Professional Documents
Culture Documents
Introduction
The formation and winding up of a company in Kenya is governed by the
Company’s Act Cap 486 of the Laws of Kenya. The company legislation in Kenya
owes its origin to the English company law. The companies Act of Kenya which
came into force on 1st January 1962 is based on English companies Act of 1948.
This Act is still applicable together with later amendments. The Act provides a
basic legal framework for the regulation of companies in Kenya. It makes
provision for the legal incorporation of companies and lays down rules for their
constitution, management and winding up.
A part from the companies Act, there is also case law which has been developed
by the courts such doctrines of ultra vires. The case law and companies practice
have developed so many rules which are useful for filling in the gaps which have
not been provided by the companies Act.
Definition of a Company
A company can be defined as a group of persons associated together for the
purpose of attaining a common objective, social or economic.
Section 2 (1) of the company Act (cap 486) provides that “a company means a
company formed and registered under this Act or an existing company”. Existing
company only means a company formed and registered under any of the
repealed ordinances. For the purposes of companies Act of Kenya the
companies includes: -
a) A registered company under this Act.
b) An existing company.
c) An unregistered company covered under section 357-364.
d) A produce company covered under section 388.
e) A foreign company covered under section 365-381.
Characteristics of a company
1. Artificial legal person
A company is an artificial legal person. It acts through a board of directors
elected by the share holders. It was stated in Bates vs standard Land company
that “The Board of Directors are the brains and the only brains of the company,
which is the body and the company can and does act only trough them”.
A company has the right to acquire and dispose of the property, to enter into
contract with third parties in its own name and can sue or be sued in its own
name.
2. Separate legal Entity
A company is a separate entity quite distinct from its shareholders. A company or
body corporate is formed once a certificate of incorporation is given. Such a body
corporate is capable of having perpetual succession, power to hold land, has a
common seal with liabilities of its members limited as per the provisions of the
Act.
In the case Lord Machagater observed the company is at law quite different
person altogether from the subscribers of the memorandum and though it might
be that after incorporation the business is precisely. The same as it was before
and the same persons are managers, and the same hands receive the profits,
the company is not in law the agent of the subscribers or trustee liable in any
shape or form except to the extent and in the manner provided by the Act”.
Other case laws in support of separate legal personality are the Lee vs Lee Air
Farming Ltd and the Maccaura vs Northern Assurance Company Limited 1952
Act 6119.
3. Perpetual Succession
A company has a common seal, with the name of the company is not affected by
the death, insanity or bankruptcy of shareholders. Change of membership also
does not affect continuity of the company.
4. Common Seal
A company has a common seal, with the name of the company engraved on it as
a substitute for its signatures. For a document to be binding it must bear the
common seal of the company and the seal witnessed by two or more directors.
5. Limited Liability
A shareholder is only liable to the debts of the company during it’s life or
during winding up only to the extent of share taken by him and only to the
balance taken by him or up to the guarantee given by him or both. The
personal property of a shareholder can’t be attached for the debts of the
company.
6. Transferability of shares
Members of a public company are free to transfer shares held by them to
anybody. However for private company transferability of shares may be restricted
by articles.
9. Separate property
A company is capable of owning, enjoying and disposing the property in its own
name. Thus a shareholder does not have an insurable interest in the property of
the company.
Lifting the Corporate Veil
Since a company is a legal person distinct from its members there is assumed to
be a curtain, a veil or a shield between the company and its members. The
principle of separate legal entity was established in the case of Salomon vs
Salomon and company Ltd. Thus once a company is formed there is a veil
between the company and its members. Based on this principle it is not easy to
go behind the curtain and see who are the real persons composing the company.
There are however cases when the corporate veil has to be lifted to look at the
individual members who are in fact the real beneficial owners of all corporate
property. Thus lifting corporate veil means identification of a company with its
members and when the corporate veil is lifted the individual members may be
held liable for its acts or entitled to its property.
Some of the instances when the corporate veil may be lifted include where it is
for the benefit of revenue, where it is essential to secure justice and where it is in
public interests. The corporate veil may be lifted by: -
a) The courts
b) The statute
a) Lifting by the courts
1. Determination of the character of the company.
A company may be declared an enemy character when its directors are
residents of an enemy country. Therefore courts may lift the veil to ascertain the
nationality of persons controlling the company.
In Daimler company Ltd vs continental Tyres and rubber company Ltd 1916 AC
307 Daimler company was sued by continental tyre company for recovery of a
debt of Tyres supplied continental tyres was incorporated in England for
purpose of selling in England tyres made in Germany. The shareholders of
continental tyres were Germany except one and all directors were Germany .
During the First World War continental tyres commenced an action to recover a
debt from Daimler. Daimler contested arguing that continental tyres was an
enemy company. It was held that continental tyres was an alien company and
the payment of debt would amount to trading with an enemy.
2. Prevention of fraud or improper conduct.
The veil may also be lifted if a company is formed for a fraudlent purpose or to
avoid legal obligations.
Professor Leower says that the veil of a corporate body will be lifted where the
corporate personality is being blantantly used as a clock for fraud or improper
conduct.
Case law Jones vs Limpman 1962
5. Protection of Revenue.
This is especially the case when a company is formed to assist shareholders
evade taxes. In such case the shareholders may be held liable to pay income
tax.
Case law illustrating is that of Sir Dinshaw Maneckfen Pefi Re AIR (1927) Bom
371.D.
Lifting by statute.
1. When members fall below statutory minimum. As per section 33 of the
Act, a business is not allowed to carry on business for more than six months
if membership falls below seven incase of a public company and below two
in case of a private company. Anyone aware of the fall of membership and
continues to carry on business will be held liable for all debts of the company
contracted after six months.
2. Misdescription of the company.
Sec 109 of the Act states that the name of the company must be fully and
properly mentioned on all documents issued by it. Where an officer of a company
signs, on behalf of the company, a bill of exchange, promissory note. Cheque,
order for money or goods in which the company’s name is not mentioned the
officer is personally liable to the holder of the bill of exchange.
Case law in this case, Hendon vs. Alderman (1973) 117s 631.
3. Holding and subsidiary companies.
Although both holding and subsidiary companies are separate entities there are
instances where a subsidiary may loose its separate identity to a certain extent.
a) Where at the end of the financial year a company has
subsidiaries, it may lay before the members in a general meeting
not only its own account but also a set of group accounts showing
the profits and loss earned by the company and its subsidiaries
and their collective state of affairs at the sixth schedules.
b) Section 167 empowers the inspector appointed by the court to
regard the subsidiary and the holding company as one entity for
the purpose of investigation.
7. Expert management.
Companies run large-scale business and have adequate financial resources and
as such can afford the services of specialists. Thus companies are run
professionally.
8. Public confidence.
Formation and running of a company is regulated by the provisions of the
companies Act and various other acts. Provisions regarding the appointment and
remuneration of directors, compulsory audit and publication of accounts
protection of minority shareholders have credited greater public confidence.
9. Social Advantages
A company helps to gather savings from the public and invests them in sound
industrial and commercial ventures. Companies provide employment opportunity
to many and since they operate in large scale they ensure economic use of
national resources And provisions of goods and services to the public at lower
prices.
Disadvantages of incorporation
1. Formation of companies is a complicated procedure and is costly.
Documents requited like the memorandum of Association, the articles, the
prospectus or statement in lieu of prospectus are usually drawn by legal
experts who charge high fees for their preparation.
2. There is no secrecy regarding the affairs of a company. Wide publicity
of the company affairs may lead to economic sabotage by its rivals.
3. It is very expensive to administer a company. This relates to
requirements pertaining the holding of general and statutory meetings and
returns of annual accounts. The accounts and audit reports require
expenses.
4. Doctrine of ultra vires. A company can only trade on the business
specified in its object clause of the memorandum of association.
5. Taxation. A company must pay taxes as a legal person while this is not
a requirement for partnerships.
6. There are many formalities before a business starts trading.
7. The winding up of a company is widely published thus exposing the
property of the company to an insecure position.
Corporation is a person in law i.e. quite distinct from the individuals who are its
members. Corporations can own property, have rights and are subject to
liabilities.
Types of corporations:
a) Corporate sole.
Has only one member.
Can continue even after death of those members.
b) Corporation aggregate.
Have more than one member.
Are classified according to the means the artificial corporate personality has been
granted: - thus
(i) Chartered corporations
Are incorporated by the grant of a royal charter by the crown.
Nowadays charters are given to non-profit making bodies of public importance
(good).
(ii) Statutory corporations
Created by passing an act of parliament e.g. the national coal board.
(iii) Registered corporations.
Are those created by compliance with the terms of an act of parliament.
Companies act 1844 provided a third and easier method of incorporation by
registration following compliance with formalities. In 1855 limited liability concept
was introduced.
Limited companies
Liability of a company is unlimited in the sense that it must pay all debts due from
it so long as its assets are sufficient to meet them. Liability of members may be
limited when the company is formed by;
a) Shares.
Members are liable to the extent of the amount paid on their shares, including
share premium if any.
There is no liability regarding unissued capital.
In case of private companies a guarantee is usually required before credit is
given.
b) Guarantee
Normally these companies don’t have share capital.
They are non-profit making organizations.
Where there is no share capital, there is no liability or the members unless and
until the company goes into liquidator in which case they were liable to the extent
to which they have agreed by the memorandum of association to contribute to
the assets of the company.
The guarantee is usually to contribute Sh1 though it may be more.
The guaranteed sum is payable by those who are members at the time of
winding up and if they can’t pay the liquidator may proceed against those who
were members previously but only in respect of debts incurred while they were
members.
An unlimited company may re-register as a limited company (by shares or
guarantors) unless it has previously been converted from a limited to an unlimited
company.
Members must pass a special resolution agreeing to the change, and the
resolution must make the appropriate alterations so that it confirms to the
requirements.
The special resolution is then sent to the register of company’s and re-
registration is effected by a director or a company secretary of the company by
signing an application form sending it to the registrar together with a printed copy
of the company’s memorandum and articles in their new form, the register then
issues a new certificate.
Unlimited companies.
There is no limit to the liability of the members.
Mostly used by stockbrokers because stock exchange can’t admit a company as
a member unless its members are personally liable for its debts.
An unlimited company can avoid giving publicity to its financial affairs.
An unlimited company can be formed by: -
2. Public interest
Personal qualities of shareholders may be investigated in public interest (Daimler
Co. Ltd vs. continental Tyre (1916)(1/7).
1. Promotion
L.W Leertenberg defines promotion “the discovery of business opportunities and
the subsequent organization of funds, property and managerial ability into a
business concern for the purpose of making profits there from”.
Promotion therefore has to do with the discovery of a business idea which can be
profitably undertaken by a company and includes preliminary and detailed
investigation of the feasibility of the idea, assembling of business elements and
making provisions of the funds necessary to launch the enterprise as a going
concern.
Thus stages can be summarized as under: -
i) Preliminary analysis and examining the proposed idea to see whether the
business is profitable.
ii) Estimating the cost of production, selling price of goods and services and the
amount of profits likely.
iii) Arranging for he acquisition of labour, materials, capital and managerial
ability.
iv) Presentation to the public and underwrites the business proposition in order to
make people to manage in the venture. This is done through the issue of a
prospectus.
2. Registration or incorporation
This involves registering the company with the registrar of companies under the
companies Act. For a public company membership should be at least seven and
at least two for a private company. The people who are involved in registration of
a company are called promoters. The following activities or steps are taken by
promoters in order to register the company.
a) Obtaining approval of the proposed name from registrar of the
companies.
Promoters are free to choose any name for their new company; section 19 of
companies Act however has put restrictions on the names to be chosen. Section
19 (2) provides that “no name shall be reserved and no company shall be
registered by a name which in the opinion of the registrar is undesirable”.
Section 17 of the business names Act cap 499 lists instances when a name is
deemed undesirable: -
Where the name chosen suggests a criminal or immoral intent.
Where the name suggests association with the president or head of
state or a government ministry or department or a local authority or suggests
connection with an international organization such as World Bank e.t.c.
If the name is misleading especially as to the nature of the business the
company will undertake or as to the nationality or religion of the people
behind the company.
Where the name is similar to the name of an existing company,
partnership or co-operative society.
Section 109 of the companies name requires publication of the name of the
company by:
a) Painting or affixing and keeping painted or affixed name on the outside
of every office or place where its business is carried on, in a conspicuous
position; in easily legible roman letters.
b) Having its name engraved in legible roman letters on its seal which shall
take the form of an embossed metal die;
c) Having its name mentioned in legible roman letters in all business
letters of the company and in all notices and other official publications of the
company and in all its 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 or parcels, invoices, receipts and
letters of credit of the company.
Section 20 of companies Act provides that a company can change its names
subject to the following: -
It’s the company itself that can change its name i.e. members in a general
meeting.
The resolution changing the name must be a special resolution.
After changing the name the company must within fourteen days give notice
of its change of name to the register of companies. The registrar will make the
change and publish the fact in the official Kenya Gazette.
b) Presentation of documents
The following have to be prepared and presented to the registrar of companies
1. Memorandum of Association
Contains conditions upon which the company is allowed to be incorporated. It
defines and sets the limits of the powers of the company. The memorandum also
sets the objects of the company.
2. Articles of Association
Contains the rules, regulations, by laws for the internal management of the affairs
of a company. Articles enable the company operate in a way to achieve the aims
and objectives set out in the memorandum of association.
3. A statement of the company’s nominal capital.
Nominal capital is the maximum amount of capital that a company aims to raise.
4. A declaration that all the requirements of the companies Act and other
formalities relating to registration have been complied with. The declaration
has to be signed by an advocate, a person named as director or company
secretary.
5. A list of the company directors and their written consent to become
company directors. Immediately after registration, the following true
documents are required: -
(i) Notice of the situation of the registered office.
(ii) Particulars of directors and the secretary.
The registered office can’t be changed but if it changes notice of change must be
given to the registrar within 14 days. Particulars of the directors and the secretary
need to be filed with the registrar within fourteen days of their appointment.
3. CAPITAL SUBSCRIPTION
This involves steps taken to raise capital for the company. Promoters are the first
directors of the company. To raise capital directors will be called to deliberate on
the following: -
a) Appointment of secretary and fixing the terms and conditions of this
appointment.
b) Appointment of bankers, brokers, solicitors and Auditors.
c) Adoption of preliminary contracts entered by promoters on behalf of the
company in the per-incorporation stage.
d) Securing underwriting contracts in order to secure minimum subscription.
e) Adoption of the draft prospectus or statement in lieu of prospectus.
f) Appointment of managing director or manger and other officers.
g) Approval of the design of the common seal of the company and the
authorizing the custody thereof.
h) Listing of shares on the stock exchange.
If the directors wish to invite the public to subscribe for its shares, they will file a
copy of the prospectus with the registrar of companies. On the advertised date,
the prospectus will be issued to the public investors can obtain the prospectus
from the registered office or from the bankers.
Investors then forward their applications for shares along with application money
to the company’s bankers’ mentioned in the prospectus. The bankers will then
forward all applications to the company and the directors will consider the
allotment of shares.
If the share applications meet a minimum subscription as disclosed in the
prospectus, directors will allot shares to the applicants. Allotment letters are then
sent to those given shares and regret letters to those who are not. If applications
fall below the minimum subscription as in the prospectors within 120 days after
prospectus issue, no allotment is made and all money will be refunded.
When a public company does not intend to raise money from the public the
company will file a statement in lien of prospectus with the registrar at least 3
days before allotment of shares.
4. COMMENCEMENT OF BUSINESS.
Section 3 of the Act gives conditions and restrictions which a company must
observe before it is allowed to start business. This includes issuance of
prospectus, and whether the minimum subscription was raised.
Form 211 which must be given to the registrar confirms the following: -
a) The minimum subscription has been raised.
b) Every director of the company has paid the company or made the shares
taken or contracted to be taken by him.
Having given for 211 and 212 and the statement in lieu of prospectus the
registrar shall certify that the company is entitled to commence business and
issue it with a Trade certificate.
If the company defaults on the above, contracts entered by it will be provisional
only and not binding on it. Section 3 (b) provides a penalty for breaching the
conditions (i.e. $1000 each day as contravention continues).
Section 3 subsections 7 exempts private companies from the conditions and
restrictions thus a private company can start business without the trading
certificate.
04. PROMOTERS.
A promoter is the person who conceives the idea of forming a company and who
undertakes, does and goes through all the formalities and incidental preliminaries
of incorporating a company. Promoter help to incorporate a company, provide it
with a share and loan capital and acquire business or properly which it is to
manage.
In Whaley Bridge Calico printing company vs. Green and Smith (1850) 5 Q BD
109’s Bowen LS stated a promoter is not a term of law but of business, usually
summing up in a single word number of business operations familiar to the
commercial world by which a company is generally brought in existence.
Lord Blackburn stated that “it is a short and convenience way of designating
those who set in motion the machinery by which the act enables them to create
an incorporated company”.
Justice Cockburn defines a promoter as “one who undertakes to form a company
with reference to a given project and to set it going and who undertakes the
necessary steps to accomplish that purpose”.
Section 45 (5) of the company’s act (cap 486) excludes persons acting on
professional capacity from being called promoters.
Section 45 (5) (a) provides that promoter means a promoter who has party to the
separation of the prospectus; or the portion thereof containing the untrue
statement, but does not include any person acting in a professional capacity for
persons engaged in the formation of the company. If any such person acts
beyond the scope of his professional duty and helps in any way in the formation
of a company or in preparations for the management of its affairs, he will become
a promoter (great wheal polgooth company Ltd; Re (1883) 53 LS ch. 42).
N/B however a registered company may also act as a promoter.
In Lindley and Wigpool Iron ore vs. Bird (1866) 33, Lindley described the position
of a promoter as “although not an agent for the company, nor a trustee for it
before its formation, the old familiar principles of the law of agency and its
trusteeship have been extended and very popularly extended to meet such
cases”.
A promoter is thus not an agent nor a trustee of the company but certain fiduciary
duties have been imposed on him under the company’s Act.
Remuneration of promoters
A promoter has not right for compensation unless there is a contract. In Clintons
claim (1908) 2 ch. 515 promoters were unable to recover fees and stamp duty
incidental to formation of the company as there was. A promoter takes
remuneration for his services in one of the following ways: -
a) Selling his own property to the company at a profit provided there in full
disclosure.
b) He may be given an option to buy shares at par.
c) He may take commission on the shares sold.
d) He may be paid a Lumpson by the company.
Article 80 table A provides that directors can pay all expenses incurred in
promoting and registering the company.
Pre-incorporation or preliminary contracts
These are contracts entered by promoters to acquire properly or some right for
the company. In Kelner vs. Baxter (1866) LR Z. Kelner agreed to sell a hotel to
Baxter who was acting agent for a company which was about to be formed. It
was held that Baxter was personally liable on the contract as the company was
not in existence after its incorporation.
The company is not liable for the Act of the promoters done before incorporation.
In Newborne vs.Sensolid Ltd 1954 1Q B45 Newborne a director, entered into a
contract in the name of a company before its incorporation. He signed his name
a contract on behalf of the company. It was held that there was no contract.
Purpose of memorandum
There are two purposes of memorandum: -
a) To enable shareholders know where their funds are to be used and risks
they are undertaking in making such investments.
b) To enable outsiders of the company know the objectives of the company
and whether the contracts they intend to make with the company are within the
objects of the company.
Preparation of the memorandum
Contents of memorandum
Section 5 of the companies Act stipulated the memorandum should compose the
following clauses.
Clause 1 The name
Promoters must enquire from the register as to whether the proposed name of
the company is available for registration and is not considered undesirable; this
should be done before filling the memorandum or even before its preparation.
Section 19 provides that promoters may reserve a name pending registration of
the company for a period of thirty to sixty days.
Section 5 (1) requires accompany if limited to use the word “limited” as the word
in its name.
Section 21 provides that a company may drop the word “limited” if it obtains a
licence to do so from the Attorney General. Such licence is given if the Attorney
General is satisfied that: -
(i) The company to be formed is to promote commerce, art science, religion,
charity or any useful object.
(ii) It intends to apply its profits or other income to promoting its objects.
(iii) It prohibits the payment of any dividends to its members.
Under section 20 a company can charge its name by special resolution and with
the approval of the registrar signified in writing. A special resolution usually
requires twenty-one days not to the members and three fourths majority of the
votes at general meeting.
The above section provides that the company may change its name if it is almost
like that of an existing company, if the registrar so directs within six months of its
registration.
The name does not affect any rights or obligations of the company or any legal
proceedings by or against it (section 20 (4)).
Limitations to alterations.
The following limitations should be observed regarding alteration of articles: -
a) Such alteration should not be inconsistent to the act.
i) Restrict the members right to petition for winding up under section 221.
ii) Authorize the company to purchase its own shares.
iii) Authorize payment of dividends out of capital.
b) It must not contradict the memorandum of association. However
articles may be referred to where there is an ambiguity in the
memorandum or where the memorandum is silent on an issue.
c) Alteration should not sanction anything illegal.
d) Alteration must be made bona fide and for the benefit of the company
as a whole. In Alten vs. Gold Reefs of west Africa Ltd (1900) ch. 656. it
was observed that the power of alteration must be exercised subject to
those overall principles of law and equity which are applicable to all
powers conferred on majorities and enabling them to bind minorities.
In Shittleworth vs. Cox bros and company (Minden-lead Ltd (1927)) 2 k B g (CA)
the articles of a company provided that 5 and four others should be permanent
directors to the company. They could be disqualified by any six specific events. S
failed to account for the company’s money on twenty-two occasions within twelve
months. The articles were accordingly altered and a 7th event disqualified a
director added. The event added was that if a director was so requested in wring
by all the other directors he should resign. S was so requested to resign, it was
held that the alteration was bona fide for the benefit of the company as a whole
and was valid.
Other rulings in support of this point were made in Greenhalgh vs. Ardene
cinemas ltd (1951) ch. 286 and side Bottom vs. Kershaw Lees company Ltd
(1920) 1 ch 154 (ca).
e) An alteration to increase the members’ liability will only bind those
who consent to it.
Section 24 provides that no member is bound by an alteration of the
memorandum or articles which requires him to increase his holding of shares or
increase his liability to pay money to the companies unless: -
i) Alteration is made before he became a member.
ii) He agrees in writing to be bound by such alteration.
An alteration of articles subject to restrictions in section 24 may be retrospective
in effect, but this will not enable the company to achieve a lien over shares after
they have been transferred for value by a debtor.
07. PROSPECTUS:
When a company wants to raise fund from the genera public it issues a
prospectus. A prospectus is a document issued by the company to arouse public
interest in the proposed company and induce the general public to buy its shares
and debentures.
A prospectus central theme is that it sets out the prospectus of the company and
the purpose for which the capital is required. A prospectus is an invitation to treat
and the application for shares on the basis of the prospectus is the officer.
Definition of a prospectus:
Sec.2 of companies act: -
“A prospectus means any prospectus, notice, circular advertisement or other
invitation; offering to the public or for subscription or purchase any shares or
debentures of a company”.
Any document inviting deposits from the public or inviting offers from the public
for subscription of shares or debentures of a company is a prospectus.
A prospectus must be in writing an oral invitation or an advertisement in
television or film is not treated as a prospectus.
Subscription:
The word when used in relation to a prospectus means to take shares for cash.
In government stock and other securities investment company Ltd vs.
Christopher an offer was made by company A to the members of company B and
C to acquire all their shares in exchange for allotment in the company. The offer
cannot be held to be an offer made to the public because it does not invite
subscription for share since subscription means taking shares for cash. Also this
can not be said to be an offer to the public.
Experts:
Refers to any person whose profession gives authority to a statement made by
him. Experts include engineers, valuers and accountants.
Exemption from requirements of third schedule matters and reports.
Requirements of the third schedule do not apply in the following: -
a) Where the prospectus is used to existing holders of shares or
debentures (whether allotment letters are renounceable or non-
renounceable).
b) Where prospectus relates to shares or debentures similar to shares or
debentures previously issued.
A prospectus thus issued without the requirements of the third schedule is called
a bridged prospectus.
Placings:
This case when a company issues its shares through one or more stockholders
who sell them to clients. This method is ideal when making a small issue of
shares.
Companies raising money through placing are required by stock exchange to
make a substantial proportion of their securities available to the general market.
Effects of disclosure
Misstatement and non-disclosure are both fatal to the validity of the contract and
a subscriber for shares or debentures may rescind the contract within a
reasonable time before the company goes into liquidation.
The contract can be rescinded if the following conditions are satisfied: -
a) The statement must be a material misrepresentation of fact. In
Greenwood vs. Leather shod Wheel company (1900) as company formed to
manufacture leather tyre wheels for trolleys issued a prospectus stating in
large type “orders have already been received from the house of the house
commons to be followed by large orders later”. Infact all orders received were
trial orders and no customers had yet expressed any intention to buy in large
scale. It was held that the prospectus was misleading.
Statements of the fact can lead to the rescission of a contract but opinions in
prospectus cannot nullify a contract.
In Edington vs. Fizmaurice (1825) a company issued a prospectus inviting
subscriptions for debentures. The object of the issue was stated to be that the
money would be used for effecting certain alterations in the company’s buildings
and for developing the business of the company. The money however was
needed to pay off pressing liabilities. The plaintiff applied for debentures in
reliance on the statements in the prospectus. It was held that the plaintiff could
rescind the contract and directors were liable.
Other cases where subscribers were given the right to rescind the contract for
misleading prospectus are: -
1. Kerberg’s case Re Metro politan coal consumer’s Association (1882).
2. Ross vs. Estates investment company (1868).
Form of statement:
The statement must be signed by every person named therein as a director or
proposed director or his agent authorized in writing. The statement must contain
same information as a prospectus complying with the third schedule.
Section 50 provides that if a statement in lien of prospectus includes any untrue
statement, the directors and others who authorized its delivery for registration are
liable to imprisonment up to two years or a fine up to ten thousand shillings or
both, unless it is established by the person liable that: -
i) The untrue statement was immaterial.
ii) He had reasonable ground to believe that such a
statement was true.
Underwriting commission
Underwriting refers to a situation where one agrees to take shares or debentures
specified in an agreement. If the public fails to subscribe for them, consideration
for this undertaking is commission.
Section 55 provides that a company may pay a commission to any person in
consideration of his subscribing or agreeing to subscribe or his procuring or
agreeing to procure subscriptions for shares in or debentures of the company.
Before commission is paid the following conditions have to be fulfilled: -
i) The payment of commission should be authorized by the articles.
ii) Commission cannot exceed ten percent the price of shares.
3. The amount and rate of the commission and number of shares which
underwriters have agreed to subscribe must be disclosed as: -
a) In the case of shares offered to the public for subscription, the
disclosure must be in the prospectus.
b) In the case of shares not offered to the public for subscription, the
same disclosure must be made in the statement in the prescribed from
delivered to the registrar before payment of the commission.
Section 55 (4) a vendor or promoter of a company or any other person who
receives payment in money or shares from the company, has power to apply any
part of the money or shares so received in payment of any commission, the
payment which if made by the company would have been legal under this
sections.
A part from the above exceptions no company may apply its shares or capital to
pay commission discount or allowance to any one in consideration of his
subscribing or agreeing to subscribe for any shares in the company.
Section 55 applies to private and public companies alike.
Brokerage
Section 55 permits companies to pay brokerage if its articles so provide. Brokers
are professional persons such as stockbrokers, bankers who exhibit prospectus
and send them to their customers and by whose mediation the customers are
induced to subscribe unlike underwriters brokers do not undertake to subscribe
shares or debentures, which are not subscribed by the public.
Brokerage must be payable to brokers only: -
In Andreae vs. Zinc mines of Great Britain Ltd (1918) 2 KB 454. A company
agreed to pay a lady ten percent commission on any capital the company as a
result of an introduction by her. The lady was not carrying on any business as a
broker, it was held that she could not recover the agreed sum as she did not
carry on business as a broker and it was a mere accident that she came into the
company’s office and was consulted on this matter.
08. MEMBERSHIP
A person is a member of a company if the subscribes to the memorandum of
association of a company and upon registration his name entered in the register
of members. Members are also called cooperators or shareholders.
A shareholder is a person who holds shares in a company while a member is one
whose name appears in the register of members.
The terms members and shareholders are used synonymously specifically in the
case of a company limited by guarantee and having a share capital and unlimited
company whose capital is held in definite shares. There are circumstances where
a person may become a member of a company without being its shareholder
without being a member.
The following are instances where a person becomes a member without being a
shareholder of the company.
1. In the case of companies limited by guarantee or unlimited companies,
because such companies may not have share capital.
2. A deceased member continues to be a member as long as his name is on
the register of members, but he cannot be a shareholder of the company.
3. A transferor of shares continues to be a member until the transfer is
registered and the name replaced.
4. Subscribers to the memorandum are treated as members by the fact of
subscription on registration of the company they are entered in the members
register even before they are allotted any shares.
The following are instances where a person becomes a shareholder of a
company without being its member.
a) A person who holds a share warrant.
b) A transferee or legal representative of deceased or insolvent member is
not a member until his name appears in the register although he is a
shareholder.
3. Succession.
The company has power to register any person as a shareholder to whom the
right to any shares (or debentures) in the company has been transmitted by the
operation of law, and in such a case an instrument of transfer is not necessary.
c) Qualification shares:
Before one is appointed a director of a public company, he must take or sign an
agreement to take and pay for qualification shares (if any) in which case he is in
the same position as a subscriber to the memorandum.
d) Estoppel:
Any one who allows his name to remain in the register of members or otherwise
holds himself out or allows himself to be held out as a member is estopped from
denying being a member of the company.
CESSATION OF MEMBERSHIP
A person ceases from being a member once his name is removed from the
register. A shareholder may cease from being a member of a company by: -
1. An act of the parties.
2. Operation of law.
1. Act of parties.
The following are instances where a person may cease to be a member through
act of parties: -
a) If one transfers his shares to another.
b) If one’s shares are forfeited.
c) If the company sells the person’s shares under a provision in the
articles.
d) If one rescinds the contract to take shares on grounds of
misrepresentation.
e) If redeemable preference shares are redeemed.
f) If one surrenders his shares, if such is permitted by articles.
g) If share warrants are issued in exchange of fully paid shares.
2. Operation of law.
One may cease membership through operation of law in any one of the following
ways:-
a) Insolvency – shares of insolvent vest in the official receiver or
assignee.
b) Death – shares of the deceased are vested in the legal representative,
however the deceased’s estate remain liable as long as the name of the
deceased is in the register.
c) Sales of shares in execution of a court decree.
d) Winding up of a company.
Rights and liabilities of members.
Rights of members.
The rights are conferred either by company’s act, the memorandum and articles
of association or by the general law. Rights conferred by the companies act are
called the statutory rights. The following are statutory rights: -
(1) Right to obtain copies of the memorandum and articles on request and
on payment of the prescribed fee.
(2) Right in priority to have shares offered incase of increase of capital.
(3) Right to transfer shares.
(4) Right to vote on resolutions at meetings of the company.
(5) Right to apply to court to have any variation of his rights set a side by the
court section 7 (4).
(6) Right to have a share certificate for shares held.
(7) Right to inspect register of members, register of debenture holders and
copies of annual return.
(8) Right to receive a copy of the statutory report.
(9) Right to apply to the BOD to call an annual general meeting when the
company fails to call such a meeting.
(10) Right to receive notice of meetings, attend and vote at meeting.
(11) Right to appoint a proxy and inspect proxy register.
(12) Right to demand poll alone or with others.
(13) Right of a body corporate to appoint a representative to attend and
vote at the general meetings.
(14) Right to require the company to circulate resolution.
(15) Right to have any request minutes of proceedings of a general
meeting.
(16) Right to receive dividends when declared.
(17) Right to receive copies of annual accounts of the company with the
auditors’ report.
(18) Right to participate in the appointment of directors and auditors in the
annual general meetings.
(19) Right to petition to the court for the winding up of the company.
(20) Right to share surplus.
The rights conferred on members by memorandum of association are called
documentary rights, while rights conferred on members by the general law are
called legal rights.
Liability of members
Liability of members depends on the nature of the nature company. Liability may
be summarized as follows: -
1. for unlimited companies each member is liable in full for all the debts
contracted by the company during the period he was a member.
2. In case of limited by shares each member is liable to pay the full nominal
value of the shares held by him.
3. For a deceased member, his estate is liable in respect of partly paid
shares and where the shares have been registered to the name of
representatives they become liable.
4. When one (a member) is adjudicated bankrupt, the official receiver may
sell the partly paid shares in which case the buyer becomes liable thereof or
he may disclaim them as onerous property.
5. When membership is reduced below seven and two for public and private
companies, every member aware of the fact becomes severally liable for the
payment of debts of the company after six months of trading from such
reduction in number.
6. For companies limited by guarantee each member is liable to contribute
the amount guaranteed by him to be paid in the event of winding up.
Register of members.
Section 112 requires every company to maintain a register with the following
particulars:-
a) The name and address of each member.
b) For a company with share capital, shares held by each member
distinguished each share by its number and extent to which the shares
have been paid up.
c) The date each person was entered in the register as a member.
d) The date on which any person ceased to be a member.
Where the company has converted any of its shares into stock a notice of the
conversion has to be given to the registrar. If default is made in maintaining the
register, the company and every officer in default shall be liable to a default fine.
Section 114 provides that on issue of a share warrant, the company must strike
out of the register, the name of the member because of the issue of the share
warrant he ceases to be a member in which case the following particulars should
be entered in the register: -
a) The fact of the issue of the warrant.
b) Statement of the shares included in the warrant
c) Date of issue of the warrant
Index of members.
Section 113 states that every company with more than fifty members is required
to keep an index that may be in the form of a card index. The index should be
kept where the register is kept. Any alteration in the register should be noted in
the index within fourteen days. Failure to comply with any of the above may
attract a fine.
Annual return.
Section 125 provides that every company with share capital must file an annual
return with the register once in every year. The return must be filed with the
registrar forty two days after the annual general meeting (sec. 127).
The following particulars must be included in the annual return in accordance to
part of the fifth schedule.
1. The address of the registered office.
2. The place where the register of members or debenture holders is kept is
not kept at the registered office.
3. Summary distinguishing between shares issued for cash and shares
issued as fully paid or otherwise than in cash specifying.
a) Amount of share capital and the number of shares.
b) The number of shares taken up to date of the return.
c) The amount called up, received and unpaid.
d) Commission and discount in respect of shares or debentures.
e) The total number of shares forfeited.
f) Total amount of shares for which share warrants are outstanding,
the number of shares compared in each warrant and the amount of
share warrants issued and surrendered since the last return.
4. The total amount of indebtedness in respect of all registrable charges.
5. A listing containing: -
a) The names and addresses of those who are members on the
fourteenth day after the annual general meeting and those who have
ceased to be members since the date of the last return.
b) The number of shares held by each member.
c) Particulars of the directors and the secretary.
Section 125 (1) if the company has converted its shares into stock, the return
should give the same particulars with regard to the stock as required for shares.
Section 126 for a company with no share capital, the following facts should be
included: -
a) The situation and the postal address for the registered office.
b) The address of the place if the register of member is kept elsewhere.
c) The address and place if the register of debenture holders is kept
elsewhere.
d) Particulars relating to directors and the company secretary.
A statement containing the particulars of the total amount of in indebtness of the
company in respect of all charges which are or were required to be registered
with the registrar under the act.
09. SHARES
Shares are indivisible units of the capital of the company. Fawell I in Barland’s
trustee vs. Steel Bros (1901) 1 ch. 279 defined a share as the interest of a
shareholder in the company measured by a sum of money for the purpose of
liability in the first place, and of interest in the second place, but also consists
of a series of mutual covenants entered into by the shareholders “inter se” in
accordance with section 22 of the company’s act.
Shares represent the equal portions into which capital is divided each
shareholder is entitled to a portion of a company’s profits in proportion to the
number of shares held by him.
A shareholder’s liability is usually measured against his indebtedness to the
company on the amount unpaid on shares held by him.
Section 76 requires that each class of shares be distinguished by its
appropriate number. The distinction is not necessary if all shares rank equally.
SHARE CAPITAL
Capital is a particular amount of money with which a business is started. For a
company is usually called share capital.
Types of capital
1. Authorized or nominal capital
This is the nominal value of the shares which a company is authorized to issue
by its memorandum of Association. It is the maximum amount of capital which
the company will have. This amount can be increased or reduced only if the
company changes the memorandum. Nominal capital is also called registered
capital.
2. Issued capital
This is the nominal value of the shares which are offered to the public for
subscription. It represents the portion of the nominal capital that has been given
out to be subscribed by the public or by any persons concerned.
3. Subscribed capital
This is the part of issued capital which has been taken up by the public. When all
the issued capital has been subscribed then subscribed and issued capital are
equal.
4. Called up capital
This is part of the issued capital which has been called up on the shares. This is
the part of the issued capital which shareholders are liable to pay as and when
called.
5. Paid up capital
This is part of the issued capital which has been paid up by the shareholders.
When calls are made on the shares and shareholders fail to pay up the amount
thus owing is called calls in arrears or “calls unpaid”.
6. Reserved capital
This is any part of the company’s share capital which a company may resolve by
a special resolution not to be called except in the event of a winding up. Section
62 of the companies Act provides that a company by special resolution determine
that any portion of its uncalled capital be reserve capital.
Reserve capital can only be turned into uncalled capital by leave of the court.
Reserve capital is different from reserves or reserve fund. Reserve fund or
reserves refers to undistributed profits kept by the companies to cater for
emergencies.
Requirements of allotment.
1. A public company must file a prospectus or a statement in lieu of
prospectus must be subscribed before allotment.
2. The minimum subscription as provided in the prospectus must be
subscribed before allotment. If the minimum subscription is not met within
sixty days all money received from applicants must be returned forthwith
otherwise the money will attract default interest at 5% p.a from the seventy
fifth day.
3. Section 52 provides that no allotment should be made of shares applied
for until the third day from the date of issue of the prospectus.
4. Under section 53; if prospectus states that application has been or will be
made to the stock exchange, then such permission must be applied before
the third day of the issue of prospectus, failure to which allotment would be
void.
Irregular allotment
Under sec.51 an allotment made by the company to an applicant in contravention
of provisions of sec. 49 (failure to meet minimum subscription) or section 50
(failure to issue a statement in lieu of prospectus) is voidable at the discretion of
the applicant within one month after the holding the statutory meeting of the
company within one month after the date of allotment. The above applies
regardless of the fact that the company is in the course of winding up.
If any director knowingly contravenes provisions of section 49 or 50 he must
compensate the company and the allotee respectively for any loss or damages or
costs incurred.
SHARE CERTIFICATE
Every one whose name is entered in the register of members has a right to
receive a share certificate in respect of those shares he holds in the company. A
certificate should be issued within sixty days of the allotment or lodgement of
transfer. In case of default, the company and every director, manager, secretary
and every other officer who knowingly is part to the default is liable to a max
penalty one hundred shillings in respect of every day during which the default
continues. One can however escape liability if he/she proves that he was not
aware of the fact that the certificate had not been issued.
To be valid, a certificate must have a common seal of the company affixed to it
and must also be stamped, one or more directors must sign it. It must state the
name, address and occupation of the holder, number of shares and their
distinctive number and amount paid.
Loss of certificate
Articles authorize directors to issue duplicate if such a certificate is proved to
have been lost or destroyed, defaced, mutilated or torn on payment of two and
half shillings or such s a lesser sum.
Transfer of shares
Section 75 states “the shares or other interests of any member shall be movable
properly transferable in manner provided by the articles of the company provided
by the articles of the company.
The articles of a public company may and those of a private company must
restrict rights to transfer.
Article 23 of table A of the first schedule to the Act states
“Subject to such of the restrictions of these regulations as may be applicable, any
member may transfer all or any of these shares by instrument in writing in all
usual or common form or any other form in which directors may approve.
Article 24 of fable A of the first schedule states
“The directors may decline to register the transfer of shares to a person whom
they shall not apply; and they may also decline to register the transfer of a share
on which the company has lien. Articles restrict but not forbid the transfer of
shares.
In case of refusal, the company must send a notice to the transferee and the
transferor within sixty days from the date on which the date of instrument of
transfer was delivered to the company.
Procedure of transfer
The following are the usual steps taken when transferring shares.
a) For a share warrant a mere delivery of the share warrant transfers
ownership of the shares.
b) To transfer shares a written instrument of transfer is executed by the
transferor and the transferee, duly stamped, specifying the name, address
and occupation of the transferee, which is delivered to the company for
registration together with a share certificate.
Certificate of transfer
When the shareholder is selling only part of the share he does not deliver share
certificate but the selling broker produces it along with the transfer instrument to
an officer of a company who “certificates the transfer” by writing its margins the
words “certificate lodged ” and mentions the number of shares for which it is
lodged: the officer then hands the certificated instrument back to the broker
together with the balance ticket for any share not registered.
The transferor to get a new certificate uses the ticket and the certificated
instrument is given to the transferee, which he uses to acquire a new certificate.
The company thus conceals the old certificate and prepares two certificates
a) One for share sold
b) For the unsold portion of the shares.
If a company after certifying returns the original certificate together with the
certificated transfer to the transferor who uses it to commit fraud on the
transferee, the third party has no right against the company.
The terms implied between seller and buyer
a) That the seller will give to the purchaser genuine of transfer and share
certificate required to enable the purchaser to be registered.
b) The seller will not prevent the buyer from registering the transfer.
c) The seller will compensate the buyer for any calls or liability which may
arise in respect of shares sold. The purchaser must also indemnify the seller
against calls made after date of contract.
Effect of transfer:
Notice of transfer
It is not mandatory, but it is advisable to give notice of the lodgement of transfer
to the transferor.
Forged transfer
Consequences of forged transfer
1 Forged transfer does not pass any legal title to the transferee
2 In instances where the company has issued a share certificate to
the transferee of forged transfer and he sold these to an innocent
buyer, the buyer gets no right to be registered as a shareholder, in
such case he can claim damages from the company.
3 If the company has been put to loss by reason of the forged
transfer, it may recover the loss from the person who procured
registration, even though he might have acted in good faith.
Blank transfer
This is a transfer of shares which is executed without the name of the transferee
being filled in the transfer form of deed which a transferor hands over to
purchaser or pledgee.
The transferor also hands over to the purchaser the share certificate along with
the blank transfer form or deed, the date the date of sale and name of the
transferor are left blank
The blank transfer is thus used as negotiable instrument. The advantage in
giving a blank transfer form is that the buyer or pledgee will be at liberty to sell
again without his name and signature to subsequent buyer.
At the end of the transfer the first seller is treated as the transferor and the last
buyer as a shareholder and his name is registered in the company register.
10. DEBENTURES
Section 2 of the company act defines debentures as including debentures stock,
bonds and any other securities of a company, whether consisting a charge on the
assets of the company or not. The section does not actually describe what a
debenture really is.
In Level vs. Abercorris state and slab Company (1897) 37 ch D 260. Debenture
was defined as a document, which either creates a debt or acknowledges it.
In Edmonds vs. Blaina Co. (1887) 36 ch. D 215 chitly S. debenture was defined.
“The term itself imports a debt an acknowledgement of a debt an obligation or
covenant to pay. This obligation or covenant is in most cases accompanied by
some charge or security”.
A debenture is thus an acknowledgement in writing a debt by a company to
some persons and it is issued to the public by means of a prospectus. The
prospectus has provisions for interest payment and repayment of loans lenders
are usually given a security against the non-repayment of their loan, by a charge
against the assets of the company.
Debenture stock
A debenture stock is borrowed capital consolidated into a unit with each leder
having a certificate entitling him to a certain sum being a portion at one large
loan. The debenture stock is usually secured by a trust deed and in case there is
no charge, the stock is called unsecured loan stock.
Debenture stock can be issued directly as such it is not necessary for an issue of
debentures to be fully paid and then turned into stock.
Classes of debentures
Debentures are classified according to the following characteristics: -
1. Negotiability
2. Security
3. Convertibility
4. Priority
Liability of trustees
A trustee is liable for any breach of trust where he fails to show the degree of
care and deligence required of him as trustees.
Any clause in the trust deed releasing the trustee exempting him from liability for
breach of trust or indemnifying him against liability for breach of trust is void
except in the following cases.
1. Where the trustee can show that he took such care and deligence as is
required of him as trustee.
2. Where the trustee acted honestly and reasonably, section 402.
3. Where a majority of not less than ¾ th in value of the debenture holders
present and voting in person or where proxies are permitted by proxy at a
meeting summoned for the purpose, agree and the voting relates to specific
Acts or omissions or to a trustee who is dead or has ceased to act.
Priority of charges
1. A fixed charge over the same assets has priority over the floating
charge.
2. Specific charge first in point of time takes priority.
3. A company is prohibited from creating mortgages ranking in priority after
crystallization of floating charge. On crystallization of floating charge
becomes a specific mortgage.
4. A company is prohibited from creating a second floating charge having
priority over the first.
5. A company can create a specific charge after a floating charge.
Floating charge is postponed to the rights of the following persons if they act
before the security crystallizes.
a) A landlord who distrains for rent
b) A judgement creditor, if the goods are sold by the sheriff.
c) A creditor who obtains a garnishee order absolute
d) A supplier of goods on hire purchase agreement has priority over such
until goods are paid for in full.
e) Preferential debts e.g. rates, taxes, wages and salaries.
11. DIRECTORS
In Ferguson vs. Wilson (1866) LR 2 ch. 77 Carris LJ observed “the company
itself cannot act in its own person for it has no person, it can only act through
directors, and the case is as regards those directors merely the ordinary case of
principal and agent”.
In Aberdeen Rly company vs. Blaike Bros (1854) Lord Cranworth LC said, “The
directors are a body to whom is delegated the duty of managing the general
affairs of the company”. A corporate body can act by agents and it is of course
the duty of those agents to act as best to promote the interests of the corporation
whose affairs they are conducting.
Directors are thus persons in charge of the management of the affairs of a
company and are collectively called board of directors.
Jurisdiction of the board of directors
CAP 486 and articles give the power to manage the company to the board of
directors. In Isle of Wight Railway Co. vs. Tahourdin (1884) Collins M.R said
“directors have great powers and the court generally refuses to interfere with
their management of the company affairs if they keep within those powers”.
Shareholders may complain about conduct of the directors but while the directors
keep within those powers conferred upon them by the company constitution to
manage the company, the courts cannot allow the members to interfere with the
jurisdiction of the directors to manage the company. All that the court can say to
the members is “if you want to interfere in the management of the company
affairs, convene a general meeting and alter the company’s constitution by
passing a resolution obliging the directors to act the way you want”.
Members however have a right to intervene and take a way such management in
the following circumstances: -
a) Where directors are improperly using the name of the company.
b) Where the board of directors is unable to function due to some reason.
c) Where the directors have acted ultra vires the powers granted to them or
to the company itself.
Meaning of director
A director is any person occupying the position of director. One is a director
because of the position of the office and its duties.
In Re. Forest of Dean Mining Co. (1878) Jessel M.R. Said “it does not much
matter what you call them so long as you understand what their real position is,
which is that they are really commercial men managing a trading concern for the
benefit of themselves and shareholders in it”.
In R vs. Camps (1962) Judge of the court of appeal of Eastern Africa, Sinclare P,
affirmed that a person occupying the position of a director though not duly
appointed is still held a director.
Appointment of directors
There are several stages of appointment of the directors: -
a) The first directors of a company – are appointed by the promoter of the
company, where promoters have not appointed the directors subscribers to
the memorandum will become and are regarded the first directors.
b) Subsequent appointment – are appointed when the company already
exists. The company will make these appointments in the following
circumstances: -
a) To replace directors who have retired on rotation or otherwise.
b) To replace directors who have been removed from office.
c) To replace retired directors.
d) To replace deceased directors.
Casual vacancies
These are vacancies occurring in the ranks of directors any time before the next
annual general meeting by death or registration of a director. Casual vacancies
are filled by appointment made by the existing directors.
Alternative directors
These are directors appointed temporarily to represent the director during his
absence or inability in the board of director.
Managing director
Guidelines for appointment of the managing director are given in the articles of
association.
Qualification of directors
The Act does not require a director to hold shares, thus one can be a director
unless articles provide otherwise. Article 77 table A provides that the share
qualification for directors may be fixed by the company in a general meeting and
unless fixed no qualification shares shall be required. If the articles of a company
contain a provision that the qualification of a director shall be holding a specified
number of shares, section 183 provides that;
(i) Each director must acquire and retain such qualification shares within two
months after appointment.
(ii) Share warrant to bearer may not count as qualification shares.
(iii) If shares are not acquired within two months one ceases to be director.
(iv) One cannot be re-appointed unless he has obtained his qualification shares.
(v) A fine of one hundred per day will accrue for the period in office without
qualification shares.
Age of directors
Every director must retire on or shortly after the seventieth birthday, but he can
continue if allowed at a general meeting and after a special notice has been
given.
The minimum age for appointment is twenty-one years. The limits do not apply to
private companies unless they are subsidiaries of public companies.
Bankruptcy
Bankruptcy disqualifies one from holding the office of a director.
Effects of disqualification
The acts of a director or manager shall be valid not withstanding any defect that
may afterwards, be discovered in his appointment or qualification. Acts done
after disclosure by the company will not be binding on the company.
Disqualification of directors
The following are grounds for disqualification of a director: -
1. Failure to take up prescribed share within two months section 183.
2. When one becomes bankrupt or makes any arrangement or composition
with his creditors generally (sec.188).
3. If one is prohibited from being a director for any reason under section
189.
4. If one becomes of unsound mind.
5. Resigning by notice in writing to the company.
6. Absence without permission for more than six months from meetings of
directors.
Position of directors
Position of directors may be considered or described from different perspectives
as follows:-
(i) Directors as agents
A company acts through directors who are representatives of directors, in the
eyes of law they are agents for the companies they act for. However directors are
at times not just agents as they have independent powers in certain matters.
Directors not personally liable as agents:
Directors are not personally liable for acts done on behalf of the company
provided they act within the scope of their authority and contracts are not in their
own names. Directors are however personally liable where: -
1. They contract in their own names.
2. They use the name of the company incorrectly.
3. The contract is signed in such a way that it is not clear, whether it is the
principal or agent who signed.
4. They exceed powers given to them by the memorandum or articles.
Directors as trustees
Directors are treated as trustees: -
1. Of the company’s money and property.
2. Of the powers entrusted to them.
Directors are trustees of the company’s money and property because they must
account for all the company’s money and property and to refund to the company
any of its money or property, which they have improperly paid away or
transferred.
The director is a fiduciary position as regards to the protection of the company
properly. The duties of directors involve;
(i) A fiduciary duty not to profit himself personally from the property of the
company.
(ii) As fiduciary to be honest to account for the profit of the company.
Directors however are not trustees in the real sense as they not vested with
ownership of the company’s property. They are quasi trustees because: -
a) They are not vested with the ownership of the company property.
b) Their functions are not the same as those of trustees.
c) Their duties of care are not as onerous as those of trustees.
Directors’ remuneration
In Re George Newman and co (1895) 1 ch. 674 Lindley LS observed “directors
have no right to be paid for their services and cannot pay themselves or each
other or make presents to themselves out of the company’s assets unless
authorized to do so by the instrument which regulates the company (articles) or
by the shareholders at properly convened meeting”.
Directors can be paid expenses incurred while conducting the business of the
company. In the absence of a provision a salaried director is not entitled to
expenses incurred as they are usually covered by his remuneration.
Disclosure of interest
If a director has an interest in a contract which is being considered by the
company he must declare his interest when the contract is being discussed. A
director who fails to declare his interest is liable to a fine of up to two thousand
shillings.
According to Lord Cairn one declares his interest not when he states that he has
an interest but when he states what his interests are.
The disclosure should be made at the time the contract in question comes before
the board of directors for discussion, section 200(1).
Legal effect of non-disclosure of interest by directors.
There are two categories of consequences.
a) Statutory consequences
Section 200 (4) such directors shall be liable to a fine not exceeding two
thousand shillings.
b) Common law consequences
At common law the contract itself becomes voidable at the instance of the
company. The director in question who also made secret profits on the contract
must refund the same to the company.
Duties of directors
The following are some of the duties of directors: -
1. To exercise their powers honestly for the benefit of the company as a
whole.
2. Not to place themselves in position in which there is a conflict between
their duties to the company and their personal interests.
3. To carry out their duties with reasonable care and exercise such degree
of skill and diligence as is reasonably expected of persons of their knowledge
and status.
4. To attend board meetings.
5. Not to delegate his functions except to the extent authorized by the Act or
constitution of the company.
6. To disclose his interest.
SECRETARY
Introduction - Every Company must have a secretary but a sole director cannot
also be a secretary
Appointment – it is usual for the secretary to be appointed by the directors on
such terms as they think fit. The directors may also remove the secretary.
Qualifications – the directors must take all reasonable steps to ensure that the
secretary is a person who appears to them to have the requisite knowledge and
experience. He must be one who: -
(i) Already hold office as secretary, assistant secretary or
deputy secretary of the company or,
(ii) For at least three out of five years immediately
proceding his appointment held office as a secretary of a public
company, or
(iii) Is a barrister, advocate or solicitor, or
(iv) Is a member of any of the following bodies; ICA, ACCA,
ICSA, CIMA, CPA, or CIPFA, CPS, e.t.c.
(v) Is a person who by virtue of having held any position or
being a member of any other body, appears to the directors to
be capable of discharging the functions of secretary.
Powers
The secretary is the chief administrative officer of the company and on matters of
administration he has ostensible authority to make contracts on behalf of the
company. Such contracts include: -
a) Hiring office staff
b) Contracts for the purchase of office equipment
c) Hiring cars for business purposes.
IN PANORAMA DEVELOPMENTS V.FIDELIS FURNISHING FABLICS 1971 the
secretary of the defendant company entered into a number of contracts for the
hire of cars.The cars were ostensibly to be used to collect important customers
from Hearthrow Airport, but infact the secretary used them for his own private
purposes. The court of appeal held that the defendant company was liable. Lord
Dinning M.R. Said;
‘a company with extensive duties and responsibilities’. He is certainly entitled to
sign contracts connected with the administrative side of the company’s affairs,
such as employing staff, ordering cars and so forth.
(vi) Although a secretary has ‘extensive duties and responsibilities’ there are a
number of decisions where it has been held that he does not have authority for
particular acts. Thus he may not: -
• Bind the company on a trading contract
• Borrow money on behalf of the company
• Issue a writ or lodge a defence in the company’s name
• Register a transfer of shares
• Strike a name of the register of members.
• Summon a general meeting on his own authority.
DUTIES
The secretary duties include: -
a) Ensuring that the company’s documentation is in order, that the
requisite returns are made to the companies registry, and that the
company’s register are maintained,
b) Taking minutes of meetings,
c) Sending notices to members and,
d) Counter signing documents.
12. MEETINGS
A meeting is an assembly of people for lawful purpose or the coming together of
at least two persons for the same reason. A company meeting is a coming
together of at least a quorum of members in order to transact either the ordinary
or special business of the company.
In Sharp vs. Dawes (1876) a meeting was defined as an assembly of people for
a lawful purpose or the coming together of at least two persons for any lawful
purpose. Meetings are divided into two types: -
a) Public meetings
These are meetings open to all members of the public and which consider
matters of public concern.
b) Private
These are meetings attended by people who have a specific right or special
capacity to attend.
Importance of company meetings
It is in meetings that important matters relating to the business of the company
are decided. Shareholders meetings are also important as they help them look
after their interests by exercising powers conferred on them by statute. There are
also certain matters that can only be decided only by shareholders.
Statutory meeting
This is the first meeting of a public company. Every company limited by shares
and every company limited by guarantee and having a share capital shall within a
period of not less than three months from the date on which the company is
entitled to commence business; hold a general meeting of members of the
company which shall be called the statutory meeting.
The purpose is to accord members an opportunity to discuss matters relating to
the formation of the company or matters arising out of the statutory report,
whether previous notice has been given or not.
Statutory report
This is a report sent to all members at least fourteen days before the statutory
meeting. If all the members entitled to attend and vote agree the report can be
forwarded in less than fourteen days to the meeting.
Contents of the statutory report: -
a) Total shares allotted distinguishing shares allotted as fully or partly paid
up.
b) Cash received in respect of shares allotted.
c) An abstract of receipts and payments of the company made up to date
without the seven days of the reports.
d) Names, address and occupation of the directors, auditors and managers
and secretary and changes, which have occurred in such names, address,
and occupations.
e) The particulars of any contract the modification of which is to be
submitted to the meeting for approval, together with the particulars of the
modification or proposed modification.
Section 130 (8) provides that the meeting may adjourn from time to time and at
any adjourned meeting a resolution can be passed after due notice in
accordance with articles.
Default
If default is made as regards to holding of the statutory meeting and delivering
the statutory report a ground for petition for winding up order against the
company is created. In usual practice courts order such meetings to be held and
reports delivered at the cost of persons in default.
The person in default is also liable to a fine of up to one thousand shillings.
Requirement of notice
Section 133 provides the minimum notice required for company meetings as
follows: -
a) In the case of a meeting, twenty-one days notice in writing.
b) In the case of a meeting then an annual general meeting for passing a
special resolution, fourteen days in writing and seven days notice for an
unlimited company.
Class meetings
These are called when the company’s share capital is divided into different
classes of shares. These meetings are required when it is proposed to alter, vary
or affect the rights of a particular class of shares.
A class meeting should be attended only by members of the class. A class
meeting can include strangers if there is no objection to their presence by a
member of the class.
The rights of a particular class of shares may be varied with the consent in
writing of the holders of three fourths of the issued shares of that class.
Rights of minority
Section 74 stipulates that the holders of not less than 15% of the issued shares
of that class being persons, who did not consent to the resolution, abstained or
did not vote all may object within thirty days to the alteration approved by the
majority of the class. The court must disallow the variation if it is satisfied that it
would unfairly prejudice the shareholders of the class, but if not satisfied, it will
confirm the variation.
2. (a) Meetings of the board of directors
These are the most frequent meetings of the company. These meetings discuss
matters of the company and decide on policy issues concerning the company.
Meeting of creditors
These are called when the company proposes to make a scheme or
arrangement with its creditors.
Meeting of creditors and contributions on winding up.
These are held when the company has gone into liquidation. These are called to
ascertain the indebt ness of the company to its creditors and also to appoint
either a liquidator or a committee of inspection.
13. ACCOUNTS
There are certain prescribed books of account which must be kept by registered
companies. The accounts of the company have then to be presented to members
at some interval.
Books of account
Section 147(1) requires all companies to keep proper books of account with
respect to
(i) All sums of money received and spent by the company.
(ii) All sales and purchases of goods made by the company.
(iii) The assets and liability of the company.
Section 147 (2) provides that proper books of account are only said to have seen
kept with respect to the matters aforesaid if such books give a true and fair view
of the state of the companies affairs and to explain its transactions.
Section 147(3)(a) provides that the books of account should be kept at the
registered office of the company or with consent of registrar and subject to
conditions he may give at any other place as the directors think fit.
Balance sheet
Section 148 (2) provides that directors should prepare at the end of every year,
and to lay before the company in a general meting, a balance sheet as at the
date to which the profit and loss accounts (or income and expenditure account) is
made up.
Contents
Section 149 (1) provides that the balance sheet should give a true and fair view
of the state of affairs of the company as at the end of its financial year and the
profit and loss account should give a true and fair view of the profit or loss of the
company for the financial year.
Group accounts
Section 150 (1) states that if at the end of the financial year, a company has
subsidiaries then it must include in it annual accounts group accounts which
incorporates the affairs of the subsidiaries.
Section 150 (2)(b) provides that group accounts need not include a subsidiary of
the company if the company’s directors are of the opinion that;
a) It is impracticable, or would be of no real value to the members
of the company in view of the insignificant amounts involved.
b) The result would be misleading.
c) The result would be harmful to the business of the company or
any of its subsidiaries.
d) The business of the holding company and that of the subsidiary
are so different that they cannot reasonably be treated as a single
undertaking.
Approval of the registrar will be required for not dealing in group accounts with a
subsidiary on grounds (c) or (d).
Section 150 (2)(a) exempts a company that is a wholly owned subsidiary of
another company from the obligation of preparing group accounts.
Form
Section 151 (1) provides that the group account laid before holding company
shall be consolidated accounts comprising: -
(a) Consolidated balance sheet
(b) Consolidated profit and loss account.
The directors can however decide to prepare the accounts in another form if they
are of the view that the form could be more appropriate.
Contents
Group accounts laid before the company should give a true and fair view of the
state of affairs and profit or loss of the company and the subsidiaries dealt with
thereby as a whole, section 152 (1).
The consolidated accounts shall comply with the requirements of the sixth
schedule to the Act; so far as applicable thereto.
Financial year
Section 153 (1) provides that a holding company’s directors shall ensure that,
except where in their opinion there are good reasons against it, the financial year
of each of its subsidiaries shall coincide with the company’s own financial year.
Under section 153 (2) the registrar is empowered to postpone the submission of
a company’s accounts to a general meeting from one calendar year to the next
for purposes of enabling the company’s financial year to end with that of the
holding company.
Balance sheet
Section 148 requires the directors to prepare and lay before the company in a
general meeting a balance sheet as at the date to which the profit and loss
account or the income and expenditure account is made up.
The accounts may be signed on behalf of the board by two directors or if there is
only one director by such director section 155 (1). If the balance sheet is not
signed as required but a copy issued, circulated or published, the company every
officer who is default shall be liable to a fine not exceeding one thousand
shillings.
Accounts annexed
By section 156 (1) the profit and loss account and any group accounts laid before
the company in a general meeting shall be annexed to the balance sheet.
Section 156 (2) requires that the account so annexed be approved by the board
of directors before the balance sheet is signed on their behalf.
Section 156 (3) provides if any copy of the balance sheet is issued, circulated or
published without having annexed thereto a copy of the profit and loss account to
be annexed, the company and every officer of the company who is in default
shall be liable to a fine not exceeding one thousand shillings.
Directors report
Section 156 provides that the balance sheet must have attached to it a director’s
report on the company’s affairs, including the amount if any, which they
recommend should be paid by way of dividend and amount if any to be
transferred to reserves.
Appointment of auditors
A company is required at each annual general meeting to appoint an auditor(s)
to hold office until the conclusion of the next annual general meeting.
Failure by a company to appoint auditor(s) entitles members to make an
application to the registrar to appoint an auditor.
A retiring auditor is to be reappointed without any resolution being passed at the
meeting unless: -
a) He is not qualified for re-appointment
b) A resolution has been passed appointing someone else.
c) A resolution has been passed that he shall not be reappointed.
d) He has given the company a written notice of his unwillingness to be
reappointed.
Any casual vacancy in the office of auditor may be filled by the directors, but
while such vacancy continues the serving auditors may act.
No person than a retiring auditor may be appointed at an annual general meeting
unless a special notice of the resolution has been given and a copy of it has been
sent to the retiring auditor forthwith.
The retiring auditor is entitled to make representations in writing and have them
circulated among the members, and speak at the meeting.
Remuneration of auditor
Remuneration of the auditors of a company may be fixed by the company in a
general meeting or in such a manners as the company in general meeting may
determine.
In case of an auditor appointed by directors or registrar his remuneration is
determined by the directors or the registrar as the case may be (sec. 159(75).
Position of auditors
1. Auditors as agents of the members
An auditor is an agent of the company even when he is not appointed by them
and his duty is to examine the affairs of the company on their behalf and at the
end of the year report to them what he has found.
It was observed in Spackman vs. Evans (1868) that although an auditor is an
agent of the shareholders, the shareholders are not necessarily bound by notice
of everything of which notice is given to the auditor.
If the auditor is negligent in the course of his audit and this result in loss to the
shareholders he is liable to the shareholders, but his liability would not extend to
third parties.
(2) Auditor as an officer of the company
as an auditor is liable for default in the performance of his duty to the company;
he may to some extent be regarded as an officer of the company
(3) Auditor as an employee
The relationship between an auditor and a company is that of a professional man
and a client rather than that of an employee and employer.
Auditors report
As per the seventh schedule, an auditors report must contain the following; -
a) The accounts examined by him.
b) The balance sheet and profit and loss account.
c) Every document annexed to be balance sheet and profit and loss
account (i.e. notes to the accounts) laid before the company in a general
meeting during his tenure of officer.
An auditor is said to have reported if after having affixed his signature to the
report annexed to the balance sheet; he forwards that report to the secretary of
the company or directors.
Matters to be expressly stated in the auditors report.
1. Whether auditors have received all information necessary for their audit.
2. Whether proper books of accounts of account have been kept by the
company and proper returns have been received from the branches not
visited by them.
3. (a) Whether the company’s balance sheet and profit and loss account (or
consolidated accounts) dealt with by the report are in agreement with the
books of accounts and returns.
(b) Whether, in their opinion and to the best of their information and
according to the explanations given to them, the said accounts give the
information required by the Act in the manner so required and give a true and
fair view.
(i) In the case of the balance sheet, of the state of affairs
as at the end of its financial year.
(ii) In the case of profit and loss account of the profit or
loss in its financial year.
Duties of auditors
Duties of auditors are set out in section 159 to 162 of the act. The duties of
auditors: -
1. They must acquit themselves with their duties as laid down by articles and
companies Act.
2. They must report to members on the accounts laid before the company in
general meeting, during that tenure of office.
3. They must be honest and must exercise a reasonable skill and care or
else they may be sued for damages.
MAJORITY RULE
A majority of members of a company is entitled to exercise the powers of the
company and to control its affairs. Directors who enjoy a wide range of powers
are elected by the majority. It will therefore be seen that in all aspects the affairs
of the company are conducted by the majority.
16. AMALMAGATION
The term implies creation of a new company by complete consolidation of
combining units. Two or more companies may liquidate themselves under the
law and sell their assets and transfer their liabilities to a new company which
issues its own shares in exchange of value received from the amalgamating
companies.
After amalgamation none of the companies retains its entity or existence.
Amalgamation may take any of the following forms: -
1. By a scheme of arrangement.
2. By sale of undertaking
3. By sale of shares
4. By amalgamation in case of a company in course of winding up.
1. Arrangement.
Arrangement includes a reorganization of the share capital of the company by
the consultation of shares of different classes or division of shares of different
classes or by division of shares of all modes of reorganizing the share capital
even when involving an interference with prefential or4 special rights attached to
the share by the memorandum.
2. Sale of undertaking
This involves the sale of the whole of the undertaking of the transferor company
as a going concern. An amalgamation of two or more companies involves the
transfer of the whole part of the undertaking of the company; the court may make
an order for the following matter
(i) The transfer to the transferee company of the whole part
of the undertaking and the property.
(ii) The allotting or appropriation by the transferee of any
share, debentures, policies or other like interests in that by that
company to or for any person.
(iii) The continuation by or against the transferee company
of any legal proceedings pending or against any transferor
company.
(iv) The dissolution without winding up of any transfer
company
(v) Provision to be made for any persons who, within such
time and in such manner as the court directs, dissent from the
compromise or arrangement
(vi) Such incidental, consequential and supplemental
matters as are necessary to secure the reconstruction in
amalgamation shall be fully and effectively carried out.
Sale of shares
Shares are sold and registered in the name of the purchasing company. The
selling shareholders receive either money or share into acquiring company.
Approval the sale of shares must be approved by nineth .of the shareholders
whose is transfer is involved.
The number must exclude any shares already held by the transferee company or
its nominees or its subsidiary. When approval of nine-tenths majority is acquired,
the transferee company can acquire two months, after expiry of a four months
the transferee company may give a notice to dissenting shareholders that within
one month, it desires to acquire their shares.
The dissenting shareholders may apply to court but if no application is made, the
transferee company gets the final right to acquire all the shares. The court will
infer fairness from the fact that the scheme has been approved by nine tenths of
the members.
When an application is made to the court by a shareholder that the terms are not
fair it is not upon the applicant to establish his allegation. Where however the
offer is being made by the same majority shareholders who have accepted it, the
burden of proof is reversed and it is up to the offeror to show the scheme is fair.
Modes of winding up
There are three modes of winding up.
1. Winding up by court
2. Voluntary winding up.
(a) Members’ voluntary winding up
(b) Creditors voluntary winding up
3. Winding up subject to the supervision of the court
Disputed debt
A creditor whose debt is disputed cannot get a winding up order.
Commencement of winding up
The commencement of winding up by the court is deemed to have started from
the date a petition is presented. When the order is made for winding up, it relates
back to the date of the presentation of petition.
Powers of court (section 218,221&222)
Courts have jurisdiction to receive winding up petition hear it and make
determination. The interest of the applicant alone is not of predominant
consideration. The interests of the shareholders of the company as a whole apart
from those other interests have to be kept in mind at the time of consideration as
to whether the application should be admitted on the allegations mentioned in the
petition.
The court may delay the order to enable the company to: -
a) Settle a list of contributories.
b) Order any person in possession of any property of the company to
surrender it to the liquidator immediately.
c) Make the last calls on the shares and debentures the members hold.
d) Where the company’s business are running the company has power to
appoint a special manager to take care of the business until it determines.
e) Prevent any creditor from participating in the distribution of the
company’s assets when the company is paying off its liabilities.
f) The courts have also power to prepare a priority list detailing the order
in which payment shall be made (sec.262).
g) If at the time of winding it appears that promoters might have committed
fraud to the company, the court may order that they be examined.
Special manager
Upon an application by the official receivers a special manager may be
appointed, acting as a liquidator, whether provisional or not by the courts. Such
an application may be made if the official receiver is satisfied that the nature of
the company ‘s business or interests of the creditors or contributories generally
require the appointment of a special manager other than himself.
The remuneration of the special manager may be fixed by the courts.
Additional powers
These are powers of the courts delegated to the liquidator.
a) To call and hold meeting of creditors and contributories.
b) Settling the list of contributories and rectifying the register of members.
c) Paying, delivery, conveyance, surrender or transfer of money, property
and documents to the liquidator.
d) Making calls on the contributories.
e) Fixing time within which debts and claims must be proved. The above
powers are exercised by the liquidator as an officer of the court.
Disclaimer by a liquidator
Section 315 empowers a liquidator with leave of the courts to disclaim any
onerous property of the company. The liquidator has to disclaim the property
within one year from the date of commencement winding up or from the date he
became a ware of the onerous property.
The disclaimer extinguishes the rights, interests and liabilities of the company in
the property disclaimed. If any person suffers a loss (or damages by a disclaimer
of the property, he may prove for the amount as a creditor).
Committee of inspection
Creditors and contributories may apply to the courts to appoint a committee of
inspection. There is no given limit of members of the committee of inspection.
There is no given limit of members of the committee. The function of the
committee is to assist and supervise the acts of the liquidator.
The committee must meet one in a month but the liquidator may call for meetings
of inspection as often as he thinks.
Voluntary winding up
This is winding up by members or creditors without interference by the court. The
members, creditors may however apply to the court for any direction, if and when
necessary.
A company may be wound up voluntarily on the following circumstances
(sec.271).
a) When the period for the duration of the company have come to an end or
the event which the company is to be wound up has happened and the
company has in a general meeting passed a resolution which may be an
ordinary resolution unless articles provide otherwise.
b) If the company passes a resolution to wind up voluntarily.
Types of winding up
a) Members voluntary winding up
b) Creditors voluntary winding up.
DECLARATION OF SOLVENCY
This is declaration by a director that a company is able to pay all its debts within
one year. If late it is proved that a director has made the declaration of solvency
without reasonable grounds he may be liable to imprisonment up to a year or a
fine or both.
Notice of declaration
The notice of the resolution to voluntarily wind up a company must be advertised
in the Gazette within fourteen days.
Final meeting
When the affairs of company are wound up the liquidator must make up a final
account and call a general meeting of the company, which must be advertised in
the Gazette.
The liquidator must send a copy of the accounts to the registrar and make a
return of the holding of the meeting within fourteen days.
Committee of inspection
Creditors at their meeting may appoint a committee of inspection, and the
committee may appoint not more than five persons to the members of the
committee subject to the power of the creditors to disapprove persons so
appointed (sec 288).
A liquidator is to call a meeting of members and creditors after each year-end
and has to lay before the meeting an account of his acts and dealings of the
winding up of the preceeding year.
Preferential payment
Section 302 provides that the company’s assets must be used to pay all costs,
charges and expenses properly incurred in the winding up including liquidation.
Thus winding up charges and expenses rank in priority to all other claims.
The following preferential payments are required to be made in priority to all
other debts and such debts rank “Pari Passu” i.e. they rank equally amongst
themselves.
a) All government and local rates payable with 12 months before the date
of winding up.
b) All government rents not more than one year in arrear.
c) Wages and salary of any clerk or servant for services rendered during
four months preceding the relevant date not exceeding four thousand
shillings.
d) All amounts done in respect of any compensation under the workmen’s
compensation act, which have accrued before the relevant date.
Proceeds left may be given to the shareholders and if any portion remains
unclaimed, if goes to the public trustee as Bona vacantia i.e. owner’s property.
REFERENCES
1. N .A SALEEM – COMPANY LAW SIMPLIFIED
You were supposed to e-mail me the company law thing. What happened?
Regards,
Rita
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