Company Law & Procedure

LPQE Class
Lecturer: Conrad Sichande
 Layout of Today’s Lecture

I. Structure of the Lectures & Key Expectations

II. Course Outcomes

III. Topic 1: Introduction to Company Law & Procedure

IV. Reading Assignment

V. Questions and Clarifications

I. STRUCTURE OF THE LECTURES & KEY EXPECTATIONS

1. The Three Types of Students in Class

2. Lecturers Approach

4. Group Networking

3. Expected Results
KEY EXPECTATIONS

 Always Attend Class – Class has a way of putting you in a

frame of mind to study.
 Devote time to Study – It shows from the answer scripts.
 Ask a lot of Questions - I will not always have the answers but
someone here will.
KEY EXPECTATIONS

 Network Among Your Colleagues – Iron sharpens Iron

 Put in Your Best - “No one can ask you to do more than your
best”- Mr E.W. Barry.
 Don’t give up – The Story of Nando Parrado
II. COURSE OUTCOMES

1. Have practical knowledge on how to incorporate a company.

Have a firm understanding on how a company can legally raise capital.

2. Understand the role of the two important organs of the Company, the
Shareholders and the Board of Directors including the role of the Company
Secretary in the Corporate Governance framework.
II. COURSE OUTCOMES

3. Have a detailed understanding of corporate rescue and insolvency

procedures in Zambia.

4. Be able to advise clients on all matters pertaining to company law and

procedure including PACRA compliance issues.
III. COURSE OVERVIEW

● Company Law and Procedure –Two aspects, the substantive law and the
procedural aspects.
● Company law is about the interactions between a company (as a legal
person), the members, directors and creditors.
● The law provides for rules on creation of companies, how companies
deal with outsiders, how shareholders directors come to be, what are
their duties, how decisions made internally are carried out, how
problems are resolved and how companies die.
 IV. TOPICS OVERVIEW

TOPIC 1: Theoretical/Substantive Law

Understand the concept of limited liability and the exceptions
Explain why you would advise a client to choose a company over other
forms of business associations and why.
 IV. TOPICS OVERVIEW

TOPIC 2: Procedural
Company formation – Different types and how they are incorporated. What
documents are filed in.
What documents are considered as the Company’s constitutional documents
(Incorporation documents, Articles of Association, Shareholder
Agreements).
What are the pre and post incorporation procedures?
 IV. TOPICS OVERVIEW

TOPIC 3: Substantive Law/Procedural

What is capital and why is it important.

How does a Company raise its capital.
What are the rules on capital maintenance and what do they aim to achieve
in practice?
 IV. TOPICS OVERVIEW

TOPIC 4: Substantive Law/Procedural

What are shares and what do they denote.

What are the rules surrounding their issuance and what rights attach to
them.
What protection mechanism is provided for under the law to protect
shareholders for variation of rights relating to shares.
 IV. TOPICS OVERVIEW

TOPIC 5: Substantive Law/Procedural

Corporate governance-What is?
How the company is organised internally, who are the main players, what
are their various roles and how do they relate to each other. What is the
place of stakeholders?
How does the company make its decisions and are there any procedural
aspects that are important. Where does the balance of power lie and what
safeguards are in place to prevent abuse of the company?
 IV. TOPICS OVERVIEW

TOPIC 7: Procedural
Schemes of Arrangement
Deals with debt or company restructuring to ensure that the company can
survive tough times.
Basically a formal process to save a company from collapse in liaison with
creditor and members.
 IV. TOPICS OVERVIEW

TOPIC 8: Procedural
Receivership
Basically an enforcement mechanism provided to creditors of a company to
be able to get back their money.
Provides for an orderly process that takes into account the interests of the
company and the creditor.
You are expected to know the detailed procedure.
 IV. TOPICS OVERVIEW

TOPIC 9: Procedural
Business Rescue
Here we will look at the procedure provided for under the law to rescue a
company in financial distress.
Know what constitutes financial distress.
The procedure for commencing the business rescue.
What effect does business rescue have on the company.
 IV. TOPICS OVERVIEW

TOPIC 10: Procedural

Winding Up/Liquidation
Provides for an orderly winding up or shutting down of the Company.
What procedure must be followed
What is the role and responsibilities of the liquidator
What does the Corporate Insolvency Act say about specific aspects of the
liquidation process/Both prior to and during the process itself.
V. INTRODUCTION TO COMPANY LAW PRACTICE

Learning Outcomes

1. Have a firm grasp of the corporate theories that explain the purpose of a company

2. Be able to distinguish the company from all other forms of business enterprises

3. Explain the concept of lifting of the corporate veil and its place in company law
WHAT IS A COMPANY?

Satirical Definition
Ambrose Bierce'sDevil's Dictionarydefines it as 'an ingenious device
for obtaining profit without individual responsibility'.

Companies Act Definition

Section 3- “company” means an entity incorporated in accordance
with this Act and section 6 of the repealed Act.

A More General Definition

It is an association of individuals formed for any common purpose,
common trade or common business and share profit and loss arising
there from.
 A DISCUSSION ON PURPOSE-CORPORATE THEORY

The Concession (Fiction) Theory

The importance of the state in granting corporate status is central. So legal theorists discussed the original
charter and statutory companies in terms of what is known as the concession or fiction theory.

The incorporation is a concession granted or a legal fiction created by the state because of the public good
being carried out by the business.

Corporate Realism Theory

This theory explains the registered company with dispersed shareholding. The theory argues that the Company
is not a fiction but has a real existence. The company does not depend on its members for existence. Once the
members have formed the company by association, the company has an interest of its own.

This theory makes the manager the focus of corporate power and not the shareholders.
 A DISCUSSION ON PURPOSE-CORPORATE THEORY

Aggregate Theory

This theory describes the company as the central institution formed by the aggregation of private contracting
individuals. He stated that Dodd’s solution would be unenforceable in practice and would further managerial
dominance.

So the focus of the company’s accountability mechanism was just the shareholders. The managers are trustees
for the shareholders, not the corporation.
 A DISCUSSION ON PURPOSE-CORPORATE THEORY

Modern Views

“The statement of purpose campaign urges companies to issue a statement of purpose to ensure better, more
transparent and more socially responsible corporate governance. The statement is a simple one-page declaration
issued by a company’s board of directors, that clearly articulates the company ’s purpose and how to harmonize
commercial success with social accountability and responsibility.”

Eccles &Youmanns (2019) : Statement of Purpose Guidance Document

“In its place, the CEO’s of Business Roundtable adopted a new Statement on the Purpose of a Corporation
declaring that companies should serve not only their shareholders, but also deliver value to their customers,
invest in employees, deal fairly with suppliers and support the communities in which they operate ”.

Business Roundtable (2019) : Statement on the Purpose of a Corporation

FURTHER READING

Read and summarise the arguments in the following two articles and
thereafter express your own view on the debate (Max words: 1500):

1. Merrick, E. Dodd Jr “For Whom Are Corporate Managers

Trustees”. Harvard Law Review, Vol. 45 No.7 (May, 1932) pp 1145-
1163.
2. Berle, A. A Jr. “For Who Corporate Managers are Trustees: A
Note” Harvard Law Review. Vol. 45 No. 8 (Jun, 1932) pp. 1365-1372.
DISTINGUISHING THE COMPANY FROM OTHER FORMS OF
BUSINESS ASSOCIATIONS
 Sole Trader –Registration of Business Names Act No. 16
of 2011
 Partnerships – Partnership Act of 1890
 Co-operative Societies – Co-operative Societies Act No. 20
of 1998
 Clubs and Societies – Clubs Registration Act, Cap 162
TO INCORPORATE OR NOT TO INCORPORATE?

There are several factors that may inform the decision to incorporate:

• Tax and Government Policies

• Regulatory Regime
• Size of Business and Ease of Formation
• Limited liability

Salomon v Salomon & Co. [1897] AC 22

ADVANTAGES OF INCORPORATION

Is there any advantage in incorporating?

• Limited Liability of members.

• Perpetual succession of the entity.

• Entity capable of owning property.

• Separation of rights and duties from those of the members.

• Tax benefits that can only be enjoyed by an incorporated entity

• Enhanced efficiency of the incorporated entity.

 LIFTING OF THE CORPORATE VEIL

Separate legal personality has formed the cornerstone of company law for years now.

There are exceptions to the principle in Salomon’s case, where the veil is lifted, or pierced, and the
law disregards the corporate entity and pays regard instead to the economic realities behind the
legal façade, i.e. where the facts supersede from.

These exceptions may be classified into those expressly provided by statute and those under
judicial interpretation.
 LIFTING OF THE CORPORATE VEIL

Statutory Exceptions
1. Group company structures can be used to avoid taxation through moving assets and liabilities
around the group.

The Companies Act recognizes this reality-Section 267 places the duty to produce group accounts
on parent companies (Companies with subsidiaries).

2. Responsibility for fraudulent trading.

Section 175 of the Corporate Insolvency Act - ….without any limitation of liability, for the debts
or liabilities of the company…(Members and Directors)

Section 134 (2) of the CIA – liability for contracting debt (Directors)
 LIFTING OF THE CORPORATE VEIL

Judicial Interpretation

Daimler Co. Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd (1916) – Lifted the veil to
determine whether the Company was an “enemy”.

Gilford Motor Co. Ltd v Horne (1933) – An employee who formed a company to solicit customers
from his former employers even though he was bound not to do so.

Jones v Lipman (1962) – Mr Lipman incorporated a company and conveyed land to it to avoid a
transaction.

In Re Bugle Press (1961) – majority shareholders set up a company to force a compulsory

purchase of minority shareholders shares.
 LIFTING OF THE CORPORATE VEIL

Judicial Interpretation

DHN Food Distributors Ltd v Tower Hamlets (1976) – Group of companies a single economic
entity to be treated as one.

Adams v Cape Industries Plc (1990) – Narrowed significantly the way in which courts could lift
the veil.

Madison Investment Property and Advisory Company Ltd v Peter Kanyinji SJ No. 48 of 2018
 A SHORT SUMMARY ON BUSINESS FORM

It is important to take note of three vital factors when it comes to deciding what business
organisation to choose.

• First you need to ask if the type of business you have chosen will facilitate capital
investment.

• Secondly, does the form of business organisation minimise the risks involved in the
business.

• Thirdly, will the form of business organisation provide a clear organisational

structure that minimises internal disagreements and conflict.
 POINTS TO REMEMBER ON TOPIC 1: INTRODUCTION TO
COMPANY LAW AND PROCEDURE

• General purpose of a company – Corporate Social Responsibility

• A company compared to other forms of business associations

• Limited liability as the main advantage of a company

• Lifting of the corporate veil as a limitation of limited liability

 TOPIC 1: INTRODUCTION TO COMPANY LAW AND
PROCEDURE - RECAP
CLASS DISCUSSION

Lessons from SALOMON V A SALOMON & CO [1897] AC 22

Merrick, E. Dodd Jr “For Whom Are Corporate Managers Trustees ”. Harvard Law Review, Vol.
45 No.7 (May, 1932) pp 1145-1163.

Berle, A. A Jr. “For Who Corporate Managers are Trustees: A Note ” Harvard Law Review. Vol.
45 No. 8 (Jun, 1932) pp. 1365-1372.
 SAMPLE EXAMINATION QUESTION

QUESTION ONE

Romazone Distributors Limited, a company registered in Zambia owns 99% of the shares in a
Zimbabwean Company called Tete Marketing Limited. The Zambia Revenue Authority (ZRA)
carried out a tax assessment on Romazone Distributors Limited for income tax purposes and
included in their assessment profits that Tete Marketing Limited had not remitted to the parent
company in Zambia. ZRA contended that the business in Zimbabwe was practically carried on by
Romazone Distributors Limited a decision which was affirmed by the Revenue Appeals Tribunal.

Romazone Distributors Limited being dissatisfied with the decision of the Revenue Appeals
Tribunal has retained your firm to appeal to the higher court. The Managing Partner of the firm has
requested you to come up with the substantive legal arguments for the appeal. You are required to
draft the legal arguments.
 SUGGESTED ANSWER TO SAMPLE EXAMINATION QUESTION

QUESTION ONE

The question requires the students to demonstrate an understanding of the meaning of lifting of the corporate
veil. This refers to the possibility of looking behind the company framework (or behind the company ’s separate
personality) as an exception to the general rule.

As counsel for Romazone Distributors Limited, the student must argue that Romazone Distributors is a separate
legal entity. The principle of separate corporate personality as confirmed by Salomon v A Salomon & Co.
[1897] AC 22 and reasserted in later cases forms the cornerstone of company law. This is also provided for in
section 16 of the Companies Act No. 10 of 2017. Based on this provision and the case of Madison Investment
Property and Advisory Company Ltd v Peter Kanyinji SJ No. 48 of 2018 one can therefore argue that the
Zambia Revenue Authority and the Tax Appeals Tribunal were wrong to tax income from a subsidiary in
Zimbabwe that had not been declared to the parent company in Zambia.
 SUGGESTED ANSWER TO SAMPLE EXAMINATION QUESTION

QUESTION ONE – CONTINUED

The students must also demonstrate that they understand that there are grounds for lifting of the
corporate veil and refer to the leading cases in this area of the law such as Gilford Motors v Horne;
Adams v Cape Industries; Re Darby, ex p Brougham. The Zambia Revenue Authority will
obviously argue that Romazone Distributors Limited and Tete Marketing Limited should be
considered as one economic unit and therefore should be considered as a single entity for tax
purposes. The legal arguments should therefore be able to address these cases and distinguish them
from the situation of the client, Romazone Distributors Limited.
 SAMPLE EXAMINATION QUESTION

QUESTION TWO

In 2019, a large British Film Company, Brittania, successfully incorporated a company, Damaza
Films Limited, here in Zambia. By some agreement between the two entities, Brittania was to fund
all of Damaza’s film projects which Damaza intended to register with the Registrar of Films here
in Zambia in order to benefit from some huge tax concessions granted to local film makers. To
Damaza’s shock and amazement, the Registrar of Films declined to register the films made by
Damaza on the grounds that they were not in reality made by Damaza but Brittania.

Damaza has retained you as Counsel to challenge the Registrar of Films decision. What will your
arguments be in support of your client’s case? What arguments will you anticipate from the
lawyers representing the Registrar of Films?
 SUGGESTED ANSWER TO SAMPLE EXAMINATION QUESTION

QUESTION TWO

The question requires the students to demonstrate an understanding of the meaning of lifting of the
corporate veil. This refers to the possibility of looking behind the company framework (or behind
the company’s separate personality) as an exception to the general rule.

As counsel for Damaza Films Limited, the student must obviously argue that Damaza is a separate
legal entity. The principle of separate corporate personality as confirmed by Salomon v Salomon
and reasserted in later cases forms the cornerstone of company law. This is also provided for in
section 16 of the Companies Act. Based on this provision and the cases, the Registrar was
therefore wrong to refuse to register the film.
 SUGGESTED ANSWER TO SAMPLE EXAMINATION QUESTION

QUESTION TWO - CONTINUED

The second part of the question requires the student to know that there are grounds for lifting of the corporate
veil and anticipate the leading cases in this area of the law such as Gilford Motors v Horne; Adams v Cape
Industries; Re Darby, ex p Brougham. The Registrar of Films will obviously argue that Damaza Films Limited
was simply registered for the sole purpose of evading the law and therefore the film was in fact made by
Brittania, a foreign company that does not qualify for tax concessions under Zambian law. In making the
decision to refuse to register the film apparently made by Damaza Films Limited, the Registrar found as a
matter of fact that there was an agency relationship between the shareholder, Brittania and the company
Damaza.

Re FG (Films) Ltd [1953] has similar facts as the question.

Finally, the student must then provide an argument on why the court should find for his or her client rather than
the Registrar of Films in this case.
GENERAL GUIDANCE ON ANSWERING EXAM QUESTIONS

• Ensure that you read more just the notes we give in class. The mark of a good lawyer is
research.
• Make sure that you thoroughly understand the question and what is required of you.
• Be methodical in your approach. A haphazard way of answering questions does not give the
marker any confidence that you are ready to advise clients.
• As much as is possible, let your answers always be backed by authorities, both statutory and
case law.
 TOPIC 2: COMPANY FORMATION

Learning Outcomes:

• State the different types of companies provided for under the Companies Act

• Be able to draft all incorporation documents for filing with the Registrar

• Explain the Company constitutional documents

• Define all pre and post incorporation procedures

TOPIC 2: COMPANY FORMATION

STARTING WITH SOME VALUE QUESTIONS

1. What is the value of a lawyer in company formation generally?

2. What value will I be proposing to add to my client? Why should they choose me?

“Value does not exist. It’s a perception we reach with expectations we meet”
 TOPIC 2: COMPANY FORMATION-PROMOTERS, WHO THEY
ARE AND WHAT THEY DO
The persons who are responsible for forming a company are called promoters. Whether or not a
person is a promoter is a question of fact. (Twycross v Grant (1877) Cockburn CJ and Whaley
Bridge Calico Printing Co v Green (1879) Bowen J)

Promotion process involves the following:

• Effecting registration of the company.

• Negotiating pre-incorporation contracts.

• Finding initial directors and shareholders.

• Registering and issuing a prospectus (Public Companies).

 TOPIC 2: COMPANY FORMATION-PROMOTERS, WHO THEY
ARE NOT AND THEIR DUTIES
What promoters are not:

• They are not agents of the company as it is non-existent at that time. [ Kelner v Baxter (1866)].

• They are not trustees of the company. [Re Leeds and Hanley Theatres of Varieties Ltd (1902)].

But promoters are nevertheless viewed as fiduciaries. These fiduciary duties of promoters
principally arise from the nature of transaction entered into by them in the course of bringing the
company into existence.

The core duty is not to make a secret profit – Erlanger v New Sombrero Phosphate Co. (1878).
 TOPIC 2: COMPANY FORMATION-PROMOTERS AND PRE-
INCORPORATION

Section 20 of the Companies Act provides that a contract which purports to be made by
or on behalf of a company at a time when the company has not been formed is binding
on the one purporting to act for the company and is personally liable.

The objective 20 of section is to protect third parties who contracted in belief that they
were dealing with registered companies by making pre-incorporation contracts legally
enforceable as personal contracts with promoters unless what is stipulated in that section
is done by the Company after its incorporation.
 TOPIC 2: COMPANY FORMATION: DIFFERENT TYPES OF
COMPANIES
Companies are creatures of the law that are generally created in two ways:

1. Pursuant to an Act of Parliament: These companies are called statutory companies.

Statutory companies are established for purposes of achieving specific objectives for
public good. Examples of statutory companies include Development Bank of Zambia,
TAZAMA and NAPSA.

2. Under the Companies Act No. 10 of 2017: These represent the typical companies we
have in Zambia.
 TOPIC 2: COMPANY FORMATION: COMPANIES UNDER THE
COMPANIES ACT

Part II of the Companies Act No. 10 of 2017 provides for the incorporation and
registration of companies.

Section 6 of the Act recognizes two types of company’s namely:

• Public limited company; and

• Three forms of a private company, i.e. private company limited by shares, private
company limited by guarantee and an unlimited company.
 TOPIC 2: COMPANY FORMATION: PUBLIC COMPANIES

The term “Public Company” is used to describe a company which is incorporated in

accordance with section 6 and fulfils the requirements stipulated in section 7 of the
Companies Act.

Public companies are usually subject to more stringent regulatory rules than private
companies due to their dealings with the public.

A public company can only be incorporated as a company limited by shares.

Public companies have much larger capital requirements imposed.

 TOPIC 2: COMPANY FORMATION: PRIVATE COMPANIES
LIMITED BY SHARES

These are by far the majority of companies registered in Zambia.

Private companies are provided for under section 9 of the Companies Act. The legal
letter of such companies is summarized in the application form of companies, i.e.
Companies Form 3.

They are formed for purposes of making profit while at the same time offering limited
liability.
 TOPIC 2: COMPANY FORMATION: PRIVATE COMPANIES
LIMITED BY GUARANTEE
Section 10 of the Companies Act provides for a company limited by guarantee.

This type of company does not have share capital; must not carry on business for purposes of profit to its
members or anyone responsible for its management; it is not allowed to invite members of the public to acquire
shares.

Companies Form 6 must be filled in by subscribers to indicate that in the event of winding-up, the subscribers
shall pay what they have guaranteed. The members are not referred to as shareholders because there is no share
capital. One therefore, becomes a member by subscribing and by signing Companies Form 6 as well as
meeting the other pre-requisite requirements.

A company limited by guarantee can make an application to the Registrar by which it will be entitled to omit
the use of the word “limited” (section 37(1) of the Companies Act).
 TOPIC 2: COMPANY FORMATION: PRIVATE UNLIMITED
COMPANIES
Section 11 of the Companies Act provides for this third type of private companies regulated under
the Act. They are very unusual types of companies. Companies Form 3 shows that this type of
company is similar to private companies limited by shares. Unlimited companies are however,
different from private companies limited by shares in the following ways:-

• There is no limited liability so that in the event of winding-up the members are required to
contribute towards debts of the company to an unlimited extent. In this regard they are like
partnerships. (See section 11 (3) of the Companies Act).

• Unlimited companies may, especially in formative stages, benefit from access to loans much
easier than companies limited by shares due to this unlimited liability which assures the lender
of the repayment of debt by the members themselves should the company fail to pay.
 TOPIC 2: COMPANY FORMATION: INCORPORATION
CHECKLIST

• Clearing the name or names for the company to be incorporated is the first and important step
in the incorporation process. This is provided for under section 39 of the Companies Act.

• Section 40 (1) of the Companies Act provides for instances when a proposed name may be
rejected by the Registrar.

• Section 12 (3) of the Companies Act sets out the information or documents required to
incorporate a company.
 TOPIC 2: COMPANY FORMATION: INCORPORATION
DOCUMENTS
Companies Form 3 must be filed depending on the type of company to be incorporated. Section 12 of the
Companies Act sets out the documentation to be filed together with Form 3:

• Proposed articles of the company or a statement that the Standard articles of association have been adopted.
• Declaration of compliance made in accordance with section 13 of the Companies Act.
• Declaration of Consent from each person named in the application as a director or secretary of the
company.
• Declaration of guarantee signed by each subscriber, if the company is limited by guarantee.
• Statement of beneficial ownership in the prescribed manner. (See Form 21)
• Declaration by applicants that the particulars of the beneficial owners have been submitted to the Registrar
with the knowledge of those individuals.

A memorandum of association is no longer required.

 TOPIC 2: COMPANY FORMATION: INCORPORATION
DOCUMENTS

If a company has a share capital, the subscribers will indicate in the application against their names
the shares they are taking. Persons who are listed under section 12 (8) of the Companies Act are
prohibited from subscribing for incorporation. It must however be noted that section 14 (2) of the
Companies Act states that a company shall not be invalid by reason only that an individual or
individuals subscribed to the application for incorporation in contravention of section 12 (8) of the
Act.
 TOPIC 2: COMPANY FORMATION: REGISTRARS DECISION

Once the application form and all the other relevant documents have been duly completed, they are
lodged with the Registrar upon payment of lodgment fees. Section 14 of the Companies Act
provides that the Registrar shall register the proposed company; issue a certificate of incorporation;
issue a certificate of share capital and assign the company a registration number where an
applicant meets the requirements of the Act. However, section 19 (1) of the Act empowers the
Registrar to reject an application for incorporation if the applicant does not meet the requirements
of the Act or submits false information.

R V Registrar of Joint Stock Companies, ex parte More (1931) 2 KB 197

R v Registrar of Companies, Ex Parte Bowen [1914] 1161

 TOPIC 2: COMPANY FORMATION: REGISTRARS DECISION

Discussion Question

Two Chinese nationals and a Zambian have approached your firm to challenge the Registrar of
Companies’ alleged decision to refuse to register their Company. Using the law and decided cases,
how would you approach this issue?
 TOPIC 2: COMPANY FORMATION: REGISTRARS DECISION

Possible Answers to Discussion Question

1) Seek to understand the issues

a) What sort of Company did they want to register? Sections 6 and 299 of the CA
b) What documents did they file in? Section 12 of the CA
c) Who were the members on the application for incorporation? Section 12 (8)
d) What did the Registrar say? Section 19 of the CA

2) Advice the client on whether they should challenge the Registrar ’s decision or simply start the
process de novo.
 TOPIC 2: COMPANY FORMATION: INCORPORATION OF THE
COMPANY AND THE LEGAL EFFECTS
A company is incorporated from the date that is specified in the Certificate of Incorporation and acquires a
separate legal status with the name by which it is registered. (See section 16 of the Companies Act).

Section 17 of the Act provides that, “subject to this Act, the incorporation of a company shall have the same
effect as a contract under seal between the company and its members from time to time and between those
members themselves, …..”

Section 22 of the Companies Act provides that a company shall have, subject to the Act and to such limitations
as are inherent in its corporate nature, the capacity, rights, powers and privileges of an individual.

If in spite of having a restriction on the nature of the business that a company can transact in a company
proceeds to transact in the restricted business, the company would nevertheless be bound in relation to third
parties according to section 23 of the Companies Act.
 TOPIC 2: COMPANY FORMATION: THE COMPANY AND ITS
CONSTITUTION
Articles of association are a document that defines the purpose of a company and specifies the regulations for
its operations. Articles of association are considered as a constitution of a company that stipulate the company ’s
internal affairs.

Section 25 (2) of the Act provides that, “the articles may contain restrictions on the business that the company
may carry on.” Section 25 (3) of the Act further provides 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. ”

Section 26 of the Companies Act provides for the contractual effect of articles of association. The articles of
association constitute a contract or covenant, which binds each member to the company on one hand and each
member on the other as well as between the members inter se. The Articles bind members only, i.e. members in
their capacity as and not in any other capacity.
 TOPIC 2: COMPANY FORMATION: THE COMPANY AND ITS
CONSTITUTION

Since the articles of association are an important part of the company’s constitution,
their amendment is regulated by the Companies Act. Section 27 (1) of the Companies
Act provides that a company may amend its articles by passing a special resolution.
 TOPIC 2: COMPANY FORMATION: POST INCORPORATION
PROCEDURES
After incorporation, the company is required to hold a post incorporation meeting which is also
necessary for the Board of Directors. The holding of the 2 meetings should take place as soon as
necessary.

Members Meeting: The members meeting are important after incorporation for deal with the
following matters:

Formalise any formation agreements such as loan acquisition, leasing agreements, agreements for
transfer of assets from promoters to the company, etc;

• Formally appoint the directors of the company.

• Adoption of any pre-incorporation contracts.
• Execute any shareholders agreements.
 TOPIC 2: COMPANY FORMATION: POST INCORPORATION
PROCEDURES- SHAREHOLDERS AGREEMENTS
The shareholders agreement is a contract entered into by the shareholders either at the time of the
company’s formation or at some subsequent time. The shareholders agreement is used to
supplement the constitutional documents of the company. Normal contract rules apply to
shareholders agreement.

The following are some of the major reasons why members might also wish to enter into a
shareholders agreement:

• The articles of a company only bind members with regard to membership rights. Therefore,
any relationship which members would like to create outside the provisions of membership
rights would have to be provided for in a separate document. That is shareholders agreement.
 TOPIC 2: COMPANY FORMATION: POST INCORPORATION
PROCEDURES- SHAREHOLDERS AGREEMENTS

The following are some of the major reasons why members might also wish to enter into a
shareholders agreement:

• Articles are a public document registrable with the Registrar of Companies; hence any busy
body can conduct a search at PACRA to get information on them. Therefore, shareholders may
want some issues to be set out in a private document which is not accessible to the public.
• Articles of a company can be amended at any time by special resolution requiring three
quarters majority vote by the shareholders. On the other hand, a duly executed shareholders ’
agreement can only be amended by consent of all the members. In this way the members can
protect their interests.
 TOPIC 2: COMPANY FORMATION: POST INCORPORATION
PROCEDURES

2. Director’s Meeting: The first meeting of the directors should also be held within a
reasonable period of time in order to: report on the incorporation of the company; and
authorize any further changes that may be required. Specific business to be transacted
includes appointment of chairman of the board; receive various reports of the chairman
of the board; Confirmation of the list of first directors; Confirmation of the company
registered office; tabling of the company’s articles and incorporation form; opening of
bank account and appointment of signatories; production of company’s common seal;
the changing of accounting date, if necessary; and writing up of statutory books, which
every company is required to keep and maintain.
 TOPIC 2: COMPANY FORMATION: FOREIGN COMPANIES

Globalisation has opened up the world for the movement of people and goods. This
means that companies are no longer static entities whose operations are confined to a
country or jurisdiction.

Companies can therefore be incorporated in the United Kingdom and choose to establish
a branch here in Zambia. Section 299 of the Companies Act provides for this scenario.

As a lawyer, it is vital that you are familiar with the requirements of Part XIV of the
Companies Act to be able to advise any client that wishes to set up a branch of a foreign
registered company here in Zambia.
 TOPIC 2: COMPANY FORMATION: FOREIGN COMPANIES

Discussion Question

Conrad Inc., an international company operating in several countries has retained you as
counsel to advise them how they can set up a business here in Zambia in the mining
industry. What matters will you take into account in your advice? Prepare a legal brief
and proceed to draft the necessary documents if any for your client.
 TOPIC 2: COMPANY FORMATION: SUMMARY OF TOPIC

In concluding this Topic, we want to emphasise how incredibly important it is for a

lawyer to have a firm grasp of the procedures for incorporating a company and all the
post incorporation procedures. For the lawyer advising a client, the type of company to
be incorporated is an important consideration since some of the requirements will be
quite distinct depending on the type of company being incorporated.
TOPIC 2: COMPANY FORMATION: SUMMARY OF TOPIC

“Do not wage a war on reality, invest in shaping perceptions”

 TOPIC 2: COMPANY FORMATION: PRESCRIBED FURTHER
READING
Davies, L.P. Principles of Modern Company Law. Sweet & Maxwell. See Chapters: “Types and Functions of
Companies” and “Formation Procedures”. (Any latest edition)

Dignam, Alan and John Lowry. Company Law. Oxford University Press. See Chapters: “Corporate Personality
and limited liability”. (Any latest edition)

Gates, Blankfein R. Gates on Understanding Company Law: A Conceptual and Functional Approach . 2018. See
Chapters: “Incorporation and Registration of Companies” and “Corporate Capacity and Administration ”.

Sealy, Len and Sarah Worthington. Sealy’s Cases and Materials in Company Law. Oxford University Press.
See Chapters: “The Company and Its Incorporation” and “Corporate Personality and Limited Liability ”. (9 th
Edition or any latest edition)
 TOPIC 2: COMPANY FORMATION: SAMPLE EXAM QUESTIONS

QUESTION

Mr. Clever Bumba, along with several other members incorporated TamTam Company Limited in Zambia
sometime in November, 2019. In order to protect his interests as a founding member of the Company, Mr.
Bumba made sure that the articles of the Company contained a clause which ensured that he was appointed as a
director in the Company for life and he was so appointed.

However, things did not go according to plan and following several quarrels within the Company, Mr. Bumba
was removed as a director through a resolution of the general meeting. He has since sued the Company and the
members for breach of contract. As counsel who has been retained to represent the Company in this matter, you
are required to prepare arguments in favour of your client. Prepare your arguments on all the legal issues of the
case.
 TOPIC 2: COMPANY FORMATION: SAMPLE EXAM QUESTIONS

SUGGESTED ANSWER

The question is generally about the effect of the articles as a contract and specifically on whether
the company was bound by a clause that had been inserted in the articles of the company to
appoint Mr. Clever Bumba as a director in the company for life.

A good answer must discuss section 26 of the Companies Act No. 10 of 2017 and what that
section means as regards the company’s articles as a contract. The students must point out that the
articles do not constitute a contract between the company and someone who is not a member of the
company. Section 26 of the Companies Act only refers to there being a contract between the
company and each of its members and amongst the members and further that the articles shall bind
the company and its members.
 TOPIC 2: COMPANY FORMATION: SAMPLE EXAM QUESTIONS

SUGGESTED ANSWER - CONTINUED

The students should cite the case of Hickman v Kent or Romney Marsh Sheep – Breeders Association [1915] 1
Ch 188 in which the court stated what is in section 26 of the Companies Act to the effect that the contract
created by the articles affects members only in their capacity as members, and not in any special or personal
capacity such as a director.

By virtue of section 26 of the Companies Act, one member may sue another on a contract created by the
articles without joining the company as a party. The case of Rayfield v Hands [1960] Ch 1 is an authority for
this.

The students should be able to argue that based on the above, the company was not a proper party to the
proceedings on account of there being no contract between Mr. Clever Bumba and the company.
TOPIC 2: COMPANY FORMATION: SAMPLE EXAM QUESTIONS
 TOPIC 2: COMPANY FORMATION: SAMPLE EXAM QUESTIONS

SUGGESTED ANSWER

The question is testing the students ’ general knowledge on the articles of association and their effect on the
governance of the company.

The students must be able to state that articles of association are a document that defines the purpose of a
company and specifies the regulations for its operations. Articles of association are considered as a constitution
of a company that stipulate the company’s internal affairs.

A good answer should refer to section 25 (2) of the Companies Act No. 10 of 2017 which provides that, “the
articles may contain restrictions on the business that the company may carry on. ” Section 25 (3) of the same
Act further provides 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.”
 TOPIC 2: COMPANY FORMATION: SAMPLE EXAM QUESTIONS

SUGGESTED ANSWER - CONTINUED

Students must also refer to section 26 of the Companies Act which provides for the contractual effect of articles
of association. The articles of association constitute a contract or covenant, which binds each member to the
company on one hand and each member on the other as well as between the members inter se. The Articles
bind members only, i.e. members in their capacity as and not in any other capacity. In the leading case of
Hickman v Kent (1915) Ch. 881, the articles provided for resolution of disputes between members and the
company to be referred for arbitration. The plaintiff brought an action against the company against the removal
from the company. The court held that the plaintiff was bound by the clause in the articles, which bound him
to refer the matter to arbitration as opposed to instituting legal action.

It must also be pointed out that since the articles of association are an important part of the company ’s
constitution, their amendment is regulated by the Companies Act. Section 27 (1) of the Companies Act provides
that a company may amend its articles by passing a special resolution.
 TOPIC 2: COMPANY FORMATION: SAMPLE EXAM QUESTIONS

SUGGESTED ANSWER - CONTINUED

Thus, relating the law to the facts in the question, the general principle is that where the articles limit the
powers of the company in a general meeting, such articles cannot be disregarded even by the majority
sufficiently large enough to alter the articles. A formal alteration must be made in accordance with section 27
(1) of the Companies Act. The case of Imperial Hydropathic Hotel C., Blackpool v Hampson [1882] 23 Ch D 1
is a relevant case.
 TOPIC 3: RAISING CAPITAL

Learning Outcomes:

1. Define share capital

2. Explain the difference between a public and private company vis a vis capital
raising
3. Be conversant with the methods of raising capital from the public
4. Explain of the rules on maintenance of capital
5. Define forms of capital raising such as debentures and be able to state the place of
charges within that context
 TOPIC 3: RAISING CAPITAL

• In company law capital is used in a restricted technical sense as cash (or less often
the value of the assets) received by the Company from investors who subscribe for
the company’s shares.

• The Company’s capital in this technical sense is measured in terms of ‘value

received’ into the company, rather than the current value of assets themselves, since
that will change with the business activities of the company.

• The value of the company’s legal capital is likely to be far less than the total value of
the company’s assets.
 TOPIC 3: RAISING CAPITAL-ATTRACTING AND PROTECTING
SHAREHOLDERS AND CREDITORS
• The interplay between the rights of the shareholders and the rights of
creditors is critical to the success of companies as business entities.
• Since a company is a separate entity claims of the company’s creditors
must be met from the company’s assets.
• The shareholders capital contributions mitigate the risks to which the
creditors are exposed.
• But if the shareholders are to be attracted to this form of investment,
then there must be appropriate protections for their rights and
appropriate limitations on their obligations.
 TOPIC 3: RAISING CAPITAL-ATTRACTING AND PROTECTING
SHAREHOLDERS AND CREDITORS
Shareholders

• Limitations on the issue of new shares, so that shareholders ’ interests in the company are not
unacceptably diluted (pre-emption rights (section 144 of the Companies Act) and limitations on
the Directors powers of allotment (section 149 of the Companies Act).
• Protection against misleading inducements to purchase shares (section 212 (a) of the
Companies Act).
• Protection of financial rights attached to shares (including protection of class rights).
• Protection of shareholders’ established and agreed relationships with the company (e.g. control
over changes to the constitution of the company).
• Protection of shareholders influence over potential success of the company (e.g. control over
Management).
 TOPIC 3: RAISING CAPITAL-ATTRACTING AND PROTECTING
SHAREHOLDERS AND CREDITORS
Creditors

Normal rules of contract law and security law provide much of the protection. In this context we
focus on special protections associated with acquisition and treatment of company capital.

• Rules require the company to have a certain minimum level of capital before it begins trading
(Banks, Insurance Companies etc) (See SI 14 of 2019 of the Laws of Zambia).
• Rules designed to ensure that the amount of legal capital shown in the company records is in
fact received in full by the company.
• Rules designed to ensure maintenance of stated levels of legal capital by restricting the freedom
of companies to return assets to its shareholders.
 TOPIC 3: RAISING CAPITAL-SHARE CAPITAL

Section 139 (1) of the Companies Act states that a company other than a
company limited by guarantee shall have share capital. Part IX of the
Companies Act provides detailed provisions on how this share capital is
dealt with. This is from alteration to payment of dividends to
shareholders.
 TOPIC 3: RAISING CAPITAL-NOMINAL OR PAR VALUE
SHARES
The Company’s (Fees) Regulations, Statutory Instrument 15 of 2019 prescribes the minimum
nominal capital for different companies, set in fee units which are determined by the Minister of
Finance. Currently the fee unit is 0.30 ngwee (Fees and Fines Act Cap 45, The Fees and Fines (Fee
and Penalty Unit Value) (Amendment) Regulations SI 41 of 2015). The division of the share
capital into shares to each subscriber is the par value.

Once the company has stated its par value, shares must never be sold below the par value. When
you divide the share capital into shares of a fixed amount of say K1 or K5, the shares will give rise
to par value or nominal value of each individual share.

Ooregum Gold Mining Co. of India Ltd v Roper & Wallroth (1892) AC 125
 TOPIC 3: RAISING CAPITAL-NOMINAL OR PAR VALUE
SHARES
Authorized or nominal share capital - This is the total amount of
authorized capital that the company is allowed to issue, and which is
stated on the form of incorporation. Authorized capital implies that the
company would not be permitted to issue shares in excess of the
authorised share capital unless it alters its authorised share capital.

Issued or allotted share capital – this is the capital which is actually issued
to members. It represents the nominal value of shares which are
appropriated to the shareholders.
 TOPIC 3: RAISING CAPITAL-ALTERATION AND REDUCTION
OF SHARE CAPITAL

Sections 140 and 150 of the Companies Act provide for alteration and
reduction of share capital respectively. In the context of how company
law views alteration and reductions of share capital, these are important
provisions to note since they provide stringent procedures by which a
company can achieve those ends. These are particularly useful safeguards
against abuse and they enhance creditor protection.
 TOPIC 3: RAISING CAPITAL-FROM THE PUBLIC

• Companies Act, Part X sections 208 to 224, sets out the legal
requirements that are associated with the public issue of shares or
debentures.

• This privilege of raising capital from the public is reserved for public
limited companies. However, under section 210(3) (c) of the Act, a
private company may be allowed to invite members of the public to
purchase its debentures under the supervision of the High Court.
 TOPIC 3: RAISING CAPITAL-FROM THE PUBLIC

Being a public limited company is not necessarily synonymous with

having every public limited company’s shares floated on the securities
market for purposes of sale to the investing public.

If a public limited company wishes to invite members of the public to

acquire shares in the company, it must first seek to be admitted on the
stock market, i.e. Lusaka Securities Exchange in the case of Zambia.
 TOPIC 3: RAISING CAPITAL-FROM THE PUBLIC

Ways of Raising Capital from the Public

• Floatation is that process of launching a public company by offering its shares to the
public. This can arise whether the company involved is a brand new public limited
company or is a former private limited company.

• A company can also raise additional capital by way of rights issues. A rights issue
arises by way of a company offering new shares to existing shareholders in
proportion to their existing shareholding.

• The other way would be by placing. A company identifies selected investors who
agree to take shares in the company.
 TOPIC 3: RAISING CAPITAL-THE PROSPECTUS

• The law imposes stringent requirements for a company to be allowed to have its
shares publicly in The Companies Act.

• The company is required to prepare a prospectus which must comply with Part X of
the Companies Act dealing with public issue of shares.

• Apart from compliance with Part X of the Companies Act, the company must comply
with section 75 and 76 the Securities Act No. 41 of 2016, in addition to the
prospectus.
 TOPIC 3: RAISING CAPITAL-THE PROSPECTUS & ITS
FUNCTION
• A prospectus is an invitation that a company makes to members of the public inviting
them to subscribe for shares in the company.

• The Securities Act No. 41 of 2016 requires any security of a public company which
is publicly traded or directly or indirectly promoted or advertised or offered for sale
to the public to be registered in accordance with the section 75 of the Securities Act.
• A prospectus 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 the purpose of making an informed assessment of the assets and
liabilities, financial position, profits and losses and prospects of the issuer of the
securities and the rights attaching to the securities (section 76 (a)).
 TOPIC 3: RAISING CAPITAL-THE PROSPECTUS & ITS
FUNCTION
The prospectus must also comply with the requirements of the Companies Act (section
212) and any directions issued and directed by the Securities and Exchange Commission
(SEC).

As section 211 of the Companies Act provides, an invitation to the public to purchase
shares or debentures in a public company or a proposed public company can only be
made if:

a) Within 6 months prior prepares and registers with the Registrar a prospectus
which must be in accordance with Part X of the Companies Act.
 TOPIC 3: RAISING CAPITAL-THE PROSPECTUS & ITS
FUNCTION

b) Every person to whom the invitation is made must be supplied with the
true copy of the prospectus.

c) Every copy of the prospectus must state on its face that it has been
registered with the Registrar of Companies.
 TOPIC 3: RAISING CAPITAL-THE PROSPECTUS & ITS
CONTENTS
Section 212 of the Companies Act sets out what should be contained in a prospectus. A
prospectus shall not be lodged with the Registrar of Companies unless:

a) It does not contain any untrue or misleading statements. The directors of the
company must ensure that;
b) It contains all information that prospective purchasers of the shares or
debentures and their advisers would reasonably expect to be provided in order to make a
decision on purchase; and
c) The prospectus must also contain all issues that are addressed by the Third
Schedule of the Companies Act.
 TOPIC 3: RAISING CAPITAL-MAINTENANCE OF CAPITAL

• So the Companies Act has provisions that ensure that the company’s legal capital is,
as far as possible, maintained in the company’s hands consistently with all the risks
associated with any business venture.

• In particular, these rules ensure that a company’s legal capital is not returned to the
members themselves directly or indirectly except as provided in the Act (such as
reduction of capital), or redemption or a repurchase of shares, which provides proper
safeguards for creditors and others who might be prejudiced by the diminution of the
company’s assets.
 TOPIC 3: RAISING CAPITAL-MAINTENANCE OF CAPITAL

Group Discussion Question 8

The doctrine of capital maintenance ensures that the company has raised the capital it
claims to have raised; and that the capital is not subsequently returned, directly or
indirectly, to the shareholders. Explain to what extent this has been achieved in Zambia.
 TOPIC 3: RAISING CAPITAL-DEBENTURES AND CHARGES

• Read Part XI of the Companies Act particularly sections 225 to 245 to have a better
understanding of this section.

• Apart from issuing shares, a company can also raise capital through borrowing. For
now we will just focus on corporate borrowing through debentures and debenture
stock. We will also examine the charges that a company would issue to creditors as
security for their lending.
 TOPIC 3: RAISING CAPITAL-DEBENTURES AND CHARGES

Debentures

A debenture is any document evidencing indebtedness of a company. Section 3 of the

Companies Act defines what a debenture is.

The Act extends the definition to include: a unit of debenture; debenture stock; and
bonds and any other securities issued by a corporation, whether or not they constitute a
charge on the assets of the company. It does not include every document of a routine
kind.
 TOPIC 3: RAISING CAPITAL-DEBENTURES AND CHARGES

Debenture Stock

• Debenture stock is money borrowed from a number of different lenders all on the
same terms.
• In effect, the lenders become a class of creditors and their rights are set out in a
document called a trust deed which would provide for appointment of trustees to
represent the creditors.
• Other terms include a list of events which would trigger enforceability of the
security, provisions relating to meetings of debenture holders and the transfer of
debenture stock.
 TOPIC 3: RAISING CAPITAL-DEBENTURES AND CHARGES

The legal nature of a debenture, relative to a share, is that the former

gives rise to a contractual relationship of debtor and creditor, coupled, if
the debt is secured on some or all of the company’s assets, with that of
mortgagor and mortgagee. In contrast with a shareholder, the debenture-
holder is not a member of the company having rights in it, but a creditor
having rights against it.
 TOPIC 3: RAISING CAPITAL-DEBENTURES AND CHARGES

Charges

• In the context of company borrowing, the most common form of charges as security
interests is the fixed charge and the floating charge.

• A charge is a security interest created in or over an asset or assets by their owner (the
“charger”) in favour of a creditor (the “charge”), by which it is agreed that that
property shall be appropriated to the discharge of a debt or other obligation. There is
no transfer of title.

• See section 3 of the Companies Act on how the Act defines a charge.
 TOPIC 3: RAISING CAPITAL-DEBENTURES AND CHARGES

Charges

The charges rights may be enforced by the sale of the property, if

necessary by court order; but in practice most security documents
expressly empower the charge to sell the property for this purpose without
recourse to the court. Legal charges are possible over some forms of
property, such as land, but not over personality.
 TOPIC 3: RAISING CAPITAL-CONCLUSION

• This topic was about how a company raises its capital. As we have
seen, there are principally two ways that this is done. Through equity
and through borrowing.

• Debt funding is not part of the company’s capital but equity funding is.

• The law treats the two types of funding differently.

 TOPIC 3: RAISING CAPITAL-PRESCRIBED FURTHER READING

Davies, L.P. Principles of Modern Company Law. Sweet & Maxwell. See Chapters: “Legal Capital and
Minimum Capital”; “Capital Maintenance”; “Debentures” and Company Charges” (Any latest edition)

Dignam, Alan and John Lowry. Company Law. Oxford University Press. See Chapters: “Raising Capital:
Equity and Its Consequences” and “Raising Capital: Debentures: Fixed and Floating Charges ”. (Any latest
edition)

Gates, Blankfein R. Gates on Understanding Company Law: A Conceptual and Functional Approach. 2018. See
Chapter: “Debentures and Charges”.

Sealy, Len and Sarah Worthington. Sealy’s Cases and Materials in Company Law. Oxford University Press.
See Chapters: “The Raising of Capital” and “Distributions and Capital Maintenance ” and “Borrowing,
Debentures and Charges”. (9th Edition or any latest edition)
CONCLUDING REMARKS