CATHOLI

CUNIVERI
STYOF
ZIMBABWE

COMPANY/ BUSI
NESSLAW
BM 215/BM212

1
 DEFI
NITI
ONOFACOMPANYANDABUSI
NESSENTI
TY

Acompanycanbedef inedasal egalent i

ty,an" art
if
ici
alperson"orjuri
sti
cper son
createdbymeansofr egist
rati
oni nt ermsoft heCOMPANI ESANDOTHERBUSI NESS
ENTI TIES ACT [ Chapt
er24: 31]( hereinr ef
erred t
o as 'the Companies Act
')byan
associ at
ionofper sons,naturalorar ti
fi
cial
,forthepur posesofmaki ngagai n.The
definingat t
ri
butesofacompanyi st hatithasasepar atejuri
sti
cpersonal
i
ty,thatisto
sayani ndependentlegalexistencef rom itsmember s,andf rom t
hisseparat
ej uri
sti
c
personalityflowsotherattr
ibutessuchl imitedli
abi
lit
y,spatepatri
monyandper petual
successi on.

A“busi
nessent it
y”accordingt otheCOMPANI ESANDOTHERBUSI NESSENTI TIESACT
[
Chapter24: 31]meansa company ,a privatebusinesscor porati
on,a syndicate,a
par
tnershiporanyot herassoci ati
onofper sons,whethercorporateorunincorporated,
whichhasabusi nesscharact er
.
Acompanyi sanincorporatedassoci at
ionwhi chi
sanar ti
fi
cialpersoncr
eatedt hrough
l
aw,hav ingasepar ateent i
ty,withaper petualsuccessi
onandagener alseal.Iti sa
per
son, art
if
ici
al,
invi
sibl
e,intangibl
e,andexisti
ngonlyintheey esoflaw.

Acompanyi smeantanassoci at
ionofmanyper sonswhocont ri
butemoneyormoney ’
s
worthtoacommonst ockandempl oyi
ti nsomet radeorbusiness,andwhoshar ethe
prof
itandloss(asthecasemaybe)ar i
singtherefrom.Thecommonst ockcontri
buted
i
sdenot edinmoneyandi sthecapit
alofthecompany .Theper
sonswhocont ri
buteit
,or
towhom i tbel
ongs,aremember s.Thepr oport
ionofcapi t
alt
owhi cheachmemberi s
enti
tl
edi shi
sshare.Sharesarealwaystransfer
ableal t
houghtherighttotransf
erthem
i
sof t
enmor eorlessrestr
ict
ed.

Acompanyisaregi
ster
edcor
por
ati
onwi
thl
i
mit
edl
i
abi
l
ityf
ormedwi
tht
hei
ntent
ionof
benef
it
ingi
tsmembers.

Sour
cesofcompanyl
aw

Zi
mbabweancompanyl
awi
scodi
fi
edandgov
ernedbyt
hecommonl
awaswel
last
he
st
atut
e.

2
3
 FORMATI
ONOFCOMPANI
ES

A companycomesi nt
obei ngbywayofr egist
rat
ioni
nt ermsofsect i
on19oft he
CompaniesandOt herBusinessEnti
ti
esAct[ Chapt
er24:31].Secti
on20pr ovidesthat
anyonepersonormor epersonsassoci
atedf oranylawf
ulpur posemay,bysubscr i
bing
thei
rnamestoamemor andum ofassoci
ationandcompl yingwi t
htheprovi
sionsoft he
CompaniesActincorporat
eacompanyl imitedbyshar esoronewhi chisl i
mi t
edby
guarant
ee.

Themai nreasonf orformingacompanyi sessent i

allytoprovidet hemeansofr aisi
ng
l
argesumsofmoneyf rom amul ti
tudeofinvestors[t
hatisshar eholder s].Appli
cati
onof
theselargesumsofmoneyi sleftinthehandsofaf ew managi ngdi rectors[whoare
normallyshareholder
st hemselves].Whenshar eholdersinvestt heirmoneyi nshares,
theyareguardingagainstpersonalli
abi
li
ty.Intheorytheyarenoti nterest edinthedayto
dayrunningoft hecompanybuti nthereturnofinvestment,thatis,dividenddecl ar
ed.

Ty
pesofcompani
es

1.Compani
esl
i
mit
edbyshar
es
2.Compani
esl
i
mit
edbyguar
ant
ee.

Theconceptofl
imi
tedl
i
abi
li
ty

Thecompanybei ngasepar at
eper son, i
tsmembersar enotassuchl i
ableforitsdebts.
Hence,i
nthecaseofacompanyl i
mi tedbyshares,thel i
abil
ityofmember sislimit
edto
thenominalvalueofshareshel dbyt hem.Thus,ift heshar esaref ull
ypai dup,their
l
iabi
li
tywillbeni l
.Howev er,compani esmaybef ormed wi th unlimit
ed liabi
li
tyof
membersormember smayguar ant eeapar ti
cul
aramount .Insuchcases, l
iabil
it
yofthe
membersshallnotbelimit
edt othenomi nalorf
acev alueoft hesharesheldbyt hem.In
caseofunli
mitedli
abil
it
ycompani es, member sshallcontinuetobel iabl
et i
lleachcase
hasbeenpai dof f
.Incaseofcompani eslimi
tedbyguar ant
ee,thel i
abili
tyofeach
membershal lbe determined byt he guarant
ee amount ,i.
e.,he shallbe l i
ableto
cont
ri
buteuptot heamountguar anteedbyhi m.

Compani
esl
imi
tedbyshar
es

Thesei
ncl
udespubl
i
ccompani
esandpr
ivat
ecompani
es.

Themaindiff
erencebetweenapr iv
ateandapubl i
ccompanyist
hatapriv
atecompany
i
smor esui
tedtoasmal lbusinessfamil
yaff
air.Ther
earemoreofi
nfor
malprocedur
es
and t
hecapitalisobtainedpr i
vatel
y.Inotherwords,apri
vatecompanydoesnot
adver
ti
seorissueoutapr ospect
uscalli
nguponmember soft
hepubl
ictosubscr
ibef
or
4
shar
es.Apubliccompanyi
ssuitedtoorgani
zat
ionshav
inggr
eat
ercapi
talneedsand
wouldcal
luponthepubl
i
ctoinv
estini
t.

Secti
on85oft heCompani
esAct ,Chapt
er24:
31summari
zesthemajordi
ff
erences
betweenapri
vatel
imi
tedli
abi
l
itycompanyandapubl
iccompany.Someoft
hemaj or
di
ffer
encesar
eas

f
oll
ows:

PRI
VATECOMPANY PUBLI
CCOMPANY

a.Sect
ion85oft
heCompani
esact Therei s no maxi
mum numberof
member s
r
est
ri
ctst
hemember
shi
ptoaprivat
e Prescr
ibed
companyt
omaxi
mum of50.

b.Section85(1)
(a)prov
idesthatt he Theri
ghtt
otransfersharesi
na
publ
i
c
art
icl
esofassociati
onofapr i
vate Companyisnotrestr
ict
ed.
company mustr estr
ict the
tr
ansfer
abil
it
y ofsharesthusof
pri
vatecompanyar e notf r
eel y
tr
ansfer
abletoanyone.

c.IntermsofSect
ion85(1)(
c),a Apubliccompanygeneral
lycall
s
pri
vate upon
Companyisprohi
bitedfr
om invi
ti
ng member soft
hepubli
ct obuyshares,
member soft
hepubl i
ctosubscri
be however,t
her
earestri
ctcontrol
sthat
for haveto
shares befol
lowedwhenissuingofan
i
nvit
ati
on.

5
d.Apr iv
atecompanycancommence Thi s company cannot commence
business
busi
nessassoonasi thasrecei
veda event houghacer tif
icateof
i
ncor poration
cert
if
icateofi
ncor
porati
on hadbeengr anted.Thecompani esact
l
ay s down some oft he conditi
ons
precedentwhi chhav etobesat isf
ied.
Thesei ncludesal lotmentofshar es
whichar enotl esst hanthemi nimum
subscr i
ption,pay mentby di rectors
forsharest heywilltake,an
affi
dav i
t by t he Secr etary.Ift he
company has not i ssued a
prospect ust henast at
ementi nl ieu
ofprospect usisalsoneeded.

e)Thedir
ect
orsarenotrequi
redby e)Thecompanywi l
lnotcommence
theact business
topayacert
ainpr
oport
ionbeforethe unti
l everydi
rect
orhaspai dforal
l
shares
companycancommencebusi ness contractedtobet akenbyhi m ora
propor t
ionwhichheunder tooktopay
i
n al l
otmentoft he shar
es.Thi sis
gover nedby
sect
ion158(
2)(
b)

6
Intermsofsecti
on191(7)aprivat
e Iti
smandator
yforacompanytoappoint
company an
maydeci denottoappoi
ntanAuditorof audit
orwi
thi
nonemonthoftheissueof
i
ts
member shipdoesnotexceedtenandif cert
ifi
catet
ocommencebusiness.
none Secti
on
oft hecompany ’
sMember sarea 191(1).Ontheannual
gener
almeeti
ng
public the
company .
audi
torappoi
ntedmayber
emov
ed.
Audit
ortobeappointedisbyspeci
al
noti
ce(28days)ifthecompanyfai
lst
o
appoint
,theMini
stermaydosoan
appl
icati
onbyamember .

f
.A di
rect
ormaybegi
venf
inanci
al General
l
ytherearenoloanst
odi
rect
ors
as
assi
stancebythecompany pr
ovidedinSect
ion208(1)
provi
dedmember sholdingnot
l
essthan9/10oft heissued
capi
talhasconsented.Thisi
s
governedbysecti
on208

h)Apr
ivat
ecompanydoesnothol
da h)Intermsofsect i
on166i ti
sa
requir
ement
statut
orymeet
ingorl
odgeast
atut
ory thatapubli
ccompanyshoul dwithi
na
report
. peri
odnotl esst hanonemont hnor
mor ethanthreemont hsfr
om thedat ei
t
i
st ocommencebusi nessholdit
sf i
rst
generalmeet i
ngt obecalledastatutory
meet i
ngwithin14day sofsuchmeet ing
astatutor
yr eportmustbel odgedbyt he
dir
ectortother egist
erofcompani es.

i
)Pr
ivat
ecompanyi
snot
,bysect
ion213 i
)Secti
on213pr
escr
ibest
hatt
he
company
7
 obl
i
gedt
okeepar
egi
sterofdi
rect
or keepar egi
stershowinganyshares
or
shar
ehol
ding. debent
uresheldbyeachdi
rect
or.

COMPANYLI
MITEDBYGUARANTEE

 Thisisacompanycr eat edforachar it

ablepur pose.Sect i
on82st atesthatthe
associati
onmustexi stforpur poseswhi char ei ntheinterestofthepubl i
c. Must
compl ywithsection77( 1b)–memor andum ofcompanyl imitedbyguarantee.
 Itisnoti ntendedt ogener atepr ofi
tf ori t
smember sandpr ohibi
tspay mentof
divi
dendt oit
smember s.
 Intermssect i
on82i fthemi nisterissatisfi
edt hattheassoci ati
oncompliedwitht
he
provi
sionoft hatsecti
on, hemayl i
censet her egist
rati
onoft heassociati
onasa
companywi t
houtusingt hewor d(li
mited)att heendofi tsname.Regi str
arof
compani esshallregi
sterthecompanyaccor dingly
.
 Liabi
li
tyoft he member s ofsuch a companyi sli
mi t
ed t othe amount sthey
guaranteedtocont ri
buteonwi ndingupoft hecompany .Readsection26and82.
 Acompanyl i
mit
edbyguar ant
eeenjoysal
lpri
vil
egesofacompanyandissubj
ectt
o
theobligat
ionsther
eof.Howev er
,ithascert
ainexemptionswhi
chdonotapplyt
o
othercompaniesinaddit
iontotheexempti
onsfrom usi
ngthewor
d“l
imi
ted”
.
 Suchcompani esar eusual
lyshapedforthepromoti
onofar t
,sci
ence,cult
ure,sport
s,
etc.Iti
smot iv
at i
ngtonotethatinacompanyl imit
edthroughguarantee,amember
i
sr equir
edtopayt heamountguaranteedthr
oughhim onlyi
fthecompanyi swound
upwhi lehei samemberorwi thi
noney earaft
erheceasest obeamember .
Therefore,t
hemember scannotbeaskedt opaytheguaranteedamountt hroughout
theli
fetimeoft hecompany .

 Thememor andum ofassoci

ati
onofacompanyl i
mit
edthroughguar
antee,shoul
d
stat
ethateachmemberoft hecompanyunder
takestocontr
ibut
etotheassetsof
thecompanyintheeventofi
tsbei
ngwoundup.
Youshould,t
hough,keepinmi ndt
hatamembercannotbeaskedtopayanamounti
n
excessoftheamountf orwhichhehasgi
ventheguarant
ee.Suchacompanymayor
maynothavesharecapi t
al.

Feat
uresofcompani
esl
imi
tedbyguar
ant
ee

8
1.Noshar
ecapi
tal
2.Theobj
ect
soft
hecompanyar
efort
hebenef
itoft
hepubl
i
c
3.Nodi
vi
dend,
prof
it
sar
epl
oughedbacki
ntot
hecompany
4.Nouseoft
hewor
dli
mit
edi
nthename.

THECONCEPTOFLEGALPERSONALI
TY

Uponr egist
rati
on,acompanyacqui r
esaj ur
ist
icpersonal
i
ty.Ajur
ist
icpersoni
sabody
orassoci at
ion,othert
hananaturalper
son,thati
sendowedbyl awwi t
hthecapaci
tyto
haver ightsand dut i
esapartfr
om i t
smember s.A companyhasasepar at
elegal
exi
stencef rom it
smember s.Asajuri
sti
cpersona,acompanyisanentit
yapartf
rom i
ts
member s.

Legalconsequencesofr
egi
str
ati
on/cor
por
atest
atus/separ
atel
egalper
sonal
it
y

1.Li
mit
edl
iabi
li
ty

I
tf oll
owst hatsincet hecompanyi ssepar atelegalent it
ydist
inctfrom its
member s;itsmember sarenotl i
abl eforitsdebt s.Li
mi t
edl i
abil
itymeansthel i
abil
it
yof
shar
eholdersf ort hecompany 'sdebt sislimitedt otheamountt heyhavepaidt ot he
company '
sshar es.
Thecl aimsoft radepay ablesoft hecompanyar erestr
ictedtotheassetsoft he
companyandt hecr edit
orscannotobt ai
nsat isfacti
onoft heirdebt sandli
abil
it
iesfrom
thepersonalasset soft heshar eholdersoft hecompany .Int heabsenceofex press
prov
isi
onst ot hecont r
arythemember swi l
lbecompl etel
yf reef r
om any per sonal
l
iabi
li
ty.
Limitedl i
abili
typreventst hisbyst i
pulatingthecreditorsofal i
mitedcompany
cannotdemand pay mentoft hecompany '
sdebt sf r
om member soft he
company .

TheCompanyActdoesnotdealwit
hwhatismeantbycorporat
estat
usandsoiti
sto
thecommonlawthatonemustlookfort
heor
iesi
nthi
sregard.I
npart
icul
art
hel
eadi
ng

9
caseofAar
onSal
omon
(Pauper
)VSal
omonandCol
td.

Case:Sal
omonvSal
omon

Fact
soft
hecase:

Salomoncar r
iedonbusi nessasal eathermer chant.Hesol dhisbusi nessforasum of
£30,000toacompanyf ormedbyhi m alongwi t
hhi swi f
e,adaught erandfoursons.The
purchaseconsi derationwassat i
sfi
edbyal l
otmentof20, 000shar esof£1eachand
i
ssueofdebent ureswor th£10, 000secur edbyf loati
ngchar geont hecompany ’sassets
i
nf avourofMrSal omon.Al ltheothershar eholderssubscribedf oroneshareof£1each.
MrSal omonwasal sot hemanagi ngdi r
ectoroft hecompany .Thecompanyal most
i
mmedi at
elyr an i nto diffi
culti
es and ev entuallybecame i nsolventand wi ndi
ng up
commenced.Att het imeofwi ndingup,t hetot alassetsoft hecompanyamount edt o
£6,050;it
sliabili
ti
eswer e£10, 000secur edbyt hedebent uresi ssuedt oMrSalomonand
£8,000owi ngt ounsecur edtradecr edi
tors.Theunsecur edsundr ycredi
torscl
aimedt he
wholeoft hecompany ’
sasset s,vi
z.£6,050ont hegr oundthatt hecompanywasamer e
al
iasoragentf orSal omon.

Held:Thecont enti
on ofthet r
adecr edi
tor
scoul d notbemai ntained becausethe
companybei nginlawapersonqui t
edisti
nctfr
om itsmembers,coul dnotber egar
ded
asan‘ al
ias’oragentort rust
eef orSalomon.Also,thecompany ’sasset smustbe
appli
edinpay mentoft
hedebent ur
esasasecur edcredi
tori
senti
tledt opaymentoutof
theasset
sonwhi chhisdebtissecuredinpri
ori
tytounsecur
edcreditors.

Ther
* efor
e,t
hel
i
abi
l
ityoft
hecompanyshoul
dnotext
endt
othemember
s.

2.Per
pet
ualsuccessi
on

 A company enjoy s a pot ent

ial
l
y per
pet
ualexi stence,whi ch means that
,
not
wi t
hstandi
ngchanges i
nit
smembershi
p.Separ
ateper sonal
i
tymeanst hatthe
exi
stenceofacompanydoesnotdependont heexi
stenceofit
smember s.
 Beinganar t
if
ici
alper
son,itcannotbei ncapacit
atedbyi l
lnessanditdoesnot
haveanall
ot t
edspanofli
fe.Thedeat h,i
nsolvencyorreti
rementofitsmembers
l
eavesthe
Companyunaf f
ect
ed.Member smaycomeandgobutt hecompanycango
f
orev
er.
 Inshort,theexist
enceoft hecompanyi snotaf fect
edbyanychangesi nit
s
membership.Thecompanyr et
ainsi
tslegali
dentit
yandcont inuest
osurv
ive.

3.Owner
shi
p
10
Asacompanyi sal egalpersondi sti
nctf
rom it
smember s,itiscapableofowning,
enj
oyinganddisposi
ngofpr opertyi
ni t
sownname.Al thoughitscapi
talandasset
sar e
cont
ri
butedbyitssharehol
der s,
theyarenotthepri
vateandjointownersofit
spropert
y.
Thecompanyi sther ealpersoninwhi chal
litspropert
yisv estedandbywhi chitis
cont
roll
ed,managedanddi sposedof .

Thecompany '
spropert
yandasset sbelongtothecompanyandnoti t
sshar eholders
andi tdoesn'
tholdthem asat rusteeoranagentoft hesharehol
ders.Thistherefore
means t hatallthe pr
opertyacqui red bythe companybel ongs toitand noti ts
shareholder
s.Evenashar eholdert hathasa100% shar ehol
dinginapr i
vatecompany
doesnothav eapropri
etaryinteresti nt
heassetsoft hecompany .Sharehol
dersonl y
haveacl aimtotheassetsoft hecompanyuponi nsol
vencyoronwi ndi
ngupandev en
thentheircl
aimissubordinatetot hoseoft hecr
edi t
orsofthecompanywhosecl aims
mustbesat i
sfi
edfi
rstbeforet heasset softhecompanycanbedi vi
dedamongsti ts
shareholder
s.

Case:
Macaur
aVNor
ther
nAssur
anceCompany

‘
Macaur a’heldal
lexceptoneshareofat i
mbercompany .Hehadalso advanced
substanti
alamountt
ot hecompany
.Hei nsur
edt hecompany’
sti
mberi
nhisper sonal
name.Ont i
mberbei
ngdestroy
edbyfi
re,hisclai
m wasrej
ectedf
orwantofinsurabl
e
i
nterest.

Hel
d:TheCourtappl
yi
ngpr
inci
pleofsepar
atel
egalent
it
yhel
dthatt
hei
nsur
ance
companywasnotl
i
abl
e.

Ashareholderhasnolegali
nter
esti
nthecompany
’spr
oper
tyandcannoti
nsur
eit
agai
nsttheft
,damage.

4.Companymaysueandbesuedi
nit
sownname

A companycanbeconv
ict
edofacr
ime,
regar
dlessofwhet
heri
tsdi
rect
ors
are
al
so convict
ed.
Asjuri
sti
cperson,companycansueandbesuedi nitsownname.Thi
sisso
becauseacompanyhasasepar atel
egalsubsist
ence.Acompanymayent
er
i
ntocontract
sandcanenf orcethecontr
actualri
ghtsagai
nstot
her
sandit

11
 canbesuedt
hroughot
her
sifi
tcommi
tsabr
eachofcont
ract
.

Case:I
nRajendr
aNat
hDut
tav
.Shi
bendr
aNat
hMukher
jee(
1982)(
52Comp.
Cas.293Cal.
)

Facts:Al easedeedwasexecut edbyt hedi r

ectorsoft hecompanywi thout
thesealoft hecompanyandl at erasuitwasf il
edbyt hedirect
orsandnott he
companyt o av
oidt he lease on t he ground thata new t erm had been
fraudul
entlyincl
udedi ntheleasedeedbyt hedefendants.Heldthatadi
rector
ormanagi ngdirect
orcoul dnotf i
l
easui t,unlessitwasbyt hecompanyi n
ordert o avoid anydeed whi ch admi t
tedlywasexecut ed byone oft he
direct
orsandadmi t
tedlyalsothecompanyaccept edtherent.

Hel
d:Ift
hecompanywasaggri
eved,i
twast
hecompanywhichwastof
il
ethe
sui
tandnott
hedir
ect
ors.Ther
efor
e,t
hesui
twasnotmai
ntai
nabl
e.

5.Bor
rowi
ng

Acompanycanborrowmoneyandgr
antasecur
it
yforadebt
.Onl
yacompanycan
cr
eat
eafloat
ingcharge.

Fl
oati
ngchar ge=akindofsecur i
tyforal
oan.Thecharge"f
loats"becauseisdoes
notatt
acht oanypar
ti
cularasset,
butfl
oat
soverthecompany’sassetsastheyexi
st
fr
om timet otime.Cer
tainev ent
scausethechargeto"cr
ystalli
se"andattachto
whateverasset
sthecompanyhasatt heti
me.

6.Cont
ract
ualCapaci
ty

Acompanyhasf ul
lcont
ractualcapacity-andonl
ythecompanycanenforceit
s
cont
ract
s.Compani
esmayal sobel iablei
nnegli
gence-shar
ehol
dercannotbe
madel i
abl
eforthenegl
igenceoft hecompany ,unlesshewasalsopersonal
l
y
negl
i
gent.

Case:LeevLee’
sAi
rFar
mingLt
d1960

Thefact
s:MrLee,whoownedthemaj or
ityoft
heshar
esofanaeri
alcr
op-spr
ayi
ng
busi
ness,andwast
hesol
eworkingdi
rectoroft
hecompany
,waski
l
ledwhil
epil
oti
ng
theai
rcr
aft.

Hel
d:Al
thoughhewast
hemaj
ori
tyshar
ehol
derandsol
ewor
kingdi
rect
oroft
he

12
 company
,heandthecompanyweresepar
atel
egal
per
sons.Ther
efore,
hecoul
dal
so
beanemployeewit
hri
ght
sagainsti
twhenkil
l
edinanacci
dentinthecour
seofhi
s
empl
oyment.

7. Taxassessment
Fort
axassessment
,compani
esar
etaxedasi
ndi
vi
dual
s

8. Nat
ional
it
y

Onceregist
ered,andbecausei tisanar t
if
ici
alper
son,acompanydoesnot
assumear ace,tr
ibe,nat
ional
i
tyorgender.Thisi
sdespi
tet
henati
onal
it
yorrace
ofits shar
eholders.Case:Dadoo Ltd and Other
s V Kr
uger
sdorp Muni
cipal
Counci
l

Facts:Therewaspr ovi
sioni
nastatut
ewhoseef fectwast opreventAsiat
ics
from establ
ishi
ngbusi nessorowningpropert
yint heTransv
aal.Dadooand
othersofAsi at
icori
ginformedacompanyt ocarr
youtbusi
nessinapr ohibi
ted
areaandt hemuni cipal
it
ysoughtt
opr ev
entthem fr
om operat
ingarguingthat
theywereAsi at
ics.

Held:I
twasthusheldbythecour
tthatnolaw hadbeenbr
eached.Essent
ial
l
y
thoughthecompanywasf ormedbyAsiati
cs,itwasnotAsiati
citsel
fasa
companydoesnothaveanyr
aceorcol
our.

TheVei
lofI
ncor
por
ati
on

Separ at
el egalpersonali
tyofcompanyoper at
esasashi eld-t hecourt
swillnotnor mall
y
l
ookbey ondt hef açadeoft hecompanyt otheshar eholderswhocompr i
sei t.The
screen separ ati
ng t he companyfrom i tsindivi
dualshar ehol
ders and directorsis
commonl yr ef
erredt oas"thevei
lofincorpor
ation".I
ncorporati
on'vei
ls'member sf r
om
outsiders'v i
ew butt hisveilmaybel if
tedinsomeci rcumst ances,socr edit
orsand
otherscanseekr edressdirect
lyf
rom member s.

Si
nceacompanyhasasepar
atel
egalper
sonal
i
ty,t
hel
awdoesnotneedt
oknow t
he

13
i
denti
tyofi
tsowner
s.Simi
lar
ly,
whenapersonent
ersat
ransact
ionwit
hacompany
,iti
s
deal
i
ngwi t
hthecompanyanddoesnotneedt
oknowtheident
it
yofit
sowner
s.

Theowner
sofacompanyar et
herefor
e‘hi
ddenf r
om thev
iew’oft
hepeopl
ewhodeal
wit
hthecompany.I
falegaldi
sputeari
ses,t
heymustdealwi t
hthecompany
,noti
ts
owner
sordir
ect
ors,
whodonothavepersonall
iabi
li
ty.

The f
actt
hatthe ownersofa companyar
e‘scr
eened f
rom v
iew’i
nthi
swayi
s
someti
mescal
l
edthe‘vei
lofi
ncor
por
ati
on’
.

Li
ft
ingt
hev
eilofi
ncor
por
ati
on

I
nsomeexcept i
onalcircumstances,t helaw doesnott r
eatacompanyasasepar ate
personfrom i
tsshar
ehol dersanddirectors.Forexample,i
tmaytreatthecompanyand
i
tsshareholder
sasbei ngt hesame,sot hatt heshar
eholder
shaveunlimit
edli
abil
it
yfor
thedebtsofthecompany .I
nothersituati
ons, acompanymightcommi tanof
fence,and
the di
rectorwho is personall
yr esponsible mightbe made li
able,rat
herthan the
company .

Whentheseexcepti
onsari
seandacompanyandi t
sshar
ehol
der
sar
etr
eat
edast
he
same,
wecansayt hat‘
thevei
lofi
ncor
por
ati
oni
sli
ft
ed’.

Therearesev eralcircumstancesinwhichtheveilofi
ncor
porat
ionmaybel i
ft
ed.Most
oftheser el
atet ofraudul
entmi suseofthecompanyform andwrongfultr
ading.When
theveilofincorporationi
slif
ted,theshar
ehol
dersmaybecomeper sonal
lyli
ablefort
he
debtsincurredbythecompany .

Thev
eil
ofi
ncor
por
ati
oncanber
emov
edusi
ngcommonl
aworst
atut
epr
ovi
sions:

14
WHATI
SCOMMONLAW?

Commonl awisabodyofunwr it
tenl
awsbasedonl egalprecedent
sestabl
ishedbythe
court
s.Commonl aw i
nfl
uencesthedecisi
on-
maki ngpr ocessinunusualcaseswhere
theoutcomecannotbedet
erminedbasedonexist
ingst atut
esorwrit
tenrul
esoflaw.

A.commonl
awpr
ovi
sions

1.Wher
ethecompanyi sbei
ngusedasa‘sham’toall
owani
ndi
vi
dual
toav
oida
l
egal
responsi
bil
i
ty.
2.I
nthecaseofcompaniesownedbythe‘enemy
’ i
nti
meofwar
.

3.Abuseofthecor porat
eprincipl
e:Therearesituat
ionswheret
hecourti
soft he
opi
nionthatthecorporat
epr i
nciplehasbeenabusedorhasbeenusedsi mplyto
hi
def r
om theeyesofequity.Insuchoccurrencesthecourt
swil
ldisr
egardthe
Sal
omonpr inci
pleandholdt hatthecompanyandi tsmembersaresimil
ar.

Case:Gi
l
for
dMot
orsLt
dVHor
neCoLt
d

Facts:Therewasacont racti
nrestr
aintoftradewhichwast otheef f
ectthatHorne,on
leavi
ng t he employ
erGi lf
ord Motors woul d notsoli
citort ake away t he l
atter
’s
customer s.Hornesubsequentl
yleftemploy mentwit
hGi lf
ordMot orsandproceededto
from hi s own company .Through his companyHor ne was solici
ti
ng hisf or
mer
empl oyer’
scustomers.Gil
fordMotorsbroughtthematterbeforethecourts.

Hornearguedthathewasnoti nbreachofthecov enantinrest

rai
ntoftr
ade
becauseitwasnothi
m buthi
scompanywhi chwassol ici
ti
ngand,inanyev
ent
,
heandthecompanyweretwodist
inctper
sonal
i
ties.

Hel
d:Thecour
trul
edthatt
hiswasclearabuseofthecor
porat
epri
nci
pleandt
hatHor
ne
wasusi
ngthecompanytoevadeanequitabl
eobli
gat
ion.

15
Case:BRe:Bugl
ePr
essLt
d

Thedi r
ector
sofacompanyhadf al
lenoutwiththethir
ddirect
or.These
di
rector
s held 90% ofthe shares i
nthe company.Theythen formed a
companyf orthepur
poseoft aki
ngoverthebusi
nessofthefi
rstcompanyin
whichtheyheld90%shar
es.

Theiri
ntent
ionwastoexcl
udethet
hir
ddi
rect
orandi
npur
suanceoft
hei
rpl
an
theyappli
edthet
ake-
overscheme.

Hel
d: Thecour
tref
usedt
osanct
iont
hei
rint
ent
ionandhel
dthatt
hiswashi
ghl
y
i
mproper
.

Di
rect
orshadbui
ltali
tt
lehousearoundthemsel
ves.Ther
ewasnoneedf or
t
he pl
aint
if
ftoknock.Heonl
yneededt oshoutandthewall
sofJerichowoul
dcome
t
umbli
ngdown.

4.Fr
audSi
tuat
ions

- Wher
et hereisfraudthecourtwil
lnothesit
atet
oli
ftt
he
cor
por
atevei
landt
hisisclearabuseofthecor
por
atest
atus.
- I
tisr
ecommendedt
hatt
hesebest
udi
ed“mut
ati
smut
andi
s.”

5.AgencySi
tuat
ions

Ther
eareinst
anceswher
ethecour
tmaybepr
epar
edt
oconsi
deracompanyanagent
ofanot
her
.

Case:
Smi
th,
StoneandKni
ghtVBi
rmi
ngham Cor
por
ati
on

Smit
h,StoneandKnightVBirmingham Corpor
ation,aholdi
ngcompanyownedsome
busi
nesspremi
sesbutdidnotcar
ryonbusinessthere.I
tssubsi
diar
ycompanydi
d.

Bi
rmi
ngham cor
por
ati
onwant
edt
ocompul
sor
il
yacqui
ret
hel
and.Thehol
dingcompany

16
demandedcompensat
ion.Thecor
porat
ionarguedthatthehol
dingcompanywasnot
car
ryi
ngonbusi
nessont hepremi
sesandhadsuf f
erednoloss.Asforthesubsi
diar
y
companyi
twasalsonoenti
tl
edtocompensat
ionbecausethel
anddidnotbel
ongtoit.

Held:Thecourthel
dthatthehol
dingcompanywasenti
tl
edt ocompensati
onbecause
eventhoughitwasnotcarry
ingonbusinessont
hepremises,t
hesubsidi
arycompany
wasdoingsoasi t
sagent.

4Wher
est
atei
nter
est
sar
eatst
ake.

Thecourtcanr
egar
dthecompanyasanenemywherethemajorit
ysharesar
eheldby
anenemycompanyorbynat
ional
sofanenemycount
ryespeci
all
ywheretwocount
ri
es
areatwar.

Case:
Dai
mlerCo.Lt
dVCont
inent
alTy
reandRubberCo.[
GreatBr
it
ain.
]

Theplai
nti
ffcompany ,thati
sCont i
nentalRubberandTy reCompanywasi ncorporated
onEnglandforthepurposeofsel l
i
ngt y
resonEngl andwhichweremadei nGer manyby
aGermanyCompanywhi chheldbulkofthesharesont heEngli
shCompany .Exceptfor
oneshareholdertherestwer eGermanr esident
s.Aftertheoutbr
eakofwarbet ween
Engl
andandGer manyin1914t heplai
nti
ffsuedthedefendantcompany,t
hati s,
Daimler
companyf orpay mentofdebt .Defendantr ef
used to paythe debt
s allegi
ng that
paymentwoul damountt otr
adingwithanalienenemy.

5.
Fort
axpur
poses

Eachmemberoft
hegr
oupofcompani
esi
staxedsepar
atel
y.
Case:
Lit
tl
eWoodsMai
lOr
derSt
oreVI
.R.
C.

BSt
atut
oryexcept
ions

Otherthant
hecommonlaworjudi
cial
except
iontheCompaniesandotherbusi
ness
enti
ti
esAct24:
31isf
raughtwi
thsi
tuati
onswherethel
egi
slat
ureispr
eparedtoignor
e

17
t
hev
eil
.Thewi
ndi
ngei
ncl
udest
hef
oll
owi
ng:

Sect i
on 83:per sonalliabi
li
tywherethebusinessi scarr
ied wi
thno member s.
Section62:Cour tremediesindeadl
ock,fr
aud,
oppressi
onandothersi
tuat
ions;
piercingthecor porateveil
Section109:Per sonall
iabil
it
yfordi
rect
orsbot
hcivil
lyandcri
minal
l
yformi sst
atement
s
i
nt hepr ospectus.
Sect i
on115( 5):read
Sect i
on116( 4):read
Sect i
on117( 2):read
Sect i
on31( 5)read
Sect i
on159( 7)read
Sect
ion185–Ahol di
ngcompanyandit
ssubsidiar
ycompany
economicunit
.Aconsol
idat
edbalancesheetandprofi
tandmaybet
reat
edas
onepresent
edinthefor
m ofGr
oupaccounts.
lossaccounti
susual
l
y
Sect
ion67-read
Sect
ion68(
3)–Fr
audul
ent
,reckl
essorgr
ossl
ynegl
i
gentconductofbusi
ness
Secti
on 69-Fraudul
ent
,reckl
ess orwi
l
fulf
ail
ure off
inanci
alaccount
ing;
f
alsi
fi
cati
onofrecor
ds.
Secti
on108-Ci
vi
ll
iabi
li
tyf
ormisst
atementsi
nprospect
us.
Sect
ion109-Cr
iminal
li
abi
li
tyf
ormisstat
ementsi
nprospect
us
18
19
 PROMOTI
ONOFACOMPANY

 Thepromot i
onofacompanyi nvol
vestakingtheact
ionsthatar
enecessar
yto:
i
ncorporat
ethecompany ,byhav
ingitr
egister
edensurethati
thasshar
ecapit
al
(andpossi
blyloancapi
tal
)

 Acqui
reasset
sfort
hecompanyt
hati
sbei
ngf
ormedt
o ownandcont
rol
.

THEPROMOTER

Apr omot eri

st heonewhoensur est hatacompanyi sproperlyregisteredt ocommence
business.Hecompl i
eswi thal lthepr ocedur esoftheCompani esactandf i
lesallthe
document at
ionneededbyt heRegi str arofcompani es.Sect i
on2oft hecompani esAct
defi
nesapr omot erasanyper sonwhoi sapar tytothepr eparati
onoft hepr ospectus
butdoesnoti ncludeanyper sonwhoi sinv ol
vedinhisprofessionalcapaci t
yt oensur e
thatthecompanyi sr
egistered.Thedef ini
tionofapromot erthereforeexcl udesall t
hose
personswhor enderpr ofessionalser vi
cest opeoplef ormingacompany .Thus,i fa
l
awy eri sconsul tedtodr aftthememor andum ofassoci ationofacompanyt obe
formedhecannotpr operlybecal l
edoneoft hepromotersoft hecompany .Apr omot er
needst obenei therashar eholdernort hemai npersonbehi ndt hef ormat i
onofa
company .Therear esomewhomer elypr omot ecompani esf orthepur poseofsel li
ng
them oncet heyar eproper lyincor por ated.Aper sonwhopr omot esacompanyi sa
promot er.Heisresponsi bl
ef orcr eatingt hecompany .

Dut
iesofPr
omot
ers

Companypr
omot
ershav
ecertaindut
iest
owar
dsthecompanyandthesear
edi
ctat
edby
bot
hcommonlawandstat
utelaw.Herei
sanout
li
neofthedut
ies.

Apr omot erhassomeexecut i

vefuncti
oninthecompany ,whichar everycri
ti
caltoit
s
format i
on.Thel awtheref
oreimposesanumberofdut iest hathavet obeobservedby
anyper soninv olvedinthepromotionofthecompany.Ther easonwhypr omot er
shave
toobser vet hesedut i
esisbecauset heyareregar
dedast hefathersofthecompany
thereforetheyshoul densurethatallt
hosewhoi nv
esttheirmoniesar einvest
ingthem
i
nsaf eandr eliablehandsfortheadvancementoftheinterestsoft hecompanyt obe
i
nfor med.

14
Apromoteri
sther
efor
esomeonewhoi
sinvol
vedinset
ti
ngupacompany
,andwhoi
sin
acontr
oll
ingposi
ti
onandabletomakedecisi
onsrel
ati
ngtothecompany
.Inmany
20
cases,
apr
omot
erwi
l
lgoont
obecomeoneoft
hef
ir
stdi
rect
orsoft
henewcompany
.

Exampl
esoft
heact
ivi
ti
est
hatapr
omot
ermi
ghtbei
nvol
vedi
nar
e:

 author
isi
ngafir
m ofsoli
cit
orstoprepar
eadr af
toft
hecompany
’sconst
it
uti
onal
documentsort
oprepar
eotherlegal
document
s

 nominating di
rector
s,banker
s,soli
cit
ors and otheragentsf orthe company
arr
angingforsharesinthenewcompanytobepl acedwithsubscr
iber
s pur
chasing
asset
sf ortheproposedcompanyoracqui
ri
ngpremi sesf
orthecompanybef or
eits
i
ncorporati
on.

 Toemphasi sethepr
evi
ouslystatedpoint,apersonisnotapr omoterofacompany
simplybecauseheorshepr ovidespr of
essi
onaladvicerelati
ngt othecompany
formati
on.Thismeansforexampl ethatsol
ici
torsandaccountantswhoareusedby
apr omoterarenott
hemselvespr omotersofthecompany .Howev er,t
hecli
ent
sof
soli
cit
orsoraccount
ant
sinvolvedinacompanyf ormat
ionarelikel
ytobepromoter
s
ofthecompany .

1.ADut
yofUt
mostGoodFai
th

Apromoterstandsi naf iduci

arydutyt
owar dsthecompany.Heisnotmerelyaparent
butal
socreator.Hef ashionsandmoul dsitaccordingt
ohiswill
.Heendowsi twith
powersorli
mititsactivit
iesinamannerhet hi
nkfit
.Heshoul
dnotcomplainift
helaw
makeshim guardianandpr ot
ectorofi
tsinf
antlif
e.(I
nReContr
ibut
ori
esofRosemount
GoldMineSyndicateinLiquidati
on.
1905TH.169

Thedut
yofut
mostgoodf
ait
hismul
ti
-f
acet
ed,
iti
ncl
udest
hef
oll
owi
ng:

a.Dut
yofDi
scl
osur
e

Apr omoterhastodiscloseallt
heinterestthathehasint hepromot i
onofacompany .
Thereareanumberofway sinwhichapr omotermaydisclosehisinter
est.Fir
stlyifthe
companyi stobesol dtothepubli
ct hent hepromoters’profi
tmustbedi sclosedt o
potenti
almember sintheprospect
us.Secondl ytothepromot ercanwaittodisclosei n
thefir
stannualgeneralmeeti
ngtoallthemember s.Hecannotdisclosetoani ndivi
dual
sharehol
der.

Thir
dly,t he pr
omot er may di
sclose i
nthe ar
ti
cles of associ
ation.Thi
sis an
advantageousf or
m ofdiscl
osur
ebecausetheart
icl
esar esignedbyeachandev ery
shareholderandbecomesacontractbet
weent
hecompanyi t
selfandtheshar
ehol
der
s.

21
Thelastmet
hodofdiscl
osur
eistoani
ndependentboar
dofdi
rect
ors.Ani
ndependent
boar
dshouldbethatwhichbeabl
etoappl
yitmi ndonwhati
sinbestint
erestofthe
company.

I
nt hecaseofEr l
angaVNewSombr eroPhosphatesE,boughtderelictami ne.Hethen
appointedhispuppetstot heboar dofdir
ectorsanddiscl
osedthistot hem.Theboar d
al
lowedt hecompanyt opur chasethepr oper
tyatani nf
lat
edpr i
ceandt hecompany
wasmetwi thproblems.Thel i
quidatorofthecompanywansui ngf orther et
urnofthe
purchaseprice.Thecourtheldthatthiswasnotsuff
ici
entdiscl
osurebecauset heboard
hadnoi ndependentmind.

Thedutynott ohaveinter
estsconfl
i
cti
ngwi t
hthoseofthecompanytobefor
med.A
promotershoul
dwor ktoadvancetheint
erest
softhecompanyonlynothi
sown,i
fthe
i
nterest
’sconf
li
ctthenthati
swhenhei scal
ledupontodi
scl
ose.

Af i
duci
arydutyhasbeendef i
nedasadut yofut mostgoodf ai
th.Thi
sdut yrequi
res
promoter
st omakef ul
ldisclosureofanyi ntereststheymi ghthaveinthecompany
ei
thertopotent
ialmember sbymaki ngadecl arati
onintheprospectusordiscl
osingthe
samet oanent ir
elyindependentboar dofdi rect
orsort hr
oughsomeot heref f
ectiv
e
method.SeeSalomonvSal omonandCoLt d( 1898).Therat
ionalebehi
ndthisdutyisto
guardagainstt
hedanger sofpr omotersdefraudinganewl yf or
medcompany .Often,
promoter
sbecomet hedirect
or softhecompanyandhencet heneedtoguardagainst
abuse.

b.
Dut
ynott
omakeSecr
etPr
ofi
ts

Whati sprohi
bit
edher eisnott hemaki ngofprof
it
sperse,butt hemaki ngofsecr
et
profi
tsforexampl einthecaseofLeedsandHenl eyTheatr
esofVar iet
yapr omot
er
purchasedpropertyfor£24,000andt henconver
teditt ohisnominee.Throughthe
nomineeandaf tertheformationoft hecompanyt hesamepr oper
tywassol dtothe
companyf or£75,000withoutdiscl
osingthatt
hepromot erwastherealvendor
.Itwas
heldthatthepromot erwasl i
ablet opayt heundiscl
osedprofi
ttot hecompanyas
damages.

Si
milarl
yi nWhaleyBridgeCali
coPr inti
ngCompanyvGr eenandSmi th(1880),Green
hadpur chasedCali
copr i
nti
ngwor ksandpr emi sesfor£15,000shor tl
ybef oreSmith
promotedt hepl
aint
if
f.
scompanyt ot akeoveratacostof£20, 000;Greenenteredint
oa
sham contractwher
ebyhet r
ansfer
redt hepri
ntingworksandpr emisestoSmi thsothat
hewoul dr e-
sel
litt
ot hecompanyatacostof£20, 000;Smi th,asapr omot erofthe
company ,waspreventedfr
om maki ngasecr etprof
itbecauset hesaidagreement( i
.e.

22
wher e Green was to pay£3, 000 outoft he pur
chase moneyt o Smi
th)
;was not
communi catedt othedirectorsoft hecompanywhent hesaletothecompanywas
effectedanditthusamount edtothemaki ngofasecretprof
itont
hepartofSmi
th:(
the
company .spromoter)
.Seeal soErl
angervNewSombr er
oPhosphateCo
(supra)andGluckstei
nvBar nes(1900).

16
Whati
snotallowedisaprofi
t?Wher
ether
eissuf
fi
cientdi
scl
osur
etheprofi
tisal
l
owed.
Thewhol
ei deaofpr omoti
ngacompanyi sobvi
ouslytohavegains.Thi
swoul dbe
def
eat
edifnoextragainwoul
dbemade.

c.
NoConf
li
ctofi
nter
est
s

2.Dut
yofCar
e

Apromot eral
sohasacommonl aw dutytoexercisereasonableskillandcareint
he
promoti
onoft hecompany.InJacobusMar lerEstateLtdvMar l
en( 1913)itwashel
d
that
,apromoterwhonegl
igentl
yallowsthecompanyt opur chaseproper t
y,i
ncl
udi
nghi
s
own,formorethani
tiswort
hisliablet
ot hecompanyf orthelossitsuffers.

I
nReJubi l
eeMil
lsLtd(
1924),t
hedef
endantwasi
nbr
eachofafiduci
aryduty
,thecour
t
foundhimli
abl
eatcommonl awwhenhesoldhi
sownproper
tyt
ot hecompanyhewas
promoti
ngatapr i
ceinexcessofit
srealval
ueandtookshar
esaspay mentofthe
proper
ty.

Thisdut yisof tenl inked to apr omot er’

sdut yt or ef
rai
nf rom makingwi l
fulfalse
statement sandal sohi sdut ytoact i
velydiscl
oset hewhol etruth.Thepri
mar ycommon
l
awr emedyofbr eachofpr omot er
’sdutiestot hecompanyi sr esci
ssionofanycontract
madeandt her ecov er
yofanysecr etpr ofi
tswhi chwer emade.I tshoul
dbenot ed,
howev er,thatt he rightt or esci
nd i s exercisablei n accordance witht he nor
mal
principlesofcont r
acti .
e.Thecompanyshoul dhav eshownnot hingwhichcoul dbe
deemedasi ntentiont oratifytheagr eementaf t
erf i
ndi
ngoutaboutt hediscl
osureor
mi srepresentati
on.Rest it
utioninintegrum mustst illbepossiblei.
e.thecompanymust
beabl et orestoretot hepromot erwhathegav et ot hecompanyi nessenti
all
ythesame
condi ti
onitwasgi v en.

However,
itshouldbenotedthati
nt hedeci
sionofEr
landervNewSombrer
oPhosphat e
CoandSpencevCr awford(1939),
itisdoubt
fulwhet
herthecour
twoul
dstri
ctl
yenforce
thi
srul
e.wheneverthepromoterhasbeenf r
audul
entorwhenhehimsel
fisresponsi
ble
formaki
ngresti
tuti
onimpossibl
e.
23
I
tshoul dbenotedt hatresci
ssionwil
lexti
nguishthesecretprofi
tcomplai
nedof.In
termsoft heCompani esAct,thestatut
orydutyoft hepr
omot errel
atestowrongful
statement
swhi ch maybecont ai
ned in acompany ’spr
ospectus.Itisoneoft he
fundamentaldut
iesofapromot ert
oissueaprospectus.

24
REMEDI
ESFORBREACHOFDUTY

a.Compensat
ion/
damages

Acompanymaysuef ordamagesaswasdonei nreLeedsandHanl eyTheatr

esof
Variet
iesLtd(supr
a1);thepromotershadf ail
edtodi
scloseintheprospectusthefact
thattheywerevendor
sofmusi chal
lsthattheyhadboughtforthecompanywhi chthey
werepr omoti
ngandthepr of
itof£12,
000t heyhadmadef r
om thatt
ransacti
on.

I
twasheldthatt
hecompanywasentit
ledtodamagesassessedatt
heprof
itmadeby
thepr
omoter
softhebasi
sthatt
hebreachofdut
yinvol
vedalsoamount
edtobreachof
promot
er’
scommonlawdutyofcar
e.

Secti
on58provi
desthati
fther
eisamisst
atementintheprospectus,t
hepr
omoterwil
l
beliabl
etopaycompensati
ontoany
onewhosuf fer
sal osshavingsubscr
ibedonthe
fai
thofthepr
ospect
us.

I
nt ermsofsecti
on68and69,apr omoteri
soneofthepersonwhomaybeper sonal
l
y
l
iableuponwindi
ngup.I
fitcanbeestabl
i
shedorwi
thint
enttodef
raudanyper
sons.

b.Resci
ssi
onoft
hecont
ract

Ther emediesforbr eachofut mostgoodf ai

thalsoincludetheor dinarycontract
ual
remedies.Thesei ncludethatthecompanycanr escindacont ractwherei thadnot
rati
fi
edt hecont
ract.Thismeanscancel
lat
ionofthecontractwiththepr omoter.I
fistoo
l
atet oresci
ndthent hecompanycanclaim damagesforthelossi twouldhavesuf f
ered
becauseoft hebr each.Thiscanbeacl aimf ort
hewhol esecretcommi ssionoft he
profi
tmade.

c.Rest
it
uti
on

Thismeanstaki
ngbackwhatwast
akenbyt
hepr
omot
er.I
tusual
l
ytakepl
aceaf
ter
resci
ssi
onoft
hecont
ract
.

Pr
e-i
ncor
por
ati
oncont
ract
s

Therearecer
tainthi
ngswhichneedst
obedonebef or
eacompanyi sincorpor
atedand
thesewouldincludeint
eral
ia,st
ampdut
iesregi
str
arsfees,l
awyerschargesetc.The
promotersar
eusual l
ynotprepar
edtoat
tachpersonall
iabi
li
tyunderthesecontr
acts.

25
Thepr obl
em wi t
hEngl i
shl aw isthatapar tycannotent erint
oav ali
dcont actasan
agentofanon- existi
ngpr inci
pal.Thus,i
nt hecaseofKel nerVBaxt er1866acompany
wasf ormedt obuyahot el.Beforethecompanywasf ormedt hepr omot erssi gneda
contr
act“onbehal foft hepr oposedcompanyf orthepur chaseofaquant i
tyofwi ne”
.
The companywas f or
med,t he wine purchased and consumed.Howev er,bef ore
paymentoft hewi newasmade,t hecompanywenti ntoliqui
dati
on.Howev er,before
paymentoft hewi newasmade,t hecompanywenti nt
ol i
quidati
on.Itwashel dt hatthe
promoters were per sonallyliabl
ef orthe wi ne.Any pur port
ed rati
fication by t he
companywasi nvali
d.

Promotermaynotwantt oat tr
actper sonall i
abi
l
itybutwoul dwi shthathisnew
companyshoul dbenefitfrom thosecont racts.
Rulesrelati
ngtopr e-i
ncorpor at i
oncont r
actsar
eintendedtopr ot
ectthecompany
whenitis f ormedfrom debt sbyt hespecul ati
vepr
omot er.
Commonl awlaysdownt hef i
duciar ydutiesofthepromot ert
hathehast oactingood
fai
thandnotmakesecr etprof i
t.
Promot ermustther ef
oreexer ciseduecar eanddil
igence.
Apr udentpromot erwilltheref orestri
vetodoonl ythosethi
ngsandt oenteronl
y
i
ntothose cont ract
sandul timatel ybenef i
thiscompanyandwi l
lnotbri
ngitdown.
Secti
on47–“ anycontr
actmadeinwrit
ingbyapersonprof
essi
ngt
oactasanagent
ort
rust
eeforanunregi
ster
edcompanyshallbecapabl
eofbei
ngr
ati
fi
edoradopt
ed
byorot
her
wisebindi
nguponandenforceabl
e….
”

Theneteffectofthisi
sthatanypre-
incorpor
ati
oncontract,whi
chisenteredint
obya
promot
er,isbindingpersonal
l
yont hepr omoter.Howev er,byadopti
ngRomanand
Dutchapromot ercangoroundthi
spr obl
em byenter
ingintoacontractfort
hebenef
it
ofthet
hir
dpar t
.

Apr
e-i
ncor
por
ati
oncont
racti
sacont
ract
:

madebyapr
omot
erofanewcompany
nami
ngt
hecompanyasapar
tyt
othecont
ract

bef
oret
hedateofthecer
ti
fi
cateofincorpor
ati
on,andsobef
oret
hecompany
act
ual
l
yexi
stsasasepar
atelegal
person.

Thelegalprobl
em withpre-
incor
porati
oncontractsisthatacompanycannotbeapar t
y
toacontractbef
oreitcomesi nt
oexist
ence.Ifthisisso,acompanycannotbeboundby
thetermsofpr e-
incorpor
ationcontr
act,eveni fithasbeennamedasapar tytothe
cont
ract.

Si
nceacompanycannotbeboundbyapr
e-i
ncor
por
ati
oncont
ract
,thel
egalposi
ti
oni
s
26
thattheper
sonwhocont
ract
sonbehal
fofanew companyi napr
e-i
ncor
por
ati
on
contr
acti
str
eat
edasi
fhehasmadet
hecont
ractonhi
sownbehal
f.

Pr
e-i
ncor
por
ati
oncont
ract
s:t
hel
egal
posi
ti
onsummar
ised,

Thelegalposi
ti
onr
elat
ingt
opr
e-i
ncor
por
ati
oncont
ract
scanbesummar
isedas
fol
l
ows.

Whenanewcompanyi sfor
med,i
tcannotbeboundbyapre-
incor
por
ati
on
cont
ract
,ev
eni
fitobt
ainssomebenef
itfr
om t
hecontr
act
.

A new companycannotsue t he ot
herpartytoa
prei
ncorporat
ioncont
ractf
orfai
li
ngtocompl ywi
ththe
obli
gati
onsundert hecontract
.Thisisbecauset he
companyi t
selfi
snotapart
ytothecontract
.

Unlesstheagreementhasbeenmadespecifical
l
ytot
he
contrary
,apr e-incor
porati
oncontr
actistr
eatedasa
contractmadebet weent hepromoteroft
hecompany
(orotheragent)andtheotherpar
ty.

Acompanycannotrat
if
yapr
e-i
ncor
por
ati
oncont
ract
,ev
en
af
teri
thasbeenf
ormed.

Howev er
,apre-i
ncorporati
oncont ractmi ghti
ncl
udeaconditi
onprecedent
(i
ftheotherpart
yagr ees)thatthecont ractshoul
dbesubjecttoadoption
bythenewcompanyaf terit
sformat ion.Thecontr
actthendoesnotcreate
obli
gat
ionsforei
therpar t
yuntilthenewcompanyi sformed,andt
henonl y
i
fthenewcompanyagr eestoadopti t.

 Cont
ractmustbei
nwr
it
ing.

 Per
sonmaki
ngt
hecont
ractmustpr
ofesst
oanagentort
rust
ee.

 Memorandum mustcontai
nasoneofi
tsobj
ect
sther
ati
fi
cat
ionoradopt
ion
ofpr
eincor
porat
ioncont
ract.

 Theor i
ginalcopyoracer
ti
fi
ed copymustbel odged wi
tht
he
regi
str
artoget
herwi
tht
hememorandum ofassoci
ati
on.

 Cont
ractmustbel
egal
l
yenf
orceabl
e.
27
THEPROSPECTUS

I
fapr omoterwantst or ai
secapitalforapubl i
ccompany .Onewayofdoi ngsois
i
ssui
ngoutapr ospectus.Aprospectusisgeneral
lyadocumentref
lect
ingt
hestat
usof
acompanywhi chisissuedbyanypubl iccompanycall
inguponmember st
osubscri
be
f
orshares.Thesai
ddef i
niti
oncanalsobef oundinSect
ion2oftheCompaniesAct
.

Thecommonl awpositi
onisclearl
ythatapr ospect
us,alt
houghdeemedt obeanof f
er
tothepubli
ctosubscr i
beforshares,i
tisratheranadverti
sementinvi
ti
ngmember sof
thepublicto subscri
be.Oncet hepot enti
almember shav esenti nthei
rproposed
i
ntenti
on totake up shares the companycan acceptorr ej
ect.Thi
s means the
subscri
beri
st heof f
erorandt hecompanyi stheofferee.Oncethepromoter
shav e
all
ott
edsharestoasubscri
berthenacont ractcomesintoexist
ence.

Section104( 8)providest hatanynewspaperorot heradv ert

isementissuedbyapubl i
c
companycal l
inguponpeopl etosubscr i
beshal lalwaysbet reatedasapr ospectus.This
meansal llegalrules,whichapplyt oapr ospectus,shallalsoappl yt
otheadv er
ti
sement .
Thepr ospect usshouldbedat ed.Sect i
on103pr ovidesthatt hedateappear i
ngont he
prospectusshal lbedeemedt obet hedat eonwhi chthepr ospectuswaspubl ishedt o
thepublic.Ther earebasi call
ythreeway sinwhi chacompanycanper suademember s
ofthepubl i
ct osubscr i
bef orshares.Firstl
y,byissuingoutadocumentcal li
ngupont he
publictosubscr i
be.Thisoccur stot hoseshar es,whichhav enotbeenpr evi
ouslyissued.
Thecompanycani ssuet hesharesdi rectl
yt othepubl icort hroughit
sagentsuchas
professi
onal promot erorf i
nancehouse.

Secondl
yitiscommonf oracompanytoal
lotaport
ionorallofit
ssharestothepubli
c,
fi
nancehouseoranyotherinst
it
uti
onwi
ththeobj
ectthatt
heal l
ott
eeswouldeventual
l
y
sel
lthem t
ot hepubl
i
c.Anysuchdocument
sareaprospect
usbyv i
rt
ueoftheact.

Cont
ent
soft
hePr
ospect
us-8t
hschedul
e

a)Thedi
rect
orsoft
hecompanyandt
hei
rint
erest
b)Debt
soft
hecompanyatpr
esentmoment
28
c)Themi
nimum subscr
ipt
ion,
whi
chi
tneedst
ofl
oatt
hecompany
.
d)Thei
nter
estandconsi
der
ati
onpai
dtopr
omot
ers.

e)Suf
ficet
ostatethatal
ltherequi
rement
sthatapr
ospect
usshoul
dcompl
ywi
thar
e
l
ist
edinSect
ionoftheAct.

Sect
ion106oftheActprescr
ibesthatforacompanytoissueapr ospect
usacopyof
theprospect
usmusthav
ebeenl odgedandregi
ster
edbyt
her egi
str
arofCompani
es.

TheDut
ynott
oMakeMi
sleadi
ngSt
atement
sint
hepr
ospect
us

Themai npur poseofi ssuingoutapr ospectusi

stoattr
actpot enti
alinv estorssot hat
theywoul dt akeupshar esi nthecompany .Toachievethisobjective,itisobv iously
contemplat edt hatthecompanywi l
lgivesuchaglowingpictur
et olureinv estors.Ther e
i
showev erar ealdangerthatthepromot er
smaydeli
beratel
ymakemi srepresent ati
ons
toattr
actt heshar e-hol
ders.Thelegisl
atorwasawareofthisproblem.I tistherefor eno
surpri
set hatt heActpr ovi
desthatapr omotermaynotmakemi sleadingst atement si n
theprospect us.

Remedi
esf
ormi
srepr
esent
ati
onoft
hepr
ospect
us

a.Claim damagesagai
nstt
hepr
omot
erordi
rect
orwhoaut
hor
izedt
hei
ssueoft
he
prospect
us

Secti
on108pr ov
idesthatever
ydirect
or,ever
yper sonwhohasagreedtobeadi r
ector
orev erypromoterandev eryper
sonaut hori
zedt oissueapr
ospectusshal
lbel i
able
underci vi
llaw forandl osssuff
eredbyat hi
rdpar t
yduetoanunt ruestat
ement
containedintheprospect
us.

Thi
ssect i
onhoweveri
snotlimiti
ngthecommonl awremedies,whichareav
ail
abl
efor
misrepr
esent
ati
on.Infactsecti
on104(8)prov
idesthat“Nothinginthi
ssecti
onshal
l
l
imitordismi
ssanyli
abil
it
ywhichanypersonmayincurunderthecommonlaworunder
thi
sAct.

29
Thepar t
ywhohassuf fer
edal ossbecauseofaf alsestat
ementi ntheprospect
usmay
suef orfraudul
entornegligentmi srepresent
ation.Iffr
audi sprovedthent heplaintif
f
canobt ainamonet aryawar dsufficienttocompensat ef orthelosshehassuf fered.
Such damages ar e clai
med f rom anyper son who a par t
yt othe i
ssuing oft he
prospectus.Thi
salsoincl
udest hecompanysi nceithascor porat
estat
us.

Twoi mport
antpointsinasf arasdamagesf ormisr
epr
esent
ati
onar econcerned.A
per
sonwhohadsuedt hecompanyf ordamagescausedbyami sr
epresent
ati
onf or
whichthecompanyi sli
abl
ecannotbeawardeddamagesandst i
l
lremainsamember .
Hemustseekr escissi
onwhichwil
lmeansar etur
noftheshar
est othecompanyand
al
sooft hemoneypaidfort
hem.

b.Resci
ssi
onoft
hecont
ractofal
l
otment

Adelayt
orescidthecontractmayaff
ectothermembersandcr edi
tor
s.Thismeansit
hastobebroughturgent
ly.Int
hecaseofInr eScot
ti
shPet r
olicyCo( 1833)23Ch.D.
413adel
ayof13day swashel dtobetool
ong.Ifonesuesthedi r
ector
sandpr omot
ers
per
sonal
l
ythendamagesonl yareawar
ded,asther
eisnorescission.

Li
abil
i
tyf ornegl
igentmi sr
epresent
ati
on i
s al
so liabi
l
ity underl aw ofdelict
.The
pri
nci
pleswhi
char eappli
ed,sodetermi
nethepersonswhoar el
iableandt hemeasur
e
ofdamagesissubstant
ial
lythesameasunderfr
audulentmisrepresentat
ion.

c.Cancel
l
ati
onoft
hemember
shi
p.

Besides suing formi srepresentat

ion,t he party suff
ering a l oss because of a
misstatementcanal sosuef orbreachofwar r
ant y.I
fthecont r
actt obuyt heshares
betweent hepar t
ieswasmadei nsuchawayt hatthemi sstat
ementwasat erm of
contract,then this action is appr opri
ate. The mai n di sti
ncti
on bei ng that a
misrepresentat
ionexist
sout sidethecont ract
.Itisaf actor,whichi nducesapar tyto
contract.A mi sr
epresentat
ion insi
de t he contractqualifi
es to be a t erm oft he
agreement .

I
nt hi
scaset hememberal sohast oseekcancel
lat
ionoft hemembership.Ifthe
memberdecidest
osuet hepromoter
sordir
ect
orsunderbreachofwarr
ant
ythenthere
areboundt obeprobl
ems.A partycanonlysueanot herforbr
eachofcontract
ual
rel
ati
onshi
p.I
nthi
scasethecontr
actisbet
weenthememberandt hecompanynotwith
30
di
rect
orsandpr
omot
ers.

I
fshar
eswereboughtbecauseofaninnocentmi sr
epresent
ati
ontheonlyappr
opr
iat
e
r
emedyfort
hememberistocancel
thecontractandclai
m backhiscapi
tal
inv
est
ment.

I
tisalsoi mportanttonot
et hatsect
ion109makesitacri
mi naloffencetoincl
udean
untruest at
ementi ntheprospectus.Anyper
son who authorized theissueofthe
prospectusmaybesent encedt oaf i
nenotexceedi
ng$1000ori mpri
sonmentnot
exceeding2y ears.

Wher eapubli
ccompanydeci desnottoissueapr ospect
usbutmer el
ymakesav erbal
adv er
ti
sement,theni
thast oissueastatementisl i
euofprospect
us.Thisi sgov
erned
bysect i
on116(2)ofthecompani esActSubstant
iall
ythestat
ementcontainsthesame
i
nf ormati
onast hati
napr ospectus.Nountruestatementsmayalsobeal lowedinthe
statementinl
ieuofprospectus.

d.Rest
it
uti
onagai
nstt
hecompany
Thepr
omot
ershoul
dret
urnbackt
othecompanyanysecr
etpr
ofi
tthathemade.

31
 REGI
STRATI
ONOFACOMPANY

Thepr omot er
sofacompanymustensur ethatiti
sregistered.Thismeanst heymust
complywi thther equirementsofthecompaniesActwithr egar dstor egistrati
on.The
Regist
rarofCompani esinHarareandBul
away odoesther egistrat
ion.TheRegi str
ar’
s
offi
ceisapubl icofficeandassuchhefall
sunderpubli
cser vice.Thebasi cf uncti
onsof
theregistr
arofcompani esi
nclude: a)To issuecer t
ifi
cat esofi ncor porati
on to
compani esandef fectchangesofnames.

b)
Toregist
erandkeepi
nsafecust
odycompanydocumentswhi
chr
erequi
redbyt
he
actt
obef i
ledofhi
m.
c)
Toall
owmember soft
hepubl
i
ctoaccesssuchdocument
s.

d)
Atwi
ndingupofacompanyt her
egi
str
arwi
l
lcompl
etet
hedi
ssol
uti
onoft
hecompany
byst
ri
ki
ngitof
ftheregi
ster
.

Thefirststagebef
oreacompanyhasbeenr
egi
ster
edi
sfort
hepr
omot
erst
oseeka
reser
vationofname.

Reser
vat
ionofname

Reservati
onofnamei smadet hr
oughanapplicati
ontother egi
strar
.Thepr escr
ibed
appli
cati
oni sFORM C. R21.Reservat
ionofnamei stoseewhet hert henamewi llbe
avai
lablef orregistr
ati
on.Usual
lypromoter
swouldgivethreepref
errednamesi nor der
ofpreference.Int er
msofSect i
on25(1)anamet hathasbeenreser
v edwil
lbeav ai
lable
foronemont h.Iftheregi
str
aragreestoanext
ensionthensuchperiodshallnotexceed
twomont hs.
Apromoteri
sfr
eet
ochooseanynamehowev
ert
her
ear
ecer
tai
nrest
ri
cti
onsi
mposed
bySect
ion

25.Apr
omotermaynotchooseanyofthefol
l
owi
ngnames:
a)Wher
ethenamehasalr
eadybeenreserv
ed.

b)
Anamewhi chisidenti
calt
othatofanotherorwhichissonear
lyr
esemblesthatof
anothersoast odeceiveormisl
eadt hepubli
c.TheCompaniesActtr
iestoensure
thatthedel
i
citpassingoffi
scommi t
ted.Thi
sisawr ongwhi
chiscommi t
tedwhena
32
 tradermi srepr esent sint hecourseofbusi nesst opr ospectiv
ecust omer sthathis
businessi si dent i
calt othatofanot her.Thust hewr ongdoerwoul dbepi rati
ngthe
nameorgoodwi l
lofanot herforhisownbenef it
.IfhecaseofLeahKel lyandLeahyV
Glover189310R. P. C141,155Lor dHer di
ellsaid“ t
hef oundationofapassi ngoff
casei sthatt hepar t yal
legingi
tshouldpr oveint hefi
rstinstancethatanynamewhi ch
hecl aimsashi st radenamehasbeensoext ensivelyusedi nconnect ionwi t
hhis
manuf actureorwi thgoodswhi chhesel l
sthathi sgoodshav ecomet obeknowni n
themar ketbyt hatname,andt hatany oneusi ngthatnamewoul di nt
endt oreferhi
s
goodsandt hatany onetowhom t henamewasusedwoul dunder standthathisgoods
wer ereferredt o.Iti snotnecessar ytopr ovet hatact ualdeception,l
ossoft radeor
damagehasr esultedort hatsuchlosswasdel i
beratelyintend.

c)
Apersonmaynotusecer t
ainwor dsaspar tofhi
scompany’
snameexcepti fthe
companycarr
iesont hatpart
icul
artrade.Thusaretai
l
ercompanycannotuset he
wordsbankorinsur
anceaspartofitsname.Thesenamesarer
eser
vedfort
radersin
thatf
iel
dandaresuchnameswhi chwouldmi sl
eadt
hepubl
i
c.

d)
Ther egi
str
arwi llref
useaname,whichinter
msofSect i
on25i sli
kelytocause
offence t
o anotherperson orcl
ass ofper
sons,name,which i
s suggest
ive of
blasphemy,indecencyoranamewhichshowsstatepat
ronageunl
essthemi ni
ster
hasapprovedit.

BySect i
on25( 3)theregi
str
armayor deracompanyt ochangei tsnameandt he
companyshalldosowi t
hin6weeksofr eceivi
ngtheewri
tt
enrequest.Ifthecompany
fai
lstodosoi twouldbeguil
tyofanoff ence.Howevert
heAudialteram part
um r
ule
(heartheot
herside)hastobefol
lowed.Thecompanycanbehear df ir
stbeforei
tis
orderedt
oeffectt
hechange.

Generall
ythef
oll
owi
ngnamesar
eexampl
esofsuchnamesasmayber
efusedbyt
he
regi
strar
:

1) Theusebyal ocalcompanyofanamewhi chwouldconnecti

tintheeyesofthe
publ
icwit
hawel
l
-knowninter
nat
ionalcompanyev
enift
hecompanyi snotregi
ster
edin
Zimbabwe.

2) Theuseofsur namesi mplici

ti
eswillnotbeall
owed.Thi swouldgrantamonopol y
totheuseofsur nameandt hereforecont
rarytopublicpolicye.
g.Mudimu( Pv
t)Ltdwi l
l
notberegi
steredbuti ft
hesur namei squali
fi
edwithi ni
ti
alsordescri
pti
onofbusinessit
wil
lbeacceptablee.g.T.M( Pvt0Ltd.Asurnamewi llber ef
usedifther
eisnodirectoror
memberofthecompanyr esidentinZimbabwewi t
ht hatname.

33
3) Theuseoflet
ter
softhealphabeti
ncompanynameswi
thoutanyqual
i
ficat
ions
wi
ll
beal
l
owedi
fthenumberofl
etter
sisnotl
esst
hanthr
ee.
4) Namesofpl acesout si
deZimbabwewi l
lnotbeal
l
owedunl
essi
tcanbeshown
thatt
her
eissomeconnect
ionwit
hsuchplaces.

34
DOCUMENTSTOBEREGI
STERED

TheCompani
esActpr
escr
ibessomeof f
ici
aldocument
stobel
odgedas
fol
l
ows: a)TheMemor andum ofAssoci
ati
on
b)TheAr
ti
clesofAssoci
ati
on
c)TheSt
atementcont
aini
ngdet
ail
sofDi
rect
ors
d)Ast
atementofr
egi
ster
edaddr
essoft
hecompany
e)Di
rect
orscont
ract
stot
akequal
i
ficat
ionshar
es
f
)Pr
e-i
ncor
por
ati
oncont
ract
s(i
fany
)

THEMEMORANDUM OFASSOCI
ATI
ON

Secti
on77pr ovidesthatonceregister
ed,thememor andum bi
ndsthecompanyandi
ts
member s,i
ncludingfuturemember s,asiftheyhadbeensignedbyeachmember.The
purposeoft hememor andum ofassociati
onist oenablepersonswhoi nv
esti
na
companyt oascertai
nitsname, i
tsobject
sandi t
sauthori
sedshar
ecapit
al.

Byfart
hemostimport
antdocumentthathast
osubmi
twi
tht
heRegi
str
arofCompani
es
i
stheMemorandum ofAssoci
ati
on.
Sect
ion78and79pr ov i
dest hatonceregi
ster
ed,thememor andum bindsthecompany
anditsmembers,i
ncludingfuturemembers,asift
heyhadbeensi gnedbyeachmember.
Thepurposeofthememor andum ofassociati
onistoenableper sonswhoi nv
esti
na
companytoascert
ainitsname, itsobj
ect
sanditsauthor
isedsharecapital
.

TheCompani
esRegul
ati
ons,pr
ovi
dest
hatanydocument
stober
egi
ster
edwi
tht
he
regi
str
ar:
i
)Mustbeonstr
ongpaperofapproximately297mil
li
metresby210mil
li
metresanda
mar
ginofatl
east37mill
imet
resmustbel eft.i
i
)Theupperhal
fofthef
ir
stpagemust
bel
eftbl
ankf
orpurposesofoff
ici
alendorsements.

Hist
ori
call
yacompanyhadnoi nherentpowers.It
sv eryexi
stencemustbegov er
nedby
i
tschar t
er,whi
chl aysdownamongstot herthingst heaimsoft hecompany .The
Memor andum i
stherefor
eregar dedast heconstitut
ionofthecompany ,whi
chrefl
ect
s
totheoutsi
deworldhowt hecompanyi sconsti
tuted.Inef
fectitdescri
besthecompany
totheoutsi
deworld.Iti
sar equirementthateverycompanymusthav eamemor andum
35
ofAssoci
ati
on.

Sect
ion77governsthecont
entsoftheMemor andum of
Associ
ati
oni)Theobject
sclauseii
)Thenamei i
i)Theshar
e
capi
tali
v)Theli
mitat
ionofl
iabi
li
tyv)Associ
ati
onclause

i
. Theobj
ectcl
ause

Secti
on77r equiresthattheMemor andum ofAssociati
onshoul dstat
et heobj
ect sof
thecompany .Thiswasav er
yimportantruleinthedevelopmentoft hecompanyl aw.A
companyhadt ostat
eitsobjectsbecauseitwasf el
tthatitcoul
dnotcar ryanyacti
viti
es
exceedingthoseobj ects.Thi
smeantacompanyhadnounl i
mitedpower stodowhati t
wished.Ifacompanyent eredintoatransacti
onorcontract,whichexceededitsobjects,
suchtransact i
onwasdeemedt obeultr
av i
resi.
e.beyondt heobject
softhecompany .

Theneteff
ectoft
hiswasthatt
hecompanyhadnocapacit
ytoconcludesuchan
agr
eementhencethecont
ractwoul
dbevoi
d-ab-
ini
ti
o(i
nval
idfr
om thebeginni
ng)
.At
l
awt her
ewasnocontract
.

Ther
easonswhyacompanywasr
est
ri
ctedi
nit
sobj
ect
sincl
udedt
hef
oll
owi
ng:
i
) Itwasthoughtthatthesharehol
dersonl
yagreedtoi
nvestthei
rmoneybecause
theyhadknowl edgeofwhatthecompanywasgoi ngtodo.Theywouldthusnotbe
happyiftheyinvest
edinf i
shfryi
ngbusinessonl
yt ofi
ndthatthei
rmoneywasnow
beingusedtoblastr
ocksforaquarrybusi
ness.
i
i) Itwasalsothoughtthatthecredit
orsonlyadvancedtheirmoneybecausethey
knewtheobject
softhecompany .Assuchfundsfrom whichtheyexpect
edrepayment
needednotbeusedforunauthor
izedpurposes.
Any
thi
ngwhi
chi
snotout
li
nedi
ntheobj
ectcl
ausecanbechangedbyspeci
al

Acompanycannotdoany thingbey ondorout

sideitsobj
ectsandanyactdonebeyond
them wilbeul
l tr
av i
resandv oidandcannotber at
if
iedevenbytheassentoft
hewhole
bodyofshareholder
s.Howev er,acompanymaydoany t
hingwhichi
sinci
dent
alt
oand
consequent
ialupontheobject sspeci
fi
edandsuchactwillnotbeul
tr
avir
es.

i
i. Thenamecl
ause
I
tisarequir
ementofsect
ion77thatthememor andum ofassociati
onshouldstat
ethe
nameofthecompany.Thenameoft hecompanyshal lendwiththewordsl i
mit
ed.One
oft
hemai nobj
ect
sofcompanylawist opr
otecttheinvest
ingpubli
cfrom unscr
upul
ous
36
busi
nessmen.Acompanymustcont i
nuousl
ydispl
ayi
tsnamei
naconspi
cuousposi
ti
on
ontheoutsi
deofeveryoff
iceorplaceinwhichit
sbusi
nessi
scar
ri
edonandhav eit
s
nameengravedi
nlegi
blechar
acter
soni t
sseal.

I
tisst atedobjecti
veoftheCompaniesandotherbusinessenti
ti
esAct[Chapt
er24:
31]
thatev erycompanyr egi
ster
edbyt heRegist
rar’
sOfficehasadi st
inctnamethatis
diff
erentfrom thenamesofothercompani
esalreadyr
egist
ered.

Thei deai stomi ni

miset heriskandpossi bili
tyofmember softhepubl i
cconfusingthe
twobusi nesses.TheRegi strarofCompani esabsolut
edi scr
etionintheappr ovalor
rej
ect i
onofpr oposednamesf orr egi
str
ation.Whencar ryi
ngoutt henamesear chthe
usualpr ocedur eist of ur
nisht heRegi strarwithatl eastthreenamesi nor derof
preference.I ft he pr
ef er
red name i sf orwhat everreason eitherunavail
able or
unaccept ablet he Registr
arwoul d sti
l
lhav e otheroptions to choose fr
om.The
reservati
onl astsaperiodofonemont hafterwhi chupongoodcausebei ngshownt he
periodcanbeext endedbynomor ethanamont h.

Sect
ions25and26r
eadsasf
oll
ows:
“nonamesshal lber eservedandnocompanyshal lber egister
edbyanamewhi chis
i
denticalwiththatforwhi char eservati
oni scur
rentorwit
ht hatofaregi
steredcompany
orar egist
eredforeigncompanyorapr i
vatebusi
nesscor porati
onregi
steredundert he
Act,orwhi chsonear lyresembl esanysuchnameast obel ikel
ytodeceiveunl essthe
regi
steredcompanyorr egisteredf or
eigncompanyorpr ivatebusi
nesscor porati
onas
thecasemaybei si nl i
quidationandsi gni
fi
esitsconsentt otheregi
strationinsuch
mannerast heRegistrarmayr equi r
e.”

Wher et henamesar enotonlyident

icalbutt heproductli
neaswel li
tshighl
yunl i
kely
thatt heRegist
rarofCompani eswouldr egisterthesecondcompanyaswel laftera
dil
igentnamesear ch.CaselawinZimbabwesuggest sthattheuseofanotherperson’s
busi ness name mustbe a del i
ber
ate attemptbyt he otherbusi
nessman tot ake
adv ant ageofthegoodwillatt
achedtot heest abl
i
shedbusinessname.I ndeter
mi ning
whet herther
ehasbeenanydel i
berat
euseoft hename.
Allci r
cumstancesoft hecasehav et obeconsi der edincludingsuchf actorsast he
newcomer s.reasons f oradopt i
ng the name and hi s knowl edge ofany pr estige
attachingt othename. Thi sappr oachwasi nf actappr ovedbyt heZi mbabwean
Supr emeCour tinBonMar che(Pvt)LtdvBonMar cheandOt hers( 1984)inwhi cht he
thenChi efJust i
ceDumbut shenaC. J.said:Iti
spat entl
yclearf rom t heev i
dencet hat
wasbef or
et hecour taquot hattherespondentsadopt edt hebusi nessname. LeBon
Mar che.wi t
h no i ntenti
on to deceiv e orto confuse ort o divertthe appel l
ant .
s
customer stot hei
rownbusi ness.Byt hev er
ynatur
eoft hedifferencesint heextentof
businessoper ati
onst hepossibil
it
yofoccasi oni
ngconf usionbet weenLeBonMar chei n
37
BulawayoandBonMar cheinHar
areisnil
.Thewr ongort or
tknownaspassi ngoff
consist
sinthemakingofarepr
esent
ati
onbyoneormor epeoplet hatt
hei
rbusinessis
thatofanotherorotherpeopl
e.I
nlightoftheabov edi
scussionitisli
kel
yt hatthe
Registr
arofCompaniescanbeper
suadedtodecl
i
ner egi
ster
ingtheBulawayocompany
forthefol
l
owingreasons:
(
1)t
henames(
Touchl
i
neTaxi
s(Pv
t)Lt
dar
eident
ical
.
(
2)Theproductl
i
net
hatwouldbeoff
eredbythesecondcompanyisthesameaswhat
i
soffer
edbythef
ir
stcompany(
carr
yingoff
are-
payi
ngpassenger
s).
(
3)Therear ereasonabl
eprospect
st hatt
heHar ar
ef i
rm would wantto ext
end i
ts
business to Bul
awayoint he nottoo dist
antf ut
ure.The for
meralready has
establi
shedasoli
dreput
ati
onandgoodwil
l amongstthetrav
ell
i
ngpubli
c.

I
nDy namosFoot ballCl
ubvDy namosUnited(1989)i
twasfeltbythecourtthatthet
wo
nameswer esoi denti
calthatordi
narymember softhepubliccouldbemi sl
edinto
thi
nkingt hattheonebusi nesswastheotherandv i
ce-
ver
sa.Itisconceiv
ablethatthe
Registr
arwi l
lprobablyadopttheatt
it
udethatthenameproposedbyt heBulaway of
ir
m
contraveness.oft heCompani esActandthi
swouldbeagoodandsuf f
ici
entreasonto
decl
inet oregi
sterthatname.

Changeofname
Acompanyi sal l
owedt ochangei t
snamepr ov i
dedithaspassedaspeci alresolutionto
doso.Howev erbeforethespecialresol
uti
onanappl i
cati
onf orther egistrar’
sappr oval
mustbemade.I ntermsofSect ion25oft heactandSect i
on26oft heRegul ati
onst he
appli
cati
onf ort hechangeofcompany ’snamei smadet ot her egistrar.Ther easonf or
thechangemustbest ated.Theregistr
arshallnotgivehisappr ovalunl esst herehas
beenpubl i
shedi nthegazet t
eandi nadailynewspaperci rculati
ngi nthedi str
ict.An
adverti
sementst at
inganappl i
cati
onwi l
lbemadet otheRegi st
rarforhi sappr ovalnot
lessthan14day saf t
erthelastpubli
cati
on.Form C.R.
Iforthechangeofnameandal so
form CR.11f orthespeci alr
esolut
ionshallbelodgedwi t
ht her egistrarassoonast he
appli
cati
onf orchangeofnamehasbeenappr oved.

i
ii
. Li
mit
ati
onofl
iabi
l
ity

I
tst
atest
hatt
hel
i
abi
l
ityoft
hemember
sisl
i
mit
ed.
I
tisimport
antthatthememor andum ofassoci
ati
oncontai
nacl auseonli
mitat
ionof
l
iabi
l
ity
.Thefactt
hattheliabi
li
tyofit
smember sisli
mitedmustexpressl
ybesetouton
t
hememor andum ofassociat
ion.Acompanymaybel imit
edbysharesorguar
antee.

i
v.Thecapi
talcl
ause

38
I
tisar equirementt hatt hememor andum statest hesharecapitaloft hecompany .This
i
sal socalledt heaut horizedornomi nalcapital
.Theshar ecapi t
ali stheamountwhi cha
companypr oposest ober egister
ed.Thi scapitalisthe‘bookf i
gur e’whichamountmay
notbeav ail
ableonr egistrati
onoft hecompany .Acompanyi snotaut hori
zedtoi ssue
anyshar esexceedi ngt hosest at
edi nt hememor andum ofassoci ati
on.Thef irststep
beforethei ssueofshar esi stoal t
erthememor andum ofassoci ation,soast oincrease
theshar ecapi tal.Therei sacademi ccontroversyast owhet heranycont ractofissuing
sharesabov etheaut horizedcapi talorv oi
dorv oidable.Anycont ractwhi chexceedst he
objectsoft hecompanyconcl udedwi that hi
rdpar t
ycanbeenf orcede. g.acontractfor
purchaseofshar esbey ondt heaut horizedcapital.Howev erthi
swoul dnotappl ywher e
thet hi
rdpar tyi swellawar et hattheissuei sinexcessoft hecompany ’
scapital
.The
basicr emedyi st o penalizet hepeopl ewho woul d haveconcl uded anul trav i
res
contract.

i
v. Theassoci
ati
oncl
ause

 S252t
oS255
 Thisist
hestatementbysubscri
bersthatt
heyint
endtosubscri
beforsharesin
thecompanyandforeachsubscr
iber
,thenumberofshar
esthathewil
lbetaki
ng.
 Inthiscl
auset hesubscr
iberst
othememor andum ofassoci
ati
ondecl
arethat
theydesir
et obefor
medi ntoacompanyandagreetotakeuptheshar
esstated
againstt
heirnames.
 Eachoft
hesubscr
iber
ssi
gnst
hememor
andum ofassoci
ati
on.

THEULTRAVI
RESDOCTRI
NEANDTHEOBJECTCLAUSE

Ult
rav i
resmeansbey ondpowers,i
.e.
,anyactdonebyt hecompanybey ondit
slegal
powersandaut hor
it
y.Ithasbeenobser
vedthatt
hecompanyhasanI ndependentl
egal
exi
stenceandi sasepar at
ebodycorporat
edist
inctf
rom i
tsmember s.Thecompany
can,theref
ore,per
form actsonit
sown.Theact swhichthecompanyper f
ormsare
authori
zedby:
a.Obj
ect
sspeci
fi
edi
ntheMemor
andum ofAssoci
ati
onoft
hecompanywi
thwhi
chi
t
is
r
egi
ster
ed.
b.Obj
ect
sincl
udei
nci
dent
alobj
ect
sal
so,
andTheCompani
esAct
.

Theol
ddi
spensat
ionoft
heul
tr
avi
res

39
Anact iv
ityout
sidetheobjectscl
auseoft
hecompanyisdeemedultr
avir
esand
thereforevoi
dandunenf orceabl
eevenbythet
hir
dpar
ty.I
twastakentohav
ethesame
effectwithanil
legalcont
ract.
Case:
Ashbur
yIr
onRai
landcar
ri
agecompanyvRi
tchi
e
Facts:Theobj ectsofAshburyRail
wayCarri
ageandIronCoLtdwer e‘t
omakeorsel l,or
lendonhi r
e,r ai
lway-car
ri
agesandwaggons,andal lki
ndsofr ai
lwayplant,fi
tt
ings,
machi neryandr ol
li
ngstock;tocarryonthebusinessofmechani calengineer
sand
generalcontractors;t
opur chaseandsel
l,asmerchants,t
imber
,coal,metal
s,orot her
materials;
andt obuyandsel lanysuchmater
ial
soncommi ssi
on,orasagents’.
Held:TheHouseofLor dsconsideredt hecont racttobebey ond,orout sideof,t he
powersoft hecompanybecausei twasnoti ncluded intheobj ectscl
ausei ni ts
memor andum.Itwashel dthatbyent er
ingintot hetransact
iont hecompanywasi n
breachofitsconsti
tuti
on,forithadno‘ compet ence’or‘power ’t
omaket hecont ract
andtheref
ore,
thetransacti
onhadnol egal ef
fect
.Thi smeantthatRi chie’
scl
aim against
thecompanyforbreachofcont r
actfailed,astherewasnocont racttobeenf orced.

Thiscaseest abli
shedt heultr
av i
resrules,whichmeantt hatacompanyonl yhadl egal
capacitytodowhati tsobjectscl ausesenabledi ttodo.I nthecaseofAshbury,hadthe
transacti
onbeeni ncludedini tsobj ectsclause,t hecompanywoul dhav ehadt he
capacity,makingi tv al
id.Anot herpoi ntto distinguishisthatthememor andum in
Ashbur ytalks aboutt he objects clauses restr
icting powers ofthe company.The
differ
encebet weent hesear et hatobj ect
sar et hosepar t
soft heconstit
uti
onwhi ch
describetheact i
vit
yacompanyi ssetupt ocar ryon.Power sofacompanyar ethe
thingsitneedstobeabl etodot ocar ryont heactiv i
ty.

Thediffi
cult
ywiththeultraviresrul
eswast hatthosedeali
ngwi thacompanywoul d
havet o check t
hati thad capacityt o enterintothe contractbyl ooking atits
memor andum intheRegisterofCompani es,otherwi
setheyriskedfindi
ngt hemselves
unabl
et oenf or
ceacont ractt hatthelaw woul dconsidervoidunlesst hecontract
enter
edintowaswi t
hinit
sobj ectcl
ause.Thiswasqui t
eimpracti
cal.

Theul t
rav i
respri
nci
plewasusedi nconjuncti
onwi t
hthedoct rneofconst
i ructi
venoti
ce.
Onceanot i
cehasbeenpubl ishedtothepublic,nooneisdeemednott oknow.Apar ty
contracti
ngwi t
hacompanyi nanact i
vi
tyoutsidetheobjectscl ausecouldnotenfor
ce
such a transacti
on on thatt r
ansact
ion againstthe companyon t he basisofhis
i
gnor anceoft heobjectsclause. Ther easoningwast hatt hememor andum wasa
publi
cdocumentuponr egist
rati
on,accessi
bletoev er
yonet her
ef or
e,anypersonhavi
ng
deali
ngswi ththecompanyshoul dapprai
sehi mselfoft heposi ti
onint er
msoft he
objectsclausebefor
edealingwi t
hthecompany .
Case:
EvansVBr
unerMond
40
Aspr evi
ouslynoted, acompanywaspr ohibi
tedf r
om carryi
ngoutthoseactivi
ti
es,which
exceededi t
sobject s.Anysuchcont r
actwasul tr
av i
res.Thest r
ictappli
cat
ionoft he
ult
rav i
resdoctri
necoul dbeseeni nt hecaseofAshbur yRailwaysVRi chi
e1875L. R7
HL653.Acompanyhadbeenf ormedundert he1862Actwi ththeobjectofmakingand
sell
ingrail
wayequi pment .Thecompanycont r
actedtoconstructar ai
lwayli
ne.Allthe
member shadratif
iedt hecontract
.Thecour theldthatthecompanycoul dnotdot his
actwhichwasbey ondi tsobj
ectsandt hatifthemember scoul dnothavepossibl
ydone
theactt hemselvest heycouldnotr ati
fythecont ract
.Themember swer ealsostruck
withimpotence.
Admit t
edlythedecisionint heAshbury’scasewasahar shone.Thedi sadv antagesof
therulegrewandt hebusi nesscommuni tydev elopedway stoav oidtheul t
rav i
resrule.
Ther ulemadeapr esumptiont hatt
hei nvestorswer enotint
erestedtot hatextent.I
ti s
corr
ectt o sayt hatt heywer e mor ei nter
est ed onlyint he retur
n oft heircapital
i
nvest mentratherthanwhatt hecompanywasdoi ng.Secondlythecreditorswhom t he
ult
rav i
resrulewantedt oprotectneedednopr ot ecti
onatallbecauset hecreditorswere
merelyinter
estedtoseet hecompanyr epay i
ngi tsdebts.

The fi
rstwayi n whi ch dr
af tsmen soughtt o ev
ade t he rul
e was to st atei nt he
memor andum ev
er yconceivableacti
vit
ythatthei
rfert
il
eimagi nati
onscouldt hinkof .As
aresul
t,thememor andum ofacompanyhadf ort
ytofif
tyobjects.Howev erev ent hough
ther
ewer esomanyobj ectst hecourtsrespondedbyst ati
ngt hatthecompanyhadt o
haveitsmai nobjects.Ther estwoul dnotbeobj ectsbutwer epowersi ncidentalto
achi
evingt heobjects.Itwoul dfol
l
ow t hatoncet heobj ectshad disappear ed,the
companyhadt owi ndup.Theconceptoft hemainobjectsandanci l
lar
yobj ectsbecame
knownast heSubst r
atum Rule.

I
nthecaseofReMar ketHal
lBioscopeSyndi
cat
e1912S. R185thesubstrat
um rulewas
appli
ed.Themai nobjectofthecompanywast oacquir
etheleaseofmar kethal
lat
Sal
isburyandt her
ewer eothersubsidi
aryobj
ectse.g.topurchaseanyt heatr
eet c.
Whent hel easeoft hemarkethallexpi
redandthebioscopemachi newassol d.The
companywoul dsti
llpur
sueotherobject
s.Howevert
hecourtrul
edt hatt
hesubstratum
(mainobject)haddisappear
edsot hecompanyhadtowindup.

Thesecondwayi nwhi chcompani esav oi

dedt heul t
rav ir
esr ulewast ostatet he
object
soft hecompanyandt henendwithagener alclauseaut hori
zingt
hecompanyt o
carryanybusinesswhi chthedirect
orsdecidedtounder take.InBellHouseVCi tywall
Properti
esLtd1966( 2)QB656t heobjectclauseincludedacl ause“t
ocarryonany
othertradeorbusinesswhat soeverwhichcani ntheopi nionofboar dofdir
ectorsbe
advantageousl
ycar r
ied out.
”The cour theldt hatthe obj ects ofthi
s nat
ure wer e
permissibl
e.Thetestwaswhet herthedi
r ect
orscouldingoodf ai
thhaveconcl
udedt hat
41
sucht
ransact
ioni
sfort
hebenef
itoft
hecompany
.

Thenewdi
spensat
ionoft
heul
tr
avi
res–S27
Theconceptoft heultr
aviresinnolongerv
oid.However
,ift
hatul
tr
av i
restr
ansact
ion
causesal ossacompany ,amemberordebent ur
eholdercanclai
m compensation
againsttheof f
icerwhoaut hori
sedtheultr
av i
restr
ansact
ion.Never
thel
ess,isthe
off
iceractedreasonabl
y,t
hecourtmaydecli
netooff
erthedamage.

Tosummar i
se,t heul tr
av ir
esdoct rinewasr elevantint wor espect s.Firstlyitmeant
thatanext er
nalcont ractbetweent hecompanyandat hirdpar tywasnotv ali
d.The
secondwasani nternaleffect.Itmeantt hatift hedi r
ect orsenter edi ntoat ransaction
whichexceededt heobj ectsoft hecompany ,thent hedi r
ectorscoul dbesuedby
member sf oract i
ngul t
rav i
res.Thecompani esacthast akenani mpor tantst epby
aboli
shi
ngt heul trav i
resdoct ri
ne.Sect i
on9oft heactpr ov i
dest hatacompanyshal l
havethecapaci tyandpower sofanat ur alper sonoff ullcapaci tyinsof arasabody
corpor
ateiscapabl eofexer ci
singsuchpower s.I tfoll
owst hereforethatat hirdpar t
yis
nowablet oent erintoacont r
actwi ththecompanybei tul t
r avi
resori ntr
av i
resthisis
nolongerexpect edt ocheckt hecont entsoft hememor andum ofassoci at
ion.Howev er
,
aquesti
onmaybet henaskedast owhyacompanyst il
lhast ost ateitsobj ectsifitcan
now enterintoanycont r
actexceedi ngt hoseobj ects.Theansweri sf oundi nt hefact
thatalt
hough an ul trav ir
es transaction cannotbe av oided byt he company ,the
member sar enow al lowedt osuet hoser esponsi bl
ef ort hecont r
actespeci all
ywher e
suchcontractresul t
sinal osst othecompany .

Theshar eholderscanst il
lagreeont hebusi nessoft hecompany .Ifanyonegoes
beyondthoseobj ectshecanbesuedbutt hecont r
actagai nstat hi
rdpar t
ywillbev al
id
andbinding.Sect ion10( 2)empowersmember st osuedi rectorsiftheyabouttoent er
i
ntoanul tr
av i
rescont ract
s.Thesect i
onpr ovidest hatmember scanappl yforan
i
nterdi
cti.e.acour tordertostopapot ent
ialul
trav ir
est r
ansact i
onwhi chthecompany
i
saboutt o.Sowhi l
sttheul t
ravir
esdoctri
neisdeadandbur i
edi nrespectofcontracts
withthi
rdpar ti
es,i tsghosthasent er
edcompanyl awt hr
ought hebackdoortopr otect
othermember sagai nstthosewhocarryoutultrav i
restransactions.

THECONSTRUCTI
VENOTI
CEDOCTRI
NE

Theeffectoftheultrav i
resrulewast hatanycont
ractexceedingtheobj ectswasv oid.
Assuchi fathirdpart
ycont ractedwiththecompanyandi ttur
nedoutt hatthecontract
i
sul t
ravirestheycoul dnotsuet hecompanyforbreachofcont ract.Forexampl eifa
thi
rdpartyhaddeliveredgoodst othecompanyhecoul dhecouldnotsuef ortheprice
becausetheascer t
ainwhet herthecompanyhadaut horit
ytoent erintotransacti
on.As
42
suchhewasexpect edtocheckt heMemor andum ofAssoci at
ionoft hecompanyt o
establi
sh t his.I fhe di d notcheck t hen he was f i
xed wi t
h knowl edge oft he
memor andum andshoul dnotcompl ai
ni fthecompanyhadnocont ract
ualcapacity.
Thisarosef r
om t hefactthatamemor andum ofassoci ati
onisapubl i
cdocumenthence
thepubl ichadt ocheckbef or econt r
act i
ngwi tht hecompany .I
nt hecaseofJon
Beaufor t
e( London)Lt d1953Ch131acompanywasf ormedf orthepurposeofcar r
y i
ng
onbusi nessasmant l
emanuf actur
ers.Theyceasedt hi
sact i
vit
yandcommencedt o
makev eneerpanel ing,anactivit
yclearl
yout sidet hescopeoft heobjectclause.Three
credit
orsi ncludingaf i
rm ofbui l
ders,whohadconst ructedthef act
oryandaf i
rm who
hadsuppl iedcokesoughtt oclaimfrom t heliqui
datoroft hecompany .Thecourtruled
thattheircont ractswer eultr
av ir
eshencet heycoul dnotsuef orbreachofcont ract.
UnderRomanandDut chl awthet hi
rdpar tywoul dstil
lbeabl et osuet hecompanyf or
unjustenrichment .

Whendeal ingwi ththeconstr

uctivenoticedoctri
net hecaseofRoy alBankVTur quand
i
sal sov er
yi mpor t
ant.Thi
scaseal readyestablishedwhathasbecomeknownast he
TurquandRul e.Inthiscaseitwasst atedthatat hirdpart
ywasf i
xedwithnot i
ceofthe
content s oft he memor andum ofassoci at
ion.Howev eronce the thir
d part
yhad
knowl edget hatthecompanyhadcapaci tyt
oent erintocontr
act
,hewasnotexpect edto
digf urthert o discoverwhet herallt he i
ndoormanagementand pr ocedur
es had
compl iedwi th.Hewasnotsupposedt of i
ndoutt hestepswhichthecompanyhast o
fol
low t oent erintothecontract.Allneededt oknow waswhet herthecompanycan
concludet hecont actornot.

I
nt hecaseofRoy alBankVTur quandt hebankhadl entmoneyt oacompany .The
moneywassecur edbyamor tgagebond,ov erthecompany ’
sassetsandhadbeen
si
gnedforbytwodi rector
s.Beforethecompanycoul dborr
ow,itwasarequirementthat
aresol
utionhadt obepassedbyt heshar
eholders.Howevernosuchr esolut
ionhad
beenpassed.Thecour theldthat,thecontractwasbindi
ngont hecompany .Oncet he
bankhadestabl
ishedt hatthecompanycoul dborrow,i
twasentit
ledt
oassumet hatthe
i
ndoorprocedur
eshadbeencompl iedwit
h.

Thi
srulehasfoundstatutor
yr ecognit
ionandpr ovi
desthatanypersondeal
i
ngwiththe
companyshallbeent
itl
edt oassumet hatthecompany’sint
ernalr
egul
ati
onshav
ebeen
compl
iedwith.Howevernoper sonshal lbeall
owedtomakesuchassumpt i
onifheis
wel
lawarethatthei
nternalregulat
ionshav enotbeencompliedwit
h.

CERTI
FICATEOFI
NCORPORATI
ON
Onceacompanyhasdul
ycompl
iedwi
thal
lther
equi
rementsofthecompani
esactt
he
Regi
str
arofCompani
eswoul
dissueacer
ti
fi
cat
eofincor
porat
ion.Thecer
ti
fi
cat
ecan

43
proper
lybecal
ledt hebi
rthcert
ifi
cateofacompany .I
facompanyhasbeenissuedwit
h
acerti
fi
cat
eofi ncorpor
ati
onthensuchcer t
if
icat
eshallbeconcl
usi
veevi
dencethatt
he
companyhasbeen dul yincorporated and therequir
ementsoftheacthav ebeen
compli
edwith.
Howev erapubl
iccompanycannotcommencebusi nessunlessther equir
ementsof
Sect
ion158oftheacthavebeencompli
edwi t
h.Inter
msofsect i
on158i tisanoff
ence
i
fthecompanycommencesbusi nesswithoutcompil
ingwiththerequirementsofthi
s
sect
ion.Whent herequi
rement
sofSect ion158hav ebeencompl i
edwi t
hapubl i
c
companywouldbeissuedwit
hacerti
fi
cat
eofi ncor
porat
ion.
Thef
oll
owingr
equi
rement
sar
enecessar
ybef
oreacer
ti
fi
cat
etocommencebusi
ness
i
sgiven.
a)I
fthecompanyhasi
ssuedapr
ospect
ust
hen
i
)Theminimum subscr
ipt
ionhasbeenreachedi.
e.sharespay
abl
eincashupt
othe
amountofthemini
mum subscr
ipt
ionhasbeenal
locat
ed.
i
i
)Eachdi
rect
orhaspai
dforhi
squal
i
ficat
ionshar
es.
i
i
i) Ther ehasbeenlodgedonFORM C.7anaff
idav
itbyadir
ectororsecr
etar
yoft
he
companythatt
heaboveprovi
sionhav
ebeendul
ycompliedwit
h.
c)Ift
hecompanyhasnoti ssuedaprospect
usitwoul
dhavelodgedastat
ementinli
eu
ofprospectus.Ast
atementinli
euofcompanydoesnotissuesharest
ot hepubl
i
cfor
subscri
pti
on.Thest
atementhastobesignedbyal
lper
sonsnamedasdirector
s.
i
) In addi
ti
on tothe st
atement,an af
fi
davi
tbythe di
rectorofcompany
secr
etar
yi nform CR7thatthedi
rector
shavepai
dincashforthei
rqual
i
ficat
ion
shar
es.
i
i) Iftheart
icl
esoft hecompanydoesnotr equir
edirect
orst
ohol
dshar
e
qual
i
ficat
iont
henitshal
lnotbenecessar
ytol
odgeform C.
R7.

44
45
 ARTI
CLESOFASSOCI
ATI
ON

Whereast
hememor andum ofassociat
ioni
sadocument,whi chexhi
bit
sthenat
ureof
thecompanytotheout si
dewor l
d.Thear t
icl
eofassociat
ionisadocumentwhi ch
cont
ainst
herul
esgoverni
ngtheint
ernalmanagementoft
hecompany .
Thearti
clesofassoci at
ionofacompanysetouti tsinternalr
ulesandr egulati
ons
i
ncl ng Ar
udi ticl
e A oft he compani es Act.Everycompanymusthav e art
icl
es of
associ
ati
on.Thememor andum woul dshowt hename, aimsandcapi t
alofthecompany
butthearti
cleswoulddel iberateonthei nt
ernali
ssueswhi chmaynotbesoi mpor t
ant
tothepubli
c.Someoft hei ssuesgovernedbyt heArt
iclesofAssociati
onincl
udedut i
es
andpower sofdirect
ors, howandwhent hecompanymeet ingswoul dbeheld,howand
whenwoul damembert ransferhisshares,t
hev ot
ingpower sofamember ,durat
ionof
noti
cesofmeet i
ngset c.
Secti
on81oftheCompani
esActprescr
ibesthatacompanymayr egisteri
tsart
icl
esof
associ
ati
onatthet
imethememorandum ofassociati
oni
sregi
stered.Thisshowst hat
i
tisnotobli
gat
oryf
oracompanyt
or egi
steri
tsart
icl
eswit
htheRegistrarofCompanies.

Howev erontheotherhandeverycompanymusthavearti
clesofassoci
ati
on.This
meansi facompanydoesi tart
icl
esi
tshal
lbedeemedtohav eadoptedthearti
cles
whicharecontai
nedi nTABLE‘A’oft
hecompaniesact
.Ifacompanyr egi
stersit
s
art
icl
esbutthearti
clesaresil
entoncer
tai
nissuest
henartl
essinTABLE‘ A’shal
l al
so
apply
.
TheAr ti
clesofAssoci at
ionsetsoutt heinternalr ul
esast otheoper at
ionoft he
company .Thear ticlesdealwitht heissueofshar es,tr
ansferofshar es,alt
erat
ionof
sharecapital,gener almeeti
ngs,v ot
ingr i
ght
s,di r
ect or
s,managingdi rector
,secretary,
divi
dends,account s,auditofaccounts.Asbet weent hememor andum andt hear t
icles,
thef or
meri st hedomi nanti
nstrumentandi nt heev entofaconf li
ctbetweent heir
respecti
vepr ovi
sionst hememor andum pr evai
ls.Thear t
icl
es(andt hememor andum)
form acontractwhi chbindsboththemember soft hecompanyandt hecompany .

Secti
on 81 oft he actpr escr
ibes thata companycan al
terit
s memorandum of
associ
ation t
hrough a specialresoluti
on.However
,thi
sshallnotappl
ywher ethe
memor andum it
selfpr
ovidesthatitcannotbeal
ter
ed.

Thecompanyi salsoempower edt oalt

eritsobjects.Howeverifthenameoft he
companydescr i
best heobj
ectsoft hecompany,itshallnotbepossibletoalt
erthe
objects onl
ywi thoutalt
eri
ng the name.I nthe al
terat
ion ofthe memorandum is
designed to oppressthe minori
tysharehol
dersint he companythen the minor
it
y
shareholder
sar eal l
owedbysect i
on195t oobjecttosuchal t
erat
ion.Themi nor
it
y
46
shareholdersshal
lmakeanappl i
cati
onwi thi
nonemont hoft hepassingofthespecial
resol
ution.Thespecialresolut
ioninFORM CR11hast obel odgedwiththeregi
str
arof
compani es.Ifanappli
cationismadet hent healterat
ionshal lnobev ali
dunti
lithas
beenconf irmedbythecour t
.Sect i
on81oft heactpr escribesthatacompanycanal t
er
i
tsmemor andum ofassociati
ont hroughaspeci alresoluti
on.Howev er
,thisshal
lnot
applywher ethememor andum itselfprovi
dest hatitcannotbeal t
ered.

I
nt ermsoftheActnoappl
icati
onhasbeenmademi norit
yshareholder
sobjecti
ngtothe
alt
erati
on,aprint
edcopyoft hememor andum asal t
ered,mustbedel i
ver
edt othe
Registr
arwi
thintwomonthsaf t
ert
hedateonwhicht hespeci
alresoluti
onwaspassed
i
.e.onemont haftert
heper i
odofonemont hallowedf ormarkingtheapplicat
ionto
court.
Alsoi nt ermsoft hesamesect i
on,whenanappli
cat
ionhasbeenmadet ocourtforthe
alterationt obecancel l
ed,thecompanymustnot i
fytheregi
str
arforthwit
h.Ifanorderis
grant edconf i
rmingt healterat
ion,t
hecompanymustwi t
hinonemont hfr
om t hedateof
theor der,deli
vertot heregist
raracopyoft heal
ter
edmemor andum togetherwiththe
originalcopyoft hecour torderoracer ti
fi
edcopy.Whendeal i
ngwi t
hal ter
ati
onof
ArticlesofAssoci ati
ont hecompanyal sohastopassaspecialresolut
ioninform CR11.
Thespeci alr
esoluti
onpassedf orthi
spurposemustalsobel odgedwi t
ht heRegistr
ar
withinonemont h.

LegalEf
fectsoftheArt
icl
esofAssoci
ati
ontheart
icleshall
,whenr egi
stered,bi
ndthe
companyandt hemembersther
eoftot
hesameext entasiftheyrespect
ivelyhadbeen
si
gnedbyt hecompanyandbyeachmember ,andcontainedcovenantsont hepar
tof
eachmember ,
toobser
veallt
heprov
isi
onsofthear
ticl
es.

Theef f
ectoftheseprovi
sionsistoconstitut
ethr
oughthear t
icl
esofacompanya
contr
actbetweeneachmemberandt hecompany.Theef f
ectandt hei
mpl
i
cat
ionsof
thi
ssectionmaybeappreci
atedbyconsider
inghowthear
ti
clesbind:
-

(
a)Member
stot
heCompany

Eachmemberofthecompanyi
sboundt
oobser
vet
hev
ari
ouspr
ovi
sionsoft
hear
ti
cles
asifhehadact
ual
lysi
gnedt
hesame.

CaseLaw:Hi
ckmanv
s.Kent(
1957)
Thearti
clesprovi
dedf
ortherefer
enceofdisputesbetweenamemberandt hecompany
toarbit
rati
on,ifashareholderbroughtanact ionincourtagainstthecompanyi n
connect
ionwi thadisput
ebet weent hecompanyandhi mselfinhiscapacityasa
member .Itwasheldthatthecompanywasent it
ledtohavetheacti
onstayed,asthe
art
icl
esamount edtoacont ractbetweent hecompanyandHi ckmant orefersuch
47
di
sput
esbet
weent
hem t
oar
bit
rat
ion.

Butadisput
ebetweent hecompanyandadi
rect
ori
nhiscapaci
tyasadi
rect
orwould
notbewithi
nthetermsofsuchart
icl
esev
eni
fthedi
rect
orwasal
soamember( Beat
ti
e
vs.E&F.Beatt
ieLtd,1938)
.

(
b)Companyt
otheMember
s

Thecompanyi sboundt othemember sbyt hev ari

ousprovi
sionscont ai
nedint he
arti
cles.Thecompanycanexerci
sei tsri
ghtsasagainstanymemberonl yinpursuance
ofandi naccordancewi
ththearti
cles.Anymemberi senti
tl
edtosuet hecompanyt o
preventanybr eachofarti
cleswhi chwouldaf f
ecthi sri
ghtsasamemberoft he
company .Thuswher eari
ghtisconf er
redbythearti
clesonashar ehol
dertovoteata
companymeet ing,t
hechai
rmanofthemeet ingcannotdepri
vehim ofhisri
ght.

CaseLaw:
Woodv
s.OddessaWat
erWor
ksCo.(
1889)
Thear t
icl
esofassociati
onoft hedefendantcompanyprovidedt hat“thedi rector
smay ,
witht hesanctionofthecompanyatagener almeeti
ng,declareadi vi
dendt obepaidi n
casht ot hemember s”.Inst
eadofpay ingcashdivi
dendtot heshar eholder,anor di
nary
resoluti
onwaspassedt ogivethem debenturebonds.Thepl ai
ntif
f,amembersuedt he
directorsforacti
ngont heresolut
ion.Thedirect
orswererest r
ainedf r
om act ingont he
resoluti
onont hegroundthat“tobepai d”meant obepaidi ncashandt hedebent ure
bondspr oposedtobeissuedwer enotpaymentincash.

Thearti
clesprov
idethatt
hedirector
smaywi tht
hesanct i
onofagener
almeeting
decl
areadivi
dendtobepai
dtoshareholder
s,pr
imefaci
ethatmeanst
obepai
dincash.

(
c)Member
sInt
er-
se

Art
icl
esdonotconsti
tuteexpr
essagreementbet weenthemember softhecompany.
Yeteachmemberoft hecompanyisboundbyt heart
icl
esont hebasi
sofimplied
contr
actt
otheothermembers.Theart
iclesr
egulatether
ightsoft
hemembers’i
nter
-se
butsuchr
ight
scanbeenf or
cedonl
ythroughthecompany .

CaseLaw:Ray
fiel
dvs.Hands(
1960)
Art
icleIIoftheart
iclesofassoci
ationofFi el
d-Davi
sLtdpr ov
ided:“Ev
erymemberwho
i
ntendst ot r
ansf
ershar esshallinformt hedi r
ect
orswhowi llt
aket hesaidshares
equall
ybet ween them ata f ai
rv alue.Rayfi
eld,a member ,soughtt o compelthe
defendants,thet
hreedirect
orsoft hecompanyt opurchasehissharesinaccordance
48
wit
hthi
sprovi
sion.Thecourtdecl
aredt
hatt
heywereboundtodoso.Therelat
ionshi
p
her
eisbetweentheplai
nti
ffasamemberandt hedefendant
snotasdi
rect
ors,butas
members.

49
(
d)t
oOut
sider
s

Art
icl
esdonotconst it
uteanycontractbetweenthecompanyandanoutsi
der. An
outsi
derisnotenti
tl
edtoenforcethearti
clesagai
nstt
hecompanyf
oranybreachof
ri
ghtthati
sconfer
redonhim bytheart
icl
es.
CaseLaw:Eleyv s.Posi
ti
veGover
nmentLifeAssuranceCompany( 1876)
Thearti
clesofthecompanyprovi
dedthatEleyshouldbeasol i
cit
orofthecompanyf or
li
feandshouldnotber emovedfrom hi
sof f
iceexceptonaccountofmi sconduct.He
wasalsoamemberoft hecompany. Eleyactedasasol ici
torofthecompanyf or
someti
mebutul t
imatel
ythecompanydisconti
nuedhisserv
iceswi t
houtanyallegat
ion
ofmisconduct.Hesuedthecompanyfordamagesf orbr
eachoft hecontr
act.

I
twasheldt
hatt
heacti
onwasnotmai
ntai
nabl
ebecausetheri
ghtwhi
chheat
tempt
ed
t
oenfor
cewasconf
err
eduponhi
minacapaci
tyot
herthanofashar
ehol
der
.

I
nar ecentdeci
siont
heHi ghCour
temphasi
sedthattheart
icl
esofassociat
ionofa
companyaretobeconst
ruedint
hesamewayasanyothercommerci
alcont
ract.

Howev eriti
salsoacont ractbetweeneachmemberandt hecompany .I
notherwordsif
thecompanydoesnotper form asperthearticl
esitmaybesuedbyashar ehol
der
.It
fol
lowst hatt
hecompanymayal sosueashar eholderi
fhedoesnotper f
orm aspert
he
art
icl
es.Theact ionwoul dbeasi mpl
ebreachofcont ractclaimforexamplesecti
on27
(2)provides that“allmoneypay abl
e byanymembert ot he companyunderthe
memor andum orar ti
clesshal lbeadebtduef r
om himt ot hecompany ”i
famember
fai
lstopayf orsharesi ssuedt ohimitisbreachofcont racthencecanbesuedbyt he
company .

50
THETURQUANDRULE/THEI
NDOORMANAGEMENTRULE
TheMemor andum ofAssoci at i
onandAr t
icl
esofAssoci ationofaCompanyhav et
obe
l
odged wi t ht he Regi str
arofCompani es.Because these ar e av ai
labl
ef orpubli
c
i
nspect i
on, peopledoi ngbusi nesswi t
ht heCompanyar efreet oinspectt hedocument s
toseei ft herei sanyl i
mitati
onofpower sorlimit
ati
onspl acedont henat ureofthe
business.Thiscr eatedapr oblem-outsidersweredeemedt oknowanyl i
mitationpl
aced
ont heDirector soft heCompany .Thereforeifl
ater
,itwasf oundt hatt herewassome
i
rregular
itywi t
hi ntheCompanyi nrespectofanydeci sions,out sidershav ingdeali
ng
withtheCompanywer edeemedt obeawar eofit.Thisbecameknownast hedoctri
ne
ofconst ructive notice.Howev erthis created pr
oblem f orout siders who had no
knowledgei fsomei nternalprocedurehadnotbeencompl iedwi t
h.

Tocir
cumv entt
heabovepr oblem theCour t
sdev el
opedtheIndoorManagementRul e.
Thi
sprinci
plewasfi
rstf
ormul atedinthecaseofRoy alBri
ti
shBankvTur quandALLER
435[1856]
.Thiscaselaw principl
epr ot
ectsinnocentpar
tieswhoar edoingbusiness
wit
htheCompanyandar enoti naposi t
iontoknowi fsomei nt
ernalr
ulehasnotbeen
compli
edwi t
h.
Thedoctri
neofi ndoormanagementisanexceptiontotherul
eofconstruct
ivenotice.
Accordi
ngt other ul
eofconstruct
ivenoti
ce,aper sondeali
ngwi t
hthecompanyi s
deemedt ohav
eknowl edgeofthememor andum andtheart
icl
esofthecompany .Ifhe
enter
sintoat ransact
ionwit
ht hecompanywhi chisultr
av i
res,hecannottreatthe
tr
ansacti
onasbi ndi
ngonthecompany.

Thedoct r i
neofi ndoormanagementont heotherhandarguesthatoutsi
dersdeali
ng
withthecompanyar eent i
tl
edtoassumet hatever
ythi
nghadbeenregul
arlydonesof ar
asitsinternalpr oceedingsar econcerned.Therulei
nTurquand'
scaseisapr esumpti
on
ofregularity.Inot herwor ds,apersondeal i
ngwiththeCompanyisenti
tl
edt opresume
thatallthei nternalproceduresoft heCompanyhav ebeencompl i
edwi th.Thisisa
pract
icalappr oacht osolvingproblemsf acingoutsi
der
sbecauseanout si
derwoul d
havedifficultytodi scoverwhatisgoingoni ntheCompany.

Thedoct
ri
nehadi
tsor
igi
ninaf
amouscase,
“Roy
alBr
it
ishBankv
s.Tur
quand”
.

CaseLaw:Roy
alBr
it
ishBankv
s.Tur
quand(
1856)
ThedirectorsoftheBankissuedabondt oMr .Turquand.Thear ticlesprovi
dedthatt
he
dir
ectorshadt hepowertoissuebondifauthori
zedbypr operresolutionofthecompany.
Nosuchr esol
uti
onwaspassed.I twasheldt hatTurquandcouldsueont hebondashe
wasent it
ledtoassumet hatt heresol
uti
onmusthav ebeenpassed.I twasobser v
ed
thatpersonsdealingwi
ththecompanyar eboundt or eadtheregistereddocumentsand
toseet hattheproposeddealingsarenotinconsist
entt her
ewith,butar enotboundt o

51
domor
e.Theyneednoti
nqui
rei
ntot
hei
rr
egul
ari
tyofi
nter
nal
proceedi
ngs.

Thedoct
ri
nei
showev
er,
subj
ectt
othef
oll
owi
ngexcept
ions:
-
(a) Knowl edgeofirregul
ari
ty:-Apersonwhodeal
swi t
hthecompanyandwhohas
knowledgeoftheir
regular
it
yinitsi
nter
nalmanagementinconnecti
onwi t
hthesubj
ect
matterofhi
sdeali
ngscannotclaimthebenef
itoft
herul
einTurquand’scase.
(
b) Wher ecir
cumstancessurroundingthetransact
ionaresuspi
cious,andt
her
efor
e
i
nvi
tei
nqui
ry,
theout
sidercannotclai
mt hebenefitoft
hisr
ule.
(
c) Forgery:-Therulei
nTurquand’
scasewi
l
lnotappl
ywher
eadocumentonwhi
ch
t
heper
sonseekstorelyonisafor
gery
.

CaseLaw:
Rubenv
s.Gr
eatFungal
lConsol
i
dat
edCo.(
1906)
Rubenl entacompanyasum ofmoneyont hesecur i
tyofashar ecerti
fi
cat
e. The
secret
aryhadfor
gedthesignat
uresoft
hetwodirectorsandhadaffixedt
hesealonthe
cert
ifi
catewit
houtaut
horit
y. Thecompanyrefusedt or egi
stert
hesharecerti
fi
cate.
Rubencl ai
meddamagesrely
ingontheTur
quand’
sr ule.
I
twasheldthathecoul
dnotdosobecauset
her
uledi
dnotappl
ywher
ethedocument
wasf
orged.

(d) Act soutsi

det heapparentauthor
it
y:-Ther ul
einTurquanddoesnotapplywhere
aper sonact
ingonbehal fofthecompanyexceedsanyact ualorostensi
bleauthor
it
y
giv
ent ohim.Aper sonwhoent ersintoatransacti
onwit
hacompanyof fi
cialwhohas
actedbeyondoff
ici
al power
swi l
lnotbeprotect
edbyt her
uleinTurquandcase.

CaseLaw:AnandLal v s.Dinshaw&Co.(1942)
P accepted a t
ransferofcompany ’s pr
opert
yf r
om its account
ant. Si
nce such
tr
ansacti
onisapparentlybeyondthescopeoftheaccount
ant’
sauthori
tyi
twasvoi
d.

TheRul einTurquand'sCasei ssti

llappli
edt hr
oughoutmanycommonl awjuri
sdicti
ons
i
nt heCommonweal th.AccordingtotheTur quandrule,
eachout sidercont
racti
ngwi tha
companyi n good fait
hi s enti
tl
ed to assume t hatt he i
nternalrequir
ement s and
procedureshav ebeencompl i
edwith.Thecompanywi llconsequentlybeboundbyt he
contracteveniftheint
ernalrequir
ement sandpr ocedur
eshav enotbeencompl i
edwi th.
The exceptions her
e ar e:ifthe outsi
derwas awar e oft he factthatthe internal
requi
rement sandprocedur eshavenotbeencompl iedwith(act
edi nbadfaith)
;orifthe
cir
cumst ancesunderwhi chthecontractwasconcl udedonbehal fofthecompanywer e
suspicious.
52
TheTur
quandrul
ewasf or
mulatedt
okeepanout
sider
'sdut
ytoi
nqui
rei
ntot
heaf
fai
rs
ofacompanywit
hinr
easonabl
ebounds.

Tosummar
iset
heabov
epoi
nts:

1. I
fanof f
iceroft
heCompanyhasexceededhi
saut
hor
it
yasgi
vent
ohi
m byt
he
Ar
ti
cles
2. Ther
ehasbeensomenoncompl
i
ancewi
thani
nter
nal
procedur
e

3. Theout
sidermaypr
esumet
hatt
hei
nter
nal
procedur
ehadbeencompl
i
edwi
th.

nMahonyvEastHol
I yfor
dMi
ningCo[1]Lor
dHat
her
lyphr
asedt
hel
awt
hus:

“Whenther
ear eper
sonsconductingtheaff
air
soft hecompanyinamanner
whichappearstobeperf
ectlyconsonantwiththearti
clesofassociat
ion,
thosesodeali
ngwitht
hem external
l
yarenottobeaffect
edbyirr
egulari
ti
es
whichmaytakeplacei
n
t
hei
nter
nal
managementoft
hecompany
. ”

So,nMahony
i ,wherethecompany '
sart
icl
esprovi
dedt hatchequesshouldbesignedby
anytwoofthet hreenameddi r
ectorsandbyt hesecretary,thef
actthatthedir
ectors
whohadsignedthechequeshadnev erbeenproperlyappointedwasheldtobeamat ter
ofi
nter
nalmanagement ,andthethi
rdparti
eswhor ecei
v edthosechequeswereenti
tled
topr
esumet hatthedi
rector
shadbeenpr oper
lyappointed,andcashthecheques.

53
 THECOMPANYSHARECAPI
TALANDSHARES

Thet erm capitalref

erst oresourcesthecompanywoul dutil
i
zei nthepr ocessof
producti
on.Ital soreferstot heproper
tybr oughtint
ot hecompany ,whichmaybe
tangi
ble ori nt
angibl
e.I n ot
hersense the t er
m capitalalso ref
erstot he tot he
i
ndividual
’sshareoft heassetswhichdeterminestheamountpr of i
therecei
vesandi f
theenterpri
seisdissolved,hi
sshareofassets.Therearebasical
lytwoway sinwhicha
companycanr aisecapital
.Thi
smayal sodependonwhet herthecompanyi sapr i
vate
orpubliccompany .

Pri
vat
ecompanieswouldusual
l
yraisethei
rcapitalf
rom t
hei
rownmembershi
p.A
publ
iccompanywouldi
ssueoutaprospect
uscalli
nguponmemberst
oinv
estinthe
companyi
nbothcasest
hecompanywouldberai
singshar
ecapi
tal
.

Ther
eishoweveranot
herwayinwhi
chacompanycanrai
secapi
talfr
om non-members
ofthe company.Thi
si sthr
ough l
oan capi
talf
rom v
ari
ous cr
edit
ors orfi
nanci
al
i
nsti
tut
ions.

I
magi net hatthecombinedval
ueofal lassetstheybr
ingint
othebusinessis$2000and
sot hecompanyi ssueseachwith500shar eof$2.00each.Af t
eray earoft
radingthe
valueoft heassetsisthesameandt hecompanyhasmade$1000pr ofit
.Thecompany
woul dpayadi vi
dendof$1.00pershar ei.e.eachsharehol
derwouldget$500oft he
profit
,andi fitwastobewouldupatt hi
sst ageandtheassetssol
deachshar ehol
ders
woul dreceiveheshareoftheasset
snamel y
$1000.00each.

Thisisrathersimplif
icationoft hepr
ocessbecauset heasset
smaydepreciatehence
dropinv alue.Ont heot herhandi ft
heshar esaresoldtothepubl
ice.
g.throughthe
stockexchange, t
heymaybewor t
hmor ethanthei
rnormalval
ueof$2.
00each.Thisis
sobecausebyt hentheirpriceiswhatpeopleareprepar
edtopayfort
hem eventhough
thenominal val
uewoul dr emainunchanged.

TypesofShareCapi
tal
a)Author
isedCapi
tal
Thiscapit
alist
heamountstatedinthememorandum ofAssociati
on.Thecapit
alisthe
amountwhi chthecompanyisaut hori
zedtoissuehenceitisal socal
l
edaut hor
ized
capit
al.Thememorandum ofAssociat
ionmustdivi
detheaut
horizedcapi
tali
ntoshares
ofaf i
xedamountsalthoughiti
snotnecessaryt ospeci
fyt
hecl assoftheshares.In

54
pr
act
icet
henomi
nal
amountsubscr
ibedbyt
hemember
s.

b)IssuedCapit
al
Theissuedcapi
talofacompanyistheamountrepresentedbyshares,whichhavebeen
i
ssuedt ot
hemember s.Thei
ssuedcapit
ali
stheext entofwhichmember sareindebted
tothecompany .Onceashar
eholderhasbeenissuedwi thsharesheisobligedt opay
fort
hem.Onwi ndingt
heshar
eholdersmayberequest edtopaysharesi
ssuest othem.

c)Call
edCapi
tal
Iti
snormalpracti
cet hateventhoughsharehol
dershav
ebeenissuedwit
htheyar
enot
expect
edtopayf orthem rightaway.Cal
l
edCapi t
ali
sthatpar
tofthei
ssuedcapi
talon
whichshar
eholdershav ebeenrequest
edtopayfor.

d)Uncal
l
edCapi
tal

Thisisdi
ff
erencebet
weentheamountoftheshar
esissuedt
oamemberandt he
amountofshareswhicht
heshar
ehol
derhasbeenrequest
edt
opayf
or.e)Pai
dup
capit
al

Thi
sist
hemoneyr
eceiv
edbythecompanyaspay
mentf
orshar
es.I
fshar
es
hav
ebeencal
l
eduptheyhav
etobepaidup.
)Unpai
f dcapi
tal
Thi
sistheamountwhi
cht
he shar
ehol
der
shav
ebeencal
l
edt
opaybuthav
e
notpai
d.

g)Reser
veCapi
tal

I
nt ermsofSect i
on86oftheactacompanymaypassaspeci alresolut
iont
hatanypart
ofitssharecapit
alwhichnotal
readybeencall
edupshallnotbecapableofbei
ngcall
ed
exceptwhent hecompanyisunderj udi
cialmanagementorisbei ngwoundup.This
amounti scal
ledreser
vecapit
al.

MAI
NTENANCEOFCAPI
TAL

Thecompany’sissuedcapit
al i
sveryimportantbecausewhencr edi
tor
saregi vi
ngcredi
t
tot hecompanyt heylookt owardst hecapitaloft hecompanyassecur i
tyforthe
repaymentoftheirdebts.Thisisf urt
herampl if
iedbyt heconceptoflimitedli
abil
it
y
whichlimi
tsthel i
abi
li
tyofshar eholdersfrom contri
buti
ngt owar
dsthedebt soft he
companyhencepl aci
ngaser iousrisktothecr edit
orswhocanbepr ejudicedifthi
ngs
gowr onginthecompany .Asar esultbot
ht helegisl
atureandthecommonl aw have
55
enactedprovi
sions,whi
charedesignedt
hatt
hecapit
aloft
hecompanyi
snotunl
awful
ly,
andunilat
eral
lyreduced.Thefol
lowingpr
ovi
sionsar
edesignedt
omaint
aint
hecapit
al
ofthecompany .

1.Pr
ohi
bit
ionofaCompanyPur
chasi
ngownshar
es

Creditor
sareenti
tl
edtorelyuponthefactt
hatthecompanyhasrecei
vedassets
from itsmemberswhichistheamountpaidoragreedtobepaid.Theyar
eal so
entit
ledtoassumethatoncecapi
talhasbeensubscr
ibedi
tisnotr
educedbyand
retur
nt othemembers.

Historicallytheref
oreacompanywasnotal l
owedt opur chasei townshar es.Itwas
thoughtt hatthiswasamountt oretur
ningt hecapi t
alt otheshar ehol dersandwoul d
resultinunaut hor
isedr educti
onofcapi tal.Thiswast herulingi nt hef amouscaseof
Trev orvWhi twort
h( 1887)inwhi chlordWat sonsaid“ oneoft heobj ectscont emplated
byt hel egisl
atureinrestri
cti
ngt hepowerofl imit
edcompani est or educet heamountof
theircapi talassetf orthinthememor andum i st oprotectthei nterest softheout side
publ i
cwhomaybecomecr editors.I
nmyopi niontheeffectoft hesest atutor
ypr ov
isions
i
st opr ohibitever
yt ransacti
onbet weent hecompanyandashar ehol derbymeansof
whi cht hemoneyal readypai dt othecompanyi ntr
ospectofhi sshar esi sirr
evocably
returnedt ohi m”.

Thestr
ictposi
ti
onhashoweverbeenr
elaxedbySecti
on128oft
heact
.ACompanycan
now purchaseownsharesprovi
dedcertai
nrequi
rement
sdesi
gnedofsaf
eguar
dthe
i
nter
estsofcredi
tor
sar
emet.
a)Thecompanyshoul
dbeaut
hor
izedbyi
tsar
ti
cledt
odoso.
b)Thepur
chasedhast
obeaut
hor
izedi
nadv
ancebyt
hegener
almeet
ing.

c)Theauthori
tyshoul
dspeci
fyint
eral
iat
hemini
mum andmaxi
mum pr
icesatwhi
chthe
shar
eswoul dbeboughtthenumberofshar
es,whi
chmaybeacqui
red,andt
hedate
atwhichtheauthor
it
ywouldexpi
re.

d)I
nt er
msofsecti
on127suchsharesshallonl
ybepurchasesoutofprof
it
swhich
wouldot
her
wisebeav
ail
abl
efordi
str
ibut
ionasdi
vi
dendoroutofpr
oceedsofaf
resh
i
ssue.

e)Acompanyshal
lnotpurchaseownsharesi
fthenetef
fectofdoi
ngsowil
lbetoleav
e
i
twit
houtmembersholdingshar
esothert
hanredeemableshar
es.Thi
spr
ovi
sionwas
56
 i
nser tedtoensur et hatt
hepurchaseofownsharesmaynothi j
ackedbyunscrupul
ous
dir
ect orstomai ntainthemselv
esinpowerandcont r
olovert
hecompany .Sect
ion132
prov i
dest hatwi t
hin28day sofbuyingownshar esacompanyshal ldeli
vertot he
registrarar et
urnshowi ngthenumberofsharesandt hedateatwhi chtheshar es
wer edel i
veredtot hecompany .Thecompanyit
selfshal
lkeepacopyoft hecontract
oft hepur chaseandi fthi
sisnotdoneanyof f
icerofthecompanymaybegui l
tan
offence.

2.Pay
mentofCommi
ssi
ons

Acompanymaypayacommi ssi
ont oanyper sonasconsider
ationforhissubscr
ibi
ng
f
orshar
es.Thecompanies’actal
lowst hi
s,howeverthecommi ssioncanonlybepaidif
i
tdoesnotr
esulti
nthereducti
onoft heavail
ablecapi
tal
.Secti
on122l aysdowncertai
n
r
equi
rements,
whichhav
et obesat i
sfi
ed.
a)Anycommi
ssi
ont
obepai
dshoul
dbeaut
hor
izedbyt
hecompany
’sar
ti
cles.
b)Thecommi
ssi
oncannotexceed5%oft
hepr
iceatwhi
cht
heshar
esar
eissued.
c)I
fitisapubli
ccompanyt
her
ateoft
hecommi
ssi
onshoul
dbedi
scl
osedi
nthe
pr
ospect
us.

d)Ifi
tisapr i
vat
ecompanyt herateshoul
dbest atedinastatementwhi
chissi
gnedand
present
edt other
egi
strar.Anycommi ssioncannotbepai doutofthecapi
taloft
he
company .I
tmaybeobtainedfrom thesharepremium account
.

3.I
ssueofshar
esataDi
scount

Acompanyi sal
l
owedtoissuesharesatadiscount.Thi
smeansshar eswhi
char eworth
$1maybesol dat95cents.Howev ertheval
ueoft heshar
esint hecompany’
scapi tal
accountshallal
waysber ef
lectedas$1.Thei ssueofsharesshouldnotdiminishthe
capi
t aloft
hecompanySection125laysdownapr oceduret
obef oll
owedtoensur et
hat
theissuedoesnotr
esul
tinar educt
ionofcapit
al.
a)Ther
emustbeaspeci
alr
esol
uti
onoft
hemember
s
b)Thespeci
alr
esol
uti
onshoul
dspeci
fyt
hemaxi
mum r
ateofwhi
cht
heshar
eswi
l
lbe
i
ssued.
c)I
tmustbeappr
ovedorsanct
ionedbyt
hecour
t

d)Acompanycannoti
ssueshar
esatadi
scountunl
essi
thasbeeni
nbusi
nessf
ormor
e
t
hanoneyear
.

4.Fi
nanci
alAssi
stancebycompanyt
opurchaseownshar
es
57
I
tisillegalf oracompanyt odirectl
yori ndir
ectl
ygiveanyfinancialassist
anceforthe
acquisitionofanyofi t
sshar esorshar esofahol di
ngcompany .Assuchacompany
cannotpr ov i
de securi
tyt o any one intending t
o borr
ow money f rom a f i
nancial
i
nstit
ut ionorcr edi
torwhichl oanwoul dbeusedf orthepurposesofpur chasingshar
es.
Howev erifcer t
ainproceduresl aiddowni nsecti
on123ar ef ol
lowedt henitismade
surethatt herewi l
lbenor eductionofcapitalandsuchassi
stancemaybeal lowed.
a)
Ther
emustbeaspeci
alr
esol
uti
onoft
hecompany
.

b)
Immediat
elyafterthecompanyhasgi venfi
nanci
alassi
stancet
heassetsoft he
companyshouldbesucht hatitissti
l
lablet
omeeti t
sdebtsasandwhent heyfold
due.Secti
on 123(2)(
a)stipul
atesthatwheretheacthasbeen cont
ravened any
cont
ractto provi
deassistancemaybesetasi deifthecompany,i
tsliquidat
or,
memberorcreditorhassued.

5.Under
wri
ti
ngCommi
ssi
on

Anunderwr i
teri
saper son,whoguar anteeapubl i
ccompanybysi gningacont ractt hat
i
fshares,whichhavebeeni ssuedt othepubl ic,arenott aken,andt herequiredmi nimum
subscri
pti
oni snotav ailabl
e,thenhewoul dt aket hem.Suchacont ractiscalledan
underwri
ti
ngcontract.Anunder writ
ermaybet akenacer tai
namountascommi ssiont o
actasani ncenti
vef orhi mtosi gnt heagr eement .Howev erthecommi ssioncanal so
notexceed5%.Bef or etheshar esar eof feredt ot hepublicacopyoft heunder wr i
ting
contr
actmustbel odgedwi thr egi
strart oget herwi t
hanaf fidav i
tswor nt obyt he
underwri
terundert
akingt hathehasabi li
tytot akeup, t
heshar es.Iftheunder writerisa
companyt hentwoaf fi
dav i
tsoftheunder writi
ngcompany ’
sadi r
ect orshallberequired.

6.Pay
mentofDi
vi
dends

Thewhol epur poseoff ormingacompanyi st or eal i

zeprofitandshar eitamongstt hose
whohav einvestedinthecompany .Whent hispr ofiti
sdi str
ibuteditiscall
eddividend.
Therear enumberofr ulesr egul
ati
ngpaymentofdi vi
dendt oensur ethatthecapitalof
thecompanyi snotunilaterall
yandunlawfullyreduced, t
hecommonl awpositi
oni sthat
div
idendsshal lonlybepai doutofpr of
it
soft hecompany .Thisi salsoprovidedi n
Arti
cle72ofTabl eAoft heSI XTH SCHEDULECompani esAct .Ifacompanyadopt s
TableA, t
hedi videndwoul dbedecl ar
edbyt hegener almeet i
ngonr ecommendationsof
dir
ectors.Howev erint ermsoft hesearticles,t heshar eholdersar enotallowedt o
declar
eadi v
idendexceedi ngt heamountr ecommendedbyt hedirector
s.Thedirectors

58
ar
ealsoall
owedt osetasi
deanamountofprofi
tswhi
chshal
lnotbedi
str
ibut
edas
di
vi
dendshal
lbeari
nter
estagai
nstt
hecompany
.

Theshar eholder
s,i fTABLEA ar t
iclesar eadopt ed,donothav ear i
ghttoclaima
div
idendunt i
lithasbeenl awfull
ydecl aredbyt hegeneralmeeti
ng.Thecourtsar
ev er
y
rel
uctanttointerveneincaseswher et hedirector
shav eploughedbackallthepr
ofit
s
i
ntot hecompany .Howev eron gr oundsofequi tythecour t
smayi nterf
erewhere
dir
ectorsarepermanent l
ycapital
izi
ngpr ofit
stot heprej
udicemembers.

Onceadi vi
dendhasbeenl awful
l
ydecl ar
editbecomesarightoftheshareholder
sanda
debtoft hecompany .Theshareholdertheref
orebecomesacr edi
torandcansuef or
non-paymentoft hedeclareddi
videndi ntermsofcommonl aw di
videndar epai
di n
proport
iontot henominalval
ueofshar esheld.I
tishowevernotewor t
ht hatacaseit
wouldhav etheregi
steri
tsownarti
cles.

6.All
otmentofshar
es f
ora noncash Asset
Al
lot
mentofshar
es

Theallotmentofshar
esisthei
ssueofnewsharesbyacompany
.Aper
sonwant
ingto
obtainnew sharesinacompanyappli
estothecompanyforaspeci
fi
ednumberof
shares.Thecompanyacceptst
heoff
erbyal
l
otti
ngshar
es.

Whenacompanyi sfi
rstfor
med,t
hepersonstowhom t hesharesareallot
tedwil
lbethe
personswhosignedt hememorandum ofassociati
onassubscr i
bers.Whensharesare
al
lotted,t
heshareholderandt
henumberofshar esallot
tedshouldbeent eredinthe
company ’
sregi
sterofmembersorregi
sterofsharehol
ders(astatut
oryregi
ster
).

I
fapubl i
ccompanyi st oallotsharesasconsi derat
ionforanon- cashassett herei sa
dangerofunl awfulr eductionofcapi t
alint hatamembermayhav eshar
esgi vent ohim,
whichexceedst hev al
ueoft heassethewoul dhav egivenasconsi derati
on.Theact
therefor
epr ovi
dest hatapubl iccompanycannotal lotsharesasconsi derati
onf ora
noncash assetunl ess a per son qualifi
ed to be an audi t
oroft he company has
i
ndependent lyvaluedt henon- cashasset .Theper sonhastopr epareareportstipulati
ng
thatthev al
ueoft henon- cashasseti snotl essthant henomi nalval
ueoftheshar esto
bei ssued.Thispr ov i
siondoesnotusual l
ytouchonpr ivatecompani esunl esst he
i
nadequacyi sclearort hecont r
acti
sf raudulent.

g.Wher
eacompany
’scapi
talhasbeenser
iousl
ydi
mini
shedt
hedi
rect
orsoft
he
59
 publi
ccompanyareempoweredtosummonanextra–ordi
nar
ygener
almeet
ing
especi
all
yift
heassetshavefall
entohal
forless.Thecompanyi
stopassa
resol
uti
ononthecour
seofacti
ontobet
aken.

8.I
ssueofRedeemabl
eshar
es

I
tiscommont hatacompanymaywantt or aisecapi
talf
orspeci
ficpur poseata
specif
icperi
od.Howev ersuchcapit
almaynotbeneededatal aterstage.Thereisa
dangerthatther edempt i
onofredeemabl
esharesmaybemadef rom capit
al.Tobuyit
s
sharesther
ear ecer t
ainsafeguar
dsprovi
dedbyt heact
.
Ther
easonswhyacompanycoul
dnotpur
chaseownshar
eswoul
dincl
ude:

a)Ifashareholderi
sgi
vencashf
orhi
sshar
es,t
hen;l
esscashi
sav
ail
abl
etomeett
he
clai
msof
thecredi
tors.

b)
Ift
hecompanypai dtooli
tt
letoasharehol
derforhi
ssharesthi
swouldincr
easethe
val
ueoft heremai
nderanddir
ector
swouldusethist
oincr
easetheval
ueoftheirown
holdi
ngs.Howeverther
ehasbeenat endencytorel
axthi
sr ul
eonpurchaseofown
sharesbecauseatt
imesiti
stothebenefi
toft
hecompany.

Themai
nadv
ant
agesofpur
chaseofownshar
eswoul
dincl
ude.

Thecompanyi
nkeptasaf
ami
l
yaf
fai
rwi
thoutunnecessar
il
yincr
easi
ngt
henumberof
members.

a)I
tincr
easest
hemarketabi
l
ityoft
heshares,asthecompanyi
tsel
fisanot
herpot
ent
ial
buyer
.Thi
sgi
vesconfi
dencetootherpotent
ial
buyers.
b)Thecompani
esar
eabl
etout
il
izet
hepr
ofi
tst
otheadv
ant
ageoft
heent
erpr
ise.

Toensur ethatthecompanyisnotputunderunnecessarypr
essur
esect
ion84pr
ovi
des
thatifthecompanyf ail
storedeem i
tsshar
esitshallnotbeli
abl
eindamagesandno
orderforspecif
icperf
ormanceshall
madeagainstthecompanybythecour
t.

I
ft heshar
esar eredeemedatapr emi um i
tmeanst hecompanyi sbuyi
ngt hesharesat
apr i
ceexceedingthei
rnominalvalue.Sect
ion127oft heactprovi
desthatthepr emium
tobepaidbyt hecompanyshal lbeoutofdistri
butabl
eprofi
ts.I
fthecompanyor i
ginall
y
i
ssuedt heshar esatapr emium t henredempt i
onmaybepr ovi
dedf r
om t heshar e
premium accounttot hedoesnotexceedt hepremiumsr ecei
vedont hei ssueoft he
60
shar
esbei
ngr
edeemed.Shar
es,
whi
char
eredeemed,
aret
reat
edascancel
l
ed.

I
nt ermsofSecti
on126whenacompanyinterali
a,r
edeemsanyredeemablepr
efer
ence
sharesitmustwithi
n28daysofdoi
ngnotifytheregi
str
art
her
eofbyl odgi
ngwithhi
m
CR4.Thepar t
icul
arsofr
edempt
ionmustbesetoutherei
n.

REDUCTI
ONOFCAPI
TAL

Eventhoughitisnotdesi
rableforacompanytoreduceit
scapitalt
her
ear ecer
tai
n
compelli
ngsit
uat
ionswherethecompanyhasnoopti
ons.Reduct
ionofcapi
talmaybe
necessaryi
nthefol
lowi
ngsit
uati
ons.

Tocancelpai
dupcapit
al,whi
chislostandnol
ongerr
epr
esent
edbyt
heasset
sfore.
g.
wher
etheassetshav
elargel
ydepreci
ated.

b)Torepaycapi
tal
,whi
chi
sinexcessoft
hecompanyneeds.Acompanyshoul
dnotbe
over
capi
tal
i
zed.

c)Toext i
ngui
shtheli
abil
i
tyofmember sonshar ecapi
talt
hathadbeenissuedbutnot
paidfor.Acompanyist her
efor
eauthori
zedtoreduceit
scapit
al.Howeverstr
ingent
requi
rementsarel
aiddownbyt heactinSect
ion144to149havet obefol
lowed.
i
)t hecompanyhast obeauthor
izedi
nadvancebyitsart
icl
esof
associ
ati
oni
i
)thecompanyhast
opassaspeci
alr
esol
uti
ont
odoso.

i
ii
) Ther educt
ionmustbeconf
ir
medbyacour tor
der.Thecour twouldonlyconf
ir
m
i
ftheint
erestoft
hecredi
tor
sarewellcat
eredforinthespecialresol
uti
on.Intermsof
Sect
ion146anunpaidcr
edit
ori
senti
tl
edtoobjecttot
her educt
ion.

i
v) t her
egist
raronpr
oduct
ionoft
hecour
tor
derconf
ir
mingt her
educti
onandthe
minut
esapprovedbythecourtwoul
dthenr
egi
stert
hereduct
ionandt hepar
ti
cul
ar

61
di
visi
onandcl
asses
ofshares.

Admini
str
ati
vel
y,t
hespeci
alr
esol
uti
onofthecompanyshallbei
nfor
m CR11and
shoul
dbesubmitt
edwi
thi
nonemonthoft
hepassi
ngt
hereof
.

I
ncr
easeofShar
eCapi
tal

A Company maypr ef
ertoi ncr
ease i
ts capi
talbeyond t
hatst
ipul
ated i
nthe
Memorandum ofAssoci
ati
on.Sect
ion98provi
desthat
.
a)Ther
emustbeaspeci
alr
esol
uti
ononf
orm CR11aut
hor
isi
ngt
hei
ncr
easeofcapi
tal
.
b)Thi
smustbel
odgedwi
tht
her
egi
str
arwi
thi
nonemont
haf
teri
tspassi
ng.

c)Noti
ce of incr
ease of nominalcapitali
nfor
m CR 5 mustal
so be l
odged
si
multaneousl
ywit
hspeci
al r
esolut
ion.
d)Apr
escr
ibedf
eehast
obepai
d.
e)Thecondi
ti
onsofi
ssueoft
henewshar
esmustbespeci
fi
edi
nfor
m CR5.

TheShar
epr
emi
um account

Acompanyi sallowedtoissueshar
esatav al
ueexceedingt
heirnominalval
uesothatit
canenhancei tscapit
alreser
ves.I
facompanydoest hist
hent hedif
fer
encebetween
theactualval
ueoft hesharesandthepr
iceatwhichtheyaresoldshouldbedeposit
ed
int
oashar epremium
account.

i
)Topayf orthoseuni
ssuedsharest obeallott
edtomember ’sdirect
or’
sempl oyee’
s
e.
t.
casbonusshar es. i
i
)Towr i
teoffthecompany ’
spr el
iminaryexpenses.i
ii)To
payforcommi ssi
onspai
dordiscountsall
owedonanyi ssueofshar esordebentures.i
v)
Toprovideforapremi
um payabl
eonr edemptionofanypreferenceshares.

Capi
talRedempt
ionReser
ve

Sect
ion126empowersacompanyt oissueshares,whichi
tcanl aterbuyback.The
buyi
ngbackismadebythecompanyusi nganyprof
itst
hatwouldhavebeendistr
ibuted
asdivi
dendoroutoftheproceedsofaf r
eshissue.Theeffectofpurchasi
ngt hese
shar
esbythecompanyi
sthattheissuedsharecapi
tali
sdimi
nished.
62
Secti
on133t her
eforeprovi
desthatanamountequi valenttothatbywhi chtheissued
capit
alhasbeendi mini
shedshouldbet r
ansferr
edtoar eser
vef undcalledthecapital
redempti
onreserve.Li
kethesharepremium account,t
hisaccounti spartofthecapital
accountandanyrulesregul
ati
onthecapit
alaccountalsoapply.Thusi fshar
esaretobe
redeemedthecompanyhasgott of i
nd,notonlyenoughmoneyt opayt hesharehol
ders
butalsoanequiv
alentamounttotransf
ertothecapit
al r
edempt i
onr eservef
und.

Asimpleexamplewouldi l
l
ustrat
et hi
s.Assumeacompanyhas1000shar eof$1.00
eachwhicharef ul
l
yissued.Thecompanydeci destobuy400oft heseshar
es.The
companydecidestobuy400oft heseshar es.Thecapit
alistherefor
esupposedtopay
theshar
ehol
ders$400andt hendepositafurther$400inthecapitalr
edempti
onreser
ve.
Admitt
edlyt
hisexampl
ehasbeendemy st
if
iedtot heextentofabsurdi
ty.
Howev
eri
tcl
ear
lyshowshowt
hecapi
tal
redempt
ionr
eser
vei
soper
ated.

CLASSESOFSHARES

Thearti
clesofAssoci
ati
onofacompanycancr eateshar
es,whichcarr
ywiththem any
ri
ghtsorcombi nat
ionofr i
ght
s.Howev eriti
si mport
antthatbeforeconsi
deringthe
di
ffer
enttypesofshar
es,thenat
ureofshareshouldbeconsi
dered.

Nat
ureofashar
e

Asharedenotest herightsandi nterestofashar eholderinacompany .Theinter

esti
s
measuredismonet aryterms.I tisincorporealpropert
ywhi chcanbeboughtandsol d,
mort
gagedbequeat hedet c.Byv i
rtueofhi ssharesashar eholder
senjoyscert
ainri
ght
s
whi
chincludeinteral
ia,therighttobegi venadi videndwhendecl ar
ed,t
her i
ghttovot
e
meeti
ngstherighttobegi vennot i
cesofmeet i
nget c.

I
tisi mport
anttonot
ethatashar
eisnotasum ofmoneybutani nterestmeasuredin
monet ar
yterms.Byvi
rt
ueofshar
ethesharehol
derbecomescont
ractuall
yliabl
etopay
forittothecompany.Ther
eisacontr
actbetweenthemembersthemsel vesandalso
betweenthemembersandthecompany.

Pr
efer
enceshar
es

63
Theshar esar edesignedbasi call
yf orthoseshar ehol
derswhowantast eadyr et
urnof
thei
r
capitalinvestmentcombi ned wi t
h high levelofsaf ety
.Theyconf eron t hehol der
preferenceov ertheothershar eholdersinrespectofpay mentofdi v
idends,repayment s
ofcapi talorbot h.Thismeanst hatwhen di r
ectorsofa companyhav e declared
divi
dends,pr efer
enceshar eholdersar epaidf i
rstbeforeanyot hershareholderispai d.
Preferenceshar eholdersareent i
tledt oaf i
xeddi vi
dende. g.5%.Ifthecompanyonl y
makessuf fi
cientpr ofi
ttosat isf
yt heamountofpr eferenceshareholders,theot her
shareholderswi l
lnotbepai d.

Therightsofpref er
enceshar ehol
dersaregov ernedbyt hei
ragreementi nthearti
clesof
associati
on.Howev eritis noteworthythatpr ef
erence shar es ar e deemed t o be
cumul ati
veintheabsenceofpr ovisi
ontot hecont rary
.I ft
heyar ecumul ati
veitmeans
thatifthecompanydoesnotmakesuf fi
cientpr ofi
tsinapar t
icul arandasar esulti
t
fai
lstopaydi vi
dendsi twil
lbeinar r
earsandt heper centagewhi chisinar r
earswi l
lbe
paidthef ol
lowingy ear.Ift
heamount shav evast l
yaccumul atedt herul
ei salwaysthat
noor dinarysharehol der
swi l
lreceiv
edividendsunt i
lthepr ef
er enceshar eholder
sar e
paidinf ull
.Ifpreferencesharedar enotcumul ati
vet henitmeanst hatthecompany
shall
notpaydi videndsi narr
earsofthepreviousy ears.

Theef fectisthati fadividendisnotpai dinapar t

icularyearthennodi v
idendwi l
lbe
cl
aimed i nthe subsequenty earf ort he pr
evious y ear.I fpref
erence shar es are
part
icipatoryitmeanst hattheshar eholderafterr eceivi
ng hisfixed percent ageis
enti
tledtopar t
icipatewiththeordinarysharehol
der sont heremaini
ngpr ofi
ts.Thust he
preferenceshar eholdersmayal so beabl et ot akea por ti
on ofthepr ofit
si fthe
divi
dendsofor dinarysharehol
dershav eamount edt oascer tainfi
gure.Obv iouslysuch
sharesar eburdensomet othecompanyandwoul donl ybegi venwher earecompanyi s
i
ndesper at
eneedf orcapit
alorasani ncenti
veforashar ehol
dertoinvest.

Mostpr eferenceshar esar er edeemabl e.Thi smeanst hatt hecompanyi sgivenan

opti
onofbuy ingback.Pr efer encesshar esar ealiabili
tytot hecompanyassuchar e
onlyi ssuedwher et hecompanyhasf ailedt or ai
secapi talonor dinaryshares.I tis
thereforeast opgat emeasur e.Thecompanymayneedt hecapi talgainnowbuti tmay
notneedi tatal aterdat
ebecausebynowi twoul dbeoper atingatfullscal
e.Ther eason
whyt heyar ebur densomei st hatt heycarryaf ixedpercentagewhi chmaybecumul ati
ve
fort hat.Sect ion126 pr ohibitsacompanyf r
om issuing r edeemableshar esi ft he
companyhasnor educt
ionofcapi t
alwhent hecompanyr edeemsi t
sshar esprovisions
rel
atingt opur chaseofownshar esshouldbecompl i
edwi th.Thisisdesignedt oensur e
thatcr edi
torsar enotpr ej
udicedwhencapi talisreturnedtot heshar ehol
ders.Fir
st l
yno
companycanr edeem sharesunl esst heyar ef ull
ypaidf or
.
64
Secondl
ysect i
on127pr ovi
desthatredemptionofshar esshallonl
ybemadef r
om
prof
it
softhecompanyav ai
l
ableforpaymentasdi vi
dend.Thi
rdl
y,i
thasbeennot
edthat
anamountequi val
enttotheamountbywhi cht hecompany ’
scapitali
sdimi
nished
shoul
dbetransfer
redt
othecapit
alredempti
onr eserve.

ORDI
NARYSHARES

Thesear ethemostusualt ypeofshar esOr dinar

yshar ehol dersdividendi snotaf i
xed
amount .Thedi v i
denddependswi ththeamountofdi vi
denddecl aredi nt hatpar ticul
ar
year.Itiscommont hatt heset ypeofshar esf ormt helargestpor ti
onoft hecompany ’
s
capital
.Hol dersoft hisclassofshar esbeart hemaj orriskoft heent erprise.Asar esul
t
theyar egiventher i
ghtbyt hear ti
clesofassoci at
iont odet erminemostoft hecompany
i
ssues.Theyar eonl yent itl
edt oreceivedi vi
dendi fpreferenceshar eholder shav ebeen
paidi nf ullhence t hiscl assi sof ten referr
ed to asa r esi
duarycl ass.Themai n
disadvantageofor dinaryshar eholdersist hatift
her eisnotenoughdi videndt heymay
notgetany thi
ng.Ont heot herhand,i fthecompanymakesawi ndfallofpr of i
ts,the
ordinaryshar eholders woul d getmostofi t
.Usual lyt he maj or
ityshar eholders of
companyhol dt heseshar esbecauseoft heneedt oputt hemselvesatt hef r
ontofany
ri
skt herebyat t
ractingi nvestorconf i
dence.Thev otingrightsofsuchshar eholdersr un
proportionall
ywi t
ht heirshareholding.

DEFERREDSHARES/
BONUSORVENDORSSHARE

Deferredshar esaret hoseshar es,whi chentitl

ethehol dertoapor t
ionoftheprofit
sif
thedividendofor dinaryshareholder shasbeensuf f
ici
entlypaid.Whenthesesharesare
i
ssuedt heyareusual l
yissuedasar ewar dforservi
cesr enderedtothecompanyorf or
pay mentofgoodwi l
l.Int hisr espectsuch shar es are gi v
en to promoters as
considerati
onf ort
hei rcontri
butiont ot hef ormati
onoft hecompany .Theyar ealso
givent odirectorsasmanagementshar es.Thesear ehowev ernotaconsiderat
ionfor
wor kdonebutt oactasani ncent i
v eforeffi
cientmanagementoft hecompanybecause
theywoul dnowhav eabi t
eoft hecaket heyar ebaki
ng.

Obvi
ousl
ytheexi
stenceofthi
scl
assofshar
eswoul
dmeanadi
minut
ionoft
heamount
ofpr
ofi
tsavai
l
abl
easdi v
idendst
oordi
nar
yshar
ehol
der
s.

I
ssui
ngofShar
es

Essent
ial
l
ytheCont
ractt
otakeshar
esi
sacompanygov
ernedbyt
hegener
alpr
inci
ples
65
ofl
awofcontract
.Ther
emustbeof
ferandacceptance.Allt
heessent
ialel
ementsofa
val
i
dagreementmustbemet(f
ormoredet
ail
spleaser ef
ertost
udypackbyt hi
sauthor
onBusi
nessLaw).

Themat eri
alt ermst obef oundinsuchacont ractarethatonehasadut ytopayf orthe
sharest hathav ebeenal l
ottedtohi m.Thepay mentmaybeanal l
ot mentorwhent he
dir
ectorsmakeacal lforthepay ment .Thedirector
smayal l
otshares,whichwoul dbe
paidatl aterst age.Thecal lcanbemadewhent hecapi t
alisneed.Itwashel dinthe
caseofAl exandervAut omat icTelephoneCompany( 1900)2Ch.56( C.A)t hatthe
dir
ectorswoul dmakeacal lt
obenef itthecompanynott hemselves.Inthiscaset he
dir
ectors,wi thoutt el
l
ingtheshar eholderswhatt heyweredoi ng,i
ssuedacal lonshar e
uponwhi cht heyt hemselveswer enotl i
abletopay .Thecour trul
edt hatdi
rectorswho
uset heirpower ssoast oobt ai
nbenef it
sf orthemselvesatt heexpenseoft heother
shareholder s,withoutinformingt hem oft hefacts,cannotbeal l
owedt oretainthose
benefitsbutmustaccountf orthem t othecompanysot hatallt
heshar eholdersmay
part
icipatei nthebenef i
t.

Shareholderscanpayf ortheirsharesbef or
ecall
sbutt hi
sshouldbef ort hebenefi
tof
thecompany .InReEur opeanCent ralRailCompany,sykescase(1872)LR13Eq255a
companyhad no moneyt o paydi rectorsfees.Theyt her
efore paidt he amounts
outstandingont heirsharesinadv anceandt henpaidtheseamount stot hemselvesas
fees.Thecour truledthatsuchpay mentwasmal afi
deamount i
ngtobr eachofdut yof
utmostgoodf ait
hbydi r
ectors.Theywer eheldsti
lll
i
abletopayfortheirshares.

66
 SHARECERTI
FICATES

I
nt ermsofsect ion153,andt ableA (46)6th Schedule,acompanyshal lwithintwo
mont hs,ofallotmentofshar esordebent ures,completeandhav ereadyfordeli
v er
ythe
certi
fi
catesofal lsharesandf oralldebenturesunlesst heconditionofissuepr ovi
des
otherwise.Fai l
uret odot hisisanof fencebyanyof ficeroft hecompany .A share
certi
fi
cateisev idenceofshar eholdi
nginacompanyandev erysharehol
derisent i
tl
edto
i
t.Sect i
on304pr ovidesthatthecerti
fi
categivenbyacompanyandsi gnedbyoneofi t
s
dir
ectorsori fitdoesnothav easeal ,thenbyt woofi tsdirectorsorbyadi rectorand
secretaryshallbepr imafacieevidenceoftitl
eofthemember .

Ashar
ecer
ti
fi
cat
econt
ainst
hef
oll
owi
ngdet
ail
s:
1.
Nameofcompany
2.
Ser
ial
numberoft
hecer
ti
fi
cat
e
3.
Nameoft
her
egi
ster
edhol
der
4.
Numberandf
ull
descr
ipt
ionoft
heshar
es
5.
Thei
mpr
essi
onorseal
oft
hecompanyi
fav
ail
abl
e
6.
Shedat
eofi
ssue

TableAar ti
clesst
ipul
atesthatever
ypersonwhosenamei senter
edinther egi
sterof
member sshal lbeenti
tledwithoutpaymenttoreceiv
eoneshar ecert
if
icateforall
shares hel
d byhi m orsev er
alcerti
fi
cat
es upon payment
s of25 centsf orevery
cert
ifi
cate.

Af orgedshar ecerti
fi
categivesnot it
letotheshar esstated.InthecaseofReubenV
GreatFi ngal
lConsolidated.1906AC439t hesecretaryoft hecompanyi ssuedashare
certi
ficateonwhi chhehadf orgedt hesignatur
esoft het wodi r
ectors.Heaf fi
xedthe
companysealwi thoutauthori
ty.Thej udgesaid,
“everystatementint hedocument si
sa
l
ie.Theonl ythingrealaboutiti
st hesignatur
eoft hesecretaryofthecompanywhowas
therealaut horandper petr
atoroft hef r
aud”.Iwashel dthatthiscer t
if
icatewouldnot
bindthecompany .

Renounceabl
eShar
ehol
der
sCer
ti
fi
cat
es

A companymaydeci detoissuer enounceablesharecerti

ficat
es.Thisisbasical
lya
provi
sionalcerti
fi
cat
eandt heall
oteemaysi mplysi
gnt herenunciat
ionf
ormforhi mto
beablet ot ransf
erhissharestoat hir
dpar tywhowoul dal sosigntheregistr
ati
on
appli
cati
onf orm.Ifther
eisrenunciati
ont herenounceabl
ecer ti
fi
catewil
lbecancell
ed
67
and a normalshare cer
tif
icate gi
ven t
ot he tr
ansf
eree.The main advantage f
or
renounceabl
esharecert
if
icatesisthatthenormalsharecert
if
icat
eispr epar
edonce
andforallwhent
heshareshav ebeenrenounced.

Theot heradv antageist hatcompanieswoul dusuall

yissueonecer ti
ficateonlyf orall
thesharest owhi chashar ehol
derisenti
tl
edandt oassistt heshar eholdertodi spose
partoft heirr i
ghts dur i
ng renunci
ati
on per i
od,provision is made f orsepar ate
i
nstrument sthuspr ovi
dingameansofspl i
tt
ingwi t
houtanaddedcompl icati
onof
spli
tt
ingthecer ti
fi
cates.Wher eashareholderhaslostashar ecer t
if
icatehecanseeka
dupli
cateofsuchdocumentt obeissued.Mostar t
icl
esallowar epl
acementoncer tai
n
conditi
onf ore.g.proofoft helossshouldbemadet othesat i
sfacti
onofdi r
ectorsthat
theshareholderspayf ortheexpensesincurredbythecompanyi ninvestigati
ngt heloss
etc.

Tr
ansf
erofshar
es

Shares maybe t ransf er

ablef rom one shar eholdert o another.The actdoes not
del
iberateonhowshar esar etransferredf rom oneshar eholdertoanot her
.Largel
yt he
art
icl
esofassoci ationofacompanygov er
nsucht r
ansf er.Secti
on150, tabl
eA( 63&64)
6thSchedulepr ovidescl earl
yt hatshar esorot herinterestofamemberi nacompany
shallbe mov able proper l
yt ransferablei n mannerpr ovided byt he art
icl
es oft he
company .I
tisunl awf ulforacompanyt oregist erat ransferofshar esunlessapr oper
i
nstrumentoft r
ansf erhasbeendel iveredt oit.Howev ert hepersontowhom t heshar es
aretobet r
ansferredshal lnotbeaf fectedbyt hef actt hatnoi nstr
umenthasbeen
l
odgedt othecompany .Atcommonl awev er yshar eholdershoul dbeallowedtot r
ansfer
hi
sshar es.

Howev ert he ar
ticl
es ofa pri
vate company interms ofSecti
on 85 r
est
ri
ctthe
transf
erabil
it
yoft heshar
es.Fr
equentlyt
her i
ghtt
otransf
ershar
esmayber ef
usedby
thedirectorsiftheyarenotfull
ypaidf or
.Secti
on304empower edtheexecut
orto
transf
ersharesonbehalfofadeceasedmember .

Tr
ansmi
ssi
onofshar
es

Accor dingt oTabl eA(65)6thSchedul e,thepr esentati

v eofadeceasedshar eholderis
vestedwi ththeshar esofthedeceasedper son.Hecansel lthesesharesonbehal fof
thedeceasedwi thoutnecessari
l
yt r
ansferri
ngt hem i nt
ohi sownname.Howev erifthe
arti
clespr ovidethatshar escanonlybesol dbyar epresentativei
ftheyar eheldint he
represent ati
vesnamet henthefir
ststagebef or ear epresentati
vecouldselltheshar es
i
st ot ransferthem intohisownname.Thepr ocessoft r
ansmi ssi
ontakespl acewher e
thear ti
clesinsistthatthesharesber egist
eredi nthenameoft herepresentati
veoft he
68
deceasedper
son.

MEMBERS

Member sconstit
uteacompany .Thesear ethemaj orbeneficiari
esofthecompany ’
s
existence.Foronetobeamemberofacompanyheshoul dhav econt
ractualcapacity
.
Thisi ssobecauseanagreementt ot akesharesinacontract,whichisal
sogov ernedby
theor dinar
yr ul
esofagreements.Iti spossibl
et hatacompanycanbeamemberof
anot hercompanybecauseitistreatedasaper sonatlaw.Ther earetwobasi cway sin
whi chaper sonmaybecomeamemberofacompany .Thefirstwayisbysubscr ibing
one’ s name i nthe memorandum ofassoci ati
on att he time oft he company ’
s
registrat
ionaccordi
ngtosection83( 2).Thesecondwayi swher eaper sonwhohas
agreedt obeamemberhashadhi snameent eredintheregist
erofmember s.

I
ti scommont hati
nt hef i
rstmet
hodonewouldbecomeamemberev enthoughno
shareshav ebeenall
ottedtohim.Whatisimport
anti
sthathewouldhavesignedt
he
memor andum ofassociati
on.Inthi
srespectcont
entsofsecti
on 77 (
2)mustbe
considered.Nosubscribertothememorandum ofacompanyli
mitedbysharesmay
takelessthanoneshare.

I
napubl i
ccompanyt heissuingofprospectusdoesnotamountt oanof f
ertot hepublic,
rat
heraprospectusist r
eatedasanadv ert
isementorani nvit
ati
ontot reaty
.Theper son
whowoul drespondtot heprospectusbyappl yi
ngforshar esi
stheonewhot henmakes
anof f
ertot hecompany .Itmeanst hecompanyt hroughi tsboardofdi r
ect orsmay
acceptorrejecttheoffer.Theaccept anceshoul dbesubsequent lycommuni cat
edt o
theoffer
.Ift heproposalort heofferclearlyprovi
dest hattheofferorshal ltakeany
shapesall
ottedtohimt henthereisnoneedt ocommuni catedacceptance.

Ther
egi
sterofmember
s

Secti
on159pr ov
idesthatever
ycompanymustkeepar
egi
sterofi
tsmember
s.The
regi
sterwoul
dcontai
nthefol
l
owingi
nfor
mat
ion.
a)Namesandaddr
essesoft
hemember
s
69
b)Ast
atementofshar
eshel
dbyeachmemberbei
ngdi
sti
ngui
shedbynumber
c)Theamountpai
doragr
eedt
obepai
dont
heshar
es
d)Thedat
eonwhi
cheachper
sonwasent
eredont
her
egi
ster
e)Thedat
eofcessat
ionofmember
shi
p

41

Everycompanyshoul
dsendanot i
ceinwr i
ti
ngtotheregist
rarast
owher et
heregi
ster
ofthecompanyiskeptwit
hinonemont hofincor
porat
ionorofchangeofpl
acefai
lure
tocomplyi
sanof f
encebyanyoff
icerofthecompanywhowoul dbeli
abl
etoafi
ne.

Dur
ingthebusi
nesshour
stheregi
sterandi
ndexformember smustbekeptopenfor
i
nspect
ionbyanymemberfr
eeofchargeandbyanyotherper
sononpaymentofafee.
Thecourtmayor
deri
mmediat
eproducti
onoft
heregi
sterori
ndex.

70
 MAJORI
TYRULEANDMI
NORI
TYPROTECTI
ON

I
nal lcompaniestheconceptofdemocr acymustpr evai
l.Likeinpolit
icswher et he
personwithmajori
tyvot
eswouldbet heleader,i
ncompani esthemajori
tysharehol
der s
makedeci si
onsfortheminori
ty.Sharehol
dershav eri
ghtstouset hei
rsharesast hey
wish.Thi
si sthei
rpropr
iet
aryri
ghtgiventot hem byvir
tueoft hei
rshares.I
nex cising
thi
sr i
ght
,theydonotowetheothershareholdersanydutyofcare.Theyshoul
dhowev er
notmanifestmalafi
des.

Thatt hemaj or
it
ymakesdeci si
onsf orthe companywast hedeci
sion in Foss V
Harbottl
e18432Har e461,67,ER189.I nthiscaseanact i
onwasbr oughtbytwo
sharehol
dersinthecompanyonbehal fofthemselvesandal soonbehalfoftheother
sharehol
dersexceptt hedefendantswhower ethedirect
orsandpr omotersoft he
company .Theysoughttosuef orawr ongt hathadbeendonet ot
hecompanybyt he
defendants.Thecourtruledthatt
heshar eholder
swer enott hepr
operplaint
if
f.They
werenott hemajor
it
yneitherweretheythecompanyi t
sel
f.

Ther
ulei
nFossVHar
bot
tl
ewasai
medt
oachi
evet
hef
oll
owi
ng:

a)Sinceacompanyi sasepar ateperson,i

tisthecompanyt hathassuffer
edtheloss
thereforei
tshoul
dbet hecompany ,whichshoulddecidewhatacti
ontobringt
hrough
agener almeeti
ng.Att hegeneralmeeti
ngther esol
utiont
obringact
ionornotwould
onlybedeci dedbyt hemaj ori
tysharehol
ders.Int hisr
especttheseparat
el egal
existencei
spreserved.

b)The rule al
so pr
eser
ves t
he conceptofmaj
ori
tyr
ule on whi
ch democr
acy i
n
compani
esis
premised.

c)Ital
sopr
event
smult
ipl
i
cit
yofact
ions.I
feachandever
yshar
ehol
derwasal
l
owedt
o
sueonthebehal
fofthecompany,itmeantthecompanywoul
dbesubject
edt
o
71
 sev
eral
lawsui
tsatt
hesamet
imebr
oughtbynumer
ouspl
aint
if
fs.

Therul
einFossVHarbot
tl
ewasnev
ermeantt
obeofuni
ver
salappl
i
cat
ion.Ther
ear
e
caseswher
eitwi
l
lnotbeappl
i
ed.

Except
ionst
other
ule

Theauthorbr
andedt
heexcept
ionsi
mpl
yasgoi
ngr
oundt
hebot
tl
einFossVHar
bot
tl
e
without
breaki
ngit
.

Fir
stlyi
fthehar m donet othecompanyi sasar esultofwr ongswhi
char ecommi t
ted
bythepersonswhohol dt hemaj ori
tyofshar
es,themaj ori
tycanuset hei
rposit
ionto
st
ifl
eantat t
emptbymi nori
ty.Iftheuseofmaj orit
yv otesamountst ofraudont he
minori
tyt
hent hemi nor
it
y
sharehol
dersmaybeal l
owedt obr i
ngacti
ononbehal fofthecompany.Fraudonthe
minori
tyi
snotnecessar i
lyrestr
ictedtodecei
tint
hecr imi
nalsensethefoll
owing
si
tuati
onswoul dal
l amounttof r
audont heminor
ity:

a) Anegl igentactwhichbenefi
tsthemajorityattheexpenseofthecompany .Inthe
case ofDani els V Daniel
s( 1978)the controll
i
ng dir
ectors and al
so the majorit
y
sharehol
dersoft hecompanysol dapieceoflandt oMrs.Daniel
satanunderv alue.The
plai
nti
ffwhowast heminor
it
yshareholderdi
dnotal l
egefraudbecausehedi dnotknow
whathadhappened.Thi sactionwashowev ersuccessfulandMr s.Daniel
shadt o
accountforthepr ofi
t.

b) Ani ssueintendedt ohar mthemi nori

ty.InClemensVCl emens1976.Thepl ai
ntiff
held45%oft heissuedshar esherauntwhowasal sooneoft hedi r
ector
shad55%.The
auntusedhershar esatagener almeetingtopassar esoluti
ont oissuefur
thershares
todirectorsandt oempl oyees.Ther esolut
ionswer ecar eful
lydesignedtoreducet he
plai
ntif
f’sholdingf rom 45%t o24.5%.Thi sdepriv
edherofherpowert oblockaspeci al
resol
ution.Itmeantmaj ordeci si
onsaffecti
ngt hecompanycoul dbemadewi thouther
consent .Thecour tsetasi det heresol
utionont hegroundst hattheywereoppressiveto
theplaintif
fsincet heywer especifi
cal
lydesignedt oensur ethatsheshouldnotcont r
ol
thecompanyast heyr emov edhernegat ivei
nf l
uence.

c) Expr opri
ati
onofthecompany ’
sproperl
y.I
nCookVDeeks1916,t hedir
ectors
whi
lstnegotiat
ingacontractonbehalfofthecompany,tookthecontr
actont hei
r
per
sonalcapacity
.Thenatthegener
almeeti
ngofthecompanytheyusedt
hei
rmajorit
y

72
vot
estopassaresoluti
ondeclar
ingt
hatthecompanyhadnoi nt
eresti
nthecont
ract
.
Thecour
trul
edt
hatthiswasfraudontheminor
it
yanditwasnoteff
ecti
ve.

Besi
deswheret
herei
sfraudontheminori
ty,t
herul
einFossVHarbot
tl
ehasalsobeen
excl
udedi
nthefol
l
owingcases.I
nthesecasestheminor
it
yhasbeenal
lowedt
osueon
behal
foft
hecompany:
a)
Wher
etheactdonei
sul
tr
avi
rest
hememor
andum ofacompany
.

b)
Wher ethepr oceduresstipulat
edbyt hecompanyi nit
sar t
icl
esofassociat
ionhave
notbeenf oll
owedi nenteringint
oat ransact
ion.Iftheminori
tywerenotall
owedt o
suet henacompanywhi chhadbr eachedi tsruleswouldbart hemi nor
ityfr
om
representi
ngitsayingthecompanyi t
sel ft
hroughthemaj or
it
ysharehol
der
s i st he
properplaint
iff
.
c)
Wheretheper
sonalri
ght
soft heshar
ehol
derhav
ebeeninf
ri
ngedbythecompany
.In
thi
scasetheminor
it
ysharehol
der
swouldbri
ngacti
ont
oenfor
cethei
rri
ght
s.

Exampl
esofsuchpersonalr
ight
sincl
udetherightt
ovote,to begi
vennot
icesof
meeti
ngsetc.pr
otect
ionoftheminor
it
ythroughlegi
slat
ion.

I
famembert akesupshar esinacompanyhei nvari
ablyagreestobeboundbyt he
decisi
onoft hemajorit
ysharehol
ders.Thearti
clesofassociati
onrepresentacontract
which,ifsignedbyami nori
tysharehol
dersuset heyshouldnotbedisappoint
edwhen
themaj ori
tyshareholdersusetheirvoti
ngtoalterhisright
s.Thecour t
saretherefore
rel
uctanttoi nter
ferwherethemi nori
tyshar
eholderbringsactionagai
nstthemaj orit
y
shareholders.

Howevert
hemaj or
ityarenotgi
venal icensetoabuseanddefr
audthemi nor
it
ybyv i
rt
ue
ofthei
rsharehol
ding.Thecompani es’acttheref
orecontai
nsprovi
sionsdesignedto
secur
etheri
ghtsofmi nor
it
yshareholdersinacompany:

a) Sect i
on91empower sacompanyt ovaryi t
scl assesofshar esift
hear ti
clesor
memor andum empowersitt odoso.Howev ersuchv ari
ati
onshouldnotamountt o
fraudont heminor
ity
.Inthisrespectthesectionpr ovidesthatmember shol di
ngnot
lessthan15%ofi ssuedsharesmayobj ecti
ftheirclassofshar esisabouttobeal tered
orv ar
ied.Theymayapplytocourtwithi
nonemont hoft hev ar
iati
ontohaveitsetasi de.

b) I facompanyi si nvol
vedinat akeov
erormer
gerthenSect
ion194provi
des
cer
tai
nconditi
onswhi charedesignedtoprot
ectt
hemi
nor
it
ye.g.t
hattheyar
eal
lowed
todi
ssentorobjectt
ot akeoverormerger
.

73
c) TheMi nist
eri sempoweredt oappointoneormorei nspect
orstoi
nvest
igat
et he
aff
air
soft hecompanyand t or eportto hi
m onmat t
ers,whichhemayconsi der
necessary
.Themi nori
tymembersofacompanycant herefor
epetit
iont
heminist
ert o
carr
youttheinvestigat
ionbutonl
yi ft
heyarenotlesst
han100ort heyhol
dnotlessone
twenti
ethoftheissuedsharesinsuch
company .

d) Sect i
ons195t o198ar especif
icallyaboutpr otecti
onofmi nori
tyshar ehol
der s.
Theybasicallypr
ovidet hatminorit
ysharehol dersorthemi ni
steruponr eceivi
ngar epor t
maymakeanappl i
cat i
ont ocourtifi
tappear sthatt
her eisoppressiveconductagai nst
themi nori
ty.Theactdoesnotdef i
neoppr essiveorunf ai
rconduct .Howev ertoprov e
oppressiv
econductt hemi nori
tyshouldshow t hatthemaj or i
tywer eact i
ngunf airly
towards them nott hatt heywer e mer elyunwi se,ineffi
cientand car eless int he
perf
ormanceoft heirdut i
es.Thereisnol imi tofwhatamount stooppr essiveort he
aff
airsoflifearesodi ver
sehencet hei nher entdangerofexcl udi
ngot heroppr essive
conductinourattemptofuni ver
saldef
amat ion.

I
nt ermsofSect
ion225thecourtisgi
vencer
tai
ndi
scr
eti
onar
ypower
swher
emi
nor
it
y
sharehol
der
shaveappl
i
edtoit.Thecour
tcan:
i
)Gi
veanor
dert
oregul
atet
heaf
fai
rsoft
hecompany

i
i
) Int
erdi
ctorbart
hecompanyororderi
ttor
efr
ainf
rom doi
ngcont
inuedoi
ngt
he
actcomplai
nedofbytheappl
i
cat
ion.

i
i
i) Aut hor
izeciv
ilproceedi
ngst obebroughtinthenameandonbehal
foft
he
companybysuchper
sonorper sonsast
hecourtmaydi
rect
.

Pr
ocedur
alaspect
s

Therear
ethreebasi
cwaysinwhichprocedur
all
ythemi
nor
it
yshar
ehol
der
scanbr
ing
acti
onagai
nstt
hemajor
it
yshar
eholder
s.

a)Per
sonal
act
ion

Aper sonalactioni
sbroughtbyaminor
ityshareholderagai
nstthecompanyormajor
it
y
shareholdersinhisownnamet oenfor
cehi spersonalri
ghtswhichheisenti
tl
edtoas
perthear ti
clesbutwhichhehasbeendeniede.g.righttovot
e,tobegiv
encerti
fi
cat
ed
etc.

74
b)Der
ivat
iveact
ion

Themi nori
tycansueint henameofcompanyf orwrongdonetoitprovi
dedtheycannot
succeedingener almeet i
ng.Thusgeneral
l
yt hemi nori
tyshar
eholderswil
lbesuingon
behalfofthecompanyt hosewhowoul dhavedoneawr ongt
ot hecompany .Theyare
sui
ngont hebehalfofthecompanybecauset hemaj or
it
ysharehol
dershaverefusedto
bri
ngact i
on.Ifthewrongdoer sareincont
roloft hecompanytheywi l
lobv
iouslyref
use
toini
ti
atelit
igat
ionagainstthemselv
es.

Topr ev
entthem from gettingawaywi t
hit,t
hemi nor
it
ycansue.Tof oundder iv
ati
ve
acti
ont hewrongshoul dhav ebeeni nfl
ict
edont hecompanyandi tmustamountt o
fr
audont hemi nori
ty.Thedef endantswhoshoul dbethemajorshareholderswhoar e
beincont r
oloft hecompany .Thecompanyi t
selfshoul
dhaver ef
usedt obringthe
acti
on.Themi nor
ityshareholdersshouldsueinthei
rcapaci
tyasrepr
esent at
ivesofthe
companyaswel lasont heirownbehal f
.

Theunfavourabl
efeatureofaderi
vati
veacti
onisthatiftheminori
tyaresuccessfuli
n
thei
racti
on,thebenefit
softhei
rlegalsui
twouldgot othecompany .Thecompanyat
theendoft hedayiscompr i
sedoft hemajori
tyshar
eholdersthatwil
lbenefi
tfrom a
casetheyhav el
ost
.Ifthederi
vat
iveacti
onisnotsuccessfult
hemi nor
it
yshareholder
s
whowi l
lbearthel
oss.

At ypi
calcasei nthisrespectisAtwoolVMer ry
weather1867LR5E. Q.464N.i nt his
casetheowner sofader el
ictmineformedacompanyandsol dtheminetoitforav ery
l
argesum.Theshar eholderssoughttohavet hecontractsetasi
dei
ncour t
.Howev er
themi nori
tyoft heshareholdersvotedagainstoftheact i
oninagener almeeting.A
shareholderstart
edanew act i
oni nthenameofhi mselfandallothershareholders
exceptthedef endantswhower efraudul
entones.Hesoughtt ohavethecont r
actset
asideandhav ear epaymentofmoneypai dforthemine.

Thecour
trul
edt
hatt
heact
ioncoul
dbebr
oughtt
hiswayi
rr
espect
iveoft
her
ulei
nFoss
VHarbot
tl
e.

c)Repr
esent
ati
veact
ion

Wherei ndi
vidualshar
eholdershassuf
feredper sonallossinadditi
ont otheinjur
ytot he
companyoneshar eholdermaybri
ngar epresentati
veactiononbehal fofhimselfandall
othershareholderswho hav esuffer
ed si mil
arl oss.Ifther epresentati
veact i
on is
successfulplaint
if
fwi l
lobtai
nadeclarati
ont hati mproperconducthasbeenpr oved.
Mayt henclaim eachinjur
eddamageswi t
houtf urt
herneedt oproveimpr operconduct.

75
d)
Ter
minat
ionofmember
shi
p

Member shi
p mayend byt ransfer
ring shares t
o anot
herperson,bydeath,bythe
companybei ngstruckoftheCompani esr egi
str
y,bysaleofthemember sshar
esif
therei
sal i
enov erthem orbyf orfail
urewhent heyaretakenawayfr
om himforone
reasonoranotheri
nt er
msoft heart
iclesofthecompany .

76
 47
CORPORATE/
COMPANYADMI
NISTRATI
ON

Acompanyisanar ti
fi
cialper
son,andcannotmanageit
self
.Compani
estheref
orehav e
i
ndi
vidual
stogiv
ei tl
eadershi
panddi r
ecti
on.Thi
sispr
ovidedbyt
heboardofdirect
ors.
Mostofthepowersofacompanyar egi
ventoit
sdir
ect
orsbyit
sart
icl
esofassociat
ion.

MANAGEMENTOFCOMPANY

Acompanyi sal egalpersonbutitcanonlyactt hr

oughhumanagent s.Director
sare
usuall
yentrustedwi t
hthemanagementoft hecompany .Togetherwiththemanager s
andsecretaryoft hecompany ,t
heyar er
eferredtoast heoff
icersofthecompany .A
personwhoper formsthedut i
esofadi rect
ori nacompanye. g.byattendingboard
meet i
ngsandt akingpartinthedecisi
onsoft heboard,wil
lbeadi rect
orifev enheis
cal
ledbyanot hernamesuchasgov er
norortrust
ee.

APPOI
NTMENTOFDI
RECTORS

Secti
on195pr ovi
desthateverycompanyshal
lhaveatleasttwodi
rect
ors.Oneoft he
twodirector
satleastoneofthem mustbeordinar
il
yresi
dentinZi
mbabwe.Thust wo
for
eignerscanbetheonlydi
rector
sofacompanybutonlyifoneoft
hem i
sar esi
dentin
Zimbabwe.

Apartfr
om thepr
ov i
sionsofsecti
on195t henumberofdi r
ect
orsisgovernedbyt he
art
icl
esofassoci
ati
onofacompany .Astothefir
stdir
ector
soft hecompanysect i
on
195(3)provi
desthatev er
ypersonwhosignsthememor andum ofacompanywi llbe
deemedt obeadi
rectorofthecompanyunti
lot
herdir
ect
orshavebeenappointed.

Subsequentdirector
s are appoi
nted inthe way pr
ovi
ded f
orby t
he arti
cles of
associat
ion.Usuall
yt heappoint
mentsar emadeatt hecompany
’sannualgeneral
t
h
meeting.Mostar t
icl
escontai
nacl ause,asi
nTableA,6 schedul
e,t
hatanycasual

77
vacanciesi.
e.avacancyar i
singbetweentwoannualgeneralmeet i
ngs,maybefi
ll
edby
thedirect
orswhomayappoi ntaninter
im di
rectorwhoshallonlyholdoff
iceunt
ilthe
nextannualgeneralmeeting.Arti
cle93provi
dest hati
fthecompanyatt hemeeti
ngat
whichadi rect
orreti
resbyr otat
iondoesnotf il
lthevacancy,t
her eti
ri
ngdir
ect
or,the
off
eringhimselfforr e-
elect
ion,isdeemedt ohav ebeenr e-
elect
edunlessanother
personiselect
ed.

Di
squal
if
iedper
son

Theactpar
ti
cul
arlysecti
on200pr
ovi
desthatcer
tai
npersonscannotactasdi
rect
orsof
acompany.Thefoll
owingar
ethedi
squal
i
fiedper
sons.
a)Mi
nororanyot
herper
sonsuf
fer
ingf
rom l
egal
disabi
l
ity
b)Unr
ehabi
l
itat
edi
nsol
vent
,exceptwher
ethecour
thasal
l
owedhi
mtobeadi
rect
or.
c)Anybodycorporat
ee.g.acompanycannotbeadi rect
orofanot
hercompany .
d)Any person who was convicted ofan offence invol
vi
ng di
shonesty and was
sent
encedt oimpri
sonmentwithouttheopti
onofaf ineorafi
neofexceeding$100.
Howeverifsuchaper sonmakesanappl i
cati
ontocour themaybegr ant
edl eav
eto
beadirector
.
e)Anyper
sonwhowasr
emov
edf
rom of
fi
ceoft
rustbyacour
tor
der
.

78
 BOARDOFDI
RECTORS

The power s which are conf erred on the dir

ect ors ofa company ar e exercised
coll
ectiv
elyatboar dmeetingsandnoti ndi
vidual
ly.Itisthereforecorrecttosayt hatthe
power scanonlybecor rectl
yexer ci
sedatapr oper l
yconv enedboar dmeet ing.TableA
t
h
arti
clesof5 schedul epar t
icularlyArti
cle8,pr ovidesthat“ thedirectorsmaymeet
togetherfort
hedi spat
chofbusi ness”ampl ifi
esthis.Itf
oll
owst hatt
hedi r
ectorshav eto
begi vennotices.Not i
cesofboar dmeet ingsshoul dgi ver easonabletime,( ifthe
arti
clesdonotstipulat
etheper iod) .
Thi
smaybemont
h,day
s,hour
sormi
nut
esdependi
ngwi
tht
heci
rcumst
ances.

Ty
pesofdi
rect
ors
Ther
earetwot
ypesofdi
rect
ors.Thesedi
rect
orswi
l
lat
tendt
hesameboar
d
meeti
ng.
a)Execut
iveDi
rect
ors
Thesear
edi
rect
orswhoar
edi
rect
lyi
nvol
vedi
nthedayt
odaymanagementofa
company
.

b)Non -
Execut
iveDi
rect
ors
Suchdi
rect
orsar
enotr
eal
l
yengagedi
nthedayt
odayadmi
nist
rat
ionoft
hecompany
.

Theymaynotevenatt
endallboar
dmeet
ing.Theyar
ebasi
cal
l
youtoft
ouchwi
tht
he
dai
lyaf
fai
rsoft
hecompany
.

MANAGI
NGDI
RECTOR/
CHI
EFEXECUTI
VEOFFI
CER

Dir
ector
scanonl yappointmanagingdir
ectoriftheyareempoweredbyt hear t
icl
esto
doso.Ifthepowert oappoi
ntamanagingdirect
orhasbeenvestedinthedirect
ors,t
hen
thegeneralmeet i
ngofshareholder
scannotappoi ntsuchmanagingdir
ect or
sunless
theboardofdirectorst
oappointoneofthem asmanagi ngdi
rect
orandal sotodecide
onhisremunerati
on.

Whenoneisappoint
edmanagingdirect
orheoccupiest
wocapabi
l
iti
es.Ononehandhe
wearsacapofadi r
ect
orwhoi snotservantofacompany
.Asamanagi ngdi
rect
orhi
s
servi
ceisgover
nedbyacont r
actofempl oyment
.Thepoweranddutiesofmanagi
ng
dir
ector
sdependonthecont
ractofserv
ice.

Thediscret
iontor
emoveamanagingdir
ectori
sv est
edi
nt heverypeoplewhowould
haveappointedhi
m.Howeverthepowert oremov eamanagi ngdirect
ormustbe
exer
cisedingoodf
ait
handi
nthebesti
nter
estofthecompanyandnotforsomeul
ter
ior
79
mot
ive.

80
 DUTI
ESOFDI
RECTORS
Therelati
onshi
pbetweenthecompanyandit
sdi r
ector
sisoneofpr i
nci
palandagent
.
Dir
ectorsmustobeycertai
nduti
esofadir
ectorareimpor
tantbecauset
heposit
ionto
mangeacompanyi ni
tsel
fisani
mport
antposit
iontomanageacompanyi nit
sel
fisan
i
mport antposi
ti
on.

1)Fi
duci
arydut
y(Dut
yofut
mostgoodf
ait
h)

Thisisperhapsthemostimportantdut
yofdir
ector
s.Thi
sdut
yispr emisedonthefact
thatthecompanyasandt hefactthatt
hecompanyasanarti
fi
cialent
it
yr el
i
esandhas
trustonthedirect
ors.Theyaretheref
orel
egall
yobli
gedtomani f
estthisuber
immae
fi
des.

Alt
hought hedir
ectorsactasaboar d,t
hedutyofutmostgoodf
ait
hisowedt ot he
companybyi ndi
vi
dualdir
ect
ors.I
tishoweveri
mpor
tantt
oemphasi
zeontheonsetthat
thedut yofbeing fai
thf
ulisowed t othecompanyasan enti
tynottoindiv
idual
sharehol
ders.

I
nt hecaseofPer ci
valVWr ight1902t woshar eholderswr otetot hecompanydi r
ectors
enquiringwhet herany onewant edt obuyt heirshar esatast atedpr ice.Negot i
ati
ons
foll
owed underwhi ch t he di r
ectors boughtt he shar es.The shar eholderslater
discov eredthatathirdpar t
ywhohadof feredaf avourablepricehadappr oachedt he
boar dbutbyt hetimet heydi scoveredt hi
st heyhadal readysol dt heshar estot he
directors.Theshareholderswhower etheplainti
ffsrequest edthatt hesal ebesetasi de
ont hegr oundsthatthedi rectorsshouldhavedi sclosedt ohimt het akeov er
.Itwashel d
thatthedi rect
orswer enotunderadut ytodisclosei nf
ormat i
onev enthought heyknew
thattheshar esweremor ev aluabl
ethant hattherewasnounf ai
rdeal i
ng.

Thedut
yofut
mostgoodf
ait
hismul
ti
facet
edandwoul
dcanv
asst
hef
oll
owi
ng:

a)Dut
ynott
omakeasecr
etpr
ofi
t
Adir
ectorwi
l
lbeunf
ait
hfuli
fheenj
oysasecr
etpr
ofi
twhi
l
stper
for
mingt
hedut
iesofa
company.

b)Dut
ynott
oconf
li
cti
nter
est
s
Thei
nter
estofacompanymustnev
erconf
li
ctwi
tht
heper
sonal
int
erest
soft
hedi
rect
or.

Adir
ectormustonlyworkt
oadv ancetheint
erestsofthecompanyandnothi sown.
Howevertheprobl
em wi
tht
hisdutyistodefi
netheinter
estofanart
if
ici
alper
son.Ina
companyther
ear emember
s,employeesandtheirdependent
s.I
tisi
mpor t
antthatt
he
81
ar
ti
fi
cialper
sonwil
lnotbeenhancedattheexpenseofi
nter
est
sofmemberssi
ncet
his
woul
dmeancapital
izi
ngaprofi
tstotheexcl
usi
onofpaymentofdi
vi
dends.

Inthi
sr espectsecti
on189ishelpfuli
nsof arasitprovi
desthatinconsideri
ngwhatisin
thebesti nt
erestofacompanyt hedirector sar
eempower edtoconsidertheinter
estof
employ ees as wellas theirdependent s.Char i
table and poli
ti
caldonat i
ons ofa
moder atevaluemaybef ort hebenefi
toft hecompanywhi l
stitisgoingconcernbutif
thecompanyi sabouttowindup,thenno
commer ci
algaincouldbemade.Acompanyhassoci alr
esponsibi
li
tyanddoesnotexist
inav acuum buti nasocietywithpeople.Assuchser vi
cetosuchpeopl eisserv
iceto
thecompanyi t
self
.

Toensur ethatt
hedi
rect
orsar
efai
thf
ult
othecompany
,thecompani
esactcont
ains
cert
ain
provi
sions.

Sect
ion177specif
ical
lyprohi
bitsthegr
anti
ngofloanstodir
ector
s.Ifdi
rector sar
etobe
gi
venloanst henadebt or-
credit
orrel
ati
onshi
pexi st
sbetweent hedi r
ect orandthe
company.Sucharelat
ionshi
pisapparentl
ynotconducivef
ortheuberri
maf idesduty
.

Howev
eri
tiscer
tai
nrest
ri
cti
vepr
ovi
sionsoft
heactar
efol
l
owedal
oanmay
begi
ven.

a)
To cov
erexpenses i
ncur
red bya di
rect
or(
in whi
ch a case i
tis a cheque f
or
rei
mbursement
).

b)
Inthecaseofacompanywhoseordi
narybusinessi
sthatofl
endi
ngmoneyandt
he
loani
sgiveni
ntheor
dinar
ycour
seofbusiness.

c)
Ifitisdonebyapr i
vat
ecompanyandabout(
9/10)ni
net
ent
hsofmember
shol
ding
issuedsharecapi
tal
haveconsent
ed.

Secti
on57al sostrengthenst hecommonl aw posi
ti
on.Adirectori
snotsupposedt o
havehisinterestconfl
ictingwi ththoseofthecompany .Assuchhei sobligedwitht he
dutytodiscloseani nterestdirectorindir
ectwhilehemayhav ei nanycont r
actwhi ch
thecompanypr oposedt oent erinto.I
tiscommont hatsuchdi r
ectorshallnotv ote
whent heissueoft hecont r
actisbeingdecided.Int
ermsofsect i
on57( 4)anydirector
whof ail
stocompl ywi tht hisprovi
sionshallbeguil
tyofanoffenceandl i
abletoaf ine
notexceeding$200.

2.Thedut
ytoexer
ciser
easonabl
ecar
eandski
ll
82
The problem withthis dut
yi s mainl
y created because t
here ar
e no mi nimum
qual
i
ficati
onsforadirect
or.Ifapeasantfar
merf r
om theremotestpar
tofZi mbabwe
anduneducatedisappointedtoleadamul t
i-nati
onalcompanyasadi r
ector,honestl
y
hi
sdegr eeofcareandskil
lcannotbecompar edtonewhoholdsamast ersinBusiness
Administr
ati
on.

Thedegr
eeofcareandski l
lexpect
edf r
om anExecut
iveDi
rect
ori
sobvi
ousl
ygreat
er
thant
hatofanon- execut
ivedir
ector
.ThecaseofReCi t
yEquit
abl
efi
reInsur
ance
Company(1925)l
aidthisdown.

I
nt hi
scaseoneoft hedirector
slivedi
nScotl
and,nev
eratt
endedBoardMeetings.The
ot
herdirectorhadbeenv eryil
landhadnotatt
endedBoardMeeti
ngsforf
ivey
ears.Both
di
rectorswer enon-executi
veandhadl ef
tthecompanybusi nesstothemanagi ng
di
rector.Thecompany ’
spr opert
ywasl ostduetot henegl
igenceofthemanagi ng
di
rectorwhowasdescr ibedasan
“unpri
ncipl
edconman. ”Theli
quidatorsoughttohol dnon-
executi
vedirect
orsli
ablefor
l
ackofcar e.Thecourtheldthattheywer enotli
able.I
twasstatedthatifadir
ectori
s
non-executi
ve,heisnottogivecontinuousattent
iontotheaffai
rsofthecompany .His
duti
esar etoattendperi
odicboardmeet ings.

I
twasal sonot edthatadi r
ectori
snotexpectedt oshowagr eaterdegr eeofcareand
skil
lthanmayr easonablybeexpectedfrom apersonofhisknowledgeandexper i
ence.
InthecaseofReBr azi
lianRubber(1911)CD205t wooft hedir
ector swereignorantof
anythingtodowi t
hrubberindustr
y.Oneofthem consentedtobeadi rect
orbecausehe
wast ol
dt hatt heof f
icewoul dgivehim al i
tt
lepleasantempl oymentwi thoutany
responsibil
i
t i
es.Theot herdirect
orswas75y earsandwasdeaf ,hehadonl ybeen
i
nducedt ojoinbecausehehadbeenseenasoneoft hepeopleconsi deredgood.

Thecompanycoll
apsedbecauseofr
ubberspecul
ati
on.Thedir
ect
orswerehel
dnott
o
benegl
i
gentbecausetheydi
dnothav
emuchknowl edgei
nrubberi
ndust
ry.

Itisthereforetheposit
ionoft
helawt hatthelesstheknowledgeadi rect
orhasthel
ess
i
sexpect edf rom hi
m andthelessli
keli
hoodhewi l
lbeli
ableifthingsgowrong.Thi
sis
astonishi
ng becauset hepositi
on to managet hecompanyi soner oushenceitis
reasonablyexpect ed t
hatresponsi
ble peopleshould stayi n offi
ce.OneAmer i
can
comment ator,Dwightcomment i
ngont hi
sr el
axeddutysai d“ whereelseinhuman
affai
rscanbef oundsoadmi rabl
eacombi nati
onofadi sti
nctionwi t
houtanxi
etyofa
rewardwi thouttoi
l.
”
83
Secti
on318oft hecompani esactr
einf
orcesthi
sdutyofcare.I
tprovidesthati
fit
appearst
hatthebusinessofacompanywasbei ngcarr
iedonwithgrossnegli
gence
thananypastorpr
esentdir
ector
smaybel iabl
ewit
houtl
i
mi t
ati
onofl
iabi
lit
ytoanyone
whomayhav esuff
eredaloss.

3Dut
ytoacti
ntr
avi
res

Director
sareagent softhecompany.Assuchtheyactasamer econduitpi
peforthe
pri
ncipalnotpersonal
lyli
ablet
ocontractwhi
cht
heyconcl
ude.Assuchtheyareobl
iged
nott oexceedtheobjectsofthecompanyorgobeyondthei
rpower.I
thasbeennot ed
thatifthedir
ectorsactul
travi
resandthecompanysuf
feralosst
hecompanymaysue
them.

4St
atut
orydut
ies

Thecompani
esactcontai
nanumberofdut
iesondir
ectors.I
tisqui
tecumber
somet
o
att
emptt
ol i
stal
loft
hese,howev
eraf
ewonlywil
lbeli
sted.
1)
Dut
ytoensur
ethatt
her
ear
etr
uest
atement
sint
hepr
ospect
us(
Sect
ion108)

2)Dutytoindemnif
yanyper
sonwhosuf
feredal ossduet oanuntr
uestat
ementi
nthe
prospect
us
(Secti
on108)
3)Dutytoindemnif
yanyper
sonwhosuf
feredal ossifsharesofapubl
i
ccompanyare
all
ott
edwithoutr
eachi
ngt
hemini
mum subscr
iption.
4)
Dut
ytoconv
eneanext
ra-
ordi
nar
ygener
almeet
ingwhenr
equest
edbyshar
ehol
der
s.

84
 REMOVALOFDI
RECTORS

Thecati ssi
lentaboutret
ir
ementofdi
rect
ors.Howev
ersect
ion202deliber
atest
he
procedur
etobef oll
owedifacompanyistor emoveadi
rect
orespeci
all
ybeforet
he
expir
ati
onofhisperi
odofoffi
ce.

Sincet hesharehol
dershiredir
ect
orssot heycanalsoremovet hem asandwhenthey
feelthatthedirector
sar enotsat
isf
actor
il
yexecuti
ngtheduties.Butsecti
on202(1)a
directormayber emov edevenifthearti
cleprov
idesimmuni t
y .Howeverifonewas
alreadyadirectorf
orlif
eon1Januar y1952thenheshal
l bei
rr
emov abl
e.

Thepr
ocedur
elai
ddowni
sasf
oll
ows:

a)Aspecialnot
ice(
28days)mustbegi v
entothecompanybytheshar
ehol
der
soft
hei
r
i
ntent
iontoremoveadi
rector
.
b)Thecompanyshouldi
nturngivenot
icetot
herel
evantdi
rect
or.

c)Thedir
ectori
sal
lowedt
omaker epr
esentat
ionsi
nwri
ti
ngt osharehol
der
sorr
eadat
themeeti
ng.
d)Atthemeeti
ngst
heshar
ehol
der
sshallpassanordi
nar
yresolut
ion.

I
thasbeenhel
dt hatnot
hingintheActpr
event
stheAr
ti
clesgi
vi
ngadi
rect
or’
sshar
e
speci
alv
oti
ngr
ightse.
g.waitandvot
e.

I
nt hecaseofBushel lVFaith(1970)1Al lE.R.53t heart
icl
esofapr i
vat
ecompany
provi
dedthat“intheeventofaresolut
ionbeingpr oposedatanygeneralmeeti
ngofthe
companyf orther emovalf
rom offi
ceofanydi rectoranysharesheldbysuchdirect
or
shall
onpollinrespectofsuchresol
uti
oncarryther i
ghttovote,t
hreevot
espershare”

Member softhecompanywi shedtori

dthemselvesoneofthedi r
ector
sandar esoluti
on
waspr oposedatameet i
ngt oremovehim from offi
ce.Onashow ofhandst he
resol
ut i
onwaspassed,sot hedir
ect
ordemandedapol landi ntermsoft hear ti
cleshe
outvotedt heshar
eholder.I
twasheldthatthedirect
orhadact edproperl
y.Sect i
on202
(5)providesthatadir
ectorwhohasbeenr emovedf r
om of
ficebeforeexpirat
ionoft er
m
ofofficesshallnotbedepr i
vedofhisri
ghttodamagesorcompensat ion.Int hesame
veinsect i
on202makesi tunlawfulf
oraccompanyt opayanycompensat ionf orlossof
offi
cewi thoutt
heparti
cular
sbeingproposedtoandapprovedbyt hegeneralmeet ing.

85
53

THECOMPANYSECRETARY

Thedutiesofthesecretar
ywoul ddif
ferwidelybot hinscopeandcharacteraccordingto
thenatureofitsact
ivi
ti
esandt hefuncti
onsassi gnedtohi m byhisdi
rect
ors.Attheend
ofspectrum hemaybemer elyar outi
nesecr etaryperfor
mi ngthefuncti
onst hatare
commont oallexecut
ivesecretar
ycont r
oll
ingt hewhol eoft hecompanyor ganizat
ion,
coordi
natingtheworkofvari
ous
depart
ment s.

1)Hei stheoffi
cerofcompanyresponsi
bleforkeepi
ngstatut
orybooks,submit
ti
ng
necessar
yret
urnstother
egi
str
arandcomplyingwi
thvari
ousadmini
str
ati
veregul
ati
ons.

Thushemusthavet
horoughknowledgewi
tht
her
equi
rement
soft
hel
awast
heyaf
fect
acompanyf
orexamplethi
sincl
udes:
a)Keepi
ngt
hev
ari
ousr
egi
ster
sandot
herbookspr
escr
ibedbyt
heActsuchas:
i
)Regi sterofmember sandshar etransfer
registerii)Asset sregisteri
ii)Boardmi nut e
register
iv)Regi sterofdebent urehol ders
v)Regi sterofdirectors,auditorsandof f
icersoft he
companyv i
)Dir
ectors’ decl arat
ionofi nterestin
cont racts
v i
i)At t
endancer egistersofboar dandcommi tt
ee
meet i
ngs
vii
i)Cer t
ifi
cateofI ncor porati
onandcer ti
ficatetocommer
ce
busi nessi x)Memor andum andar ti
clesofassoci at
ion
x)Account ingrecords
xi)Regi sterofpledges, cessionsandbonds

b)Fili
ng i
nformati
on wi
ththe Registr
arofCompani
es t
orepor
tcer
tai
n changes
regar
dingthecompanyorot
herper
iodicfi
li
ngl
i
ke:
i)Financi
alRepor
ts

i
i
i) AmendedMemor
andum ofAssoci
ati
on

86
i
v) i
ii
)ReturnsofAl
lot
ments
v
) i
v)Not
icesofAppoi
ntment
s,r
egi
str
ati
onandr
emov
alofdi
rect
orsandaudi
tor
s

vi
) Not i
cesofchangeofr
egi
ster
ed
of
fices

v
ii
) v
i)Speci
alResol
uti
ons

c) Mai nt
aini
ng the company regi
sterdealing withtransf
erand othermat ter
s
af
fect
ingsharehol
dingsanddeali
ngwithquer i
esandr equestfr
om shar
eholders.Thi
s
mayincl
udeprepari
nglett
ersofal
l
otment s,
let
ter
sofr egar
dandsharecert
ifi
cates.

d) Ensur ing thatthecompanycompl ieswithitsMemor andum and Ar

ti
clesof
Associ
ati
on,draft
ingandobt ai
ning t
henecessaryspeci
alresol
uti
onfrom agener
al
meeti
ng.e)Havingcustodyofcompanyseal(
ifi
thasaseal)

f
) Ensur
ing t
hatever
ymatterthatar
isesf
rom t
ime t
oti
me i
sdeal
twi
tht
he
r
equi
rementsoftheCompani
esAct.

g) Thesecr etar
yisalsothepubl
icoff
icerofthecompanyi
nhi
sdeal
i
ngswi
tht
he
out
sidewor
ldandothergov
ernmentdepar
tmentforexampl
e.

h) Deal ingwi t
hallmatt
ersaff
ect
ingt
hecompany’
sliabi
l
ityf
orincometaxand
submi
tti
ngt henecessar
yretur
nstotheRecei
verofRev
enueaftertheendofthe
company’
sfinanci
aly
ear.

i
) Attendi
ng conf er
ences and meeti
ng regarding workmen’
s compensati
on
aff
ect
ingempl oyeesandsubmit
ti
ngannualr
etur
nstot heworkmen’
scompensat
ion.
2)Heisthesecretaryoft
heboardinr
egar
dtomeet i
ngs.

Withther egardt oconductofmeet ingswhetherofshar eholder

s,ofdirector
sorof
commi t
tees,thesecr etar
yshoul dmaket henecessaryarrangement se.g.securi
ngthe
hal
lorr oom,f urni
shingar rangement
s,stati
onery
,etc.Inaddi t
ionhehast odr af
tthe
necessarynotices,advert
isements,et
c.Hewoul dthenscrut i
nizeallpr
oxyformslodged
wit
hinthepr escri
bedper i
odbef or
ethemeet i
ng.
Att
hemeet i
ng,t
hesecretarywi
l
lensur
ethat
:
Att
endanceregi
steri
ssigned

87
i
ii
) Act sasadvi
sert
ochai
rmanwhil
stt
hemeetingi
sin
pr
ogress
i
ii
)Takeroughnot
esofever
ythi
ngt
hatmakespl
aceatthe
meeti
ng

i
v) Part
icul
arl
yofthepr
eci
sewordingofever
yresol
uti
onpassedandfr
om t
hesehe
wri
teuptheminutesoft
hemeeti
ngsandwill
prepar
eanyrepor
tsther
eof
.
3)
Hei
sseni
oradmi
nist
rat
iveof
fi
cerr
esponsi
blef
oref
fi
cientr
unni
ngoft
hecompany

As the senioremployee hi
mself
,he has t
o communicat
ethe boar
d’s pol
icyand
i
nstruct
ionst of
ell
ow employeesandal
soconveytotheboardt
heirsuggesti
onsand
eventheircompl
aint
s.

4)
Heisregardedastheri
ghthandofdi
rect
orsact
ingast
headv
iseroft
heboar
dand
chi
efsourceofi
nter
nal
infor
mati
on.

Hewillbeabletoactasanint
ernaladvi
serbecauseofhisknowledgeofCompanyl aw,
e.
g.adi r
ectormayproposeacourseactionwhichisult
ra-
vir
esandt hesecret
arymay
fi
nditnecessaryt
oremindthedir
ectornotonl
yf orhi
sult
ravir
esproposalbutalsothe
di
rect
or’sduti
esgener
all
y.
Thesecret
aryhast
okeept
hedi
rect
orsupont
hest
rai
ghtandnar
rowpat
hofconf
ormi
ty
wit
hlegalr
equir
ement
s.

Thesecr et
arycanev enadv iset hedirectorsonot hernon-legali
ssues.Hemaybe
requi
red to makesuggestionsr egar
ding appropri
atemet hodsofr ai
sing addit
ional
capit
al.Havingnofinanci
alinterestinsuchmat t
ers,andtherefor
ebeingablet ov i
ew
eachpositi
onobject
ivel
yanddi spassionately
.
Thesecr
etar
yisi
naposi
ti
ont
ogi
vet
imel
ywar
ningort
omakeconst
ruct
ivepr
oposal
s.

The secretarymayneed t o provi

de r
elevantinformat
ion t
ot he boar
d and seni
or
execut
ives ion which wi
se decisi
on maybe based.Ther ei s pr
obablyno great
er
weaknessi nbusinessadmini
strati
onatthepresenttimethanmakingofdecisi
onson
i
nadequat e,i
ncomplet
e,misl
eadingorobsol
eteinformati
on.

88
89
 COMPANYMEETI
NGS

Thecompany ’
sbusi nessistransactedt hr
oughmeet ingsofv ariousor ganizati
ons.We
hav ealreadydi scussedt heboar dofdi r
ect or
smeet ing.Suf ficet osayt hatitisa
meet ingofdi r
ect orsofacompany ,itsnotice,it
snotice, composi t
ion,voting,r
ightsand
resoluti
onar e,byandl argegov ernedbyt heAr ti
clesofAssoci at
ion.Iti stheref
ore
necessar ytodi scusssomeoft hemeet ings,whicharepr escri
bedbyt heCompani esAct.
Althought hedayt odaymanagementofacompanyi slef ttoboar dofdi rector
sorev en
toasi ngleman, suchasmanagi ngdirector,theult
imat econt rolrestswi t
ht hecompany
asawhol eint hesenset hati
thaspowert or emoveadi rectorfrom of f
ice.Wet heref
ore
needt oappr eciatehast hisoveral
lcontroli
sexer ci
sed.

1.St
atut
oryMeet
ings

I
tisimportantthatmember swhohav ei
nv est
edi napubliccompanyshoul dknowhow
thei
rmoneyi sbeingexpendedandshouldanear l
yoppor t
unitytoscr
uti
nizewhethert
he
promoter
shav eexecutedthei
rfunct
ionshonestlyandper fectl
y.I
nthi
srespectSecti
on
166providest hatever
ypubliccompanyshal l,withi
naper iodofnotl essthanone
monthormor ethanthreemonthsfrom thedat eitisenti
tledtocommencebusi ness,
holdi
tsfi
rstgeneralmeeti
ngwhichshallbecall
edast atut
or ymeeti
ng.

Atabout14day sbefor
ethemeeti
ngthedir
ector
smustgiveal
lmember
sacer
ti
fi
ed
st
atut
oryrepor
twhichwoul
dcont
ainthef
oll
owingi
nfor
mat
ion:
a)Tot
alnumberofshar
esal
l
ott
edf
ull
yandpar
tl
ypai
d.
b)Tot
alcashr
ecei
ved
c)Recei
ptsofexpendi
tur
es
d)Det
ail
sofaudi
tor
soft
hecompany

Ther epor
tshal
lbeannexedt oform CR10.Themember soft
hecompanypresentatt
he
meet i
ngareatlibertytodiscussanymat terrel
ati
ngtotheformat
ionofthecompany
ari
singoutofthest at
utor
yr eport
,thi
sisir
respect
iveofwhet
hernot
icewasgiv
enornot
forsuchadiscussionSect
ion166( 7).

2.AnnualGener
alMeet
ing

Thi
sisameet i
nghel
dbyt hecompanyonceev eryyear.Sect
ion167(
2)provi
desthati
fit
i
st he fi
rstannualgeneralmeet i
ng then i
tshal lbe held wit
hin 18 months of
i
ncorpor
ationoft
hecompany .Subsequentannualgeneralmeeti
ngsarehel
dwi t
hinsix

90
(6)oftheendoft hefi
nanci
aly earandnotmor ethan15mont
hsaf terthepr
evi
ous
annualgener
almeeti
ng.Theactdoesnotlistt
hebusinesst
obet
ransactedatt
heAGM
savesecti
on167(
3)whichsimplystat
edthatsuch

57

meeti
ngshalldealwi
thanddisposeofallmatt
ersr
equi
redi
nter
msoft
heact
.The
ar
ti
clesofacompanyalsor
egul
atethi
sissue.

The busi ness commonly carri

ed outatannualgener almeet i
ngs wouldinclude
considerati
onofaccounts,chai
rmananddi rect
ors’r
epor
ts,thedeclar
ati
onofdev i
ants
andel ecti
onofboar dofdir
ectors.I
npract
icetheboardofdi r
ectorswouldbefor
et he
shareholderstheprofi
tandlossaccountaswellasthebalancesheetofthatpart
icul
ar
year
.

I
ntermsofSecti
on169anannualgeneralmeetingmayhercal
ledon21daysnoti
ceis
wri
ti
ngi
facompanyf ail
stoholdanAGM t
hesect i
on167(
8)i
tshall
bepenal
i
zed.Noti
ce
f
oranAGM totheRegistr
arshal
lbei
nform CR20.

3.Ext
raor
dinar
ygener
almeet
ing

Thisi
sameet i
nghel dbyshar ehol
dersbetweentwogener almeeti
ngi ti
sunav oidabl
e
andimpracti
calthatsomeur gentbusinessmayar i
sewhichbusinesscannotwai tuntil
thenextAnnualgeneralmeet i
ng.Anymeet ingwhichisnotanAGM i sther
eforeanext r
a
ordi
narygeneralmeet ing.AnEGM canbehel don14day s’noticeifit’
sapubl i
c
companyorbysev enday s’
not icei
fitisapri
vatecompany.Providedhowev er,t
hatthe
companiesareatliber
tytoext endthisperi
od.

Member shavestatutorypowert ocompeldirectorstoconv eneanEGM Sect ion126

provi
desthatifmember sholdi
ngnotl esst
hanonet wentieth(1/20)ofpaidupcapi tal
ofthecompanyasatt hedateandwhohav ear i
ghtt ovotecanr equestthedir
ectorsto
summonsanEGM.Despi t
eany t
hingtothecontrarystat
edi ntheAr t
icl
es.Thedirect
ors
sorequestedshal
lissueanot i
cetomember sconv eningthemeet ingwithi
ntwent yone
daysofsuchrequestandt hemeet i
ngshoul
dbeofadat enotl essthan14day sormor e
than28day sf
rom t
hedat eofthenot i
ce.

91
I
fthedi r
ectorsfai
ltoconvenethemeet i
ngt herequisi
tionistsoranyoft hem numbering
moret hanfif
tyorrepr
esenti
ngmor et hanhal fofthet otalvoti
ngrightsmayt hemselves
convenet hemeetingstat
ingtheobject sthereofon21not ice.Thecompanyshal lrepay
anyreasonableexpensesincurredbyt hemember sbyr easonoffailur
eoft hedir
ectors
toconv enethemeet ingatr equestsoft heshar eholders;theyshal lbeguilt
yofan
off
enceandl iabl
etoaf i
nenotexceedi ngonehundr eddol l
ars.

92
 CONDUCTI
NGOFMEETI
NGS
Quor
um

Thisr ef
erstot hemi ni
mum numberofper sonswhomustbepr esentinordert hat
businesscanv ali
dlytr
ansacted.S204,Art
icl
e38ofTabl eB,schedule6,provi
dest hat
nobusi nessshallbetransactedunl
essaquor um i
spresent
.TableBAr ti
cle38st ated
thatifwithi
nhalfanhouraquor um i
snotpresent
,themeeti
ngwi l
lstandadjournedt o
thesameday ,timeandpl aceinthenextweekort osuchot herdateandpl aceas
dir
ectorsmayindicate.

Vot
ing

Amember ’
svotei
shispropri
etar
yrightandheowesnodutytoanybodyint
heexer
cise
ofhi
svote.Howeverhecannotstabhisbrot
heri
ntheback.I
notherwordsheshal
lnot
bemali
cious.

Met
hodsofVot
ing

1)Bypol
lorbal
l
ot

Atcommonlawanyvoterhasrightt
odemandapoll
.Thechai
rman,i
fhei
samember
,
mayalsodemandapol
linhiscapaci
tyasamember
.

Ademandofapol li
susuall
yachall
engeonthechai
rmanofdeclari
ngthev otebyshow
ofhands.Iti
simportantt
onotethatanymembersenti
tl
edtov ot
emayv ot
eont hepoll
eventhoughhewasabsentont hedatethepol
lwassuggested.Thismet hodismor e
appropri
ateifmember sdonotwantt odiscl
osethei
rpersonalint
erestsandal soit
avoidsanyinfl
uenceont hevot
erwhichmaybeexer t
edonhi m asresultofatt
itude
reveal
edbyothers.

(
i)Vot
i ingbyshowofhands

Thisi
st hemostcommonmet hodofascert
aini
ngthevi
ewsoft
hemeeti
nganditi
s
usedint heabsenceofanypr
ovi
siongov
erningthewayofv
oti
ng.(
RexVRect
orof
Bir
mingham).

(
ii
iVot
) ingbyv
oiceoraccl
amat
ion

Thememberswoul
dcall“
Aye”orNosi
mult
aneousl
yaccordi
ngtowhet
hertheysuppor
t
ofopposet
hemoti
on.Thechai
rmanwoul
dthenannouncethatt
her
esolut
ionhasbeen

93
passedornot
.

Resol
uti
ons

Company busi ness i

st ransact
ed t
hrough resolut
ions ofBoard ofDir
ect
ors or
sharehol
ders.Thisi
sbasicall
yadeci
sionreachedatameet ingr
epr
esent
ingt
hewishes
ortheopini
onoft hemajori
tyofmemberspresent.

Bl
ack’
sLawDi ct
ionary4thEdatpage1474def inesaresolut
ionas“ afor
malexpression
ofthe opi
nion orwi l
lofan of f
icialbodyorpubl ic assembl yadopted byv ot
e”.
Resol
uti
onsmaybepassedt odealwi t
hv ar
iousissuesaf fect
ingthecompany .Itis
i
mportantt
onotet hataresolut
iont obepassedmaydet erminet heper
iodofnoti
cet o
begiv
enandalsothemaj ori
tyvotetobepassed.

I
nthi
sway
,thecompani
esActr
ecogni
zet
hreet
ypesofr
esol
uti
onsnamel
y.

a)Or
dinar
yResol
uti
ons

An ordinaryresolut
ion i
s one whi ch needs a simple maj ori
tyto be passed itis
not
ewor thythatthecompaniesactdoesnotdef ineanordi naryresol
ution.I
tishowever
par
toft hecommonl awt hatav oteofmor ethanf i
ft
yper centoft hemember spresent
andvot i
ngwoul dconsti
tuteanor dinar
yresol
ution.Thecompanyt opassal ldeci
si
ons,
whichdonotneedaspeci alresolut
ionatgeneralmeetings, usesanor dinar
yresol
uti
on.
Iti
spassedonnotl esst han14day snoti
cet oallmember si fiti
sapubl iccompany.
Howev erincasesofpr i
vatecompani esanordinaryresolutioncanbepassedongi v
ing
anoticeofnotlessthan(7)day s.

b)
Speci
alResol
uti
on

Somedeci sionsofacompanyar esoimportantthatt

heydonotneedasi mplemajori
ty.
Inst
eadt heyneedov er
whelmingmaj or
it
ytobepassedSect i
on175def i
nesaspeci al
resol
utionasanyr esol
utionpassedbyanotl essthanthreefourthsofsuchmember s
enti
tl
edt ovoteasar epresentinpersonorbypr oxyatagener almeeti
ngforwhichnot
l
esst hantwent yonedaysnot i
cehasbeengiven,speci
fyi
ngt heint
enti
ontoproposethe
resol
utionasspeci al
resolut
ionandatwhichmember sholdingintheaggregat
enotless
thanone-fourthofthetotalvot
esofthecompanyar epresentinpersonorbyproxy.

Thi
sdef
ini
ti
onissel
fexpl
anator
yandalsodescr
ipt
iveofaspecial
resoluti
on.Wi
thi
none
monthofpassi
ngthespecialresol
uti
onacopymustbel odgewi t
ht heRegi
str
arof
94
Companiesi nForm CR11.I nt
ermsofsection136t heresol
uti
onmustbesi gnedbya
di
rectororsecretaryofthecompany.Thespeci
alresoluti
onshallnotbeval
iduntilt
he
Regist
rarhasr egist
eredit
.I
ntermsoft hecompaniesActt hefoll
owingbusinesscan
onl
ybedeal twithbyaspecialr
esol
uti
on.

Al
ter
nat
ionofAr
ti
clesofassoci
ati
on
ii
)Al t
ernati
onofMemor andum of
Associat
ionii
i)Conver
sionofpubli
ctoa
pr
ivatecompanyi v
)Issuingshar
esata
di
scountv )Reducti
onofsharecapit
alv
i)
Volunt
arywindingup

v
ii
)Wi
ndi
ngupbycour
t

c)Wr
it
tenResol
uti
ons

I
ti spossi blethatmember sofpr iv
atecompanymaydeci detopassar esoluti
onwi t
hout
holdingagener almeeting.I
nt hiscasethecompanydi r
ector
swoul dcirculateacopyof
theresol utiontoal lmember swhoshal lsi
gni t
.Intermsofsect i
on176i fallmember s
signi tshallbeef f
ecti
veasi fithadbeenpassedatagener almeetingoft hecompany
dulysi gnt hisresoluti
onconv enedhadhel d.Thi
sresoluti
oncanbespeci alorordi
nary
resolution.Thespeci alresol
utioncannotbeusedt oremoveadi rectororanaudi tor
.
Themai nadv antageoft hi
smodeofr esoluti
onisthattheperiodofnot i
cei sdispensed
with.Themember sdonotneedt obeconv enedf orameet ingy ett heycanpass
decisionsf rom t hecomf or
toft hei
roff
ices.

a.Resol
uti
onsRequi
ri
ngSpeci
alNot
ice

Ther ei
smat eri
aldisti
ncti
onbetweenaspeci alr esolut
ionandar esoluti
onr equir
inga
specialnot i
ce.Int hesecondi nstance,whati sspeci alist henot i
ceot herwisethe
resolut
ionisanor dinar
yone.Section177def inesr esolut
ionswhi chrequireaspeci al
noticeasr esolut
ionatwhi chtwentyeightdaysnot icehasbeengi ventot hecompany
andofwhi chatl easttwent yoneday snoti
cehasbeengi veni fther esoluti
ont obe
passedi stor emov eadi r
ectororanauditor
.Itisi mpor t
antt onot ethatthemember s
whoi ntendtomov eamot i
ontoremov eadirectorsoranaudi torhav etogiv enoti
ceto
thecompany .Theirnoticetothecompany .Thecompanywi llthengi ven,thecompany
95
mustsendt heaff
ecteddir
ectororaudit
oracopyoft heresoluti
onandnot iceofthe
meetingatwhichi
twi l
lbeconsider
ed.Inter
msofSection177( 2)suchpersonisthen
ent
it
ledtospeakontheresol
utionatthemeeti
ngbef
oreanyv ot
ei stakenonit
.

AUDI
TSANDAUDI
TORS

Anauditisprocesswhi chi sconcernedt oestabli

shandconf i
rm conf i
dencei nt he
account
inginf
ormationy iel
dedbyt hecompany ’
sr ecordsandsy stemssot hatan
opini
onmaybegi venupont heaccount
swhi chhav ebeenpreparedbyt hecompany
fr
om thoser
ecordsandsy st
ems.Theaudi tiscarr
iedoutpri
mari
lyfort heshareholders
asacheckupondi rectors’stewardshipbuti tisobv i
ousl
yalsof ort hebenef i
tof
credi
tor
sandpotent
ialinvestors.

Sect
ion191provi
desthatthedir
ect orsshallappoi nttheaudi
torwhowouldhavebeen
gi
venaspecialnoti
ceofnomi nati
onpr iortot hemeet i
ng.Themember salsoshoul
d
havebeengi
venanomi nati
onnoticeofanaudi torofabout14days.I
fthemembersor
di
rector
sfai
ltoappointanauditor,themi nisterisempower edtodosoi fanyofthe
member smakeanapplicat
iont
ohi m.Thedi rectorsorthecompanyisgener
almeeti
ng

96
mayappointaudi
tor
stofi
llcasualvacanci
es.Thevacancymayari
seaft
erthedeat
hor
i
ncapaci
tyofanexisti
ngaudit
or.Thecompanyi nageneralmeeti
ngoranyotherf
ixes
t
heremunerati
onofanaudit
orast hegener
almeeti
ngmaydet er
mine.

Exemptcompani
es
Sect
ion191(7)st
ipul
atet
hatapr
ivatecompanyshall
notbeobli
gedto appoi
ntan
audi
tori
f:i
)thenumberofmember sinsuchcompanydoesnotexceedt
en

i
i)noneoft hemember soft hepri
vat
ecompanyi sapubl
i
ccompanyorapri
vat
e
company,whichi
sasubsidiar
yofapubl
iccompany
.i i
i
)Allmember
sagr
eethatan
audi
torshal
lnotbeappoi
nted.

Di
squal
if
icat
ionsf
rom bei
ngaudi
tor
Thef
oll
owi
ngper
sonscannotbeappoi
ntedaudi
tor
stoacompany
.

i
)Anyof fi
cerorservantofthecompany .Alt
houghanaudit
ori
sanof f
iceroft
he
companyforsomepurposes,t
hisprov
isi
onmeansoff
icer
s ot
hert
he audi
torfort
he
ti
mebeing.i
i)Abodycorpor
atee.g.al
imit
edcompani
es

i
ii
)Apersonwhoisanof
fi
cerorser
vantofabodycor
por
atewhi
chi
sasubsi
diar
yora
hol
dingcompany
.

Resol
uti
ont
oappoi
ntorr
emov
eaudi
tor
s

Audit
orsmaybeappoint
edorr emovedbyordi
nar
yresolut
ionpassedaf
teraspeci
al
noti
ce.Suchnot
icei
smandat
oryint
hefol
lowi
ngcir
cumstances.
i
) To appoi
ntapersonotherthant
her
eti
ri
ng
audi
tori
i
)Tofi
ll
acasual
vacancy

i
i
i)Toreappointasaudi
toraret
ir
ingaudi
torwhowasappoint
edbyt
hedi
rect
orst
ofi
l
la
casualv
acancy.
i
v)Toremov eanaudit
orbef
oretheendofhister
m ofof
fi
ce.

Powers,Dut
iesandLi
abil
iti
esof
Audit
ors Anaudi
torhastwomai
n
dut
ies:
97
i
)Toaudi ttheaccountsoft
hecompany
i
i)Tor eportt
othemember sonthe
accountsi)Toauditt
heaccount
softhe
company

Theaudi
tormustcarr
youtinvesti
gati
ons,whichwil
lenabl
ehi
mtof
orm anopi
nion
whet
her:
a)thecompanyhaskeptproperaccount
ingr
ecor
ds
b)Thebal
ancesheetandpr
ofi
tandl
ossagr
eewi
tht
heaccount
ingr
ecor
dsandr
etur
ns.

Toachi
evethisdutytheActempower stheaudi
torst
ohav eaccesstobooksaccounts
andvoucher
soft hecompanyandshal lbeentit
ledt
or equi
refr
om theoff
icer
soft he
companysuchi nf
ormati
onandexpl anati
onashet hinksfi
t.I
ft heyar
edeniedsuch
i
nfor
mationtheycansaysointhei
rreportS193.

Audit
orsar
ealsoempower edt oat t
endanygeneralmeeti
ngs.Theymustbesentall
noti
cesandcommunicat
ionsr elat
ingtothegeneralmeet
ingsandtheyspeakatsuch
general
meeti
ngonanymat terthatwoul
daffectt
hem audi
tors. i i
)Dutytorepor
tto
themembersoft
hecompanyaccount s.

I
tisthedutyoft heaudit
orst oreporttothemember sont heaccountleadbefor
et he
companyduringthei
rterm ofoffi
ce.Accountsincl
udethebalancesheet
,prof
itandloss
accountandgroupaccount s.TheAudi torshoul
dthuspresentanAuditor’
sReportas
provi
dedinsect i
on193.Ther eportmustber eadbefor
et hecompanyi nagener al
meetingandmustbeopenf orinspect
ion.Secti
on193provi
dest hatt
heaudit
or’sr
epor t
shouldcont
ainthefol
lowinginformati
on.

a)Whetherintheopi
nionoftheaudi
tors(
s)t
heaccount
shav
ebeenpr
oper
lypr
epar
ed
andwhetherthetr
ueandfai
rviewi
sgiven.

•I
nt hecaseofabalancesheetofthestat
eoft hecompany’
saf
fai
rsatt
heendofi
ts
f
inanci
alyear.
•Withaprofi
tandl
oss,whet
herithasbeenproperl
yprepar
ed.

•Incaseofgroupaccount
s,whetherthestateofaff
air
soft
hepr
ofi
torl
ossoft
he
companyandit
ssubsi
diar
ieshasbeenclear
lyshown.

b)Iftheaccount
sdonotcl ear
lyshowparti
cul
arsofdi
rect
or’
ssal
ari
esandpar
ti
cul
arsof
loanandot hertransact
ionsfavouri
ngdir
ector
s,theaudit
orsmuststat
ethedetai
ls
reasonabl
yneeded.c)Theaudi tors’r
epor
tmuststatethenamesoftheaudi
tor
sand
signedbythem.

98
I
nReLondonandGener alBank(1895)thecourtstatedthati
tisnotthedutyofaudit
ors
toseet hatt
hebusi
nessisruneffi
cientl
yorprofi
tablyortoadviseoftheconductofthe
business.Li
kewisetheauditorsarenotani nsureranddo notguar ant
eet hatthe
accountingr
ecor
dsshowt hetruestateoft
hecompany ’
saffai
rs.

The company’
s of
fi
cers notunderdut ytot ake st
ockand acceptas honestany
stat
ementsmakeauditorandservantssolongasheact sr
easonablyi
nsodoi ngand
thecir
cumst
ancesarenotsuspi
cious.SereKingst
onCott
onMissCompany( 1896)
.

Howev erithastobeappr eciatethatsi

ncethedeci
sioni
nt hiscaset hestandar
ds
excepted hav
er i
sen.Thecur rentposit
ionwasperhapsbestill
ustr
ated i
nFoment
(Steeri
gnArea)LTDVSel solom Folent
ainPenCompanyLimited(1958)1WLR45at
page61.Thecourtrai
sedt
hedut yofcar
eand
statedthat
:

“An auditoris notconf i

ned t
ot he mechanics ofchecki ng v oucher
s and making
arit
hmeticalcomput at
ion.He is notto be offasa pr ofessionaladder-
upperand
subtract
ed.Thisvit
altaskistotakecaretoseet haterr
orsarenotmade, betheyer
rors
ofcomput ati
onorerrorsofemissionorcommi ssion,ordownrightuntrut
hs.Toperf
orm
thistaskpr operl
yhe mustcomet oi twith an enquiri
ng mi nd notsuspici
ousof
dishonestybutsuspectingthatsomeonemayhav emadeami stakesomewhereand
thatacheckmustbemadet oensurethatt
herehasbeennone” .

Anauditor
’sdutyist
othecompanywithwhom hehasacontr
actualrel
ati
onshi
p.Heis
l
iabletopaydamagestothecompanywithwhom hehasacontract
edr el
ati
onshi
p.He
i
sl iabl
eto paydamagest othecompanywher ehei sin br
each ofdut yoracts
fr
audulent
lyforexamplewher
edivi
dendhadbeenpaidoutofcapi t
albecauseofhis
breachofduty(ReThomasGer
rar
dandsonsLtd(1968)
.

I
tmayal sobenecessar ytoci
tetheimport
antdeci
sionofHedleyBryneVHell
er1964.I
n
thi
scasei twascl ar
ifi
edthataper sonisli
ablef orf
inanci
allossresul
ti
ngfrom a
negli
gentmisstatementevenift
hereisnocontr
actbetweenthemakerofthestat
ement
andt hereci
pient.Withregardtoauditor
srecipi
entsofsuchmi sstat
ementsmaybe
member sofpot ent
ial
sharehol
ders
(i
nvestor
).

99
100
 JUDI
CIALMANAGEMENT

“Acompanyi nintensivecar euni t

”.Compani esmustmanaget heirownaf fairs,ast hey
arelegalper sonswhoactt hr ought hei
rpr oper lyagent s.Itisther i
ghtofshar ehol derst o
appoi ntpeopl e who woul dr untt he company on t heirbehal f.Howev erdue t o
mismanagementt her emaybet i
mesot heri ndiv idualsmaybeappoi ntedbyt hecour tt o
runt heaf fairsoft hecompany .Themai npur poseofj udici
almanagementi st oenabl e
compani est hatar esuf fer
ingf rom tempor ar yset backsduet omi smanagementorot her
speci alci rcumst ances t o,once mor e,become successf ulv entures.The exi sting
managementoft hecompanyi sdivestedoft hemanagement ,whi chisnowv estedi na
j
udicialmanagerwhocont inuesi sdivestedoft hemanagement ,
whi chisnowv estedi n
aj udi cialmanagerwho cont inues tor un t he af f
ai r
s oft he companyundert he
super visionoft heMast erofHi ghCour t
.I tist hei ntentionoft hej udicialmanagert o
restoret hecompanyt osuccess.Ul ti
mat elyt hecour twoul dwantt heshar ehol derst o
managet hei rownaf fai
rs.Thepr ocessofj udici almanagementi snotanexper imentt o
determi newhet heracompanycanext ri
cat ei tsel ff
rom i t
sf i
nanci aldiff
iculti
esr atherit
shoul dbet reatedasacompanyi nhospi t
al.Weshoul dbeopt imisticthatthepat ientwi l
l
surviver at hert handi e.

Gener
all
y,t
hecourtsar
enotv erykeentobei nvol
vedinthemanagementofacompany
such t
hatstri
ctrequi
rements havet o be sati
sfi
ed forthe courtt
o orderjudi
cial
Management.Theappli
cantmustshow t hatthereisreasonabl
eprobabil
i
tythati
fthe
companyisputinhospitali
twillbecomeasuccessf ulconcern.Theproblemsofthe
companymustbesucht hati
nternalr
emediescannotbef ound.

I
ft hecompanycaneasi lyfi
ndanal t
ernat
ivei nt
ernalremedyt hant hecourtwouldnot
granttheor der.InMakhuv avLukotoBusser vice1987(3)5A376t hecourtheldthatthe
appli
cant scouldnotpr ayforj
udi
cialmanagementor derbecauset heywerethemaj orit
y
shareholdersint hecompanysot heyhadt her emedyt oremov et hedirect
orstof i
ndan
al
ternativesolut i
on.Thecourtmayal soorderj udi
cialmanagementwher eitisjustan
equitabletodoso.Thi si
snotaneasydecisi onforthecour t.Thecompanyi t
selfcannot
applyf orjudicialmanagementbuti tanr aiseitasdef encei fsomecr edi
torshav e
petit
ionedthecour tt
hatthecompanyshoul dbewoundup.

Themaj ordisadv antageofplaci

ngacompanyunderjudicialmanagementisthatthi
s
orderaffectsthecr edit
worthi
nessofacompany.I
twillbedi ff
icul
tther
eaf
tertorai
se
mor ecapital.Creditorstr
eatthecompanywithsuspici
on.Andwoul dnol ongerbe
will
i
ngtogi veloanst osuchacompanyevenifthej udicialmanagementordersbe
fi
nall
ysetasi de.

101
Onthesamepl ane,thefeel
ingthatthi
ngswi l
lnevert
hesamewi l
ltor
mentthesoulsof
cr
edit
orsbefor
et heydecidetoinvesti
nt hecompany.Thecour
thasdiscr
eti
ontoorder
j
udici
almanagementhast ostat
et hegroundsfordoi
ngso.Thegroundsarecont
ained
i
nsection300oftheactasf ol
lows:
i
)Thatbyreasonofmi
smanagementoranyot
hercause,t
hecompanyi
sunabl
etopay
i
tsdebts.

i
i
) Thatther
eisr
easonabl
eprobabi
l
ityt
hatifi
tispl
acedunderj
udi
cialmanagement
i
twil
l beablet
opayit
sdebtsormeetit
sobli
gati
ons. i
i
i)Thatiti sjustand
equi
tablet
odoso.

Whomayappl
y?
Anappli
cat
ionforj
udi
cialmanagementi
smadet
ocour
tbyt
hef
oll
owi
ng
peopl
e. a)Credi
tor
s
b)Members

Thecompanyitsel
fcannotappl
yjudi
cialmanagement
.Itmayhoweverraisej
udi
cial
managementasadefensei
fthemember sorcr
edi
tor
shaveappl
i
edforwi
ndingup.

APPOI
NTMENTANDFUNCTI
ONSOFPROVI
SIONALJUDI
CIALMANAGER

Itisimpor tanttonot ethatbeforet heactualapplicati

onofj udicialmanagementi s
madet ocour t,acopyoft heapplicati
ontogetherwitht hesupportingaffidavit
shast o
belodgedwi t
hMast erofHighCour t(Secti
on90,s62) .TheMast ermayr eporttocourt
astohi sopi nionast owhyt heappl i
cati
onshoul dbegr ant
edordi smi ssed.Ifthe
appl
icati
on f orjudi
cialmanagementwer egranted,t hecourtwoul d usuallygivea
provi
sionalortempor ar
yorder
.Thet emporaryorderwillhaveareturnday ,notlessthan
60day sfrom thedateoftheorder.Ont hi
sdayt hemat tershal
lbehear dincour t.

Reasonswhyt heordershoul dorshoul dnotbemadeper manentshal

lbeadv anced.I n
otherwor dsont hereturndayt hepr ovisionalj
udici
almanagershallr
eporttocour ton
whet herjudicialmanagementshoul dbecont i
nuedorsetasi de.Thi
swi l
lnow bean
easierdiscussi onconsideringhisexper ienceinmanagingt hecompany.Theappl icant
ofjudi ci
almanagementusual l
ypr oposesaspeci f
icpersonasapr ovisi
onaljudi ci
al
manager and gener all
y speaki ng credi t
ors would confir
m such a per son and
contributors.Howev eriti simpor t
antt ost atethatthecourtcangrantapr ovisional
j
udicialmanagementor derwi t
houtappoi nti
ng someone as a provi
sionaljudi ci
al
manager .I nthiscase,allthepropertyoft hecompanyconcer nedshal
lbeincust odyof
theMast erofHi ghcour tuntilapr ovi
sionaljudici
almanagerhasbeenappoi ntedand
102
assumedof
fi
ce.

Theprovisi
onalJudi
cialManagermaysubsequent
lybeappoint
edbythemaster.Hehas
topr
ov i
desomesecur itywhichcanbei
nfor
m ofmoney.Thisshal
lbeanassurancet
hat
heshallper
fect
lyexecutehisduti
es.

Thedut
iesofapr
ovi
sional
judi
cial
managerar
e:

i
)Toassumethemanagementoft
hecompanyandr
ecov
erandt
akepossessi
onofal
l
asset
sof
t
hecompany

i
i
) Lodgewit
htheRegi
str
arofcompani
esacopyofhi
slet
terofappoi
ntmentwi
thi
n
sev
enday soft
heappoi
ntment
.

i
i
i) Topr epar
ear epor
twi
ththef
oll
owi
nginfor
mationwhichshal
lbel
aidatsepar
ate
meet
ingsofcr
edi
torsandmember
sconvenedbytheMaster.

a)Anaccountofgener
alst
ateofaf
fai
rsi
nthecompany
.

b)A st
atementofreasonswhyt hecompanyhasnotbeenasuccessf
ulconcer
n,
par
ti
cular
lywhyi
tcannotpayi
tsdebt
s
c)Ast
atementofasset
sandl
i
abi
l
iti
esoft
hecompany
.
d)Acompl
etel
i
stofcr
edi
tor
sincl
udi
ngamount
sowi
ngandt
henat
ureoft
hei
rcl
aims.
e)Anyexi
sti
ngsour
ceofmoneyf
ort
hecompanybusi
ness.
f
)Whet
hert
hecompanycanonce,
mor
eisasuccessf
ulv
ent
ure.

Theot herpurposeoft hemeet i

ngofcr edi
torsshallbetonominatet hef inalj
udi
cial
managerandt opr ovet hei
rclai
msagai nstthecompany .Ont
hedatestat edbyt hecourt
theprovisi
onalorderforjudici
almanagementcanbemadeper manentaf terconsi
deri
ng
theevidenceofal lst
akehol dersi
.e.creditors,r
eportofpr
ovisi
onaljudi ci
almanager
repor
toft heMast er,r
eportoftheRegistraretc.

I
fafinalj
udi
cialManageri
sappoi
ntedsheshallt
akeoverfr
om theprovi
sionalj
udi
cial
managerandassumet hemanagementoft hecompanyandgener al
lytakeoverthe
managementofthecompany.Heshallcomplywit
hallthedi
rect
ionsofthecourtvis-

103
àvi
smanagement .Al t
hough t hereappearst o beast ri
king si
milari
tybetween the
l
iqui
datorandaj udicialmanager ,therei
sabigdi ff
erence.Theli
quidatorissupposedto
bri
ngalltheassetst ogetherandsel lt
hem todissolv
et hecompanyassoonaspossi ble.
Ontheotherhandt hetaskofaj udici
almanagerittonursethecompanyasbesthecan
i
nor dert
hathecanheali ttosuccess.Itisclearthatthejudici
almanagerassumesal l
theduti
esofadi rectorinsof arasmanagementi sconcerned.

104
 EFFECTSOFJUDI
CIALMANAGEMENTORDER

Asnot ed,themain purposeofaj udici

almanagementor derist otakeawayt he
managementandcont r
olfrom thedirect
orsandplaceitinthehandsoft hejudi
cial
manager .AsNannetteChadwi cknotes,iti
showev eramat terofpracticethatthe
j
udici
almanagerwilll
eavet hedaytodaymanagementi nthecompanyi nthehandsof
thedir
ect or
sandwi l
lexerciseresi
dualcontr
olespeci
all
yoni ncur
ri
ngcr editandthe
paymentofdebts.

Thejudi
cialmanagerwil
lbeundert hesupervi
sionofthecour t
.Aprovi
sionalj
udici
al
managementor dermaycontai
ndi r
ect i
onsthatwhil
et hecompanyi nunderjudici
al
managementallacti
onsandproceedingsandtheexecutionofallwr
it
s,summonsand
otherpr
ocessagainstt
hecompanybest ay
edandbenotpr oceedwit
houtapprovalof
thecour
t.

Appl
icat
ionofasset
s

Aprovisionalorf
inalj
udici
almanagershal
lnothav
epowert
osel
lorotherwisedi
spose
anyoft hecompany ’
sassetsex cepti
fsuchassetsar
esoldi
nor dinarycour
seof
busi
nessandt opayof fcr
edit
ors.

Remuner
ati
onofJudi
cialManager
s

Ajudici
almanager sshal
lbeenti
tl
edtoreasonabl
eremunerati
onfort
hei
rservi
ces.The
MasterofHighCour tshal
lfi
xthi
sremunerati
on.I
ndeter
miningtheamount
,themaster
hast oconsiderthewayt hejobwasdoneandal sorecommendati
onsbymember s
and/orcredi
torsr
elati
ngtosuchremuner
ation.

Cancel
lat
ionofj
udi
cialmanagementor
der

There ar
et wo grounds f
orcancelli
ng a judi
cialmanagementorder.Fi r
stl
yi fthe
companyi snow backoni t
sf eetitcanber ei
ntrust
edt odi
rect
ors’management .
Secondly
,whereforsomejusti
fi
ablereasons,t
hecourtbel
iev
esthatt
heor dershouldbe
cancel
ledforexampleincaseswher ethejudici
almanagerhasdesperatel
yf ai
ledto
savethecompanyf r
om it
seconomi ccri
sisinwhichcasethecompanyhast obewoul d
up.

I
ncancel
l
ingt
hef
inalj
udi
cialmanagementor
der(
incaseswher
ethecompanyi
snow

105
backoni t
sf eet)thecourtshallgivedirecti
onsasmaybenecessar yfortheresumpt i
on
andcont roloft hecompanybyt heof fi
cersthereof.Thismayi ncl
udedi r
ectionst hata
generalmeet i
ngi shel
dforpur posesofel ecti
ngboar dofdirector
s.Generall
yt hecour t
s
arever yreluctantt oret
ur nthecompanyt ot hedi rect
orswhowoul dhav ef ail
ed.In
conclusionitisemphasi zedt hatinmostcasescompani esunderj udi
cialmanagement
usuall
ynev ersucceed.I nact ualfactcompani esunderj udicialmanagementdi eal ong
andpai nfuldeat h.InthecaseofSi lvermanVDoor nhoelMi nesLtd1935TPD349de
Wet.Jendedupsay i
ngthatt hegr anti
ngofaj udicialmanagementor derisaspeci al
pri
vi
leget obeexer ci
sedonl yi nv eryspecialcircumst ances,mor epar t
icularly
,onl y
wheret herei sast r
ongpr obabil
itythattheor derwillenablet hecompanyt oov er
come
i
tsdiffi
culti
es.

106
 WI
NDI
NG-
UP

Likeachi l
dwhoi sborn,acompanywi lldev el
opandpr osperbutwi l
levent ual
lydie.The
deathofacompanycanpr operlybeaf fectedthr oughapr ocesscalledwi nding-up.The
compani es’actdealswi tht hepr ocedureofwi ndingup.Account antsandpr ofessional
li
quidatorsadmi nist
ermuchoft hebusi nessofwi nding-up.Mostoft headmi nistrati
ve
issuescanbef oundi nt hebooksofchar t
eredaccount ants.Themai npur poseon
winding-upor deristoprotectt heinterestsofcr editorsbecauset hecompanywi llnow
becommer ciall
yinsolv
ent, asitcannol ongerpayi tsdebt s.Theactt hereforelaysdown
theci r
cumst ancesunderwhi chacompanymaybewoundup,t hepr ocedur et obe
foll
owedwhocanappl yf ori tswi ndi
ngupt hepr ocedur et obef oll
owed,whot ake
custodyoft hecompany ’
spr opertyandt hedut ies.

Theactal
soprovi
dest
heprocedur
etobef ol
lowedbyt hosesharehol
derswhowishto
windupacompanywhichmaynotbeinsol
vent.Themai ndi
ffer
encebeingt
hatt
hefir
st
methodi
swindi
ngupbycourtandi
nthesecondi nst
ance,i
tisvol
untar
ywindi
ngup.

Wi
ndi
ngupbyt
hecour
t

Anumberofgroundsonwhichacompanycanbewoul dup.I
tprovidesthefoll
owi
ng.
i
)Ifthecompanyhaspassedaspecialresol
uti
ont hati
tbewoul dup.ii
)Iftheapubl
ic
companydef
aultsi
nlodgi
ngstat
utor
yreportorconducti
ngastatutorymeeti
ng.

i
ii
)Ifthecompanydoesnotcommenceit
sbusi
nesswit
hinoneyearofi
tsincor
por
ation
ori
fitsuspendsi
tsbusi
nessf
orayear
.iv) Ifthe company ceases t
o have any
member s.
v)If75%oft
hepaidupcapit
alofthecompanyhasbeenlostv
i)Ift
hecompanyi
s
unablet
opayit
sdebt
s.vi
i)Anyotherreasononwhi
chthecourt
swouldseei
tasf
air
fort
hecompanytobewouldup.

Whocanappl
y?
Anappl
icat
ionf
orwindi
ngupcanbe madebyt
hef
oll
owi
ng
per
sons.a)Thecompanyi
tsel
f
b)Cr
edi
tororcr
edi
tor
soft
hecompany

c)Contr
ibut
ors–Thesear
edefi
nedasper
sonswhoaresupposedt
ocont
ri
but
etot
he
asset
softhecompanyi
ntheev
entt
hati
tisbei
ngwoundup.

107
Pr
ocedur
eforAppl
icat
ionofwi
ndi
ngup

Theappl
i
cat
ionforwindi
ngupi
saddressedtothecour
tandinter
msofthecompani
es
(wi
ndi
nguprul
es)ithast
obeaccompaniedbysomeaffi
dav
itsoft
heappl
icant
s.

Consequencesofwi
ndi
ng-
up

Wherethecour
thasgrantedanor derf
orwindingup(prov
isional
)theRegi
str
arofHigh
Cour
thast opasscopi
est otheregist
rarofcompanies,t
hemast erofHighCourt
,the
Regi
str
arofDeeds,ifthecompanyhasi mmov abl
eassets,andtoanymessengerof
cour
twhomayhav ealr
eadyattachedproper
tyofthecompany .

Thei
mmedi
ateef
fect
sofawi
ndi
ng-
upor
derar
ethat
:

a)Noactionorproceedi
ngshallbecommencedbyoragainstt
hecompanywi
thout
per
missionofcour
t.
b)Noassetsshal
lbesoldi
nexecuti
onofaj
udgmentpr
evi
ousl
yobtai
ned.
c)Thecompanycannotdi
sposei
tsasset
sincl
udi
ngr
ight
sort
ransf
eronshar
es.
d)Al
lpr
opert
yinthecompanyshal
lbedeemedt obei nt
hecustodyorcont
rolofthe
Mast
erunt
ilal
i
quidat
ororpr
ovi
sional
li
qui
dat
orisappoi
ntedandi
scapabl
etoact.

e)The di
rector
s wil
lcease t
o hav
e powerto manage orr
epr
esentthe company.
Howeverthedutyofut
mostgoodfai
thi
ssti
l
limposeduponadi
rect
ordur
ingwindi
ng
up.

St
atementofaf
fai
rs

Thecompanysoonaf terawi ndingupor derhast osendastatementofaf fai

rsthrough
i
tsdirect
orsandcompanysecr etar
ies(withi
n14day soft heorder)
.Thest atement
wouldcontai
nthepar ticul
arsoft hecompany ’
sassets,debt
sandl i
abili
ti
esthenames
anddetai
lsofcredit
ors.TheMast erofHighCour thasanopti
onwhet herornott omake
areporttocourt.TheMast er’
sRepor twouldst at
ethemanneri nwhi chthecompany
wasformedandwhet herinhisopi ni
onanyf raudhasbeencommi ttedbyanyper sonin
i
tspromotionorformat i
onorbyanydi r
ectorsoroffi
cers.

108
TheLi
qui
dat
or

Ali
quidatorhasbeendef inedinGoodeDur raniandMur r
aySALt dvStephenson(2)SA
1961asani ndependentumpi rehav i
ngaf i
duciarydutytowardsthecompany ,its
member sandt hecr edi
tors.I
npr act
iceli
quidatorsareusual
lychar
teredaccount
ants.
Thefoll
owingper sonsaredisqual
ifi
edfrom appointm ent.a)Aninsol
vent
b)Ami
nororanyot
herper
sonundersomel
egal
disabi
l
ity
c)Abodycor
por
ate
d)Anon-r
esidentofZi
mbabwe
e)Anypersonwhohasbeendi
squal
i
fiedf
rom bei
ngadi
rect
or
f
)Anyper
sonr
emov
edf
rom anof
fi
ceoft
rustbyr
easonofmi
sconduct
.

g)Anypersonwhof
raudulent
lysol
i
cit
edsupportofcredi
tor
sorcont
ri
but
orst
oappoi
nt
orvot
eforhi
minthatappoint
mentofal
iqui
dator.

h)Anypersonconvi
ctedofanoffenceinvol
vi
ngdi
shonest
yandsent
encedt
oaf
ine
exceedi
ng
$100orimpri
sonmentwit
houtt
heoptionofafi
n.

Whenaf inalor
derforl
i
qui
dati
onhasbeengr ant
edtheusualpracti
ceofappoi
nti
nga
l
iqui
datorbeinter
msofmeeti
ngshel
dbycreditor
sandcont
ribut
ions.Thewi
shesofthe
part
iesatthemeeti
ngar
eobvi
ousl
yconsi
dered.

Remov
alofal
iqui
dat
or

Thecourtcan,ont
heappl
i
cat
ionbytheMasteroranypersonhavi
ngani
nter
esti
n
windi
ngup,r
emoveanyl
i
qui
dat
oront
hegroundssetout
.Thesei
ncl
ude:
a)Absencef
rom t
hecount
ry,
il
lheal
thoranyot
herf
act
ori
nter
fer
ingwi
tht
hel
i
qui
dat
or’
s
j
ob.
b)Mi
sconducte.
g.f
ail
uret
osat
isf
ylawf
uldemandsmadebyt
heMast
er.

c)Anyothergoodcause–t hi
sphr
aseisther
ebroadtocoveranysi
tuat
ioni
nwhi
cht
he
cour
tmayf eel
iti
sjustandequi
tabl
etoremov
et hel
i
quidat
or.

Secur
it
y

Theli
qui
dat
orhastoprovidesecur
it
yf ort
heperf
ormanceofhisduti
esthi
sissecur
it
y,
whichi
sdet
erminedbytheMasteroftheHighCourt
.Unt
ilhehasdonesohecannotact
109
andi
fhef
ail
stopr
ovi
dei
thewi
l
lbedeemedt
ohav
eresi
gned.

POWERSOFLI
QUI
DATORS

Duringthecourseofhisadmi ni
strati
onal i
quidatorhasapositi
onoft rust,whi
chhe
owest obothcredi
tor
sandt ot hecompany .Thel iqui
dat
orshallgeneral
lytakeover
controloft
hecompanyandal lit
sasset s,
col
lectdebtsowedreal
izeallassetsandthen
proceedtopaythecredit
orsandtot hecompany .

Dut
iesofLi
qui
dat
ors

a) I mmediatel
yaft
erhisappoi
ntment
,thel
iqui
dat
orofacompanybei
ngwoundup
bycour
tshal
lopenanaccounti
nthenameofthecompanyi
nli
qui
dator
.

b) I nev er
ymodeofwindingup,wi
thi
n3mont hsifhi
sappoint
menttheli
qui
dator
should summon a meeti
ng ofcredi
tor
s and contr
ibut
ori
es and pr
epar
ear eport
contai
ningthefol
l
owi
nginf
ormati
on.

i
) Theamountofcapital
issuedsubscri
beandpaidup
andtheestimat
edamountofassetsandliabi
li
ti
es.
i
i) Thecausesoffai
lur
e(ifthecompanyhasf ai
l
ed)i
ii
)
Whetherthecompanyhasproperl
ykeptthebooksof
account
si v
)Theprogr
essofliqui
dati
on.

v)Anyot
hermat
ter
,whi
chhemayt
hink,f
itt
hati
tneedsdi
rect
ionsf
rom cr
edi
tor
sor
cont
ri
but
ors.

VOLUNTARYWI
NDI
NGUP

Asnot edacompanycanbecompel ledt owi ndup.A companymaybewoundup

voluntari
lyiftheperi
odf i
xedbyt hearti
cleshasexpi r
edori far
esolutecondi
ti
onsetin
the contracthasbeen f ul
fil
l
ed.Alt
ernativ
elyt hecompanymayr esol
vebyspecial
resoluti
ont hatitshoul dbewoundup.Theactr ecognizestwot ypesofv ol
unt
ary
windingupi .e.attheinstanceofmember sorcreditors.Bothmethodsarecommenced
i
nt hesameway ,par
ti
cular l
ybypassi
ngaspeci al r
esoluti
on.

Howev
ert
her
ear
ethr
eemai
ndi
ff
erence:
a)I
namember
svol
unt
arywi
ndi
ngupt
hedir
ect
orshav
etof
urni
shsat
isf
act
orysecur
it
y
110
 t
othe

Mast erofthepaymentofallthecompany ’
sdebt swi t
hinaperi
odnotexceedi ng
twelvemont hsfr
om thecommencementofwi nding.TheMast ermayhowev er
dispensewitht
heissueofsecuri
tyi
fthemajori
tyoft hedir
ect
orsfur
nishhim wit
ha
swor nstat
ementwit
hcert
if
icat
eofauditor
sthatitdoesnothaveanyli
abil
i
ties.

b)Inacr edi
torsvolunt
arywindingup,prov
idest hatthecompanyshal lcausethe
credit
orsoft hecompanytobesummonedf orthedayorthef ol
lowi
ngdayonwhi ch
thereistobehel dameeti
ngatwhichtheresoluti
onforvoluntar
ywindingupistobe
proposed.Thesai dmeet i
ngofcredit
orsshallbeadv ert
isedoncei ngov er
nment
gazettesev endaysbefor
et hemeeti
ng.Nosuchpr ovisi
oni smadef oramember s
voluntarywindi
ngup.
c)Member
’sv
olunt
arywi
ndi
ngupcanonl
ytakepl
acewhent
hecompanyi
ssol
vent
.

Ef
fect
sofv
olunt
arywi
ndi
ngup

Volunt
arywindi
ngupshallbedeemedt
ocommenceatthetimeofthepassi
ngoft
he
resol
uti
onforvolunt
arywi
ndi
ngup.Thefol
l
owi
ngaret
her esul
tsofvol
unt
arywi
ndi
ng
up.

1.
Ever
yt ransferofshar
esexceptt
ransf
ersmadefororwiththesanct
ionofthe
li
qui
dator,andever
yalt
erat
ioni
nst
atusofmember
s,madeaf
tert
hecommencement
ofwindi
ngupi svoi
d.

2.
Inwindi
ngup, theactprov
idest
hatupont
heappoi
ntmentofal
i
qui
dat
oral
lpower
sof
thedir
ectorshallcease
3.
Thel
i
qui
dat
ori
sgi
vent
hesamepower
sundert
het
womai
nmodesofwi
ndi
ngup.

DI
SSOLUTI
ONOFTHECOMPANY

I
nor derofdi
ssolv
eacompanyisavoluntarywindingup,t
heMasterimmediatel
yaft
er
theconfi
rmati
onofthel
i
qui
dati
on’sf
inalaccount,giv
esnoti
ce.Ontheexpi
rat
ionofthe
threemonthsfrom t
her
egi
str
ati
onoft hi
snotice,thecompanyshallbedeemedt obe
dissol
ved.

111
112
113