COMPANY LAW

INTRODUCTION
The word company ordinarily means an association of a number of individuals formed for some
common purpose.  When such an association is registered under companies Act, it becomes an
artificial person with perpetual succession and a common seal.

According to Lord Justice Lindley, a company is an association of many persons who contribute
money or money’s worth to a common stock and employed for a common purpose.  

The persons who contribute it are members.  The proportion of capital to which each member is
entitled is his share.  Shares are always transferable although the right to transfer them is often
more or less restricted.

Characteristics of a company

On being incorporated, a company enjoys certain advantages over other associations. Such

advantages are termed as characteristics of a company and are as follows:-

1.  Separate Legal Entity:

A company formed and registered under the companies Act is a distinct legal entity.  It is
regarded by law as a person, just as a human being is a person.  It is a creation of law also called
artificial person being invisible and intangible without physical existence.

It can own land and other property, enter into contracts, sue and be sued, have a bank account in
its own name, owe money to others and be a creditor to other people and employ people to work
for it.

This principle of legal separate entity is clearly illustrated in the leading case of Solomon v.
Solomon & Co. Ltd.

2. Perpetual Succession

Unlike a natural person, a company never dies.  Its existence is not affected by death, lunacy and
insolvency of its members.  A company is an immortal person.  Members may come and go, but
the company continues in its operation unless it is wound up. The existence of the company is
not affected by the death of all the shareholders.  Thus where all the members of a company were
killed say by a bomb the company was deemed to survive.
The perpetual succession occurs because a company and its members are separate persons and so
the company’s legal life is not terminated by a member’s death.

3. Limited liability
The liability of members is to the extent of the value of their paid up shareholding in the
company or to the extent guarantee so pledged to be paid by the shareholder during the winding
up of the company.

This means that the company’s debts are not the debts of its members.  If a company has
borrowed money, it and it alone is under an obligation to repay the loan.  The members are under
no such obligation and cannot be asked to repay the loan.  

4. Common Seal

As an artificial person it cannot sign its name on the contract.  So it functions with the help of a
seal.  Common seal is used as a substitute for its signature.  Every company must have a seal
with its name engraved on it.  Anything done under an agreement between the company and the
third party requires recognition of the company in the form of an official seal.

5. Capacity to sue and be sued

Because a company is at law a different person altogether from its members it follows that a
wrong to, or by, the company does not legally constitute a wrong to, or by, the company’s
members.  Consequently;-
a) A member cannot institute legal proceedings to redress a wrong to the company.  The
company as the injured party is generally speaking, the proper plaintiff.

b) A member cannot be sued to redress a wrong by the company.  This is illustrated by

Solomon v Solomon Co. Ltd in which it was held that Solomon was not liable for the
company’s failure to repay the loans as agreed with its creditors and should not therefore
have been sued to recover them.
 
6.   Transferability of shares

The shares of a company are freely transferable and can be sold or purchased in the share
market.  The shares or other interest of any member shall be movable property transferable in the
manner provided for in the articles of the company

7. Shareholders

Shareholders are the owners of one or more units of equal value into which the company is
divided and which, usually, have been sold in order to raise money either for the company itself
or for its founders.

8. Membership
The minimum membership of a public company is seven (7) members and the maximum number
is infinite while for a private company the minimum membership is two (2) and the maximum
membership is fifty (50).

Advantages of incorporation

Incorporation offers certain advantages to a company as compared with all other kinds of
business organizations. They are

1)      Independent corporate existence- the outstanding feature of a company is its independent

corporate existence. By registration under the Companies Act, a company becomes vested with
corporate personality, which is independent of, and distinct from its members. A company is a
legal person. The decision of the House of Lords in Salomon v. Salomon & Co. Ltd. (1897 AC
22) is an authority on this principle.    

2)      Limited liability- limitation of liability is another major advantage of incorporation. The

company, being a separate entity and leading its own business life, the members are not liable for
its debts. The liability of members is limited by shares; each member is bound to pay the nominal
value of shares held by them and his liability ends there.

3)      Perpetual succession- An incorporated company never dies. Members may come and go,
but the company will go on forever. During the war all the members of a private company, while
in general meeting, were killed by a bomb. But the company survived, it was not destroyed.

4)      Common seal- Since a company has no physical existence, it must act through its agents
and all such contracts entered into by such agents must be under the seal of the company. The
common seal acts as the official seal of the company.

5)      Transferable shares- when joint stock companies were established the great object was that
the shares should be capable of being easily transferred. Sec 82 gives expression to this principle
by providing that “the shares or other interest of any member shall be movable property,
transferable in the manner provided by the articles of the company.”

6)      Separate property- The property of an incorporated company is vested in the corporate

body. The company is capable of holding and enjoying property in its own name. No members,
not even all the members, can claim ownership of any asset of company’s assets.

7)    Capacity for suits- Company can sue and be sued in its own name. The names of managerial
members need not be impleaded.

8)      Professional management- A company is capable of attracting professional managers. It is

due to the fact that being attached to the management of the company gives them the status of
business or executive class.

 
Disadvantages of incorporation 

1)      Lifting of corporate veil- though for all purposes of law a company is regarded as a

separate entity it is sometimes necessary to look at the persons behind the corporate veil.

2)      Formality and expense- Incorporation is a very expensive affair. It requires a number of

formalities to be complied with both as to the formation and administration of affairs.

3)      Publicity: There is no secrecy with the affairs of a public company. Once MoA and AoA
and the prospectus have been filed with the registrar of companies, these documents become
public documents open to the inspection of the public.

4) Doctrine of Ultra-vires: A company can only carryout the business specified in its object
clause of the Memorandum of Association. This doctrin hinders the company from investing
in other forms of profitable business.

5) Administration: The adminstration of a company must comply with the requirements of the
Companies Act, e.g., holding of general meetings, statutory meetings and filling the returns
of annual accounts.

6) Winding up: The winding up of a company is widely published, thus exposing the property of
the company to an insecure position.

Distinction between Company and Partnership

     The principal points of distinction between a company and a partnership are:

i. Legal status- A company is a distinct legal person. A partnership firm is not distinct from
the several members who compose it.

ii. Property- In partnership, the property of the firm is the property of the members
comprising it. In a company, it belongs to the company and not to the members
comprising it.

iii. Agents- Partners are the agents of the firm, but members of a firm are not its agents.

iv. Contracts- A partner cannot contract with his firm, whereas a member of a company can.

v. Transferability of shares- A partner cannot transfer his share and make the transferee a
member of the firm without the consent of other partners whereas a company’s share can
easily be transferred unless the Articles provide otherwise and the transferee becomes a
member of the firm.
 vi. Liability- A partner’s share is always unlimited whereas that of a shareholder may be
limited either by shares or a guarantee.

vii. Perpetual succession- The death or insolvency of a shareholder or all of them does not
affect the life of the company, whereas the death or insolvency of a partner dissolves the
firm, unless otherwise provided.

viii. Audit/ statutory report-A company is legally required to have its accounts audited
annually by a chartered accountant, whereas the accounts of the partnership are audited at
the discretion of its members.

ix. Number of members- The minimum number of partners in a firm is 2 and maximum is 20

in any business. In case of a private company the minimum number of members is 2 and
maximum is 50. In case of a public company the minimum number of members is 7 and
no max limit.

x. Dissolution- a company can only be dissolved as laid down by law. A partnership firm
can be dissolved at any time by an agreement.

Lifting Corporate Veil

For all purposes of law a company is regarded as a separate entity from its shareholders. But
sometimes it is sometimes necessary to look at the persons behind the corporate veil. The
separate entity of the company is disregarded and the schemes and intentions of the persons
behind are exposed to full view which is known as lifting or piercing the corporate veil. This is
usually done in the following cases

Lifting the corporate veil by the court

i. Determination of character- A company though registered in Kenya would assume an

enemy character if the persons in de facto control of the company are residents of an
enemy country.

ii. For benefit of revenue- The separate existence of a company may be disregarded when
the only purpose for which it appears to have been formed is the evasion of taxes.

iii. Fraud or improper conduct- A company will be restrained from acting when its principal
shareholder is bound by a restraint covenant and had incorporated a company only to
escape the restraint.

iv. Agency or Trust - The separate existence of a company may be ignored when the
company is being used as an agent or trustee.

Lifting the veil under statutory provisions- 

The Act sometimes imposes personal liability on persons behind the veil in some instances like,

i. Where business is carried on beyond six months after the knowledge that the membership
of company has gone below statutory minimum.
ii. When contract is made by miss-describing the name of the company ,
iii. When business is carried on only to defraud creditors.
iv. Investigation of company memebership

TYPES OR CLASSIFICATION OF COMPANIES

Companies are classified as follows:

1) Chartered Companies

It is a very old model of companies which does not exist today. It is only institutions of higher
learning that are registered through a charter.

2) Statutory Companies
This is a company incorporated by a Special Act of Parliament. They are formed for special
undertakings and are owned by the government in order to meet social needs and not for the
purposes of profit making.

3) Registered Companies
Registered companies are formed under the Companies Act Cap 486 of the laws of Kenya. They
come to existence only when they are registered under the Act and certificate of incorporation
issued by the registrar
Registered companies can further be classified as:

a): Limitation of Liability

i. Companies limited by shares- where the liability of the members of a company is

limited to the amount unpaid on the shares, such a company is known as a
company limited by shares

ii. Companies limited by guarantee- where the liability of the members of a

company is limited to a fixed amount which the members undertake to contribute
to the assets of the company in the event of its being wound up, the company is
called a company limited by guarantee.

iii. Unlimited companies- A company without limited liability is known as an

unlimited company. In case of such a company, every member is liable for the
debts of the company.

b): Private and Public Companies

Registered companies may be also divided in to two categories:

Private Companies: S. 30(1) of Companies Act states that a private company is that which by
articles of association:

i. Restricts the right to transfer its shares

ii. Limits the number of its members to fifty
iii. Prohibits any invitation to the public to subscribe for any shares or debentures of the
company.

The minimum membership of a private company is two while the maximum is fifty, and a
private company must add the words “Private Limited “at the end of its name.

Private companies must also commence business immediately after obtaining the certificate of
incorporation.

In case of a private company, following points must be noted:

i. The articles merely restricts the right to transfer shares rather than forbidding it
ii. A private company cannot sell its shares to the public e.g. through stock exchange.
iii. The number of the shareholders must vary from two to fifty.

Public companies: A public company is that which is not private company and that which:

i. Can invite the general public to subscribe for its shares and debentures
ii. Does not have any restrictions on the transfer of shares
iii. Does not limit the maximum number of members and the minimum number of members
is seven.

Differences between private and public companies

i. Number of members: Minimum 2 and maximum 50 for private companies while for
public companies minimum is 7 and maximum is infinite.
ii. Name of the company; for a private company; the name must end with ‘Private Limited’
while a public company the name must end with the word ‘Limited’ only.
iii. Transfer of shares: Shares are freely transferable in public companies but transferability
is restricted in private companies.
iv. Public subscription: A public company shall invite the public to the subscription of
shares unlike private companies.
v. Minimum number of directors; for a private company at least two directors and a public
company at least three.
vi. Holding of statutory meeting; public companies must hold a statutory meeting within a
period not less than one month and not exceeding three months.
vii. Commencement of business; a private company will commence business after being
issued with the certificate of incorporation while the public company must be issued with
the trading certificate.

Advantages of a Private Company

i. Number of members-its formation requires only 2 persons. This facilitates its harmonious
functioning and makes the choice of a private company suitable for friends or family
concerns.
ii. Allotment before minimum subscription-a private company can allot shares before the
minimum subscription is subscribed for or paid.
iii. Commencement of business-a private company can commence business immediately on
incorporation without having to obtain a certificate for commencement.
iv. Number of directors-a private company need not have more than 2 directors. All the
directors can be given permanent appointment by a single resolution.
v. Prospectus or statement in lieu of prospectus- a private company may allot shares
without issuing a prospectus or delivering to the Registrar a statement in lieu of
prospectus.
vi. Statutory meeting and statutory report-a private company need not hold statutory
meeting or file with the Registrar the statutory report.

 Conversion of a Private Company into a Public Company

 A private company may become a public company by-

1. Conversion by default- -where a default is made by a private company in complying with

the essential requirements of a private company, the company ceases to enjoy the
privileges and exceptions conferred on a private company. In such a case, the provisions
of the Companies Act apply to it as if it were not a private company.

2. Conversion by operation of law-a private company becomes a public company-

 Where not less that 25% of the paid-up share capital of the private company is held
by one or more bodies corporate.
 Where the private company invites, accepts or renews deposits from the public.

3. Conversion by choice or volition- if a private company so alters its Articles that they do
not contain the provision which make it a private company, it shall cease to be a private
company as on the date of the alteration.

It shall then file with the Registrar, within 30 days, either a prospectus or statement in
lieu of prospectus. When this is done, the company becomes a public company

A private company which becomes a public company shall also-

i. File a copy of the resolution altering the Articles, within 30 days of passing thereof, with
the Registrar;
 ii. Take steps to raise its membership to at least 7 if it is below that number on the date of
conversion, and also increase the number of its directors to more than 2 if it is below that
number;

iii. Alter the regulations contained in the Articles which are inconsistent with those of a
public company

4) One Man Company

In these companies, one man holds practically the entire share capital of the company. He takes a
few other members who are no more than dummies or nominees of the former. This is done to
fulfill the statutory requirement of at least seven members in case of a public company and two
members in case of a private company. The person who holds the entire bulk of the share capital
except a few shares held by his nominees enjoys full control over the company and is thereby
enabled to do his business with limited liability. Example: (Solomon Vs Solomon case).

5) Holding and Subsidiary Companies

When a company has control over another company, it is known as a holding company. The
company which is so controlled is known as a subsidiary company. A company shall be deemed
to be a subsidiary company of another only if any or more of the following conditions are
satisfied:

i. Where the composition of its boards of directors is controlled by other company

ii. Where the other company holds more than half in nominal value of equity share capital
iii. Where the other company is a subsidiary of any other company that is a subsidiary e.g.,
company B is a subsidiary of company A, and company C is a subsidiary of B.
Accordingly, company C becomes a subsidiary of company A.
 PROMOTERS

A promoter is a person who does the necessary preliminary work incidental to the formation of a
company. It is a compendious term used for a person who undertakes, does and goes through all
the necessary and incidental preliminaries, keeping in view the object, to bring into existence an
incorporated company.

Chronologically, the first persons who control a company’s affairs are its promoters.

“A promoter is one who undertakes to form a company with reference to a given project and to
set it going, and who takes the necessary steps to accomplish that purpose.
Bowen simply puts it as one who generally brings a company into existence”.

Promotional Acts (Functions of a promoter):-

i. The promoter of a company decides its name and ascertains that it will be accepted by the
Registrar of Companies.
ii. He settles the details of the company’s Memorandum and Articles, the nominations of
directors, solicitors, bankers, auditors and secretary and the registered office of the
company.
iii. The appointments of first directors.
iv. Preparation of the prospectus.
v. Negotiating preliminary contracts.
vi. Paying the preliminary expenses. 

Quasi-trustee-a promoter is neither an agent nor a trustee of the company under incorporation
but certain fiduciary duties have been imposed on him under the Companies Act, 1956.

He is not an agent because there is no principal born at the time and he is not a trustee because
there is no cesti que trust in existence. Hence he occupies the peculiar position of a quasi-trustee.

Fiduciary position of promoters                                                        

i. Not to make any profit at the expense of the company-the promoter must not make, either
directly or indirectly, any profit at the expense of the company which is being promoted.
If any secret profit is made in violation of this rule, the company may, on discovering it,
compel him to account for and surrender such profit.

ii. To give benefit of negotiations to the company-the promoter must, when once he has
begun to act in the promotion of a company, give to the company the benefit of any
negotiations or contracts into which he enters in respect of the company.

iii. To make a full disclosure of interest or profit-if the promoter fails to make a full
disclosure of all the relevant facts, including any profit and his personal interest in a
 transaction with the company, the company may sue him for damages for breach of his
fiduciary duty and recover from him any secret profit made even though rescission is not
asked or is impossible.

iv. Not to make unfair use of position-the promoter must not make an unfair or, he must take
care to avoid any unreasonable use of his position and must avoid anything which has the
appearance of undue influence or fraud

v. Duty of promoter as regards prospectus-the promoter must see, in connection with the
prospectus, if any is issued, that the prospectus –
 Contains the necessary particulars
 Does not contain any untrue or misleading statements or does not omit any material
fact.

 Remuneration of promoters

 A promoter has no right to get compensation from the company for his services in promoting the
company unless there is a contract to that effect. In practice, a promoter takes compensated for
his services in one of the following ways-

i. He may sell his own property at a profit to the company for cash or fully- paid shares
provided he makes a disclosure to this effect
ii. He may be given an option to buy a certain number of shares in the company at par.
iii. He may take a commission on the shares sold
iv. He may be paid a lump sum by the company.

Pre-Incorporation Contracts

Pre-incorporation contract is an agreement which is entered into, usually by a promoter on behalf

of a company at a time when the company’s formation has not been completed by its
registration.  

Such contracts may relate to property which the promoters wish to purchase for the company or
they may be made with persons whose know-how is vital to the success of the company.  The
promoters may perhaps have arranged for the company to take over an existing business, and
therefore need to make a contract with the vendor for its sale or purchase.

Before its incorporation, a company has no capacity to contract.  A contract entered into by
promoters on behalf of a proposed company is void in so far as the company is concerned.  

The promoters cannot be agents for a principal which has not yet come into existence.  In such
cases the company cannot sue or be sued on it.  The company has no legal existence until it is
incorporated.  It therefore follows:-

i. That when the company is registered, it is not bound by pre-incorporation contracts.

In a Case Law, it was stated that a solicitor prepared the memorandum and articles of association
and paid all the necessary registration fees on the instructions of persons who later became
directors.  

He claimed his fees and expenses on the liquidation of the company.  The court of appeal held
that the company was not liable to pay the solicitor cost, though it had taken the benefit of its
work.

ii. That the company when registered cannot ratify the agreement.  
The company was not a principal with contractual capacity at the time when the contract was
made.  A contract can be ratified only when it is made by an agent for a principal who is in
existence and who is competent to contract at the time when the contract is made.

iii. That if the agent undertook any liability under the agreement he would be personally
liable notwithstanding that he is described in the agreement as an agent and that the
company may have attempted to ratify the agreement.