Financial Training Company

2007

Corporate and Business Law- F4 (Zimbabwe)

Casebook

Appointment and resignation of Directors

The procedure for appointing and removing directors is invariably governed by the companys articles of association. If Table A has been adopted, articles 90-98 specify the formalities for electing directors and in terms of article 96 the directors shall have power at any time and from time to time to appoint any person to be a director, either to fill a casual vacancy or as an addition to the existing directors. At a Board meeting the outgoing director would tender his resignation and, the Company Secretary, would note the resignation in the minutes. At the same time the directors would decide at a Board meeting to invite the incoming director to fill the seat vacated by the outgoing director and this decision would be recorded in the minutes. The Secretary would delete the outgoing directors name and details from the Register of Directors and Secretaries and insert the incoming directors particulars in terms of s.187 of the Companies Act. The Secretary would be obliged to complete a CR14 form advising the Registrar of Companies within one month of the change. At the same time the companys letterheads and other printed stationery should reflect the new changes. The Secretary should send a letter to the incoming director, the new board member congratulating him upon his appointment and enclosing a copy of the companys memorandum and articles of association. The new director should also be reminded that he is required to give notice of interest that he may have in contracts involving the company as per s.186 of the Act. If the new director is to be signatory on one or more of the companys bank accounts, his details and specimen signatures should be sent to the bank.

The fiduciary duty of directors

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A director owes the company a number of common law and statutory obligations. The duties of a director can conveniently and usefully be broken down into the following categories. (1) fiduciary duties (2) the duty to exercise powers bona fide in the companys interest (3) the duty not to make secret profits (4) the duty not to have personal interest conflicting with those of the company (5) the duty to disclose (6) the duty of care and skill (7) the duty to act intra vires the companys statutes (memorandum and articles of association) At common law a director is subject to certain fiduciary duties which require him to exercise his powers bona fide and for the benefit of the company. A person possesses fiduciary duties when he is in a position of trust or occupying a position of power and confidence with respect to another person such that he is obliged by law to act solely in the interest of that other persons rights which he is to protect. It cannot be doubted that directors occupy a position of trust or as is usually stated, a fiduciary position towards the company similar in some respects to that of an agent entrusted with the control and management of the money or effects of another person. The fiduciary duties are owed to the company and to the company alone and not necessarily to individual shareholders (Pergamon Press Ltd v Maxwell).

The fiduciary duty of directors in respect of the shareholders is akin to the duty owed by the trustees to their beneficiaries and thus the fiduciary duty can conveniently be broken down into two parts: (1) the directors must act bona fide for the benefit of the company and not for an ulterior motive and (2) the director must refrain from embarking upon an act which will lead to a conflict of his interests with those of the company. Roodpoort Limited Main Rep v Du Toit (1928) An important consequence of the relationship between a director and his company is the directors duty to exhibit utmost good faith in his dealings with the company. He must refrain from placing himself in a position where his own interests clash with those of the company and he must never take an improper advantage of his position by acquiring for himself assets or opportunities that rightly belong to the company. In Robinson v Randfontein Estates Gold

Mining Company Ltd (1921).

The Managing Director of a company using information he acquired in the course of his official duties bought immovable property worth 60 000, which the company was interested in

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acquiring and using a front immediately resold it to the company for 275 000.000. The court held that the plaintiff company was entitled to claim from the defendant the profit of 215 000.00 made by him on this transaction. Innes CJ said where one man stands to another in a position of confidence involving a duty to protect the interests of that other he is not allowed to make a secret profit at the others expense or place himself in a position where his interests conflict with his duty In Magnus Diamond Mining Syndicate v Macdonald and Hawthorne (1909), the defendant while directors and managers of a company acquired information as to the value of certain diamondiferous property. They thereupon purchased the property in competition with the company without disclosing their intention to the company. The court decided that the defendants were obliged to transfer the property to the company and to account to it for profits already received. The court made the following observation that it is the duty of all agents including directors of companies to conduct the affairs of their principal in the interests of the principal and not for their own benefit.

One of the major statutory duties of the directors is the duty to disclose his interest in contracts (where he has either a beneficial direct or indirect interest) between a director and his company. Section 186(1) of the Companies Act Chapter 24:03 says that it shall be the duty of a director of a company who is in any way whether directly or indirectly interested in a contract or proposed contract with the company to declare the nature and full extent of his interest at a meeting of the directors of the company.

In the case of Aberdeen Railway Company v Blaikie Bros (1854) the defendant company entered into a contract to purchase a quantity of chairs from the plaintiff partnership. At the time that the contract was concluded, a director of the company was a member of the partnership. The court held that the company was entitled to avoid the contract.

Persons prohibited from being directors

The Companies Act disqualifies certain parties from holding the position of either director or auditor of the company. Directors Section 173 specifies who may not be a director and any of the following persons shall be disqualified from being appointed a director of a company

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(a) a body corporate, for the reason that the work of a company director requires the personal involvement of the director. (b) a minor or any other person under legal disability (c) save with the leave of the court an unrehabilitated insolvent (d) save with the leave of the court any person who has at any time been convicted, whether in Zimbabwe or elsewhere, of theft, fraud, forgery or uttering a forged document or perjury and has been sentenced therefore to serve a term of imprisonment without the option of a fine or to a fine exceeding one hundred dollars. In the case of Oliver John Tengende v the Registrar of

Companies (1988) Manyarara JA of the Supreme Court of Zimbabwe cited with approval the
case of Ex parte Boland (1967), the headnote to which says: .The object of section 150(1)(d) (now section 173(1)(d)) is that the management of companies should not be in the hands of unscrupulous or disreputable men ... A director.s position involves trust and section 173 (1)(d) is meant to weed out persons who from their past conduct are likely to breach that trust.

Trading of shares

The fiduciary duties of directors are:

(i) fide for the benefit of the company as a whole; and (ii) personal interests may conflict: Hindle v John Cotton Ltd 1919. At common law the directors of a company were always freely permitted to hold and deal in the shares of their company. The only sanction which the common law imposed was to make actionable the use of certain confidential information belonging to the company (such as trade secrets). The reason why the common law imposed no clear prohibition on the use of inside information in share dealings stemmed largely from the decision in Percival v Wright 1902 which has been followed consistently by our courts, Pretorious v Natal South Sea Investments Trust Ltd 1965. (ii) not to put themselves in a position in which their duties to the company and

to exercise their powers for the purposes for which they were conferred and bona

In Percival v Wright the court held that there was no duty on the part of a director, who was

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invited by a member to buy shares, to disclose to the member the fact that negotiations were in progress for the sale of the companys undertaking at a price representing more per share than that asked by the member. The basis of this conclusion is that while a director owes a fiduciary duty to the company, he owes no such duty to individual members.

Subsequently in the case of Allen v Hyatt 1914 the courts did recognise special but very limited circumstances in which a duty might be owed by directors to individual shareholders. In this case the directors had profited through share purchase from members. The directors were held accountable to them because they had purported to act as agents for the members by inducing the latter to give them purchase options over each members shares, supposedly to facilitate a proposed amalgamation.

Membership
One facet of a company is that it has its own legal personality and an existence apart from its members, while another is that it is an association of its members. In the case of a company limited by shares, a member is a person whose legal relationship with the company arises by virtue of his shareholding in the company. The terms member and shareholder accordingly refer to the same person. The concept of membership refers in particular to the right of the shareholder to participate in the exercise of control by the general meeting. The concept of shareholding refers in particular to the right to dividends after they have been declared and participation in the distribution on liquidation. This concept refers, also, to the obligation to pay the unpaid portion of his shares when the call is made.

It should be emphasised that on the registration of the memorandum and articles of association the corporate body, comes into existence, and is composed of the subscribers to the memorandum and all other persons who may from time to time become members. Section 7 of the Companies Act [Chapter 24:03], refers. L J Bowen in Nicols case (1885) stated that: A person becomes a member of a company (a) by subscribing to the memorandum of association or (b) by allotment of shares (c) by transfer of shares A subscriber of the memorandum becomes a member as soon as the company is incorporated, see Brown v Nanco Pty Ltd (1977 s.30(1). Subscribers of the memorandum, that is, those who sign their names in the memorandum, are deemed to have agreed to become members in

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terms of s.7 of the Act. There is no need for allotment of shares in this regard, but the subscription imposes liability to take up and pay for the shares agreed in the memorandum. In terms of s.8(2) every subscriber is duty-bound to take more than one share.

It is one of the duties of the subscribers of a company limited by shares to state in their own handwriting in words opposite to his name the number of shares they take (s.8(3)).

Once the subscription process is completed, it is now the duty of the directors to enter the subscribers name in the register. If the subscribers name is not entered into the register, this entitles him to escape liability for calls on the shares for which he has subscribed in terms of s.8(1)(b)(iv) of the Act. Membership can arise through express or implied consent when a members name is entered in the register of members but the member concerned does not object. (Section 30(2) of the Act.) Agreement to be registered in the members register occurs through application and allotment (s.65), or by taking transfer of shares from an existing member (ss.99 and 104 of the Act), by transmission on the death or insolvency of an existing member. (Section 102). As was emphasised in the case of Brown v Nanco (Pty) Ltd (1977), an allottee or transferee becomes a member when his name is entered on the register, as confirmed in terms of s.30(2) of the Companies Act [Chapter 24:03].

It is also vital for the purposes of this discussion to note that for the rights and duties to be lawfully asserted one needs to have the capacity to become a member. The aspect of capacity of a person is canvassed under the law of contract. This is, however, subject to the articles of association of that particular company in question. The articles may make provision for any person, for instance, minors to be excluded. Note should be taken that a company cannot become a member of itself nor of its subsidiary. Trevor v Whitworth (1887). Membership may also arise through estoppel. If a person knowingly allows his name to be added to or to remain on the register of members, he/she is estopped from denying his/her membership in the company concerned. Section 30(2) seems to be raising the aspect of estoppel. Shareholding in a company establishes the relationship between a company and the shareholder. The case of Eley v Positive Assurance Company (1922) is instructive on the point. A member of a company has an interest in the company entitling him subject to the articles to (a) share in the profits of the company (b) attend and vote at meetings (c) a share in surplus assets if any when the company is being wound up. (d) a limited right to sue for a wrong done to the company where the company itself is unable to do so due to the wrongful act of the controlling majority.

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(e) to resist oppression and case law has defined this to mean conduct which is harsh, burdensome, illegal and unreasonable.

Appointment of an auditor
A number of statutory provisions deal with the appointment of an auditor by two categories of a company: public companies and other companies. In terms of s.150(1) of the Companies Act [Chapter 24:03] the first auditor of a public company shall be appointed within one month of the issue of the certificate of incorporation. The appointment of the first auditor is made by directors of the company; if they fail to do so, the company in a general meeting may appoint the first auditor. If neither the board of directors nor the company appoints the auditor, the Minister may on the application of a member do so. This may happen when a shareholder with a sufficient voting strength vetoes such appointment. In terms of s.150(2) of the Companies Act subsequent auditors shall be appointed by the company at the conclusion of each annual general meeting to hold office until the conclusion of the next annual general meeting.

As regards private companies, the first auditor shall be appointed within 30 days of the issue of a certificate of incorporation. This is in terms of s.151. However, s.150(7) of the Act provides that a private company shall not be required to appoint an auditor in the following situations, if: (i) the number of members does not exceed ten and; (ii) none of the members is a company and (iii) all the members agree that an auditor shall not be appointed.

This is dealt with in section 150 of the Companies Act (Chap. 24:03). This section is long and worded in a complicated manner but in essence it makes it compulsory for every company to appoint an auditor. The first appointment must be done by the directors. In the case of a public company, it must be done within a month of the issue of a certificate entitling it to commence business. In the case of other companies, it must be done within a month of the issue of a certificate of incorporation.

Once the first auditor is appointed he is required to hold office until the conclusion of the first Annual General Meeting of the company. Thereafter the appointment is made by the company at each of its Annual General Meetings. Where, at an Annual General Meeting, an auditor is not appointed or re-appointed the Minister may appoint a person to fill the vacancy. The company, however, is required to give the Minister a weeks notice of the fact that an auditor was not appointed or re-appointed at its Annual General Meeting.

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If the directors fail to appoint the first auditor the company, in a general meeting, may appoint him/her: and if neither the directors nor the company appoint an auditor, the Minister may do so on the application of any member of that company. A special notice is required for a resolution at the companys Annual General Meeting to appoint, as auditor, any person other than a retiring auditor. Note that a private company is not required to appoint an auditor if, inter alia, membership does not exceed ten or if all members agree that an auditor is not necessary. The Companies Act does not specifically deal with the issue of qualifications of an auditor but it does disqualify, in terms of s.152, certain persons from being appointed as auditors of a company. The examples are: an officer or servant of the company, a body corporate, or a person who is an employer or employee of an officer or servant of the company.

Removal of an auditor
An auditor may be removed at a general meeting and a substitute appointed in his place. This is provided for in terms of s.150(1) of the Companies Act [Chapter 24:03] which states that a company may at a general meeting remove an auditor and appoint in his place any person. The nomination of the substitute auditor shall be made by a special notice by a member of the company to the other members not less than fourteen days before the date of the meeting. In terms of s.150(2), a company in the course of ordinary proceedings in a general meeting is not permitted to dismiss or remove an auditor from office without following the statutorily laid down procedures. If during the course of the year, an auditor tenders his resignation to the company or is otherwise disqualified by death or other cause as provided for in s.152 of the Act, it is not necessary to call a general meeting for the purpose of appointing a substitute, as such a resignation or disability creates casual vacancy in office of auditor which the directors are authorised to fill in terms of s.150(5) of the Act. When the next annual general meeting is held the provision of s.150(2) will apply.

The duties of an auditor

The duties of an auditor under the Companies Act
The statutory duties of an auditor are set out in ss.153 and 154 of the Companies Act. These include the duty (i) to make a report to members on the accounts examined by him; (ii) to state in his report that the accounts of the company and the group accounts are properly drawn up in accordance with the Companies Act so as to give a true and fair view of the

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companys affairs; (iii) to include in his report statements which in his opinion are necessary if he has not obtained all the information and explanations which to the best of his knowledge were necessary for the purposes of his audit; (iv) to attend any general meeting of the company.

The common law duties of an auditor include the duty (i) to act honestly and with reasonable skill, diligence, care and caution. In re Kingston Cotton

Mill Company (1896) the court made the following observation: It is the duty of an auditor to bring to bear on the work he has to perform that skill, care and caution which a reasonably competent, careful and cautious auditor would use . . . .
(ii) to show the companys true financial position as shown by the books (Tonkwane Sawmill

Company Ltd v Filmalter, 1975)

(iii) to make sure that the amount of stock stated to exist is a reasonable probable figure but the auditor has no duty to take stock unless there are suspicious circumstances (iv) to act as a watchdog but not a bloodhound. In re Kingston Cotton Mills (1896), the court made the observation that an auditor is not bound to be a detective or to approach his work with suspicion or with a foregone conclusion that there is something wrong. Lord Dennings remarks (Fomento v Selsdon Fountain and Others, 1958) are equally instructive. He remarked that an auditor is not to be confined to the mechanics of checking vouchers and making arithmetical computations. His vital task is to take care to see that errors are not made, be they errors of computation or errors of omission or commission of downright untruths. To perform this task properly he must come to it with an enquiring mind not suspicious of dishonesty but suspecting that someone may have made a mistake somewhere and that a check must be made to ensure that there has been none.

Persons prohibited from being auditors

As far as the appointment of auditors is concerned section 152 of the Companies Act places emphasis on impartiality, objectivity and the independence of the auditor. As such none of the following persons shall be qualified for appointment as auditors of a company. (a) an officer or servant of the company (b) a person who is a partner of an officer or servant of the company (c) a person who is an employer or an employee or an officer or servant of the company. (d) a body corporate

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(e) a person who is an officer or servant of a body corporate which is an officer of the company. (f) A person who by himself or his partner or his employee regularly performs the duties of secretary or bookkeeper to the company.

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