COMPANY LAW

TOPIC EIGHT

8.1 INTRODUCTION

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8.2 OBJECTIVES

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8.3 DEFINITIONS
A person may be defined as an entity or being which is recognized by law having certain defined
rights and obligations. There are two types of persons:
a) Natural person: these are human beings who are capable of rights and are subject to obligation
The legal personality of natural person or human beings starts at birth and end at death.
b) Corporations: a part from human beings, the law also accords legal personality to certain
offices and groups of persons known as corporations. A corporation is an association of persons
bound together for some particular object, mostly to carry on business with a view of profit. It is
an artificial person created by law with capital divided into transferable shares and with limited
or unlimited liability possessing a common seal and perpetual succession. A corporation is
regarded as a person because it has legal rights and obligations of the individual who constitute
it. A corporation may be composed of one or several or legal persons. It has a legal personality of
its own distinct from that of its members. The individual members have rights and liabilities of
their own apart from those of the corporation. The corporate body is different in that it has
perpetual succession, it never dies and has a common seal by which to authenticate its acts. The
members may change, but the corporate body does not.
Salomon – vs. – Salomon & co. ltd 1897 ac 22 S incorporated a company and sold his sold his
boot business to it for 30,000. His wife one daughter and four sons took up one share of 1 each. S
took 20,000shares of 1 each and 10,000 debentures in the company. The debentures gave S a
charge over the assets of the company as the consideration for the transfer of the business.
Subsequently when the company was wound up, its assets were found to be worth 6,000 and its
liabilities amounted to 17,000 of which 10,000 were due to S (secured claimed that S and the
company was one and the same person, and that the company was a mere agent for S and hence
they should be paid in priority to S. Held: that as soon as the company was duly incorporated it
became, a separate person in the eyes law, independent from S and was not his agent. Although S
was virtually the holder of the shares in the company yet he was also a creditor secured by its
debentures and was therefore entitled to repayment in priority to the unsecured creditors.

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9.4 TYPES OF COMPANIES/CORPOLARATION
a) Corporation sole: is one which consists of one human member at a time, such a member
being the holder of an office which is held in succession by one person at a time some
corporations sole are creature of the common law e.g. the office of a bishop. There cannot be
more than one bishop in a diocese at the same time. The living official comes and goes out but
the offspring of the law remains forever. Other corporation sole are created by the constitution or
an act of parliament e.g. the office of the president, office of the public trustee. These corporation
are not common in the business world.
b) Corporation aggregate: most corporation are corporations aggregate. These types of
corporations consist of two or more members at the same time. Example includes public and
private companies. These are also statutory corporations and registered companies under the co-
operative societies act.
c) Statutory corporation has various names.
1. Statutory company or corporation – it is a company that he come to existence through an
enabling statute hence statutory company.
2. Parastatal corporation – intended to meaning that the state is involved in its making i.e. state.
3. Public corporation – used to denote that this is an enterprise in which members of public have
an interest hence public corporation.
d) The Chartered Company/ corporation: This form of a company is a very old type which
does not exist today because businessmen prefer to trade through modern companies e.g.
registered company and not through this old archaic type. This company is a feature of 16th, 17th
and 18th Cs it existed during the colonial period. The English practice was as follows if the
people wanted to create such a company.
1. A group of people had to come together and to carry out business.
2. To raise capital for intended business.
3. To draw the business objects and detail
4. To petition the crown to grant them a charter or a letter patent that legally will bind them in
the name they have chosen
5. The crown either granted or rejected the petition for charters. If it granted, then from the date
as indicated in the charter, the company was deemed to have been formed to engage in business
ex.

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The British east India company was incorporated by the grant of a charter granted by queen
Elizabeth 1 on 31- 12 – 1600 A.D. it was made of 127 shareholders an among them they had
contributed 72,000 as capital and their main object was to engage in business of gold and spices
from the east as the charter indicated, be engaged in spice business with any country the East Of
Cape Of Good Hope. The Queen granted them the charter to last for 15 years from the time of
formation and she outlawed any other British company from rivaling the BEI Co. in the
designated territory. So the BEI Co. had exclusive business.

8.5 CREATION OF CORPORATIONS

A corporation can be created in the following way
a) Through other Acts of Parliament . Corporation can be created by acts of parliament in
Kenya. This includes state corporations. Examples include Kenya meat commission, pyrethrum
board of Kenya, Kenya airways etc. The power of these corporation are defined by the
incorporating Act and they cannot do any activity which is not expressly or implied authorized
by the Act. A statute creating the corporation gives it a name stipulates its composition,
principles its powers and duties.
B) By Registration under the Companies.Act registered companies are created by registration
under the companies act cap 486 laws of Kenya companies can be public or privatees of
corporations
How to register a company. The three main stages.- - Promotion - Registration –reservation of
name ,presentation of documents (all documents),payment of stamp duty, - Issue of certificate -
If private –start business, - If public –issue a prospectus then get certificate of
commencement :the process (in brief) Promotion The steps involved in the promotion of a
company are stated as follows:-
1. Discovery of idea-it involves a preliminary analysis and verification of the proposed idea to
find out whether the business would be profitable or not
2. Detailed investigation-intensive investigation with a view to ascertaining the soundness of the
proposition in terms of probable cost of production, the estimated selling price of the goods or
services proposed to be made available and amount of profit .study market demand.
3. Assembling –the promoter arranges for the acquisition of necessary men, materials,
machinery, money, and managerial ability.

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4. Financing of proposition-through public financing by issuing a document known as
“prospectus”
5. Registration or incorporation-the promoters take the following steps for registration or
incorporation of a company - Name of the company - Presentation of documents to the registrar
of companies, and these are the documents to present: - The memorandum of association -
Articles of association - Statement of company’s nominal capital/authorized capital - Declaration
compliance - A list of directors

When the requisite documents are filed with the registrar shall satisfy himself that the statutory
requirements regarding registration have been duly complied will he then issue a certificate of
incorporation.
Commencement of business stage
If it is a public company, it has to undergo a further stage, the capital subscription stage: In the
capital subscription stage, the company arrangements for raising the capital of the company .
After incorporation the affairs of the company are taken over by the directors. Usually the
promoters are the first directors of the company. in order to make necessary arrangements for
raising the capital of the company a meeting of the board of directors will be convened to deal
with the following business:
1. Appointment of secretary and fixing the terms and conditions of his appointments
2. Appointment of bankers, brokers, solicitors and auditors
3. Adoption of preliminary contracts entered by the promoters on behalf of the company in
reincorporation stage.
4. Adoption of underwriting contracts in order to secure minimum subscription
5. Adoption of the draft “prospectus” or statement in lieu of prospectus
6. Appointment of managing director or manager and other responsible officers of the company
7. Approval of the design of the common seal of the company and authorizing custody thereof
8. Listing of shares on the stock exchange Thus a public company can start business only after it
obtains a certificate of commencement of business.

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8.6 ADVANTAGES / CONSEQUENCES OF INCORPORATION.
1. Limited liability -The liability of the members of a limited company is limited to the amount
of their shares therein. This enables even not too enterprising people to invest part of their money
in industrial ventures carried on by limited companies because they know beforehand that their
liability is limited.
2. Transferability of shares -Shares in a company can be transferred (subject to any restrictions in
the article of association) from one person to another without the consent of the other members.
3. Separate legal entity A company as is already illustrated both by the act and the case law, has
separate legal entity from its members and its existence is not affected by death, insanity or
bankruptcy of a member i.e. a company has perpetual succession but the members will always
come and go but the company will continue to exist.
4. Control The control of accompany can be secured by the acquisition of the majority of the
company’s shares hence carry the voting powers.
5. Permanent existence/ perpetual succession The life of the company is permanent. The
company act creates the company and dissolves it. The death, insolvency or the transfer of the
shares of the members does not affect the existence of the company. It may stated that “members
may come, members may go, but the company goes for ever”.
6. Separation of ownership and management The shareholders who are the owners of the
company cannot participate in the management of the company’s business. They can elect their
representatives to the board of directors, which manages the affaire of the company. This has led
to the recognition of the fact that ownership and management of business are specialized
functions.
7. Expert management Since a company carries a business on a large scale and has financial
resources, it can afford the services of the experts. This will lead towards professionalism in
management which is necessary for efficient management of the business.
8. Public confidence The formation and running a company is regulated by the provisions of
companies act and various acts. Provisions regarding appointment and remuneration of directors,
compulsory audit and publication of accounts, protection of minority shareholders and so have
created greater public confidence in companies.
9. Social advantages A company is also beneficial from the society’s point of view. It mobilizes
the scattered savings of public and invests them in sound industrial and commercial ventures. It

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provides employment to a large number of people. Economics of large-scale operation lad to
economic use of national resources and provisions of goods and services to the public at cheaper
prices.
10. Suing or being sued: The entity is capable of suing or being sued it its own name. These
advantages apply in respect of a registered co-operative society; with or two minor differences.
8.7 UNINCORPORATED ASSOCIATIONS
An incorporated association is one which has no corporate status i.e. it has no legal personality
and cannot therefore own property or enter into contracts or sue or be sued in its own name. Such
associations include clubs, societies, trade unions, partnerships etc. These associations consist of
groups of individuals is regarded as the joint property is held on behalf of all the members
trustees. The members are individually responsible for their own torts or the torts authorized by
them. For example in case of Brown Vs- Lewis 1896 the committee of a football club authorized
the repair of a football stand for use by the public. The repair was faultily done and a member of
the public injured. When the collapsed, it was held that the committee authorizing the repair was
liable for the injuries by member of the public
8.8 SUMMARY
How to register a company.
- Promotion
- Registration –reservation of name, presentation of documents (all documents),
-payment of stamp duty,
- Issue of certificate
Advantages / consequences of incorporation.
1. Limited liability.
2. Transferability of shares
3. Separate legal entity
4. Control
5. Permanent existence/ perpetual succession.
6. Separation of ownership and management
7. Expert management
8. Public confidence
9. Social advantages

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10.Suing or being sued
8.8 SELF-TEST QUESTIONS

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