ZAMBIAN OPEN UNIVERSITY

COMPANY LAW
LL324 ASSIGNMENT 2

BANJI KALENGA
21811816
0977335663

April 2021
1. INTRODUCTION

This essay analyses an imaginary situation where the Zambian Open University (ZAOU)
finds itself in a position where it desires to win a lucrative tender but does not qualify to
participate in the tender because it does not fill the requirement of having a minimum of four
directors as it currently has only two and its Articles of Association only allow for two
directors.

The author is challenged to provide a solution to the Board of Directors that will enable
ZAOU to participate in the said tender which is due in two months’ time so that the
University can win the tender for the job that runs for a two year period.

Registered Companies are governed by the provisions of the Companies Act 2017
(hereinafter the Act) and by the rules made there under as well as by the Articles of
Association of the Company itself. In cases where the Articles of Association are in conflict
with the Act, section 25(4) of the Act provides that a provision in the articles which is
inconsistent with this Act or any other law is invalid to the extent of the inconsistency.

The essay will describe a solution which involves the amendment of a company’s Articles of
Association to increase the number of directors. It will also establish the type of directors that
a company can have that is most appropriate for the scenario under consideration.

2.0 ARTICLES OF ASSOCIATION

According to section 25(1) of the Act, a company shall have articles of association that
regulate the conduct of the company. This is the document that contains the basic regulations
for the management of the company. It covers such matters as the issue and allotment of
shares, the calls on shares, the rules relating to the transfer of shares, the procedures to be
followed at general meetings and the regulations relating to members voting, the
appointment, removal and powers of directors, the payment of dividends and the
capitalisation of profits.1

Section 26 of the Act has the effect of establishing the Articles of Association as a ‘statutory
contract’ between the company and its members, the terms of which can be enforced both by
1
Goulding, S. (1999). Company law (2nd ed.). London, UK: Cavendish. p. 94.

1
the company and the members. This was emphasized in the matter of Oakbank Oil Co v
Crum2 in which the court held that each party must be taken to have made himself
acquainted with the terms of the written contract contained in the articles of association ...
He must also in law be taken ... to have understood the terms of the contract according to
their proper meaning; and that being so he must take the consequences whatever they may
be, of the contract which he has made. This was a matter in which shareholders had a dispute
over dividends.

A company will be able to enforce the terms of the statutory contract against the members
too. Where, for instance, the articles provide that any disputes between a member and the
company shall be referred to arbitration, the company will be able to obtain an order staying
proceedings brought by a member who has not gone to arbitration on such a dispute.3

In the case of Borland's Trustee v Steel Bros & Co Ltd 4 the court held that when terms are
agreed on in the Articles of Association, it is impossible to justify that those terms should not
be observed. In this matter, Mr Borland was a shareholder in the defendant company. The
company’s articles contained pre-emption rights, such that on a shareholder’s bankruptcy, he
had, on receiving a transfer notice from the directors, to transfer his shares to a manager or
assistant at a fair value calculated in accordance with the articles. His trustee said that the
transfer articles were void because, among other reasons, they amounted to a fraud upon the
bankruptcy laws, and could not prevail when bankruptcy had supervened, since the trustee
was forced to part with the shares at less than their true value, and the asset was not fully
available for creditors.

This implies that in the ZAOU matter we are considering, the problem cannot be cured by
simply appointing another two directors in contravention of the existing Articles of
Association. It is mandatory thar the articles be first amended.

2.1 AMENDMENT OF ARTICLES OF ASSOCIATION

2
[1882] 8 App Cas 65
3
Goulding, S. (1999). Company law (2nd ed.). London, UK: Cavendish. p. 96.
4
[1901] 1 Ch 279

2
The Articles of Association of a company aren’t cast in concrete. They can be altered from
their original registered form. The relevant enabling section is section 27(1) of the Act, which
reads: Subject to this Act, and its articles, a company may amend its articles by passing a
special resolution.

The Act defines a special resolution as a resolution passed by not less than seventy-five per
cent of the votes of members of a company, entitled to vote in person or by proxy at a meeting
duly convened and held at which the resolution is moved as a special resolution, or such
higher majority percentage as the articles of association may require.

In the matter of Shuttleworth v Cox Brothers and Company (Madenhead) Ltd and Others 5
the court held that the contract contained in the Articles of Association in their original form
were subject to the statutory power of alteration if such alteration was bona fide for the
benefit the company. This was a matter in which Cox Bros and Co (Maidenhead) had
appointed a board of directors for life, and had fixed this under its articles of association.
Then it proposed to amend its articles so that a director would lose his position if the other
directors requested in writing for him to resign. Mr Shuttleworth, who was targeted by the
changes, brought a claim alleging that the alteration of the articles was not bona fide for the
benefit of the company as a whole. The ZAOU amendments of articles would thus be
justified under this case law as it aims at increasing the profitability of the University.

In Greenhalgh v Arderne Cinemas6 it was held that ‘when a man comes into a company, he
is not entitled to assume that the articles will always remain in a particular form’. This was a
matter in which the plaintiff wished to prevent control of the company going away, and
argued that the article change was invalid, a fraud on him and the other minority
shareholders. This holding speaks to the inevitability of the change of Articles of Association
making the proposed change in the ZAOU Articles more of an inevitable happening that a
peculiar thing.

The Punt v Symons & Co7 matter gave us the principle that any attempt to craft an article to
the effect that the articles would not be subject to amendment would be contrary to the Act
(for Zambia section 27(1)) and as such illegal. This was a case in which the defendant’s
company’s articles gave GG Symons and after his death his executors the power of

5
[1927] 2 KB 9
6
[1951] Ch 286
7
[1903] 2 Ch 506

3
appointment and removal of directors. When the company had bought GG Symons’ business,
it had included in that purchase contract a promise not to alter these articles. GG Symons died
and disputes arose between his executors and the remaining directors. The directors proposed
to alter by way of special resolution the articles which empowered the executors. The
executors had sought an injunction to prevent this on the ground that the company had
undertaken in separate contract not to alter its articles.

In Southern Foundries (1926) Ltd v Shirlaw 8 the court held that a company is free to amend
or alter its articles and cannot be estopped from doing so by an outsider whose contract may
be affected by such an amendment. This was a matter in which Shirlaw argued his
employment contract was for a fixed term of 10 years, and the articles could not amend that
contract. He argued there was an implied term of the contract that the company would not
amend its articles in a way which would be detrimental to him. The company contended they
were empowered to amend their articles of association under statute. The new articles had
been appropriately adopted, and the new procedures correctly followed. Given the statutory
right to alter articles, it would be inappropriate for a court to interfere with the company’s
right to do so.

Some restrictions exist to the amendment of Articles of Association. These include:

a) Amendments that would permit a company to engage in illegal activities.

Based on this, for our ZAOU situation under consideration, the Board of Directors would
simply need to meet and pass a special resolution increasing the number of directors. As soon
as this resolution is lodged with the registrar of companies, it will be considered to have come
into effect. The Board of Directors would then be in a position to appoint the two or more
directors that would assist in meeting the requirement of the tender.

3.0 DIRECTORS OF A COMPANY

8
[1940] Ch 794
9
Gates, R.B. (2018). Gates on understanding company law: A conceptual and functional approach. Lusaka,
Zambia: Printech. p. 47.

4
Since a company is an artificial legal person, it needs individuals who can act for it, represent
it and make decisions concerning how it is to be run. These individuals are the directors, who
are officers of the company.10 In the matter of Ferguson v Wilson11 it was held that directors
are, in the eyes of the law, agents of the company and thus when the directs act in the name of
the company, they bind the company.

According to section 3 of the Act, the term director means a person appointed as a member
of the board of directors and includes an alternate director, by whatever name designated.
Directors are appointed by the company in accordance with its Articles of Association. Their
activities are controlled by the Articles of Association, which deal with appointment,
qualification, rotation and remuneration. In the case of Brown-Wilkinson v Cin Re Lo-Line
Electric Motors Limited12 it was held that the term whatever name designated shows that the
section is dealing with nomenclature and can thus apply to, for instance, governors or
managers doing the job of a director.

Section 85 of the Act provides that every company must have at least two directors (three in
the case of a public company) and they have a multifaceted role within a company. The
directors may be employees, they have duties as directors and they generally act on behalf of
the company in its dealings with the outside world.13

For the ZAOU situation under consideration, since the current directors do not desire to
permanently alter their current structure of the company, the appointment of two alternate
directors would suffice in meeting the objective of being compliant with the requirements of
the tender. Each of the current directors would appoint an alternate director for a period of
two years (duration of the tender). This would mean that ZAOU would have four directors for
the duration of the contract if awarded.

According to section 97(1) of the Act: A director may, subject to any restriction provided in
the articles, with the approval of the board of directors, appoint a person who is not a
director as an alternate director. Section 97(2) further states that: An appointment as
alternate director shall be in writing, signed by the director making the appointment and the
person being appointed and be lodged with the company.

10
Goulding, S. (1999). Company law (2nd ed.). London, UK: Cavendish. p. 245.
11
[1886] 2 Ch. App. 77
12
[1988] 2 All ER 692 at 699
13
James, J. (2003). Company law: 2003-2004. (4th ed.). London, UK: Cavendish. p.87

5
The alternate directors’ details have to be maintained in accordance with section 31 of the
Act which makes it mandatory for a company to keep a register of its directors and
secretaries.

At the end of the two year period, the appointment of the alternate directors would cease in
line with section 97(10)(a) of the Act which states that the appointment of an alternate
director shall cease at the expiry of the period for which the alternate director was
appointed.

4.0 PROCESS

In order to achieve the desired results, the ZAOU board of directors will first need to call a
meeting at which a special resolution will be passed to amend the Articles of Association to
increase the number of permitted directors from two to four. Since there are two members of
the board of directors, the resolution will pass if both members vote for it as a threshold of
75% (seventy five percent) needs to be exceeded for the resolution to be considered to have
been passed.

Section 63(1)(b) provides that a notice of a company meeting shall be given not less than
twenty-one days, in the case of a meeting at which a special resolution will be proposed, it
would be imperative that a notice of the said meeting be raised immediately as the University
has only two months available to it to submit its tender. However since section 63(3)(b)
where a meeting of the company is convened with a shorter period of notice than that
required under this section, full notice shall be deemed to have been given if it is so agreed
by a majority in number of the members having a right to attend the meeting and vote on the
resolution concerned, being a majority holding not less than ninety-five percent of the total
of such voting rights, in the case of a meeting convened as a meeting at which a special
resolution will be moved, and in relation to that resolution, such a meeting can be held with
just a day’s notice if both existing directors agree to it. Case law exists to support this view.
In the matter of Re Oxted Motor Co. Ltd14 both members of a company waived the normal
length of notice of a meeting at which an extraordinary resolution for voluntary winding up
was validly passed.

Section 27(2) of the Act provides that a company shall, where it amends its articles, in
accordance with subsection(1),within twenty-one days after the date of passing the
14
[1921] 3 KB 32.

6
resolution, lodge a copy of the resolution with the Registrar, together with a copy of each
paragraph of the articles affected by the amendment, in its amended form. Section 27(3)
states that the articles shall take effect, in their amended form, on and from the day of their
lodgement with the Registrar, or such later date as may be specified in the resolution. Based
on this, as soon as ZAOU files the special resolution with the registrar, they can proceed to
appoint the alternate directors.

Under the provisions of section 97(5), the alternate director is permitted to attend all board
meetings where the director who appointed him/her is not present. The alternate director is
also permitted to vote at such meetings. Section 97(9) permits the alternate director to receive
remuneration from the company if the Articles of Association permit it.

5.0 CONCLUSION

The ‘Constitution’ of a company are its Articles of Association. The Articles can be amended
from time to time as the board of directors may desire through the passing of special
resolutions. This is the method that can be used to vary the number of directors in a company.
Alternate directors are members of the board of directors that only attend meetings when the
director that appointed them is not present and are lodged as directors in the company. The
term of office of an alternate director can be a fixed one.

BIBLIOGRAPHY

BOOKS

Gates, R.B. (2017). Gates company law and practice in Zambia.(1st ed.). Lusaka, Zambia:
Printech.

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Gates, R.B. (2018). Gates on understanding company law: A conceptual and functional
approach. Lusaka, Zambia: Printech.

Goulding, S. (1999). Company law (2nd ed.). London, UK: Cavendish.

James, J. (2003). Company law: 2003-2004. (4th ed.). London, UK: Cavendish.

CASES

Borland's Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279

Brown-Wilkinson v Cin Re Lo-Line Electric Motors Limited [1988] 2 All ER 692

Ferguson v Wilson [1886] 2 Ch. App. 77

Greenhalgh v Arderne Cinemas [1951] Ch 286

Oakbank Oil Co v Crum [1882] 8 App Cas 65

Punt v Symons & Co [1903] 2 Ch 506

Re Oxted Motor Co. Ltd [1921] 3 KB 32

Southern Foundries (1926) Ltd v Shirlaw [1940] Ch 794

Shuttleworth v Cox Brothers and Company (Madenhead) Ltd and Others [1927] 2 KB 9

STATUTES

The Companies Act 2007.