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COMPANY LAW:

INTRODUCTION
Th e f o r ma t i o n a n d wi n d i n g u p o f a c o mp a n y i n Ke n ya i s g o v e r n e d b y
t h e Companys Act Cap 486 of the Laws of Kenya. The company egisation in Kenya owes
its origin to the !ngish company aw. The companies Act of Kenya which came into
force on "
st
#anuary "$6% is based on !ngish companies Act of "$48.This Act is sti
appicabe together with ater amendments. The Act provides a b a s i c e g a
f r a me wo r & f o r t h e r e g u a t i o n o f c o mp a n i e s i n Ke n ya . ' t ma & e s
provision for the ega incorporation of companies and ays down rues for
their constitution( management and winding up.

A part from the companies Act( there is aso case aw which has been deveoped by the courts
such doctrines of utra vires. The case aw and companies practice have deveoped so many rues
which are usefu for fiing in the gaps which have not been provided by the companies Act.
Definition of a Company
A company can be def i ned as a gr oup of per s ons as soci at ed t oget her f or t he
purpose of attaining a common ob)ective( socia or economic.

According to Lord #ustice Lindey a company is *associations of many personswho contribute
money or moneys worth to a common stoc& and empoys it in s o me t r a d e o r
b u s i n e s s a n d wh o s h a r e t h e p r o f i t a n d o s s t h e r e f r o m. Th e common
s t oc& so cont r i but ed i s denot ed i n money and i s t he capi t a of t he company.
The persons who contribute it or to whom it beongs are members. The proportion of capita
to which each member is entited is his share. The shares a r e a wa ys
t r a n s f e r a b e a t h o u g h t h e r i g h t t o t r a n s f e r i s o f t e n mo r e o r e s s
restricted+.
#ustice ,arsha defines a company as an artificia being( invisibe( intangibe(
e - i s t i n g o n y i n c o n t e mp a t i o n o f t h e a w. .e i n g a me r e c r e a t i o n o f
a w( i t possesses ony the properties( which the charter of its creation confers upon
it( either e-pressy or as incidenta to its very e-istence.

Accor di ng t o /aney *a company i s an i ncor por at ed ass oci at i on whi ch i s an
artificia person created by aw( having separate entity( with a perpetua succession and a
common sea+.
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0ection %1"2 of the company Act 1cap 4862 provides that *a company means a
company formed and registered under this Act or an e-isting company+. !-isting c o mp a n y
o n y me a n s a c o mp a n y f o r me d a n d r e g i s t e r e d u n d e r a n y o f t h e repeaed
ordinances. 3or the purposes of companies Act of Kenya the companies incudes4 5

a2 A registered company under this Act.

b2 An e-isting company.

c2 An unregistered company covered under section 6785664.

d2 A produce company covered under section 688.

e2 A foreign company covered under section 667568".

Characteristics of a company
". Artificia ega person

A company i s an ar t i f i ci a ega per son. ' t act s t hr ough a boar d of di r ect or
seected by the share hoders. 't was stated in .ates vs standard Land company that
*The .oard of 9irectors are the brains and the ony brains of the company( which is
the body and the company can and does act ony trough them+.

A company has t he r i ght t o ac:ui r e and di s pose of t he pr oper t y( t o ent er i nt o
cont r act wi t h t hi r d par t i es i n i t s own name and can s ue or be sued i n i t s own
name.

%. 0eparate ega !ntity

A company is a separate entity :uite distinct from its sharehoders. A company or body corporate
is formed once a certificate of incorporation is given. 0uch a body corporate is capabe of
having perpetua succession( power to hod and( has a common sea with iabiities
of its members imited as per the provisions of the Act.

'n !ngand ega personaity of a company was recogni;ed in "868 in <a&es
vsTur:uand. 'mportance of separate entity was firmy estabished by 0aomon
vs.0aomon 1"8$82 AC %%. 'n the case 0oomon sod his boots business to a newy
f or med company f or =6>>>>. /i s wi f e( daught er and f our sons t oo& up
shar es of ="each. 0aomon too& %6>>> shares of =" and =">>>> debentures. ?hen
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the company was wound up 0aomon was abe to ran& any of secured 1or preferred2 creditors for
his debentures.

' n t he cas e Lor d ,c@aught en obser ved *t he company i s at aw :ui t e
di f fer ent person atogether from the subscribers of the memorandum and though it
might be that after incorporation the business is precisey the same as it was before
and the same persons are managers( and the same hands receive the profits (the
company is not in aw the agent of the subscribers or trustee iabe in any shape or
form e-cept to the e-tent and in the manner provided by the Act+.

<ther case aws in support of separate ega personaity are the Lee vs Lee
Air 3arming Ltd and the ,acaura vs @orthern Assurance Company Limited "$7% AC
6"".

6. Aerpetua 0uccession

A company has a common sea( with which the name of the company is not affected by the
death( insanity or ban&ruptcy of sharehoders. Change of membership aso does not
affect continuity of the company.

4. Common 0ea
A company has a common sea( with the name of the company engraved on it as a subst i t ut e
f or i t s si gnat ur es . 3or a document t o be bi ndi ng i t mus t bear t he common sea
of the company and the sea witnessed by two or more directors.

7. Limited Liabiity

A sharehoder is ony iabe to the debts of the company during its ife or during
winding up ony to the e-tent of share ta&en by him and ony to the ba ance t a&en
by hi m or up t o t he guar ant ee gi ven by hi m or bot h. The persona property of
a sharehoder cant be attached for the debts of the company.

6. Transferabiity of shares
,e mb e r s o f a p u b i c c o mp a n y a r e f r e e t o t r a n s f e r s h a r e s h e d b y
t h e m t o anybody. /owever for private company transferabiity of shares may be restricted by
artices.

8. Capacity to sue or be sued
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A company can sue or be sued a in its own name. Thus is the case of for suits for and against
the company is the proper paintiff and proper defendant.

8. 0eparation of ownership and management

.oar d of di r ect or s e ect ed by member s i n t he gener a meet i ng gover ni ng t he
affairs of the company.

$. 0eparate property
A company is capabe of owning( en)oying and disposing the property in its own
name. Thus a sharehoder does not have an insurabe interest in the property of the
company.

Lifting the Corporate ei!
0ince a company is a ega person distinct from its members there is assumed to be a cur t ai n(
a vei or a shi e d bet ween t he company and i t s member s . The pr i nci p e of
s epar at e ega ent i t y was est ab i shed i n t he cas e of 0a omon vs 0 a o mo n
a n d c o mp a n y Lt d . Th u s o n c e a c o mp a n y i s f o r me d t h e r e i s a v e i
between the company and its members. .ased on this principe it is not easy to go
behind the curtain and see who are the rea persons composing the company. There are
however cases when the corporate vei has to be ifted to oo& at the individua
members who are in fact the rea beneficia owners of a corporate property. Thus
ifting corporate vei means identification of a company with its members and when
the corporate vei is ifted the individua members may be hed iabe for its acts or
entited to its property.

0ome of the instances when the corporate vei may be ifted incude where it is for
the benefit of revenue( where it is essentia to secure )ustice and where it is in pubic interests.
The corporate vei may be ifted by4 5

a" The co#rts

$" The stat#te

a" Lifting $y the co#rts

%& Determination of the character of the company&

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A c o mp a n y ma y b e d e c a r e d a n e n e my c h a r a c t e r wh e n i t s d i r e c t o r s
a r e residents of an enemy country. Therefore courts may ift the vei to ascertain the nationaity
of persons controing the company.

'n 9aimer Company Ltd vs. continenta Tyres and rubber company Ltd "$"6 AC6>8 9aimer
company was sued by continenta tyre company for recovery of a d e b t o f Tyr e s
s u p p i e d . Co n t i n e n t a t yr e s wa s i n c o r p o r a t e d i n !n g a n d f o r pur pose
of se i ng i n !ng and t yr es made i n Ber many. The s har eho der s of continenta
tyres were Bermans e-cept one and a directors were Bermans

9uring the 3irst ?ord ?ar continenta tyres commenced an action to recover a debt f r om
9ai m er. 9ai m er cont est ed argui ng t hat cont i nent a t yr es wer e an enemy
company. 't was hed that continenta tyres was an aien company and the payment of
debt woud amount to trading with an enemy.

'& Pre(ention of fra#) or improper con)#ct&

The vei may aso be ifted if a company is formed for a frauduent purpose or to
avoid ega obigations.

Arofessor Bower says that the vei of a corporate body wi be ifted where the
corporate personaity is being batanty used as a coc& for fraud or improper conduct.

Case aw #ones vs. Lipman "$6%


*& Where a company is a sham&

This refers to a situation where a company is formed and used for some iega or improper
purpose.

Case aw Luniford motors Company Ltd vs /orne 1"$662

+& Where the company is acting as the agent of the shareho!)ers&

?h e n a c o mp a n y i s a c t i n g a s a n a g e n t o f i t s s h a r e h o d e r s o r o f
a n o t h e r company( it wi be iabe for its acts. There may be e-press agreement to
the effect or an agreement 1of agency2 may be impied from the circumstances
of each particuar case.

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Case aw reating to this is the 3.B 3im Ltd in Ce 1"$762 ' ALL !.C 6"7.

An American company financed the production of a fim in 'ndia in the name of a .r i t i s h
company. The pr esi dent of t he .r i t i sh company( t he boar d of t r ade of Breat
.ritain refused to register the fim as a .ritish fim. The decision was hed as a vaid
in view of the fact that .ritish company acted merey as the agent or nominee or the
American company.

,& Protection of Re(en#e&

Thi s i s especi a y t he cas e when a company i s f or med t o ass i s t shar eho der s
evade ta-es. 'n such case the sharehoders may be hed iabe to pay income ta-.

-& Protecting p#$!ic po!icy.

Courts ift the corporate vei to protect the pubic poicy and prevent transactions contrary to
pubic poicy. ?here there is a confict between the separate entity pr i nci p ed and
pub i c po i cy t he cour t s i gnor e f or m and t a&e i nt o account t he substance
1Conners vs Connors Ltd 1"$4>2 for ALL !C "842.

Lifting $y stat#te&

%& When mem$ers fa!! $e!o. stat#tory minim#m. As per section 66 of the Act( a
business is not aowed to carry on business for more than si- months if membership fas
beow seven in case of a pubic company and beow two in case of a private
company. Anyone aware of the fa of membership and continues to carry on business
wi be hed iabe for a debts of the company contracted after si- months.

%. Mis)escription of the company&

0 e c " > $ o f t h e Ac t s t a t e s t h a t t h e n a me o f t h e c o mp a n y mu s t b e f u y
a n d propery mentioned on a documents issued by it. ?here an officer of a company signs(
on behaf of the company( a bi of e-change( promissory note. Che:ue( or der f or
money or goods i n whi ch t he companys name i s not ment i oned t he officer is
personay iabe to the hoder of the bi of e-change.

Case aw in this case( /endon vs. Aderman 1"$862 ""8.

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*& /o!)ing an) s#$si)iary companies&

Athough both hoding and subsidiary companies are separate entities there are
instances where a subsidiary may oose its separate identity to a certain e-tent.

a2?h e r e a t t h e e n d o f t h e f i n a n c i a y e a r a c o mp a n y h a s
subsidiaries( it may ay before the members in a genera meeting not ony its own
account but aso a set of group accounts showing t he pr of i t s and os s ear ned by
t he company and i t s subs i di ar i es and their coective state of affairs at the si-th
schedues.
b2 0ection "68 empowers the inspector appointed by the court to regard the
subsidiary and the hoding company as one entity for the purpose of investigation.

+& In(estigation of company mem$ership&

0 e c t i o n " 8 6 1 s 2 e mp o we r s t h e r e g i s t r a r t o a p p o i n t o n e o r mo r e
c o mp e t e n t inspectors to investigate and report on the membership of any company
for the p u r p o s e o f d e t e r mi n g t h e t r u e p e r s o n s wh o a r e o r h a v e b e e n
f i n a n c i a y i n t e r e s t e d i n t h e s u c c e s s o r f a i u r e o f t h e c o mp a n y o r
a b e t o c o n t r o o r t o infuence the poicy of the company. To investigate the
corporate vei is ifted to ascertain the rea persons controing it.
,& Ta0e o(er 1i)s&

0ect i on %"> pr ovi des t hat wher e scheme or cont r act i nvi t i ng t he t r ansf er
of s h a r e s o r c a s s o f s h a r e s i n t h e c o mp a n y t o a n o t h e r c o mp a n y
h a s b e e n approved by the hoders of not ess than nine tenths in the vaue of shares whose
transfer is invoved the transferee company may at any time within two months
a f t e r t h e ma & i n g o f t h e o f f e r b y t h e t r a n s f e r o r c o mp a n y( g i v e n o t i c e
i n t h e prescribed manner to any dissenting sharehoder that it deserves to ac:uire
his shares. This is iustrated in the case Ce .ufe press Ltd.

-& 2ra#)#!ent con)#ct of 1#siness&

0 e c t i o n 6 % 6 o f c o mp a n y s Ac t i n t h e c o u r s e o f wi n d i n g u p t o a
c o mp a n y i t appears that any business of the company has been carried on with
intention to defraud creditors( the court may decare that any person who were
&nowingy( parties to the carrying on such business are to be personay iabe for the
debts and other iabiities of the company.
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3& Prosec#tion of )e!in4#ent officers an) mem$ers of company&

0ection 6%7 of Act if in the course of winding up of a company it appears that any past or
pr esent of fi cer or any member of t he company has been gui t y of any
off ence i n r e at i on t o t he company t hen t he cour t may dec ar e such a per son
iabe for his offence.
A)(antages of Incorporation&

". Limited iabiity.

As observed in #en&ins vs pharmaceutica society of irent .ritain 1"$%"2 "ch
6$%*imited companies are off springs of preview necessity( that is( men shoud be
entited to engage in a commercia pursuit without invoving the whoe of
their fortune in that particuar pursuit in which they are engaged+.

%. Transferabiity of shares.

0hares in a company can be transferred 1sub)ect to restrictions in the artices
of associations2 from one person to another without the consent of other members.

6. 0eparate Lega entity.

A company is not affected by the death( insanity or ban&ruptcy of a member.

4. Contro

Contro can be gained by ac:uisition of ma)ority shares which carry voting power.
7. Aermanent e-istence.

A companys ife is permanent.

6. 0eparation of ownership and management.

0harehoders are owners of the company. 0harehoders eect their r epr es ent at i ves
t o t he boar d of di r ect or s ( whi ch manages t he aff ai r s of t he company.

8. !-pert management.

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Companies run arge5scae business and have ade:uate financia resources and as such can
aff or d t he s er vi ces of speci a i st s. Thus compani es ar e r un professionay.
8. Aubic confidence.

3 o r ma t i o n a n d r u n n i n g o f a c o mp a n y i s r e g u a t e d b y t h e p r o v i s i o n s
o f t h e companies Act and various other acts. Arovisions regarding the appointment and
remuneration of directors( compusory audit and pubication of accounts protection of minority
sharehoders have credited greater pubic confidence.
$. 0ocia Advantages

A company heps to gather savings from the pubic and invests them in sound
industria and commercia ventures. Companies provide empoyment opportunity t o many and
s i nce t hey oper at e i n arge sca e t hey ensur e economi c use of nationa
resources and provisions of goods and services to the pubic at ower prices.

Disa)(antages of incorporation
". 3or mat i on of compani es i s a comp i cat ed pr ocedur e and i s cos t y.
9ocuments re:uited i&e the memorandum of Association( the artices( the prospectus or
statement in ieu of prospectus are usuay drawn by ega e-perts who charge high fees
for their preparation.
%. There is no secrecy regarding the affairs of a company.
?ide pubicity of the company affairs may ead to economic sabotage by its rivas.

6. 't is very e-pensive to administer a company.
This reates to re:uirements pertaining the hoding of genera and statutory meetings and
r e t u r n s o f a n n u a a c c o u n t s . Th e a c c o u n t s a n d a u d i t r e p o r t s r e : u i r e
e-penses.

4. 9oct r i ne of u t r a vi r es .
A company can on y t r ade on t he busi ness specified in its ob)ect cause of the
memorandum of association.

7. Ta-ation.
A company must pay ta-es as a ega person whie this is not a re:uirement for partnerships.

6. There are many formaities before a business starts trading.

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8. The winding up of a company is widey pubished thus e-posing the property of the
company to an insecure position.


'& CLA55I2ICATION O2 COMPANI65 CORPORATION5.

Corporation is a person in aw i.e. :uite distinct from the individuas who are its me mb e r s .
Co r p o r a t i o n s c a n o wn p r o p e r t y( h a v e r i g h t s a n d a r e s u b ) e c t t o
iabiities.

Types of corporations4

a2 Corporate soe.

/as ony one member.

Can continue even after death of those members.
b2 Corporation aggregate.

/ave more than one member.

Are cassified according to the means the artificia corporate personaity has been granted4 5 thus

1i2 Chartered corporations

Are incorporated by the grant of a roya charter by the crown.

@owadays charters are given to non5profit ma&ing bodies of pubic importance
1good2.

1ii2 0tatutory corporations

Created by passing an act of pariament e.g. the nationa coa board.

1iii2 Cegistered corporations.

Are those created by compiance with the terms of an act of pariament.

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Compani es act "844 pr ovi ded a t hi r d and easi er met hod of i ncor por at i on by
registration foowing compiance with formaities. 'n "877 imited iabiity concept was
introduced.

Types of registered companies
". Aubic companies
Dnder section " 1"2 are formed by seven or more members( the purpose being to attract
investment from the genera pubic.

%. Arivate companies.
3ormed by two or more members. 9efined by sec.%8 1"2 as a company which by its
artices4 5

a2Cestricts rights to transfer shares e.g. by cause that members must offer their
shares first to other members or to directors or a cause under which directors have a
right to refuse to register a transfer.

b2 Li mi t s t he number of i t s member s t o 7> 1 e-c udi ng pr es ent or past
empoyees2. #oint hoders of shares are treated as a singe member.

c2 Ar ohi bi t s any i nvi t at i on t o t he pub i c t o subscr i be f or i t s shar es
or debentures.

Limited companies

Liabiity of a company is unimited in the sense that it must pay a debts due from it so ong as
its assets are sufficient to meet them. Liabiity of members may be imited when the
company is formed byE

a2 0hares.

,embers are iabe to the e-tent of the amount paid on their shares( incuding share
premium if any.

There is no iabiity regarding unissued capita.

' n case of pr i vat e compani es a guar ant ee i s usua y r e:ui r ed bef or e cr edi t i s
given.

b2 Buarantee
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@ormay these companies dont have share capita.

They are non5profit ma&ing organi;ations.

?here there is no share capita( there is no iabiity or the members uness and unti
the company goes into i:uidator in which case they were iabe to the e-tent to which they
have agreed by the memorandum of association to contribute to the assets of the
company.

The guarantee is usuay to contribute 0h" though it may be more.

Th e g u a r a n t e e d s u m i s p a ya b e b y t h o s e wh o a r e me mb e r s a t t h e t i me
o f winding up and if they cant pay the i:uidator may proceed against those who
were members previousy but ony in respect of debts incurred whie they were
members.

An u n i mi t e d c o mp a n y ma y r e 5 r e g i s t e r a s a i mi t e d c o mp a n y 1 b y
s h a r e s o r guarantors2 uness it has previousy been converted from a imited to an unimited
company.

,e mb e r s mu s t p a s s a s p e c i a r e s o u t i o n a g r e e i n g t o t h e c h a n g e ( a n d
t h e r e s o u t i o n mu s t ma & e t h e a p p r o p r i a t e a t e r a t i o n s s o t h a t i t
c o n f i r ms t o t h e re:uirements.

T h e s p e c i a r e s o u t i o n i s t h e n s e n t t o t h e r e g i s t e r o f
c o mp a n y s a n d r e 5 registration is effected by a director or a company secretary
of the company by signing an appication form sending it to the registrar together with a
printed copy of the companys memorandum and artices in their new form( the
register then issues a new certificate.

Dnimited companies.

There is no imit to the iabiity of the members.

,osty used by stoc&bro&ers because stoc& e-change cant admit a company as a member uness
its members are personay iabe for its debts.

An unimited company can avoid giving pubicity to its financia affairs.

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An unimited company can be formed by4 5


a2 .y being formed as suchE

!ither with or without share capita and as a pubic or private company.

?her e t her e i s no shar e capi t a member s cont r i but e e:ua y t o t he debt s and
iabiities of the company.

b2 .y being re5registered
0 e c . 4 6 CA " $ 6 8 a o ws a c o mp a n y i mi t e d b y s h a r e s o r g u a r a n t e e d
t o r e 5 register as an unimited company.

A me mb e r s mu s t c o n s e n t i n wr i t i n g a n d a t h e c o n s e n t s t o g e t h e r
wi t h a statutory decaration by the directors that the consents have been obtained and acopy
of t he memor andum and ar t i c es a t er ed so as t o conf i r m t o t hos e of an
unimited company.
The r egi st r ar may t hen i ssue a cer t i f i cat e and pub i sh t he f act of i ssue i n t he
Ba;ette.

0pecia features of unimited companies.

a2 't need not deiver copies of its annua accounts( directors and auditors reports
to the registrar with its annua return
't en)oys privacy as regards its financia affairs.

Th i s p r i v i e g e i s n o t e - t e n d e d t o a n u n i mi t e d c o mp a n y( wh i c h
i s a subsidiary or hoding of a imited company( or unimited company(
which is potentiay under contro of two or more imited companies.

b2 Arovisions of CA "$48 governing the ateration of capita do not appy to unimited
companies.

A company may ater its capita structure by a specia resoution atering the
artices.

@otice of any ateration must be given to the registrar within one month uness
ateration increases the companys nomina capita( when notice must be given within "7
days.
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c2 An un i mi t ed company may ac:ui r e any of i t s own shar es i f i t s
ar t i c es authori;e it to do so( even though it uses its own assets to purchase
them. 1Ce .orough commercia and buiding society 1"8$622.

'f at the time it ac:uires the shares the company &nows that its e-isting assets and
amounts which it coud e-pect to e-act from its members on winding up wi not be enough to
satisfy its iabiities the ac:uisition of the shares wi be set a side as a fraud on its
creditors 1,itche vs. city of Basgow .an& 1"88$22.

d2 An unimited company need not give a more than seven days notice to its member s of
an e-t r a or di nar y gener a meet i ng ca ed t o pass a r es o ut i on other than a
specia one. The period for other companies is "4 days.

e2 An unimited company may issue shares of no par vaue.

f 2 An u n i mi t e d c o mp a n y h a s n o s t a t u t o r y p o we r t o i s s u e
r e d e e ma b e preference shares( but since it can purchase its own shares if artices
provide.

' t cou d i n pr act i ce i ss ue r edeemab e pr ef er ence shar es and pr ovi si on
of section 78 woud not appy.

<ther instances of unimited iabiity.

1a2 0ection 6"

Dnder this if a company carries on business for more than si- months with ess than
seven members 1or two in a private company2( every member who &nows of the fact is
iabe for the debts of the company which are incurred of the period of si- months has e-pired.

The section does not appy as regards damages after awarded e.g. a breach of contract
by the company.

1b2 0ection 66%

Th e s e c t i o n a p p i e s i f t h e c o mp a n y i s b e i n g wo u n d u p . Th e c o u r t
mu s t b e satisfied that the companys business has been carried on with intent to defraud
creditors.

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Aerson carrying on business frauduenty must be made personay iabe for the companys
debts.

!-ampe directors coud be hed iabe if &nowing that the company is unabe to pay
its debts as they fa due( they ordered goods on credit or received money from
customers for goods( which the company might not be abe to suppy.

1c2 0ection %>%

The memorandum of a company may provide or be atered to provide( that the
iabiity of its members sha be imited but the iabiity of its directors sha be
unimited. This aternative is hardy ever adopted in practice.


0eparate ega personaity of a company

The case( which estabished the independent ega personaity of a company( 0aomon
vs. 0aomon and company Ltd 1"8$82 1"( "2.

,a)or conse:uences of the 0aomon case.

a 2 ' t e s t a b i s h e d t h e v a i d i t y o f r e g i s t r a t i o n a s a me a n s o f
c r e a t i n g a corporation formery these was done by charter for statute.

b2 Cegistration was estabished as a method of creating a company with s eparate
ega personaity.

c2 A registered company has perpetua succession.

d2 0eparate personaity is made to function by the board of directors which is t he
agent . Ther e i s t hus need f or member s t o have s ome cont r o over t he
board. 0ome of the ways the member can achieve this contro was45

a. The utra vires rue.

0harehoders can see& a court in)unction wherever directors invove in transaction that are
beyond the company powers.

These days the courts construct ob)ects cause widey so that this contro is often more apparent
than rea 1Ce @ew 3inance and ,ortgage Co. Ltd 1"$8722.
15

Aso acts by directors which are defective whether because of ac& of authority or : u o r u m o r
b e c a u s e o f s o me d e f e c t ' t h e i r a p p o i n t me n t o r b e c a u s e o f
t h e i r motives were improper( can be vaidated by ordinary resoution of the
members after fu discosure of the facts to them in a genera meeting( provided the acts in
:uestion are not utra vires the company 1e.g. .ranford vs. .ranford 1"$6$2 F42.

b2 Accounts and audits
The boar d i s r e:ui r ed t o account f or i t s f i nanci a st ewar ds hi p by ens ur i ng
t he pr oduct i on of annua account s whi ch must be audi t ed and pr es ent ed t o
t he members at the
c2 0ec. "84 remova of directors is made easy.
A company may by ordinary resoution remove a director before the e-piration of h i s p e r i o d
o f o f f i c e r e g a r d e s s o f t h e wa y i n wh i c h h e wa s a p p o i n t e d
n o t withstanding anything in its artices or any agreement in his favour section
"841"2.

0pecia notice of %8 days to the company is re:uired of the intention to move the resoution
1sec."84 1%22.

3oowing the acceptance of imited iabiity in 0aomon( certain protections are
given to creditors and potentia creditors.

a 2 A u b i c i t y a s t o f i n a n c i a s t a n d i n g 5 Co mp a n i e s mu s t f i e t h e
a n n u a returns.

b2 0hare capita 1creditors fund2 cannot be returned to sharehoders.

1 i 2 Capi t a r educt i ons mus t be appr oved by t he cour t under section 66.

1 i i 2 A i mi t ed company may not pur chase i t s own shar es 1 Trevor and
?hor t wor t h "888 1 "G 62 2 ( nor( sub) ect t o cer t ai n e-cept i ons ( end
money t o per s ons so t hat t hey may buy t he companys shares 1s.742

There is an e-ception when shares are issued as redeemabe preference shares 1section 782.
1iii2 9ividends must be paid out of profits and not out of capita.

There are provisions to prevent the capita of a company being watered down as i t comes i nt o
t he company by t he cont r o of t he i ssue of shar es at a di scount 1 sect i on 782
and of under wr i t i ng commi s si on pai d on s har es on t he i s sue of shares.
16

!-ceptions to the rue of separate ega personaity.

". Companies act "$48
'f the membership fa beow the statutory minimum for si- months.

There is aso iabiity where on winding up the court is satisfied that a companys business has
been carried on within intent to defraud its creditors.

%. Aubic interest
Aersona :uaities of sharehoders may be investigated in pubic interest 19aimer Co. Ltd vs.
continenta Tyre 1"$"62 1"G82.

6. !vasion of ega obigations
?hen a company is formed to evade ega obigations 1e.g. Biford motor Co. Ltd vs. /orne
1"$6622 sharehoders may be personay iabe.
4. Aersona reationship company sec. "84 of "$48 Act(
?hich aows remova of a director by an ordinary resoution after %8 days has aso
given rise to abuse of the corporate entity theory in the private company. This is
because a director can be easiy be removed without a mista&e of in part( uness there is a specia
cause in artices as in .ushe v. 3eith.

/owever in !brahim vs. ?estborne Leaaries 1"$8%21"G$2 the /ouse of Lords
decided that a remova under section "84 coud be ground for winding up
under section %%% in private company. This rue appies not to a private companies but to
persona reationship companies.

Aer s ona r e at i onshi p compani es ar e i n es sence par t ner s hi ps wher e each
member assumes continuing invovement in management. 'n order to ascertain
whether the company is a persona reationship company( it is necessary to ift the
corporate vei and discover the hopes and aspirations of the members.

'n Ce. AH.( C chewing gum 1"$872"G4> the court too& a view that entitement to
ma n a g e me n t p a r t i c i p a t i o n wa s a n o b i g a t i o n s o b a s i c t h a t ( i f b r o & e n (
t h e association must be dissoved even though it was not a company arising out
of partnership.

'& 2ORMATION O2 A COMPANY
17
Intro)#ction

There are severa formaities( which have to be foowed before a company is
incorporated 1formed2. The process is grouped in the foowing stages4 5

". Aromotion

%. 'ncorporation or Cegistration

6. Capita subscription

4. Commencement of business

't shoud be noted that a private company need ony to go through the first two stages
ony. A pubic company must go through a the four stages.

". Aromotion

L.? Leertenberg defines promotion *the discovery of business opportunities and t he
subs e:uent or gani ;at i on of f unds ( pr oper t y and manager i a abi i t y i nt o a
business concern for the purpose of ma&ing profits there from+.

Aromotion therefore has to do with the discovery of a business idea which can be pr of i t ab y
under t a&en by a company and i nc udes pr e i mi nar y and det ai ed investigation
of the feasibiity of the idea( assembing of business eements and ma&ing provisions
of the funds necessary to aunch the enterprise as a going concern.

Thus stages can be summari;ed as under4 5
i. Ar e i mi nar y ana ys i s and e-ami ni ng t he pr opos ed i dea t o see whet her
t he business is profitabe.
ii. !stimating the cost of production( seing price of goods and services and the
amount of profits i&ey.
i i i . Ar r angi ng f or t he ac:ui s i t i on of abour( mat er i a s ( capi t a and
manager i a abiity.
iv. Aresentation to the pubic and underwrites the business proposition in order to ma&e
peop e t o manage i n t he vent ur e. Thi s i s done t hr ough t he i ss ue of a
prospectus.
18

%. Cegistration or incorporation

This invoves registering the company with the registrar of companies under the
companies Act. 3or a pubic company membership shoud be at east seven and at east two for a
private company. The peope who are invoved in registration of a company are caed
promoters. The foowing activities or steps are ta&en by promoters in order to register
the company.
a) <bt ai ni ng appr ova of t he pr oposed name f r om r egi s t r ar of t he
companies.

Ar omot er s ar e f r ee t o choose any name f or t hei r new companyE sect i on "$
of companies Act however has put restrictions on the names to be chosen. 0ection" $ 1 % 2
p r o v i d e s t h a t * n o n a me s h a b e r e s e r v e d a n d n o c o mp a n y s h a b e
registered by a name which in the opinion of the registrar is undesirabe+.

0ection "8 of the business names Act cap 4$$ ists instances when a name is deemed
undesirabe4 5

i. ?here the name chosen suggests a crimina or immora intent.
i i . ?her e t he name suggest s as soci at i on wi t h t he pr esi dent or head
of state or a government ministry or department or a oca authority or suggests
connection with an internationa organi;ation such as ?ord .an& e.t.c.
iii. 'f the name is miseading especiay as to the nature of the business the company wi
under t a&e or as t o t he nat i ona i t y or r e i gi on of t he peop e behind the
company.
i v. ?h e r e t h e n a me i s s i mi a r t o t h e n a me o f a n e - i s t i n g c o mp a n y(
partnership or co5operative society.

0ect i on ">$ of t he compani es name r e:ui r es pub i cat i on of t he name of t he
company by4
a2 Aainting or affi-ing and &eeping painted or affi-ed name on the outside of
every office or pace where its business is carried on( in a conspicuous
positionE in easiy egibe roman etters.

b2 /aving its name engraved in egibe roman etters on its sea which sha ta&e the form of
an embossed meta dieE

19
c2 /avi ng i t s name ment i oned i n egi b e r oman et t er s i n a busi ness
etters of the company and in a notices and other officia pubications of the company
and in a its bis of e-change( promissory notes( endorsements( che:ues and
orders for money or goods purporting to be signed by or on beha f of t he
companyE and i n a bi s or par ce s ( i nvoi ces ( r ecei pt s and etters of
credit of the company.

0ect i on %> of compani es Act pr ovi des t hat a company can change i t s names
sub)ect to the foowing4 5

i. 'ts the company itsef that can change its name i.e. members in a genera
meeting.
ii. The resoution changing the name must be a specia resoution.
iii. After changing the name the company must within fourteen days give notice of its
change of name to the register of companies. The registrar wi ma&e the
change and pubish the fact in the officia Kenya Ba;ette.

b2 Aresentation of documents
The foowing have to be prepared and presented to the registrar of companies

". ,emorandum of Association

Contains conditions upon which the company is aowed to be incorporated. 't defines
and sets the imits of the powers of the company. The memorandum aso sets the ob)ects of the
company.

%. Artices of Association
Contains the rues( reguations( by aws for the interna management of the affairs of a company.
Artices enabe the company operate in a way to achieve the aims and ob)ectives set out in the
memorandum of association.

6. A statement of the companys nomina capita.

@omina capita is the ma-imum amount of capita that a company aims to raise.

4. A decaration that a the re:uirements of the companies Act and other formaities
reating to registration have been compied with. The decaration has to be signed by
an advocate( a person named as director or company secretary.
20

7. A i s t of t he company di r ect or s and t hei r wr i t t en consent t o become
company directors. 'mmediatey after registration( the foowing true documents are re:uired4 5

1i2@otice of the situation of the registered office.

1ii2Aarticuars of directors and the secretary.

The registered office cant be changed but if it changes notice of change must be given to the
registrar within "4 days. Aarticuars of the directors and the secretary need to be fied with the
registrar within fourteen days of their appointment.

d2 'ssuance of a certificate of incorporation
<n receipt of necessary documents the registrar opens a fie for the
particuar company. 'f a re:uirements of the Act have been compied with( he wi register the
company and pace( its name in the register of companies. A certificate
of incorporation wi be issued where upon the registrar sha certify under his hand
that the company is incorporated. The origina copy is given to the promoters and a copy wi be
eft in the companys fie 1s. "%2.

' t shou d be not ed t hat pr esent at i on of document s does not mean aut omat i c
r e g i s t r a t i o n o f t h e c o mp a n y. Th e r e g i s t r a r o f c o mp a n y s p o we r s t o
r e f u s e r e g i s t r a t i o n a r e i n h e r e n t . ' f t h e r e g i s t r a r s r e a s o n s f o r r e f u s a
t o r e g i s t e r a company are not vaid the promoters can see& order of mandamus from the
high court to compe the registrar to issue the certificate.

'n C vs. registrar of )oint stoc& companies 1"$"62 %& . "$8E the promoters of the
company sought mandamus to issue the registrar of the )oint stoc& companies on grounds that he
had without reasonabe cause refused to register their company.

't was hed that where promoters are aggrieved by the decision of the registrar they
can appy for order of mandamus to issue against the registrar. /owever where the
registrar is )ustified in aw and in fact not to issue the certificate the order of
mandamus sha not be issued.

' n t he above case t he pr omot er s f ai ed i n t hei r at t empt because i s sui ng t he
certificate woud mean aowing an !ngish company commits an iegaity.

21
0ection "81"2 once the certificate is issued it acts as concusive evidence that the company was
propery formed in accordance with a the re:uirements of either the companys Act or
the company practice. 'f it is ater found that the granting of t h e c e r t i f i c a t e wa s ma d e
i n i g n o r a n c e o f s o me i r r e g u a r i t y o n t h e p a r t o f promotersE it cannot be
withdrawn. 'ncase in this point is .arnards .an&ing company Ce Aoes case 1"8682
L.C.%ch. 684. 't was hed by Lord Cairns in this case that4

?hen once t he memor andum i s r egi st er ed and t he company ho ds out t o t he
word as a company underta&ing business wiing to receive sharehoders and ready
to contract engagements then it woud be of most disastrous conse:uences if at a that
has been done( any person was aowed to go bac&
and enter into e-amination of the circumstances attending origina registration and
the reguarity of the e-ecution of the documents.

The cer t i f i cat e cannot be di s put ed on any gr ounds and cannot be cha enged
even4 5

a2 ?here the memorandum is atered after signatories put their signatures on memorandum
but before it is registered with the registrar.

b2 ?hen memorandum is signed by ony one person for a the seven.

c2 ?here a the signatories are minors.

d2 0ignatures to the memorandum are forged.

<t her cas e aw r e at i on t o i ncor por at i on i s #ubi ee cot t on mi s Lt d vs .
Lewi s 1"$%42 AC $78.
Circumstances when incorporation can be withdrawn4 5

1 i 2 ?her e i t i s di scover ed t hat t he company was f or med wi t h
b asphemous ob)ectives. This is the case in .owman and others vs. the secuar
society imited 1 "$"82 AC 4>6 wher e t he company t hought agai nst
Chr i s t i ani t y and urged i t s members to stop 0avation Army members from
attending their 0unday worship.

Thi s was f ound t hat t he act i vi t i es of t hi s company wer e b asphemous t o t he
d o c t r i n e s o f t h a t r e i g i o n a n d t h e c e r t i f i c a t e wa s wi t h d r a wn a n d
c a n c e e d . /owever on technica grounds the action faied.
22
1ii2 There the ob)ects of the company are found to be immora. 'n C vs. Cegistrar of )oint
stoc& companies 1!-5parte the A.B2 1"$8>2 I.J a firm of Accountants
sought to register a company on behaf of their cient. They intended to
register t he company i n t he name *pr os t i t ut es+ but t he name was
r e) ect ed and t her e s e r v e d a n o t h e r * /o o & e r Lt d ( wh i c h wa s a s o
r e f u s e d b y r e g i s t r a r . Th e accountants then submitted the name *Lindi 0t.
Caire 3rench Lessons Ltd+. The registrar accepted the name and registered the
company issuing a certificate. Later it was discovered that the companys
soe purpose was to enabe cients either aone or with others provide prostitution
service for gain.
#udge Ac&ner L0 stated that though prostitution per se was not unawfu under the
!ngish aw it was contra ,oros bonus. /ence the registrar was entited to :uash
registration and withdraw the certificate.
1iii2?her e t he ent i t y t hat was r egi s t er ed as a company i s not a company i n
nature. 'n 0aomon vs. 0aomon and company Ltd 1"8$82 AB %% Lord Aar&er in the
course of his )udgment suggested that courts woud be ready to go behind the
certificate and nuify the registration of a company on the grounds that the entity
which was not corporate body with the status and capacity conferred by the Act.

1iv2?here the company to which the certificate has been issued turns out to be an
enemy of the state. A company becomes an enemy if persons controing it defacto
are resident in an enemy country or wherever resident are adherent of ta&ing
instruction from or acting under the contro of the enemy Lord Aar&er.

A c o mp a n y b e c o me s a n e n e my i f i t d r a ws i t s me mb e r s h i p f r o m a n
e n e my country. A case aw reating the above is 9aimer company Ltd vs.
continenta Tyres company 1"$"62 % AC 6>8.

d2 Ac:uisition of ega personaity
?h e r e a c o mp a n y i s r e g i s t e r e d i t b e c o me s a e g a p e r s o n b y
t h e n a me contained in its memorandum of association. 0 "6 1%2 incorporation of a company
as a ega per son was est ab i shed i n t he case of 0a omon vs. 0a omon and
company Ltd 1"8$82 AC %%. 'n this case it was hed that upon incorporation and in
essence of any fraud on the part of the promoters the company becomes a ega
person separate and distinct from its members( however cosey it may be controed
by those members.

Another cases supporting the separate entity are tustai vs. 0tegmann 1"$6%2 %I.
7$6. 'n Lee vs. Lee Air farming company Ltd 1"$6>2 ?'C 878( Lee formed a
23
company and he secured a )ob in his company. /e died whie on duty and it was hed that a
company being a ega person separate and distinct from its members is capabe of empoying
and dismissing wor&ers. As an empoyer( the company is sub)ect to amongst aws( the
wor&mans compensation aw and must compensate an in)ured or deceased wor&er
1empoyee2 accordingy. /owever the case faied on a procedura technicay since the widow
sued on her own name. Another case in support of separate entity is the ,c Aura vs. @orthern
Assurance Co mp a n y Lt d " $ % 7 AC 6 " $ . ' n t h i s c a s e ,C Au r a f o r me d a
c o mp a n y a n d transferred his timber estate to it and he aso owned the company.
/e affected an insurance poicy on the timber in his own name with severa
companies. The t i mb e r w a s d e s t r o y e d b y f i r e b u t h e w a s n o t
c o mp e n s a t e d f o r h e h a d n o insurabe interest in the timber.
6. CAA'TAL 0D.0CC'AT'<@

This invoves steps ta&en to raise capita for the company. Aromoters are the first directors of the
company. To raise capita directors wi be caed to deiberate on the foowing4 5

a2Ap p o i n t me n t o f s e c r e t a r y a n d f i - i n g t h e t e r ms a n d c o n d i t i o n s o f
t h i s appointment.

b2Appointment of ban&ers( bro&ers( soicitors and Auditors.

c2Adopt i on of pr e i mi nar y cont r act s ent er ed by pr omot er s on beha f of t he
company in the prer5incorporation stage.

d2 0ecuring underwriting contracts in order to secure minimum subscription.

e2Adoption of the draft prospectus or statement in ieu of prospectus.

f2 Appointment of managing director or manger and other officers.

g2 A p p r o v a o f t h e d e s i g n o f t h e c o mmo n s e a o f t h e c o mp a n y
a n d t h e authori;ing the custody thereof.

h2 Listing of shares on the stoc& e-change.

'f the directors wish to invite the pubic to subscribe for its shares( they wi fie a
copy of the prospectus with the registrar of companies. <n the advertised date( the
prospectus wi be issued to the pubic investors can obtain the prospectus from the
registered office or from the ban&ers.
24

'nvestors then forward their appications for shares aong with appication money to the
companys ban&ers mentioned in the prospectus. The ban&ers wi then f o r wa r d
a a p p i c a t i o n s t o t h e c o mp a n y a n d t h e d i r e c t o r s wi c o n s i d e r t h e
aotment of shares.

' f t h e s h a r e a p p i c a t i o n s me e t a mi n i mu m s u b s c r i p t i o n a s d i s c o s e d
i n t h e prospectus( directors wi aot shares to the appicants. Aotment etters are then sent to
those given shares and regret etters to those who are not. 'f appications
fa beow the minimum subscription as in the prospectors within "%> days
after prospectus issue( no aotment is made and a money wi be refunded.

?hen a pub i c company does not i nt end t o r ai s e money f r om t he pub i c t he
company wi fie a statement in ien of prospectus with the registrar at east 6 days
before aotment of shares.

4. C<,,!@C!,!@T <3 .D0'@!00.

0ect i on 6 of t he Act gi ves condi t i ons and r est r i ct i ons whi ch a company must
o b s e r v e b e f o r e i t i s a o we d t o s t a r t b u s i n e s s . Th i s i n c u d e s i s s u a n c e
o f prospectus( and whether the minimum subscription was raised.

3orm %"" which must be given to the registrar confirms the foowing4 5

a2 The minimum subscription has been raised.

b2 !very director of the company has paid the company or made the shares ta&en or
contracted to be ta&en by him.

/a v i n g g i v e n f o r % "" a n d % " % a n d t h e s t a t e me n t i n i e u o f
p r o s p e c t u s t h e registrar sha certify that the company is entited to commence
business and issue it with a Trade certificate.

'f the company defauts on the above( contracts entered by it wi be provisiona
on y and not bi ndi ng on i t . 0ect i on 6 1 b2 pr ovi des a pena t y f or br eachi ng
t he conditions 1i.e. =">>> each day as contravention continues2.

25
0ect i on 6 subs ect i ons 8 e-empt s pr i vat e compani es f r om t he condi t i ons and
r e s t r i c t i o n s t h u s a p r i v a t e c o mp a n y c a n s t a r t b u s i n e s s wi t h o u t t h e
t r a d i n g certificate.


+& PROMOT6R5&

A promoter is the person who conceives the idea of forming a company and who underta&es(
does and goes through a the formaities and incidenta preiminaries of incorporating a
company. Aromoter hep to incorporate a company( provide it wi t h a s har e and
oan capi t a and ac:ui r e bus i nes s or pr oper y whi ch i t i s t o manage.
'n ?haey .ridge Caico printing company vs. Breen and 0mith 1"87>2 7 I .9">$s
.owen L0 stated a promoter is not a term of aw but of business( usuay summi ng
up i n a s i ng e wor d number of busi ness oper at i ons f ami i ar t o t he commercia
word by which a company is generay brought in e-istence. Lor d . ac&bur n st at ed t hat
*i t i s a s hor t and conveni ence way of des i gnat i ng those who set in motion the
machinery by which the act enabes them to create an incorporated company+.

#ustice Coc&burn defines a promoter as *one who underta&es to form a company wi t h
r ef er ence t o a gi ven pr o) ect and t o set i t goi ng and who under t a&es t he
necessary steps to accompish that purpose+.

0 e c t i o n 4 7 1 7 2 o f t h e c o mp a n y s a c t 1 c a p 4 8 6 2 e - c u d e s p e r s o n s
a c t i n g o n professiona capacity from being caed promoters.

0ection 47 172 1a2 provides that promoter means a promoter who has party to the s e p a r a t i o n
o f t h e p r o s p e c t u s E o r t h e p o r t i o n t h e r e o f c o n t a i n i n g t h e u n t r u e
statement( but does not incude any person acting in a professiona capacity
for per sons engaged i n t he f or mat i on of t he company. ' f any such per son
act s beyond the scope of his professiona duty and heps in any way in the formation
of a company or in preparations for the management of its affairs( he wi become a promoter
1great whea pogooth company LtdE Ce 1"8862 76 L0 Ch. 4%2.

@G. however a registered company may aso act as a promoter.

2#nction of the promoters
The foowing are the functions of the promoters4 5

". 9ecide on the company name and ascertain that it is accepted by the registrar.

26
%. Arepare memorandum and Artices of Association.

6. @omi nat i on of di r ect or s( .an&er s( audi t or s and secr et ar y and t he
registered office of the company.

4. Arinting memorandum and artices of association.

7. Cegistration of the company.

6. 'ssue of prospectus.

Lega! stat#s of promoter

'n Lindey and ?igpoo 'ron ore vs. .ird 1"8662 66( Lindey described the position of a
pr omot er as *a t hough not an agent f or t he company( nor a t r us t ee f or i t
bef or e i t s f or mat i on( t he o d f ami i ar pr i nci p es of t he aw of agency and i t s
t r ust eeshi p have been e-t ended and ver y popu ar y e-t ended t o meet such
cases+.

A promoter is thus neither an agent nor a trustee of the company but certain fiduciary duties have
been imposed on him under the companys Act.

2i)#ciary position of a promoter
'n !ranger vs new 0ombrero Ahosphate Company "888 6A Ac "%"8 Lord Cais
observed that promoters in e:uity cannot find the company by any contract with
themseves as promoters without fuy discosing to the company a materia facts which the
company ought to &now. Aromoters are in a fiduciary position4 5

a2 @ot to ma&e profit at the e-pense of the company. Cape .reton company Ce.
1"8872 %$ Ch.9 8$7

b2 To give benefit of negotiation to the company.

Thus where the promoter purchases an item he cant rightfuy se that item at a
higher price that he gave in for. 1!ranger vs. new 0ombrero phosphate company 1"8882 AC
"%"82. The right of rescission is ost if the parties cannot be reegated to their origina position
this happens4 5

1i2 ?here the character of the property has been atered.

27
1ii2 ?here third parties have ac:uired vauabe rights.

?her e a pr omot er se s or wi s hes t o s e hi s own pr oper t y t o t he company he
shoud4 5

1i2 0e e t h a t t h e r e i s a .o a r d o f i n d e p e n d e n t p e r s o n s a p p o i n t e d
a s directors of the new company.

1ii2 9iscose his interest in the property to the intended members or to the pubic by
means of a prospectus. /e must aso discose the profit he is ma&ing out of
the dea.

c2 To ma&e fu discosure of interest of profit. Aromoters need to fuy discose his profit and
his persona interest in a transaction. A case in support of this is the Liuc& vs.
.arress AC %4>. 'n this case a syndicate bought property worth="4>>>> property at
="%>>>>( which they ater sod to a company which they formed at ="8>>>>. A
prospectus was issued discosing a profit of = 4>>>>. it was hed that the = %>>>> was a
secret profit and promoters are sound to refund the company. Lady we winning company Ltd .
.roo&ers 1"8882 67 ch. 94>> in the above case five persons bought a nine for =7>>> on "G%G"886
and sod it to a company on 4G4G"886 for ="8>>>( ma&ing a profit of ="6>>>.

't was hed that the vendors were not promoters when they bought the mine and they were
therefore under no fiduciary duty to discose their interest and account for the profit they had
made.

d2 @ot to ma&e unfair use of position. /e must avoid see&ing. /e must guard against
ta&ing advantage of position or see& under infuence or participate in fraud.



D#ty of promoters as regar)s prospect#s

Aromoters must ensure that a prospectus is issued 1pubic company2 and the
prospectus.

1i2 Contains necessary particuars

1ii2 9oes not contain an untrue or miseading statements or does not omit any materia facts.

28
0ect i on 6$ of t he act st at es t hat a pr os pect us sha be dat edE and t hat dat e
u n e s s t h e c o n t r a r y i s p r o v e d b e t a & e n a s t h e d a t e o f
p u b i c a t i o n o f t h e prospectus.

0ection 4> provides that a prospectus issued sha state the matters specified in par t
" of t he t hi r d schedu e. Chapt er 8 speci f i es t he f or m and cont ent s of a
prospectus.

A prospectus must be truthfu and promoters can be hed responsibe 1iabe2 for any
misstatement in the prospectus. 'f a prospectus is found untruthfu4 5

a2Aotment of shares may be set a side in the case of frauduent misrepresentation.

b2 Aromoters may be sued for damages.

c2 They may be sued for compensation for misrepresentation.

d2 They may be sued f or damages by shar eho der s who have suff er ed by
r eason of t hei r non5 comp i ance wi t h t he s t at ut or y r e:ui r ement s as wi t h t he
contents of prospectus.

e2 They may become iabe for crimina proceedings.

The companys act pr ovi des bot h cr i mi na and ci vi i abi i t y f or bot h ci vi
and crimina iabiity for any untrue statement contained in the prospectus.

3or civi iabiity 6. 47 1"2 provide.

0 e c t i o n 4 7 1 " 2 p r o v i d e s t h a t t h e f o o w i n g p e r s o n s s h a b e
i a b e t o p a y compensation to a persons who subscribe for any untrue
statement incuded therein.

a2 !very person who is a director at the time of issue of the prospectus.

b2 !very person who has agreed to be named as a director in the prospectus or anyone
who has agreed to be a director immediatey or after an interva.

c2 !very person being a promoter of the company.

29
d2 !ver y per s on who has aut hor i ;ed i ss ue of t he pr ospect us. /owever an
e-per t can on y be he d r es ponsi b e f or an unt r ue st at ement made by hi m.
0ection 47 1%2 provides defences to iabiities under section 47 1"2 such persons sha not be
iabe if he proves.

a2 /e withdrew from being a director before issue of the prospectus and it was issued without
his authority or consent.

b2 A r o s p e c t u s wa s i s s u e d wi t h o u t h i s & n o w e d g e o r a c o n s e n t a n d o n
becoming aware he gave reasonabe pubic notice that it was issued without his
&nowedge.

c2 That after the issue of the prospectus and before aotment there under( then on
becoming aware of any untrue statement there in withdrew his consent there to and gave
reasonabe notice of the withdrawa and reason thereto that45

1i2 <f every untrue statement not made by an e-pert he had reasonabe ground to beieve
and did up to the time of aotment beieve that the statement was true.

1ii2 That he reieved on an e-pert and untrue statement is a fair representation of the e-pert
report and he had reasonabe ground to beieve that the person ma&ing the
statement was competent to ma&e it.

1iii2 As regards every untrue statement purporting to be a statement made by an
officia person or contained in what purports to be a copy of an e-tract from the
document.

0ection 46 1"2 of the Act a prospectus may attract crimina iabiity.

An untrue statement in prospectus may ead to imprisonment for a term not
e-ceeding two years or to a time not e-ceeding ten thousand shiings or both un es s
he pr oves ei t her t hat t he s t at ement was i mmat er i a or t hat he had reasonabe
ground to beieve and did up to the time of issue( beieve that the statement was true.

Crimina proceedings are ony made where there is wifu untrue statement and not otherwise.



Cemuneration of promoters
30
A promoter has not right for compensation uness there is a contract. 'n Cintons
caim 1"$>82 % ch. 7"7 promoters were unabe to recover fees and stamp duty
incidenta to formation of the company as there was. A promoter ta&es remuneration
for his services in one of the foowing ways4 5

a2 0e i ng hi s own pr oper t y t o t he company at a pr of i t pr ovi ded t her e i n
f u discosure.

b2 /e may be given an option to buy shares at par.

c2 /e may ta&e commission on the shares sod.

d2 /e may be paid a Lumpson by the company.

Ar t i c e 8 > t a b e A p r o v i d e s t h a t d i r e c t o r s c a n p a y a e - p e n s e s
i n c u r r e d i n promoting and registering the company.
Pre7incorporation or pre!iminary contracts
These are contracts entered by promoters to ac:uire propery or some right for the
company. 'n Kener vs. .a-ter 1"8662 LC K. Kener agreed to se a hote to .a-ter
who was acting agent for a company which was about to be formed. 't was hed that
.a-ter was personay iabe on the contract as the company was not in e-istence after
its incorporation.

The company is not iabe for the Act of the promoters done before incorporation. 'n @ewborne
vs.0ensoid Ltd "$74 "I .47 @ewborne a director( entered into acontract in the
name of a company before its incorporation. /e signed his name in a contract on behaf
of the company. 't was hed that there was no contract.

Position of promoters as regar)s pre7incorporation contracts.

Company is not bound by pre5incorporation contract even where it ta&es the benefit of the
contract entered into on its behaf.

A case aw in this is in !ngish and coonia produce company Ltd Ce 1"$>62 % ch467. A
soicitor prepared the memorandum and artices of a company and paid necessary
ta-es and other e-penses to obtain the registration of the company. /e did this on the
instructions of promoters. 't was hed that the company was not iabe to pay the
soicitors costs athough it had ta&en benefit of his wor&.

31
%. The company cannot enforce pre5incorporation contract. A case aw in this point is
@ata Land and cooni;ation company Ltd vs. Aauine Coiery and deveopment
syndicate Ltd Ac "%>. a company cant enforce a contract made before its incorporation.

6. Ar omot er s ar e per sona y i ab e f or cont r act s made on beha f of t he
company before the companys incorporation.


Ratification of a pre7incorporation contract&

A company cannot ratify a contract entered into by promoters before incorporation.
?here contract is entered into by with both parties aware of the non5e-istence of the
company( the contract is a deserved to have been entered into personay and promoters
are iabe.

To vaidate the pre5incorporation contracts a new contract has to be entered into with the other
party 1in which case promoters cease to be iabe2

3or pr omot er s act i ng on beha f of t he company about t o be f or med i t i s saf e
1advisabe2 to provide in the contract that4 5

a2 'f the company ma&es a fresh contract in terms of the incorporation contract( the iabiity
of the promoters sha come to an end.

b2 'f the company does not ma&e a fresh contract within a imited time either of the parties
may rescind the contract.


,& M6MORANDUM O2 A55OCIATION
A memorandum of Association sets the fundamenta conditions upon which the
company is aowed to be incorporated. 't defines the reationship of the company and
cr edi t or s t he out s i de pub i c as we as t he shar eho der s . ' t a s o enab es
creditors and the outside pubic &nows the range of permitted business of the
company.

' n As h b u r y Ca i wa y Ca r r i a g e a n d c o mp a n y v s . Ci c h e i t wa s n o t e d
t h a t * t h e memorandum is as it were( the area beyond which the action of the
company cannot go inside that area the sharehoders may ma&e such reguations for their own
government as they thin& fit+.
32

Importance of memoran)#m.

a2 Arovides basis of incorporation.

b2 't determines the areas of operations of the company.

c2 't defines the reationship of the company with the outsiders.

d2 ' t i s a char t er of t he company( whi ch can be a t er ed on y under speci a
circumstances.

P#rpose of memoran)#m
There are two purposes of memorandum4 5

a2 To enabe sharehoders &now where their funds are to be used and ris&s they
are underta&ing in ma&ing such investments.

b2 To enabe outsiders of the company &now the ob)ectives of the company and
whether the contracts they intend to ma&e with the company are within the ob)ects of the
company.

Preparation of the memoran)#m

0chedue " of the act gives e-ampes of various types of memoranda. Aromoters can adopt
any of t hese t ab es wi t h necess ar y modi f i cat i ons. These pr es cr i be forms of
memoranda are as under4 5

Tabe . for a company imited by shares(

Tabe C for a company imited by guarantee and not having share capita(

Tabe 9 for a company imited by guarantee and having share capita(

Tabe ! for unimited company that has share capita.

0ection 7 provides that memorandum of every company sha be in !ngish and
printed.

33
0ect i on 6 s t at es t hat memor andum sha be s i gned by each s ubs cr i ber 1 wi t h
posta address and occupation2 in the presence of at east one witness who sha affect the
signature and sha i&ewise add his address and occupation if any.

Contents of memorandum
0ection 7 of the companies Act stipuated the memorandum shoud compose the foowing
causes.

Cause " The name
Aromoters must en:uire from the register as to whether the proposed name of the
company is avaiabe for registration and is not considered undesirabeE this shoud be
done before fiing the memorandum or even before its preparation.

0ection "$ provides that promoters may reserve a name pending registration of the
company for a period of thirty to si-ty days.

0ection 7 1"2 re:uires accompany if imited to use the word *imited+ as the word in
its name.

0ection %" provides that a company may drop the word *imited+ if it obtains a
icense to do so from the Attorney Benera. 0uch icense is given if the Attorney
Benera is satisfied that4 5

1 i 2 The company t o be f or med i s t o pr omot e commer ce( ar t sci ence(
r e i gi on( charity or any usefu ob)ect.

1ii2 it intends to appy its profits or other income to promoting its ob)ects.

1iii2 it prohibits the payment of any dividends to its members. Dnder section %> a
company can charge its name by specia resoution and with t he appr ova
of t he r egi s t r ar s i gni f i ed i n wr i t i ng. A speci a r eso ut i on us ua y
re:uires twenty5one days not to the members and three fourths ma)ority of
the votes at genera meeting.

The above section provides that the company may change its name if it is amost i&e that of an
e-isting company( if the registrar so directs within si- months of its registration.

The name does not affect any rights or obigations of the company or any ega
proceedings by or against it 1section %> 1422.

34
Cause % Cegistered office
!very company must have a registered office from the day on which it begins to
c a r r y o n b u s i n e s s o r wi t h i n f o u r t e e n d a ys a f t e r i n c o r p o r a t i o n
wh i c h e v e r i s eariestE to which notices and a communications can be made 1section ">82

0ection ">8 states that notice of the address of the registered office( and of any
change therein( must be given to the register within "4 days after incorporation or of the change.

The registered office is not necessariy the head:uarters of the company.

9ocuments that must be &ept at the registered office incude4 5

1i2 Cegister of members and inde- of members( uness made up esewhere
or &ept by an agent 1section ""%H""62.

1ii2 ,inute boo&s of genera meetings section "46.

1iii2 The register of directors interests in shares or debentures.

1iv2 A copy of every instrument creating any charge re:uiring registration.

1v2 The companys register of charges affecting propery of the company.


Cause 6 the ob)ectives of the company
<b)ects cause defines the sphere of the companys activities( the aims that its
formation see&s to achieve and the &ind of activities or business that it proposes to conduct.

<b)ects give protection to the sharehoders and creditors as they are sure where t he f unds wi
be app i ed. <b) ect s a s o he p out si der s &now t he power s of t he company.


Choice of the companys ob)ects
0 u b s c r i b e r s t o t h e me mo r a n d u m ma y c h o o s e a n y o b ) e c t f o r t h e
p r o p o s e d company. ?hen drawing the ob)ect the subscribers shoud note the foowing4 5

1i2 <b)ects shoud not incude committing an iegaity.

1ii2 The ob)ects shoud not contradict the Act.

35
1iii2 <b)ects shoud not be against pubic poicy.

<b)ects cause in the memorandum has to state.
1i2 The main ob)ects of the company and ob)ects incidenta or au-iiary to the
attainment of the main ob)ects
1ii2 <ther ob)ects of the company not incuded in 1i2 above.

A c company cannot continue to peruse subsidiary ob)ects after the main ob)ect has
come to an end. 'n crown ban& Ce 1"8$>2 44 ch 9664. A company ob)ects cause
enabed it to act as a ban& and further invest in securities and and and to u n d e r wr i t e i s s u e
o f s e c u r i t i e s . ' t s b a n & i n g b u s i n e s s wa s a b a n d o n e d a n d i t conf i ned
i t s e f t o f i nanci a specu at i on. ' t was he d t hat t he company was not entited to
do so.


'ncidenta acts4 5

A company may do anything which is fairy reated to its core business. Anything i n c i d e n t a
t o t h e a t t a i n me n t o r p u r s u i t o f a n y o f t h e e - p r e s s o b ) e c t s o f t h e
company wi uness e-pressy prohibited to be within the impied powers of the
company.
". !vans vs. .runner( mond and company 1"$%"2 " ch 67$.

A company engaged in manufacture of chemicas proposed to devote substantia sum of money
to the encouragement of scientific education. 't was proved that this wi in the end
benefit the company( but a sharehoder ob)ected that this was beyond t he power s of t he
company. ' t was he d t hat t he pr opos a was f ai r y incidenta to the companys
ob)ects.

%. 3oster vs. London( Chatham and 9over company 1"8$72 " I. 8"".

A company ac:uired a piece of and for the purpose of its raiway. The raiway was
erected on arches. The company eft the arches as wor&shops e.t.c. The neighbours
ob)ected of an account of noise and caimed that the act was utra vires to the company
it was hed that etting of the arches was vaid.

6. 3orrest vs. ,anchester etc Cy company 1"86"2 4 Ltd 666.

A raiway company had the authority to &eep boats to be suppied for a ferry. 't
empoyed the boats for e-cursion trips to the sea when they were not wanted for the ferry. 't was
36
hed that the use of the boats was incidenta to the main purpose and was within the powers of
the company.

The foowing activities have aso been hed incidenta to carrying of business4 5

a2 Appointing agents and hiring servants.

b2 .orrowing money and giving security for oans.

c2 Aaying gratuities to empoyees.

d2 Aaying pensions to former officers and empoyees or their dependants.

'n the foowing cases( companies were found to engage in activities beyond their powers.

". London county counci vs. Attorney Benera 1"$>%2 AC "67. The counci had
the power to run tramways. 't ran omnibuses to feed the tramways. 't was hed
that this was outside its powers as the omnibuses business was in no way incidenta to the
business of wor&ing tramways.

%. 0tephenes vs. ,ysore reefs 1Kangudry ,ining Company Ltd 1"$>%2 " ch847.
the company ob)ect authori;ed to it ac:uire god mines in ,ysore and
esewhere and it had other causes. The company wanted to wor& in Bhana.
' t wa s h e d t h a t e s e wh e r e c o u d n o t b e t a & e n t o me a n a n y o t h e r
p a c e outside 'ndia.

?ays a company can engage in a wide variety of business4 5a2

'nfated ob)ect cause.

Aromoters have given a ist of severa businesses that the company may engage itsef.

b2 'ndependent ob)ect cause

Courts usuay ta&e the first ob)ect in the memorandum as the core business and others
subsidiary. To avoid this interpretation e-perts drafting the ob)ects may specifyE

37
L!ach of the foregoing cause sha in no way uness otherwise provided as forming
part of or being dependent upon or sha in no way be severay formed and ob)ect
cause of an independent company.

c2 0ub)ective ob)ects cause

/er e e-per t s can s i mp y s ay t hat t he company can engage i n any bus i nes s(
which in the opinion of the directors( the company can advantageousy engage in.

Cause 'M. Liabiity cause

Aromoters must indicate
a2 ?hether the iabiity of the company is imited or unimited.

b2 'f imited( is it by shares or guarantee.

c2 'f the company is pubic promoters have to indicate the iabiity of directors whether
imited or unimited.

Li abi i t y c ause i s ent i r e y omi t t ed f r om t he memor andum i n an un i mi t ed
company.

Cause M The capita cause

0 t a t e s t h e r e g i s t e r e d s h a r e c a p i t a d i v i d e d i n t o s h a r e s o f a f i - e d
a mo u n t . Cegistered capita is aso caed nomina or authori;ed capita.


The cause is omitted in the companies with unimited iabiity and the companies imited by
guarantee having not shown capita.

Cause M'. Association or subscription cause.

Thi s i s a dec ar at i on by subscr i ber s t hat t hey desi r e t o f or m a company and
a g r e e t o t a & e s h a r e s s t a t e d a g a i n s t t h e i r n a me s . T h e s i g n a t u r e
o f e a c h subs cr i ber may be any of t he subs cr i ber s. !ach subs cr i ber must
i ndi cat e hi s address( description and occupation.

38
8enera! form of c!a#se&

'f the severa persons whose names and address are subscribed are desirous of being formed
into a company in pursuance of the memorandum of association and we respectivey
agree to ta&e the members of shares in the company set opposite of our respective names.

Af t er r egi s t r at i on no subs cr i ber t o t he memor andum can wi t h wi t hdr aw hi s
description on any ground.
A!teration of the memoran)#m
0ection 8 provides that a company cannot ater the conditions contained in the
memor andum e-cept i n t he cas es E i n t he mode and t o t he e-t ent f or whi ch
e-press provision has been made in the companies Act.

0ection 8 gives seven instances where a company may ater its ob)ects after a specia
resoution.

i2 To enabe the company carry its business more economicay and efficienty.

ii2 To attain its main purpose by new or more improved means.

iii2 To enarge or change the oca area of its operation.

i v2 To car r y on some busi ness whi ch may be conveni ent y combi ned
wi t h i t s own.

v2 To restrict or abandon any of its ob)ects.

vi2 To se or dispose part of or whoe of its business.

vii2 To amagamate with another company.

Th e p r o p o s e d a t e r a t i o n b e c o me e f f e c t i v e u n e s s wi t h i n t h i r t y d a ys
o f t h e resoution( ob)ection is made to the courts in which case the ateration wi
be effective if the court affirms it.

0ection 8 1%2 provides not such appication may be made
a2 .y hoders of that ess than "7N of the companys members if the company is not imited
by shares.

39
b2 .y hoders of not ess that "7N of the companys debentures entiting the
hoders to ob)ect to the ateration of its ob)ects.

0 e c t i o n 8 1 8 2 a f t e r a r e s o u t i o n a t e r i n g t h e o b ) e c t s ( a p r i n t e d c o p y
o f t h e memorandum must be deivered to the registrar within fourteen days after
the e-piry of the period aowed for ob)ection. 0ect i on 8 1 %2 t he f act t hat an a t er at i on
does not come wi t hi n one of t he s even c aus es speci f i ed i n sect i on 8 does
not r ender t he a t er at i on i nva i d un ess ob)ection is submitted within thirty days.

@o a t er at i on can be made r e:ui r i ng a member t o t a&e up f ur t her shar es
or increasing his iabiity uness he agrees in writing 1section %42.

The courts cannot aow an ateration( which is incompatibe with the origina of t he
ob) ect s of t he company. A cas e i n t hi s poi nt i s i n Cecyc i s t s Tour i ng C ub
1 "$8>2 . A company was r egi s t er ed t o pr omot e( as si st and pr ot ect t he use
of bicyces( tricyces and simiar vehices on pubic roads. The company proposed to ater its
powers by admitting a tourists and motorists( it was hed by the court t hat t he
a t er at i on mus t not be a owed as one of t he ob) ect s was t o pr ot ect cycists
against motorists.

DOCTRIN6 O2 ULTRA IR65
Dtra vires is a term given to refer to a situation a company does anything beyond power s
gi ven i n t he memor andum. A company mus t not engage i n act i vi t i es which
are not e-pressy or impiedy authori;ed by the memorandum( otherwise any act
which e-ceeds the powers of the company wi be utra vires and void and thus cannot
be ratified even by the assent of the whoe body of directors.

An Act of *'ntra vires+ the company if it is within the companys powers( this is the case whenE

1 i 2 The act i s wi t hi n t he companys ob) ect s as st at ed i n t he
memor andum of association of the company.

1 i i 2 Th e a c t i s r e a s o n a b y i n c i d e n t a t o t h e c o mp a n y s o b ) e c t s (
wh i c h a r e e-pr ess y st at ed i n t he memor andum of ass oci at i on and
i s done i n or der t o effectuate or achieve the stated ob)ectives. The
doctrine was e-pained by the /ouse of Lords in the case of Attorney Benera
MB! Cy. The doct r i ne of u t r a vi r es i s i ust r at ed i n *Ashbur y
r ai way car r i age and ' r on company vs. Ciche+ in this case the
memorandum gives the company powers to ma&e and se raiway
carriages. The directors entered in to a contract to ay a r ai way i n
40
.e gi um and t he company i n a gener a meet i ng subse:uent y
purported to ratify the act of the directors by passing a specia resoution
to that effect. The company ater dishonored 1repudiated2 the contract and
the other par t y sued f or br each of cont r act . /ouse of Lor ds he d t hat
t her e cou d be no ratification of a contract made by a company utra vires even
though every singe member consented there to. The contract to ma&e a
raiway in a foreign country was a nature not incuded in the memorandum. The
company was therefore hed not iabe for the breach of contract.

The doctrine of utra vires approved but :uaified in Attorney Benera vs. Breat
!a s t e r n C y c o mp a n y 1 " 8 8 > 2 7 AC b y a d d i n g t h a t t h e d o c t r i n e o u g h t
t o b e r easonab y under st ood and app i ed and what ever may f ai r y be
r egar ded as i nci dent a t o or as conse:uent i a upon t hose t hi ngs whi ch t he
egi s at ur e has authori;ed ought not to be hed utra vires to the company.

' n C e B e r ma n y 9 a t e c o f f e e c o mp a n y 1 " 8 8 % 2 i t w a s h e d t h a t
w h e r e t h e substratum of the company fais( the heart of the company fais and the
body cannot f unct i on wi t hout t he hear t . /owever i n t he case of Ce Li s t on C.
co. 1"$462 it was hed that the company wi not be wound up if the carrying on of the genera
business is sti possibe.

The main issue in the doctrine of utra vires is that a company not being a natura person
shoud not be hed responsibe for its own acts or agents acts that are beyond its
powers and privieges. .ut there is nothing to prevent a company from pr ot ect i ng i t s
pr oper t y. A cas e on t hi s poi nt i s nat i ona Te ephone co. vs. 0t . Aeter Aort
constabes 1"$>>2 AC 6"8. A teephone company put wires where it didnt have
powers to put the defendant cut them down. 't was hed the company coud sue for
damages for the wires.

'f transaction is beyond powers of directors but within powers of the company( the
sharehoders can ratify it by a resoution in a genera meeting provided they have a
facts reating to the transaction to be ratified.

!ffects of utra vires transactions
". Any member may obtain an in)unction of the court to restrain the company from
committing an utra vires act.
%. 9irectors may be hed personay iabe for utra vires payments. .ut the
di r ect or s havi ng r ef unded t he money cou d get i ndemni t y as agai nst
41
t he person who received the payment with the &nowedge that the payment to
him was utra vires.
6. 9irectors entering into utra vires contracts may be iabe to the third partyf or br each
of war r ant y of aut hor i t y. 9i r ect or s wi be i ab e t o t he oss es incurred
to third parties provided the third party does not &now that they have no authority to enter
in a particuar contract. 'n wee&s vs. propertyO. a company invited appications
for a oan on debentures but the company had aready issued a ma-imum imit
of debentures. 9irectors were hed personay iabe to a paintiff who offered
a oan of =7>>. 'n order to ma&e directors personay iabe it must be estabished that
their act amounts to an impied misrepresentation of facts and not of aw.
4. 'f funds have been spent utra vires in purchasing some property( its right over the
property wi be protected.
7. Dtra vires contracts have no ega effect and are void. A company cannot sue or be
sued on t hose cont r act s becaus e t hey ar e voi d. !ver y per son deaing with
the company is e-pected to &now its powers and if he enters into a contract that is
inconsistent with them he does so at his own ris&.

!-ceptions where a party can sue on an utra vires contract.

i2 'f the company ta&es an utra oan and uses it to pay off the awfu debts of the
company then the second creditor 1render2 steps to the position of the paid
off c r e d i t o r a n d t o t h a t e - t e n t wi h a v e t h e r i g h t t o r e c o v e r
h i s o a n f r o m t h e company. .ut he cannot caim any right to securities hed by
the origina creditor.

ii2 'f t he pr oper t y handed over t o t he company e-i s t s i n speci e or i f i t
can be traced( the party handing it over can recaim it.
iii2 'f money is ent by a company that does not have the power to end it( it
can be recovered because the debtor wi be stopped from ta&ing the pea
that the company had no power to end.
6. A company wi be iabe for any tort of its empoyees if4 5

a2 The tort is committed in pursuance of its stated ob)ects.

b2 't is committed by empoyees within the course of their empoyment. A company wi not
be iabe for utra vires torts.

42
-& ARTICL65 O2 A55OCIATION
Artices of association are the rues and reguations of a company formed for the pur pose of
i nt er na management . Accor di ng t o t he Lor d # ust i ce .owen *t he memorandum
contains the fundamenta conditions upon which aone the company is aowed to be
incorporated. They are conditions introduced for the benefits of creditors and the
outside pubic. The artices of association are the interna reguations of the company and
are for the benefit of sharehoders+.

Lor d Cai r ns sai d *t he ar t i c es p ay a par t subs i di ar y t o t he memor andum
of association. They accept the memorandum as a charter of incorporation of the
company and s o accept i ng t he ar t i c es pr oceed t o def i ne dut i es ( r i ght s and
powers of the governing body as between themseves and the company at arge and the mode and
form in which business of the company is to be carried on and the mode and form in which
changes in the interna reguations of the company may from time to time be made+.

0ection % 1"2 Artices incude the reguations contained in tabe A schedue " to t h e
Ac t i n s o f a r a s t h e y a p p y t o t h e c o mp a n y. Ar t i c e s we r e t o b e
f r a me d carefuy so that they do not go beyond the powers of the company. They shoud not
vioate any provision of the companies Act as these wi ma&e them nu and voi d.
' n Aer ner i Bo d mi nes Lt d 1 "8$82 " ch. "%% t he ar t i c es of a company
provided that no petition for a winding up coud be presented uness4 5

a2 Two directors consented in writing(

b 2 Th e p e t i t i o n e r h e d i s o f t h e i s s u e o f t h e s h a r e c a p i t a o f t h e s e
conditions were fufied. 't was hed that the restrictions were invaid and petition coud
be presented.



3unctions of the Artices of Association

". 9efine duties( rights and powers of the governing body.

%. 9etermine the mode and the form in which the business of the company may
from time to time be made. 0ection $ stipuates that the artices must be
registered before incorporation. 0ection "" states a company imited by shares may
adopt a or any par t of t he r egu at i ons of t ab e A ar e not e-c uded
43
or modified( these reguations sha be the reguations of the company so far
as they are appicabe.

Tabe A in the first schedue to the act is provided as a specimen form of artices of association.
Aart ' may be adopted in whoeGpart by pubic companies and part '' may be adopted in
whoe part by private companies where a private company does not adopt part '' of
tas& A are registers its own artices they must incude the restrictions re:uired by section
6>.

0ection "% provides that if specia artices are registered they must be4 5

a2 Arinted in !ngish
b2 9ivided into paragraphs
c2 9ated
d2 0igned by each subscriber and witnessed.


Contents of Artices of Association.

As an interna constitution promoters and ater the members can indicate any rues
they may wish to have so ong as such rues are permissibe. The foowing are e-pected to be
incuded in the artices of association.

a2 0har e capi t a ( r i ght s of shar eho der s ( and var i at i on( of t he r i ght s
payments of commissions share certificates.
b2 Lien on shares
c2 Cas on shares.
d2 Transfer of shares
e2 Transmission of shares
f2 3orfeiture of shares
g2 Conversion of shares into stoc&
h2 0hare warrants
i2 Ateration of capita
)2 Benera meetings and proceedings there at
&2 Moting rights of members voting and po pro-ies.
2 9irectors their appointments remuneration( :uaifications( powers and
proceedings of board of directors.
m2 ,anager.
n2 0ecretary.
o2 9ividends and reserves
p2 Accounts( audit and borrowing powers
:2 Capitai;ation of profits
44
r2 ?inding up.
Ateration of artices of association
0ection "6of companies act cap 486 provides that a company can ater or add to i t s ar t i c es
by pass i ng a s peci a r eso ut i on. Any a t er at i on some made i n t he ar t i c es
sha E sub) ect t o t he pr ovi si ons of t he act E be as va i d as i f or i gi na y
contained therein.

Limitations to aterations.

The foowing imitations shoud be observed regarding ateration of artices4 5

a2 0uch ateration shoud not be inconsistent to the act.
i2 Cestrict the members right to petition for winding up under section %%".

ii2 Authori;e the company to purchase its own shares.

iii2 Authori;e payment of dividends out of capita.

b2 ' t mus t not cont r adi ct t he memor andum of ass oci at i on. /owever artices
may be referred to where there is an ambiguity in the memorandum or where the
memorandum is sient on an issue.

c2 Ateration shoud not sanction anything iega.

d2 Ateration must be made bona fide and for the benefit of the company as a whoe. 'n Aten
vs. Bod Ceefs of ?est Africa Ltd 1"$>>2 ch. 676. it was observed that the power of
ateration must be e-ercised sub)ect to t hos e over a pr i nci p es of aw and
e:ui t y whi ch ar e app i cab e t o a powers conferred on ma)orities and enabing them to
bind minorities.

'n 0hitteworth vs. Co- bros and company 1,inden5ead Ltd 1"$%822 % & . g 1CA2the artices
of a company provided that 7 and four others shoud be permanent directors to the
company. They coud be dis:uaified by any si- specific events. 0 faied to account for the
companys money on twenty5two occasions within tweve mont hs. The ar t i c es wer e
accor di ng y a t er ed and a 8
th
event dis:uaified a director added. The event added was
that if a director was so re:uested in writing by a the other directors he shoud resign. 0
was so re:uested to resign( it was hed that the ateration was bona fide for the
benefit of the company as a whoe and was vaid.
45

<t her r u i ngs i n suppor t of t hi s poi nt wer e made i n Br eenha gh vs . Ar dene
ci nemas t d 1 "$7"2 ch. %86 and s i de .ot t om vs . Ker shaw Lees company
Lt d1"$%>2 " ch "74 1ca2.

e2 An ateration to increase the members iabiity wi ony bind those who
consent to it.

0ection %4 provides that no member is bound by an ateration of the memorandum or
artices which re:uires him to increase his hoding of shares or increase his iabiity to
pay money to the companies uness4 5
i2 Ateration is made before he became a member.
ii2 /e agrees in writing to be bound by such ateration.

An ateration of artices sub)ect to restrictions in section %4 may be retrospective in effect( but
this wi not enabe the company to achieve a ien over shares after they have been
transferred for vaue by a debtor.

The reationship between the Artices and memorandum of Association.

". The artices are subordinate to the memorandum. The memorandum states the
ob)ectives of the company whie the artices provide the manner in which the
interna management of the company is to be carried out.

%. The memor andum must be r ead i n con) unct i on wi t h ar t i c es wher e i t i s
necessary toE

a2 !-pain any ambiguity in terms of the memorandum.

b2 0upp ement t he memor andum on mat t er s wher e i t i s s i ent but cannot
e-tend the scope of the memorandum.

6. The terms of the memorandum cannot be modified or controed by the artices.

Lega effects of memorandum and artices4

". 0ection %% provides that after the artices and memorandum of association have been
signed by bind the members as if they have been signed by each individua
member of the company. The ega impications of the artices and
memorandum may be dissoved in four categories.
46

a2 ,embers to the company.

!ach member is bound to the company as if each member has actuay signed t h e
me mo r a n d u m a n d t h e a r t i c e s . ' n .o r a n d Tr u s t e e v s . 0 t e e .r u s a n d
c o mp a n y Lt d 1 " $ > " 2 " c h . % 8 $ ( t h e a r t i c e s o f a c o mp a n y we r e
a t e r e d a n d provided that the shares of any member who became ban&rupt shoud be sod to
certain persons at a fair price. . a sharehoder became ban&rupt and his trustee in ban&ruptcy
caimed that he was not bound by the atered artices. 't was hed
that the artices were persona contract between . and the rest of the members and .
and his trustee was bound.

Another case aw is that of /ic&man vs. Kent or Comney ,arsh sheep breeders
Asociation 1"$"72 " ch. 88".

b2 Company to the member

A company is bound to the members and the company can e-ercise its rights as against any
member ony in accordance with the provisions in the memorandum and artices. A
member can obtain an in)unction restraining the company from doing utra vires act.

'n wood vs. <desa water wor&s company Ltd 1"88$2 4% ch. 966> the artices
of company provided that the directors may with the sanction of the company at
genera meeting decare a dividend to be paid to the members.

A resoution was passed to give the sharehoders debenture bonds instead of paying
the dividend in cash. 't was hed that the words *to pay+ meant paid in cashE and a
sharehoder coud restrain the company from acting on the resoution on the ground that it
contravened the artices.

A member can aso obtain an in)unction restraining the company from committing a breach of
the memorandum and the artices( which woud affect his rights as a member.

c2 ,embers to members.

The memorandum and artices constitute a contract between the members and e a c h
me mb e r i s b o u n d t o a s a g a i n s t t h e o t h e r o r o t h e r s . Lo r d /e r s c h e i n
?a t on vs . 0aff er y 1 "8$82 AC %$$ obser ved *i t i s :ui t e t r ue t hat t he ar t i c es
constitute a contract between each member and the company and there is no
cont r act i n t er ms of bet ween t he i ndi vi dua member s of t he company but t he
47
artices do not any the ess( reguate their rights inter se. such rights can ony been forced by or
against a member through the company or through the i:uidatorsE r e p r e s e n t i n g t h e
c o mp a n y b u t n o me mb e r h a s b e t we e n h i ms e f a n d o t h e r members any
right beyond that which the contract of the company gives+.

'n Cay fied vs. /ands 1"$6>2 " is a eading case in this point.

d2 Company to outsiders.

The artices do not constitute any binding contract as between a company and an outsider. 'n
genera aw a stranger to a contract cannot ac:uire any rights under such a contract.

Cases on these points are4 5

i2 .rown vs. La Trinidad 1"8882 68 ch. 9".

The artices of a company contained a cause whereby . was to be a
director irremovabe for a period of time. /e was removed from office before the periodE it was
hed that it coud not restrain the company from removing him as there was no
contract between him and the company.

ii2 !ay vs. positive government security ife Ass.Co. "886 " !- 9 88.

The artices of a company provided that it shoud be the soicitor of the company for ife and
coud be removed from office ony for misconduct L too& office and became a
shar eho der( af t er some t i me t he company di s mi s sed hi m wi t hout aeging
misconduct. ! sued the company for damages for breach of contact. 't was hed that
the artices did not constitute any contract between the company and outsiders and as
such no action coud ie.

The case in !ey has brought in some probems. The courts have therefore in some
cases acted on the footing that a cause in the artices not deaing with the rights of a member as
such but apparenty intended to operate as a contract with him is to be regarded as the basis of a
contract.

'n 0wabey vs. ports 9anwin Bod mining company 1"88$2 " ,eg 687( the articespr ovi ded
t hat a di r ect or shou d r ecei ve a speci f i ed sum per annum by way
of remuneration. 'n #uy( the company passed a specia resoution reducing the sum a s f r o m
t h e e n d o f t h e p r o c e e d i n g ye a r . Th e p a i n t i f f ( wh o wa s a d i r e c t o r (
48
resigned and sued for the services( it was hed that he was entited to sue
for remuneration up for the date of his resignation.

Constructive notice of memorandum and artices
!ach person deaing with the company is assumed to &now the contents of the
memorandum and artices of association. 't is presumed the individuas deaing
with the company have read and understood the documents. This is caed the doctrine
of constructive notice.

,emor andum and ar t i c es ar e open and acces si b e t o a speci a r eso ut i on
become pubic documents once registered and an outsider is in notice of
their contents in the same way as he is of the artices and memorandum.

Lord /artheey in ,ahoney vs !ast /oyford mining company 1"8872 LC8 /L86$
observed. .ut whether he actuay reads them or not it wi be presumed that he has read them.
!very )oint stoc& company has its memorandum and artices of association open to a
who are minded to have any deaings whatever with the company and those who sue dea
with them must be affected with notice of a that is contained in these two documents.

A n y o n e d e a i n g w i t h a c o mp a n y i s p r e s u me d n o t o n y t o h a v e
r e a d t h e memorandum and artices but have understood them propery 1<a& .an& <i
Co.vs. Crum 1"88%2 8 A. 672. The doctrine aso prevents one from aeging that he
did not &now that the memorandum and artices rendered a particuar act utravires
to the company 13reeman and Loo&eyer vs. .uc&husst par& properties td 1"$642 "
ALL !C 66>2.

Doctrine of in)oor management&

This doctrine imposes a imitation on the doctrine of constructive notice. Aersons deaing with
the company once they are satisfied that the company has powers t o e n t e r t h e
p r o p o s e d t r a n s a c t i o n ( t h e y a r e n o t r e : u i r e d e n : u i r e i n t o t h e reguarity
of any interna proceedings they are entited to assume that provisions of Artices have been
compied with by the company in its interna wor&ing.

'f the proposed contract is within the powers of the company the company wi be bound to the
outsider and caims of the outsider wi not be affected in any way by the interna irreguarity of
the company. This is the doctrine of indoor management or the rue in roya .ritish .an& v.
Tur:uand.

49
' n Coya .r i t i sh .an& vs. Tur :uand t he ar t i c es empower ed t he di r ect or s
t oborrow money provided they were authori;ed by a resoution passed at a genera meet i ng of
t he company. The di r ect or s bor r owed money f r om T and i ssued a bond to him
without the authority of resoution passed at the genera meeting. 't was he d t hat
t he company was i ab e f or t he money t o T becaus e once t he ar t i c es
aut hor i ;ed di r ect or s t o bor r ow sub) ect t o a r eso ut i on of t he gener a
me e t i n g o f t h e c o mp a n y T( wa s e n t i t e d t o a s s u me t h a t t h e d i r e c t o r s
we r e borrowing on the authority of the resoution passed at a genera meeting of the
company( T was not r e:ui r ed t o en:ui r e i nt o t he r egu ar i t y of t he companys
interna proceedings.

'n Aremier industria .an& Ltd Ms. Caton ,anufacturing company( it was stated that
*if the directors have power and authority to bind the company( but certain
preiminaries are re:uired to be gone through on the part of the company before that
power can be duy e-ercised( then the person contracting with the directors is not
bound to the section( that a these preiminaries have been observed he is entited to presume
that the directors are acting awfuy in what they do+.

The rue is aso hed in 3uontain vs. Carmarthen Cy co. 1"8682 LC7 !0I 6"6. The
genera rue here is that persons deaing with imited iabiity are not bound to in:uire into the
reguarity of the interna proceedings and wi not be affected by irreguarities of which
they had no notice.

!-ceptions to the 9octrine of indoor management.

The doctrine of indoor management wi not appy in the foowing instances4 5

i 2 ?her e t he out s i der has not i ce 1 act ua or cons t r uct i ve2 t hat t he
pr escr i bed procedure has not been compied with by the company. 'n /oward
Aatent 'vory Company( the directors were empowered to borrow up to" > > > a n d
s u c h f u r t h e r s u ms a s t h e c o mp a n y i n t h e g e n e r a me e t i n g
mi g h t authori;e without such consent they issued to themseves debentures for
sums in e-cess of =">>>. it was hed they had &nowedge of irreguarity in
the interna proceedings of the company( the company woud be iabe for =">>>
ony. 0ums borrowed in e-cess of this were hed invaid.

ii2 A company cannot be hed iabe for forgeries committed by its officers. 'n
Cuben vs. Breat 3inga Ltd( the company secretary issued a share certificate by
forging the signatures of the two directors under the sea of the company.
The
50
A ai nt i f f cont ended t hat i t was not hi s dut y t o ver i f y t he si gnat ur es .
?het her signatures were genuine or not was part of interna management. 't was hed that the
certificate was not binding on the company as the rue in Tur:uands case does not
protect forgery. Lord Loreburn observed in the case *it is :uite true that persons deaing with
imited iabiity companies are not bound to in:uire into their indoor management and wi
not be affected by irreguarities of which they have no not i ce. .ut t hi s doct r i ne
app i es on y t o i r r egu ar i t i es t hat ot her wi se mi ght affect a genuine transaction( it
can appy to forgery+.

iii2 ?hen the outsider is negigent4 5

Any per son ent er i ng i nt o a cont r act wi t h t he company ought t o ma&e
pr oper in:uires( and in the absence of this he cannot caim benefit under the
Tur:uardcase.

'n ?ood vs. .an& of Liverpoo the soe director paid che:ues drawn in the name of
the company in his account. 't was hed that the ban& was put upon in:uiry before
crediting the che:ues drawn in favour of the company in the account of the director.
The ban& was not entited to rey upon the ostensibe authority of the director.

'n Arand .ihari La vs. 9inshaw and company( the paintiff accepted transfer on the
companys property from its accountant. The transfer was hed to be void because
such a transaction is apparenty beyond the scope of the accountants power s . ' t
put s t he per son dea i ng wi t h t he company i nt o i n:ui r y( t he p ai nt i ff shoud
have insisted on seeing the power of Attorney e-ecuted in favour of the accountant
by the company. !ven deegation cause is not enough to ma&e the transaction vaid
uness the accountant is in fact authori;ed.
iv2 ?hen an outsider does not have any &nowedge of the artices. A person who did not
consut the companys memorandum and artices and conse:uenty did not act in
reiance on those documents( cannot be protected under the rue inTur:uands case.

v2 ?here an act is ordinariy beyond the apparent authority.

An outsider wi not be protected by the rue in Tur:uards case if the act of the
agent i s one whi ch wou d not or di nar i y be wi t hi n hi s power s si mp y
because u n d e r t h e a r t i c e s t h e p o we r o f ma & i n g s u c h a c o n t r a c t mi g h t
h a v e b e e n entrusted to him. The outsider can ony hod the company iabe if ony the
power h a d i n f a c t b e e n d e e g a t e d . Th e f a c t s o f An a r d b i h a r i La v s .
9i n s h a w a n d company iustrate this point.

51
0tatutory decaration of compiance.

This is a document re:uired by section "81%2 and it contains a decaration made to
the registrar of companies teing him that the persons who have formed the
company have comp i ed wi t h a t he r e:ui r ement s of t he compani es Act as
regards formation of a company.

The decaration shoud be prepared and signed by an advocate of the high court or by a person
who was named in the artices as a director or secretary of the company. The
decaration must be in the prescribed format usuay on form %>6A.

The Act re:uires the promoters to prepare4 5

a2 ?ritten consent of every director of pubic companies stating that each has
agreed to act as a director.

b2 A return of the first directors i.e. particuars of the first directors.

c2 A s t at ement on t he aut hor i ;ed shar e capi t a of t he company. Thi s i s
re:uired by the stamp duty act section 6$.

d 2 A d o c u me n t i n d i c a t i n g n o t i c e o f t h e c o mp a n y s r e g i s t e r e d
o f f i c e 1sec.">82.

3& PRO5P6CTU5
?h e n a c o mp a n y w a n t s t o r a i s e f u n d f r o m t h e g e n e r a p u b i c i t
i s s u e s a prospectus. A prospectus is a document issued by the company to arouse pubic
interest in the proposed company and induce the genera pubic to buy its shares and debentures.
A prospectus centra theme is that it sets out the prospectus of the company and the purpose for
which the capita is re:uired. A prospectus is an invitation to treat and the appication for shares
on the basis of the prospectus is the officer.

9efinition of a prospectus4

0ec.% of companies act4 5

52
*A pr ospect us means any pr ospect us( not i ce( ci r cu ar adver t i sement or
ot her i nvi t at i onE off er i ng t o t he pub i c or f or subscr i pt i on or pur chas e any
shar es or debentures of a company+.

Any document inviting deposits from the pubic or inviting offers from the pubic for
subscription of shares or debentures of a company is a prospectus.

A p r o s p e c t u s mu s t b e i n wr i t i n g a n o r a i n v i t a t i o n o r a n
a d v e r t i s e me n t i n teevision or fim is not treated as a prospectus.

0ubscription4

The word when used in reation to a prospectus means to ta&e shares for cash. 'n
government stoc& and other securities investment company Ltd vs.Christopher an offer was
made by company A to the members of company . and C to ac:uire a their shares in e-change
for aotment in the company. The offer cannot be he d t o be an of fer made t o t he
pub i c becaus e i t does not i nvi t e subscription for share since subscription means ta&ing
shares for cash. Aso this cannot be said to be an offer to the pubic.



'nvitation to the pubic4
0 e c t i o n 7 8 d e f i n e s * p u b i c + a s i n c u d i n g a n y s e c t i o n o f t h e p u b i c (
wh e t h e r seected as members or debenture hoders of the company concerned or as cients
of the person issuing the prospectus or in any other manner. The section aso provides
that a pubic offer4 5
a2 ,ust be ca cu at ed t o r esu t i n t he shar es or debent ur es becomi ng
avaiabe to persons other than those receiving the offer.
b2 0houd not be a domestic concern of those ma&ing and receiving the offer or
invitation.

'n @ash vs. Lynde the managing director of a company prepared a document t hat
was mar &ed s t r i ct y pr i vat e and conf i dent i a and i t di d not cont ai n particuars
re:uired to be discosed in a prospectus( a copy of the document aong with appication
forms were sent to soicitor who in turn sent it to the paintiff. The document was hed to
be prospectus and as such the caim of the paintiff for compensation was dismissed. 'n another
case distribution of 6>>> copies of a prospectus among members of a certain company was hed
to be a pubic offer because persons other than those r e c e i v i n g t h e o f f e r c o u d a s o
a c c e p t i t . Th e ma i n i s s u e i s t h a t a n o f f e r o r invitation to any section of the
pubic( whether seected as members or debenture hoders of the company or as cients of
the person ma&ing the invitation( wi be deemed to be an invitation to the pubic.
53


3orm and contents of a prospectus
A prospectus gives a picture of the companys intended activities and position. 't provides a
the necessary and materia particuars about given company. The f o o wi n g
p r o v i s i o n s o f t h e a c t mu s t b e o b s e r v e d i n t h e p r e p a r a t i o n o f t h e
prospectus.

a2 0ection 46 a copy of the prospectus must be deivered to the register
of companies and must be signed by every person named therein as a director or
proposed director.

b2 0ect i on6$ ever y pr ospect us mus t be dat edE and t he dat e un ess t he
contrary is proved( is ta&en to be the date of pubication of the prospectus. 'ts advisabe to
insert a date two or three days ater than actua date.

c 2 0 e c t i o n 4 > 1 " 2 e v e r y p r o s p e c t u s i s s u e d mu s t i n c u d e t h e
ma t t e r s speci f i ed i n par t " of t he t hi r d schedu e t o t he act and s et out
t he r epor t s specified in part "" of that schedue.

As per third schedue to the act the prospectus must contain the foowing4 5

". The number of founders or management or deferred shares if any and the nature and
e-tent of the interest of the hoders in the property and the profits of the
company.

% . Th e mi n i mu m s h a r e s a d i r e c t o r c a n h a v e a n d t h e r e mu n e r a t i o n
o f directors.

6. @ames( occupation and posta addresses of the directors.

4. ?here shares are offered to the pubic for subscription( particuars as toE

a2 ,inimum amount that must be raised by the issue of those shares to provide
funds for the foowingE

i 2 Th e p u r c h a s e p r i c e o f p r o p e r t y p u r c h a s e d o r t o b e purchased(
which is to be defrayed in whoe of the issue.
54

ii2 Areiminary e-penses payabe by the company and any commi s si on so
payab e t o any per s on i n consi der at i on of hi s agreeing to procure
subscription for any shares in the company.

iii2 Cepayment of any moneys borrowed by the company wi t h o u t u s e t h e
i s s u e p r o c e e d s a n d s o u r c e s o u t o f wh i c h amounts are to be provided.

7. The time of the opening of the subscription ists.

6. The amount payabe on appications and aotment on each share. 'n the case
of second or subse:uent offer( the amount offered for subscription on each
previous aotment made within the two preceding years( the amount paid for
the aotted shares.

8. The number( description and amount of any shares in or debentures of the c o mp a n y
wh i c h a n y p e r s o n h a s ( o r i s e n t i t e d t o b e g i v e n ( a n o p t i o n t o
subscribe forE together with the foowing particuars of the option4 5

a2 The period during which it is e-ercisabe.

b2 The prices to be paid for shares or debentures subscribed for under it.

c2 Consideration 1if any2 given or to be given for it for the right to it.

The names and posta address of the persons to whom it or the right to it was given
8. The number and amount of shares and debentures issued or agreed tube issued
with the two preceding years as fuy or party paid otherwise than in cash and the
e-tent to which they are paid up.

$. 1i2 'n respect of any property to which this paragraph appiesE

a2 The names and posta addresses of the renders.

b2 The amounts payabe in cash( shares or debentures to the vendor and where there are
many vendors amount payabe to each vendor.

c2 0hort particuars of any transaction reating to the property competed within
the two preceding years in which any vendor of the property to the company
55
was at the time of the transaction( a promoter or a director or proposed director
of the company had any interest direct or indirect.

1ii2 The property to which this paragraph appies is property purchased or by the company or
proposed so to be purchased( which is to be paid for whoy or par t y out of t he pr oceeds
of t he i ss ue off er ed f or subs cr i pt i on by t he prospectus or the purchase of which
has not been competed at the date of the issue of the prospectus( other than property4 5

a2 The cont r act f or t he pur chas e wher eof was ent er ed i n t o t he ordinary
course of the companys business( the contract not being made in
contempation of the issue nor the issue in conse:uence of the contract.

b2 As r es pect s whi ch t he amount of t he pur chas e money i s not materia.

">. The amount s ( i f any( payab e as pur chase money i n cas h( shar es
or debentures for any property referred to in $ above specificay the amount
of goodwi.

"". The amount i f any payab e or pai d wi t hi n t he t wo pr ecedi ng year s as
commission for subscribing or agreeing to subscribe on procuring or agreeing to procure
subscriptions for any shares in or debentures of the company or the rate of any such
commission.

"%. Th e a mo u n t o r e s t i ma t e d a mo u n t o f p r e i mi n a r y e - p e n s e s a n d t h e
persons by whom any of those e-penses have been paid or are payabe and t he
amount of t he e-pens es of t he i ss ue and t he per sons by whom any of those
e-penses have been paid or are payabe.

"6. Any amount or benefit paid within two preceding years or intended to be paid to any
promoter and the consideration for the payment or benefit.

"4. Benera nature of any materia contract not being a contract entered in the ordinary course of
the business carried on or intended to be carried on by the company or a contract entered into
more than two years before date of issue of prospectus. The dates of the contract and
parties to such contract shoud aso be discosed.

"7. The names and posta address of the auditors if any by the company.

"6. 3u par t i cu ar s of t he nat ur e and e-t ent and i nt er es t ( i f any of ever y
director in the promotion of or in the property proposed to be ac:uired by the
56
company or where the interest of such a director consists in being partner in affirm( the nature
and e-tent of the interest of the firm( with a statement of a sums pai d or agr eed
t o be pai d t o hi m or t o t he f i r m i n cas h or shar es or otherwise by any person either
to induce him to become or to :uaify him as a d i r e c t o r ( o r o t h e r w i s e f o r
s e r v i c e s r e n d e r e d b y h i m o r b y t h e f i r m i n connection with the promotion
or formation of the company.

"8. 'f the prospectus invites the pubic to subscribe for shares in the company and t he shar e
capi t a of t he company i s di vi ded i nt o di f fer ent c as ses of shares( the right of
voting at meetings of the company conferred thereby( and the rights in respect of capita and
dividends attached to the severa casses of shares respectivey.

"8. ' n t he cas e of a company whi ch has been car r yi ng on busi ness or of a
business which has been carried on for ess than three years( the ength of t i me
d u r i n g wh i c h t h e b u s i n e s s o f t h e c o mp a n y o r t h e b u s i n e s s t o b e
ac:uired( as the case may be( has been carried on.

Ceports to be set out in prospectus.

Aart '' of the third schedue stipuates reports to be incuded in the prospectus. These
reports are prepared by the companys auditors and state4 5

i . The pr of i t s or osses of t he company i n each of t he f i ve pr ecedi ng
years.
ii. The rate of dividends paid by the company in each in respect of each cass of shares in
each of those years.
iii. The assets and iabiities at the ast date to which the accounts of the company were made
up.
i v. ' f t he pr oceeds or par t s of t he pr oceed ar e t o be used di r ect y
or i ndi r ect y t o pur chase a busi ness t he r epor t must be made up of t he
profits or osses of the business for the ast five years.

?here the company has subsidiaries the performance of such subsidiaries has to be
reported or the consoidated accounts have to be prepared.


Ceports of e-perts in prospectus
57
0ection 4%. A prospectus must not be issued purporting to contain a statement by an
e-pert uness4 5

a2 /e has given and has not before deivery of a copy of the prospectus for r egi st r at i on(
wi t hdr awn by wr i t t en cons ent t o t he i s sue t her eof wi t h t he statement
incuded in the form and conte-t in which it is incuded.

b2 A statement that he has given and not withdrawn his consent appears in the prospectus

!-perts4
Cefers to any person whose profession gives authority to a statement made by him.
!-perts incude engineers( vauers and accountants.

!-emption from re:uirements of third schedue matters and reports.
Ce:uirements of the third schedue do not appy in the foowing4 5

a 2 ?h e r e t h e p r o s p e c t u s i s u s e d t o e - i s t i n g h o d e r s o f s h a r e s
o r debentures 1whether aotment etters are renounceabe or non5
renounceabe2.

b2 ?here prospectus reates to shares or debentures simiar to shares
or debentures previousy issued.

A prospectus thus issued without the re:uirements of the third schedue is caed a bridged
prospectus.
'ssue of forms of appicationE

3orms of appication must be accompanied with a prospectus. This re:uirement does
not appy where the form of appication was issued either4 5

'n connection with a bonafide invitation to a person to enter into an underwriting
agreement with respect to shares or debentures.

'n reation to shares or debentures which were not offered to the pubic section 4> 162
1ii2 1iii2.

'ssuing of shares to the pubic4

58
'ssuing shares to the pubic is done by pubic companies wishing to raise capita
throughE

a2 Aubic issue by prospectus(

9one through a direct invitation(

To the pubic to subscribe for its shares or debentures invitation is made through a prospectus(
which specified the purpose for which the capita wi be used.

b2 <ffer for sae

The provisions reating to the prospectus are cumbersome and companies in the past used
evaded the re:uirements by aotting the whoe of an issue of shares and debentures
to an issuing house at a certain price. The issued house then pubished an advertisement
in the nature of an offer for sae inviting the pubic to b u y s h a r e s f r o m i t a t a h i g h e r
p r i c e . 0 e c t i o n 4 8 o f t h e a c t p r o v i d e s t h a t a document by which an offer
for sae is made to the pubic is within the definition of prospectus.

An aotment with a view to offer for sae is evidenced whenE

a2 An off er of shar es or debent ur es was made wi t hi n s i - mont hs
af t er aotment or agreement to aot.

b2 At t he dat e when t he of fer was made t he who e consi der at i on t o be
received by the company had not been received per section 48 1%2.

'n addition to compying with re:uirements of section 4> matters to be stated and reports to be
made out in prospectus an offer for sae must state4 5
a2 The net commi s si on r ecei ved or r ecei vab e i n r espect of shar es
or debentures to which the offer reates.

b2 The p ace and t i me at whi ch t he cont r act of a ot ment or s har es
or debentures may be respected per section 48 162.

An offer for sae must be signed by two directors of the company or not ess than haf of two
partners of the issuing form that a partner may sign through an agent. Aer sons ma&i ng t he
off er ar e pr i ma f aci e i ab e t o pay compens at i on under section 47 caused by
misstatements in the offers as if they were directors.

59
Aacings4

This case when a company issues its shares through one or more stoc&hoders who
s e t hem t o c i ent s. Thi s met hod i s i dea when ma&i ng a s ma i s sue
of shares.

Compani es r ai si ng money t hr ough p aci ng ar e r e:ui r ed by s t oc& e-change t o
ma&e a substantia proportion of their securities avaiabe to the genera mar&et.


Arospectus and duty of discosure4

A part from re:uirements set out under section 4> any other information may be
vounteered. The intending purchaser of shares is entited to a true discosure in the prospectus.

' n @ew .r unswi c& and Canada C y and and Co. vs . ,ugger i dge 1 "86>2
MCKindersey said.

*Thos e who i s sue pr ospect us ho di ng out t o t he pub i c t he gr eat advant ages
which wi accrue to persons who wi ta&e shares in a proposed underta&ing and inviting them to
ta&e shares on faith of the representations therein contained are bound t o s t at e ever yt hi ng
wi t h s t r i ct and scr upu ous accur acy and not on y t o abstain from stating as fact
that which is not so but to omit no one fact within their &nowedge the e-istence of which might
in any degree affect the nature or e-tent and :ua i t y of t he pr i vi eges and advant ages
whi ch t he pr os pect us ho ds as inducement to ta&e shares+.

!ffects of discosure
,isstatement and non5discosure are both fata to the vaidity of the contract and a
s u b s c r i b e r f o r s h a r e s o r d e b e n t u r e s ma y r e s c i n d t h e c o n t r a c t wi t h i n
r easonabe time before the company goes into i:uidation.

The contract can be rescinded if the foowing conditions are satisfied4 5

a2 The st at ement must be a mat er i a mi s r epr es ent at i on of f act
. 'n Breenwood vs. Leather shod ?hee Company 1"$>>2 as company formed to manufacture
eather tyre whees for troeys issued a prospectus stating enarge type *orders have
aready been received from the house of the house of commons to be foowed by arge
orders ater+. 'nfact a orders received were tria orders and no customers had yet e-pressed any
intention to buy in arge5scae. 't was hed that the prospectus was miseading.
60

0tatements of the fact can ead to the rescission of a contract but opinions in
prospectus cannot nuify a contract.

' n !di ngt on vs . 3i ;maur i ce 1 "8%72 a company i ss ued a pr ospect us i nvi t i ng
subscriptions for debentures. The ob)ect of the issue was stated to be that the money
woud be used for effecting certain aterations in the companys buiding s and f or
deve opi ng t he bus i nes s of t he company. The money however was needed t o
pay off pr essi ng i abi i t i es . The p ai nt i ff app i ed f or debent ur es i n reiance
on the statements in the prospectus. 't was hed that the paintiff coud rescind the
contract and directors were iabe.

<ther cases where subscribers were given the right to rescind the contract
for miseading prospectus are4 5

". Kerbergs case Ce ,etropoitan coa consumers Association 1"88%2.

%. Coss vs. !states investment company 1"8682.

b2 The statement must have induced the sharehoder to ta&e shares.
'n #ennings vs. .rought( 1"8742 L# ch. $$$. A subscriber for shares in a mining
company offered by a prospectus which inaccuratey described the capacity of the
companys mine. /e inspected the mine himsef. 't was hed that he was not ent i t ed t o
r es ci nd t he cont r act t o t a&e s har es as he had i ns pect ed t he mi ne himsef. 't
was hed that he was not entited to rescind the contract to ta&e the shares as he had
inspected the mine himsef and must have therefore( reied on his own observation and
not on the content of the prospectus.



c2 The statement must be untrue.
A s t at ement i s unt r ue i f i t i s mi s eadi ng i n t he f or m and cont e-t i n whi ch i t
i s incuded or where the omission from a prospectus of any matter is cacuated to
misead. A mere non5discosure does not amount to misrepresentation uness the conceament has
prevented an ade:uate appreciation of what was stated.

A s t at ement can be f a se becaus e of what i t has sai d( concea ed( omi t t ed
or impied. 'n Ce- vs. Lord Kysant 1"$6%2 K. 44% a prospectus was issued by a
company stating that the company had paid a dividend every year between "$%" and
"$%81years of depression2 thus giving the impression that the company was stabe.
61
/owever( the company had in fact incurred considerabe trading osses and was a b e
t o p a y d i v i d e n d s o n y o u t o f r e a i ; e d c a p i t a p r o f i t s . Th i s f a c t wa s
n o t discosed. 't was hed that the prospectus was fase in materia particuar in that it conveyed
a fase impression.

d2 The deceived sharehoder is an aotee and he must have reied on the statement in the
prospectus.
'f a person purchases shares in the open mar&et he has no right against the company.

'n Aec& vs. huirney 1"8862 LC 6/L( 688( a company issued a prospectus with a
misstatement. A reying on the misstatement appied and was aotted shares( which
he ater sod to A. The company was wound up and A had to pay =">> and as a contributory. A
sought an indemnity for his oss from the directorsE it was hed that the directors were not
iabe to A.

Lor d C aemosf or d obser ved *t he of fi ce of a pr os pect us i s t o i nvi t e per s ons
t o become a ot ees ( and t he a ot ment havi ng been comp et ed( s uch of fi ce i s
e-hausted and the iabiity to aotees does not foow the shares into the hands of the subse:uent
transferees. 9irectors cannot be made iabe *ad infinitum+ for a the subse:uent deaings( which
may ta&e pace with regard to those shares upon the stoc& e-change.

e2 The omission of materia fact must be miseading before recession is granted.
'f a person reies as aground for the rescission of a contract on t h e o mi s s i o n o f
a s t a t e me n t ( h e mu s t s h o w t h a t t h e o mi s s i o n o f t h e statement
ma&es what is stated miseading. An omission must be of such a nature to ma&e a
statement actuay miseading.

' n Co es vs . ?hi t e Br eyhound Assn Lt d 1 "$%$2 47 TLC %6>. a pr os pect us
des cr i bed and as emi nent y s ui t ab e f or Br eyhound r aci ng( oca aut hor i t y
r ef us ed appr ova ( i t was he d t hat he descr i pt i on of and was mi s eadi ng
andrescission was granted.
f 2 The pr oceedi ngs of r esci s si on must be s t ar t ed as soon as t he a ot ee
comes t o &now of a mi s eadi ng st at ement and bef or e t he company goes
into i:uidation.
?her e an a ot ee deci des t o r es ci nd a cont r act on gr ounds of f r audu ent
mi s pr es ent at i on( a mer e not i ce t o t he company is not enough. /e must ma&e effective
steps for the rectification of register of members and remova of his name there from.

Loss of rights of rescission4

62
The r i ght t o r esci nd a cont r act based on f r audu ent st at ement or wi t hho di ng
materia fact is ost in the foowing instances4 5

" . ?h e n a f t e r d i s c o v e r i n g t h e mi s s t a t e me n t h e t r e a t s t h e c o n t r a c t
a s subscribing or does any act adopting the contract by4 5

a2 Attempting to se the shares.

b2 !-ecuting a transfer.

c2 Aaying cas or receiving dividends.
d2 At t endi ng and vot i ng at a gener a meet i ng of t he company i n person or
by pro-y.

%. ?hen there is unreasonabe deay upon discovering a misstatement. A deay of "7
days may be hed to be too ong and amounted to waiver of the right to rescind 10cottish
petroeum co. Ce. ?aaces case 1"8862 %6 ch 4"62.
6. ?here the winding up of the company has commenced and the rights of the
creditors of the company have intervened( the right of rescission is ost. ?here the
sharehoder has started active proceedings to be reieved of his shar es ( passi ng of
t he wi ndi ng up or der dur i ng t hei r pendency wou d not pre)udice his right of
getting reief.

9amages for deceit
Anyone i nduced by f r audu ent st at ement t o t a&e shar e i s ent i t ed t o sue t he
company f or damages. /e cannot bot h r et ai n t he shar es and get damages
against the company.


Liabiity for fase statement in prospectus
0 e c t i o n 4 6 wh e r e a p r o s p e c t u s h a s a n y u n t r u e s t a t e me n t a n y p e r s o n
wh o authori;ed its issue is iabe for convictions( to a term of two years imprisonment or five to
ten thousand uness he proves.

a2 That the statement was immateria.

b2 That he had reasonabe ground for beieving and did beieve up to the time the
issue of prospectus that the statement was true.

63
'n 9erry vs. Aee& 1"88$2 the court hed that the directors might not be iabe on a statement
contained in a prospectus( which in their honest opinion was true and not made
careessy.

0ection 47 aso provides that civi iabiity to pay damages may be incurred by4 5

i2 9irectors of the company

ii2 Aersons who have agreed to become directors at a ater date.

iii2 Aromoters
i v2 <t her per sons who have aut hor i ;ed t he i ssue of t he prospectus.

9efences for directors or promoters4

0ect i on 47 1 %2 pr ovi des t he f o owi ng def ences ( whi ch t he di r ect or s have t o
estabish to avoid iabiity4 5

a2 That one had withdrawn his consented to become a director before the issue of prospectus
and it was issued without his consent.

b2 That the issue was made without his &nowedge or consent and that on
becomi ng awar e of t he i ss ue( he f or t h wi t h gave r eas onab e pub i c
notice of the fact.

c2 That he withdrew his consent after the issue of the prospectus and gave
reasonabe pubic notice before aotment.

d2 /e had reasonabe ground to beieve that the statements were true and beieved
them to be true.

e2 That the statement was correct and fair summary of an e-perts report or a
statement made by officia or in an officia documents.

!-perts iabiity4

An e-per t who gi ves a r epor t t o be i nc uded i n t he pr os pect us i s p aced i n a
simiar position for untrue statement i&e the person who authori;ed the issue of the
prospectusE section 47 162 provides the foowing defences to an e-pert4 5

64
". That he withdrew his consent in writing before the registration of the
prospectus.
%. That offers registration sued before aotment( on becoming aware of t he
unt r ue st at ement ( he wi t hdr ew hi s st at ement i n wr i t i ng and gave
reasonabe pubic notice of such withdrawas and the reason for it.
6. That he was competent to ma&e the statement and up to the time of aotment he
beieved on reasonabe grounds that it was true.

0TAT!,!@T '@ L'!D <3 AC<0A!CTD0
A statement in ieu of prospectus is to be fied with registrar on two occasions.
Dnder sect i on 7> a pub i c company havi ng pr i vat e y ar r anged f or i t s capi t a
subscription need not issue a prospectus( but in that event a statement in ieu
of prospectus must be fied with the registrar three days before any aotment of any
shares or debentures can be made.

Dnder section 6% if a company aters its artices such that provisions of section 6>
ar e e-c uded( t he company wi ceas e t o be a pr i vat e company and mus t
within fourteen days after the said date fie with the registrar a statement in ieu of prospectus.

3or a pubic company a statement in ieu of prospectus has to be in the form of the
fourth schedue whie in the case of a private company it has to be in the form of the second
schedue.
3orm of statement4

The statement must be signed by every person named therein as a director
or proposed director or his agent authori;ed in writing. The statement must contain same
information as a prospectus compying with the third schedue.

0ection 7> provides that if a statement in ien of prospectus incudes any untrue
statement( the directors and others who authori;ed its deivery for registration are iabe to
imprisonment up to two years or a fine up to ten thousand shiings or both( uness it is
estabished by the person iabe that4 5

i2 The untrue statement was immateria.

ii) / e h a d r e a s o n a b e g r o u n d t o b e i e v e t h a t s u c h a statement
was
65
true.

Contents of statement in ieu of prospectus4

Contents of this statement depend on whether that statement is deivered
under section 6% 1"2 or section "" 1%2. A statement deivered under section 6% 1"2 must contain
the foowing particuars.

The nomina share capita of the company and shares into which it is divided.

The amount 1if any2 of the capita constituted by redeemabe preference shares.

The eariest date in which the company has power to redeem the redeemabe
preference shares( if any.

a 2 @a me s ( o c c u p a t i o n a n d p o s t a a d d r e s s o f d i r e c t o r s o r p r o p o s e d
directors.

b 2 Amo u n t o f i s s u e d s h a r e s a n d c o mmi s s i o n o r d i s c o u n t a o we d
therewith.

c2 Amount of preiminary e-penses and by whom they have to be paid or are payabe.

d2 Amount gi ven or any ot her benef i t gi ven t o any pr omot er and t he
consideration for the payment of the benefit.

e2 Moting( capita and dividend attached to the different casses of shares.
f2 0hares and debentures issued in the preceding two years as fuy paid5up otherwise than for
cash and consideration for the issue.
g2 @umber description and amount of any shares which any person has or i s ent i t ed
t o be gi ven an opt i on t o subs cr i be f or and t he per i od t he option is e-ercisabe.

h2 @ame and posta address of vendors of the property of the company the amount
payabe for any such property to each separate vendor.

i29ates( parties to and genera nature of materia contracts( and the time and pace at
which the contract or copies thereof may be.

)2 @ames and address of auditors.

66
&2 3u particuars of the nature and e-tent of the interest of every director i n any of t he
i nt er es t s of ever y di r ect or i n any pr oper t y of t he company purchased or ac:uired
by the company within the preceding two years.

2 Cat es of di vi dend 1 i f any2 pai d by t he company i n r espect of each c a s s
o f s h a r e s i n t h e c o mp a n y i n e a c h o f t h e f i v e f i n a n c i a y e a r s
i mme d i a t e y p r e c e d i n g t h e i s s u e o f t h e s t a t e me n t o r f i n a n c i a ye a r s
immediatey preceding the issue of the statement or since incorporation of the company(
whichever period is short and particuars.

m2 The case in which no dividend have been paid in any cass of shares in any of these
years.

0T<CK !JC/A@B! C!ID'C!,!@T04

The s t oc& e-change i s a mar &et wher e st oc&s or shar es ar e bought and s o d
through stoc&bro&ers. The stoc& e-change is governed by governed by a counci eected by the
members from amongst themseves.

The f o owi ng condi t i ons ar e f u f i ed bef or e a company i s i s t ed i n t he
s t oc& e-change4 5

a2 A competion of an appication form and signing an agreement.

b2 A short history of the company.

c2 A certificate from the auditors that the company is pubic within the terms of
the companies act.

d2 'ssued share capita must not be ess than = %7>>>.

e2 Aayment of a hearing fee of five hundred shiings.

f2 3urther five hundred shiings for a :uotations granted.

g2 Counci has to be satisfied that a reasonabe number of shares are offered in
order to start a mar&et.

h2 0ubmission of three copies of the artices of association( which may be referred
after perusa by the committee members.
67


ALL<T,!@T <3 0/AC!0 ACT <@ 0T<CK !JC/A@B!
0 e c t i o n 7 6 wh e r e a p r o s p e c t u s s t a t e s t h a t a p p i c a t i o n h a s b e e n ma d e
f o r permission for the shares or debentures offered thereby to be deat in any stoc&
e-changes( aotment made wi be void if4 5

a2 The permission has not been appied for before the third day after the first issue of the
prospectus.

b2 Aermission has been refused before the e-piration of three wee&s from the
date of the cosing of the subscription ist or such onger period not e-ceeding
si- wee&s.

0ection 76 1%2 states that where the permission has not been appied for or has 5 been
r ef us ed( t he company mus t i mmedi at e y r epay a money r ecei ved f r om
appicants. .ut if such money is not paid within eight days after the company
.ecame iabe to repay the directors became iabe to pay with interest at five
percent per annum from the e-piration of the eight day( uness a director can prove
that the defaut was not due to any misconduct or negigence on his part.

0ection 76 provides further that a money received from appicants must be &ept in a separate
account so ong as the company may become iabe to repay it.

Dnderwriting commission
Dnderwriting refers to a situation where one agrees to ta&e shares or debentures specified in an
agreement. 'f the pubic fais to subscribe for them( consideration for this underta&ing is
commission. 0ect i on 77 pr ovi des t hat a company may pay a commi ss i on t o any
per son i nconsi der at i on of hi s subscr i bi ng or agr eei ng t o subscr i be or hi s
pr ocur i ng or agreeing to procure subscriptions for shares in or debentures of the company.

.efore commission is paid the foowing conditions have to be fufied4 5

i2 The payment of commission shoud be authori;ed by the artices.

ii2 Commission cannot e-ceed ten percent the price of shares.

6. The amount and r at e of t he commi ss i on and number of shar es whi ch
underwriters have agreed to subscribe must be discosed as4 5

68
a 2 ' n t h e c a s e o f s h a r e s o f f e r e d t o t h e p u b i c f o r s u b s c r i p t i o n ( t h e
discosure must be in the prospectus.

b2 ' n t he cas e of shar es not off er ed t o t he pub i c f or subscr i pt i on( t he
s ame di sc osur e mus t be made i n t he s t at ement i n t he pr es cr i bed f r om
deivered to the registrar before payment of the commission.

0ect i on 77 1 42 a vendor or pr omot er of a company or any ot her per son who
receives payment in money or shares from the company( has power to appy any par t of t he
money or s har es so r ecei ved i n payment of any commi s si on( t he p a yme n t
wh i c h i f ma d e b y t h e c o mp a n y wo u d h a v e b e e n e g a u n d e r t h i s
sections.

A part from the above e-ceptions no company may appy its shares or capita to p a y
c o mmi s s i o n d i s c o u n t o r a o wa n c e t o a n y o n e i n c o n s i d e r a t i o n o f h i s
subscribing or agreeing to subscribe for any shares in the company.

0ection 77 appies to private and pubic companies ai&e.

.ro&erage

0ection 77 permits companies to pay bro&erage if its artices so provide. .ro&ers are
professiona persons such as stoc&bro&ers( ban&ers who e-hibit prospectus and send
them to their customers and by whose mediation the customers are induced to
subscribe uni&e underwriters bro&ers do not underta&e to subscribe shares or
debentures( which are not subscribed by the pubic.

.ro&erage must be payabe to bro&ers ony4 5

' n Andr eae vs. Ki nc mi nes of Br eat .r i t ai n Lt d 1 "$"82 % K. 474. A company
agreed to pay a ady ten percent commission on any capita the company as a resut
of an introduction by her. The ady was not carrying on any business as a br o&er( i t
was he d t hat she cou d not r ecover t he agr eed sum as she di d not carry on
business as a bro&er and it was a mere accident that she came into the companys
office and was consuted on this matter.


9& M6M16R5/IP
69
A per son i s a member of a company i f t he subscr i bes t o t he memor andum
of association of a company and upon registration his name entered in the register of
members. ,embers are aso caed cooperators or sharehoders.

A sharehoder is a person who hods shares in a company whie a member is one whose name
appears in the register of members.

The terms members and sharehoders are used synonymousy specificay in the case of a
company imited by guarantee and having a share capita and unimited company whose capita
is hed in definite shares. There are circumstances whereas per s on may become a
member of a company wi t hout bei ng i t s shar eho der without being a member.

The foowing are instances where a person becomes a member without being a sharehoder of
the company.

"2 ' n t he cas e of compani es i mi t ed by guar ant ee or un i mi t ed compani es
because such companies may not have share capita.
%2 A deceased member continues to be a member as ong as his name is on the
register of members( but he cannot be a sharehoder of the company.
6 2 A t r a n s f e r o r o f s h a r e s c o n t i n u e s t o b e a me mb e r u n t i t h e
t r a n s f e r i s registered and the name repaced.
42 0ubs cr i ber s t o t he memor andum ar e t r eat ed as member s by t he f act
of subscription on registration of the company they are entered in the
members register even before they are aotted any shares.

Th e f o o wi n g a r e i n s t a n c e s wh e r e a p e r s o n b e c o me s a s h a r e h o d e r
o f a company without being its member.

a2 A person who hods a share warrant.

b2 A transferee or ega representative of deceased or insovent member is n o t a
me mb e r u n t i h i s n a me a p p e a r s i n t h e r e g i s t e r a t h o u g h h e i s a
sharehoder.

,odes of ac:uiring membership4

0ection %8 of the companies act provides that a person may become a member of a
company by4 5
70

a2 0ubscription to the memorandum4

0 u b s c r i b e r s t o t h e me mo r a n d u m a r e d e e me d t o h a v e a g r e e d t o
b e c o me members. The names are entered in the register of members upon registration of the
company.

'n officia i:uidation vs. 0ueman .hai( 0 subscribed to a companys memorandum for
two hundred shares( but actuay too& %> shares. 't was hed that he was iabe in the
winding up of the company for a the %>> shares( as he became a member by the very
fact of subscription.

A subscriber to the memorandum cannot rescind the contract to ta&e shares on the
ground of misrepresentation made by a promoter 1meta constituents Ltd( CeLord Lurgens case
1"$>%2 'ch 8>8 because4 5

i2 .y his name act he brought the company into e-istence.

ii) The company coud not appoint an agent before it came into e-istence and
it is therefore not iabe for the promoters act.

iii2 .y signing the memorandum he became bond as between himsef and the company
and aso between himsef and other persons who became members.

b2 Agreement and registration4
!very person who agrees in writing to become a member and whose name is entered
in the register of members is a member of the company. Cegistration of a name as a
member of a company may be obtained through4 5

". Appication and aotment.

An appication for shares is an offer to ta&e sharesE aotment is acceptance of t h a t
o f f e r b y t h e c o mp a n y( wh i c h c r e a t e s a b i n d i n g c o n t r a c t b e t we e n t h e
app i cant and t he company. An app i cat i on may be abs o ut e or condi t i ona .
' f conditiona the aotment must be in accordance to the terms of the appication
1Adborough /ote Co. Ce. 0impsons case 1"$862 4 ch. 4842.

%. Transfer.

71
<ne becomes a member when the transfer of shares is affected and his name is entered in the
register of members.

6. 0uccession.
The company has power to register any person as a sharehoder to whom the right to
any shares 1or debentures2 in the company has been transmitted by the operation of
aw( and in such a case an instrument of transfer is not necessary.

c2 Iuaification shares4

.efore one is appointed a director of a pubic company( he must ta&e or sign an
agreement to ta&e and pay for :uaification shares 1if any2 in which case he is in the
same position as a subscriber to the memorandum.

d2 !stoppe4
Anyone who aows his name to remain in the register of members or otherwise hods
himsef out or aows himsef to be hed out as a member is estopped from denying being a
member of the company.

C!00AT'<@ <3 ,!,.!C0/'A

A per son ceas es f r om bei ng a member once hi s name i s r emoved f r om t he
register. A sharehoder may cease from being a member of a company by4 5

". An act of the parties.

%. <peration of aw.
". Act of parties.

The foowing are instances where a person may cease to be a member through act of parties4 5

a2 'f one transfers his shares to another.

b2 'f ones shares are forfeited.

72
c 2 ' f t h e c o mp a n y s e s t h e p e r s o n s s h a r e s u n d e r a p r o v i s i o n i n
t h e artices.

d2 'f one rescinds the contract to ta&e shares on grounds of misrepresentation.

e2 'f redeemabe preference shares are redeemed.

f2 'f one surrenders his shares( if such is permitted by artices.

g2 'f share warrants are issued in e-change of fuy paid shares.

%. <peration of aw.

<ne may cease membership through operation of aw in any one of the foowing ways45

a2 'nsovency P
0 h a r e s o f i n s o v e n t v e s t i n t h e o f f i c i a r e c e i v e r o r assignee.

b2 9eath P
0hares of the deceased are vested in the ega representative( however the deceaseds estate
remain iabe as ong as the name of the deceased is in the register.

c2 0aes of shares in e-ecution of a court decree.

d2 ?inding up of a company.

Cights and iabiities of members.

Cights of members.

The rights are conferred either by companys act( the memorandum and artices of
association or by the genera aw. Cights conferred by the companies act are caed the
statutory rights. The foowing are statutory rights4 5

1"2 Cight to obtain copies of the memorandum and artices on re:uest and on
payment of the prescribed fee.

1%2 Cight in priority to have shares offered in case of increase of capita.

73
162 Cight to transfer shares.

142 Cight to vote on resoutions at meetings of the company.

172 Cight to appy to court to have any variation of his rights set aside by the court section 8
142.

162 Cight to have a share certificate for shares hed.

182 Cight to inspect register of members( register of debenture hoders and copies
of annua return.

182 Cight to receive a copy of the statutory report.

1$2 Cight to appy to the .<9 to ca an annua genera meeting when the company
fais to ca such a meeting.

1">2 Cight to receive notice of meetings( attend and vote at meeting.

1""2 Cight to appoint a pro-y and inspect pro-y register.

1"%2 Cight to demand po aone or with others.

1"62 Cight of a body corporate to appoint a representative to attend and vote
at the genera meetings.

1"42 Cight to re:uire the company to circuate resoution.

1 " 7 2 Ci g h t t o h a v e a n y r e : u e s t mi n u t e s o f p r o c e e d i n g s o f a
g e n e r a meeting.

1"62 Cight to receive dividends when decared.

1"82 Cight to receive copies of annua accounts of the company with the
auditors report.
1"82 Cight to participate in the appointment of directors and auditors in the annua
genera meetings.
1"$2 Cight to petition to the court for the winding up of the company.
74
1%>2 Cight to share surpus. The r i ght s conf er r ed on member s by
memor andum of ass oci at i on ar e ca ed documentary rights( whie rights
conferred on members by the genera aw are caed ega rights.



Liabiity of members
Liabiity of members depends on the nature of the nature company. Liabiity maybe summari;ed
as foows4 5

". 3or un i mi t ed compani es each member i s i ab e i n f u f or a t he
debt s contracted by the company during the period he was a member.

%. 'n case of imited by shares each member is iabe to pay the fu nomina vaue of the
shares hed by him.

6. 3or a deceased member( hi s es t at e i s i ab e i n r espect of par t y pai d
shares and where the shares have been registered to the name of representatives
they become iabe.

4. ?hen one 1a member2 is ad)udicated ban&rupt( the officia receiver may se
the party paid shares in which case the buyer becomes iabe thereof or he
may discaim them as onerous property.

7. ?hen membership is reduced beow seven and two for pubic and private companies(
every member aware of the fact becomes severay iabe for the p a y me n t o f
d e b t s o f t h e c o mp a n y a f t e r s i - mo n t h s o f t r a d i n g f r o m s u c h
reduction in number.

6. 3or companies imited by guarantee each member is iabe to contribute the
amount guaranteed by him to be paid in the event of winding up.

Cegister of members.

0ect i on ""% r e:ui r es ever y company t o mai nt ai n a r egi s t er wi t h t he
f o owi ng particuars45
a2 The name and address of each member.

75
b 2 3 o r a c o mp a n y wi t h s h a r e c a p i t a ( s h a r e s h e d b y e a c h
me mb e r di st i ngui s hed each shar e by i t s number and e-t ent t o whi ch
t he shar es have been paid up.

c2 The date each person was entered in the register as a member.

d2 The date on which any person ceased to be a member.

?here the company has converted any of its shares into stoc& a notice of the
conversion has to be given to the registrar. 'f defaut is made in maintaining the
register( the company and every officer in defaut sha be iabe to a defaut fine.

0ection ""4 provides that on issue of a share warrant( the company must stri&eout 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 foowing particuars shoud be entered in the register4 5

a2 The fact of the issue of the warrant.

b2 0tatement of the shares incuded in the warrant

c2 9ate of issue of the warrant

'nde- of members.

0ection ""6 states that every company with more than fifty members is re:uired to
&eep an inde- that may be in the form of a card inde-. The inde- shoud be &ept
where the register is &ept. Any ateration in the register shoud be noted in t he
i nde- wi t hi n f our t een days . 3ai ur e t o comp y wi t h any of t he above may
attract a fine.

Location of the register.

0 e c t i o n "" % 1 % 2 r e : u i r e s t h a t t h e r e g i s t e r mu s t b e & e p t a t t h e
c o mp a n y s registered office. 't may be &ept esewhere provided.

a2 The wor& of ma&ing it up is done at another office.

b2 The register is prepared by another person.

'nspection of register of members.
76
'nspection of the register of members and debenture hoders is open to the pubic for at east two
hours a day.

'nspection is free for members and a fee of Ksh % is charged for every inspection. The right to
inspect incudes the right to ma&e e-tracts from the register. A fine of Ksh 4> is imposed for
refusa to inspect or refusa to suppy e-tracts. The ob)ect of i nspect i ng t he
r egi s t er i s i mmat er i a . !-t r act s have t o be supp i ed wi t hi n fourteen days upon
receipt of the demand.

The right to inspect ceases upon the commencement of winding up and an order of the court
must be obtained if inspection is re:uired after that date.

Cosure of register of members.

D n d e r s e c t i o n " " 8 a c o mp a n y c a n c o s e a r e g i s t e r f o r 6 > d a y s
a f t e r a n a d v e r t i s e me n t i n a o c a d a i y. C o s u r e i s u s u a y d o n e
p r i o r t o p a yme n t o f dividends or issue of new shares.

Cectification of register of members
0ection ""8 provides that courts can order rectification of register of members in the foowing
cases4 5

a2 ?here ones name is entered or omitted from the register of members without any
sufficient cause.
b2 ?here defaut is made or unnecessary deay ta&es pace in entering on the register
the fact that any person having ceased to be a member. Courts may re:uire companies to pay
damages to the aggrieved person.

@o notice of trust on register.

0ection ""$ states that no notice of any trust e-press( impied or constructive( sha
be entered on the register of members or debenture hoders.

The trustee can be entered in the register in his persona capacity and not as a
trustee( and he wi e-ercise the rights of a sharehoder( and is aone iabe for shares
cas and to be put in the ist of contributories.
.ranch register.

77
0ect i on "%" a company car r yi ng busi ness out s i de Kenya i n any par t of t he
commonweath countries may &eep a branch register in that part.

@otice must be given to the registrar of the situation of the office where a branch register is
&ept within one month of the opening of the office and any change in its situation or
discontinuation of such a register.

A branch register is deemed to be part of the companys register of members.

Annua return.

0ection "%7 provides that every company with share capita must fie an annua
r et ur n wi t h t he r egi st er once i n ever y year. The r et ur n must be f i ed wi t h t he
registrar forty two days after the annua genera meeting 1sec. "%82.

The foowing particuars must be incuded in the annua return in accordance to part
of the fifth schedue.

". The address of the registered office.

%. The pace where the register of members or debenture hoders is &ept is not &ept at the
registered office.

6. 0ummar y di st i ngui s hi ng bet ween shar es i ss ued f or cash and shar es
issued as fuy paid or otherwise than in cash specifying.

a2 Amount of share capita and the number of shares.

b2 The number of shares ta&en up to date of the return.

c2 The amount caed up( received and unpaid.

d2 Commission and discount in respect of shares or debentures.

e2 The tota number of shares forfeited.

f2 Tota amount of shares for which share warrants are outstanding( the number
of shar es compar ed i n each war r ant and t he amount of share warrants
issued and surrendered since the ast return.

78
4. The tota amount of indebtedness in respect of a registrabe charges.

7. A isting containing4 5

a2 The names and addr esses of t hose who ar e member s on t he fourteenth
day after the annua genera meeting and those who have ceased to be members
since the date of the ast return.

b2 The number of shares hed by each member.

c2 Aarticuars of the directors and the secretary.

0ection "%7 1"2 if the company has converted its shares into stoc&( the return shoud
give the same particuars with regard to the stoc& as re:uired for shares.

0ection "%6 for a company with no share capita( the foowing facts shoud be
incuded4 5

a2 The situation and the posta address for the registered office.

b2 The address of the pace if the register of member is &ept esewhere.

c2 The addr ess and p ace i f t he r egi s t er of debent ur e ho der s i s &ept
esewhere.

d2 Aarticuars reating to directors and the company secretary.

A statement containing the particuars of the tota amount of in indebtness of the company in
respect of a charges which are or were re:uired to be registered with the registrar
under the act.

9ocuments to be anne-ed to annua return.

0ec "%81"2 the foowing documents must be anne-ed to the annua return.

a2 A copy of the baance sheet with a notes thereto duy certified by a director or company
secretary.

b 2 A c o p y o f a u d i t o r s r e p o r t a n d d i r e c t o r s r e p o r t c e r t i f i e d b y a
director and company secretary.
79

0ection "761"2 the profit and oss account and group account shoud be anne-ed to the baance
sheet.

0ection 1"%$2 re:uires that aso a private company must aso submit with annua return the
foowing certificates45
a2 The company has not invited the pubic to subscribe its shares or debentures.

b2 Any e-cess of f i f t y member s consi st s of ent i r e y pr esent and e-5
empoyees.

:& 5/AR65

0hares are indivisibe units of the capita of the company. 3awe ' in .arandst r us t ee vs.
0t ee .r os 1 "$>"2 " ch. %8$ def i ned a shar e as t he i nt er es t of a sharehoder in
the company measured by a sum of money for the purpose of iabiity in the first
pace( and of interest in the second pace( but aso consists of a series of mutua
covenants entered into by the sharehoders *inter se+ in accordance with section %% of
the companys act.

0hares represent the e:ua portions into which capita is divided each
sharehoder is entited to a portion of a companys profits in proportion to the number
of shares hed by him.

A sharehoders iabiity is usuay measured against his indebtedness to the company
on the amount unpaid on shares hed by him.

0ection 86 re:uires that each cass of shares be distinguished by its appropriate
number. The distinction is not necessary if a shares ran& e:uay.

0/AC! CAA'TAL

Capita is a particuar amount of money with which a business is started. 3or accompany is
usuay caed share capita.

Types of capita

". Authori;ed or nomina capita

80
This is the nomina vaue of the shares which a company is authori;ed to issue by its
memorandum of Association. 't is the ma-imum amount of capita which t he
company wi have. Thi s amount can be i ncr eas ed or r educed on y i f t he
company changes the memorandum. @omina capita is aso caed
Cegistered capita.

%. 'ssued capita

Th i s i s t h e n o mi n a v a u e o f t h e s h a r e s wh i c h a r e o f f e r e d t o t h e
p u b i c f o r subscription. 't represents the portion of the nomina capita that has
been given out to be subscribed by the pubic or by any persons concerned.

6. 0ubscribed capita

This is the part of issued capita which has been ta&en up by the pubic. ?hen a the issued
capita has been subscribed then subscribed and issued capita are e:ua.
4. Caed up capita

This is part of the issued capita which has been caed up on the shares. This is the part of the
issued capita which sharehoders are iabe to pay as and when caed.

7. Aaid up capita

This is part of the issued capita which has been paid up by the sharehoders. ?hen
cas are made on the shares and sharehoders fai to pay up the amount thus owing is
caed cas in arrears or *cas unpaid+.

6. Ceserved capita

This is any part of the companys share capita which a company may resove by a specia
resoution not to be caed e-cept in the event of a winding up. 0ection 6% of the
companies Act provides that a company by specia resoution determine that any portion of its
uncaed capita be reserve capita.

Ceserve capita can ony be turned into uncaed capita by eave of the court.
Ces er ve capi t a i s di f fer ent f r om r es er ves or r es er ve f und. Ceser ve f und
or r e s e r v e s r e f e r s t o u n d i s t r i b u t e d p r o f i t s & e p t b y t h e c o mp a n i e s t o
c a t e r f o r emergencies.


81
Appication and aotment of shares4

App i cat i on i s an off er by a pr os pect i ve s har eho der i n i eu of a pr ospect us
issued by the company. Aotment is the acceptance of an appication and it resuts to
a contractua reationship between the company and the appicant(
Aotment of shares is an aocation 1appropriation2 by the board of directors of a
given number of shares in response to an appication.

As the post is the medium of communication aotment is deemed competey on the
instant( the etter of aotment is posted even though the aotment etter is deayed in the post or
it never reaches the offeree 1appicant2 househod fire insurance Co. vs. Brant 1"88$2 4 !-. %"6.

Arovisions regarding aotment

". Aotment must be by a resoution of the board of directors uness there is cause in the
artices providing otherwise.

%. Aotment must be made within a reasonabe time( in Camsgate Miction /ote
vs. ,onte fiore 1"8662 Lr" !- ">$. ,onte fiore was entited to refuse an aotment as his
offer had apsed due to undue deay in aotment.

6. Aotment must be communicated to the appicant where the post is used aotment is
competed as soon as the company posts the etter of acceptance( provided the
etter is sufficienty stamped and correcty addressed.

4. The aotment must be absoute and unconditiona. The aotment must be made
in accordance to the conditions of the offer sub)ect to provisions of the artices.

'n Camabhai vs. Bhai Cam 1"$"82 .orn LC 7$7( C appied for 4>> shares in a
company on condition that he was appointed a branch manager of the company. /e was aotted
shares but was not appointed a branch manager. 't was hed that he was not bound by the
aotment.
7 . An o f f e r ma y b e wi t h d r a wn a n y t i me b e f o r e c o mmu n i c a t i o n o f
i t s acceptance. An appicant can withdraw his offer any time before his
offer has been accepted sec. 7% 172 an appicant cannot withdraw his
appication unti after the e-piration of the third day after the opening of the
subscription ist.
Ce:uirements of aotment.
82
" . A p u b i c c o mp a n y mu s t f i e a p r o s p e c t u s o r a s t a t e me n t i n i e u
o f prospectus must be subscribed before aotment.

% . Th e mi n i mu m s u b s c r i p t i o n a s p r o v i d e d i n t h e p r o s p e c t u s mu s t
b e subscribed before aotment. 'f the minimum subscription is not met within
s i -t y days a money r ecei ved f r om app i cant s must be r et ur ned
f or t hwi t h otherwise the money wi attract defaut interest at 7N p.a from the
seventy5fifth day.

6. 0ection 7% provides that no aotment shoud be made of shares appied for unti the third
day from the date of issue of the prospectus.

4. Dnder section 76E if prospectus states that appication has been or wi be made to the
stoc& e-change( then such permission must be appied before the third day of
the issue of prospectus( faiure to which aotment woud be void.


'rreguar aotment
Dnder sec.7" an aotment made by the company to an appicant in contravention of
pr ovi si ons of s ec. 4$ 1 f ai ur e t o meet mi ni mum subs cr i pt i on2 or s ect i on
7>1faiure to issue a statement in ieu of prospectus2 is voidabe at the discretion of t he
app i cant wi t hi n one mont h af t er t he ho di ng t he st at ut or y meet i ng of t he
c o mp a n y wi t h i n o n e mo n t h a f t e r t h e d a t e o f a o t me n t . Th e a b o v e
a p p i e s regardess of the fact that the company is in the course of winding up.

' f any di r ect or &nowi ng y cont r avenes pr ovi si ons of sect i on 4$ or 7> he
mus t compensate the company and the aotee respectivey for any oss or damages or costs
incurred.

Ceturn of aotment 1section 742

A company is re:uired to deiver within si-ty days the foowing to the registrar of companies for
registration4 5

a2Ceturn of aotment
The t r ans f er or t o get a new cer t i f i cat e uses t he t i c&et and t he cer t i f i cat ed
instrument is given to the transferee( which he uses to ac:uire a new certificate.

The company thus conceas the od certificate and prepares two certificates
a2 <ne for share sod
83
b2 3or the unsod portion of the shares.

' f a company af t er cer t i f yi ng r et ur ns t he or i gi na cer t i f i cat e t oget her wi t h
t he c e r t i f i c a t e t r a n s f e r t o t h e t r a n s f e r o r wh o u s e s i t t o c o mmi t f r a u d
o n t h e transferee( the third party has no right against the company.

The terms impied between seer and buyer
a2 That the seer wi give to the purchaser genuine of transfer and share
certificate re:uired to enabe the purchaser to be registered.

b2 The seer wi not prevent the buyer from registering the transfer.

c2 The seer wi compensate the buyer for any cas or iabiity which may arise
in respect of shares sod. The purchaser must aso indemnify the seer against cas made
after date of contract.

!ffect of transfer4

Aosition of the transferee before he is registered as a member
" The transferor continues to be the ega owner of the shares set as a trustee of the transferee
% The transferee has no rights as a sharehoder of the company.

6 The transferee has e:uitabe caim
4 'f cas are made( the transferor must pay and recover the amount from the transferee
7 'f dividends are paid the transferor is entited to them.

6 Transferor must vote as the transferee directs Qmasse white vs v.,asse white =son imitedR
1"$6%2 ch. $64

Ariority between transferees
?hen two or more persons ay their caim to the same shares( the priorities as
between the different caimants wi be decided in accordance with the foowing
rues4

" The first to secure registration wi get priority irrespective of the date when his
caim arose.

% As between caimants( the earier in point of time wi be preferred( irrespective of the date
when notice was given to the company.
84

@otice of transfer
't is not mandatory( but it is advisabe to give notice of the odgment of transfer to the transferor.

3orged transfer
Conse:uences of forged transfer

" 3orged transfer does not pass any ega tite to the transferee

% 'n instances where the company has issued a share certificate to t he t r ansf er ee of
f or ged t r ans f er and he so d t hes e t o an i nnocent buyer( t he buyer get s no
r i ght t o be r egi st er ed as a shar eho der( i n such case he can caim damages from the
company.

6 ' f t h e c o mp a n y h a s b e e n p u t t o o s s b y r e a s o n o f t h e f o r g e d
t r a n s f e r ( i t ma y r e c o v e r t h e o s s f r o m t h e p e r s o n w h o p r o c u r e d
registration( even though he might have acted in good faith.

.an& transfer
This is a transfer of shares which is e-ecuted without the name of the transferee b e i n g f i e d
i n t h e t r a n s f e r f o r m o f d e e d wh i c h a t r a n s f e r o r h a n d s o v e r t o purchaser
or pedge.

The transferor aso hands over to the purchaser the share certificate aong with t h e b a n &
t r a n s f e r f o r m o r d e e d ( t h e d a t e t h e d a t e o f s a e a n d n a me o f t h e
transferor are eft ban&

The ban& transfer is thus used as negotiabe instrument. The advantage in giving a
ban& transfer form is that the buyer or pedge wi be at iberty to se again without
his name and signature to subse:uent buyer.

At the end of the transfer the first seer is treated as the transferor and the ast buyer as a
sharehoder and his name is registered in the company register.
%;& D616NTUR65

0ection % of the company act defines debentures as incuding debentures stoc&( bonds and any
other securities of a company( whether consisting a charge on the asset s of t he company or
not . The s ect i on does not act ua y des cr i be what a debenture reay is.

85
'n Leve vs. Abercorris state and sab Company 1"8$82 68 ch 9 %6>. 9ebenture was
defined as a document( which either creates a debt or ac&nowedges it.

'n !dmonds vs. .aina Co. 1"8882 66 ch. 9 %"7 chity 0. debenture was defined.*The term
itsef imports a debt an ac&nowedgement of a debt an obigation or covenant to pay.
This obigation or covenant is in most cases accompanied by some charge or security+.

A debent ur e i s t hus an ac&now edgement i n wr i t i ng a debt by a company t o
some per s ons and i t i s i ss ued t o t he pub i c by means of a pr ospect us. The
prospectus has provisions for interest payment and repayment of oans enders are
usuay given a security against the non5repayment of their oan( by a charge against the assets of
the company.

Characteristic features of a debenture

'n Lemon vs. Asustin 3riars investment Trust Ltd 1"$%62 ch. " debenture was defined
as foows *a debenture is a document containing an ac&nowedgement of indebtedness
which need not be( athough it usuay is( under sea( which need not give( athough it is
usuay does give a charge on the assets of the company by way of security and which
may or may not be one of the services+.

The foowing are characteristics of a debenture4

". 't is used by a company and is usuay in the form of a certificate.

%. 't is issued under the companys sea.

6. 't is one of a series issued to a number of enders athough there can be a
s i ng e debent ur e( f or e-amp e a mor t gage of a companys pr oper t y t o a
singe individua.

4. 't specifies the period and date of repayment.

7. ' t cr eat es a char ge on t he under t a&i ng of t he company or par t s of t he
company property( but this is not aways necessary.
6. 9ebenture hoders do not vote in company meetings.

9ebenture stoc&
86
A debenture stoc& is borrowed capita consoidated into a unit with each eder having
a certificate entiting him to a certain sum being a portion at one arge oan. The
debenture stoc& is usuay secured by a trust deed and in case there is no charge( the stoc& is
caed unsecured oan stoc&.

9ebenture stoc& can be issued directy as such it is not necessary for an issue of debentures to be
fuy paid and then turned into stoc&.

Casses of debentures
9ebentures are cassified according to the foowing characteristics4 5

". @egotiabiity
%. 0ecurity
6. Convertibiity

4. Ariority

". Cassification according to negotiabiity

a2 .earer debentures

Th e s e a r e a s o & n o wn a s u n r e g i s t e r e d d e b e n t u r e s a n d a r e p a ya b e t o
t h e bearer. These are negotiabe instruments and are transferabe by deivery and a
bonafide transferee for vaue is not affected by the defect in the tite of the
prior hoder.

'n .echuanaand !-poration company vs. London Trading .an& Ltd 1"8$82 %I..
648 Co. hed debentures of an !ngish company( payabe to bearer. 't &ept t hem i n a
s af e of whi ch t he s ecr et ar y had t he &ey. The secr et ar y p edged t he
debent ur es wi t h a ban& s ecur i t y f or a oan t a&en by hi m. The ban& t oo& t he
debentures bonafide. 't was hed that the ban& was entited to the debentures as against the
company.

b2 Cegistered debentures

These ar e debent ur es payab e t o r egi st er ed ho der s. A ho der i s one whos e
name is on the certificate and in the companys register of debentures.

A registered debenture is issued under the sea of the company and contains the foowing
causes4 5
87

1i2 A covenant to pay the principa sum.

1ii2 Covenant to pay interest.

1iii2 A description of the charge on the companys underta&ing property.

1 i v2 A s t at ement t hat i s i s sued s ub) ect t o t he condi t i ons endorsed thereon.

%. Cassification according to security

a2 0ecured debentures

These debentures create a charge on the property of the company. The charge may be
fi-ed or foating.
b2 Dnsecured or na&ed debentures

These do not create any charge on the assets of the company.

6. Cassification according to permanence

a2 Cedeemabe debentures

These are issued on condition that they sha be redeemed after a given period.

b2 'rredeemabe or perpetua debentures

These are debentures with no fi-ed period for repayment of the principa amount or repayment
of it is made conditiona on the happening of an event which may not happen or may
happen is specified events i&e winding up.

c2 9ebentures with LAari Aassu cause

These are debentures payabe rataby( though issued at different and varying t i me s .
?h e n a s s e t s a r e i n s u f f i c i e n t t o p a y a d e b t s t h e d e b e n t u r e s r a n &
p r o p o r t i o n a t e y . ' f t h e r e i s n o A a r i p a s s u c h a n g e i n t h e t e r ms
o f i s s u e ( debentures are payabe according to the date of issue.

A company cannot however issue a new batch of debentures to ran& Aari Aassu with an on batch.
88
9ebentures trust 9eed
9ebenture hoders may appoint persons as their trustees. ?hen the trustees are appointed a trust
deed is e-ecuted conveying the property of the company to the t r ust ees. Dnder t he t er ms
of t he deed t he company commi t s i t s e f t o pay t he debent ur e ho der t hei r
pr i nci pa and i nt er es t and char ges i t s pr oper t y t o t he trustees as security.

The trust deed contains the terms and conditions endorsed on the debentures and
defines the rights of debenture hoder and the company. 't empowers the trustees to
appoint a receiver to protect the interest of debenture hoders.

<ther contents of debentures are provisions concerning meetings of the debent ur e ho der s (
super vi s i ons of t he asset s charged and t he &eepi ng of a register of debenture
hoders.

' n c a s e o f d e f a u t b y t h e c o mp a n y t h e t r u s t e e s t a & e a c t i o n o n b e h a f
o f t h e debenture hoders.

Advantages of the trust deed
". 't gives trustees a ega mortgage over the companys property.

%. Trustees Act are at better position of safeguarding the interests of the debenture
hoders

6. 't specifies the events upon which principa and interest are payabe and
trustees ensure that the money is paid.
4. The company is given power to dea with its own property advantageousy for the
purpose of its business without pre)udicing the interests of debenture hoders.
7. The trustees act as watchdogs for the debenture hoders.
6. The trustees have power to appoint a receiver to run the company.
8. ' n c a s e o f d o u b t o r c o n t i n g e n c y t h e t r u s t e e s c a n c a a me e t i n g
o f debenture hoders to ma&e a decision.
8. 'n c a s e o f d e f a u t b y t h e c o mp a n y t h e c o mp a n y c a n a c t t o
p r o t e c t debenture hoders.



Liabiity of trustees
A t r us t ee i s i ab e f or any br each of t r us t wher e he f ai s t o show t he degr ee
of care and deigence re:uired of him as trustees.

89
Any cause in the trust deed reeasing the trustee e-empting him from iabiity for br each of
t r ust or i ndemni f yi ng hi m agai ns t i abi i t y f or br each of t r us t i s voi d e-cept
in the foowing cases.

". ?here the trustee can show that he too& such care and deigence as is re:uired
of him as trustee.

%. ?here the trustee acted honesty and reasonaby( section 4>%.

6. ?here a ma)ority of not ess than S th in vaue of the debenture
hoderspresent and voting in person or where pro-ies are permitted by pro-y
at ameeting summoned for the purpose( agree and the voting reates to
specificActs or omissions or to a trustee who is dead or has ceased to act.

Cights to copy the trust deed
A registered debenture hoder is entited to re:uire a copy of a printed trust deed section 8$ 1%2.

Ariority of charges
" . A f i - e d c h a r g e o v e r t h e s a me a s s e t s h a s p r i o r i t y o v e r t h e
f o a t i n g charge.

%. 0pecific charge first in point of time ta&es priority.

6. A company is prohibited from creating mortgages ran&ing in priority after crystai;ation
of foating charge. <n crystai;ation of foating charge becomes a specific mortgage.

4. A company is prohibited from creating a second foating charge having priority
over the first.

7. A company can create a specific charge after a foating charge.

3oating charge is postponed to the rights of the foowing persons if they act before
the security crystai;es.

a2 A andord who distrains for rent

b2 A )udgement creditor( if the goods are sod by the sheriff.

c2 A creditor who obtains a garnishee order absoute
90
d2 A suppier of goods on hire purchase agreement has priority over such unti goods
are paid for in fu.

e2 Areferentia debts e.g. rates( ta-es( wages and saaries.

%%& DIR6CTOR5
' n 3erguson vs. ?i s on 1 "8662 LC % ch. 88 Car r i s L# obs er ved *t he company
itsef cannot act in its own person for it has no person( it can ony act through
directors( and the case is as regards those directors merey the ordinary case
of principa and agent+.

'n Aberdeen Cy company vs. .ai&e .ros 1"8742 Lord Cranworth LC said( *The
di r ect or s ar e a body t o whom i s de egat ed t he dut y of managi ng t he gener a
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.

9i r ect or s ar e t hus per s ons i n charge of t he management of t he af fai r s of a
company and are coectivey caed board of directors.

There are severa stages of appointment of the directors4 5

a2 The first directors of a company P
are appointed by the promoter of the company( where promoters have not appointed the
directors subscribers to the memorandum wi become and are regarded the first directors.

b2 0ubse:uent appointment P
are appointed when the company aready e-ists. The company wi ma&e these
appointments in the foowing circumstances4 5

a2 To repace directors who have retired on rotation or otherwise.

b2 To repace directors who have been removed from office.

c2 To repace retired directors.

d2 To repace deceased directors.

Casua vacancies
91
These are vacancies occurring in the ran&s of directors any time before the ne-t
annua genera meeting by death or registration of a director. Casua vacancies are
fied by appointment made by the e-isting directors.

Aternative directors
These are directors appointed temporariy to represent the director during his absence
or inabiity in the board of direct(

,anaging director
Buideines for appointment of the managing director are given in the artices
of association.

Iuaification of directors
The Act does not re:uire a director to hod shares( thus one can be a director un ess
ar t i c es pr ovi de ot her wi s e. Ar t i c e 88 t ab e A pr ovi des t hat t he shar e
:uaification for directors may be fi-ed by the company in a genera meeting and uness fi-ed no
:uaification shares sha be re:uired. 'f the artices of a company contain a provision that the
:uaification of a director sha be hoding a specified number of shares( section "86 provides
thatE

1i2 !ach director must ac:uire and retain such :uaification shares within two
months after appointment.

1ii2 0hare warrant to bearer may not count as :uaification shares.

1iii2 'f shares are not ac:uired within two months one ceases to be director.

1iv2 <ne cannot be re5appointed uness he has obtained his :uaification shares.

1 v2 A f i ne of one hundr ed per day wi accr ue f or t he per i od i n off i ce
wi t hout :uaification shares.

Age of directors

!very director must retire on or shorty after the seventieth birthday( but he can
cont i nue i f a owed at a gener a meet i ng and af t er a speci a not i ce has been
given.

The minimum age for appointment is twenty5one years. The imits do not appy to private
companies uness they are subsidiaries of pubic companies
92

.an&ruptcy

.an&ruptcy dis:uaifies one from hoding the office of a director.
!ffects of dis:uaification
The acts of a director or manager sha be vaid not withstanding any defect that may
af t er war ds( be di s cover ed i n hi s appoi nt ment or :ua i f i cat i on. Act s done after
discosure by the company wi not be binding on the company.

9is:uaification of directors
The foowing are grounds for dis:uaification of a director4 5

". 3aiure to ta&e up prescribed share within two months section "86.

%. ?hen one becomes ban&rupt or ma&es any arrangement or composition with his creditors
generay 1sec."882.

6. 'f one is prohibited from being a director for any reason under section"8$.

4. 'f one becomes of unsound mind.

7. Cesigning by notice in writing to the company.

6. Absence without permission for more than si- months from meetings
of directors.

Macation or remova of a director
A director can eave office either by
1a2 Macation

This arises when a director vountariy :uits office by whatever reason. A director is iabe for a
acts committed whie in office but not thereafter.

1b2 Cemova from office

These ar e s i t uat i ons when one i s f or ced t o :ui t t he pos i t i on of a di r ect or.
Adirector can be forced to :uite by4
a2 <peration of aw

'nstances where a director is removed by operation of aw.
93

1i2 .reach of statutory :uaifications.

1ii2 Li:uidation of the company.

b2 The company

The company may r emove a di r ect or by an or di nar y r es o ut i on af t er speci a
notice is given. A removed director may caim compensation for the oss of office.

Aosition of directors
Aosition of directors may be considered or described from different perspectives as foows45

1i2 9irectors as agents

A company acts through directors who are representatives of directors( in the eyes of
aw they are agents for the companies they act for. /owever directors are at times not )ust agents
as they have independent powers in certain matters.

9irectors not personay iabe as agents4
9i r e c t o r s a r e n o t p e r s o n a y i a b e f o r a c t s d o n e o n b e h a f o f t h e
c o mp a n y provided they act within the scope of their authority and contracts are not in
their own names. 9irectors are however personay iabe where4 5

". They contract in their own names.

%. They use the name of the company incorrecty.

6. The contract is signed in such a way that it is not cear( whether it is the
principa or agent who signed.

4. They e-ceed powers given to them by the memorandum or artices.

9irectors as trust empoyees
9i r ect or s ar e not emp oyees or ser vant s of t he company but t her e i s not hi ng
preventing a director from being an empoyee of the company under a specia contract
of service( which he may enter into with the company.
9irectors as trustees
9irectors are treated as trustees4 5

94
". <f the companys money and property.

%. <f the powers entrusted to them.

9irectors are trustees of the companys money and property because they must
account for a the companys money and property and to refund to the company a n y o f i t s
mo n e y o r p r o p e r t y ( w h i c h t h e y h a v e i mp r o p e r y p a i d a w a y
o r transferred.

The director is a fiduciary position as regards to the protection of the company
propery. The duties of directors invoveE

1 i 2 3i duci ar y dut y not t o pr of i t hi ms e f per sona y f r om t he pr oper t y of
t he company.

1ii2 As fiduciary to be honest to account for the profit of the company.

9i r ect or s however ar e not t r us t ees i n t he r ea sense as t hey not ves t ed wi t h
ownership of the companys property. They are :uasi trustees because4 5

a2 They are not vested with the ownership of the company property.

b) Their functions are not the same as those of trustees.

c2 Their duties of care are not as onerous as those of trustees.

9irectors remuneration
'n Ce Beorge @ewman and co 1"8$72 " ch. 684 Lindey L0 observed *directors have
no right to be paid for their services and cannot pay themseves or each o t h e r o r
ma & e p r e s e n t s t o t h e ms e v e s o u t o f t h e c o mp a n y s a s s e t s u n e s s
authori;ed to do so by the instrument which reguates the company 1artices2 or by
the sharehoders at propery convened meeting+.

9irectors can be paid e-penses incurred whie conducting the business of the
company. ' n t he absence of a pr ovi si on a sa ar i ed di r ect or i s not ent i t ed t o
e-penses incurred as they are usuay covered by his remuneration.

Compensation for oss of office
95
The powers of directors are spet out in the artices. There is usuay a cause
de egat i ng t o t he di r ect or s t he power s t o manage t he company. 0ome of t he
functions directors incuded45

1i2 !ntering into contracts on behaf of the company.

1ii2 !ngaging and dismissing empoyees.

The powers of directors may aso be restricted by the artices.

9iscosure of interest

' f a d i r e c t o r h a s a n i n t e r e s t i n a c o n t r a c t wh i c h i s b e i n g c o n s i d e r e d
b y t h e company he must decare his interest when the contract is being discussed.
A director who fais to decare his interest is iabe to a fine of up to two thousand
shiings.

According to Lord Cairn one decares his interest not when he states that he has an interest but
when he states what his interests are.

The discosure shoud be made at the time the contract in :uestion comes before the board of
directors for discussion( section %>>1"2.

Lega effect of non5discosure of interest by directors.
There are two categories of conse:uences.

a2 0tatutory conse:uences

0 e c t i o n % > > 1 4 2 s u c h d i r e c t o r s s h a b e i a b e t o a f i n e n o t e - c e e d i n g
t wo thousand shiings.

b2 Common aw conse:uences

At c o mmo n a w t h e c o n t r a c t i t s e f b e c o me s v o i d a b e a t t h e i n s t a n c e
o f t h e company. The director in :uestion who aso made secret profits on the
contract must refund the same to the company.

9uties of directors
The foowing are some of the duties of directors4 5

96
". To e-er ci s e t hei r power s honest y f or t he benef i t of t he company as a
whoe.

%. @ot to pace themseves in position in which there is a confict between their
duties to the company and their persona interests.

6. To carry out their duties with reasonabe care and e-ercise such degree of s&i
and diigence as is reasonaby e-pected of persons of their &nowedge and status.

4. To attend board meetings.

7. @ot to deegate his functions e-cept to the e-tent authori;ed by the Act or constitution of
the company.

6. To discose his interest.

0!CC!TACF

'ntroduction 5
!very Company must have a secretary but a soe director cannot aso be a secretary
Appointment P it is usua for the secretary to be appointed by the directors on such
terms as they thin& fit. The directors may aso remove the secretary.

Iuaifications P
The directors must ta&e a reasonabe steps to ensure that the secretary is a person who appears
to them to have the re:uisite &nowedge and e-perience. /e must be one who4 5

1i2 Aready hod office as secretary( assistant secretary or deputy secretary of the
company or(

1ii2 3or at east three out of five years immediatey proceeding his appointment hed
office as a secretary of a pubic company( or

1iii2 's a barrister( advocate or soicitor( or

1iv2 's a member of any of the foowing bodiesE 'CA( ACCA('C0A( C',A( CAA( or
C'A3A( CA0( e.t.c.

97
1v2 's a person who by virtue of having hed any position or being a member of
any other body( appears to the directors to be capabe of discharging the
functions of secretary.

Aowers
The secretary is the chief administrative officer of the company and on matters
of admi ni s t r at i on he has ost ensi b e aut hor i t y t o ma&e cont r act s on beha f of
t he company. 0uch contracts incude4 5

a2 /iring office staff

b2 Contracts for the purchase of office e:uipment
c2 /iring cars for business purposes.

'@ AA@<CA,A 9!M!L<A,!@T0 M.3'9!L'0 3DC@'0/'@B 3A.L'C0 "$8" the secretary
of the defendant company entered into a number of contracts for the hire of cars. The
cars were ostensiby to be used to coect important customers from /eathrow
Airport( but in fact the secretary used them for his own private purposes. The court
of appea hed that the defendant company was iabe. Lord 9enning ,.C. 0aidE

La company with e-tensive duties and responsibiities. /e is certainy entited to
sign contracts connected with the administrative side of the companys affairs( such
as empoying staff( ordering cars and so forth.
1vi2 Athough a secretary has Le-tensive duties and responsibiities there are a
number of decisions where it has been hed that he does not have authority
for particuar acts. Thus he may not4 5

T .ind the company on a trading contract
T .orrow money on behaf of the company
T 'ssue a writ or odge a defence in the companys name

T Cegister a transfer of shares

T 0tri&e a name of the register of members.

T 0ummon a genera meeting on his own authority.

9DT'!0
The secretary duties incude4 5

98
a2 !ns ur i ng t hat t he companys document at i on i s i n or der( t hat t he
r e : u i s i t e r e t u r n s a r e ma d e t o t h e c o mp a n i e s r e g i s t r y( a n d t h a t
t h e companys register are maintained(

b2 Ta&ing minutes of meetings(

c2 0ending notices to members and(

d2 Counter signing documents.

%'& M66TIN85

A meeting is an assemby of peope for awfu purpose or the coming together of at east t wo
per sons f or t he same r eason. A company meet i ng i s a comi ng together of at
east a :uorum of members in order to transact either the ordinary or specia business of
the company.

'n 0harp vs. 9awes 1"8862 a meeting was defined as an assemby of peope for a
awfu purpose or the coming together of at east two persons for any awfu purpose.
,eetings are divided into two types4 5

a2 Aubic meetings

Th e s e a r e me e t i n g s o p e n t o a me mb e r s o f t h e p u b i c a n d wh i c h
c o n s i d e r matters of pubic concern.

b2 Arivate
These ar e meet i ngs at t ended by peop e who have a speci f i c r i ght or speci a
capacity to attend.

'mportance of company meetings
't is in meetings that important matters reating to the business of the company are
decided. 0harehoders meetings are aso important as they hep them oo& after their
interests by e-ercising powers conferred on them by statute. There are aso certain matters that
can ony be decided ony by sharehoders.



Cassification of company meeting
Company meetings are cassified as beow4 5
99

". ,eetings of sharehoders.

1i2 0tatutory meetings

1ii2 Annua genera meetings

1iii2 !-tra P ordinary genera meetings

1iv2 Cass meetings
%. ,eetings of directors
1i2 ,eetings of the board of directors

1ii2 ,eeting of committees of directors

6. ,eetings of debenture hoders
4. ,eetings of creditors.

7. ,eetings of creditors and contributories on winding up of the company.

0tatutory meeting
This is the first meeting of a pubic company. !very company imited by shares and
every company imited by guarantee and having a share capita sha within a per i od of not
es s t han t hr ee mont hs f r om t he dat e on whi ch t he company i s ent i t ed t o
commence bus i nes sE ho d a gener a meet i ng of member s of t he company which
sha be caed the statutory meeting.

The purpose is to accord members an opportunity to discuss matters reating to t he
f or mat i on of t he company or mat t er s ar i si ng out of t he s t at ut or y r epor t (
whether previous notice has been given or not.

0tatutory report
This is a report sent to a members at east fourteen days before the statutory
meeting. 'f a the members entited to attend and vote agree the report can be
forwarded in ess than fourteen days to the meeting.

Contents of the statutory report4 5
a. Tota shares aotted distinguishing shares aotted as fuy or party paid5up.
b. Cash received in respect of shares aotted.
100
c. An abstract of receipts and payments of the company made up to date without
the seven days of the reports.
d. @ames( address and occupation of the directors( auditors and managers and secretary
and changes( which have occurred in such names( address( and occupations.
e . Th e p a r t i c u a r s o f a n y c o n t r a c t t h e mo d i f i c a t i o n o f wh i c h i s t o
b e submitted to the meeting for approva( together with the particuars of the
modification or proposed modification.

0ection "6> 182 provides that the meeting may ad)ourn from time to time and at any
ad)ourned meeting a resoution can be passed after due notice in accordance with artices.

9efaut

'f defaut is made as regards to hoding of the statutory meeting and deivering t h e
s t a t u t o r y r e p o r t a g r o u n d f o r p e t i t i o n f o r wi n d i n g u p o r d e r a g a i n s t
t h e company is created. 'n usua practice courts order such meetings to be hed and reports
deivered at the cost of persons in defaut.

The person in defaut is aso iabe to a fine of up to one thousand shiings.

Annua genera meetings
These are meetings hed annuay and the interva between one meeting and the ne-t one sha be
not more than fifteen months. A company however may hod its first annua genera meeting
within a period of eighteen months from the date of corporation.

The registrar may for any specia reason( e-tend the time for hoding any annua genera
meeting by a given period of time. @o e-tension of time is granted for hoding the first
annua genera meeting.

'n case of defaut a member may appy to the registrar of companies to ca or direct
the caing of such meeting.

'f defaut is made in hoding the annua genera meeting in year one the annua
genera meeting hed in year two is treated as an annua genera meeting for the year
one.

101
9ef au t t o ho di ng t he annua gener a meet i ng( r ender s t he company and i t s
officers in defaut to a fine up to two thousand shiings.



Ce:uirement of notice
0ect i on "66 pr ovi des t he mi ni mum not i ce r e:ui r ed f or company meet i ngs as
foows4 5

a2 'n the case of a meeting( twenty5one days notice in writing.

b2 'n the case of a meeting then an annua genera meeting for passing a speci a
r es o ut i on( f our t een days i n wr i t i ng and seven days not i ce f or an
unimited company.


<rdinary business of the annua genera meeting.
The ob) ect s depend on t he ar t i c es( but ar t i c e 7% of t ab e A pr ovi des t hat
t he ordinary business of an annua genera meeting sha be4 5

a2 Consideration of dividend

b2 Consideration of accounts

c2 !ection of directors to repace the retiring

d2 Appointment of and fi-ing the remuneration of auditors.

Athough appointment of auditors must be made by the company in the genera
me e t i n g t h e y a r e ma d e b y t h e c o mp a n y i n t h e g e n e r a me e t i n g t h e y
a r e automaticay re5eected( provided they are :uaified( without any resoution to
that effect( unessE

a2 They have resigned.

b2 They are unwiing

c2 A resoution has been passed e-pressy providing that they sha not be re5
appointed.

102

!-tra ordinary genera meeting
Th e s e a r e c a e d f o r t r a n s a c t i n g s o me s p e c i a b u s i n e s s ( wh i c h ma y
n o t b e post poned t i t he ne-t annua gener a meet i ng. A meet i ngs ot her
t han t he annua genera meeting and statutory meeting are caed e-tra ordinary
genera meeting.

The e-tra ordinary genera meeting may be convenedE

a2 .y the board of directors on its own or on the re:uisition of the members.
b2 .y the re:uisitions on faiure of the board of directors.

!-tra ordinary meeting convened the board of directors.

1i2 <n its own

.oard of directors may ca an e-traordinary genera meeting to aow members
decide on matters that cannot be postponed to the ne-t annua genera meeting.

1ii2 <n re:uisition of the members

The re:uired number of members of a company may aso as for an e-traordinary
genera. The re:uisition for such a meeting by the members sha be signed.

a2 'n the case of a company having share capita hoders if not ess than one tenth
of the paid up capita of the company.

b 2 ' n t h e c a s e o f a c o mp a n y n o t h a v i n g a s h a r e c a p i t a ( b y
me mb e r s representing not ess than one tenth of the tota voting power in regard to the
matter in re:uisition.

The di r ect or s ar e r e:ui r ed by s ect i on "6% t o convene such a meet i ng wi t hi n
t went y5 one days f r om t he dat e of t he r e:ui s i t i on and i f t hey f ai t o do so(
t he r e:uisitionists may convene the meeting. The company must compensate the
re:uisitionists for any reasonabe e-penses incurred.


Cass meetings
103
These ar e ca ed when t he companys shar e capi t a i s di vi ded i nt o di ff er ent
casses of shares. These meetings are re:uired when it is proposed to ater( vary or affect the
rights of a particuar cass of shares.

A c as s meet i ng s hou d be at t ended on y by member s of t he c as s. A c as s
meet i ng can i nc ude st r anger s i f t her e i s no ob) ect i on t o t hei r pr esence by a
member of the cass.

The r i ght s of a par t i cu ar c as s of shar es may be var i ed wi t h t he cons ent i n
writing of the hoders of three fourths of the issued shares of that cass.

Cights of minority
0ection 84 stipuates that the hoders of not ess than "7N of the issued shares of
that cass being persons( who did not consent to the resoution( abstained or did not
vote a( may ob)ect within thirty days to the ateration approved by the ma)ority of
the cass. The court must disaow the variation if it is satisfied that it woud unfairy
pre)udice the sharehoders of the cass( but if not satisfied( it wi confirm the variation.

%. 1a2 ,eetings of the board of directors

These are the most fre:uent meetings of the company. These meetings discuss matters of the
company and decide on poicy issues concerning the company.

,eetings of committees of directors
Committees are common in arge companies where it is convenient to deegate
certain matters. 9eegation to committees can ony be aowed if the artices so
provided. Committees may be standing or ad hoc committees.

,eetings of debenture hoders

These meetings are hed in accordance with the rues and reguations that are ei t her
ent er ed i n t he t r ust deed or endor s ed on t he debent ur e bond and ar e binding
on the company and the debenture hoders.

These meetings are caed wherever the interests of the debentures are invoved as in
reconstruction( reorgani;ations( amagamation and winding up.

104
The rues and reguations entered in the trust deed reate to notice of meeting(
appointment of a chairman and the writing and signing of minutes.



,eeting of creditors
These are caed when the company proposes to ma&e a scheme or arrangement with its
creditors.

,eeting of creditors and contributions on winding up.

These are hed when the company has gone into i:uidation. These are caed to as cer t ai n t he
i ndebt nes s of t he company t o i t s cr edi t or s and a s o t o appoi nt either a i:uidator
or a committee of inspection.

Ce:uisites of a vaid meeting
The foowing are re:uirements for a vaid meeting4 5

". The meeting must be duy commenced by a proper authority.

%. A proper notice must be served in the prescribed manner.

6. A :uorum must be present.

4. A chairman must preside.

7. ,inutes of proceedings must be &ept.

%*& ACCOUNT5
There are certain prescribed boo&s of account which must be &ept by registered companies. The
accounts of the company have then to be presented to members at some interva.

.oo&s of account
0ection "481"2 re:uires a companies to &eep proper boo&s of account with respect to

1i2 A sums of money received and spent by the company.

1ii2 A saes and purchases of goods made by the company.
105
1iii2 The assets and iabiity of the company.

0ection "48 1%2 provides that proper boo&s of account are ony said to have seen &ept with
respect to the matters aforesaid if such boo&s give a true and fair view of the state of the
companies affairs and to e-pain its transactions.

0ection "481621a2 provides that the boo&s of account shoud be &ept at the registered office of the
company or with consent of registrar and sub)ect to conditions he may give at any other pace as
the directors thin& fit.

Arofit and oss account
0ection "48 1"2 stipuates that the directors of every company must( at some date not ater than
eighteen months after incorporation of the company and subse:uenty once at east in every
caendar year( ay before the company in genera meeting profit and oss account for the period.
A company which does not trade for profit is re:uired to ay an income and e-penditure account
instead of a profit and oss account. The period during which accounts are to be aid before the
genera meeting wi be e-tended by the registrar on specia circumstances.

.aance sheet
0ection "48 1%2 provides that directors shoud prepare at the end of every year( and to ay before
the company in a genera meeting( a baance sheet as at the date to which the profit and oss
accounts 1or income and e-penditure account2 is made up.

Contents
0ection "4$ 1"2 provides that the baance sheet shoud give a true and fair view of the state of
affairs of the company as at the end of its financia year and the profit and oss account shoud
give a true and fair view of the profit or oss of the company for the financia year.

Broup accounts
0ection "7> 1"2 states that if at the end of the financia year( a company has subsidiaries then it
must incude in its annua accounts group accounts which incorporates the affairs of the
subsidiaries.

0ection "7> 1%2 1b2 provides that group accounts need not incude a subsidiary of the company if
the companys directors are of the opinion thatE

a2 't is impracticabe( or woud be of no rea vaue to the members of the company in view
of the insignificant amounts invoved.

106
b2 The resut woud be miseading.

c2 The resut woud be harmfu to the business of the company or any of its subsidiaries.

d2 The business of the hoding company and that of the subsidiary are so different that they
cannot reasonaby be treated as a singe underta&ing.

Approva of the registrar wi be re:uired for not deaing in group accounts with a subsidiary on
grounds 1c2 or 1d2.

0ection "7> 1%2 1a2 e-empts a company that is a whoy owned subsidiary of another company
from the obigation of preparing group accounts.

3orm
0ection "7" 1"2 provides that the group account aid before hoding company sha be
consoidated accounts comprising4 5

1a2 Consoidated baance sheet
1b2 Consoidated profit and oss account.

The directors can however decide to prepare the accounts in another form if they are of the view
that the form coud be more appropriate.

Contents
Broup accounts aid before the company shoud give a true and fair view of the state of affairs
and profit or oss of the company and the subsidiaries deat with thereby as a whoe( section "7%
1"2. The consoidated accounts sha compy with the re:uirements of the si-th schedue to the
ActE so far as appicabe thereto.

3inancia year
0ection "76 1"2 provides that a hoding companys directors sha ensure that( e-cept where in
their opinion there are good reasons against it( the financia year of each of its subsidiaries sha
coincide with the companys own financia year.

Dnder section "76 1%2 the registrar is empowered to postpone the submission of a companys
accounts to a genera meeting from one caendar year to the ne-t for purposes of enabing the
companys financia year to end with that of the hoding company.


107
.aance sheet
0ection "48 re:uires the directors to prepare and ay before the company in a genera meeting a
baance sheet as at the date to which the profit and oss account or the income and e-penditure
account is made up.

The accounts may be signed on behaf of the board by two directors or if there is ony one
director by such director section "77 1"2. 'f the baance sheet is not signed as re:uired but a copy
issued( circuated or pubished( the company every officer who is defaut sha be iabe to a fine
not e-ceeding one thousand shiings.


Accounts anne-ed
.y section "76 1"2 the profit and oss account and any group accounts aid before the company in
a genera meeting sha be anne-ed to the baance sheet.

0ection "76 1%2 re:uires that the account so anne-ed be approved by the board of directors before
the baance sheet is signed on their behaf.

0ection "76 162 provides if any copy of the baance sheet is issued( circuated or pubished
without having anne-ed thereto a copy of the profit and oss account to be anne-ed( the company
and every officer of the company who is in defaut sha be iabe to a fine not e-ceeding one
thousand shiings.


9irectors report
0ection "76 provides that the baance sheet must have attached to it a directors report on the
companys affairs( incuding the amount if any( which they recommend shoud be paid by way of
dividend and amount if any to be transferred to reserves.

%+& AUDITOR5 AND IN65TI8ATION

The subs cr i ber s of capi t a ar e not i n di r ect cont r o of t he app i cat i on of t he
capi t a ( whi ch i s ef t ( t o t he cont r o of di r ect or s and super i or off i cer s of t he
company. 'n these circumstances it becomes necessary to have someone to safeguard
their interests. The persons who safeguard the interests of sharehoders are caed auditors.

The audi t or i s a s er vant of t he shar eho der s and hi s dut y i s t o e-ami ne t he
affairs of the company on their behaf at the end of the year and report to them what
he has found.
108

Appointment of auditors

A company is re:uired at each annua genera meeting to appoint an auditor1s2 to hod
office unti the concusion of the ne-t annua genera meeting.

3 a i u r e b y a c o mp a n y t o a p p o i n t a u d i t o r 1 s 2 e n t i t e s me mb e r s t o ma & e
a n appication to the registrar to appoint an auditor.
A retiring auditor is to be reappointed without any resoution being passed at the meeting uness4
5

a2 /e is not :uaified for re5appointment

b2 A resoution has been passed appointing someone ese.

c2 A resoution has been passed that he sha not be reappointed.

d2 /e has given the company a written notice of his unwiingness to be
reappointed. Any cas ua vacancy i n t he offi ce of audi t or may be f i ed by
t he di r ect or s( but whie such vacancy continues the serving auditors may act.

@o person than a retiring auditor may be appointed at an annua genera meeting uness a specia
notice of the resoution has been given and a copy of it has been sent to the retiring auditor
forthwith.

The retiring auditor is entited to ma&e representations in writing and have them
circuated among the members( and spea& at the meeting.


9is:uaification for appointment as auditor
A par t f r om pr i vat e compani es ( a per son i s not :ua i f i ed f or appoi nt ment as
auditor uness45

". he is a member of one or more professiona bodies specified in the first coumn
of the schedue to the accountants.

% . /e i s a u t h o r i ; e d b y t h e r e g i s t r a r t o b e a p p o i n t e d a s h a v i n g
s i mi a r :uaifications obtained outside i.e. Dnited Kingdom( 0outh Africa( Kimbabwe
109
or 'ndia has ade:uate &nowedge and e-perience ac:uired in the course of his
empoyment.

6. /e has practiced in Kenya as an accountant before %6
th
may "$7$.

4. /e has been appointed and practiced before %6th may "$7$ as auditor of an
e-isting company.

The foowing persons are not :uaified to be appointed as directors4 5

a2 An officer or servant of the company.

b2 A person who is a partner or in the empoyment of an officer or servant of the
company.

c2 A body corporate.

d2 A per son di s:ua i f i ed f or appoi nt ment as audi t or of a subs i di ar y
or hoding company.

Appointment of an un:uaified person as auditor renders such person and the
company and every officer in defaut iabe to a fine up to four thousand shiings.


Cemuneration of auditor
Cemuneration of the auditors of a company may be fi-ed by the company in a
genera meeting or in such a manners as the company in genera meeting
maydetermine.' n cas e of an audi t or appoi nt ed by di r ect or s or r egi s t r ar hi s
r emuner at i on i s determined by the directors or the registrar as the case may be 1sec. "7$1872.


Aosition of auditors
". 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 e-amine the affairs of the company on their behaf and at the end of the
year report to them what he has found.

110
't was observed in 0pac&man vs. !vans 1"8682 that athough an auditor is an agent of
the sharehoders( the sharehoders are not necessariy bound by notice of everything of
which notice is given to the auditor.

'f the auditor is negigent in the course of his audit and this resut in oss to the sharehoders he is
iabe to the sharehoders( but his iabiity woud not e-tend to third parties.

1%2 Auditor as an officer of the company as an auditor is iabe for defaut in the
performance of his duty to the companyE he may to some e-tent be regarded as an officer of
the company.
162 Auditor as an empoyeeE The reationship between an auditor and a company is that of a
professiona man and a cient rather than that of an empoyee and empoyer.
Auditors report
As per the seventh schedue( an auditors report must contain the foowingE 5

a2 The accounts e-amined by him.

b2 The baance sheet and profit and oss account.

!ver y document anne-ed t o be ba ance sheet and pr of i t and os s account 1i.e.
notes to the accounts2 aid before the company in a genera meeting during his tenure of
officer.

An audi t or i s s ai d t o have r epor t ed i f af t er havi ng af fi -ed hi s s i gnat ur e t o
t he report anne-ed to the baance sheetE he forwards that report to the secretary
of the company or directors.

,atters to be e-pressy stated in the auditors report.

". ?hether auditors have received a information necessary for their audit.

%. ?het her pr oper boo&s of account s of account have been &ept by t he
company and pr oper r et ur ns have been r ecei ved f r om t he br anches not
visited by them.

6. 1a2 ?hether the companys baance sheet and profit and oss account 1or conso i dat ed
account s2 dea t wi t h by t he r epor t ar e i n agr eement wi t h t he boo&s of
accounts and returns.

111
1b2 ?h e t h e r ( i n t h e i r o p i n i o n a n d t o t h e b e s t o f t h e i r i n f o r ma t i o n a n d
accor di ng t o t he e-p anat i ons gi ven t o t hem( t he sai d account s gi ve t he
information re:uired by the Act in the manner so re:uired and give a true and fair view.

1i2 'n the case of the baance sheet( of the state of affairs as at the end of its financia
year.

1ii2 ' n t he case of pr of i t and oss account of t he pr of i t or oss in its financia year.

Cights and powers of auditors
". Cight to access boo&s of account and vouchers. An auditor has a right to access at a
times to the boo&s and vouchers of the company and is entited to re:uire from
the officers of the company such information and e-panations as he thin&s necessary for
the performance of his duties as auditor.

%. Cight to attend any genera meetings of the company and to receive any notices
which members are entited to receive.



9uties of auditors
9ut i es of audi t or s ar e s et out i n sect i on "7$ t o "6% of t he act . The dut i es
of auditors4 5

". They must ac:uit themseves with their duties as aid down by artices and companies
Act.

%. They must report to members on the accounts aid before the company in genera
meeting( during that tenure of office.

6. They must be honest and must e-ercise a reasonabe s&i and care or ese they
may be sued for damages.

%,& MA<ORITY RUL6 AND MINORITY RI8/T5

,A#<C'TF CDL!

112
A ma) or i t y of member s of a company i s ent i t ed t o e-er ci s e t he power s of
t he company and to contro its affairs. 9irectors who en)oy a wide range of powers
are eected by the ma)ority. 't wi therefore be seen that in a aspects the affairs of the company
are conducted by the ma)ority.

Arincipe of ma)ority rue
The principe was recogni;ed in 3oss vs. /arbotte and the principe was caed the
ma)ority rue or the proper paintiff principe.

The rue is that the proper paintiff in action to redress a wrong to a company on t h e
p a r t o f a n y o n e ( i s t h e c o mp a n y a n d w h e r e t h e a e g e d w r o n g
i s a n y irreguarity which might be made binding on the company( by a simpe ma)ority
of members( no individua member can bring an action in respect of it.

' n 3oss vs. /ar bot t e t wo ma) or i t y s har eho der s i n a company a eged t hat
i t s directors were guity of buying their own and for the companys use and paying
themseves a price greater than its vaue. This act of the directors resuted in a oss to
the company. The minority sharehoders therefore decided to ta&e action f or damages
agai nst t he di r ect or s. The s har eho der s i n a gener a meet i ng by ma)ority
resoved not to ta&e any action against the directors saying that they were not
responsibe for the oss( which had been incurred. The court dismissed t he sui t on
gr ounds t hat t he act of di r ect or s wer e capab e of conf i r mat i on by ma) or i t y
of member s and he d t hat t he pr oper p ai nt i ff f or wr ongs done t o t he company
is the company is the company itsef not the minority and the company can ony act through its
ma)ority sharehoders.

The principe of ma)ority rue as aid down in 3oss vs. /arbotte was aso uphed in
,adanga vs. !ardinor by ,eish L.# H in .urand vs. !are by Lord 9avery.

Advantages of the rue in 3oss vs. /arbotte
.

". Cecognition of the separate ega personaity of a company.

%. 't preserves the right of ma)ority of members to ma&e decisions.

6. ,utipicity of futie suits is avoided.

4. Litigation at the suit of a minority is futie if ma)ority do not wish it.
113

Arotection of minority sharehoders or !-ceptions to the rue in 3oss vs/arbotte.

The wide powers of the ma)ority if not used carefuy may be used to e-poit the minority
sharehoders. Aamer pointed out that *a proper baance of the rights of ma)ority and minority
sharehoders is essentia for the smooth functioning of the company+.

The foowing are e-ceptions to the 3oss vs. /arbotte Cue.

1iv2 ?hen the acts of the ma)ority are utra vires or iega.

1v2 ?hen act s ar e suppor t ed by i ns uf fi ci ent ma) or i t y f or certain acts the act or
artices re:uire a specia ma)ority of three fourths of the sharehoders.

1vi2 ?here the act of ma)ority constitutes a fraud on minority. A r es o ut i on wou d
const i t ut e a f r aud on mi nor i t y i f i t i s not bonaf i de f or t he benefit of the company
as a whoe.

The cases which iustrate the concept of fraud on minority are4 5

,enier vs. /oopers Teegraph ?or&s LtdE Coo&s vs. 9ee&s and brown vs. .ritish Abrasive
?hee co.

1iv2?here the persona membership rights of the paintiff sharehoder have been infringed.

'ndividua membership rights incude right to attend meetings( the right to receive dividends( the
right to insist on strict observance of ega rues e.t.c. if such rights are vioated then a singe
sharehoder can defy the ma)ority.

1v2?here there is a breach of duty where there is a breach of duty by the directors and ma)ority
sharehoders to the det r i ment of a company t he mi nor i t y can br i ng act i on agai nst
t he company. A case iustrating this point is in 9anies vs. 9anies 1"$882.

1vi2<ppression and mismanagement

?here oppression of the minority and mismanagement of the company affairs is aeged the
rue in 3oss vs. /arbotte does not appy. A member thus can bring an action against
the management of the company on grounds of oppression and mismanagement.

%-& AMALMA8ATION
114
Th e t e r m i mp i e s c r e a t i o n o f a n e w c o mp a n y b y c o mp e t e
c o n s o i d a t i o n o f combining units. Two or more companies may i:uidate
themseves under the aw and se their assets and transfer their iabiities to a new
company which i ss ues i t s own s har es i n e-change of va ue r ecei ved f r om t he
ama gamat i ng companies.

After amagamation none of the companies retains its entity or e-istence.

Amagamation may ta&e any of the foowing forms4 5

". .y a scheme of arrangement.
%. .y sae of underta&ing
6. .y sae of shares
4. .y amagamation in case of a company in course of winding up.
". Arrangement.

Arrangement incudes a reorgani;ation of the share capita of the company by the
consutation of shares of different casses or division of shares of different casses or
by division of shares of a modes of reorgani;ing the share capita even when
invoving an interference with preferentia or for specia rights attached to the share by the
memorandum.

%. 0ae of underta&ing

This invoves the sae of the whoe of the underta&ing of the transferor company as a
going concern. An amagamation of two or more companies invoves the transfer of
the whoe part of the underta&ing of the companyE the court may ma&e an order for the foowing
matter

1i2 The transfer to the transferee company of the whoe part of the underta&ing and the
property.

1ii2 The aotting or appropriation by the transferee of any share( debentures(
poicies or other i&e interests in that by that company to or for any person.

115
1iii2 The continuation by or against the transferee company o f a n y e g a
p r o c e e d i n g s p e n d i n g o r a g a i n s t a n y t r a n s f e r o r company.

1 i v 2 Th e d i s s o u t i o n wi t h o u t wi n d i n g u p o f a n y t r a n s f e r company

1v2 Arovision to be made for any persons who( within such time and in such
manner as the court directs( dissent from the compromise or arrangement
1vi2 0uch incidenta( conse:uentia and suppementa matters as are necessary to
secure the reconstruction in amagamation sha be fuy and effectivey carried out.

0ae of shares

0har es ar e so d and r egi st er ed i n t he name of t he pur chas i ng company. The
s e i ng shar eho der s r ecei ve ei t her money or shar e i nt o ac:ui r i ng company.
Appr ova t he sa e of shar es mus t be appr oved by ni net h . of t he shar eho der
whose is transfer is invoved.

The number must e-cude any shares aready hed by the transferee company or its nominees or
its subsidiary. ?hen approva of nine5tenths ma)ority is ac:uired( the transferee company can
ac:uire two months( after e-piry of a four months the transferee company may give a
notice to dissenting sharehoders that within one month( it desires to ac:uire their shares.

The dissenting sharehoders may appy to court but if no appication is made( the transferee
company gets the fina right to ac:uire a the shares. The court wi infer fairness from
the fact that the scheme has been approved by nine tenths of the members.

?hen an appication is made to the court by a sharehoder that the terms are not fair it is not
upon the appicant to estabish his aegation. ?here however the offer is being made
by the same ma)ority sharehoders who have accepted it( the burden of proof is reversed and it is
up to the offeror to show the scheme is fair.

Amagamation in case of a company in course of winding up4 5
0ection %8> provides that a company may transfer or se the whoe or part of its
busi ness or pr oper t y t o anot her company and a company may pass a speci a
resoution authori;ing the i:uidator to receive as a consideration cash or shares( po i ci es or
i &e i nt er es t i n t r ansf er ee company f or di st r i but i on among t he members of the
transferor company according to their rights and interests in that company. The sanction of the
court is unnecessary
116
0 e c t i o n % 8 > a s o p r o v i d e s t h a t s u c h a n a r r a n g e me n t i s b i n d i n g o n a
t h e me mb e r s o f t h e t r a n s f e r o r c o mp a n y wh e t h e r t h e y a g r e e t o i t o r
n o t b u t t h e members who did not vote in favour of the resoution may eave his
dissent in writing addressed to the i:uidator at the companys registered office within seven
days after the passing of the resoution. The i:uidator must then either abstain from
carrying the resoution into effect or pur chase t he member s i nt er est s at a pr i ce
agr eed by t hem or det er mi ned by arbitration.

'f there are many dissentients the i:uidator may be forced by circumstance to
abandon the scheme.

%3& WINDIN8 UP OR LI=UIDATION

?indi ng up r epr es ent t he pr oceedi ng by whi ch a company i s di ss o ved. The
assets of the company are disposed of( the debts are paid from assets proceeds 1or from
contributories2 and the surpus is distributed to the sharehoders.

?i n d i n g u p o r i : u i d a t i o n i s t h e p r o c e s s b y w h i c h t h e
ma n a g e me n t o f a companys affairs is ta&en out of its directors hands( its
assets are reai;ed by a i:uidator and its debts are paid out of the proceed of reai;ation.

Ar of es sor Bower gave t he f o owi ng def i ni t i on *wi ndi ng up of a company i s
a process whereby its ife is ended and its property administered for the benefit of its
creditors and members. An administrator caed a i:uidator( is appointed and he t a&es
cont r o of t he company co ect s i t s asset s ( pays i t s debt s and f i na y
di s t r i but es any s ur p us among t he member s i n accor dance wi t h t hei r
r i ght s+1modern company aw( 4
th
edition page 88$2.

Aennington gives the foowing definition of winding up. ?inding up is a process by
whi ch t he management of a companys aff ai r s i s t a&en out of i t s di r ect or s
hands E i t s asset s ar e r ea i ;ed by t he i :ui dat or and debt s ar e pai d out of t he
proceeds of reai;ation and any baance remaining is returned to its members. At the end of the
winding up( the company wi have no assets or iabiities and wi therefore be simpy
a forma step for it to be dissoved( that is its ega personaity as a corporation to be brought to
an end+ 1company ater %
nd
edition2.

?inding up and dissoution
A company is said to be dissoved when it ceases to e-ist as a corporate entity.
?inding up proceeds dissoutionE it is the process by which the dissoution of a
company is brought about.
117

?inding up and insovency
The foowing can be noted as regard to winding up and insovency.

a2 ?inding up order can be made even when the company is sovent.

b2 <n winding up( the company continues to e-ist it ony its administration that is carried on
through the medium of a i:uidator.

c 2 ! v e n w h e r e a c o mp a n y i s w o u n d u p b e c a u s e i t i s i n
i n s o v e n t circumstances( a the provisions of insovency aw do not appy to it.

,odes of winding up
There are three modes of winding up.

". ?inding up by court

%. Mountary winding up.

1a2 ,embers vountary winding up

1b2 Creditors vountary winding up

6. ?inding up sub)ect to the supervision of the court



?inding up by the court 1sec.%"$2

?inding by court is aso caed compusory winding up. This may occur in the
foowing circumstances4 5

a2 'f the company has by specia resoution resoved that it be wound up by court.

b2 9efaut is made in deivering the statutory report to the registrar or in hoding
the statutory meeting.

<ny a sharehoder may present a petition on this ground and where reason is faiure
to hod the statutory meeting( fourteen days must have eapsed from the
118
9ate meeting was due to be hed. The courts may instead of ma&ing the winding up order direct
that the statutory report sha be deivered or the meeting be hed and the costs to be paid by any
persons who are responsibe for the defaut.

c2 ?here there is faiure to commence business within a year or where the
business is suspended for a whoe year by the company.

The court may order winding up if the company has no intention of carrying on its business or if
is not possibe to carry on its business.

An e-amp e of a company t hat was wound up because of f ai ur e t o cont i nue
business is in <rissa Trun&s and !name ?or&s Ltd 1"$862 where the company
suspended business for ten years due to embe;;ement.

' f a c o mp a n y h a s n o t b e g u n t o c a r r y o n b u s i n e s s w i t h i n a y e a r
f r o m i t s incorporation or suspends its business for a whoe year the court wi not
wind it up if4 5

1i2 There are reasonabe prospects of a company starting business within a
reasonabe time.
1ii2 There are good reasons for the deay.

An e-ampe where courts decined to wind a company on the above reasons is in
,iddeborough Assemby Cooms Co. Ce 1"88>2 where the company suspended
business for three years due to depression in trade.

d2 The number is reduced in case of private company beow two or in the c a e o f
a n y o t h e r c o mp a n y b e o w s e v e n . ' f t h e c o mp a n y c a r r i e s o n
business for more than si- months whie the member is so reduced( every
member who i s awar e of t he f act t hat t he number i s be ow t he
s t at ut or y mi n i mu m wi b e s e v e r a y i a b e f o r t h e p a y me n t o f
t h e d e b t s o f t h e company contracted after si- months.

This is aso one of the situations under the act where the vei of incorporation is
ifted.

e2 ?here the company is unabe to pay its debts.

1i2 A creditor to whom the company owns more than one thousand shiings
has eft at the companys registered office demand under his hand for the
payment of the sum due and the
119
Company has for three wee&s or thereafter negected to pay the sum( to secure or compound for
it to the reasonabe satisfaction of the creditor orE

1ii2 !-ecution or other process in favour of creditors of the company is returned
unsatisfied in whoe or part orE

1 i i i 2 ' t i s p r o v e d t o t h e s a t i s f a c t i o n o f t h e c o u r t t h a t t h e company
i s unab e t o pay i t s debt s E t a&i ng i nt o account t he contingent and
prospective iabiities of the company.

f2 ?hen it is )ust and e:uitabe.

The petition shoud be aowed ony as a ast resort or for compeing reasons when
other remedies are not efficacious enough to protect the genera interests of the
company.

'n ?estbourne Baeries Ltd Ce. 1"$862 AC 66> it was observed that *a petitioner who r e i es
on t he ) us t e:ui t ab e+ c ause must come t o t he cour t wi t h a c ean hand( and if
the brea&down is confidence between him and other parties to the di sput e appear s
t o have been due t o hi s mi s conduct ( he cannot i nsi st on t he company being
wound up if they wish to continue.

?hat is a )ust and e:uitabe cause
The cour t s may or der wi ndi ng up under t he ) us t and e:ui t ab e c ause i n t he
foowing Case4 5

". ?hen the substratum is said to have disappeared. This occurs when the ob)ect
for which the company was formed has substantiay faied or when it is i mposs i b e t o
car r y busi ness e-cept at oss or t he e-i st i ng and possi b e assets are
insufficient to meet the e-isting iabiities. 'n ma&ing the winding up o r d e r t h e
c o u r t s s h o u d c o n s i d e r t h e i n t e r e s t s o f t h e s h a r e h o d e r s a n d
creditors.

The substratum of a company disappears4 5

1i2 ?hen the sub)ect matter of the company is gone. This was the case in Aerievs.
0tewart 1"$>42
1ii2 ?hen the main ob)ect of the company has substantiay faied or become
impractica.

120
?hen a companys mai n ob) ect f ai s i t s subst r at um i s gone and i t may be
wound up even though it is carrying on its business in pursuit of a subsidiary ob)ect.

A c o mp a n y wo u n d u p o n t h i s g r o u n d wa s t h e Be r ma n d a t e c o f f e e Co .
i n Berman date coffee company Ce. 1"88%2 %> ch 9 "6$.

1 i i i 2 ?hen t he company i s car r yi ng on i t s bus i nes s at a oss and t her e i s
no reasonabe hope that the ob)ect of trading can be attained.

?here the ma)ority sharehoders are against winding up( the court wi not order a company to be
wound up merey because it is ma&ing a oss.

1iv2 ?here the e-isting and probabe assets of the company are insufficient to
meet its e-isting iabiities.
%. ?hen t he management i s car r i ed i n such a way t hat t he mi nor i t y ar e
disregarded or oppressed. The court wi not ma&e an order for winding up
un es s i t i s pr oved t hat wr ong has been done t o t he company by abus e
of ma)ority voting power( and it is impossibe for the business of the company as a
whoe( owing to the way in which voting is hed and used.

'n Ce/arnets ,ining co. Ltd ?C 1winding case no "% of "$882 the petitioner ,rs.
.eth ?ambui ,ugo wanted the company to be wound up on the )ust and e:uitabe
ground( the reasons were as foows4 5

1i2 The affairs of the company were conducted in manner oppressive to her.
Though she had 7>N of sharehoding she did not participate in decision5ma&ing but
was e-pected to sign resoutions by other directors.

1 i i 2 The subs t r at um of t he company had gone and t hat t he company had
no aternative business to engage in.

1iii2 The directors had oss confidence and probity in each other to the e-tent
t h a t t h e c o mp a n y c o u d n o o n g e r b e ma n a g e d a t a . ' t wa s
h e d t h a t t h e company coud be wound up.

6. ?here there is a deadoc& in the management of a company.
This is usuay rea when the sharehoding between the two competing sides is e:ua
and thus there is a compete deadoc& in the company on account of ac& of probity in the
management of the company and there is no possibiity of efficient continuance of the
company as a commercia concern.
121

Ca s e s o f c o mp a n i e s wo u n d u p o n t h o s e g r o u n d s a r e i n Ame r i c a n
A i o n e e r Leather Core 1"$882 and in Fenid)e Tobacco Co. Ltd 1"$"62.

4. ?hen the company was formed to carry out fraud or the iega business or the
business of the company becomes iega.

A c a s e i n w h i c h t h e c o mp a n y w a s w o u n d u p i s t h e a b o v e
g r o u n d i s i n .rinsmead 1Thomas !dward2 H sons Ce 1"8$82 " ch. 47.

7. 'n the case of a company incorporated outside Kenya and carrying on business
in Kenya( winding up proceedings have been commenced in respect of it either4 5

1i2 'n the country of its incorporation.

1 i i 2 ' n any count r y i n whi ch i t has es t ab i s hed a p ace of business sec. %"$.

Aetitioners for compusory winding up.

An appication to the courts for winding up by petition may be presented.

a2 .y the company

A company in genera meeting may resove that the company be wound up byte court.

b2 .y a cr edi t or or cr edi t or s
1'ncuding any contingent or prospective creditors2.

Aersons incuded in the category of creditors

". A contingent or prospective creditor
%. A secured creditor

6. A debenture hoder

4.Any person who has a pecuniary caim against the company.

7.The ega representations of a deceased creditor.

6. The government or oca authority to which any ta- or pubic charge is due.
122



9isputed debt

A creditor whose debt is disputed cannot get a winding up order.

c2 .y petition of any contributory

A contributory is any person iabe to contribute to the assets of the company in the
event its being wound up. The definition does not incude debtors. A hoder of f u y pai d
shar es i s r egar ded as a cont r i but or y a t hough no f ur t her ca s can normay be
imposed upon him in i:uidation of the company.

d2 .y officia receiver.

e2 .y t he at t or ney gener a af t er r ecei vi ng a r epor t of i ns pect or s on t he
companys affairs.

f2 0ection %%" 1%2 provides that when a company is aready in the course of being wound
up vountariy or sub)ect to supervision( the courts if satisfied t hat vo unt ar y
wi ndi ng up or wi ndi ng up sub) ect t o super vi si on cannot be continued
with due regard to the interest of the creditors and contributories.

Cight of assignee of a debt
The assignee of a debt has the same right which his assignor had to present a petition
for winding up order( uness the assignment was made after a petition had aready been
presented.

Commencement of winding up
The commencement of winding up by the court is deemed to have started from the
date a petition is presented. ?hen the order is made for winding up( it reates bac& to the date of
the presentation of petition.

Aowers of court 1section %"8(%%"H%%%2

Co u r t s h a v e ) u r i s d i c t i o n t o r e c e i v e wi n d i n g u p p e t i t i o n h e a r i t a n d
ma & e determination. The interest of the appicant aone is not of predominant
123
Consideration. The interests of the sharehoders of the company as a whoe apart from those
other interests have to be &ept in mind at the time of consideration as to whether the appication
shoud be admitted on the aegations mentioned in the petition.
The court may deay the order to enabe the company to4 5

a2 0ette a ist of contributories.

b2 <r der any per son i n pos ses si on of any pr oper t y of t he company t o
surrender it to the i:uidator immediatey.

c2 ,a&e the ast cas on the shares and debentures the members hod.

d2 ?here the companys business is running the company has power to appoint a
specia manager to ta&e care of the business unti it determines.

e 2 A r e v e n t a n y c r e d i t o r f r o m p a r t i c i p a t i n g i n t h e d i s t r i b u t i o n o f
t h e companys assets when the company is paying off its iabiities.

f2 The courts have aso power to prepare a priority ist detaiing the order in
which payment sha be made 1sec.%6%2.

g2 'f at the time of winding it appears that promoters might have committed fraud to the
company( the court may order that they be e-amined.



Arocedure for winding up by the courts
A petition for winding up order against a company may be presented to the high court
of Kenya such a petition must be supported by an affidavit of the petitioner 1sec.%"82.

?hen determining the case 1petition2 the court may 1sec.%%%24 5

a2 9ismiss it with or without costs.

b2 Ad)ourn the hearing conditionay or unconditionay.

c2 ,a&e an interim order.

d2 ,a&e any ot her or der 1 f or compu sor y wi ndi ng up or wi ndi ng up
under supervision of the court2.
124

Conse:uences of winding up order
The conse:uences date bac& to the commencement of winding up. A winding up order operates
in favour of a creditors and contributories as if made on the )oint petition of a creditor and a
contributory.

'n the case of compusory winding up by courts( the winding up dates from the
presentation of the petition uness before that date a resoution was passed to
winding up vountariy( in which case the commencement is the time
of resoution.

An y s u b s e : u e n t d i s p o s i t i o n o f t h e p r o p e r t y a n d a n y t r a n s f e r o f
s h a r e s o r ateration in the status of members is void uness the court otherwise orders.

?hen wi ndi ng up or der has been gr ant ed or an i nt er i m i :ui dat or has been
appointed( no action may be preceded with or commenced against the company e-cept with
the eave of the courts and sub)ect to such terms as the courts may impose.

The power s of di r ect or s ar e t er mi nat ed and t he companys ser vant s ar e ' pso
f a c t o d i s mi s s e d . Th e o f f i c i a r e c e i v e r 1 o f t h e c o u r t 2 b e c o me s t h e
p r i n c i p a i :ui dat or t o t he company unt i he or anot her per son becomes
i :ui dat or 1sec.%662.



0pecia manager
D p o n a n a p p i c a t i o n b y t h e o f f i c i a r e c e i v e r s a s p e c i a
ma n a g e r ma y b e appointed( acting as a i:uidator( whether provisiona or not by
the courts. 0uch an appication may be made if the officia receiver is satisfied that
the nature of the companyLs business or interests of the creditors or contributories
generay re:uire the appointment of a specia manager other than himsef.

The remuneration of the specia manager may be fi-ed by the courts.

<fficia receiver as i:uidator.

The courts are empowered by section %67 to appoint a provisiona i:uidator at any
time after presentation of a petition and before winding up order is made. <nce the
125
winding up order has been made the officia receiver becomes 'spofacto( a provisiona
i:uidator unti a i:uidator is appointed.


9uties of an officia receiver
An officia receiver as a provisiona i:uidator can ca on the directors to furnish
h i m wi t h a s t a t e me n t o f t h e c o mp a n y s a f f a i r s t h a t h a s t o b e ma d e
o u t i n accordance to a statutory form and verified by an affidavit. This statement
must show4 5

a2 Aarticuars of assets( debts( and iabiity of the company.

b2 @ames( residence and occupation of its creditors.

c2 The security hed by creditors and the dates when they were given and such
other information as may be re:uired.

The above statement must be submitted and verified by affidavit if4 5

1i2 .y one or more directors and secretary or(

1 i i 2 .y per s ons who ar e or have been of fi cer s or wer e engaged i n t he
f or mat i on of t he company wi t hi n t he pas t years in its empoyment during
such a time.

Ceport by officia receiver
Af t e r r e c e i v i n g a s t a t e me n t o f a f f a i r s t h e o f f i c i a r e c e i v e r h a s t o
s u b mi t a preiminary report to the courts as soon as practibe. The report shoud
contain the foowing4 5

a2 Amount of capi t a i ss ued( subs cr i bed and pai d and t he est i mat ed
amount of assets and iabiities.

b2 The cause of faiure of the company 1if the company faied2.

c2 ?hether in his opinion there is need for further in:uiry to any matter reating
to the promotion formation or faiure of the company or the conduct of its business.



126
3irst meeting of creditors and contributories
The of fi ci a r ecei ver i s under ob i gat i on t o convene separ at e meet i ngs of t he
cr edi t or s and cont r i but or i es t o f i nd out whet her t hey wou d i &e t o appoi nt a
i:uidator in pace of the officia receiver.
The above meeting shoud be hed within si-ty days from the date when the order was given
uness the courts provide otherwise.

A notice of seven days is re:uired to hod both meetings. Cue ""4 re:uires that the
officia receiver must send to the creditors and contributories a summary of the
companys statement of affairs incuding causes of faiure of the company and any
observation he may thin& fit to ma&e.

?her e s uch meet i ngs ar e ca ed t he of fi ci a r ecei ver or 1 or i :ui dat or 2 or hi s
nominee is the chairman at the meeting.

The ob)ect of the meetings is to find outE

a2 ?hether creditors or contributories desire a i:uidator of their choice.

b2 ?het her t her e sha be a commi t t ee of i nspect i on and whom sha i t
consist.

Aowers of the i:uidator
After winding order is granted or after a provisiona i:uidator is appointed he wi t a&e i nt o
hi s cus t ody or under hi s cont r o a t he pr oper t y of t he company and other
right of the company.

The i:uidator has power with eave of the court or committee.

a2 To institute or defend suits and other ega proceedings( civi( crimina in the
name of the company.

b2 To car r y on t he busi ness of t he company so f ar as neces sar y f or t he
beneficia winding up of the company.

c2 To appoint an advocate to assist him performs his duties.

d2 Aay any cass of creditors in fu.

127
e2 ,a&e any compromise with creditors or persons caiming to be creditors.

f2 Compromise cas debts and other caims between the company and any contributory or
debtor and(
A i:uidator may( without sanction of the courts(

a2 0e companys movabe and immovabe property.

b2 9o a acts and e-ecute a documents in the companys sea.
c2 Arove and receive dividends in the ban&ruptcy of any contributory.

d2 9raw( accept and endorse bis and notes in the name of the company.

e2 .orrow money on the security of the company assets.

f2 Ta& e o u t h i s o f f i c i a n a me e t t e r s o f a d mi n i s t r a t i o n t o a d e c e a s e d
contributory.

g2 Appoint an agent to do any business which the i:uidator is unabe to do himsef.

h2 ?h e r e wi n d i n g u p p r o c e e d i n g h a v e b e e n c o mme n c e d i n Dg a n d a (
Tan;ani a or i n Kenya t o ma&e such payment s t o a i :ui dat or t her ei n as
necessary for the distribution of the companys assets.

Additiona powers

These are powers of the courts deegated to the i:uidator.

a2 To ca and hod meeting of creditors and contributories.

b2 0etting the ist of contributories and rectifying the register of members.

c2 Aaying( deivery( conveyance( surrender or transfer of money( property and
documents to the i:uidator.

d2 ,a&ing cas on the contributories.

e2 3i-ing time within which debts and caims must be proved. The above powers
are e-ercised by the i:uidator as an officer of the court.
128

9iscaimer by a i:uidator

0ect i on 6"7 empower s a i :ui dat or wi t h eave of t he cour t s t o di s c ai m any
oner ous pr oper t y of t he company. The i :ui dat or has t o di sc ai m t he
pr oper t y within one year from the date of commencement winding up or from the date he
became aware of the onerous property.

The discaimer e-tinguishes the rights( interests and iabiities of the company in the property
discaimed. 'f any person suffers a oss 1or damages by a discaimer of the property( he may
prove for the amount as a creditor2.

Termination of i:uidators powers
A i:uidator wi cease to function if4 5

a2 /e resigns
b2 /e is removed
c2 /e is reeased.

Committee of inspection

Creditors and contributories may appy to the courts to appoint a committee
of inspection. There is no given imit of members of the committee of inspection.
Th e r e i s n o g i v e n i mi t o f me mb e r s o f t h e c o mmi t t e e . Th e f u n c t i o n
o f t h e committee is to assist and supervise the acts of the i:uidator.

The committee must meet one in a month but the i:uidator may ca for meetings of inspection
as often as he thin&s.

Aower of the court to stay winding up
The cour t s at any t i me af t er an or der of wi ndi ng up have a di s cr et i on on t he
appication of the i:uidator( officia receiver or creditor or contributor( so stay
pr oceedi ngs i n r e at i on t o wi ndi ng up. The cour t s may s t ay t he pr oceedi ngs
atogether or for a imited time.

9issoution of the company
?h e n t h e a f f a i r s o f t h e c o mp a n y h a v e b e e n wo u n d u p t h e c o u r t wi (
i f t h e i:uidator ma&es an appication( ma&e an order dissoving the company and
the company is dissoved from the date of such order.
129

Th e i : u i d a t o r mu s t wi t h i n f o u r t e e n d a ys d e i v e r a c o p y o f t h e o r d e r
t o t h e registrar for registration.

Mountary winding up
This is winding up by members or creditors without interference by the court. The members(
creditors may however appy to the court for any direction( if and when necessary.
A c o mp a n y ma y b e wo u n d u p v o u n t a r i y o n t h e f o o wi n g
c i r c u ms t a n c e s 1sec.%8"2.

a2 ?hen the period for the duration of the company have come to an end or t h e
e v e n t wh i c h t h e c o mp a n y i s t o b e wo u n d u p h a s h a p p e n e d a n d
t h e company has i n a gener a meet i ng passed a r es o ut i on whi ch may
be an ordinary resoution uness artices provide otherwise.

b2 'f the company passes a resoution to wind up vountariy.

Types of winding up
a2 ,embers vountary winding up

b2 Creditors vountary winding up.
a2 ,embers vountary winding up

Th i s i s a o we d i f a d e c a r a t i o n o f s o v e n c y o f t h e c o mp a n y i s ma d e .
Th e decaration sha be made by a ma)ority of the directors at a meeting to of the
board that they have made a fu in:uiry into the affairs of the company and that
having done so they are of the opinion that

a2 That the company has no debts

b 2 Th a t t h e d e b t s c a n b e p a i d i n f u wi t h i n t we v e mo n t h s f r o m
t h e commencement of the winding up. 0uch decaration is infective uness4 5

1i2 't is made within thirty days immediatey preceding t he dat es of pass i ng
of t he r es o ut i on and de i ver ed t o t he registrar.

130
1ii2 't embodies a statement of the companys assets and iabiities at the atest
practicabe date before the ma&ing of the decaration.

9!CLACAT'<@ <3 0<LM!@CF


This is decaration by a director that a company is abe to pay a its debts within one year. 'f
ate it is proved that a director has made the decaration of sovency without
reasonabe grounds he may be iabe to imprisonment up to a year or a fine or both.

@otice of decaration
The notice of the resoution to vountariy wind up a company must be advertised in the Ba;ette
within fourteen days.

0ummoning a genera meeting
' f t he wi ndi ng cont i nues f or mor e t han a year t he i :ui dat or mus t s ummon a
genera meeting at the end of the first and subse:uent years.

The i:uidator must ay before the meeting an account of his acts and deaing of winding up
during the preceding year.

3ina meeting
?hen the affairs of company are wound up the i:uidator must ma&e up a fina
account and ca a genera meeting of the company( which must be advertised in the Ba;ette.

The i :ui dat or must send a copy of t he account s t o t he r egi st r ar and ma&e a
return of the hoding of the meeting within fourteen days.

Creditors vountary winding up
This arises when the company is insovent in which case the company must ca a
meeting of the creditors on the same day of the genera meeting of member on a day after.

The meeting must be advertised in the ga;ette and directors must ay before the meeting .a
statement of the position of the company with a ist of its creditors.

The directors can appoint one of their numbers to preside at the meeting

Appointment of i:uidator
131
The cr edi t or s and t he company i n t hei r separ at e meet i ngs may nomi nat e a
i:uidator for the purpose of winding up the affairs of the company.

'f the creditors and the company nominate different persons the nomination
of creditors wi prevai.

The i :ui dat or must wi t hi n f our t een days of hi s appoi nt ment ( pub i s h i n t he
Ba;ette and deiver to the registrar of companies notice of his appointment in the form
prescribed by the register 1sec.%$$2.

Committee of inspection
Cr edi t or s at t hei r meet i ng may appoi nt a commi t t ee of i ns pect i on( and t he
c o mmi t t e e ma y a p p o i n t n o t mo r e t h a n f i v e p e r s o n s t o t h e me mb e r s o f
t h e c o mmi t t e e s u b ) e c t t o t h e p o we r o f t h e c r e d i t o r s t o d i s a p p r o v e
p e r s o n s s o appointed 1sec %882.

A i:uidator is to ca a meeting of members and creditors after each year5end and
has t o ay bef or e t he meet i ng an account of hi s act s and dea i ngs of t he
winding up of the preceding year.

3ina meeting and dissoution
?h e n t h e c o mp a n y i s f u y wo u n d u p ( t h e i : u i d a t o r h a s t o h o d a
g e n e r a me e t i n g o f t h e c o mp a n y a n d a me e t i n g o f c r e d i t o r s a n d h a s
t o p r o d u c e a n account of the winding up showing how it has been conducted and
property of the company disposed of. These meetings are to be advertised in the
ga;ette( pubished thirty days before the meeting. ?ithin fourteen days after the meeting the
i:uidator must send to the registrar a copy of the accounts and a return of the meetings.



?'@9'@B DA 0D.#!CT T< 0DA!CM'0'<@ <3 C<DCT.

0ection 6>4 provides that when a company has passed a resoution to wind up
vountariy( the courts may order the continuation of vountary winding up sub)ect to their
supervision on any terms or conditions.

The i:uidator wi continue to e-ercise a powers sub)ect to any restrictions aid b y
t h e c o u r t s . A p e t i t i o n f o r wi n d i n g s u b ) e c t t o c o u r t s u p e r v i s i o n ma y
b e presented by any person entited to petition for the compusory winding up.

132
!ffects of supervision order.

Aowers for the e-ercise of which such i:uidation woud re:uire sanction may be e-ercised
ony with the sanction of the courts or the committee of inspections ot her wi se i n
a ot her i nst ances or di nar y vo unt ar y i :ui dat i on pr ocedur es ar e foowed.

Areferentia payment
0ection 6>% provides that the companys assets must be used to pay a costs( charges
and e-penses propery incurred in the winding up incuding i:uidation. Thus winding
up charges and e-penses ran& in priority to a other caims.

The f o owi ng pr ef er ent i a payment s ar e r e:ui r ed t o be made i n pr i or i t y t o
a ot her debt s and such debt s r an& *Aar i Aass u+ i . e. t hey r an& e:ua y
amongst themseves.

a2 A government and oca rates payabe with "% months before the date of winding up.

b2 A government rents not more than one year in arrears.

c2 ?ages and saary of any cer& or servant for services rendered during f our
mont hs pr ecedi ng t he r e evant dat e not e-ceedi ng f our t hous and
shiings.

A amounts done in respect of any compensation under the wor&mens compensation act( which
have accrued before the reevant date.

A r o c e e d s e f t ma y b e g i v e n t o t h e s h a r e h o d e r s a n d i f a n y p o r t i o n
r e ma i n s uncaimed( if goes to the pubic trustee as .ona vacantia i.e. owners property.
133