An introduction to company law in malawi

University of
Malawi


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INTRODUCTION

TO COMPANY LAW IN

MALAWI

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An lntroduction
to
Company Law
in

Malawi
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CH Chilumpha, LLB, PhD
Head of Business Studies Department and Dean ol the Faculty of Commerce

Published by:
lnterlink Trade cc

University of Malawi

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\
AN INTFODUCTION TO COMPANY LAW IN MALAWI

TO COMPANY LAW IN MALAWI

Directors' duties
Directors' remuneration

Contents

.... ...'

Remedies against directors
Loan to directors
The board of directors.
Termination of aPPointment .

Preface

Table of cases

.

80
81

82
83

.

({1,
I
Auditor. '-' .

6 Company officers

CHAPTER

The Company

The Company Secretary
The Company Manager

1 The formation of a comPanY

12
17
19

Promoters

lncorporation. . . . . . . .
Classification of comPanies
The filing of documents.

7

27

F;

38
38

39
40

r+
ta

CompanymembershiP
Companymeetings
Noticeatgeneral meetings

/

meetings
Proceedings at the generai meeting
..'...;.
Directors
Persons entitled to attend general

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""
"""'
"""'
''''

49
51

53

'

56

57

CompanY liabilitY

I

'tt'l

70

99

101

102

"

r(finance- Share capital

',

\

EL-'..*i-..
:tr' '

lssue and allotment of shares
Share distinguishing number
Slrare certificate
Share warrant
Share trust

Classification of shares
Transfer of shares
Transmission of shares bY law
Offering shares to the Public

110
111

113
113

114
119

120
121
127

----

Prohibition of the return of capitalwhile the company is a going

concern

103

112
112

'Fi

10 Maintenance of share capital 'ti

67

69

9B

.

Considerationforshares .....

....""
"""

92

protection
The rule in Foss v Harbottle
Common law excePtions. . . '

9 Company
;+l
Share.
'\-)'

43
45

com

4 The management of a company
(

90

Statutory excePtions

i'y

Corporate personalitY
Lifting the corPorate veil

90

8 Enforcement of controllers' and directors' duties and minority

33

3 The legal status of a comPanY

87

.

Liability through directors' acts ' .
Liability through the company secretary's acts
Liability through the company manageds acts

24

2 The constitution of a company
The Memorandum of Association ' . '
Alteration of the Memorandum
Articles of Association. . . . . . . .
Relation of Articles to the Memorandum
Effect of the Articles
Alteration of Articles

Alternatedirectors
Registerof directors

/0
7B


AN INTRODUCTION TO COMPANY LAW IN MALAWI

AN INTRODUCTION TO COMPANY LAW IN MALAWI

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
Payment of dividends
Reduction of share capital

132
134

135
136
139
140

143

,t" -

11 Company finance- Loan capital q- '

Powertoborrow

....).

149
150
150

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

162

j.ln
'^175

176
178
178
180
180

13 Company taxation

Filingof thecompanyconstitution....
Thecompanypublicofficer.
Returns
Payabletax...
Shareholders who are absent from Malawi . . . .

14 Schemes of arrangement and take-overs
A scheme of arrangement or compromise under section 198

15 Externalcompanies

.. 183
.....183

...184
...185

......

.

.

. 188

.

190

Pegistration requirements. . . . .
Obligation to state name.
Regulations as to localdirectors
Accounting records and accounts . . .
Registration of charges
Public invitation {or debentures and shares
Cessation of business.
Notification of winding uP . . .

Windingup...

1gti
.

198

.

199

200
2C1

I

152
152

165
166

Keeping accounting records
Accounts
The directors' report
The company auditor's report
Circulation of accounts and reports
The annual return .

Compulsory 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

151

161

i.

15 Winding up and dissolution of a registered compan

Liability at members to contribute towards the settlement of debts . . ' '
Dissolution of a registered company

156
157

12 Company accounting records, accounts and financial reports

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

-t!

208
219
?-23

224
.

235
235

240
241

242
243

244
244
245
245
246
l

lndex

248

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6 -

AN INTRODUCTION TO COMPANY LAW IN MALAWI

Table of Cases
ACompany,Re(1983)..

AOompany,Re(1983)..
ACompany,Re(1984)..
Allen, Craig & Co Ltd
AmmoniaSodaCoLtdvChamberlain
Andreae v Zinc Mines of Great Britain
Anglo-African Shipping Co LtdvDharrap.
Automatic Bottlemakers Ltd, Re
Automatic Self-Cleansing FilterSyndicatev Cunninghame.
Baille v Oriental Telephone Company Ltd .

BainbridgevSmith
Barronvpotter

-.'..'.106
---"" 107
.......210
- ' '. 179
....- 142,215
. . . 139
..... ' 194
' ' 164
. 61
. .'.

.

Bechuanaland Exploration Co Ltd v London Trading Co

BedeSteamShippingCoLtd,Re...
Benjamin Cope & Sons Ltd, Re . . .

BisgoodvHendersonTransvaal Estates Ltd...
Bolton&CoLtdvGraham&SonsLtd...
BondvBarrowHaematiteSteel .
Booth v New Afrikander Gold Mining Co Ltd
Boston Deep Sea Fishing Co Ltd v Ansell
Brazilian Rubber Plantations & Estates Ltd, Re

ChoppingtonCollieriesLtdvJohnson
CityEquitable Fire lnsuranceCoLtd,

CollenvWright
CookvDeeks

....
Re...

100
130
75
141

112
72
38

1O7
"""'
EbrahimivWestbourneGalleriesLtd...
127
"

'
.
"
Re
"
Eddystone Marine lnsurance Co Ltd,
'"' 105
EldervElder.
'
'
' ' ' ' ' 39
'
EleyvPositiveGovernmentSecurityLifeAssuranceCoLtd "
197'220
195'
Re
Bank,
'
''
enjtisn, Scottish & Australian Chartered
13' 14
Ertinger v New Sombrero Phosphates
103
"""'
EstmincoLtdvGreaterLondonCouncil

102,208

......'

69

.64,67

. 156
.'..129

Ltd

...

163,216

.. ' '...

199

.."...93

...115,215
. . . . 138

..

.

73,211

. ' ' 71
146

....'.
British&AmericanTrusteeCorporationvCouper
103
.
.
.
.
40,
Brown v British Abrasive Wheel Co Ltd
'
.....2O3
BuglePressltd,Re
..225
ButlervBroadhead....

Carlton Holdings Ltd, Re
Carruth v lmperial Chemical lndustries Ltd . .
Centraf Associates Ltd, lnThe Matterof ...
Chatterley-Whitfield Collieries Ltd, Re

"""'
""
""'
""'
""'
""'
"""'

DeBuschevAlt.
DerryvPeek.

DiamondvOreamuno
Dimbula Valley Tea Co Ltd v Laurie
DixonvKenniwaY&Coltd
DoveyvCory
DuncanGilmour&Coltd,Re...

.

. 201

52,197

.... 211
. . . '144
...... 54
..... 70
....80
....103

101,102,108

Foss v Harbottle

""'

GeneralAuctionEstateLtdvSmith
GethingvKilner
Gilford-MotorCoLtdvHorne
GlucksteinvBarnes
Goy&Coltd,Re...

Greymouth-PointElizabethRailway&CoalCoLtd,
Grierson, Oldham & Adams Ltd, Re
Harmer Ltd, Re
Hedley Byrne & Co Ltd v Heller & Partners Ltd
Hely-Hutchnison v BraYhead Ltd ' '
Hickman v Kent
Hilder v Dexter
Holders lnvestment Trust Ltd, Re. ' '
Holdsworth & Co Ltd v Caddies
Horbury Bridge Coal, lron & Wagon Co Ltd, Re ' '
Howard v Patent lvory Manufacturing Co Ltd
lndefund v Manguluti & Manguluti
lndustrial Development Consultants Ltd v Cooley
lron ShiP Coating Co Ltd v Blunt

Re' '

'

215

" 191
""' 46
""" 13
"" 154
' " ''' 75
" " ' 202
..

105

130

93, 95, 97
39
137

145,207
83
'

58
97

159,168, 174
73
84


8 -

AN INTFODUCTION TO COMPANY LAW IN MALAWI

AN INTRODUCTION TO COMPANY LAW IN MALAWI

...62

JohnShaw&SonsltdvShaw.
Kumchenga lndustries Ltd, lnThe Matterof

Kushlerltd,Re

...

Labellndustries Ltd v SEDOM
Leeds & Hanely Theatres of Variety Ltd, Re
Lennards' Carrying Co Ltd v Asiatic Petroleum Co Ltd
London Pressed Hinge Co Ltd, Re
LongmanvBath ElectricTramways Ltd...

Ltd
MaceBuildersvlunn ...:..
Makinsvlbbotson
Macaura v Nodhern Assurance Co

...

174,210

...230

16, 158
. . . . . 14

48,92

.... ..
.....
..

168

120

.

43

....228
.......169
. 108,211
Mapanga Estates Ltd, ln The Matter of . . .
.....71
Marquisof Bute'sOase,The
Mdinde Estate Ltd v Commercial Bank of Malawi Farm Services Ltd. . 171,174
.......63
MetalimpexvAGLeventisCoLtd
Metropolitan Coal ConsumersAssociationvScrimgeour . . . . . . 139
....144
MeuxBreweryCoLtd,Re...
...... 210
MiddlesboroughAssembly RoomsCo Ltd, Re...
...95
MorrisvKansen
...... 157
MosleyvKofyffontein....
....131,215
MoxhamvGrant
55, 65, 114
Musselwhite v CH Musselwhite & Son Ltd
43

Naidoo v Mazi lmport & Export & Tchongwe
Nali Farms Ltd & Kholomana v National Seed Company of Malawi . . . . . 15

NationalBank, Re
NFU Development Trust, Re
Nyasaland Civil Servant Co-operative Society Ltd, Re
Old Silkstone Collieries Ltd, Re
Ooregum Gold Mining Co of lndia v

Roper

191

193

220
.
....

OxfordBenefitBuildinglnvestmentSociety,Re... .....

PacayaRubber&ProduceCoLtd,Re...
Palmer's Decoration & Furnishing Co Ltd, Re ...
Panorama Development Ltd v Fidelis Furnishing Fabrics

Parker&CoopervReading

.
.

145
136
141

......124
...... 155
Ltd . . . . . ., . . . 98
......60

Parker-KnollLtdvKnoll lnternationalLtd
PatridgevRhodesiaGoldfields
Pendervlushington....
PercivalvWright
Potters Oils, Re

-

9

........

30

"."."

63
76

..154

"'
."

231

RafsanjanPistachioProducersCo-operativevRice .....

46

...39
RhyfieldvHands
--..73
Regal(Hastings)LtdvGulliver
..'...49
RepvJack&Ferret
.
.. 78,211
Re
.
.
.
Ltd,
Co
Property
Richmond Gate
Roith(W&M),Re
".'.".72
Rolled Steel Products Holding Ltd v British Steel Corporation. . . . 94
Royal British Bank v Turquand
' 77,97

93' 95
....
RubenvGreatFingallConsolidated.....
".169

SaltervleasHotelOoltd...
Savoy Ltd, Re

163, 194, 197,207,220

ScottishCo-operativeWholesaleSocietyvMeyer.'....'105

seddonvNESalt

SEDOM v Gep Shoe Co Ltd & lndefund . . .

ShearervBercain

"""'

.....140'214,215

Shuttleworth v Cox Bros & Co Ltd
SidebottomvKershawLeesCoLtd...
Smith & Fawcett Ltd, Re
SmithLtdvAmpol PetroleumLtd...
Smith, Stone & Knight Ltd v Birmingham Corp.
Societe Generale de ParisvTramways Union Co Ltd...
Spearhead Enterprises Ltd, lnThe Matterof '...
Spencerv Kennedy

Steenvlaw
Sussex Brick Co Ltd, Re
Syston &ThurmastonGas, Light&CokeCoLtd. - -

Nattrass
TiessenvHenderson....
TrevorvWhitworth

Twycross v Grant

' . . 39' 212

'..:.....41
' . 129
.'...73
. . . 47
...... 114
.. 196, 199
.

.

69' 208

.....133
. . . . 168,203
.... 115
45, 92' 99

Tesco Supermarkets Ltd v

Transvaal Lands Co Ltd v New Belgium Co

124
164,217

Ltd

53'54'193
. ' ' 74

......

134
12


1O - AN INTRODUCTION TO COMPANY LAW IN MALAWI

AN INTRODUCTION TO COMPANY LAW IN MAI AWI

W^

lt

UnangoEstatesLtd&ChigambavMichael
Underwood Ltd v Bank of Liverpool& Martin Ltd . . .
UnitConstruction Co LtdvBullock.....

.....174

. . 44,98
........ 47

WallvExchangelnvestmentCorp.
WallvLondon&NofthernAssetsCorp.
WallersteinervMoir(No. 1)
WallersteinervMoir(No.2)
WebbvShropshireColtd
WeltonvSaffery
WestCanadianCollieriesLtd,Re
WheatleyvSilkstone & Haigh MoorCoalCo Ltd
WhitelayvChallis
Woodroffes (Musical lnstrumenls) Ltd, Re
WorcesterCorsetryLtdvWitting
Wragg Ltd, Re

......57
........56
...... 46
.....132
......156

When this book was first published, the overriding idea was to provide a basic

........55
....... 163
.......169
. . 159,216
........67

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.

Yorkshire Woolcombers Association,

Re.

..136

F.

T'.'-,1ulu-

t' - E'',,y F:t p 7

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

Preface

' ( iJc G'ld

introduction to company law in Malawi to University and Malawi College of

127,214
...

.

136, 158, 163

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. Consequently 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
part of this book. And lastly, footnotes, an index and a preface have been added
to the book. The result therefore is that the book is now better than when
originally presented to the reader.

Having said that, let me take this opportunity to express my gratitude to RPC for
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

Chapter One

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The Formation of a Company
Just like a co-operative and a partnership, a company is a means through which
business is carried on. The reason tor choosing it rather than the f irst two, is the

desire (inspired by advantages, such as limited liability, which will emerge in
later chapters of the book) to carry on the business through an organisation
which has an independent personality. ln other words, the idea behind the
choice 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 own
right.
Such a business entity has been recognised for many years. The law not only
allows its creation but also confers on it the capacity of a natural person. As
shown more fully in Chapter 3, an incorporated company has perpetual
succession. Besides, subject to limitations inherent in its corporate characier,
it has full legalcapacity to employ and dismiss people, buy and sellgoods and
services, contract debts and other forms of legai liability, and own property of
all kinds. Moreover, it can be bought and sold.

1.1

Promoters

Persons who are forming a company occupy a very crucial position vis-a-vis the
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
after incorporation and enter into transactions for its benef it. Undoubtedly these
activities create opportunities for the abuse of that position. And to prevent that

abuse, both the Companies Act and the common law impose duties on any
person 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 the

formation of a company and to set it on its feet. As Cockburn C.J. said in

Twycross v Grant (1877):


AN INTBODUCTION TO COMPANY LAW IN MALAWI

-

13

"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 corporation". 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
been formed by the syndicate to purchase the property. A prospectus issued by
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
in full out of the t140,000 paid for the property. lt was held that the syndicate was
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,


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.
Lastly, the promoters may also be sued by the company for damages for breach
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.

I
I

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
into on behalf of a company not yet formed to procure some of the things such
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.

t

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_\
AN INTROOUCTION TO COMPANY LAW IN MALAWI

Sectron 20(1) provides that any person who purports to enter tnto a contract in
the name of or on behalf of a company before incorporation will be personally

bound by the contract and be entitled to its benefits. The application of this
provision is illustrated by the case of Nali Farms Ltd & Kholomana v National
Seed Company ot Malawi (1 9Ba1.tot 11.re the second plaintiff who was the sole
owner 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
sued the defendant for the loss. A preliminary issue which had to be considered
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:
"[U]p to the time the company has been incorporated it cannot contract or enter
into any other act in law. Even after incorporation it cannot be held liable on or

be entitled under contracts purported to be made on its behalf prior to its
incorporation. lndeed ratification is not possible when the ostensible principal
did not exist at the time when the contract was entered into."
There are, however, two exceptions to this rule which apply to written preincorporation contracts only. First, section 20(4) states that if there is an express

provision in the contract which excludes the liability of the person who concluded the contract on behalf of a company before its incorporation, then he will
neither be bound by the contract nor be entitled to the benefit of it. Clearly, this
gives the promoter who is negotiating a contract on behalf of a company which
he intends to form a strong incentive to insist on the inclusion of a clause in the
contract terminating his liability, preferably as soon as the company is incorporated. 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 Section
20(2), a company is allowed to adopt a written contract concluded on its behalf
before 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 the
company to be bound by the contract.

There is, however, one disadvantage here. For, although one of the consequences of the company's adoption of the contract is to release f rom liability the
promoter who concluded it on the company's behalf, the other party to the
contractcan havethatliability re-instated. Section 20(3)givesthe partythe right
to apply to court for an order which either:


16 -

(a)
(b)

AN INTRODUCTION TO COMPANY LAW IN MALAWI

makes the company and the promoter jointly and severally liable for the
contract or

apportions liability for the contract between the company and the

promoter.

Thus, it will be clear that the only way whereby a promoter can conclusively
escape 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 company
immediately after its incorporation. This seems to have been the view of the
High Court in Label lndustries Ltd v SEDOM.Ia There the proprietor of Label
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 was
granted on the condition thatthe business should be incorporated into a limited
company. After that was done, the company signed the loan agreement for the
K20,000 adanced. ltwas held thatthe company should be regarded as the other
party to the agreement, and not the proprietor of the then Label lndustries who
had actually negotiated it.

Besides, since subsections (2) and (a) apply to written pre-incorporation
contracts only, where the contract is oral subsection (1)will apply. ln
other words, it will not be possible to exclude the promoter's liability
under the contract nor will the company (after being incorporated) be
able to ratify it. As a result only the promoter who concluded the contract
will be able to sue and be sued under it.

1.1.1.3 Liability under section

299(1)

A promoter may also be subject to civil liability under this provision if in the
course 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 appears
that during the formation or promotion of the company, he

(a)

misapplied or retained the company's money or property;


AN INTRODUCTION TO 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 the
company.

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

deems 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, the
contract can be prohibited by the court on application by any one of the
company'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
enter into such a contract. For should adoption of the contract by the
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 the
company he is forming, he must ensure that statements made in it are correct.
For as shown in para. 9.'10.2, if they are not he will be subject to civil as well as
criminal liability.

1.2 lncorporation
It must be clear from the opening paragraph of this chapter that a company's
personality is a creature of the law. ln other words, it acquires the personality
through a legal process.

Section 2 of the Companies Act defines a company as a ,company
incorporated under the Act'. As this def inition shows, a company is born
after incorporation under the companies Act. To this end, section 324
of the Act creates the office of Registrar of companies, one of whose
responsibilities is the incorporation of companies.
The incorporation procedure is laid down by the Act itself. section 4 provides
that:


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 company".

Thusthe process of incorporation beginswith the memorandum of association.

More is said about it in the next chapter. Here suffice it to say that the
memorandum is the company's constitution which contains rules governing
mostly its corporate structure. This document must be prepared in accordance

with 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 their
names to the memorandum. As Section 4 shows, there must be at least two
subscribers, clearly indicating that a company must have a minimum of two
members. According to Section 7(1), the subscription involves signing of the
memorandum by the subscribers in the presence of a witness who attests each
signature. Once that is done, the memorandum must be delivered to the
registrar for registration tel either on its own or together with articles of

association.

A document which must accompany the memorandum is

a

statement in the prescribed form which shows:(a)

the full name, residential and postal address, and the occupation of each
of the company's frrst directors;

(b)

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

(c)

the situation and postal address of the company's registered office.

tl0l

According to Section 1 4(3), this stalement must be signed by or on behalf of the
subscribers. Besides, it must contain a signed consent to act by the directors
and secretary.
However, these documents will not be deemed to have been delivered to the
registrar for registration unless the appropriate registration fee is paid le Ii6.ttt)
Consequently, they must be accompanied by the fee. The Schedule to the
Companies (Fees) Regulations of 1986 provides that the registration fee for a
company with a share capital together with its memorandum, articles (if any
and all accompanying documents), is K65 plus K35 for the lirst K1 ,000, and


i

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.
After the company is registered, Section 19(1 1) requires the registrarto assign
to it a'designating number'. This will be used to identify the company if for any
reason it has no registered name. The registrar is also required to issue to the
company a certificate of incorporation t12l which will be conclusive evidence that

-

all the requirements of registration have been complied with and that the
company is duly registered.

1.3

t131

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 this
means is that if the company is wound up with debts, its members will be
personally responsible to discharge those debts without any limit on their
liability.lnthecaseof alimitedcompanyontheotherhand,theamountof capital
to be contributed by a member to the company is fixed by agreement between

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

1.3.1.1 Conversion of a limited company to an unlimited company and
vice 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 orguarantee
can be converted into an unlimited company. Similarly, an unlimited company
can be converted into a company limited by shares or guarantee. However, for
that to happen, two conditions must be fulfilled. First, all members of the
company must give a written consent to the conversion and the company must
adopt a memorandum and articles appropriate to its new status. Thereafter, the
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 ,,: i.

f

Apparently an unlimited company cannot be converted into a limited one unless
it is solvent on the date of the conversion. Consequently there are two further
requirements in the case of such a conversion. First, the statutory declaration
in (d) must add that the company's directors and secretary are satisfied that the
company is solvent. Second, the four documents listed above must be accompanied by a certif icate by the company's auditor(s) certifying that the company
has been investigated, and that it is solvent. ( JrAfter 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

that a company limited by shares is one the liability of whose members is limited
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
will be limited to the amount not paid on their shares. Thus,_if they have f ully paid
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':) r'l',i.",
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
making business. ln fact section 23(1 ) prohibits incorporating a company limited

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.

L


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;
2.

Each member of the company must agree in writing to the conversion and
to voluntarily surrender to the company for cancellation all shares held by

/

him immediately before the conversion;

3.

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

4.

Each member must agree in writing to contribute to the assets of the

company, 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:
(a)

the company's certificate of incorporation;

(b)

a copy of the new memorandum and articles;

(c)

a copy of the special resolution whereby the company adopted these
documents;and

(d)

astatutorydeclaration bythe company's directors and secretaryconfirming
that 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 private
company'. According to Section 5(3), a'private'company is one which by its
memorandum or articles :
(a)

restricts the right to transfer its shares, if any;

(b)

limits the total number of its members,

t14

to 50 and


22 -

(c)

AN INTROOUCTION TO COMPANY LAW IN MALAWT

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 the
Act. Some of these privileges and exemptions are:
1.

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 under
subsection (2) can apply to the court under subsection (3) to have the
alteration annulled. However where the company is a public one and the
applicants are not trustees of holders of debentures secured by a floating

charge on the company's assets, then they must hold at least 5% of the
company's issued shares or debentures secured by a f loating charge over
its assets . t18l i,*, 4

\.-,

2.

3.

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 longer
comply with Section 5(3) ,tl,tlQn the other hand, under Section 27, lhe
process for the conversi6rioiHilublic company into a private one is rather
elaborate.

Under Section 182(1) (b), a private company is exempted from the
requirementto 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 sheet
circulated to its members and debentureholders during the period to which
the return relates. t2ot :l l.i 7 l:

1.3.3.1 Gonversion of a public company to a private company or vice
versa
Section 27(1)provides that a public company can by special resolution be
converted into a private company after compliance with allthe provisions of the
Act governing private companies. Similarly, under Section 28(1) after compliance with the requirements of the Act in respect o{ public companies, a private

company may be converted into a public company by special resolution.
lndeed if a private company alters its articles by special resolution so that they


AN INTFODUCTION TO COMPANY LAW IN MALAWI

-

23

no longer comply with Section 5 (3), the company will be deemed to have
been converted into a public company. Then within 21 days of passing the
resolution 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 public
oompany to a private one, the company must accompany these documents
with a statutory declaration by its directors and secretary that Section 27(1)
has been complied with. On the other hand, where the company is being
converted from a private company to a public one and the conversion takes
place 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 the
following 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 preceding
year.

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

1.3.4

External company

This is defined by Section 306(2) as a body corporate formed outside Malawi
which establishes or maintains an established place of business in Malawi.
According to Section 306(3) 'established place of business' includes any fixed

place of business except an agency unless the agent has general authority to
negotiate 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. External
companies 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 Seventh
Schedule to the Act, a holding company is a rnember of its subsidiary and


24 1

.

2.

AN INTRODUCTION TO COMPANY LAW IN MALAWI

can appoint, remove or prevent the appointment or removal of at least half
of the latter's directors; or

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 described
above, 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 accounts
clerk. 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's
employees 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 the
defendant and the subsidiary were two distinct legal persons and that since the
money stolen belonged to the latter, the de{endant had no just cause for
dismissing the plaintiff .
As shown in Chapter 2, a holding company must prepare group accounts which
give 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 affairs

and 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's
allotment or transfer of its shares to its subsidiary.

1,4

The filing of documents

It will have been noticed from what has been said above that one of the
obligations which law imposes on companies is the filing of certain documents
with the registrar. The first document which must be filed is the memorandum
with or without articles of association. Thereafter, the company must also send
tothe registrarfor registration acopy of everyspecialresolution which it passes,

statutory declarations that certain requirements have been satisfied, financial
accounts and any new memorandum and articles which it may subsequently
adopt 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 return
which gives certain information about the company during the year to which it
relates.


AN INTRODUCTION TO COMPANY LAVV IN MALAWI

-

25

The objectof this requirement isto furnish the registrarwith as much information

about the company as possible and to apprise him of any changes in its
corporate and financial structures. But apart frorn that, the filing of these
documents also acts as a means of disclosing information aboutthe company's
affairs 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 course

upon payment of the appropriate inspection fee.
lnformation contained in these documents will be useful to prospective investors who maywish to puttheir money in ihe company as eitherdebentureholders
or shareholders. lt will enable them to assess the company's performance and
viability, and therefore, facilitatethe decision asto whetheror notthe investment
would be profitable. Other members of the public who wish tdealings vrith the company will also find this information useJul.
Previously, the rule was that mere filing of a document with the registrar gave
ccnstructive notice to the general public of not only the document itself but also
its contents. ln other words, a person was deemed to have notice of the
document and what it contained, irrespective of actual knowledge of them,
simply because the filing put the document in the public domain. However, that
rule 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 the
existence 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

Chapter One

1. [1877] 2 CPD 46e.
2. [1878] 3 App Cas 1218.
3. [1900] 4C240.
4. Supra., note 2.
5^ [1902]

2 Ch 809.

6. Civ cas 469/1989.
7. Civ cas 52611987.
8. Section 6(2).
9. Section 14(1 ).
10 Section 14(2).
11.
12.

'13.

14.
15.
16.
17

.

18.
19.
20.
21.

22.

Section
Section
Section
Section

325(2).
15(1 ).
16.

25(2\.
Section 5(1 Xb).
Section 24(1).
This excludes bona fide employees of the company and former employees
who were, and have coniinued to be, members of the company.
Section 10(4Xb).
Section 2B(2).
Section 197(1).
The expression 'equity share capital' generally refers to ordinary share
capital unless there is a restriction on ordinary shareholders'participation in
any distribution to be made by the company. ln that case, the expression will
refer to deferred share capital.
Civ cas 2BG119B7.


_I
AN INTFODUCTION TO COMPANY LAW IN MALAWI

Ghapter Two

-

27

,;]

The Constitution
of a Company
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 will
obtain funds necessary for the achievement of those objects. Besides, it will
contain rules on the organisation's management and membership, and the
division of decision-making powers between the two. Finally, the constitution
will also make provision for the organisation's office-bearers, their election and
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 these
two documents that this chapter is concerned.

2.1

The Memorandum of Association

According to Section 6(1), the memorandum of a company limited by shares
must comply with the form tn Table B of the First Schedule to the Act. Besides,
it must state:
1

.

The name of the comPanY;

2.

The restrictions, if any, imposed on the business which the company can
carry on;

3.

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

4.

Where the shares are divided into two or more classes, the rights

5.

Whether the company is private or public;

6.

That the liability of its members is limited; and

privileges, restrictions and conditions which attach to each class;


TO COMPT1NY LAW lN MALAWI

7.

The full name, address and occupation of each subscriber to the memorandum.

Almost simiiar information must be contained in the memorandum of an
unlimited company and a company limited by guarantee. of course, additionally, the memorandum of a company limited by guarantee must show the
maximum number, if any, of members with which it proposes to be registered

and state that:
1

.

2.

lts income and property will be appiied solely towards the promotion of its
objects;

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 company
limited by guarantee which has similar objects or be applied to some
charitable object.

Besides, whereasthe memorandum of acompany limited by shares mustshow
any restrictions imposed on the business which the company can carry on, the
memorandum of a company limited by guarantee must state the nature of the

object(s) for which the company is formed. And in the case of limited and
unlimited companies, Section 7(2) requires that each subscriberto the memorandum must write opposite his name the number of shares for which he
subscribes.

2.1.1

l,

The company's name

Just like a natural person, a company is normally identifiable by name. smali
wonder, therefore, that the memorandum must show the name whereby the
company 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
can refuse to register a company by a name which in his opinion, is misleading"i
.f.lf?p, undesirable.Itl Similarly, if the Minister is of the opinion that the name under
which a company is registered is misleading or undesirable, he can direct the
company to change itJ2t e i"7 ,i'

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

1,1


_
AN INTRODUCTIO}I TO COMPANY LAW IN MALAWI

- A

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 any
government officer, the registrar cannot register it without the approval of the

Minister.t3l

.;i

Oncealimitedcompany

is registered, the lastwordof its name mustbe'Limited'
which may legally be abbreviated 'Ltd'. t4lAn exception is where it is proved to
the Minister's satisfaction thatthe company has been incorporated as limited by
gLlarantee to promcte charity, education, art, science, religion or any other
usefulobject. ln such a case, Section 30(1 ) provides thatthe Minister may direct
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 the
company without accurately mentioning ihe company's name on the instrument
or order, he will be personally responsible to discharge the liablilty thereby
incurred. Of course this responsibiliiy will not arise if the liability is duly

discharged by the company. lndeed even if he is liable, he can ciaim an
indemnity from the company. ln Rafsanjan Pistachio Producers Go-operative v Rice sathe plaintiffs who obtained a default judgement against a cornpany
reached a compromise with it whereby it paid them five post-dated cheques.
The defendant director signed the cheques on behalf of the company.

./