with the company is a fiduciary one.

The promoter has a duty of the utmost good faith to his
company.
The duty of good faith can be divided into two:

a. DUTY NOT TO MAKE SECRET PROFITS

The promoter must not make a secret profit from the

floatation of the company. This does mean he should not
make a profit. It only means that he must be honest with his
company and shareholders. This was established in the
leading case of Emma Silver Mining Co.V Lewis 1879 4
Cpd 396

In that case, it was held that although a promoter has a duty

not to make a secret profit, it does not mean he cannot gain
from the flotation. The principle is that he must be honest
with his company and the shareholders, both present and in
the future. Briefly, the facts were that the plaintiff mine in USA
was a property of certain persons. They wanted to sell it and
they knew that it was not making a profit at all. It was
certainly not a good investment .A company was then formed
in the UK for purposes of purchasing the mine. The defendant,
Lewis was given a very liberal remuneration for promoting the
new company. The mine failed and it claimed against Lewis. It
was held that any person who knows that monies they are to
receive are secret profits when they are in a fiduciary
relationship with the company would have breached this duty.

In the case of Erlanger V New Sombrero Phosphates, the

facts in brief were that there was a derelict mine. A company
was formed to purchase that mine. They however disclosed
this fact to the board of directors. The Board however
comprised of the nominees who were described by the court
as “puppets”. The mine failed and there was a claim for those
profits made. The promoters argued that they made full
21
 disclosure to the Board of Directors. It was held that the
promoter must make full disclosure to an independent board
capable of exercising an independent discretion. It is his duty
to furnish his company with that independent board of
Directors.

The question usually asked is:-Where is disclosure made? It is

made in the prospectus.

In the case of Re Contibutories of The Rosemont Gold

Syndicate 1905 T.H. 169, it was held:

“It is well established that promoters stand in a

fiduciary relationship to the company they promote
.They are not merely its parents but they are its
creators. They fashion and mould it according to their
will. They endow it with powers or limit its activities in
any manner they think fit. They cannot complain if the
law makes them, as it does, the guardians and
protectors of its nascent life”.

The fiduciary duty is imposed by the plain dictates of common

honesty as well as by settled principles of common law. The
promoter can make an honesty profit; what the law seeks to
prevent is the cheating of shareholders.

In this case of Gluckstein V Barnes, a promoter failed to

disclose a profit that he had made by buying a mortgage at a
discount .He was liable to disgorge that profit to the company.

REMEDIES FOR BREACH OF PROMOTER’S DUTIES

These are governed by the ordinary rules of contract .The

following are
some of them :

1) Rescission of Contract

If the promoter does not disclose material facts, the

company can elect to rescind the contract. Rescission is
22
 conditional upon the company’s ability to restore to the
promoter what he gave or expended under the contract.
(Restitutio in integrum)

2) Damages

The company can sue for damages in lieu of rescission.

This is described as equitable compensation for the breach
of duty.

3) Accounting for profits

Promoters are called to account for their activities, that is,

the profits they made.

THE PROSPECTUS

If a promoter wishes to form a private company he does not need to issue

a prospectus. This is because s29 of the Act prohibits the articles of a
private company from inviting the public to subscribe for shares or
debentures of the company.

A prospectus is defined in Section 2 as:

“any prospectus notice, circular, advertisement or other printed

invitation to the public for subscription or purchased any shares
or debentures of a company”

The definition is clearly quite encompassing. As can be seen from this

definition, a document does not have to be described as a ‘prospectus’; if
it is issued for the purposes for which a prospectus is published, it shall be
deemed to be a prospectus. The very nature of the definition of a
prospectus shows that it has no relevance to a private company. This is
because a private company is not allowed to invite the public to subscribe
to its shares. The prospectus must be in writing and, it would appear,
must be in English. The prospectus must satisfy the matters outlined in
23
 the Fourth Schedule in respect of date of incorporation, address of the
company, number of directors, names and addresses of directors, name
and address of auditor, number and amounts of shares and debentures,
details of the company property and so on.

The promoter’s concern is to raise sufficient capital for his new

company .He therefore needs to issue a prospectus.

The temptation to lie or to mislead the public into believing that the new
company will benefit them tremendously is always present hence the
legislature provided for civil and criminal liability for misstatements in the
prospectus.

Section 58 provides as follows:-

“(1) Subject to this section , where a prospectus

invites people to subscribe for shares or debentures
of a company , the following persons shall be liable
to pay compensation to all persons who subscribe
for any shares or debentures on the faith of the
prospectus for the loss or damage they may have
sustained by reason of an untrue statement
included therein, that is to say-
(a) Every person who is a director of the company
at the time of the issue of the prospectus, and
(b) Every person who has in writing authorized
himself to be named and is named in the
prospectus as a director of as having agreed to
become a director , either immediately or after
an interval of time, and
(c) Every person who is a promoter of the
company, and
(d)Every person who authorized the issue of the
prospectus”

It is clear that the intention of the legislature was

to protect potential shareholders from
unscrupulous promoters who misrepresented the
facts in the prospectus.
24
Section 59 provides for criminal liability for
misstatements in the prospectus .It says ,

(1) Where a prospectus issued after the 1st of April

1952, included any untrue statements any
person who authorized the issue of the
prospectus shall be guilty of an offense and
liable to a fine not exceeding one thousand
dollars or to imprisonment for a period not
exceeding two years or both such fine and
imprisonment unless he proves either that the
statement was immaterial or that he had no
reasonable grounds to believe and did ,up to
the time of the issue of the prospectus,
believe that the statement was true”
Further protection of the subscribing public is found
in Section 64(1) which provides as follows:

“ It shall not be lawful for any person to go

from the house to house , or farm to farm,
offering shares or debentures for the
subscription or purchase to the public or any
member of the public”

The Act also makes it an offence to invite people to

subscribe to shares verbally or otherwise, unless
such invitation is accompanied by prospectus. The
intention of the legislation clearly is to frustrate
dishonest promoters who invite people without using
a prospectus.

A prospectus amounts to a contract between the

shareholders and those who issued it; hence there
are civil liabilities for mis-statements.

The prospectus also is an invitation to submit offers

by completing and returning the relevant forms .Only
after a person has signed the forms and has been
accepted does he become registered as a
shareholder.
25
CONTENTS OF A PROSPECTUS

The matters that have to be set-out are set out in Section 54. The prospectus
must be present matters specified in Parts I and II of the fourth
schedule(Section 54(1)) which in summary as follows:

a. unless where the prospectus is issued prior to the incorporation of the

company, the date of incorporation and the address of the company’s
registered office,
b. the number, if any, of the directors’ qualification shares; any provision
as to remuneration of the directors or managing director, if any,
c. names, occupation and addresses of the directors, proposed directors;
name and address of the auditor, if any, terms of office of present and
future directors and any special right of anyone of them or managing
director. Where shares are offered to the public, the subscription
particulars such as minimum amount to be raised by the issue of those
shares to cover specified costs, and the amounts to be provided in
respect of such costs other than out of the proceeds of the issue and
the sources out of which those funds are to be provided,
d. amount payable on application; time of the opening of the subscription
lists
e. amount payable on application and allotment on each share; and other
related details,
f. detailed substance of any contract or arrangement, whereby an option
or preferential right of any kind has been or is proposed to be given to
any person to subscribe for shares or debentures,
g. number and amounts of shares and debentures which have been
issued within the preceding two years as fully or partly paid up
otherwise than in cash and the consideration given to them,
h. details of the company property,
i. amount ,if any, paid or payable as purchase money in cash, shares or
debenture for goodwill of the property referred to above,
j. amount, if any, and the nature and extent of consideration paid within
the two preceding years or payable as commission to any sub-
underwriter who is a promoter,
26
 k. amounts of preliminary expenses and by whom they were paid or
payable,
l. an amount or benefit paid or given to the promoter within the two
preceding years, the name and address of such promoter,
m. dates of, parties and general nature of very material contract other
than a contract entered into in the ordinary course of the business of
the company,
n. full particulars of the nature and extent of the interest, if any, of every
director or promoter in relation the promotion of the company,
o. number of founders and management or deferred shares, if any, and
any special rights attaching to them; particulars of the share capital,
nominal, issued, paid-up or held in reserve and other details relating to
shares, and
p. length of time the business of the company has been carried on, if that
time is less than five years.

The purpose of these details in the prospectus is ensure full disclosure

of relevant information regarding the formation of a company in order
to protect the unsuspecting public investor

PRE-INCORPORATION CONTRACTS

Before a company is formed, the promoter needs to enter into contracts with
third parties for the benefit of the new company. The promoter may not
want to attract personal liability but would wish that his new company
should benefit from these contracts. The legal problem is that the
company would not yet be in existence .In English law , the position
appears to be that no one can enter into contracts on behalf of a non-
existing company, hence a company cannot be bound by contracts
entered into before it was formed. Effectively, in English law, one cannot
be an agent of a company that has not yet been formed. This means that
the company cannot ratify such contracts when it is formed. Under Roman
–Dutch law, it is possible for a contract to be formed to benefit a third
party provided the third party ratifies the contract. This is by operation of
the doctrine of Stipulatio alteri , that is, contract for the benefit of a
third party.

Section 47 of the Companies Act provide for the ratification of pre-

incorporation contracts provided the following requirements are satisfied:
27
 (1)The contract must be in writing.

(2)The person making the contract must profess to be the agent or

trustee. This means that he must behave in such a manner as to show
that he is acting for a company yet to be formed and not for his own
personal benefit.

(3)The memorandum, must contain as one of its objects the ratification or

adoption of pre-incorporation contract.

(4)The original copy or a certified copy must be lodged with the Registrar
together with the memorandum of association, and

(5) The contract must be legally enforceable. This means it must be a

valid contract which our law will enforce; this, of course, is based on
the general principles of contract.

THE MEMORANDUM OF ASSOCIATION

The memorandum is the most important constitutive document that has to

be lodged with the Registrar. Every company must have a memorandum
and no certificate of incorporation will be issued in the absence of a
memorandum.

The memorandum is the constitution of the company .It is the company’s

Charter. Essentially the Memorandum is a statement which shows the
powers of the company to the outside world. A memorandum of
association should be distinguished from the Articles of Association.

Articles of Association deal with the relationship between the company and
its shareholders and the relationship between shareholders inter se. The
memorandum on the other hand deals with the relationship between the
company and the outside world.
The memorandum defines the limit or extent of the company’s powers i.e.
what the company may or may not do.

Section 8 deals with the memorandum of association and provides that the
following
28
clauses are to be contained in the memorandum:

a. NAME CLAUSE

The company must have the word “limited” as its last word if it is a
public company e.g. Murozvi Ltd. If it is a private company then it
should have the words (Private) as the penultimate word e.g. Mubudya
(Pvt) Ltd.

This is to warn those doing business with the company that the liability
of its members is limited.

In choosing the name for his new company, the promoter must comply
with the provisions of section 24.He may not choose a name that is
identical to that of another company, a misleading name, a name
likely to cause offence, suggestive of blasphemy or indecency or
undesirable for any other reason, or that which suggests that the
company enjoys state patronage. The discretion of the Registrar to
refuse a name is very wide indeed.

The promoter must therefore apply for a name reservation so that if

the name he has chosen is unacceptable, he can change it.

Where there are two similar names, there must be intention to deceive
before a company is prevented from using a similar name. In the case
of Bon Marche (Pvt Ltd V Le Bon Marche And Others Sc 68/84(A
Cyclostyled judgment):

Bon Marche (Harare) sued Le Bon Marche in Bulawayo arguing that the
name used was similar to its own and deceived customers. It was held
by Dumbutshena CJ, as he then was, that there ought to be evidence of
intention to deceive not a mere likelihood.

This brings us to the delict of Passing-off which essentially is an unfair

trade practice. In this case, one person misrepresented that his
business is that of another. This is unfair in that it misleads customers
and clients with some prejudicial consequences.

The company may change its name in terms of Section 25 by way of a

special resolution before the Registrar can enter the new name.
29
The company is under an obligation to display its name at all times at
its registered offices. Failure to do so is a punishable offence.

b. THE OBJECTS CLAUSE

This is the most important clause in the memorandum of association.

The powers of a company are set out in the objects clause. There is no
statutory limit as to the number of objects that may be pursued by a
company. The objects are those things which a company intends to
pursue e.g. general and mechanical engineering business (section 10).
Anything which is out of the objects clause is beyond the powers of the
company and therefore ultra vires. The objects clause can be altered
by a special resolution in terms of section 16. A company may wish to
alter its objects in order to diversify or even limit those objects,
probably in response to economic changes.

It is relevant to discuss the ultra vires doctrine under the objects

clause.

Ultra vires term which means ‘beyond the powers’. The memorandum
of association sets out the objects of the company and when a
company does acts which are beyond the objects as defined in the
objects clause; such acts are deemed ultra vires. The effect was that
any contract entered into beyond the powers of the company was in
law ultra vires and therefore void. That meant such a contract was not
enforceable by the disadvantaged party. The doctrine went hand in
hand with the doctrine of constructive notice which doctrine
assumed that since company documents are filed with the Registrar
and are available for inspection at any time they were available to the
public and hence whoever dealt with the company was assumed to
have knowledge of its objects.

However, the position has been altered by section 9 which gives the
company the power and capacity “of a natural person of full capacity in
so far as a body corporate is capable of exercising those powers”. The
doctrine of constructive too has been done away with in terms of
section 11 which states as follows:
30
“No person shall be deemed to have notice or knowledge of
the contents of a company’s memorandum, articles or other
document by reason only of the fact that the memorandum,
articles or document has been registered by the Registrar or Is
available for inspection at the company’s registered office”.

The reason why the memorandum should still spell the objects despite
the fact that the ultra vires doctrine does not bind anymore is merely
to alert investors the field of operation of the company for purposes of
assessing investment risk.

The bases of the ultra vires doctrine were that investors were
protected in that the purpose to which their money would be put was
specified, delimited and identified in the objects thereby defining the
extent of the company’s powers. It was then viewed that the narrower
the objects the less the investor risk with wider objects viewed as
posing a greater security risk.

However, the mischief the ultra vires doctrine sought to address was
always circumvented as many companies would craft their objects so
wide and open that they could do virtually anything. This coupled with
the fact that the objects could be altered by resolution of the majority
lessened the effect of the doctrine.

The doctrine was also viewed by the business community is too harsh
for it made contracts void and unenforceable.

The current position is now that no transaction is invalidated on the

basis that the company exceeded its powers as stated in the objects.

Basically therefore, as regards third parties, a company has unlimited

contractual capacity just like a natural person of full capacity. However,
members of the company are at liberty to apply to court to restrain the
company from doing those things which are beyond its stated powers.
The restraining order is called an Interdict. This is in terms of Section
10(2).To that extent, the doctrine of ultra vires still exists but only
among the members and the company itself, but not as between the
company and outsiders.
31
It is also prudent to discuss the The Turquand Rule under the
objects clause.

For a company to be bound by a contract, the agent dealing

representing the company must have had the authority to conclude the
contract on behalf of the company. Normally, an agent whose authority
is defective will not be able to bind the principal. However, the rules of
agency have since undergone changes and modifications to
accommodate a situation in which the company is a party to a
contract.

The Turquand Rule developed from a celebrated British case: The Royal
British Bank v Turquand (1856) 6 E & B 327. According to the Turquand
Rule, an outsider contracting with the company in good faith is entitled
to assume that the internal requirements and procedures have been
complied with. Consequently the company will be bound by the
contract even if the internal requirements and procedures have not
been complied with. The reasoning behind the rule is that there are no
special means available to an outsider for discovering whether or not
the company’s ‘indoor’ management is in order.

Gower , 4th Edition page 184 indicated that the Turquand Rule “was
manifestly based on business convenience, for business could not be
carried on if everybody who had dealings with the company had
meticulously to examine its internal authority”.

Nkala & Nyapadi (1995:18) stated that the rule placed a heavy duty on
directors, and equally on those who purported to act as directors, to
look after the affairs of the company, to see that it acted within its
powers, and that its transactions were regular and orderly.

However, rules rarely apply absolutely. There are exceptions to The

Turquand Rule which are as follows:

(a) the rule did not apply in favour of persons acting in bad faith. A
person who entered into a transaction with another person acting
on behalf of the company, and who knew of an irregularity in the
transaction could not claim the benefit of the rule such as if the

32
 outsider was aware of the fact that the internal requirements and
procedures have not been complied with.

(b) where the person (i.e. the outsider) dealing with the company had
been put on enquiry, but through his own omission has not made
reasonable enquiries. This is usually the circumstances under which
the contract was concluded on behalf of the company were
suspicious.

(c) When the irregularity resulted in the third party relying on a

document which was forged such as in when the seal is affixed
without authority and the signatures are counterfeited.

The Turquand Rule is confirmed in the Companies Act Section 12 under

the heading “Presumption of Regularity” hence it has become a
statutory rule.

c. THE LIMITATION OF LIABILITY CLAUSE

This clause must be included in the memorandum of the company,

whether the company is limited by shares or by guarantee.

Where the company is limited by shares no shareholder shall be liable

to contribute towards the payment of the company’s debts and
liabilities and the expenses of winding-up, a sum greater than the
amount, if any, unpaid on his shares. Just to illustrate:
If a company issued 100 shares to a member at $1-00 each and the
member has paid the company the full $100-00, he will have no further
liability to the company or its creditors, but if he paid only $50-00 or
half the issue price, his shares are described as partly paid shares and
he will be liable for the balance of $50-00 when the company makes a
call for payment in full.

Where the company is limited by guarantee then the extent of

guarantee must be stated.

33
 Limitation of liability may be disregarded in certain instances as may
be read under piercing of the corporate veil discussed elsewhere in this
text
d. CAPITAL CLAUSE

Section 8 (1) (iv) makes provisions for the capital clause. It states that
the memorandum must state:

“the amount of share capital with which the company proposes to

be registered and the division thereof into shares of a fixed
amount”

We can illustrate the effect of this section in this manner:-

Share Capital-$20 000

Divided into-20 000 shares

Of $1 -00 each.

e. THE ASSOCIATION CLAUSE

This is a statement by the subscribers that they wish to form a

company. They must therefore, in terms of section 8(3) sign in their
own handwriting and state their names opposite the number (in words)
of shares they take.

THE ARTICLES OF ASSOCIATION

In addition to its memorandum a company limited must register

articles of association at inception, that is, at incorporation. It is not a
must for a company limited by shares which has a choice to register
the articles failure of which model articles as contained in table A of
the Act apply.

The articles amount to a contract between the shareholders and the

company and also between the shareholders inter se. They are an
34
internal document of the company as opposed to the memorandum
which is intended for the outside world.

The articles determine the rights of the shareholders which are

enforceable in the courts. They are only enforceable as the members’
rights; hence outsiders cannot enforce these rights. Articles are
provided for by section 17.They must be signed by the subscribers to
the memorandum. If the articles are inconsistent with the
memorandum, the articles are subordinate so that the conflicting
provisions will be void to the extent of the inconsistency.

Because Articles constitute a contract between the company and its

members and also between members inter se only a member can
enforce the provisions of the articles. In the case of Hickman V Kent
Rooney Sheep Breeders Association (KRSBA) 1915 1 Ch.881,
the facts were briefly as follows:-

The articles of KRSBA provided inter alia that the differences between
the association and members shall be referred to an arbitrator
appointed by the parties. It was held articles can neither constitute a
contract between the company and an outsider nor give individual
member special contractual rights beyond those of members generally.
The plaintiff could therefore not enforce these rights.

Another interesting case is that of Eley V Positive Gvt Security Life

Assurance 1876 1 Ex. D 88 . The articles of association contained a
clause to the effect that one Eley should be the solicitor (lawyer) of the
company and transact all its legal business. These Articles had been
drafted before the company had been formed. The Articles were then
registered when the company was incorporated. Eley was not
appointed Solicitor by any resolution but continued to act in such
capacity. Subsequently, the company stopped employing him and he
brought an action. He purported to rely on the articles of Association. It
was held that there was no contract between Eley and the company
because Eley was not a member even though he subsequently became
one.

35
 CHAPTER 4

MAJORITY RULE AND MINORITY PROTECTION

The general rule in company law is that the minority are bound by the
decisions of the majority. If a member has a contract with the
company, that contract as evidenced by the articles of association can
be altered by the majority and his rights therein changed.

The majority is not supposed to complain, the rationale being that

when he joined the company, he had knowledge that its rules might be
changed or altered in future by the majority vote. It has been said that-

“The law looks upon companies as autonomous democracies in which

the minority has to abide by the will of the majority. If the wrong
complained of is a wrong done to the company, then the minority
shareholder as a rule cannot seek redress” (Nkala& Nyapadi 1995:307)

This is because the wrong has been done to the company and to the
company alone. The company is a legal persona. It can sue and be
36
sued in its own name, therefore the decision to remedy the wrong
complained of lies with the company. The company is the plaintiff. This
is called the rule in FOSS V HARBOTTLE 1843 2 Hare 46 .In that case
, a minority shareholder brought an action to court alleging that the
company’s property was being misapplied, sold and wasted by some
directors. His prayer was that the directors should be ordered to make
good the loss done by the company. The minority brought an action on
behalf of itself and all other members of the company except the
directors. It was held that

“……………………….it cannot be competent to individual

shareholders to sue in the manner proposed by the
plaintiff……………………..’.

The court was basically saying that the proper plaintiff is the company
in its corporate form, hence this rule is also called the Proprer Plaintiff
Rule. The harm had been done to the company and to the company
alone. It was therefore up to the company to seek redress. The
Judgement can be summarised as follows:

(1) Judges are unwilling to interfere in the internal affairs of companies.

The rationale for this is that, it is not for the courts to manage
company’s affairs. That duty is best left to the directors and the
majority shareholders in a general meeting. The general meeting is
the company’s parliament where corporate decisions are taken.

(2)The minority cannot complain of a wrong done to the company as a

whole or of any internal impropriety

(3)Without such a rule there would be futile actions by the directors

and shareholders

(4) Even if the minority were allowed to institute litigation, the result
will be a vicious circle in that the majority would get its wishes
anyway through voting.

The courts realize that the majority view dominates in the use of the
company’s name and in a legal action; the minority would be in a
dilemma.
37
 The situation was summed up by one Judge thus:

“If directors do acts which perhaps because of the lack of a

quorum or because their appointment is defective or they
are actuated by improper motive, they can make full
disclosure to the majority shareholders and obtain
absolution and forgiveness of their sins. If the acts are not
ultra vires, then all will seem alright”.

A similar case to Foss V Harbottle is that of MaCougall V

GARDNER (1875)ICLD 13 in which the articles of association of a
company provided for the taking of a poll at a general meeting of
the company if so demanded by five shareholders. At a general
meeting, the chairman, in breach of the articles, declined to take a
poll. One of the shareholders brought proceedings on behalf of
himself and all other shareholders except the directors, against the
directors and the company, seeking a declaration that decisions
taken at the meeting were invalid and an injunction to restrain their
implementation. The action failed. The words of Mellish, LJ
illustrated the court’s attitude:

“In my opinion, if the thing complained of is a thing which in

substance the majority of the company are entitled to do, or
if something has been done illegally which the majority of
the company are entitled to do legally, there can be no use
in having litigation about it, the ultimate end which is only
that a meeting has to be called, and then ultimately the
majority gets its wishes. Is it not better that the rule should
be adhered to that if it is a thing which the majority is the
masters of, the majority in substance shall be entitled to
have their will followed? Of course, if the majority are
abusing their powers, and are depriving the minority of
their rights, that is an entirely different thing and the
minority are entitled to come before this court to maintain
their rights”.

EXCEPTIONS TO THE RULE IN FOSS V HARBOTTLE

38
Again it is hereby reiterated that rules rarely operate absolutely. There are
always exceptions to a rule. The following are circumstances when the
this rule will not apply:

(1). Where the majority have not acted bona fide in the interests of the
company as. In this case, there is a heavy burden on those who want to
prevent the alterations since it is the majority which is best placed to decide
what the best interests of the company are.

It is an accepted principle in company law that shareholders in casting their

votes do
not owe each other a duty of care; neither do they owe this duty to the
company. As result, a majority vote can ratify a breach of duty by the
directors. However, decided cases show that where minority shareholder
can show evidence of malice or positive harm of discrimination, the courts
may interfere such as in the following cases:

Sidebottom V Kershaw Lease & Co. Ltd (1920) 1 Ch 154 (CA)

The defendant was a private company. It passed a resolution to alter its
articles of association by providing that directors who had a majority
shares should have the power to require shareholders who carried on
competing business with the company to transfer their shares at a fair
value to the directors. Sidebottom held minority shares and carried on
competing business. He appealed the resolution claiming that it was not
in the best interest of the company and discriminated against the
minority. It was held, considering the nature of the company under the
circumstances, that majority power was used bona fide the company.

Edwards V Halliwell (1950)2 ALL ER 1064

The constitution of a trade union provided that contributions were not altered
until a ballot vote of the members had been taken and a two –thirds
majority obtained. A meeting of the Union, without taking a ballot, passed
a resolution increasing the contribution of members. Two members of the
union were not impressed and they sued the executive to declare the
resolution invalid. Their action succeeded.

Brown V British Abrasive Wheel Co. Ltd (1919) 1 Ch 186

The company needed more capital. The majority shareholder with 98% of the
shares was willing to provide the capital provided that they could buy up
the 2%minority shareholders. The minority shareholders were unwilling to
39
 sell. The majority then proposed to alter the articles so as to provide for
compulsory acquisition of the shares. It was held that this was not bona
fide the company; it was plain abuse of majority power because the
alteration was not going to result in increased capital.

Dafen Tin Plate Co. Ltd V Llanelly Steel Co. (1907) 2 Ch 124
By altering the articles, the majority were empowered to compel any
member to sell his shares at a price to be fixed from time to time by the
directors. A minority shareholder did not agree with the alteration. It was
held that the company could not confer such power to the directors. The
judge had this to say:

“ as drawn , then resolution authorizes the majority at

their will without any reason other than desire to get into
their hands the whole of the shares of the company, to
expropriate the shares of the minority………………..”.

(2).Where the minority can prove that the majority is perpetrating a

fraud on the minority. The minority will then be allowed to enforce a
company’s action. The minority seek to enforce the company’s action
because the company has refused to do so or is prevented from doing
so by the majority. The minority must however prove that-
(i) The wrong has been done to the company but the
company is prevented from rectifying the situation by
the majority.
(ii) It has clean hands(the first law of equity)
(iii) That the majority would benefit from the act complained
of.

A fraud on the minority means inter alia a breach of the

directors duties of good faith and where there is voting for the
company resolutions that are not in the interests of the
company. It should also be where there is expropriation of the
minority’s property.

(3). Where a minority seeks to enforce individual or class rights where

those rights are being infringed or varied.

Where an act must be carried out by a special procedure e.g.

special resolution,if that is not done the minority may validly object
40
 because allowing it would lead the company to breach its own
articles.

STATUTORY MINORITY PROTECTION

What has been discussed above are common law protection of the minority
rights and interests. There are statutory provisions enacted for the same
purpose:

1) Oppression of the Minority

An application may be made in terms of section 196 (1) which

provides as follows:

“A member of a company may apply to court for an order in

terms of section one hundred and ninety eight on the
ground that the company’s affairs are being or have been
conducted in a manner which is oppressive or unfairly
prejudicial to the interests of some part of the members,
including him…”

2) Variation of rights attaching to shares

Where there are different classes of shares and it is intended that a class of
such rights be varied by a majority decision in a general meeting, the
holders of not less than 15% of the issued shares of that class who did
not agree to the variation may apply to court for such variation to be
cancelled in terms of Section 91.

3) The Minister’s Application

The Minister is empowered in terms of Section 197 to make an

application to court if it –

“………………….appears to him that the company’s affairs are

being or have been conducted in a manner which is oppressive
or unfairly prejudicial to the interests of some part of the
members…………………….”
41
 4) The shares of a dissenting minority may be compulsorily acquired in
take-over bids and mergers if 90% of the majority agrees. However the
minority are entitled to lodge an application objecting to this in terms
of Section 194.

5) A company may be wound-up if it appears just and equitable that it

should be so wound-up. The just and equitable ground which is wide
indeed has been interpreted to include oppression of the minority in
terms of Section 206(g).

THE ACTIONS WHICH MAY BE USED BY THE MINORITY

The procedural aspects of minority protection are discussed below:

THE PERSONAL CLAIM

In this case, the shareholder makes a claim in his own name against the
company to enforce his rights. He may bring the action to restrain the
company from engaging in acts that are ultra vires its stated objects. He
can also bring this action to enforce his rights to vote.

In addition, the shareholder is at liberty to utilize this action to

enforce a right to a dividend or any other right that accrues to him
in terms of the articles.
This claim is therefore enforced in an individual capacity for a wrong
done to him personally or for a breach of duty which is owed to him
personally.

REPRESENTATIVE ACTION

In this case, a minority seeks to enforce class rights. Representative actions

are permissible only where a group of persons have the same interests or
a common grievance.

Where a minority feels that they are oppressed, they can institute a
representative action. The general rule is that, if class rights are varied,
then the class of shareholders affected must accept variation. In this case
42
 of Livanos V Swartzberg & Ors1962 (4) SA 395 it was held that
where oppressive conduct is alleged by a minority, it must be conduct
that is harsh, unfair or burdensome.

If the conduct complained of affects all the members in the same manner but
happens only to prejudice a particular member, it will not be oppressive and
he cannot be heard to complain.
In the case of Allen V Gold Reefs Of West Africa Ltd (1900) 1 Ch 656
(CA) the court said that there is no fiduciary duty on members to act in
the interests of the minority.

Allen held fully up and unpaid shares in the company. Under the articles, the
company had a lien for all debts and liabilities of any member to the
company upon all shares not being paid up. By a special resolution, the
company altered the articles so as to omit the words,
“NOT BEING FULLY PAID”. This created a lien over Allen’s fully paid
up shares as well. Allen sought an order to declare the alteration
oppressive.
The declaration of the court which has been criticized severely was
that the company had power to alter the articles. Any regulation to
deny the company this power is not valid. The shareholders were
being treated in a similar manner. The mere fact that Allen
happened to be the only member of that class who was unhappy did
not make the alterations oppressive. The court added that there
was oppression, but not selective oppression.

3) THE DERIVATIVE ACTION

If the minority can prove that the majority are perpetrating a fraud
on a minority, then the minority can institute an action against the
company. With this action, the minority sues in the name of the
company for a wrong done to the company for which it cannot get
redress in a general meeting.
The minority in this case seeks to enforce the company’s action
because the company has refused to do so or if prevented from
doing so by majority.

The minority does not in fact sue for its own benefit, but for the
benefit of company which cannot do so.

43
The shareholder sues in the name of the company but the company
is made a nominal defendant so that it can be bound by the
decision of the court.

The purpose of the derivative action is to allow the court to interfere

and remedy a wrong done to the company. In order to succeed, the
minority must prove the following:

(1)The wrong has been done to the company and the company
would have instituted action but is unable, or is being prevented
from doing so.

(2)That the majority would benefit from the act complained of.

(3)That he has clean hands i.e. he is not party to the fraud in

tandem with the law of equity.

In the case of Atwol V Merryweather 1967 LR5 Eq 464, the

owners of a derelict mine formed a company and sold it
Merryweather company. The shareholders sought to rescind the
contract. An action was brought to court. The majority voted to
discontinue the action. It was alleged that the majority had put
minority property into their pockets. Atwol, a shareholder started a
new action in his name and all the other minority shareholders
except for the fraudulent ones. This action succeeded. The court
said that, with the derivative action, the company must be made a
nominal defendant and the minority can use the company’s name
without authorization.

Limitations Of The Derivative Action

1) It is limited in ambit and scope. It is limited only to cases of

illegality, ultra vires and fraud.

2) It is extremely expensive, especially to a minority shareholder

who lacks resources to pursue action.

3) If anything is recovered from the action, the money goes into the
company coffers and the minority may get nothing.

44
 CHAPTER 5

CAPITAL

Introduction

For a company to operate, it requires capital. The promoter of the

company must therefore decide on the capital his company would
require for it to operate.

Capital refers to the assets of the company. It therefore includes the

cash injected into the company, land, buildings, furniture,
machinery, goodwill, patents, copyright and trade secrets.

In the case of New State Areas V C.I.R 1946 Ad 610, Capital was
described as –

“…………………….the income producing

machine……………………..”(627)

45
Here we are concerned mostly with share capital which may be
divided into shares having a value, or it may consist of having no
par value.

Section 8(1)(4) requires a capital clause in the Memorandum of

association which must state, inter alia, the amount of share capital
with which the company proposes to be registered and the division
thereof into shares of a fixed amount.

Before we move on to discuss capital in some greater detail, it is

perhaps important that we define and explain a few common
expressions relating to capital.

1)Nominal capital

This is the capital with which the company is registered e.g. a

company registered with a share capital of $100 000. It is therefore
referred to as the company’s registered capital or the authorized
share capital

2) Issued capital

A company with a nominal capital will need to issue shares. It may

not be necessary to issue all the authorised share capital and only a
party of it issued. The part that is issued is called issued capital. The
remaining is called unissued capital. The unissued may be issued
later when more capital is needed. It is the practice of companies to
have an authorised share capital which is much greater than their
estimated capital requirements so that they will not have to
undergo the rigorous process of amending the memorandum in the
event the capital has to be increased.

3) Paid up capital

The issued capital may be partly paid. The part that is paid is called
the paid-up capital while the unpaid will obviously be called the
unpaid capital. The unpaid party will be called as when more capital
is needed. It is this unpaid part that a shareholder will be liable to
pay in the event the company is liquidated and a need arises for
contributions.
46
RAISING OF CAPITAL

The sources of finance for a company can either be internal or

external equity.

The most common method of raising capital in a company limited

by shares is by allotment of shares. In this case, subscribers agree
to subscribe in the company’s shares in money i.e. by paying cash.
They may also pay by way of services or money’s worth.

Payment in cash

This means payment in cash, by cheque or some negotiable

instrument. The company and the subscriber may reach an
agreement whereby the company issues the subscriber with shares
as a way of discharging a debt owed to him by the company.

Payment in consideration other than cash

A company may buy property or goods from a person and instead of

being paid in cash, the seller may agree to be issued with shares. It
is also possible to make a profit by selling property to a company in
exchange for fully paid up shares.

A person may perform services for the company and instead of

payment in cash, he is issued with shares. Since it is difficult to
assess what shares would be equivalent to the services rendered,
this is left for agreement by the parties. The court might however
intervene where the company fails to assess the money value of
such services.

ISSUING OF SHARES AT PREMIUM

Usually, the nominal value of shares bears no relevance to their real
value. The actual price of shares is fixed arbitrarily, bearing in mind
the economic and market conditions. This is because shares with a

47
small nominal value are sooner grabbed than those with a higher
nominal value since they are easily marketable.

A company is under no obligation to issue its shares at their real

value. It can therefore issue them at a price higher than their
nominal value. This is called issuing at a premium. If a share with
nominal value of $1, 00 is issued at $1, 50, the 50c excess is a
premium. It does not constitute profit but forms part of the
company’s capital. It appears separately in the company’s balance
sheet in an account called Share Premium Account.

It is sometimes necessary for the company to take measures which

will enable it to operate even if the public does not subscribe to all
its shares. Companies usually resort to underwriting. In this case the
underwriter agrees and becomes obliged to take certain number of
shares if the public does not subscribe to all of the company’s
shares. This means that if all the shares are taken, the underwriter
will not be obliged to take any shares anymore. The underwriting
contract, must in terms of section 60 , together with an affidavit
sworn to by the underwriter that he will be able to carry out his
obligation be submitted to the Registrar of Companies.

The under writer is further obliged to furnish the company with the
affidavit within seven days of a request being made to him. If he
fails to furnish such an affidavit, he will be guilty of an offence .It is
also an offence for the underwriter to swear to an affidavit without
reasonable ground or belief that he would be in a position to carry
out his obligation in terms of the underwriting contract when called
upon to do so.

48
Because the business of underwriting is obviously risky, the
underwriting is usually entitled to a commission. A company can
only pay such a commission if its articles allow it to do so. This is in
terms of section 72.

The advantage of underwriting is that it ensures that the minimum

share capital subscription is made up, even if all the shares are not
taken by the public.

For a new company, underwriting enables the new company to raise

the operating capital it requires.

MAINTAINANCE OF CAPITAL

Introduction

The rules relating to maintenance of capital are designed to protect

creditors. This is because if the company is in financial difficulties,
the creditors will be paid from the capital of the company. The
company as a general rule may therefore not reduce its capital
because that what creditors resort to in the event the company is
unable to pay.

To safeguard the capital of the company (that is maintaining it)

certain rules have been developed that are meant to restrict the
reduction of the capital:

1) Payment of commission

49
 A company may pay commission to any person who subscribes
to any of its shares e.g. when it pays a commission to an
underwriter. It can only do this if its articles permit so. The
commission payable must not exceed 5% of the price of which
the shares were issued or the amount or rate authorized by the
articles, whichever is less. This is in terms of section 72. Doing
otherwise will result in the commission paid eating into capital
thereby reducing it to the possible detriment of the creditors.

2) Discounts

Payment of discounts where the effect is that the capital will be

reduced is also not allowed in terms of Section 72

3) Purchase of its own shares

The purpose of issuing shares for subscriptions is to enable the

company to raise capital for operations. If the company
purchases its own shares, or assist a person financially to
purchase its shares, this would go against the spirit of raising
capital. A company is therefore prohibited in terms of section 73
to offer financial assistance for the purchase of its shares or its
holding company’s shares unless the company is authorized by a
special resolution and if it can still pay its debts after rendering
such assistance.

A decision to render financial assistance may be set aside by the

court which may order any officer who took part in the
transaction to compensate the company for any loss resulting
from such a transaction in terms of Section 73(2)a and b.

A company previously was not allowed to purchase its own

shares. It could render financial assistance subject to exceptions.
It is now allowed in terms of section 78 to purchase its own
shares but it has to be authorized by the articles to do so.

4) Alterations of the Company’s Share Capital

50
 A company may cancel shares which have not been taken or
agreed to be taken by any person and diminish the amount of its
share capital by the amount of the shares so cancelled by special
resolution as provided for in section 87 (f).The registrar must be
notified of this alteration. It is an offence to fail to do this. The
alteration is made cumbersome with the view to ensure capital is
not wantonly reduced.

5) Reduction in Share Capital

A company may find it necessary to reduce its share capital. This

may be necessitated by losses made by the company or the
company may find itself with more resources than it needs.
Reduction of share capital is governed by section 92.

A company requires to be authorized by its Articles and by a

special resolution for it to reduce its registered share capital. The
company may therefore reduce its registered share capital in any
way including the ways listed in section 92.

Reduction must be confirmed by the court order which verifies

whether such reduction is justified for creditor’s protection

SHARES

Nature of a share

A share may be described as a form of intangible corporeal

movable property. It is an interest which a person has in a
company and this interest comes with rights and obligations in
terms of the Companies Act and the Articles of Association.

A share is measured by a sum of money.

Shares may be of different classes as regulated by the articles of
association. The shareholder, even if he is the sole
trader shareholder has no proprietary interest in the company’s property. A

51
company is allowed to create different types of shares, the most common
types being the following:

Ordinary shares

These are, as their name suggests, ordinary shares which do not

confer any special rights or obligations. They are the most
common and usually the most numerous.

Ordinary shares determine who controls the company and are

therefore regarded as the most important class of shares. The
dividends for the ordinary shareholders are not fixed, unlike that
of the preference shareholders.

The fact that the dividend payable is not fixed has an advantage
where the company realizes a huge profit. However, ordinary
shareholders are paid last after preferential shareholders and
creditors have been paid up on winding up. The ordinary shares
are considered the most risky shares as a result.

Founder members usually get ordinary shares and the articles of

the company would usually require that whenever a fresh issue is
made, it should be made to ordinary shareholders first. These
new shares are usually offered at a lower price than they would
to outsiders.

Preference shares

These shares offer preferential right to their holders e.g. voting,

dividend etc. They rank favourably regarding dividend and
repayment of capital upon liquidation.

Preferential shareholders are entitled to preferential dividend of a

specified percentage e.g. 12.5%. When the dividend has been
declared, they are paid a 12.5% of it before any other
shareholders are paid. This is a contractual right in terms of the
articles.

Participating and non-participating preference Shares

52
A company may be allowed by its articles to create participating
and non-participating preference shares. With participating
preference shares, the holders may be allowed to participate
with the other shareholders in the remaining dividend after they
have been paid their fixed percentage. Non-participating
preference shareholders do not enjoy this right.

Cumulative and Non-cumulative Dividend

Any deficiency in one year may be expressly or impliedly made

non-payable out of the profits of the subsequent year. This
means that, conversely, if the dividend or profit in a particular
year is insufficient or no dividend is declared, the dividend of that
year will not be paid, but will be carried over to the next year.
Where the dividend payable is carried over into the next year, or
the subsequent year, it is described as cumulative dividend. If it
is not, it is non-cumulative.

REDEEMABLE PREFERNCE SHARES

Section 76 provides that a company may, if authorized by its

articles issue shares which are redeemable at the option of the
company or shareholder concerned. Such shares are called
redeemable shares .They can only be redeemed if they are fully
paid.

In terms of section 77, these shares can be redeemed only out of

profits or out of the proceeds of a fresh issue of shares made for
the purpose of redemption.

Redemption of shares means that all the shares redeemed are

treated as cancelled and the amount of the company’s share
capital shall be diminished by the nominal value of those shares.

Redemption in terms of section 77(4), however, shall not be

taken as reducing the amount of the company’s authorized share
capital.

53
 DEFERRED SHARES

These are lesser shares; the holders of which are paid after all the
other shareholders, including ordinary shareholders have been paid.
The payment of their dividend is therefore postponed or deferred
until all the other shareholders have been paid. They are to ordinary
shares what ordinary shares are to preference shares. They carry
large voting rights but are considered risky. They are usually
founder members’ shares e.g. promoters.

RAISING OF CAPITAL BY EXTERNAL MEANS

A company can raise capital for its operations by borrowing. Money

raised in this way is called Loan capital .A Company can borrow
from banks or individuals who become debenture holders. Those
who lend money to the company are called creditors and they enjoy
certain rights at winding-up depending on whether they are secured
or not.

DEBENTURES

The company is usually authorized by its memorandum to borrow

money for its operations as provided for in Article 78 Table A first
Schedule.
Section 106(1) gives the company the right to issue debentures.

Section 2 of the act defines a debenture as including debenture

stock or bonds. In simple terms however, a debenture is really an
acknowledgement of debt and comes in the form of a document.

A debenture may be secured by either movable or immovable

property of the company and such security must be stated in the
document. If the debenture binds movable property, then it may
be registered as a notarial bond. If it binds immovable property,
it may accordingly be registered by means of a mortgage bond.

54
INDIGENISATION

The Indigenisation and Economic Empowerment Act was passed

by Parliament towards the end of 2007 and was gazetted on
March 7,2008.It was then signed into law on April 17 2008.The
law provides that all foreign owned companies operating in
Zimbabwe must cede at least 51% of their shares to indigenous
Zimbabweans.
According to the indigenization law, locals must control at least
51% shareholding in all foreign-owned companies operating in
Zimbabwe. The law is administered by the Ministry of Youth
Development, Indigenisation and Empowerment.

CHAPTER 6

COMPANY MANAGEMENT

Introduction

55
A company, as was observed earlier on, is a legal persona with a
distinct personality from its own members. It is by legal fiction,
supposed to run its own affairs without looking up to any person
to help it do so.

However, a company is in reality only an abstraction with no

physical existence. It can only function if there are officers of the
company who have to run it and conduct its business activities.
These people are the company directors. Shareholders
theoretically are not interested in the day to day running of the
business of the company but are interested only in their return
on investment. Directors therefore are the stewards who are
entrusted with the running of the company.

DIRECTORS

Directors once appointed must undertake the obligations

imposed on them by the Act and the articles, and the common
law.

It is not enough, neither is it a defence for a director to say that

he was only appointed as a formality to fulfil the legal
requirements.

Every company in terms of section 169(1) must have not less

than two directors, other than alternate directors, at least one of
whom shall be ordinarily resident in Zimbabwe.

Section 2 defines a director as including any person occupying

the position of director or alternate director of a company by
whatever name he may be called. This means that, any person
whose functions are effectively those of directing a company is a
director, even though he may be called for instance, the chief
executive officer, manager, official or superintendent.

In addition, every person signing the memorandum of the

company is deemed to be a director of the company until other
directors have been appointed.

APPPOINTMENT OF DIRECTORS
56
The articles of association usually provide for the appointment of
directors. The shareholders exercise the power to appoint
directors in a general meeting. It is also possible for the articles
to give the power to appoint directors to the directors
themselves.

Subscribers to the memorandum or a majority of them appoint

the first directors and determine their number, which in any case
may not be less than two. This will be set out in the list
submitted to the Registrar in terms of Section 17(4).These people
will hold office until directors are appointed in a general meeting.
The general meeting will decide what happen to the first
director’s i.e. whether they will retire or continue to hold office.

Table A of the first Schedule, article 74-108 deals with the

directors. Article 90 deals with rotation of directors and provide
that the meeting i.e. the first annual general meeting of the
company, all directors shall retire from office.

WHO MAY BECOME A DIRECTOR

Section 173 lays down the persons who are disqualified from
becoming directors. It provides as follows:-

“(1) Any of the following persons shall be

disqualified from being appointed a director of a
company-
a) A body corporate
b) A minor or any other person under legal disability.

Provided that a woman married in community of

property may be a director if her husband gives her
written consent and that consent is lodged with the
Registrar;

c) Save with the leave of the court, an un-rehabilitated

insolvent;

57
d) Save with the leave of the court, any person who at
any time been convicted, whether in Zimbabwe or
elsewhere, of theft, fraud, forgery or uttering a forged
document or perjury and has been sentenced therefore
to as term of imprisonment without the option of a fine
or to a fine exceeding one hundred dollars.

e) Any person who is the subject of any order under this

act is disqualifying him as a director

f) Save with the leave of the court, any person removed

by a competent court from an office of trust on
account of misconduct”.

This list is obviously not exhaustive. The articles may in terms

of section 173(4) also lay down further disqualification such as
foreigners or directors of other companies.

The case of Tengende v Registrar of Companies SC

189/88 is illustrative of the stance which the courts adopt
when dealing with the issues of disqualification .In that case,
the court said that even where a person has a string of
previous convictions, he will not be disqualified by that fact
alone. The court will look at the whole character of the person
to determine whether he has been rehabilitated, said the
judge in that case:

“In my view, what must be scrutinized herein is the

applicant`s whole character whether it can be said
that his word is his bond. In this regard, the
petitioner’s obvious lack of candour or tendency to
deceive casts a great deal of doubt on whether he is
truly reformed character, one to be trusted with the
honest management of the company.”

Certain people are disqualified from being directors because it

must be ensured that the company is run by capable,
responsible and honest people. The office of director is one of
trust. He has a fiduciary relationship with the company hence
the demand for the utmost integrity.
58
 ALTERNATE DIRECTORS

It is not always possible for the substantive director of a company to act in

that position. He may be on leave, on holiday in another country or he
could be ill. This does not mean that the company will go without a
director. An alternate is usually appointed. The definition of a director in
Section 2 includes an alternate director. He is only however a substitute
director or one appointed to act in the place of the absent substantive
director.

An alternate director can only be appointed to act in the place of the absent
substantive director. An alternate director can only be appointed if the
articles permit such an appointment. A company must have not less than
two directors in terms of Section 169(1).However, alternate directors are
not included in reckoning the number of directors of a company.

An alternate director is bound to comply with all the duties of a director

because even though he is not counted as a director for purposes of
Section 169, he is nevertheless a director by virtue of the definition of a
director in section 2

THE BOARD OF DIRECTORS(BOD)

The board of directors consists of the various directors of the company. Where
directors sit to discuss the affairs of the company is called a boardroom. This is
where meetings of directors are held. Usually there are executive and non-
executive directors although they may be called by various names such as
Managing Director (MD), Chief Executive etc.

EXECUTIVE DIRECTORS

Executive directors or Management Executives are officers of the company

with a service contract. They work full time for the company hence they
are often referred to as full time directors.

The executive director has knowledge of the company and is usually in that
position because of his expertise. He is very powerful and important in the
administration and day to day running of the company .The executive

59
 director is almost referred to as the Managing Director or Chief Executive
officer. The MD is also provided for in article 108-110.

There is a difference between an ordinary manager and the Managing

Director, although the difference is not very distinct. A director is under
the control of the BOD. He occupies an office which is statutory. His
powers and duties are defined by law. The ordinary manager on the other
hand is merely an employee and its not a legal requirement for a
company. He is engaged by the Directors for his services hence he is a
worker albeit higher up the hierarchy.

NON-EXECUTIVE DIRECTORS
As their name suggests, they do no not work full time for the company unlike
the executive directors. Sometimes they are employed elsewhere on a full
time basis and may even be non-executive directors for several other
companies.

Indeed, some of them have “little relevant knowledge” of the companies

they direct. They therefore rely heavily on the MD. Their powers and
rights are determined in the General Meeting.

REMUNERATION OF DIRECTORS

Payment for the services of directors depends on the articles and their
service contracts, if any. It should be realized that directors are not
servants of the company like ordinary employees.

Therefore, the mere fact that one is a director does not imply that he must
be paid for it. In the absence of a provision regulating payment of the
directors, the payment will be in the nature of a gratuity. Managing
Directors are usually paid a salary with some percentage of the profits. In
terms of article 109 of the Table of the first Schedule, the MD is entitled to
a salary, commission or participation in the profits as the directors may
determine.

POWERS OF DIRECTORS
60
These powers are provided in the articles of association, the Companies Act
together with common law.

Article 81-88 deal with the power and duties of directors.

The BOD can act in any manner it wishes as long as it does not exceed its
powers as granted in the articles. The shareholders have no control over
directors in terms of their granted powers. If the BOD does anything that
displease the shareholders, then the powers of directors may be restricted
by alteration of the articles as provided for in Section 16.The directors
may also be removed from office by resolution of which special notice is
required before the expiration of his period of office in terms of Section
175(1).

Articles 81 table A gives the directors’ powers to run the company subject
only to the regulation of the general meeting.

In the case of John Shaw & Sons (Salford) Ltd v Shaw (1935) 2 KB 113,
it was held that the company in a general meeting cannot resolve to
override the powers of directors when they have been properly exercised.

The company had resolved in a general meeting to discontinue an action

which had been instituted by the directors in a court of law. The court said
that some powers may be exercised by the directors and others by the
shareholders in a general meeting. The directors however, are the only
ones who can exercise the powers of management if such powers are
vested in them by the articles. The shareholders may, if they are unhappy
with the directors alter the articles of association, refuse to re-elect them
or simply remove them from office. The guiding principle however is that
there should be no interference with the directors unless the articles
specifically state that the directors will be subject to the general meeting

DUTIES OF DIRECTORS

a. FIDUCIARY DUTIES

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These are derived from the law of agency and trust. Directors occupy a
position of power and trust in the company. They have a duty to act solely
for their company and to protect its rights.

Directors have a greater duty of good faith than the ordinary agent in that
directors act for a company which has no real existence but is only a legal
fiction. It can therefore not act on its own.

Directors are expected to exhibit honesty and integrity. They owe a fiduciary
duty to the company and to the company alone. They do not owe any
duty of care to the individual shareholders. This was decided in the
important case of Percival V Wright (1902) 2 Ch 421. In that case the
secretary of a company received enquiries from certain shareholders who
wished to sell their shares to any person willing to buy them. The directors
bought the shares themselves even though they had been approached by
a certain person who wanted to buy them at higher price than the one
paid by the directors.

The directors did not disclose this fact to the shareholders. When the
shareholders discovered this, they sought to have the sale set aside. The
court came to the conclusion that the directors did not have any duty to
disclose such information to the shareholders. The directors had not
approached the shareholders; instead the shareholders had approached
the directors wishing to sell the shares.

It has been said that a director has a duty to promote the interests of his
company but not to take away business from it. In the case of HORCAL V
GATLAND, the facts briefly were as follows:-

A company director by the name of Gatland was close to retirement. The

BOD decided to award him a golden handshake. After the decision had
been taken, Gatland received a phone call from a customer who wanted
to do business with the company. Gatland converted the business to his
own use. The company only came to know of this when the irate customer
rang to complain about the shoddy job.

The company sued Gatland for the profits and the golden handshake
payment. The court ordered Gatland to pay the profits but not the golden
handshake. The reasoning of the court was that the decision to award the

62
 payment was taken before Gatland diverted the contract. There were evil
thoughts but not evil deeds.

This was reiterated in the case of Industrial Development Consultancy

Ltd V Cooley (1972) 1 WLR 443; (1972) 2 All ER 162 where a
company director pretended to be ill so that he could be away from work
and take some business contracts intended for the company. The court
said that he was in breach of his fiduciary duties.

However even though directors owe a duty to the company, they do not owe
that duty to the shareholders, hence directors are enjoined to act in the
interests of the company and not their own selfish interests. The question
then is :-

What are the interests of the company?

It has been decided that the interests of the company are the interests of the
shareholders.
The directors must act in good faith. They must not be motivated by any
ulterior purpose. The court will not however usurp the powers and
functions of directors since it is not concerned with financial wisdom
neither is it concerned with the commercial wisdom of the directors. Given
the choice, the court will therefore, in determining whether a particular
act is for the benefit of the company enquire into whether a reasonable
person would believe such acts to be in the interests of the company.

Directors must be careful to engage in activities which will result in a

conflict of interest with the company. As a general rule, directors may not
compete with the company. A director may obtain no other advantage
from his office other than that which he is entitled by way of a director’s
remuneration or fees. If a director obtains any additional advantages,
these will be regarded as secret profits and the director will accordingly be
in breach of his fiduciary duties. The duty to act in good faith for the
company is so fundamental that it cannot be contracted out of. If the
articles or the service contract purport to free the director from this duty,
such a provision will be a complete nullity and of no force or effect.

In the case of Robinson V Randfontein Estates Gold Mining Co. Ltd

1921 Ad 168, the company wanted to buy a piece of land. The owner
however was not willing to sell on the terms proposed by the company.
63
 Robinson who was chairman of the company then entered into
negotiations personally with the seller and managed to buy the piece of
land for R120 000.He then resold the land to the company for R550 000
hence making a profit on the speculation. The court held that he had used
his position as director to make a profit.

The court had this comment to make,

“Where one man stands to another position of

confidence involving a duty to protect the interests
of the other , he is not allowed to make a secret
profit at the other’s expense or place himself in a
position where his interest conflicts with his duty.”

As long as one is a director, the duty not to make secret

profits subsists, hence in the case of Atlas Organic
Fertilizers (Pty) Ltd V Pikkewyn Ghwano (Pty) Ltd
1981 (2) SA 173 (T), a director gave notice of his
intention to leave the company. He wanted to go and direct
another company he was going to join. During the period
he was serving notice, he enticed the employees of the
company he was leaving to leave the company as well and
join his new company. The court decided that his intentions
were not bona fide the company’s interest. He was still a
director of the company, and until he formally left, he owed
the company a fiduciary duty.

Fiduciary duty is very wide and all encompassing. It covers

the duty to act in good faith and in the interests of the
company, duty of independent judgment, duty to act intra
vires and duty to avoid conflict of interest

DUTY OF DISCLOSURE

Section 186(1);(2) provides for this duty as follows:

64
 1) …….it shall be the duty of a director of a company
who is in a way, whether directly or indirectly,
interested in a contract or proposed contract with
the company to declare the nature and full extent
of his interest at the meeting of the directors.

2) In the case of a proposed contract, the

declaration required by this section to be made
by a director shall be made at the meeting of the
directors at which the question of entering into
the contract is first taken into consideration or ,
if the director was not at the date of that meeting
interested in the proposed contract, at the next
meeting of the directors held after he became so
interested, and in a case where the director
becomes interested in a contract after it is made,
the said declaration shall be made at the first
meeting of the directors becomes so interested”

It is clear from the wording of this section that disclosure must be made to
the Board of Directors.

Directors are not prohibited from being interested in any contract with the
company, but for the purposes of transparency, they must make an
equitable disclosure of their interest.

Article 85 restricts members from voting on matters where they have an

interest. It states:

“a director shall not vote in respect of any contract or arrangement

in which he is interested, and if he shall do so his vote shall not
be counted, nor shall he be counted in the quorum present at
the meeting…………..’’

If the company has not adopted article 85, or if the matter falls within one of
the exceptions provided therein, the directors may of course vote.

65
DUTY TO EXERCISE AN INDEPENDENT DISCRETION

The duty is closely related to the duty of directors to act in the interest of the
company and the company alone .The directors shall be independent of
external influence and should not dance to the tune of any person other
than the company.

While directors may be nominees when it comes to directing the company,

their duty to exercise an independent discretion comes above everything
else. They should therefore have unfettered discretion. They should not
be dummies, puppets or stooges of any person.

In the case of S V Shaban 1965 (4) Sa 646 (W), a judge made a

statement as follows:

‘’I want to destroy the idea that puppets can be

lawfully employed in our company system. By
that I mean, persons placed on board who
pretend to have taken part in resolution of which
they know nothing. Our law does not know the
complete puppets that pretend to take part in
the management of the company whilst having no
idea what it is to which he parts his signature. It
is utterly foreign to the basic concepts of our law
and the courts will punish it as a fraud, the more
when entire boards consist of puppets
manipulated from outside by persons who are
ostensibly unconnected with company.’’

DUTY OF CARE , SKILL AND DILIGENCE

Directors have a duty to display reasonable care and skill in the execution of
their duties. As decided cases show, this duty is not heavy or onerous.

66
In the case of Re City Equitable Fire Insurance Co Ltd (1925) 1 Ch 407
(ChD) the company had experienced serious short falls. The MD was
convicted of fraud. The liquidators sought to make other directors liable in
negligence for failing to detect the frauds. The court held as follows :-

“….. A director need not exhibit in the

performance of his duties a greater degree of
skill that may be reasonably expected from a
person of his knowledge and experience. A
director of an insurance company for instance
does not guarantee that he has the skill of an
actuary ”.

Directors should act with such skill and care as is

reasonably expected of them having regard to their
knowledge and experience. They are not liable for mere
errors of judgment.

In the case of RE DENHAM &COMPANY for instance, a

director had recommended the payment of dividend out
of capital. He was not liable because he was only a
country gentleman and not an accountant.

The extent of this duty will also depend on the nature of the company’s
business operations, having regard to the exigencies of business and the
articles of association, some duties may be left to other officials and a
director may be justified in trusting the official to perform his duty
honestly.

In the case of DOVEY V METROPOLITIAN BANK OF ENGLAND AND

WALES, a director delegated the task of drawing up accounts to others. It
was held that he was entitled to rely on those accounts in recommending the
payment of a dividend which was in fact made out of capital.

The duties of care and skill are light compared to those of loyalty and good
faith but the directors “may not be indifferent or be mere dummies”.

67
 CHAPTER 7

COMPANY MEETINGS AND RESOLUTIONS

Introduction

Meetings are very important in a company. They have to be held periodically

to map out strategies and to discuss the operations of the company. The
general meeting has therefore been described as the company’s
parliament. Because it has no physical existence, the company need to
have decisions made for it by the directors and the members .The control
of the company is thus divided into three authorities namely:-

1) Shareholders in a general meeting (GM)

2) Board of Directors(BOD)

3) Managing Director(MD)

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Generally shareholders are not involved in the management of the company
but are interested in the financial returns of their investment. Control of
the company is therefore, as we saw earlier on, left in the hands of the
directors. However, there are times when collective action is required and
the BOD may not take drastic steps without the blessing of a general
meeting.

PURPOSE OF THE MEETINGS.

The general meeting provides the forum for the members to hear and
discuss the progress of their company. This is their opportunity to grill
their directors about the manner of operation of the company and the
stewardship entrusted to them by the shareholders .It has been said that
the general meeting is the ultimate organ of corporate control. The BOD is
kept in check by the general meeting and asked to account for its actions.
It is in the general meeting that resolutions are passed and where
directors are elected and removed.

There are basically four types of meetings and these are the following :-

1) Statutory meeting

2) Extraordinary General Meeting

3) Annual General Meeting

4) Class Meeting

THE ANNUAL GENERAL MEETING(AGM)

It is a requirement of every company in terms of section 125(1) to hold a

general meeting .The section states:-
“(1)……..every company shall …hold general
meetings to be known and described in the
notices calling such meetings as annual
general meetings of that company.”

The requirements of section 125 are peremptory

and so are the times for holding the meeting
which are provided for in subsection (2):
69
 “Annual general meetings of a company
shall be held-

a) In the case of the first meeting, within a

period of eighteen months after the
date of the incorporation of the company
concerned, and

b) Thereafter, within not more than six

months after the end of every ensuing
year of that company, and

c) Within not more than fifteen months after

the date of the last preceding meeting of
that company”.

It is an offence in terms of subsection 7 to fail to hold the annual general

meeting.

The purpose of calling a general meeting is to discuss matters prescribed by

the Act and those in Article 52.A Company can deal with the declaration
of a dividend, consideration of financial statements and appointment of
directors. There is no limitation on matters that may be discussed in the
meeting. Article 47 deals with the convening of meetings.

THE EXTRAORDINARY GENERAL MEETING

Urgent matters usually arise in the company. To wait for the AGM might be
too late. The remedy lies in calling for an extraordinary general meeting of
the members. Extraordinary general meetings are all general meetings
that are not annual general meetings as per article 48.

In terms of section 126, these meetings are mainly by requisition.

(1) On the requisition of members of a

company holding at the date of the
deposit of the requisition not less than
one-twentieth of such of the paid-up
70
 capital of the company as at the date
of the deposit carries the right of
voting at the general meetings of the
company, notwithstanding anything in
its Articles, shall within twenty-one
days of the deposit of the requisition,
issue a notice to members convening
an extraordinary meeting of the
company……”

When such a requisition has been made, the

directors have a mandatory duty to convene
the meeting. If the directors decline to
convene the meeting, then the members
themselves are at liberty to do so. The
expenses incurred by the members in
convening the meeting are paid by the
company from the monies due as fees or
remuneration to the directors. In addition, it
is an offence to fail to convene an
extraordinary general meeting if such has
been requisitioned.

If there were no extraordinary general

meetings, the directors would run the
company unscrupulously without
interference from the members in between
general meetings (AGMs). Extra -ordinary
meetings therefore keep directors on their
feet.

THE STATUTORY MEETING

Section 124(1) provides as follows :

“Save in the case of a private company,
every company shall, within a period of
not less than one month and not more
than three months from the date at
which it is entitled to commence
business, hold a general meeting”.
71
It is clear from this Section that a private company is exempted from holding
a statutory meeting which is compulsory for other companies. The
purpose of this meeting is to enable the members to discuss the affairs of
the company; the members are afforded the opportunity to discuss any
matters relating to the company’s formation and the way forward. This is
because section 124(7) provides as follows:

“The members of the company

present shall be at liberty to discuss
any matter relating to the formation
of the company or arising out of the
statutory report….”

The directors of the company would have furnished the members with the
statutory report before the meeting. This report will include inter alia , the
total number of shares allotted, the amount received from such
allotment, particulars of the company’s reports and expenses, names and
addresses of auditors , managers, secretary and directors of the
company.

The members will discuss the statutory report, and as mentioned before, any
other business. If the directors fail to produce the report, they will be
guilty of an offence in terms of Section 124(9).In addition, failure to hold a
statutory meeting can result in the company being wound up at the
petition of any member.

EFFECT OF IRREGULAR CONVENING OF MEETING.

A meeting must be properly convened. Notices must be sent out to members

of the intention to hold meetings. The periods for convening meetings are
specifically provided for in section 127.Unless the members agree, any
meeting called by shorter notice will be void.

The courts however tend to adopt ‘a common sense” approach in dealing

with irregularities in the convening of meetings. Sometimes certain
members may not be given notices because they are inaccessible, failure
to give them notice will not necessarily be sufficient grounds to declare
the meeting void.
72
In the case of Africa Organic Fertilizers And Associated Industries Ltd
V Premier Fertilizers Ltd (1948) 3 SA 233 (N) , the court has this to
say:

“now if every shareholder must have notice of a general meeting

no matter in what part of the world he may happen to be, it is
almost inconvenient construction because a company cannot
without serious injury to itself delay the transaction of important
business until every shareholder in every part of the world has
had notice of the meeting at which the business is to be
discussed….”

THE BUSINESS OF THE MEEETING

PROXIES

It may happen that a member is unable to attend a meeting personally, but

at the same time he is desirous of registering a vote. In such
circumstances, he will have to appoint a proxy. The proxy is a person who
acts in the place of the absent member. A proxy is an agent who is duly
authorized to attend and vote at a meeting. Because he is an agent, the
member is at liberty to revoke the appointment at any time. The agency
will also come to an end upon the death, insolvency or legal incapacity of
the member.

The appointment and voting by proxies is provided for in terms of section

129(1). A company can be a member of another company but cannot be a
director and it can theoretically exercise all the powers and rights of a
member of a company.

However, a company cannot show hands in voting on a show of hands

because it has no hands neither can it address the meeting because it has
no mouth.It can therefore only act through persons properly appointed to
represent it. In terms of Section 131(1), a corporation which is a member
or creditor of another corporation can by a resolution of its directors
authorize such a person as it sees fit to act as its representative at any
company meeting. A person so appointed will be entitled to exercise the
same powers on behalf of the company which he represents as that
73
 company could exercise if it were an individual member, creditor or
debenture holder.

QUORUM

A quorum is the minimum number of members present required for business

to be transacted. In terms of Section 128(10(c), two members personally
present may be a quorum. A single person, even if holding proxies for
many other persons cannot constitute a quorum. However there are
some exceptions:

1) In terms of section 128(2) where it is not practicable to call a meeting

in the normal manner, the court may mero motu or on the application
of any director or member order a meeting to be called and may also
order that one member of the company present constitute a meeting.

2) The registrar may order that one member shall form a quorum in terms
of Section 125(5)

3) The directors may fix the quorum for a board meeting at one.

4) Where a company has one member.

5) In terms of Article 54, one member can form a quorum if a quorum is

not present within half an hour from the time appointed for the
meeting.

CHAIRMAN AT MEETINGS

The chairman is responsible for conducting the proceedings. He is

there to ensure that there is order and must also ensure that the
proceedings are carried out regularly. The members present must elect
the chairman to chair the meeting.

Article 52 also provides that the chairman of the BOD, if any, shall
preside as chairman at every general meeting. If he is unwilling to act
as chairman, then the members shall elect one of their numbers to be
the chairman.

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RESOLUTIONS

When members decide to do something, such a decision is called a

Resolution. It is an expression of the intention of the meeting. There
three types of resolutions:

a. ORDINARY RESOLUTION

This requires a simple majority of those voting either personally or

by proxy. It a resolution other than a special resolution. It is used for
all matters which do not need a special resolution.

Fourteen days (14) notice is required for a meeting at which an

ordinary resolution is to be passed. This period is seven days for a
private company.

b. SPECIAL RESOLUTION

In terms of section 133(1), this is a resolution passed by a majority

of not less than three fourths of the members present. The
following transactions require a special resolution:

1) Alteration of the articles in terms of section 16

2) Alteration of the memorandum

3) Alteration of the share Capital or variation of the share structure.

4) Change of the company’s name

5) Removal of directors and auditors

6) Winding up by the court

It should be noted that this list is by no means exhaustive, but

what we have highlighted are some of the important situations
where a special resolution is required. A special resolution must
be lodged with the Registrar, if it is not, it will be of no effect or
force.
75
c. WRITTEN RESOLUTION

Written resolutions apply only to private companies.

Section 134 provides as follows:

“(1) in the case of a private company , a resolution in

writing signed by all the members for the time entitled to
attend and vote on such resolutions at a general
meeting , being body corporate, by their duly authorized
representatives, shall be as valid and effective for all
purposes as if the same had been passed at a general
meeting of the company duly convened and held, and if
described as a special resolution shall be deemed to be a
special resolution”

VOTING

As general rule, members of the company are entitled to vote.

The articles may however restrict voting in any class of shares.

Generally, every member is entitled to one vote in respect of

each share held by him, or each twenty dollars of stock he holds
in terms of Section 128(1) (e).

Voting may be on a poll or by show of hands. At common law,

voting is by show of hands, unless the articles specify otherwise.

When shareholders vote, they owe each other no duty of care,

neither do they owe a fiduciary duty to the company, they vote
as they wish.

Directors who are also shareholders are exempted from their

duties when they vote in a general meeting. It has been held that
directors are no different from the rest of the shareholders when
voting in a general meeting.

76
 It would however appear that the fact that members owe nobody
a duty of care is not absolute if the decision of Clemens V
Clemens (1976)2 All ER 268 is anything to go by. In that case,
the court held that although the members owe the company no
duty of care, they must exercise their powers for a proper
corporate purpose .It will be improper if the vote is exercised
primarily to injure other members.

CHAPTER 8

THE COMPANY IN TROUBLE

JUDICIAL MANAGEMENT

Judicial management refers to the substitution of the company directors with

a judicial manager duly appointed by the court.

Judicial management must be distinguished from winding up.

These two processes are fundamentally different in both purpose and effect.
Although in both instances the company will be experiencing problems,
these two remedies are different.

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Winding up is concerned with the dissolution of the company and the
extinction of its legal personality. Judicial management on the other hand
is intended to save the company from collapse. It is therefore an
alternative remedy to winding up. The court has discretion whether or not
to put a company under judicial management. Judicial management is
only granted in circumstances where a winding up order may cause
unnecessary prejudice to the shareholders and creditors of the company

However, it does not follow that before a company can be wound-up, it must
be placed under judicial management. Judicial management is essentially
intended and designed to enable accompany suffering from a temporary
problem or setback due to mismanagement or some viability problem to
become a successful concern once again. The company is therefore taken
over by the judicial manager who is supervised by the master of the High
Court. His aim is to rejuvenate the company once more and give it a new
lease of life.

In deciding whether to wind up a company or to place it under judicial

management, the court will be guided by the principle of whether there
are grounds or certainty of success. The disadvantage of judicial
management is that it affects the credit worthiness of the company.

CIRCUMSTANCES IN WHICH A PROVISIONAL JUDICIAL MANAGEMENT

ORDER MAY BE OBTAINED

There are basically two stages in judicial management proceedings: the

provisional stage and the final stage. The court if satisfied will grant a
provisional order which may or may not be confirmed on the return date.

Section 300 provides that a provisional judicial management order may be

granted if it appears to the court –
(i) “that by reason of mismanagement or for any other
cause the company is unable to pay its debts and
has not become or is prevented from becoming a
successful concern and

(ii) That there is reasonable probability that if the

company is placed under judicial management it will
be enabled to pay its debts or meet its obligations
and become a successful concern, and
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 (iii) That it would be just and equitable to do so”

INABILITY TO PAY DEBTS

This is also a ground for winding up the company. In terms of section 205:

“a company shall be deemed to be unable to pay its

debts;-

a) If a creditor by cession or otherwise , to whom

the company is indebted in a sum exceeding one
hundred dollars then due, has served on the
company a demand requiring it to pay the sum so
due by leaving the demand at its registered office
and if the company has for three weeks
thereafter neglected to pay the sum or secure or
compound for it to the reasonable satisfaction of
the creditor, or

b) If the execution or other process issued, on a

judgment , a decree or order of any competent
court in favor of the creditor, against a company
is returned by the Sherriff or messenger with
endorsement that no assets could be found to
satisfy the debt or that the assets found were
insufficient to do so , or

c) If it is proved to the satisfaction of the court that

the company is unable to pay its debts and , in
determining whether a company is unable to pay
its debts, the court shall take into account the
contingent and prospective liabilities of the
company”

Basically, the fact that a creditor has demanded

payment without success will be prima facie evidence
79
 that the company is unable to pay its debts, as
amplified in the above cited section.

Factors that give rise to judicial management:

a. MISMANAGEMENT OF THE COMPANY

The courts have a history of keeping their distance where management of

the company is concerned. Judges appreciate that they are not sufficiently
equipped to run the affairs of the company. They are reluctant to usurp
the functions of the directors. A judicial manager will therefore only be
appointed if there is something manifestly illegal, oppressive or
fraudulent. The court will not interfere, for instance where there is just
animosity between the directors. The court will also not interfere if the
management complained of can be remedied using the company
machinery.

b. INABILITY TO MEET ITS OBLIGATIONS

The inability could be as a result of mismanagement. This however does not

necessarily mean inability to pay debts. It could just be failure to
timeously perform contractual obligations.

c. PREVENTED FROM BEING A SUCCESSFUL CONCERN

Under this heading, it has to be satisfactorily shown that there is a possibility

that the company can operate successfully if given an opportunity to do
so. If it is only to buy time, the court will not grant the application. The
purpose of this remedy is not to delay the obvious ‘death of a terminally ill
company’. Failure to become a successful concern can be a result of
mismanagement as well or where the company is plagued with labour
unrest or litigation.

d. THE JUST AND EQUITABLE GROUND

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Under this ground, the court attempts to strike balance between the
interests of the members and those of the creditors. The creditors are
obviously not interested in the sustenance of a company which has no
prospects of survival. The court would therefore grant the application
under this ground if the eventual result will be beneficial to both creditors
and shareholders.

APPLICATION FOR JUDICIAL MANAGEMENT ORDER

The court has discretion whether or not to grant the order sought in terms
Section 229(1) (a) (b).The people who are competent to apply for judicial
management can also apply for winding up.

When an application is made, a copy of that application shall be filed with

the Master of the High Court who will report to the court on any
circumstances justifying the postponement or dismissal of the application
in terms of section 299(2).The order granted provisionally will be in terms
of Section 301(1)(c) and has the following effect:

“……………all actions and proceedings and the

execution of all writs, summonses and other
processes against the company be stayed and not
proceeded with or without leave of the court”.

The rationale for the provision is to protect the company

from law suits during the time of the order to give it the
best opportunity to

APPOINTMENT OF THE PROVISIONAL JUDICIAL MANAGER

In terms of Section 302(1) (b) (i), the Master shall without delay appoint a
provisional judicial manager. The provisional judicial manager will take
custody of the company property upon his appointment. The custody
would have hitherto been in the hands of the Master. He is appointed in
the same manner as a liquidator in terms of Section 272.

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The duties of the provisional judicial manager are itemized in Section 303
and these are:
(a) Assume the management of the company and recover
and take possession of all the assets of the company, and

(b) Within seven days after his appointment, lodge with the
Registrar of Companies , under cover of the prescribed
form, a copy of his letter of appointment as provisional
judicial manager, and

(c) Prepare and lay before the meetings convened…..a

report containing

i) An account of the general state of affairs

of the company, and

ii) A statement of the reasons why the

company is unable to pay its debts or is
unable to meet its obligations or has not
become or, is prevented from becoming a
successful concern, and

iii) A statement of the assets and liabilities

of the company, and

iv) A complete list of creditors of the

company , including contingent and
prospective creditors, and of the amount
and nature of the claim of each creditor,
and

v) The considered opinion of the provisional

judicial manager as to the prospects of
the company becoming a successful
concern and the removal of the facts and
circumstances which prevent the
company from becoming a successful
concern”.

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On the return day in terms of section 305, the court may after considering
the evidence and “if it appears that there is a reasonable probability that
the company concerned, if placed under judicial management, will be
enabled to become successful concern and that it is just and equitable to
grant such an order, or it may discharge the provisional judicial
management order or make any other order that it thinks just”.

If the court discharges the provisional order, then the company has no hope
of surviving and it may as well be just wound up. If it confirms the
provisional judicial order, then the company will be put under judicial
management and the final judicial manager will be appointed.

A judicial manager exercise his duties subject to the memorandum and the
articles and his duties are like those of the liquidator.

CHAPTER 9

83
LIQUIDATION OF THE COMPANY

Winding up

The legal personality of a company comes to an end at the dissolution.

During its life, the company would have acquired rights and incurred
liabilities. These have to be dealt with before the company is finally
dissolved. The process of ascertaining and realizing the assets and
applying them to the payment of creditors and distribution of the residue
to the members is called winding up or liquidation. Winding up, therefore,
is just a process.

Dissolution spells the death of the company and its legal personality is
extinguished. The concepts of dissolution and winding up even though
they are used synonymously, are not interchangeable and should not be
confused. These two concepts should, in addition not be confused with de-
registration.

De-registration does not terminate the existence of the company. It simply

deprives it of its legal personality but will continue as an association
whose members are personally liable for its debts.

Winding up is essentially an administrative process which involves the

handing over of the company’s affairs to a liquidator. Directors are
therefore relived of their duties of directing the company.

During the process of winding up the company retains its legal personality
which is only extinguished at dissolution.

There are two procedures for winding up of a company as provided for in

section 199 which provides as follows :
a. COMPULSORY WINDING UP

Section 206 sets out the circumstances in which the company may be wound
up by the court as follows:“

a) If the company has by special resolution resolved that the

company be wound up by the court,

84
 b) If default is made in lodging the statutory report or in
holding a statutory meeting

c) If the company does not commence its business within a year

from its incorporation or suspends its business for a whole
year;

d) If the company cease to have members;

e) If seventy-five per Centrum of the paid –up share capital of

the company has been lost or has become useless for the
business of the company

f) If the company is unable to pay its debts;

g) If the court is of the opinion that it is just and equitable that

the company should be wound up”.

These grounds as listed in this Section will now be considered in turn.

DEFAULT IN LODGING STATUTORY REPORT OR HOLDING STATUTORY

MEETING

The petition for winding up under this ground should not be presented before
the expiration of fourteen days (14) after the last day on which the
meeting ought to have been held. The idea is to give the directors an
opportunity to remedy the wrong or put right the default.(section 207(1)
(ii)

In terms of Section 208(3), the court has the discretion and may instead of
making a winding up order direct that the statutory report should be
delivered or that the meeting should be held.

FAILURE TO COMMENCE BUSINESS WITHIN A YEAR

Under this ground, the court can order the winding up of a company for
failure to commence business within a year. This is because a year is long
enough for the company to have started operating and failure to do so

85
 within this period may be indicative of the fact that the company is unable
to operate and so should be dissolved.

The court however has the discretion and can give the company a chance if
there are prospects that the company will be able to operate in the near
future.

WHEN COMPANY IS MEMBERLESS

When the member`s number has been reduced to below one, or when the
company ceases to have any members, then the company may be
wound-up. In terms of Section 7, a company must have at least one
member. In terms of Section 32, if the company ceases to have any
members but carries on business for more than six months, then any
person who knowingly caused it to do so, shall be liable together with
the company for its debts.

LOSS OF 75% OF PAID UP SHARE CAPITAL

The purpose of this requirement is to pre-empt a situation whereby a

company will be unable to meet its obligations to third parties. Once a
company uses up 75% of its paid-up capital, an interested party may
petition the court for winding-up. The court however exercise a
discretion .The fact that 75% of the paid-up capital has been lost or has
become useless does not necessarily mean that the company is unable to
pay its debts especially where the share capital is lost but the directors
did not over –commit the company but entered only into transactions
which the company could meet.

INABILITY TO PAY DEBTS

This is considered to be the most common ground for winding up. Failure to
pay debts is defined in Section 205. The court has discretion. It should be
established that the company is unable to pay its debts in the sense of
being unable to meet its current obligations. If the company is still solvent
in the sense that its assets exceed its liabilities, the court may refuse to
order winding up

JUST AND EQUITABLE GROUND

86
This is also a common ground for winding up. The ground is all-
encompassing and gives the court a very wide discretion. It is based on
the principle of good faith which is derived from the law of
partnerships.This ground is usually divided into the following categories:

a. LOSS OF SUBSTRATUM

This occurs where the company has abandoned its main objects or is unable
to achieve them. It was decided in Rhenosterkop Copper Co. 1908
(18) CTR 931 where a company was formed to mine copper and no
copper was found, then the substratum of the company has disappeared
and it ought to wind up. The reason for this is that it would be unfair for
the company to pursue other objects which were not contemplated by the
shareholders.

In Re German Date Coffee Co.(1882) 20 Ch.D 169, a company’s main

object was to acquire a patent for manufacturing dates as a substitute for
coffee. The company was unable to obtain such patent but it was doing
very well. It was held that it should have been wound up.

b. DEAD LOCK OR STALEMATE

This may occur where the company is unable to take management decisions
on account of equality of voting strength of two opposing groups of
shareholders. This is most common in small companies where the
shareholders may have personal relationships. The court then tends to
treat the company as if it were a partnership. Once the court is of the
opinion that the trust and confidence have been undermined, it will order
winding up.

In Re Yenidje Tobacco Co.Ltd (1916)2 Ch 426 (C.A) there were two

tobacco manufacturers who were the only shareholders in the company.
They were also the directors, with equal voting powers. They had a
serious disagreement resulting in continuous quarrels. At one point, one of
them brought a legal action against the other. They had over one
thousand pounds in litigation over the validity of the dismissal of a factory
manager .They also argued over the terms of employment of a travelling
salesman. It is said that the relations between them became so bad that
87
 they could not talk to each other but communicated through the
secretary.

Although the company was doing very well, the court, applying the
principles of partnership ordered a winding up.

c. MINORITY OPPRESSION

If it can be shown that persons controlling the company have conducted

themselves in a manner oppressive to the petitioner, the court may grant
winding up. The court however will only grant winding up on the petition
of the members even though some other remedies are available provided
that the member is not being unreasonable to pursue that remedy
(section 208(2)).

d. LACK OF ROBITY

This happens where there is no transparency. There is dishonesty or

misconduct in the affairs of the company. In the case of Woomack V
Commercial Vehicle Spares (Pvt) Ltd 1968 (3) SA 419 (R), a
minority shareholder complained that the directors and the majority
shareholders had perpetrated a fraud on him by falsifying minutes,
illegally issuing shares and declaring and paying dividends. He said that
this constituted a fraud and that as a result of this misconduct he had lost
confidence in the management of the company’s affairs. The court
granted the order sought.

Having looked at the reasons for winding what is left is the procedure itself.
The winding up procedure is merely administrative and fully provided for
in the companies Act .It is therefore not necessary for us to regurgitate
the act.

88
 CHAPTER 10

THE PRIVATE BUSINESS CORPORATION ACT (Chapter 24:11)

Introduction

The Private Business Corporation (PBC) Act (Chapter 24:11) is still relatively
unknown to many people. It however satisfies a real need in the business
world. Before its introduction, concern had been raised in many quarters
regarding the companies act and its various procedures. It was felt that
the procedures in the Companies Act are rather complicated and
cumbersome especially for those people intending to operate small
enterprises. Such people would rather opt for a partnership, instead of a
limited company. We however discussed the disadvantages of a
partnership, chief of which is that there is no legal personality attached to
it.

Unlike some countries, there is no partnership act in Zimbabwe. The law

Development Commission then came up with the idea of a private
business corporation which has the corporate status and limited liability.
The result of course is the current PBC Act. A PBC closely resembles a
89
 partnership and some cynics have been saying that the effect of the PBC
act is effectively to introduce a Partnership Act through the back door.
One would readily notice that , for instance , in terms of the Companies
Act, a partnership can only be formed by two people, but not exceeding
twenty(Section 6(1) the Companies Act).A PBC can also have a maximum
number of twenty members.

MAIN CHARACTERISTICS OF A PBC

Upon registration, a PBC acquires a juristic personality. Its main advantage is

that it is easy to form and does not have to comply with the vigorous
procedure in the Companies act. There is no requirement that a PBC
should appoint directors. Every member is an agent of the business just
like in a partnership and outsiders are deemed to assume that he has
authority to bind the corporation. The ordinary rules of agency will apply
in this case i.e. matters such as authority by estoppels, implied authority,
actual authority etc.

The PBC is under no legal requirement to hold formal meetings except in

circumstances such as winding up.
It is not a requirement in terms of the Act for Articles or Memorandum of
Association hence there is also no need to specify the objects of the
corporation.

From the foregoing, it is clear that the doctrine of constructive notice and
ultra vires do not exist where third parties are involved. If members agree
on a set of objectives which are not followed, this will not invalidate any
transaction entered into with a third party. He is entitled to assume that
everything is done in a regular manner.

However, just like in the Companies Act, an aggrieved member who is

unhappy that the corporation is pursuing objects other than those agreed
can interdict to restrain the Corporation from engaging in ultra vires acts.
If he has suffered damages, he can claim compensation from those

90
 members who caused the corporation to engage in ultra vires acts.
(Section 12)

The memorandum of association is not a requirement for the Corporation.

Instead of the memorandum, members must, in terms of section 14,
complete an Incorporation statement. Once this Incorporation statement
is lodged with the Registrar of Companies, a Certificate of Incorporation
will then be issued.

The corporation has no obligation to submit returns to the Registrar.

However, it has a duty to keep proper books and to make financial
statements. This is in terms of Section 144. An accounting officer must be
appointed to deal with the financial books who may be a member of a
profession approved by the Minister or issued with a license. It is clear
therefore that the accounting officer need not to be an accountant.

Like a partnership a PBC is not allowed to issue any shares for subscription
both to its members and the public. Each member therefore holds an
interest in the corporation which is recorded as a percentage in the
incorporation statement. A member is therefore issued with a Certificate
which shows his percentage of shares (equivalent to a share certificate
issued to a company member). On winding up, the member is entitled to
participate in the assets in accordance with his percentage.
While members enjoy limited liability to the amount contributed (member
can contribute money, property, services etc.) a member who has been
reckless in dealing with the assets of the corporation, or who knowingly
took part in such recklessness, will be personally liable for the debts of
the corporation.
As regards protection of members, this is provided for Section 41.

The corporation can use the abbreviations “PBC” at the end of its name e.g.
Kudu PBC.

If there is any matter that is not provided for in the PBC Act, recourse is
had to the Companies Act which in terms of Section 56 shall apply
mutatis mutandis.

91
CHAPTER 11

STATE–OWNED ENTERPRISES

Introduction
State–owned enterprises commonly known as parastatals are a form of
state intervention in the economy (Nkala & Nyapadi 1995:447).The
creation of a parastatal is not the only form of state intervention in the
economy. The state can intervene through acquisition of share capital
in existing limited liability companies or may use statutory controls
without itself participating in the economic activities.

The objective of state intervention is to attempt to distribute the

wealth of the nation so that it benefits all sectors including the
marginalized.

DEFINITION
In Zimbabwe the common termed used for state owned enterprises is
“parastatal”. These are enterprises owned by the state or Government.
They may just be referred to as public Corporations, statutory bodies or
statutory Corporations.

A parastatal is created by or in terms of an Act of parliament. Examples

of parastatals are: Agricultural Marketing Board, the Agricultural
Finance Corporation, Cold Storage Commission, Industrials
Development Corporation and Small Enterprises Development
Corporation.

Parastatals are wholly owned by the state in some instances while in

other instances the state may a controlling stake or in a joint venture
with another partner.

92
 Gardener, in Nkala & Nyapadi (1995:451) defines a parastatal as
follows:

“A legal entity established normally by parliament and always

by legal authority (usually in the form of special statute)
charged with the duty of carrying our specified. Government
functions ( more or less precisely defined) in the national
interest, those functions being confined to a comparatively
restricted field and subjected to some degree of control by the
entity not directly responsible to Parliament”.

OBJECTIVES OF ESTABLISHING PARASTATALS

1. The Government may intervene in an attempt to fill gaps in the

economy which have been left by private enterprises either because
of the size of the investment required or because of the
unprofitability of the sector concerned e.g. small Enterprises
Development Corporation and Zimbabwe Development
Corporations were created for this purpose.
2. Government may intervene to provide a basic infrastructure for the
economy e.g. in areas of transport, hence the National Railways of
Zimbabwe.
3. Government intervention in the economy to promote greater
national independence e.g. Zimbabwe Development Corporation.
4. Government intervention to provide a check over competition with
the private sector.
5. Government may intervene in order to obtain greater control over
the economy.
6. The intervention may be to ensure a more balanced distribution of
industry and its rewards.

It should be noted that the objectives do not work in isolation hence a

corporation may be established to achieve any one or more of these
objectives and other objectives.

CHARACTERISTICS OF PARASTATALS

Although the structures and characteristics of parastatals are determined

largely by the act that establishes them, they share common features:

93
 1. Unlike a limited liability company, it has no shareholders to subscribe
the capital or to have any voice in its affairs.
2. Money needed is raised by borrowing and not by issue of shares.
3. Borrowings are guaranteed by Treasury while for Limited Liability
Company it is usually secured by the issue of debentures.
4. Its profits are not available for distribution.
5. The duty of the parastatal is to make revenue and expenditure balance
one another and not to make profit. However, commercial ones are
expected to make profit.
6. A relevant minister wields power as that held by a person who holds all
shares in a private company, with the difference that he is accountable
to parliament for his stewardship. He appoints the board and decides
its remuneration. He decides the policy and issues directions the board
should obey. However, it does not become a Government department;
it remains its own master.

The characteristics as outlined above do not apply to parastatals which are

limited liability companies registered under the companies Act but are
controlled by the state.

LEGAL STATUS OF PARASTATALS

They have a corporate personality and may be sued or sue. Unless otherwise
stated in the enabling Act a parastatal acts on its own behalf, even though it
may be controlled by a Government department. Where Parliament intends
that it acts on behalf of the state, it should state that in the statute
constituting the Corporation so that it enjoys the immunities and privileges
of the state, such as exemption from taxation.

MANAGEMENT OF PARASTATALS

The Minister
Parastatals are placed under the general control and supervision of a
Government Minister. The relevant Act gives the appropriate Minister
certain powers and duties which he may exercise in his own right or
after consultation with the board.

THE BOARD
Parastatals are run by boards or commissions. The Minister appoints the
board members and in most cases after consultation and acting in
accordance with any direction the President may give him.
94
 CHAPTER 12

INTRODUCTION TO CORPORATE GOVERNANCE

Introduction

95
Corporate Governance is concerned with the structures and process
associated with management, decision making and control in organization
(Cassim, F 2011:432).It concerns the manner in which companies are
directed and controlled and the principles and practices that are regarded as
appropriate conduct by directiors and managers (Mervin King “The synergies
and interaction between King iii and the Companies Act 71 of 2008, 2010
Acta Judica 446 at 477).

Corporate Governance practices are essentially a performance management

system to ascertain or assist directiors on whether they have discharged
their duties (Cassim, F2011:432).

Cassim, F (2011:32) succinctly put it when summarised Corporate

Governance as essentially about affective responsible leadership, with
responsible leadership being characterised by ethical values of
responsibilities, accountability, fairness and transparency. These values
underpin good Corporate Governance.

In the case of South African Broadcastng Corporation Ltd Vs Mpofu

(2009) All SA169 (GSV) the court stressed that integrity is a key principle
underpinning good Corporate Governance and that good Corporate
Governance is based on a clear code of ethical behaviour and personal
integrity exercised by the board where Communications are shares openly
(Cassim ,F 20011:433).

The practice of good Corporate Governance other than being essential for
the well- being of a Company is also a factor in attracting investments.
Realising the importance of good Corporate Governance in 1994 a committee
was set at the instance of the Institute of Directors of South Africa. The
committee became known as the King Committee, named after the
Chairperson of the committee Mervyn King. The Committee came up with
the King Report on Corporate Governance which had in it a code of corporate
practices and Conduct. This underwent reviews over the years up to the
current King III Report that was issued in 2009.

APPLICATION OF THE KING REPORT

The King III Report and the code is meant to apply to all entitles incorporate
in and resident in South Africa, regardless of the manner and form of
incorporation or establishment and whether such establishment is in the
public, private or non- profit sectors (King III Report at 17) .This was unlike
the King II Report which only applied to certain categories of business

96
enterprises which were Companies, financial institutions and public sector
enterprises while companies outside the categories were merely required to
consider the application of the Report in so far as it was applicable.

It should be noted that while the King Reports were crafted for South Africa
they have become persuasive in jurisdiction outside South Africa such as
Zimbabwe where no such Reports and codes exhausts. However, Zimbabwe
has a draft National Code on Corporate Governance (CGC) that is awaiting
approval. There is also a Corporate Governance Forum (CGF) for State
Owned Enterprises and parastatals. The effect of these reports and codes is
that entities are encouraged to observe them but they do not have the force
of law.

South Africa is not the only Country with codified Corporate Governance, but
United States of America has its own the Sarbanes-Oxley Act 2002 which has
the force of law and non- compliance comes with sanctions.

In South Africa, compliance with the King III report and the code is mandatory
for companies listed on the Johannesburg stock exchange (JSE) but for all
other entities there is no statutory obligation to comply. While Corporate
Governance practices may be voluntary, they are highly recommended and
have considerable persuasive force.

Corporate Governance in South Africa has not been legislated as is the case
in USA, but an “Apply or explain” philosophy was adopted instead of the
“comply or else” of USA. The “apply or explain” approval requires more
consideration and explanation of what has actually been done to implement
the principles of Corporate Governance. All entities should make a positive
statement to the shareholders about how the principles have been applied or
not. Following the “apply or explain” approach, the board of directions
may conclude that to follow a recommendation would not, in particular
circumstances, be in the best interests of the company, and it may decide to
apply the recommendation differently or to apply a different practice but
nevertheless achieve the objective of the overarching Corporate Governance
principle. Explaining how the Corporate Governance recommendations were
applied, or the reasons for not applying them, would result is compliance
(Cassim, F 2011:434-5).This was a development from the King 11Report
were the approach was “Comply or explain”.

It should be noted that significant issues of corporate governance got

incorporated in the South African Companies Act 71 of 2008. It is also our
hope that current company law reform processes in Zimbabwe would result
97
in the incorporation of some corporate Governance issues in the new Act
thereby giving such issues the force of law.

PRINCIPLES AND RECOMMENDATIONS OF THE KING III REPORT AND

THE CODE

1. ETHICAL LEADERSHIP AND CORPORATE CITIZENSHIP

The philosophy underlying the King III Report revolves around
leadership, sustainability and corporate citizenship (King III Report, at
10). The King III Report requires the board of directors to provide
effective leadership based on an ethical foundation (Principle1.1 of
King III Report). If directors ensure that the company is run ethically
then the company would earn the necessary approval from those
affected by and effecting its operations. Ethical leaders consider the
short-and long term impact of the company’s strategy on the
company, society and the environment. They should take account of
the company’s impact on internal and external stakeholders (Cassim F,
2011:436)

The board should set the values to which the company will adhere and
these values should be incorporated in a code of conduct as per Code
1:1.7. The board should ensure that all decisions and actions are based
on the four values under pinning good Corporate Governance, namely
responsibility, accountability, fairness and transparency and to ensure
that each director adheres to the duties of a director. The board to
ensure that its conduct and that of management aligns to the set
values and is adhered to in all aspects of its business (Code 1.1.8)

It is also the responsibility of the board to ensure that the company’s

ethical performance is assessed, monitored, reported and disclosed
(Code 1.3.8).The assessment, reporting and disclosure of its ethical
performance enable the uses of ethical reports to form opinions and
make decisions on disclosed and verified information (King III report
para 12 p.21).

Sustainability as a moral and economic imperative is needed in

effective leadership. Sustainability means having regard to the impact
of a company’s business operations on the economic life of the
98
 community in which it operates and includes environmental, social and
Governance issues (King III Report, preface at 11).

The board should ensure that the company is, and is seem to be, a
responsible corporate citizen (Principle K 1.2 of King 111).There has to
be an ethical relationship of responsibility between the company and
the society in which it operates (King III Report, para 19 P. 22) The
Company should consider not only the financial performance of the
Company, but also the impact of the Company’s operations on society
and the environment (Code 1.2.1). As a responsible corporate citizen,
the company should protect, enhance and invest in the well -being of
the economy, society and the environment (King III Report para 19 p
22).

2. BOARDS AND DIRECTORS

a.Types of Directors

The King III Report differentiates between executive and non- executive
directors. An executive director is involved in the day- today
management of the company. He or she is in the full- time salaried
employ of the company and is generally under a contract of service
with the company. A non- executive is a part time director. He or she is
not involved in the management of the company, but plays an
important role in providing objective judgment, independent of
management on issues facing the company. These directors generally
contribute to the development of management strategies and monitor
the activities of the executive directors. They are not bound to give
continuous attention to the affairs of the company. Their duties are of
an intermittent nature, to be performed at periodical board meetings
and at any other meetings that may require their attention (Cassim, F
2011:437).

An independent non- executive director is a director who is required to

be independent in character and judgment. There should be no
relationships or circumstances that are likely to affect, or could appear
to affect their independence (King III Report 66 p. 38).

Independence means absence of undue influence and bias that could

be affected by the intensity of the relationship between the director
99
and the company, rather than any particular act such as length of
service or age (King III Report para 66. P 38) .The independence
should not only be in fact but he or she should also appear or
perceived to be independent in the perception of a reasonably
informed outsider.

The King III Report defines an independent non-executive director as a

non- executive director who:

1. Is not a representative of a shareholder who has the ability to

control or significantly influence management or the board

2. Does not have direct or indirect interest in the company that

exceeds 5 percent of the group’s total number of shares in issue.

3. Does not have a direct or indirect interest in the company that is

less than 5 percent of the group’s total number of shares in issue,
but is material to his or personal wealth.

4. Had not been employed by the company or the group of which it

currently forms part in any executive capacity, or been appointed as
the designated auditor or partner in the group’s external audit firm
or as a senior legal advisor in the preceding three financial years.

5. Is not a member of immediate family of an individual who is, or has,

during the preceding those financial years, been employed by the
company or the group in an executive capacity.

6. Is not a professional adviser to the company or the group, other

than as a director.

7. Is free from any business or other relationship (contractual or

statutory) that could be seen by an objective outsider to interfere
materially with the individual’s capacity to act in an independent
manner, such as being a director of a material customer of or
supplier to the company.

100
 8. Does not receive remuneration contingent upon the performance of
the company.

The king III Report recommends that independent director undergo on

evaluation of their independence by the chairperson of the board every year
and suggest that a term beyond nine years for independent non- executive
director be subjected to vigorous review by the board of directors both in
performance and factors that may impair independence.

b. THE RESPONSIBILITIES OF BOARD OF DIRECTORS

Act as the focal point and custodian of corporate governance (principle
2.1 of the King III Report). Provide effective leadership and direction
based on ethical foundation. Ensures the company is, and is seen to be
a responsible corporate citizen (Principle 1.1 of King 111 Report). It is
responsible for the strategic direction and control of the company and
should act in the best interest of the company.

In dispensing its duties the board of directors should strive to achieve

an appropriate balance between its various stakeholders.

The board should ensure that the company complies with applicable
laws and that it is also considers adherence to non- binding rules,
codes and standards (Principle 6.1 of the King III Report). The board
should be responsible for the governance of both risk and information
technology, and should ensure that there is an effective risk- based
internal audit (Principles 6.1; 4.2; 5.1 and 2.10 of the King III Report)

The board should be responsible for dispute resolution and should

ensure that disputes are resolved as effectively, efficiently and
expeditiously as possible (Principle 8.6 of the King III Report)

c. COMPOSITION OF THE BOARD

There are two types of board structures; unitary boards and two tier
boards (Cassim, F 2011; 439). A two tier board consists both a
management board and a supervisory board. The task of running the
company is entrusted to the management board which is composed of
executive directors (appointed by the supervisory board). The
supervisory board, which is composed of non- executive directors that
are elected by the shareholders and in some cases by the employees,

101
 monitors how the management board discharge its functions (Cassim
F, 2011:440). Both employees and shareholders are represented on
the supervisory board. Members of the one board may not sit as
members of the other board thereby creating a separation between the
management and the supervisor’s functions.

A unitary board, on the other hand, is composed of executive and non-

executive directors who interact directly with each other. The King III
Report’s view is that the unitary board is more preferable because it
allows for positive interactions and diversity of views between
individuals of different backgrounds, experiences and skills.

The King III Report states that there should be a balance of power and
authority in the board and that no one individual or block of individuals
should have sufficient power to be able to dominate the board’s
decision making (Principle 2.18 and para 63 p. 38 of the King III
Report). There should be a majority of non- executive directors on the
board and the majority should be independent there by reducing the
possibility of conflicts of interests and promoting objectivity (King III
Report para 64 p. 38)

The Code (2.18.5) recommends that every board should have a

minimum of two executive directors, being the chief executive officer
and the director responsible for finance. Every board should consider
whether its size, diversity and demographics make it effective (Code 2.
1.8.4).

d. BOARD APPOINTMENT
The appointment of directors should be formal and transparent
(Principles 2.19. of the King III Report and para 80 p 40.).There should
be a nomination committee to assist in the identification of suitable
members of the board (Code 2.19.1) which should do a background
and reference check of prospective directors.

e. BOARD MEETINGS
The board to meet as often as is required to fulfil its duties, but at least
four times per year, (Code 2.1.2). Non – executive directors should
meet from to time without the presence of any executive directors to
consider the performance and actions of executive management.
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f. BOARD COMMITTEES
While the board may delegate certain functions to committees, that
must not amount to abdication of its own responsibilities (Principle 2,
23 of the King III Report).It should critically apply its collective mind to
the recommendations and the reports of all its committees before
approving such recommendations (King III Report para 137P. 47). It is
mandatory in terms of code 2.23.4 for public and state –owned
companies to appoint an audit committee while is voluntary for other
companies. The audit committee is responsible for overseeing the
internal audit and is an integral component of the risk management
process (Principles 3.7 and 3.8 of the King III Report). Members of the
audit committee should be skilled and experienced independent non-
executive directors.

Companies should establish a risk committee to assist the board in

considering the risk management policy, to plan and monitor the risk
management process (Principle 4.3 of the King III Report and code
4.3.2.1)

There should also be a remuneration committee to assist the board in

setting and administering remuneration policies (Code 2.25.2) and a
nomination committee to assist with the process of identifying suitable
members for the board of directors (Code 2.19.1).The King III Report
para 130 p.46 also recommends the establishment of a governance
committee, an information technology steering committee and a
suitability committee. Where small companies find it onerous to set up
all these committees the King III Report provides that they may not
establish formal committees but should ensure that the functions are
appropriately addressed by the board (King 111 Report para 130 p.
46).

The code (2.23.7) recommends that committees (other than the risk
committee, which should comprise executive and non- executive
directors) should comprise a majority of non –executive directors, the
majority of which should be independent.

Committees should be free to take independent outside professional

advice at the cost of the company subject to an approved process
being followed (Code 2.23.9) external parties may be present at
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 committee meetings by invitation, but may not vote on the committee
(King III Report para 132 p. 46).

g. GROUP BOARDS

The King 111 Report recommends that there be a Governance

framework agreed upon between a group and the boards of its
subsidiaries.

The holding company must recognize and respect the fiduciary

duties of the directors of the subsidiary company and particularly
the duty to act in the best interest of the subsidiary company at
all times, whether or not the director has been nominated to the
board of the subsidiary by the holding company (King 111
Report para 142 p. 48)

h. INDUCTION AND TRAINING

There should be a formal induction programme for new directors
and continuing professional development programme (Code
2.20.1 and 2.20.3).

i. PERFOMANCE ASSESSMENT
The King III Report requires the board, its committees and
individual directors to be evaluated on an annual basis. (Principle
2.22 of the King III report).The evaluations should be performed
by the chairperson or an independent provider (Code 2.22.2).

j. REMUNERATION
The king 111 Report recommends that companies should
remunerate directions and executives fairly and responsibly but
should disclose the remuneration of each individual director and
certain senior executives in its annual remuneration report as
part of its integrated report. (Principle 2.26 of the King III Report)
shareholders should approve the company’s remuneration policy
(Principle 2.27 of the King III report).

k. THE CHAIRPERSON
The chairperson should be an independent non- executive
director (Principle 2.16 of the King III Report). The chief executive
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 should not be the chairperson for that will concentrate power in
one person. The chairperson should be elected on an annual
basis (Code 2.16.1).

l THE CHIEF EXECUTIVE OFFICER (CEO)

Serves as the representative of the company and is vested with
the collective responsibilities of management he or she is
delegated by the board to manage, and in turn delegates to these
reporting to him or her.

m. THE COMPANY SECRETARY

Assist the board and should be qualified and experienced
(Principle 2.21. of the King 111 Report). He or she is the
gate keeper of good corporate governance and should maintain
an arm’s length relationship with the board of directors (code
2.21.3).He or she should not be a director of a company (Code
2.21.4).

The Secretary is required among other things to provide

guidance to the board on the duties of directors, good corporate
governance and to assist with the evaluation of the board, its
committees as well as individual directors. He or she should also
assist the nomination Committee in the appointment of the
directors of the company (Code 2.21.-13)

3. AUDIT COMMITTESS
They are mandatory in terms of the King III Report for listed and
state –owned companies (King III Report 3 p. 56) members of this
Committee are elected by shareholders at each annual general
meeting.

Private companies, non- profit companies and personal liability

companies may voluntarily appoint an audit committee and define
its composition, purpose and duties in its Memorandum of
Associations (code 3.1.2.)

This committee should meet at least twice a year (Code 3.1.4)

and should meet with internal and external auditors at least once
a year without management being present (Code 3.1.5).The audit
committee should comprise at least three members (Code 3.2.2)
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 who should be suitably skilled and experienced independent non-
executive directors. The chairperson of the board of directors
should not be the chairperson of or a member of the audit
committee (Code 3.2.3) but may attend audit committee
meetings by invitation (King III Report para 11 p.57).

Among the functions of the audit Committee are: to oversee the

integrity of the integrated report for whch the board of director is
responsible; oversee the internal audit; form an integral
component of the company’s risk management process;
recommend one appointment of the external auditor and oversee
the external audit process.

The audit Committee should report to the board of directors and

shareholders on how it has discharged its duties (Principle 3.10 of
the King III report).

4. THE GOVERNANCE OF RISK

The board of directors is responsible for the Governance of risk
and should determine levels of risk tolerance that the Company is
able to bear in the pursuit of its objectives (Principles 4.1 and 4.2
of the King III Report).

The board should determine the levels of risk tolerance at least

once per year and should review these limits during periods of
increased uncertainly or any adverse changes in the business
environment (King 111 Report para 11 p. 74).

A risk Committee or audit committee should assist the board in

carrying out its risk responsibilities. The Committee should have at
least three members, executive and non- executive directors
(Code 4.3.2.2 and 4.3.2.3.)

5. THE GOVERNANCE OF INFORMATION TECHNOLOGY (IT)

IT Governance should be taken as an integral part of the overall
Corporate Governance (King III Report para 6 p 82)

It Governance is a framework that support effective and efficient

management of IT resources to facilitate the achievement of a
Company’s strategic objectives (King III Report para 2 p. 82).
106
 It is the responsibility of the board but it may appoint an IT steering
Committee to assist its governance of IT risks.

6. COMPLIANCE WITH LAWS, RULES, CODES AND STANDARDS.

It is the responsibility of the board of directors to ensure that the
company complies with all applicable and relevant laws and that it
considers adherence to non- binding rules, codes and standards
(Principle 6.1 of the King III report).

The responsibility for the implementation of an effective compliance

framework and processes may be delegated by the board to the
management. An independent compliance officer may be appointed
(Code 6.4.6)

7. INTERNAL AUDIT
The board to ensure that there is an effective risk- based internal audit
(Principle 7.1 of the King III report). An internal audit should evaluate
the company’s governance processes, perform an objective
assessment of the effectiveness of risk management and the internal
control frame work, systematically analyses and evaluate business
processes and associated controls, and provide a source of information
as appropriate ,regarding instances of fraud, corruption, unethical
behaviour and irregularities (Code 7.1.2). An internal audit plays an
important role in providing assurance to the board regarding the
effectiveness of the system of internal controls and risk Management
of the Company.

8. GORVENING STAKEHOLDER RELATIONSHIPS

a. The King III Report adheres to the ‘triple context’ or integrated
approach, which acknowledges that companies should act with
economic, social and environmental responsibility (King III Report para
18 p22). Directors should consider the economic, social and
environmental factors when they manage a company .The board of
directors is not only responsible merely for the company’s financial
performance but for the company’s performance within the triple
context.

As to whose interest the company should be managed depends on two

schools of thought. The enlightened shareholder value approach
107
 holds that directions must have regard to the longer-term interest of
shareholders, as opposed to the immediate term and, where
appropriate, must have regard to the need to ensure productive
relationships with all stakeholders, but with shareholders interest
retaining primary. In other words, directors may prioritise the interest
of other stakeholders only if this would promote the success of the
company for the benefit of the shareholders in general.

Stakeholders are any persons that could affect the company’s operations
or could be affected by the Company’s operations such as investors,
creditors, lenders, suppliers society in general, communities, and
auditors, both current and potential, (Cassim F, 2011:449)

The pluralist approach holds the view that companies have a social
responsibility to society and that shareholders are just one
constituency among many. Directors must consider the interests not
only of shareholders, but of all stakeholders in the company.

The enlightened shareholder value approach is a profit- maximizing

approach, while the pluralist approach is a profit- sacrificing social
responsibility approval.

The King III Report adopted a stakeholder inclusive corporate

governance approach which recognizes that a company has many
stakeholders that, could affect it in the achievement of its strategy and
long- terms sustained growth (King III Report para 6 p. 100) in terms of
this approach legitimate interests and expectations of stakeholders are
considered when making decisions in the best interest of the company
(King III Report para 4 p 100). There has to be an approximate balance
between its various stakeholder groupings, in the best interest of
the company.

b. SHAREHOLDER ACTIVISM AND SHAREHOLDER APATHY

The exercise of shareholder’s right to vote allows shareholders not to
vote if there so wish. However, the passivity of shareholders in the
exercise of the right to vote may undermine good levels of compliance
by management. Shareholder activism should be encouraged through
the creation of an environment where shareholders are not spectators
108
 but are concerned with the well- being of the company in which they
hold shares constantly checking whether directors are practicing good
Corporate Governance (Cassim F, 2011:452).

The King III Report strongly recommends that institutional investors be

encouraged to vote and engage with companies or require agents
through mandates to vote and engage with the company (King III
Report, preface at 10).The King III Report further recommends that the
board of directors should encourage shareholders to attend annual
general meetings and other company meetings, at which all the
directors should be present.

c. DISPUTE RESOLUTION
The king III Report recognised the alternative dispute resolution (ADR)
as a vital element of good corporate governance. The Report requires
the board of directors to ensure that disputes are resolved as
effectively, efficiently and expeditiously as possible (Principle 8.6 of the
King III Report). In choosing a dispute resolution method consideration
must be given to the preservation of business relationships, cost
effectiveness and must not be a drain on the finances and resources of
the company.

The King III Report suggest that mediation may be a more appropriate
channel to resolve disputes where interests of the disputing parties
need to be addressed, and where commercial relationships need to be
preserved and even enhanced.

9. INTERGRATED REPORTING AND DISCLOSURE

Integrated reporting means a holistic and integrated representation of
the company’s performance in terms of both its finances and its
sustainability (King III Report para 1 p 108). The integrated report
should be prepared every year and should convey adequate
information regarding the company’s financial and sustainability
performance (Code 9.1.3 and 9.1.4) it should focus on substance over
form (Code 9.1.5.)

109
CHAPTER 13

INSOLVENCY

There are many ways in which a person who is owed money in

terms of a contractual obligation or any obligation can recover
that money. He can approach the courts for redress. If he
obtains a judgement in his favour against the debtor, a
warrant of execution against property may be obtained. A

110
warrant of execution is an order to the messenger of court or
the Deputy Sherriff to attach and sell so much of the
judgement debtor’s property in order to satisfy the judgement
of the court.

However, there are many loopholes inherent in the system

hence the law allows for the liquidation of a debtor’s estate.
This is provided for in the Insolvency Act Chapter 6.04

A debtor who is unable to meet his liabilities may be required

to surrender his estate to the Master of the High Court. He can
make an application for voluntary surrender if he wishes to
get his creditors off his back.

The debtor‘s estate will be managed by a trustee appointed

by the court and to that extent, the debtor will lack capacity
to contract generally without the consent of the trustee.

It has to be noted that there are two types of sequestration in

terms of the Insolvency Act. These are the compulsory
sequestration and Voluntary surrender.

Voluntary Surrender

A debtor may himself apply for the sequestration of his own

estate. This is in terms of section 3 of the Act. He can
surrender his estate either personally or through an agent. An
executor of a deceased insolvent estate and all the members
111
of a partnership other than partners en commandite may
apply for voluntary surrender. It must be noted that the
partners will also surrender their own estates.

The procedure to be adopted is that of a petition.

Section 3(3) provides that:-

“A petition ...... shall include a statement of the

debtor’s affairs in the prescribed form”

The reason why a statement must be included is to make it

clear that the estate is indeed insolvent. The court will require
satisfaction in the following matters in terms of Section 4(1)
which provides as follows:-

“Upon the application for the acceptance of the

surrender of the estate of the debtor the High Court
may, if it is satisfied that prima facie:-

a)There are available assets of the estate sufficient

to defray all such costs of sequestration as are
payable out of the free residue in terms of this Act,
and

b)The estate of the debtor is insolvent provisionally

accept the surrender of the estate of the debtor and
grant an order of provisional sequestration of that
estate and shall at the same time issue a rule nisi
calling upon interested persons to appear and show

112
cause why the debtor should not be sequestrated
finally.”

The court must be satisfied also that, the sequestration will

be for the benefit of the creditors. The question that tends
to arise is: What must the court do if the statement or the
schedule shows that the assets of the estate tend to exceed
the liabilities?

This is tricky in the sense that only an estate which is in fact

insolvent must be sequestrated, yet at the same time, even
though assets appear to exceed the liabilities, this may not
necessarily be so because the assets may not realise their
purported value on a forced sale.

The procedure therefore is designed to allow only genuine

cases of insolvency to be dealt with, hence the need for a
provisional order.

Section 5 of the Act requires the rule nisi to be published in

the Government Gazette, and in a newspaper circulating in
the debtor’s area.

Section 6 provides that on the return date, if the court is

satisfied that;

a) There are available assets of the estate sufficient

to defray all the costs of sequestration as are
payable out of the free residue...............
b) The estate of the debtor is insolvent, and

113
c) The provisions of section 5 have been complied
with the High Court may finally accept the
surrender of the estate and grant an order placing
the estate of the debtor under sequestration.

The High Court of course may decide not to confirm the rule
nisi. If the court declines to do so, then in terms of Section
7, the rule nisi shall be discharged and the estate of the
debtor concerned shall be re-vested in him and all the rights
of or against the estate shall be revived.

COMPULSORY SEQUESTRATION

It is not every creditor who may apply for compulsory

sequestration. The creditor must be one of those described
in Section 12 which provides inter alia that:

“A petition for the sequestration of the estate of a

debtor who is insolvent or who has committed an act
of insolvency may be made to the High Court by-

a) A creditor who has a liquated claim for not less

than one hundred dollars, or

114
b) Two or more creditors who have liquidated claims
in the aggregate for not less than two hundred
dollars, or

c) The agent of any creditor or creditors referred to

in paragraph (a) or (b)

A liquidated claim has been defined as a claim the amount

of which is ascertained or which can clearly and promptly be
established. This was decided in Union Share Agency V
Spain 1928 Ad 74

The effect of this definition is that a claim which is not

capable of quick and ready proof is not a liquidated claim
and therefore a creditor with a disputed claim has no locus
standi to petition the court. It has also been held that the
wife, who has a claim for maintenance, even where it is
based on a court order, has no locus standi as a creditor. A
landlord who is owed arrear rentals is a creditor, but only for
the outstanding rentals and not for damages after
cancellation. A liquidated claim which has accrued will
suffice, even though it may not be due on the date of the
application for sequestration.

The petitioner is required to show that the debtor is

insolvent or has committed an act of insolvency. All these
must be stated in an affidavit filed of record.

115
It can readily be appreciated how difficult the position of the
petitioner may be since one cannot easily prove the
solvency or otherwise of another.

The legislature was awake to this problem hence reliance is

usually made of the various acts of insolvency itemised in
section 11 of the Act. To fully appreciate the section, it is
hereby reproduced to the text:-

ACTS OF INSOLVENCY

A debtor shall be deemed to have committed an act of

insolvency if:-

a)He leaves Zimbabwe or being out of Zimbabwe, remains

absent wherefrom or departs from his dwelling or otherwise
absents himself with the intent by so doing to evade or
delay the payment of his debts, or

b) a court has given judgement against him and he fails,

upon the demand of the office whose duty it is to execute
that judgement, to satisfy it or to indicate to that officer
disposable property sufficient to satisfy it or if it appears
from the return made by that officer that he has not found
sufficient property to satisfy the judgement, or

c) He makes or attempts to make any disposition of any of

his property which has or would have the effect of
116
prejudicing his creditors or of preferring one creditor above
another, or

d)he removes or attempts to remove any of his property

with the intent to prejudice his creditors or to prefer one
creditor above another, or

e)..............he agrees or offers to assign his estate for the

benefit of his creditors or any of them or makes any
arrangement with his creditors for releasing him wholly or
partially from his debts, or

f) He gives notice to any of his creditors that he has

suspended or is about to suspend payment of his debts or if
he has suspended payment of his debts, or

g) He makes default in publishing the notice required by

Section 152.....or

h)being a trader, he gives notice in terms of Section 47 that

he is unable to meet the liabilities of his business, or

i) a notice of assignment having been published in terms of

Section 152, he omits to lodge his statement of affairs as by
law required or his statement of affairs does not fully
disclose his debts or property and the omission is material.

117
It can therefore be seen that the petitioner in compulsory
sequestration must allege certain facts which prima facie or in terms of
Section 11 shows that the debtor is insolvent.

At the hearing, the court will grant a provisional order if it is satisfied,

which provisional order may, or may not be confirmed on the return
date.

In terms of Section 16, the estate of all active members, other than
members en commandite shall be sequestrated concomitantly with the
Sequestration of the partnership estate. It does not matter whether the
Sequestration is voluntary or compulsory.

CONSEQUENCES OF A SEQUESTRATION ORDER

Insolvency by its very nature divests the debtor of his property and
vests it in the Master until appointment of a trustee. Legal disabilities
are imposed on the debtor and his general contractual capacity
becomes limited.

An insolvent can however manage and own property outside

Zimbabwe because the declaration of insolvency does not extend
beyond our borders.

If the Deputy Sheriff had attached some of the insolvent’s property and
sold it to a third party without being aware of the order of
sequestration, he will be required to transfer that immovable property
to the buyer.

In the case of Edwards v Wood 1966 RLR 708, it was held that if it
becomes necessary to evict an insolvent from the property, then such
118
eviction will be proper, especially where the insolvent refused to move
out without being forced out.

An insolvent may not acquire property during the subsistence of the

insolvency order. This does not apply to his necessary clothing,
bedding, furniture and tools of trade. In other instances, he may be
allowed to retain his pension, life insurance policies and damages
arising out of defamation or personal injury claims.

Third parties who acquire property from the insolvent in good faith are
protected in that the insolvent may pass ownership to them. However,
all the property acquired by the insolvent is deemed to be part of the
insolvent estate unless the contrary is proved.

No civil proceedings may be brought against the insolvency personally.

There is therefore a moratorium of some sort.

All proceedings will be handled by the trustee on behalf of the

insolvent and the trustee may be joined as a party.

The insolvent person is at liberty to apply to court to compel a trustee

to administer the estate properly and efficiently. He may also apply to
have the order of sequestration rescinded.

An insolvent person cannot become a company director and cannot

hold a position of trust. He may in certain situations not stand as
surety and co-principal debtor to a principal obligation.

An insolvent may enter into contract but may not enter into those
contracts dealing with the disposal of assets of the estate without the
consent of the trustee. The consent must be in writing.

119
Effect of Insolvency on the Spouse

When a person has been declared insolvent, the spouse’s property also
vests in the Master. The intention of the legislature here clearly was to
pre-empt situations where insolvents would put their property out of
reach of the Master by claiming that it belonged to their spouses.

The definition of spouse in the Act is wide indeed. It includes not only
couples married customarily or under civil law but those who live
together as husband and wife even though they are not actually
married (Section 2 of the Act).

However, the spouse is allowed to prove that the property cannot be

claimed by the creditors. A spouse can for instance prove that she
acquired that property before the marriage, that she acquired it under
a marriage settlement, that it was acquired by a title valid against
creditors etc.

The procedure is that creditors must first excuse the spouse who is
insolvent before proceeding against the other.

The Trustee

The office of trustee is a fiduciary one. As a result it calls for the

highest integrity and good faith. The legislature has provided in Section
74 of the Act that certain persons may not hold the office of trustee.
These are;

a) An insolvent

b) Any person related to the insolvent by consanguinity or affinity

within the third degree
120
c) A minor or any other person under legal disability

d) Any person who does not reside in Zimbabwe

e) Any person who has an interest opposed to the general interest of

the creditors of the insolvent estate,

f).................

g)......any person removed by the High Court, on account of

misconduct, from an office of trust

h) A corporate body

i) any person who has been convicted whether in Zimbabwe or

elsewhere, of theft, fraud, forgery, or uttering a forged document or
perjury and has been sentenced there to serve a term of imprisonment
without the option of a fine or a fine exceeding one hundred dollars;

j)any person who at any time during the period of twelve months
immediately preceding the date of sequestration acted as the
bookkeeper, accountant, or auditor of the insolvent,

k)any agent authorised specially or under a general power of attorney

to vote for or on behalf of a creditor at a meeting of creditors of the
insolvent estate and acting or purporting to act under such special
authority or general power of attorney.

The trustee shall therefore take custody of all the assets of the estate
and administer them as if they were his own. As pointed out above, his
is in a fiduciary position which requires commitment and undivided
attention.

REHABILATION

There comes a time when the insolvent person feels that he can return
to living a normal life. He will be in short, asking to be released from
the shackles of insolvency. In order to do so, he must apply for
rehabilitation in terms of Section 141 of the Insolvency Act.

121
A partnership cannot be rehabilitated although the partners
themselves can be rehabilitated.

Rehabilitation has the effect of putting to an end the insolvent status

and it effectively removes the legal disabilities suffered by the
insolvent. It puts an end to the sequestration and therefore discharges
all the insolvents’ debts incurred before the order of sequestration. The
High Court has discretion whether or not to grant a order for
rehabilitation and in so doing, it will be guided by a report from the
Master.

The following are the circumstances under which rehabilitation may be

applied for in terms of Section 141.

1) Upon obtaining a certificate from the master that due Security has
been furnished for the costs should the application be opposed.

2) After the lapse of twelve months from the date of confirmation by

the Master of the trustee’s first account, or after two years from the
date of the final sequestration order.

3)If the estate had been sequestrated prior to the current

sequestration, then application must be three years from the
confirmation of the account referred in (2) above.

4) If the insolvent applicant had been convicted of any fraudulent act

in relation to his existing or prior insolvency, application must be after
five years from the date of conviction.

122
CHAPTER 14

THE BUSINESS TRUST

A trust is a relationship in terms of which one or more (the founders) hand

over assets to another person or persons (the trustees) to administer it for
the benefit of a third party or parties (the beneficiary or beneficiaries). A
trust is generally created by means of a will, in which case it is called a trust
mortis causa or by means of contract (trust inter vivos).

Ownership of the trust property often vests in the trustee in his official
capacity. It is possible to create a trust in such a way that the beneficiary
owns the trust asset so that the trustee only manages it.

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LEGAL NATURE OF A TRUST
A trust is not a legal person. It has no separate existence and hence has no
rights and liabilities of its own. The assets, liabilities, rights and duties of the
trust vest in the trustee in his official capacity and not his personal capacity.
The trustee does not personally incur any liabilities in respect of the debts of
the trust. The trustee is the owner of both the trust assets and assets in his
private estate. The law treats him as owner of two totally separate assets:

a. if any of the two estates is declared insolvent, the creditors of that estate
will normally not be entitled to attach assets which clearly and officially form
part of the other estate.

b. if the trustee dies, his personal heirs will not be entitled to inherit the
assets of the trust

c. if a trustee acts officially in his capacity as trustee, he does not bind his
private estate and claims which arise from that course of action will be
payable only from the trust estate.

d. the trustee can commit theft by wilfully and wrongfully appropriating

movable assets which belong to the trust for his private estate.

e. the trustee’s ownership of trust asset lapses when he relinquishes his

office as trustee.

f. the law also requires the trustee to prevent the assets of the two estates
from mingling.

CREATION OF A TRUST

Whether a trust is created by means of a will or contract it must meet the

following requirements:

a. the founder must intend to create a trust,

b. the founder must express his intention in such a way that a legally binding
trust obligation is created,

c. the trust property must be defined with sufficient certainty. It must be

possible to ascertain which property is subject to the trust,

124
d. the object of the trust must be certain. The object can either be to benefit
named or ascertainable persons or a class of persons or to further one or
more impersonal objects e.g culture or sports,
e. the trust object must be lawful

A legally binding trust is created when the above requirements are complied
with. There are no legal formalities attached to the creation of a trust.
However, certain formalities have to be complied with before a person may
act as a trustee. One of such requirements is the lodging of a trust
instrument or a copy thereof with the Master of the High Court.

THE PARTIES TO A TRUST

THE FOUNDER
He is the person who initiates the creation of a trust. He chooses whether to
create the trust by will or by contract. The founder determines the extent
and nature of the trust assets together with the object of the trust and trust
beneficiaries. If no beneficiaries are ascertained he prescribes the mode by
which beneficiaries are to be determined. Normally he nominates the
trustee(s) and determines their powers and authority.

The role of the founder does not terminate after the creation of the trust. He
can also be a trustee of the trust. It is possible and legally valid for him to be
the only trustee in which he retains control over the trust assets.

THE TRUSTEE
This is the person who is entrusted with the management of the trust in
accordance with the objects of the trust. He administers the trust property
but does not personally acquire any rights in respect of the said assets.

Generally, any person with full legal capacity can act as trustee. There may
be additional requirements by statute or as posed by the trust document
itself. It is possible to have more than one trustee if the trust document
provides for such appointment.

The person appointed as a trustee must accept his nomination. The following
persons may, inter alia, nominate a trustee:

125
1.existing trustees,

2.the founder,

3. Beneficiaries.

4.the Master of the High Court

Where the founder fails to nominate a trustee or the nominated person does
not accept his nomination, a court will ensure that another trustee is
appointed. A trust will not fail for want of a trustee.

DUTIES OF TRUSTEE
1. to observe his duties in terms of the trust document, so as to benefit the
trust beneficiaries,

2. he must fulfil his duties impartially and in good faith,

3. to exercise diligence and skill expected of a person who manages the

assets of another,

4.he must take possession of the trust asset and keep these clearly separate
from his personal property. He should open a separate trust account and
render account of his administration of the trust when the Master requests
him to do so.

POWERS OF THE TRUSTEE

Under common law the trustee does not have extensive powers to deal with
the trust assets. He does not automatically possess the right, inter alia, to:

1. sell trust assets,

2. enter into a loan agreement and to mortgage trust assets,

3. expose trust assets to business risks by conducting a business.

However, a wide discretion may be conferred on a trustee in the trust

document regarding the nomination of the beneficiaries and the extent of

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any benefit, which they are to receive. Such a trust is called a discretionary
trust.

The trustee is entitled to remuneration for the execution of his official duties.
If the trust document does not provide for such remuneration, the trustee is
entitled to reasonable remuneration fixed by the Master of the High Court in
the event of a dispute.

REMOVAL AND RESIGNATION

The office of the trustee may be vacated in a variety of ways:

1. on the death of the trustee,

2. the trust document often-stipulate grounds on which a trustee must

vacate his office,

3. the trustee may resign from his office by giving notice to the Master of the
High Court and trust beneficiaries,

4. the Master has wide powers to remove a trustee from his office.

THE TRUST BENEFICIARY

He is a person who is entitled to receive a benefit as per trust document.
This right may be conditional. Not all trusts have beneficiaries; some are
created to further impersonal object e.g nature conservation. However,
business trusts usually have beneficiaries.

Any person, whether natural or juristic and even another trust can be a
beneficiary. A beneficiary is not required to have legal capacity. Minors, an
insolvent person and even unborn persons may be nominated as
beneficiaries. There is no limit as to the number of beneficiaries a trust could
have.

The trustee may also be a beneficiary of the trust, which he manages, but
not the sole beneficiary or even the only beneficiary.

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The founder usually names the beneficiaries, either individually or by class.
The founder may confer rights on his trustee to select beneficiaries whether
from a designated group or not.

RIGHTS OF THE TRUST BENEFICIARIES

The trust document determines the nature and extent of the rights of trust
beneficiary. The right may be conditional or unconditional. It can vest
immediately or on a future date.

It is by acceptance of the benefits offered in the trust document that the

beneficiary acquires his right to benefit from a trust. Before acceptance, the
founder can revoke or vary the benefits. The beneficiary retains the right but
subject to the terms of the trust document and discretion as exercised by the
trustee. Once the beneficiary acquires a vested right in the benefit, the right
forms part of his estate and his creditor can attach it.

The beneficiary may forfeit his right to benefit, as provided in the trust
document. Acquisition of a trust benefit may be subject to a condition, for
example, upon reaching a certain age.

EXTERNAL RELATIONS
Because a trust is not a legal person, it cannot conclude a contract on its
own. The trustee is the representative of the trust. However, the trustee may
operate within the limits set by the trust document from which he derives his
power. If there is more than one trustee, they should act jointly.

CHAPTER 15

ALTERNATIVE DISPUTE RESOLUTION

INTRODUCTION

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The acronym for Alternative Dispute Resolution is ADR. It is a system of
dispute resolution that uses a variety of informal process as a means of
resolving disputes, usually outside of the Court systems. These processes are
alternative to litigation i.e. court process. Litigation is the mainstream model
of dispute resolution against which ADR processes are posed as alternatives.

In order to understand ADR, it is necessary to explain the process of

litigation. Litigation is state sponsored and is applied through the Court
system. It is based on rules that prescribe how proceedings must be
conducted. Because of this it is regarded as a public process if compared to
ADR processes that are private processes. It is characterized by formality,
technicality and procedures which are meant to protect the procedural rights
of Litigants. Being a public process it is regulated and controlled by external
rules such as the rules of Court and statutory provisions.

Litigation is a command process. The decision in the form of a judgment is

imposed on the Litigants by a judicial official and that decision is enforced
under the sanction of the state. In other words, a judgment is enforced by
execution proceedings. In Litigation the purpose to which all proceedings are
directed is a judgment of Court.

Contrasted to Litigation ADR processes are diametrically opposed to it. ADR

processes are informal in that they are not bound by strict rules of procedure
nor are they constrained by technicalities. They are also very flexible as the
processes may be adapted to suit the needs of particular types of disputes in
different contexts e.g. labour, commercial, Industrial, family, International
relations and out of Court settlements. Disputants are not compelled to enter
into the process hence they are voluntary. In addition to being voluntary,
they are also consensual in that the outcome (result/decision) of the process
is reached through the consent of both disputants. During ADR processes
what dominates are the interests of disputants rather than their rights in law.
These processes also emphasize on the relationship between the disputants

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and are therefore highly suited to disputes between persons who are in a
continuing or long term relationship e.g. married couples. Most ADR
processes do not focus on blame for past events but rather concentrate on
establishing or re-establishing the future relationship between the
disputants.

ADR processes may be described in summary as informal, flexible, voluntary,

consensual, interest based, relational and future based. It is actually the
opposite of Litigation.

ADR PROCESSES

The system of ADR is based on three primary processes; negotiation,

Mediation and Arbitration. These processes are not new as they have been in
use in many cultures as traditional methods of non- judicial (outside the
Court systems) dispute resolution.

However, it is noteworthy that from these primary processes other

independent processes were developed which became known as derivative
processes. In certain instances, elements of two or more primary processes
have been combined forming totally new processes called hybrid
processes.

Let us examine the primary processes first, before the derivative and hybrid
processes.

A. NEGOTIATION

This may be defined as a method of dispute resolution which is private,

voluntary and consensual where two or more disputants seek to resolve their
differences personally by means of an agreement that governs their future

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relationship. The characteristics of the process may come out clear if the
definition above is evaluated.

1. PRIVATE

It is a private process in that the disputants are able to choose the venue for
the negotiations and also agree on the rules and standards that they will
apply. Disputants may keep their communications and even the outcome
confidential. However, publicity and confidentiality cannot always be
maintained when the negotiations are in the public interest e.g. in the case
of political, labour or international negotiations.

2. VOLUNTARY

The process is not imposed on the disputants. Disputants choose to

enter into and participate in the process.

3. CONSENSUAL

This has a similar meaning to “Voluntary” but is mainly used to indicate that
the outcome of a negotiation (whether it ends in an agreement or a failure to
agree) is based on the consent of both disputants. There is a greater
possibility that disputants will co-operate with each other to keep the terms
of the agreement to which they have consented than to a decision that is
imposed and enforced by law.

4. NEGOTIATION IS A PROCESS

It is not a casual event. Like litigation it has a definite point of

commencement and ends either with an agreement or the failure to reach an
agreement.

5. TWO OR MORE DISPUTANTS

Negotiation is a bilateral process because only two sides are involved at any
given moment.
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 6. AGREEMENT THAT GOVERNS FUTURE RELATIONSHIPS

In negotiation, the emphasis is on the disputant’s relationship and not on the

development of consistent legal rules, as is the case in Litigation.

The purpose of the agreement is therefore to regulate the future relationship

between the disputants based on respect for their common interests than on
the maintenance of their legal rights.

B. MEDIATION

Mediation is a private, voluntary and consensual process whereby two or

more disputants agree to their dispute through the intervention of a third
party, a mediator, who should be impartial and accepted by both parties.

Its characteristics are:

1. PRIVATE, VOLUNTARY AND CONSENSUAL

These are the same as for negotiation.

2. INTERVENTION BY A THIRD PARTY (THE MEDIATOR)

Although in both Litigation and arbitration there is intervention of a third

party, the degree to which the mediator intervenes differentiates mediation
from these two. The mediator has a very limited role which is basically
controlling the process of mediation while disputants control the content and
outcome of the mediation. The mediator merely assists and guides the
disputants as they interact with each other. Disputants own the content of
the mediation, which is they state their views on the dispute, give their own
interpretation of the facts, explore possible solutions and negotiate with each
other through the mediator. The mediator may not impose a decision on the
disputants.

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 3. IMPARTIAL AND ACCEPTED BY BOTH DISPUTANTS

Some people might want to say that the mediator must be neutral, but
neutrality is an impossible standard in culturally diverse societies, hence the
use of “impartial and accepted” is used.

“Impartial” means that the mediator should be fair and act without
prejudice in regard to both disputants. The mediator must be accepted by
and be able to retain the trust of disputants.

The mediator does not necessarily have to be a lawyer. Social workers,

psychologists Ministers of Religion, Community workers or any other
acceptable persons may act as mediators irrespective of educational
qualifications.

C. ARBITRATION

Arbitration is a process whereby the disputants voluntarily and jointly ask a

third party, the Arbitrator, to hear both sides of the dispute and thereafter
make an award which the disputants undertake in advance to accept as final
and binding.

Arbitration is closer to litigation than negotiation and mediation. The reason

is that negotiation and mediation are consensual processes whereas
arbitration and litigation are command processes. In arbitration just like
litigation, a decision in the form of an award is imposed on the disputants. An
arbitration award may be made and enforced as an order of Court. The
outcome of both Litigation and arbitration is final and binding.
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However, contrary to litigation the award arises from the consent of the
disputants to accept the award. The decision of the judicial official does not
bind the parties in question only but also third parties in the present and in
the future, yet an arbitral award binds only the disputants. In other words a
judicial decision forms a precedent but an award does not.

Like negotiation and mediation, arbitration allows a great deal of party

control over the process. The disputants may select the arbitrator on the
grounds of his/her relevant expertise and may choose the rules of arbitration
that must be applied. The disputants determine the issues in their
submission to arbitration and have input as to matters relating to the venue
for arbitration, the date of the hearing, as well as the payment of cost. So
compared to litigation, arbitration is a flexible process enabling it to be
adapted to diverse contexts such as commerce, Industry, Labour and
environmental matters.

In Zimbabwe arbitration is governed by the Arbitration act Chapter 7:15.

DERIVATIVE PROCESSES

Out of the primary process discussed above arise other processes called
derivative processes.

DERIVATIVES OF MEDIATION

1. CONCILIATION

It is not clear what the difference of mediation is from conciliation.

Conciliation is a form of mediation with the difference being that the third
party, intervener (the conciliator) takes a more directive approach during the
mediation and may make a recommendation in regard to the outcome. The
mediator in the primary process of mediation also has a directive function
but is restricted to guiding and assisting the disputants in the negotiations.
However, a conciliator may go further and actually advise the disputants

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during their negotiations in the hope that the advice will lead to settlement.
While the mediator should not interfere in the outcome of the mediation, the
conciliator may finalize the process by giving a non-binding recommendation
which it is hoped will persuade the disputants to settle their dispute. For this
reason, conciliation may be called advisory mediation.

2. FACILITATION

The third party intervener is called a facilitator. Facilitation is usually used

in situations where reaching an agreement is not necessary e.g. at workshop,
conference or meeting.

This process is suited to creative problem solving rather than specifically

settling disputes. It is also used in group dynamics as a means of assisting
the group and individuals within a group to come to certain personal
realizations.

DERIVATIVES OF ARBITRATION

1. EXPEDITED ARBITRATION

In this case rules of arbitration are simplified in order to avoid delays and to
speed up the hearing. It is sometimes referred to as “fast track
arbitration”.

2. DOCUMENTS ONLY ARBITRATION

It is conducted purely on the basis of the documents submitted by each

disputant to the arbitrator, without the need for an arbitral hearing. This
occurs where there is little or no dispute on basic facts and the dispute
relates to a matter of interpretation of a contract or where certain
conclusions need to be drawn from the facts.

3. QUALITY ARBITRATION

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It also called “look-sniff” or “taste look” arbitration. It happens in
commodity centres where an expert is requested by the disputants to give a
binding decision as regards the type or quality of a certain product e.g.
coffee beans, olive oil e.tc by testing, smelling or looking. The expert makes
a determination to which the disputants are bound.

4. FINAL OFFER ARBITRATION

It is also known as “pendulum” or “flip- flop” arbitration. The arbitrator

may make an award only on the basis of the most reasonable of the last
offers made by each disputant. The arbitrator may not choose a middle path
but must choose only one of the offers.

HYBRID PROCESSES

These come about as a result of combining elements of one primary process

with elements of another process forming a totally new process.

a. THE MINI-TRIAL

This mainly consists of a combination of the processes of litigation and

negotiation. It imitates the trial procedure as a means of communicating
information that eventually forms the basis for a negotiated settlement. It is
conducted in two stages: an exchange of information conducted in
manner of a shortened trial and settlement negotiations. The purpose
of the mini-trial is to settle legal disputes. A neutral advisor supervises the
process.

b. MEDIATION/ ARBITRATION AND ARBITRATION/ MEDIATION

It is usually abbreviated to Med/Arb and Arb/Med. In both cases the

process are linked into a single process through the intervention of the same
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third –party intervener who controls both processes. The mediator becomes
the arbitrator for the purposes of Med/Arb and vice versa in the case of
Arb/Med. The result is a single and continuous process and not two separate
processes.

Med/ Arb has a psychological effect on the disputants. They enter into
mediation first knowing that if they do not settle their differences the
mediation will be converted into arbitration in terms of which a decision will
be imposed on them. The threat of future arbitration impacts on the initial
stage of mediation thereby encouraging a mediation settlement. The other
advantage is that the disputant enter the mediation in an extremely
thorough state of preparedness in anticipation of the arbitration that might
follow if they do not settle. That state of preparedness of both parties is an
incentive for settlement during the mediation stage of the process. The
major disadvantage of Med/ Arb is the fact that the mediator also acts as the
arbitrator. The mediator is bound to use confidential information he receives
during mediation later when he becomes the arbitrator, which should not be
the case.

With Arb/Med arbitration is followed by the mediation stage where the matter
is not settled at the award stage. Arbitration is converted to mediation at the
close of the cases for both parties. The task of the arbitrator/ Mediator is to
assist and persuade both disputants to settle on the basis of the information
and issues that become evident during the arbitration.

ADVANTAGES OF ADR

There are distinct advantages in choosing an informal ADR process rather

than selecting litigation as a formal process for dispute resolution.

1. ADR processes convert a legal dispute into a framework of personal

needs of disputants. A rights based dispute becomes an interest based
problem. Disputants own the process because they will have selected

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 the process, defined the issues in dispute and established standards.
As a result they take responsibility for the outcome.

2. ADR processes are private and disputants will not have to divulge
personal or confidential information as is done in a public trial.

3. ADR processes achieve mutually beneficial settlement which parties

take responsibility of and respect. This leads to a higher level of
voluntary compliance than in the case with compulsory court orders
that litigants often resist.

4. ADR processes concentrate on problem solving directed at future

relationship of the parties unlike litigation that focuses on past wrongs
and attribution of blame.

5. ADR processes are cheaper if compared to litigation.

THE WEAKNESS OF ADR

1. ADR processes do not guarantee the procedural rights of litigants.

There is usually no record on the basis of which a disputant may later
turn to Court for further relief.

2. Except with arbitration, decisions reached by other processes are only

contractually binding; it is therefore left to the maturity and goodwill of
the parties to comply with their agreement. This is unlike court
decisions that are binding and enforced through the state by means of
execution procedures.

3. If settlement is not reached the costs of an informal process will have

to be added to the eventual costs of litigation.

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