Company Law - Module (NIPA)

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photocopying, recording or otherwise, without permission in writing from the National
Institute Of Public Administration, Lusaka, Zambia
National Institute of Public Administration – Outreach Programmes Division 1

Acknowledgements
The National Institute Public Administration (NIPA), Outreach Programmes Division
wishes to thank those below for their contribution to this Company Law Module:
Ismail Siame (Mr.)
National Institute Of Public Administration

Outreach Programmes Division
P. O. Box 31990
Dunshanbe Road
Lusaka
Zambia
Phone No.: +260228802-4
Fax: +260227213
E-mail:Executivedirector@nipa.ac.zm
Website: www.nipa.ac.Zm

About this Company Law Module Module
The Company Law Module has been produced by National Institute of Public
Administration (NIPA). All modules produced by the Institute are structured in the same
way, as outlined below.
How this Company Law Module is structured
The Module overview

The module overview gives you a general introduction to the module. Information contained
in the module overview will help you determine:
What you can expect from the course.

How much time you will need to invest to complete the course.
The overview also provides guidance on:

Study skills.
Where to get help.
 Assignments and assessments
 Activity icons
We strongly recommend that you read the overview carefully before starting your study.
The Module Content
The Module is broken down into Fourteen (14) units. Each unit comprises:
An introduction to the unit content.
Unit outcomes.
New terminology.
Core content of the unit with a variety of learning activities.
A unit summary.
Assignments and/or assessments, as applicable.
For those interested in learning more on this subject, we provide you with a list of additional
resources at the end of this module; these may be books, articles or web sites.

Your comments
After completing this Module, we would appreciate it if you would take a few moments to
give us your feedback on any aspect of this course. Your feedback might include comments
on:
Content and structure.

Reading materials and resources.
Assignments and Assessments.
Duration.
Support (assigned tutors, technical help, etc.)
Your constructive feedback will help us to improve and enhance this course.

Welcome to Company Law Module
This Banking Law Module gives an in-depth knowledge of the law in Zambia and under
English Zambian law.
Module learning outcomes

Upon completion of this Module, you will be able to:
 Demonstrate an understanding of the following:
- Meaning of Banking Business;

- Setting up a Financial Service Provider;
- Licencing of Financial Service Providers;
- Corporate Governance;
- Banker-Customer Relationship;
- Lending/Types of Securities;
- In solvency and winding up of Financial Service Providers.
Time Frame
Expected duration of this Module is 6 months
Formal study time required is 4 weeks before the beginning of the semester
Self-study time recommended is 4 hours per week

Study skills
As an adult learner your approach to learning will be different to that of your school days:
you will choose what you want to study, you will have professional and/or personal
motivation for doing so and you will most likely be fitting your study activities around other
professional or domestic responsibilities. Essentially you will be taking control of your
learning environment. As a consequence, you will need to consider performance issues
related to time management, goal setting, stress management, etc. Perhaps you will also need
to reacquaint yourself in other areas such as essay planning, coping with exams and using
the web as a learning resource. Your most significant considerations will be time and space
i.e. the time you dedicate to your learning and the environment in which you engage in that
learning. We recommend that you take time now—before starting your self-study— to
familiarize yourself with these issues. There are a number of excellent resources on the web.
A few suggested links are:
 http://www.how-to-study.com/
The “How to study” web site is dedicated to study skills resources. You
will find links to study preparation (a list of nine essentials for a good study
place), taking notes, strategies for reading text books, using reference
sources, test anxiety.
 http://www.ucc.vt.edu/stdysk/stdyhlp.html
This is the web site of the Virginia Tech, Division of Student Affairs. You
will find links to time scheduling (including a “where does time go?” link),
a study skill checklist, basic concentration techniques, control of the study
environment, note taking, how to read essays for analysis, memory skills
(“remembering”).
 http://www.howtostudy.org/resources.php
Another “How to study” web site with useful links to time management,
efficient reading, questioning/listening/observing skills, getting the most
out of doing (“hands-on” learning), memory building, tips for staying
motivated, developing a learning plan. The above links are our suggestions
to start you on your way. At the time of writing these web links were active.
If you want to look for more go to www.google.com and type “self-study
basics”, “self-study tips”, “self-study skills” or similar.

Need Help?
In case you need help, you can contact NIPA at the following website, phone number or you
can email.
www.nipa.ac.zm
NIPA-Main Campus – Outreach Programmes Division Phone Numbers: +260-211-
222480 Fax: e-mail address: opd@nipa.ac.zm
The teaching assistant for routine enquiries can be located from the Outreach Division from
08:00 to 17:00 or can be contacted on the numbers and email address indicated above.
Library
There is a library located at the main campus along Dunshabe Road. The library opens
Monday to Friday from 08:00 to 17:00.
Assignments
There shall be one assignment and a test during residential school given for this module and
the assignments should be sent by post or email them to the provided email addressed to the
Outreach Programmes Division – Nigeria Hall. Assignments should be submitted to
Outreach Programmes Division Registry.
Assessments
There shall be a minimum of two (02) assessments given to the students undertaking this
subject. These assessments shall be teacher marked assessments. The assessments shall be
determined and given by the course tutors after you have covered a number of topics The
teacher/tutor shall ensure that the assessments are marked and dispatched to the student
within a period of two weeks.

You may not have studied by distance education before. Here are some guidelines to help
you.
How long will it take?

It will probably take you a minimum of 70 hours to work through this study guide. The time
should be spent on studying the module and the readings, doing the activities and self-help
questions and completing the assessment tasks. Note that units are not all the same length,
so make sure you plan and pace your work to give yourself time to complete all of them.
About the study guide

This study guide gives you a unit-by-unit guide to the module you are studying. Each unit
includes information, activities, self-help questions and readings for you to complete. These
are all designed to help you achieve the learning outcomes that are stated at the beginning of
the module.
Activities, self-help questions and assessments

The activities, self-help questions and assessments are part of a planned distance education
programme. They will help you make your learning more active and effective, as you process
and apply what you read. They will help you to engage with ideas and check your own
understanding. It is vital that you take the time to complete them in the order that they occur
in the study guide. Make sure you write full answers to the activities, or take notes of any
discussion. We recommend you write your answers in your learning journal and keep it with
your study materials as a record of your work. You can refer to it whenever you need to
remind yourself of what you have done.
Unit summary
At the end of each unit there is a list of the main points. Use it to help you review your
learning. Go back if you think you have not covered something properly.

Studying at a distance
There are many advantages to studying by distance education – a full set of learning materials
as provided, and you study close to home in your own community. You can also plan some
of your study time to fit in with other commitments like work or family.
However, there are also challenges. Learning at a distance from your learning institution
requires discipline and motivation. Here are some tips for studying at a distance.
1. Plan – Give priority to study sessions with your tutor and make sure you allow enough
travel time to your meeting place. Make a study schedule and try to stick to it. Set specific
days and times each week for study and keep them free of other activities. Make a note
of the dates that your assessment pieces are due and plan for extra study time around
those dates.
2. Manage your time – Set aside a reasonable amount of time each week for your study
programme – but don’t be too ambitious or you won’t be able to keep up the pace. Work
in productive blocks of time and include regular rests.
3. Be organised – Have your study materials organized in one place and keep your notes
clearly labelled and sorted. Work through the topics in your study guide systematically
and seek help for difficulties straight away. Never leave this until later.
4. Find a good place to study – Most people need order and quiet to study effectively, so
try to find a suitable place to do your work – preferably somewhere where you can leave
your study materials ready until next time.
5. Ask for help if you need it – This is the most vital part of studying at a distance. No
matter what the difficulty is, seek help from your tutor or fellow students straight away.
6. Don’t give up – If you miss deadlines for assessments, speak to your tutor – together you
can work out what to do. Talking to other students can also make a difference to your
study progress. Seeking help when you need it is a key way of making sure you complete
your studies – so don’t give up.

UNIT ONE: FUNCTIONS OF COMPANY LEGISLATION AND INCORPORATION
FORMALITIES
Introduction
Learning Outcomes
After completing this unit, you will be able to;
 Explain the functions of company legislation

 Describe the process of incorporating a company
 Explain the effect of issuance of a certificate of incorporation
 Explain what a company’s constitution is
The Functions of the Companies Act No.10 of 2017
The Companies Act No. 10 of 2017 performs two (2) main functions namely; the enabling
function and the regulatory function.
Enabling function: this relates to provisions within the Companies Act which stipulate the
requirements for incorporation. That is, provisions within the Companies Act which assist
corporate promoters in forming a company. The main provision that achieves this function is
Section 12 of the Companies Act. Section 13 is also relevant in this regard.
Regulatory function: this relates to provisions within the Companies Act which ensure that the
incorporated entity conducts its business and affairs within the confines of its Constitutional as
well as Statutory regime. This function is mainly achieved by Section 17 of the Companies Act.
Sections 22 and 23 are also relevant in this regard.

NB: the enabling function is a pre-incorporation function, i.e. it is relevant at the point of
incorporation, while the regulatory function is a post-incorporation function, i.e it comes into play
when a company has been successfully incorporated.
The Incorporation Checklist (steps one needs to take to incorporate a company in Zambia)
Section 12 of the Companies Act provides for the requirements for incorporation. In this section,
we shall look at the things that one has to fulfill from initiation up to when a company is formed.
They relate to the full instructions that a lawyer must take from a client once it has been decided
on what sort of a company is to be formed. We shall discuss the steps necessary for the
incorporation of a company.
1. Firstly, one must obtain instructions relating to the company proposed to be formed. The
instructions must be informative of a number of things including the following;
I. The type of company to be formed (S.12(4) + S.6);

II. The proposed name of the company (S.12(4) + S.36);
III. The proposed registered office of the company (12(4) + S.28);
IV. The postal and physical address of the company (S.12(4));
V. The nature of the company’s proposed business (S.12(4)) and
VI. The share capital of the company (S.12(5));
2. It is important to decide where the registered office of the company will be located.
According to Sections 28 and 30, the registered office of the company is a place at which
all company records are kept, and a place to which all communications and notices may be
addressed. Under the old Cap 388, section 190 and section 191 required companies to
maintain two separate offices, namely the registered office and the registered records
office. This has been repealed and the two offices combined into one.

3. Following receipt of instructions, the next step is name clearance. Before a name is
proposed to the Registrar of Companies, it is important to conduct a search on the proposed
name to see whether it is available for registration. Name clearance is done by filling in a
prescribed form and filing the same with the Registrar of companies. A prescribed fee must
also be made before the request can be granted. The Registrar will only clear the name
upon being satisfied with the search and on confirmation that the name is available for
registration. (Section 39).
4. Name clearance is important because the Registrar may refuse to register a proposed name
of the company if the proposed name is likely to cause confusion with a name or trademark
of a registered company or a well-known name or trademark or if registration of the name
is sought to prevent another person, who is legitimately entitled to use the name, from using
the name or the registration of the name is otherwise undesirable or inimical to the public
interest or the name denotes the patronage of the State etc. or the name is calculated to
deceive or mislead the public, cause annoyance or offence to any person or is suggestive
of blasphemy or indecency or registration would suggest or imply a connection with a
political party or leader of a political party (Section 40).
5. If the proposed name is acceptable to the Registrar, the Registrar may register the name as
reserved by the person or persons for a period of ninety days (Section 41). This is optional.
In fact, reservation of a name pending incorporation is rarely done in practice. As a person
wishing to incorporate a company, you will normally have prepared all the necessary
incorporation documents while waiting for the name clearance and you will lodge them
immediately the name is cleared. When a name has been reserved, promoters will have to
incorporate the company within the 90 days, or they will have to re-apply for name
clearance.
6. A point to also note about the name of a company is that under s. 36 (1) and (2) the name
should end with the word “limited” if a private limited company and “plc” if a public
company. Curiously s. 36 does not direct that an unlimited company should end with the

word “unlimited”. A private company limited by guarantee can apply to the Registrar of
companies to dispense with the use of the word “Limited” as part of its name. This is
provided for under s.37. Perhaps this is because the word “limited” has a business
connotation, yet, private companies limited by guarantee do not pursue business for profit
for the members.
7. Further, a company can apply to change its name, post incorporation pursuant to S. 42. The
Registrar can also compel a company to change its name post incorporation pursuant to
S.43 should any of the reasons provided in S.40 resurface.
8. Once the issue of name clearance is concluded the next natural step is to fill-up the
incorporation forms (application for incorporation), depending on the type of company
proposed to be formed. A person wishing to incorporate a company must complete a
number of forms each requiring separate details to be furnished. This is unlike the position
before 1994 when incorporation of a company was by subscription to the Memorandum
and Articles of Association. Today, incorporation is done by application that is done by the
persons wishing to incorporate a Company subscribing their names to an application for
incorporation, which is a prescribed form.
9. Section 12(1) of the Act states that; any two or more persons associating for a lawful
purpose may form an incorporated company by subscribing their names to an application
for incorporation. The 1994 Companies Act dispensed with the Memorandum of
Association and this position has been maintained under the current Companies Act no. 10
of 2017. The application for incorporation replaced the memorandum of association.
10. Once the incorporation documents have been completed, promoters must proceed to lodge
the documents with the Registrar of Companies for purposes of registration. The
incorporation forms must be accompanied by other documents such as articles of
association etc. in accordance with Section 12 (3). According to Section 351, documents

lodged with the registrar of companies must be completed in the English language. Should
they be completed in a language other than the English language, then a translation into
English must be annexed to the application (or any document lodged with the Registrar).
11. Under Section 349 (4), the Registrar of Companies has discretion to accept or reject
documents lodged with him. He can reject the application for incorporation if, for instance,
it contains matter(s) contrary to law or does not otherwise comply with the provisions of
the law. He can also reject the application for incorporation if it does not meet the
requirements of the Companies Act or contains false information (Section 19(1)). If the
Registrar rejects an application for incorporation, the decision must be communicated to
the applicant within 14 days and must give reasons for the rejection (Section 19(2)).
12. On the other hand, if the registrar is satisfied that the application for incorporation has been
duly completed and lodged, then he must proceed to register the company within five days
of lodgment pursuant to Section 14. Therefore, registration of a company is a natural step
following an application that has been duly completed and lodged. Registration simply
means entering the name of the company in the register of companies by the registrar of
companies.
13. Once a company’s name has been entered in the register of companies, the next step will
be issuance of a certificate of incorporation. A certificate of incorporation is issued
pursuant to section 14 (1) (b). If the company is one with a share capital, a certificate of
share capital will be issued at the same time (section 14(1) (c)). The issuance of the
certificate of incorporation effectively gives birth to a company. According to Section 15
(1) (b), a company comes into existence on and from the date specified on the certificate
of incorporation.
Certificate of Share Capital

The certificate of share capital is issued pursuant to Section 14 (1) (c). If the company in
question is one limited by guarantee, no certificate of share capital is issued. The certificate
of share capital states the amount of the company's share capital and the division of the
share capital into shares of a fixed amount. The significance of this document seems to lie
in the fact that a company cannot issue shares beyond what is authorized by this document
(the authorized share capital). By definition, the authorized share capital of a company, is
the total amount of share capital which a company is authorized to issue at any given time
by its capital clause of the application for incorporation.
Effect of Issuance of a Certificate of Incorporation
The issuance of a Certificate of Incorporation signals the birth of a company, with effect from the
date of incorporation specified in the Certificate of Incorporation (Section 15 (1) (b). Upon being
incorporated, all particulars of the company will be entered in the Register of Companies
(Section14 (1) (a).
Further, the following may be considered on the effect of issuance of a certificate of incorporation:
I. Firstly, according to Section 14 (2), the incorporation of a company shall not be invalid by
reason only that the persons who subscribed to an application for incorporation subscribed
in contravention of Section 12(8). Section 12 (8) provides that an individual shall not
subscribe to an application for incorporation if that individual is – under 18 years of age;
an undischarged bankrupt; or of unsound mind and has been declared to be so by a court
of competent jurisdiction. The import of Section 14 (2) is that persons who are disqualified
under Section 12 (8) from incorporating a company can still subscribe, and, the Registrar
of companies may unknowingly or inadvertently proceed to register the company. Once a
certificate of incorporation is issued, no issues can be raised with respect to the subscribers’
capacity. However, if it can be shown that there was fraud, forgery, bribery or some other
illegality involved, then the certificate of incorporation can be quashed. The key point to

note is that there has to be something more than the fact that persons who subscribed to the
application for incorporation contravened Section 12 (8).
II. Further, the issuance of a certificate of incorporation shall be conclusive evidence of

incorporation (Section 15). A certificate of incorporation cannot be challenged by reason
of anything in the incorporation formalities.
III. In addition, in the case of Bowman-v-Secular Society Ltd, it was stated that “the granting
of the Certificate of Incorporation of a company, while constituting conclusive evidence
that all the requirements of the Companies Act, in respect of registration, have been
complied with and that the company is duly registered under the Act, is not conclusive of
the Legality of the objects set out in its constitutive documents (i.e. the objects set out in
the Application for Incorporation in the Zambian context). The Attorney-General could, in
judicial review proceedings, apply for a Writ of Certiorari to quash the Certificate of
Incorporation.” (emphasis mine).
IV. Thus, in R-v-Registrar of Companies ex parte Attorney-General, the incorporation of a

company formed for the purpose of providing the services of prostitution, was quashed.
Similarly, in R-v-Registrar of Companies ex parte Moore, it was held that since the
objects of the company were unlawful, the Registrar of Companies was right in refusing to
register the company.
V. Further, Section 17 provides that the incorporation of a company has the same effect as a
contract under seal between the company and its members and among the members
themselves. Therefore, when a certificate of incorporation is issued, a contract comes into
existence between the company and its members and among the members themselves. This
contract is defined and regulated by a company’s articles of association.

VI. In addition, a registered company acquires a status separate and distinct from its
incorporators, members, directors and officers. It shall continue to exist until it is removed
from the register of companies (Section 16). See also Salomon-v-Salomon.
Regulatory Function
As stated above, this relates to the role that the Companies Act performs in ensuring that a company
operates within the confines of its constitution (Articles of Association) and the Law (Companies
Act, etc) (Section 17). This provision envisages at least 3 different types of contracts (i.e. members
will have contracts with each other, each member will also have a contract with the company and
the company will have a contract with the members collectively).
Members who join after incorporation will still be bound by the Articles of Association. It is worth
noting that the contract created by Section 17 is a statutory contract, which need not necessarily
conform to the elements essential to make a contract valid at common law. The statutory contract
created by Section 17 is defined and regulated by the Company's Articles of Association, which
can be amended from time to time. Articles bind the company and its members in their capacity
as members and not in any other capacity.
Furthermore, Section 17, (in achieving the regulatory function of the Companies Act) makes it
mandatory for the company, its members and officers to conduct the company's business and
affairs in accordance with the Articles of Association and the Companies Act. Articles of
association form the company’s constitution.
Articles of Association
Articles of association will be discussed in detail later. Briefly, articles of association are internal
regulations of a company that traditionally governed the relationship between the company and its
members, and among the members themselves from time to time. As per Section 17, articles of
association form a statutory contract between the company and its members and among the

members themselves. This contract is not fixed or static as it can be altered or amended, from time
to time, by passing a special resolution pursuant to Section 27.
The Companies Act
A company must conduct its business in accordance with the Companies Act. Inclusion of the
Companies Act in Section 17 may suggest that the Act also forms part of the constitutive
documents of a company. However, this is not the case as the Act is not a product of a company
or its members. In Zambia, it is only the Articles of Association that are to be considered as a
company’s constitution.
In addition, Section 23 (1) (a) appears to allow companies to act contrary to the company’s articles.
The effect of this provision is that no act of a company shall be invalid by reason only that the act
is contrary to the company's articles or that internal procedures of the company have not been
followed. It appears S. 23 was enacted to protect third parties who may have acquired rights within
a company.
Unit Summary
In this unit you have learnt that
 Company legislation serves two main functions, namely enabling and regulatory function
 Incorporation of a company requires one to follow specific steps. One has to lodge a
completed application form with the Registrar of Companies and pay prescribed fees
 The registrar may reject an application for incorporation for various reasons.
 If the Registrar is satisfied that the application for incorporation has been duly completed,
he shall issue a certificate of incorporation within 7 days

 The incorporation of a company shall not be invalid by reason of anything in the
incorporation process
 A certificate of incorporation gives birth to a company, and can only be quashed in limited
instances such as where allegations of fraud, forgery, illegal objects etc have been raised
 Articles form a company’s constitution. They create a statutory contract between a
company and its members and among the members themselves.
ACTIVITY
1. Describe the process of incorporating a company in Zambia

2. On what basis can the registrar of companies reject an
application for incorporation?
3. On what basis can a certificate of incorporation be quashed?
4. Can one amend the objects set out in the incorporation form
post incorporation?
5. What is the effect of issuance of a certificate of
incorporation?

UNIT TWO: TYPES OF COMPANIES
Introduction
Learning Outcomes
 Explain the different types of companies that can be incorporated in Zambia

 Show an understanding of the different features of companies
Types of Companies
Section 6 of the Companies Act lists the types of companies that can be incorporated under the
Act as:
I. Public Company; and
II. Private Company, which can be:
- Limited by shares,
- Limited by Guarantee, or
- Unlimited companies.
Further, though not specifically stated, public companies can either take the form of a nominal
public limited company or a listed public limited company. A nominal plc is one whose shares are

not listed on the securities exchange. E.g. ABSA Bank PLC. A listed PLC is one whose shares are
listed on the stock or securities exchange and can therefore trade its shares publicly.
Limited Companies
A limited Company is one in which the liability of the members is limited. By limited liability it
is meant that the members are liable to a limited amount and beyond that limit they cannot be
called upon to contribute to the liabilities of the company. Thus, assuming that in the event of
winding up of a company the assets are not sufficient to pay the liabilities, then the private property
of the shareholders cannot be attached or forfeited to pay the company’s liabilities. Under this
classification, limited companies are public companies limited by shares (section 7), private
companies limited by shares (section 9) and private companies limited by guarantee (section 10).
As stated above, it is mandatory for a private company limited by shares or by guarantee to include
the word “limited” or “Ltd” in their name (Section 36 (2)) while a Public Limited Company must
have “public limited company” or “Plc” at the end of its name (Section 36 (2)).
A Company Limited by Shares
The vast majority of limited liability companies are companies limited by shares. As is implied in
the name, such companies must have a share capital. A company limited by shares is one where
the liability of its members i.e. its shareholders, is limited to the unpaid amount (if any) on the
shares held by them. Under this classification, companies limited by shares are public companies
limited by shares (section 7) and private companies limited by shares (section 9).
In Section 7 (4) (relating to public companies) and Section 9 (3) (relating to private companies
limited by shares), members of the company still owing on the shares that they have will be called
upon to contribute in the event that the company is wound up and its assets are not sufficient to
discharge its liabilities. This liability of the members can be enforced both when the company is

in normal existence and when the company is wound up. Thus, a company limited by shares can
be private or public.
A Company Limited by Guarantee
This is provided for in Section 10. The liability of the members here is limited to the amount the
members agree to contribute to the company in the event that the company is wound up (Section
10(1) and (3)).
Each subscriber to an application for incorporation of a company limited by guarantee is required

to sign a declaration guaranteeing the amount each subscriber will pay in the event that the
company winds up (Section 10(1) and (3)). Two points: (i) the guaranteed amount may differ
from member to member or it may be fixed by the articles and (ii) the liability of the members can
only be enforced during the winding up of the company as members cannot be called upon to pay
their guaranteed amounts during the operation of the company.
While in some jurisdictions, companies limited by guarantee may have share capital; in Zambia
such companies have no share capital. This means that such companies do not receive their initial
capital from their members and sources of initial capital is usually from grants, subscriptions,
endowments etc. Section 10(6) prohibits companies limited by guarantee from carrying on
business for purposes of making a profit for members or anyone concerned with their promotion
or management. It is for this reason that companies limited by guarantee are confined almost
exclusively to charitable and philanthropic causes. A Company limited by guarantee can never be
a public company.
As earlier stated, under Section 37, the Registrar may, on application from such a company, allow
it to dispense with the word “limited” in its name, and in practice this provision is often invoked.
The rationale could be that the word “limited” has a business connotation to it. Given that
companies limited by guarantee do not carry on business for profit making purposes for the

members, it is important that they are given the option to dispense with the use of the word
“limited.”
Unlimited Companies
This is a company having no limit at all on the liability of its members who are personally liable
for the company’s debts and liabilities. If, when winding up, the assets of the company are not
sufficient to discharge the liabilities then the personal property of the members can be attached for
the purpose of settling the company’s obligations (Section 11(3)). However, there is still privity
of contract and separate legal identity and creditors cannot go after the property of members during
the normal business of the company.
Unlimited Companies are provided for in Section 11. The Act directs that such companies must
have share capital. From sections 6, 8 and 11, it is obvious that an unlimited company can never
be a Public Company.
According to Section 11(3), when an unlimited company is wound up, the members are liable to
contribute without limit, but not when the company is operating as a going concern. While Section
36(2) imposes an obligation on all limited companies to use the word “Limited” as part of their
name, there appears to be no equivalent provision in respect of an unlimited company to add the
word “Unlimited” after its name for reasons that are not immediately obvious.
Comparing the different types of companies
Limited and unlimited companies
An unlimited company has no limit on the liability of its members, meaning, its members can be
personally called upon to satisfy the whole of the company’s liabilities to its creditors. In a limited

company, this liability is restricted by law to an amount fixed by the terms of the company’s
constitutive documents.
Public and private companies
A public company must state in its application for incorporation that it is public company and must
formally register as such. Only a company limited by shares may be a public company. Public
companies have the advantage of being able to offer their shares by advertisement to the public for
investment; but they are subject to a greater degree of regulation by the law. A private company is
any company that is not a public company. There is provision in the Act for a company to alter its
status (e.g from private to public) by conversion. Further, membership in a private limited
company is limited to 50 while membership in a public company is unlimited. There is an option
for private unlimited companies to have more than 50 members if the articles so allow (Section 8
(2)).
Companies limited by shares and companies limited by guarantee
There are two types of limited companies. In a company limited by shares a member is not liable
for the company’s debts beyond the amount remaining unpaid on his shares. In a company limited
by guarantee a member is only liable to make a contribution to the assets of the company in the
event of its being wound up and the amount of this contribution is fixed at the outset by the
company’s constitution. That is, by the company’s articles of association.
Unit Summary

 The Companies Act provides for 2 types of companies that can be incorporated in Zambia,
Public and Private Companies
 Public companies may take the form of nominal public limited company or listed public
limited company while private companies may take the form of private company limited
by shares, private company limited by guarantee or unlimited private company.
 Statutory corporations are set up pursuant to an Act of parliament and not pursuant to the
Companies Act, e.g the Bank of Zambia is a statutory corporation set up pursuant to the
Bank of Zambia Act, Cap 360 of the laws of Zambia
ACTIVITY
1. What is a nominal Plc? Are there examples of such

companies in Zambia?
2. Why would one set up an unlimited company?
3. What features are unique to a private company limited by
guarantee?
4. What are some of the similarities between a public company
and a private company limited by shares?

UNIT THREE: PROMOTERS
Introduction
Learning Outcomes
 Show an understanding of who promoter is

 Explain the role of a promoter
 Describe the status of a promoter
 Explain the duties and liabilities of a promoter
 Understand the principles on remuneration of promoters
Who is a promoter?
A promoter is someone who forms a company and performs other tasks necessary for it to begin
business, whether the company is to issue shares or not. This, however, is only a description of
what a promoter is. There is no definition of the term ‘promoter’ in the present Zambian
Companies Act presumably because it has been thought that to produce a definition would ensure
that unscrupulous promoters would arrange circumstances so that they always remained outside it.
This was also the view of the Cohen Committee when it was suggested to it that the term
‘promoter’ should be statutorily defined. Any definition would limit rather than expand the scope
of what is a promoter or promotion. Persons would then escape who ought to be held liable and a
statutory definition cannot be constantly amended. But there are a number of general statements
in the cases as to the sort of persons who are considered promoters. One of the most well-known
is that of Bowen J, in Whaley Bridge Calico Printing Co v Green (1879) 5 QBD 109 where he
states that:

“The term promoter is a term not of law, but of business, usefully summing up in a
single word a number of business operations particular to the commercial world by
which a company is generally brought into existence…”
But, rather than look for a general definition of a promoter in terms of what such a person does, it
is preferable, in any particular case, to ask more broadly, as Bowen J did in Whaley Bridge,
whether the person in question placed himself in such a position in relation to the company from
which equity will not allow him to retain any secret advantage for himself. This is because:
The relief afforded by equity to companies against promoters who have sought improperly to make
concealed profits out of the promotion, is only an instance of the more general principle upon
which equity prevents the abuse of undue influence and of fiduciary relations.
Also:
In every case the relief granted must depend on the establishment of such relations between the
promoter and the birth, formation and floating of the company, as to render it contrary to good
faith that the promoter should derive a secret profit from the promotion.(See also Twycross v Grant
1877 46 LJ CP 636).
Persons who are acting in a purely professional capacity who have been instructed by a promoter,
for example, a lawyer or accountant, do not become promoters themselves.(see Re Great Wheal
Polgooth Co Ltd (1883) 53 LJ Ch 42). Although, if they go beyond this and, for example, agree
to become a director or secretary of the company, they will be held to have become promoters (see
Bagnall v Carlton (1877) 6 Ch D 371).
Note: A promoter is not an agent of the company as an agency relationship cannot be formed
before a principal is formed. [Similarly, he/they are not trustees].

The promoters will decide such matters as (a) the company name, (b) the kind of business the
company will engage in, (c) if the company will be public or private (d) if the company will be
limited by shares or guarantee etc. After deciding on these issues the promoter(s) will take steps
to actualize his/their intention.
Promoters play an important role e.g. they decide on the scope of the business of the company and
if necessary can negotiate the purchase of existing businesses or property. They instruct lawyers,
accountants etc. to prepare the necessary incorporation documents and they provide the necessary
pre-incorporation expenses. For a public company promoters also arrange for the preparation and
publication of a prospectus. Promoters may be an individual or a group/syndicate, or even a firm
or other corporate body. A person can be called a promoter even if they have taken only a minor
role in the formation of the company. However, not everyone involved in the formation of a
company is a promoter. As earlier stated, persons acting in a professional capacity e.g. lawyers,
accountants, engineers, etc. are not promoters in the eyes of the law unless such persons exceed
their professional mandate and take a peculiar interest in the formation of the company.
Although not defined in the Companies Act, promoters are referred to in a number of sections of
the Companies Act No. 10 of 2017 and Corporate Insolvency Act No. 9 of 2017:
- s.217 (2) (c) (ii) deals with civil liability for misstatements contained in a prospectus.
- s. 220 deals with the waiting period when an invitation is made to the public to acquire shares.
- s. 84 - a promoter is one of the persons who may be summoned to court in the process of winding
up a company for purposes of enquiring if he has any assets of the company or to supply any
relevant information relating to the company.
Although promoters are very important in the life of a company, the Act is unfortunately silent as
to their legal position bearing in mind that at this stage the company will not have a board of
directors so as to be able to form an independent judgment and, therefore, it can be forced into

transactions which, perhaps, are not in its best interests and are, instead, to the advantage of the
promoter. Therefore, the duties which are imposed upon a promoter are fiduciary and, as such, he
will be subject to broadly the same statutory duties which apply to directors. As was clearly stated,
in New Sombrero Phosphate Co Ltd v Erlanger (1877) 5 Ch D 73, p 118, by James LJ:38
“A promoter is ... in a fiduciary relation to the company which he promotes or

causes to come into existence. If that promoter has a property which he desires to
sell to the company, it is quite open to him to do so; but upon him, as upon any
other person in a fiduciary position, it is incumbent to make full and fair disclosure
of his interest and position with respect to that property.”
Again, in Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392 Lindley MR said: The first
principle is that in equity the promoters of a company stand in a fiduciary relation to it, and to
those persons whom they induce to become shareholders in it, and cannot bind the company by
any contract with themselves without fully and fairly disclosing to the company all material facts
which the company ought to know. The fiduciary duty of a promoter is to the company but, as
alluded to in the last quotation, ultimately, the persons whose money and property are at risk are
the investors who are the first persons to buy shares in the new company.
In a situation which used commonly to occur, the promoter forced the sale of his own property to
the company at substantially more than its true value and paid himself out of the cash received
from the sale of shares. The shareholders would then find that the company’s assets had already
been seriously diminished and, thus, the value of their shares fell. (See Erlanger v New Sombrero
Phosphate Co Ltd (1878) 3 App Cas 1218)
Another problem was where a promoter received a commission on a transaction he made for the
company. Although the company was not suffering any apparent direct loss, it was against the
principles of equity that the promoter should keep the commission if undisclosed and unapproved
(Emma Silver Mining Co v Grant (1879) 11 Ch D 918).

Disclosure
So, disclosure is the key for the promoter and, as long as he has brought his interest to the relevant
persons’ notice, then, except in one special class of case, he will be able to enforce the contract
and retain the profit. But a crucial question is, to whom must the disclosure be made? In Erlanger
v New Sombrero Phosphate Co, ‘a syndicate purchased the lease of an island, together with
phosphate mineral rights. A company was then formed and the lease and mineral rights were sold
to it at a price which was double its true market value. The syndicate had named the first board of
directors of the company, the active members of which acted simply as nominees of the syndicate
and adopted and ratified the contract. In the words of Lord O’Hagan, their conduct was precisely
that which might have been expected from the character of their selection. In these circumstances,
the House of Lords set the contract aside. The thrust of the speeches is that the promoting syndicate
failed in its obligation to the company to nominate an independent board and make full disclosure
of the fact that they were the vendors of the property: Lord Cairns
‘I do not say that the owner of property may not promote and form a joint stock
company, and then sell his property to it, but I do say that if he does, he is bound to
take care that he sells it to the company through the medium of aboard of directors
who can and do exercise an independent and intelligent judgment on the
transaction, and who are not left under the belief that the property belongs, not to
the promoter, but to some other person.’
Status of a Promoter
May not be defined in legal terms but many of the principles of the law of agency and trusteeship
are extended to the promoter/company relationship. It is therefore well settled that the promoter of
a company is accountable to it for all monies secretly received by the promoter, just as an agent is
liable to his principal for any secret profits. The same principles apply in relation to a trustee and

the beneficiaries (cestuique trust). This fiduciary relationship between the promoter and the
company he floats imposes on the promoter the following specific duties.
(a) The promoter may not directly or indirectly make any profit at the expense of the company
without the knowledge of the company. If he does so, he will be compelled to account for
it. I.e. the company is entitled to any profit that the promoter makes during formation.
Gluckstein v Barnes [1900] AC 240. A syndicate bought property for 140,000 pounds and resold
it to the company for 180,000 pounds. Previously, the syndicate had bought charges ion the
property at a discount and after they bought the property, the vendor paid these charges in full. He
prospectus issued for the new company showed only the 40,000 pounds the syndicate made on the
sale of the property to the company but no disclosure of the 20,000 pounds it made on the charges.
However, the 40,000 pounds was disclosed in a way that “excluded profits made on interim
investments”. The House of Lords held that the promoters were liable to account to the company
for the 20,000 pounds made on the charges as well as the 40,000 pounds.
(b) Promoters should never be allowed to derive gain from the sale of their own property to
the company they float unless all material facts are disclosed (no conflict of interest).
Where the promoter contracts to sell his own property to the company without disclosing
fully, then the company can either repudiate the sale or affirm the contract and recover the
profit made by the promoter. [Erlanger v New Sombrero Phosphate Co. [1878] Note: it is
not the making of a profit that the law seeks to forbid but any non-disclosure of this profit
- see Salomon v Salomon - the profit was disclosed. The law only requires that the promoter
make a full disclosure.
(c) The promoter must not make any unfair/unreasonable use of his position. He is under a
duty to avoid anything that may suggest undue influence/fraud. This is a cross cutting issue.

(d) The promoter has a duty not only to be honest to the company and its shareholders but
also to be careful towards them as well. The standard of duty - Hedley Byrne & Co v
Heller & Partners Ltd [1964]. The promoters’ liability is imposed by both the common
law and statutory law.
Promoters Liability
a. The liability of the promoter is imposed by both the Common Law and the Companies Act.
It is important to note that the rules under which a promoter will be liable for any secret
profit made and for failure to disclose are identical to the rules of the Common Law which
impose liability on agents and trustees. The Companies Act makes reference to the liability
of a promoter in numerous sections, e.g.
b. S.217 - liability of promoter for misstatements or omissions in the prospectus issued to the
public.
c. S. 210 and s.224 - relating to the public issue of shares -impose obligations and liabilities
on a promoter without necessarily referring to them by that name.
Remedies
Where a promoter is in breach of his duty to the company and is making an undisclosed profit
from the sale of an asset to the company, the remedies available to the company are a rescission
of the contract, in which case the profit will usually evaporate (but the company will still be able
to recover any profit made as an ancillary to the main transaction), or a recovery of the profit from
the promoter.
For rescission to be available for the company, restitutio in integrum has to be possible. This means
that the right to rescind will be lost if an innocent third party has acquired an interest in the property
(for example, the company has mortgaged the property as security for a loan to a third party

mortgagee), or there has been a delay by the company in making its election to rescind after
discovery of the true position and, during that time, the position of the promoter has changed. (See
Re Leeds and Hanley Theatres of Varieties [1902] 2 Ch 809; Clough v The London and North
Western Rly Co (1871) LR 7 Ex 26).
The right of the company to rescind as a result of an undisclosed interest on the part of the promoter
exists whether the promoter acquired the property in question before or after he began to act as
promoter.
In respect of a recovery of secret profit by the company where rescission is not available, the
company, it seems, can only do this where the promoter acquired the interest in the property after
he began to act as promoter. This is because the courts have reasoned that to make the promoter
account for profits made on the sale of pre-acquired property to the company while the contract
remained intact would be, essentially, to force a new contract on the promoter and the company at
a lower purchase price. To allow the company to elect to keep the property and insist upon a return
of the profit would be to alter the contract and substitute a lower purchase price. This proposition
was accepted by a majority in the Court of Appeal in Re Cape Breton Co (1885) 29 Ch D 795.They
reasoned that, in these circumstances, the claim by the company would be for either;
(a) the difference between what the promoter originally paid for the property and the price
paid by the company; however, this could not be the correct amount because, at the time
the promoter acquired the property, he was under no duty and he was not acquiring on for
and on behalf of the company; or
(b) Alternatively, the difference between the real or market value of the property, at the time
of the sale of the company, and the price actually paid by the company; in other words, the
price at which the property should have been sold to the company. This was also rejected,
since, if the company is affirming the contract by electing not to rescind, it is adopting the
contract at the sale price. No surreptitious or clandestine profits are made by the promoter

because, in this sense, the profits are only made once the adoption of the contract is made
by the company.
Hence, in order to avoid injustice in those cases where the promoter sells pre-acquired property to
the company and makes a profit because of the unavailability of rescission, the courts have held
promoters liable in damages for loss caused by a breach of duty or in negligence in causing the
company to buy an overpriced asset.
Remuneration of Promoters
Promoters cannot claim remuneration as a matter of right. They can only do so for services they
provide where there is a contract to that effect. If there is no contract, the promoter is not even
entitled to recover expenses incurred in the incorporation of the company. In Re: Clinton’s Claim
[1908] 2 ChD 515 a group promoted a company and incurred expenses of 400 pounds in
registration fess and stamp duty. There was no contract entitling the promoters to recover these
expenses. The company shortly went into liquidation and the question was whether the group could
be reimbursed their costs. Held: the expenses were NOT recoverable.
The Articles of a Company generally empower the Directors to pay the preliminary expenses out
of company funds. However, even in these circumstances there is, in law, still no binding contract
between the principal and the company. In practice the promoters will often be the first directors
of the company and so will ensure that they receive their remuneration anyway. Where a promoter
is entitles to remuneration, the mode of payment will either be;
(a) a lump sum,

(b) issuance of shares to the promoter,
(c) payment of a commission or
(d) granting of discounts on shares.

Unit Summary
 promoters are individuals who are involved in the incorporation of a company

 promoters owe certain duties to the company similar to those owed by officers of a
company
 promoters are entitled to remuneration for the role they play in bringing into existence a
company
 a company will have certain remedies against promoters where promoters have breached
their duties to the company
ACTIVITY
1. Who is a promoter and what role do they play?

2. What duties do promoters owe to the company?
3. In what instances can promoters be held liable?
4. What rules govern remuneration of promoters?
5. What remedies are available to the company against the promoter for
breach of duty the promoter?

UNIT FOUR: ATTRIBUTES OF INCORPORATION
Introduction
Learning Outcomes
 Explain the Attributes of incorporation

 Demonstrate an understanding of the veil of incorporation
 Explain the instances when the veil of incorporation can be lifted
Attributes of Incorporation
An incorporated company has several characteristics that give it advantages over unincorporated
business associations. These attributes set the company, as a business association, apart from other
forms of business enterprise.
(a) Separate Legal Personality - A company is in law regarded as a legal person with
separate and distinct identity from its members. As an artificial person a company will
be entitled to deal with other persons, natural and artificial, in its own name and in its
own right. In terms of s.16 of the Co. Act, a company is deemed to come into existence
on the date of incorporation i.e. from the date its name is entered into the register and
given a certificate of incorporation by the Registrar of Companies. In terms of s. 22 (b),
Once incorporated, a company has the rights, powers, capacity and privileges as an
individual, subject to such limitations as are inherent to its corporate nature and as may
be prescribed by the Companies Act. A member of the company can thus not be held
liable for the acts of the company nor can he/she claim or enjoy the benefits due to the

company. The leading case on corporate personality is Salomon v Salomon [1897] AC
22 where Salomon sold his leather business to a Company that he formed and was the
principal shareholder for which he was paid, in part, by a debenture on the company.
Within a year the Company went under and, as a secured creditor, he was entitled to be
paid first. Other creditors sued saying that Salomon and the Co. were one and the same
but the House of Lords held that Salomon and the Company were separate legal
personalities and Salomon as a secured creditor could be paid as a secured creditor first.
[See also Macaura v Northern Assurance Co (1925] AC 619), Lee v Lee’s Air Farming
[1961] AC 12].
In Zambia the SCZ upheld the concept of separate corporate personality as articulated
in Salomon in ZCCM and Ndola Lime Ltd. v Sikanyka and Others SCZ Judgment No.
24 of 2002. SCZ held: The change of ownership of shares in a company cannot result
in the corporate entity becoming a new employer. The SCZ emphasized the distinction
between a company as a body corporate and the shareholders in that company. In
similar fashion, the SCZ in Newton Silulanda and Others v Foodcorp Products Ltd.
[2002] ZLR 36 held that a sale of shares to a new shareholder does not alter the
corporate character in which the shares are held. In this case the appellants sought a
declaration that there had been a change of employer without their consent when all the
shares in ZAMHORT Products were sold to Foodcorp Products Ltd. or when the name
was changed from the former to the latter. The workers contended that there had been
a disadvantageous change in their conditions of service that should be deemed to be a
breach of their contract of employment and therefore they were entitled to treat their
contracts as repudiated. Ngulube C.J dismissing the appeal said:
“Another argument advanced sought to assert that the change of the ownership of the shares
brought about a new employer. The court below, quite corrected itself in the law which has long
recognized separateness of the corporate entity from those behind it, owning it and directing its
affairs. The celebrated case of Salomon v Salomon on the point is still good law. Similarly our

holding in ZCCM and Ndola Lime Ltd. v Sikanyka and Others is still valid and applies with equal
force to the case at hand.”
(b) Perpetual Succession - Once incorporated, the company has perpetual succession i.e.
the company has a continuous existence and can outlive its original members. In terms
of s.16 ‘….a Company shall continue to exist as a corporate until it is removed from
the register of companies.’ Further, in terms of s. 22(a) ‘a company shall have perpetual
succession and a common seal capable of suing and being sued in its corporate name...”
The continuity of the company does not depend on the continuity of the shareholder.
They may come and go but the company will live on. This however does not suggest
that once incorporated, a company will never come to an end. A company’s life comes
to an end up to when it is wound up or struck off the register in accordance with the
Companies Act. Where a shareholder of a company dies, the legal representative of the
deceased shareholder becomes entitled to the shares by transmission. This is provided
for in s. 190 of the Companies Act.
(c) Can Own Property in its Own Name - As a legal person, a company can own property
in its own name, enjoy such property and dispose of it. The property of the Company
will not be considered as the joint property of the shareholders. It is for this reason that
it was held in Macaura v. Northern Assurance Co. Ltd. [1925] that the shareholder had
no interest in the property of the company. In an unincorporated business association
such as a partnership, there will often be no clear distinction between the property of
the firm and the private property of the partners.
(d) Limited Liability - An important attribute of incorporation as a company is that the

liability of the members is limited. This is arguably the main advantage of
incorporation. Limitation of liability is either by way of shares or by guarantee. Where
limited by shares, the liability of the members is limited to the amount unpaid if any on
the shares they hold. Where the company is limited by guarantee, the liability of the

members is limited to such amount as the members will have undertaken to contribute
to the assets of the company in the event it is wound up. Section 19 of Companies Act
provides that each subscriber for application for incorporation as a company limited by
guarantee must sign a declaration of guarantee specifying the amount he undertakes to
contribute to the assets of the company in the event it is wound up.
(e) Transferability of Shares - The shares of a company are freely transferable and can
be sold and purchased in the share market. This is another advantage over e.g.
partnerships. Transferability is recognized by s. 187 and 188 of the Companies Act a
share of a member of a company is personal estate and movable property transferable
by a written transfer in a manner prescribed by the articles of the company. Thus, shares
are: (a) personal and movable property and (b) transferable as such. However, the
articles of a private company may impose restrictions on the transferability of shares
after they have been issued and transfer may only be done in accordance with
conditions laid down in the articles (section 189). Transferability is an advantage to
both the company and the shareholder. Thus the stability of the company is assured as
the shareholder will not withdraw anything from his share capital and on the other hand
the shareholder gets a marketable security which he can convert into liquid form as and
when desired. This is turn allows companies to raise large amounts of capital on the
share markets through IPOs or new share issues.
(f) Common Seal - A company, being an artificial person, cannot sign its name on any
document. A common seal of the company is thus used in place of a signature. S.32
states every company shall have a common seal bearing the Company’s name and the
words “common seal”. A rubber stamp may not satisfy the requirements of s.32 of the
Act.
(g) Capacity to Sue and Be Sued - As a legal person with independent existence, a
company can file suits against other persons in its own name and similarly it can be

sued in its own name (s.22 (a)). No action can be maintained in a company’s name
without the authority of the company nor can a director or shareholder be a proper
plaintiff or defendant to an action to redress wrongs committed by or against the
company.
(h) Crimes: A company can be convicted of a crime, regardless of whether its directors
are also convicted.
Some limitations: it has been held that a company cannot be convicted of a crime which requires
the physical act of driving a vehicle:
Richmond on Thames Borough Council v Pinn& Wheeler [1989] Crim LR 510
a company cannot be convicted of any crime for which the only available sentence is
imprisonment. There are particular problems with crimes which require mens rea ("a guilty mind")
- most common law crimes require mens rea, while many statutory offences involve strict criminal
liability. In order to convict companies of common law crimes, courts may regard the mens rea of
those individuals who control the company to be the mens rea of the company. However, the courts
have been very restrictive in their use of this approach:
Tesco Supermarkets v Nattrass ([1972] AC 153
R v Kite and OLL Ltd [1996] 2 Cr App R 295
Piercing the Corporate Veil
Together, the speeches of the House of Lords in Salomon have become immensely influential in
English company law. However, the decision has not been uniformly approved of, with one
distinguished commentator describing it as ‘calamitous’. The reason for the criticism of Salomon
is, by and large, the opportunities which the decision gives to unscrupulous promoters of private
companies to abuse the advantages which the Companies Act gives them by achieving a ‘wafer

thin’ incorporation of an under-capitalised company and, further, to give even the apparently
honest incorporators the advantage of limited liability in circumstances in which it is not necessary
in order to encourage them to initiate or carry on their trade or business.
In the 100 years since Salomon, though, the legislature and the courts have not been unaware of
the possibilities of abuse and, on occasion, have responded in various ways to remove the
advantages from the corporators of forming a company or of hiding behind one. These ‘occasions’
are generally described or known as ‘lifting the veil’ or ‘piercing the veil’. For example, it may be
decided that, in the circumstances, it should be ignored that a certain activity or transaction is
carried out by a company and the court will regard the activity or transaction as that of the
shareholders of the company or again, the court may look behind the company to the shareholders
in order to extract certain features or characteristics from them and ascribe them to the company
itself.
Judicial lifting of the veil
It is not possible to distil any single principle from the decided cases as to when the courts will lift
the veil, nor will any two commentaries categorise the case law in precisely the same way. Nor
should we expect to find such a principle or coherent categorisation for, amongst other reasons,
these cases are extremely diverse and, although they may all be termed lifting the veil cases, the
courts are being requested to undertake a variety of different processes
(a) By the Judiciary - it is difficult to be precise about the circumstances under which a
judge will lift the corporate veil but it is a tactic that a judge will use to counter fraud,
sharp practice, oppression and illegality.
(b) By Statute - e.g. if number of members falls below 2 for more than 6 months.
Fraud and the use of equitable remedies

One area of general consensus is that the courts will lift the veil to prevent the use of the
registered company for fraudulent purposes or for evading a contractual obligation or liability.
So, for example, in Gilford Motor Co Ltd v Horne, [1933] Ch 935.H had been employed by
the plaintiffs as their managing director. His contract of service had included a restrictive
covenant, to the effect that, after his employment had ended, he would not solicit the customers
of the plaintiff. The case arose because he did precisely that. One point which was raised in
the case was that the solicitation was done by H as an employee of a company which had been
formed for the purpose, of which all the shares had been issued to his wife and another
employee, who were the only directors. The Court of Appeal regarded this company as a ‘cloak
or sham’, formed merely as a ‘device or stratagem’ in order to ‘mask the solicitation’. An
injunction was granted against both H and the company from acting in breach of the covenant.
A case which follows Gilford Motor Co v Horne and goes even further is Jones v Lipman
[1962] 1 WLR 832. Here, L entered into a contract to convey a parcel of land to J.
Subsequently, he changed his mind and, in an attempt to avoid being compelled to convey the
land, he formed a company, A Co, of which he and a clerk employed by his solicitors were the
only shareholders and directors. L then conveyed the land to A Co. Russell J granted an order
for specific performance against both L and A Co to convey the land to J for two reasons;
1. Because L, by his absolute ownership and control of A Co, could cause the contract to be
completed, the equitable remedy could be granted against him.
2. the order could be made against the company because it was a creation of Land ‘a device
and a sham, a mask which he holds before his face in an attempt to avoid recognition by
the eye of equity. See also the case of Adams v Cape Industries plc (1990) CH 433 and
Creasey v Breachwood Motors Ltd [1993] BCLC 480 on how courts have interpreted the
issue of façade.

The Company as Agent or Nominee
Lord Halsbury, in Salomon, expressly refers in his speech to the fact that there was no fraud or
agency. Of course, if there is an express agency agreement between the shareholder and the
company so that the latter is the agent and the shareholder is the principal, the court is obliged to
lift the veil and treat the business or the activities of the company as that of the shareholder. This
can commonly occur where the shareholder is, in fact, a parent company. See, also, Lord Cozens-
Hardy MR in Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89 But the strength of the
Salomon decision has always been that, even in circumstances where one shareholder holds
virtually all the issued shares and de facto controls what the company does, there is to be no implied
agency.
A more reasoned decision on implied agency is to be found in the judgment of Atkinson J, in

Smith, Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116, where it was held
that the parent company which owned property which was compulsorily acquired by Birmingham
Corporation could claim compensation for removal and disturbance, even though it was a
subsidiary company which occupied the property and carried on business there. This was because
the subsidiary was operating on the property, not on its own behalf, but on behalf of the parent
company. After asking a number of questions concerning the degree of control and receipts of
profits from the business by the parent company, Atkinson J concluded:
‘if ever one company can be said to be the agent or employee, or tool or simulacrum
of another I think the [subsidiary company] was in this case a legal entity, because
that is all it was. ... I am satisfied that the business belonged to the claimants; they
were ... the real occupiers of the premises.’
Along similar lines is the decision in Re FG (Films) Ltd [1953] 1 WLR 483 where Vaisey J held
that an English company with no significant assets or employees of its own was merely an agent
or nominee for its American parent company. Therefore, any film nominally made in its name

could not be a ‘British’ film and, therefore, was not entitled to the advantages provided by the
Cinematograph Films Acts 1938–48.
Single Economic Unit
In the past, courts have been willing to lift the veil on the basis that a group of companies was not
a group of separate persons, but a single economic unit:
DHN Food Distributors v Tower Hamlets London Borough Council [1976] 1 WLR 852 lord
Denning MR stated the following
‘These subsidiaries are bound hand and foot to the parent company and must do
just what the parent company says. ... This group is virtually the same as a
partnership in which all the three companies are partners. They should not be
treated separately so as to be defeated on a technical point. ... The three companies
should, for present purposes, be treated as one, and the parent company DHN
should be treated as that one.’
Later cases have doubted this principle:
See Woolfson v Strathclyde Regional Council
Adams v Cape Industries Ltd
State of Hostility
In times of war, courts may regard a British company as an enemy alien if the company is
controlled by nationals of an enemy country:
Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd

Justice and Equity
Courts have sometimes been prepared to pierce the corporate veil where they feel this is in the
interests of justice:
In Re a Company
Creasey v Breachwood Motors Ltd
But see: Adams v Cape Industries Ltd
Ord v Belhaven Pubs Ltd [1998] BCC 607
Yukong Lines Ltd v Rendsburg Investment Corp (No 2) [1998] 1 WLR 294
Unit Summary
 A company enjoys certain attributes of incorporation including ability to sue and be sued,
ability to own property, ability to borrow money etc
 There are instances when the veil of incorporation can be lifted to hold the individuals
behind the company personally liable for acts done purportedly in the name of the
company.
ACTIVITY
1. What is your understanding of the ‘veil of incorporation’?

2. What are the attributes of incorporation?

3. In what instances can the veil of incorporation be pierced?

UNIT FIVE: CORPORATE CAPACITY AND THE ULTRA VIRES DOCTRINE
Introduction
Learning Outcomes
 Explain the meaning of corporate capacity

 Explain the status of the Memorandum of Association
 Explain the status of the doctrine of constructive notice
 Explain the status of the doctrine of ultra vires
Corporate Capacity
Corporate capacity relates to the power or ability of a company to enter into transactions or
contracts with third parties. According to Section 22 (a), a company shall have perpetual
succession and a common seal, capable of suing and being sued in its corporate name and shall,
subject to the Companies Act, have power to do all such acts and things as a corporate may by
law, do or perform.
Further, under Section 22 (b), subject to the Companies Act and to such limitations as are inherent
in the company’s corporate nature, a company shall have the capacity, rights, powers and
privileges of an individual. In the light of Section 22 (c), a company shall have the capacity to
carry on business and exercise its powers in any jurisdiction outside Zambia, to the extent that the
laws of Zambia and of that jurisdiction permit.
It is clear that Section 22(b) of the Companies Act imbues a company with the same rights,
capacity, powers and privileges of an individual. That is, anything that can be done by a natural

person can also be done by a body corporate. Given that an individual has unrestricted capacity to
enter into contracts or transactions with other persons, it would follow that a company equally has
unrestricted capacity to enter into contracts. A company has the same capacity and powers as a
natural person.
It is worth to note that the unrestricted capacity of a body corporate under section 22 (b) is subject
to 2 limitations, being: limitations inherent in the company's corporate nature and limitations
imposed on the company by the Companies Act itself. For instance, Section 25(3) imposes
restrictions on a company by providing that a company shall not carry on any business or exercise
any power that it is restricted by its articles from carrying on or exercising, nor exercise any of its
powers in a manner contrary to its articles.
It would follow that where a company's articles contain restrictions on the business that the
company can carry on, such company would no longer have unrestricted capacity and would be
expected to conduct its business in accordance with the articles and the business set out in its
application for incorporation.
As regards limitations inherent in the company's corporate nature these relate to things that can be
done by an individual but cannot be done by a company due to the fact that a company has no
physical existence. For instance, an individual can marry while a company, due to its artificial
nature, cannot marry. Noteworthy, limitations inherent in the company's corporate nature do not
necessarily limit the company's power or ability to enter into contracts or transactions with third
parties.
It would follow that for one to fully appreciate the corporate capacity of a company, regard must
be had not only to the Companies Act but to the company’s articles of association as well. This is
so because where the company's articles of association impose restrictions on the business that the
company may carry on, the company will be expected to conduct its business in line with those

restrictions. That is, while the Companies Act imbues a company with unrestricted capacity, the
company may opt to restrict its capacity via its articles of association pursuant to Section 25 (2).
Where the company's articles contain restrictions, the company would no longer have unrestricted
capacity.
Doctrine of Constructive Notice
This is a common law principle. It relates to the idea that knowledge of the contents of a company
document could be imputed on third parties dealing with the company merely because the
document in question was a public document registrable with the registrar of companies or was
available for inspection at the company’s registered office. For instance, third parties dealing with
a company were presumed to be aware of any restrictions a company’s articles of association
imposed on the company’s corporate capacity. See Ashbury Railway Carriage vs Richie.
Section 24 has since abolished the doctrine of constructive notice. According to this provision, a
person dealing with a company shall not be affected by or presumed to have notice or knowledge
of the contents of the documents concerning the company by reason only that the document has
been lodged with the Registrar or is held by the company, available for inspection.
The use of the words ‘by reason only’ in the above provision seems to suggest that if other reasons
exist other than the mere fact that a company’s document is available for inspection, third parties
may be taken to be aware of the contents of a company’s documents in question. These reasons
are to be found in Section 23 (3). A careful reading of this provision will reveal that one has to
show that the third party had ought to have had actual knowledge of the fact asserted as opposed
to imputed knowledge. The onus is on the company to show this, due to previous dealings, for
example.
In so far as third parties are concerned, they are entitled to act on the basis that the company has
unrestricted capacity. This should follow from the fact that knowledge of any restrictions contained

in the company's articles cannot be imputed on third parties merely by virtue of the fact that articles
of association are public documents registrable with the Registrar of Companies or merely by
virtue of the fact that articles are available for inspection at the company's registered records office.
The following Zambian authorities are illustrative of this;
I. Bata Shoe Company Ltd v. Vinmas

Held: the company's authorized agents bound the company to comply with the contract and
such liability could not be avoided.
II. Bank of Zambia v. Chibote Meat Corporation

Held: matters of internal procedure in the management of a company are not the concern
of third parties.
III. National Airports Corporation v. Zimba and Konie

Held: an outsider dealing with a company cannot be concerned with any alleged want of
authority, when dealing with a representative of appropriate authority and standing, or type
of transaction.
NB: If a third party is dealing with a director of the company then the third party should
not be concerned with the director's authority and standing i.e. the third party should not
worry about whether the director has the authority to bind the company to the contract.
However, the National Airports case also seems to suggest that if the representative does
not have the appropriate authority and standing (e.g. if dealing with a cleaner) then the
court will look at the type of transaction i.e. if the type of transaction is such that the
representative (lacking the appropriate authority and standing) can bind the company, then
the company is bound.

On the other hand, as noted above, where third parties dealing with the company have or ought to
have had actual knowledge the contents of the company's articles or any other document, by virtue
of their position in or relationship with the company, they shall no longer be entitled to act on the
basis that the company has unrestricted capacity.
In this regard, it can be argued that Section 24 does not entitle third parties to assume that the
company has unrestricted capacity if they have or ought to have had actual knowledge that the
company does not have unrestricted capacity. Courts in Zambia have had the occasion to interpret
the doctrine of constructive notice and the legal provisions in a number of cases, including the
following:
Memorandum of Association
At common law corporate promoters were required to set out a company’s objects in a document
known as the memorandum of association. This document defined the relationship between the
company and the outside world. In effect, this document defined the company's ability/power to
enter into contracts with outsiders, and companies were prohibited from pursuing objects that were
not specifically set out in the company’s memorandum of association.
In relation to articles of association, the memorandum of association was an outward-looking

document; the document communicated to the outside world what business/businesses the
company was authorized to pursue.
Objects that were not specifically set out in a company’s memorandum of association were said to
be ultra vires i.e. beyond the company’s corporate capacity. Thus, in Ashbury Railway Carriage
v. Richie it was held that the company could not be compelled to perform the contract as the objects
the directors set out to pursue were not specifically set out in the memorandum of association.

With the advent of the Zambian Companies Act of 1994, the requirement to file a memorandum
of association for purposes of incorporating a company was done away with. The position is still
the same under the current Companies Act No. 10 of 2017. The memorandum of association is no
longer used for purposes of incorporating a company and no longer forms part of a company’s
constitutive documents.
Noteworthy, the essential features of the memorandum of association have been condensed in the
incorporation forms. That is, the substance of the memorandum of association has remained the
same although the form has changed (the substance is now contained in the application for
incorporation, albeit in a condensed form/version). For instance, the name clause, objects clause
and capital clause of the memorandum of association have been retained in the application for
incorporation forms.
As stated above, the purpose of the Memorandum of Association was to define the capacity of the
company by setting out its objects and powers. The Application for Incorporation Form does this
by doing 2 things: the form indicates what the capacity of the company will be (i.e whether the
articles of a company restrict the business of the company or not); and the form has provision for
setting out the nature of the company's business. However, the application for incorporation does
not, strictly, define a company’s corporate capacity.
Ultra Vires Doctrine
Traditionally, the ultra vires doctrine related to acts of a company that were beyond the company's
corporate capacity. In its strictest and original form, the ultra vires doctrine meant that no
transaction which was beyond the capacity of a company could ever be binding on the company.
At common law, it was a requirement for corporate promoters to set out the company’s objects in
a document known as the memorandum of association.

As stated above, this document defined the relationship between a company and third parties
dealing with the company. While articles of association were said to be inward-looking, the
memorandum of association was said to be outward-looking. Companies were precluded from
pursuing objects that were not specifically set out in the memorandum of association, as such
objects were said to be ultra vires, i.e beyond the company’s corporate capacity. The English case
of Ashbury Railway Carriage v. Richie and the Zambian case of JP Karnezos-v- Hermis
Safaris Limited are demonstrative of this fact.
In the Ashbury Case, the directors of a company entered into a contract to do with the construction
of a railway line, and yet, the memorandum of association of the company did not provide for
construction of railway lines. The company failed to perform and the suit by the other party, the
Court held that the company could not be compelled to perform because the contract that the
directors entered into was ultra vires.
In the JP Karnezos Case, The High Court of Zambia had occasion to consider the effect of a
contract that was beyond the powers of a company as set out in its Memorandum of Association.
In this case, the Defendant company which was engaged predominately in the business of
transportation entered into a contract to buy 7,484 bags of burnt maize from the Plaintiff for K
9,729.20 Having taken delivery of about half the amount, the Manager and MD of the company
were deported. Consequently, the company failed to perform the rest of the contract. On an action
for the price, Sakala J as he then was agreed with the Defendant that the company had no power
under its Memorandum of Association to buy burnt maize. Sakala said “applying the law as I find
it I have to regrettably hold, and I so hold that the oral agreement entered into between the Plaintiff
and the Defendant Company was ultra vires and void on the ground that the company had no
power to buy burnt maize.”
For illustrative purposes, the advent of the UK Companies Act of 2006, applicability of the ultra
vires doctrine has been significantly reduced in the UK. Firstly, although the memorandum of

association has been retained under the UK Act, this document no longer defines a company’s
corporate capacity. The memorandum of association is used merely for incorporation purposes and
ceases to have relevance once the company is incorporated. It no longer defines the relationship
between the company and the outside world.
Secondly, accordingly to Section 31(1) of the UK Companies Act, unless a company's articles
specifically restrict the objects of the company, its objects are unrestricted. The assumption is that
companies have general capacity and if restrictions are introduced into the company’s constitution
through a statement of objects in the articles of association, then this will be a limitation on the
authority of the directors rather than the company. That is, the company will not be said to have
acted ultra vires but that the directors acted beyond or in want of authority.
Thirdly, according to Section 39(1) of the same statute, the validity of an act done by a company
shall not be called into question on the ground of lack of capacity by reason of anything in the
company's constitution. This provision supports section 31 (1) above in so far as the provision
suggests that a company shall be presumed to have unrestricted capacity. The effect of this
provision is to prevent a situation where lack of capacity could be raised as a defence to any
contractual claim against the company and to ensure that such lack of capacity cannot be pleaded
against a company by a third party.
On the other hand, the ultra vires doctrine retains some relevance because the directors will be in
breach of duty if they fail to act in accordance with the company’s constitution. If the company
has a statement of objects and directors take action which is not covered by these objects then they
will be acting both without authority and in breach of their general duty (Section 17, UK
Companies Act). Establishing a breach of duty and a lack of authority on this basis may entail the
application of the relevant principles of the ultra vires doctrine.
It worth to note that the restrictions in the company’s constitution may relate either to the business
of the company (or activities in the case of companies limited by guarantee) or to the general

powers of the directors. The ultra vires doctrine will be most relevant if the breach relates to the
former rather than the latter. For breaches relating to the latter are more conveniently labeled as
acts beyond the directors’ powers or acts pursued in want of authority on the art of the directors.
However, it is not uncommon to use the ultra vires doctrine to describe acts of directors which are
outside their authority.
The Ultra vires doctrine under the Zambian Companies Act
With the enactment of the former Cap 388 of the Laws of Zambia, the requirement to file a
memorandum of association for the purposes of incorporating a company was done away with.
Two main reasons were advanced for this, being: (i) so as to do away with the ultra vires doctrine;
and (ii) so as to simplify procedures for incorporation. the current Zambian Companies Act No.
10 of 2017 has maintained this position.
Whether or not the legislative draftsman succeeded in his endeavors (i.e. simplify incorporation
and abolish ultra vires doctrine) is debatable. To begin with, the fact that corporate promoters are
no longer required to set out a company’s objects in the memorandum of association is indicative
of the fact that the ultra vires doctrine has been abolished. This is so, given the fact that at common
law, and prior to the enactment of Cap 388 and Act No. 10 of 2017, the ultra vires doctrine related
to acts of a company that were outside the company’s memorandum of association.
Further, Section 22 (b) of the Companies Act imbues a company with the same rights, powers,
privileges and capacity of an individual. That is, a company, once incorporated, has the ability to
enter into any contract or transaction with outsiders in the same way as a natural person.
Given that a natural person has unrestricted capacity to enter into contracts, it would follow that a
company is given the same unrestricted capacity once incorporated. Implied in this, is the fact that
a company has the ability to depart from the objects set out in its application for incorporation.
Therefore, it would be inconceivable for a company with ‘unrestricted capacity’ to act ultra vires

i.e. ‘beyond its corporate capacity’. This provision alone seems to suggest that the ultra vires
doctrine has been abolished in Zambia.
The above position is supported by Section 23 (a-c) of the same statute, whose effect is that no act
of a company shall be called into question solely on the basis that the company acted contrary to
its articles of association or that the persons who acted on behalf of the company did not have the
authority to represent the company. It seems the Companies Act allows companies to act contrary
to their articles, and, in which case, it would seem illogical to declare acts of such company as
ultra-vires. In other words, it would seem ludicrous for a company with capacity to act contrary to
its articles, and possibly the Companies Act (Sections 17 and 104, which requires companies to
act in accordance with their articles), to be said to have acted ‘beyond its corporate capacity.’
The provisions presented above seem to suggest that the ultra vires doctrine has been abolished in
Zambia. By way of example, Section 87(1)(a) provides that directors of a company cannot sell a
company's property without the approval of an ordinary resolution by the company's members.
However, directors may still sell the company’s property without such approval and the act by the
directors would still be valid, in the light of Section 24. The buyer is not required to conduct a
search to establish whether the necessary ordinary resolution had been passed.
On the other hand, there are provisions that seem to suggest that the ultra vires doctrine has not
been completely abolished but merely watered down as remnants of this doctrine still linger within
some provisions of the Companies Act. Also, the fact that the memorandum of association has
been done away with is not conclusive of the fact that the ultra vires doctrine has been abolished.
The fact that what used to be the memorandum of association has been condensed in the
incorporation forms is indicative of the retention of the ultra vires doctrine. The substance of the
memorandum of association has remained the same though the form has changed.
Secondly, Section 25(2) gives a company the option to restrict its business via its articles of
association. Where a company exercises this option, Section 25(3), 17 and 104 all become

operative, requiring such company to carry on business in line with the restrictions contained in
the articles of association. A departure from the articles would essentially be illegal.
All illegal acts are ultra vires, therefore, strictly speaking, acts of a company that are outside its
articles of association should be declared ultra vires (i.e. beyond the company's corporate
capacity).
Further, the use of the words "by reason only" in Section 23(1) of the Act, seems to suggest that
if other reasons (other than the mere fact that the company acted contrary to its articles or the
Companies Act) exist, then such act by the company can still be declared invalid. The other reasons
envisaged by this provision, are reasons contained in Section 23(3), which include actual
knowledge, on the part of the 3rd party, of the extent of the company’s powers.
To fully appreciate the effect of Section 23 (3), one may have to consider Section 23(1)(a) whose
effect is that a company cannot assert against a third party dealing with a company that the articles
have not been complied with. Section 23(3) provides an exception to this rule. The effect of
Section 23(3) is that a company could still assert against a third party that the company acted
beyond its corporate capacity (and therefore should not be bound by the transaction) where the
third party dealing with a company has or ought to have had actual knowledge of the contents of
the company’s articles of association or the extent of the company's corporate capacity. The act in
question can therefore be declared ultra vires.
The above provisions seem to suggest that the ultra vires doctrine has not been completely
abolished but merely "watered down". This stems largely from the fact that where a third party
dealing with the company had actual knowledge of the extent of the company's corporate capacity
and the directors acted beyond the company’s corporate capacity, such acts would be said to be
ultra vires.

The fact that the ultra vires doctrine still applies in Zambia was confirmed by the Supreme Court
in the 2008 case of Fresh Mint Limited-v-Kawambwa Tea Company Limited (2008). In this
case, a director of Kawambwa Tea Company guaranteed a loan to the company. When
guaranteeing the loan, the director executed a memorandum of understanding with the lender that
the loan was for the benefit of Kawambwa Tea Company. Kawambwa Tea Company went into
receivership and Fresh Mint paid the loan (the director of Kawambwa was also a director of Fresh
Mint). Fresh Mint then sought to recover the money it repaid on behalf of Kawambwa. Kawambwa
argued that it was not a party to the memorandum of understanding between the director and the
lender, and that it did not authorize the director to obtain the loan. It was held:
“We are live to the fact that a company is a legal entity, without physical existence which
can only act through human beings, Section 215(1) and (3) provide as follows;
1. Subject to this Act, the business of a company shall be managed by the directors,
who may pay all expenses incurred in promoting and forming he company and may
exercise all such powers of the company as are not, by this Act or the articles,
required to be exercised by the company by resolution.
2. Without limiting the generality of subsection (1), the directors may exercise the
powers of the company to borrow money, to charge any property or business of the
company or all or any of its uncalled capital and to issue debentures or give any
other security for a debt, liability or obligation of the company or of any other
person.
However, the human being that acts on behalf of a company must have authority of the
said company to do so. Only contracts entered into on behalf of a company by authorized
agents will bind such company. Such agents are formally authorized through a resolution
of a company. This is the basis of the famous Turquand’s case. Our own decision in the

case of Zambia Bata Shoe Company Vs Vin-Mas Limited supports this principle. We said
in this case:
"In practice most people dealing with companies rely on the rule in Turquand’s
case and do not bother to inspect the articles. Applying the fiction of constructive
notice both the vendor and the purchaser were aware of the need for a special
resolution and the binding contract for sale was entered into on that basis. The
company’s authorized agents bound the company to comply with the contract and
such liability cannot be avoided."
We have found that the director acted without Kawambwa's authority. As the directed acted
without authority from the company the loan agreement he entered into, purportedly on
behalf of the defendant, was therefore ‘ultra vires’ and so it was not binding on
Kawambwa.”
It is clear from the above case that agents are normally authorised through resolution of a company;
and that it was not for the Respondent company to prove that it had, in fact, not given such power,
it was for the appellants to have been on guard to prove that the 2 nd Appellant had in fact acted
within the authority given to him.
Further, the ultra vires doctrine must be approached from 2 dimensions, being the external
dimension and the internal dimension (i.e. internal validity).
The external dimension refers to the relationship between the company and third parties dealing
with the company, while the internal validity refers to the relationship between the company and
its directors. As regards the external dimension, the ultra vires doctrine has not been abolished but
merely watered down as shown by the above provisions/authorities.

As regards the ultra vires doctrine's internal validity, one will note that the ultra vires doctrine has
been maintained under Zambian company law, in that members always have specific remedies
against directors where such directors act or are about to act in want of authority or beyond the
company's corporate capacity. Specifically, 3 remedies are available to the members, being:
I. Members can seek an injunction from court to restrain the directors from acting in a
proposed manner (Section 330(1)); It should be noted that this remedy will only be
available where directors have not yet acted but merely proposed to act in an ultra vires
manner.
II. Members can sue the directors in their individual capacities for damages where such
directors have acted beyond the company's corporate capacity (Section 335);
III. Members can ensure criminal proceedings are commenced against the directors and assist
in the criminal process (Section 104); or
IV. The members can ratify such ultra vires act at a general meeting. (Section.339). Also, this
was affirmed in the case of Re Duomatic.
Whose rights, between the members and third parties’, take precedence over the other's
where members succeed in obtaining an injunction from court restraining the directors
from acting, especially where third parties have acquired rights within the company?
It depends. A third party's rights will take precedence where the third party was not aware
of the extent of the company's corporate capacity (Section 23 (3)). However, where the
third party had or ought to have had actual knowledge of the extent of the company’s
corporate capacity then the member's rights would take precedence over the third party's
rights and the injunction should be affirmed.

Would the ultra vires doctrine be relevant to a company whose articles do not restrict the
company’s business?
It would be correct to say that the ultra vires doctrine will only be relevant to a company
whose articles contain restrictions on the type of business the company may carry on or the
general powers of the directors. Thus, where the articles do not contain restrictions either
the business of the company or powers of the directors, the ultra vires doctrine would
indeed cease to be relevant to such company because the company will have unrestricted
capacity.
Does Section 23 authorize the commission of unlawful acts by companies?
Not necessarily. Sections 23 is there for the protection of third parties who may have
acquired rights in the company. What is clear from section 23 is that where a company acts
contrary to the articles, the act shall be valid. However, it shall constitute an offence under
section 104 and the directors can be punished accordingly. Third parties will have benefit
from the error of the directors and act shall be valid.
Unit Summary
 Corporate capacity relates to the power/ability of a company to transact

 At common law corporate capacity was restricted by the memorandum of association
 Zambian company law has done away with the requirement to file a memorandum of
association for purposes of incorporating a company
 The doctrine of constructive notice has been abolished in Zambia

 There are provisions within the Companies Act which suggest that the ultra vires doctrine
has been abolished and provisions that suggest that the doctrine has not been abolished but
merely watered down
 There are certain remedies available to the shareholders were directors act in an ultra vires
or illegal manner.
ACTIVITY
1. Has Zambian Company law abolished the doctrine of ultra vires?

2. Would the ultra vires doctrine be relevant to a company whose articles
do not restrict the business that the company may carry on?
3. What is your understanding of the doctrine of constructive notice and
what is its place in Zambian company law?

UNIT SIX: PRE-INCORPORATION CONTRACTS
Introduction
Learning Outcomes
 Describe a pre-incorporation contract

 Identify statutory provisions on pre-incorporation contracts
Definition/Background
The promoter is obligated to bring a company into legal existence and to ensure its successful
running (at least initially). In order to accomplish his obligation he may enter into contracts on
behalf of company before its incorporation. These types of contract are called ‘Pre-incorporation
Contracts’.
A pre-incorporation contract is one which is purportedly made by or on behalf of a corporation at

a time when the corporation has not yet been incorporated. Because the corporation named in the
promoter's contract has not been formed at the time the contract is made, the corporation when
formed is not initially bound by the contract. However, adoption of the contract is anticipated by
the parties to the contract. If the corporation in fact adopts the contract, then it will assume those
rights and liabilities set out in the contract.
In order to get the benefits of a ‘corporate personality’, it is very necessary for the entity to become
incorporated under the Companies Act No. 10 of 2017. After incorporation, the company comes

into existence, and it can start its business operations as company only after that. The simple reason
behind it is that before incorporation a company does not have any legal existence, and if the
persons involved in the incorporation of the company enter into an agreement in the name of
company before incorporation; the agreement should not bind the company, but also, it should not
be void ab initio.
When a promoter enters into a contract on behalf of a corporation to be formed, the promoter may
be considered personally liable to meet the obligations of the corporation if for some reason the
corporation is not formed or does not adopt the contract. When the pre-incorporation contract is
made, the corporation is not in existence and therefore cannot be a party to the contract. The
promoter thus must be a party to the contract, and, under agency law principles, the promoter will
be personally bound as an agent acting on behalf of a non-existent principal.
Further, the promoter is solely liable for the breach of contract because the rule of privity of
contract would keep away the company from the pre-incorporation contract. But as shall be seen
below developments in Zambian corporate law and contract law makes the company liable, in
certain instances, for pre-incorporation contracts.
Common Law Position
In Kelner v Baxter, where the promoter in behalf of unformed company accepted an offer of Mr.
Kelner to sell wine, subsequently the company failed to pay Mr. Kelner, and he brought the action
against promoters. Erle CJ found that the principal-agent relationship cannot be in existence before
incorporation, and if the company was not in existence, the principal of an agent cannot be in
existence. He further explained that the company cannot take the liability of pre-incorporation
contract through adoption or ratification; because a stranger cannot ratify or adopt the contract and
company was a stranger because it was not in existence at the time of formation of contract. So,
he held that the promoters are personally liable for the pre-incorporation contract because they are
the consenting party to the contract.

In Newborne v Sensolid (Great Britain) Ltd, the Court of Appeal interpreted the finding of
Kelner v Baxter in a different way and developed the principle further. In this case, Newborne
entered into a contract with Sensolid Ltd. to supply tinned ham to Sensolid Ltd. The price of tinned
ham fell and Sensolid Ltd. refused to take further deliveries of tinned ham from Newborne. The
contract had been signed by Leopold Newborne underneath the words Leopold Newborne
(London) Ltd. It was not formally signed “on behalf of Leopold Newborne (London) Ltd.” as had
been the case in Kelner v. Baxter. Unfortunately, Leopold Newborne (London) Ltd. had not been
incorporated. Leopold Newborne (London) Ltd. was later incorporated and it brought an action
against Sensolid Ltd. That action was dismissed because Leopold Newborne (London) Ltd. had
not been incorporated at the time the contract was entered into. Leopold Newborne then sued
Sensolid Ltd. in his own name seeking to enforce the pre-incorporation contract on the basis that
he was a party to the contract himself. The argument was made on the basis of Kelner v. Baxter
saying that if the contract was not with Leopold Newborne (London) Ltd. then it must have been
with the person who signed on behalf of the company, namely, Leopold Newborne.
The English Court of Appeal held that the correct approach was a rule of construction approach.
The real test was whether the promoter was intended, in the circumstances, to be a party to the
contract or not. It was held that given the way in which the contract was signed by Leopold
Newborne it was intended to be a contract with the company and only the company. In other words,
given the way in which it was signed it indicated that it was not intended that Leopold Newborne
be a party to the contract himself. Thus, Leopold Newborne could not enforce the contract in his
own name.
The Court observed that before incorporation the company cannot be in existence, and if it is not
in existence then the contract which the unincorporated company signed would also not be in
existence i.e. the contract shall not be enforceable. So, a company cannot bring an action for a pre-
incorporation contract and the promoter also cannot bring a suit because such promoter was not a

party to the contract. According to the Court, before incorporation, the company cannot be in
existence, and if it is not in existence, then the contract which the unformed company signed would
also be not in existence. So, a company cannot bring an action for pre-incorporation contract, and
also the promoter cannot bring the suit because they were not the party to contract.
The Newborne case created some amount of confusion that, if the contract was signed by the agent
or promoter, then he will be liable personally and he has the right to sue or to be sued. But if a
person representing him as director of unformed company enters into the contact then the contact
would be unenforceable. This distinction was found objectionable by the Windeyer J in Black v
Smallwood and this was also criticized by Professor Treitel in the Law of Contract. Later in
Phonogram Limited v Lane, Lord Denning settled the position, he found that if an unformed
company enters into the contact, then it cannot bind the company, but the legal effect of contract
does not entirely lack. And even in that situation the promoter or representor are personally liable
for the pre-incorporation contract.
In Phonogram Limited v Lane, a person was attempting to from a company which was going to
run a pop artists group and that person arranged financial assistance from a recording company. A
rock group intended to perform under the name "Cheap Mean and Nasty" and to form a company
for the purpose to be called "Fragile Management Ltd". Mr Lane accepted a cheque from
Phonogram for £6,000, signing his name "for and on behalf of Fragile Management Ltd". The
money was to be used to finance production of an album and was repayable if this was not
achieved. When the album was not produced, Phonogram sought to recover the money from Lane,
the company having not been in existence at the time the contract was made. Lane argued that his
signature "for and on behalf of" the company amounted to an agreement that he was not to be
personally liable on it. Lord Denning analyzed Kelner v Baxter, Newborne v Sensolid, Black v
Smallwood and the section 9(2) of the European Communities Act, 1972, and found that the
promoters are personally liable for the pre-incorporation contract.

According to Lord Denning, if an unincorporated company enters into a contract, then such
contract cannot bind the company (i.e. the company will not be bound by such contract when it
comes into existence and it cannot ratify or adopt such contracts) but the legal effect of contract
does not entirely lack. And even in such a situation, the promoter representative is personally liable
for the pre-incorporation contract.
The common law position is therefore, is as was stated in Phonogram Ltd v. Lane, which confirms
Kelner v. Baxter but departs from Newborne v. Sensolid.
Statutory Intervention
UK Companies Act 2006
Section 51(1) of the UK CA 2006 provides:
a contract which purports to be made by or on behalf of the company at a time when the company
has not been formed has effect, subject to any agreement to the contrary, as one made with the
person purporting to act for the company or as agent for it and is personally liable on the contract
accordingly.
Meaning of "subject to any agreement to the contrary"
When the company comes into existence, the company can enter into a separate agreement with
the promoter and/or third party whereby the promoter assigns his duties and liabilities, under the
contract, to the company through the process of novation. Although under common law, the
promoter is personally liable for the pre-incorporation contract, there is some scope where the
promoter can shift his liability to the company under the UK Act.

To shift his liability, the promoter must enter a separate contract with the company, assigning his
liabilities and duties under the contract to the company.
Once novation takes place, the promoter ceases to be bound while the company becomes
automatically bound. Novation seems to be different from ratification in that under novation, a
new contract is made on the same terms but this time between the company and the promoter,
whereas the ratification dates back to the time of the act ratified, so that if the company ratifying
(which is not in existence) cannot itself have then performed the act in question then its subsequent
ratification of the contract is ineffective.
Zambian Companies Act
Section 20 of the Companies Act is instructive on pre-incorporation contracts. s.20(1) provides

that if a person purports to enter into a contract, not evidenced in writing, in the name of or on
behalf of a company before it comes into existence, then such person shall be bound by the contract
and entitled to the benefits thereof. Thus, s.20 (1) adopts the common law position.
On the other hand, the combined effect of s.20(2) and s.20(3) is that if the contract in question is
evidenced in writing then the company may (i.e. adoption is optional - it is not mandatory that the
company must adopt contract), not later than 15 months after its incorporation, adopt the contract
by an ordinary resolution.
The effect of adoption is that the company becomes bound by the contract and the person who
purported to act in the name of or on behalf of the company ceases to be bound by or entitled to
the benefits of the contract.
Further, section 20(4) provides to the effect that whether or not the relevant contract is adopted by
the company, the other party to the contract (i.e. the third party) may apply to court for an order

fixing obligations under the contract or an order apportioning liability between the company and
the person who purported to act in the name of or on behalf of the company.
On the other hand, section 20(5) states that if the relevant contract expressly provides that the
person who purported to act in the name of or on behalf of the company before it came into
existence, shall not in any event be bound by the contract nor entitled to the benefits of the contract,
then section 20(4) shall not apply. Arguably, Section 20 (5) serves as an exclusion clause. It
suggests that a promoter can limit or exclude his or her liability under the contract by inserting
within the pre-incorporation contract a clause to that effect.
Unit Summary
 A contract entered into for and on behalf of a company prior to its incorporation is known
as a pre-incorporation contract.
 A company may adopt a pre-incorporation contract upon its incorporation
ACTIVITY
1. How has the Companies Act modified the common law position on
pre-incorporation contracts?
2. What are the pre requisites for adopting a pre-incorporation contract
in Zambia? What is the effect of adoption of a pre-incorporation
contract?

3. Can a verbal pre-incorporation contract be adopted in Zambia?
4. What is your understanding of novation? Does it apply to pre
incorporation contracts executed in Zambia?

UNIT SEVEN: CONVERSION OF COMPANIES FROM ONE FORM TO ANOTHER
Introduction
Learning Outcomes
 Explain the different forms of conversions acknowledged by the Act

 Explain the requirements for each conversion envisaged by the Act
 Describe the process of conversion
 Explain the effect of conversion
 Provide reasons as to why a company may convert from one form to another
Conversion of a private company limited by shares to company limited by guarantee
A private company limited by shares may be converted to guarantee. This is possible under section
48 which reads:
48. (1) A private company limited by shares may be converted into a company limited by
guarantee if-
(a) all its members agree in writing to such a conversion;

(b) there is no unpaid liability on any of its shares;
(c) the members surrender their shares for cancellation, despite section 150 (1)(c);
(d) the members pass a special resolution to amend the articles to convert the company to
a company limited by guaranteecomplyingwithsection10; and
(e) each member makes a declaration of guarantee.

Note. A company limited by guarantee does not have shares or share capital, therefore, it is
important to ensure that each member makes a declaration of guarantee before the conversion takes
place. This is perhaps the second most important requirement after the agreement in writing. This
is because in a company limited by guarantee, the members’ liability is tied to the declaration of
guarantee that each member makes. Also, if there is provisions in the company’s articles
suggesting that the company has shares and pursues business for profit for the members, such
provisions must be amended.
Further, a private company limited by shares may be converted to an unlimited company.
Conversion of a private company limited by shares to private unlimited company
A private company limited by shares may be converted to an unlimited company. This is possible
under section 49 which reads:
49. (1) A private company limited by shares may be converted into a company limited by
guarantee if-
(a) all its members agree in writing to such a conversion;

(b) there is no unpaid liability on any of the company’s shares;
(c) the members pass a special resolution to amend the articles to convert the company to
an unlimited company complying with section11;and
(d) each member agrees, in writing, to take up a specified number of shares.
Note. Although both a private company limited by shares and an unlimited company have shares
and pursue business for profit, a key difference between the two is that while the members’ liability
is limited in the former, the members’ liability is unlimited in the latter. Therefore, any provisions

in the articles suggesting that the members’ liability is limited must be amended before the
conversion can take place.
Conversion of company limited by guarantee to company limited by shares or unlimited

company
A company limited by guarantee may be converted to a private company limited y shares or an

unlimited company. This provided for in section 50 which reads as follows:
50. A company limited by guarantee may be converted into a company limited by shares or an
unlimited company if-
(a) all the members agree in writing to-

(i) Convert it into a company limited by shares or an unlimited company; and
(ii) a share capital for the company; and
(b) each member agrees in writing to take up a specified number of shares;
(c) the members pass a special resolution to amend the articles to convert the company
to a company limited by shares or an unlimited company complying with section 9
or 11.
Note. Since both a private company limited by shares and an unlimited company have shares and
a share capital, it is important that before the conversion, the members of a company limited by
guarantee agree to the share capital, number of shares, par value and how many shares each
individual will get.
Conversion of private unlimited company to private limited company
Under Section 51, a private company limited by shares may be converted into an unlimited
company if –

(a) all its members agree in writing to its conversion;
(b) in the case of conversion to a company limited by guarantee, each member makes a
declaration of guarantee as provided in section10; and
(c) the members pass a special resolution to amend the articles to convert the company to a
private limited company complying with section8.
In the case of an unlimited company becoming limited, Professor Gower could not express it better
when he says in the case:
“it is not the members who need special safeguards but the creditors”
This possibility means that whereas creditors could pursue managers, directors and members for
recovery of their dues, they are suddenly limited to the amounts the directors, managers and
members state in the new articles.
Conversion of public company into private company limited by shares
Under Section 52, a public company may be converted into a private company limited by shares
by –
(a) its members passing a special resolution to convert the company into a company limited
by shares;
(b) amending the articles to satisfy sections 8 and 9;
(c) its members agreeing in writing to a share capital for the company; and
(d) each member agreeing, in writing, to take up a specified number of shares.
Note. For this conversion, no agreement in writing is required by ALL the members. A special
resolution would suffice. Perhaps the rationale for this is that this conversion does not alter the

members’ liability in anyway as is the case with the preceding conversions. In both a public
company and private company limited by shares, the members’ liability is limited to the unpaid
amount on shares allotted to them. This applies to the next conversion as well (private to public).
Also, public companies are huge corporations with unlimited membership, therefore, it may be
practically impossible to obtain the written consent of all the members.
Conversion of a private company limited by shares to a public company
Furthermore, it is possible under the Act to convert a private company limited by shares to a public
company. According to Section 53, a public company may be converted into a private company
limited by shares by –
(a) passing a special resolution to convert the company into a public company;
(b) amending the articles to satisfy section 7; and
(c) its members agreeing in writing to a share capital for the company.
Note. Again, no agreement in writing by all the members is required for this conversion, possibly
for the reasons presented above with the exception of the one relating to membership.
Process of Conversion
For a company to convert from one form to another, it must follow the procedure set out in section
54. A prescribed application form must be completed and filed at PACRA, and prescribed fees
must be paid accordingly. Relevant documents as set out in Section 54 (2) must accompany the
application for conversion. Once the company satisfies Section 54, the Registrar of companies
shall issue a replacement certificate of incorporation.
From the date of conversion stated in the certificate of incorporation, (a) the company shall stand
converted into a company of the status specified on the replacement certificate of incorporation;

(b) articles shall stand amended in accordance with the documents lodged with the notice of
conversion; and (c) name shall be as stated in the replacement certificate of incorporation (Section
54 (4)).
Effect of Conversion
According to Section 54 (5), the conversion of a company shall not—
(a) alter the identity of the company;

(b) affect any rights or obligations of the company, except as specified in the Act; or
(c) render defective any legal proceedings by or against the company.
Note. Although the Act does not define ‘identity’, it seems to relate to the name of a company. It
is true to say that conversion does not alter the name of the company as a different process is
provided for in the Act for name change. Also, any contracts entered into by a company prior to
conversion shall continue being in force. This applies to legal proceedings as well commenced
prior to conversion.
Unit Summary
 A company can convert from one form to another by following prescribed statutory steps
 There are statutory requirements unique to each conversion
 When a company converts, the identity remains the same, its rights and obligations
including legal proceedings will not be affected.

ACTIVITY
1. Why would a company convert from one form to another?

2. Can a company convert from being a private company limited by
guarantee to being a public company? What are the steps?
3. The law provides that conversion of a company shall not affect the
company’s identity. What is meant by company’s identity?

UNIT EIGHT: ARTICLES OF ASSOCIATION
Introduction
Learning Outcomes
 Explain the legal effect of articles of association at common law

 Identify statutory provisions on articles of association
 Explain the binding nature of articles of association
 Describe the relationship between articles of association and a shareholders’
agreement
 Describe the process of amending a company’s articles of association
Articles of Association
Every company incorporated pursuant to Act No. 10 of 2017 must have Articles of Association
regulating the conduct of the company (S.25 (1)). The articles may contain restrictions on the type
of business that a company may carry on or the powers exercisable by the company (S.25 (2)). A
company shall not carry on any business or exercise a power which the company is restricted by
its articles from carrying on or exercising, or exercise any of its powers in a manner that is contrary
to its articles (S.25(3)). Further, a provision in the articles which is inconsistent with the Act or
any other law is invalid to the extent of the inconsistency (S.25 (4)). It is also a requirement for
the articles to be divided into paragraphs numbered consecutively (S. 25 (5)). The articles must
also be signed by persons who are the first members of the company (S.25 (6)). A company has
the option to adopt the Standard Articles set out in the Schedules of the Act or any specified
regulation therein (S. 25(7)). Where a company adopts the Standard Articles set out in the

Schedules, the company shall not be required to file the Standard Articles with the Registrar (S.
25(8)).
Legal Effect of Articles
Traditionally, the Articles of Association have served as the rules governing the relations between
the company and its members and among the members inter se, in the relation to the Memorandum
of Association in jurisdictions where it is still a requirement (and in Zambia before 1994) which
is understood to be a charter of the Company governing its relations with the outside world by
setting out the objects and powers of the company. The Articles govern the internal relationships
and deal with such matters as:
(a) The share capital of the company
(b) Changes in the share capital
(c) Appointment of the Directors and their powers.
(d) Conduct of Meetings
(e) Payment of dividends
(f) Voting at general meetings, etc
To get a good understanding of this common law position, read the following cases
Hickman v Kent or Romney Marsh Sheep Breeder’s Association [1915] 1 Ch 881
Beattie v E & F Beattie [1938] Ch 708
Eley v Positive Government Security Life Assurance Co (1876) 1 Ex D 88
Rayfield v. Hands
Wood v Oddessa Waterworks Limited

Pender v Lushington
The above cases emphasise that Articles are inward looking and that outsiders cannot be bound
nor enforce provisions of a company’s articles. That articles bind members in their capacity as
members and not in any other capacity such as director (Beatie v Beatie) or solicitor (Eley v
positive government).
Are Articles Outward Looking?
Section 104 of the Act suggests that directors may be bound by a company’s articles of association.
In fact, the provision places an obligation on the directors to ensure that the company acts in
accordance with the articles. Directors can therefore be bound and possibly enforce provisions of
a company’s articles of association.
Further, under section 25(2) and (3), articles may contain restrictions on the business the company
may carry on. If a third party dealing with the company is aware of these restrictions, they will be
bound by them and the company can enforce same against the third party (S. 23(3)). Therefore,
there are instances where articles may bind third parties.
Further, Section 104 (1) requires directors to act in accordance with the company’s articles of
association and to also ensure the company complies with its articles of association. It is an offence
for the directors to act or to allow the company to act contrary to the articles of association
(S.104(2)).
The foregoing provisions seem to suggest that the traditional role of articles of association has be
modified and articles can now bind third parties and the company’s directors. However, this is
only to the extent envisaged by the law. Section 26 is instructive on the legal effect of articles. It
provides as follows;
26. (1) The articles shall have the effect of a contract between—

(a) the company and each member; and
(b) amongst the members.
(2) The articles shall bind the company and its members.
Further, when one examines section 17, it is clear that articles are a contract between the company
and its members and the members themselves.
What if a company’s Articles are deficient in some material respects, can a Company
automatically fall back on the Standard Articles?
If the articles are deficient, one does not automatically fall back on the standard articles. The only
recourse is to amend the articles to cure the deficiencies via section 27. A company can only fall
back on the standard articles if it does not have its own articles, i.e a company that adopted the
standard articles as its regulations.
Amendment of Articles-section 27
A company may amend its articles by passing a special resolution. A company shall, where it
amends its articles, within twenty-one days after the date of passing the resolution, lodge a copy
of the resolution with the Registrar, together with a copy of each paragraph of the articles affected
by the amendment, in its amended form. The articles shall take effect, in their amended form, on
and from the day of their lodgement with the Registrar, or such later date as maybe specified in
the resolution. If a company fails to comply with lodgment requirements, the company, and each
officer in default, commits an offence and is liable, on conviction, to a fine not exceeding three
hundred thousand penalty units for each day that the contravention continues.

Unit Summary
 It is mandatory for every company incorporated in Zambia to have articles of association

 Articles constitute a binding contract between the company and its members and among
the members themselves
 Articles can be amended from time to time
ACTIVITY
1. What is the legal nature of articles of association?

2. Can articles of association bind 3rd parties dealing with the company?
3. Has the Companies Act extended the applicability of articles of
association to outsiders dealing with the company?
4. Are directors of a company party to the contract created by a company’s
articles of association?

UNIT NINE: MEMBERSHIP
Introduction
Learning Outcomes
 Explain the different ways of becoming a member of a company

 Explain the different ways of ceasing to be a member
 Understand the differences between member and shareholder
 Comment on capacity to be a member
A company, as a corporate entity, is made up of natural and/or artificial persons who, in essence,
own the company. The persons who make up the company are known as members or
shareholders.
How to Become a Member
There are various ways in which a person can become a member/shareholder in a company, these
are;
(i) subscription
(ii) allotment, which can be either a private placement or a public issue
(iii) Acquiring shares being transferred
(iv) Transmission
(v) employee share option plan (ESOP)

Membership by Subscription
A person can become a subscriber in a company, by stating that he is a shareholder in the particular
company in its application for incorporation form. In this regard, a shareholder or member of the
company, as the case may be is called a subscriber because his name appears on the company’s
application for incorporation/constitutive documents. Under the current Companies Act,
membership by subscription is more pronounced with respect to private companies limited by
guarantee. The following references are made, in this regard;
Section 3 “member” means a shareholder or stockholder of a company or a subscriber to a

company limited by guarantee;
Section 10 (2)’; A subscriber to an application for incorporation for a company limited by

guarantee shall, on incorporation of the company, be a member of the company.
Second Schedule (standard articles for company limited by guarantee) Clause 2: Each subscriber
to an application for incorporation of the company and such other persons as are admitted to
membership in accordance with the articles shall be the members of the company. No person shall
be admitted as a member of the company unless by a resolution of the company, and by signing a
declaration of guarantee and delivering it to the company.
Allotment
This refers to the shares that are issued by a company after its date of incorporation. An allotment
is distinguishable from a transfer of shares in that it constitutes a direct divestiture by the company,
whilst a transfer of shares involves the transfer of shares from one shareholder (not being the
company) to another shareholder, or prospective shareholder. Shares may be allotted in two ways,
the first mode is known as the private placement and the second mode is called a public issue. A

third mode, rights issue, also exists, albeit it involves an allotment of shares to existing
shareholders. Therefore, a person does not become a member through this latter mode.
i) Private Placement
This is a discrete way through which shares are sold to persons privately, its significance lies in
the fact that the allottees of the shares are specifically identified by the company prior to the
placement. To this end, a private placement is distinguishable from a public placement, in that a
public placement is generally addressed to the public.
ii) Public Issue
A public issue can only be undertaken by a ‘public company’, and not a private company. It
follows therefore that in order for a private company to undertake a public issue, it ought to convert
itself into a public company. When a company makes its first public issue, it is referred to as an
initial public offering (‘IPO), subsequent offers are referred to as public offers.
Ordinarily an IPO is undertaken at various steps. The first step is known as the public invitation.
At this stage the company issues advertisements inviting members of the public to subscribe for
shares in the company. A public invitation is equivalent to an ‘invitation to treat’ in contract law.
The second stage is known as the ‘subscription stage’. This refers to the actual applications by
members of the public for subscription in the company, in response to the public invitation. A
subscription is equivalent to an ‘offer’ in contract law.
The third and final stage is the ‘allotment stage’. At this stage shares are allotted to the subscribers,
and it amounts to an ‘acceptance’ at contract law.

In the event that the public’s response to a public issue of shares is overwhelming, the shares are
deemed to be over-subscribed. If the response is at par with the number of shares to issued, then
the offer is fully subscribed. Lastly, if the public response is less than the anticipated issue, than
the shares are under-subscribed.
iii) Subscription Rights Issues
A subscription rights issue consists of an offer to shareholders giving them the right to subscribe
for further shares in the company, at a price, usually lower than the market value of the existing
shares which are issued, the number of shares usually being in proportion to the shareholders’
present shareholding e.g. a right to subscribe for one new share for every five shares that a
shareholder holds. A subscription rights may crystallise into a public issue, for example where
shares are subsequently issued to the public after a subscription rights issue. A subscription rights
issue may also be made simultaneously with a public issue.
In all cases, shares must not be issued at a consideration less than payment or the promise of
payment of the nominal amount of each share.
Process of share allotment to an outsider
An outsider can apply to acquire shares for the purpose of becoming a member of the company
The application is followed by allotment of shares which is basically the appropriation of a
specific number of shares to a particular individual. Once shares have been allotted to the applicant,
the company shall proceed to notify the allottee that shares have been allotted to them. Once
communication has been made to the allottee, a binding contract comes into existence between
the company and the allottee whereby the company becomes obliged to enter the allottee's name
in the Register of Members and the allottee is obliged to pay for the shares allotted to him. When
the allottee's name is entered in the Register of Members, a share certificate will also be issued and
shares will then be said to have been issued to the allottee. Therefore, "Share Issuance" constitutes

the whole complete process from the time a person applies for shares to the time his/her name is
entered in the Register of Members. See. Westminster Bank of Britain v. Inland Revenue
Commission.
Membership by acquiring shares being transferred
According to Section 188, subject to the articles, fully paid-up shares in a company may be
transferred by entry of the name of the transferee on the share and beneficial ownership register
and evidenced by registration with the Registrar. For the purpose of transferring shares, a share
transfer form signed by the present holder of the shares or by the personal representative of the
present holder shall be delivered to (a) the company; or (b) an agent of the company who maintains
the share register. Further, A share transfer form shall, where registration as holder of the shares
imposes a liability to the company on the transferee, be signed by the transferee.
In addition, Section 189 provides that subject to any limitation or restriction on the transfer of
shares in the articles and the Companies Act, shares in a company shall be transferable without
restriction. Only the Companies Act and the company’s articles can impose restrictions on
transferability of shares. In this regard, Section 189 (3) provides;
“The board of directors shall refuse to register a transfer of shares to any person
who—
(a) is under eighteen years of age;

(b) has been declared by the Court or a court of competent jurisdiction of another
country to be of unsound mind; or
(c) is an undischarged bankrupt.”
In the absence of other restrictions in the company’s articles, and the transferee of shares not caught
up by the above provision, he/she is entitled to be entered to be registered. I.e the transferor’s name

is entered in the share and beneficial ownership register, and the allottee shall become a member
at that point.
Membership by transmission
This is provided for under Section 190 of the Companies Act. Transmission of shares is commonly
used to refer to the automatic transfer of shares by operation of the law, as opposed to transfer
which entails a voluntary act on the part of a person transferring shares, otherwise called the
transferor. Acquisition by transmission mainly occurs in the event of death or bankruptcy of an
existing shareholder and this may entail shares moving from a deceased person to his personal
representative or from a bankrupt person to a trustee. In either case, the successor shareholders
must have their names entered in the register of members and until that happens one is not a
member.
The Companies Act makes provision for transmission of shares in the case of death of a
shareholder. In this regard, the Companies Act recognizes that the survivor or survivors where the
deceased was, for example, a joint holder shall be recognised as the shareholder and, where the
deceased shareholder was a sole holder of shares, his legal personal or representative shall be the
only person recognised as a shareholder.
Employee share option plan (ESOP)
Employees of a company can become shareholders by acquiring shares in a company. Employee

share option plans are contracts between a company and its employees that give employees the
right to buy a specific number of the company's shares at a fixed price within a certain period of
time. The employees will then be entered in the register of members and thus become members.

Requirements to be met in order for an Employee Share Option Plan to qualify as an Approved
Share Option Scheme in line with the Eighth Schedule of the Zambian Income Tax Act.
General requirements for the approval of a scheme
The scheme must be established in Zambia (or at the least have an administrative wing within the
country) by or on behalf of an employer carrying on business wholly or in partly in Zambia.
 The scheme should provide for the participation of all eligible employees (including
directors).
 An employee participating in the scheme should not acquire more than one fifth of
the shares to be issued in the scheme.
 Only ordinary shares of the company may participate in the scheme.
 The scheme entitles an employee to acquire a set number of shares at a fixed price.
 The employee must be restricted to a set period of time to use an option to buy
shares.
 The employees must be citizens or permanent residents of the Republic of Zambia

and it does not matter in which country they may be carrying out their duties.
The company’s constitution (articles) and rules must:
 provide for the participation of all eligible employees;

 limit the number of shares an employee may acquire to one fifth of the shares being
offered under the scheme;
 provide for notification of the eligible employees and provision of all information
of the scheme and the risks and benefits associated with participation in the scheme;
 indicate how the pricing of the shares in the scheme shall be undertaken and that
only ordinary shares shall participate in the scheme;
 require that the employer (or in this case its subsidiary) shall bear the expenses of
the scheme and that the scheme shall be independently audited by auditors or
independent accountants;
 set out the criteria for eligibility to participate in the scheme;
 require that the employer and the trustees act as tax agent for the participating
employees for all tax matters relating to the scheme;
 provide that employees may sell shares after five years, except where the
termination of services with the employer or the death of the employee is earlier;
 not require the employee to contribute any additional amounts beyond the amounts
agreed upon in the scheme;
 not permit changes to the rules or constitution which affect the employees
adversely, without the consent of the trustees and confirmation from the
Commissioner-General of the Zambia Revenue Authority; and

 not permit for the granting of credit towards financing the exercise of an option to
acquire shares.
Ceasing to be a member
By transferring shares to another person
In the light of Sections 188 and 189 of the Companies Act, a person can transfer his entire
shareholding to either an existing shareholder or an outsider. Such a person ceases to be a member
when his name is removed from the register of members.
By death
Section 190 of the Companies Act acknowledges that when a member dies, his name shall be
removed from the register of members and replaced by the name of his personal representative or
a named beneficially under a will.
A personal representative of a deceased member has the option either to request that the company
have his name entered in the Register of Members or to request that the company enter a
beneficiary's name in the Register of Members.
When a Company is Wound-Up
The Corporate Insolvency Act No. 9 of 2017 provides for winding up of companies. When a
company undergoes voluntary or compulsory liquidation its affairs are halted, save for the
beneficial interest of the winding-up process. The winding up process is followed by dissolution
(the striking of a company off the register of companies). Once the company's name is struck-off
the register of companies, members automatically no longer have any interest in the company.

By forfeiture or surrender of shares
According to Section 148 of the Companies Act, a shareholder may forfeit or surrender shares to
the company in accordance with the articles. If a member fails to pay a call on shares, the member
may, subject to the articles, forfeit the shares to the company. The Registrar shall register a
forfeiture or surrender of shares lodged in the prescribed manner and form. In the event a member
forfeits or surrenders all his shares, he shall cease to be a member.
Note on Capacity
It appears a person will not automatically cease to be a member merely by virtue of the fact that
he has become insane or bankrupt. The Companies Act is conspicuously silent on capacity to be a
member. In fact, the combined effect of Sections 12 (8) and 14 (2) suggests that persons below
the age of 18, persons of unsound mind and undischarged bankrupts can all become members of a
company. This is because for instance, under Section 3, member means a shareholder or
stockholder of a company or a subscriber to a company limited by guarantee. Therefore, two
minors can subscribe to an application for incorporation in contravention of Section 12 (8), and
yet the error will be forgiven under section 14 (2), and the minors shall be considered to be
members by subscription.
On the other hand, Section 189 (3) suggests that persons below the age of 18, persons of unsound
mind and undischarged bankrupts cannot acquire shares via a transfer. It would be safe to conclude
as follows;
 Persons who lack the legal competence to contract (minors, imbeciles etc) can
become members via subscription, but they cannot become members via a transfer
of shares;

 Imbeciles, undischarged bankrupts etc do not automatically cease to be members
when the affliction befalls them.
Whether a person can be a member without being a shareholder and vice versa
Although the terms "member" and "shareholder" are used interchangeably, it is possible to have a
member who is not a shareholder and vice versa. A subscriber to an application for incorporation
becomes a member on the incorporation of the company but not a shareholder until he acquires
shares. Members in a company limited by guarantee are not shareholders because a company
limited by guarantee has no shares. A transferor of shares in a share transfer transaction ceases to
be a shareholder when he executes and delivers to the transferee instruments of share transfer.
The transferee, on the other hand, becomes a shareholder and only becomes a member when his
name is entered in the company’s register of members. Also, a personal representative of a
deceased member automatically becomes a shareholder upon the death of a member and only
becomes a member when his name is entered in the register of members upon presenting evidence
of his entitlement to be so entered. Before registration, the personal representative will be entitled
to all the benefits, rights and privileges and/or remedies of a shareholder but not those of a member
until the personal representative's name is entered in register of members. For instance, the
personal representative will be entitled to receive dividends as and when declared but he will not
be entitled to vote at a general meeting, as the right to vote is a right incidental to being a member
(i.e. someone whose name appears in the Register of Members) and not necessarily incidental to
being a shareholder.
Unit Summary

 There are 4 main ways of becoming a member of a company
 There are 4 main ways of ceasing to be a member
 It is possible for a person to be a member without necessarily being a shareholder and vice
versa
 The issue of capacity to be a member is only subtly addressed the Companies Act
ACTIVITY
1. Who is a member of a company?

2. Is there any technical difference between the word
‘member’ and ‘shareholder’?
3. Explain the different ways in which a person ca become a
member of a company
4. Explain the different ways in which a person can cease to be
a member of a company
5. Does a person cease to be a member when they become
insane or are declared bankrupt?

UNIT TEN: SHARES AND SHARE CAPITAL
Introduction
Learning Outcomes
 Explain the meaning of share

 Describe the legal nature of a share
 State the functions of a share
 Identify statutory provisions on transferability of shares
 Explain the concept of share capital
 Understand the classifications of share capital and the share capital structure
 Identify statutory provisions of alteration of share capital
Shares
The legal nature of a share
A company raises the money it requires for its business activities from its members and the money
so raised is called the company’s capital and is usually divided into different units of a fixed
amount; these units are called shares. Disappointingly the Companies Act does not define the term
“share.” Section 3 simply states that “share” includes stock” which is not very helpful. One of the
best definitions is that articulated by Farwell J in Boarland’s Trustee v Steel Bros. & Co. [1901]
1 Ch 279 where he defined a share as follows:
“A share is the interest of a shareholder in the company measured by a sum of

money, for the purpose of liability [and dividends] in the first place, and of interest

in the second, but also consisting of a series of mutual covenants entered into by
all the shareholder inter se.”
The Definition of a share by Farwell J, in the context of Zambian Company Law, characterizes a
share as a bundle of rights emanating from the statutory contract created by Section 17 of the
Companies Act. The contract contained in the articles of association is one of the original incidents
of the share. A share is not a sum of money… but is an interest measured by a sum of money and
made up of various rights contained in the contract, including the right to a sum of money of more
or less amount.
Further, a share is an interest measured by a sum of money namely the nominal amount of the
share (Par value) and also the rights and liabilities belonging to it as defined in the Companies Act
and/or in the Articles of Association. A share represents the pecuniary interest of its holder and his
rights and liabilities. It is in this sense that a share is sometimes referred to as a bundle of rights
and liabilities of the shareholder.
In essence, a share constitutes personal estate and moveable property transferable by a written
transfer in a manner provided by the articles of a company or by the Companies Act itself. A share
is thus an item of property which should be regarded and treated in the same way as other personal
property and may as such be transferred, sold, bequeathed, mortgaged or pledged by the owner as
he pleases, subject always to the provisions of the Articles and the Act.
A share has therefore emerged as personal intangible property transferable from one shareholder
to another person, who may either be an existing shareholder or an outsider.
Rights associated with acquisition of shares

When a person acquires shares in a company, all that they acquire is a bundle of rights which
include:
1. the right to vote at general meetings of the company;

2. the right to information about the company;
3. the right to participate in the deliberations at the meeting of the company;
4. the right to receive dividends as and when declared;
5. the right to residue capital of the company in the event of it being wound-up;
6. the right to commence a derivative action against erring directors etc.
Functions of a share
A share serves 3 main functions, namely:
1. As a share is measured by a sum of money, it establishes the extent of members' liability

for and interest in the company;
Liability -a member is liable only to the extent that their shares are not fully-paid up i.e. a
member will be liable for shares that are not paid up at all or shares that are only partly
paid up. Note: there is no liability for unissued shares and fully paid-up shares.
e.g. if company has an authorized capital of K5,000 divided into 5,000 shares, but only
2,000 shares have been issued. Members will only be liable for the K2, 000 issued to the
extent that they are not fully paid-up (not the 3000 of unissued shares
2. It represents a series of mutual covenants entered into by all the members; i.e. it is a
medium through which shareholders interact.

3. It gives entitlement to dividends, share of profits and return of surplus capital in the event
that the company is wound-up.
Transferability of shares
Transferability of shares is one of the attributes/characteristics of a share. A transfer of shares is a

voluntary inter vivos disposition or change of ownership of shares. Shares are freely transferable
unless the articles of a company or the Companies Act imposes some restrictions (S.189(1)).
A transfer of shares is characterized by 3 elements, namely:
- It is voluntary;
- it arises between a willing buyer and a willing seller; and
- it arises during the lifetime of the parties to the transfer, being the transferor and the
transferee.
In terms of Section 188 of the Companies Act, shares can be transferred in writing in a manner
prescribed by the companies Act subject the articles of association. One can transfer shares via a
share transfer form executed by both the transferor and transferee or their duly appointed agents
or representatives. A company cannot refuse to register a duly executed share transfer instrument
on account of form.
In terms of Section 188 and 190, a company is obliged to register a person as a member who
presents a proper instrument of transfer to the company or on whom the right to the shares has
been transmitted by operation of law. If a company refuses to register a transfer of shares, then the
company must inform both the transferor and the transferee, within a reasonable period, that it
shall not register the transfer.

Further, the company must furnish both the transferor and the transferee with notice in writing
giving them reasons that would be considered to justify refusal. In the event that the company
breaches the notification requirement, then the company and each officer in default shall be guilty
of an offence.
In terms of Section 189, shares shall be freely transferable without restriction, unless the articles
of the company or the Companies Act imposes restrictions. However, it should be noted that the
articles of a private company cannot impose any restrictions on the transferability of shares after
they have been issued, unless all the shareholders have agree in writing to impose the restrictions.
Further, Section 189 (3) imposes restrictions on transferability of shares by providing that a
company may refuse to register a transfer of shares to a person below the age of 18 years, an
undischarged bankrupt or a person of unsound mind’
Share Capital
The word “capital” is not defined in the Companies Act but the Act requires corporate promoters
to specify, in the application for incorporation, of a company with share capital the amount of the
share capital and the division of the share capital into shares of a fixed amount.
Companies are generally formed to enable individuals participate in an enterprise by pooling

resources together and by contributing goods and services to a vehicle intended to generate profits.
Assume 2 bricklayers, James and John, wish to set up a construction company. Each offers their
skill in the trade and their workmanship at the building site. James contributes concrete mixers,
wheelbarrows, spirit levels, shovels and other tools of the trade. John contributes blocks and other
essential materials and cash. Also each of them brings some goodwill and trade secrets.
Each of these contributions by James and John is “capital” in the widest sense of the word. With
this capital the two as entrepreneurs would hope to make some profit and to use it as they deem

appropriate and possibly to invest some of it back into the business so as to increase the capital
from which more profit may be reaped. There is of course no guarantee that profits will actually
be made and the capital may in fact be lost. James and John may opt to define in monetary terms
the value of their construction company and also the extent of their individual contributions in
money form. The value of their contributions would be expressed in the capital account of the
business so that each one of them is credited with a proportion of the business assets referred to in
monetary terms or alternatively as a fraction of the total assets. Either James’ or John’s share of
the profits of the enterprise will then be calculated with reference to that amount or fraction. Suffice
to say that capital is often expressed in terms of currency value that bears little or no relationship
either to the actual amount contributed or to the value of the assets that it purports to represent.
From the example above, the word “capital” has been used in two senses: (a) The amount of
tangible and intangible assets that form the profit-making vehicle of the business enterprise. (b)
The measure of each individual’s share of the assets which in turn determines the amount of profit
he is entitled to receive, and if the enterprise is voluntarily dissolved, his share of the assets.
Assuming that in our example, the combined value of all the assets brought into the enterprise by
James and John is K 200m and the company issues each of the two with 400,000 shares of K 250.
If after a successful year of business, the value of the company’s assets is the same and the
company makes a profit of K 100m, the company could declare a dividend of K 125/share i.e. each
of the two would get K 50 million (K 125 times 400,000) D. The value of the bricklayer’s assets
will probably not remain the same over time so that the 2 times 400,000 times K 250 shares i.e. (K
200m) will no longer be the correct reflection of the monetary value of the capital. Also if the
shares are being bought and sold on the open market, they will no longer be worth K 250. While
their nominal or par value will remain the same the real value or worth of the shares are what
people are prepared to pay for them in an open market. This is the real idea behind Capital.
Classification of share capital

A Company registered under the Companies Act is required to have an ‘authorized share capital.’
This is an amount which is stated in the company’s application for incorporation and is the
maximum sum which a company can raise by way of issuing shares. The Articles will also state
how this authorized share capital is to be made up, that is, by how many shares and of what nominal
value.
A company does not have to issue all the shares which it is entitled to do but the aggregate nominal
value of the shares which it does issue is known as the ‘issued share capital’. ‘Paid up capital’,
refers to the amount of money paid to the company in respect of the shares. It might be equal to
the issued capital but it could be nil in the case of a private company. If the company has issued
partly paid shares and wishes to obtain more money, it can make a ‘call’ on the shares, in which
case, the shareholders are contractually bound to pay the amount specified in the call. This is called
‘called-up share capital’. This is the aggregate amount of the calls made on the shares (whether
or not those calls have been paid), together with any share capital paid up without being called and
any share capital to be paid on a specified future date under the articles, the terms of allotment or
any other arrangements for payment of those shares. On the other hand, ‘Uncalled Capital’ is the
amount owing on unpaid or partly paid shares which members have not yet been called on to pay.
“Reserve capital’ is uncalled capital the company has resolved not to call unless the company is
wound up. Sometimes, a company can issue shares at a value higher than the valuer stated on the
certificate of share capital. Such shares are said to have been issued at a ‘premium.’ The extra
sum received is deposited into an account called a share premium account.
Importance of Issued Share Capital
When a company is incorporated, its issued capital is recorded in the publicly available documents
with the registrar and the legitimate objects for which the company is formed are also publicly
known and, as Lord Herschell explained in Trevor v Whitworth (1887) 12 App Cas 409;

‘The capital may, no doubt, be diminished by expenditure upon and reasonably
incidental to all the objects specified. A part of it may be lost in carrying on the
business operations authorized. Of this all persons trusting the company are aware,
and take the risk. But I think [those dealing with the company] have a right to rely,
and were intended by the legislature to have a right to rely, on the capital remaining
undiminished by any expenditure outside these limits, or by the return of any part
of it to the shareholders.’
Again, in the speech of Lord Watson:
‘One of the main objects contemplated by the legislature, in restricting the power
of limited companies to reduce the amount of their capital as set forth in the
memorandum, is to protect the interests of the outside public who may become their
creditors. In my opinion the effect of these statutory restrictions is to prohibit every
transaction between a company and a shareholder, by means of which the money
already paid to the company in respect of his shares is returned to him, unless the
court has sanctioned the transaction. Paid-up capital may be diminished or lost in
the course of the company’s trading; that is a result which no legislation can
prevent; but persons who deal with, and give credit to a limited company, naturally
rely upon the fact that the company is trading with a certain amount of capital
already paid, as well as upon the responsibility of its members for the capital
remaining at call; and they are entitled to assume that no part of the capital which
has been paid into the coffers of the company has been subsequently paid out,
except in the legitimate course of its business.’
The company’s capital could be lost as a result of poor business decisions but from a creditor’s
point of view the company’s capital gives some measure of credit worthiness and unsecured
creditors can look to the capital fund of the company as well as the company’s unsecured assets.
This is not to suggest that unsecured creditors are guaranteed payment by reason of the capital. In

practice, companies will have a low issued capital but a wide base of assets. The rule that share
capital must be raised is intended to ensure that money or assets equal in amount to the paid up
capital on paper is or are received by the company i.e. that shares can be treated as paid up only to
the extent of the amount actually received by the company in cash or in kind. The idea is to protect
the creditors of the company. The concern of the law is that shareholders must pay the price of
their shares in money or money’s worth in accordance with the provisions of the Companies Act.
The general rule is that shares must be issued for the full value i.e. not at a discount i.e. not issued
as fully paid for a consideration less than the nominal amount.
A shareholder subscribes for shares by paying or agreeing to pay the price for those shares to be
issued to him/her. The price paid for the shares is made up of two elements
(a) the par or nominal value and

(b) the premium for the shares that may be attached to the price. E.g. a company’s share
capital could be K 10m made up of 10m shares of K1 each. In this case K1 is the par or
nominal value. However, a premium may be attached to these shares such that a K1 share
may be sold for K100 or more.
Shareholders must pay the full nominal value of their shares. This principle was enunciated in
Ooregum Gold Mining Co. of India v. Roper [1892] AC 125. Here a company wanted to issue
shares with a nominal value of one pound on the basis that they be credited with 75 pence meaning
that each shareholder had a liability of 25 pence. The House of Lords rejected the argument that a
company had the power to do so. Lord Halsbury L.C. said
“The Act of 1862 makes it one of the conditions of limited liability that the
Memorandum shall contain the amount of the capital with which the company
proposes to be registered divided into shares of a fixed amount. It seems to me that
the system thus created by which the shareholders’ liability is to be limited by the
amount unpaid upon his shares renders it impossible to depart from that

requirement and by any expediency to arrange with the shareholders that they shall
not be liable for the amount unpaid on their shares.”
The share premium account
For the purposes of the Articles, which must state the authorized capital, only the par value is
relevant and where shares are sold at a premium, as stated above, the amount of the premium is
kept separately in the company’s accounts by entering it under the heading “share premium
account”. The company will treat such sums as capital which cannot be returned to members unless
by way of formal reduction of capital.
Further, where a company issues shares at a premium, whether for cash or otherwise, a sum equal
to the aggregate amount of value of the premiums on these shares shall be transferred to an account
to be called "the share premium account", and the provisions of this Act relating to the reduction
of share capital of a company shall, except as provided in this section, apply as if the share premium
account were paid up share capital of the company.
The share premium account may be applied by the company-
- in paying up unissued shares of the company to be issued to members of the company as fully
paid bonus shares;
- in writing off
(i) the preliminary expenses of the company; or
(ii) the expenses of, the commission paid or the discount allowed on any issue of shares
or debentures of the company; or
- in providing for the premium payable on redemption of any redeemable preference shares or
of any debenture of the company.

Raising of Share Capital
The price at which shares are issued is dependant on many factors; for example, shares can be
issued at their ‘market value’, their ‘book value’ and/or ‘breakdown value’. The market value
refers to the price at which shares are issued as determined by the market. Shares can be issued.
The issued share capital of a company is the fund to which creditors of the company can look to
for payment of their debts.
In order to protect the creditors, it has been held that issued share capital must be raised, this means
that shares can only be treated as paid up to the amount actually received by the company in cash
or in kind, and must not be issued at a discount. The rule that share capital must be raised is to
ensure that money or assets equal in amount or value to the paid-up capital on paper is or received
by the company. A company is not necessarily required to demand payment in full of the nominal
amount of a share amount its issue.
Shares can be issued at various values; these are a) at par or nominal value b) at a premium and c)
at a discount.
a) Issues of Shares at Par Value
Shares are issued at a nominal value when they are issued at their value as indicated in the
company’s constitutive documents. Thus if a company’s documents indicates that it has 2,000,000
shares of K1.00 each, the shares will be deemed to be issued at par or nominal value if they are
issued for K1.00 each.
b) Issue of Shares at a Premium
A company may issue shares at a premium that is, for a consideration in cash or kind which exceeds
the nominal amount of the shares. Where shares are issued at a premium, whether for cash or

otherwise, a sum equal to the aggregate amount or value of the premiums must be transferred to
an account known as the ‘share premium account’. Funds in the share premium account are treated
as part of the company’s distributable reserves that is for example, they can be distributed as
dividends just like any other ordinary profits.
c) Issues of Shares at a Discount
Shares are issued at a discount when they are issued at a consideration, which is less than their
nominal value. The general rule has always been that shares should never be issued at a discount,
and the requirement is that a shareholder must pay the full nominal value of his shares, whether in
cash or otherwise. There is not issue of shares at a discount when shares are issued at par, e.g after
the exercise of an option to take them at par, even though they could otherwise be issued at
premium, or where shares are issued at a lesser premium that that at which they might have been
paid.
Alteration of Share capital
The Companies Act envisages two types of alterations of share being;
Alterations that do not entail a reduction in share capital
An alteration that does not entail a reduction is provided for under Section 140. It provides the
ways share capital can be altered as follows;
If the articles of the company authorize, a company can by special resolution alter its share capital
as stated in the certificate of share capital by doing any of the following:
(a) Increasing its share capital by new shares of such an amount as it thinks expedient. This is the
only time that a company can increase its share capital.

(b) Consolidating and dividing all or any of its share capital into shares of a larger amount than its
existing shares. Hence it can increase the par value of shares but maintain its share capital
(c) converting all or any of its paid up shares into stock, and re-converting that stock into paid up
shares of any denomination.
(d) subdividing its shares, or any of them, into shares of smaller amounts than is stated in the
certificate of share capital;
(e) cancelling shares which, at the date of the passing of the resolution, have not been allotted to
any person, and diminishing the amount of its share capital by the amount of the shares so
cancelled.
Alterations that entail a reduction in share capital
An alteration that does not entail a reduction is provided for under Section 150. There are strict
rules governing reduction of share capital. This is because creditors and shareholders generally
need to protect their interests in the company and hence require the maintenance of capital or an
increase thereof. The first principle of the English company law is that generally, capital cannot
be reduced without approval of the courts.
According to Poole v National Bank of China, a reduction of Share capital is a diminution,

reduction or extinguishment of capital of a company affecting the fund available to the creditors
or the rights of different classes.
Section 150 provides as follows;
A company may, subject to confirmation by the Court, if authorised by its articles, by special
resolution, reduce its share capital in any manner, and may, in particular—
(a) extinguish or reduce the liability on any of its shares;

(b) with or without extinguishing or reducing liability on any
of its shares—
(i) cancel any paid-up share capital which is lost or is
unrepresented by available assets; or
(ii) pay off any paid-up share capital which is in excess
of the wants of the company;
(d) accept the surrender of shares by any of its shareholders;
And
may, where necessary, reduce the amount of its shares accordingly,

except that the share capital shall not be reduced below the prescribed minimum.
There are three important guidelines for this to take place;
a. the articles must authorize
b. a special resolution has to be passed
c. the Court must confirm the reduction
Unit Summary
 When a person acquires shares in a company, all that they acquire is a bundle of rights,
including the right to vote, the right to receive dividends as and when declared etc
 A share is personal intangible property transferable in the manner provided in the
Companies Act or a company’s articles of association.

 A share serves certain functions including giving entitlements to shareholders in
accordance with the number of shares they hold.
 Only fully paid up shares can be transferred
 Share capital can be altered
ACTIVITY
1. Discuss the legal nature of a share.

2. Explain the concept of transferability of shares
3. What restrictions can be imposed on transferability of
shares?
4. In what instances can a company alter its share capital
without reducing it?
5. In what instances can a company reduce its share capital?
6. Why is court approval necessary when reducing a
company’s share capital?
7. Why is the cancellation of a company’s unalloted shares
considered not to be a reduction of share capital?

UNIT ELEVEN: CORPORATE FINANCE (FINANCING THE OPERATIONS OF
A COMPANY)
Learning Outcomes
 Explain the different ways of financing the operations of a company

 Identify the rules and legal requirements relating to issuance of prospectuses
Introduction
Where members set up a company, they have reason for doing so. Usually it shall be for
entrepreneurial purposes. The available personal funds are not often enough for the operations of
a Company and they will therefore seek loans from banks. However, in order to borrow from the
bank, the articles should deem the way in which the company may raise its finance. The share
capital fund is usually very limited.
Methods of Raising Funds
1. Through payment for shares: a Company cannot make a gratuitous allotment of shares. The
allottee must therefore pay for the shares allotted in full at some stage. In a private company, shares
may theoretically be paid for in kind for example through provision of some service in exchange
for shares.
2. By way of increasing its capital: a Company may if it is authorized by its articles alter its
capital clause by passing a special resolution so as to increase capital (Section 140 (1)(a)). Thus, a

company can create new shares of such an amount as it thinks expedient as a way of introducing
additional into the company.
Further, a company may issue shares at a premium (a value higher than the one attached to the
shares) and the extra sum received will be treated as forming part of the company’s share capital.
That is, the share capital will have increased.
3. From the Public: Companies are normally formed for purposes of carrying out individual
entrepreneurial enterprises. This may require massive amounts of money which Banks may
especially in formative stages not be able to give. For this reason, public companies are authorized
to raise capital from the public. This arises by way of the Company inviting external investors to
buy shares in the Company. Raising capital this way is also known as equity capital and is cheaper
for borrowing.
As stated above, a company can also raise capital by way of rights issue. A rights issue arises by
way of a company offering new shares to its existing shareholders in the proportion of their existing
shareholding. The other way it can raise capital is by placing (private placement). A placing arises
by way of a company identifying selected investors who agree to take the shares.
There are a lot of stringent measures for a company to allow its shares to be publicly traded. Part
X of the Companies Act contains these restrictions. The public company making invitation
requires that the company which is trading shares must prepare a prospectus which must comply
with the Act. Further, the invitation itself must comply with section 32 (2) of the Securities Act
Chapter 354.
What is a prospectus?
This is an invitation which a company makes to the members of the Public inviting them to
subscribe for shares in the company. (Section 32 (2)) Securities Act. It should also be noted that

any prospectus that is issued or prepared for the purposes of any public offer must contain or be
accompanied by all such information as investors and their professional advisers would reasonably
require and reasonably expect to find there for purposes of making an informal assessment of the
assets and liabilities, financial position, profit and losses and prospects of the issuer of the
securities and the rights attaching to the securities Section 33 (a) of the Securities Act.
Apart from complying with this section, the prospectus must also comply with the requirements
of the Companies Act (Part X) and any directions issued and directed by the Securities and
Exchange Commission (SEC).
What constitutes an invitation to the public?
An "invitation to the public" to acquire shares or debentures of a company means an offer of, or
invitation to make an offer for, shares or debentures of a company other than one-
(a) Made to fifteen or fewer persons; or
(b) Made to fifty or fewer persons of the company exclusively to its existing shareholders,
debenture holders or employees on the basis that a person who accepts the invitation may
not renounce or assign the benefit of any shares or debentures to be obtained thereunder in
favour of any other person.
Anything that goes outside the confines of these three would constitute an invitation to the public.
Further, a prospectus required for invitations to the public to purchase share or debentures in a
public company can only be made if
(a) within six months prior to the making of the invitation there was registered by the Registrar a
prospectus relating to the shares or debentures that complies with this Division;

(b) every person to whom the invitation is made is supplied with a true copy of the prospectus at
the time when the invitation is first made to him; and
(c) every copy of the prospectus states on its face that it has been registered by the Registrar and
the date of registration. An invitation should be published in a newspaper or magazine
advertisement that summarizes the contents of a prospectus.
Secondly, the advertisement must state with reasonable prominence

(1) where copies of the full prospectus may be obtained,
(2) the fact that it has been registered and
(3) the date of registration
Contents of the Prospectus
A prospectus shall not be lodged with the Registrar unless-

(a) it does not contain any untrue or misleading statements
(b) it contains all information that prospective purchasers of the shares or debentures and their
advisors would reasonably expect to be provided in order to make a decision on purchase; and
(c) either if it deals with the matters and provides the reports specified in the Fourth Schedule; or
the invitation concerned is an invitation made only to existing members or debenture holders of
the company (whether or not an applicant for shares or debentures will have the right to renounce
in favour of other persons)
Upon being registered, it is a requirement that the registered copy of the prospectus must contain
a statutory declaration by the director or secretary in which they confirm that the prospectus will
have been prepared in accordance with the Act. The Registrar is empowered to decline to register

a prospectus of shares or debentures in a company or in a company proposed to be formed if the
copy lodged does not conform to the Act.
4. Through Borrowing: a Company can raise capital through borrowing.
(a) Mortgages and Charges: these are covered under part XI of the Companies Act. In terms of
section 86 (3) of the Act, the directors may exercise the powers of the company to borrow money,
to charge any property or business of the company or all or any of its uncalled capital and to issue
debentures or give any other security for a debt, liability or obligation of the company or of any
other person. This is also reflected in the standard articles.
A company may raise loans by the issue of a debenture or of a series of debentures. Debentures
may either be secured by a charge over property of the company or be unsecured by any charge.
The purpose of the charge is to secure the borrowing in case of a borrower and the lending in case
of a lender.
There are many reasons why a lender may require security from a borrower.
(a) Insolvency: in terms of Insolvency a secured lender will have advantage by way of accessing
their security as opposed to unsecured lenders.
(b) A secured lender has a right to pursuit of security right up to the proceeds that may have arisen
out of the security.
(c) Right of Enforcement ; if there is a default, the lender will have the right for example to appoint
a receiver to enforce the security
(d) Right of capital: the lender can follow the borrowers business to ensure that the borrower
conducts prudent business practices such that the repayment of the debt is protected.
The Debenture

The indebtedness of the Company to a creditor is generally acknowledged or evidenced by way of
debenture. In simple terms a debenture is a document that is given by a company as evidence of
or to acknowledge a debt to the holder of the debenture. A debenture would be secured by wither
a fixed or floating charge.
Types of Debentures
According to the Act, debentures may either be secured by a charge on the property or they may
be unsecured.
Register of Debenture Holders
A company which issues or has issued debentures shall maintain a register of debenture holders.
The register must be kept at the companies registered office. The provisions relating to the
prospectus to subscribe for shares also apply to debenture holders in accordance with the Act.
Company Charges
The Companies Act does not define what a charge is. It only gives what constitutes a charge. A
charge can take two forms.
(a) It may be a fixed charge
(b) It may be a floating charge
A Floating Charge: is a charge or security which is not put into immediate operation but “floats”
so that the company is allowed to carry on with its business i.e. the company will be allowed to
use the assets that are secured. It moves with the property it is intended to effect until some event

occurs or some act is done which causes it to settle and fasten on the subject of the charge within
its reach. [See Illingworth v Houldsworth [1904] AC 355; Amiran& Others v Agriflora (Z) Ltd.
(In receivership) 2004/HPC/0268 (unreported); and Re: Yorkshire Woolcombers Association Ltd.
[1903] 2 CHD 284 where the court said “a mortgage or charge by a company, which contains the
following characteristics, is a floating charge:
(1) If it is a charge on a class of assets both present and future,
(2) If that class is one which, in the ordinary course of business of the company will be changing
from time to time;
(3) If it is contemplated by the charge that, until some future step is taken by or on behalf of the
mortgagee, the company may carry on its business in the ordinary way so far as concerns the
particular class of asset so charged.”
In Illingworth v Houldsworth [1904] that is discussed in The Attorney General v Zambia Sugar
Co. and Nakambala Estates Ltd. [1977], Lord MacNaghten described a floating charge at p. 254
as being “ambulatory and shifting in its nature, hovering over and so to speak floating with the
property which it is intended to affect until some event occurs which causes it to settle and fasten
on the subject of the charge within its reach and grasp.”
A floating charge remains dormant until the undertaking charged ceases to be a going concern or
until the person in whose favour the charge is created, intervenes e.g. when a receiver is appointed
or the debtor defaults. Then the floating charge will “crystallise” into a fixed charge. As regards
crystallization, Gower‟s Principles of Modern Company Law, 6th Edition, p. 367 states “a
crystallised charge will bite on all the assets covered by the charge since normally a floating charge
does not provide for crystallization over part only of the assets to which it relates. The effect of
the crystallization is to deprive the company of the autonomy to deal with the assets subject to the
charge in the normal course of business”.

A Specific or Fixed Charge
A specific or fixed charge on the other hand is fastened on ascertained or definite property or
property capable of being ascertained and defined. It prevents the company from disposing of the
property without the consent of the holder of the charge (which will not usually be given!!). [Note:
In a debenture, there may be both fixed and floating charges that act as security for the loan.]
Effect of a Floating Charge
As a floating charge is only a charge on the assets for the time being, a company can, in the course
of ordinary business, sell, mortgage, or otherwise deal with any of its asserts as if the floating
charge had not been created, until the security becomes fixed
Restrictions on a Floating Charge
The operation of a floating charge is usually restricted by a provision in the debenture that the
company shall not create a mortgage or charge on any of the assets, ranking in priority to, or
parripassuwith, the charge given by the debenture.
A floating charge becomes a fixed charge in the flowing situations:

(a) If the company ceases to do business i.e. it stops trading (but may still exist as an entity);
(ii) If the company is wound up i.e. it “dies”;
(iii) If a receiver is appointed;
(iv) If some event happens upon which the charge the charge is to become a fixed charge and
notice to that effect is given pursuant to the terms of the charge e.g. in the debenture creating it.

When a floating charge becomes a fixed charge, a company cannot thereafter deal with any part
of the property so charged, except subject to the charge See: Government’s Stock & Securities
Investments Co v Manila Railway Co [1897] AC 81 and Gower‟s Principles of Modern Company
Law 6th Edition page 367 which states:
“A crystallised charge will bite on all the assets covered by the charge since a floating charge does
not normally provide for crystallization over a part only of the assets to which it relates. The effect
of the crystallization is to deprive the company of the authority to deal with the assets subject to
the charge in the normal course of business”.
The mortgagee has various ways of enforcing the payment, among them;
(1) An action for payment of money due
(2) In default sale of mortgaged property
(3) Payment of borrowed money
(4) Writ of possession
When is the power of sale exercisable?
The power would not be exercisable until certain things occur. The Mortgagor must first be served
with a notice requiring him to pay the mortgagee. The power of the mortgagee becomes exercisable
when the mortgagor falls into arrears or fails to pay interest or if there is a breach, of covenants as
contained in the mortgage deed.
Unit Summary

 There are 4 main ways of financing the operations of a company, namely, through payment
for shares, by way of increasing the company’s share capital, through borrowing and from
the public.
 A company cannot make a gratuitous allotment of shares.
 A company can increase its share capital by passing a special resolution.
 A can borrow money by charging any of its assets as security for the loan
 A public company whose shares are listed on the stock/securities exchange ca invite the
public to acquire shares as a way of raising capital
ACTIVITY
1. What is your understanding of the following;

- Rights issue
- Private placement; and
- Public issue
2. What is your understanding of the following;
- Over subscription
- Undersubscription; and
- Full subscription
3. When can floatation take place?
4. What rules regulate the issuance of prospectuses by
companies?
5. What is your understanding of a debenture?

UNIT TWELVE: CORPORATE GOVERNANCE
Learning Outcomes
 Explain who a director is

 Describe the general responsibilities of a director
 Explain the nature of the relationship between directors and shareholders
 Identify statutory provisions on the fiduciary duties of a director
 Explain the role of a company secretary
Introduction
The artificial nature of a company creates a very specific problem and this is that a company does
not physically exist as an artificial legal entity. A company can only function through the medium
of agencies of human beings. These mediums are the two primary corporate organs of a company
that is
(a) General Meetings were members act collectively to make decisions for the Company and
(b) The Board of Directors.
Theoretically, it is primarily through these organs that the Company will function. For example
section 86 (1) of the Companies Act provide as follows „… the business of a company shall be
managed by the directors, who may pay all expenses incurred in promoting and forming the
company, and may exercise all such powers of the company as are not, by this Act or the articles,
required to be exercised by the company by resolution.‟

Beyond the two organs, there exists a professional managerial organ. The function of the board of
directors is of an intermittent basis with effectively the management team consisting of
management board to carry out the functions on behalf of the board of directors.
Company Officers
Company Secretary
The office of Company secretary is a statutory office created by Section 82 of the Act and every
company is expected to have a secretary. The persons named in the application for incorporation
as the first secretary or joint secretary of a company shall on the incorporation of the company be
deemed to have been appointment as such for a term of one year- . Two or more persons may
jointly as the secretary may be a body corporate. The secretary of a company shall be resident in
Zambia, if an individual and incorporated in Zambia if a body corporate.
Duties and functions of company secretary
Section 83 of the Companies Act sets out the duties of a secretary. The primary role of a Company
secretary is to ensure that the company operates in accordance with the statutory and constitutional
regime that is the company must operate in accordance with the Companies Act, the incorporation
and its Articles of Association. The Secretaries convene and attend meetings take down the
minutes of the meeting and calls annual general meetings. The secretaries also attend to filling of
annual returns, maintenance of registers and ensure that the seal of the company is properly used.
The following is a detailed summary of the duties of a company secretary
A. Board meetings
Before

(i) Dispatch notice of meeting to each director;
(ii) Advise all relevant persons who are to attend by invitation;
(iii) Advise branches, departments responsible for producing statements or information for
board meeting;
(iv) Prepare agenda for the meeting;
(v) Circulate the agenda in advance of the meeting with copies of financial and other
statements attached;
(vi) Circulate (if applicable) the form of resolutions to be considered;
(vii) If the meeting is likely to be protracted make arrangements for refreshments to be served
at a suitable time;
(viii) On the day of meeting go through the agenda, item by item and ensure that transport to and
from is adequately prepared;
At Board meeting
(i) Record the names of the directors present at commencement of the meeting;
(ii) Check that quorum is present and maintained;
(iii) Report any apologies for absence and note them for recording in the minutes; take notes of
the proceedings and of instructions given and decisions reached;
(iv) Be prepared on request to advise the chairman or the board generally on any point of
procedure and to give an opinion on any matter if invited to do so; and
(v) Obtain at the end of the meeting the chairman’s copy of the agenda, so that the notes he
made can be compared with the company secretary;
After Board meeting
(i) Notify departments senior executives etc of any decisions affecting them;
(ii) Write any necessary letter; and
(iii) Prepare draft minutes of meeting

B. Annual General meetings
Before
(i) As soon as the directors have approved the proof print of the report and accounts and
chairman’s statement obtain on two copies the signature of a director to the balance sheet
and of the chairman to his statement. The secretary should sign the notice of meeting and
report of the directors on behalf of the board;
(ii) Complete another copy of the report and accounts and chairman’s statement;
(iii) Send invitations to any limited persons;
(iv) Prepare an agenda for use by the board;
(v) Prepare attendance sheets; and
(vi) Arrange for register of members.
At the meeting
(i) Check that a quorum is present;

(ii) Be ready at the request of the chairman to read the notice covering the meeting;
After the meeting
(i) Prepare the minutes of the meeting, send copies to the directors for information
(ii) enter the minutes in the general minutes book and have them signed at the next General
meeting.
C. Statutory obligations
(a) The completion and signing of the annual returns of the company;

(b) The signing of the directors’ report in the company’s annual accounts;
(c) The completion and signing of various Companies forms;
(d) The making of applications on behalf of the company to the Companies Registry; and
(e) The making of various statutory declarations on behalf of the company.
Directors
Section 86 as cited above prescribes the powers of the directors as defined by the statute.
Specifically the directors may exercise the powers of the company to borrow money, to charge
any property or business of the company or all of its uncalled capital and to issue debentures or
give any other security for a debt, liability or obligation of the company or of any other person.
Who is a Director?
According to Section 3 of the Companies Act, “Director” means a person appointed as a member
of the board of directors and includes an alternate director. A director is appointed to direct and
administer the business of the company.
Fiduciary Nature of the office of Director
The relationship of the director with the company is that of principal and agent. Directors are
agents of the companies they work for by reason of this, the relevant law is that of agency.
Although the directors are appointed by the members, they only stand in a fiduciary relationship
with the company that they serve. They owe their duty to the company and not necessary to the
members. They are therefore, required to act in the best interests of the company as opposed to
those of individual members. Although directors are not necessarily trusties, they do occupy a

position of trust so that they owe those common law duties of care, good faith and loyalty to the
company as opposed to the members who have appointed them. Fiduciary duties of the directors
are provided under sections 106 – 114 of the Companies Act. The fiduciary duties may be
summarized as follows;
1. Loyalty: Directors must act in good faith in doing what they consider to be in the best
interest of the company.
2. Compliance: the directors must exercise their collective powers in accordance with the
incorporation form, articles and the law generally. They must ensure that as they discharge
their functions, they have due regard to the incorporation form, Articles and the law as it
stands. For instance if the directors declared a dividend when the company has insufficient
funds that can be regarded as a breach of duty.
3. No Secret Profit: The directors must not use their position that is use the company name,
property, information or opportunities that belong to the company for the purposes of
advancing their own of anyone else‟ benefit unless this is allowed by the Company
constitution. Section 110, 111
4. Independence: the directors are required not to restrict their powers in respect of their
independent judgment. This independence is found in; A person shall not give directions
or instructions to the duly appointed directors of a company if the person is not eligible to
be a director of the company.‟
5. Conflict of Interest: Directors must never allow their personal interests or duties to
conflict with those of the company- Section 107
6. Directors are required to act with fairness as between shareholders. This means that
they are required to treat all shareholders equally.

7. Duty to exercise reasonable care and skill: directors are required to exercise this duty.
What constitutes care and skill is a question of fact. The members should choose a person
with necessary competence to discharge the functions of the directors more so that there is
now the presumed distinction between the company and the directors. In the case of
Ethiopian Airlines Ltd v Sunbird Safaris Ltd and others SCZ Judgment No 26 of 2007 were
the Supreme Court held that „… in view of the failure by third respondent to challenge the
seriousness averments pleaded by the appellant in their petition, the learned trial judge
ought to have found the third respondent personally liable for the 1st respondents debts.
The first respondent had been doing business with the appellant from 1994 to 2000 and in
doing such business it had less than two members as alleged and not denied by the 3rd
respondent, the 3rd respondent was found liable under section 26(1) of the Companies Act.
The 3rd respondent fraudulently allowed the 1st respondent to continue to trade and
therefore, personally liable for the debt of the 1st respondent. The Court held that there was
clear manifestation of fraudulent trading and the 3rd respondent was held to have been
personally liable for the debt of the 1st respondent. (Read the full case).
Appointment of Directors
Section 85 of the Act provides that, the members can by ordinary resolution appoint directors.
Persons Deemed Directors by Default; The definition of directors entails that at a director will not
be restricted to persons who are formally appointed as there are other persons who will be treated
as directors for purposes of the Act even though they will not be appointment as directors.
Accordingly, a person, not being a duly appointed director of the company, who holds himself out,
or knowingly allows himself to be held out, as a director of the company. (a) shall be deemed to
be a director for the purposes of all duties and liabilities (including liabilities for criminal penalties)
imposed on directors by this Act; and (b) shall be guilty of an offence, and shall be liable on
conviction to a fine not exceeding five hundred monetary units.

Note: that it is an offence for company to hold a person as director as director who has not been
formally appointed as such
Defacto Director; this is a director not formally appointed as opposed to de jure. Zambian
company law recognizes that a person, not being a duly appointed director of a company, on whose
directions or instructions the duly appointed directors are accustomed to act shall be deemed to be
a director for the purposes of all duties and liabilities (including liabilities for criminal penalties)
imposed on directors.
Scope of the Director’s Authority
According to the Act, no limitation upon the authority of a director of a company, whether imposed
by the articles or otherwise, shall be effective against a person who does not have knowledge of
the limitation unless, taking into account his relationship with the company, he ought to have had
such knowledge. The starting point is that a limitation will be ineffective as against a third party
with no knowledge of the limitation. However, where the third party had actual knowledge he shall
be bound
Number of Directors
Section 90 of the Act requires that every company shall have at least two directors regardless of
whether it is a public limited company or a private company. It is an offence for a company to
operate for more than 2months with fewer than 2 directors
Eligibility for Appointment
Section 92 of the Act sets out the categories of persons who may be appointed or who cannot
continue to act as directors.

(a) a body corporate;
(b) a person below the age of 18 or any other person under legal disability;
(c) any person prohibited or disqualified from so acting by any order of a court; or
(d) an undischarged bankrupt.
(e) A company can in its own articles add further prohibitions as to qualification for appointment
as director
Residential Requirements of Directors
Section 91 of the Act requires at least half of the directors of a company, including-
(a) the managing director, if the company has a managing director; and
(b) at least one executive director, if the company has executive directors, shall be resident in
Zambia;
Directors Share qualification
In accordance with the Act, unless the company's articles otherwise provide, a director need not
be a member of the company or hold any shares therein.
Vacation of Office of Director
In addition to Section 99 of the Act, a Company can through its articles of association provide
circumstances in which a person could vacate office of director. But in terms of section 99, a
person can vacate the office if;

(a) resign his office by notice in writing to the company.
(b) is absent from meetings of the directors held during a period of six months, without the consent
of the directors;
(c) holds any office of profit under the company, except that of managing director or principal
executive officer, without the consent of the company by ordinary resolution; or
(d) is directly or indirectly interested in any contract or proposed contract with the company and
fails to declare his interest as required by this Act.
Further, a director may be removed from office via an ordinary resolution at a general meeting of
the company except that if the director is removed in breach of his employment contract he shall
have the right to claim damages for breach of contract.
Categories of Directors
Though the Companies Act does not give a distinction between the different types of directors, it
does however recognize that a company can have both executive and non-executive directors.
(a) Executive Directors
Executive directors are full time officers of the Company who manages the business on a daily
basis but who are also co-opted onto the board of the Company. They are in employment
relationship with the Company and therefore, enjoy rights duties and remedies available to
employees.
(b) Non- executive Directors

Non-executive Directors have no employment or executive functions and typically these will be
part time persons who genuinely bring an independent voice, there are very important categories
of directors in the management of the Company.
(c) The Managing Director
Regulation 15 of the Standard Articles provides that the directors may from time to time appoint
a person to the office of managing director for such period and on such terms as they think fit, and
subject to the terms of any agreement entered into in a particular case, may revoke any such
appointment. In practice, a managing director is appointed by the board and the managing director
become an ex-official member of the board but not appointed from among themselves.
(d) Alternate Directors
The office of director is personal in character so that generally speaking, once someone as a
director, it is expected that they can appoint someone else act on their behalf however, the Articles
of a Company may permit the appointment of an alternate director. Section 97
An alternate director is a person who will act in the director‟s stead in the event that the director
is not available to attend the meeting or committee of the board. The rules relating to appointment
of alternate directors are set out in sections 97 of the Act. The appointment which must be approved
by the other directors shall be in writing signed by the director making the appointment and the
person appointment and lodged with the company.
Powers and Duties of Directors under Section 86 of the Act
Under the Act,
(a) a reference to "the directors" is a reference to the directors acting collectively;

(b) where a decision of the directors is required for them so to act, the decision shall be made by
resolution of the directors;
(c) a requirement that a document be signed by the directors shall be read as a requirement that a
majority of the directors sign the document.
Directors have both specific as well as residual powers. The specific powers will be set out in the
Companies Act as well as the Articles. The residual powers are those powers which the directors
will exercise by default that is if the Companies Act or Articles do not specifically assign certain
powers to the members then the directors can exercise those powers. However, if the directors
exercise powers that are allocated to the shareholders, the directors will be said to act outside their
powers.
Section 86 of the Act provides that Subject to this Act, the business of a company shall be managed
by the directors, who may pay all expenses incurred in promoting and forming the company, and
may exercise all such powers of the company as are not, by this Act or the articles, required to be
exercised by the company by resolution. In specific terms, the directors may exercise powers of
the company to borrow money, to charge any property or all or any of its uncalled capital. Further
Section 86 (4) provides that directors may by power of attorney appoint any person or persons to
be the attorney or attorneys of the company for such purposes, with such powers, authorities and
discretions (being powers, authorities and discretions vested in or exercisable by the directors), for
such periods and subject to such conditions as they think fit.
Limitations on Power of Directors –Section 87
There are certain things that the directors cannot do without the sanction of an ordinary resolution
by members. Hence the directors shall not;

(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking or
of the assets of the company;
(b) issue any new or unissued shares in the company; or
(c) create or grant any rights or options entitling the holders thereof to acquire shares of any class
in the company.
Directors to Disclose or Declare Interest in Contracts Involving the Company-
A director can enter into valid contract with a company in respect of which they serve as director
unless the Articles of that particular company do not allow it and if doing so would not offend the
provisions of the Act. If a director is interested in a contract then they are required to declare the
nature and extent of their interest.
Further, the Act, generally covers prohibitions of loans by companies of directors. A public
company or a company related to a public company shall not give loans to a director of the
company or a related body corporate or enter into any guarantee or provide any security in
connection with a loan made by any other person to a director of the company or related body
corporate. The prohibition on giving loans is premised on the fact that the director stands in a
fiduciary relationship with the company and should therefore be allowed to take advantage of that
position to the detriment of the company.
Payment of Directors
The Act provides that the directors shall be paid such remuneration as from time to time determined
by the company by ordinary resolution. A company shall not make to any director or former
director of the company or of a related body corporate any payment by way of compensation for
loss of any office in the company or in a related body corporate, or as consideration for or in

connection with his retirement from office, unless the particulars relating to the proposed payment
(including the amount thereof) have been disclosed to the members of the company and the
proposal has been approved by an ordinary resolution of the company.
Registers Relating to Directors
The Act provides that a company shall keep a register of its directors r secretaries. On the other
hand, a company shall keep a register showing in respect of each director and of the secretary the
number, description and amount of any shares in or debentures of the company or any related body
corporate which are held by or in trust for him or of which he has any right to become the holder
(whether on payment or not). The Act requires any shares or debentures affecting members of the
board to be subject of notification to the Registrar of Companies.
Relationship between the Directors and Shareholders
In Boxtel v Kearney (a minor by Charles Kearney her father and next friends) 1987 ZR 63 (SC)
The respondent, through her father, entered into an agreement with the appellant to the effect that
once the latter had purchased Falcon Air Ltd., the parties would hold shares in the company in the
ratio of 60% for the respondent and 40% for the appellant. The respondent paid a sum of K110,
000 to the appellant in consideration of receiving shares amounting to 60% of the equity. The High
Court upheld the respondent's claims for a declaration that the sum of K110, 000 was for the
purchase of shares in Falcon Air Ltd., and a declaration that the plaintiff was a shareholder; and
for an account of all the property and money of the company. In his appeal the appellant argued
that since the litigation had been between individuals, the court had no jurisdiction to bind the
company to implement any decision passed as to the entitlement of the respondent. Further, that
the proper formalities had not been complied with and that properly constituted Board of Directors
(comprising the appellant and another) had never passed any resolutions on the question of the
plaintiff's shareholding.

Held:
(a) The court has undoubted jurisdiction in litigation to which the company is not a party but which
is between a shareholder and an alleged shareholder, to make an order for rectification under s.60
of the Companies Act, which will be binding upon the company
(b) Shareholders enjoy, as a matter of right, overriding authority over the company's affairs. Where
all the shareholders happen to be present at a meeting where an intra vires decision is passed with
the unanimous concurrence of all of them, then even if the meeting was defective a director's
meeting, the business transacted is valid as a member's decision (In Re Express Engineering
Works, Ltd. followed).
In Bank of Zambia v Chibote Meat Corporation,SCZ Judgment No. 11 of 2003 the Supreme Court
again held that the shareholders enjoy as a matter of right overriding authority over the company‟s
affairs. Therefore, it is wholly unrealistic as between a nominee and his principal that there would
be undue influence in carrying out the wishes of the principal. If anything it was the nominee who
stands in the relationship of trust and confidence and who should take account of the best interest
of the principal and the beneficial owner who had entrusted him with his property. Further, that
matter of internal procedure in the management of a company is not the concern of third parties.
In ZCCM v Kangwa& Others (2000) ZR 109, this is an appeal from the Industrial Relations Court.
The case arose from a decision of the appellants not to extend the sale of houses to “sitting tenants”
who are employees of wholly owned subsidiary companies, preferring instead to sell some of
housing units occupied by the respondents to direct employees and others who were not even the
“sitting tenants”. That is to say, there were not persons in occupation and residence.
Held:
Shareholders as beneficial owners of a company have and enjoy as of right overriding authority
over the company‟s affairs and even over the wishes of mere nominees or directors.

John Kasengele& Others v ZANACO (2000) ZR 72 This is an appeal against a decision of the
Industrial Relations Court that the appellant be paid terminal benefits in accordance with the
shareholders directive dated 28th March 1995. The undisputed facts of the case were that the
appellants were employed by the respondent; a subsidiary of ZIMCO and wholly owned by
government, the Minister of Finance being the sole shareholder. The appellants were retired on
various dates but between 18th March 1995, and 30th November, 1996. On 28th March 1995, the
then Minister of Finance the late Ronald Penza wrote to the then Director-General Mr. Bwalya,
with a copy to the President of the Republic of Zambia, Mr F.T.J. Chiluba that at its 87th Meeting
of ZIMCO Board of Directors held at State House on August 26th 1994, it was decided that the
allowances be merged with salaries and that the decision be implemented without further delay.
Upon their retirement the appellants were paid terminal benefits not based on the Ministers
directive but on ZIMCO conditions of service then applicable. The appellants then filed a
complaint in the court below which was unsuccessful.
The appellants appealed.
Held:
(a) Shareholders enjoy as a matter of right overriding authority over company affairs, even over
the wishes of the Board of Directors and Managers.
(b) Inability to pay has never been and is not a defence to a claim. It is not a bar to entering
judgment in favour of a successful litigant.
In Shaw &Sons Ltd v Shaw (1935) 2KB 113 a resolution of the general meeting disapproving the
commencement of an action by the directors was held to be a nullity. The modern doctrine was
expressed by Greer LJ as follows; A company is an entity distinct alike from its shareholders and
its directors. Some of its powers may according to its Articles be exercised by directors; certain
other powers may be reserved for the shareholders in general meeting. If powers of management
are vested in the directors, they and they alone can exercise these powers vested by the Articles in
the directors is by altering their articles or if an opportunity arises under the articles by refusing to

re-elect the directors in an ordinary resolution of whose actions they disprove. They cannot
themselves ursurp the powers which by the articles are vested in the directors any more than the
directors can ursurp the powers vested by the articles in the general body of shareholders.
Unit Summary
 A company’s affairs are managed through the agency of human beings, mainly, the
directors.
 Directors are officers of a company and they stand in a principal-agent relationship with
the company.
 The relationship between a company and its directors gives rise to fiduciary duties
including, the duty to act in the best interests of the company and the duty to avoid conflict
of interest.
 A company secretary is also an officer of a company whose main role is to ensure that the
company acts in accordance with the law and its constitutional regime.
ACTIVITY
1. Who is an officer of the company?

2. Describe the fiduciary duties of a director.
3. Describe the nature of the relationship between the board of
directors and shareholders?

4. In what instances can shareholders impugn a decision of the
board of directors?
5. Describe the role and qualifications of a company secretary.

UNIT THIRTEEN: GENERAL MEETINGS AND RESOLUTIONS
Learning Outcomes
 Explain the different meetings of a company and the rules applicable

 Demonstrate an understanding of what constitutes a company resolution
 Explain what written resolutions are
 Explain registration requirements for certain resolutions
Introduction
A general meeting of the members of a company can be called and held at any point (unless the
period is fixed by statute e.g the ‘annual general meeting’ which must be held within 3 months at
the end of each financial year), and any number of times, in a year so that the members may
pass resolutions. Resolution passing is the essence of the meeting and any decision made by the
shareholders present is legally binding. Thus, resolutions formalize decisions taken by
shareholders at a general meeting.
MEETINGS
Part VI of the Companies Act deals with this subject. As discussed above, day to day management
of a company is in the hands of the directors, not the shareholders. However, the shareholders
retain some important powers. In fact, many decisions require a resolution of the shareholders and
cannot be decided by the directors alone. As shown above, a company is governed through two
collective bodies namely the body of directors and shareholders acting in a general meeting. A
company general meeting is one of the medium through which shareholders act. General meetings
and resolutions represent the way in which shareholders can make their voices be heard by

management though shareholders can also privately meet management and make their voices
heard.
Since general meetings are the means through which shareholders participate in management and
governance of their companies, the laws which regulates the summoning and conduct of meetings
is very important to the company. Because of the importance of these meetings, the rules which
govern general meetings are now part of the main body of the Companies Act unlike the past where
they were provided in the articles of individual companies.
Some of the provisions governing meetings operate in default that is where no specific provisions
are made in the Companies Act. Although some provisions may operate by default there are still a
number of provisions which are mandatory and to which a company may not depart.
Categories of General Meetings
Section 56 of the Act classifies general meetings into three;
(a) an annual general meeting;
(b) an extraordinary general meeting; and
(c) a class meeting.
Annual General Meetings
Section 57 covers annual general meetings. An Annual General Meeting is an ordinary meeting
which every company is required to hold within three months after its financial year. If a company
fails to hold its meeting within three months, any share holder can apply to the registrar of
companies for purposes of causing the meeting to be convened.

Note that this is an offence for a company to fail to hold its annual general meeting. However
section 138 (4) entitles a private company to dispense with the holding of an annual general
meeting in any financial year other than the financial year.
Length of Notice to Convene an AGM (Section 63)
This is determined by the type of meeting. As far as convening an AGM is concerned, the
requirement is that 21 days‟ notice be given. However, a company is entitled to give a longer
notice period in its articles serve that such longer notice period should not exceed 30 days. It should
also be noted that a shorter notice period would suffice if all shareholders agree or consents.
Notice of an annual general meeting must be given in writing. Giving notice is very important and
if a member is not served with a notice of the meeting, he can apply to invalidate whatever
resolutions passed at such a meeting.
Who is entitled to receive notice of a meeting?
Section 62 of the Act provides that where a meeting of a company is to be convened, any person
who is, on the day before the latest day on which notice of the meeting may be given under this
Act-
(a) a registered member having the right to vote at a meeting of that kind;
(b) a person upon whom the ownership of a share devolves by reason of his being a legal
personal representative, receiver or trustee in bankruptcy of such a member and of whom
the company has received notice;
(c) a director of the company;
(d) an auditor of the company; or
(e) a person entitled under the articles to receive such notice; shall be entitled to receive notice
of the meeting

In terms of the Act, the proceedings of a meeting shall not be invalid by reason only of the
accidental omission to give notice of a meeting to a person entitled to receive notice; or the non-
receipt of notice of a meeting duly sent to such a person. The use of the term by reason only of
suggests that in order for proceedings of an annual general meeting is invalidated on basis of two
scenarios, there must be something more.
Entitlement to attend an AGM
Section 66 identifies the persons who are entitled to attend and to speak at an AGM.
Place of Meetings
According to section 65 of the Act, unless the articles provide otherwise, or all the members
entitled to vote at that meeting agree in writing to a meeting at a place outside Zambia, a meeting
of a company shall be held in Zambia.
No person who is not a member will be entitled to vote at annual general meeting. The manner of
deliberations at an AGM or extraordinary general meeting takes the form of plenary session so
that all members take part in deliberations because these deliberations will affect them all.
Quorum
Regulations 10 and 11 of the Standard Articles provide for quorum. No business of a meeting can
be transacted without the requisite quorum. The quorum for a meeting of the company shall be
two members of the company holding not less than one-third of the total voting rights in relation
to the meeting. A company can provide in its Articles that a member shall not be entitled to attend
a meeting of the company unless all sums presently payable by him in respect of shares in the
company have been paid.

Right to demand a Poll
A poll is a method of voting whereby each member can vote for or against a motion according to
the number of shares he holds. Section 69 and 70 stipulate the circumstances when a poll can be
decide at an AGM.
Proxy-Section 71
A member of the company who is entitled to attend and vote at a general meeting is entitled to
appoint another person to attend and vote in his place. However a shareholder of such a company
is excluded from being appointed as a proxy.
Extra ordinary General Meetings
An extra ordinary general meeting is not a scheduled or a planned meeting as the case of an AGM.
An extra ordinary general meeting is intended to transact specific business which cannot wait until
the time for an AGM. An extra ordinary general meeting is defined as a general meeting of a
company which is not an AGM. The manner of convening an extra ordinary general meeting is
provided for in section 139(1) of the Act. The meeting can be convened by the directors whenever
they think fit or if the Articles so provide by any other person in accordance with the provisions
of the Act.
The length of notice for convening an extra ordinary general meeting at which a special resolution
is proposed to be passed is 21 days, otherwise, a shorter notice period of 14 days may be adopted.
Types of business to be transacted
AGM- section 58

The type of business typically transacted at AGMs is ordinary business. E.g;
(a) directors lay before the company annual reports and reports for the most recent financial
period;
(b) the consideration of the accounts and the directors' and auditors' reports; auditors term of
office so that they may be reappointed or new ones are appointed.
(c) the election of directors in place of those retiring;
(d) the fixing of the remuneration of the directors;
(e) the appointment of the auditors and the fixing of their remuneration.
(f) Shareholders may have their own resolutions placed on the agenda
Although traditionally AGMs are meant for ordinary business, if the requisite notice is given, it
can transact special business.
Extra Ordinary General Meeting – Section 59
The business to transact at an extra ordinary general meeting is special business. In most cases,
this is business to be transacted by passing a special resolution. Special business is urgent business
that cannot wait for the next AGM. E.g. amendment of articles, conversion of companies, name
change, alteration of capital, winding up etc.
Class Meetings – Section 60
These are the meetings of a class of shareholders. These meetings are restricted to members of that
class that is open to every member of that company. Section 60 provides that unless the Articles
provide otherwise, a meeting of members of a particular class may be convened-

(a) by the directors whenever they think fit; or
(b) by two or more members of that class, holding, at the time that notice of the meeting is sent
out, not less than one-twentieth of the total voting rights of all the members having a right to vote
at meetings of that class.
RESOLUTIONS
There are three types of resolutions which a company can pass namely ordinary, extra ordinary
and special resolution –section 3
Ordinary Resolution
A resolution shall be an ordinary resolution, if it is passed by a simple majority of votes cast by

such members of the company as, being entitled so to do, votes in person or by proxy at a meeting
duly convened and held. It is a type of resolution passed by simple majority that is 50% + 1 of
such members of the company entitled to attend and vote at a duly convened and held meeting of
the company.
Extra Ordinary Resolution
A resolution shall be an extraordinary resolution if it is passed by a majority of not less than three-
fourths of the votes cast by such members of the company as, being entitled so to do, vote in person
or by proxy at a meeting duly convened and held.
Special Resolution

A resolution shall be a special resolution if it is passed by a majority of not less than three-fourths
of the votes cast by such members of the company as, being entitled so to do, vote in person or by
proxy at a meeting duly convened as a meeting at which the resolution will be moved as a special
resolution, and duly held. The only difference with an extra ordinary resolution is that the notice
for the meeting has to indicate the proposed motion to be passed.
If the resolution is described in writing as a special resolution for the purposes of this Act, it shall
be deemed to be a special resolution. There are different types of businesses which the company
must pass by special resolution to invalidate the decisions of the company.
Resolution by Circulation – Section 77
The members of a private company may pass a resolution in writing holding a meeting and such a
resolution shall be as valid and effective for all purposes as if it had been passed at a meeting of
the appropriate kind duly convened, held and conducted. The resolution shall be signed by each
member who would be entitled to vote on the resolution. If it were moved at a meeting of the
company or by his duly authorized representative, the resolution takes effect when the last member
entitled to sign actually does so.
Registration of Special Resolution
A certified copy of every special resolution made by a company, or by a class of members of a

company, shall, within 21 days after the making thereof, be lodged with the Registrar.
Unit Summary

 There are 3 meetings of a company, namely annual general meeting, extraordinary general
meeting and class meeting
 There are 3 resolutions that can be passed at a meeting of a company, namely, ordinary
resolution, extraordinary resolution and special resolution.
 A private company can pass written resolutions by circulation without having to hold a
meeting.
 Only special resolutions must be registered.
ACTIVITY
1. When should an AGM be held?

2. Is it mandatory for every company to hold an AGM?
3. What resolutions can be passed and what business can be transacted
at the respective meetings of a company?
4. In what instances can a private company dispense with the holding of
annual general meetings?
5. What is the difference between a board meeting and a meeting of the
members? Is it necessary to have different such different meetings?

UNIT FOURTEEN: WINDING UP
Learning Outcomes
 Explain the different modes of winding up

 Describe the process of winding up a company in Zambia
 State the statutory filing requirements and timelines
 Explain the appointment, role and duties of a liquidator
 Describe the role of the Registrar of Companies
 Explain dissolution of a company
Introduction
Winding up is a term commonly associated with the ending of the company’s existence. Winding
up or its synonym liquidation is a process by which the assets of a company are collected and
realized, its liabilities discharged and the net surplus (or residue) if any, distributed to the members
in accordance with the companies articles. Only when this has been done is the company’s life’s
existence finally terminated by a process known as dissolution.
Winding-Up Procedure
Section 9 of the Corporate Insolvency Act provides for two types of winding up, that is compulsory
winding up and voluntary winding up by members or creditors of a company.
Compulsory Winding-Up

Compulsory winding up is essentially any liquidation commenced by an order of the court
following a petition by a concerned party.
Under Section 56 (1) of the Corporate Insolvency Act, the following persons are entitled to petition
for a winding up under the Corporate Insolvency Act:
(a) the company itself by passing a special resolution;

(b) any creditor, including a contingent or prospective creditor, of the company;
(c) a member;
(d) any person who is the personal representative of a deceased member;
(e) the trustee in bankruptcy of a bankrupt member;
(f) a liquidator of the company appointed in a voluntary liquidation; or
(g) the Registrar of Companies or Official Receiver.
Amongst the circumstances in which the court may order the winding up of a company is where
the company is unable to pay its debts (section 57 (1) of the Corporate Insolvency Act). Further, a
company is unable to pay its debts in the following instances (section 57 (3) of the Corporate
Insolvency Act):
(a) If there is due from the company to any creditor (including a creditor by assignment) a
prescribed fee;1 and
(i) the creditor has, more than thirty days previously, served on the company a
written demand requiring the company to pay the amount due; and
(ii) the company has failed to pay the sum or to secure or compound it to the
reasonable satisfaction of the creditor;
(b) execution or other process issued on a judgement, decree or order of any court in favour of
a creditor or the company is returned unsatisfied in whole or in part; or
1
The Minister of Commerce, Trade and Industry is yet to prescribe the applicable minimum fee

(c) the company is unable to pay its debts as they fall due.
Further, in assessing whether a company is able to pay its debts or not, due regard is given to the
contingent and prospective liabilities of the company.
The other circumstances in which a company can be wound up by the court are the following
(section 57 (1) of the Corporate Insolvency Act);
(a) the company has by special resolution resolved that it be wound-up by the Court;
(b) the period, if any, fixed for the duration of the company by the articles expires, or an event
occurs in respect of which the articles provide that the company is to be dissolved;
(c) the number of members is reduced below two;
(d) the company was formed for an unlawful purpose;
(e) the incorporation of the company was obtained fraudulently; or
(f) in the opinion of the Court, it is just and equitable that the company should be wound-up.
A winding-up by the court would require a petition with an affidavit in support to be filed at the
Principal Registry of the High Court. The High Court will then set a date of hearing at which any
interested person who has filed documentation in support of or in opposition to the petition may
be heard.

The petition is required to be advertised in the prescribed form for seven days, once in the
Government Gazette (the “Gazette”) and once in a national newspaper of general circulation in
the area.
Further the petitioner is also required to file a statement in the prescribed form to satisfy the
Registrar of the High Court that the petition has been duly advertised and an affidavit verifying
the statements therein and an affidavit of service has been duly filed.
A petitioner is then required to make an application, supported by an affidavit stating sufficient

grounds for the appointment of a provisional liquidator. The court shall then make an order
appointing a provisional liquidator. The order of the court shall describe the property which the
provisional liquidator will be required to take possession of and the duties to be performed by the
provisional liquidator.
Once the winding up order is made, the court shall then appoint a liquidator or may give directions
as to the appointment of a liquidator by the members or creditors of a company.
Within fifteen days after the making of the winding up order by the court, the Petitioner is required
to lodge a copy of the order with the Registrar of Companies at the Patents and Companies
Registration Agency (PACRA) who will then strike the name of the company off the register and
notify the same in the Gazette. The company shall thereupon be dissolved as at the date of the
publication of the notice in the Gazette.
Members Voluntary Winding Up
Under the Corporate Insolvency Act, a company may be voluntarily wound up by its shareholders
by passing a special resolution that it be wound up (section 88 (1) of the Corporate Insolvency
Act). An ordinary resolution may be sufficient to commence the winding up procedure where the
period fixed by the articles of the company as the duration of the company has expired or upon the

occurrence of the event which the articles provide that the company is to be dissolved occurs.
(section 88 (2) of the Corporate Insolvency Act).
The winding-up commences upon the passing of the resolution for a winding-up (section 89 of the
Corporate Insolvency Act). Once resolution is passed, the company must lodge a copy of the
resolution with the Registrar of Companies (the “Registrar”) within 7 days, and the Registrar will
within 7 days after the lodgment cause a notice to be published in the Government Gazette (the
“Gazette”).
A members’ voluntary winding up can only take place when the company is solvent. The winding
up is managed entirely by the members who also appoint a liquidator. A company may only effect
such liquidation if it makes a declaration of solvency at least thirty days prior to the passing of the
resolution to wind up the company (section 91 of the Corporate Insolvency Act).
The declaration of solvency is made at a meeting of the directors of the company and it provides
confirmation that they have made a full inquiry into the affairs of the company, and that they have
formed the view that the company will be able to settle all its debts and liabilities in full. The
declaration must be attached to the company’s state of affairs which shows the assets and liabilities
of the company and an estimate of the cost of winding up.
The declaration of solvency will be of no force and effect unless it is made at a meeting of the
directors. The declaration must then be filed with the Registrar before or on the date on which the
notice for the shareholders’ meeting is sent out (section 91 (3) of the Corporate Insolvency Act).
The members of the company must pass a special resolution appointing a liquidator (section 92
(1) of the Corporate Insolvency Act). Once a liquidator has been appointed, all the powers of
directors will cease except so far as the liquidator or the company (by ordinary resolution) approve
the continuance thereof (section 92 (2) of the Corporate Insolvency Act).

Within 14 days of appointing the liquidator, the company shall lodge a certified copy of the
ordinary resolution with the Registrar upon payment of the prescribed fee and the Registrar shall
cause a notice to be published in a daily newspaper of general circulation in Zambia (section 92
(3) of the Corporate Insolvency Act).
As soon as the Company’s affairs are fully wound-up, the liquidator must (section 105 of the
Corporate Insolvency Act):
(a) draw up an account of the winding-up, showing how it has been conducted and the
company's property has been disposed off;
(b) call a general meeting of the company, by notice in one issue of the Gazette, and in one
issue of a newspaper in general circulation throughout Zambia at least one month before
the meeting, specifying the time and place and object of the meeting;
(c) lay his account before the meetings and give any explanations required; and
(d) send to the Registrar, and to any Official Receiver within twenty-one days after the date of
the meetings (or after the date of the later meeting, if not held on the same day) a copy of
his account, and a return of the holding of the meetings.
The quorum at a meeting of the company shall be two members. If there was less than a quorum
present at either meeting, the liquidator’s return to the Registrar and to any Official Receiver must
state that the meeting was called but no quorum was present. This is then deemed to comply with
the Corporate Insolvency Act with regard to the making of the return.
Upon the lodgment of the return, the Registrar shall strike the name of the company off the register
and cause a notice to be published in the gazette and the company shall thereupon be dissolved as
at the date of the publication in the Gazette.

Creditors Voluntary Winding Up
A creditors’ voluntary winding up occurs where the company in question is insolvent. The
Corporate Insolvency Act provides in this regard that, the company must convene a meeting of the
creditors at which the resolution for a creditor’s voluntary winding-up shall be put, and passed by
the creditors (section 95 (1) of the Corporate Insolvency Act).
Notices of the creditors’ meetings must be sent by post to each of the creditors not less than 7 days
before the day on which that meeting is to be held and, in addition, must be advertised in the
Gazette and in any newspaper circulating generally in Zambia at least twenty-one days before the
date of the meeting (section 95 (4) of the Corporate Insolvency Act)
A statement showing the names of all creditors and the amounts of their claims must accompany
the notice to the creditors.
At the meeting of creditors:
(i) a director appointed by the company to attend the meeting together with the secretary of
the company must disclose to the meeting the company's affairs and the circumstances
leading to the proposed winding up;
(ii) the creditors at the meeting may appoint one of their member or the director referred to
above to preside at the meeting;
(iii) a full statement of the company's affairs, showing in respect of assets the method and
manner in which the valuation of the assets was arrived at together with a list of the
company's assets, debts and liabilities, the names and addresses of the company's creditors,

the securities held by them, the dates when the securities were given and such other
information as may be prescribed must be laid before the creditors by the directors of the
company;
(iv) a liquidator may by ordinary resolution be nominated; and
(v) a committee of inspection may, by ordinary resolution be appointed.
Both the creditors and the directors, at their respective meetings have the power to nominate a
liquidator. If different persons are nominated the choice of the creditors shall prevail and, in the
event, that the creditors make no nomination, the person nominated by the company shall be
liquidator. Any director or creditor may apply to the court within 7 days of the nomination to
enforce the directors’ nomination.
After his appointment, all powers of the directors cease, unless the committee of inspection (or the
creditors, if there is no committee) sanctions otherwise. Any vacancy in the office of the liquidator
caused by his death, resignation or otherwise, may be filled by the creditors, unless the liquidator
was appointed by the court. The creditors have power to appoint, by resolution, members of a
committee of inspection and this appointment may be made either at the first or subsequent
meeting of the creditors.
As soon as the company’s affairs are fully wound-up, the liquidator must (section 105 of the
Corporate Insolvency Act);
(a) make up an account of the winding-up, showing how it has been conducted and the
company's property has been disposed of;
(b) call a general meeting of the company and a meeting of the creditors, by notice in one issue
of the Gazette, and in one issue of a newspaper in general circulation throughout Zambia

at least one month before the meeting, specifying the time and place and object of the
meeting – the meeting of the company must be held after, but not more than one month
after, the meeting of the creditors;
(c) lay his account before the meetings and give any explanations required; and
(d) send to the Registrar, and to any Official Receiver within one week after the date of the
meetings (or after the date of the later meeting, if not held on the same day) a copy of his
account, and a return of the holding of the meetings.
The quorum at a meeting of the company shall be two members and at the meeting of creditors
shall be two creditors. If there was less than a quorum present at either meeting, the liquidator’s
return to the Registrar and to any Official Receiver must state that the meeting was called but no
quorum was present. This is then deemed to comply with the Corporate Insolvency Act with regard
to the making of the return.
Upon the lodgment of the return, the Registrar shall strike the name of the company off the register
and cause a notice to be published in the Gazette and the company shall thereupon be dissolved as
at the date of the publication in the Gazette.
How creditors’ and other claims are submitted to the Liquidator
Generally, creditors may submit proof of their claims to the liquidator at any time after the winding
up commences and request payment of their claims. Following commencement of winding up, all
the assets of the company are placed under the control of the liquidator, who will promote the sale
of the assets and thereafter distribute payments to the creditors in a particular order of preference.
(Section 127 of the Corporate Insolvency Act).

In the case of a compulsory winding up, there is a requirement for the company to prepare and
submit to the liquidator a statement on the affairs of the company as at the date of the winding-up
order showing (section 72 of the Corporate Insolvency Act);
(a) the particulars of its assets, debts and liabilities;

(b) the names and addresses of its creditors;
(c) the securities held by each of the creditors;
(d) the dates when the securities were respectively given; and
(e) such further information as may be prescribed or as the liquidator requires.
The statement, referred to in the preceding paragraph should be submitted within three months of
the appointment of a liquidator, and should be verified by a statutory declaration as at the date of
the winding-up order, of at least one director and the secretary of the company.
In the case of a creditors’ voluntary winding up, a company is required to produce a list of the
creditors and the estimated amount of their claims. The list should then be submitted to each of the
creditors and the liquidator.
Any arrangement entered into between a company about to be or in the course of being wound-up
voluntarily and its creditors shall be binding on the company and the creditors, if approved by
respective resolutions. However, a creditor or member of the company may, within twenty-one
days after the completion of an arrangement, appeal to the High Court against the arrangement,
and the court may amend, vary or confirm the arrangement as it considers appropriate (section 106
of the Corporate Insolvency Act).
Other issues worth considering in relation to winding up
Directors’ potential liability exposure on winding up of a company

Directors of a company being wound up may be held liable in the following instances:
(a) where the director does not to the best of his knowledge and belief fully reveal to the
liquidator all the real and personal property of the company, when, how, to whom and for
what consideration the company disposed of the same (except such property as has been
disposed of in the ordinary way of business of the company);
(b) where the director does not deliver up to the liquidator;
(i) all the real and personal property of the company in his custody or under his
control and which he is required by law to deliver up; or
(ii) all books and documents in his custody or under his control belonging to
the company and which he is required by law to deliver up;
(c) where the director makes any material omission in any statement relating to the affairs of
the company;
(d) where the director knowing or believing that a false debt has been proved by any person,
fails for a period of one month to inform the liquidator thereof;
(e) where the director prevents the production of any book or paper affecting or relating to the
property or affairs of the company;
(f) where the director has attempted to account for any part of the property of the company by
fictitious losses or expenses; or
(g) where the director has made any false representation or committed any other fraud for the
purpose of obtaining the consent of the creditors of the company or any of them to an
agreement with reference to the affairs of the company or to the winding-up;

De-registration of a company
As an alternative to winding up, the shareholders of a company may, by special resolution, request
the Registrar to strike the company off the Register (section 318 (1) and (2) of the Corporate
Insolvency Act). The company would be required to lodge with the Registrar a copy of the
resolution, summary of accounts and a statutory declaration of two or more directors showing what
disposition the company has made of its assets and that the company has no debts or liabilities.
Once the request for dissolution has been made and all relevant documents submitted, the Registrar
will cause to be published in the Gazette a notice stating that at the expiration of three months from
the date of that notice, unless cause is shown to the contrary, the company will be dissolved (the
“First Notice”) (section 318 (4) of the Corporate Insolvency Act)
After the expiration of three months from the publication in the Gazette of the First Notice, the
Registrar will, unless cause to the contrary is shown, strike the name of CECA-S off the Register,
and cause a notice thereof to be published in the Gazette (the “Second Notice”).
On the publication of the Second Notice that the name of the company has been struck off the
Register, the company will stand dissolved save that the liability, if any, of every officer and
member of the company continues and may be enforced as if the company had not been dissolved.
Further, it should be noted that the fees of the Registrar and the costs incurred by him in publishing
notices in the Gazette would be payable by the company and recoverable from it.
Closure of a bank account and tax deregistration following winding up or de-registration
The procedures for closing of a bank account are dependent on the guidelines and procedural steps
of the bank at which an account is held and the type of account. When closing bank accounts, a
bank will seek to establish whether there are any outstanding liabilities on the specific account,
timing restrictions in relation to access and transfer of funds in the relevant account and unpaid

facilities or specific obligations associated with the company that need to be considered. The
company will need to pass a special resolution to sanction the closing of the bank accounts either
by a specific date or following the conclusion of the winding up proceedings.
In order to effect the tax de-registrations of its tax payer identification number, Value Added Tax
registration, Pay As You Earn registration, withholding tax registration and income tax
registration, the company would need to notify the Commissioner General of the Zambia Revenue
Authority (“ZRA”) that it will be winding up its operations and therefore request that the company
be deregistered for tax purposes. The company may also be able to apply for de-registration using
the ZRA online system via its taxpayer designated account.
In order for the de-registrations to be effected, proof of the dissolution or deregistration (i.e. the
gazette notice of the dissolution or deregistration as the case may be) of the company would have
to be submitted to ZRA. Once the ZRA confirms that the company has no outstanding tax liabilities
and that its tax returns prior to the date of application for de-registration are up to date, it would
process the de-registration. It is worth noting that the Commissioner General can request for a tax
audit to be carried out prior to processing the de-registration application to ascertain the tax
compliance status of the company.
Unit Summary
 A company incorporated in Zambia may be wound up either by way of voluntary or

compulsory winding up.
 A compulsory winding up process is one that is managed through the courts following the
presentation of a winding up petition by an interested party.

 A voluntary winding up process of a company does not involve the courts and can be
initiated either by the members or creditors of the company.
 A company can commence winding up proceedings by passing a special resolution for the
winding up of the company. Provided that the company is solvent, it may be wound up by
way of a members’ voluntary winding up which requires the board of directors to make a
declaration of solvency for purposes of showing that the company will be able to pay all
debts and liabilities of the company within the period of time stated in the declaration from
the date of the resolution for winding up.
 The appointed liquidator will assume all the powers of the directors unless by ordinary
resolution the company with the approval of the liquidator allows the directors to continue
with some of the duties.
 When the affairs of a company are fully wound up, the liquidator will be required to
convene a meeting and give an account of the liquidation proceedings and file a return of
the meeting with the Registrar. Once the return is lodged, the Registrar will strike the name
of the company off the Register and cause a notice of the dissolution of the company to be
published in the Gazette.
 As an alternative to the voluntary winding up of a company, if the company has no debts
and liabilities the shareholders of the company may, by special resolution, request the
Registrar to strike the company off the Register. Once the company’s name has been struck
off the Register, the company would stand dissolved but the liability, if any, of every officer
and member of the company would continue and be enforced as if the company had not
been dissolved.
 Deregistration of a company compared to undertaking a winding up process may be more
timely and cost effective provided all the necessary information and support is provided to
the Registrar. However, any resulting liability of the directors would continue to subsist
and be enforceable after the dissolution of the company.

ACTIVITY
1. What is your understanding of liquidation?

2. Is liquidation synonymous with dissolution?
3. How is a compulsory winding-up initiated?
4. How is a voluntary winding-up initiated?
5. How is a members’ voluntary winding-up different from a creditors’
voluntary winding-up?

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National Institute of Public Administration – Outreach Programmes Division 1

Ismail Siame (Mr.)

National Institute Of Public Administration

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How this Company Law Module is structured

The Module overview

What you can expect from the course.

The overview also provides guidance on:

The Module Content

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Content and structure.

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Module learning outcomes

- Meaning of Banking Business;

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How long will it take?

About the study guide

Activities, self-help questions and assessments

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After completing this unit, you will be able to;

 Explain the functions of company legislation

The Functions of the Companies Act No.10 of 2017

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I. The type of company to be formed (S.12(4) + S.6);

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Certificate of Share Capital

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Effect of Issuance of a Certificate of Incorporation

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II. Further, the issuance of a certificate of incorporation shall be conclusive evidence of

IV. Thus, in R-v-Registrar of Companies ex parte Attorney-General, the incorporation of a

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The Companies Act

In this unit you have learnt that

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1. Describe the process of incorporating a company in Zambia

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After completing this unit, you will be able to;

 Explain the different types of companies that can be incorporated in Zambia

I. Public Company; and

II. Private Company, which can be:

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A Company Limited by Shares

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A Company Limited by Guarantee

Each subscriber to an application for incorporation of a company limited by guarantee is required

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Comparing the different types of companies

Limited and unlimited companies

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Public and private companies