1

Introduction to Business Associations

Business associations is a course that introduces the students to the corporate world. It
encompasses the different types of business associations that can be formed in
Zambia; the formalities to be adhered to when forming such business organisations; the
regulatory requirements; the legal nature of these business; finally the advantages of
one type of business against the other. An attempt has been made in this module to
expose other factors that affect businesses by making reference to the business
environment, even though the course has a bias towards the legal aspects of business;
it worth mentioning that businesses are not the exclusive domain of the law. Hence,
reference will be made to factors such as social, political, economic etc, and how they
affect the existence of a business. Emphasis must also be put on company law, as this
course is also aimed at laying the foundation of company law as a course. It is
therefore, hoped that at the end of the course, the students will display knowledge on
the aforementioned areas.
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CHAPTER ONE
AN OVERVIEW OF BUSINESS ENTITIES
The aim of this chapter is to introduce the students to the idea behind the formation
of business organisations by explaining why people may form business organisations
and the benefits of forming business associations.

Objectives:
At the end of the chapter, students must be able to:
1. Define what an organisations is
2. Explain the characteristics of business associations
3. Explain why business associations may be formed
4. Define what a business organisation is
5. Give in outline, the types of business associations

1.0. Business Organisations and their stakeholders

1.1.Definition – 'An organisation is a social arrangement which pursues collective goals,

which controls its own performance and which has a boundary separating it from its
environment'. Boundaries can be physical or social.

Key categories:
Commercial
Not for profit
Public sector
Charities
Trade unions
Local authorities
Mutual associates
Lecture example 1 l
The common characteristics of organisations are as follows:
(a)Organisations are preoccupied with performance, and meeting or improving their
standards.
(b)Organisations contain formal, documented systems and procedures which enable
them to control what they do.
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(c) Different people do different things, or specialise in one activity.

(d) They pursue a variety of objectives and goals.
(e) Most organisations obtain inputs (e.g. Materials) and process them into outputs (e.g.
for others to buy).

1.2.0.Why do organisations exist?

Organisations can achieve results which people cannot achieve by themselves.
(a) Organisations overcome people’s individual limitations, whether physical or
intellectual.
(b) Organisations enable people to specialise in what they do best.
(c) Organisations save time because people can work together or do two aspects of a
different tasks at the same time.
(d) Organisations accumulate and share knowledge.
(e) Organisations enable synergy: by bringing together two individuals their
combined output will exceed their output if they continued working separately. In
brief organisations enable people to be more productive.

1.3.0.How Organisations differ

Organisations differ in a number of ways and below are some of the possible
differences.
 Ownership-Some organisations are owned by private owners or shareholder. These
are private sector organisations. Public sector organisations are owned by the
government.
 Control-Some organisations are controlled but owners themselves but many are
controlled by people working on their behalf. Some are indirectly controlled by
government-sponsored regulators.
 Activity-What organisations do varies enormously e.g. health or manufacturing, etc.
 Profit or non-profit orientation-Some businesses exist to make a profit. Others for
example, the army are not profit oriented.
 Legal status-Organisations may be limited companies or partnerships.
 Size-The business may be a small family business or a multi-national corporation.
 Sources of finance-Business can raise finance by borrowing from banks or
government funding or issuing shares.
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 Technology-Businesses have varying degrees of technology to use, e.g. Computers.

1.4.0.Types of business organisations

Profit vs. Non-profit orientation- Some businesses exist to make a profit. Others for
example, the army are not profit oriented.

1.4.1.Private v public sector

Organisations owned or run by the government (local or national) or government agencies are
described as being in the public sector. All other organisations are classified as the private
sector.

1.4.2.Private sector businesses

A business organisation exists to make a profit. The cost of its activities should be less
than the revenues it earns from providing goods or services. Profits are not incidental to
its activities, but the driving factor.

1.4.3.Limited liability
Limited companies (denoted by X Ltd or X plc) are set up so as to have a separate legal entity
from their owners (shareholders). Liability of these owners is thus limited to the amount
invested.

1.4.4.Private v public
Private companies are usually owned by a small number of people (family members), and
these shares are not easily transferable. Shares of public companies will be traded on the
Stock Exchange.

1.4.4.1.Legal Status
Someone setting up a business can choose to go into business alone, take one or more
partners who also share the profits of the business, or set up a limited company.
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1.4.4.2.Sole proprietorship

With this type of business organization, you would be fully responsible for all debts and
obligations related to your business and all profits would be yours alone to keep. As a sole
owner of the business, a creditor can make a claim against your personal or business assets to
pay off any debt.

1.4.5.Advantages:

 Easy and inexpensive to form a sole proprietorship (you will only need to register
your business name provincially, except in Newfoundland and Labrador)
 Relatively low cost to start your business
 Lowest amount of regulatory burden
 Direct control of decision making
 Minimal working capital required to start-up
 Tax advantages if your business is not doing well, for example, deducting your losses
from your personal income, lower tax bracket when profits are low, and so on
 All profits will go to you directly

1.4.6.Disadvantages:

 Unlimited liability (if you have business debts, personal assets would be used to pay
off the debt)
 Income would be taxable at your personal rate and, if your business is profitable, this
may put you in a higher tax bracket
 Lack of continuity for your business, if you need to be absent
 Difficulty raising capital on your own

1.5.0.Partnerships

A partnership would be a good business structure if you want to carry on a business with a
partner and you do not wish to incorporate your business. With a partnership, you would
combine your financial resources with your partner into the business. You can establish the
terms of your business with your partner and protect yourself in case of a disagreement or
dissolution by drawing up a specific business agreement. As a partner, you would share in the
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profits of your business according to the terms of your agreement.

1.5.1.Advantages:

 Easy to start-up a partnership

 Start-up costs would be shared equally with you and your partner
 Equal share in the management, profits and assets
 Tax advantage, if income from the partnership is low or loses money (you and your
partner include your share of the partnership in your individual tax return)

1.5.2.Disadvantages:

 Similar to sole proprietorship, as there is no legal difference between you and your
business
 Unlimited liability (if you have business debts, personal assets would be used to pay
off the debt)
 Hard to find a suitable partner
 Possible development of conflict between you and your partner
 You are held financially responsible for business decisions made by your partner (for
example, contracts that are broken)

1.6.0.Corporations

Another business structure is to incorporate your business. When you incorporate your
business, it is considered to be a legal entity that is separate from the owners and
shareholders. As a shareholder of a corporation, you will not be personally liable for the
debts, obligations or acts of the corporation.

1.6.1.Advantages:

 Limited liability
 Ownership is transferable
 Continuous existence
 Separate legal entity
 Easier to raise capital
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 Possible tax advantage as taxes may be lower for an incorporated business

1.6.2.Disadvantages:

 A corporation is closely regulated

 More expensive to incorporate than a partnership or sole proprietorship
 Extensive corporate records required, including shareholder and director meetings,
and documentation filed annually with the government
 Possible conflict between shareholders and directors
 Possible problem with residency of directors, if they are in another province or
country.

1.7.0.Types of limited companies

There are public limited companies and private limited companies.

 Most private companies are owned by only a small number of shareholders. Public
companies are generally owned by a wider proportion of the investing public.
 Shares in public companies can be offered to the general public.
 The directors of a private limited company are likely to hold a company’s shares
than directors of a public company.
 A private company’s share capital is normally provided from three sources.
i. The founder promoter
ii. Business associates of the founder or employer
iii. Venture capitalists
 A public company’s share capital can be raised from the public

1.7.1.The public sector

The public sector comprises all organisations owned and run by the government and
local government. Some examples are: the armed forces; government departments; and most
schools and universities. Public sector organisations have a variety of objectives.

1.7.1.1.Key characteristics of the public sector

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(a) Accountability, ultimately to Parliament

(b) Funding, the public sector can obtain funds in three main ways: Raising
taxes; making charges (e.g. For prescription) and borrowing.
(c) Demand for services-in the public sector, demand for many services is
practically limitless.
(d) Limited resources. Despite the potentially huge demand for public
services, constraints on government expenditure mean that resources are
limited and that demand cannot always be met.

1.7.1.2.Advantages

 Fairness provides services for all

 Filling the gaps left by the private sector
 Public interest
 Economic scale. Costs can be spread if everything is centralised
 Cheaper finance. Taxes or borrowing backed by government guarantees might be
cheaper than borrowing at commercial rates.
 Efficiency. The public sector is sometimes more efficient than the private sector.

1.7.1.3.Disadvantages

 Accountability. Inefficiency may be ignored as taxpayers bear losses.

 Interference. Politicians may interfere with the operations of public institutions.
 Cost. There can be conflict between economy of operation and adequacy of service.
The public will demand as perfect a service a s possible but will not bear the
cost involved.

1.7.1.4.Non-governmental organisations

A non-governmental organisation (NGO) is an independent voluntary association of

people acting together for some common purpose (other than achieving government
office or making money). NGO’s need to engage in fundraising and mobilisation of
resources (donations, volunteer labour, materials).This process may require quite complex
levels of organisation. The following are some organisational features of NGOs:
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 Staffing by volunteers as well as full time employees

 Finance form grants or contracts
 Skills in advertising and media relations
 Some kind of national ‘headquarters’
 Planning and budgeting expertise

1.8.0.Co-operative societies and mutual associations

Co-operatives are businesses owned by their workers or customers, who share profits. Some
features of co-operatives are:

 Open membership
 Democratic control (one member, one vote)
 Distribution of the surplus in proportion of purchases
 Promotion of education

1.8.1.Mutual associations are similar to co-operatives in that they are owned by their
members rather than by outside investors. Credit unions are examples of mutual
associations. They are financial institutions owned and controlled by their members.

Revision Questions

1. What is an association?
2. What are the reasons why people may form organisations?
3. Briefly explain the features of organisations.
4. Discuss the different types of organisations that may be formed.

Recommended Texts:

Andrew Clark, 2005, Business Entities. London: Sweet and Maxwell

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CHAPTER TWO
THE BUSINESS ENVIRONMENT

2.0.What is a business environment?

A business organization cannot exist a vacuum. It needs living persons, natural resources and
places and things to exist. The sum of all these factors and forces is called the business
environment.

Objectives
At the end of this chapter, Students must be able to:
1. Explain what the business environment is
2. Describe the details of the components of the business environment
3. Illustrate the various effects that that these components have on the business
environment.
4. Evaluate the relevance of these factors to the law
5. To understand the significance of studying the business environment

2.1.Business environment is of two types-

(i) Micro environment or the internal environment
(ii) Macro environment or the external environment

2.1.1.(i)Micro-environment or the internal environment of the business

Micro environment comprises of the factors in the immediate environment of the business
that affect the performance of the business. In includes the suppliers, competitors, Marketing
intermediaries, customers, pressure groups and the general public. Suppliers form an
important factor of the micro environment of business as the importance of reliable sources of
supply are obvious. Suppliers include the financial labour input. Stock holders, banks and
other similar organizations that supply money to the organization are also termed as
suppliers. Managers always strive to ensure a study flow of inputs at the lowest price.
Customers are also an important factor in the internal environment of business. The
customers or the clients absorb the output of an organization and a business exists to meet the
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demands of the customers. Customers could be individuals, industries, government and other
institutions. Labour force is also an important part of the internal environment of business.
Other than these the business associates, competitors, regulatory agencies and the marketing
intermediaries are also a part of the micro business environment.

2.1.2.Macro environment / External environment of Business

The forces and institutions outside of the organization that can potentially affect the
performance of the organization come under the external environment of Business. The
macro environment of business consist of the economic, demographic, natural, cultural and
political forces. The external environment of business is often categorized into the economic
environment, political and government environment, socio cultural environment and the
international environment.

2.1.3.Analysing the business environment

The environment is everything that surrounds an organisation, physically and socially.
Management cannot control the environment; however it influences all aspects of
organisational activity and so must be viewed strategically. Johnson and Scholes suggest the
following the following procedure:

 Step 1 Assess the nature of the environment

 Step 2 Identify the influences
 Step 3 Prepare a structural analysis

These steps should identify important developments, then the following questions
should be asked.

 Step 4 What is the organisation’s position in relation to other organisations?

 Step 5 What threats and/or opportunities posed by the environment?

An organisation’s environment may be examined in a number of ways:

(a) Global or local
(b) General/task
 General or macro environment
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 Task or micro-environment

The environment is a source of uncertainty. The overall degree of uncertainty may be

assessed along two axes:
(a) Simplicity/complexity
I. the variety of influences;
II. the amount of knowledge necessary and
III. the interconnectedness of environmental influences causes complexity.
(b) Stability/dynamism

2.2.The changing environment

Changes in the business environment have been driven by a number of developments
which include:
i. Globalisation of business
ii. Science and technology
iii. Mergers acquisitions and strategic alliances
iv. Changing customer values and behaviour
v. Increased scrutiny of business decisions be government and the public
vi. Increased liberalisation of trade and deregulation and co-operation between
business and government ha s increased access to foreign markets
vii. Changes in business practices
viii. Changes in the social and business relationships

The general environment covers all the political/legal, economic, social/cultural and
technological influences in the countries in which an organisation operates. PEST analysis
is used as a framework for generating ideas for the factors that are influencing the
environment:
P Political/Legal/Regulation
E Economic
S Social/Cultural/Fashion
T Technology

2.2.1.Political and legal environment

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The political factors impacting on the environment include:

(a) Degree of government intervention
(b) Policy direction
(c) Political risk

The legal framework in which organisations operate derives from:

(a) Parliamentary legislation
(b) Government regulations
(c) Treaty obligations
(d) Official regulations
(e) International bodies
Key legislation for organisations includes:
 Company law
 Health and Safety
 Criminal law Data Protection
 Employment law

2.2.2.Influencing government
Businesses are able to influence government policies in a number of ways:
a) They can employ lobbyists to put their case of individual ministers or civil
servant
b) They can give MP’s non-executive directorship
c) They can try to influence public opinion

2.2.3.Political risk and political change

This may come about as a result of changes in the law. Changes in UK law are predictable.
And these changes have an influence on both the national and international levels.
The political risk in a decision is the decision that political factors will invalidate the
strategy of a firm, and may damage the firm e.g. wars, political chaos, corruption and
nationalism.

2.3.0.SWOT ANALYSIS
A SWOT analysis is a strategic planning technique that involves scanning the internal and
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external business environment to determine whether a specific goal is attainable and what
needs to be involved in achieving that goal.

2.3.1.Strengths

The "S" in SWOT stands for strengths, internal factors that are favorable to achieving the
desired outcome. Strengths may include product patents, trade secrets, exclusive access to
resources and company reputation.

2.3.2.Weaknesses

The "W" in SWOT stands for weaknesses, internal factors that may interfere with achieving
the desired result, including high overhead, lack of supplier relationships and poor reputation.

2.3.3.Opportunities

The "O" in SWOT stands for Opportunities; these are external factors that may help in
reaching the desired outcome, including new technologies, increased customer demand and
loosened regulations.

2.3.4.Threats

The "T" in SWOT stands for threats, external factors that may hinder the achievement of the
desired goal; these include changes in customer preferences, intense competition in a
particular market and governmental regulations.

2.3.5.Using the SWOT Analysis

Once a SWOT analysis has been completed, it should be reviewed to determine whether the
desired outcome is feasible. Management should focus on how to capitalize on each strength
and opportunity, and how to mitigate each weakness and threat.

2.4.0. Porter’s Five Forces Model

1. Threat of entry: Important common entry barriers are 1.Government Policy

2.Economies Of Scale 3.Cost Disadvantages Independent Of Scale 4.Product
Differentiation 5.Monopoly Elements 6.Capital Requirements
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2. Rivalry among existing competitors: Factors influencing the intensity of rivalry

1.Number of Firms and their Relative Market Share, Strengths etc. 2.State of Growth
of Industry. 3.Fixed or Storage Costs. 4.Indivisibility of Capacity Augmentation.
5.Product Standardisation & Switching Costs. Rivalry among existing competitors.
6.Strategic Stake 7.Exit Barrier 8.Diverse Competitors 9.Switching Costs 10.Expected
Retaliation
3. Threat of substitutes: An Important force of competition is the power of substitutes.
“Substitutes limit the potential returns in an industry by placing a ceiling on the price
firms in the industry can profitability charge .The more attractive the price
performance alternative offered by substitute, the firmer the lid on industry profits.’’
4. Bargaining power of buyers: Important determinants of the buyer power, explained
by Porter, are the following 1.The volume of purchase relative to the total sale of the
seller. 2.The importance of the product to the buyer in terms of the total cost. 3. The
extent of standardisation or differentiation of the product. 4. Switching costs.
5.Profitability of the buyer (low profitability tends to pressure costs down). 6.Potential
for backward integration by buyer. Importance of the industry’s product with respect
to the quality of the buyer’s product or services. 8.Extent of buyer’s information.
5. Bargaining power of suppliers is an important determinant.1.Extent of
concentration & domination in the supplier industry. 2.Importance of the product to
the buyer. 3.Importance of the buyer to the supplier 4.Extent of substitutability of the
product 5.Switching costs 6.Extent of differentiation or standardisation of the product
7.Potential for forward integration by suppliers.

2.5.0.Strategic Groups

According to Porter, “a strategic group is the group of firms in an industry following the
same or similar strategy along the strategic dimensions’’. Normally , a small number of
strategic groups capture the essential strategic differences among firms in the industry
although one may even think of the extreme cases of an industry having only one
strategic group on the one end and each firm in an industry amounting to a strategic group
on the other end. There are many strategic analysis tools that a firm can use, but some are
more common. The most used detailed analysis of the environment is the PESTLE
analysis. This is a bird’s eye view of the business conduct. Managers and strategy
builders use this analysis to find where their market currently.  It also helps foresee where
 16

the organization will be in the future.

Questions

1.What is the business environment?

2.What are the two main environments considered when analyzing the business
environment?

3. Of what relevance is the study of the business environment to business

associations?

Recommended Texts: Accountant in Business, 2013 Paper F1 Course Notes

ACF1CN07, BPP Learning Media.
 17

CHAPTER THREE

SOLE PROPRIETORSHIP

3.0. Introduction

A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of
business entity that is owned and run by one natural person and in which there is no legal
distinction between the owner and the business. The owner is in direct control of all elements
and is legally accountable for the finances of such business and this may include debts, loans,
loss etc. The owner receives all profits (subject to taxation specific to the business) and has
unlimited responsibility for all losses and debts. Every asset of the business is owned by the
proprietor and all debts of the business are the proprietor's. It is a "sole" proprietorship in
contrast with partnerships (which have at least two owners). A sole proprietor may use a trade
name or business name other than his, her or its legal name. They will have to legally
trademark their business name, the process being different depending upon country of
residence.1

Objectives

At the end of this chapter, students must be able to:

1. Distinguish between a sole trader an d other business s types

2. Explain how sole traders are established
3. Explain the obligations of the sole trader
4. Identify and explain the advantages of the sole trader
5. Explain how sole traders are terminated

3.1. Formation

A sole proprietor starting a new business involves them compiling a business plan related to
ambitions for development and determined results to be achieved.2 Sole owners are engaged
1
"Small Business.gov.au - How do I register my business name?", Retrieved 2015-07-13.

2
"Sole Proprietorship Foundation & Development". Business2sell. Retrieved 11 December 2014.
 18

in many varieties of industry and commerce. The selection of a business type by a new sole
proprietor is in many instances, motivated by appropriate business experience in a particular
field, especially those pertaining to enterprises involving the marketing and selling of defined
products and services.

A crucial component of a sole proprietorship within a business plan is the provision of an

inherent guideline, for actions that require implementing for a business to achieve growth.
The business name and products are critical aspects in the founding of a sole proprietorship
and once selected, should be protected. In the event of a determined brand name being
legalized, information regarding trademark protection is available from the Patent and
Trademark Office. In Zambia, a sole trader’s business is established by registration with
the Registrar of Business names under Section 2 of Cap 389 of the Laws of Zambia.

3.2. Finances

For the sole proprietor there are a variety of options in obtaining financial support for their
business, including loan facilities available for small businesses.

Sole proprietors are able to finance legitimate operating expenses; for example, working
capital, furniture, leasehold improvements and building renovations. Many and varied private
organizations and individuals seek opportunities to invest and fund a business that may not
qualify for traditional financing from institutions, such as banks. For the sole proprietor,
seeking to take advantage of this facility, there are various factors that must be understood
and adhered to regarding the loan application.

3.3. Characteristics of a sole traders business

Sole Proprietorship key attributes are:

 Creation (minimum requirements) - No Formalities for creating a sole proprietorship.

 Profits / Losses / Distributions - Owner may use all profits and losses for business.
 Liability - Owner faces unlimited personal liability.
 Capital / Financing - All capital obtained from owner or through loans based on
owner's creditworthiness.
 Duration - Usually no continuity upon disability, retirement or death of owner as
there is no perpetual succession.
 Transfer of Ownership - Assets may be sold in entirety or in part.
 19

 Management and Control - Owner manages and controls the company.

 Taxation - The business does not file or pay taxes.
 Reporting Requirements - None.
 Fees - None.

3.4. Advantages and disadvantages of Sole Proprietorship

3.4.1. Advantages of a Sole Proprietorship

 Easiest and least expensive form of ownership to organize.

 Sole proprietors are in complete control, and within the parameters of the law, may
make decisions as they see fit.
 Sole proprietors receive all income generated by the business to keep or reinvest.
 Profits from the business flow-through directly to the owner's personal tax return.
 The business is easy to dissolve, if desired.

3.4.2. Disadvantages of a Sole Proprietorship

 Sole proprietors have unlimited liability and are legally responsible for all debts
against the business. Their business and personal assets are at risk.
 May be at a disadvantage in raising funds and are often limited to using funds from
personal savings or consumer loans.
 May have a hard time attracting high-calibre employees, or those that are motivated
by the opportunity to own a part of the business.
 Some employee benefits such as owner's medical insurance premiums are not directly
deductible from business income (only partially deductible as an adjustment to
income).

3.5. Termination of a Sole Trader’s Business

Provisions concerning the termination of a sole trader’s business are contained under
Section 15 (3) of the Act where the Registrar would terminate himself where he or she
believes that the registered business is not carrying on business. The other ways through
which the business may be terminated are:

 Death of the proprietor

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 Bankruptcy
 Fulfilment of the objective
 Expiration of the period for which it was formed

Revision Questions

1. What is a sole trader’s business?

2. What are the formalities to be followed when registering this business?
3. Account for the advantages and disadvantages of registering a sole trader’s
business.

Recommended Text: Andrew Clark, 2005, Business Entities. London: Sweet and Maxwell
 21

75b7c1f086

CHAPTER FOUR

PARTNERSHIPS

4.0. Introduction

A partnership is the relationship which exists between persons carrying on a business in

common with a view to profit. It involves an agreement between two or more parties to enter
into a legally binding relationship and is essentially contractual in nature. According to
Tindal CJ in Green v Beesley ,3 ‘I have always understood the definition of partnership to be
a mutual participation ...’, yet the participants do not create a legal entity when they create a
partnership. James LJ in Smith v Anderson (1880) 15 Ch D 247 at 273 saw the concept in the
following way:

“An ordinary partnership is a partnership composed of definite individuals bound together

by contract between themselves to continue combined for some joint object, either during
pleasure or during a limited time, and is essentially composed of the persons originally
entering into the contract with one another. “

Despite these definitions, there are limitations on the number of persons that can form a
single partnership. A partnership will have a name (called a firm name) and this is registered
under one of the state Business Names Acts.
At the end of the chapter, students must be able to:

Objectives

1. Identify relevant laws and explain how a partnership business entity is

established
2. Explain what a partnership agreement is and its significance
3. Identify and explain rights and duties of partners in a partnership
4. Explain the relationship between the partnership and third parties
5. Explain the advantages and disadvantages of partnerships

3
[1835] 2 Bing N C 108 at 112
 22

6. Explain the process of dissolving a partnership business

4.1.Definition

A partnership is defined by the PARTNERSHIP ACT 1980 as ‘the relation which subsists

between a person carrying on a business in common with a view to profit’.

(a) A partnership is described as a ‘relation’ because, unlike a company, it

is not a legal entity separate from the partners.

(b) The partners must carry on a ‘business’, i.e. a trade, profession or vocation over a
period of time. If they merely co-own property this does not create a partnership.
(c) ‘In common’ means the business must be carried on for the joint benefit of the
persons who are partners.
(d) ‘View to profit’ means the partners must intend to make a profit. It does not
mean that if the actual result is a loss there is no partnership.

4.2. Determining when a partnership exists

Necessary elements
The Partnership Act provides that three elements must be satisfied in order to establish the
existence of a partnership. These elements are:
 the carrying on of a business;
 in common;
 with a view to profit.
If one of these elements is missing, the relationship is not one of partnership.

4.2.1. Carrying on of a business

The task of determining what is meant by the phrase ‘carrying on business’ has raised the
issue of whether there is a need to establish some repetitiveness of action, as opposed to
isolated action taken by parties. A number of early decisions emphasised the need for
continuity or repetition. In Smith v Anderson,4 a group of investors subscribed for the
purchase of shares through a trust in various submarine cable companies. The shares were
4
[1880] 15 Ch D 247
 23

sold to these investors by the trustees of the trust who then issued certificates to the
subscribers. A £100 certificate was issued for each £90 certificate that was subscribed. Smith,
along with more than 20 other people, received a certificate. Later Smith applied to wind up
the trust on the basis that it was an illegal association under s 4 of the English Companies Act
1862. Section 4 of this Act provided so far as was relevant:

“No company, association or partnership consisting of more than twenty persons shall be
formed after the commencement of this Act for the purpose of carrying on any other business
that has for its object the acquisition of gain by the company, association or partnership, or
by the individual members thereof, unless it is registered. “

The question was whether the trust was a partnership. The court looked at the nature of the
trust and of the relationship of those involved in it. Although each holder of a certificate
could elect trustees of the trust and received a trust report, and the elected trustees had certain
management powers, including the power to sell the shares and to reinvest or distribute the
proceeds, it was noted that the trustees had no power to speculate and that there were no
mutual rights and obligations amongst those involved. In these circumstances, the court held
that the trust was not a partnership as there was no association for the purpose of ‘carrying on
a business’.

According to Brett LJ at 277-8:

“The expression ‘carrying on' implies a repetition of acts and excludes the case of an
association formed for doing one particular act which is never to be repeated. That series of
acts is to be a series of acts which constitute a business ...The association, then, must be
formed in order to carry on a series of acts having the acquisition of gain for their object.”

The same judge, then Lord Esher MR, stated in Re Griffin; Ex parte Board of Trade:5

“If an isolated transaction, which if repeated would be a transaction in a business, is proved

to have been undertaken with the intention that it should be the first of several transactions,
that is with the intent of carrying on a business, then it is a first transaction in an existing
business.”

5
[1890] 60 LJQB 235 at 237
 24

In Re Griffin, Griffin bought a piece of land with the intention of building cottages on it and
then selling them. However, at the time of entering into this building speculation, he had no
money. He had also undertaken certain contracts for making roads, which he could not carry
on without borrowing money to pay for the labour and materials. One of the questions facing
the court was whether Griffin had entered into business as a builder. The court concluded that
there was no evidence that this was the first of an 3intended series of transactions.

4.2.2. Carrying on of a business in common

To constitute a partnership the business must be carried by, or on behalf of, all the partners
(Re Ruddock (1879) 5 VLR (IP & M) 51); however, all the partners need not take an active
role. In Lang v James Morrison & Co Ltd,6 an action was brought by an English company,
James Morrison & Co Ltd, against three defendants, J McFarland, T Lang and W Keates. The
plaintiffs carried on the business of receiving and disposing of frozen meat from abroad.
They alleged that the three defendants carried on business in Melbourne as partners under the
names ‘T McFarland & Co’ and on occasions ‘McFarland, Lang and Keates’. Before the
action commenced, J McFarland and W Keates became insolvent and the action proceeded
against their assignees and Lang. At the trial, judgment was given for the plaintiff and Lang
appealed to the High Court. The High Court held that there was no partnership. According to
Griffith CJ at 6:
... the real substance of the transaction was that the plaintiffs and Thomas McFarland agreed to enter
into a joint venture. They were not partners as against third parties, but each party had certain rights

against each other....

Evidence for this finding was found in the fact that separate bank accounts were kept as it
was apparent that neither Lang nor Keates operated on the account of T McFarland & Co.
Further Lang and Keates took no part in the business of the new firm other than to sign two
letters. Griffith CJ saw this as decisive. According to his Honour:

“Now in order to establish that there was a partnership it is necessary to prove that JW

McFarland carried on the business of Thomas McFarland & Co on behalf of himself, Lang

and Keates, in this sense, that he was their agent in what he did under the contract with the

plaintiffs.”

6
[1912] 13 CLR 1
 25

4.2.3. With a view to profit

The third limb of the definition confines partnerships to associations formed for making
profit. This can be contrasted with clubs and societies formed for the promotion of religious,
social, educational and recreational activities and which are not run in order to create profits
for the individual members. Lord Linley in Wise v Perpetual Trustee Co Ltd,7 stated that:

“Clubs are associations of a peculiar nature. They are not partnerships; they are not associations for
gain; and the feature which distinguishes them from other societies is that no member as such becomes
liable to pay to the funds of the society or to anyone else any money beyond the subscription required
by the rules of the club to be paid so long as he remains a member. It is upon this fundamental
condition, not usually expressed but understood by everyone, that clubs are formed; and this

distinguishing feature has been often judicially recognised .”

The ‘gain’ mentioned above is pecuniary gain and refers to the gain made between

accounting periods. Association members, unlike partners, do not expect to gain monetarily

by their membership. They may however gain in other ways by, for example, an

improvement in their knowledge or skills, enhanced social status, or personal satisfaction

from participation in the association’s activities. Association members cannot obtain a

distribution of pecuniary gains or profits made by the association, although associations can

make profits in the furtherance of their objects.

‘Profits' are not defined in the Partnership Act. However, courts have come up with

definitions: see Fletcher Moulton LJ in Re Spanish Prospecting Co Ltd [1911] 1 Ch 92 at 98-

99, quoted at [17.1]; also see Bond Corporation Holdings Ltd & Anor v Grace Bros

Holdings Ltd & Ors (1983) 1 ACLC 1009. Usually courts adopt a simple balance sheet

approach in relation to ascertaining whether there is a partnership ‘profit’. This test involves

comparing any change in value of the assets of the company at two different points in time.
7
[1903] AC 139
 26

Any gain in value will generally be regarded as a profit.

4.3.0.Formation of Partnership

(a) No formalities are necessary, although for practical reasons writing is

usually used.
(b) The maximum number of partners is 20, except for certain professional
partnerships, for example solicitor and accountants where there is no maximum.
(c)The partner may trade under any name they please, except that the word ‘limited’
must not be the last word of the name.
(d) Any partnership agreement will usually deal with the following matters.

I. The firm’s name

II. The place and nature of the business;
III. The date on which the partnership is to commence and its
duration. If there is no fixed period then it is a partnership at
will;
IV The proportions in which capital is to be provided, and

whether interest in the paid on capital before profiles

are divided:

V details of the firm’s bank account, including who is allowed to sign

cheques:

VI whether all or only some of the partners shall manage the business and
whether all partners shall give their whole time to the business:

VII How profits are to be shared and provisions for drawing:

VIII Provisions for keeping regular account and the preparation of an

annual profit and loss account and balance sheet.

IX What shall happen o the death or retirement of a partner? In the

absence of an agreement to the contrary the death of a partner
automatically dissolves the partnership.
 27

X Whatever a retired partner is allowed (within limits) to compete with

the firm.

XI A list of description of what is agreed to be partnership property.

XII Insurance against death or sickness of a partner and for the business
generally.

XIII Any limits on the business interests of the persons outside the firm.

XIV Any arbitration clause.

4.4.Internal Regulation of Partnership

(a) Good Faith

There is duty of utmost good faith once the partnership is established although
the contract of partnership is not itself uberrimae fidei. Thus

I. Partners are bound to render true accounts and full information on all
matters affecting the partnership.
II. A partner must account for any profit made by him without the consent
of the others from using the firm’s property, name or trade
connections.
III. A partner may have a separate account unless he had agreed to the
contrary, but a partner must account for any profit made in a business
of the same kind as, and competing with, the firm.

(b) 4.4.1.Management

Subject to contrary agreement every partner is entitled access to

Partnership books and may take part in the management of the
business.

I. Decisions on ordinary matters connect with the partnership business

are by majority of the general partners. If there is a deadlock the views
of those opposing any change will prevail, but unanimity is required
for matters relating to the constitution of firm, for example to change
 28

the nature of the partnership business or to admit a new partner.

(c) 4.4.2.Capital profit and losses

I. Profits and losses are shared equally in the absence of contrary

agreement. However if the partnership agreement states the profits
are to be shared in certain proportions then, prima facie losses are to
be shared in the same proportions.
II. No interest is paid on capital except by agreement. However a
partner is entitled to 5% interest on advances beyond his original
capital.

(e) 4.4.3. Indemnity

The firm indemnity any partner against liabilities incurred in the

ordinary and proper conduct of the partnership business, or in doing

anything necessary done for the preservation of the partnership property or
business.

(f) 4.4.4. Partnership property

I. The initial property of the partnership is that which the
partners, expressly impliedly agree shall be partnership. It is
quite possible that property is used in the business should not
be partnership property, but should, for example, be the sole
property of one of the partners; it depends entirely on the
intention of the partners.
II. Property afterwards acquired is governed by the same
principle, but clearly it will be partnership property if it is
bought with partnership money.

4.5. Partnership and Outsiders

(a) Every partner is an agent of the firm and therefore has implied authority to bind
the firm by transaction entered into by him in the ordinary course of business.
Thus an outsider who contracts with a partner within the scope of that implied
 29

authority may treat the firm as bound, despite any restriction on the authority of
that partner to which the partners have agreed, unless the outsider knew of the
restriction. In Merchant Credit v Garrod (1962)

A and B were partners in a firm which let garages and required cars. The
partnership agreed expressly excluded buying and selling cars. Without B’s
knowledge, A, acting without the owner’s consent, sold a car to a finance
company for £700, paying the proceeds into the partnership account. It was that B
was liable to pay the £700 to the finance company.

The prohibition on buying and selling in the partnership agreement did not entitle
B (or the firm) to avoid liability since A’s conduct was of a kind normally
undertaken by persons trading as a garage, i.e. A apparently had authority to sell
cars.

(b) in a trading partnership the following acts are within the implied authority of a
partner:-

I. Borrowing money in the name of the firm and

giving security by pledging its goods or by depositing title
deeds to create an equitable mortgage;

II. Signing cheques, and drawing, accepting or

indorsing
bills of exchange.

III. Employing a solicitor to defend an action

against the firm.
However it is doubtful if a partner would have authority to commence
any proceedings other than routine actions to recover trade debts;

IV. Receiving payment of debts and giving valid

receipts;
V. Buying and selling goods on account of the
firm;
VI. Engaging employees to work for the firm. A
partner
 30

Probably does not have implied authority to dismiss

employees.

(c) The following acts are outside a partner’s implied authority.

I. Consenting to a judgment against the firm;

II. Executing a deed;
III. Giving a guarantee in the absence of a trade custom to do so;
IV. Referring a dispute to arbitration;
V. Accepting property other than money in payment of a debt.

(a) 4.5.1.Liability for torts

On the usual principle of vicarious liability (since each partner is an agent of the
others) all the partners are liable for a tort committed by a partner in the ordinary
course of the firm’s business, or with the authority of his co-partners.

In Hamlyn v Houston (1903)

A partner bribed a competitor’s clerk to disclose confidential information relating to

it. The partner used the information and the rival firm consequently suffered loss. It
was held that the partner’s firm was liable his wrongful act since he was acting in the
ordinary course of business when he obtained information about the rival.

Partners’ liability in tort is joint and several. This means that a partner is liable jointly
with the other partners and also individually liable. Thus a plaintiff may issue
separate writs each partner either at the same time or successively and judgment
against one partner does not prevent an action being brought against the others.

Liability for misappropriate of money or property. Where either:-

I. One partner, acting within the scope of his apparent authority, receives money
or property of a third person and misapplies it, or
II. A firm, in the course of its business, receives money of property of a third
person and the money or property is misapplied by one or more of the partners
while in the custody of the firm, then the firm is liable to make good loss.
 31

(c) 4.5.2.Liability in contract

I. Every partner is liable jointly with his co-partners for all debts and obligations
of the firm incurred whilst he was a partner.
II. Where liability is used to be the case that once a third party had sued one of
the partners he could not sue the others. However the Civil Liability
(Contribution) Act 1978 removed this limit on the number of actions. It also
provides that a partner who has paid a debt of the firm can claim a
contribution from his partners.

(d) 4.5.3.Liability of a retired partner

I. A partner who retires does not cease to be liable for partnership debt incurred
before his retirement. These may include debts arising after his retirement from
transactions during the period when he was a partner.
II. A retired partner may be discharged from liability for debts incurred while she
was a partner if the debts are later discharged by the firm, or if the creditors
agree to release him by novation (see below).
III. A retired partner may be liable on contracts made after his retirement if he
continues to be an ‘apparent partner’ by for example allowing his name to
remain on the firm’s notepaper.
(e) 4.5.4. Liability of a new partner

I. A person admitted as a partner does not thereby incur liability for debts incurred
before he becomes a partner.
II. There may be a contract of novation between a retired partner, the firm as
reconstituted by the entry of a new partner and the creditors. Under such a three
party agreement, the creditors and the firm agree that the reconstituted firm will
be liable for unpaid debts of the old firm that the retired partner be discharged
from liability.
4.6. Termination of Partnership

(a) Dissolution occurs:

I. By effluxion of time, if the partnership was entered into for a fixed term.
II. By termination of the adventure, if entered into for a single adventure.
 32

III. By the death or bankruptcy of a partner, unless the partnership agreement

otherwise provides.
IV. By subsequent illegality, i.e. an event which makes it unlawful to continue the
business.
V. By notice of a partner.
VI. By order of the court, for one of several reasons, for example the permanent
incapacity of a partner, or because it is just and equitable to or dissolution.
(b) Misrepresentation: when a partner is induced to enter into a partnership by
misrepresentation he remains liable to creditors for obligations incurred while
a partner, but he has several remedies against the maker of the statement
including, for example, rescission and/or damages.
(c) After dissolution the authority of the partners continues so far as is necessary
to wind-up the partnership affairs and complete transactions already begun.
(d) On dissolution any partner can insist on realization of the firm’s assets,
(including goodwill), payment of the firm’s debts and distribution of the
surplus, subject to any contrary agreement.

4.7. Types of Partners

The different kinds of Partners that are found in Partnership Firms are as follows:

1. Active or managing partner:

A person who takes active interest in the conduct and management of the business of the firm
is known as active or managing partner. He carries on business on behalf of the other
partners. If he wants to retire, he has to give a public notice of his retirement; otherwise he
will continue to be liable for the acts of the firm.

2. Sleeping or dormant partner:

A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the
management of the business. Such a partner only contributes to the share capital of the firm,
is bound by the activities of other partners, and shares the profits and losses of the business.
A sleeping partner, unlike an active partner, is not required to give a public notice of his
retirement. As such, he will not be liable to third parties for the acts done after his retirement.

3. Nominal or ostensible partner:

A nominal partner is one who does not have any real interest in the business but lends his
name to the firm, without any capital contributions, and doesn’t share the profits of the
business. He also does not usually have a voice in the management of the business of the
 33

firm, but he is liable to outsiders as an actual partner.

Sleeping vs. Nominal Partners:

It may be clarified that a nominal partner is not the same as a sleeping partner. A sleeping
partner contributes capital shares profits and losses, but is not known to the outsiders.

A nominal partner, on the contrary, is admitted with the purpose of taking advantage of his
name or reputation. As such, he is known to the outsiders, although he does not share the
profits of the firm nor does he take part in its management. Nonetheless, both are liable to
third parties for the acts of the firm.

4. Partner by estoppel or holding out:

If a person, by his words or conduct, holds out to another that he is a partner, he will be
stopped from denying that he is not a partner. The person who thus becomes liable to third
parties to pay the debts of the firm is known as a holding out partner.

There are two essential conditions for the principle of holding out : (a) the person to be held
out must have made the representation, by words written or spoken or by conduct, that he was
a partner ; and (6) the other party must prove that he had knowledge of the representation and
acted on it, for instance, gave the credit.

5. Partner in profits only:

When a partner agrees with the others that he would only share the profits of the firm and
would not be liable for its losses, he is in own as partner in profits only.

6. Minor as a partner:
A partnership is created by an agreement. And if a partner is incapable of entering into a
contract, he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a
person who has not attained the age of 18 years) cannot be one of the parties to the contract.
But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the
benefits of partnership’, with the consent of all partners. A minor partner is entitled to his
share of profits and to have access to the accounts of the firm for purposes of inspection and
copy.

He, however, cannot file a suit against the partners of the firm for his share of profit and
property as long as he remains with the firm. His liability in the firm will be limited to the
extent of his share in the firm, and his private property cannot be attached by creditors.

On his attaining majority, he has to decide within six months whether he will become regular
partner of withdraw from partnership. The choice in either case is to be intimated through a
public notice, failing which he will be treated to have decided to continue as partner, and he
becomes personally liable like other partners for all the debts and obligations of the firm from
the date of his admission to its benefits (and not from the date of his attaining the age of
 34

majority). He also becomes entitled to file a suit against other partners for his share of profit
and property.

7. Other partners:
In partnership firms, several other types of partners are also found, namely, secret partner
who does not want to disclose his relationship with the firm to the general public. Outgoing
partner, who retires voluntarily without causing dissolution of the firm, limited partner who is
liable only up to the value of his capital contributions in the firm, and the like.

However, the moment public comes to know of it he becomes liable to them for meeting
debts of the firm. Usually, an outgoing partner is liable for all debts and obligations as are
incurred before his retirement. A limited partner is found in limited partnership only and not
in general partnership.

4.8. Other Types of Partnerships

4.8.1. Limited Partnership

 Unlimited liability for general partners only. In a limited partnership (LP), at least
one partner has unlimited liability—the general partner(s). The other partners (limited
partners) have limited liability, meaning their personal assets typically cannot be used
to satisfy business debts and liabilities. The amount of their liability is limited to their
investment in the LP.
 Limited partners are not involved in management. The general partners oversee
the day-to-day operations of the LP. Limited partners are basically silent investors.
 Short-term projects/ventures. LPs are often the business type of choice for special
situations versus true businesses. For example, films are often formalized as LPs and
family estate planning often utilizes LPs.

4.8.2. Limited Liability Partnership

 Professional service businesses. Limited liability partnerships (LLPs) can only be

created by certain types of professional service businesses, such as accountants,
attorneys, architects, dentists, doctors, and other fields treated as professionals under
each state’s law.
 Personal asset protection. The personal assets of the partners in an LLP typically
cannot be used to satisfy business debts and liabilities. The LLP does not shield the
partners for liability for their personal acts. Put simply, the LLP cannot limit the
liability of owners for their own malpractice.

4.8.3.Tax considerations for partnerships

General partnerships, limited partnerships and limited liability partnerships are all taxed the
same. No tax is paid by the partnership. Form 1065 is filed with the IRS, as well as a
 35

Schedule K for each owner. The Schedule K lists the owner’s share of the partnership’s
income, expenses, etc.

4.8.4.Limited liability protection

Keep in mind that general partnerships offer no liability protection to the owners. The owners
are legally considered the same as the business, and personal assets can therefore be
considered business assets. Additionally, partners in a general partnership bear responsibility
for the actions of the other partners. General partnerships are undoubtedly the easiest to
create and have the lowest ongoing costs, but they also provide the highest risk to the
partners.

Revision Questions

1. Write a comprehensive essay on the different types of partnerships that can be

formed.

2. What are the contents of a partnership deed; and why is it important in the
formation of partnerships?

3. What are some of the advantages that a partnership business has over a sole
proprietorship[.

4. How can an ordinary partnership be terminated?

Recommended Texts:

Cole, G.D.H. 2014, The Case for Industrial Partnership, UK

Shaff, Robert, (2003), Preserving Business Partnerships, aicpa.

Walls Ernest, 1921, Progressive Co-partnership, London, Nisbet & Co.

 36

CHAPTER FIVE

CORPORATIVES

5.0. Introduction

A co-operative or co-operative is an autonomous association of people who voluntarily

cooperate for their mutual social, economic, and cultural benefit.
In short, a co-op is defined as "a jointly owned enterprise engaging in the production or
distribution of goods or the supplying of services, operated by its members for their mutual
benefit, typically organized by consumers or farmers." Co-operatives frequently have social
goals which they aim to accomplish by investing a proportion of trading profits back into
their communities.

Objectives

At the end of this chapter students must be able to:

1. Give a background of cooperatives in Zambia

2. Explain how a corporative can be formed in Zambia

3. Illustrate the use of cooperatives as business entities

4. Give the key features of corporative

5. Explain the role of government in promoting cooperatives in Zambia

The International Co-operative Alliance was the first international association formed by the
cooperative movement. It includes the World Council of Credit Unions. A second
organization was formed later in Germany, the International Raiffeisen Union. In the United
States, the National Cooperative Business Association (NCBA) serves as the sector's oldest
national membership association. It is dedicated to ensuring that cooperative businesses have
the same opportunities as other businesses operating in the country and that consumers have
 37

access to cooperatives in the marketplace. A U.S. National Cooperative Bank was formed in
the 1970s. By 2004, a new association focused on worker co-ops was founded, the United
States Federation of Worker Cooperatives.

In 2012 the turnover of the largest 300 co-operatives in the world reached $2.2 trillion –
which, if they were a country, would make them the seventh largest. Cooperatives include
non-profit community organizations and businesses that are owned and managed by the
people who use their services (a consumer cooperative) or by the people who work there (a
worker cooperative) or by the people who live there (a housing cooperative), hybrids such as
worker cooperatives that are also consumer cooperatives or credit unions, multi-stakeholder
cooperatives such as those that bring together civil society and local actors to deliver
community needs, and second and third tier cooperatives whose members are other
cooperatives.

5.1.Cooperatives as legal entities

A cooperative is a legal entity owned and democratically controlled by its members.

Members often have a close association with the enterprise as producers or consumers of its
products or services, or as its employees

There are specific forms of incorporation for cooperatives in some countries, e.g. Finland,
Sweden, and Australia. Cooperatives may take the form of companies limited by shares or by
guarantee, partnerships or unincorporated associations. In the UK they may also use the
industrial and provident society structure. In the USA, cooperatives are often organized as
non-capital stock corporations under state-specific cooperative laws. However, they may also
be unincorporated associations or business corporations such as limited liability companies or
partnerships; such forms are useful when the members want to allow

1. some members to have a greater share of the control, or

2. some investors to have a return on their capital that exceeds fixed interest,

neither of which may be allowed under local laws for cooperatives. Cooperatives often share
their earnings with the membership as dividends, which are divided among the members
according to their participation in the enterprise, such as patronage, instead of according to
the value of their capital shareholdings (as is done by a joint stock company).
 38

5.2.Identity

Cooperatives are typically based on the cooperative values of "self-help, self-responsibility,

democracy and equality, equity and solidarity" and the seven cooperative principles:[22]

1. Voluntary and open membership

2. Democratic member control
3. Economic participation by members
4. Autonomy and independence
5. Education, training and information
6. Cooperation among cooperatives
7. Concern for community

Cooperatives are dedicated to the values of openness, social responsibility and caring for
others. Such legal entities have a range of social characteristics. Membership is open,
meaning that anyone who satisfies certain non-discriminatory conditions may join. Economic
benefits are distributed proportionally to each member's level of participation in the
cooperative, for instance, by a dividend on sales or purchases, rather than according to capital
invested Cooperatives may be classified as either worker, consumer, producer, purchasing or
housing cooperatives. They are distinguished from other forms of incorporation in that profit-
making or economic stability are balanced by the interests of the community.

5.3.0.Economic stability

Capital and the Debt Trap reports that cooperatives tend to have a longer life than other types
of enterprise, and thus a higher level of entrepreneurial sustainability. In one study, the rate of
survival of cooperatives after three years was 75 percent, whereas it was only 48 percent for
all enterprises ... and after ten years, 44 percent of cooperatives were still in operation,
whereas the ratio was only 20 percent for all enterprises. "Cooperative banks build up
counter-cyclical buffers that function well in case of a crisis," and are less likely to lead
members and clients towards a debt trap. This is explained by their more democratic
governance that reduces perverse incentives and subsequent contributions to economic
bubbles.

5.4.0.Types of cooperatives
 39

5.4.1.Non-monetary cooperative

A non-monetary cooperative provides a service based on entirely voluntary labour in the

maintenance and provision of a particular service or good, working in the identical manner of
a library. These co-ops are locally owned and operated and provides the free rental of
equipments of all kinds (bicycles, sports, gear). This idea has been said to reduce general
human consumption of goods, a key subject in sustainable development.

5.4.2.Retailers' cooperative]

A retailers' cooperative (known as a secondary or marketing cooperative in some countries) is

an organization which employs economies of scale on behalf of its members to receive
discounts from manufacturers and to pool marketing. It is common for locally owned grocery
stores, hardware stores and pharmacies. In this case the members of the cooperative are
businesses rather than individuals.

The Best Western international hotel chain is actually a retailers' cooperative, whose
members are hotel operators, although it refers to itself as a "non-profit membership
association." It gave up on the "cooperative" label after some courts insisted on enforcing
regulatory requirements for franchisors despite its member-controlled status.

5.4.3.Worker cooperative

A worker cooperative or producer cooperative is a cooperative, that is owned and

democratically controlled by its "worker-owners". There are no outside owners in a "pure"
workers' cooperative, only the workers own shares of the business, though hybrid forms exist
in which consumers, community members or capitalist investors also own some shares. In
practice, control by worker-owners may be exercised through individual, collective or
majority ownership by the workforce, or the retention of individual, collective or majority
voting rights (exercised on a one-member one-vote basis). A worker cooperative, therefore,
has the characteristic that the majority of its workforce owns shares, and the majority of
shares are owned by the workforce. Membership is not always compulsory for employees,
but generally only employees can become members either directly (as shareholders) or
indirectly through membership of a trust that owns the company.

The impact of political ideology on practice constrains the development of cooperatives in

 40

different countries. In India, there is a form of workers' cooperative which insists on

compulsory membership for all employees and compulsory employment for all members.
That is the form of the Indian Coffee Houses. This system was advocated by the Indian
communist leader A. K. Gopalan. In places like the UK, common ownership (indivisible
collective ownership) was popular in the 1970s. Cooperative Societies only became legal in
Britain after the passing of Slaney's Act in 1852. In 1865 there were 651 registered societies
with a total membership of well over 200,000. There are now more than 400 worker
cooperatives in the UK, Suma Wholefoods being the largest example with a turnover of £24
million.

5.4.4.Volunteer cooperative

A volunteer cooperative is a cooperative that is run by and for a network of volunteers, for
the benefit of a defined membership or the general public, to achieve some goal. Depending
on the structure, it may be a collective or mutual organization, which is operated according to
the principles of cooperative governance. The most basic form of volunteer-run cooperative
is a voluntary association. A lodge or social club may be organized on this basis. A volunteer-
run co-op is distinguished from a worker cooperative in that the latter is by definition
employee-owned, whereas the volunteer cooperative is typically a non-stock corporation,
volunteer-run consumer co-op or service organization, in which workers and beneficiaries
jointly participate in management decisions and receive discounts on the basis of sweat
equity.

5.4.5. Social cooperative

A particularly successful form of multi-stakeholder cooperative is the Italian "social

cooperative", of which some 7,000 exist. "Type A" social cooperatives bring together
providers and beneficiaries of a social service as members. "Type B" social cooperatives
bring together permanent workers and previously unemployed people who wish to integrate
into the labor market. They are legally defined as follows:

 no more than 80% of profits may be distributed, interest is limited to the bond rate
and dissolution is altruistic (assets may not be distributed)
 the cooperative has legal personality and limited liability
 the objective is the general benefit of the community and the social integration of
 41

citizens
 those of type B integrate disadvantaged people into the labour market. The categories
of disadvantage they target may include physical and mental disability, drug and
alcohol addiction, developmental disorders and problems with the law. They do not
include other factors of disadvantage such as unemployment, race, sexual orientation
or abuse.
 type A cooperatives provide health, social or educational services
 various categories of stakeholder may become members, including paid employees,
beneficiaries, volunteers (up to 50% of members), financial investors and public
institutions. In type B cooperatives at least 30% of the members must be from the
disadvantaged target groups
 voting is one person one vote

5.4.6. Consumers' cooperative

A consumers' cooperative is a business owned by its customers. Employees can also

generally become members. Members vote on major decisions and elect the board of
directors from among their own number. The first of these was set up in 1844 in the North-
West of England by 28 weavers who wanted to sell food at a lower price than the local shops.

The world's largest consumers' cooperative is the Co-operative Group in the United
Kingdom, which offers a variety of retail and financial services. The UK also has a number of
autonomous consumers' cooperative societies, such as the East of England Co-operative
Society and Midcounties Co-operative. In fact, the Co-operative Group is something of a
hybrid, having both corporate members (mostly other consumers' cooperatives, as a result of
its origins as a wholesale society), and individual retail consumer members.[citation needed]

5.4.7. Business and employment cooperative

Business and employment cooperatives (BECs) are a subset of worker cooperatives that
represent a new approach to providing support to the creation of new businesses.

Like other business creation support schemes, BEC's enable budding entrepreneurs to
experiment with their business idea while benefiting from a secure income. The innovation
BECs introduce is that once the business is established the entrepreneur is not forced to leave
 42

and set up independently, but can stay and become a full member of the cooperative. The
micro-enterprises then combine to form one multi-activity enterprise whose members provide
a mutually supportive environment for each other.

BECs thus provide budding business people with an easy transition from inactivity to self-
employment, but in a collective framework. They open up new horizons for people who have
ambition but who lack the skills or confidence needed to set off entirely on their own – or
who simply want to carry on an independent economic activity but within a supportive group
context.

5.4.8. New generation cooperative

New generation cooperatives (NGCs) are an adaptation of traditional cooperative structures

to modern, capital intensive industries. They are sometimes described as a hybrid between
traditional co-ops and limited liability companies. They were first developed in California
and spread and flourished in the US Mid-West in the 1990s.[25] They are now common in
Canada where they operate primarily in agriculture and food services, where their primary
purpose is to add value to primary products. For example, producing ethanol from corn, pasta
from durum wheat, or gourmet cheese from goat’s milk.

5.4.9. Housing cooperative

A housing cooperative is a legal mechanism for ownership of housing where residents either
own shares (share capital co-op) reflecting their equity in the cooperative's real estate, or have
membership and occupancy rights in a not-for-profit cooperative (non-share capital co-op),
and they underwrite their housing through paying subscriptions or rent.

Housing cooperatives come in three basic equity structures

 In market-rate housing cooperatives, members may sell their shares in the

cooperative whenever they like for whatever price the market will bear, much like any
other residential property. Market-rate co-ops are very common in New York City.
 Limited equity housing cooperatives, which are often used by affordable housing
developers, allow members to own some equity in their home, but limit the sale price
of their membership share to that which they paid.
 Group equity or zero-equity housing cooperatives do not allow members to own
 43

equity in their residences and often have rental agreements well below market rates.

Members of a building cooperative (in Britain known as a self-build housing cooperative)

pool resources to build housing, normally using a high proportion of their own labor. When
the building is finished, each member is the sole owner of a homestead, and the cooperative
may be dissolved.

This collective effort was at the origin of many of Britain's building societies, which
however, developed into "permanent" mutual savings and loan organisations, a term which
persisted in some of their names (such as the former Leeds Permanent). Nowadays such self-
building may be financed using a step-by-step mortgage which is released in stages as the
building is completed.The term may also refer to worker cooperatives in the building trade.

5.4.10. Utility cooperative

A utility cooperative is a type of consumers' cooperative that is tasked with the delivery of a
public utility such as electricity, water or telecommunications services to its members. Profits
are either reinvested into infrastructure or distributed to members in the form of "patronage"
or "capital credits", which are essentially dividends paid on a member's investment into the
cooperative. In the United States, many cooperatives were formed to provide rural electrical
and telephone service as part of the New Deal.

In the case of electricity, cooperatives are generally either generation and transmission
(G&T) co-ops that create and send power via the transmission grid or local distribution co-
ops that gather electricity from a variety of sources and send it along to homes and
businesses.

In Tanzania, it has been proven that the cooperative method is helpful in water distribution.
When the people are involved with their own water, they care more because the quality of
their work has a direct effect on the quality of their water.

5.4.11. Agricultural cooperative

Agricultural cooperatives or farmers' cooperatives are cooperatives where farmers pool their
resources for mutual economic benefit. Agricultural cooperatives are broadly divided into
agricultural service cooperatives, which provide various services to their individual farming
 44

members, and agricultural production cooperatives, where production resources such as land
or machinery are pooled and members farm jointly. Known examples of agricultural
production cooperatives are Ocean Spray, collective farms in socialist states and the
kibbutzim in Israel.

Agricultural supply cooperatives aggregate purchases, storage, and distribution of farm inputs
for their members. By taking advantage of volume discounts and utilizing other economies of
scale, supply cooperatives bring down members' costs. Supply cooperatives may provide
seeds, fertilizers, chemicals, fuel, and farm machinery. Some supply cooperatives also
operate machinery pools that provide mechanical field services (e.g., plowing, harvesting) to
their members.

Agricultural marketing cooperatives provide the services involved in moving a product from
the point of production to the point of consumption. Agricultural marketing includes a series
of interconnected activities involving planning production, growing and harvesting, grading,
packing, transport, storage, food processing, distribution and sale. Agricultural marketing
cooperatives are often formed to promote specific commodities. Commercially successful
cooperatives include India's Amul (dairy products), Dairy Farmers of America (dairy
products) in the United States, and Malaysia's FELDA (palm oil).

5.5.0.Federal or secondary cooperatives

In some cases, cooperative societies find it advantageous to form cooperative federations in

which all of the members are themselves cooperatives. Historically, these have
predominantly come in the form of cooperative wholesale societies, and cooperative unions.
Cooperative federations are a means through which cooperative societies can fulfill the sixth
Rochdale Principle, cooperation among cooperatives, with the ICA noting that "Cooperatives
serve their members most effectively and strengthen the cooperative movement by working
together through local, national, regional and international structures."

5.5.1.Cooperative wholesale society

According to cooperative economist Charles Gide, the aim of a cooperative wholesale society
is to arrange "bulk purchases, and, if possible, organise production." The best historical
example of this was the English CWS and the Scottish CWS, which were the forerunners to
 45

the modern Co-operative Group. Today, its national buying programme, the Co-operative
Retail Trading Group performs a similar function.

5.5.2. Cooperative union

A second common form of cooperative federation is a cooperative union, whose objective

(according to Gide) is "to develop the spirit of solidarity among societies and... in a word, to
exercise the functions of a government whose authority, it is needless to say, is purely
moral." Co-operatives UK and the International Cooperative Alliance are examples of such
arrangements.

5.5.3. Cooperative political movements

In some countries with a strong cooperative sector, such as the UK, cooperatives may find it
advantageous to form political groupings to represent their interests. The British Cooperative
Party, the Canadian Cooperative Commonwealth Federation and United Farmers of Alberta
are prime examples of such arrangements.

The British cooperative movement formed the Cooperative Party in the early 20th century to
represent members of consumers' cooperatives in Parliament, which was the first of its kind.
The Cooperative Party now has a permanent electoral pact with the Labour Party meaning
someone cannot be a member if they support a party other than Labour. An alternative
grouping, the Conservative Co-operative Movement is open to people of all parties or none.
Plaid Cymru also run a credit union that is constituted as a co-operative, called the 'Plaid
Cymru Credit Union.' UK cooperatives retain a strong market share in food retail, insurance,
banking, funeral services, and the travel industry in many parts of the country, although this
is still significantly lower than other business models.

5.6.0. Women in cooperatives

Since cooperatives are based on values like self-help, democracy, equality, equity, and
solidarity, they can play a particularly strong role in empowering women, especially in
 46

developing countries. Cooperatives allow women who might have been isolated and working
individually to band together and create economies of scale as well as increase their own
bargaining power in the market. In statements in advance of International Women's Day in
early 2013, President of the International Cooperative Alliance, Dame Pauline Green, said,
"Cooperative businesses have done so much to help women onto the ladder of economic
activity. With that comes community respect, political legitimacy and influence."

However, despite the supposed democratic structure of cooperatives and the values and
benefits shared by members, due to gender norms on the traditional role of women, and other
instilled cultural practices that sidestep attempted legal protections, women suffer a
disproportionately low representation in cooperative membership around the world.
Representation of women through active membership (showing up to meetings and voting),
as well as in leadership and managerial positions is even lower.

5.7.0. The History and Current Structure of Zambian Cooperatives

5.7.1. The Pre-Independence Period

The first Cooperative in Zambia (North Rhodesia) was formed in 1914 by the European
settler farmers as a means of marketing agricultural produce to the newly opened copper
mines in the Copper belt of southern Zaire and northern Zambia. The earliest cooperatives
were largely restricted to the Eastern and Southern provinces of Zambia.

Despite the colonial policy of trying to protect the interests of the settler community several
cooperatives also emerged among small-scale African farmers. In 1947, the colonial
government was forced to recognize cooperatives amongst indigenous Africans under a
cooperative ordinance which was followed in 1948 by the formation of a government
department, the Department of Marketing and Cooperatives, for the registration and
regulation of cooperative enterprises.

This was despite the fact that the formation of agricultural cooperatives by Africans was not
permissible as Africans were not legally recognized as farmers. Under the Farmers Licensing
Ordinance Number 30 of 1946 a farmer was defined as any person other than:

(a) An African or;

(b) Any company or body of persons where the controlling interest was held by Africans.
 47

With this background and the continued obstacles to the formation of cooperatives by
Africans it was pot surprising that the Northern Rhodesia Farmers’ Union (NRFU) at
Independence in 1964 was essentially a union for the European commercial farmers. It was
recognized as the only representative organization for the farming community in the country.

In 1966 a new act abolished the colonial definition of a “farmer” and all assets, liabilities and
obligations of the NRFU were transformed into the Commercial Farmers Bureau of Zambia
(CFB). (In 1992 the CFB changed its name to the Zambia National Union of Farmers,
ZNFU).

5.7.2. The Period 1964 to 1991

Immediately after independence the Zambian government embarked on the active promotion
of cooperatives throughout the country, and for many types of economic and social ventures.
Cooperatives at this time were largely viewed as a mechanism for stimulating rural
development and not necessarily as institutions for meeting the economic and other needs of
their members. This view of cooperatives was further reinforced by the policies of central
planning which were actively pursued in Zambia in that period.

As a result the government sponsored initiatives, and often with donor support, primary
societies were formed in all parts of the country. While many of those cooperatives were
based on genuine grassroots mobilization, others were established mainly to take advantage
of the assistance that was available. From a total of about 500 cooperative at independence
the number approximately doubled in less than ten year to about 1000 in 1973. Secondary
cooperatives, in the form of cooperative unions, some predating independence, were formed
in the Southern, Central and Eastern Provinces.

As the number of primary and secondary cooperatives continued to increase, it became clear
that there was a need to also create a national organization. This resulted in the formation in
1973 of the Zambia Cooperative Federation (ZCF), the cooperative apex organization, to
coordinate the development, representative and business functions of the cooperative
movement.

In 1983 cooperatives were declared a mass movement by Zambia’s sole political party, the
United National Independence Party (UNIP). Through this measure, which included
 48

cooperative representation in the highest decision making body of UNIP, the cooperative
movement became affiliated to the party.

Also in 1983, the Ministry of Cooperatives was formed and given the responsibility of
cooperative policy formulation. The Ministry included the Department of Marketing and
Cooperatives (DMC) and the Cooperative College, which had been established with donor
funding in the early 1970’s.

In 1984 the government adopted as a deliberate policy the formation of provincial

cooperative unions (PCUs) in all the nine provinces of Zambia. As a result six unions were
formed in addition to the three already existing. The main function of the PCUs was
agricultural marketing, initially as agents of the National Agricultural Marketing Board
(Namboard).

The new provincial unions were thus primarily a result of external initiative, and they did not
have strong backing from primary cooperative societies (PCSs), who however were obliged
to buy shares in those PCUs. This process contributed to the erosion of cooperative autonomy
and self-reliance. It was by then clear that UNIP and the government had assumed the
undisputed lead role in the formulation of cooperative policy and the development of the
cooperative structure.

In 1988 the government decided, partly as a result of lobbying from the cooperative
movement, that all marketing functions were to be performed by cooperatives only, while
Namboard would be responsible for importation of fertilizer and maintenance of strategic
maize reserves. The following year, in 1989, Namboard was abolished and all its functions
were transferred to the ZCF, which for some time had been actively advocating this course of
action. The same year the government decided that district cooperative unions (DCUs) should
be formed and within less than a year such unions were established in about half of Zambia’s
over 50 districts.

The main reason for the process of increased cooperative dependence on government during
this period was undoubtedly the gradually more important role that the cooperatives were
given, and aspired to, in the national economy. Maize is the dominant crop and provides the
national staple food, and its regulation and management was therefore a government high
priority. The perception of cooperatives that has prevailed in the country, including partly the
 49

self-perception of the cooperative movement itself, was a contributing factor. Since

independence, cooperatives were seen as potentially important contributors to overall rural
mobilization and agricultural development rather than as member based business
organizations.

This view of cooperatives also led to their incorporation in national development plans that
were drawn up by the government with cooperative participation. As a result they came to be
used by the government, backed in many cases by external donors, as instruments for general
social and economic development in rural areas, with only part of their services confined to
their members. This undermined their cooperative identity and resulted in their being
perceived, by the general public and to some extent also by their members, as part of the
government sector.

It is against the background of this official policy and practice that the controlling role of
government in cooperative affairs should be seen. The government, particularly through the
DMC, set the economic parameters for the cooperatives, involved itself in the financial and
other operations of the cooperatives at all levels, and intervened and made organizational and
personnel changes.

The resulting unsatisfactory situation as regards cooperative management, economic

performance and democratic control by the members must be seen in that perspective.

5.8.0. Current Cooperative Structure and Activities

With the formation of the District Cooperative Unions (DCUs), the co-operative movement
currently has a four tier structure, starting with primary cooperative societies at local level.
The PCSs are generally affiliated to either a DCU, or if none has been formed in a given
district, to a PCU. The DCUs, in turn, are affiliated the PCU in each province. All nine PCUs,
finally, are affiliates of ZCF, the apex organization for the entire cooperative movement. As a
result, and in accordance with general cooperative practice, each lower level in the
cooperative structure owns the next higher level through affiliation and shareholding.

The economic viability and sustainability of this four tier system is questionable and a
process of review has been initiated. The structure is also unwieldy from the point of view of
democratic control from the members. Below is a more detailed discussion of the functions of
 50

different cooperative levels in the cooperative structure.

The PCSs, formed by a minimum of 10 people, each contributing a share towards the capital
of the society, constitute the organizational basis of the cooperative movement. There are
currently over 1,300 registered primary societies with a membership of about 400,000.
Slightly more than two thirds of this membership belongs to some 800 multipurpose
agricultural PCSs. Of the approximately 0.8 million primary society members 25 percent are
women. About 700 of the PCSs are affiliated district or provincial cooperative unions.

The major activity carried out by the PCSs is to assist members with agricultural marketing
and input supply. In addition a typical PCS can offer its members services through a retail
shop, a grinding mill for processing of members maize or other income generating activities.

With the formation of DCUs, the role of the PCUs has gradually changed towards
agricultural processing, leaving an increasing role in marketing activities to the DCUs and
PCSs. There are currently 34 established DCUs, covering more than half of the existing
districts.

The national apex organization, ZCF, has 15 affiliates. Besides the nine PCUs, one for each
province, the following organizations are affiliates: Credit Union and Savings Association of
Zambia (CUSA Zambia), National Marketers Cooperative Union, Zambia Agricultural
Trading Cooperative, Zambia Army Multi-purpose Cooperative Society, Zambia Farmers
Cooperative Society and Zambia National Farmers Union (ZNFU).

Two specialized national cooperative apex organizations, the Cooperative Bank of Zambia
(COBZ) and the Zambia Cooperative College Society Ltd (ZCCS) are closely related to ZCF
but not formal affiliates.

In addition to being a spokesman for the cooperative movement ZCF serves as a coordinator
of foreign aid and development programs for cooperatives. National level cooperative
business activities are also carried out through ZCF and its subsidiary companies. ZCF
Finance Services (ZCF FS) provides mainly short and medium term agricultural input loans;
ZCF Professional Services (ZCF PS) renders computer, audit and accounting services; the
newly established ZCF Insurance Services (ZCF IS) is already a major actor in the insurance
market, and ZCF Properties administers ZCF’s real estate.
 51

ZCF also operates the following autonomous divisions: ZCF Commercial Services for
agricultural inputs and implements, as well as consumer goods; ZCF Transport and
Engineering Division operating a sizeable fleet of trucks for transporting mostly of
agricultural commodities; ZCF Agri-Business Division, currently primarily involved in
national maize storage operations; and ZCF Development Services Division with a focus on
the development of PCSs in the rural areas.

Established through funding from SIDA in 1979 the Cooperative College, situated in Lusaka
and owned by the Government, is the major institution carrying out cooperative education
and training. The only other institution, which is involved on a much smaller scale, is the
government owned President Citizenship College. The Cooperative College runs residential,
correspondence and field training courses. The training is aimed at educating cooperative
members, elected cooperative leaders, and cooperative staff in the areas of cooperative
organization, leadership and management.

In 1990 the government agreed to transfer the Cooperative College to the cooperative
movement, in line with the original intention of the donor. In 1991 the ZCCS was established
with PCSs, cooperative unions and national level cooperatives as members.

5.9. Law applicable to cooperative societies

The Cooperative Societies Act is the principal piece of legislation that governs the formation and
regulation of cooperatives in Zambia. The Act, which repealed and replaced the 1970 Cooperative
Societies Act, contains detailed provision dealing with registration and organization, rights and
liabilities of members, administration, amalgamation, transfer of engagements and divisions,
cooperative unions and federations and winding up and cancellation of cooperative societies.

As cooperatives involves persons associating together for purposes of achieving set economic or
business objectives it is inevitable that some contractual arrangements are implicit in the
organization of these organizations. Principles of contract law therefore, have a significant place in
the governance of cooperatives. The Companies Act also governs certain aspects of cooperative
societies. For example, there is considerable reference to the Companies Act and the role of the
Registrar of Companies in sections 11 and 13 of the Cooperative Societies relating to conversion of
a limited company registered under the Companies Act into a cooperative society. Other areas of
overlap between cooperatives and companies include matters to do with winding up of cooperatives
with the Act stating is section 82(3) that
 52

“Subject to the provisions of other provisions of the Act, the Companies Act shall apply, with the
necessary modification, to any winding up under this Act.”

There are many similarities in the legal nature of cooperatives and companies. They both become
corporate entities when registered and have members who hold a stake in the entity upon
contribution of equity capital and are in essence the owners. They both have boards of directors
who direct the affairs of the entity subject to the rules, these being the articled in the case of
registered companies and the by-laws in the case of cooperatives, they both require to have
registered offices, to keep registers of members which should be open for inspection, they should
file annual returns and must register charges, etc. these similarities entail that the modus operandi
of these entities are materially similar. Principles of company law which are not expressly excluded
by the cooperative societies Act or the by-laws of the society will naturally be applicable to
cooperatives.

Cooperatives are of course not exempt from the operation of all other laws and regulations such as
those relating to taxation, licensing and environmental control so that in addition to complying with
the provisions of the Cooperative Societies Act under which they are set up, it is necessary for them
to be conversant with the legal milieu in which they operate and to ensure they comply with all the
other laws and regulations.

Regrettably cooperatives as a form of business association in Zambia have not attracted the level of
litigation that other business association have. This accounts for the paucity of case law around the
various provisions of the Cooperative Societies Act, previous or current. Fortunately, due to the
striking similarities between cooperatives and companies, many company law principles apply to
cooperatives.

5.10. Registration and organization of cooperative Societies

Cooperatives are formed by way of application in the prescribed form to the Registrar of
cooperatives. Any ten or more persons wishing to form a cooperative society may apply to the
Registrar for registration of their association into a cooperative. The application should, in
accordance with section 9 of the Act, be accompanied with four copies of the by-laws of the
cooperative society to be registered, a statement by the applicants that the capital to be furnished
initially by the applicants and other persons expected to become members is sufficient for the
commencement of the operations. Furthermore, a notice of situation of the registered office of the
proposed cooperative should be submitted.
 53

The by-laws of a cooperative form the constitution of the association. It covers virtually every
aspect of the life of the cooperative beginning from the name of the cooperative to the geographical
area of operation of the cooperative. Other matters covered in the by- laws are as diverse and as
detailed as the place and postal address of the registered office, the objects of the cooperative, the
value of each share in the cooperative, the qualification for membership, the entrance fee if any, the
annual membership fee, if any, terms as to withdrawal of membership, provision on directors, the
composition of the board of directors, the qualifications, tenure of office, remuneration of directors
to the dates of the financial year of the cooperative society. One would assume that the by-laws of a
co-operative society are the same as the regulations of the co-operative society so that the two
terms could be used interchangeably to mean the rules by which a co-operative is governed. In the
case of a registered company the articles of the company are understood to be the same as the
regulations of the company. Any such assumption, however, should be cautioned by section 21 of
the Act which seems to suggest that the by-laws and regulations are distinct and separate. That
section reads;

“A co-operative society shall keep a copy of its regulations, by-laws and list of members open to
inspection by any member free of charge or any member of the public on payment of a prescribed
fee, at all reasonable times, at the registered office of the cooperative society.”(Emphasis added)

The term ‘regulation’ is nowhere defined in the Act. A perusal of the Act also shows that the term
is not mentioned anywhere else in the Act, except in section 83 which empowers the Minister to
make regulations for the better carrying out of the purpose of the Act. Doubtless these are not the
regulations envisioned by section 21. Regulations made by statutory instrument under the Act are
part of the law generally available to the public and need not be a subject for a search at the
registered office of a co-operative society. One wonders, therefore, whether in fact this was not
another slip by the drafts person.

Upon receipt of the application for registration, the Registrar scrutinizes same and is obliged to
register the cooperative if it complies with the provisions of section 9 (2) as regards the
documentation and the details which should, under the Act, be furnished together with the
application. Furthermore the Registrar should satisfy himself that the bylaws of the proposed
cooperative make adequate provision for regular audits to be carried out and for the education,
training and provision of advisory services to its members. The by-laws must not be ultra vires the
Act or any other written law. Upon registration, a certificate of registration is issued to the society.

Quiet clearly, section 9 (2) (b) on contribution of share capital and section 10 which obliges the
 54

Registrar to register a proposed cooperative society satisfying the requirements as laid down in the
Act take into account at least two of the established cooperative principles namely, members’
economic participation and their education and training.

Under section 15 (11) the Registrar may refuse to register any proposed cooperative if he is not
satisfied with the application submitted. He is, however, under an obligation to give reason for his
refusal to register within thirty days of receipt of the application.

The Act provides for the right of appeal against any refusal to register a cooperative first to the
Minister responsible for cooperatives and thereafter a further appeal to the High Court. One
assumes that the purpose for the Act providing for an initial appeal to the Minister is to encourage
an administrative settlement in the first place. Ultimately, aggrieved applicants for registration who
are unhappy with the decision of the Registrar and that of the Minister on appeal can access the
court.

5.11. Effect of registration

Section 14 indicates the effects of registration of a cooperative society. It states that

“A cooperative society shall be a body corporate with perpetual succession, a common seal and
limited liability and shall, subject to the other provisions of this Act and its bylaws, have power to
do all such acts and things as a body corporate may by law do or perform.”

This provision is materially similar to section 22 of the Companies Act. The capacity of a
cooperative once registered is similar to that of a company. It has among the unstated powers, the
power to sue and be sued in its own name, to own property in its name and to enter into contracts.
In fact, it is capable of doing all things and acts which it is not precluded by its corporate nature
from doing or performing provided always that such acts or things are within the provision of the
Act, the law generally, and the by-laws of the cooperative society. The same rules as regards to
ultra vires acts as applies to companies will apply to cooperative societies. By section 17 liability
of the members for debts and liabilities of a cooperative society shall be limited to the amount, if
any, unpaid on the shares respectively held by them or on the membership fees as the case may be.

5.12. Name of a cooperative society

Once registered, a cooperative society acquires the status of a limited liability entity. In terms of
section 12(2), the world “limited” shall be the last word in the name of very cooperative society
while the word “cooperative shall also form part of the name. The section reads as follows;
 55

“The word ‘limited’ shall be the last word in the name of every cooperative society and except as
otherwise provided in this act, the word ‘cooperative’ shall form part of the name of every
cooperative society”.

This section in itself and by itself alone appears fairly harmless. What is more, section 12 says
nothing about the fate of a cooperative or its officers where there is failure to comply with its
provisions. It is, however, easy to appreciate that a cooperative that does not comply with this
particular provision will, in the first place, probably not be registered by the Registrar in exercise of
his power under section 15 for failure to comply with section 9(1) of the Act. It is when section 12
is read together with section 18 that some issues of concern begin to emerge. Section 18 breads;

“(1) A cooperative society shall -

(a) Cause its registered name to be painted or affixed, in a conspicuous place and in letters which
are easily legible, at its registered office and at every other office or place at which the business of
the cooperative society is carried on; and
(b) Engrave its registered name, in legible characters, on its seal; and shall emboss its registered
name –
(i) On all notices, advertisements and other official publications of the cooperative society;
(ii) On all business letters of the cooperative society; and
(iii) On all bills of exchange, promissory notes, endorsements, cheques, and orders for money or
goods, purporting to be signed by or on behalf of the cooperative society”
This section equally contains no penalty clause for failure to observe its provisions. In the event,
section 84 providing for a general penalty applies. Under that section any person who contravenes
the provisions of the Act where no penalty is specifically provided shall be liable on conviction to a
fine not exceeding six hundred penalty units, or to imprisonment for a term not exceeding six
months or to both. The question one would ask is whether payment of such a penalty by a guilty
cooperative absolves the officers of the cooperative from personal liability. The Zambian High
Court had occasion to consider a similar issue in S.J. Patel (Zambia) Limited v D.V. Cinamon
(Male)8 The Court in that case consider a similar but not identical provision in the Companies
Ordinance to section 18 of the Cooperative Societies Act. Section 8 (1) (a) of the Companies
Ordinance9 requires that the memorandum of association of every company must state the name of
the company with "Limited" as the last word of the name. Section 80 of the Ordinance provided:

8
(1970) ZR 63
9
Cap 216 of the Laws of Zambia, the forerunner of the Companies Act
 56

"80. Every company shall paint or affix and shall keep painted or affixed its name on the outside of
every office or place in which the business of the company is carried on, in a conspicuous place
and in letters easily legible, and shall have its name engraved in legible characters on its seal and
shall have its name mentioned in legible characters in all notices, advertisements, and other
official publications of the company, and in all bills of exchange, promissory notes, endorsements,
cheques and orders for money or goods purporting to be signed by or on behalf of the company,
and in all bills of parcels, invoices, receipts and letters of credit of the company."

Section 81 of the Ordinance prescribed the penalties and sanctions for non-compliance with the
requirement to publish a company's name and further provided:

"81. If any director, manager or officer of the company or any person on its behalf, uses, or
authorises the use of any seal purporting to be a seal of the company whereon its name is not so
engraved as aforesaid, or issues or authorises the issue of any notice, advertisement, or other
official publication of the company, or signs or authorises to be signed on behalf of the company,
any bill of exchange, promissory note, endorsement, cheque, order for money and goods, or issues
or authorises to be issued any bill of parcels, invoice, receipt, or letter of credit of the company,
wherein its name is not mentioned in manner aforesaid, he shall be liable to a penalty of fifty
pounds sterling, and shall further be personally liable to the holder of any such bill of exchange,
promissory note, cheque or order for money or goods for the amount thereof, unless the same is
duly paid by the company.”

In that case the plaintiffs supplied goods to Longacres Stores Limited and three cheques were
drawn in their favour signed by the defendant in his capacity as managing director of the company
over a rubber-stamp bearing the inscription "Longacres Store", without the word "Limited"
appearing on the cheques. Subsequent to the issue of these cheques the company went into
voluntary liquidation and on presentation of the cheques they were dishonoured. The Court had to
consider issue whether the defendant was liable for the amount claimed by the plaintiff. It was held
failure to comply with the provisions made the person who signs the documents personally liable if
the company fails to pay. By failing to comply with the statutory provisions the defendant rendered
himself liable to the plaintiffs for the amount payable in respect of the three cheques.

This case is, of course, distinguishable from the situation that would arise if a cooperative society
failed to comply with the provisions of section 18 principally on grounds that the Companies
Ordinance which was a subject of interpretation in that case, expressly provided for the personal
criminal liability of the officers of a defaulting company as well as their civil liability to the injured
 57

third party which section 18 of the Cooperative Societies Act does not do. While it appears
desirable that a third party who suffers loss as a result of the failure by a cooperative society to
comply with section 18 of the Act should have recourse to the officers of the cooperative
personally for redress it appears that the wording of the Act do not provide for such a possibility
and one has to be extremely clear as to why a sanction additional to that prescribed in the Act
should be imposed on either the cooperative or the officers in disregard of the concept of corporate
personality of the cooperative.

Under section 68 a savings and credit cooperative may be registered as a credit union under the Act
for the promotion of savings among its members and for the creation of a source of financing for its
members and it shall be a cooperative society for purposes of the Act. Such cooperative society
should have in accordance with section 69 one or more of the words “savings”, “thrift” or “credit”
as part of the name of that cooperative society.

As regards the need to have the word “cooperative” form part of the name of a cooperative society
two points need to be noted, namely; firstly that unlike the case with the word “limited” which by
section 12 (2) must be the last word in the name of the cooperative, no order in which the word
“cooperative” should appear in the name of the cooperative is prescribed, and secondly, under
section 78 the Registrar may exempt a cooperative union or a federation from the requirement that
the word “cooperative” shall form part of the name that union or federation, if it is clear to the
public that they are cooperative societies.

5.13. Membership of a cooperative society

A cooperative society may be made up of persons, natural and/or artificial, who in essence own the
cooperative society. Since upon registration a cooperative society acquires distinct legal
personality, the persons who own the cooperative society will be different from the cooperative
society itself and vice versa. Persons who come together to form a business association called a
cooperative or who join an existing cooperative society are referred to as the ‘members’ or
‘shareholders’ of the cooperative society. Although the terms ‘member’ and ‘shareholder’ are often
used interchangeably, it is possible to have a member who is not a shareholder. This is because it is
possible to have a cooperative without share capital and based on membership fees only or with a
share capital and no membership fees or both.

Section 2 of the act defines a member as

“an individual who, or a body corporate which, has been admitted to the cooperative society as a
 58

member in accordance with the by-laws.”

As already pointed out in terms of section 8 of the Act a cooperative must have a minimum of ten
members. Section 23 states that in no case shall the by-laws of a cooperative society fix any limit to
the number of its members. The members could either be natural persons or bodies corporate or a
mixture of these two. It would appear from section 2 of the Act that an unincorporated association
such as a partnership would not qualify to be a member of a cooperative society since it is neither
an individual nor a body corporate.

Minors as member of a cooperative society

As regards contracts the position is that minors generally have no legal capacity to contract and all
contract with minors, serve for necessaries, are void. This is clearly set out in section 1 of the Infant
Relief Act of England of 1874 which is applicable in Zambia by virtue of the English Law (Extent
of Application) Act10. However, in as far as membership of a cooperative society, which invariably
concerns entering into contract of sorts, is concerned, the Act makes very specific provision totally
contrary to the know common law position. Interestingly section 24 of the Act specifically entitles
infants to form or join cooperative societies. It provides that;

“(1) Notwithstanding anything contained in contained in any other law, a minor may form or
become a member of a cooperative society.

(2) Notwithstanding anything contained in the by-laws or any other law, where any member has
not reached the age of eighteen years, that member may execute or cause to be executed any
instrument under this Act; and any contract entered into by that member with the cooperative
society shall be valid whether as principal or as surety, and shall be enforceable at law.”

This provision removes all the contractual restrictions imposed by the law of contract on the
infant’s capacity to contract. It is possible for infants to form a cooperative society without the
involvement of persons of full age. Since by section 38 of the Act the members of the board of
directors of a cooperative society are to be elected from the members of the cooperative society, it
follows that infant can be directors in a cooperative. This contrasts sharply with the Companies Act
which specifically disqualifies infant from directorship of a company in section 207(b).

Persons with legal disabilities

The position of persons of unsound mind, undischarged bankrupts and drunks is not referred to in
10
Chapter 11 of the laws of Zambia
 59

the Act. The common law position will therefore apply in respect of the membership of these
categories of persons.

By-laws and membership

Both section 2 and section 23 refer to the by–laws in respect of the question of membership.
Section 2 states that members are admitted to the cooperative society in accordance with the by-
laws while section 23 provides that membership of a cooperative society shall be governed by its
by-laws. Section 19 directs that the by-laws of a cooperative society shall include provisions
relating to matters specified in the Schedule. As far as they relate directly to members the matters
in the Schedule affecting membership are the following;

Clause I(e) stating that the by-laws should deal with the qualification for membership, clause I(f)
requiring the by-laws to indicate the minimum number of shares to be subscribed for by each
member as a condition of being admitted to membership, clause I(g) requiring the by-laws to state
the terms of membership if the cooperative society has no share capital, clause I(h) which requires
the member’s entrance fee if any to be stated in the by-laws, clause I(i) which equally directs that
the annual membership fee should be dealt with by the by-laws if any, clause I(m) regarding the
condition of a member’s withdrawal from membership and II(a) dealing with the liability of
members whether limited by shares, guarantee or unlimited. It is important to point out that any
provision dealing with membership or ant other matter in the by–laws which is in conflict with the
provisions of the Act and any other written law will be regarded as ultra vires the Act or such other
written law and will contravene section 10(c) of the Act and thereby justify the refusal by the
Registrar to register the cooperative society under section 15(1) of the Act.

5.14. Rights of a member of a cooperative society

A member of a cooperative society is entitled to a number of rights. These rights will ordinarily be
detailed in the by-laws of the cooperative society. They will, however, only be available to a
member who has paid to the cooperative society the amount required for membership of that
cooperative society or has acquire such interest in the cooperative society as may be prescribed in
the Act or in the by-laws (section 25). Though the detailed rights will be a matter for the by-laws,
there are some rights which are set out or discernible from the provisions of the Act. These
including the following;

The right to be issued with a certificate of membership

 60

A member of a cooperative society is entitled to be issued with a certificate evidencing his

membership of the cooperative society. Where the cooperative has a share capital, a member will
be entitled to be issued with a share certificate evidencing his interest in he cooperative. Under
section 26(2) no such share certificate will be issued to a member unless the share to which the
certificate relates has been paid for in full. In terms of section 26(1) on the other hand, where a co-
operative society does not have any share capital, a member who has paid the membership fee, as
set by the co-operative society, in full, shall be issued with a certificate of membership.

The right to pay for membership in installments

A member is entitled to pay for his membership in installments. Although the conditions for
membership are by section 23 a matter for the by-laws it should also be recalled that the by-laws
must conform with the provisions of the Act so that if the not n conformity with the provisions of
the Act they could be possibly ultra vires the Act. Section 25 provides that a member shall not be
entitled to exercise any right of membership unless he has paid the amount required for
membership. This is amplified by section 26 which requires full payment before a share certificate
or a certificate of membership is issued. The clear implication here is that payment in installments
is permissible and a member is therefore, entitled to opt to pay in installments.

The right to attend meetings of the cooperative society and to vote at such meetings

Very member has the right to attend the duly convened meetings of the cooperative society of
which he is a member and to vote thereat in accordance of the provisions of the by-laws. This aptly
summed in section 29 of the Act. These meeting include the general and the special meetings of the
cooperative society. The subject of meeting is discussed in a separate section.

The right to transfer, assign, redeem, or repurchase shares

Subject to the conditions laid out in the by-laws and the Act a member is entitled to transfer, assign,
redeem or repurchase of shares in the cooperative society. A member of a cooperative society is
therefore entitled as a starting point to sale or assign his shares when he so desires. Such sale or
transfer may however be subject to such reasonable conditions as the cooperative may set in its by-
laws. The one condition set forth by section 31(b) of the Act is that such transfer will not be not be
valid unless approved by the board; except that the board shall not give the approval if it would
reduce the total number of members below the minimum required by the Act (i.e. 10) for the
registration of a co-operative society.
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The right to elect and be elected to board membership of the cooperative society

Every cooperative society should have a board of directors to manage and direct the affairs of the
cooperative society. These directors are elected by the members from amongst their number at an
annual meeting of the cooperative held in accordance with the provisions of the by-laws. Every
member is entitled to attend these meetings, and to elected and be elected to membership of the
cooperative (section 38). Unless there are good reasons specified in the by-laws or determined by
the general meeting, this right to attend meeting and to elect and stand for elections to board
membership cannot be denied a member who has paid his dues in full. Furthermore, persons whose
names appear in an application for the registration of a co-operative society shall: upon registration,
be deemed to have all the powers and duties of directors; and shall direct the affairs of the co-
operative society until directors have been elected at the first general meeting of the co-operative
society.

The right to elect and be elected to membership of committees of the cooperative

Under section 39 (i) a co-operative society shall, at an annual general meeting, establish such
number of committees as it may consider necessary for· the purpose of assisting the board carry out
its functions as set out under the Act. Members of a co-operative society are entitled to elect from
amongst its members

at least three persons, who are not employees of the co-operative society, to constitute each
committee.

The right not to have his shares attached

Under section 32 (1) a member has the right not to have his shares or other interests in the capital
of a co-operative society attached or sold under decree or order of any court in respect of any debt
or liability incurred by the member. A member’s interest in a cooperative society’s capital is
therefore insulated or immune from attachment for separately and privately contracted debts of the
member.

The right to have his estate paid his entitlement from the cooperative society

A deceased member of a cooperative society is entitled to have his shares or other interests
transferred to a person nominated according to the rules made in that behalf and where there is no
person nominated to the legal representative of that deceased member, or to pay to any nominee or
legal representative sum representing the value of such member’s share or interest. Furthermore a
 62

deceased member is entitled to have his estate paid all moneys due from a cooperative society.
( Section 33)

The right to withdraw membership

A member of a cooperative society has the right, at any time, to withdraw from a cooperative
society, subject to the other provisions of the Act and the by-laws. If the withdrawal is premised on
grounds of illness, disability, permanent removal from the area or district served by the co-
operative society or death, then payment of the shares or other interests of the member shall be
made in such order or priority as the by-laws may prescribe; or where not so prescribed, in such
order or priority as the board may approve.(Section 36(1) In terms of section36(3) where it appears
that the financial stability of a co-operative society would be impaired if the co-operative society
made payment for the shares held by a member who has withdrawn from the co-operative society,
at their par or paid-up value, or of any other interests of such a member at the value shown on the
books of the co-operative society, the directors may suspend payment for such period as may be
approved by the annual general meeting. except that, such period shall not exceed one year from
the time the member withdrew from the cooperative society. This provision is no doubt intended to
strike a balance between the interest of the departing member and those of the cooperative society.

The right to defend himself from allegations

Section 37 contains somewhat interesting if not altogether unclear provisions. It states that upon
any complaint arising against a member, the secretary shall, upon the instructions of the board,
provide the member with a written notice of the particulars of the complaint and of the date, time
and place of the meeting of the board at which the complaint shall be considered. The board may,
after having given the member against whom the complaint has been made, the opportunity to
make representations or submissions, orally or in writing, or both, in rebuttal or in mitigation,
recommend to the genera! meeting, in a report detailing the complaint and the opinion of the board.
that the member be expelled. The general meeting may, after considering the report submitted by
the board, expel a member by a resolution passed by at least a two-thirds majority vote of the
members of the co-operative society.

Firstly, it is no clear as to who could make a complaint against a member. Secondly, is equally not
stated what the complaint would be about and thirdly the whole procedure seems to fall short of
natural justice requirements. What is clear is that the member concerned will have the right to
exculpate himself, or at least to answer to the allegations against him before the board refers the
 63

matter to the general meeting for a decision.

The right to a refund upon expulsion

Section 37(5) provides a member who has been expelled from a co-operative society, under that
section shall forfeit all rights to share in the net surplus or other benefits of the co-operative society
from the date of such expulsion but shall be entitled to be refunded his share capital or other
interest held in the co-operative society, together with such dividend as may later be declared and
calculated up to the date of expulsion.

The right to inspect the any instrument creating a charge created by a cooperative society

Part VI of the Act related to the creation of charges by cooperative societies on its property or
undertaking. Such charges must be registered in the manner directed by the Act under section 53; a
member is entitled to have access for purposes of inspection any instrument creating any charge
requiring registration under that part of the Act. Whether section 53 adds any substantial value to
the general provision on inspection as contained in section 59 is a matter for debate.

The right to inspect records of the cooperative society

Section 59 of the Act confers a right on any member to inspect the records of a cooperative society
at the registered office of the cooperative during working hours. It seem that this provision adds
nothing more to section 53 since one would like to believe that a cooperative societies instruments
creating charges are part of the records of the cooperative society.

The right to be availed a copy of the audited annual statement on request

Under section 62 (1) of the Act a cooperative society must within six months after the end of each
financial year, make available to any member, on request, an audited statement of the receipt,
expenditures, assets and liabilities of the co-·operative society.

The right to appeal against cancellation of the cooperative society

Under section 81 the Registrar is empowered under specified circumstance to cancel the
registration of a cooperative society. When this happens a member is entitled to, within thirty days
from the date of the cancellation; appeal to the Minister responsible for cooperatives against the
cancellation.

Revision Questions
 64

1. What law in Zambia regulates corporative?

2. What is the procedure of registering a cooperative in Zambia?

3. What are the advantages and disadvantages of corporative?

4. How can a corporative be used as a business entity?

5. What are the main types of corporative?

6. Give a historical developments of corporative in Zambia.

Recommended Texts:

Melvin Aron Eistemberg .Business Organisations: Cases and Materials, 2011, 11th
Edition. 2014

Thomas, Lee Hazen, Corporation Law, 2012, (American Bar Association),.

The Corporative Societies Act, 1998

CHPATER SIX
 65

COMPANY LAW

6.0.Introduction

A person possesses legal rights and is subject to legal obligations. In law, the term person is
used to denote two categories of legal person. An individual human being is a natural person;
the law also recognizes artificial persons in the form of corporations. The importance of a
legal person is that it is being recognized by the law as having rights and obligations. The
owner of property or a party to a contract is necessarily a person. A corporation is an
artificial person, which is recognized in law as a separate legal entity, provided that the legal
formalities for its creation have been complied with. A corporation, such as a limited
company, must be distinguished from an unincorporated association. An unincorporated
association is not a separate legal entity; it does not have legal identity separate from that of
its members. A typical example of an unincorporated association is a partnership.

Objectives

At the end of this chapter students must be able to:

1. Explain what an incorporated company is

2. Explain how incorporated companies are formed
3. Explain what the Articles and Memorandum of associations are
4. Explain the meaning of a company
5. Explain the consequences of incorporation a company

6.1. Artificial persons

A corporation is a legal entity separate from the natural persons connected with it, for
example as members. Corporations are classified in one of the following categories:

(a) Corporations’ sole: A corporation sole is an official position, which is

filled by one person who is replaced from time to time, e.g. Office of the
Republican President

(b) Chartered corporations: These are usually charities or bodies such as the
Chartered Association of Certified Accountants.

(c) Statutory corporations: Statutory corporations are those corporations

formed by special Acts of Parliament. Its advantage is that the Act can
confer on the particular corporation any special legal powers, which it
may need, such the power to make compulsory acquisitions of land.

(d) Registered companies: Registration under the Companies Act 388 is the
normal method of incorporating a commercial concern. Anybody of this
type is properly called a company. (The term ‘firm’ sometimes used to
describe this type of undertaking, is best reserved for partnerships, which
are unincorporated).
 66

(e) Registered companies are usually companies limited by shares, although a

small numbers are limited companies or companies limited by guarantee.

6.2.0. Unincorporated Associations

Besides partnership and companies, persons may form other sorts of aggregate (usually non –
profit making), which are known as unincorporated associations. These may be sports or
social clubs, amateur dramatics societies, trade associations etc. But they have no separate,
independent personality and hence title to property remains with the members. As there is no
legal personality, any person who enters into a contract ‘on behalf of such an association, is
personally liable on that contract, although all the members may ratify it afterwards.

6.2.1. Incorporation

The most important consequences of registration are that a company becomes legal person
distinct from its owners. The owners of a company are its members, or shareholders. The
case which clearly established the separate legal personality of the company is of great
significance to any study of company law and is therefore set out in some detail below.

Salomon v Salomon & Co Ltd (1879)

The plaintiff had for some years carried on business as a leather merchant and boot
manufacturer. He decided to form a limited company to purchase the business. He and six
members of his family each subscribed for one share. The company then purchased the
business for $38,782, the purchase price being payable to the plaintiff by way if the issue of
20,000 $1 shares, the issue of debentures for $10,000 and the payment of $8,782 in cash. The
company did not prosper and was wound up a year later, at which point its liabilities exceed
its assets by $7,733. The liquidator, representing unsecured trade creditors of the company,
claimed that the company’s business was in effect still the plaintiff’s (he owned 20,001 of
20,007 shares) and that he should bear liability for its debts and that payment of the debenture
debt to him should be postponed until the company’s trade creditors were paid. Held: at first
instance and in the Court of Appeal, that the other shareholders were ‘mere puppets’ and that
the company had been incorporated for an unlawful purpose. Solomon should indemnify
reversed the earlier decision. The plaintiff was under no liability to the company or its
creditors, his debentures were validly issued and the security created by them over the
company’s assists was effective.

6.2.2. Limited liability

One of the principal advantages of trading as a limited company is that the liability of the
members of the company is limited. This is important: it is not the liability of the company is
limited, but that of its members. The company is liable without limit for its own debts.

A company obtains its capital from and distributes its profits to its members. It may be and
usually is, formed on the basis of limited liability of members; it is then known as a limited
 67

company. In that case of the company becomes insolvent the members cannot be required to
contribute more than the amount outstanding (if any) on their share (or if it is a guarantee, the
amount of their guarantee). This is because a shareholder’s liability to contribute towards
payment of the company’s debts is measured by the nominal value of the shares he holds. As
soon as he has paid that nominal value any premium agreed at the time of issue of the shares,
he is no longer liable to contribute any further amounts towards the company’s debts.

It is important to note that a shareholder is liable to contribute to the payment of the

company’s debts; he is not liable to pay the debts himself. This means that he cannot be sued
by a creditor who wishes to obtain repayment of a debt, even if there is still an amount unpaid
in respect of his shares. The procedure is for the creditor to petition the court to wind up the
company and a liquidator to be appointed. The liquidator realizes the company assets and, if
this does not produce enough to meet the company’s liabilities, hw will call on the
shareholders to the extent to the balance of capital unpaid on their shares.

6.2.3.Characteristic of a Company

A company has a number of other characteristics in consequence of being a legal entity

separate from its members.

6.2.3.1.Transferable shares

The interest of a member, as proprietor of the company, is a form of property (measured in

‘shares’), which can transfer to another person, subject to any restrictions imposed by the
constitution of the company.

6.2.3.2.Perpetual succession

A change of membership or the death of a member is not a change in the company itself. It is
a separate person which continues unaffected by changes among its members.

6.2.3.3.Assets, rights and liabilities

The assets and liabilities, rights and obligations incidental to the company’s actual activities
are assets and liabilities and obligations respectively of the company and not of its members.

6.2.3.4. Capital

The sums paid to the company by its members in return for their shares form the company’s
capital. If it is a company with limited liability it may not ordinarily distribute capital to the
members but must retain it as a fund to meet its own debts.

6.2.3.5. Supervision

A company is created by the legal process of incorporation being registration under the
 68

Companies Act 388. It exists as an artificial person under the Act until it is formally
dissolved by removal of its name from the registrar at the Companies Registry. While it
exists it is subject to detailed regulation; for instance, it must prepare and unless it is an
unlimited company, deliver to the registry annual accounts and an annual return (a summary
of its situation). The Registrar of Companies and the courts all have power of regulation and
investigation over companies. The public has legal right of access to the records at the
Companies Registry and to other sources of information.

6.2.3.6. Management

A company cannot, as an artificial person, manage itself. It must therefore have managers or
directors. Directors are the persons to whom management of a company is entrusted.
Together with the company secretary they are the officers of the company. Directors may be
appointed and removed by a simple majority vote of the members: S 211 CA 388. Since they
are in a position whereby it is relatively easy to abuse this trust, directors are subject to a
wide variety of statutory and non-statutory rules, which try to ensure that directors do not
abuse their position.

6.3.0. Written Constitution

A company has no mind of its own to decide what to do. The structure of divided control
between directors and members must be clearly defined. A company therefore has a written
constitution. On the creation of a company, the promoters must file certain documents with
the Registrar of Companies. These include the Articles of Association. The article contain
details of how the company will be run from day to day, for example the duties of directors,
the rights of each class of shares and procedure at meetings.

6.3.1. Public and Private Companies

A company may be registered as public or private. Public companies must:

(a) Be registered as public companies

(b) Have at least two members; and

(c) State in their constitutions that they are public companies.

Private companies are limited companies having a minimum of two member and which are
not registered as public companies. A company is private unless it is specifically registered
as public. The main reason for distinguishing between public and private companies is that
private companies are generally small enterprises in which some if not all shareholders are
also directors and vice versa. Ownership and management are thus combined in the same
individuals. In that situation, it is unnecessary to improve on the directors’ complicated
restrictions on safeguard the interests of members so the whole structure of the company can
be simplified.

The main difference between public and private companies are as follows:
 69

(a) Purpose: Public and private companies fulfill different economic purposes. The
purpose of a public company is usually to raise capital from the public to run the
enterprise.

(b) Issue of capital: A private company may not raise capital by issuing its securities
to the public. There is no restriction on the offer of securities by a public
company. S. 112 CA 388.

(c) Transferable share capital: The shares of a public company are freely
transferable. S (14) 5 CA 388. A private company will, in contrast, wish to
remain under the control of the ‘family’ or ‘partners’ concerned.

(d) Minimum share capital: A public company must have a minimum allotted share
capital of K50, 000,000. A private company has no minimum share capital of K5,
000,000.

(e) Company name: The name of a public company must end with the words ‘Public
Limited Company’ which may be abbreviated to ‘PLC’ or ‘plc’ S 37 (1) CA 388
A private company’s name must end with ‘limited’. This may be abbreviated to
‘ltd’. S 37 (2) CA 388.

(f) Payment for shares: There are a number of differences in the rules relating to the
consideration given in return for shares. For example, if a public company issues
shares in return for the transfer of a non- case asset must be independently valued.

(g) Dividends: There are detailed rules, which differentiate between the ability of
public and private companies to distribute their profits as dividends.

6.4.0. Limited and Unlimited Companies

6.4.1. Limited Liability Companies

Liability is usually limited by shares. This is the position when a company, which has share
capital states in memorandum of association that ‘the liability of members.’ When such a
company allots shares it fixes a price, which the allottee agreed to pay in money or money’s
worth at or soon after the time of allotment.

A company may alternatively be limited by guarantee. Its memorandum of association then

states the amount, which each member undertakes to contribute in the event of liquidation S
19 CA 388. As with a company limited by shares, a creditor has no direct claim against a
member under his guarantee, nor in this case can the company require a member to pay up
under his guarantee until the company goes into liquidation.

Companies limited by guarantee are appropriate to non-commercial activities, such as a

charity or a trade association, which aims to keep income and expenditure in balance but also
have members’ guarantees to fall back in the event of insolvency.

6.4.2. Unlimited liability companies

A company may also be formed with unlimited liability S 13 (b) (iii) CA 388. Its
 70

memorandum of association makes no reference to the liability of members. If the company

goes into liquidation, the liquidator (but not the creditors of the company) can require
members to contribute a much as may be necessary to enable the company to pay its debts in
full. An unlimited company can only be a private company, since a public company is by
definition always limited.

The main advantage of operating as an unlimited company is that the company need not
file a copy of its annual accounts and reports with the Registrar of Companies, unless
during the relevant account period.

(a) It is (to its knowledge) a subsidiary of a limited company;

(b) It is the parent company of a limited company;

(c) It is the promoter or a trading stamp scheme

The unlimited company can be a useful vehicle.

6.5.0. Registration Procedures

In the vast majority of cases a company will today be formed by registration under the
Companies Act 388 and it may be helpful to set out the procedures in some details.

A company is formed by the issue of a certificate of incorporation by the registrar of

companies. The certificate identifies the company by its name and serial number at the
registry and states (if be so) that is limited and (if necessary) that it is a public company.

To obtain the certificate of incorporation it is necessary to deliver to the registrar prescribed

documents 9see below) bearing the name of the proposed company. In selecting a name it is
wise (in the light of s. 37 CA 388).

(a) to search the index of names at the registry to ensure that there is no existing
company with the same name (for this purpose a name is the same’ in spite of
minor differences such as the definite article at the beginning and spelling
difference);

(b) to consider the statutory regulations and administrative guidelines issued to

identify the words which are either prohibited altogether or restricted,
requiring official consent for their use in a company name.

The documents to be delivered to the registrar are as follows: S 6 (1) 388.

(a) Any proposed articles of the company.

(b) A statutory declaration that the requirement of the company Act 288 in respect of
registration have been complied with,

(c) A statement in the prescribed form giving the particular of the first director (s) and
secretary must sign the form to record their consent to act in this capacity. When
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the company is incorporated they are deemed to be appointed.

Under S 6 (2) CA 388, an application for incorporation shall be signed by each subscriber
and shall specify:

(a) The proposed name of the company;

(b) The physical address of the office to be the registered office of the company.

(c) A postal address to the registered postal address of the company;

(d) The type of company formed; and

(e) If the company is to have share capital.

(i) the amount of share capital

(II) the division of the share capital into shares of fixed amount;
and

(iii) the number of shares each subscriber agrees to take.

(f) The particulars of at least two persons who are to be the first directors of the
company;

(g) The particulars of a person or persons who are to be the first secretary or joint
secretaries of the company;

(h) The name and address of the individual lodging the application; and

(i) Such other information respecting the application, the company and the nature of
its proposed business.

A registration fee of K254,000 is also payable on registration of a private company and

K1,370,000 for public company.

The registrar considers whether the documents are formally in order and if he is satisfied, he
gives the company a ‘registered number’ issues a certificate of incorporation. S 10 CA 388.

(a) All the requirements of the Companies Act in respect of registration have been
complied with;

(b) The company is a company authorized to be registered and has been duly registered;
and

(c) If the certificate states that the company is a public company it is conclusive that it is
a public company: 10 CA 388.

The effect of registration is that the company exists under the name given in the certificate of
incorporation; it can exercise its functions as a company and its members are liable to
contribute to its assets in accordance with their liability arising from either shares or
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guarantee.

6.5.1. Companies ‘off the self’

Because the registration of a new company can be lengthy business, it is often easiest for
people wishing to operate as a company to purchase one ‘off the shelf’. This is possibly by
contracting enterprises specializing in registering a stock of companies, ready for sale when a
person comes along who needs the advantages of incorporation.

Normally, the persons associated with the company formation enterprises are registered as
the company’s subscribers and its first secretary and director. When the company is
purchased, the shares are transformed to the buyer, and the registrar is notified of the
director’s and secretary’s resignation. Since the shelf company’s articles memorandum and
the names are unlikely to be a perfect fit, these will normally have to be changed. But the
process of buying ‘ready made’ is quicker and cheaper.

6.6.0. The Veil of Incorporation

The veil of incorporation means simply that a company is to be distinguished as a separate

person from its members. It is in many ways an inappropriate expression since there is no
concealment of the members whose identify is revealed by the register of members which any
member of the public may inspect: s 49 CA 388. There are also many rules, which require
that information about a company shall be available to the public, for example, the registrar
of directors and the filing of accounts at the Companies Registry.

Exceptions are made (called lifting the veil of incorporation) in some specific situations. The
effect of so doing is either to identify the company with other person, that is its members of
directors, or to treat a group of companies as a single commercial entity.

There is no consistent principle applies in making these exceptions, each of which has to be
considered separately; but their general purpose is:

(a) to enforce rules of company law:

(b) to prevent fraud or other evasion of legal obligations by the use of companies; or

(c) to recognize that in economic reality the enterprise is the group and not the
individual companies within it.

Lifting the veil by statute to enforce the law

Liability of a sole member of a company’s debts

Every company must have a minimum membership of at least two members: s 6. If therefore
a public company has two members and one dies or transfers his shares to the other, the rule
is broken.

To enforce its observance so that second member is introduced when necessary, one
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surviving member is made liable (with the company) for its debts if:

(a) the company cries on business after six months from the time when the
membership is reduced to one and

(b) the surviving member knows that it is carrying on business with himself as a sole
member.

The member’s liability is not retrospective and extends only to debts of the company incurred
after the six months have expired: s 26 CA 388. The rule is not often applied since the sole
surviving member can easily remedy the situation by transferring on of his own shares to
another person who becomes the second member.

6.6.1. Fraudulent trading

If, when a company is wound up. It appears that its business has been carried on with intent
to defraud creditors or others the court may decide that the persons (usually the directors)
who were knowingly parties to the fraud shall be personally responsible for debts and other
liabilities of the companies: s 360 CA 388. This is a restraint on directors, which might
otherwise permit their company to continue trading fraudulently when they know that it can
no longer pay its debts. Even in the absence of fraud, s 357 CA 388 (wrongful trading) may
apply.

6.6.2. Liability for use of company name in incorrect form

A company is identified by its name, which distinguishes it from other companies. Every
company is required to exhibit its name in its correct form outside every place of business, on
it seal (if it has one) and on its business letters and other documents such as bills of exchange.
If the rule is broken an officer of the company responsible for the default may be defined and,
as regards business documents, he is personally liable to the creditor if the company fails to
pay the debt: s 194 (2) CA 388.

6.6.3. Evasion of obligations imposed by law

A company may be identified with those who control it, for instance do determine its
residence for tax purposes. The courts may also ignore the destination between a company
and its members and managers if the latter use that distinction to evade their legal obligations.

6.6.4. Public interest

In time of war it permitted to trade with ‘enemy aliens.’ The courts may draw aside the veil
if, despite a company being registered in Zambia, it is suspected that it is controlled by aliens.
The court may then determine the owner’s personality’.

6.6.5. Evasion of liabilities

The veil of incorporation may also be lifted where directors themselves ignore the separate
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legal personality of two companies and transfer assets from one to the other in disregard of
their duties in order to avoid a contingent liability.

6.6.6. Evasion of taxation

The court may lift the veil of incorporation where it is being used to conceal the nationality of
the company.

6.6.7. Quasi-partnership

An application to wind up a company on the ‘just and equitable’ ground under S 272 (f) CA
388 may involve the court piercing the veil to reveal the company as a quasi-partnership.
This may happen where individuals who have operated contentedly as a company for years
fall out, and one seeks to remove the other: The courts are willing in such cases to consider
the central relationship between directors rather than to look at the ‘bare bones’ of the
company.

6.6.8. Group of Companies

A holding company must ordinarily produce group accountants in which the profits or losses,
assets and liabilities of subsidiary companies are consolidated or treated as if they belonged
to the holding company. There is no general rule that commercial activities of a subsidiary
are to be treated as acts of the holding company merely because of the relationship of holding
company and agent or trustee of the other or they both involved in carrying on what amounts
to a single business.

6.7. 0. A company’s Liability in Tort and Crime

A company can have civil liability in tort for wrongs done by its officers and employees
acting on its behalf I its business. This is a normal application of the principle of vicarious
liability. There is more uncertainty about the liability of company for a crime committed in
the course of its business activity.

Tesco Supermarket v Nattrass (1971)

There was a breach of the Trade Description Act 1968 due to the default of the branch
manager of a supermarket in allowing goods to be priced at a higher amount that the ‘special
offer’ posters in the window. The company was prosecuted. Held: the branch manager could
not be held to act for the company since it had more than 800 such managers. The more
senior people who could be said to act for the company had exercised due diligence. Thus
the House of Lords quashed the conviction. Where there is strict liability for a criminal
offence, a company may be convicted of its since the accused’s state of mind – mens rea – is
irrelevant to liability for such an offence: Mousell Bros Ltd v London & North-Western
Railway Co 1917.
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6.8.0. Articles of Association

6.8.1. The Purpose and Scope of the Articles

The articles of association deal mainly with the internal conduct of the company’s affairs –
the issue and transfer of shares; alterations of capital structure; calling general meetings and
how they are to be conducted (including members’ voting rights); appointments, powers and
proceedings of directors’ dividends; accounts and the issue of notices. If the company has
more than one class of shares the rights of a class and the procedure for varying them is
usually set out in the articles. There is a summary of the statutory model articles. (Standard
Articles) 1st Schedule CA 388.

6.8.2. The Articles of Association as Contracts

A company’s articles bind, under s 21 CA 388

(a) Members to company;

(b) Company to members (but see below);

(c) Members of members; but not

(d) Company to third parties

The members are deemed to have separately covenanted to observe the articles.

This principle applies only to rights and obligations, which affect members in their capacity
as members.

Hickman v Kent or Romney Marsh Sheep Breakers Associations (1915)

The plaintiff (H) was in dispute with the company, which had threatened to expel him from
membership. The articles provided that disputes between the company and its members
should be submitted to arbitration. H, in breach of that article, began an action in court
against the company. Held: the proceedings would be stayed since the dispute (which related
to matter affected H as a member) must, in conformity with the articles be submitted to
arbitration. In reviewing other cases the court held that if the matters affect members
generally, if it is not something confined to one member in his personal capacity, it is not a
question of members’ rights and obligations and is not subject to the rule.

Elley v Positive Government Security Life Assurance Co (1876)

E, a solicitor drafted the original articles and included a provision that the company must
always employ him as its solicitor. E became a member of the company some moths after its
incorporation. He later sued the company for breach of contract in not employing him as its
solicitor. Held E could not rely on the article since it was a contract between the company
and its members and he was not asserting any claim as member.
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It may at times be difficult to distinguish between rights accruing as a shareholder (which

may be class rights) and those as an outsider.

Rayfied v Hands (1958)

The article required that a (a) every director should be a shareholder and (b) the directors
must purchase the shares of any member who gave them notice of his wish to dispose them.
The director, however, denied that a member could enforce the obligation on them to acquire
his shares. Held: that a member could enforce the obligation on them to acquire his shares.
Held: there was ‘a contract…between a member and member – directors in relation to their
holdings of the company’s shares in its article’ and the directors were bound by it.

If an outsider makes a separate contract with the company and that contract contains no
express term on a particular point but the articles do, then the contract is deemed to
incorporate the articles to that extent. It is most likely to arise when services, say as a
director, are provided without agreement as to remuneration.

6.9. Company Administration

Since a company is an artificial legal person; it can only act through human agents
known as directors. Decisions in companies are mainly made during meetings. The
main types of meetings being the Annual General Meeting; The Extra-Ordinary general
Meeting and Class Meetings. Resolutions are usually passed during these meetings
namely; Ordinary resolution; extra-ordinary resolution and special resolution.

6.10. Directors
In a similar way to partners in a partnership, the directors act as agents of the company. Any
person who occupies the position of director is treated as such, the test being one of function.
A director is a person who is responsible for the overall direction of the company's affairs. In
company law, director means any person occupying the position of director, by whatever
name called. The directors' function is to take part in making decisions by attending
meetings of the board of directors. Anyone who does that is a director whatever they may be
called. An executive director is a director who performs a specific role in a company under a
service contract which requires a regular, possibly daily, involvement in management. A
director may also be an employee of his company. Since the company is also his employer
there is a potential conflict of interest which in principle a director is required to avoid.
To allow an individual to be both a director and employee the articles usually make express
provision for it, but prohibit the director from voting at a board meeting on the terms of their
own employment.
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A non-executive director does not have a function to perform in a company's management

but is involved in its governance. In listed companies, corporate governance codes state that
boards of directors are more likely to be fully effective if they comprise both executive
directors and strong, independent non-executive directors.
The main tasks of the NEDs are as follows:
• Contribute an independent view to the board's deliberations
• Help the board provide the company with effective leadership
• Ensure the continuing effectiveness of the executive directors and management
• Ensure high standards of financial probity on the part of the company

A managing director is one of the directors of the company appointed to carry out overall
day-to-day management functions. If the articles provide for it the board may appoint one or
more directors to be managing directors. A managing director ('MD') does have a special
position and has wider apparent powers than any director who is not appointed an MD.
Assessments may require the identification of differences between the different types of
director.

Every company must have at least one director and for a public company the minimum is
two. At least one director must be a natural person, not a body corporate. A company may
be a director. In that case the director company sends an individual to attend board meetings
as its representative. Companies are run by the directors collectively, in a board of directors.
The board of directors is the elected representative of the shareholders acting collectively in
the management of a company's affairs.

The method of appointing directors, along with their rotation and co-option is controlled by
the articles. A director may be appointed expressly, in which case they are known as a de
jure director. Where a person acts as a director without actually being appointed as such (a
de facto or shadow director) they incur the obligations and have some of the powers of a
proper director. In addition, a shadow director is subject to many of the duties imposed on
directors. Most company articles allow for the appointment of directors:
• By ordinary resolution of the shareholders, and
• By a decision of the directors.

Directors are entitled to fees and expenses as directors as per the articles, and emoluments
 78

(and compensation for loss of office) as per their service contracts (which can be inspected
by members). Some details are published in the directors' remuneration report along with
accounts. Details of directors’ remuneration is usually contained within their service contract.
This is a contract where the director agrees to personally perform services for the company
A director may vacate office as director due to: resignation; not going for re-election; death;
dissolution of the company; removal; disqualification.

6.11. Duties of directors

 Duty to promote the success of the company
 Duty to exercise independent judgement
 Duty to exercise reasonable skill, care and diligence
 Duty to avoid conflicts of interest
 Duty not to accept benefits from third parties
 Duty to declare interest in proposed transaction or arrangement

Consequences of breach of duty include:

• Damages payable to the company where it has suffered loss.
• Restoration of company property
• Repayment of any profits made by the director
• Rescission of contract (where the director did not disclose an interest)

6.12. The Company Secretary

Every public company must have a company secretary, who is one of the officers of a
company and may be a director. Private companies are not required to have a secretary. In
this case the roles normally done by the company secretary may be done by one of the
directors, or an approved person. The secretary of state may require a public company to
appoint a secretary where it has failed to do so. The specific duties of each company secretary
are determined by the directors of the company. As a company officer, the company
secretary is responsible for ensuring that the company complies with its statutory obligations.
In particular, this means:
• Establishing and maintaining the company's statutory registers
• Filing accurate returns with the Registrar on time
• Organising and minuting company and board meetings
• Ensuring that accounting records meet statutory requirements
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• Ensuring that annual accounts are prepared and filed in accordance with statutory
requirements
• Monitoring statutory requirements of the company
• Signing company documents as may be required by law
Under the Combined Code on Corporate Governance, the company secretary must:
• Ensure good information flows within the board and its committees
• Facilitate induction of board members and assist with professional development
• Advise the chairman and the board on all governance issues

6.13. The Company Auditor

Every company (apart from certain small companies) must appoint appropriately qualified
auditors. An audit is a check on the stewardship of the directors. Every company (except a
dormant private company and certain small companies) must appoint auditors for each
financial year. The first auditors may be appointed by the directors, to hold office until the
first general meeting at which their appointment is considered. Subsequent auditors may not
take office until the previous auditor has ceased to hold office. They will hold office until the
end of the next financial period (private companies) or the next accounts meeting (public
companies) unless reappointed.
Appointment of auditors
The statutory duty of auditors is to report to the members whether the accounts give a true
and fair view and have been properly prepared in accordance with the Companies Act. They
must also:
• State whether or not the directors' report is consistent with the accounts.
• For quoted companies, report to the members on the auditable part of the directors’
remuneration report including whether or not it has been properly prepared in accordance
with the Act.
• Be signed by the auditor, stating their name, and date. Where the auditor is a firm, the
senior auditor must sign in their own name for, and on behalf, of the auditor.
To fulfil their duties, the auditors must carry out such investigations as are necessary to form
an opinion as to whether:
(a) Proper accounting records have been kept and proper returns adequate for the audit have
been received from branches.
(b) The accounts are in agreement with the accounting records.
(c) The information in the directors' remuneration report is consistent with the accounts.
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6.14. Corporate Governance and Corporate Social Responsibility

Corporate governance is the system by which organisations are directed and controlled.
Corporate governance problems can result from the agency problem and lack of shareholder
activism. Governance problems are often caused by lack of control over the directors and
senior management. This lack of control may mean that negligent mismanagement of the
company’s affairs is not discovered and/or that the directors are able to get away with fraud.
The agency problem and lack of shareholder activism can lead to poor control of directors.

Symptoms of poor corporate governance

The following symptoms can indicate poor corporate governance.
• Domination by a single individual
• Lack of involvement of board
• Lack of adequate control function
• Lack of supervision
• Lack of independent scrutiny
• Lack of contact with shareholders
• Emphasis on short-term profitability
• Misleading accounts and information

There are a number of elements in corporate governance:

(a) The management and reduction of risk.
(b) The notion that overall performance is enhanced by good supervision and management
within set best practice guidelines.
(c) Good governance provides a framework for an organisation to pursue its strategy in an
ethical and effective way from the perspective of all stakeholder groups affected, and offers
safeguards against misuse of resources, physical or intellectual.
(d) Good governance is not just about externally established codes, it also requires a
willingness to apply the spirit as well as the letter of the law.
(e) Accountability is generally a major theme in all governance frameworks.
The scandals over the last 25 years have highlighted the need for guidance to tackle the
various risks and problems that can arise in organisations' systems of governance.

Businesses, particularly large ones, are subject to increasing expectations that they will
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exercise social responsibility. This is an ill-defined concept, but appears to focus on the
provision of specific benefits to society in general, such as charitable donations, the creation
or preservation of employment, and spending on environmental improvement or
maintenance.

6.15. Corporate Finance

The main types of capital of a company are share capital and loan capital. Share capital
is the money raised by the company through the sale for its shares and dividends are
paid to share holders; while loan capital is money raise through borrowing and interest is
paid. The types of shares are: ordinary shares; preference shares; and redeemable shares.

6.16. Corporate Insolvency

Insolvency mean that a company is unable to pay its debts. Once this happens the
owners of the company can decide to put it under administration or wind it up. There
are three main types of winding up. Compulsory winding up is winding-up by the
court pursuant to a petition presented to the court by a person other than the Registrar
after it has been resolved the company be wound up by a special resolution; where the
company doe s not commence business in 12 month s after incorporation or it is
unable to pay its debts; the number has reduced below two, the term of the company has
expired or where in the opinion of the court it is just equitable to wind it up. Voluntary
winding-up can either be members or creditors voluntary winding up. A members
voluntary winding up takes place when the company s solvent. The process is managed
by ,member who appoint a liquidator. The company is required to file a declaration of
solvency. A creditors voluntary winding up occurs where the shareholders of the
company resolve to put the company into liquidation but cannot make a declaration of
solvency. Within 24 hours of passing the resolution to wind up the company, the
shareholders must convene a meeting of the creditors. At this meeting, either the
shareholders or creditors appoint the liquidator. In certain case a company
may be struck-off the register. There are two benefits of striking off a company form
the register. Firstly, it is the advantage over cost. It is less costly for the company. There
will be no need for the company to engage in the lengthy and costly procedures
involved in having a company liquidated. Secondly, it is time efficient. The procedure
only takes about four moth s to conclude. This save a lot of time as compared to
liquidation process which may take a year to be concluded.
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Revision Questions
1. What is the difference between an incorporated and an incorporated association?
2. Discuss five consequences of incorporating a company with reference to the case of
Salomon v Salomon.
3. Briefly describe the procedure for registering a company in Zambia.
4. Explain the significance of corporate governance in company administration in
Zambia.
5. How are companies dissolved?

Recommended Texts:
Business and Corporate Law, 2013, ZICA Manual
Charlesworth’s Company Law, 2001
Zambian Business and Company Law, 2015, Northline Training Company (NTC)

CHAPTER SEVEN
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THE BUSINESS TRUST

7.0. Introduction

An unincorporated business organization created by a legal document, a declaration of trust,

and used in place of a corporation or partnership for the transaction of various kinds of
business with limited liability. The use of a business trust, also called a Massachusetts trust or
a common-law trust, originated years ago to circumvent restrictions imposed upon corporate
acquisition and development of real estate while achieving the limited liability aspect of a
corporation. A business trust differs from a corporation in that it does not receive a charter
from the state giving it legal recognition; it derives its status from the voluntary action of the
individuals who form it. Its use has been expanded to include the purchase of Securities and
commodities.

Objectives

At the end of this chapter students must be able to:

1. Explain what a trust is

2. Identify and explain the relevant law on trusts in Zambia
3. Explain how trusts are created
4. Explain the rights and liabilities of trusts
5. Explain the termination process of a trust

A business trust is similar to a traditional trust in that its trustees are given legal title to the
trust property to administer it for the advantage of its beneficiaries who hold equitable title to
it. A written declaration of trust specifying the terms of the trust, its duration, the powers and
duties of the trustees, and the interests of the beneficiaries is essential for the creation of a
business trust. The beneficiaries receive certificates of beneficial interest as evidence of their
interest in the trust, which is freely transferable.

In some states, a business trust is subject to the laws of trusts while, in others, the laws of
corporations or partnerships govern its existence. The laws of each state in which a business
trust is involved in transactions must be consulted to ensure that the trust is treated as an
entity whose members have limited liability. If the laws of a particular state consider a
business trust to be a partnership, the beneficiaries may be fully liable for any judgments
rendered against it. The trustees of a business trust are liable to third parties who deal with the
trust unless there is a contract provision to the contrary, since they hold legal title to the trust
property and may sue and be sued in actions involving the trust. They may, however, seek
indemnity from the trust property and possibly from the beneficiaries.

The property of a business trust is managed and controlled by trustees who have a fiduciary
duty to the beneficiaries to act in their best interests. In many states, the participation of the
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beneficiaries in the management of the property destroys their limited liability, and the
arrangement will usually be treated as a partnership. Profits and losses resulting from the use
and investment of the trust property are shared proportionally by the beneficiaries according
to their interests in the trusts. A business trust is considered a corporation for purposes of
federal Income Tax and similarly under various state income tax laws.

In common law legal systems, the law of Equity defines a Trust as an enforceable three-party
a fiduciary relationship whereby the first party transfers title to property to a second party
who holds title in trust and for the benefit of a third party.

7.1. Creation

Trusts may be created by the expressed intentions of the settlor (express trusts) or they may
be created by operation of law known as implied trusts. An implied trust is one created by a
court of equity because of acts or situations of the parties. Implied trusts are divided into two
categories: resulting and constructive. A resulting trust is implied by the law to work out the
presumed intentions of the parties, but it does not take into consideration their expressed
intent. A constructive trust is a trust implied by law to work out justice between the parties,
regardless of their intentions.

Typically a trust can be created in the following ways:

1. a written trust instrument created by the settlor and signed by both the settlor and the
trustees (often referred to as an inter vivos or living trust);
2. an oral declaration;
3. the will of a decedent, usually called a testamentary trust; or
4. a court order (for example in family proceedings).

In some jurisdictions certain types of assets may not be the subject of a trust without a written
document. In Zambia the laws regulating trust are; the Administration of Estates (Trust
Corporations) Act, The Restriction of Trusts Chapter 62 and 63 of the Laws of Zambia;
The Wills and Administration of Testate Estates Act Chapter 60 of the Laws of
Zambia. There are some formalities that have to be met whether the trust is one by
will or by contract. In Zambia it is not outlined in detail the formalities that have to be
followed by a founder intending to establish a trust, but simply talks about giving
notice to in the Gezzette of the proposed registration and the actual registration under
Section 8(2)(3) of Chapter 63 of the Laws of Zambia.

7.1.1. Formalities
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Generally, a trust requires three certainties, as determined in Knight v Knight:

1. Intention. There must be a clear intention to create a trust (Re Adams and the
Kensington Vestry)
2. Subject Matter. The property subject to the trust must be clearly identified (Palmer v
Simmonds). One may not, for example state, settle "the majority of my estate", as the
precise extent cannot be ascertained. Trust property may be any form of specific
property, be it real or personal, tangible or intangible. It is often, for example, real
estate, shares or cash.
3. Objects. The beneficiaries of the trust must be clearly identified or at least be
ascertainable (Re Hain's Settlement). In the case of discretionary trusts, where the
trustees have power to decide who the beneficiaries will be, the settlor must have
described a clear class of beneficiaries (McPhail v Doulton). Beneficiaries may
include people not born at the date of the trust (for example, "my future
grandchildren"). Alternatively, the object of a trust could be a charitable purpose
rather than specific beneficiaries.

7.1.2. Trustees

A trust may have multiple trustees, and these trustees are the legal owners of the trust's
property, but have a fiduciary duty to beneficiaries and various duties, such as a duty of care
and a duty to inform. If trustees do not adhere to these duties, they may be removed through a
legal action. The trustee may be either a person or a legal entity such as a company, but
typically the trust itself is not an entity and any lawsuit must be against the trustees. A trustee
has many rights and responsibilities which vary based on the jurisdiction and trust instrument.
If a trust lacks a trustee, a court may appoint a trustee.

The trustees administer the affairs attendant to the trust. The trust's affairs may include
prudently investing the assets of the trust, accounting for and reporting periodically to the
beneficiaries, filing required tax returns, and other duties. In some cases dependent upon the
trust instrument, the trustees must make discretionary decisions as to whether beneficiaries
should receive trust assets for their benefit. A trustee may be held personally liable for
problems, although fiduciary liability insurance similar to directors and officers liability
insurance can be purchased. For example, a trustee could be liable if assets are not properly
invested. However, in the United States, similar to directors and officers, an exculpatory
clause may minimize liability; although this was previously held to be against public policy,
this position has changed.

In the United States, the Uniform Trust Code provides for reasonable compensation and
reimbursement for trustees subject to review by courts, although trustees may be unpaid.
Commercial banks acting as trustees typically charge about 1% of assets under management.

7.1.3. Beneficiaries
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The beneficiaries are beneficial (or equitable) owners of the trust property. Either
immediately or eventually, the beneficiaries will receive income from the trust property, or
they will receive the property itself. The extent of a beneficiary's interest depends on the
wording of the trust document. One beneficiary may be entitled to income (for example,
interest from a bank account), whereas another may be entitled to the entirety of the trust
property when he attains the age of twenty-five years. The settlor has much discretion when
creating the trust, subject to some limitations imposed by law.

7.1.4. Purposes

Common purposes for trusts include:

1. Privacy: Trusts may be created purely for privacy. The terms of a will are public and
the terms of a trust are not. In some families, this alone makes the use of trusts ideal.
2. Spendthrift clauses: Trusts may be used to protect beneficiaries (for example, one's
children) against their own inability to handle money. These are especially attractive
for spendthrifts. Courts may generally recognize spendthrift clauses against trust
beneficiaries and their creditors, but not against creditors of a settlor.
3. Wills and estate planning: Trusts frequently appear in wills (indeed, technically, the
administration of every deceased's estate is a form of trust). Conventional wills
typically leave assets to the deceased's spouse (if any), and then to the children
equally. If the children are under 18, or under some other age mentioned in the will
(21 and 25 are common), a trust must come into existence until the contingency age is
reached. The executor of the will is (usually) the trustee, and the children are the
beneficiaries. The trustee will have powers to assist the beneficiaries during their
minority.[
4. Charities: In some common law jurisdictions all charities must take the form of trusts.
In others, corporations may be charities also. In most jurisdictions, charities are
tightly regulated for the public benefit (in England, for example, by the Charity
Commission).
5. Unit trusts: The trust has proved to be such a flexible concept that it has proved
capable of working as an investment vehicle: the unit trust.
6. Pension plans: Pension plans are typically set up as a trust, with the employer as
settlor, and the employees and their dependents as beneficiaries.
7. Remuneration trusts: Trusts for the benefit of directors and employees or companies
or their families or dependents. This form of trust was developed by Paul Baxendale-
Walker and has since gained widespread use.
8. Corporate structures: Complex business arrangements, most often in the finance and
insurance sectors, sometimes use trusts among various other entities (e.g.,
corporations) in their structure.
9. Asset protection: Trusts may allow beneficiaries to protect assets from creditors as the
trust may be bankruptcy remote. For example, a discretionary trust, of which the
settlor may be the protector and a beneficiary, but not the trustee and not the sole
beneficiary. In such an arrangement the settlor may be in a position to benefit from
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the trust assets, without owning them, and therefore in theory protected from
creditors. In addition, the trust may attempt to preserve anonymity with a completely
unconnected name (e.g., "The Teddy Bear Trust"). These strategies are ethically and
legally controversial.
10. Tax planning: The tax consequences of doing anything using a trust are usually
different from the tax consequences of achieving the same effect by another route (if,
indeed, it would be possible to do so). In many cases, the tax consequences of using
the trust are better than the alternative, and trusts are therefore frequently used for
legal tax avoidance. For an example see the "nil-band discretionary trust", explained
at Inheritance Tax (United Kingdom).
11. Co-ownership: Ownership of property by more than one person is facilitated by a
trust. In particular, ownership of a matrimonial home is commonly effected by a trust
with both partners as beneficiaries and one, or both, owning the legal title as trustee.
12. Construction law: In Canada and Minnesota monies owed by employers to contractors
or by contractors to subcontractors on construction projects must by law be held in
trust. In the event of contractor insolvency, this makes it much more likely that
subcontractors will be paid for work completed.
13. Legal Retainer - Lawyers will often require that a legal retainer be paid upfront and
held in trust until such time as the legal work is performed and billed to the client, this
serves as a minimum guarantee of remuneration should the client become insolvent.
However, strict legal ethical codes apply to the use of legal retainer trusts.

7.2.Types of Trusts

Trusts go by many different names, depending on the characteristics or the purpose of the
trust. Because trusts often have multiple characteristics or purposes, a single trust might
accurately be described in several ways. For example, a living trust is often an express trust,
which is also a revocable trust, and might include an incentive trust, and so forth.

Constructive trust: Unlike an express trust, a constructive trust is not created by an

agreement between a settlor and the trustee. A constructive trust is imposed by the law as an
"equitable remedy". This generally occurs due to some wrongdoing, where the wrongdoer has
acquired legal title to some property and cannot in good conscience be allowed to benefit
from it. A constructive trust is, essentially, a legal fiction. For example, a court of equity
recognizing a plaintiff's request for the equitable remedy of a constructive trust may decide
that a constructive trust has been created and simply order the person holding the assets to
deliver them to the person who rightfully should have them. The constructive trustee is not
necessarily the person who is guilty of the wrongdoing, and in practice it is often a bank or
similar organization. The distinction may be finer than the preceding exposition in that there
are also said to be two forms of constructive trust, the institutional constructive trust and the
remedial constructive trust. The latter is an "equitable remedy" imposed by law being truly
remedial; the former arising due to some defect in the transfer of property.

Discretionary trust: In a discretionary trust, certainty of object is satisfied if it can be said

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that there is a criterion which a person must satisfy in order to be a beneficiary (i.e., whether
there is a 'class' of beneficiaries, which a person can be said to belong to). In that way,
persons who satisfy that criterion (who are members of that class) can enforce the trust. Re
Baden’s Deed Trusts; McPhail v Doulton.

Directed trust: In these types, a directed trustee is directed by a number of other trust
participants in implementing the trust's execution; these participants may include a
distribution committee, trust protector, or investment advisor. The directed trustee's role is
administrative which involves following investment instructions, holding legal title to the
trust assets, providing fiduciary and tax accounting, coordinating trust participants and
offering dispute resolution among the participants

Dynasty trust (also known as a generation-skipping trust): A type of trust in which assets
are passed down to the grantor's grandchildren, not the grantor's children. The children of the
grantor never take title to the assets. This allows the grantor to avoid the estate taxes that
would apply if the assets were transferred to his or her children first. Generation-skipping
trusts can still be used to provide financial benefits to a grantor's children, however, because
any income generated by the trust's assets can be made accessible to the grantor's children
while still leaving the assets in trust for the grandchildren.

Express trust: An express trust arises where a settlor deliberately and consciously decides to
create a trust, over their assets, either now, or upon his or her later death. In these cases this
will be achieved by signing a trust instrument, which will either be a will or a trust deed.
Almost all trusts dealt with in the trust industry are of this type. They contrast with resulting
and constructive trusts. The intention of the parties to create the trust must be shown clearly
by their language or conduct. For an express trust to exist, there must be certainty to the
objects of the trust and the trust property. In the USA Statute of Frauds provisions require
express trusts to be evidenced in writing if the trust property is above a certain value, or is
real estate.

Fixed trust: In a fixed trust, the entitlement of the beneficiaries is fixed by the settlor. The
trustee has little or no discretion. Common examples are:

o a trust for a minor ("to x if she attains 21");

o a life interest ("to pay the income to x for her lifetime"); and
o a remainder ("to pay the capital to y after the death of x")

Grantor retained annuity trust (GRAT): GRAT is an irrevocable trust whereby a grantor
transfers asset(s), as a gift, into a trust and receives an annual payment from the trust for a
period of time specified in the trust instrument. At the end of the term, the financial property
is transferred (tax-free) to the named beneficiaries. This trust is commonly used in the U.S. to
facilitate large financial gifts that are not subject to a gift tax.

Hybrid trust: A hybrid trust combines elements of both fixed and discretionary trusts. In a
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hybrid trust, the trustee must pay a certain amount of the trust property to each beneficiary
fixed by the settlor. But the trustee has discretion as to how any remaining trust property,
once these fixed amounts have been paid out, is to be paid to the beneficiaries.

Implied trust: An implied trust, as distinct from an express trust, is created where some of
the legal requirements for an express trust are not met, but an intention on behalf of the
parties to create a trust can be presumed to exist. A resulting trust may be deemed to be
present where a trust instrument is not properly drafted and a portion of the equitable title has
not been provided for. In such a case, the law may raise a resulting trust for the benefit of the
grantor (the creator of the trust). In other words, the grantor may be deemed to be a
beneficiary of the portion of the equitable title that was not properly provided for in the trust
document.

Incentive trust: A trust that uses distributions from income or principal as an incentive to
encourage or discourage certain behaviors on the part of the beneficiary. The term "incentive
trust" is sometimes used to distinguish trusts that provide fixed conditions for access to trust
funds from discretionary trusts that leave such decisions up to the trustee.

Inter vivos trust (or living trust): A settlor who is living at the time the trust is established
creates an inter vivos trust.

Irrevocable trust: In contrast to a revocable trust, an irrevocable trust is one in which the
terms of the trust cannot be amended or revised until the terms or purposes of the trust have
been completed. Although in rare cases, a court may change the terms of the trust due to
unexpected changes in circumstances that make the trust uneconomical or unwieldy to
administer, under normal circumstances an irrevocable trust may not be changed by the
trustee or the beneficiaries of the trust.

Offshore trust: Strictly speaking, an offshore trust is a trust which is resident in any
jurisdiction other than that in which the settlor is resident. However, the term is more
commonly used to describe a trust in one of the jurisdictions known as offshore financial
centers or, colloquially, as tax havens. Offshore trusts are usually conceptually similar to
onshore trusts in common law countries, but usually with legislative modifications to make
them more commercially attractive by abolishing or modifying certain common law
restrictions. By extension, "onshore trust" has come to mean any trust resident in a high-tax
jurisdiction.

Personal injury trust: A personal injury trust is any form of trust where funds are held by
trustees for the benefit of a person who has suffered an injury and funded exclusively by
funds derived from payments made in consequence of that injury.

Private and public trusts: A private trust has one or more particular individuals as its
beneficiary. By contrast, a public trust (also called a charitable trust) has some charitable end
as its beneficiary. In order to qualify as a charitable trust, the trust must have as its object
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certain purposes such as alleviating poverty, providing education, carrying out some religious
purpose, etc. The permissible objects are generally set out in legislation, but objects not
explicitly set out may also be an object of a charitable trust, by analogy. Charitable trusts are
entitled to special treatment under the law of trusts and also the law of taxation.

Protective trust: Here the terminology is different between the UK and the USA:

o In the UK, a protective trust is a life interest that terminates upon the
happening of a specified event; such as the bankruptcy of the beneficiary, or
any attempt by an individual to dispose of his or her interest. They have
become comparatively rare.
o In the USA, a protective trust is a type of trust that was devised for use in
estate planning. (In another jurisdiction this might be thought of as one type of
asset protection trust.) Often a person, A, wishes to leave property to another
person B. A, however, fears that the property might be claimed by creditors
before A dies, and that therefore B would receive none of it. A could establish
a trust with B as the beneficiary, but then A would not be entitled to use of the
property before they died. Protective trusts were developed as a solution to
this situation. A would establish a trust with both A and B as beneficiaries,
with the trustee instructed to allow A use of the property until they died, and
thereafter to allow its use to B. The property is then safe from being claimed
by A's creditors, at least so long as the debt was entered into after the trust's
establishment. This use of trusts is similar to life estates and remainders, and is
frequently used as an alternative to them.

Purpose trust: Or, more accurately, non-charitable purpose trust (all charitable trusts are
purpose trusts). Generally, the law does not permit non-charitable purpose trusts outside of
certain anomalous exceptions which arose under the eighteenth century common law (and,
arguable, Quistclose trusts). Certain jurisdictions (principally, offshore jurisdictions) have
enacted legislation validating non-charitable purpose trusts generally.

QTIP Trust: Short for "qualified terminal interest property." A trust recognized under the tax
laws of the United States which qualifies for the marital gift exclusion from the estate tax.

Resulting trust: A resulting trust is a form of implied trust which occurs where (1) a trust
fails, wholly or in part, as a result of which the settlor becomes entitled to the assets; or (2) a
voluntary payment is made by A to B in circumstances which do not suggest gifting. B
becomes the resulting trustee of A's payment.

Revocable trust: A trust of this kind may be amended, altered or revoked by its settlor at any
time, provided the settlor is not mentally incapacitated. Revocable trusts are becoming
increasingly common in the US as a substitute for a will to minimize administrative costs
associated with probate and to provide centralized administration of a person's final affairs
after death.
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Secret trust: A post mortem trust constituted externally from a will but imposing obligations
as a trustee on one, or more, legatees of a will.

Simple trust:

o In the US jurisdiction this has two distinct meanings:

 In a simple trust the trustee has no active duty beyond conveying the
property to the beneficiary at some future time determined by the trust.
This is also called a bare trust. All other trusts are special trusts where
the trustee has active duties beyond this.
 A simple trust in Federal income tax law is one in which, under the
terms of the trust document, all net income must be distributed on an
annual basis.
o In the UK a bare or simple trust is one where the beneficiary has an immediate
and absolute right to both the capital and income held in the trust. Bare trusts
are commonly used to transfer assets to minors. Trustees hold the assets on
trust until the beneficiary is 18 in England and Wales, or 16 in Scotland.

Special trust: In the US, a special trust, also called complex trust, contrasts with a simple
trust (see above). It does not require the income be paid out within the subject tax year. The
funds from a complex trust can also be used to donate to a charity or for charitable purposes.

Special Power of Appointment trust (SPA Trust): A trust implementing a special power of
appointment to provide asset protection features.

Spendthrift trust: It is a trust put into place for the benefit of a person who is unable to
control their spending. It gives the trustee the power to decide how the trust funds may be
spent for the benefit of the beneficiary.

Standby Trust (or Pourover Trust): The trust is empty at creation during life and the will
transfers the property into the trust at death. This is a statutory trust.

Testamentary trust (or Will Trust): A trust created in an individual's will is called a
testamentary trust. Because a will can become effective only upon death, a testamentary trust
is generally created at or following the date of the settlor's death.

Unit trust: A trust where the beneficiaries (called unitholders) each possess a certain share
(called units) and can direct the trustee to pay money to them out of the trust property
according to the number of units they possess. A unit trust is a vehicle for collective
investment, rather than disposition, as the person who gives the property to the trustee is also
the beneficiary.

7.3. An example of a trust in Zambia

Madison Unit Trust

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A Unit Trust is a Collective Investment Scheme that aims to provide investors with an
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capital and money market funds. The Madison Unit Trust provides a suitable investment
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diversification and enhanced returns.

Benefits of Investing in Madison Unit Trust?

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Madison Unit Trust enable an investor access to a broad spread of listed shares and other
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Flexibility: Madison Unit Trust funds allow your units to be sold and the proceeds made
available within a relatively short period of time.

7.4. Advantages of a trust

 Avoid probate Probate refers to the process of legally establishing the validity of a
Will before a judicial authority. The assets in a trust are distributed in accordance with
the terms of the trust. Your estate, therefore, avoids the cost and delay of probate.

 Continuity of management during disability Creating a revocable trust ensures that

your property remains available to be used for your benefit, should you become
physically or mentally incapable of managing your own affairs.

 Remain in control A revocable trust gives you full use of your assets while you are
alive and then passes this authority onto a successor trustee after your death. The
successor trustee then distributes the assets to the named beneficiaries.

 Flexibility Using a funded revocable trust may allow you to name unrelated, out-of-
state individuals and out-of-state trust companies to act as the primary administrator
of your property at death.

 No interruption in investment management Assuming the assets were previously

transferred into the trusts name, there is no need to reregister securities after death.
Depending on the cash needs and investment objectives of the grantors estate, there
may be no need to develop a new investment strategy.
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 A trust provides asset protection and limits liability in relation to the business.
 Trusts separate the control of an asset from the owner of the asset and so may be
useful for protecting the income or assets of a young person or a family unit.
 Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in
the distribution of income and capital gains among beneficiaries.
 Beneficiaries of a trust are generally not liable for the trust debts, unlike sole traders
or partnerships.
 Beneficiaries of a trust pay tax on income they receive from a trust at their own
marginal rates.

7.5. Disadvantages of a trust

 Re-registration of property In order to be included in a revocable trust, property must

be reregistered in the name of the trust. This may be burdensome and may involve
other costs such as filing fees. If any property has not been reregistered in the name of
the trust at the time of death it’s likely the estate will have to go through the probate
process even though a revocable trust was in place.

 Creditors have access to cash A revocable trust may not shield you from creditors.
Your debts may be applied to the trust.

 Costly to establish A revocable trust costs substantially more to establish than a Will
because you must fund the trust at the time you form it.

 May not automatically adapt to changed circumstances In many jurisdictions, Wills

change automatically upon divorce, marriage or the birth of a child. Most jurisdictions
do not provide similar flexibility for revocable trusts.

 Establishing a trust costs significantly more than establishing sole traders and
partnerships.
 A trust is a complex legal structure, which must be set up by a solicitor or accountant.
 The trustee has a strict obligation to hold and manage the property for the exclusive
benefit of the beneficiaries.
 Operation of the business is limited to the conditions outlined in the trust deed.
 As with companies, there are extensive regulations that trusts must comply with.
 Losses derived in a trust are not distributable and cannot be offset by beneficiaries
against other income they may have.
 Unlike a company, a trust cannot retain profits for expansion without being subject to
penalty rates of tax.

7.6. Significance

The trust is widely considered to be the most innovative contribution of the English legal
system. Today, trusts play a significant role in most common law systems, and their success
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has led some civil law jurisdictions to incorporate trusts into their civil codes. In Curaçao, for
example, the trust was enacted into law on 1 January 2012; however, the Curaçao Civil Code
only allows express trusts constituted by notarial instrument France has recently added a
similar, Roman-law-based device to its own law with the fiducie, amended in 2009; the
fiducie, unlike a trust, is a contractual relationship. Trusts are widely used internationally,
especially in countries within the English law sphere of influence, and whilst most civil law
jurisdictions do not generally contain the concept of a trust within their legal systems, they do
recognise the concept under the Hague Convention on the Law Applicable to Trusts and on
their Recognition (partly only the extent that they are parties thereto). The Hague Convention
also regulates conflict of trusts. Although trusts are often associated with intrafamily wealth
transfers, they have become very important in American capital markets, particularly through
pension funds (essentially always trusts) and mutual funds (often trusts). Howvere, it is
worth mentioning the trusts are not commonly used in Zambia as business entities.

7.7. Basic principles

Property of any sort may be held in a trust. The uses of trusts are many and varied, for both
personal and commercial reasons, and trusts may provide benefits in estate planning, asset
protection, and taxes. Living trusts may be created during a person's life (through the drafting
of a trust instrument) or after death in a will.

In a relevant sense, a trust can be viewed as a generic form of a corporation where the settlors
(investors) are also the beneficiaries. This is particularly evident in the Delaware business
trust, which could theoretically, with the language in the "governing instrument", be
organized as a cooperative corporation, limited liability corporation, or perhaps even a non-
profit corporation, although traditionally the Massachusetts business trust has been
commonly used. One of the most significant aspects of trusts is the ability to partition and
shield assets from the trustee, multiple beneficiaries, and their respective creditors
(particularly the trustee's creditors), making it "bankruptcy remote", and leading to its use in
pensions, mutual funds, and asset securitization as well protection of individual spendthrifts
through the spendthrift trust.

7.8. Terminology

 Appointer: This is the person who can appoint a new trustee or remove an existing
one. This person is usually mentioned in the trust deed.
 Appointment: In trust law, "appointment" often has its everyday meaning. It is
common to talk of "the appointment of a trustee", for example. However,
"appointment" also has a technical trust law meaning, either:
o the act of appointing (i.e. giving) an asset from the trust to a beneficiary
(usually where there is some choice in the matter—such as in a discretionary
trust); or
o the name of the document which gives effect to the appointment.
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The trustee's right to do this, where it exists, is called a power of appointment.

Sometimes, a power of appointment is given to someone other than the trustee, such
as the settlor, the protector, or a beneficiary.

 As Trustee For (ATF): This is the legal term used to imply that an entity is acting as
a trustee.
 Beneficiary: A beneficiary is anyone who receives benefits from any assets the trust
owns.
 In Its Own Capacity (IIOC): This term refers to the fact that the trustee is acting its
own.
 Protector: A protector may be appointed in an express, inter vivos trust, as a person
who has some control over the trustee—usually including a power to dismiss the
trustee and appoint another. The legal status of a protector is the subject of some
debate. No-one doubts that a trustee has fiduciary responsibilities. If a protector also
has fiduciary responsibilities then the courts—if asked by beneficiaries—could order
him or her to act in the way the court decrees. However, a protector is unnecessary to
the nature of a trust—many trusts can and do operate without one. Also, protectors are
comparatively new, while the nature of trusts has been established over hundreds of
years. It is therefore thought by some that protectors have fiduciary duties, and by
others that they do not. The case law has not yet established this point.
 Settlor(s): This is the person (or persons) who creates the trust. Grantor(s) is a
common synonym.
 Terms of the Trust means the settlors wishes expressed in the Trust Instrument. See
Terms (law).
 Trust deed: A trust deed is a legal document that defines the trust such as the trustee,
beneficiaries, settlor and appointer, and the terms and conditions of the agreement.
 Trust distributions: A trust distribution is any income or asset that is given out to the
beneficiaries of the trust.

 Trustee: A person (either an individual, a corporation or more than one of either)

who administers a trust. A trustee is considered a fiduciary and owes the highest duty
under the law to protect trust assets from unreasonable loss for the trust's
beneficiaries. More than one Trustee serving simultaneously are sometimes called Co-
Trustees. A replacement trustee, named before serving, is called a Successor Trustee.

7.9. Variation of a Trust

What is a Trust Variation?

Its effect is like that of an agreement of every interested beneficiary that the trust
should be terminated or varied. The law provides the means by which the Court can supply
consents for some beneficiaries. It:-
(1) approves the arrangement: supplies consents to the arrangement for the
variation of trust purposes on behalf of:-
(a) any of the beneficiaries who by reason of non-age or other incapacity
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is incapable of assenting.

a “beneficiary” as including “any person having, directly or indirectly, an interest, whether

vested or contingent under the trust” or
(b) ‘any person (whether ascertained or not) who may become one of the beneficiaries as
being at a future date or on the happening of a future event a person of any specified
description or a member of any specified class of persons, so however that this paragraph
shall not include any person who is capable of assenting and would be of that description or
a member of that class, as the case may be, if the said date had fallen or the said event had
happened at the date of the presentation of the petition to the court’.

It will be necessary to invite the Court to supply approval on behalf of those

who are not sui juris.

Where is Judicial Variation necessary?

Judicial variation is unnecessary (and incompetent) where the Trust can be terminated/
varied by Agreement. Variation by agreement cannot be done where there is a party with an
interest who is disabled from consenting or there is an alimentary liferent the renunciation of
which needs to be authorised. So far as concerns approval, non-age is the usual disability. A
person under the age of 18 but aged 16 or more can enter into any transaction.

Gray v. Gray’s Trustees,11, Lord Gifford at 383:-

“When in a private trust every possible beneficiary desires and consents to a particular
course being adopted – al the beneficiaries being of full age and sui juris and none of them
being placed under any restraint or disability by the trust deed itself – then no-one has any
right or interest to object and the court will not interfere to prevent the sole and unlimited
proprietors doing what they like with their own.” In England this is referred to as the Rule
in Saunders v. Vautier). The trust estate may therefore be resettled on different terms.

Saunders v Vautier,12 is a leading English trusts law case. It laid down the rule of equity
which provides that, if all of the beneficiaries in the trust are of adult age and under no
disability, the beneficiaries may require the trustee to transfer the legal estate to them and
thereby terminate the trust. The rule has been repeatedly affirmed in common law
jurisdictions.[1] A testator had bequeathed £2,000 worth of stock in the East India Company
on trust for Vautier. According to the terms of the trust, it was to accumulate until V attained
the age of 25. The stock's dividends were to be accumulated along with the capital. Upon
reaching the age of maturity (21 at the material time) he sought access to the capital and
dividends immediately.

The case was ruled in favour of the defendant. The rights of the beneficiary were held to
supersede the wishes of the settlor as expressed in the trust instrument.

11
(1877) 4R. 378
12
(1841) EWHC Ch J82
 97

Lord Langdale MR held as follows:

“I think that principle has been repeatedly acted upon; and where a legacy is directed to
accumulate for a certain period, or where the payment is postponed, the legatee, if he has an
absolute indefeasible interest in the legacy, is not bound to wait until the expiration of that
period, but may require payment the moment he is competent to give a valid discharge.”

Significance

Although the rule is most often exercised where there is a sole trustee holding the trust fund
on a bare trust for a sole beneficiary (usually where the trusts were held for the benefit of a
tenant for life, who has died, and the sole beneficiary is the remainderman), the rule is not
limited to those circumstances. However, if there is more than one beneficiary, then all of
them need to be adults and without any disability.

There are a number of reasons why the beneficiaries may elect to do this. In Saunders v
Vautier, the accumulation trusts were to continue until the beneficiary was 25, and (at 21)
the beneficiary wished to terminate the accumulation. Similarly, if the trusts are held for a
tenant for life, and then for the benefit of a remainderman, both tenant for life and
remainderman may decide to terminate the trusts and obtain the capital immediately, and
agree a partition of the funds between them; this situation often occurs where changes in the
revenue laws means that upon the death of the tenant for life the trust fund may be subject to
inheritance tax in a way that was not envisaged when the trust fund was originally set up.

It has also been held that the rule in Saunders v Vautier also applies to discretionary trusts
as well as fixed trusts.[4] However, some caution is in order, as that decision was made at a
time when the law was understood to require that a valid discretionary trust need to be able to
draw up a complete list of the beneficiaries of the trust in order to be valid; subsequent to the
decision of the House of Lords in McPhail v Doulton, 13, this is no longer the appropriate
test,[5] and accordingly it may be that not all discretionary trusts are capable of being
terminated by the beneficiaries under the rule. Where the beneficiaries are all sui juris, and
between them absolutely entitled to the trust property, they may require the trustees to end the
trusts and distribute the funds as the beneficiaries agree English trusts law.

7.10. Termination of a Trust

A trust may be terminated in a number of ways. A trust will for example can be
discharged if the trust assets are destroyed; if the objects of the trust are fulfilled; or if
the term for which it was created expires. The right to terminate the trust may be
awarded to several persons by the trust instrument.

13
[1971] AC 424
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Sample Essay Question and Answer

Question 1

In order for a settlor to create a valid inter vivos trust of property he owns absolutely, it is
necessary both to constitute the trust perfectly and to meet certain statutory requirements.
Discuss.

Answer Plan

 Brief summary of the concept of a trust.

 The need for title to the trust property to be effectively conveyed to the trustee, if not
already present (Milroy v Lord (1862)).
 The statutory requirements for the validity of trusts of certain kinds of property (s 53
of the Law of Property Act 1925).
 The consequences of imperfect creation (briefly).

Answer

The trust is a unique creation of the common law, and one of its most versatile concepts.
Moreover, when the trustee holds property on trust for the beneficiary, the trustee is
submitting to one of the most powerful forms of legal obligation known to English law. A
trustee may well ?nd himself bound by onerous duties, either imposed by the trust instrument,
by statute, or by general principles of equity, and there are serious consequences awaiting any
trustee who neglects his duties or breaches the terms of the trust. Likewise, the trustee is only
the mere 'paper' owner of the property and, unless he is also a beneficiary, will derive no
benefit from the trust property. The trustee holds the trust property 'on trust' for the
beneficiary for the beneficiary's use and benefit, and the trustee may even be prohibited from
being paid for his labours (although this will be rare for professional trustees: see ss 28-30 of
the Trustee Act 2000). Necessarily, therefore, there must be clarity and certainty when
establishing a trust. It is vital to be clear that the person to whom title to the property is
transferred (or who already possesses it) is indeed bound by a trust and so may not use the
property for himself. Similarly, the rights of the beneficiaries must be established with
certainty so that they may be allowed to enforce the trust should the trustee fail to carry out
its terms. In other words, the need to determine where the real ownership of property lies and
the need to be certain about the nature of the ownership of the trustee and beneficiary requires
trusts to be created and evidenced with some measure of formality. Of course, that is not to
say that all trusts must fulfil the same requirements of form before they can be recognised and
enforced.

After all, it is common in English law for there to be different levels of formality when
dealing with different types of property. For example, transactions concerning land - an
immovable asset - have traditionally required a higher degree of formality than dealings with
other kinds of property. Thus, it should come as no surprise to learn that the nature of the
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property which is to be the subject matter of the trust is relevant when considering how trusts
may be validly created.

In considering the creation of trusts, it is important to realise that there are two distinct and
separate issues which must be addressed. First, it is inherent in the concept of a trust that the
trustee be invested with title to the trust property, either because he is already the owner of
that property or because such title has been effectively conveyed to him by the settlor. Unless
that is the case, the trust is said to be incompletely constituted and the beneficiaries will have
no claim on the trust property under the failed trust (Milroy v Lord (1862)). A recent
innovation created by the Privy Council involves the occasion where the settlor appoints
multiple owners as trustees, including himself. If he manifests an irrevocable intention to
create a trust, his retention of the property will be construed as one of the trustees thereby
constituting the trust, whether with or without a transfer to the other trustees. The maxim,
'equity regards as done that which ought to be done' will be applicable, see Choithram v
Pagarani (2001). In cases where the trust property needs to be conveyed to a trustee, it is
necessary to examine the particular type of trust property in order to determine what must be
done in order effectively to transfer the title. The requirements will be different for each type
of property. Secondly, there are 'external' formality rules, imposed by statute, which regulate
the way in which trusts per se can be created. These are to be found in the Law of Property
Act (LPA) 1925 and they are designed to ensure that the creation of trusts of certain kinds of
property is not open to doubt and to minimise the potential for fraud by the trustee. Failure to
fulfil these requirements renders the trust unenforceable, even if title to the property is
effectively vested in the trustee (s 53 of the LPA 1925).
The first issue is the creation of a trust by establishing that the trustee has title to the property.
Once again, a distinction needs to be drawn at the outset between situations where the
existing owner of the trust property declares himself to be a trustee (self-declarations) and
situations where the existing owner of property wishes to transfer the property to someone
else as trustee (transfer and declaration). In the former case, the person who is to be the
trustee already has title and, therefore, there is no need to transfer the property. Consequently,
there is no need for any formality for this aspect of trust creation. All that is needed for an
effective declaration of trust - or rather, a declaration by the current owner of himself as
trustee - is some clear evidence of a present and irrevocable declaration of trust, as in Paul v
Constance (1977), and this evidence may take any form. Indeed, there is no requirement that
the declaration of trust ever be communicated to the intended beneficiary (Middleton v
Pollock (1876)). So, for example, if A, the owner of a book, declares that 'I now hold this
book on trust for B', a trust will be created even if B is unaware of the fact, provided that
there are no external formality requirements imposed by statute for the creation of trusts of
books (which there are not). It is important to note, however, that for a declaration of trust by
the present owner of the property to be effective, the circumstances of the case must not
reveal a failed attempt by that owner to create a trust by the transfer of the trust property to
another as trustee. In other words, declaration of oneself as trustee requires no formality,
because the declarer already owns the property; but such a declaration will not be validly
made if the owner had tried and failed to create a trust by the other method - transfer of
property to a trustee - especially if that failure is due to a defect in the formality requirements
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for the transfer of that property (Milroy v Lord (1862)). The intention to declare oneself a
trustee is very different from the intention to transfer property to another as trustee and they
are mutually exclusive.

The second way in which trusts may be created is the effective transfer of property to the
trustee. As noted at the outset, unless the trustee has title to the property, the trust is
incompletely constituted and the beneficiaries have no enforceable claim to the property
under the failed 'trust' (Jones v Lock (1865)). Thus, if the owner of property decides to create
a trust by transferring that property to someone else as trustee, it is essential that the intended
trustee obtains title to the property in the manner appropriate to the type of intended trust
property. So, if S (the owner and 'settlor') decides to create a trust of his book by transferring
the book to A on trust for B, legal title to the book must be effectively transferred to A if the
trust is to be constituted and B is to have enforceable rights to it. In reality, then, it is essential
to know how title to different types of property may be transferred. Indeed, there is nothing
special about the rules we are about to consider, as they are the normal rules applicable to the
transfer of title to property whenever and whreever it is conveyed. It is just that, with trusts,
the trustee is receiving the property on behalf of someone else and not for his own use.
Typical examples of the formality requirements for the transfer of title in property to a trustee
are: a deed or registered disposition for land (unregistered and registered respectively);
execution of a share transfer form and registration as owner for stocks and shares; written
assignment for choses in action; and delivery of possession or a deed of gift for personal
property. It is clear, then, that the particular requirements for the effective transfer of title to a
trustee depend upon the nature of the property being transferred and, in this sense, the
formality requirements for the creation of a trust are really the formality requirements for the
effective transfer of ownership of property generally.

Finally, before considering the 'external' formality requirements for the creation of a trust, it
is necessary to consider briefly one or two exceptions to the general principle just considered.
First, a trust may be held to have been validly constituted, despite the fact that the trustee has
not formally received title, if failure to be invested with that title is because of non-
compliance with some condition outside the control of the settlor or trustee. Thus, in Re Rose
(1952), a trust of shares in a private company was held to be perfectly constituted despite the
fact that the legal title of the trustee had not been formally con?rmed at the relevant time by
entry in the share register of the company. This was because transfer of legal title was by
registration in the company's register but its directors had a discretion to refuse such
registration and registration had not yet taken place. Given, then, that complete transfer of
legal title was outside the settlor's (and trustee's) control, lack of compliance was not
destructive of the trust. Similarly, in Mascall v Mascall (1985) title to registered land was
taken to have been effectively transferred by completion of the relevant land transfer form
even though registration of that title by the registrar had not yet occurred. Likewise, in
Pennington v Waine (2002), the Court of Appeal decided that the execution and delivery of
share transfer forms to an intermediary for the purpose of registering the new owner was
sufficient to transfer the equitable interest. However, it is unclear whether legal title will be
taken to have been effectively transferred if subsequent registration (of the private company's
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shares or registered land) does not take place and so the exception really allows the trust to be
constituted in advance of the time that it technically occurs. Secondly, according to Re Ralli
(1964), it may be immaterial that the trustee acquires title to the trust property in a manner
different from that which the settlor originally intended. So, even though the settlor has failed
to transfer title to the trustee during his lifetime, if the intended trustee is also the settlor's
executor under his will, when the settlor dies, the executor (and trustee) will obtain legal title
by virtue of his position as executor and the trust will thereby be constituted, albeit in a
different manner from that which was intended. Thirdly, there are several other methods by
which title to property may be effectively transferred from one person to another without the
normal formality rules for that type of property being satisfied. However, these are usually
relevant when the transferee obtains the property absolutely and not as trustee - that is, they
are used to make gifts, not to perfect trusts. Examples include the principles of donatio
mortis causa and the law of proprietary estoppel.

We shall look now at the other major requirement for the valid creation of a trust: the external
formality rules imposed by statute. In essence, these rules are necessary to ensure certainty in
dealings with certain kinds of property, especially land. In fact, the position in respect of
trusts of property created inter vivos is relatively straightforward. First, assuming that title to
the property is with, or has been transferred to, the trustee, there are no further formal
requirements for the creation of trusts of personalty (that is, not land or interests in land). So,
trusts of property other than land may be created orally or in writing and all that is needed is a
declaration of self as trustee or an effective transfer of title to another as trustee. In the case of
land, however, the creation of a trust must be 'manifested and proved' in writing. Although
the trust does not have to be in writing, there must be written evidence of it, even if that
evidence is not contemporaneous with the date of the creation of the trust (s 53(1)(b) of the
LPA 1925 and Rouchefoucauld v Boustead (1897)). Failure to comply with this evidential
requirement renders the trust of land unenforceable, although there are exceptions for
resulting or constructive trusts of land (s 53(2) of the LPA 1925 and Pettitt v Pettitt (1970)).
Likewise, the court may, in exceptional circumstances, allow oral evidence to prove the
existence of a trust of land if this is necessary to prevent fraud by the trustee, as where the
trustee dishonestly claims that there is no trust and that he may keep the property because of
an absence of the necessary writing (Rouchefoucauld v Boustead (1897)).

These, then, are the necessary formalities which must be met before a settlor can create an
inter vivos trust of property which he owns absolutely. Of course, if the trust is by will, then
different considerations apply (see s 9 of the Wills Act 1837, as amended) and if the subject
matter of the trust is itself an equitable interest (so that the trustee holds an equitable title on
trust for another), there may be further formality requirements springing from the
requirements of writing found in s 53(1)(c) of the LPA 1925. Finally, it is relevant to note
that, in some circumstances, it may be dif?cult to distinguish between, on the one hand, the
creation of a trust of pure personalty (no writing) or of land (evidenced in writing) and, on the
other, the transfer of an equitable interest in personalty or land under a trust which already
exists. The difference is, however, crucial, for the transfer of any equitable interest under an
existing trust - be it of personalty or realty - must actually be in writing under s 53(1)(c) of
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the LPA 1925. As the cases of Grey v IRC (1960) and Vandervell v IRC (1967) demonstrate,
such a distinction is not always easy to draw.

Note: This question is quite specific as it does not require consideration of trusts by will
(testamentary trusts) or where the settlor has only a purely equitable interest. Understanding
the distinction between creation of trusts by declaration and by transfer of property is
important, especially as the methods are mutually exclusive.

Recommended Texts

Derek Francis, Advocate, July, 2008, “Variation of Trusts”, Terra Ferma Chambers.

Hudson, A (2003). Equity and Trusts (3rd ed.). Cavendish Publishing. ISBN 1-85941-729-
9.

Mitchell, Charles; Hayton, DJ (2005). Hayton and Marshall's Commentary and Cases on
the Law of Trusts and Equitable Remedies (12th ed.). Sweet & Maxwell.

Mitchell, Charles; Hayton, DJ; Matthews, P (2006). Underhill and Hayton's Law Relating
to Trusts and Trustees (17th ed.). Butterworths.

CHAPTER EIGHT
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SMALL AND MEDIUM SIZED ENTERPRISES

8.0. Introduction

Small and medium-sized enterprises (SMEs; sometimes also small and medium enterprises)
or small and medium-sized businesses (SMBs) are businesses whose personnel numbers fall
below certain limits. The abbreviation "SME" is used in the European Union and by
international organizations such as the World Bank, the United Nations and the World Trade
Organization (WTO). Small enterprises outnumber large companies by a wide margin and
also employ many more people. SMEs are also said to be responsible for driving innovation
and competition in many economic sectors.

Objectives

At the end of the chapter, students must be able to:

1. Explain what SMEs are and the law regulating their establishment
2. Explain the importance of SMEs in terms of FDI
3. Explain the nature of Transnational SMEs
4. Illustrate the level of contribution by SMEs in host Zambia
5. Identify and explain the problems faced by transnational SMEs
6. Identify and explain policies to promote SMEs especially by developing
counties such as Zambia

8.1. Definition of Small And Midsize Enterprises - SME'

A business that maintains revenues or a number of employees below a certain standard.

Every country has its own definition of what is considered a small and medium-sized
enterprise. In the United States, there is no distinct way to identify SME; it typically it
depends on the industry in which the company competes.

In the European Union, a small-sized enterprise is a company with fewer than 50 employees,
while a medium-sized enterprise is one with fewer than 250 employees. SME firms tend to
spend a lot of money on IT and, as a result, these businesses are strongest in the area of
innovation. The need to attract capital to fund projects is therefore essential for small and
medium-sized enterprises. To be competitive SME firms require "out of the box" solutions,
even if they involve surrendering some functionality.

8.1. Overview of SMEs

Small and medium-sized enterprises (SMEs) account for over 95% of firms and
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60%-70% of employment and generate a large share of new jobs in economies. They
have specific strengths and weaknesses that may require special policy responses. As
new technologies and globalisation reduce the importance of economies of scale in
many activities, the potential contribution of smaller firms is enhanced. However,
many of the traditional problems facing SMEs – lack of financing, difficulties in
exploiting technology, con-strained managerial capabilities, low productivity,
regulatory burdens –become more acute in a globalised, technology-driven
environment.

Small firms need to upgrade their management skills, their capacity to gather
information and their technology base. Governments need to improve SME access to
financing, information infrastructures and international markets. Providing regulatory,
legal and financial frameworks conducive to entrepreneurship and small firm start-up
and growth is a priority. Fostering public-private partnerships and small-firm
networks and clusters may be the most expeditious path to a dynamic SME sector.
Grouped in local systems of production, SMEs can often be more flexible and
responsive to customer needs than large integrated firms. They can pool resources and
share the costs of training, research and marketing. Clustering facilitates exchange of
personnel and diffusion of technology and creates new possibilities for efficiency
gains. Importantly, these local networks and support systems can help SMEs meet the
challenges of globalisation. Whether alone or in clusters, SMEs are seeking
international opportunities through strategic alliances, franchising and joint ventures.
Government policy initiatives should take account of regional and local factors which
affect entrepreneurship and build on these particularities to foster small-firm
partnerships. Policies should use local institutions, groups of industries and inter-firm
linkages to create and strengthen the micro-level bonds which can underpin global
competitiveness. Building on local strengths, SME policies need to address the new
dynamics of entrepreneurship and small-firm clusters to meet the challenges posed by
globalising economies

8.2.What are SMEs?

SMEs are defined as non-subsidiary, independent firms which employ fewer than a
given number of employees. This number varies across national statistical systems.
The most frequent upper limit is 250 employees, as in the European Union.
However, some countries set the limit at 200 employees, while the United States
considers SMEs to include firms with fewer than 500 employees. Small firms are
generally those with fewer than 50 employees, while micro-enterprises have at most
ten, or in some cases five, workers. Financial assets are also used to define SMEs. In
the European Union, SMEs must have an annual turnover of EUR 40 million or less
and/or a balance-sheet valuation not exceeding EUR 27 million.
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8.3.What is their economic contribution?

SMEs play a major role in economic growth in the economy, providing the source
for most new jobs. Over 95% of enterprises are SMEs, which account for 60%-70%
of employment in most countries. As larger firms downsize and outsource more
functions, the weight of SMEs in the economy is increasing. In addition, productivity
growth – and consequently economic growth – is strongly influenced by the
competition inherent in the birth and death, entry and exit of smaller firms. This
+process involves high job turnover rates – and churning in labour markets – which is
an important part of the competitive process and structural change. Less than one-half
of small start-ups survive for more than five years, and only a fraction develop into
the core group of high- performance firms which drive industrial innovation and
performance. This underscores the need for governments to reform policies and
framework conditions that have a bearing on firm creation and expansion, with a view
to optimising the contributions that these firms can make to growth.

8.4.In which sectors are SMEs found?

Most SME jobs are in the service sector, which now accounts for two-thirds of
economic activity and employment in OECD countries. Smaller firms are found
particularly in wholesale and retail trade, the hotel and restaurant business,
communications and business services, and construction. SMEs also account for a
high percentage of manufacturing firms in many OECD countries and provide at least
half of OECD manufacturing employment. Smaller firms are increasingly present in
technology-intensive industries such as information and communications technology
(ICT) and bio-technology. SMEs predominate in the important strategic business
services subsector, including services relating to computer software and information
processing, research and development, marketing, business organisation and human
resource development. Increased outsourcing by major manufacturing firms,
combined with new technologies that have allowed SMEs to win market niches, has
led to 10% annual growth in these knowledge-based services in recent years. The
fact that the average firm size in strategic business services is a fraction of the
average size of firms in manufacturing or in the economy as a whole is an indication
of the importance of SMEs in this field.

8.5. Why is entrepreneurship important?

A vibrant entrepreneurial sector is essential to small-firm development.
Entrepreneurs are people who sense opportunities, innovate, take risks and develop
new goods and services. They drive business dynamics – the birth, expansion,
contraction and death of firms – and fuel overall economic growth. The
entrepreneurial process, however, remains mysterious. Social, cultural and political
factors in countries influence the availability of entrepreneurial opportunities as well
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as the degree of risk-taking and the mobility of resources. Factors discouraging

entrepreneurship include education and training which is risk-averse and regulations
and institutional impediments which discourage the establishment of new ventures or
expansion of existing activities. Entrepreneurship tends to vary across regions. Some
regions or locales are known for generating clusters of dynamic firms which benefit
from “information spillovers” and other intangible factors. All countries have local
“pockets” with extremely high levels of entrepreneurial activity, e.g. Silicon Valley
in the United States, Arezzo and Modena in Italy, Valencia in Spain, Nüremberg in
Germany, and Gnosjö in Sweden. Culture, social and intellectual capital and local
networking influence the development of such firm links. Clustering can be of
particular benefit to smaller firms which, because of their size, cannot finance in-
house services such as training, research or marketing. And clustering can generate
benefits that progressively increase the competitive advantage of the group of firms
and enable them to compete globally. Successful districts and clusters are
characterised by the continual emergence of new entrepreneurial firms.

Based on survey data, some 30%-60% of SMEs in the OECD area are characterised
as innovative in the broad sense. On average, they are less likely to conduct research
and development (R&D) than larger firms. But they may be more likely toinnovate
in other ways – through creating or re-engineering products or services to meet new
market demands, introducing new organisational approaches to enhance productivity,
or developing new techniques to expand sales. Public policies or attitudes which
constrain creativity, competition, risk-taking and adequate returns to investment are
inimical to innovative behavior by smaller enterprises. There is a subset of high-
growth small firms which are exceptional innovators. These SMEs are located in the
top 5%-10% of all growing firms. In most countries, their job creation rates exceed
those of larger companies. They tend to be technology-based and conduct R&D.
Found mostly in knowledge-intensive sectors and in regions characterised by intense
economic activity and clustering, these fast growers are usually integrated into formal
and informal networks of firms. High-growth SMEs play a pioneering role in
developing new products and markets in sectors such as ICT and biotechnology and
are at the cutting edge of the “new economy”.

8.6. What type of SME financing is needed?

Funding gaps for smaller firms are a major impediment to growth. Widevariance in
the profitability, survival and growth of SMEs compared to larger firms brings
special financing problems. Owners and managers of smaller firms often lack
commercial experience and/or a track record as entrepreneurs. Early stages of
growth are marked by uncertainty both in production and marketing. Smaller,
innovative firms operate in environments of high complexity and rapid change and
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rely heavily on intangible assets. SMEs often have trouble obtaining financing
because banks and traditional lending institutions are averse to risky ventures.
Venture capital can be supplied by specialised funds which raise money from a
range of sources: private individuals, corporations, government agencies, pension
funds, banks and insurance companies, endowments and foundations. Or it can be
provided directly by the same range of investors.

8.7. Are SMEs in global markets?

Smaller firms have traditionally focused on domestic markets and many will continue to do
so. But others are becoming increasingly globalised, often on the basis of inter-firm
linkages and clusters. About 25% of manufacturing SMEs are now internationally
competitive and this share should increase. About one-fifth of manufacturing SMEs draw
between 10%-40% of their turn-over from cross-border activities. At present, SMEs
contribute between 25%-35% of world exports of manufactures and account for a small share
of foreign direct investment. These internationally active SMEs are generally growing faster
than their domestic equivalents. Networking allows SMEs to combine the advantages of
smaller scale and greater flexibility with economies of scale and scope in larger markets –
regional, national and global. Relative to larger firms, SMEs can better respond to changing
market conditions, evolving consumer preferences and shorter product life cycles by
customising and differentiating products. New communication tools make it easier for small
firms to reach foreign partners. As a result, SMEs are becoming more involved in
international strategic alliances and joint ventures, both alone and in groups. Larger
multinationals are partnering with smaller firms with technological advantages to economise
on R&D, minimise the lead- time for new products and serve emerging markets. And SMEs
are reaching across borders to form international alliances and ventures composed of
globalised small firms. Governments recognise that the size of SMEs often prevents them
from going global. A wide range of financial and risk-management services, including
insurance, bank guarantees and advice, is available to SME exporters through
government export credit and promotion agencies.

8.8.Contribution of SMEs to the economy

Much is being done to improve the environmental performance of industry through
policies which induce reductions in harmful emissions and encourage energy and
resource efficiency. Smaller firms, however, tend to be less aware than larger firms
of environmental externalities and of the legislation that governs their activities. They
have fewer resources to invest in environmental improvements and management tools
that could make their operations more sustainable. On the other hand, SMEs can fill
market niches in the development and sale of environmental goods and services.
Involving the full range of SMEs in working towards sustainable solutions is a
formidable challenge. With ICT advances, the means for governments and other
stakeholders to reach, inform and influence smaller players are at hand, but an
effective government environmental strategy is needed, together with heightened
awareness in small firms of the need for firm level environmental strategies.
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8.9. The role of government

In view of the SME role in economic restructuring, governments should above all
promote entrepreneurship, facilitate firm start-up and expansion, and improve access
to venture capital and other types of financing. To this end, governments are now
fostering the development of secondary stock markets to allow easy entry and exit for
venture investors; easing taxes on capital gains and other dividends; and allowing
greater use of stock options as compensation in small firms. Governments are also
fostering business angel networks which bring together small companies and
prospective investors. Reducing the regulatory burden on smaller firms can be one
of the greatest spurs to entrepreneurship. Problems stem from regulatory systems
developed to serve the needs of large firms and the cumulative pressure of regulatory
requirements. SMEs identify high compliance costs, extensive and complicated
paperwork, and economic regulations that prohibit certain activities as the most
onerous burdens they face. Countries are now reducing paperwork and bureaucracy,
minimising administrative burdens, streamlining procedures and reducing
compliance costs for SMEs, including setting up “one-stop shops”. At the same time,
the relatively weak bargaining power and generally poor liquidity of SMEs make
them strongly dependent on regulatory frameworks that guarantee the reliability of
transactions and secure orderly playing rules in the economy. Promoting enterprise
clusters can also enhance SME performance and competitiveness. Small firms
working in clusters can attain the advantages of large firms while retaining the
benefits of specialisation and flexibility. Local, regional and national governments
can foster small-firm linkages through providing the frameworks for public/private
and inter-firm partnerships.

Furthermore, reforming fiscal practices, reducing administrative burdens, providing

management and skills training, improving information dissemination and increasing
access to markets. Programmes to increase the technology base of SMEs include
R&D tax credits, loans or grants for innovative activities, and technology diffusion
schemes. Concurrently, more OECD countries are adopting an “evaluation culture”
whereby programmes are reviewed on a regular basis to determine their relevance
and effectiveness. Evaluation of SME programmes is essential to justify their cost
and to assist in the design of future programmes. The challenge of enhancing
conditions for SME competitiveness goes beyond the bodies directly responsible for
SME policies: the provision of an appropriate regulatory, legal and financial
framework conducive to small-firm start-up and growth depends on a wide range of
institutions at all levels of government – local, regional, national and international.

8.10. Developments in the Zambian economy

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Economic growth positive in 2013 – but higher growth and greater job creation will require
continued investment in economic infrastructure as well as health and education.

1. In 2013 real GDP was K125.9 billion compared to K106 billion in 2012. GDP growth in
2013 was 6.5%, with average real growth over the past three years (2011 – 2013) of 6.9%.
2. Key contributors to real GDP growth in 2013 were: transport, storage and communications
(27.1%); construction (24%); community, social and personal services (17.4%); financial
institutions and insurance (13.7%); manufacturing (8.2%); and mining (5%).
3. Investment in the economy (Gross Fixed Capital Formation) is currently estimated at
29.7% of GDP in 2013, with average investment over the past three years (2011 – 2013) of
27.1%.
4. Agriculture, mining, manufacturing, tourism, energy and construction set to be major
drivers of GDP growth and job creation over the medium to long term.

8.11. Fiscal policy and the Budget

Expansionary fiscal budget largely aimed at infrastructure development necessary to sustain

high levels of economic growth over the medium term. Higher deficit in 2013 reflected
structural reforms related to management of strategic reserves (FRA), oil procurement (fuel
subsidies), and reform of the public service (wage award).

1. Preliminary data indicates that in 2013 the budget deficit was approximately 6.7% of GDP,
compared to the target of 4.3% of GDP. However, this was significantly below the figure of
8.6% of GDP which was initially forecast by the IMF.
2. Average budget deficit over the past three years (2011 – 2013) stood at a relatively low
figure of 3.3% of GDP.
3. Domestic revenues estimated at 20% of GDP in 2013.
4. Expenditures were 26.7% of GDP in 2013, with wages and salaries at approximately 9.5%
GDP and Government investment at 6.0% of GDP.
5. Government is committed to reducing fiscal deficit to no more than 3% of GDP over the
medium term. This should be possible as Zambia achieves higher growth and greater tax
revenues from the mining and other sectors sector as production increases.

8.11.Debt Policy

Government is mindful of the need to maintain debt sustainability to safeguard

macroeconomic stability.

1. Total debt as a percentage of GDP stood at 28% in 2013.

2. External debt stood at US $3.1 billion 2013 or 13.7% of GDP, whilst domestic debt stood
at K17.6 billion or approximately 14% of GDP.
3. External and domestic debt levels remain below their international thresholds of 40% and
25%, respectively.
4. Debt service (principal and interest payments) stood at K11 billion or 1.2% of GDP (and
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approximately 6% of domestic revenue) in 2013.

8.12.Monetary Policy

Monetary policy remains committed to delivering low inflation and a strong financial sector
that continues to expand access to finance particularly to SMEs. Increasing attention is also
being paid to improving consumer protection and strengthening corporate governance
standards.

1. Inflation remains in single digits at 7% in 2013, and goal is to reduce this to no more than
5% by end 2016.
2. Average lending rates have stabilised around 16%.
3. Private sector credit grew by approximately 16.2% on an annual basis (as at November
2013).
4. Financial sector has been strengthened with new capital requirements, and the banking
system remains profitable
5. Access to financial services, particularly for SMEs remains a challenge, but significant
progress being made in improving the payment systems as well as ways of spreading
financial service provision through branchless banking.
6. Government has supported provision of longer term finance by channelling more resources
through DBZ and the CEEC.

8.13. External Sector Developments

Current account and trade balance remain positive with strong FDI flows. But declines in
trade balance in recent past reflect need to promote greater NTEs by diversifying the export
base. Agriculture, energy and manufacturing sectors are going to be important sources of
diversification over the medium to long term.

1. In 2013 the current account balance recorded a surplus of US $216 million or 1% of GDP.
2. The trade balance (goods) also recorded a surplus of US $ 1.4 billion or 6% of GDP. Both
the current account and the trade balance have been positive between 2011 and 2013.
3. In 2013, mining sector exports are estimated to have grown by 13% to US $10.4 billion,
whilst NTEs grew by 23% to US $3.3 billion.
4. Import growth has also been strong at 16.5% in 2013, driven by both strong FDI flows as
well as incentives in the budget for job creating sectors which included customs duty
reductions.
5. Capital and intermediate goods continue to account for over 50% of all imports.
6. The nominal exchange rate (Kwacha versus the US Dollar) remains market determined and
depreciated by an annual average rate of approximately 4.2% in 2013.
7. Government committed to maintaining a flexible and open exchange rate regime – with
stronger monitoring of external flows so that we can better manage the economy and respond
to any global financial shocks.
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Zambia needs to achieve higher levels of economic growth to make meaningful headway in
creating decent jobs and reducing poverty and inequality. Government remains committed to
maintaining macroeconomic stability characterised by low inflation, stable exchange rate,
rising international reserves, and expansion in access to credit particularly for SMEs.
Real economic growth of between 7%-8% targeted over the medium term (2014 – 2016)
Budget deficits are expected to be consolidated towards a lower figure of 3% of GDP in the
medium term. Revenues are projected to rise to 23% of GDP by 2016. Inflation targeted to
decline to no more than 5% by 2016. External debt will remain sustainable and well below
the threshold of 40% of GDP. Improving access to financial services as well as achieving
better health and education outcomes critical in making meaningful progress in reduction of
poverty and inequality.

Revision Questions

1. What is an SME?

2. What is the contribution of SMEs to the economy?

3. What challenges are faced by SMEs?

4. What is the role of government in promoting SMEs?

5. Identify an SME in Zambia and discuss how it has contributed to development in

Zambia.

Recommended Texts

Economic Factsheet – January 20, 2014

- Read more at: http://lusakavoice.com/2013/03/20/zanis-copy-from-india-smes-of-value-
addition-to-zambias-economy-scott/

John Ward, Creating, 1991, Effective Boards for Private Enterprises, Family
Enterprises Publishers
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CHAPTER NINE

STATUTORY CORPORATIONS

9.0. Introduction

A statutory corporation is a corporation created by statute. Their precise nature varies by

jurisdiction thus they might be ordinary companies/corporations owned by a government with
or without other shareholders, or they might be a body without shareholders which is
controlled by national or sub-national government to the (in some cases minimal) extent
provided for in the creating legislation. Bodies described in the English language as
"statutory corporations" exist in the following countries in accordance with the associated
descriptions (where provided).

Objectives:

At the end of this unit, students must be able to:

1. Know and explain the background behind statutory corporations

2. Identify and explain operation of relevant laws of statutory corporations
3. Characteristics of statutory corporations
4. Explain the functions of statutory corporations
5. Explain how statutory corporations are controlled

9.1. Creation

A public or statutory Corporation is an autonomous corporate body set up under a special Act
of Parliament or State Legislature. The Act or statute defines its objectives, powers and
functions. A public corporation seeks to combine the flexibility of private enterprise with
public ownership and accountability. In the words of the late President Roosevelt to U.S.A.,
“a public Corporation is an organisation that is clothed with the power of the government, but
is possessed of the flexibility and initiative of private enterprise.” A public Corporation is
thus a combination of public ownership, public accountability and business management for
public end. It must be remembered that, an enterprise does not become a public corporation
simply by using the word 'corporation' in its name.

.
 113

9.2. Features

The essential features of a public corporation are as under:

1. Corporate body: It is a body corporate established through a special Act of Parliament or
Stat Legislature. The Act defines its powers and privileges and its relationship with
government departments and ministries.
2. Legal entity: It enjoys a separate legal entity with perpetual succession and common seal.
It can acquire an own property in its own name. It can sue and be sued and can enter into
contracts in its own name.
3. Government ownership: The public corporation is wholly owned by the Central and/ or
State Government (s).

4. Financial independence: It enjoys financial autonomy. Its initial capital and borrowings
are provided by the government but it is supposed to be self-supporting. It can borrow money
from the public an is empowered to plough back its earnings.
5. Accounting system: The corporation s not subject to the budgetary, accounting and audit
regulations applicable to government departments. It is generally exempt from the rigid rules
applicable to the expenditure of public funds.
6. Management and personnel: A public corporation is managed by a Board of Directors
appointed by the Government. However, its employees need not necessarily be civil servants.
They can be employed on terms and conditions laid down by the corporation itself.
7. Service motive : The primary motive of the corporation is public service rather than
private profits. It is, however, expected to operate in a business-like manner.

9.3.Merits
A Public corporation offers the following advantages;
1. Operational autonomy : A public corporation enjoys internal autonomy as there is no
Parliamentary interference in its day-to-day working. Therefore, it can be run in a
businesslike manner. There is “a high degree of freedom, boldness and enterprise in the
management of undertakings and circumspection which is considered typical of government
departments”
2. Flexibility operations: Being relatively free from bureaucratic control, a public
corporation enjoys flexibility and initiative in business affairs. It can experiment in new lines
of activity and decisions can be taken without undue delay.
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3. Continuity: Being a distinct legal entity, it is not affected much by political changes. It
can, therefore, maintain continuity of policy and operations.
4. Special privilege: A public corporation is often granted special privileges. The special law
by which by which it is created can be tailor made to meet the specific needs of the particular
situation.
5. Availability of managerial talent: A public corporation can employ professional
managers by offering them better terms and conditions or service than those available to
government servant.

9.4.Demerits
A public corporation suffers from the following drawbacks:
1. Difficult formation: It is very difficult and time-consuming to set up a public corporation
because a special law has to be passed in the Parliament.
2. Inflexibility: It is very difficult to change the objects and powers because the special law
has to be amended by the Parliament or the State legislature.
3. Excessive accountability: There are frequent debates and discussions on the reports and
working of public corporations. Ministerial and political interference in day-to-day working
do not allow internal autonomy in actual practice.
4. Clash of divergent interests: When the Board of Directors is constituted to give
representation to divergent interests, a conflict may arise. This will hamper the smooth and
efficient functioning of the corporation. Emphasis on service motive and lack of incentive
may further reduce the profitability of operations.

9.5.Suitability
Despite its weaknesses, the public corporation is generally considered appropriate for public
enterprises of industrial and commercial nature. It represents an appropriate combination of
public accountability and operational autonomy. According to Prof. Robson: “It is destined to
play as important a part in the field of nationalized industry in the 20the century as the
privately-owned corporation played in the realm of capitalist organisation in the 19the
century.”

The public corporation is suitable for undertakings requiring monopoly powers,. e.g., public
utilities. It is also useful for undertakings which involve exercise of powers to be conferred
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by legislature and enterprises which may not be self-supporting and have to be financed by
regular grants by the State. However, in India, “it would not be wrong to say that for the most
part the public corporation has lost the spirit but retained the form.” Bureaucratic
management, financial dependence on the government and lack of personal motivation are
the main reasons for this state of affairs.

9.6. Termination

It is normally terminated by the ct establishing it as it generally provides the ways

through which such an entity can be terminated.

9.7. Examples of Statutory Corporations in Zambia

9.7.1. Zambia Institute of Mass Communication (ZAMCOM)

The Zambia Institute of Mass Communication is an independent professional media training

trust in Zambia. The institute was initially the in service training wing of the Ministry of
Information and broadcasting when it was first established in the early 1980s. It has since
then seen a lot of change and transformation where now it is mandated to offer professional
media and communication training for audiences from within and outside Zambia. This
mandate comes well stipulated through the ZAMCOM Act of 1996 in the parliament of the
republic of Zambia.
 
9.7.2. Zambia National Broadcasting Corporation is a Zambian

Zambia National Broadcasting Corporation is a Zambian state owned TV station. Established

during British rule, it remains the biggest TV station with most parts of the country covered
now. ZNBC has its head office located in the capital Lusaka.

9.7.3. Zambia Daily Mail

The Zambia Daily Mail is a daily broadsheet newspaper published in Zambia. The newspaper
publishes in English. It is one of two papers owned by the Zambian government.

9.7.4. Times of Zambia

The Times of Zambia is a national newspaper published in Zambia. It was, together with its
sister paper The Sunday Times, owned by Lonrho, until 3 August 1983 when it changed
hands to the United National Independence Party (UNIP),the former ruling party of Zambia.

Revision Questions

1. What is a statutory corporation?

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2. How is it formed?

3. What are the features of a statutory corporation?

4. What are some of the differences between statutory corporations and companies?

5. Explain the advantages and disadvantages of statutory corporations.

Recommended Texts

Denis Leach and John Leachy, 1991, Ownership and Structures, Control of Large
British Companies, Economic Joiurnal.

Fred Neubar and alden G.Lank, 1998, The Family Business: Its Governance for
Sustainability, Routledge: New York.
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CHAPTER TEN
PACRA

10.0. General Information

The registrar is located at the PACRA. PACRA is a stand-alone office with a customer
service centre designed in a process chain platform, where the applicant goes through
various steps: check name, submit the completed Form 2: Application for Incorporation,
Form 5: Declaration of Consent to act as a Director or Secretary, Form 11: Declaration of
compliance, receive a case number to track the application status, and pay the fees at the
cashier. At the end of the process, the applicant returns to PACRA to obtain the
certificate of incorporation and the certificate of share capital.

Objectives

Students must familiarise themselves with the operations of PACRA.

The fees payable to PACRA are as follows:

- Registration Fee: 2.5% of nominal capital
- Sealing Fee: ZMW 10
- Certificate of incorporation: ZMW 30
- Certificate of share capital: ZMW 30
- Certificate of minimum capital: ZMW 30
- Companies Form 5: ZMW 10
- Companies Form 11: ZMW 10

Register with the local Zambia Revenue Authority (ZRA) office, direct tax division to
obtain a corporate tax number
3 Agency: Zambia Revenue Authority

The corporate tax number is obtained from the Zambia Revenue Authority (ZRA).

Register with National Pension Scheme Authority for Social Security

Agency: National Pensions Scheme Authority

4 In order to register with the National Pension Scheme Authority, the Employer must file
an Employer registration form and attach a copy of the company's certificate of
incorporation. The Employees must complete a membership registration form and attach
copies of their National Registration Cards.

Pay business levy to the Lusaka City Council

Agency: Lusaka City Council
5
All Businesses are required to pay a business levy to commence business activities.
 118

How businesses are registered with Patents and Registration Agency (PACRA) which is the
Government institution mandated to register any business formation in the Zambia.

PACRA formerly Patents and Registration Office (PACRO) was established under Act
number 15 of 2010.

Doing business in Zambia begins with PACRA in the sense that, formal business registration
is only undertaken by PACRA.

Business entrepreneurs should get acquainted with the operations of PACRA for compliance
sake.

The business registration of sole proprietorship, partnership and private limited company
under which SMEs register their businesses, are regulated by two pieces of legislations.

The first two are regulated under Act number 16 of 2011 while the private limited companies
are regulated by Companies Act number 388 of the Laws of Zambia.

The business names Act number 16 of 2011 replaced Business Names CAP 389 Act number
29 of 1939.

However, the certificate issued under the repealed Act has been allowed to remain valid
under the new Act.

The business Names Act is responsible for the birth of the sole-proprietorships and
partnerships.

It is important whenever you enter any business premises to recognise what business
registration is in force at that particular time, because this will help you to know what kind of
a business you are dealing with.

It is the requirement for each business to display the certificate.

Sole proprietorship: To register a sole proprietorship one needs to buy Business Name Form
number 111(BN Form 111) which is a form designed for individuals registering businesses.

The groceries, butcheries, tailoring shops, stationery shops, hardware shops and others hang
their business of registration certificates on the walls.

If one is operating a business without this form of registration, then the business is operating
illegally.

This does not imply that these forms of businesses register their businesses under sole
proprietorship only.

On form number 111(BN Form 111) the applicant is required to fill in the following details.

•The proposed business name (three choices)

•The nature of a business

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•The location of a business

•First and Surname of applicant

•The nationality

•Age and Sex

•Date of commencement of business

•Financial year end

The registration form should be filled in duplicate accompanied with K80,000 or KR80 fee
which should be submitted to the Registrar of Companies.

Once the Registrar is satisfied with all the requirements, including name clearance, he/she
then issues the certificate of registration as proof that a business has been legally registered.
Partnership: If two or more people come up in partnership to register a partnership business,
they need to obtain Business Name Form 11(BN Form 11).

Questions

1. What does PACRA stand for?

2. discuss the functions of PACRA.

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CHAPTER ELEVEN

REGIONAL ECONOMIC COMMUNITIES

11.0. Introduction

Regional Economic Communities (RECs) in Africa group together individual countries in

sub-regions for the purposes of achieving greater economic integration. They are described as
the 'building blocks' of the African Union (AU) and are also central to the strategy for
implementing the New Partnership for Africa's Development (NEPAD).

Objectives:

At the end of this chapter students must be able to:

1. Identify the regional economic communities

2. Discuss the importance of these organisations.

3. Explain the relevance of these organisations to the economies of members states

11.1. List of Regional Economic Communities recognized by the African Union

Currently, there are eight RECs recognised by the AU, each established under a separate
regional treaty. They are:

 Arab Maghreb Union (UMA)

 Common Market for Eastern and Southern Africa (COMESA)
 Community of Sahel-Saharan States (CEN-SAD)
 East African Community (EAC)
 Economic Community of Central African States (ECCAS)
 Economic Community of West African States (ECOWAS)
 Intergovernmental Authority on Development (IGAD)
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 Southern African Development Community (SADC)

11.2. Background

From its establishment in 1963, the Organisation of African Unity (OAU) identified the need
for the economic integration of the continent as a prerequisite for economic development.
The 1980 Lagos Plan of Action for the Development of Africa, followed by the 1991 treaty to
establish the African Economic Community (also referred to as the Abuja Treaty), proposed
the creation of regional economic communities (RECs) as the basis for African integration,
with a timetable for regional and then continental integration to follow. The Treaty provides
for the African Economic Community to be set up through a gradual process, in 6 stages over
34 years, i.e. by 2028.

Article 88 of the Abuja Treaty states that the foundation of the African Economic Community
is the progressive integration of the activities of the RECs, with the establishment of full
continental economic integration as the final objective towards which the activities of
existing and future RECs must be geared. A Protocol on Relations between the AEC and the
RECs entered into force on 25 February 1998.

In 2000, the OAU/AEC Summit in Lomé adopted the Constitutive Act of the African Union,
which formally replaced the OAU in 2002. The final OAU Summit in Lusaka from 9 to 11
July 2001 reaffirmed the status of the RECs within the African Union and the need for their
close involvement in the formulation and implementation of all programmes of the Union.

At the same time, it was recognised that the existing structure of the RECs was far from ideal,
with many overlaps in membership. At the Maputo Summit in 2003 the AU Commission was
requested to accelerate the preparation of a new draft Protocol on Relations between the
African Union and the RECs. Rationalisation of the RECs formed the theme of the July 2006
Banjul summit of the AU. At the July 2007 Accra summit the AU Assembly adopted a
Protocol on Relations between the African Union and the Regional Economic Communities.
This protocol is intended to facilitate the harmonisation of policies and ensure compliance
with the Abuja Treaty and Lagos Plan of Action time frames.

11.3. Challenges facing the RECs

Several of the RECs overlap in membership: for example, in East Africa, Kenya and Uganda
are members of both the EAC and COMESA, whereas Tanzania, also a member of the EAC,
left COMESA and joined SADC in 2001. This multiple and confusing membership creates
duplication and sometimes competition in activities, while placing additional burdens on
already over-stretched foreign affairs staff to attend all the various summits and other
meetings.

 European Union (EU) is a politico-economic union of 28 member states that are

located primarily in Europe. It covers an area of 4,324,782 km2, with an estimated
population of over 508 million. The EU operates through a system of supranational
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institutions and intergovernmental-negotiated decisions by the member states. The

institutions are: the European Parliament, the European Council, the Council of the
European Union, the European Commission, the Court of Justice of the European
Union, the European Central Bank, and the Court of Auditors. The European
Parliament is elected every five years by EU citizens.

 The EU has developed an internal single market through a standardised system of

laws that apply in all member states. Within the Schengen Area, passport controls
have been abolished. EU policies aim to ensure the free movement of people, goods,
services, and capital, enact legislation in justice and home affairs, and maintain
common policies on trade, agriculture, fisheries, and regional development. The
monetary union was established in 1999 and came into full force in 2002. It is
currently composed of 19 member states that use the euro as their legal tender.

 The EU traces its origins from the European Coal and Steel Community (ECSC) and
the European Economic Community (EEC), formed by the Inner Six countries in
1951 and 1958, respectively. In the intervening years, the community and its
successors have grown in size by the accession of new member states and in power by
the addition of policy areas to its remit. The Maastricht Treaty established the
European Union under its current name in 1993 and introduced European citizenship.
The latest major amendment to the constitutional basis of the EU, the Treaty of
Lisbon, came into force in 2009.

 Covering 7.3% of the world population, the EU in 2014 generated a nominal gross
domestic product (GDP) of 18.495 trillion US dollars, constituting approximately
24% of global nominal GDP and 17% when measured in terms of purchasing power
parity. Additionally, 26 out of 28 EU countries have a very high Human Development
Index, according to the UNDP. In 2012, the EU was awarded the Nobel Peace Prize.[23]
Through the Common Foreign and Security Policy, the EU has developed a role in
external relations and defence. The union maintains permanent diplomatic missions
throughout the world and represents itself at the United Nations, the WTO, the G8,
and the G-20. Because of its global influence, the European Union has been described
as a current or as a potential superpower.

Revision Questions

1. Write an essay on the purpose of regional economic organisations

2. Give at least two examples of regional economic organisations and explain how they
have contributed to economic development of their regions.

Recommended Texts
 123

Daniels, J., Radebaugh, L., Villarreal, D. (2007). International Business: environment and operations,
11th edition. Prentice Hall. ISBN 0-13-186942-6

Joshi, Rakesh Mohan, (2009) International Business, Oxford University Press, ISBN 0-19-568909-7

CHAPTER TWELVE

INTERNATIONAL BUSINESS

12.0. Introduction

International business comprises all commercial transactions (private and governmental,

sales, investments, logistics, and transportation) that take place between two or more regions,
countries and nations beyond their political boundaries. Usually, private companies undertake
such transactions for profit; governments undertake them for profit and for political reasons.
The term "international business" refers to all those business activities which involve cross-
border transactions of goods, services, resources between two or more nations. Transactions
of economic resources include capital, skills, people etc. for international production of
physical goods and services such as finance, banking, insurance, construction etc.

Objectives

At the end of this chapter the student must be able to:

1.Explain the nature of international business transactions

2. Give reasons for factors that influence international business

3. Explain how this is regulated

4. Discus its advantages and disadvantages

12.1. Factors that influenced the growth in globalization of international business

There has been growth in globalization in recent decades due to (at least) the following eight
factors:

 Technology is expanding, especially in transportation and communications.

 Governments are removing international business restrictions.
 Institutions provide services to ease the conduct of international business.
 124

 Consumers want to know about foreign goods and services.

 Competition has become more global.
 Political relationships have improved among some major economic powers.
 Countries cooperate more on transnational issues.
 Cross-national cooperation and agreements.

12.2. Importance of International Business Education

 Most companies are either international or compete with international companies.

 Modes of operation may differ from those used domestically.
 The best way of conducting business may differ by country.
 An understanding helps you to make better career decisions.
 An understanding helps you decide what governmental policies to support.

Managers in international business must understand social science disciplines and how they
affect all functional business fields.

12.3. Importance of language/cultural studies in International Business

A considerable advantage in International Business is gained through the knowledge and use
of language. Advantages of being an International Businessperson who is fluent in the local
language include the following:

 Having the ability to directly communicate with employees and customers

 Understanding the manner of speaking within business in the local area to improve
overall productivity
 Gaining respect of customers and employees from speaking with them in their native
tongue

In many cases it is truly impossible to gain an understanding of a culture's buying habits

without first taking the time to understand the culture. Examples of the benefit of
understanding local culture include the following:

 Being able to provide marketing techniques that are specifically tailored to the local
market
 Knowing how other businesses operate in the and what might or might not be social
taboos
 Understanding the time structure of an area. Some societies are more focused on
"being on time" while others focus on doing business at "the right time"
 Associate with other people whom do not know several languages.

12.4. Importance of studying International Business

The International Business standards focuses on the following:

 125

 raising awareness of the interrelatedness of one country's political policies and

economic practices on another;
 learning to improve international business relations through appropriate
communication strategies;
 understanding the global business environment—that is, the interconnectedness of
cultural, political, legal, economic, and ethical systems;
 exploring basic concepts underlying international finance, management, marketing,
and trade relations; and
 identifying forms of business ownership and international business opportunities.

Revision Questions

Critically analyse the role of international business in today’s business world.

Recommended Texts:

Cole, Ehmke (2011).Strategies for competitive advantage. Western Centre for Risk and
Management Education,p.1-8

Kim, W. C., & Hwang, P. (1992). Global strategy and multinationals' entry mode choice.
Journal of International Business Studies, 23(1), 29. Accessed 30 September 2015.

Luthans, F., Doh, J. P. (2015). International Management: Culture, Strategy and Behavior,
9th edition. McGraw Hill. ISBN 0-07786244-9