An introduction to company law in malawi

First, section 204 states that if there is an expressprovision in the contract which excludes the liability of the person who con-cluded the contract on behalf of a company before its in

University of Malawi

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TO COMPANY LAW IN MALAWI

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AN INTFODUCTION TO COMPANY LAW IN MALAWI

Directors' dutiesDirectors' remuneration ' .

Remedies against directorsLoan to directors

The board of directors

The filing of documents

The Memorandum of Association ' '

Alteration of the Memorandum

Articles of Association .

Relation of Articles to the Memorandum

Effect of the Articles

Lifting the corPorate veil

4 The management of a com

CompanymembershiP "" 49

Companymeetings """' 51

Noticeatgeneral meetings """' 53

Persons entitled to attend general meetings ' ' ' ' ' 56

The Company SecretaryThe Company Manager

7 CompanY liabilitYLiability through directors' acts ' .

Liability through the company secretary's actsLiability through the company manageds acts

protection

and directors' duties and minority

113 113

114

119

120

121 127

Common law excePtions ' .

Statutory excePtions

lssue and allotment of sharesShare distinguishing numberSlrare certificate

Share warrantShare trustClassification of sharesTransfer of sharesTransmission of shares bY lawOffering shares to the Public

Considerationforshares

'Fi

10 Maintenance of share capital 'ti

Prohibition of the return of capitalwhile the company is a going

24

92

9B

9927

33

38

38

3940

F;

4345

AN

Prohibition of financial assistance by a company for the purchase of

its shares

Prohibition of a company's acquisition of its ovrn shares

Redemption of redeemable shares

Payment of commission or discount on shares

Application of share premiums

Debentures and debenture stock

The issue of debentures .

The debenture trust deed .

Liability of the trustees .

Classification of debentures .

The issue of debentures at a discount

Security for debentures .

Registration of charges

Priority of charges

Satisfaction of a charge

Remedies for debentureholders

12 Company accounting records, accounts and financial reports i.

Keeping accounting records

Accounts

The directors' report

The company auditor's report

Circulation of accounts and reports

The annual return .

Shareholders who are absent from Malawi 188

14 Schemes of arrangement and take-overs

A scheme of arrangement or compromise under section 198 190

A scheme involving reconstruciion or amalgamation

An arrangement between a company and its members under section 263 .

An arrangement between a company and its creditors under section 266 .

Directors Compensation .

A take-over under section 201

15 Winding up and dissolution of a registered companCompulsory winding up by the court

Voluntary winding up by members .

Voluntary winding up by creditors .

Special provisions for the protection of creditors'and members'interests

Liability at members to contribute towards the settlement of debts ' ' .

Dissolution of a registered company

Pegistration requirements .

Obligation to state name

Regulations as to localdirectorsAccounting records and accounts .

Registration of chargesPublic invitation {or debentures and sharesCessation of business

143

149 150 150

151

152152

156 157

161

162

165 166 ln

j.

'^175

176178178

180 180

?-23

224235235

240

241

242243244244245245246

248

l

I

Ertinger v New Sombrero Phosphates 13' 14

EstmincoLtdvGreaterLondonCouncil """' 103

GeneralAuctionEstateLtdvSmith ""' 215GethingvKilner " 191

Gilford-MotorCoLtdvHorne ""' 46GlucksteinvBarnes """ 13

Hilder v DexterHolders lnvestment Trust Ltd, Re ' ' 145,207

39 137

Horbury Bridge Coal, lron & Wagon Co Ltd, Re ' ' 'Howard v Patent lvory Manufacturing Co Ltd

58 97

lndefund v Manguluti & Mangulutilndustrial Development Consultants Ltd v Cooley

159,168, 174

7384

Andreae v Zinc Mines of Great Britain 139

Anglo-African Shipping Co LtdvDharrap ' 194

Automatic Bottlemakers Ltd, Re ' ' 164

Automatic Self-Cleansing FilterSyndicatev Cunninghame .' 61

Baille v Oriental Telephone Company Ltd 102,208

Booth v New Afrikander Gold Mining Co Ltd 138

Boston Deep Sea Fishing Co Ltd v Ansell 73,211

Brazilian Rubber Plantations & Estates Ltd, Re ' ' 71

Carruth v lmperial Chemical lndustries Ltd 52,197

Centraf Associates Ltd, lnThe Matterof 211

8 - AN INTFODUCTION TO COMPANY LAW IN MALAWI

JohnShaw&SonsltdvShaw 62

Kumchenga lndustries Ltd, lnThe Matterof 174,210 Kushlerltd,Re .230

Labellndustries Ltd v SEDOM 16, 158 Leeds & Hanely Theatres of Variety Ltd, Re 14

Lennards' Carrying Co Ltd v Asiatic Petroleum Co Ltd 48,92 London Pressed Hinge Co Ltd, Re 168

LongmanvBath ElectricTramways Ltd 120

Macaura v Nodhern Assurance Co Ltd 43

MaceBuildersvlunn .: 228

Makinsvlbbotson .169

Mapanga Estates Ltd, ln The Matter of 108,211 Marquisof Bute'sOase,The .71

Mdinde Estate Ltd v Commercial Bank of Malawi Farm Services Ltd 171,174 MetalimpexvAGLeventisCoLtd .63

Metropolitan Coal ConsumersAssociationvScrimgeour 139

MeuxBreweryCoLtd,Re 144

MiddlesboroughAssembly RoomsCo Ltd, Re 210

MorrisvKansen .95

MosleyvKofyffontein 157

MoxhamvGrant 131,215 Musselwhite v CH Musselwhite & Son Ltd 55, 65, 114 Naidoo v Mazi lmport & Export & Tchongwe Nali Farms Ltd & Kholomana v National Seed Company of Malawi .

NationalBank, Re NFU Development Trust, Re Nyasaland Civil Servant Co-operative Society Ltd, Re Old Silkstone Collieries Ltd, Re 145

Ooregum Gold Mining Co of lndia v Roper 136

OxfordBenefitBuildinglnvestmentSociety,Re 141

PacayaRubber&ProduceCoLtd,Re .124

Palmer's Decoration & Furnishing Co Ltd, Re 155

Panorama Development Ltd v Fidelis Furnishing Fabrics Ltd ., 98

Parker&CoopervReading .60

AN INTRODUCTION TO COMPANY LAW IN MALAWI - 9 Parker-KnollLtdvKnoll lnternationalLtd 30

PatridgevRhodesiaGoldfields 154

Pendervlushington "."." 63 PercivalvWright "' 76 Potters Oils, Re " 231 RafsanjanPistachioProducersCo-operativevRice 46

RhyfieldvHands 39

Regal(Hastings)LtdvGulliver 73

RepvJack&Ferret ' 49

Richmond Gate Property Co Ltd, Re - 78,211 Roith(W&M),Re ".'.".72 Rolled Steel Products Holding Ltd v British Steel Corporation 94

Royal British Bank v Turquand ' 77,97 RubenvGreatFingallConsolidated 93' 95 SaltervleasHotelOoltd ".169 Savoy Ltd, Re 163, 194, 197,207,220 ScottishCo-operativeWholesaleSocietyvMeyer.' '105

seddonvNESalt """' 124 SEDOM v Gep Shoe Co Ltd & lndefund 164,217 ShearervBercain .140'214,215 Shuttleworth v Cox Bros & Co Ltd ' 39' 212 SidebottomvKershawLeesCoLtd ' : 41

Smith & Fawcett Ltd, Re ' 129 SmithLtdvAmpol PetroleumLtd .' 73

Smith, Stone & Knight Ltd v Birmingham Corp 47

Societe Generale de ParisvTramways Union Co Ltd 114

Spearhead Enterprises Ltd, lnThe Matterof ' 196, 199 Spencerv Kennedy 69' 208 Steenvlaw 133

Sussex Brick Co Ltd, Re 168,203 Syston &ThurmastonGas, Light&CokeCoLtd - - 115

Tesco Supermarkets Ltd v Nattrass 45, 92' 99 TiessenvHenderson 53'54'193 Transvaal Lands Co Ltd v New Belgium Co Ltd ' ' 74 TrevorvWhitworth 134

43

15

191

193

220

1O - AN INTRODUCTION TO COMPANY LAW IN MALAWI

UnangoEstatesLtd&ChigambavMichael .174

Underwood Ltd v Bank of Liverpool& Martin Ltd 44,98 UnitConstruction Co LtdvBullock 47

WallvExchangelnvestmentCorp 57

WallvLondon&NofthernAssetsCorp 56

WallersteinervMoir(No 1) 46

WallersteinervMoir(No.2) .132

WebbvShropshireColtd .156

WeltonvSaffery 136

WestCanadianCollieriesLtd,Re .55

WheatleyvSilkstone & Haigh MoorCoalCo Ltd 163

WhitelayvChallis .169

Woodroffes (Musical lnstrumenls) Ltd, Re 159,216 WorcesterCorsetryLtdvWitting .67

Yorkshire Woolcombers Association, Re 136, 158, 163

AN INTRODUCTION COMPANY LAW MAI AWI

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T'.'-,1ulu-F t' - E'',,y F:t p 7

Preface

L!1.*-,,J'7,,:.

' ( iJc G'ld

When this book was first published, the overriding idea was to provide a basic introduction to company law in Malawi to University and Malawi College of

Accountancy students in the light of the Companies Act, 1984 Because of that, many matters of detail and style were considered unimportant However it has become clear in the course of the book's usethat itcannotcontinue in its original form- both in terms of content as well as layout And it is for this reason that less than a year on, I have decided to have it reprinted

ln this reprint three major changes have been introduced First, is the omission

of any reference to the ultra vires doctrine lt is my view that the doctrine is a

historical relic which is of impofiance only to students of legal history Conse-quently I believe that there is no justification to continue devoting space to it in

a modern company law text book like this one Second, major parts of chapters

5, 6,7 ,8, 9, 10, 12-14 have been rewritten ln fact whole chunks have been expunged from chapter 12 This is because in the light of my book entitled COMPANY ACCOUNTING LAW lN MALAWI, I feel that they need no longer be

to the book The result therefore is that the book is now better than when originally presented to the reader

financially supporting production of this edition I am also greatly indebted to Ralph Mhone (Assistant Company Secretary for Brown & Clapperton) for drawing my attention to matters which I had overlooked in the first publication Special mention should also be made of to my third year students over the last three academic years for contributing in no small measure to the evolution of this book

O{ course although I share the pleasure of producing the book with all these people, any shortcoming in the exposition of the law is entirely mine

CHC, Chichiri, July, 1991

."4

12 _ AN INTRODUCTION TO COMPANY LAW IN MALAWI

business is carried on The reason tor choosing it rather than the f irst two, is thedesire (inspired by advantages, such as limited liability, which will emerge in

later chapters of the book) to carry on the business through an organisationwhich has an independent personality ln other words, the idea behind thechoice will be to have the business run by an organisation which is distinct f rom its own membership and management and which, therefore, trades in its ownright

Such a business entity has been recognised for many years The law not onlyallows its creation but also confers on it the capacity of a natural person Asshown more fully in Chapter 3, an incorporated company has perpetualsuccession Besides, subject to limitations inherent in its corporate characier,

it has full legalcapacity to employ and dismiss people, buy and sellgoods andservices, contract debts and other forms of legai liability, and own property ofall kinds Moreover, it can be bought and sold

nascent company They will hold money or property for it; make statements in

respect of rnvitations for its shares and debentures; acquire property for its use

activities create opportunities for the abuse of that position And to prevent thatabuse, both the Companies Act and the common law impose duties on anyperson who can be described as a'promoter'of a company

Now although the Act uses the word 'promoters' in Sections 60(4), 173(2) (c)

(ii)and299 (1), itdoes notdefinetheword However, atcommon law, apromoter

is the person who takes or participates in taking, steps necessary for theformation of a company and to set it on its feet As Cockburn C.J said in

Twycross v Grant (1877):

(tt \

AN INTBODUCTION TO COMPANY LAW IN MALAWI -

"A promoter is one who undertakes to farnr a company with reference to a

given praject and to set ii going, and who takes the necessary steps to

acco mpl i sh th at pu rpos e" ttl

Similarly, in the case of Erlanger v New Sombrero Phosphates Co (1878)

Lord Cairns L.C said:

"[Promoters] have their hands in the creation and rnoulding of the company;they

have the power cf defining how, and when, and in what shape, and under what

supervision, it shall start into existence and begin to act as a trading

corpora-tion" r2t

ln other words, a promoter wili conceive the company and its business, find

directors for it, make invitations {or its shares, pay its preliminary expenses and

do other things to ensure that it is ready to operate immediately after

incorpo-ration He may later become either director or member of the company Of

cgurse a legal practitioner who handles legal technicalities of the formation

process is not a promoter This is because he is employed and paid to do that

job On the other hand, the person who engages him will be a promoter

1.1.1 Duty not to make secret prolits

A promoter owes a fiduciary duty to the company he is forming As a result of

that duty, he is not allowed to make any secret profit from any transaction

between him and the company lf he makes such a profit, he must disclose it to

an independent board of directors or to the company's existing and future

shareholders Should he failto do that, the company can compel him to account

for the profit to it in the case of Gluckstein v Barnes (1900)t31 a syndicate

bought property for t140,000 and resold it at e 1 80,000 to a company which had

the company disclosed the sum of f40,000 earned on this sale as the only profit

made by the syndicate on the deal lt tailed, however, to disclose that a further

profit of t20,000 had been made by the syndicate from the sale of charges on

the property which it had earlier bought at a discount and for which it was repaid

bound to pay to the company the secret profit of !20,000

lf the profit is made from a sale by the promoters to the company, the latter will

also be entitled to rescind the contract of sale This will involve refund of the

purchase price and return of the property sold ln the case of Erlanger v New

1,

'1

14 - AN INTROOUCTION TO COMPANY LAW IN MALAWI

Sombrero Phosphates Co Ltd (1826;trl the appellants formed a syndicate

which bought the lease of an island at f55,000 Subsequently, the syndicate

created a company to which it resold the lease at t1 10,000 No disclosure was

made of the profit made by the syndicate on the deal lt was held that the

company was entitled to rescind the contract of sale

of their fiduciary duty This is illustrated by the case of Re Leeds and Hanley

Theatres of Variety Ltd (1902;tst ln this case a company acting through its

nominee, bought hallsfort24,000with the intention of re-selling them to another

company which it was intending to form When this company was formed, the

halls were sold to it at e75,000 A prospectus was later issued by the new

company which showed the nominee as the seller oJ the halls but did not

disclose the first company's interest in the sale or the profit made out of the

transaction lt was held that because of the failure to make the disclosure, the

first company was in breach of its fiduciary duty for which it was liable to pay

damages to the second company

It should be noted that the fiduciary duty exists as long as the promotion

continues ln other words, it will not cease simply because subsequent to the

commencement of the promotion but before its completion, the p.romoter

becomes director or member of the company Similarly, if the process includes

the setting up of the company as well as procurement of its working capital, the

duty may continue even after the company has been incorporated

1.1.2 Liability under pre-incorporation contracts

Apart f rom breach of the fiduciary duty, a promoter may also be liable because

of what are called 'Pre-incorporation Contracts' These are contracts entered

as premises, office equipment and vehicles, which it will need to operate after

incorporation Since the company will be non-existent at the time of such a

contract, it will obviously not be a party to the contract Therefore, applying the

general principles of contract law, it cannot sue or be sued under the contract

This is re-enforced by the law of agency which states that where a person

purports to enter into a contract on behalf of a principalwho is non-existent, the

latter cannot, on coming into being, ratify that contract Consequently, it is that

purported agent who will be liable to discharge the liability created by the

contract

These principles of law have been incorporated into the Companies Act.

I I

J

t

AN INTROOUCTION TO COMPANY LAW IN MALAWI

the name of or on behalf of a company before incorporation will be personallybound by the contract and be entitled to its benefits The application of thisprovision is illustrated by the case of Nali Farms Ltd & Kholomana v NationalSeed Company ot Malawi (1 9Ba1.tot 11.re the second plaintiff who was the soleowner of Nali Farms bought chilli seed from the defendant Subsequently, he

formed a company, the first plaintiff of which he was the major shareholder a.nd

director, which took over all the assets of the farm When the seed turned out

to be defective and caused loss of profit through poor yield, the second plaintitf

was whether or not the plaintiff company could sue on the contract between him

and the defendant lt was held that it could not because as Mbalame, J said:

be entitled under contracts purported to be made on its behalf prior to itsincorporation lndeed ratification is not possible when the ostensible principaldid not exist at the time when the contract was entered into."

There are, however, two exceptions to this rule which apply to written incorporation contracts only First, section 20(4) states that if there is an expressprovision in the contract which excludes the liability of the person who con-cluded the contract on behalf of a company before its incorporation, then he willneither be bound by the contract nor be entitled to the benefit of it Clearly, thisgives the promoter who is negotiating a contract on behalf of a company which

pre-he intends to form a strong incentive to insist on the inclusion of a clause in thecontract terminating his liability, preferably as soon as the company is incorpo-rated The effect of that clause will be to put the company in his shoes so that

it is liability as if the contraci had been concluded by it Second, under Section20(2), a company is allowed to adopt a written contract concluded on its behalfbefore it came into existence Of course the contract must be adopted within a

reasonable time after the company's incorporation The adoption may be

express or implied frorn conduct which signifies intention on the part of thecompany to be bound by the contract

There is, however, one disadvantage here For, although one of the quences of the company's adoption of the contract is to release f rom liability thepromoter who concluded it on the company's behalf, the other party to thecontractcan havethatliability re-instated Section 20(3)givesthe partythe right

conse-to apply to court for an order which either:

16 - AN INTRODUCTION TO COMPANY LAW IN MALAWI

(a) makes the company and the promoter jointly and severally liable for thecontract or

(b) apportions liability for the contract between the company and thepromoter

Thus, it will be clear that the only way whereby a promoter can conclusivelyescape liability for a contract concluded on behalf of a company which he is

promoting is to have a dause inserted in the contract which terminates his

liability under the contract as soon as the company comes into existence

It should be noted that section 20(1) applies to a contract concluded by a

promoter on behalf of a company which is not yet incorporated lt is not

concerned with a contract negotiated by him and concluded by the companyimmediately after its incorporation This seems to have been the view of the

lndustries borrowed K9,000 from the defendant to import business equipment.However because of a currency devaluation, the money proved inadequate.Consequently, he approached the defendant for a further K1 1 ,000 which he wasgranted on the condition thatthe business should be incorporated into a limitedcompany After that was done, the company signed the loan agreement for theK20,000 adanced ltwas held thatthe company should be regarded as the other

had actually negotiated it.

Besides, since subsections (2) and (a) apply to written pre-incorporation

under the contract nor will the company (after being incorporated) beable to ratify it As a result only the promoter who concluded the contract

1.1.1.3 Liability under section 299(1)

A promoter may also be subject to civil liability under this provision if in thecourse of the company's liquidation, the liquidator or any creditor or member of

the company applies to the court to enquire into his conduct because it appearsthat during the formation or promotion of the company, he

(a) misapplied or retained the company's money or property;

COMPANY LAW IN MALAWI 17

(b) became liable or accountable for such money or property;

(c) was guilty of misfeasance or breach of trust or duty in relation to thecompany

lf the wrongdoing is proved, the court can compel him to repay or restore themoney or property or pay such compensation to the company as the courtdeems just

1.1.1.4 Liability by virtue of section 22(1)

As shown in para 2.1 .2, where a company enters into a contract which is

within any restriction imposed on its business or outside its objects, thecontract can be prohibited by the court on application by any one of thecompany's members or holders of a debenture secured by a f loating charge

on the company's assets Arguably this means that a promoter should not

company after its incorporation be prohibited by the court, he may end up

shouldering liability under the contract

1.1.1.5 Liability for statements in a prospectus

lf a promoter issues a prospectus in respect of the shares or debentures of thecompany he is forming, he must ensure that statements made in it are correct

criminal liability

1.2 lncorporation

It must be clear from the opening paragraph of this chapter that a company'spersonality is a creature of the law ln other words, it acquires the personalitythrough a legal process

incorporated under the Act' As this def inition shows, a company is born

The incorporation procedure is laid down by the Act itself section 4 providesthat:

18 _ AN INTRODUCTION TO COMPANY LAW IN MALAWI

"Anytwo or more persons associated for any lawfulpurpose may by subscribing

the i r name s to a m e mo rand u m of associ atio n and othe rw i se co mpl y i ng w ith th e

requirements of this Act in respect of registration form an incorporated pany"

com-Thusthe process of incorporation beginswith the memorandum of association.More is said about it in the next chapter Here suffice it to say that thememorandum is the company's constitution which contains rules governingmostly its corporate structure This document must be prepared in accordancewith the form in Table B or C of the First Schedule to the Act depending on

whether the company is limited by shares or guarantee.tsl

Thereafter, those who are associating to form the company must subscribe theirnames to the memorandum As Section 4 shows, there must be at least twosubscribers, clearly indicating that a company must have a minimum of twomembers According to Section 7(1), the subscription involves signing of thememorandum by the subscribers in the presence of a witness who attests eachsignature Once that is done, the memorandum must be delivered to theregistrar for registration tel either on its own or together with articles ofassociation A document which must accompany the memorandum is a

statement in the prescribed form which

shows:-the full name, residential and postal address, and the occupation of each

of the company's frrst directors;

the {ull name, resrdential and postal address and the occupation of thecompany's secretary; and

(c) the situation and postal address of the company's registered office tl0lAccording to Section 1 4(3), this stalement must be signed by or on behalf of thesubscribers Besides, it must contain a signed consent to act by the directorsand secretary

However, these documents will not be deemed to have been delivered to theregistrar for registration unless the appropriate registration fee is paid le Ii6.ttt)

Consequently, they must be accompanied by the fee The Schedule to theCompanies (Fees) Regulations of 1986 provides that the registration fee for a

company with a share capital together with its memorandum, articles (if anyand all accompanying documents), is K65 plus K35 for the lirst K1 ,000, and

(a)

(b)

-AN INTRODUCTION TO COMPANY LAW IN MALAWI - 19

K10 for each additional K2,000, of that capital On the other hand,for a

company limited by guarantee and all its registration documents, the fee is

a flat figure of K100

to it a'designating number' This will be used to identify the company if for anyreason it has no registered name The registrar is also required to issue to thecompany a certificate of incorporation t12l which will be conclusive evidence thatall the requirements of registration have been complied with and that thecompany is duly registered t131

1.3 Classification of companies

1.3.1 Limited and unlimited companies

A registered company may be limited or unlimited According to Section 5(1)(c),

an unlimited company has no limit on the liability of its members What thismeans is that if the company is wound up with debts, its members will be

personally responsible to discharge those debts without any limit on theirliability.lnthecaseof alimitedcompanyontheotherhand,theamountof capital

him and the company As a result, he cannot generally be required to payanything towards the company's debts except the fixed agreed amount

1.3.1.1 Conversion of a limited company to an unlimited company andvice versa

A limited company can be converted to an unlimited one and vice versa.Sections 25(1)and 26(1)providethat acompany limited by shares orguaranteecan be converted into an unlimited company Similarly, an unlimited company

that to happen, two conditions must be fulfilled First, all members of thecompany must give a written consent to the conversion and the company must

following documents must be delivered to the

registrar:-(a) the company's certificate of incorporation;

(b) a copy of the new memorandum and articles;

(c) a copy of the special resolution sanctioning the company's adoption of

these two documents; and

20 - AN INTRODUCTION TO COilPAI'lY LAW lN llALAWl

(d) a statutory declai'ation by the company's directors and secretary conf irming

that the company has fulfilled the two conditions mentioned above.l'nl f ,,: i.

Apparently an unlimited company cannot be converted into a limited one unless

requirements in the case of such a conversion First, the statutory declaration

company is solvent Second, the four documents listed above must be

accom-panied by a certif icate by the company's auditor(s) certifying that the company

has been investigated, and that it is solvent (

Jr-After the registrar receives these documents, he must issue a new certificate

of incorporation to the company which reflects the change of status

1.3.2 Gompanies limited by guarantee and those limited by shares

The iimit on the liability of company members may take two forms, depending

on whether or not the company has contributed capital lf it has contributed

capital, the members' liability will be limited by shares Section 5(1 )(a) provides

to the amount, if any, unpaid on the shares respectively held by them The most

common way whereby a company raises capital is to issue shares to its

members Each share is assigned a nominal value which a member may pay

in full or in part Where acompany is limited by shares, the liability of its members

forthe shares, theycannot, on the company's winding up, be askedto contribute

to the repayment of any debts incurred in its business operations

But instead of a share capital, a company may simply get a promise from each

member to contribute a fixed amount, if necessary, to pay the company's debts

on winding up Such a company will be limited by guarantee and, therefore,

cannot by virtue o{ Section 5(6), create or issue shares The liability of the

members of such a company will be limited to the amount which they have

respectively undertaken to contribute towards the settlement of its debts on':)

winding up ttsl Sorrnis reason acompany limited byguarantee cannot have any

contributed capital until it is wound up Accordingly, it will be ideal for a non-profit

by guarantee with the object of carrying on profit-making business lf this

prohibition is contravened members and off icers of the company who are aware

of the contraventron will be jointly and severally liable to pay the debts which the

company incurs while carrying on the profit-making business

r'l',i.",

L

/

3.

4.

AIiI INTRODUCTION TO COMPANY LAW IN MALAWI - 21

1.3.2.1 Conversion of a company limited by shares to a company limited

by guarantee

Again, a company registered as limited by shares can be changed into a

company limited by guarantee.liT,t"r the conversion to be effected:

1 The company's shares must be fully paid up;

Each member of the company must agree in writing to the conversion and

to voluntarily surrender to the company for cancellation all shares held byhim immediately before the conversion;

A new memorandum and articles appropriate to a company limited byguarantee must be adopted by the company; and

Each member must agree in writing to contribute to the assets of thecompany, in the event of its being wound up with debts, such sums as may

be required,

lf these conditions are satisfied, the company must deliver the following:the company's certificate of incorporation;

a copy of the new memorandum and articles;

a copy of the special resolution whereby the company adopted thesedocuments;and

(d) astatutorydeclaration bythe company's directors and secretaryconfirmingthat the four conditions listed above have been complied with

1.3.3 Public and private companies

Another distinction drawn by the Act is between a public and a private company.Section 5(5) defines a'public' company as 'any company other than a privatecompany' According to Section 5(3), a'private'company is one which by its

memorandum or articles :

restricts the right to transfer its shares, if any;

limits the total number of its members, t14 to 50 and

22 - AN INTROOUCTION TO COMPANY LAW IN MALAWT

(c) prohibits the company to invite the public to acquire any of its debentures or

shares

Should a private company failto comply with any of these three requirements,

it willcease to be entitled to the privileges and exemptions conferred on it by theAct Some of these privileges and exemptions are:

Where a private company alters its memorandum under Section 10(1),

subsection (4) shows that any of its members and debentureholders or

their trustees who may have been given notice of the alteration undersubsection (2) can apply to the court under subsection (3) to have thealteration annulled However where the company is a public one and theapplicants are not trustees of holders of debentures secured by a floatingcharge on the company's assets, then they must hold at least 5% of thecompany's issued shares or debentures secured by a f loating charge overits assets t18l

For a private company to be converted into a public company, it requires

a mere special resolution which alters its articles so that they no longercomply with Section 5(3) ,tl,tlQn the other hand, under Section 27, lheprocess for the conversi6rioiHilublic company into a private one is ratherelaborate

Under Section 182(1) (b), a private company is exempted from therequirementto send to its members a report of rts directors on its profit and

loss account and balance sheet

4 A private company is not obliged to accompany the annual relurn required

by Section 181(1)with every profit and loss account and balance sheetcirculated to its members and debentureholders during the period to whichthe return relates t2ot :l l.i 7 l:

1.3.3.1 Gonversion of a public company to a private company or viceversa

Section 27(1)provides that a public company can by special resolution be

converted into a private company after compliance with allthe provisions of theAct governing private companies Similarly, under Section 28(1) after compli-ance with the requirements of the Act in respect o{ public companies, a privatecompany may be converted into a public company by special resolution.lndeed if a private company alters its articles by special resolution so that they

2.

3.

AN INTFODUCTION TO COMPANY LAW IN MALAWI - 23

no longer comply with Section 5 (3), the company will be deemed to havebeen converted into a public company Then within 21 days of passing theresolution the company must send a copy of it and the company's certif icate

of incorporation to the registrar Where the conversion is from a publicoompany to a private one, the company must accompany these documentswith a statutory declaration by its directors and secretary that Section 27(1)has been complied with On the other hand, where the company is beingconverted from a private company to a public one and the conversion takesplace at least 1B months after the company's incorporation, Sectioru2ffi)S2*i?

requires that there be delivered to the registrar a certif ied copy of each of thefollowing additional docu ments :-

'1 A balance sheet;

2 A profit and loss account;

3 Group accounts, if any

4 A director's report; and

5 The auditors' report circulated to the company's members in the precedingyear

After receipt of these documents the registrar will issue a new certificate ofincorporation to the company

1.3.4 External company

This is defined by Section 306(2) as a body corporate formed outside Malawiwhich establishes or maintains an established place of business in Malawi.According to Section 306(3) 'established place of business' includes any fixedplace of business except an agency unless the agent has general authority tonegotiate and conclude contracts on behalf of that body corporate or maintains

a stock of its goods from which he regularly fulfils orders on its behalf Externalcompanies are discussed more fully in chapter 16.

1.3.5 Holding and subsidiary companies

Lastly, the Act distinguishes between a holding and a subsidiary company.Section 2 provides that a company is a holding company of another company

or body corporate if the latter is its subsidiary According to the SeventhSchedule to the Act, a holding company is a rnember of its subsidiary and

24 - AN INTRODUCTION TO COMPANY LAW IN MALAWI

1 can appoint, remove or prevent the appointment or removal of at least half

of the latter's directors; or

2 holds more than half of the nominal value of the latter's equity share

caPital.t2ll

Besides, a company will be a subsidiary of another company if it is a subsidiary

ol the latter's subsidiary

Although a holding company relates to its subsidiary in the manner describedabove, the two have legal personalities which are distinct from each other ln

Banda v Cilcon 2'?the plainti{f was employed by the defendant as an accountsclerk However he also worked in the accounts ol the defendant's subsidiary.Subsequently K5,000 was discovered missing from the subsidiary's office.Becausethe plaintiff wasconsidered aprimesuspectforthetheft, thedefendant'semployees took him to the Police Besides, he was later dismissed from his job

ln an action against the defendant for wrongful dismissal, it was held that thedefendant and the subsidiary were two distinct legal persons and that since themoney stolen belonged to the latter, the de{endant had no just cause fordismissing the plaintiff

As shown in Chapter 2, a holding company must prepare group accounts whichgive a true and fair view of its profit or loss and state of affairs as well as those

of its subsidiaries Fu rthermore, its directors' report must show its state of affairsand those of its subsidiaries, as a group Finally, Section 57(1) restricts a

subsidiary's membership of its holding company and renders void a company'sallotment or transfer of its shares to its subsidiary

1,4 The filing of documents

obligations which law imposes on companies is the filing of certain documentswith the registrar The first document which must be filed is the memorandum

tothe registrarfor registration acopy of everyspecialresolution which it passes,statutory declarations that certain requirements have been satisfied, financialaccounts and any new memorandum and articles which it may subsequentlyadopt as a result of a change in its corporate structure lt will be seen later that

a registered company must also register charges which it creates on its

property, a return of any allotment or transfer of its shares and an annual returnwhich gives certain information about the company during the year to which it

relates

COMPANY LAVV IN MALAWI - 25

The objectof this requirement isto furnish the registrarwith as much informationabout the company as possible and to apprise him of any changes in its

corporate and financial structures But apart frorn that, the filing of thesedocuments also acts as a means of disclosing information aboutthe company'saffairs to the generai public This is because Section 329(1) allows any person

to inspect any document registered by the registrar under the Act - of courseupon payment of the appropriate inspection fee.

lnformation contained in these documents will be useful to prospective

or shareholders lt will enable them to assess the company's performance andviability, and therefore, facilitatethe decision asto whetheror notthe investmentwould be profitable Other members of the public who wish t<l have businessdealings vrith the company will also find this information useJul.

Previously, the rule was that mere filing of a document with the registrar gaveccnstructive notice to the general public of not only the document itself but alsoits contents ln other words, a person was deemed to have notice of thedocument and what it contained, irrespective of actual knowledge of them,simply because the filing put the document in the public domain However, thatrule has now been repealed by the Companies Act Section 343 provides that

no person will be affected by or be deemed to have notice or knowledge of theexistence or contents of a document concerning a company by reason only that

the document has been registered with the registrar or is available for inspection

at any office of the company or elsewhere by virtue of the Act.

26 - AN INTRODUCTION TO COMPANY LAW IN MALAWI

21 The expression 'equity share capital' generally refers to ordinary share

refer to deferred share capital

22 Civ cas 2BG119B7.

Every organisation usually has a constitution which governs the way it is run.

The constitution will spell out the organisation's objects and explain how it willobtain funds necessary for the achievement of those objects Besides, it willcontain rules on the organisation's management and membership, and thedivision of decision-making powers between the two Finally, the constitution

how its meetings are to be conducted ln the case of companies, this function

is performed by the memorandum and afiicles, of association lt is with thesetwo documents that this chapter is concerned

According to Section 6(1), the memorandum of a company limited by shares

it must state:

1 The name of the comPanY;

2 The restrictions, if any, imposed on the business which the company cancarry on;

3 The amount of share capitalwith which the company is registered, and thenumber of shares into which the capital is divided;

4 Where the shares are divided into two or more classes, the rightsprivileges, restrictions and conditions which attach to each class;

5 Whether the company is private or public;

6 That the liability of its members is limited; and

7 The full name, address and occupation of each subscriber to the randum

memo-Almost simiiar information must be contained in the memorandum of an

unlimited company and a company limited by guarantee of course, ally, the memorandum of a company limited by guarantee must show themaximum number, if any, of members with which it proposes to be registeredand state that:

addition-1 lts income and property will be appiied solely towards the promotion of its

objects;

2 Each member undertakes to contribute to its assets in the event of its

being wound up while he is still a member; and

3 Upon its winding up and after the discharge of all its debts and liabilities,any property which remains will either be transferred to another companylimited by guarantee which has similar objects or be applied to somecharitable object

Besides, whereasthe memorandum of acompany limited by shares mustshowany restrictions imposed on the business which the company can carry on, thememorandum of a company limited by guarantee must state the nature of theobject(s) for which the company is formed And in the case of limited and

unlimited companies, Section 7(2) requires that each subscriberto the randum must write opposite his name the number of shares for which he

memo-subscribes

2.1.1 The company's name

Just like a natural person, a company is normally identifiable by name smaliwonder, therefore, that the memorandum must show the name whereby thecompany seeks to be registered However, there are some legal restrictions on the choice of the name under which a company can be registered The registrar

.f.lf?p, undesirable.Itl Similarly, if the Minister is of the opinion that the name underwhich a company is registered is misleading or undesirable, he can direct thecompany to change itJ2t e i"7 ,i'

Moreover, certain business names require registration under the BusinessNames Registration Act Section 4 of that Act provides that a corporation which

AN INTRODUCTIO}I TO COMPANY LAW IN MALAWI - A /

.;i

has a place of business in Maiawi and operates as a nominee or trustee of any

person or corporation or acts as general agent for any foreign firm, mrrst be

registered under the Act lf its name contains any expression or implication of

the approval, patronage or sanction of the President, the government or anygovernment officer, the registrar cannot register it without the approval of the

by licence that the company be registered without the addition of the word'Limited'to its name.

2.1.1.1 Publication of name

Section 130 requires that every company should publish its name ln practice,this means that it should:

(a) paint or affix the name in easily legible Floman letters above or adjacent

to the main entrance to its registered office and to every office or piace

in which it carries on business; and

(b) have the name accurately mentioned in the same type of letters in all its

business letters, invoices, receipis, notice or other publications and all

negotiabie instrumenis or order for money, goods or services purporting

to be signed or endorsed by or on its behalf

Its seal must also bear the name in legible Roman letters tsl * t ll t l',

According tc Section 130(3), il any officer of a company signs or endorses a

negotiable instrument or an order for money, goods or services on behalf of thecompany without accurately mentioning ihe company's name on the instrument

or order, he will be personally responsible to discharge the liablilty therebyincurred Of course this responsibiliiy will not arise if the liability is dulydischarged by the company lndeed even if he is liable, he can ciaim an

indemnity from the company ln Rafsanjan Pistachio Producers tive v Rice sathe plaintiffs who obtained a default judgement against a cornpanyreached a compromise with it whereby it paid them five post-dated cheques.The defendant director signed the cheques on behalf of the company

Go-opera-30 - AN INTRODUCTION TO COMPANY LAW IN MALAWI

However there was no mention of the company's name on the cheques or thecapacity in which the defendant signed them lnstead the cheques simplyshowed the company's bank account number lt was held that since thecompany's name did not appear on the cheques, the defendant was personally

they created

2.1.1.2 Change of name

A company may change its name under the companies Act either by a special

si ( fesolution approved in writing by the registrar t6l or if directed by the Minister to ,ii,'do so because the name is misleading or undesirable mwhere the change ismade in the first way, the company must within 21 days of passing tireresolution, deliver to the registrar a copy of it and the company's certificate of

t; ;;,'' incorporation tsl The registrar will then enter the new name on the register and

1 , *ralteration to which it relates tel Of course, this change will not affect thecompany's rights or obligations or render defective any legal proceedings

;;,i;r, brought against it in its former name.tlol

2.1.1.3 Passing-off

A problem related to a company's name which may occur is that of passing off .This will be the case where in order to take an unfair advantage of anotherperson's business goodwill, a company conducts itsbusiness in such a way as

to mislead the general public into taking it as that of the other person Usually,

a company passes off by operating under a name which so closely resemblesthat of another business as to make confusion of the businesses likely Wherethat happens, the offended business may seek an injunction to prevent furthertrading under that name by the offending company The former may also bring

an action to recover damages for any profit lost as a result of the passing off.

It should be emphasized that these remedies will be available only if the twobusinesses are trading in the same line so that the offending company is in

effect taking advantage of the business reputation already established by the

both parties were manufacturers of furniture, the plaintiff being a well-knowncompany in Britain and the defendant, an American company which had justbegun operating in England lt was held that the defendants were guilty ofpassing off and the court granted an injunction to restrain them from continuing

to usef their name on their f urniture without distinguishing the f urniture f romthat made by the plaintiff company The court reasoned that the name applied

by the defendants to their furniture was such as to create a likelihood that a

AN INTRODUCTION TO COMPANY LAW IN MALAWI - 31

substantial section of the purchasing public would be misled into believing thatthe furniture was that of the plaintiff

2.1.2 The Business clause

It was stated in Chapter 1 that the distinctive attribute of a registered company

is its capacity to do business in its own name and right The extent of thatcapacity must be defined by the company's memorandum Thus, where thecompany is limited by guarantee, Section 6(2) requires its memorandum to

is limited by shares or unlimited, there is no such requirement ln that case what

is needed is simply a statement of whether or not the business which thecompany can carry on is subject to any restrictions r12l And if any restrictionsare imposed on the business, they must be enumerated in the memorandum

with unlimited business capacity For if no restrictions are imposed on thebusiness of such a company, it will be free to carry on any legal business which

it likes lt is perhaps because of this that subject to limitations inherent in thecorporate personality, every company registered in Malawi now has, and mustalways be deemed to have, the capacity of a natural person of full capacity tH:

l,t

Of course if the business of a company limited by shares is subject torestrictions, the company is not allowed to encroach upon those restrictions.Similarly, since every company limited by guarantee must state the objects forwhich it is registered, itwillnotbe allowedto carry on any business outsidethoseobjects This is because according to section 22(1):

"A company shatt not carry on any business or pursue any obiect or exercise

any power that it is restricted by its memorandum or articles from carrying on

or pursuing or exercising"

But transactions which contravene Section 22(1) will not necessarily be void.This is because the proviso to this provision States that an act of a company ortransfer of property to or by it will not be invalid simply because the act or transf ercontravenes Section 22(1) Thus subject to what is said below, such an act ortransfer is enforceable by or against the company

Section 22(2) allows any member of the company or the holder of anydebenture secured by a floating charge over all the company's property or

a trustee for the holder of any such debenture to apply to the court for an

t

:.

l

32 - AN INTRODUCTION TO COMPANY LAW IN MALAWI

injunction prohibiting the doing of any act or the transfer of property whichcontravenes subsection(1) To understand the significance of this provision, it

is important to bear in mind that creditors and shareholders put their money in

a company on the expectation that the money wiil not be dissipated on

unauthorised business activities Now what section 22(2) does is to give thesepersons the right to prevent the company from carrying on such activitieswherever that is feasible When this is read together with the proviso to Section22(1) what emerges is that a transaction which contravenes the businessclause of a company's mernorandum is voidable at the option of the company'sshareholders and creditors mentioned in subsection (2) But if they fail to avoidthe trarrsaction, the company can enforce it as if there is nothing wrong with it.

2.1.2.1 The third party and section 22

Successfulapplication by members orcreditors lorthe prohibition of aconnpanytransaction which c'cntravenes section 22(1) may prejudice the other party to

the transaction For clearly he cannot enlorce ihe transaction against thecompany Howeverthat hardship is mitigated by two lactors First, section 22(3)allows the court, once it has prohibited the transaction, to make any order as to

compensation or otherwise as it may consiCer equitable.' lt is argued that theeffect of this provision rs to allow the court not only to order restoration of thepadies to the transaction to their status qito anfe but also to award the third party(as long as he was unaware of the contravention of section 22(1\) damages forany loss he may suffer as a result of the prohibition Second, he can choose torecover the damages at common law from the company's directors on theground of breach o{ warranty of authority

2.1.3 Share capital

It will be recalled that it is allowed to form a company under the Companies Actwhich has no share capital as where the company is limited by guarantee For

capital, that must be shown in the company's memorandum Besides, thememorandum must indicate the amount of the capitaland how it is divided intoshares The point here is that once the amount of contributed capital that thecompany will need is fixed, that capital is then divided into parts called shares.The legal nature of a share wili be discussed in Chapter 9 However, here it is

enough to say that the capital with which a company proposes to be registered

will represent the aggregate cf ttre nominal values of shares which it is

authorised to issue Of course the actual share capital which the company doeseveniually have will depend on how many shares it issues

2.1.4 Type of company

Another thing which must be stated in the memorandum is whether thecompany will be registered as private or public As already noted, the companycan be i'egistered as one or the other Therefore, whichever of these two thesubscribers choose must be disclosed in the company's memorandum

2.1.5 Limited liability

The principal advantage which a trading company will seek to obtain fromincorporation under the Companies Act is limited liability Now since the Actdoes also allow the formation of unlimited companies, it should be indicated in

the memorandum that the liability of the company's members is limited Again,this disclosure will be vital to those who wish to contribute to the company'scapital For the source ol attraction to a person to invest in a cornpany as a

member is the fact that he will not be personally liable for its debts and liabilitiesbeyond a certain pre-determined figure when it is wound up Consequently, hewillwant to know that before he puts his money in the company

2.1.6 The Association clause

According to Table B of the First Schedule to the Act, the memorandum of acompany limited by shares is supposed to end with a clause in which thesubscribers express their wish to be formed into a company The subscriberswill also declare in that clause their agreement to take shares in the company

number of shares taken by each one of them Each subscriber must sign thememorandum in the presence of a witness who must attest the signature.ll{:; 7 t '

Once registered, the memorandum hastheeffectof a legalagreement Section

l Tsaysthat it hasthe effect of 'acontract undersealbetween the companyand

its members and between the members themselves' The terms of the contract

time to time More will be said about Section 17 later in this chapter However,

it should just be noted here that this contract is subject to the provisions of theAct relating to the company and its members

2.3 Alteration of the memorandum

Section 8(1) allows a registered company to alter its memorandum of tion The object of the alteration may be to remove any restriction imposed on

34 - AN INTRODUCT]ON TO COMPANY LAW IN MALAWI

the business which the company can carry on or to impose such a restriction

it may be, the alteration can only be made by special resolution, and in

accordance with the Act Furthermore, Section 8(2) provides that where a

memorandum contains provisions restricting or excluding the company'spowers to alter it or imposing conditions for the alteration of the memorandum,then unless the company obtains the sanction of the court under a scheme ofarrangement pursuant to section 198, the memorandum can only be altered in

compliance with those provisions Moreover, even wherethe memorandum is

validly altered, the alteration will not be binding on any member without his

written consent in the absence of a scheme of arrangement pursuant to section

198, il its effect is to either:

(a) require him to take more shares in the company than those held by him

at the time of the alteration; or

(b) increase his liability to pay money to the company or

(c) increase or impose restrictions on his right to transler shares held by him

at the time of the alteration t151 t t',4\

And finally, section 8(5) prohibits a company to make an alteration of itsmemorandum which is in conflict with a court order under section 203 Thisorder is considered in detail in para.8.2.2

2.3.1 Procedure for the alteration of the memorandum

Section 8(1) merely grants the power to alter the memorandum; it does notprovidethe procedurewherebythe alteration may be made.Therelore, to knowthat procedure, resort must be made to relevant provisions of the Act

2.3.1.1 Alteration ol the company's name

As already stated, the company's name must be indicated in the company'smemorandum Consequently, change of that name will necessarily entailaltering the memorandum That alteration must be made in accordance withSection 19(3) which requires that the change be approved by the registrar and

be made by special resolution Then 21 days after passing the resolution, acopy of it together with the company's certificate of incorporation, must be sent

to the registrar who will enter the new name on the register in place of the oldone and issue a new certificate of incorporation to the company

AN INTRODUCTION TO COMPANY LAW IN MALAWI - 35

2.3.1.2 Alteration of the company's share capital

Alteration of a registered company's share capital may take more than oneform However, all the forms will inevitably involve alteration of the company'smemorandum Forthat reason, they must be carried out in accordance with theprocedure laid down by the Act Where the alteration is in the form of anincrease in the company's share capital beyond the registered amount, the

1 Increase rn the company's snare capllal Deyono Ine reglslereo amounl, Ine

I ;:, i:company must send notice of the increase to the registrar within twenty-one

| - days of passing the resolution authorising it tl6lAccording to section 66 (2), the

- notice must be accompanied by a copy of the resolution and must give

particulars of the class of shares affected by the increase and conditionssubject to which the additional shares have been or will be issued Nowalthough the increase, just like most company actions, must be sanctioned by

a resolution, the Act does not show the type of resolution needed Apparently

it is left to each company to specify that in its articles And according to Article

I r 7, Table A a mere ordinary resolution will suffice to increase a company's

share capital by issuing new shares

A registered company may also alter its share capital by either consolidating

and dividing the capital into shares of larger amounts, re-converting stock intoshares, subdividing its shares, redeeming redeemable preference shares or

>,.'r'r' cancelling unallotted shares trTlAgain, this must be approved by a resolution

(which according to Article 17, Table A is an ordinary resolution) ol the

):.- ' company in a general meeting t18l Then twenty-one days after passing the

resolution, the company must send notice of the alterationtothe registrarunderSection 65(1) The Act does not say whether or not a copy of the resolutionmust also be sent to the registrar under Section 65(1) However, it requires thenotice to specify the shares which have been consolidated, divided, subdi-vided, redeemed or cancelled, or the stock which has been re-converted

., , ;.'Lastly, share capital may also be altered by being reduced in any way, trelexcept the cancellation of shares which have not been taken or agreed to be

;_ *taken by any person t20l This type of alteration can only be made a special

resolution of the company Of course the resolution will not be etfective unlessconfirmed by a court order for which the company must apply under Section68(1) Besides, if the resolution sanctioning the reduction varies rights at-tached to any class of shares, it must comply with Section 48; otherwise it will

: , ' : be ineffective t2rl

' 2.3.1.3 Alteration of rights attached to any class of shares

It will have been noted above that alteration of a company's share capital may

(a)

(b)

(c)

36 - AN INTRODUCTION TO COMPANY LAW IN MALAW

take the form of varying rights attached to certain classes of shares According

to Section 8(1)(c) as read together with Section 67(3), such an alteration must

be made in accordance with Section 48 This provision stipulates two methodswhereby the variation may be made lf a company's memorandum expresslyforbids variation of the rights of any class of shares or provides the procedurewherebythe variation may be made and forbids anyalteration of that provision,then the variation can be made either:

in accordance with that provision; orwith the written consent of all members of that class; orwith the sanction of the court under Section 198.

Where, on the other hand, the memorandum is silent on this issue, the variationmay be made with either the written consent of three-quarters of the holders

of issued shares of that class or the approval of a special resolution passed at

a separate general meeting of those nolders*]fl But however the variation is

atfected, holders of at least 5% ol the issued bharels of the class allected canapply to the court for cancellation of the variatiqn,,Sltr!n that case, unless thevariation is confirmed by the coun, it will have no effect.t24l

For the purpose of this procedure, the creation or issue of further shares doesnotamounttoavariation of class rights On the otherhand, a resolution willvaryclass rights if its effect is to either:

1 diminish the proportion of the total votes exercisable at the company'sgeneral meeting by holders of the existing shares of a class or

2 reduce the proportion ol dividends or other distributions payable toholders of the existing shares of a class.Pstqrr\

or to alter objects for which it was formed

Within 28 days of passing the'esolution, the company must give notice of it to

AN INTRODUCTION TO COMPANY LAW IN MALAWI - 37

holders of all debentures secured by a floating charge over the company'sj=,; .:property and to trustees ior those debentureholders P6l These persons together

court within 60 days of the passing of the resolution, to have the proposedalteration annulled Now unless they exercise that right, the alteration will be

effective However, if the alteration is challenged, then it will be ineffective unlessconfirmed by the court under subsection (6).

Subsection (4) gives the lollowing persons the right to apply to court to havethe proposed alteration cancelled:

(a) in the case of a private company, any member or debenttureholder ortrusteee of a debentureholder to whom notice of the resolution approvingthe alteration is given under subsection (2); and

(b) where the comPanY is Public,

1 holders ol at least 5o/o ol the company's issued shares or, if thecompany is not limited by shares, at least 5% of its members;

2 holders of at least 5o/o ol the company's debentures secured by a

floating charge over of the company's property; and

3 trustees for the holders of any debentures secured by a floatingcharge over the company's property'

The significance of the right conferred by subsection (4) lies in this Creditorsand shareholders will invest their money in a registered company on theunderstanding that it will be used for purposes mentioned in the business

that where it is intended to alter that clause, they should be notified and theirconsent be sought

Where an application is made by any of these persons, the court may confirm

r-'; tr,.the alteration in whole or in part or may cancel it altogether PrThen within 21days, the company must send a copy of the court order to the registrar forregistration Ittll" t.:, ",

1

2.3.1.5 Change of the company's status

As already shown, a company must state in its memorandum whether it is being

r 38 - AN INTRODUCTION TO COMPANY LAW IN MALAWI

registered as private or public, limited or unlimited, limited by shares or byguarantee Naturally, to change that will entail alteration of the memorandum

To do that, the company must follow the procedure laid down in sections 24 to

28 which was discussed earlier in Chapter 1.

2,4 Articles of association

As stated in the last chapter when the memorandum is sent for registration, it

may be accompanied by articles of association These are rules forthe internalmanagement of the company or as Section 11 puts it, 'regulations for theconduct of the company's affairs', ln other words they will deal with suchmatters as allotment of shares, the company's management, membership,meetings and powers, and its directors, their appointment, meetings, remu-neration and powers

A company need not register any articles of association; it may send itsmemorandum onlyfor registration.lzelAccording to Section 12(3), if it does that,

it will be deemed to have adopted the articles in Table A or C, depending onwhether it is limited by shares or by guarantee The effect of this provision is

clearly that instead ol preparing its own articles, a company may adopt those

in Table A or C, and modily them wherever necessary to suit its own capital andcorporate slructures

The memorandum takes precedence over the articles For that reason, if there

Duncan Gilmour & Co Ltd (1952) 1301the memorandum ol a company whichhad ordinary and preference shares provided that preference shareholdershad priority in the distribution of the company's assets on winding up Thearticles, on the other hand, stipulated that in that event any surplus remainingafter repayment ol the paid-up share capital should be divided between thecompany's members in proportion to sums paid on their shares, whetherordinary or preference lt was held that the preference shareholders wereentitled to preference in the distribution of the company's assets and not toparticipate in any surplus left after the contributed share capital had beenrepaid

But in spite of this, because the two documents are contemporaneous, thearticles may be used to explain any ambiguity in the memorandum Besides,reference can be made to them to fill any gap in the memorandum

AN INTRODUCTION TO COMPANY LAW IN MALAWI - 3t

Reference has already been made to Section 17 which provides that onceregistered, the memorandum creates a contract between the company and its

members ln fact, that provision governs both the memorandum and articles.Consequently, the articles too have the same contractual effect as thememorandum ln the case of Hickman v Kent (1915) t3llthe company's articles

of association required disputes between the company and any of its members

to be referred to arbitration.There was a dispute between the plaintiff memberand the company However, instead of referring it to arbitration, he sought to

sue the company lt was held that since the articles created rights andobligations between the plaintiff and the company, the latter could enforce thearbitration clause and compel the plaintiff to refer the dispute to arbitration.Similarly, in Rayfield v Hands (1958) t32l the plaintiff was a member of a

company of which the defendants were also members and directors Aprovision in the company's articles stated that any member who intended totransfer his shares should inform the directors who would take them at a fairprice When the plaintiff asked the directors to purchase his shares, theyrefused on the ground that they were not obliged to do so ln an action by theplaintiff to compelthem to take the shares, it was held that the afticles created

a contract underwhich the defendants, as members, were obliged to purchasethe shares at a fair value

As these two cases show, the contracl embodied in the articles is between thecompany and its members, and not outsiders ln other words, a person who,

as an outsider deals with the company, cannot rely on the articles to compel

it to refrain from breaking the deal even though the deal is sanctioned by thearticles This is illustrated by the case of Eley v Positive Government

the plaintiff should be the defendant company's solicitor for which he was to bepaid fees The plaintiff served in that post for some time When he wassubsequently dismissed, he sued the company for breach of the provision ofthe articles which made him the company's solicitor lt was held that as theplaintiff was not a member of the company, the provision did not place the latterunder an obligation to keep him as its solicitor

Moreover, since (as shown below) the articles are alterable the contract whichthey create can be altered As a result if they are altered no member who is

adversely affected by the alteration can sue the company for breach of thatcontract ln Shuttleworth v Cox Bros & Co Ltd (19271t34l the company's

40 - AN INTRODUCTION TO COMPANY LAW lN MALAWI

articles provided for five people to be its directors for lile unless disqualified in

accordance with certain contigencies The articles were subsequenily alteredand a new contigency was added to them By reason of this contigency one ofthe directors was.asked to resign f rom his post The director sued the companyfor breach ol the provision in its articles which made him directorlor life lt washeld that although articles do create a contract between a company and itsmembers, that contract was based on terms which were alterable For thatreason, neither party to the contract had a cause for complaint if those termswere altered

2.7 Alteration of articles

Every registered company has power under Section 13(1) to alter its articles.However, this power is subject to some restrictions First, the articles can bealtered only by special resolution Second, the alteration will be ineffective if itbrings the articles into conflict with certain provisions of the Act or renders any

one of the provisions inapplicable to the company An example of suchprovisions is Section 49(1) which provides that in spite of any stipulation to thecontrary in a company's articles, it will not be lawf ul for the company to register

any transfer of shares unless a proper instrument of transfer has beendelivered tc the company Another is Section 161 which renders void anyprovision in the articles purporting to empower an oflicer of the company toassign his office to another person

Third, as already noted, articles must comply with the memorandum quently any alteration which purports to make them superior to the memoran-dum or introduces any conflict between the two, will not be effective

Conse-Finally, at common law an alteration of the articles will be void if the majoritywho approve it are not acting bona fide in what they deem to be the interest of

the company ln the case of Brown v British Abrasive Wheel Co Ltd (1919)

l35l the defendant company needed more capital The majority who held 98%

of its existing shares were willing to provide the extra capital but on thecondition that they should first buy up the 2/" minority When the minorityrefused to sell their shares, the majority proposed to alter the company'sarticles to provide forcompulsoryacquisition of the shares atafairvalue ltwasheld that the alteration was invalid since it was merely for the benefit of themajority and was not directly concerned with the provision of the capital whichthe company needed

Enunciating the law here Evershed MR said: " 'bona lide for the benefit of

AN INTRODUCTION TO COMPANY LAW IN MALAWI - 'I1

the Company as a whole means not two things but one thing lt means that theshareholder must proceed upon what, in his honest opinion, is for the benefit

of the company as a whole The second thing is that the phrase 'the company

as a whole', does not mean the company as a Commercial entity, distinctfrom the corporators: it means the corporators as a general body." t36l

Of course, if the majority are acting bona fidethen the alteration will be valid

and this is illustrated bythe case of Sidebottom v Kershaw Leese & Co Ltd.(1920) t37l Here the defendant company passed a resolution to alter its articles

by providing that its directors should have power to require any shareholderwho carried on business in competition with the companyto transfer his sharestothem atafairvalue The plaintitf whowas a minorityshareholderand carried

held that the alteration was valid because the majority who supported it wereacting bona fidelor the benefit of the company as a whole by providing for theremoval from its membership of any person who abused his position as a

member to compete with the company

20 section 64(4).- provides that this type of cancellation rs ,,ot a reduction

of share Capital within the meaning of the Act

a corporate personality As Section 15(2) says, after incorporation, the scribers to the company's memorandum together with such other persons asmayf rom timeto time join the company as members, become'a bodycorporate,capable of exercising all the functions of an incorporated company' ln otherwords the company becomes an entity which is distinct and separate from not

21 (1) describes as lhe capacity of a natural person of full capacity' to carry on

business in its own name and right

One of the effects of this is that generally members of the company are notpersonally liable for its debts as long as it is still a going concern ln the case ofNaidoo v Mazi lmport and Export and Tchongwe (1 985)nlthe plaintiff and thesecond defendant formed a limited company of which they were both directors.and shareholders Subsequently, the plaintiff incurred some expenses in thename of the company When the matter came to court one of the issues to be

considered was whether or not he could recover those expenses f rom the firstand the second defendants lt was held that since the company was a distinctlegal personality, the expenses could be recovered from it, and not from thesecond defendant

Besides, once a business organisation acquires the corporate personality, anyproperty which it acquires belongs to it and not to its members or creditors ln

Macaura v Northern Assurance Go Ltd (1SZS1tzt the appellant who owned

a timber estate, assigned the timber to a company in return for the allotment by

the company of fully paid-up shares to him He thereafter, insured the timber in

his own'name against fire When the timber was later destroyed by fire, it was

insurable interest in the timber which belonged to the company As Lord

t

44 - AN INTRODUCTION TO COMPANY LAW IN MALAWI

Summer said:

., good deal of money, but neither as creditor nor as shareholder, could heinsure the company's assefs The debt was not exposed to fire nor were theshares, and the fact that he was virtually the company's only creditor, while thetimber was its only asset, seerns to me to make no difference"

Secondly, shareholders cannot validly pay money belonging to the companyinto their personal accounts or draw money f rom its account for their personal

Martin Ltd (1924; tst*6"re the sole director and member of the plaintiffcompany paid into his personal account (which he maintained at the defendantbank) cheques payable to the company and endorsed by him on its behalf ltwas held that the bank must compensate the company for the money paid intohis account because he was distinct from the company and the bank was notentitled to ignore that distinction

Thirdly, since the company is an independent personality, it will not come to an

end because of the death ol its shareholders Thus, unless it is wound up anddissolved in accordance with the procedures discussed in Chapter 15, it willcontinued to exist in spite of the death

Fourthly, the Companies Act distinguishes between a company and itsmembers in respect of schemes of arrangement As shown in Chapter 14,lor

such a scheme to be sanctioned by the court, it must be between a companyand inter alia, its members And for this purpose, the word 'company' meansthe company as a legal personality which is separate from its members talAs

a result if the members agree to the scheme but the company does not, thescheme cannot be sanctioned by the court

Lastly, another result of granting a company separate legal personality is thatthe company is charged to'tax on its own income, and not as an agent for itsshareholders Section 66 of the Taxation Act of Malawi provides that company

tax is payable at the rate specified by the Act on the company's incomereceived or accrued f rom sources within Malawi And in computing this taxableincome, dividends paid or payable to shareholders are not deducted On theother hand, they are considered to be part of the shareholders' income on whichincometax is payable interms of Section26,27,71 and76 (A)of theAct This point

is discussed more fully in Chapter 13.

i