Classification of Companies KKG

A company is defined as a legal and separate entity that is formed by either a single person
or a group of individuals that want to engage in and operate a business whether in a
commercial capacity or an industrial enterprise. Kenyan company law is heavily based on
the principles of English company statute law and the common law, as handed down through
judge-made decisions of the courts. The New Act preserves this heritage in the English
system. However, the sheer scale of the legislation will have the effect of making statutory
provisions out of former common law doctrines such as directors’ common law and equitable
duties, rights of shareholders to protections against unfair actions of directors and controlling
shareholders, offences of fraudulent trading and many others.

LEARNING OBJECTIVES

At the end of this lesson the leaner should be able to:

i. Understand the classifications of companies
ii. Discuss the different types of limited companies
iii. Be enlightened on the process of company registration
iv. Different forms of business organization

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Classification of Companies KKG

2. CLASSIFICATION OF COMPANIES

Corporation is a person in law i.e. quite distinct from the individuals who are its members.
Corporations can own property, have rights and are subject to liabilities.

Types of corporations:

a) Corporate sole
Has only one member and can continue even after death of those members.

b) Corporation aggregate.

Have more than one member. Are classified according to the means the artificial corporate
personality has been granted:

(i) Chartered corporations

Are incorporated by the grant of a royal charter by the crown. Nowadays charters are given to non-
profit making bodies of public importance (good).

(ii) Statutory corporations - Created by passing an act of parliament e.g. the KPLC.

(iii) Registered corporations.

Are those created by compliance with the terms of an act of parliament. Companies’ act 1844
provided a third and easier method of incorporation by registration following compliance with
formalities. In 1855 limited liability concept was introduced.

Types of registered companies

1. Public companies

Under section 1 (1) are formed by seven or more members, the purpose being to attract
investment from the general public.

2. Private companies

Formed by two or more members. Defined by sec.28 (1) as a company which by its articles: -

a)Restricts rights to transfer shares e.g. by clause that members must offer their shares first to other
members or to directors or a clause under which directors have a right to refuse to register a
transfer.
b) Limits the number of its members to 50 (excluding present or past employees). Joint holders of
shares are treated as a single member.
c) Prohibits any invitation to the public to subscribe for its shares or debentures.

Limited companies
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Classification of Companies KKG

Liability of a company is unlimited in the sense that it must pay all debts due from it so long as
its assets are sufficient to meet them. Liability of members may be limited when the company is
formed by;

a) Shares.
Members are liable to the extent of the amount paid on their shares, including share premium if
any.
There is no liability regarding unissued capital. In case of private companies a guarantee is usually
required before credit is given.

b) Guarantee

Normally these companies do not have share capital. They are non-profit making organizations.
Where there is no share capital, there is no liability or the members unless and until the company
goes into liquidator in which case they were liable to the extent to which they have agreed by the
memorandum of association to contribute to the assets of the company. The guarantee is usually to
contribute Sh1 though it may be more.

The guaranteed sum is payable by those who are members at the time of winding up and if they
can’t pay the liquidator may proceed against those who were members previously but only in
respect of debts incurred while they were members. An unlimited company may re-register as a
limited company (by shares or guarantors) unless it has previously been converted from a limited to
an unlimited company. Members must pass a special resolution agreeing to the change, and the
resolution must make the appropriate alterations so that it confirms to the requirements.

The special resolution is then sent to the register of company’s and re-registration is effected by a
director or a company secretary of the company by signing an application form sending it to the
registrar together with a printed copy of the company’s memorandum and articles in their new
form, the register then issues a new certificate.

Unlimited companies

There is no limit to the liability of the members. Mostly used by stockbrokers because stock
exchange can’t admit a company as a member unless its members are personally liable for its debts.
An unlimited company can avoid giving publicity to its financial affairs.

An unlimited company can be formed by: -

a) By being formed as such;

Either with or without share capital and as a public or private company. Where there is no share
capital members contribute equally to the debts and liabilities of the company.

b) By being re-registered

Sec. 43 CA 1967 allows a company limited by shares or guaranteed to re-register as an unlimited

company. All members must consent in writing and all the consents together with a statutory
declaration by the directors that the consents have been obtained and acopy of the memorandum

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 Classification of Companies KKG

and articles altered so as to confirm to those of an unlimited company. The registrar may then issue
a certificate and publish the fact of issue in the Gazette.

Special features of unlimited companies

a) It need not deliver copies of its annual accounts, directors and auditors reports to the registrar
with its annual return
● It enjoys privacy as regards its financial affairs.
● This privilege is not extended to an unlimited company, which is a subsidiary or holding of a
limited company, or unlimited company, which is potentially under control of two or more limited
companies.
b) Provisions of CA 1948 governing the alteration of capital do not apply to unlimited companies.
● A company may alter its capital structure by a special resolution altering the articles.
● Notice of any alteration must be given to the registrar within one month unless alteration
increases the company’s nominal capital, when notice must be given within 15 days.
c) An unlimited company may acquire any of its own shares if its articles authorize it to do so, even
though it uses its own assets to purchase them. (Re Borough commercial and building society
(1893)).
If at the time it acquires the shares the company knows that its existing assets and amounts which it
could expect to exact from its members on winding up will not be enough to satisfy its liabilities
the acquisition of the shares will be set aside as a fraud on its creditors (Mitchell vs. city of
Glasgow Bank (1879)).
d) An unlimited company need not give a more than seven days notice to its members of an extra
ordinary general meeting called to pass a resolution other than a special one. The period for other
companies is 14 days.
e) An unlimited company may issue shares of no par value.
f) An unlimited company has no statutory power to issue redeemable preference shares, but since it
can purchase its own shares if articles provide. It could in practice issue redeemable preference
shares and provision of section 58 would not apply.

Other instances of unlimited liability

(a) Section 31

Under this if a company carries on business for more than six months with less than seven members
(or two in a private company), every member who knows of the fact is liable for the debts of the
company which are incurred of the period of six months has expired. The section does not apply as
regards damages after awarded e.g. a breach of contract by the company.

(b) Section 332

The section applies if the company is being wound up. The court must be satisfied that the
company’s business has been carried on with intent to defraud creditors. Person carrying on
business fraudulently must be made personally liable for the company’s debts.
Example directors could be held liable if knowing that the company is unable to pay its debts as
they fall due, they ordered goods on credit or received money from customers for goods, which the
company might not be able to supply.

(c) Section 202

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Classification of Companies KKG

The memorandum of a company may provide or be altered to provide, that the liability of its
members shall be limited but the liability of its directors shall be unlimited. This alternative is
hardly ever adopted in practice.

Separate legal personality of a company

The case, which established the independent legal personality of a company, Salomon vs. Salomon
and company Ltd (1897) (1, 1).

Major consequences of the Salomon case.

a) It established the validity of registration as a means of creating a corporation formerly these was
done by charter for statute.
b) Registration was established as a method of creating a company with separate legal personality.
c) A registered company has perpetual succession.
d) Separate personality is made to function by the board of directors which is the agent. There is
thus need for members to have some control over the board. Some of the ways the member can
achieve this control was:-

a. The ultra vires rule.

Shareholders can seek a court injunction wherever directors involve in transaction that are beyond
the company powers. These days the courts construct objects clause widely so that this control is
often more apparent than real (Re New Finance and Mortgage Co. Ltd (1975)).

Note:

For unlimited companies there is no limitation on the liability of members to pay the debts of the
company and the members are jointly and personally liable for the debts in case of winding up.

Also acts by directors which are defective whether because of lack of authority or quorum or
because of some defect I their appointment or because of their motives were improper, can be
validated by ordinary resolution of the members after full disclosure of the facts to them in a
general meeting, provided the acts in question are not ultra vires the company (e.g. Branford vs.
Branford (1969) Y4).

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Classification of Companies KKG
c) Accounts and audits

The board is required to account for its financial stewardship by ensuring the production of
annual accounts which must be audited and presented to the members at the c) Sec. 184
removal of directors is made easy.
A company may by ordinary resolution remove a director before the expiration of his period
of office regardless of the way in which he was appointed notwithstanding anything in its
articles or any agreement in his favour section 184(1). Special notice of 28 days to the
company is required of the intention to move the resolution (sec.184 (2)).

Following the acceptance of limited liability in Salomon, certain protections are given to
creditors and potential creditors.

a) Publicity as to financial standing - Companies must file the annual returns.

b) Share capital (creditors fund) cannot be returned to shareholders.
(i) Capital reductions must be approved by the court under section 66.
(ii) A limited company may not purchase its own shares (Trevor and Whortworth 1887
(1/6)), nor, subject to certain exceptions, lend money to persons so that they may buy
the company’s shares (s.54)
There is an exception when shares are issued as redeemable preference shares (section 58).
(iii) Dividends must be paid out of profits and not out of capital. There are provisions to
prevent the capital of a company being watered down as it comes into the company by the
control of the issue of shares at a discount (section 57) and of underwriting commission paid
on shares on the issue of shares.

Exceptions to the rule of separate legal personality.

1. Companies act 1948

If the membership fall below the statutory minimum for six months. There is also liability
where on winding up the court is satisfied that a company’s business has been carried on
within intent to defraud its creditors.

2. Public interest
Personal qualities of shareholders may be investigated in public interest (Daimler Co. Ltd vs.
continental Tyre (1916) (1/7).
3. Evasion of legal obligations
When a company is formed to evade legal obligations (e.g. Gilford motor Co. Ltd vs. Horne
(1933)) shareholders may be personally liable.
4. Personal relationship company sec. 184 of 1948 Act,
Which allows removal of a director by an ordinary resolution after 28 days has also given rise
to
abuse of the corporate entity theory in the private company. This is because a director can be
easily be removed without a mistake of in part, unless there is a special clause in articles as in
Bushell v. Feith.

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Classification of Companies KKG
However in Ebrahim vs. Westborne Leallaries (1972)(1/9) the House of Lords decided that a
removal under section 184 could be ground for winding up under section 222 in private
company. This rule applies not to all private companies but to personal relationship
companies. Personal relationship companies are in essence partnerships where each member
assumes continuing involvement in management. In order to ascertain whether the company
is a personal relationship company, it is necessary to lift the corporate veil and discover the
hopes and aspirations of the members.
In Re. A&B, C chewing gum (1975)1/40 the court took a view that entitlement to
management participation was an obligation so basic that, if broken, the association must be
dissolved even
though it was not a company arising out of partnership.

FORMATION OF A COMPANY

Introduction

There are several formalities, which have to be followed before a company is incorporated
(formed). The process is grouped in the following stages: -

1. Promotion
2. Incorporation or Registration
3. Capital subscription
4. Commencement of business

It should be noted that a private company need only to go through the first two stages only. A
public company must go through all the four stages.

1. Promotion
L.W Leertenberg defines promotion “the discovery of business opportunities and the
subsequent organization of funds, property and managerial ability into a business concern for
the purpose of making profits there from”.
Promotion therefore has to do with the discovery of a business idea which can be profitably
undertaken by a company and includes preliminary and detailed investigation of the
feasibility of the idea, assembling of business elements and making provisions of the funds
necessary to launch the enterprise as a going concern.
Thus stages can be summarized as under: -
i. Preliminary analysis and examining the proposed idea to see whether the business is
profitable.
ii. Estimating the cost of production, selling price of goods and services and the amount of
profits likely.
iii. Arranging for the acquisition of labour, materials, capital and managerial ability.
iv. Presentation to the public and underwrites the business proposition in order to make
people to manage in the venture. This is done through the issue of a prospectus.

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Classification of Companies KKG
2. Registration or incorporation

This involves registering the company with the registrar of companies under the companies
Act. For a public company membership should be at least seven and at least two for a private
company. The people who are involved in registration of a company are called promoters.
The following activities or steps are taken by promoters in order to register the company.

a) Obtaining approval of the proposed name from registrar of the companies.

Promoters are free to choose any name for their new company; section 19 of companies
Act however has put restrictions on the names to be chosen. Section19 (2) provides that
“no name shall be reserved and no company shall be registered by a name which in the
opinion of the registrar is undesirable”.
Section 17 of the business names Act cap 499 lists instances when a name is deemed
undesirable: -
i. Where the name chosen suggests a criminal or immoral intent.
ii. Where the name suggests association with the president or head of state or a government
ministry or department or a local authority or suggests connection with an international
organization such as World Bank e.t.c.
iii. If the name is misleading especially as to the nature of the business the company will
undertake or as to the nationality or religion of the people behind the company.

iv. Where the name is similar to the name of an existing company, partnership or cooperative
society.
Section 109 of the companies name requires publication of the name of the company by:
a) Painting or affixing and keeping painted or affixed name on the outside of every office
or place where its business is carried on, in a conspicuous position; in easily legible roman
letters.
b) Having its name engraved in legible roman letters on its seal which shall take the form
of
an embossed metal die;
c) Having its name mentioned in legible roman letters in all business letters of the
company and in all notices and other official publications of the company and in all its
bills of exchange, promissory notes, endorsements, cheques and orders for money or
goods purporting to be signed by or on behalf of the company; and in all bills or parcels,
invoices, receipts and letters of credit of the company.

Section 20 of companies Act provides that a company can change its names subject to the
following: -

i. It’s the company itself that can change its name i.e. members in a general meeting.
ii. The resolution changing the name must be a special resolution.
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 will make the change and publish the
fact in the official Kenya Gazette.

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Classification of Companies KKG

b) Presentation of documents

The following have to be prepared and presented to the registrar of companies

1. Memorandum of Association

Contains conditions upon which the company is allowed to be incorporated. It defines and
sets
the limits of the powers of the company. The memorandum also sets the objects of the
company.

2. Articles of Association

Contains the rules, regulations, by laws for the internal management of the affairs of a
company.
Articles enable the company operate in a way to achieve the aims and objectives set out in the
memorandum of association.

3. A statement of the company’s nominal capital.

Nominal capital is the maximum amount of capital that a company aims to raise.

4. A declaration that all the requirements of the companies Act and other formalities relating
to registration have been complied with. The declaration has to be signed by an advocate, a
person
named as director or company secretary.

5. A list of the company directors and their written consent to become company directors.
Immediately after registration, the following true documents are required: -

(i)Notice of the situation of the registered office.

(ii)Particulars of directors and the secretary.

The registered office can’t be changed but if it changes notice of change must be given to the
registrar within 14 days. Particulars of the directors and the secretary need to be filed with the
registrar within fourteen days of their appointment.

c) Issuance of a certificate of incorporation

On receipt of necessary documents the registrar opens a file for the particular company. If all
requirements of the Act have been complied with, he will register the company and place, its
name in the register of companies. A certificate of incorporation will be issued where upon
the registrar shall certify under his hand that the company is incorporated. The original copy
is given to the promoters and a copy will be left in the company’s file (s. 12).

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Classification of Companies KKG
It should be noted that presentation of documents does not mean automatic registration of the
company. The registrar of company’s powers to refuse registration is inherent. If the
registrar’s reasons for refusal to register a company are not valid the promoters can seek
order of mandamus from the high court to compel the registrar to issue the certificate. In R
vs. registrar of joint stock companies (1913) 2k B 197; the promoters of the company sought
mandamus to issue the registrar of the joint stock companies on grounds that he had without
reasonable cause refused to register their company. It was held that where promoters are
aggrieved by the decision of the registrar they can apply for order of mandamus to issue
against the registrar. However where the registrar is justified in law and in fact not to issue
the certificate the order of mandamus shall not be issued. In the above case the promoters
failed in their attempt because issuing the certificate would mean allowing an English
company commits an illegality.
Section 17(1) once the certificate is issued it acts as conclusive evidence that the company
was properly formed in accordance with all the requirements of either the company’s Act or
the company practice. If it is later found that the granting of the certificate was made in
ignorance of some irregularity on the part of promoters; it cannot be withdrawn. Incase in this
point is Barnard’s Banking company Re Poel’s case (1867) L.R.2ch. 674. It was held by Lord
Cairns in this case that:
When once the memorandum is registered and the company holds out to the world as a
company
undertaking business willing to receive shareholders and ready to contract engagements then
it would be of most disastrous consequences if at all that has been done, any person was
allowed to go back and enter into examination of the circumstances attending original
registration and the regularity
of the execution of the documents.
The certificate cannot be disputed on any grounds and cannot be challenged even: -

a) Where the memorandum is altered after signatories put their signatures on memorandum
but before it is registered with the registrar.
b) When memorandum is signed by only one person for all the seven.

c) Where all the signatories are minors.

d) Signatures to the memorandum are forged.

Other case law relation to incorporation is Jubilee cotton mills Ltd vs. Lewis (1924) AC 958.

Also acts by directors which are defective whether because of lack of authority or quorum or
because of
Circumstances when incorporation can be withdrawn: -

(i) Where it is discovered that the company was formed with blasphemous objectives. This is
the case in Bowman and others vs. the secular society limited (1917) AC 406 where the
company thought against Christianity and urged its members to stop Salvation Army
members from attending their Sunday worship.

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Classification of Companies KKG
This was found that the activities of this company were blasphemous to the doctrines of that
religion and the certificate was withdrawn and cancelled. However on technical grounds the
action failed.

(ii) There the objects of the company are found to be immoral. In R vs. Registrar of joint
stock companies (Ex-parte the A.G) (1980) QBX a firm of Accountants sought to register a
company on behalf of their client. They intended to register the company in the name
“prostitutes” but the name was rejected and there served another “Hooker Ltd, which was
also refused by registrar. The accountants then submitted the name “Lindi St. Claire French
Lessons Ltd”. The registrar accepted the name and registered the company issuing a
certificate. Later it was discovered that the company’s sole purpose was to enable clients
either alone or with others provide prostitution service for gain.
Judge Ackner LS stated that though prostitution per se was not unlawful under the English
law it was contra Moros bonus. Hence the registrar was entitled to quash registration and
withdraw the certificate.
(iii)Where the entity that was registered as a company is not a company in nature. In Salomon
vs. Salomon and company Ltd (1897) AG 22 Lord Parker in the course of his judgment
suggested that courts would be ready to go behind the certificate and nullify 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.
(iv)Where 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 controlling it defacto are resident in an
enemy country or wherever resident are adherent of taking instruction from or acting under
the control of the enemy Lord Parker.
A company becomes an enemy if it draws its membership from an enemy country. A case
law relating the above is Daimler company Ltd vs. continental Tyres company (1916) 2 AC
307.

d) Acquisition of legal personality

Where a company is registered it becomes a legal person by the name contained in its
memorandum of association. S 16 (2) incorporation of a company as a legal person was
established in the case of Salomon vs. Salomon and company Ltd (1897) AC 22. In this case
it was held that upon incorporation and in essence of any fraud on the part of the promoters
the company becomes a legal person separate and distinct from its members, however closely
it may be controlled by those members.

Another cases supporting the separate entity are tulstail vs. Stegmann (1962) 2QB 593. In
Lee vs. Lee Air farming company Ltd (1960) WIR 758, Lee formed a company and he
secured a job in his company. He died while on duty and it was held that a company being a
legal person separate and distinct from its members is capable of employing and dismissing
workers. As an employer, the company is subject to amongst laws, the workman’s
compensation law and must compensate an injured or deceased worker (employee)
accordingly. However the case failed on a procedural technically since the widow sued on her
own name. Another case in support of separate entity is the Mc Aura vs. Northern Assurance
Company Ltd 1925 AC 619. In this case MC Aura formed a company and transferred his

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Classification of Companies KKG
timber estate to it and he also owned the company. He affected an insurance policy on the
timber in his own name with several companies. The timber was destroyed by fire but he was
not compensated for he had no insurable interest in the timber.

CAPITAL SUBSCRIPTION

This involves steps taken to raise capital for the company. Promoters are the first directors of
the
company. To raise capital directors will be called to deliberate on the following: -

a)Appointment of secretary and fixing the terms and conditions of this appointment.
b)Appointment of bankers, brokers, solicitors and Auditors.
c)Adoption of preliminary contracts entered by promoters on behalf of the company in the
pre-incorporation stage.
d) Securing underwriting contracts in order to secure minimum subscription.
e)Adoption of the draft prospectus or statement in lieu of prospectus.
f) Appointment of managing director or manger and other officers.
g) Approval of the design of the common seal of the company and the authorizing the
custody thereof.
h) Listing of shares on the stock exchange.

If the directors wish to invite the public to subscribe for its shares, they will file a copy of the
prospectus with the registrar of companies. On the advertised date, the prospectus will be
issued to the public investors can obtain the prospectus from the registered office or from the
bankers. Investors then forward their applications for shares along with application money to
the company’s bankers’ mentioned in the prospectus. The bankers will then forward all
applications to the company and the directors will consider the allotment of shares. If the
share applications meet a minimum subscription as disclosed in the prospectus, directors will
allot shares to the applicants. Allotment letters are then sent to those given shares and regret
letters to those who are not. If applications fall below the minimum subscription as in the
prospectors within 120 days after prospectus issue, no allotment is made and all money will
be refunded. When a public company does not intend to raise money from the public the
company will file a statement in lien of prospectus with the registrar at least 3days before
allotment of shares.

COMMENCEMENT OF BUSINESS

Section 3 of the Act gives conditions and restrictions which a company must observe before
it is
allowed to start business. This includes issuance of prospectus, and whether the minimum
subscription was raised.

Form 211 which must be given to the registrar confirms the following: -
a) The minimum subscription has been raised.
b) Every director of the company has paid the company or made the shares taken or
contracted to

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Classification of Companies KKG
be taken by him. Having given for 211 and 212 and the statement in lieu of prospectus the
registrar shall certify that the company is entitled to commence business and issue it with a
Trade certificate.
If the company defaults on the above, contracts entered by it will be provisional only and not
binding on it. Section 3 (b) provides a penalty for breaching the conditions (i.e. $1000 each
day
as contravention continues).
Section 3 subsections 7 exempts private companies from the conditions and restrictions thus a
private company can start business without the trading certificate.

Activity

1. In relation to the membership of a company:

a) Highlight six ways through which a person might cease to become a member of a
company.
b) Outline four rights of a member in relation to meetings of a company. .
2) With reference to formation of companies:
(i) Explain the meaning of the term “articles of association”.
(ii) Describe four effects of registration of the articles of association of a company.

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