NATIONAL INSTITUTE OF PUBLIC

ADMINSTRATION
LEGAL STUDIES DIVISION

NAME: KEKVIN NAMALA MUSONDA

STUDENT NO: 28026016

COURSE: COMPANY LAW

PROGRAMME: BACHELOR OF LAWS (LLB)

LECTURER: MR I SIAME

DUE DATE: 20/11/2024

ASSIGNMENT NO: 2
Introduction

This legal piece of writing focuses on how The Articles of Association form the constitutional
basis of a company, outlining its internal governance, shareholder rights, and director duties.
Traditionally, and how they guide company actions by setting objectives, operational limits, and
governance procedures. Under Zambia’s Companies Act No. 10 of 2017, Sections 25(2), 25(3),
and 104 emphasize the binding nature of the Articles, restricting companies and directors from
exceeding their defined powers. While these provisions strengthen enforceability and
accountability, they do not alter the Articles' primary purpose; they continue to serve as a
governance framework, with added focus on compliance and accountability.

The Function of the Articles of Association: Historical Context and Modern Role

Historically, the Articles of Association, together with the memorandum of association, formed
the company's constitution, setting boundaries on the activities a company could undertake. The
doctrine of ultra vires, prevalent in 19th-century English law, was pivotal to this purpose.
According to the doctrine, any act undertaken outside a company’s stated objects was deemed
void and unenforceable. This principle aimed to protect shareholders and creditors by ensuring
that corporate funds and efforts were used solely for the purposes for which the company was
formed. This doctrine was illustrated in the seminal case of 1Ashbury Railway Carriage and Iron
Co Ltd v Riche (1875) LR 7 HL 653, where the House of Lords ruled that a company could not
engage in activities outside its specified objects, as this would be beyond its capacity.

While the strict doctrine of ultra vires has been relaxed in many jurisdictions, the principle of
companies acting within their defined powers remains a core component of corporate
governance. Modern company law, especially in jurisdictions like the United Kingdom and
South Africa, has shifted to allow companies more flexibility in defining their objects while still
holding directors accountable to act within the company’s stated purposes. The Companies Act
No. 10 of 2017 in Zambia reflects this global shift yet retains an emphasis on the binding nature
of the Articles, particularly through Sections 25 and 104, which reaffirm the Articles as
regulatory mechanisms that restrict company activities and impose accountability on directors.
1
Ashbury Railway Carriage and Iron Co Ltd v Richie (1875) LR 7 HL 653
Section 25: Restrictions on the Company’s Powers

Section 25(2) of the Companies Act No. 10 of 2017 specifies that 2a company's Articles may
include restrictions on the types of business it may conduct or the powers it can exercise. This
provision reinforces the Articles as a governance tool by allowing companies to delineate their
permissible activities and powers, aligning with the traditional purpose of the Articles. However,
Section 25(3) goes a step further by prohibiting companies from engaging in any business or
exercising any power contrary to these restrictions, giving legal teeth to the Articles’ provisions.

The practical impact of Section 25(3) is that companies are legally bound by the limitations in
their Articles, making any breach potentially voidable and subject to legal consequence. For
instance, if a company engaged in a business transaction not authorized by its Articles, the
transaction could be contested on the grounds of ultra vires. This reaffirms the principle laid out
in Ashbury Railway Carriage and Iron Co Ltd v Riche, though the context is modernized.
Zambia’s Act preserves the concept of ultra vires by ensuring that a company remains
accountable to the scope defined in its Articles.

This statutory reinforcement has implications for creditors, investors, and shareholders. By
mandating compliance with the Articles, the Act provides additional assurance that a company’s
funds and efforts will be directed solely toward authorized activities, thus protecting stakeholders
from unauthorized or high-risk ventures. It is worth noting that while similar restrictions exist in
other jurisdictions, such as the United Kingdom’s Companies Act 2006, Zambia’s law imposes a
stricter adherence to the Articles, ensuring companies remain confined within their original
operational boundaries.

Section 104: Director Accountability and Legal Consequences

Section 104 of the Companies Act No. 10 of 2017 addresses the responsibilities of directors,
particularly concerning their adherence to the Articles of Association. Section 104(1) 3mandates
that directors must not act, or permit the company to act, in a manner that contravenes the Act or
the Articles. This provision aligns with directors’ fiduciary duties, which require them to act in

2
Companies Act No. 10 of 2017 Section 25 (2)
3
Ibid Section 104(1)
the best interests of the company and within the scope of their authority as defined by the
company’s constitution.

Section 104(2) introduces a significant shift by attaching 4criminal liability to directors who
contravene the Articles or allow the company to act outside of its stipulated powers. Directors
found in violation may face penalties, including fines of up to one hundred thousand penalty
units, imprisonment for up to twelve months, or disqualification from future directorship roles
under Section 85 of the Act. This provision marks a shift in the regulatory approach, embedding
legal accountability within the Articles and underscoring the Articles’ role as a binding
governance framework rather than mere operational guidelines.

The personal liability imposed on directors is consistent with the fiduciary duties established in
common law, such as in 5Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378, where directors
were held liable for acting outside their authorized powers. However, Zambia’s statutory
framework extends this liability to criminal penalties, creating a powerful deterrent against
breaches of the Articles. By doing so, Section 104 emphasizes the importance of the Articles in
regulating not only company activities but also individual director behavior.

Comparative Analysis: International Perspectives on Director Duties and the Role of

A comparison with other jurisdictions highlights the distinctive approach taken by Zambia’s
Companies Act No. 10 of 2017. In the United Kingdom, for example, the Companies Act 2006
mandates that directors act within their powers, as stated in the company’s constitution.
However, breaches generally lead to civil liability, not criminal penalties. The Company
Directors Disqualification Act 1986 further provides for disqualification but does not impose
direct criminal penalties as in the Zambian context. South African law similarly imposes a duty
on directors to adhere to the company’s memorandum of incorporation (akin to the Articles) but
limits liability largely to civil penalties.

The Zambian approach places the Articles at the heart of corporate governance, treating breaches
as both a civil and criminal matter. This robust stance reinforces the Articles as a quasi-

4
Ibid Section 104(2)
5
Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
regulatory document, setting Zambia apart by prioritizing strict compliance within the corporate
framework. Such stringent enforcement emphasizes that directors are stewards of the company’s
defined purpose, with the Articles serving as a strict boundary rather than a flexible guide.

Additional Considerations: The Role of Articles in Defining Stakeholder Relationships

The binding nature of the Articles as reinforced by Sections 25 and 104 also has implications for
stakeholder relationships, particularly for shareholders and creditors. By clearly restricting a
company’s permissible activities, the Articles provide shareholders with assurance that their
investments are directed toward defined objectives, reducing the risk of mismanagement.
Creditors similarly benefit from these restrictions, as they can rely on the Articles to understand
the company’s operational boundaries and associated risk profile.

Courts have historically supported this function of the Articles, as seen in 6Automatic Self-
Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34, where the court held that
directors are bound by the Articles and cannot be overridden by shareholder resolutions. This
case reinforces the idea that the Articles, once defined, serve as a stable governance structure that
directors and shareholders alike must respect. Zambia’s Companies Act builds upon this
precedent by enforcing a strict adherence to the Articles, ensuring that directors’ powers are
confined within these established limits.

Conclusion

In summary, the Companies Act No. 10 of 2017's Sections 25(2), 25(3), and 104 uphold the
Articles of Association as legally binding governance documents that limit a company's
operations and director decisions. These clauses strengthen the Articles' function within Zambia's
corporate regulatory framework rather than significantly changing its intent. The Act enhances
the Articles' importance as a regulatory tool that ties directors and corporations to specified goals
by making them more enforceable and imposing criminal penalties for violations. As a result,
these clauses reinforce and strengthen the Articles' purpose rather than changing it, guaranteeing
that businesses function within precise, legally binding parameters that safeguard creditors,
shareholders, and other stakeholders.

6
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34
Bibliography
Statutes Used
 Companies Act No 10 of 2017
 Companies Act 2006 (United Kingdom)
Cases Used
 Ashbury Railway Carriage and Iron Co Ltd v Richie (1875) LR 7 HL 653
 Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378
 Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34