TC12 ACCOUNTING JUNE-2012

1. STRICTLY CONFIDENTIAL
THE PUBLIC ACCOUNTANTS EXAMINATION
COUNCIL OF MALAWI
2012 EXAMINATIONS
ACCOUNTING TECHNICIAN PROGRAMME
PAPER TC12: COMPANY LAW
MONDAY 4 JUNE 2012 TIME ALLOWED: 3 HOURS
2.00 PM - 5.00 PM
SUGGESTED SOLUTIONS

2. 1
1. (a) The principle expounded in the classic case of Salomon v Salomon (1892) A.C.22
relates to the effect incorporation of a company. The principle is that once a
company is incorporated, it acquires a personality of its own distinct from that of
its members as well as that of its management.
As a consequence of incorporation the company can enjoy rights, own property,
dispose of property, incur liability, sue or be sued in its own right and not as an
agent or trustee of its members. The principle is reflected in Section 15(2) of the
Companies Act, (1984).
(b) Upon incorporation, a company acquires a personality of its own so that whatever
it does becomes the act of the company and not that of its members Section 20 of
the Companies Act. Lifting the veil of incorporation might happen when the
law, for special reasons, departs from the general rule to hold members or officers
of a company personally responsible for actions which otherwise would have
been the responsibility of the company.
The lifting of the veil as an exception to the rule occurs primarily where to hold
otherwise would create problems or lead to absurdities.
(c) The lifting of the veil of incorporation:
Under statutory law
(i) Under Section 42(1) of the Companies Act, if the number of members of
the company falls below the statutory minimum of two and the company
carries on business for more than six months, every member or director
who is aware that the company is carrying on business through that period
will be severally and jointly liable for the company’s debts and liabilities
incurred during that period.
(ii) Under Section 119 of the Taxation Act where a company is liable to a
penalty under the Act, every person who, at the time of commission of the
offence, was an officer of the company, will be personally liable to the
same penalty.
(iii) Under Section 337(2) of the Companies Act, if, during the winding up of
a company or any proceeding against it, is shown that a debt was
contracted by the company at a time when there was no reasonable ground
for its repayment, any member or officer who was knowingly party to the
contracting of the debt will be held personally liable for it.
(iv) Under Section 130(3) of the Companies Act, if it appears that a
company’s business was being carried on with intent to defraud creditors
or for any fraudulent purpose, any person who was party to the carrying on
of the business will be held personally liable for the debt of any other
liabilities of the company.

3. 2
Under the common law
(i) Where a company is using the veil of incorporation to evade legally
binding obligations: Gilford Motor Co. Ltd v Home.
(iv) Where a company is using the veiling of incorporation to evade tax: Unit
Construction Co. Ltd v Bullrek.
(iii) Where a wholly owned subsidiary is in fact an agent or employee of its
holding company, the holding and subsidiary company may be taken as
one single economic unit: Smith, Stone and Knight vs Birmingham
Corporation.
(iv) Where for security reasons e.g. during war the veil of incorporation is
pierced to identify the true nationality of a company: Daimler Co. Ltd vs
Continental Tyre and Rubber Co. (Great Britain) Ltd.
2. (a) A company’s share capital may be altered through an ordinary resolution of the
general meeting as follows:
(i) By creating new shares of such amount as they deem expedient.
(ii) By consolidating and dividing all or any of the share capital of the
company into shares of a larger amount.
(iii) By subdividing all the shares, or any of them, into shares of smaller
amount.
(iv) By cancelling shares which, at the date of the passing of the resolution in
that behalf, have not been taken by any person and thus diminish the
amount of the company’s share capital by the amount of the shares so
called.
(b) The principal rights of a shareholder are:
(i) The right to a dividend, if one is declared.
(ii) The right to vote at meetings of members of the company.
(iii) The right, during the winding up of the company, after the payment of the
debts, to receive a proportionate part of the capital or otherwise to
participate in the distribution of the assets of the company.
(c) The principal duty of a shareholder in a company is to pay what is due on the
share or the nominal amount of the shares.
(d) The main preferential rights that accrue to holders of preferential shares in a
company are:

4. 3
(i) the right to a dividend.
(ii) the right, on the winding up of the company, to receive a proportionate
part of the capital or otherwise to participate in the distribution of the
assets of the company.
3. (a) To raise funds using the shares Tinkhani has in United Paints Limited, he can
either:
(i) Sell the shares.
(ii) Mortgage the shares.
(b) Debentures of a company may be secured by:
(i) A specific charge or a mortgage on particular property of the company.
(ii) A floating charge.
(iii) Both a specific and floating charge. When specifically secured debentures
are issued, by way of a further security floating charge.
(c) I would advise John that since Superior Garments Limited had defaulted on its
obligations under the debenture, he can have the following remedies, depending
upon the terms of the debenture.
(i) he can commence a debenture holder’s action in court; once he obtains
judgment he can levy execution by seizing the company’s property if
judgment is not satisfied.
(ii) where the debenture is secured he can exercise the power to appoint a
receiver or apply to court for the appointment of a receiver.
(iii) he can apply to the court for an older for the sale or foreclosure of the
company’s security.
(iv) he can commence winding up proceedings petitioning the court under
Section 213(1)(d) of the Companies Act for the company’s compulsory
winding up of the company on grounds that it cannot pay its debts.
4. (a) In Foss v Harbottle two shareholders brought an action on behalf of themselves
and all other shareholders except the directors who had sold land to the company
for an undisclosed profit. The court dismissed the action on the grounds that the
two shareholders were not the right plaintiffs to the action.
The rule is that the separate personality which a company acquires on its
incorporation means that whenever a wrong is done the company, only the

5. 4
company is harmed by the wrongful act and therefore only the company can sue
to remedy it.
Vingram V.C. said that it was not, nor could it successfully be argued that it was
a matter of course for any individual members of a corporation thus to assume to
themselves the right of suing in the name of the corporation. In law, the
corporation and aggregate members of the corporation are not the same thing.
Thus, in Cotter v National Union of Deamen (1929) 2 Ch 58, Lord Justice
Russel explained that the rule in Foss v Harbottle really works by means of
something in the nature of a dilemma. The only possible plaintiff to stop an intra
vires act is the corporation itself. If an individual is in a position to be able to
use the name of the corporation, then the majority are in disagreement with him,
and he is not entitled to bring an action in his own name.
(b) The most appropriate thing for Richard to do in the circumstances of this case is
to avail himself of the remedy under Section 203(1) of the Companies Act which
provides that any member of a company may apply to the court for an order under
this section of the ground:
(i) that the affairs of the company are being conducted or the powers of the
directors are being exercised in a manner oppressive to one or more of the
members or in disregard of this or their proper interest as members of the
company.
(ii) that some of the act of the company has been done or is threatened or that
some resolution of the members or any class of them has been passed or is
proposed, which unfairly prejudicial to, one or more of the members.
It is undoubtedly clear in this particular case that the acts by management of Kaso
Timbers Limited are or will be oppressive to or in disregard of Richards proper
interests as he still wants to be a shareholder in the company and further there is
no act that Richard has done which justifies such an act on the part of
management.
Further, since the facts show that the management has only decided to acquire the
shares and have not actually acquired the same, it can properly be said to be a
threatened act which unfairly discriminates against, or it is otherwise unfairly
prejudicial to Richard.
In Re: Bovey Hotel Ventures Limited ChD31 July 1981 Justice Slade, in
referring to an English equivalent of Section 203, said that a member of a
company will be able to bring himself within the section if he can show that the
value of his shareholding in the company has been seriously diminished or at least
seriously jeopardized by reason of a course of conduct on the part of those
persons who have had de facto control of the company, which has been unfair to
the member concerned. He went on to say that the test of unfairness is whether a
reasonable bystander observing the consequences of their conduct, would regard
it as having unfairly prejudiced the petitioner’s interests.

6. 5
If the court is satisfied that Richard’s petition is well founded, it is empowered by
Section 203(2) to make such an order as it thinks fit for giving relief in respect of
the matters complained of, more particularly, the court may amongst others:
(i) direct or prohibit any act or cancel or any transaction or resolution;
(ii) regulate the conduct of the company affairs in future (Section 203(2) of
the Companies Act.
5. (a) (i) Section 140(1) of the Companies Act provides that the expression
“director” means any person by whatever name called who is appointed to
direct and administer the business and affairs of the company. It
should be noted however, that not every person in a company who is
referred to as director is necessarily a director. Some companies prefer
to motivate their employees by giving them titles in order to enhance
their status in the organization. Some “sales directors” and “directors of
research” are in this category.
The ultimate test whether one is or is not a director is membership to the
board of directors. Thus a director, by virtue of his office, is entitled to
attend board meetings at all times. But if an individual only attends such
meetings upon invitation, for instance, in order to give a report, then he is
not a director.
(ii) Section 141(i) of the Companies Act provides that the statutory
minimum number of directors is three for every company.
(iii) If at any time the number of directors is less than three and the company
continues to carry on business for more than two months thereafter, the
company and every director and members of the company who is in
default shall be liable to a fine not exceeding K10 for everyday during
which it so carries on business after the expiration of such two months
without having at least three directors and every director and members of
the company who is cognizant of the fact that it is carrying on business
with fewer than three directors shall be jointly and severally liable for all
the debts and liabilities of the company incurred during that time Section
141(ii) of the Companies Act.
(b) These are outlined under Section 142(1) of the Companies Act and are:
(i) a body corporate;
(ii) an infant or any other person under legal disability;
(iii) any person prohibited or disqualified from so acting by any order of court
for the time being in force; and

7. 6
(iv) except with the leave of the court, an undischarged bankrupt.
(c) The procedure to follow is outlined under Section 146 of the Companies Act.
Continental Hotels Limited may, by ordinary resolution, at any general meeting,
remove from office Mr Moyo or any of its directors notwithstanding anything in
its articles or in any agreement with any director (Section 146(1) of the
Companies Act.
This is, however, subject to the right to compensation open to the director under
such agreement on the termination of his directorship or of any right to damages if
his removal from his directorship constitutes a breach of such service agreement
(Section 146(7) of the Companies Act.
A resolution to remove a director shall not be moved at any general meeting
unless notice of the intention to move it has been given to the company not less
than thirty five days before the meeting (Section 146(2) of the Companies Act.
On receipt of such notice, the company shall forthwith send a copy thereof to the
director concerned who shall be entitled (a) to be heard on the resolution at the
meeting; and (b) to send to the company a written statement, copies of which the
company shall send with every notice of the general meeting or, if the statement is
received too late, shall forthwith circulate to every person entitled to notice of the
meeting in the same manner as notices of the meetings are required to be given
(Section 146(3)(a) and (b) of the Companies Act.
Continental Hotels Limited shall, however not need to circulate such statement if
(i) it is received by the company less than seven days before the meeting or (ii) if
the court (on application by the company or any other person who claims to be
aggrieved) so orders upon being satisfied that the statement is unreasonably long
or that the rights conferred by this section (Section 146) are being abused to
secure needless publicity for defamatory matter.
6. (a) A court may order the winding up of a company if:
(i) The company has, by special resolution, resolved that it be wound up by
the court;
(ii) The company does not commence its business (if any) within a year from
its incorporation or suspends its business for a whole year.
(iii) The number of members is reduced to two;
(iv) The company is unable to pay its debts.
(v) The period, if any, fixed for the duration of the company has expired, or
the even, if any, occurs on the occurrence of which the company was to be
dissolved.

8. 7
(b) A company may be wound up under an order of the court on the petition of:
(i) the company;
(ii) any creditor, including a contingent or prospective creditor;
(iii) a member or any person who is the personal representative of a deceased
member or the trustee in bankruptcy or a deceased member;
(iv) the Attorney General;
(vi) any liquidator of the company appointed in a voluntary liquidation.
(c) An auditor, whilst acting in performance of his duties under the Act, must act in
such a manner as faithful, diligent, careful and ordinarily skilful auditors would
act in the circumstances.
(d) The powers and rights of auditors towards the companies are:
(i) Auditors have the right of access at all times to the places of business and
the books and accounts and vouchers of the company shall be entitled to
enquire of the company such information and explanation as they think
necessary for the performance of their duties.
(ii) Auditors are entitled to attend any general meeting of the company and to
receive all notices of the other communications relating to any general
meeting and to be heard at any general meeting on any part of the business
of the meeting which concerns them as auditors.
(iii) The auditors of a company may apply to the court of directors in relation
to any matter arising in connection with the performance of their functions
under the Act.
7. (a) An extraordinary general meeting of a company may be requisitioned by any
member or members of the company holding, at the date of the requisition, not
less than one twentieth of the total voting rights of the members having the right
to vote at general meeting of the company.
(b) The following persons are entitled to receive notices of general meetings of a
company.
(i) Every member having the right to vote at such meeting;
(ii) Every person upon whom ownership of a share devolves by reasons of his
being a legal personal representative, receiver, or trustee in bankruptcy of
such a member.
(iii) Every director of the company;

9. 8
(iv) Every auditor of the company for the time being.
(c) (i) 21 days notice is required for any other meeting other than an annual
general meeting or a meeting of the passing of a special resolution.
(ii) 14 days notice is required for any other meeting other than an annual
general meeting or a meeting of the passing of a special resolution.
(d) The following persons are entitled to attend and to speak at any general meeting
of a company:
(i) Every member of the company having the right to vote at such meeting;
(ii) Every person whom the ownership of a share devolves by reason of his
being a legal representative, receiver or trustee in bankruptcy of such a
member;
(iii) Every secretary of the company;
(iv) Every auditor for the time being of the company.
(e) For a resolution to operate as a valid special resolution, it must have been passed
by a majority of not less than three fourths of the votes cast by such members of
the company, as being entitled so to do, vote in person or by proxy at a general
meeting of which not less than 21 days notice, specifying the intention to
propose the resolution as a special resolution, has been given.
(f) A member’s proxy at a general meeting has a right to attend and vote instead of
the member and he shall have the same right as the member to speak at the
meeting.
8. (a) (i) A company may be wound up voluntarily in the following circumstances:
(1) When the period, if any, fixed for the duration of the company by
the Memorandum or Articles expires, or event.
(2) If any, occurs, on the occurrence of which the memorandum or
articles provide that the company is to be dissolved.
(3) If the company in a general meeting passes an ordinary resolution
that the company shall be wound up voluntarily. Section 245(1)(a)
of the Companies Act).
(4) If the company so resolves by special resolution (Section
245(1)(b) of the Companies Act.
(ii) The procedure to be followed upon passing a resolution for voluntary
winding up of a company is under Section 245(2) of the Companies Act.

10. 9
(1) Within seven days of passing a resolution to wind up, deliver a
copy of the resolution to the Registrar for registration.
(2) Within fourteen days of passing a resolution to wind up, cause
notice thereof to be published in the Gazette.
(iii) Under Section 246 of the Companies Act a voluntary winding up shall
commence at the time of the passing of the resolution for voluntary
winding up.
(b) The effect of voluntary winding up of a company under Section 247 of the
Companies Act as follows:
(i) The company shall, from the commencement of the winding up, cease to
carry on its business, except so far as in the opinion of the liquidator, this
is required for the beneficial winding up thereof, but the corporate state
and corporate powers of the company shall continue until it is dissolved.
(ii) Any transfer of shares, not being a transfer made to or with the sanction of
the liquidator, and any alteration in the status of the members made after
the commencement of the winding up, shall be void.
(c) (i) Section 248(2) of the Companies Act statement should show the following:
(1) The assets of the company, and the total amount expected to be
realized therefrom.
(2) The liabilities of the company; and
(3) The estimated expenses of winding up.
(ii) Factors which will give effect to the declaration under Section 248(3) of
the Companies Act are as follows:
(1) It should be made at the meeting of directors.
(2) It should be made within 5 weeks immediately preceding the date
of the passing of the resolution for voluntary winding up.
(3) It should be delivered to the Registrar for registration on or before
the date on which the notices of the meeting at which the
resolution for the winding up of the company is to be proposed are
sent out.
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