L7 Business & Company Law Q&A

ZICA

ZAMBIA INSTITUTE OF CHARTERED ACCOUNTANTS CHARTERED ACCOUNTANTS EXAMINATIONS LICENTIATE LEVEL L7: BUSINESS AND CORPORATE LAW SERIES: JUNE 2012 TOTAL MARKS – 100 TIME ALLOWED: THREE (3) HOURS INSTRUCTIONS TO CANDIDATES 1.

You have fifteen (15) minutes reading time. Use it to study the examination paper carefully so that you understand what to do in each question. You will be told when to start writing.

2.

This paper is divided into TWO sections: Section A:

Attempt any TWO Business Law questions.

Section B:

Attempt any TWO Corporate Law questions.

3.

Enter your student number and your National Registration Card number on the front of the answer booklet. Your name must NOT appear anywhere on your answer booklet.

4.

Do NOT write in pencil (except for graphs and diagrams).

5.

The marks shown against the requirement(s) for each question should be taken as an indication of the expected length and depth of the answer.

6.

All workings must be done in the answer booklet.

7.

Present legible and tidy work.

8.

Graph paper (if required) is provided at the end of the answer booklet.

SECTION A ANSWER ANY TWO QUESTIONS QUESTION ONE (a)

Discuss the “Zambian Constitution being the Supreme Law” of the land in the administration of Justice. [10 marks]

(b)

Identify and discuss at least four (4) sources of Law in Zambian.

(c)

Explain the extent to which English Laws form part of the sources of Zambian Law. [3 marks]

(d)

Write brief notes in relation to Judicial precedence on the following:

[8 marks]

(i)

Overruling

[1 mark]

(ii)

Distinguishing

[1 mark]

(iii)

Obiter dicta

[1 mark]

(iv)

Stare decisis

(1 mark) Total marks [25 marks]

QUESTION TWO Bongani works for Lusaka General Dealers as a driver. His duties include transporting goods from different parts of Zambia in the light truck owned by Lusaka General Dealers. While other colleagues of Bongani report for work at 08.00 hours and finish at 17.00 hours and are required to work half day on Saturdays, Bongani has a choice on what time he reports for work depending on how much work he has and what time he is required to make deliveries to Lusaka General Dealers’ clients. Equally, Bongani only works on Saturdays if he wants to and after being consulted by his supervisor. One Saturday, Bongani was not necessarily working but requested to use the vehicle assigned to him for some errands he wanted to perform. Lusaka General Dealers agreed to allow Bongani to use the vehicle on condition that he carries out some work for Lusaka General Dealers in the course of his business. While in the course of activities as he carried the goods for delivery to Lusaka General Dealers’ clients, Bongani also takes with him an assistant Dingani who is not working for Lusaka General Dealers but simply assisting Bongani. On the dash board in the inside of the vehicle is a notice which reads as ‘only employees of Lusaka General Dealers are authorised. Lusaka General Dealers will not be liable for any injury caused to unauthorized passengers’. As he drove the vehicle Bongani was involved in a serious accident as he tried to switch on his car radio. Dingani has sustained serious injuries. The other vehicle with which Bongani collided was extensively damaged and its passengers injured. Required: (a)

Considering matters of employment contract and with reference to decided cases, advise Lusaka General Dealers on their liability, if any, for the injuries as a result of the accident. [15 marks] 2

(b)

Advise Dingani on his liability and whether he can claim compensation for the injury sustained. [4 marks]

(c)

Advise whether the passengers on the other vehicle can claim compensation and if they can, against whom? [4 marks]

(d)

Advise Bongani on any defense available to Dingani and the passengers of the other vehicle against whom the accident happened. [2 marks] Total marks [25 Marks]

QUESTION THREE Lusaka Engineering Company is in the business of supplying heavy duty machinery to industries and mines across Zambia. Sancha Mines Limited, a Copper-belt based mining company, would like to make an order for one of the machines from Lusaka Engineering Company. Sancha Mines requests a quotation from Lusaka Engineering Company. The quotation is prepared and includes a price variation clause to reflect changes in transportation costs. It is anticipated that transport costs would change because of fluctuating fuel prices. Lusaka Engineering Company’s quotation at the time it was presented was K50,000,000 unit price for the machine and K10, 000, 000 as delivery costs with a disclaimer that their conditions would override all other conditions that would come with orders. Three weeks later, Sancha Mining Limited made an order for the machine and indicated that they were making the order on the terms of the quotation received three weeks ago. Lusaka Engineering Company delivered the machine and indicated that they were delivering on the revised quotation of K50, 000,000 unit price and K15, 000,000 transportation costs to the Copper-belt. A week after the delivery, Lusaka Engineering Company wrote to Sancha Mining Ltd demanding the K5, 000, 000 balance as indicated in the delivery slip. Sancha responded and argued that when they had sent the order they indicated that they were making the order from the initial quotation and therefore did not owe any money to Lusaka Engineering Company. Required: (a)

Sarcha Mining Ltd and Lusaka Engineering Company are now embroiled in a legal argument. With reference to decided cases, advise both parties on issues raised by this contractual agreement and where the liabilities lie. [15 marks]

(b)

Distinguish a warranty from a condition in a contract.

(c)

Write notes on the following:

[4 marks]

(i)

Common law and equitable remedies

[2 marks]

(ii)

Fiduciary duty

[2 marks]

(iii)

Duty to disclose

[2 marks] Total marks [25 Marks]

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SECTION B – ATTEMPT ANY TWO QUESTIONS. QUESTION FOUR Kamutaundi has been a small scale businessman in Lusaka as a general dealer. In the past few years, his business has been doing so well that he has now decided to properly establish a business and have it incorporated under the Zambian laws. Because his business is viable, he has started to trade in his company even before it is registered. All business undertakings are done in the company name Mutaundi Imports and Exports Ltd. He now has started the process of registering the company with Patents Companies and Registration Agency (PACRA) but not yet incorporated. He has already started using the business name. Before incorporation of the company, Kamutaundi operating under the company name (Mutaundi Imports and Exports Ltd) entered into a contract with Fwambo General Dealers for Mutaundi to supply a consignment of assorted goods. The business transaction has gone beyond Kamutaundi’s expectation such that before the certificate of incorporation could be issued to Kamutaundi and company, huge profit was made from the transaction. However, since the company had no certificate of incorporation, Kamutaundi decided to keep the proceeds of the transaction as a personal benefit. Mutaundi Imports and Exports Ltd has since been incorporated and the other members of the newly registered company are demanding that Kamutaundi should not personally benefit from the transactions that took place before the company was incorporated. Required: (a) (b)

Discuss the consequences of incorporating a business as a company. [8 marks] Advise Kamutaundi and the other members of the incorporated Mutaundi Imports and Exports Ltd on the implications of Kamataundi’s conduct before and leading to the incorporation of their company. [17 marks] Total marks [25marks]

QUESTION FIVE (a)

Explain the process of registering a company under the Companies Act CAP 388 in Zambia. [11 marks]

(b)

Identify and discuss at least any three types of meetings a company is required to have under the Companies Act Cap 388. [9 marks]

(c)

Identify and briefly explain any five duties directors owe to a Company. [5 marks] Total marks [25 marks]

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QUESTION SIX (a)

Identify the types of companies that can be formed under the Companies Act Cap 388 of the Laws of Zambia and explain the advantages and disadvantages of each of the types identified. [11 marks]

(b)

Explain the circumstances which would lead companies formed under the Companies Act Cap 388 of the laws of Zambia to wind up. [6 marks]

(c)

Discuss the Articles of Association and their important in the formation and running of a company [8 marks] Total marks [25 Marks]

END OF PAPER

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L7: BUSINESS AND CORPORATE LAW SUGGESTED SOLUTIONS SOLUTION ONE (a)

(b)

(c)

(d)

Parliament through its legislative powers has established one of the most important principles in the Zambian Laws in relation to the constitution. It has established that in Zambia, the constitution is the supreme law of the land. Article 1 (3) of the constitution provides that any other law made in Zambia which is in conflict or it is inconsistent with the Zambian constitution shall be declared null and void. Further, the courts have powers to declare null and void any section of the law for as long as such section is inconsistent with Articles 20 and 21 of the constitution. (10 marks) The constitution, statutes, decided cases and delegated legislation are sources of Zambian Law. The constitution is the primary source of law in Zambia and all laws that are made by parliament are required to conform to the constitution. Article 1(3) of the constitution makes it clear that the constitution is the supreme law of the country. Statutes are laws made by the country’s parliament. Parliament is the institution vested with all law making powers by the constitution in Zambia. Statutes are known as second sources to the constitution and are specific to a particular subject matter unlike the constitution which makes general provisions. Statutes form the bulk of the sources of law in Zambia. The Penal Code is an example of a statute. Case law or precedents are equally sources of law in Zambia. Precedents are decisions made in the country’s highest court and they have a binding effect on courts below. Delegated legislation is that which comes from either ministers or local authority in the form of statutory instruments and by-laws respectively. (8 marks) English Laws have been accepted as part of Zambian law by virtue of the English Law (Extent of Application) Act Cap 11 of the laws of Zambia. Under the Act, all laws that were in force in England on 17th August 1911 apply to Zambia. Overrule, distinguish an obiter dicta. (i) OVERRULING: A previous decided case that may have stood as a precedence now being abandoned by a new decision which overtakes the old one to become a new precedence. (1 mark) (ii) DISTINGUISHING: A past precedence not being relied upon in court because its facts are materially different from those presently under court’s consideration. (1 mark) (iii) OBITER DICTA: Statements made by the in the course of judgement and have no influence on decisions although they can be persuasive. (1 mark) (iv) STARE DECISIS: that some decisions in certain cases have developed the capacity to become law in themselves and courts stand by decisions of these previously decided cases. (1 mark) Total marks [25 Marks]

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SOLUTION TWO (a)

(b)

(c)

(d)

The issues in the case are weather Bongani is actually an independent contractor or employed by the company whose vehicle he was driving. To determine whether Bongani was an employee or contractor mainly two tests have been employed. The control test Mersey Docks and Harbour Board v Coggins and the integration test Whittaker v Ministry of Pensions and National Insurancer (1967). If, Bongani is said to have been employed by the company whose vehicle he was driving and not just an independent contractor, then his employer can be held to be vicariously liable for the damage caused by Bongani. Once established that there is a relationship of employer employee between Bongani and the place he worked, then Dingani could have a cause of action against Bongani’s employers in vicarious liability. In the same way Dingani can sue above, so would be correct of the passengers in the other vehicle. They can bring action against Bongani’s employers in vicarious liability. To the victims of the accident in the other vehicle Bongani may not have a defence. However, as to Dingani, it would be difficult for him to be awarded full compensation. Dingani would be considered to have contributed to suffering he sustained because he was in a truck where it was made clear that non employees were not authorized in the vehicle and therefore, Dingani’s decision to stay in the vehicle would be taken that he contributed to his Injury in what is known as contributory negligence.

SOLUTION THREE (a)

The legal argument is on offer, acceptance and counter-offer. Lusaka Engineering Company offered with a disclaimer that whatever other conditions that may be in acceptance would be subject to the quotation they earlier sent and that those terms would override all other conditions. However Sancha Mining makes the order and relies on the contents of the initial quotation made with the price of K50, 000, 000 and K10, 000, 000 for transportation but without consideration a price variation clause which made the cost go up because of transport costs. The argument therefore was, on what terms was the contract entered, the initial conditions contained in the quotation or the terms on the order of Sancha? This is an argument that would not really have a correct or wrong answer. The students who identify the issues should be awarded marks. However, case of Butler Tools Machine Company v Ex-Cell-O Ltd is indicative on this. Three Lordships decided with Lord Denning dissenting the court held that the contract was entered into on the terms of the buyer not the seller.

(b)

A warranty is a term incidental to the conditions of a contract. Warranties do not really warrant rescission and refund when they are breached. They only entitle the plaintiff to compensation for damage that may ensure consequent to the breach of the warrant and equally to a repair. A condition on the other hand forms the core of the contract. Where there is a breach of a condition of a contract, the aggrieved party is entitled to rescind the contract and recover all expenses incurred hitherto in the course of executing the contract section 11(1) Sales of Goods Act. [There should 7

be no restrictions to which cases candidates can cite to buttress their answers provided the issues were considered in those cases]. (c)

Common Law and Equitable remedies: common law remedies are remedies that a party has as a matter of right. Where a party has suffered damage due to breach of contract, he/she is entitled to compensation in the form of damages. They are remedies granted not at the discretion of the court but because a party is entitled to them. Example, damages. Equitable remedies are not right based remedies but are granted at the discretion of the court. Equitable remedies will look at what is fair to do even where a party does not have any legal entitlement to something but the courts will considered what would be fair and just and, if what would be fair and just is to award some form compensation then the court will use its discretion to award. A number of equitable maxims exist to help courts determine what is fair and just e.g. specific performance.

(d)

Fiduciary Duty is the duty of trust that exists between a principal and an agent and partners in a partnership or directors to the company. Fiduciary duty is a duty of trust to act in good faith and not in conflict with the interests of the company or of the partnership. Equally, between Solicitors and clients there is a fiduciary duty that exists. The duty to disclose is equally a duty owed to the partnership by partners. In a partnership partners have a duty to disclose to the partnership all dealings and profits the partnership engages in. partners are have a duty to disclose any conflicts of interest that may arise between their personal businesses and the business of the partnership. Failure to disclose affects the fiduciary duty partners owe to the partnership.

SOLUTION FOUR (a)

A company does not start on its own but has sponsors who are also known as members of the company. The members sponsor the company into incorporation. Once the company is incorporated, it develops into a separate legal person from the sponsors. That is, sponsors cannot really treat themselves as being one with the company. The company will stand as its own legal personality being able to sue and be sued in its own right. When a company is incorporated, all debts incurred by the company accrue only to the company and does not extend to the sponsors so that, if the company fails to pay its debts the liability will be limited to the assets of the company and will not extend to the member of the company. Salomon v Salomon established the principle of corporate legal personality for all incorporated companies.

(b)

Section 28(1) of the Companies Act provides that promoters of a company shall be bound by contracts not evidenced in writing entered into before the company comes into existence and that they will be entitled to the benefits that comes with the contract. S 28(2) further provides that promoters of a company shall be bound by contracts evidenced in writing entered into before the company comes into existence and that then will be entitled to the benefits that comes with the contract. Paragraphs (a) and (b) of section 28(2) has however made exceptions to the rule in subsections (1)(2) above. (a) the company may adopt the contract by ordinary resolution passed within fifteen months after the company is incorporated (b) a party 8

to the contract may seek an order from the court that the company be attached to the contract in which case, liability and benefit would then accrue to the company and not just the sponsor.

Re Northumberland Avenue Hotel Co. Ltd (1886) in line with paragraph (a) above,

the court held that the contract could not be ratified retrospectively and the company’s adoption of it was not making of a new contract. Natal Land and Colonisation Co v Pauline Colliery Syndicate (1904) the court held that although the company had had the benefit of the contract, it did not impose on it any liability to pay since the contract was made before the company was formed. Kelner v Baxter (1866) the court held that the company was not liable but B, C and D must be presumed to have intended to make themselves personally liable and must therefore pay.

SOLUTION FIVE (a)

First stage in the registration of a company is to submit a name for a search to ensure there are no other companies on the registry with the same name (section 37 Cap 388). A search will be made at PACRA for the names and, if no similar name exists PACRA will give a go ahead for the name to be used. When the name is approved, sponsors will then be required to submit the following documentation: Statutory declaration to be made by the sponsors of the company or the secretary that all the requirements have been met, a declaration giving the particulars of the first directors or secretary giving their consent to act as first directors and the articles association shall be submitted to PACRA (S. 6(1) Cap 388). Section 6(2) requires sponsors to submit in the prescribed forms the physical address of the office of trading, the postal address, a statement as to the type of company being registered that is, whether company limited by share or guarantee. The share capital, the division of shares among the sponsors and finally, the name and address of the person lodging the forms should be provided to PACRA. After all the documentations are submitted with PACRA a certificate of incorporation is then issued section 10 Cap 388.

(b)

Cap 388 provides for the types of meetings a company should hold to make decisions. Annual General Meeting, Extraordinary General Meeting and Class Meeting. The AGM is provided for under section 138(1) which is supposed to be held within three months after the end of the financial year. Where such a meeting is not held in accordance with (1) above, a member of the company can petition the registrar of companies to convene or direct that such a meeting be held. Section 139 Cap 388 provides for extraordinary general meeting which is called by directors whenever they think fit or if the articles of association provides. The court, on its own motion or through an application by one of the members entitled to vote at such meeting can order the company to convene such a meeting. A class meeting is one which is held by members of a particular class in terms of shareholding and calls the meeting to discuss issues especially affecting members of the class. All members entitled to vote at the AGM are entitled to be give twenty-one days notice of the AGM and fourteen days for other meeting.

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(c)

Duties of directors to a company include: (i) (ii) (iii) (iv) (v)

Duty Duty Duty Duty Duty

to act bona fide to use authority for purpose conferred not to act in conflict with interests of the company not to take personal profits where the company is supposed to benefit to act with skill and care.

SOLUTION SIX (a)

There are two types of companies that can be established under the Companies Act Cap 388. Public and Private Companies. Public companies are said under the Act to be companies that have share capital and are supposed to end with the letter plc (public limited company). A public company can have as many share holders as possible because there are no restrictions on the number. Public companies are usually larger than private companies and they usually raise their capital from the public hence the term public. A public company is legally required to have a share capital of fifty million kwacha and its shares are freely transferable. Conversely, a private company is restricted to a membership of only fifty. The share capital for a private company is five million kwacha and cannot raise capital by issuing its shares to the public. Unlike a public company, shares in a private company are not freely transferable. Advantages of a public company mainly are that raising capital to finance the enterprise is not difficult since shares can be floated to the public. More investors can be invited to invest their capital in a public company since there is no restriction on the maximum number of members a public company would have. A private company on the other hand is more susceptible to shocks and may easily collapse if members cannot find capital to invest in the company. Because there is a limit to the maximum numbers a private company is supposed to have, it may be difficult to invite new investment into a private company. A private company is however more efficient because of their small size, it is easy and faster to make decisions as opposed to a public company which may be rigid in terms of decision making on how to operate.

(b)

Mainly two ways a company may wind up under the Companies Act Cap 388. Compulsory and Voluntary winding up. (i)

Compulsory winding up would occur where: (a) (b) (c) (d)

The company has, by special resolution resolve that the company be wound up by the court The company unable to pay its debts Where the court feel and is just and equitable for the company to wind up Company’s failure to commence its business a year after be registered

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(ii)

Voluntary winding up occurs where: (a) (b)

(c)

By special resolution of a company, the company may resolve to wind up By extraordinary resolution a resolution to wind up the company may be passed on grounds that its liabilities are such that it can continue in operation.

The articles of association are the company’s constitution. It contains all rules and regulations of the company. The Articles of Association stipulates how the company is supposed to run and also stipulates the relationship between the company and the outside world. The Articles of association is an important document because it brings about certainty in the company as to how the outside world is to deal with the company. This importance was emphasized in Oakbank Oil Co v Crum (1882) where Lord Salborne LC stated the following with reference to the article of association: ‘each party must be taken to have 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. Section 21 of the Companies Act Cap 388 further buttresses the position of the Articles of Association.

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