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Contents
SECTION 3 PAPER NO.7 COMPANY LAW GENERAL OBJECTIVES.................................................10
1.0 LEARNING OUTCOMES ..........................................................................................................10
CONTENT ...............................................................................................................................................10
1Nature and classification of companies .................................................................................................10
2 Formation of companies ..................................................................................................................10
.4 Shares...........................................................................................................................................11
.5 Share capital.................................................................................................................................11
6 Debt capital ......................................................................................................................................11
7 Company meetings ..........................................................................................................................12
8 Directors ..........................................................................................................................................12
9 The company secretary ....................................................................................................................12
10 Auditors .......................................................................................................................................12
11 Company accounts, audit and investigation ................................................................................13
12 Corporate restructuring ................................................................................................................13
13 Receivership and liquidation of companies .................................................................................13
14 Companies incorporated outside the country ..............................................................................14
Nature and classification of companies ...................................................................................................15
BASIC CHARACTERISTICS OF COMPANIES ...............................................................................................15
CLASSIFICATION OF COMPANIES .............................................................................................................18
Differences between private and public companies ...............................................................................19
Other classifications .................................................................................................................................20
Differences between statutory and registered companies .....................................................................21
Differences between a company and partnership ..................................................................................21
Differences between a company and a cooperative society ..................................................................22
2 Formation of companies ..................................................................................................................23
FORMATION OF A COMPANY ..................................................................................................................24
Legal position of a promoter ...................................................................................................................24
Duties of a promoter ...............................................................................................................................24
RENUMERATION OF PROMOTERS ...........................................................................................................25
pre-incorporation contracts ....................................................................................................................26
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Procedure of incorporation of a company ..............................................................................................28

Circumstances when the name of the company may not be registered /accepted ...............................28
1.MEMORANDUM OF ASSOCIATION .......................................................................................................29
CONTENTS OF MEMORANDUM OF ASSOCIATION ..................................................................................29
DOCTRINE OF CONSTRUCTIVE NOTICE ....................................................................................................31
ARTICLES OF ASSOCIATION ......................................................................................................................31
CONTENTS OF THE ARTICLES OF ASSOCIATION.......................................................................................32
ALTERATION OF THE ARTICLES ................................................................................................................32
LEGAL EFFECTS OF MOA AND AOA ..........................................................................................................33
PRACTICAL CONSEQUENCES OF INCORPORATION..................................................................................34
LIFTING THE VEIL OF INCORPORATION ...................................................................................................35
1 LIFTING THE VEIL UNDER STATUTORY PROVISION ...............................................................................35
Lifting the veil under case law/common law ...........................................................................................35
Membership of the company ..................................................................................................................36
METHODS /WAYS OF BECOMING A MEMBER OF A COMPANY ..............................................................37
Ways/methods of becoming a member of a company ...........................................................................38
Circumstances when a person can be a member of a company without being a shareholder ..............39
REGISTER OF MEMBERS...........................................................................................................................40
RECTIFICATION OF THE REGISTER............................................................................................................41
NOTICE OF TRUST IN REGISTER ...............................................................................................................41
Rights of members ...................................................................................................................................42
Rights relating to communication ...........................................................................................................42
Liabilities of members ..............................................................................................................................42
CEASATION OF MEMBERSHIP ..................................................................................................................43
COMPANY SHARES ...................................................................................................................................45
Shares.......................................................................................................................................................45
Classification/type of shares in a company .............................................................................................46
The procedure of variation of class rights is as follows ...........................................................................51
Objections to variation of class rights .....................................................................................................51
Share certificates and share warrants .....................................................................................................52
Contents of a share certificate ................................................................................................................52
Procedure of issuing share warrant .........................................................................................................53
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Differences between share certificate and share warrant ......................................................................54

Transfer and transmission of shares........................................................................................................54
Transfer of shares in private companies .................................................................................................55
Circumstances under which the company would decline to register a transfer of its shares ................56
TYPES OF SHARE CAPITAL ........................................................................................................................59
RAISING OF CAPITAL ................................................................................................................................60
Types of misrepresentation .....................................................................................................................65
Persons who can be held liable in relation to the prospectus ................................................................66
Circumstances under which a person may be exempted from liabilities in the prospectus ..................66
STATEMENT IN LIEU OF PROSPECTUS .....................................................................................................67
MAINTAINANCE OF CAPITAL ...................................................................................................................67
Provisions which prevent capital from being reduced in value as it comes into company ....................68
Provisions which prevent capital from leaving the company once it comes in ......................................69
ALTERATION OF CAPITAL .........................................................................................................................71
Methods of alteration ..............................................................................................................................71
Reduction of share capital .......................................................................................................................71
Methods of reduction of capital ..............................................................................................................72
Role of court in capital reduction ............................................................................................................72
DIVIDENDS ...............................................................................................................................................73
Some of the basic rules that govern declaration and payment of dividends are ..................................73
Common law rules that govern dividends ...............................................................................................74
Circumstances when dividends become payable and enforceable to company ....................................74
Why companies may seek to control the funds from which the dividends are paid(may 2014 ............75
EFFECTS OF ULTRA –VIRES BORROWING ................................................................................................76
Characteristics /features of a debenture ................................................................................................77
Issuing of a debenture .............................................................................................................................77
Debenture certificate should contain the following particulars .............................................................78
Register of debenture holders .................................................................................................................78
RIGHTS OF DEBENTURE HOLDERS ...........................................................................................................79
CLASSIFICATION OF DEBENTURES ...........................................................................................................79
Debenture trust deed ..............................................................................................................................81
Contents of the debenture trust deed ....................................................................................................82
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Advantages of debenture trust deed ......................................................................................................82

Securing of debentures ............................................................................................................................82
Advantages of a fixed charge ...................................................................................................................83
Disadvantages of a fixed charge ..............................................................................................................83
CYSTALLIZATION OF A FLOATING CHARGE ..............................................................................................83
Effects of crystallization ...........................................................................................................................84
ADVANTAGES OF A FLOATING CHARGE ..................................................................................................84
Disadvantages of a floating charge ..........................................................................................................85
Differences between floating charge and fixed charge...........................................................................85
Priority of charges ....................................................................................................................................86
Registration of charges ............................................................................................................................86
Effects of non –registration of a charge ..................................................................................................87
Register of charges ..................................................................................................................................88
Business transacted at the Annual General Meeting ..............................................................................89
ROLE OF THE ANNUAL GENERAL MEETING .............................................................................................89
OTHER MEETINGS THAT CAN BE HELD IN THE COMPANY ......................................................................90
CONVENING OF GENERAL MEETING .......................................................................................................91
METHODS OF SERVICE .............................................................................................................................92
QUORUM .................................................................................................................................................93
EXCEPTIONS TO THE RULE IN SHARP VS DAWES .....................................................................................94
FUNCTIONS AND THE POWERS OF THE CHAIRMAN ...............................................................................97
POWERS OF THE CHAIRMAN ...................................................................................................................97
RESOLUTIONS ..........................................................................................................................................98
MINUTES OF A GENERAL MEETING .......................................................................................................100
Types of directors ..................................................................................................................................102
APPOINTMENT OF DIRECTORS ..............................................................................................................103
QUALIFICATION OF DIRECTORS .............................................................................................................103
DISQUALIFICATION OF DIRECTORS ........................................................................................................104
POSITION OF THE DIRECTORS IN THE COMPANY ..................................................................................105
Vacation and removal from office .........................................................................................................106
Removal of a director ............................................................................................................................106
Remuneration of the directors ..............................................................................................................107
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Disclosure of interest by the directors ..................................................................................................107

Duties of the director.............................................................................................................................107
Remedies for breach of fiduciary duties................................................................................................108
General duties /statutory duties ...........................................................................................................108
Liabilities of the directors ......................................................................................................................109
Loans to directors ..................................................................................................................................110
Doctrine of indoor management (the rule in Turquand’s case) ............................................................111
Royal British Bank VS Turquand (1856) .................................................................................................111
Exceptions to the rule in Turquand case ...............................................................................................111
Majority rule and minority protection ..................................................................................................112
The majority rule is also called the RULE IN FOSS VS HARBOTTLE (1843) ............................................112
Facts of the case ....................................................................................................................................112
The rule in Foss vs Harbottle can be explained in three principles as follows ......................................112
Proper plaintiff principle ........................................................................................................................112
Internal management principle .............................................................................................................112
Irregularity principle ..............................................................................................................................113
Exceptions to the rule in Foss VS Harbottle ..........................................................................................113
Minority protection ...............................................................................................................................113
(ii)Representation action .......................................................................................................................113
Where an individual member has suffered personal loss in addition to the injuries that a company has
suffered then the member can bring a representative action on behalf of him and on behalf of other
shareholders who may have suffered similar injuries or losses............................................................113
Protection of the minority by the statute .............................................................................................114
Qualifications .........................................................................................................................................115
DISQUALIFICATION ................................................................................................................................116
Duties of the company secretary...........................................................................................................118
What is the legal position of the company secretary ..........................................................................119
Functions of auditors .............................................................................................................................124
The auditor shall include in the auditor’s report – ................................................................................124
Responsibilities of the auditor ...............................................................................................................126
Auditor’s right to information ...............................................................................................................126
Cessation of office of auditor ................................................................................................................127
Resignation of auditor ...........................................................................................................................128
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Duty of care between the auditor and the third party..........................................................................128

Introduction................................................................................................................................................130
Books of Accounts..................................................................................................................................131
Laying financial statements before the General meeting...........................................................................132
Right to receive Copies..............................................................................................................................132
Exception ...............................................................................................................................................132
Other requirements as to accounts .........................................................................................................132
Group Accounts .....................................................................................................................................133
Exceptions to preparation of Group Accounts ......................................................................................133
Form and Content of Group Account ....................................................................................................133
Annual Return ........................................................................................................................................134
Contents of the Annual return...............................................................................................................135
Directors Report ....................................................................................................................................135
Investigation into the Affairs of the Company ..........................................................................................137
Circumstances under which a court might appoint inspectors .............................................................138
Investigation by Attorney General.........................................................................................................138
Application by members (Sec 786) .......................................................................................................139
Application by the company (Sec 787(1) ..................................................................................................139
Powers of inspectors .............................................................................................................................140
Advantages of a scheme of arrangement..............................................................................................142
Disadvantages of scheme of arrangements ..........................................................................................143
Contents of the advisor ‘s circular .........................................................................................................146
Hostile take over ....................................................................................................................................149
Post merger integration .........................................................................................................................151
Disadvantages of reverse merger ..........................................................................................................153
Other forms of restructuring .................................................................................................................153
Chapter thirteen ....................................................................................................................................155
CORPORATE INSOLVENCY ......................................................................................................................155
Appointment of administrator/receiver ................................................................................................155
Effects of administration orders ............................................................................................................156
Powers and functions of the administrator/receiver ............................................................................156
Vacation of the office of the administrator ...........................................................................................157
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LIQUIDATION /WINDING UP OF A COMPANY .......................................................................................157

Winding up by the court/compulsory winding up.................................................................................158
Persons who can file a petition for winding up .....................................................................................158
Grounds for compulsory winding up .....................................................................................................159
Some circumstances which may lead to liquidation on just and equitable grounds are......................159
Liquidation process ................................................................................................................................159
When the compulsory winding up order is issued it has the following consequences/effects ............160
Liquidator ...............................................................................................................................................160
For a person to be appointed as an insolvency practitioner he must have the following qualifications
...............................................................................................................................................................160
The following category of persons can be appointed as liquidator ......................................................161
Disqualification from acting as an insolvency practitioner ...................................................................161
Legal position of a liquidator .................................................................................................................161
Duties and obligations of the liquidator ................................................................................................161
Powers of the liquidator ........................................................................................................................162
Release of the liquidator........................................................................................................................163
Committee of inspection .......................................................................................................................163
Voluntary winding up.............................................................................................................................163
Types of voluntary winding up ..............................................................................................................163
Declaration of solvency is invalid unless ...............................................................................................164
Process of members voluntary winding up ...........................................................................................164
Creditors voluntary winding up .............................................................................................................165
Differences between winding up and receivership ...............................................................................167
Liquidation of unregistered companies .................................................................................................168
Transaction arising out of liquidation ....................................................................................................168
Offences relating to liquidation .............................................................................................................170
Procedure for registration of foreign companies ..................................................................................172
Documents required to accompany the applications are .....................................................................172
On registering a foreign company the registrar shall ............................................................................173
Requirements with respect to name of foreign companies ..................................................................174
Local representatives of foreign companies .........................................................................................174
Regulations of registered foreign companies carrying on business in Kenya .......................................174
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Registered foreign companies have a registered office ........................................................................175

Registered foreign company to display its name at office and places of business ...............................175
Copies of registered foreign company’s financial statements and other documents to be lodged with
registrar..................................................................................................................................................176
Registered foreign companies to lodge certain returns with registrar .................................................176
Circumstances in which name of registered foreign company can be struck off or restored to registrar
of foreign companies .............................................................................................................................177
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PART II
SECTION 3 PAPER NO.7 COMPANY LAW GENERAL OBJECTIVES

This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable
him/her to apply and comply with the provisions of company law in relevant circumstances and
environments.

1.0 LEARNING OUTCOMES

A candidate who passes this paper should be able to:

• Apply legal principles relating to formation of companies

• Evaluate the rights and obligations of members and shareholders
• Comply with the legal principles governing liquidation of corporates and
restructuring

• Comply with the legal principles relating to companies incorporated outside Kenya
• Ensure books of account are prepared in compliance with the law.

CONTENT
1Nature and classification of companies
- Nature and characteristics of a company
- Types of companies
- Principle of legal personality and veil of incorporation
- Distinction between companies and other forms of business associations, sole
proprietorships, partnerships and cooperative societies.

2 Formation of companies
- Promoters and pre-incorporation contracts
- Process of forming a company
- Memorandum and articles of association
- Certificate of incorporation
- Effects of incorporation
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3 Membership of a company
- Acquisition of membership
- Register of members
- Rights and liabilities of members
- Cessation of membership

.4 Shares
- Classes of shares
- Variation of class rights
- Share certificates
- Issue and allotment
- Transfer and transmission
- Transfer of shares under central depository system
- Mortgaging and charging of shares

.5 Share capital
- Meaning and types of share capital
- Raising of share capital
- Prospectus/information memorandum
- Maintenance of capital
- Alteration of capital
- Dividends

6 Debt capital
- Borrowing powers of a company
- Debentures
- Charges
- Registration of charges
- Remedies for debenture holders
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7 Company meetings
- Nature and classification of company meetings
- Essentials of a valid meeting
- Voting
- Resolutions

8 Directors
- Qualifications, appointment and disqualification
- Powers and duties of directors
- Removal and vacation of office
- Register of directors
- Remuneration of directors
- Loans to directors
- Compensation for loss of office - Disclosure of director’s interest in contracts
- The rule in Turquand’s case/Indoor Management rule - Insider dealing

9 The company secretary

- Qualification, appointment and removal
- Powers and duties of the company secretary
- Liability of the company secretary
- Register of secretaries

10 Auditors
- Qualification, appointment and removal
- Remuneration of auditors
- Powers and duties
- Rights and liabilities
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11 Company accounts, audit and investigation

- Books of accounts
- Form and content of accounts - Group accounts
- Director’s report
- Auditor’s report
- Annual returns
- Investigation of company affairs
- Appointment and powers of inspectors
- Inspector’s report

12 Corporate restructuring
- Need for restructuring
- Mergers,
- Post merger reorganisation
- Takeovers and acquisitions
- Schemes of arrangement and compromises
- Reconstruction

13 Receivership and liquidation of companies

- Meaning of receivership
- Appointment and vacation of office
- Powers and duties of a receiver
- Termination of receivership
- Meaning of liquidation
- Types of liquidation
- Appointment, powers and duties of liquidators
- Discharge of liquidators
- Distribution of assets and dissolution of companies
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14 Companies incorporated outside the country

- Process of registering a company
- Certificate of registration
- Power to hold land
- Registration of charges
- Accounts of foreign companies
- Service of process and notices on foreign companies
- Returns
- Penalties
- Cessation of business

15 Emerging issues and trends

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Chapter one

Nature and classification of companies

Define company

A company can be defined as an association of people who contribute resources into a business
and in return acquire shares or ownership of the business and they share out the profit that is
generated by the business.

A company is considered to be a legal person and therefore the persons who have created it are
always considered to be separate from that company.

In Kenya majority of companies are registered governed by the Companies Act 2015.

BASIC CHARACTERISTICS OF COMPANIES

Legal personality

A registered company is considered to be a legal person that is separate from the person who
formed it.

The concept of legal personality was explained in the case of reference salomon vs salomon co
lts 1897

In this case salomon had converted his sole trade business into a company whre he was a majority
shareholder together with his family members.He had also given the company a loan that was not
secured by the company’s assets making him a secured creditor.When the company went into
liquidation the other creditors argued that Salomon should not be paid as a secured creditor before
them because according to them he and the company were the same. The court held that Salomon
and the company were separate and according to the court once a company is registered it becomes
a separate legal person different from its owners.

Limited liability

The liability of members of the company is limited up to the extent of any amount that remains
unpaid on the shares that are taken by the members. Therefore where the member has fully paid
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for his shares he cannot be called upon to contribute to the debts of the company if the company
is unable to pay its debts.

Ownership of the property

A registered company can acquire and own property under its registered name .Such property does
not belong to the members or shareholders. This was explained in the case of Macaura vs
Northern Assurance Co Ltd 1925

In this case Macaura had converted his timber business into a company. He took an insurance
cover to protect the timber against fire. However the policy was registered in his own name. When
the timber was destroyed by fire Macaura made claim for compensation but the insurance company
refused arguing that Macaura had no insurable interest on the timber .When he sued the company
the court held that Macaura could not be compensated because the property he insured belonged
to the company. The court explained that companies properties do not belong to the members

CAPACITY TO CONTRACT

A registered company can enter into legally binding contracts with other parties in order to pursue
its objectives.

CAPACITY TO SUE OR BE SUED

A registered company can sue another party to protect its interest and can also be sued if it fails to
fulfill its obligations.

PERPETUAL SUCCESSION

The company’s life is not affected by the death of its members .If a member dies the company
continues to exist.

COMMON SEAL
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A registered company can acquire a common seal that can be used as an official signature of the
company.

BORROWING POWER

A registered company can borrow finances from lenders to finance its operations.

MANAGEMENT

Registered companies are usually managed by trained personnel that are able to provide
professional services to the company.

TRANSFER OF SHARES

Shares of a registered company can be transferred from one member to another.

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CLASSIFICATION OF COMPANIES
(a) Statutory corporations

This refers to companies that are either wholly owned or majority owned by the government.

They are created usually to carry out certain commercial activities or to promote certain
sectors.

The capital is usually provided by the government .

Government owns majority of the shares.

Basic features

-shares controlled by the government.

-capital is provided by the government

-the board of directors is chosen by the government

-they are usually audited by the auditor general

-there main objective is not necessary to make profit but to promote certain commercial activities.

(b)CHARTERED CORPORATIONS

These are the oldest form of corporations that used to be created by European colonial powers
where a business organization would be given a charter by the head of the state to explore business
opportunities on behalf of the state in various colonies. However with time these corporations have
been faced out and no longer registered in Kenya. However under the universities Act for a
university to operate in Kenya it must be issued with a charter which acts as a license to operate

(c)REGISTERED COMPANIES
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This is the largest group of companies in Kenya which are formed and registered under the
companies act of 2015.

The companies are further subdivided into

-public companies

Companies listed in the stock market and allow free transfer of shares from one person to another

-private companies

Companies that restrict transfer of their shares and therefore not listed in the stock market.

Differences between private and public companies

Public company Private company

Listed in the stock market Not listed in the stock market

Shares are freely transferable Transfer of shares restricted

No maximum limit on number of Maximum number of members is 50

members

Must have a company secretary No need of a company secretary unless

the capital exceeds 5,000,000

Hold annual general meeting No obligation to hold annual general

meeting

Publish its accounts Not requirement for them to publish

Minimum of two directors Minimum of one director

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Regulated by the capital market Not regulated by Nairobi stock exchange

authority and Nairobi Stock and the capital market authority
exchange

Other classifications
Limited company and unlimited company

A limited company is a company where the liability of members is limited while unlimited
company the liability of members is unlimited.

Company limited by shares and company limited by guarantee

Where a company is limited by shares then the liability of members is limited up to the extent of
the amount that remains unpaid on the shares taken by the members.

Where a company is limited by guarantee the liability of the members is limited up to the extent
of the amount of guarantee that the members undertake to contribute if the company goes into
liquidation

(d)Holding and Subsidiary

A holding company is a company that controls more than 50 % of the share capital of another
company or it is able to influence and control its board of directors.

Subsidiary company is a company whose more than 50 % of its share capital is controlled by
another company.

(e)Foreign companies

This refers to a company that is registered /incorporated in another country other than Kenya but
it has business operations here in Kenya .
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Differences between statutory and registered companies

Statutory corporation Registered company

Created by specific acts of parliament Formed and registered under the companies
act

Capital is provided by the government Capital is provided by the shareholders

Board is chosen by the government The board is elected by the shareholders

If wholly owned by the government they Audited by an independent external auditor

are audited by the auditor general

The main objective is not necessary to make Usually profit drives business enterprises
profits but rather to promote certain
activities.

Differences between a company and partnership

Company partnership

Legal person Not legal

Limited liability Unlimited liability except for a limited partner

Own property Jointly by partners

Perpetual succession No perpetual succession

Has a common seal No common seal

Governed by the companies act of Governed by the partnership act

2015
22

Shares can be transferred from one No shares and capital is in form of money
person to another

Companies managed by board of Partnership is managed by partners themselves

directors on behalf of the shareholders

Constitution of the company are the Partnership deed is the constitution of the
memorandum of association and partnership
articles of association

Differences between a company and a cooperative society

Company Cooperative society

Registered and governed by the Formed and governed by cooperative

companies act societies act

Managed by board of directors on Managed by the management committee on

behalf of the shareholders behalf of the members

Registered by the company registrar Registered by the commission of

cooperative development

Can be liquidated either by Can be liquidated by the commissioner of

members,creditors or the court cooperative development

The main objective is to make profits The main objective of cooperative is to help
and pay dividends to the its members to achieve certain objectives
shareholders but not necessarily to make profits
23

Chapter two

2 Formation of companies
- Promoters and pre-incorporation contracts
- Process of forming a company
- Memorandum and articles of association
- Certificate of incorporation
- Effects of incorporation
24

FORMATION OF A COMPANY
Registered companies are formed and registered under the companies act regulations.Before a
company is registered there are certain activities that are done by the person or persons who intend
to register a company .This activities are called promotion of a company and the person who comes
up with the idea of forming a company and who carries out this activities is called is a promoter

Legal position of a promoter

Since the company is yet to be registered there exist no contractual relationship between the
company and the promoter and therefore the promoter is neither a trustee ,an agent nor an
employee of the company and the activities he carries out do not bind the company

However over the years the court have explained that there exist a fiduciary relationship between
the promoter and the company .A fiduciary relationship exist where a person puts all his confidence
and trust on another person in relation to given issues or matters

Duties of a promoter
They are classified into two categories

Fiduciary duties

General duties

Fiduciary duties/common law duties

The promoter is required to act honestly in good faith and for the best interest of the company

Duty of disclosure of any interest that the promoter may have in a transaction involving a
company

Duty to account for any money or property that comes into his control and which relates to the
company

Duty not to make secret profit

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General duties

To choose the name of the company

To pay all the preliminary expenses

Cause the company to be registered

Prepare all the official documents that are needed to register the company

To acquire the services of directors on behalf of the company

To acquire capital and property on behalf of the company

To enter into transactions and contracts on behalf of the company (pre –incorporation
contracts)

RENUMERATION OF PROMOTERS
Since the promoter is not an agent or employee of the company he is not entitled to any
remuneration.However the company’s internal constitution can make a provision for the promoter
to be rewarded for the services that he has provided

Some of the rewards are

He can be allowed to sell his business undertaking to the company at a profit which must be
disclosed

He can be allowed to sell assets and property to the company in return of free fully paid
shares
26

The promoter may be allowed to facilitate transaction between a company and a third party
for a commission which must be disclosed

The promoter can be made one of the first directors of the company

In future the company may decide to give the promoter some management shares for free

The promoter may be allowed to acquire shares in the company at a price that is lower than
the market value of those shares

pre-incorporation contracts
this refers to a contract that is entered into on behalf of the company before it is registered usually
by the promoters.the general rule is that such a contract cannot be enforced against the company
.The court have also laid down a number of rules in relation to such contracts which are commonly
called the rules of pre-incorporation contracts .the rules include

1.before a company is incorporated it has no legal existence and therefore cannot contract
or have agents

this was explained in the case of kelner vs Baxter (1866)

in this case the promoters of a company (a hotel)entered into a contract for hotel to be supplied
with goods before it was registered .upon its registration the company rectified the contract and
goods were supplied and used by the hotel. However before the money was paid the company went
into liquidation .the promoters were sued by the suppliers on the contract but they argued that the
responsibilities had been transferred to the company due to rectifications of the contract. The court
held that the promoters were liable since at the time of making the contract the company did not
exist legally and could not contact
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2.at common law a person who purports to contract as an agent but the principal does not
exist at the time will be held personally liable for the contract

This is direct from law of Agency

3.at common law a person who purports to contract with a non existence person such a
contract is void

4.at common law a company cannot after incorporation ratify a pre-incorporation contract

5.at common law mere adoption or confirmation of pre-incorporation contract by the

directors does not create contractual relationship between the company and the other party

6.promoters are held personally liable for any pre-incorporation contract that they enter
into

7.at common law a pre-incorporation contract can be enforced against the company if the
company onces it is registered enters into a new similar contract

Ways in which a promoter can escape liability on pre-incorporation

He can enter into a draft agreement with other party so that when the company is formed then it
can enter into that draft contract and therefore become accountable

The promoter can move the contract himself provided the other party agrees to release the promoter
from the obligation when the company is registered and enters into a new agreement
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Procedure of incorporation of a company

Stage 1 Choice and reservation of the name

The promoter is required to make a choice of the proposed name of the company intended to be
registered

The name should then be reserved with the registrar usually for a period of 30 days .the companies
act regulations make the following provisions in relation to the name of the company

Circumstances when the name of the company may not be registered /accepted

-If the name is the same as the name of already existing company

-If the name has a close phonetic resemblance with an existing name

-If the name differ with another name just by addition of a place

-If the name is identical to other reserved name

-If the name is the same as the name of body corporate if the registrar believe that the name
may amount to a commission of a crime

-If the registrar believe that the name is offensive or contrary to public interest

Names considered to be undesirable by the registrar

-If the name includes words such as cooperative society or trade union

-If the name suggests association or patronage with the state or its agencies

-The name suggests association or patronage of foreign government

-The name suggests association or patronage of the county government

-The name consist of the acronym that is vague or uncertain

-The name include a registered trade mark that has not been allowed by its owner

-Where the registrar believes that the name could offend the public or a given community
29

Stage 2 preparation of the constitutive documents

Constitutive documents refers to the constitutions of the company

this are

1.MEMORANDUM OF ASSOCIATION
This is considered to be the external constitution of the company which regulates the relationship
between the company and the outside world

There are three statutory forms of memorandum of association

-the memorandum of association of a company limited by shares

-the memorandum of association of company limited by guarantee

-The memorandum of unlimited company

CONTENTS OF MEMORANDUM OF ASSOCIATION

The company’s act prescribes the following contents of the memorandum of association

1.Name clause

This indicates the registered name of the company.the name must comply with the requirements
of the company’s act regulations.in addition the name must comply with the following

-where the company is a public company then its name must end with public limited company(plc)

-in case of a private company the name must end with the word limited abbreviated as ltd

All companies are required to affix their registered name in a conscipicous place in all the locations
where the company carries out its activities

The company must also ensure that all its official documents bear the registered name of the
company

A company can change its name either voluntarily by passing a resolution or compulsorily where
it may be forced to change its name
30

2.Particulars of the subscribers

Including their names,addresses and occupation

The particulars should also indicate the number of shares held,the nominal value the class of each
share and the rights attached to each share

3.Association clause

This is the declaration by the subscribers of the desire to be formed into the company

It is a declaration to the whole world that they become members of the company willingly without
been forced by anybody

4.Liability clause

This usually indicates whether the liability of members is limited or unlimited and even it is limited
whether it is limited by shares or guarantee

5.Date clause

the memorandum must clearly indicate the date on which the memorandum was registered

NB for companies that existed before the company’s act of 2015 came onto force the memorandum
of association also contains

Capital clause

this indicate the authorized capital with which the company is registered

Objective clause

which highlighted the purpose for which the company was created

where the company indicates its objects in the memorandum then it can only engage in those
activities that where authorized by the memorandum

any activity that was not authorized by the memorandum is said to be ultra vires(beyond the powers
)and therefore could not be enforced by the company.this was explained in the case of Ashbury
railway
31

and iron co ltd vs riche (1875)

in this case Ashbury entered into contract with Riche for contruction of railway line in Belgium
the contract was not authorized by the memorandum of the company .When the company was sued
by Riche for failure to fulfill its obligation under the contract the court held that the contract was
ultra vires and could not be enforced against the company

Nb under the new company’s act of 2015 the company can engage in any activity and therefore
the doctrine of ultra vires may no longer restrict companies as long as they have not started their
objects

DOCTRINE OF CONSTRUCTIVE NOTICE

This is a company law rule to the effect that any person who is transacting with the company is
taken to be aware of the contents of the company’s public documents and therefore even the
transaction turns out to be ultra vires then the person cannot blame anybody

Public documents in this context refers to all those documents that the company is required to file
with the registrar which is a public office .such documents can be accessed by anybody and
therefore they are open.they include

-memorandum of association

-the articles of association

-special resolutions

-annual returns

ARTICLES OF ASSOCIATION
This is the internal constitution of the company which regulates the relationship between the
company and its members

It also provides a guideline on how the company would be managed

32

Unlike the memorandum which is prescribed by the Act ,company can create its own articles or
adopt the one provided by the Act .However whichever the case the articles must comply with the
following statutory requirements

-it must be in English language

-it must be printed

-it must be divided into paragraphs which are numbered consequently

-it must be dated

-it must be signed by each subscriber of the memorandum of association

CONTENTS OF THE ARTICLES OF ASSOCIATION

-company shares and debentures including their type,nominal value for each share ,the rights
attached to each shares

-the directors of the company including the size of the board,appointment of the directors,how they
can be removed ,remuneration ,powers etc

-appointment of company secretary

-appointment of company auditor

-company meetings including how they are convened ,the chairman of the meeting ,conduct of the
meeting etc ,voting

-company accounts/financial statements

-dividends

ALTERATION OF THE ARTICLES

A company has power to alter its articles .However the power to alter the articles is subject to the
following limitations

-the alteration is subject to the conditions set by the memorandum of association

33

-the alteration must comply with the requirements of the company’s act

-any alteration that increases the liability of member beyond the liability they had at the time of
alteration is void unless they give their consent

Any alteration must be for the overall benefit of the company

Any alteration that varies rights attached to the class of shares is void unless it is supported by the
members of that class.

LEGAL EFFECTS OF MOA AND AOA

Onces the articles and memorandum are registered they will have the following legal effects

-the articles constitute a statutory contract which binds the members to the company and the
company to the members as a result

-the company can sue any member incase of breach of the articles

-the members are bound to the company and the company to the members only in their capacity
as members

-a member can sue a company for any breach of the articles

-the articles constitute a statutory contract which bind member to the other members

Stage 3 preparation of other official documents

Apart from memorandum and articles any other person who wishes to register a company must
provide the following documents

-complete standardized application form

-a copy of pin of each proposed director

-a copy of national ID/passport

-a passport size photo for each subscriber or intended to be director

34

-a statement of capital and initial shareholding

-a statement of guarantee in case of companies limited by guarantee

Stage 4 PRESENTATION OF DOCUMENTS TO REGISTRAR

If the documents are in order he will register the new company and issue a certificate of
incorporation .This certificate is a physical evidence that the company has been incorporated

The certificate contains the following details

-registered name of the company

-the serial number of the certificate

-the signature of the registrar for the common seal of the registrar office

-the date at which the certificate was issued

PRACTICAL CONSEQUENCES OF INCORPORATION

Once a company is incorporated the incorporation has the following consequences

-the company becomes a separate person that is separate from its owners

-the liability of the members will be limited except where the company is an unlimited
company

-the company can acquire and own property for the company’s gain capacity to enter into
legally binding contracts

-the company can sue or be sued in a legal case

-the company will have perpetual succession unless it is liquidated

-the company an acquire a common seal that will serve as the company’s official signature.
35

LIFTING THE VEIL OF INCORPORATION

Veil of incorporation refers to the situation where the real identity of the owners of the company
is hidden by the concept of legal personality

As a result the company is able to deal with parties in its own identity hiding the real identity of
the shareholders or people behind that company .

However there are certain circumstances when the veil of incorporation can be lifted In order to
know the real identity of the persons behind that company

This circumstances can be classified into two categories as follows

1 LIFTING THE VEIL UNDER STATUTORY PROVISION

The companies act has a number of provisions that can lead into lifting of the veil .this are

-where the number of members of the company has fallen below the statutory minimum

-where there is a failure by the company to publish its name or name of the company is not
properly described

-in case of investigations into the companies affairs

-in case of investigations of the company’s membership

-during the preparation of group accounts

-during the takeover bids

When a bid is made to take over a registered company then there could be cases where lifting of
veil of incorporation could be done

-where there is fraudulent trading

This is an offence where people controlling a company carry out the business of the company with
an intention to defraud creditors

Lifting the veil under case law/common law

The veil of incorporation can be lifted under the case law under the following circumstances
36

In case of a fraud

That is where the court is of the opinion that fraud has been committed in a company

In cases of improper conduct either by the shareholders or the directors of the company

Where the company is considered to have an enemy character ie it is been controlled by the
enemies of the state

Determination of residence of a company

There are circumstances when it is necessary to determine the residence of a company in order to
know from where it is been controlled for taxation purposes

In cases of group enterprises

Where the company is in a group structure then there could be circumstances when lifting of the
veil may be required

Ratification of corporate Acts

Where the members of the company informally ratify acts that are done on behalf of the company
then the court can order for the lifting of the veil of incorporation

Chapter three
Membership of the company
4 Membership of a company
- Acquisition of membership
- Register of members
- Rights and liabilities of members
- Cessation of membership

Although the companies act does not define who a member is generally a member is any person
whose name has been entered in the companies register of members
37

METHODS /WAYS OF BECOMING A MEMBER OF A COMPANY

The capacity to become a member of a company is governed by the common law rules relating to
capacity to contract.

Generally a person or any person can acquire shares in a company and become a member

However there are a number of categories of persons whose capacity to become a member is
restricted in one way or the other .this persons are

Infants/minors

An infant is a person who has not attained the age of majority in Kenya 18 years of age

At common law an infant can enter into contract to buy shares in a company and therefore become
a member of the company

However such a contract is voidable at the option of the infant and can avoid it at any time he is
still an infant

In most companies the articles of association restricts membership to adults only

Personal representatives

When an existing member of a company dies his shares are transmitted to his personal
representative in accordance with the law of succession

Therefore unless the articles of the company provides otherwise the personal representative will
have the right to be registered as a member of the company

Trustee in bankruptcy

If a member of the company is declared bankrupt by the court then his shares will be transmitted
to a trustee in accordance with the law of bankruptcy

The trustee shall have a right to have their name entered in the register and become a member
38

Corporation

As a legal person a registered company can buy shares in another company and therefore become
a member

However such a contract must be authorized by the company’s constitution

Ways/methods of becoming a member of a company

Subscribing to the memorandum of association

The subscribers to the memorandum of a company shall be deemed to have agreed to become
members of the company and therefore once a memorandum is registered they will have a right to
have their name entered in a register as members

Through allotment of shares

Any person to whom the shares of the company have been allotted is considered to be in the same
position as the subscribers to the memorandum and therefore they have a right to be registered as
members of the company

Through transfer

Transfer of shares occurs where an existing shareholder sells his shares to another person

The buyer of such shares will have a right to be registered as a member onces the contract of
buying and selling of shares is concluded

Transmission on death of a member

Once a member of a company dies his shares are transmitted to his personal representative in
accordance with the law of succession

The personal representative may choose to have his name entered in the register and therefore
become a member

Transmission on bankruptcy of a member

39

If a member is declared bankrupt by the court his shares will be transmitted to a trustee in
bankruptcy in accordance with the law of bankruptcy

The trustee may choose to have his name entered in register and therefore become a member

Share qualification of directors

Any person who may be conceited to become a director of a company may be required by the
articles to take up a minimum number of shares commonly called share qualification

Such a person is in the same status /situation as a subscriber to the memorandum and once he takes
up the shares he will have to be registered as a member

Estoppel

Any person who without having agreed to become a member of a company is aware that his name
has been wrongly entered in the register of members of the company but does not take the
necessary step to have the mistake rectified will be estopped by the court from denying the fact
that he is a member of that company

Circumstances when a person can be a member of a company without being a

shareholder
-In case of a company that is limited by guarantee then the members of that company will not be
shareholders /will not hold any shares as per the requirements of the companies act 2015

-A deceased person /member will continue to be a member of the company if his name is not
removed and replaced with his personal representative

-Where a member is declared bankrupt the shares are transmitted to trustee and if the trustee’s
name is not entered in the register then the bankrupt member will continue to be a member but
without any shares
40

-Where shares have been transferred from one person to another the transferor of shares will
continue to be a member without shares until the transfer is registered and the name of the
transferee is entered

-A subscriber to the memorandum is considered to be a member of the company even where the
shares have not been allotted to him

REGISTER OF MEMBERS
Every registered company is required to keep a register of its members at the registered office of
the company

The register should contain the following details

-the name and addresses of each member

-the date at which each member was entered in the register as a member

-the date at which any person ceased to be a member

-a statement of shares held by each member incase the company has share capital

-the amount paid /agreed to be paid on shares taken by the member

If the company has more than 50 members it is required to maintain an index of members which
shall

-indicate sufficient information about each member to enable the account of that member in the
register to be easily found

-the index of members should be kept at the same place as the register of members

-if the register is altered or changed then the index should also be altered with 14 days to reflect
the changes that has occurred in the register
41

The register of the members of the company should remain open for inspection by the members
of the company during business hours without any charge

The company can close the register during the year end for a period that does not exceed 30 days

The closure is usually done under any of the following circumstances

-when the company is preparing for annual general meeting in order to determine the members
who are entitled to be paid dividend

-incase the company is engaged in restructuring eg mergers ,acquisition ,take over,recervership etc

RECTIFICATION OF THE REGISTER

A company’s register can be rectified either voluntarily or compulsory

Compulsory

Compulsory rectification of register may happen where a high court issues an order for any of the
following reasons

-the name of the person has been entered /omitted in the register without a good reason

-where there has been failure or delay to indicate that a person has ceased to be a member of the
company

NOTICE OF TRUST IN REGISTER

No notice of trust shall be entered on the register of the company

As a result the company is entitled to assume that the names of the person entered on the register
are the beneficial owners of those shares even though they could be holding the shares in trust on
behalf of another person

Therefore if a trustee sells off the shares without the authority of the beneficiary then the company
cannot be held accountable for any losses that the beneficiary may suffer

In addition the company is not a trustee for any person who claim the shares under equitable titles
42

Rights of members
When a person becomes a member of a company he is accorded the following rights

-Right to receive notices of general meetings

-Right to attend general meetings of the company

-Right to vote during general meetings

-Right to receive properly declared dividends

-Right to receive a copy of the financial statements of the company and the company’s
constitution

-Right to require directors to convene a general meeting

-Right to appoint a proxy to attend meeting on behalf of the member

-Right to inspect registers of the company without paying any fee

-Right to petition for the winding up of the company where there is a good reason

-Right to receive communication from the company

Rights relating to communication

-Right to be sent a proposed written resolution

-Right to require circulation of written resolution

-Right to require a circulation of statement issued by the company

-Right to receive hard copies of documents or information that is provided in any other form

Liabilities of members
The liability of past and present members when the company goes into liquidation are
43

-A past member is not liable if he ceased to be a member one year or more before the
commencement of winding up

-A past member is not liable to contribute in respect to the debts of the company that were incurred
after ceasing membership

-A past member is not liable to contribute unless it appears to the court that the existing members
are unable to make the contribution required to be made of them

-In case of a company limited by guarantee every member is liable to contribute the amount of
guarantee that they undertook to contribute

-The court can make an order requiring a past director to make contributions to satisfy the debts
and liabilities of the company relating to the costs and expenses of winding up

CEASATION OF MEMBERSHIP
Membership of the company can come to an end through any of the following

Through transfer

This occurs when a member transfers all his shares to another person example through sale

Membership is lost when all the shares are transferred.

Forfeiture

Forfeiture occurs where a member is unable to respond to a call that is properly mad by the
directors under the provisions of the articles

Surrender

If a member decides to surrender all his shares back to the company without requiring a refund for
them then that member will lose his membership if the shares are accepted back by the company.

Death
44

Where a member of a company dies his shares are transmitted to his personal representative in
accordance with the law of succession.

If the personal representative decides to have his name entered in the register then the dead member
will lose his membership

Bankruptcy

Where a member is declared bankrupt by the court then his shares are transmitted to a trustee in
bankruptcy in accordance with the law of bankruptcy.

If the trustee decides to have his name entered in the register then the bankrupt member will lose
his membership.

Resale by the company in exercise of right of lien

A company retains the right of lien on its shares for the balance of their price.

If a member fails to pay for any balance of the price then the company can resale the shares and
the member will lose his membership.

Redemption of redeemable preference shares

Where a member’s shares are redeemable then he will lose his membership if all the shares are
redeemed back by the company.

Repudiation by an infant

An infant has a common law right to repudiate his membership of a company especially if there
has been total failure of consideration because shares have become worthless.

If repudiation occurs then the infant will lose his membership in the company

Rescission of a contract by a member

45

Where a contract to buy shares in a company Is rescinded or reversed due to vitiating elements
of a contract then the member will lose his membership

Liquidation

When the company goes into liquidation then the members will lose their membership in the
company

Disclaimer by a trustee in bankruptcy

If the trustee decide to disclaim or fail to take up the shares of a bankrupt member then the member
will lose his membership under the English law.

Chapter four

COMPANY SHARES
Shares
- Classes of shares
- Variation of class rights
- Share certificates
- Issue and allotment
- Transfer and transmission
- Transfer of shares under central depository system
46

- Mortgaging and charging of shares

The companies act provides that shares or other interests of any member in a company shall be a
movable property

This provision does not define what a share is

In practice however a share can be described to be the interest of a shareholder in the company
that is measured by a sum of money for the purpose of liability in the first place and of interest in
the second place

From the description the following should be noted about the share

A share is a yardstick of the shareholder’s liability to the company

It is a yardstick of the shareholders rights in the company particularly in relation to dividends,

voting rights and return of capital during winding up

It is a foundation that creates a relationship between the company and the members

It is a form of property which can be transferred, bought, sold or given out as a security for a loan

Classification/type of shares in a company

Where a company is limited by shares it can issue different types of shares in accordance with the
provision of the company’s articles of association

The most common type of shares that a company can issue out are

(A)ORDINARY SHARES

These are the most common type of shares that form the most basic capital of the company

Holders of these shares are considered to be the owners of the company and therefore they are able
to control the company usually through voting
47

Ordinary shares do not have a fixed rate of dividend or return and therefore dividends are paid
when the company makes profit and directors declared dividends

During winding up holders of these shares will be the last one to be considered during the return
of capital making investments in this shares very risk

(B )PREFERENCE SHARES

This is a class of shares that carries a prior right to receive annual dividend over fixed amount

The following should be noted about preference shares

-they have a fixed rate of dividend or return

-they receive priority in payment of dividends before the ordinary shares however this
priority right to receive this dividend is not a right to compel the company to pay dividends

-the right to receive preference dividend is deemed to be cumulative unless the articles
provides otherwise

-if the company has arrears of unpaid cumulative dividend and it goes into liquidation then
the right to those dividend is lost unless they have been declared but not yet paid at the c
commencement of liquidation.

-holders of preference shares are not entitled to participate in any additional dividends above
their fixed rate unless the articles provides otherwise

-in all the other aspects the preference shares will carry the same rights as the ordinary
shares unless the articles provide otherwise .however in most companies preference share
holders are not given a right to vote

-during liquidation the preference shares will carry a prior right to return of capital

TYPES OF PREFERENCE SHARES

(i) Cumulative preference shares

This are a category of shares where if the dividend is not paid in any given year then it is cumulated
and carried forward to be paid in future when dividends are available
48

Non-cumulative preference shares

These are preference shares where if dividend is not paid in any given year then they are not
cumulated or carried forward

Participative/participating preference shares

These are preference shares where once they receive their fixed rate of dividend they may be
allowed to participate further in sharing additional dividends. However in most cases companies
preference shares are non participative

Convertible preference shares

These are preference shares that can be converted into other forms of shares like ordinary shares

Non convertible preference shares

This cannot be converted into other types of shares

Redeemable preference shares

This are shares which can be redeemed back by the company

RULES RELATING TO REDEEMPTION OF REDEEMABLE PREFERENCE SHARES

(i)The redemption must be authorized by the articles of the company

(ii)The shares must be fully paid for before they are redeemed

(iii) The redemption must be authorized by a resolution passed by the members

(IV) The shares must be redeemed out of profit or out of proceeds of a fresh issue that is
done for that purpose

(V) If the shares are issued out of the profits the company must create a capital redemption
reserve fund to facilitate the redemption.
49

(VI) Where a premium is to be paid on redemption of shares then the premium must be
provided out of share premium account.

Preference shares Ordinary shares

Have a fixed rate of return Do not have a fixed rate of return

During winding up preference share During winding up holders will be the last to be
carry a priority considered

Can be converted Non convertible

Dividends can be cumulative Dividends not cumulative

50

Less risky compared to ordinary shares The holders are the main risk takers

Usually no voting power Have voting power

Can be redeemed Cannot be redeemed

Prior right to return of capital They are the last to be considered in the return of
capital

Prior rights to dividends Dividends will be paid after the preference shares

Differences between preference shares and ordinary shares

(C)Deferred shares

Refers to shares that can be set aside at the formation of the company to be later given to the
founders of the company as a way of appreciating their work during the formative years of the
company.

They are usually given out after the company has started to prosper and the value of the shares has
gone up.

They are also called management shares

(D)Employees’ shares
51

These are shares that are set aside for the benefit of the employees of the company under the
scheme called Employee share ownership plan.

The shares are usually given to a trustee to hold them on behalf of the employees.

If dividends are paid, then they are given to the trustee to distribute them to the employees.

VARIATION OF CLASS RIGHTS

Every share in a company has rights attached to it which includes right to vote, right to dividend
and right to the return of capital

These rights can be varied from time to time in accordance with the provisions of the articles.

The procedure of variation of class rights is as follows

(i)The articles must set out these rights and have a provision for their alterations.

(ii)The company will convene a shareholders’ meeting of the members who hold the class of
shares in question

(iii)The agenda of variation of rights is put to a vote, if it is supported by a minimum of ¾ of

the votes cast, then the decision is passed.

(iv)A copy of the resolution must be delivered to the registrar for registration within 14 days

(v)Notice of particulars of the variation must also be filled with the registrar within 30 days
period.

Objections to variation of class rights

Where a member who holds not less than 15 % of the issued shares of the class under question
does not agree with the variation o the class right, then he is entitled to apply to the court to cancel
the variation.
52

Such an application must be made within 21 days after the consent has been given to vary the class
rights.

The court will consider the application and can either cancel or withhold the decision of the
majority depending on the merit of the argument.

Share certificates and share warrants

Share certificate

A share certificate is a document that is issued by the company within 60 days of allotting shares
to prove that the person whose name appears on the certificate is entitled to the number of shares
indicated there and therefore he has the right to have his name entered in the register as a member.

Share certificate therefore is a document that signifies title of ownership of shares indicated there.

However, it is not a final prove that the holder is a member of the company.

However, when the company is issuing the share certificate it must be very careful since it will be
held liable to any person who suffers a loss as a result of relying on that share certificate in a
transaction.

However a forged share certificate cannot be used to transfer the rights and ownership of those
shares to another person.

Contents of a share certificate

-name of the company

-class of shares

-registered name of the holder of shares

-the number of shares

-serial number of the certificate

-date in which the shares were issued

53

-the common seal of the company

-the signature of the directors and company secretary

Share warrants

A share warrant is a negotiable instrument that can be issued by a company indicating that the
bearer of the warrant is entitled to the shares specified.

The holder can therefore be able to negotiate and transfer the shares without going through the
formal process of share transfers.

However, the name of the bearer of the warrant is removed from the register of members and
therefore they are not considered to be members of the company.

Before a share warrant can be issued, the following conditions must be fulfilled

(i)The company must be a public company limited by shares

(ii)The issue must be authorized by the articles

(iii)The shares must be fully paid for

(iv) The company must get permission from the treasury or ministry of finance

Once the company issues a share warrant, then the name of the member will be removed from the
register and instead, the company will indicate that the shares are held under warrant.

Procedure of issuing share warrant

-An application is made by the member to the company. The application must be
accompanied by share certificate where applicable.

-The application is given to the board of directors for consideration.

54

-If the board approves, then the company secretary will cancel the share certificate and
remove the name of the member from the register.

-The company secretary will issue a share warrant and have it signed by the chairman of the
board.

-The share warrant is given to the holder, who is no longer a member of the company.

Differences between share certificate and share warrant

Share certificate Share warrant

The bearer is a member of the company Bearer is not a member of company

Share certificate not a negotiable Is a negotiable instrument

certificate

No need for treasury consent to be There must be consent from the treasury to
issued be issued

Issued by private companies only in Usually issued by public companies

Kenya

Holder of the certificate can be Holder of a warrant cannot be appointed

appointed as a director of the company as a director of the company

Transfer and transmission of shares

Transfer of shares in Kenya will depend on whether a company is a public company or private
company.
55

In case of a public company where shares are freely transferable the transfer is conducted through
central depository system account.

A central depository system account is a form of online ledger that is used to record transactions
of shares sold or bought by players in the stock market.

The system was created and maintained by the Nairobi Stock Exchange.

Any person therefore who wishes to participate in the stock market must open and maintain a
central depository systems account usually through stock brokers.

The transaction in the central depository system account is then transmitted to the company to
update its records.

November 2018 1c

-owner of that account is suspected to be involved in insider trading

-if the central depository system is jointly held and the owners are in dispute relating to the account

-where there is a court order to suspend such an account

-if there is a dispute between the owner of the account and the stock broker

-if the account has not been in use for more than six months then it will be suspended

Transfer of shares in private companies

In private companies transfer of shares is done manually and it involves the following steps

-the transferor and the transferee must enter into a legally binding contract of transfer.

-the transferor will complete the instruments of transfer by entering all the particulars.

-the transferor will sign the completed instruments.

-the instruments of transfer and share certificate will then be delivered to the company for
registration.
56

-after registration of the transfer the share certificate will be cancelled and new one issued
to the transferee.

-the company will update the register of members.

Circumstances under which the company would decline to register a transfer of its
shares
-if the documents were not properly prepared.

-if the transferee has not been approved by the board in accordance with the articles.

-where the court has issued an order to prevent the transfer

-if the transfer can change the nature of the board putting to risk the interest of the company.

-if the transfer is discovered to be a forgery

CONSEQUENCES OF FORGED TRANSFER OF SHARES

-The transfer is null and void and does not give legal title to the transferee

-If the true owner is removed from the register then he has the right to have his name
restored and continue to be a rightful owner.

-The company will be required to compensate the true owner for any dividends that were
paid when his name was removed from the register.

-Where shares acquired through forgery are sold to third parties then the third party has no
right to have his name entered in the register as a member.

-Where by reasoning of forged transfer the company issues a new certificate then it will be
held liable for any losses that a person may suffer as a result of relying on the new certificate.

-If the company has been put at a loss by a reason of forged transfer then it can claim those
losses from the person who procured the forged transfer.
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Transmission of shares

Refers to the process where the ownership of shares changes from one person to another by
operation of law examples

-where a member dies ,shares are transmitted to personal representative in accordance with the law
of succession.

-if a member is declared bankrupt, the shares are transmitted to a trustee in accordance with the
law of bankruptcy.

Differences between transfer and transmission of shares

transfer transmission

Voluntary process Involuntary process

Consideration is required during The issue of consideration does not

transfer arise

The parties must execute formal Instruments of transfer are not needed
transfer documents
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Mortgage of shares

Shares as property can be given out as a security for a loan .when this happens ,then the shares are
said to be mortgaged or charged

Two types of mortgage of shares

Legal mortgage and equitable mortgage

Legal mortgage

In this type of mortgage the ownership of shares are transferred to the lender on the condition that
when the loan is fully paid, they will be retransferred back to the borrower/member.

Therefore the lender will become new owner who will enjoy the rights that are attached to those
shares including dividends

Equitable mortgage

Under this mortgage, borrower does not transfer shares to the lender but the contract transfers some
rights over the shares to the lender.

Therefore the borrower will continue to own those shares but they cannot transfer them without
involvement of the lender.

Can be executed in two ways

-the borrower can give share certificate to the lender without transferring ownership.

-the borrower can give share certificate together with a signed blank transfer form to the lender .In
such a case ,the lender can execute the transfer to someone else if the borrower is unable to pay
the loan
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Chapter five

SHARE CAPITAL

The term capital is used to refer to the amount of money which a company raises from selling its
securities such as shares and debentures.

The amount raised from the sale of shares is called share capital

TYPES OF SHARE CAPITAL

Nominal/authorized capital

This is the capital that is indicated in the company’s constitution ,.

It is called nominal capital because it is calculated on the basis of the nomimal/par value of the
shares into which it is divided.

It is called authorized because once the memorandum of association and articles of association are
registered the company can take immediate steps to raise the capital without applying for
permission to do so.

Issued capital
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This is that portion of the nominal capital which is constituted by the nominal value which has
been issued by the company

It may be less than or equal to the nominal capital but it cannot exceed it.

Unissued capital

This is the part of nominal capital that is not yet issued by the company.

Paid up capital

This is constituted by the aggregated amount of money that is paid up on each share issued by the
company. It may be equal to or less than the issued capital but it cannot exceed it.

Unpaid capital

This is the portion of the issued capital that is not yet paid.

Called up capital

This is the amount of capital that is equivalent to the calls that can be made by the directors on
the issued shares

Reserve capital

Refers to the portion of the issue but uncalled capital which the members have resolved through a
resolution that the company will not call it up unless and until the company is in liquidation.

RAISING OF CAPITAL
The method of raising the capital will depend whether the company is a private or public company.

In the case of private company, the capital is raised privately without involving the general public.
This is because a private company is not allowed to invite the general public to subscribe for its
shares.

In the case of public company, it is allowed to invite the general public to subscribe for its shares
and therefore raising of capital is highly regulated by capital market authority.

A public company can raise capital using any of the following methods
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1.PLACING

Under this method the company will enter into agreement with the a registered stock broker
whereby the stock broker will take up the shares and look for people to subscribe for them

If the stock broker only invites his own clients, then the process is called private placing

If the broker does not undertake to keep any shares that may not be sold within the agreed time.
Such shares will be returned back to the company.

For the services that the broker provides he is going to earn brokerage fee

2.OFFER FOR SALE

In this method ,the company will enter into an arrangement with some financial institutions
commonly called issuing house .

In this arrangement ,the issuing house will buy the shares from the company and then they will
look for subscribers from the general public to come and buy those shares from them.

Therefore ,if there are shares that remain unsold ,they will be retained by the issuing house.

In all these arrangements ,the issuing house will earn an underwriting commission

Placing Offer for sale

The company engages stock broker the company selling shares engages an
issuing house

Any shares that remain unsold are The unsold shares remain with the
returned back to the company issuing house
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The stock broker earns a brokerage The issuing house earns underwriting
fee commission on shares it has sold out to
the public subscribers

3.PROSPECTUS ISSUE/DIRECT OFFER FOR SALE

Under this method the company invites the members of the public to subscribe for its shares.

The invitation is contained in a document called prospectus.

The prospectus must be approved by the capital market authority and Nairobi Stock Exchange

For the shares to be sold direct to the public the following regulations must be complied with

-the offer must be made to the public

-the invitation to the public must relate to the company shares

-the prospectus must comply with all the regulations that are set by the capital market
authority
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Contents of prospectus

Under the Capital Market Authority regulations, the prospectus must contain the following matters
and reports

(i) Matters

(a) Matters relating to the directors and auditors of the company including

The directors’ names, addresses and occupation

The directors’ interest in the promotion of the company

The directors’ qualification shares if any

Auditors’ names and addresses

(b) Formation expenses including

Preliminary expences, promoter’s remuneration, brokerage fee, underwriting commission

(c) Investors information including

-the minimum subscription

-deferred shares

-amount payable on application and allotment

(d)Particulars of the company’s property and business

(e)The length of time that the business of the company has been carried on

(ii)Reports

(a) The auditor’s report showing the following

-profit and loss in each of the last five years
-the rate of dividends paid during the last five years
-the assets and liabilities of the company
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-if the company has subsidiary then similar information should be provided

(b)if the proceeds of the issue will be used

(3)Liabilities in relation to the prospectus

Criminal liabilities

These liabilities can arise under any of the following circumstances

-issuing a form of application that is not accompanied by full prospectus

-where prospectus contains /includes untrue statements
-knowingly issuing a prospectus containing a statement purporting to be made by an
expert without the experts consent to the issue.
-issuing a prospectus without delivering a signed copy to the registrar for registration.
-issuing a prospectus containing an expert’s statement and delivering a signed copy
to the register for registration without endorsement from the expert.

CIVIL LIABILITIES

Civil liabilities may arise under the following circumstances

-failure by the directors to include all the matters and reports in the prospectus as required
by the regulations
-allowing inclusion of a misrepresentation in the prospectus. A misrepresentation is a false
statement that is made by one party in a contract with an aim of enticing the other party to
enter into a contract .For a statement to be called a misrepresentation it must have the
following elements /components/essentials
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-the statement must be false/untrue

-the statement must be a statement of facts but not opinion
-the statement is intended to entice the other party
-the statement must have been made either before or after the time of entering into a
contract.
-the other party must have relied on the statement to make a decision to enter into a
contract.

Types of misrepresentation
(i)Innocent misrepresentation

This is a misstatement that is made innocently where the maker does not know it is untrue and he
has no means or ways of finding out if it is true or false.

In such a case ,the innocent party can only sue for damages but not reversal of the contract.

(ii)Negligent misrepresentation

This exist where the maker of the statement in the prospectus has both means and capacity to find
out whether it is true or not but he does not do so.

In such a case the innocent party can sue for damages and for rescission of the contract.

(iii)Fraudulent misrepresentation

Is a statement made knowingly ,recklessly and without any belief in its truth.

In such a case ,the innocent party can sue for damages and for the rescission of the contract.
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NB the right of rescission of a contract can be lost under the following circumstances

-where the innocent party does not sue within a reasonable time.

-where the innocent party adopts the contract, example by accepting dividends from the company
or by attending the general meetings of the company.

Persons who can be held liable in relation to the prospectus

(i) Directors at the time of the issue of the prospectus
(ii) Persons who agreed to be named in the prospectus as directors or future directors
(iii) Promoters of the company
(iv) Every person who authorized the issue of the prospectus

Circumstances under which a person may be exempted from liabilities in the prospectus
-having consented to become a director,the person withdraw his consent before the prospectus was
issued and that the prospectus was issued without his authority

-the person can prove that the prospectus was issued without his knowledge or consent and that on
becoming aware of its issue ,he gave a reasonable public notice that it was issued without his
knowledge –the person can prove that after the issue of the prospectus but before the allotment of
the shares ,the person withdrew his consent and gave a reasonable public notice.

-in relation to a statement made by an expert ,the person can argue that at the time he had
reasonable grounds to believe that the expert was competent to make the statement

-an expert can also prove that the statement was included in the prospectus without his consent.

NB A public company which has issued a prospectus cannot commence business unless
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-minimum subscription has been raised

-that every director has paid for all the shares they have taken in the company.

-all the money that was oversubscribed had been returned back to the applicants.

STATEMENT IN LIEU OF PROSPECTUS

This is a document that may be issued by a public company instead of a prospectus.

The document can be issued under the following circumstances

-where a private company is converting into a public company.

-where a public company is not issuing shares directly to the public .

-where the company has issued a prospectus but it does not allot shares on the basis of that
prospectus.

A statement in lieu of prospectus usually contain the same information as a prospectus but it may
not be intended to the general public.

MAINTAINANCE OF CAPITAL
The authorized capital of company is intended to be used by company for its operation.

As such that capital must be maintained within the company.

In addition to this ,capital is considered to be the alternate security of creditors of the company.

The companies act has a number of provisions intended to ensure that

-company’s capital is not reduced in value as it comes into the company.

-the company’s capital does not go out of company once it is received.

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Provisions which prevent capital from being reduced in value as it comes into company
(i) Issuing shares at a discount

General rule is that it is illegal for a company (limited company)to issue shares at a discount
because the nominal value of each share is fixed at the time when the company is being registered
thus the authorized capital should not be less as it comes into the company .

However ,there are certain circumstances when the company can issue shares at a discount

-if shares belong to a class that is already issued meaning they will have a market value that is
different from nominal value.

-the issue must be authorized by a resolution passed by members in a general meeting.

-Resolution must specify the maximum rate of discount to be given .

-not less than one year has elapsed since the company was entitled to start business.

-issue of shares must be allowed by the court.

-issue must be done within one month after the court has given its permission.

(ii)Payment of underwriting commission

Commission refers to amount of money paid by the company to a person in consideration of

subscribing or agreeing to subscribe for any shares of the company.

A company may be allowed to pay underwriting commission but company should not apply any
shares or capital to pay underwriting commission.

In addition the company can pay commission if

-payment is authorized by the article

-commission should not exceed 10 % of the price of shares.

-the amount or rate of discount should be disclosed in the prospectus.

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(iii) payment of brokerage fee

The company may be allowed to pay brokerage fee for subscription or issue of shares.

However, company should not use capital or shares as consideration for brokerage fee.

Provisions which prevent capital from leaving the company once it comes in

(i) Issuing shares at a premium

Where shares are issued at a price higher than nominal value of the shares then they are said
to be issued at a premium.

Where a company issues shares at a premium, a sum equal to the aggregate amount of premium
should be transferred to account called share premium account.

The funds contained in share premium account can be used for

-to write off preliminary expenses of the company.

-to pay or provide premium that is payable on redemption of redeemable preference shares.

-can be used to pay up for shares issued to members as bonus shares(shares given to members
instead of dividends)

-can be used by company to settle expenses relating to issue of shares such as brokerage fee or
commissions.

(ii) Purchase of own shares

General rule is that company should not purchase its own shares.

This rule was explained in case of Trevor vs Witworth 1887

The company had bought back shares from members but it had not completed paying for them
when it went into liquidation.
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During the liquidation, a member made a claim with liquidator for balance that had not been paid
by the company.

The court held that the company cannot buy its own shares .

Exception to this rule

A company may acquire or purchase its own shares under

-if the purchase is redemption of redeemable preference shares.

-if shares are acquired back following a resolution allowing a company to reduce its capital.

-where company is ordered by court to purchase back shares from its members.

-where shares are forfeited for non- payment of a call or surrendered instead of forfeited.

-where company acquires its own fully paid shares otherwise for valuable consideration.

(iii) Financial assistance for purchase of own shares

It is unlawful for a company to give either directly or indirectly financial assistance or provide
loan or guarantee purchase of its own shares.

However ,there are certain exceptions where company could be allowed to give financial
assistance for purchase of its own shares.

-where lending of money is part of ordinary business of company and money is lend in ordinary
course of business.

-where loan given to trustees to enable them to purchase shares of company which are held under
employee share ownership plan.

-where loan is to the ordinary employee other than directors to enable them to purchase shares of
the company.
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Consequences of contravening this

(i)Such transaction of giving financial assistance is void and illegal.

(ii)the company and every officer is found guilty of contravening this provision is liable for an
offence that may attract a fine from court.

(iii)Every director who is involved in such a transaction shall be guilty of breach of trust and
company can recover the amount from him.

ALTERATION OF CAPITAL
The company is empowered to alter or change to capital subject to the following conditions

-Alteration must be authorized by the company’s constitution.

-Company must hold a general meeting of the members with an agenda of altering capital.

-Alteration must be authorized by special resolution passed by the members in a general meeting.

Methods of alteration
(i)increasing the company’s share capital by issuing new shares.

(ii) by consolidating and dividing all or any of the company share capital into shares of larger
amount than the existing shares.

(iii)By subdividing all or any of the shares into shares of smaller amounts (share split).

(iv)By cancelling shares that have not been issued or taken by anybody.

(v)By reducing the company share capital.

Reduction of share capital

The general rule is that a company should not reduce its capital because by doing so it will reduce
the security available to the creditors of the company.

However the company may reduce its capital if

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-it is authorized by its constitution .

-it passes a special resolution to that effect.

-the reduction is confirmed by the court

Methods of reduction of capital

(i) By extinguishing the liability on any of its shares in respect of share capital not paid
up.
(ii) By reducing the liability on any of its shares in respect of share capital not paid up by
cancelling any paid up share capital
(iii) Which is less or not represented by the available assets without extinguishing or
reducing liability on any shares.
(iv) By cancelling any paid up share capital lost not represented by the available assets of
the company and also reducing liability on any share.
(v) By cancelling any paid up share capital lost or not represented by the available asset
and also extinguishing liability on any share.
(vi) By paying off paid up share capital which is in excess of the needs of the company’s
without reducing or extinguishing liability on any shares.
(vii) By passing off paid up share capital which is in excess of the company’s needs and also
extinguishing liability on any share.
(viii) By paying off paid up share capital which is in excess of the company’s needs and also
reducing liability on any share of the company.

Role of court in capital reduction

(i) protection of creditors.

the court will only allow a reduction of capital if it is satisfied that

the creditors have consented

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creditors have been given security

creditors have been paid off

(ii) protection of members

although the majority of members of the company may not need protection from the court,the
minority who may not agree to a resolution to reduce the capital may require the court to protect
their interests especially if the majority acted in a manner that is oppressive to the minority.

(iii) protection of the general public

It may happen that the company may have decided to pass a resolution to reduce the capital without
providing proper information to the general public.

The court may step in to ensure that their interests are protected by requiring the company to
provide all the necessary information.

DIVIDENDS
This is the amount paid to the shareholders by company as a share of profit.

It is not a must for a company to pay dividends thus the rules relating to declaration and payment
of dividends are left to the articles of association.

Some of the basic rules that govern declaration and payment of dividends are
- The company at a general meeting may declare dividends but no dividends shall exceed the
amount recommended by the directors.Thus the directors will recommend and members will
approve dividends during the Annual General Meeting.

-Directors may from time to time pay the members such interim dividends as may appear justified
by the profits of the company.Thus a resolution passed by members requiring directors to pay
dividends(interim)is invalid

-No dividends shall be paid otherwise or out of profits

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-Dividends shall be declared and paid according to amount paid or credited as paid on shares in
respect of which dividends are paid

-Members may authorize directors to pay dividends in other forms other than cash example bonus
shares.

-Members at general meeting can authorize directors too pay dividends through other means other
than cash example mobile payment.

-No dividend shall bear interest against the company.

Common law rules that govern dividends

-Losses in the previous years need to be provided for .Dividends can be paid if there is profit in
current year’s trading.

-Profits of the previous years can be brought forward and distributed as dividends even if there is
a revenue loss in current trading year.

-Losses on fixed assets in the current year need not to be made good by provision and depreciation
before treating revenue profit to pay dividends

-Unrealized capital profits on revaluation of assets can be distributed as dividends

-Dividends must not be paid out of capital.

May 2015 q 5b,may 2014 q 5c and 5d,june 2013 q 2b,dec 2013 q 4b

Circumstances when dividends become payable and enforceable to company

-When final dividend is declared and does not specify the date of payment it immediately creates
an enforceable debt.

-For interim dividend it is regarded due and payable when it is actually paid

-In a private company final dividend is due on date of resolution unless a future date is specified.
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Why companies may seek to control the funds from which the dividends are paid(may 2014
q5d)

-To ensure dividends is not paid out of capital(capital maintainance)

-To maintain certain levels of reserves

-To know best method for payments of dividends.

Chapter six

DEBT CAPITAL

Debt capital refers to the capital that is raised through borrowing.

A registered company has implied powers to borrow.

The powers can also be provided for by the company’s constitution.

A public company cannot exercise borrowing powers before it receives certificate of trading from
the registrar.

However a private company can exercise borrowing powers as soon as it is registered.

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The company’s articles of association may also contain provisions on how the directors can carry
out borrowing including the internal procedures to be followed and the maximum amount that the
directors can borrow.

If any borrowing exceeds those internal procedures and requirements then it is said to be ultra –
vires borrowing and such a borrowing can be rectified by the members of the company.

Where borrowing is beyond the overall powers of the company then it is said to be ultra –vires
borrowing .

EFFECTS OF ULTRA –VIRES BORROWING

-no legal debt is created for the company

-any security given for the loan /security is in operative.

-the borrowing contract is void and cannot be rectified.

-the lender cannot sue the company for repayment of the loan.However under the doctrine of
equity the lender can be awarded the following equitable remedies

(a)the lender can obtain an injuction order to stop the company from using the money.

(b)the lender can seek tracing order that will allow the lender to trace property bought using
the borrowed funds.

(c)restitution –this is the remedy that will allow the lender to start a process to recover assets
acquired through the borrowed funds.

(d)subrogation –if the borrowed money was used to pay legitimate debts of the company ,the
lender may be allowed by the court to step into the position of the person whose debts has
been settled.

(e)the lender can sue the directors personally for breach of authority.

Debentures
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A debenture is an instrument or document issued by the company for acknowledging or as an

evidence of a debt the company owes to the holder.

The holder of the debenture is a creditor to the company and the debenture can provide the
following remedies if the company does not pay

-to sue the company for repayment of the money

-power to appoint a receiver to take over the business of the company

-right to obtain a court order for foreclosure

-the lender can petition for compulsory winding up of the company

-if the company goes into liquidation the lender has a right to take over the security and if
not enough make a claim with the liquidator.

Characteristics /features of a debenture

-it is an instrument /security for raising debt capital.

-debentures usually earns interest from the company

-can be secured with the property of the company

-debenture can be redeemed back by the company upon maturity

-holders of the debenture are creditors to the company .

-interest of debenture is paid periodically by the company whether it makes profit or not.

Issuing of a debenture
Debentures can be issued in the same way as shares.

Where debenture is issued to one lender then it is called a single debenture and if issued to different
lenders even at different times then it is called series debentures/debentures in series.
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Upon issuing debentures the company must prepare debenture certificate and give them to the
debenture holders.

Debenture certificate should contain the following particulars

-Name of the company

-Name of the debenture holder

-The number and type of debentures

-Date of issue of the certificate

-The serial numbers of the debentures and of the certificate

-Signature of the director and of the company secretary

-The common seal of the company

Register of debenture holders

Where a company has issued debentures it is required to maintain a register of debenture holders.

Usually at a registered office of the company.

The register should contain the following details

-The names and descriptions of debenture holders

-The date at which each debenture holder was entered in the register.

-The numbers of debentures held

-The type of debentures issued

-The nominal value of each debenture

-Maturity date of the debentures

-Rate of interest on the debentures

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RIGHTS OF DEBENTURE HOLDERS

-Right to receive a notice before the constitution of the company is altered

-Right to receive a copy of trust deed in case of a public company

-Right to take position of property under charge

-Right to appoint a receiver

-Right to petition for the winding up of the company

-Right to attend creditors meeting

CLASSIFICATION OF DEBENTURES
Registered and bearers debentures

A registered debenture is the one where the name of the holder is indicated in the certificate and
therefore he is the only one who can enjoy the rights attached to the debenture.

Bearers debentures on the other hand is one where there is no name of the holder and therefore
any person who is in position of the debenture can claim its rights

Secured and unsecured debentures

Secured debentures are secured by the assets of the company while unsecured are not secured by
the assets of the company.

Redeemable and irredeemable debentures

Redeemable can be redeemed back by the company while irredeemable cannot be redeemed back
by the company.

Convertible and non convertible debentures

Convertible can be converted to other securities while non convertible cannot be converted to other
securities.
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Differences between debentures and shares

Debentures shares

Long term debt capital Long term equity capital

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Holder is a creditor Holder is the owner of the company

Earn interest Earns dividends

Payment of interest is a must whether Payment of dividends is not a must

company makes profit or not

Are redeemable Not redeemable except the preference

shares

Holder does not attend company Holder attends the company meetings and
meetings and has no vote has a voting rights

Holder cannot appoint a receiver

Holder can appoint a receiver

Similarities between debentures and shares

-they are both converted to stock

-they are both long term investment repayable during winding up or after a long period

-both can be redeemed

-issued in the same way

-both are transferable securities and procedure of transfer is almost the same

Debenture trust deed

When debentures are offered for public subscription the company may be allowed to create a trust
and appoint a trustee who will be acting on behalf of the debenture holders.

The company therefore will be dealing with one trustee rather than many debenture holders .the
legal document that creates the trust is called the debenture trust deed
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Contents of the debenture trust deed

-the particulars of the parties involved

-a covenant/promise by the company to pay the debenture holders their agreed instalments and
their accrued interest

-description of the property charged to cover the debenture

-the events in which the security becomes enforceable

-appointment of the receiver

-a clause empowering the trustees to take the position of the property charged in the event the
company defaults.

-meetings of the debenture holders

-a covenant by the company to insure the property charged and to keep it in good condition

Advantages of debenture trust deed

-it creates a trust where the company will not be dealing with a lot of people but the trustees.

-the circumstances in which the loan become repayable is clearly indicated

-the appointment of the trustees facilitates efficient administration of the trust

-the trustees are empowered to appoint a receiver in case the company defaults.

-the trust deed requires the company to insure the property charged and to keep it in a good
condition.

Securing of debentures
When the company issues debentures it usually secures them with the assets of the company .

When the assets are given out as the security to secure the debentures then they are said to be
charged.

There are two types of charges as follows

(i)fixed charge
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This is the charge that is usually on ascertained specific property of the company such as land
,buildings,plant and machinery etc.

The charge attaches itself immediately on the assets once it is created.

Advantages of a fixed charge

-the assets charged are specified

-the value secured by the asset is known

-the charge attaches itself immediately on the asset

-fixed charges are usually ranked fast above the other charges

Disadvantages of a fixed charge

-The company is not given freedom to deal with the assets charged.

-The company cannot create numerous charges on the same assets.

Floating charge

This is a charge which has the following characteristics

-it is a charge on a class of assets of the company both present and future

-the class of the asset is the one which changes from time to time in the ordinary cause of the
company’s business

-it is contemplated by the charge that until some events occurs which causes the charge to
crystallize the company can continue to use the assets in the ordinary cause of its business

CYSTALLIZATION OF A FLOATING CHARGE

A floating charge does not attach itself on the assets on the point of its creation.
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It hovers around the charged asset until a certain event occurs that makes the charge to attach itself
and immediately becomes a fixed charge.

Some of the events that may lead to crystallization of the floating charge include

-If the company defaults and the debenture holders takes steps to enforce their security.

Where the debenture holder appoints a receiver /administrator

When the company goes into liquidation

When the company ceases /stops to carry on its business

When there is commencement of recovery proceedings against the company

When another floating charge crystallize causing the company to cease business

If the charge allows the debenture holder to convert the charge into fixed charge by giving a notice

On occurrence of any other event that may be contemplated by the charge

Effects of crystallization
-The floating charge is converted into fixed charge

-The assets charged goes into the control of the debenture holder

-Any person who buys the charged asset will buy it in accordance with the rights of the debenture
holder over the charged assets

ADVANTAGES OF A FLOATING CHARGE

-The company is allowed to continue to use the assets charged.

-The charge can be on both present and future assets.

-Allows companies without fixed assets to borrow.

-It enhances the borrowing capacity of the company.

-It enables the company to charge property which would otherwise could not have been charged
under the fixed charge.
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Disadvantages of a floating charge

-The assets charged are not specific.

-The value covered by the charge cannot be ascertained at any given time

-The floating charge is ranked lower compared to the fixed charge

-A floating charge created within six months before commencement of winding up is considered
to be void and invalid

-A floating charge can be avoided by the liquidator unless it is proved that they were created at
the time when the company was solvent.

Differences between floating charge and fixed charge

Fixed charge Floating charge

Created on identifiable specific assets Created on unspecified present and

future assets

The secured value can be ascertained The secured value cannot be ascertained
from the word go

Companies not allowed to deal with Company is allowed to continue dealing

the assets charged with the assets charged

it is usually created on non –current Floating charge is mostly on current assets

assets which are also called fixed
assets

The issue of crystallization does not There is crystallization on charges

arise
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Cannot be converted into another Floating charge can be converted into fixed
charge charge upon crystallization

Any person can create a fixed charge Floating can only be created by body
as long as they have the assets corporate example a company.

Priority of charges
Where a company has created different types of charges and the charges will be ranked as follows

-Legal fixed charges will rank according to their order of creation

-A legal fixed charge will rank higher than an equitable fixed charge even if the equitable fixed
charge was created earlier.

-Fixed charge will rank higher than the floating charge.However a floating charge may have
priority over a fixed charge if the floating charge had a negative pledge clause which prevents the
company from creating a fixed charge over the same asset and the holder of the charge actually
knew about the negative pledge .

-Where the company has a floating charge only over the general assets they will rank in their order
of their creation

-If a company creates a floating charge on a specific asset the charge will rank higher than existing
floating charge over the general assets.

Registration of charges
Under the companies act of 2015 where a company has created any of the following charges it
must have them registered within 30 days after the date of creation .

The specified charges are

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-A charge to secure issue of debentures

-A charge on uncalled share capital

-A charge on land

-A charge on book debts of the company

-A floating charge

-A charge on calls made but not paid

-A charge on goodwill ,patent ,copyrights and trademarks

-A charge on a ship or any share in the ship

When registering a charge the company must provide the following prescribed particulars

-The description of the instrument creating the charge

-Te date on which the charge was created

-The amount secured by the charge

-The particulars of the property charged

-The description of the persons entitled to the charge

Effects of non –registration of a charge

Failure to register a charge as required by the act has the following effects

-The money secured becomes immediately repayable

-The lender is not bound by the terms of the charge

-The lender can take immediate steps to recover his money

-The charge is void and cannot be enforced.

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NB the court is empowered by the Act to extend the time of registration of the charge if it is
satisfied that failure to register the charge was accidental or due to in advertence or any other
sufficient information.

Register of charges

Where the company has created charges it must maintain a register of charges at the registered
office of the company and which should contain the following details

-The name of the person entitled to the charge

-The date on which the charge was created

-The amount of the charge, the description of the property charged

Chapter seven

COMPANY MEETINGS

The term meeting refers to an assembly of two or more people who gather together for a certain
reason or purpose.

The meetings of the companies involving the shareholders are called general meetings and
are usually held for the following reasons

i)To comply with statutory provisions which require certain general meetings to be held to
transact specified business
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ii)To transact business which can only be transacted at a general meeting ie alteration of
capital.

iii)To enable the directors and members exchange views regarding the running of the
company’s affairs

iv)To transact business which can only be transacted at a class meeting of the members

TYPES OF GENERAL MEETINGS

i)Annual General Meeting

According to the companies’ act of 2015 all public companies are required to hold a general
meeting annually for each of the financial year.

It is not a must for a private company to hold an Annual General Meeting if they do not wish to
do so.

The notice that convene the Annual General Meeting must clearly state that the meeting is an
Annual General Meeting.

Where there is failure by the directors to convene an Annual General Meeting members of the
company can petition either the registrar or the court to issue an order for the Annual General
Meeting to be held in accordance with the instructions.

Business transacted at the Annual General Meeting

-To consider and approve the director’s report and the auditor’s report on the financial
statements .

-To declare and approve dividends.

-To appoint directors to replace those who are either retiring or leaving the board.

-To appoint the Auditor and fix his remuneration.

ROLE OF THE ANNUAL GENERAL MEETING

-To transact the ordinary business
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-It is only at the Annual General Meeting where members can exercise any control over the
affairs of the company through voting

-The members get an opportunity to question the directors on any matter that may be
affecting the company.

-Members get an opportunity to interact with the directors

-Members also get an opportunity to play an oversight role by determining persons who will
sit in board and who will serve as an auditor for the next financial year.

(ii)GENERAL MEETING

This refers to any other general meeting of the members other than the AGM.

The general meeting can be convened by the board to deal with matters that cannot be dealt with
in the AGM or which cannot wait for the AGM to be held

General meetings are convened by the directors either on their own motion or after a requisition
has been made by the members.

If the directors fail to convene a general meeting after a requisition is made then the members can
go ahead and convene and conduct the meeting without the directors.

For this to happen it must be supported by holders of not less than 10% of the issued share capital
of the company.

(iii)CLASS MEETINGS

Where the company has issued different classes of shares then holders of certain class can hold a
general meeting that is commonly called a class meeting to discuss issues affecting their class of
shares.

OTHER MEETINGS THAT CAN BE HELD IN THE COMPANY

Board meetings

Meetings involving the directors of the company alone.

Management meetings
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Meetings involving the top managers of the company

Creditors meetings

Meetings of the creditors which may be held especially where the company is under receivership
or is going through liquidation

Staff meetings

Meetings that are held by the ordinary employees of the company from time to time.

CONVENING OF GENERAL MEETING

Convening of a general meeting in a company is governed by the provisions of the companies act
and the requirements of the Articles of Association.

For a general meeting to be validly held it must certify certain conditions that are commonly called
a requisite of valid general meetings

Valid notice

Proper authority

Quorum

Chairman

Taking of the minutes

Notice of a general meeting

This is the communication that is issued by the company to all the persons that are entitled to
attend the general meeting informing them about the proposed or intended meeting

A valid notice must have the following

-Must be issued by a proper authority.

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-Must have a requisite number of days (which is usually 21 days ordinary for AGM 14 days
for other general meetings).

-Must specify the business to be transacted clearly.

-Where resolutions are to be passed in the general meeting the notice must specify those
resolutions

-The notice must specify the dates, time and place of the meeting.

The notice of a general meeting must be served to all persons who are entitled to attend the
general meeting including

-All the current directors of the company

-All the current members of the company

-The current auditor of the company

-Personal representative of dead members

-Trustees of bankrupt members

METHODS OF SERVICE
The notice can be served through any of the following

-Can be delivered to the members personally

-Can be sent to members using the registered postal addresses.

-Can be put in the print media example newspapers

-Can be posted in the company’s websites

-Can be sent through electronic mails

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Special notice

This is a notice whose intention to move it must be given to the company with a minimum of 28
days.

It is usually required when there is an intention to pass a resolution to

-Remove the auditor from office before expiry of his term

-Remove the director from office before expiry of his term

-To appoint a director who has exceeded the age limit

Proper authority

Generally the authority to convene a general meeting is vested on the board of directors.

However there are certain circumstances where other parties other than the board may have
authority to convene a general meeting. These parties include

-The members of the company –if the director fails to convene the general meeting when
required doing so

-Registrar if a petition is made

-The court if the petition is made usually by the members

QUORUM
Refers to the maximum number of persons or members that are needed to be present for the
meeting to proceed to transact a business

In most cases quorum is usually needed at the commencement of the meeting and as long as there
are members who can transact business quorum is no longer needed.

The articles of the company can fix quorum but in ordinary cases quorum of a general meeting is
a minimum of two persons either present in person or by proxy.

This quorum was explained in the case of SHARPE VS DAWES(1876)

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In this case a company convened a meeting with one of the business to be transacted been to make
a call. Only one member attended together with the company secretary who was not a member.
The meeting went ahead and a resolution was passed to make the call. In the meantime a member
who did not attend the meeting was requested to pay for the call but he refused and challenged the
validity of the meeting and of the call in the court .The court held that the meeting was not validly
convened and therefore the call was invalid. The court explained that the word meeting “prima
facie”means “on the face of it” means coming together of more than one person and therefore one
person cannot hold a meeting. This decision held is called the RULE IN SHARP VS DAWES

EXCEPTIONS TO THE RULE IN SHARP VS DAWES

-Under the companies Act of 2015 one person can form and register a company .In such a case
the person will be holding valid general meetings alone.

-If the general meeting is convened under the directions of the registrar who has ordered that
the members present will be the quorum.

-If the meeting was ordered to be held by the court and the court has instructed that the members
present shall be the quorum.

-If the meeting is adjourned/postponed and the articles provide that whoever attends shall be
the quorum.

-In case of a private company that has only one director such a director will be holding board
meetings alone.

-If in the case of liquidation only one creditor has proved his debts with the liquidator then when
creditors meetings are called the creditor will be attending the meeting alone.

Proxy

Is a person who is appointed by the member to attend general meetings on his behalf if the member
will not be attending .In public companies the regulations requires that the notice that is convening
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a general meeting must indicate that every member has a right to appoint a proxy to attend general
meeting on his behalf if he will not be attending. A member therefore will complete a proxy
notice which should contain the following details

-Details of the member appointing the proxy

-The identity of the proxy

-The signature of the member

The proxy can either be a general proxy or special proxy

General proxy

Proxy appointed by the member to attend and vote in the meeting in any way that he feels fit.

Special proxy

Proxy who is under instructions on how to vote if certain resolutions comes up.

Rights of a proxy

-To attend general meeting on behalf of the member

-To vote on behalf of the member

-To join other members and proxies to demand voting by poll

-To participate in discussions during the meeting especially in private companies

Revocation of proxies’ authority

The authority of the proxy can be revoked under the following circumstances

-If the proxy appointment form is not delivered to the company within 48 hours before the
commencement of the meeting.

-If the member attends the general meeting personally.

-If the member directly revoke the appointment.

-If the member dies before the date of the meeting.

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-If the member becomes insane before the date of the meeting.

Proceedings at the general meeting

On the material day the chairman of the meeting will call the meeting to order and confirm whether
there is quorum.

If there is quorum the meeting will commence by having the secretary read the notice and business
to be transacted.

Each item of the business shall be taken separately ,discussed and voted for where necessary.

Where a resolution is to be passed the members can propose amendments which can be accepted
or rejected.

Voting in a general meeting can be done in two ways

(i) Voting by show of hands

In this kind of voting each member present in person or by proxy shall be entitled to one vote.

The votes are counted and the results are declared by the chairman.

His declaration is final.

(ii) Voting by poll

This is an equivalent of ballot voting where members vote with their shares. Therefore the number
of votes that a member is entitled will depend on their shareholding. In most cases one share will
be equivalent to one vote or any other way that may be provided for by the articles. Voting by poll
can be demanded by

-The chairman

-At least two members present

-Holders of not less than 5% of the voting rights.

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CHAIRMAN OF THE MEETING

This is the person who is elected by the members present in the meeting to preside over the
meeting.

The chairman is elected in accordance with the provisions of the articles where the company has
a chairman of the board then he usually presides over general meetings of the company and if he
is not available then any of the directors can be chosen to preside over /chair the meeting.

FUNCTIONS AND THE POWERS OF THE CHAIRMAN

Functions/duties

-To determine that the meeting is properly constituted.

-Determine whether a quorum is present.

-Inform him about the objects and the business of the meeting.

-To preserve order in the conduct of those present in the meeting

-To confine decisions with the scope of the meeting and within a reasonable time.

-To determine whether proposed motions and amendments are in order.

-To formulate for discussions and decision questions relating to business of the meeting.

-To ensure minutes of the meeting are kept.

POWERS OF THE CHAIRMAN

To call the meeting to order

To determine who is to speak and for how long

To close discussions on an issue after a reasonable debate

To make decisions on a point of order

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To demand voting by poll

To declare results of a tie in a vote

To close the meeting of the company

RESOLUTIONS
Decisions during company meetings are usually passed using resolutions.

Under the companies Act the company can pass any of the following resolutions.

(i) Ordinary resolutions

This is a resolution that requires to be supported by simple majority.

Ordinary resolutions are usually needed whether the company is making decisions that are internal
in their nature and may not affect the third parties.

Examples are

-Adoption of financial statement /accounts

-Appointment of directors

-Appointment of auditor

-Declaration of dividends

-Increase of share capital

Since ordinary resolution is an internal affair a copy is not required to be filed with the registrar.

(ii)Special resolutions

This is a resolution that requires to be supported by super majority ie a minimum of 75% of the
votes cast.
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For a special resolution the notice that convene the meeting must contain the full text of the
resolution and once the resolution is passed a copy must be filled with the registrar.

Special resolution is usually needed when the company is making major decisions which are likely
to affect the outsiders /third parties.

Examples are

-Change in the name of the company

-Changing the nature of the company eg from private to public

-Alteration of the company’s constitution

-Reduction of the share capital

-Creation of capital reserve

-Appointment of the inspector to investigate the affairs of the company

-Winding up of the company voluntarily

(iii) Resolutions requiring special notice

This refers to certain resolutions whose intentions to move must be given to the company through
a special notice.

-Remove the auditor from office before the expiry of his period.

-Remove the director from office before expiry of his term

-To appoint a director who has exceeded the age limit

(iv) Written resolutions

Under the companies Act of 2015 /a private company can propose through either a member or a
director to pass a written resolution.
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The resolution will be sent to the members without necessarily holding the meeting who will
respond whether they are in agreement with the resolution or not.

If the majority of the members agree then the resolution will be passed as if it has been passed in
a general meeting.

However a written resolution cannot be used to remove a director or an auditor from office .

A written resolution will not be valid if

-Against the law

-If it defames a person

-If it causes worries to the members

A written resolution can lapse after the deadline specified by the articles or after 28 days after
circulation.

MINUTES OF A GENERAL MEETING

This refers to a record of the proceedings of a general meeting.

The minutes are usually taken by the secretary to the meeting and it is the obligation of the chair
of the meeting to make sure that the minutes are taken down.

It is recommended that each type of a meeting should have separate minute books that should be
kept at the registered office of the company.

When taking minutes the following rules should be observed

-The minutes must give a precise account of the discussions at the meeting.

-The minutes must be concise and free from any doubt or ambiguity.

-The minutes must provide adequate information to enable those who do not attend the
meeting to understand fully what was transacted.

-For the minutes to be valid must be signed by the chairman of the meeting.
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ADJOURNMENT MEETING

This refers to a postponed meeting.

A meeting can be adjourned under the following circumstances

-If the meeting comes chaotic/disorderly increasing the level of insecurity

-If there is no quorum present.

-Due to unavoidable circumstances.

-Where the meeting cannot be concluded within the prescribed period or time .

-On occurrence of a major event which can disrupt the meeting example natural disasters .

- If the chairman and the members present pass a resolution to postpone it.

No new notice is needed if the meeting is adjourned for more than 30 days.

Only unfinished business can be dealt with in an adjourned meeting.Unless the articles provides
otherwise quorum is not needed for an adjourned meeting.

Chapter eight

DIRECTORS

The companies act does not define who a director is but rather provides that director include any
person occupying the position of a director by whatever name he is called.

In practice however a director refers to any person who is appointed by the shareholders to manage
the affairs of the company on shareholders behalf.

In most cases directors are also shareholders in the company but there is nothing that prevent the
articles from allowing an outsider to be appointed as the director.
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Types of directors
(i)Executive director

This is the director who spent most of his time in the management of the company’s affairs on day
–to – basis.

In most cases an executive director also has a separate employment contract meaning that he is
both an employee and also sits in the board.

(ii) Non executive director

This is a director who does not spent most of his time managing the affairs of the company.

He attends the affairs occasionally example during the board meetings.

(iii) Shadow director

This is a person who is able to control and influence the board and the operations of the company
without necessary sitting in the board.

Such individuals usually have big shareholding but do not want to sit in the board themselves but
through representatives or proxies.

(iv) Alternate director

A company’s articles can allow a director to appoint another person to attend and vote in board
meetings in his absence.

This person appointed is called alternate director.

(v )Managing director

This is the director who can be appointed by the board to oversee and manage the company on day
to day basis on behalf of the board.

He is usually also an employee of the company.

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APPOINTMENT OF DIRECTORS
Directors are appointed in accordance with the provision of the articles and of the Act as follows

(i) First directors

The articles of the company usually names the first directors at the point when the company is
been registered.

If the article does not indicate the first directors then all the subscribers to the memorandum are
considered to be the first directors of the company.

(ii) Subsequent directors

Any future directors of the company are usually elected by the shareholders during the Annual
General Meeting to serve for a specified period after which they can be re-elected or retire.

(iii) Casual vacancy

This vacancy usually arises when the director leaves office before the Annual General Meeting is
held for example through resignation, death etc.

In such cases the boards usually have power to appoint a director to fill in the vacancy.

Such a director will serve until the next Annual General Meeting when he will be eligible for re-
election /re-appointment

QUALIFICATION OF DIRECTORS
The companies Act does not specify the qualifications that somebody should have to be appointed
as directors.

However it makes the following restrictions

-A person to be appointed as a director should have attained the age of majority 18 years .
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-The person should not be undischarged bankrupt

-In addition to this the articles may provide that for a person to be appointed as a director
they must take and pay a minimum number of shares common called share qualification

DISQUALIFICATION OF DIRECTORS
Directors may be disqualified either by the Act or by the articles on the following grounds

-Where a director has failed to take up share qualification

-Where a director is undischarged bankrupt

-If he becomes a person of unsound mind

-If he is restrained by the court after been found guilty of fraud or mismanagement.

-If he resigns from office by giving a written notice to the company

-If he has not attained the age of qualification

-If he is absent without permission for more than six months

REGISTER OF DIRECTORS

A company must maintain a register of its directors in its registered office .

The register should contain the following particulars

-The past and present names of the directors

-The nationality and residential address

-Date of birth

-Business occupation if any

-Date of appointment

-Details of any other directorship

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NB if the director of a company is a corporate body or firm then the following details should
be included in the register

-The firm /corporate name

-The firms registered office

-The legal form of the body example whether a partnership ,cooperative etc

-The law under which it is registered and governed

-Details of its registration

POSITION OF THE DIRECTORS IN THE COMPANY

(i)Director as an agent of the company

Directors are considered to be agents of the company and therefore they can enter into transactions
and contracts on behalf of the company.

This means that the actions of the directors will bind the company .

However there are certain circumstances when a director will be held personally liable to
third parties for any contract they enter into.These are

-If he acts in his own name

-If he does not mention he is signing the contract on behalf of the company

-If he exceeds his powers

-If the company’s name is not properly indicated

(ii)Directors as trustees

Directors are considered to be trustees of the company’s assets and money and therefore there
exist a fiduciary relationship between the company and the director where the director is required
to act honestly in good faith and for the best interest of the company.

(iii)Directors as managing partners

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A company is owned by shareholders collectively but the management is vested on the directors.

Therefore directors are considered to be the managing partners.

Vacation and removal from office

Vacation of office

The office of the director can be vacated under the following circumstances

-If the director becomes disqualified

-If the director retires

-If the director resigns by giving a written notice

-If the director dies while in office

-If the company is dissolved after liquidation

-If the director is removed through a resolution by the members

Removal of a director
The members of a company can remove a director from office by passing a resolution to that effect.

The procedure of removing the director is as follows

-The proposal to remove the director should be sent to the company as a special notice .A copy
must be given to the director concerned.

-The company will convene a general meeting with the business to remove the director

-The resolution to remove the director is discussed. The concerned director must be given an
opportunity to make presentations either orally or in writing.

-The resolution is voted for and if supported by simple majority then the director stands removed.

-Within 14 days of his removal the company must notify the register.
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Remuneration of the directors

Since directors are not employees of the company they are not entitled to any remuneration.

However the articles of association can make a provision for directors to be remunerated. Such
remuneration must be authorized by the members who will pass an ordinary resolution during the
Annual General Meeting.

In addition any remuneration that is paid to directors must be disclosed in the company’s financial
statement in accordance with financial reporting standards.

The companies Act does not prevent a company from making payment to directors as a
compensation for loss of office. Such payment must however be disclosed and approved by the
members.

Disclosure of interest by the directors

Directors of a company are required to make certain disclosures as required by the act and for the
purpose of promoting good governance in the company.

The disclosures that a director must make include

Any interest that a director may have in a transaction involving a company

Any interest that a director may have in relation to contracts involving the company

Other directorships that the director may be holding in other companies

Personal relationships including family relations that a director may have in any interested parties
relating to the companies affairs .

Duties of the director

Duties of the director can be classified into two

-Fiduciary duties

-Statutory /general duties

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Fiduciary duties

These duties arise due to fiduciary relationship that the directors have with the company as trustees.

These duties include

-Duty to always act honestly

-Duty to always act in good faith

-Duty to act for the best interest of the company

-Duty to avoid conflict of interest

-Duty to disclose any interest in company’s contracts

Remedies for breach of fiduciary duties

In case of breach of fiduciary duty company and the members can have the following remedies.

-Removal of director from office.

-Sue for damages/compensation.

-Sue for injunction order to prevent continuous breach.

-In case of a contract the company can sue for rescission of the contract.

-In case the director has made secret profit he may be required to account for the profit to the
company.

General duties /statutory duties

The companies Act of 2015 requires the directors to perform the following duties.

-Duty to act within the powers provided by the company’s constitution.

-Duty to promote the success of the company and for the benefit of the company .
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-Duty to exercise independent judgment while handling company’s matters or decisions .

-Duty to avoid conflict of interest between personal interest and interest of the company.

-Duty not to accept benefits from third parties by a reason of being a director or by doing
anything as a director.

-Duty to declare interest in proposed transactions or arrangements.

-Duty to exercise reasonable care, skills and diligence

This duty was previously highlighted or explained in the case of city equity fire insurance
company co ltd (1925)

Facts

The directors of an insurance company left the entire management of the company’s affairs
in the hands of the managing director.They never enquired about what was happening in the
company .Due to the managing director fraud and negligence the company’s assets and
money were lost .When they were sued the court held that the directors were protected from
the liability by the company’s articles and therefore the court did not hold them accountable.
In delivering his judgment the court explained the duties of the directors in the following
propositions

-A director need not to exhibit /show in performance of his duties a greater degree of skills than
may reasonably be expected from a person of his knowledge ,experience or the law that expects
from him is to serve the company honestly and to the best of his ability.

-A director is not bound to give continuous attention to the affairs of the company because his duties
are alternating in their nature and can be performed periodically.

-The director can delegate his duties to the officers of the company provided there is no suspicion
that the officer will not perform his duties honestly.

Liabilities of the directors

Liability to the outsiders
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Directors are personally liable to outsiders if they do not act within the powers that have been
given to them by the company’s articles. For example if they contract in their own capacity or they
fail to indicate that they are acting on behalf of the company

Liability to the company

These liabilities may arise under any of the following circumstances

-Where they allow the company to act in ultra vires manner

-Where they have acted negligently or careless

-Where there is breach of trust by the directors

-Where they have willingly misconduct themselves

Criminal liability

This arises where directors commit crimes either under the companies act or under any other law
.For example where they have committed insider trading.

Loans to directors
Under the companies act it is unlawful for the company to make loans to a director including
guaranteeing loans to directors.

These restrictions do not apply under the following circumstances

-In case of a private company

-In case of a subsidiary whose director is its holding company.

-If payments are made to the director for purposes of allowing the director to meet expenses
relating to the company

-If the loan is given to the director in the course of ordinary business of the company whose
one of the businesses is to give loans example a bank
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Doctrine of indoor management (the rule in Turquand’s case)

This doctrine is to the effect that a third party who is dealing with the company is not obligated to
inquire whether the company’s internal procedures have been followed or not.

The law only requires such a person to have a constructive notice about the contents of the
company’s public documents.

Royal British Bank VS Turquand (1856)

Turquand was a liquidator of the company that had taken a loan of 2000 pounds from the Royal
British Bank by issuing a bond to that bank.However the amount had not been paid when the
company went into liquidation.According to the company’s articles the directors had the power
to borrow that was authorized by an ordinary resolution.In this particular case however no such a
resolution had been passed even though the bond was issued under the common seal of the
company and signed by the directors and the company secretary.Turquand had refused to pay
arguing that the loan was not properly authorized due to lack of resolution.The court held that the
company was liable to pay.The court explained that a person dealing with the company is only
required to have a constructive notice but is not obligated to enquire whether the internal
procedures of the company have been followed or not.

Exceptions to the rule in Turquand case

The rule will not apply under the following circumstances

-Where the person suing is in fact an insider example the director.

-If the person actually knew about the irregularity but did not do anything about it.

-If the articles had recommended special resolution which had not been passed.

-If there was some special circumstances which would have made the outsider to make an
inquiry.

-If the transaction is ultra vires as far as the company is concerned.

-If the transaction relate to issue of a forged document without the authority of the board
example a share certificate
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Majority rule and minority protection

This rule is to the effect that the majority in a company will always have the say in terms of decision
making as long as those decisions are made within the provisions of the articles and of the
companies act.

Where the majority makes decision that are within the law then the court will not interfere with
the majorities decision .

The majority rule is also called the RULE IN FOSS VS HARBOTTLE (1843)
Facts of the case
In this case the plaintiff Foss and Turton were shareholders in a company called Victoria park &
co ltd which was formed to buy land for use as a pleasure park.

The defendants on the other hand were directors and other shareholders in the company.

The plaintiff alleged that the defendant had defraudent the company in various ways and in
particular some of them had sold their own land to the company at an exergerated price.

They therefore requested the court to order the defendants to make good the losses that the
company had suffered.

The court held that it was incompetent for the plaintiffs to bring such case because the right to do
that belonged to the company in its corporate character.

The court explained that when a wrong is committed against the company then the proper plaintiff
is the company itself.

The rule in Foss vs Harbottle can be explained in three principles as follows

Proper plaintiff principle

This principle is to the effect that where a wrong is committed against the company then the proper
plaintiff is the company itself.

Internal management principle

If the alleged wrong can be confirmed or rectified by simple majority then the court will not
interfere.
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Irregularity principle
If what is complained of is an internal irregularity which can be confirmed by the majority then
the court will not interfere.

Exceptions to the rule in Foss VS Harbottle

This rule will not apply in the following circumstances

-Where the actions complained about are ultra vires or illegal.

-Where the actions were required to be supported by a special majority which is not achieved

-Where the actions of the majority constitute fraud on minority

-Where the actions of the majority violated membership rights of the minority or members

-Where the actions of the majority amounted to oppression on minority

-Where the actions of the majority was a breach of duty and mismanagement

Minority protection
Where the decision of the majority violates rights or amounts to oppression of minority then a
member of the company can take action against the majority and the directors

(i) Personal action

This is where an individual member sues in his own rights to protect his individual rights as a
member.

For example in case of membership violation.

(ii)Representation action
Where an individual member has suffered personal loss in addition to the injuries that a
company has suffered then the member can bring a representative action on behalf of
him and on behalf of other shareholders who may have suffered similar injuries or
losses.

(iii)Derivative action
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In this case a member will sue on behalf of the company .

It is called derivative action because a member will derive the right to sue from the rights of the
company .

Derivative action has the following characteristics.

-A wrong must have been committed against the company .

-The company is under the control of the majority shareholders and directors.

-Majority shareholders and directors are not willing to act.

-A member decides to sue on behalf of the company.

-Any damages awarded will go to the company but not to the suing member.

Protection of the minority by the statute

The companies act has a number of provisions whose impact is to protect the members and their
interests.

These provisions include

-Where the decision is made by the majority to alter the company’s articles .The member
can make a petition to prevent the alteration.

-Variation of class rights

If the decision is made to vary the rights of a given class of shares then holders of that class
have a right to stop the variation.

-If the directors fail to convene an Annual General Meeting the members can make a petition
to the registrar or to the court to have the Annual General Meeting convened.

-Members can require the directors to convene a general meeting. If the directors refuse or
fail then the members can convene the general meeting on their own.
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-Members have powers to pass a resolution to appoint an inspector to investigate the affairs
of the company.

-During a takeover bid a member can make a petition to the court to stop the takeover even
where it has been approved by the majority.

-A member of the company has a right to file a petition in court for compulsory winding up
of the company if they have a good reason to do that.

Chapter nine

COMPANY SECRETARY

Qualifications
A person is qualified to be registered if

-He has been awarded by the examination board a certificate designated the final certificate of
the certified public secretaries examination.

-He holds a qualification approved by the registration board

-He is, on 30th June 2002, both a Kenyan citizen and a member of the professional body known
as the institute of chartered secretaries and administrators.
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-He is, on 30th June 2002, both ordinarily resident in Kenya and a member of the professional
body known as the institute of chartered secretaries and administrators.

-He is registered as an accountant under section 24(1) of the Accountant Act (No 15 of 2008)

-He is, on 30th June 2002, an advocate of the High Court of Kenya.

DISQUALIFICATION
A person is disqualified from been registered

If he is convicted by the court of competent jurisdiction in Kenya or elsewhere of an offence

involving fraud or dishonesty

If he is an undischarged bankrupt

If he is of unsound mind and has been certified to be so by a medical practitioner

If during any period when the registration board has determined that he shall not be registered.

Private company

A private company is required to have a secretary only if it has a paid up capital of five million
shillings or more.

If a private company does not have a secretary anything authorized or required to be given or sent
or served on ,the company by been given or sent to ,or served on its secretary

-must be given or sent to,or served on ,the company itself

-if addressed to the secretary ,is taken to be treated as addressed to the company and anything else
required or authorized to be done by the secretary of the company may be done by the director or
a person authorized generally or specifically for the purpose of the directors.

Public company

Every public company is required to have at least one secretary.

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The directors of the public company shall take reasonable steps to ensure that the secretary or each
joint secretary of the company

(a) Is a person who appears to them to have requisite knowledge and experience to discharge
the functions of a secretary of the company

Is the holder of a practicing certificate issued under the Certified Public Secretaries of Kenya Act
.

If ,in case of a public company,the office of secretary is vacant,or for any other reason there is
no secretary capable of acting ,anything required or authorized to be done by or to the secretary
can be done

-by or to an assistant or deputy(if any);or

-if there is no assistant or deputy secretary or no person capable of acting by or to any person
authorized generally or specifically for the purpose by the directors.

Public company shall keep a register of its secretaries

The company shall ensure that its register of secretaries-

Contains the required particulars of the person who is,or persons who are,the secretary or joint
secretaries of the company

Except in so far as the regulations otherwise provide ,is kept available for inspection at the
registered office of the company

The company shall ensure that its register of secretaries is kept open for the inspection by

-any member of the company without charge

-any person on payment of the prescribed fee(if any)

A public company shall within 14 days after

-after a person is appointed to be its secretary or one of its joint secretaries

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-Ceases to be appointed as such;or

-any change occurs in the particulars contained in its register of secretaries ,lodge with the registrar
for registration a notice for the appointment ,cessation of appointment or change and of the date
on which it occurred.

A public company shall ensure that a notice that a person has been appointed as a secretary ,or a
joint secretary of the company is accompanied by a written consent by the person to act as the
secretary or joint secretary.

If the secretary of a public company is a natural person ,the company shall ensure that its register
of secretaries contain the following particulars

-the name and any former name of the secretary

-the address of the secretary

If the secretary of a public company is a company or a firm ,the company shall ensure that its
register of secretaries contains the following particulars

-the name of the company

-the registered or principal office of the company or firm

-the legal form of the company or firm and the law by which it is governed

-in case of a company or a firm that is incorporated ,register in which it is recorded and its
registration number in the register.

Duties of the company secretary

A company secretary can perform the following duties

-maintaining the company’s statutory registers or books

-filing the company’s annual returns.

-arranging meetings of directors and the shareholders

-informing the company of any significant changes in the company’s structure or management.
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-establishing and maintaining the company’s registered office as the address for any formal
communications.

-ensuring the security of the company’s legal documents.

-deciding on the company’s policy for the filing and retention of documents.

What is the legal position of the company secretary

(a) As a servant of the company

The secretary of a company is a servant of the company ,whose duty is to act in accordance
with instructions given to him by the directors

(b) As an agent of the company

The secretary of the company ,being the chief administrative officer of the company by
virtue of his office ,is also an agent of the company in a restricted sense.He has osten-sible
authority to enter into contracts on behalf of the company as regards matters connected
with administration

(c) As an officer of the company

The secretary is also an “officer” of the company.
AS an” officer “of the company he may incur liability to statutory penalties by reason of
non –compliance with the requirements of the Act ,for instance ,he may be held liable for
default in holding the statutory meeting and filing the statutory report.
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Chapter ten

COMPANY AUDITORS

Eligibility for appointment as a statutory auditor

A natural person or firm is eligible for appointment as an auditor only if the person ,or each partners
of the firm-

Is the holder of a practicing certificate issued under the Accountants Act

Has a valid annual license issued under the accountant act.

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Statutory auditor, who, at any time during the auditor’s tern of office, becomes ineligible for
appointment as such, shall immediately resign from office, and give notice to the audited person
that the auditor has resigned as a result of having become ineligible for appointment.

-Person may not act as statutory auditor of the company if the person is

-An officer or employee of the audited company

-A partner or employee of the audited company, or a partnership of which such a person is

a partner

-An officer or employee of an associated undertaking of the audited company

-Partner or employee of the audited company or a partnership of which such a person is a

partner.

Appointment of auditors of private companies

A private company shall appoint an auditor or auditors for each financial year of the company,
unless the directors reasonably resolve otherwise on the ground that the audited financial statement
is unlikely to be required.

Following a period during which the company (being exempt from audit) did not have any auditor
–at any time before the next deadline for the company to appoint auditors or to fill a casual vacancy
in the office of auditor.

The members may appoint an auditor or auditors by ordinary resolution –

(a) Not later than the deadline for appointing auditors

(b) If the company should have appointed the auditor or auditors by a deadline for appointing
auditors but did not do so or
(c) If the directors had power to appoint an auditor or auditors but did not make an appointment

Term of office of auditors of private company

An auditor or auditors of a private company hold office in accordance with the terms of their
appointment ,subject to the requirement that –
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(a)They do not take office until any previous auditor or auditors cease to hold office

(b)They cease to hold office at the end of the next period for appointing auditors unless
reappointed.

If no auditor has been appointed by the end of the next period for appointing auditors ,any auditor
in office immediately before that time is taken to be reappointed at that time unless

-The auditor was appointed by the directors

-The company’s articles require actual reappointment

-The reappointment is blocked by the members

-the members have resolved that the auditor should not be re-appointed

-the directors have resolved that no auditor or auditors should be appointed for the financial year
concerned.

Appointment of auditors of public company

A public company is required to have an auditor or auditors for each financial year of the company
,unless the directors reasonably resolve otherwise on the ground that an audited financial statement
is unlikely to be required for a particular financial year.

For each financial year for which an auditor or auditors is ,or are to be appointed,other than the
company’s first financial year,a public company shall ensure that the appointment is made before
the end of the general meeting at which the company’s annual financial statement for the previous
financial year is presented.

The directors of a public company may appoint an auditor or auditors of the company-

(a) At any time before the general meeting at which the company’s first financial statement is
presented.
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(b) Following a period during which the company ,being exempt from audit did not have any
auditor ,at any time before the next general meeting at which the company’s annual
financial statement is to be presented
(c) To fill a casual vacancy in the office of the auditor
The members may appoint an auditor in the office of auditor
(a) At a general meeting at which the company’s financial statement is presented
(b) If the directors had power to appoint an auditor or auditors but did not make an
appointment.
If an auditor or auditors have not been appointed for a public company within a period
for appointing auditors ,the company shall ,within seven days after the end of that
period ,notify the cabinet secretary of the failure .
As soon as practicable after being notified in the cabinet secretary shall appoint one or
more auditors to fill the vacancy unless satisfied that there are good reasons not to.
(c) If the company should have appointed an auditor or auditors but did not make an
appointment.

Term of office of auditors of public company

The auditor or auditors of a public company hold office in accordance with the terms of their
company appointment ,subject to the requirement that-

They do not take office until the previous auditor or auditors have ceased to hold office

They cease to hold office at the conclusion of the financial statements meeting next following
their appointment unless re-appointed

If an auditor is appointed by the members of a company ,the members shall fix the auditor’s
remuneration either by ordinary resolution or in such as the members may ,by ordinary
resolution determine

If an auditor of a company is appointed by the directors ,the directors shall fix his
remuneration of the auditor at a reasonable rate fixed by the cabinet secretary.
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Company to disclose terms of appointment

A company shall disclose the terms on company to disclose terms of audit which the company’s
auditor is appointed,remunerated or appointed is required to carry out his or her responsibilities .

In making a disclosure a company

(a) Shall include

-a copy of any terms that are in writing
-a written memorandum setting out any terms that are not in writing
(b) ensure that the disclosure is made at such times ,in such places and by and by such
means as are prescribed in the regulations
(c) specify the place and means of disclosure
-in a note to its annual financial statement
-in the director’s report
-in the auditor’s report on its annual financial statement

Functions of auditors
An auditor shall make a report to the members of the company on all annual financial statements
of the company of which copies are ,during the auditor’s company tenure in office-

(a) In the case of a private company –to be sent out to members

(b) In the case of a public company-to be presented at a general meeting of the company

The auditor shall include in the auditor’s report –

-An introduction identifying the annual financial statement that is the subject of the
audit and the financial reporting framework that has been applied in its preparation
-A description of the scope of the audit identifying the auditing standards in
accordance with which the audit was conducted.
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-The auditor shall clearly state in the report whether ,in the auditor’s opinion ,the
annual financial statements

(a)gives a true and fair view of

-(i)in the case of an individual balance sheet of the financial position of the company
as at the end of the relevant financial year
(ii)in the case of an individual profit and loss account of the company for the financial
year

(iii) in the case of a group financial statements of the financial position as at the end
of the financial year and of the profit or loss for the financial year of the undertakings
to which the statements relate,taken as a whole ,so far as concerns members of the
company.
-has been prepared in accordance with the relevant financial reporting framework.
-has been prepared in accordance with the requirements of the companies Act.
-state in the report whether the report is unqualified or qualified
-include in the report a reference to any matters to which the auditor wishes to draw
attention without qualifying the report.
-the auditor shall state in the auditor’s report on the company’s annual financial
statement whether the auditor’s opinion ,the information given in the director’s
report for the financial year for which the financial statement is prepared is consistent
with that statement
-in reporting on the annual financial statement auditor’s of a quoted company,the
auditor shall report to the company’s members on the auditable part of the director’s
remuneration report and state whether in the auditor’s opinion that part of the
director’s remuneration report has been properly prepared in accordance with this
Act.

-an auditor shall sign and date the auditor’s report and ensure that the auditor’s
name is prominently displayed in the report.
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Responsibilities of the auditor

In reporting on the annual financial statement of the company,the company’s auditor shall
carry out such investigations as will enable the auditor to form an opinion –
-Whether adequate accounting records have been kept by the company and returns
adequate for their audit have received from the company’s branches not visited by
the auditor
-Whether the company’s individual financial statement is in agreement with the
company’s accounting records and returns
-In the case of a quoted company –whether the auditable part of the company’s
directors’ remuneration report is in agreement with those accounting records and
returns

Auditor’s right to information

-Has a right of access at all times to the company’s accounting records and financial
statements ,in what form they are held.
-Right to attend any general meeting of the company
-Right to be heard at any general meeting that the auditor attends on any part of the business
of the meeting in the capacity of auditor
-Entitled to receive all notices of and other communication relating to ,any general meeting
which a member of the company is entitled to receive
-In relation to written resolution proposed to be agreed to by the private company ,the
company’s auditor is entitled to receive all such communications relating to the resolutions
as required to be supplied to the member of the company
-Right to require any of the following persons to provide with such information or
explanations as the auditor thinks necessary for carrying out the responsibilities of auditor-
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An officer or employee of the company

A person holding or accountable for any of the company’s accounting records or
financial statements
A subsidiary undertaking of the company that is a body corporate incorporated in
Kenya
An officer ,employee or auditor of any such subsidiary undertaking or any person
holding or accountable for any accounting records or financial statements of any such
subsidiary undertaking
A person who at a time to which the information or explanations required by the
auditor relates or relate

Cessation of office of auditor

-The members of a company may remove an auditor from office at any time by ordinary
resolution at a meeting.
-Special notice is required for a resolution at a general meeting of a company removing an
auditor from office .On receipt of the notice of such an intended resolution ,the company
shall immediately serve a copy of the notice on the auditor proposed to be removed
-The auditor proposed to be removed may ,be with respect to the intended resolution
(i) Make a written representations to the company ,not exceeding two thousand words
(ii) Request the company to notify the representations to the members.
- The company is not required to send copies of the representations to the members
if the members would not receive their copies of the representations before
-if a copy of any such representations is not sent out as required because it was
received too late or because of the company’s default,the auditor may ,require the
representations to be read out at the meeting
-within 14 days after after a resolution to remove the auditor from office is passed company
shall lodge a copy of the resolution with the registrar for registration.
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Resignation of auditor

An auditor of a company may resign office by lodging a notice to that effect at the
registered office of the company
The notice is not effective unless it is accompanied by the statement of the circumstances
connected with the auditor’s ceasing to hold office ,unless the auditor considers that there
are no circumstances in connection with the cessation of office that need to be brought to
the attention of members or creditors of the company.
An effective notice of resignation ends the auditor’s term of office on the date on which
the notice is lodged or on such a later date as may be specified in the notice
Within 14 days after an auditor of the company has resigned the company shall lodge with
the registrar for registration a copy of the notice of resignation

Duty of care between the auditor and the third party

This occurs when

-The loss suffered is a reasonably foreseeable consequences of the defendant’s conduct
-There is sufficient proximity of relationship between the defendant and the pursuer
-It is fair ,just and reasonable to impose a liability on the defendant.
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Chapter eleven

COMPANY ACCOUNTS, AUDIT AND INVESTIGATION

CHAPTER KEY OBJECTIVES

To be able to understand the following;-

1. Books of accounts

2. Form and content of accounts

3. Group accounts

4. Director’s report

5. Auditor’s report

6. Annual returns

7. Investigation of company affairs

8. Appointment and powers of inspectors

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9. Inspector’s report

Introduction
As a safeguard to creditors, investors and shareholders, there is a statutory obligation placed upon
every company to keep proper books of accounts and to make an annual return to the registrar
giving certain information regarding the financial position. The books must give a true and fair
view of the state of the company’s affairs and to explain its transaction.

Annual financial statement in relation to a company, means the company's individual financial
statement for a financial year, and includes any group financial statement prepared by the company
for that year.

In the case of an unquoted company, its annual financial statement and reports for a financial year
consist of;-

(a) Its annual financial statement;

(b) The directors' report; and

(c) The auditor's report on the financial statement and directors' report unless the company is
exempt from audit.
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In the case of a quoted company, its annual financial statement and reports for a financial year
consist of;-

(a) Its annual financial statement;

(b) The directors' remuneration report;

(c) The directors' report; and (d) The auditor's report on;-
(i) the financial statement;

(ii) the auditable part of the directors' remuneration report; and (iii)
the directors' report.

Books of Accounts
Section 628 imposes a strict obligation upon the company to keep proper books of accounts of
respect to:-

- All sums of money received and spent by the company and the matters in respect with which
the receipts and expenditure take place (cash book).
- All sales and purchases of the goods by the company.

- The assets and liabilities of the company.

The books of accounts must be kept in English language at the registered office of the company
or at such other place as may be determined by the directors. If kept at a place outside Kenya,
returns regarding the business recorded in such books are to be made to the registrar at interval not
exceeding six months.

The books and returns are to be open for inspection by the directors.

The articles also make provisions for the inspection of the books by members of the company but
no members shall have the right except as conferred by statutes or authorized by directors or by
the company’s general meeting. The responsibility of preparing the books of accounts rests on the
directors and default in this renders the directors liable to a fine.
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Laying financial statements before the General meeting

Section 679 requires that the directors shall present to the members at the general meeting copies
of its annual financial statements and director’s report and other reports. The financial statement
shall comprise: .

- A balance sheet as at the last day of the year

-A profit and loss account

-A statement of cash flow

-A statement of change in equity

Default in laying the financial statements renders the officers of the company liable to a fine not
exceeding sh.500, 000.

Right to receive Copies

Every shareholder is entitled to a copy of every balance sheet which is to be laid before the
company in a general meeting together with those documents to be annexed to the balance sheet.
A copy must be sent to every member not less than 21 days before the meeting.

Exception
1. A member of a company without share capital

2. Where the shareholder’s address is not known

Other requirements as to accounts

There must be shown either in the balance sheet or profit and loss account laid before the general
meeting.
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- The amount of directors’ emoluments

- Particulars of directors’ emoluments which have been waived

- Any loans made to any officer of the company or by its subsidiaries during the financial year.

- Particulars of employees’ salaries.

Group Accounts
Section 639 imposes an obligation on a holding company to present to its members alongside its
own annual accounts group, accounts relating to the state of affairs of the company and its
subsidiaries. This is one of the occasions when the veil of incorporation is lifted by statute so that
the holding and subsidiary companies are treated, though separate as one entity.

Exceptions to preparation of Group Accounts

Group accounts need not to be prepared in the case of a wholly owned subsidiary company of the
holding company.
Group accounts need not to deal with a subsidiary company if the company’s directors are of the
opinion that:-

- It is impracticable or it will be of no value to the members in view of the insignificant amount

involved or it would involve delay.
- The results would be misleading or harmful to the business of the company or the subsidiaries.

- If the business of the holding company differs from that of the subsidiary to such an extent that
they

can’t be reasonably be treated as a single undertaken.

Form and Content of Group Account

The group accounts presented before a holding company must be in the form of consolidated
accounts comprising of:-
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a) A consolidated balance sheet dealing with the state of affairs of the company and all its
subsidiaries.

b) A consolidated profit and loss account dealing with the profit and loss account of the
holding company and its subsidiaries.

When the financial years of a group of companies do not coincide, the registrar may relieve a
holding company or a subsidiary company from holding an Annual General Meeting in a calendar
year where it is desirable to extend financial year to coincide with that of its subsidiary or holding
company. However, the directors are required to explain the reasons why the financial years don’t
coincide.

There must also be attached to the holding company’s books laid before the General Meeting a
report by the directors. The report must show:-
- The state of the company’s affairs

- The amount, if any, they recommended to be paid as dividends

- The amount, if any, they propose to carry to reserves

- A fair review of the business during the year and at the end of the year. The names of
directors who have held office at any time during the year.
- Details of any acquisition by a company of its own shares.

- Directors’ interests in the shares or debentures of the company at the beginning and end of
the year if not shown elsewhere in the accounts.

Annual Return
Section 705 of Act states that every company having a share capital must file an annual return
(report) with the register once every year.

The return shall consist of the information required to be given to the registrar at the end of the
year.
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The return must be prepared and filed with the registrar within 28 days after the date to which is
made up. If a company fails to lodge an annual return as required, the company and each officer
who is in default shall be liable to a fine not exceeding sh.200,000.

Contents of the Annual return

Particulars to be included in the return
include i. Address of the registered office

ii. The place where the register of members or debentures holders are kept if not at the
registered office.
iii. Total amount of indebtedness in respect of all registrable charges.

iv. A summary distinguishing between shares issued for cash and shares issued for a
consideration other than cash specifying amount of share capital and the number of shares.
v. Type of company and its principals activities.

vi. Financial statements or exemption statement where applicable. A list containing the;
- Names and addresses of those who were members

- Number of shares held by each member stating the shares transferred since the date of the
last return.
- Particulars of directors and secretaries

- Any person appointed as authorized signatory of the company.

Directors Report
Under Section 653 of the Act, the directors of a company shall prepare a directors’ report for each
financial year of the company. For a financial year in which;-

(a) The company is a parent company; and

(b) The directors of the company prepare a group financial statement; the directors shall prepare a
group director's report relating to the undertakings to which the financial statement relates.
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If appropriate, a group directors' report may give greater emphasis to the matters that are significant
to the undertakings to which the group financial statement relates, taken as a whole.

The directors shall include in their report for a financial year;-

(a) The names of the persons who, at any time during the financial year, were directors of the
company; and
(b) The principal activities of the company during the course of the year.

In relation to a group directors' report, subsection (1)(b) has effect as if the reference to the
company were a reference to the undertakings to which the relevant group financial statement
relates.

Except in the case of a company that is subject to the small companies regime, the directors shall
specify in the report amount (if any) that the directors recommend should be paid as a dividend.

If the directors of a company fail to include in the report the relevant information, each director of
the company who is in default commits an offence and on conviction is liable to a fine not
exceeding five hundred thousand shillings.

Business Review

The directors will have to include also in the report a business review, so that their performance
can be assessed by the stakeholders of the company.

The business review will elaborate on;-

- A description of the principal risks and uncertainties facing the company;

- The development and performance of the business of the company during the company's
financial year; and
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- The position of the company’s at the end of that year, consistent with size and complexity of
the business.

In the case of a quoted company, the directors shall specify in the business review (to the extent
necessary for an understanding of the development, performance or position of the company);-

- the main trends and factors likely to affect the future development, performance and position
of the business of the company;
- information about environmental matters (including the impact of the business of the company
on the environment);
- information about the employees of the company;

- information about social and community issues, including information on any policies of the
company in relation to those matters and the effectiveness of those policies; and
- Information about persons with whom the company has contractual or other arrangements that
are essential to the business of the company.

As soon as practicable after the directors have finished preparing their annual report for the
company, they shall approve the report and arrange for one of them or the secretary of the company
to sign it.

Investigation into the Affairs of the Company

Investigation into affairs of a Company means an investigation of all its business affairs; its profit
and losses, assets, investments and management of the affairs of its subsidiaries.

The most important reason for investigation is for the protection of investors and creditors. This is
because in most cases persons who are in real control of the affairs of a Company manage its affair
in such a way that shareholders are rendered almost ineffective.
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Circumstances under which a court might appoint inspectors

- Where the company is being conducted with the intention to defraud the company’s creditors.

- If the company was formed for fraudulent or unlawful purpose.

- If the company members have not been given all the information all the information with
respect to its affairs.
- If it is in pubic interests.

Application for investigation may be made by:

i. The Attorney General

ii. The members

iii. The Company

Investigation by Attorney General

Under section 787(2), it is provided that the Attorney general can order investigation where he has
reasonable grounds to believe

a) That the business is being conducted;

• With intent to defraud its creditors

• In manner oppressive to its members

b) That the company was formed for a fraudulent or unlawful purpose

c) That the company’s members have not been given all the information with respect to its
affairs.

d) That it would be in public interest to do so.

e) That person responsible for the formation or management of its affairs are guilty of fraud
or misconduct towards its members.
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Application by members (Sec 786)

Members have a statutory mandate to apply to the court to appoint one or more inspectors to carry
out investigations and report their findings. Such an application may be made by:

a) In case of company having a share capital by not less than 200 members or by members holding
not less than 1/10 of the issued shares.
b) In case of a company not having share capital by not less than 1/10 of the members. The court
before acting may require members to file convincing evidence of matters requiring
investigation.

Before acting on members’ application, the court will require evidence of matters they
require investigation. The court may require such members to deposit an amount not
exceeding sh.500,000 to meet the costs of investigation.

Application by the company (Sec 787(1)

A company may by special resolution of members in a general meeting declare that its affairs
ought to be investigated and in such a case, the court is bound to appoint an inspector to make an
investigation and report to it.

The court may also appoint inspectors where it seems that:-

a) The business of the company is being conducted with intent to defraud creditors or for some
other fraudulent/unlawful purpose
b) Where persons concerned with formation of the company have been guilty of fraud or other
misconduct towards a company or its members
c) Where members of the company have not been given all the information with respect to its
affairs.
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Powers of inspectors
An inspector appointed pursuant to an application for investigation by members or the company
has discretionary powers to investigate subsidiary of company and co-subsidiaries

Section 795 empowers an inspector to apply to the court for attendance and examination on oath
of any person he would not otherwise be entitled to examine.

On conclusion of his investigation, the inspector is required to make a written report to the court
and the court must then supply a copy of the report

- To the company itself

- To the registrar.

- Any person who is a member of a company at a fee - Anybody corporate dealt with in the
report.
- To the applicants applying for the investigation

Under sec 813 copy of the report certified by the Attorney General is admissible evidence in any
legal proceedings in relation to matters contained therein.

If the report discloses any offence in relation to the company for which any person should be
criminally prosecuted, the court is required to refer the matter to the director of public prosecutions
(DPP).

Once proceedings have commenced officers and agents of the company are required to give any
necessary assistance as they are reasonably able to give towards the proceedings

Chapter twelve

CORPORATE RESTRUCTURING
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Restructuring

This refers to a process that involves changing the company’s structre to make it more viable and
a going concern .

The change can either be on the capital structure or the overall business structure.

Capital restructuring can be done for the following reasons

-To improve the competitiveness of the company in the market or industry

-To prevent the company from going into liquidation

-To overcome financial difficulties that the company may be facing

-To enter into a compromise or arrangement with the creditors over the company’s debts

-To reorganize the overall company capital structure

-To improve the capacity or the objectives of the company

Forms of capital restructuring

Reconstruction

This is a procedure that involves the alteration of the capital structure and rebuilt it again.

This can be achieved through reduction of capital ,increase of capital,variation of class rights etc.

The procedure of reconstruction involves the following steps

-The company should do away with possible objections by the creditors either by paying off the
debts ,providing the security for debts or obtaining consent from them.

-Company can convene a general meeting with the agenda of presenting the proposal to the
members of the company to approve

-During the meeting the members will consider the proposal and vote for it .

-If the proposal is supported by a minimum of 75% of the votes then the proposal is passed.

-A copy of the resolution must be filed with the registrar

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Schemes of arrangement

This involves a reorganization of the company share capital by entering into a compromise with
the company’s creditors and members.

Steps/procedure for a scheme of arrangement is as follows

-An application is made to the High Court ,so that the court can allow a meeting of the members
and creditors to consider the scheme

-If the court authorizes, separate meetings of members and creditors are convened to consider
the proposal.

-If the scheme is approved by members and creditors with a vote of 75% or more then the scheme
is passed.

-Another application is made to the court so that it can approve and allow the implementation
of the scheme .if the court approves then it can make the following matters

(i)the transfer of the whole or part of the undertaking ,property and liabilities to a new company

(ii)continuation of any legal proceedings .

(iii)the allotment of shares and debentures.

(iv)dissolution of the whole company.

(v)provision for the opposing members/dissenting members .

(vi)provision for any incidental and consequential matters that may be necessary to secure the
scheme.

(vii)a copy of the court order must be delivered to the registrar for registration.

Advantages of a scheme of arrangement

-It can be used where reconstruction or take over may not apply .

-The court makes a provision for any other eventuality.

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-The scheme is more flexible than other methods.

-It ensures continuity of the company

-It prevents the company from being liquidated.

Disadvantages of scheme of arrangements

-It is not easy to compromise the members and the creditors.

-The procedure can take a long period of time.

-It is an elaborate procedure that requires a lot of efforts.

-There is no guarantee that the company will survive the procedure.

Differences between reconstruction and schemes of arrangement

Reconstruction Scheme of arrangement

It is governed by section of 927 of It is governed by section 922 of the

the companies act companies act

Must be sanctioned by the Must be sanctioned by the court

members

Carried out by the company Involves settlement of disputes by entering

which may end up being into a compromise
liquidated

Involves selling of the assets of a Involves the reorganization of the capital

company to a new entity structure
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It involves transfer of assets from Involves a compromise between members

one entity to the other with the and creditors without going into
older company been dissolved liquidation

3. Takeover bids

Takeover bid can be defined as a process where an offer is made by one entity to acquire all the
voting shares in another company called the offeree or the target company.

The company that makes the offer is called the offeror.

A takeover scheme involves making an offer for the acquisition of all the voting shares in that
company.

In Kenya takeover bids are governed by the Capital Market Authority and the provisions of the
Companies Act and the Competition Act of 2010.

For public listed companies an entity is assumed to have an intention to take over a listed
company where such an entity or person

-Holds more than 25% but less than 50% of the voting shares of the listed company and
acquire more than 5% in any year.

-The person holds more than 50% of the voting shares and acquires additional shares in the
listed company.

-Where the person acquires the company that holds effective control in the listed company

The capital market authority can grant exemptions from complying with procedural
regulations under the following circumstances.
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-Where an acquisition is done for purpose of strategic investments in a listed company that
is tied up with the management or any other technical support that is relevant to the business
of such company.

-Where there is an acquisition of a listed company that is in a financial distress.

-Where the acquisition is a restructuring of the listed company’s share capital.

-Where the acquisition involves a management buyout involving majority of the employees.

Procedure of takeover

The procedure of takeover is prescribed by the Capital Market Authority regulations and it include
the following steps

(i) The offeror is required within 24 hours of making a decision to make a takeover bid
announce the proposed offer by a press notice and serve a notice of intention in writing
of the takeover scheme.

The notice of intention must contain all the information that is required by CMA,NSE and
competition authority and should be delivered to the target company.

(ii) Within 10 days from the date of service of notice of intention the offerer must serve the target
company with an offeror’s statement which should contain the following

-whether the offer is conditional

-whether the shares will be acquired in wholly or in part.

-Whether the shares are to be acquired through the swap .the proportion of the swap should be
indicated

-Whether the offerror is engaged in the same line of business as the offeree.

(iii) Within the 24 hours of receiving the offeror’s statement ,the target company must inform the
Nairobi security exchange and capital market authority and put the proposed takeover in the
newspapers.
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(iv)After receiving the offeror’s statement the target company must appoint an independent
advisor.The independent advisor must prepare an advisor’s circular and sent a copy of CMA and
other copies are distributed to the shareholders of the target company.

Contents of the advisor ‘s circular

-The offeror’s stated intention regarding the continuation of the business of the offeree

-The offeror’s stated intention regarding major changes to be introduced into the business

-The offerors long term commercial justification for the proposed takeover

-The offeror’s stated intention with regard to continued employment of the employees of the
offeree

-The reasonableness of the take over including accuracy of the profit forecast of the offeree

(v)within 14 days of serving the offeror’s statement the offeror is required to submit to the Capital
Market Authority for approval a take over offer documentwhich should contain the following
details

-Whether the offer is conditional upon acceptance of the offer under the scheme

-Where the shares are to be acquired in whole or in part for cash then the period with which such
payments will be made

-Where the shares are acquired through share exchange or swap then the proportion of share
exchange and the period with which the offeree’s shareholders will receive the new shares.

-Whether the offeror is engaged in the same line of business as the offeree and whether the offer
has been approved by the competition authority

-Whether the offer is conditional upon maintainance of a minimum percentage of shareholding by

the general public.

(vi) the Capital market Authority should approve the take over offer document within 30 days after
which a copy is sent to the target company.
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(vii)After receiving the take over offer document the target company is required to circulate the
document together with the advisor’s circular to the shareholders .The shareholders of the target
company will consider the document and will be required to accept the offer within 30 days

(viii)once the offer is accepted by the shareholders of the target company then the offer will be
closed and the offer must inform capital market authority and Nairobi security exchange about the
closure of the offer.

Period Event
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1st month 1 day-decision to make a take over bid is made .

2day -Press notice and notice of intention are made

acopy given to capital market authority and competition
authority

12th day-Offeror serves offers statement to target

company

13th day-target company informs CMA.NSE and CA

about the offer .It also appoints independent advisor.

26th day-offeror submits offer document to CMA for

approval

26th day CMA approves take over document

29th day-CA approves take over document

2nd month 30th day-offeror serves approved take over offer

document to the target company

3rd month 14th day-the target company issues board circular and
circulate approved take over document and independent
circular to the shareholders

29th day –CA approves the take over proposal

4th month 13th day –closure of the offer

-offeror informs CMA and NSE about the closure and

announces the results through press notice
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Hostile take over

This is a form of take over where the offeror seeks to acquire a target company whose management
is unwilling to agree to the takeover.

It is also applied where there is in fighting among the shareholders with an intention of kicking out
the current management and shareholders who are troublesome.

There are a number of defences that the management of the target company can use to defend
themselves against the hostile takeover.

(i) Poison pill defense

In this case the target company dilutes its shares in such a way that the hostile offeror/bidder cannot
obtain controlling power without incurring huge expenses.

(ii)white knight defense

In this case the board of target company seeks a friendlier firm /person with whom they exchange
shares such that they get controlling interest before the hostile bidder.

(iii)Crown jewel defense

The target company sells of most of its valuable assets to make it less attractive

(iv)Golden parachute defense

In this case the management of the company will get contracts with a lot of benefits and
compensation in case they are removed from the company.

(v) Pac –man defense

This is where the target company makes a counter take over against the offeror

(vii)Greenmail strategy
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In this case the target company repurchases shares that the offeror had already acquired at a very
high premium to prevent the shares from being given to the offeror.

(viii) Shark repellants

This is where the target company put provisions in its constitution that will deter or prevent the
offeror’s desire to make a hostile takeover

(ix) Leveraged buyout

This is where the management of the target company purchase controlling interest in the company
by use of debt financing thereby becoming a bidder who opposes the hostile offeror.

(4) mergers and acquisition

Merger refers to combination or union of two or more businesses or companies where the merger
creates a new company then it is called amalgamation

Mergers can be achieved in two ways

-Through absorption –this involves combining two or more companies into an existing company
where all companies except one will lose the identity.

-Consolidation

This is where two or more companies combine to form a new company with a new identity

Reasons why merges may fail

-Failure to carry out due diligence between the parties involved in the merger

-Where parties have different backgrounds in terms of system ,culture and operations

-Where parties have different missions and objectives

-Failure to clearly understand the laws and regulations that govern mergers

-Poor execution and implementation of the merger process

-Poor leadership throughout the merger process

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-Failure to carry out proper post merger integration

Types of mergers

(i) Horizontal merger

This is where two or more businesses that are offering the same products and services in the
same market combine their business operation.

(ii) Vertical merger

This is a merger that involves businesses that are at different stages or points of their
supply chain usually with an aim of controlling the supply chain.

(iii)Conglomerate merger

This is the merger that involves businesses or companies that are in different industries
and are offering different products or services to different customers/markets .

(iii) Concentric merger

This is a merger that involves business or companies which are offering different
products and services but to the same customers

Post merger integration

This refers to all the processes that requires to be done after companies agree to merge in order to
bring together their operations and systems .

Their activities are intended to realign the employees and the system of the merging parties into
one operation.

Post merger integrations may end up having different post merger objectives depending on the
merging parties .
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The four main merger integrations that come out of post merger integration includes

(i)Preservation

This is where the dominant party in the merger preserves the other party making it autonomous.

Only financial reporting and financial processes are integrated.

(ii)Holding

In this case the dominant party in the merger just keeps the ownership of the other party without
integrating anything into its system.

(iii)symbiosis

In this type of merger the dominant party will only integrate those processes that will help it to
reach its merger objective.

(iv)Absorption

This is where the dominant party fully absorbs the other party in the merger with all its systems
and processes.

Reverse merger

This is the term that is used to refer to a process in which a private company go public without
offering shares directly to the public but through an intermediary.

Such as the investment banks who help the company to sell the shares to the public .

It is also called the reverse initial public offer or reverse take over.

Benefits /advantages of reverse merger

-It is a simpler process of going public.

-It is less expensive process with fewer regulations compared to initial public offer.
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-The original owners of the company would get a chance to liquidate their shares and exit the
company at any time .

-The company is forced to become more transparent and accountable and with good governance.

-The company becomes more publicized thereby gaining the ability to attract talented and skilled
employees.

Disadvantages of reverse merger

-Since no prospectus is issued not many members of the public may know that the shares are on
offer

-There is no guarantee that once the shares are listed their value will improve

-The cost of compliance with various regulations is higher

-Companies are forced to make a lot of disclosures thereby losing confidentiality.

Other forms of restructuring

(i) Demerger
This is a form of corporate restructuring in which companies business operations are
segregated into different components such as division or branches.

(ii) Divestiture
This is a process whereby a company withdraws its investments from different business
units example by selling of a brand or product to other players in the market
(iii) Reduction in capital
(iv) Redemption of shares/share buy back
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Chapter thirteen
CORPORATE INSOLVENCY
The term corporate insolvency refers to a situation where a company is unable to meet its financial
obligations as and when it is required to do so.

Technically the company’s liabilities far exceeds its assets and therefore its not able to pay its debts
when it is required to do so .

Where the company falls into corporate insolvency it can be dealt with in two major ways which
are provided for by the insolvency act of 2015.

-Administration/receivership

-Winding up/liquidation

Administration /receivership of the company

This is a procedure in which a company is put under a receiver or administrator in situations where
it is unable to meet its financial obligations .

The main objectives of administration are

-to maintain the company as a going concern .

-to protect the interest of the creditors.

-to continue to trade in order to generate revenues under a new administration in order to settle its
debts .

-to achieve a better outcome for the company’s creditors in case the company goes into liquidation
.

Appointment of administrator/receiver
A person can be appointed as an administrator of th company by

-the order of the court where a petition has been filed

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-by holders of the floating charge

-by unsecured creditors of the company

-by the directors of the company

Where a petition is filed in court to put the company under an administrator the court has powers
to

-make the administration as been sought

-dismiss the application

-adjourn the hearing

-make an interim order

-treat the application as an application for liquidation

Effects of administration orders

When the court issues an administration order such an order has the following effects

-no insolvency proceedings shall be made against the company as long as the order is there.

-the existing legal cases for or against the company can only proceed with the consent of the
administrator.

-all the official documents of the company must always indicate the company is under
administration.

-the powers of the director will cease during the period of administration.

-a person can take steps to repossess goods which are under the possession of the company if the
goods were acquired through hire purchase

Powers and functions of the administrator/receiver

-To sell the property of the company through auction or privately.
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-Power to use the company’s common seal.

-Power to appoint and remove the company’s directors.

-To manage the affairs and the property of the company.

-To convene general meetings of the company.

-To enter into contract with third parties on behalf of the company

Vacation of the office of the administrator

A person can cease to be an administrator under the following circumstances

-Where the appointment comes to an end at the expiry of his term

-If an application is made by the creditor to remove the administrator.

-If the company goes into liquidation

-If the court think it is just and equitable to do so

LIQUIDATION /WINDING UP OF A COMPANY

This is a legal procedure by which the life of a company is dissolved and put into an end .

Liquidation process in Kenya is governed by the insolvency act of 2015.

The insolvency Act recognizes the following methods of liquidation

(i)Winding up by the court/Compulsory winding up

(ii)Voluntary winding up

-members voluntary winding up

-creditors voluntary winding up

(iii) Winding up under the supervision of the court.

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Winding up by the court/compulsory winding up

This is winding up that is initiated by the court after issuing a winding up order.

The order is issued after a petition is filed in court to have the company wind up compulsarily.

Persons who can file a petition for winding up

(i)The company itself through its creditors

(ii)By the creditors of the company-this happens where the company is unable to pay its debts

(iii)By a contributory –this refers to any person who is liable to contribute to the assets of the
company in the event the company goes into liquidation.

(iv)By member or members of the company-this can arise where there is oppression of member or
minority by the majority

(v)The official receiver/administrator –where the company is under administration and the receiver
feels that it has no chance to be revived then he can file a petition for it to be wind up

(vi)The attorney general-the attorney general can file a petition under certain circumstances for
example where an investigation has been conducted and the results indicate that to protect the
interest of the public the company should wind up

(vii)The commissioner of insurance –under the insurance act commissioner can petition for
winding up of the insurance company under any of the following circumstances

-where the company has failed to comply with the requirements of the insurance act

-where the company is unable to pay its debts.

-Where the company is carrying out insurance business without been registered.

-where the company is unable to meet reasonable expectations of its policy holders
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Grounds for compulsory winding up

-Where the number of members have fallen below the statutory minimum.

-Where the company has failed to commence business within one year of incorporation

-Where the company has suspended its business for a whole year.

-Where the company is unable to pay its debts

-Where the court is of the opinion that it is just and equitable to winding up the company

Some circumstances which may lead to liquidation on just and equitable grounds are
-Where the company has failed to reach its objectives(failure of substratum) explained in the case
of German Dates Company Ltd

In this case the company was unable to produce a certain specific product as it is indicated in its
constitution due to lack of license from the government.A petition was filed by a member and the
court held that since the sole objective could not be achieved the company should be liquidated.

-Where a member is able to proof that he has been unfairly excluded from the management of the
company’s affairs.

-Where the member is able to proof that there was oppression of the minority by the majority.

-Where the company is found guilty of engaging in illegal and fraudulent activities.

-Where there is complete deadlock in the management of the company such that the board cannot
operate .

-Where it is proved that the company is sham/bubble ie it exist only on paper.

Liquidation process
Compulsory winding up commences when a petition is filed for the company to be wind up.

Upon hearing the petition the court has powers to

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-Dismiss the petition

-Issue interim orders

-Issue an order for compulsory winding up

-Adjourn the hearing either conditionally or unconditionally.

When the compulsory winding up order is issued it has the following

consequences/effects
-The administrator or official receiver becomes provisional liquidator

-The company will seize to carry all its business except where it is necessary for the benefits of
winding up

-Any disposal of the company’s property without liquidator’s permission is void.

-Any transfer of shares or alteration of membership is void.

-Any legal proceedings or cases either for or against the company are halted

-All the servants and employees of the company are automatically dismissed.

-Directors powers will cease and will be exercised by the liquidator.

Liquidator
This refers to an insolvency practitioner who is appointed to carry out and supervise winding up
of the company.

For a person to be appointed as an insolvency practitioner he must have the following

qualifications
-must hold an academic degree from a recognized university.

-5 years experience (minimum) as a professional and a member of professional body.

-minimum of 2 years experience in insolvency practice.

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-minimum of 4 years experience as an apprentice/understudy under an insolvency practitioner.

-fulfill the requirements of chapter six of the constitution.

The following category of persons can be appointed as liquidator

-Official receiver or administrator of a company.

-Supervisor of voluntary arrangement of a company

-A provisional liquidator

-An existing liquidator

Disqualification from acting as an insolvency practitioner

-A person declared bankrupt by the court

-An insane person

-A person incapable of performing due to physical incapacitation.

-A person disqualified by the court order

Legal position of a liquidator

Where a liquidator is appointed by the court then his position can be explained as follows

-The liquidator will be an officer of the court

-The liquidator is an agent of the company

-The liquidator is a trustee of all the creditors

-Liquidator is a fiduciary. Therefore he is required to always act honestly and in good faith

Duties and obligations of the liquidator

-Realize the assets of the company

-Secure control of the assets of the company

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-Ascertain and pay the company’s debts .

-Keep proper books of accounts

-Convene meetings of members and creditors

-Always act for the benefit of interested parties

-Avoid conflict of interest

-Exercise a high degree of care and skills

-Always act honestly and impartially

Powers of the liquidator

This can be classified into two categories

(a) Powers exercisable with sanctions of the court

-To bring or defend a legal action on behalf of the company.

-Carry on the business of the company for the benefits of winding up.

-Appoint an advocate to assist in performance of duties.

-To pay in full all the classes of creditors.

-To make any compromise or arrangements with the creditors.

-To make a call on amount unpaid on shares.

(b) Powers exercisable without the sanctions of the court

-To sell the assets of the company.

-To draw, accept or endorse a negotiable instrument.

-To prove, rank and make a claim from a contributory who is insolvent or bankrupt.

-Make a claim from the administrators of a deceased contributory.

-Raise money on the security of company’s assets.

-Employ agents to perform the tasks that he cannot perform.

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-To do all such acts and execute deeds on behalf of the company.

Release of the liquidator

Once the liquidator has realized the assets of the company,paid all the debts and has distributed
the surplus then he can make an application to the court to be released from his obligations.

The court will require the liquidator to prepare a final report and if there is no objection from the
creditors then he will be released by the court.

Such a release also releases the liquidator from any liability or acts that came out of the liquidation
process.

Committee of inspection
This is a group of creditors who are appointed to work with the liquidator during the liquidation
process.

Their main duty is to supervise the work of the liquidator and to fix his remuneration.

Voluntary winding up
This is a form of winding up that is initiated and controlled either by members or by creditors
without involvement of the court.

It commences when a special resolution is passed to wind up the company voluntarily.

Types of voluntary winding up

(a)members’ voluntary winding up

This is winding up that is initiated and controlled by the members.

It can only be done when the company is solvent and therefore before it commences the directors
are required to make a declaration of solvency.
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This is a statutory declaration by the directors of the company to the effect that they have made
inquiry into the company’s affairs and they have concluded that the company is able to pay all its
debts within a period of 12 months after commencement of winding up.

Declaration of solvency is invalid unless

-It is made five weeks before commencement of winding up

-It contains a statement of assets and liabilities as at the last date of the account.

-A copy is filed with the registrar before commencement of winding up.

Process of members voluntary winding up

(i) A general meeting is convened where members pass a special resolution to wind up
the company voluntarily.In the same meeting a liquidator is appointed.
(ii) A declaration of solvency is made by the directors .
(iii) The liquidator commences his work immediately .Where at any time the liquidator
realizes that the company cannot pay its debts within the required period then the
liquidator should
Notify the registrar
Provide a statement of assets and liabilities to the creditors
(iv) Where the liquidation is done beyond 12 months the liquidator at the end of each year
is required to prepare a report ,convene a general meeting of members and present the
report.
(v) When all the affairs of the company have been fully wound up the liquidator should
prepare a final report,call a final general meeting and present the final report for
approval.
(vi) If the report is approved by the members a copy should be filed with the registrar with
an application for dissolution of the company.
(vii) The registrar will then dissolve the company and remove its name from the register of
companies.
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Creditors voluntary winding up

This winding up is initiated by the creditors of the company especially where the company is
insolvent.

Procedure

(i)two separate general meetings are convened simultaneously for the members and creditors .The
agenda of the meeting are as follows

-Members meeting

Pass a resolution to wind up the company voluntarily

Propose a liquidator

Appoint members of the committee of inspection.

Creditors meeting

Receive a statement of affairs from the directors of the company

Appoint a liquidator

Appoint members of committee of inspection

(ii) where both members and creditors agree on the liquidator then he will commence his work .If
they disagree then the one appointed by the creditors will become the liquidator .

(iii)if the winding up continues for more than one year then at the end of each year the liquidator
will be preparing a report and convene a general meeting of both members and creditors and
present the report.

(iv)when all the affairs of the company are wound up then the liquidator will prepare a final report
,convene a final general meeting and lay the report for approval.

(v)if the report is approved then a copy will be sent to the registrar together with an application for
the dissolution of the company.

(vi)the registrar will dissolve the company and remove the name from the register of companies.
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Differences between compulsory winding up and voluntary winding up

Compulsory winding up Voluntary winding up

Controlled by the court Controlled by members or creditors

Commences when a petition is filed in Commences when a special resolution is passed

the court by the various parties. to wound up the company

The liquidator is appointed by the court Liquidator appointed by members or creditors

Liquidator is the officer of the court Liquidator not the officer of the court

When court order is issued all the When the resolution is passed employees
employees are dismissed continue with their employment

When the court order is issued all the When a resolution is passed all the existing
cases for or against the company are cases will continue
altered

When court order is issued the official When a resolution is passed the receiver does
receiver /administrator becomes the not became automatic provisional liquidator
provisional liquidator

(iii) Winding up under the supervision of the court

This is the form of winding up which usually begins as a voluntary winding up but after sometime
disagreements may arise forcing the members and creditors to seek the court’s intervention .
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When the case comes up to the court the court will issue orders for the winding up to continue
under the supervision of the court thereby converting it to compulsory winding up.

The court may add another liquidator if there is need. otherwise the existing liquidator will become
an officer of the court as if he had been appointed by the court.

Differences between winding up and receivership

Liquidation /winding up Receivership

Carried out by the liquidator Carried out by the receiver/administrator

It affects legal existence of the company Does not affect legal existence of the
company

Liquidator can be appointed by the Receiver can be appointed by the creditors or

court,members or the creditors the directors

The company stops to carry on its The company will continue with its business
business

The objective is to realize the assets ,pay The objective is to maintain a company as a
debts and close down the company going concern that can be able to settle its
debts

Liquidator can investigate the affairs of Receiver cannot investigate the affairs of the
the company and hold the directors company
accountable for its failure

Directors power will cease to exist and Directors can continue to hold their office but
will be exercised by the liquidation exercise of power is limited
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Liquidation of unregistered companies

Under the companies act of 2015 unregistered company include any association and any company
other than a company registered under the companies act .

A registered company and the provisions relating to liquidation of a registered company will also
apply to unregistered company.

However unregistered company cannot be liquidated voluntary but compulsory under any of the
following circumstances

-if the company has been dissolved or it has ceased to carry on its business.

-if the company is unable to pay its debts

-if the court is of the opinion that it is just and equitable for the company to be liquidated

NB for a company that has been incorporated outside Kenya and which has been carrying out its
business in Kenya then it can be liquidated as unregistered company.

Transaction arising out of liquidation

When liquidator is carrying out his work he is likely to deal with different issues and transactions
some of which are explained as follows

(i)Assets in the possession of creditors

If the creditors had taken over the assets of a company in the course of executing a judgment for a
debt against the company at the commencement of winding up then the creditor can be compelled
by the liquidator to return the assets back to the company and make a claim for the debt from the
liquidaton.

(ii)Disclaimer of assets

A liquidator has statutory right of disclaimer of assets which is governed by the following rules

He must obtain permission from the court

The disclaimer must be done within 12 months period after the commencement of winding up.
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Any person who may suffer some losses due to the disclaimer will become a creditor to the
company and can make the claim with the liquidator.

The right to disclaim the property or the asset is limited to shares ,unprofitable contracts ,land with
a lot of burden and encumbrances and other property that is difficult to sell.

(iii)proof of debts

The liquidator does not settle the debts any howly whoever makes a claim must sufficiently provide
evidence that the debt exist.

Any debt that is not proved sufficiently will not be paid.

Those debts that are proved will be paid in accordance with the priority of the claims as follows

(a)all the costs and expenses that are properly incurred in the winding up process including
liquidator remuneration.

(b)the preferential debts will be paid next.This includes

-All taxes and local rates that are due from the company for not more than one year.

-All government rent in arrears for not more than one year.

-Wages and salaries payable to the servants of the company up to four months preceeding winding
up.

-The amount payable under the NSSF and NHIF Act.

-Any amount payable under the work injury benefit Act.

(c) Secured creditors will be paid next-this refers to creditors whose debts were secured by
the assets of the company.

Secured creditors have a number of options during liquidation process. These options are

-They can rely on the security and not proof the debt.

-They arise the security and proof the balance with the liquidator.

-You can value the security and proof th balance with the liquidator
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-Surrender security to the liquidator and proof all the debts .

(d)unsecured creditors are paid next

This are creditors whose debts are not secured by the assets of the company

(e)Deffered debts

This refers to debts that the company owes to its members in the capacity as members.For example
dividends that were declared but have not been paid at the time the company went into liquidation

(f)if there is any balance or surplus then it is distributed to the members as return and
dividends.

(iv) avoidance of floating charges

Where a floating charge was created within a period of 12 months before the commencement of
winding up can be avoided by the liquidator unless it is proved that it was created at a time when
the company was solvent.

Offences relating to liquidation

(i)Fraudulent preference

This refers to any action which gives a creditor an undue advantage over the other creditors by
putting the creditor in a position that is better than they should be at a time when the company is
unable to pay its debts .

(ii) Fraudulent trading

This is where a director or employee of the company allows the company to continue to carry out
its business with an intention of defrauding the creditors or for any fraudulent purpose.
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(iii)misfeasance

This refers to wrongful performance of a normally lawfully duty or action.

Misfeasance proceedings can be brought against a director ,a promoter,a manager ,a liquidator or

an employee of the company in order to recover any losses or property belonging to the company.

Examples of misfeasances

-misuse of company’s asets for personal gain

-misappropriation of company’s funds

-Abuse of authority and power

-Stealing of company’s assets

-Directors making secret profit

(iv)Concealing any part of the company’s property

(v)Destroying company’s official documents

(vi)Making false entries into the company’s documents

(vii)failure to handover property and documents to the liquidator

(viii)Making false representations to the liquidator

(ix)Deliberately making omissions in the company’s financial statements

(x)Failure to provide information as may be requested by the liquidator.

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Chapter fourteen

FOREIGN COMPANIES

When a foreign company may carry on business in Kenya

A foreign company shall not carry business in Kenya unless

-It is registered

-It has applied to be so registered and the application has not been dealt with within the period
prescribed for the purposes of this Act.

Carrying on a business in Kenya includes (but is not limited to)

-Offering debentures in Kenya or

-Being a guarantor for debentures offered in Kenya .

Procedure for registration of foreign companies

A foreign company that wishes to be registered as a foreign company shall lodge with the registrar
an application that is in accordance with the Act.

The registrar shall approve the application for registration and register the company by entering
its name and other particulars in the foreign companies register if the application

-Contains the information prescribed by the regulations for the purposes of the Act.

-Demonstrates that at least 30% of the company’s shareholding is held in Kenyan citizen by birth

-It is accompanied by the prescribed fee ,if any ,and the required documents

-Complies with the requirements of the act with respect to the company’s name and the
appointment of the local representative.

Documents required to accompany the applications are

-A certified copy of the current certificate of the foreign company’s incorporation or registration
in its place of origin or a document of similar effect.

-A certified copy of its constitution

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-A list containing the names of its directors and shareholders and their personal details

-If that list includes directors who

resides in kenya

are members of a local board of directors a memorandum that is duly executed by or on behalf of
the foreign company and states the powers of those directors

-in relation to each existing charge on property of the foreign company that would be registrable
charge if the foreign company were a company formed and registered under the Act ,the documents
that would be required to be lodged for registration with the registrar under the act.

-Notice of the address of a registered office or its principal place of business in its place of origin

-Notice of the address of its registered office

On registering a foreign company the registrar shall

(a)Allocate a unique identifying number to the company

(b)Issue to the company a certificate of registration which states

-The name of the company and its unique identifying number and the fact that the company is
registered under this Act as a foreign company

-The date of its registration as a foreign company and the date of its incorporation in its place of
origin

-Such other particulars (if any) as are prescribed by the regulations for the purpose of Act

The registrar will sign the certificate and authenticate it with the registrar’s official seal.

The certificate is conclusive evidence that the requirements of the Act relating to the registration
of foreign companies have been complied with and that the company is duly registered as a foreign
company under the Act.
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Requirements with respect to name of foreign companies

The name of such a foreign company can be

(a)The name of the company name under the law of the country or territory in which it is
incorporated or

(b)An alternate name specified in accordance with the law

A foreign company that wishes to be registered may ,at any time ,lodges with the registrar for
registration a statement specifying a name other than its corporate name ,under which it proposes
to carry on business in Kenya.

A foreign company that has registered an alternative name may at any time ,lodge with the registrar
for registration ,a statement specifying a different name under which it proposes to carry on
business in Kenya,which may b its corporate name or a further alternative ,in substitution for the
name previously registered.

If a foreign company is registered with an alternate name as provided by this section,that name is
for all purposes of the law applying in Kenya the corporate name of the company.

On registering a change in a registered foreign company’s name ,the registrar shall issue to the
company a certificate ,under the registrar’s common seal and in the prescribed form,certifying the
company’s registration with that name.

Local representatives of foreign companies

The registrar may not register a foreign company unless the company has at least on local
representative in relation to whom the foreign company has complied with the prescribed
requirements of the foreign companies regulations relating to the local representatives of foreign
companies.

Regulations of registered foreign companies carrying on business in Kenya

Particulars of places of businesses of registered foreign companies to be notified to registrar
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A registered foreign company shall not carry on business at a place in Kenya unless the company
has lodged with the registrar for registration a notice containing the prescribed particulars of that
place.

Registered foreign companies have a registered office

A registered foreign company shall establish and maintain a registered office in kenya to which all
registered office communications and notices may be addressed.

The company shall ensure that its registered office is kept open on each business day.

And the local representative of the company is present at all the times when the office is open.

Registered foreign company to display its name at office and places of business
A registered foreign company shall paint or affix and keep painted or affixed .in a conspicuous
position and in letters easily legible ,on the outside of every office and place (including its
registered office )that is in Kenya ,at which its business is carried on and that is open and accessible
to the public

-Its name and the name of its place of origin

-If the liability of its members is limited and the last word is neither the word “limited” nor the
abbreviation “ltd”-notice of the fact that the liability of its members is limited and

-In case of its registered office –the expression “registered office”

Registered foreign company to give notice of certain changes relating to its constitution
,directors and business in Kenya may 2019

A registered foreign company shall,within one month lodge with the registrar for registration a
notice of particulars of the change in relation to any of the following

-Its constitution or any other document lodged in relation to the company

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-Its directors

-The powers of the directors who reside in Kenya and members of a Kenya board of directors of
the company

-A local representative or local representatives

-The name or address of a local representative

-The location of its registered office or its principal place of business in place of origin

Copies of registered foreign company’s financial statements and other documents to be

lodged with registrar
A registered foreign company shall,at least once in every calendar year and at intervals of not more
than fifteen months ,lodge a copy of its financial statement made up to the end of its last financial
year,in such form and containing such particulars ,and including copies ,as the company is required
to prepare by the law for the time being applicable to that company in its place of origin ,together
with a statement in writing,supported by a statutory declaration ,verifying that the copies are true
copies of the documents so required.

Registered foreign companies to lodge certain returns with registrar

If any alteration is made in

(a) The charter ,statutes or memorandum and articles of a foreign company or any such
instrument as a foresaid.
(b) The directors or secretary of a foreign company or the particulars contained in the list of
the directors and secretary.
(c) The names or postal addresses of the persons authorized to accept service on behalf of a
foreign company,the company shall ,within sixty days ,deliver to the registrar for
registration a return containing the prescribed particulars of the alteration.
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Circumstances in which name of registered foreign company can be struck off or

restored to registrar of foreign companies
Within one month after a registered foreign company has ceased to carry on business in Kenya
,each person who ,on the day when the company’s business in Kenya ceased ,was a local
representative of the company in Kenya shall lodge with the registrar for registration a notice to
that effect.

As soon as practicable after receiving a notice the registrar shall strike the foreign company’s name
off the foreign companies register

If a foreign company ‘s name is strike off the register the company ceases to be registered under
this act.

If the foreign company is placed in liquidation in its place of origin –

(a)each person who,on the day when the liquidation proceedings began was a local representative
of the company in Kenya shall ,within one month after the day ( or within that period as extended
by the registrar in special circumstances),lodge with the registrar-

I wish you all the best in

your examination
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