Company Law

COMPANY LAW

STUDY TEXT

PAPER NO.11

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Copyright

ALL RIGHTS RESERVED.

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any

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the copyright owner. This publication may not be lent, resold, hired or otherwise disposed of in anyway of trade

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ISBN NO: 9966-760-20-2

© 2009 STRATHMORE UNIVERSITY PRESS

First Published 2009

STRATHMORE UNIVERSITY PRESS

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Nairobi, Kenya.

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AcknowledgmentWe gratefully acknowledge permission to quote from the past examination papers of Kenya

Accountants and Secretaries National Examination Board (KASNEB).

ACKNOWLEDGMENT

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Table of ContentsAcknowledgment ..................................................................................................................... iii

Table of Contents .....................................................................................................................v

PART A ..................................................................................................................................... ix

CHAPTER ONE ........................................................................................................................1

NATURE AND CLASSIFICATION OF COMPANIES ................................................................ 3

CHAPTER TWO ......................................................................................................................13

REGISTRATION OF A COMPANY ......................................................................................... 15

PART B ...................................................................................................................................57

CHAPTER THREE ..................................................................................................................59

SHARE CAPITAL ....................................................................................................................61

CHAPTER FOUR ....................................................................................................................93

DEBT CAPITAL ......................................................................................................................95

CHAPTER FIVE ....................................................................................................................109

MEMBERSHIP OF A COMPANY .......................................................................................... 111

CHAPTER SIX ......................................................................................................................125

SHARES ................................................................................................................................127

PART C .................................................................................................................................147

CHAPTER SEVEN ................................................................................................................149

MEETINGS ............................................................................................................................151

CHAPTER EIGHT .................................................................................................................170

DIRECTORS .........................................................................................................................173

CHAPTER NINE ....................................................................................................................195

THE SECRETARY .................................................................................................................197

CHAPTER TEN .....................................................................................................................215

AUDITORS ............................................................................................................................217

CONTENTS

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PART D .................................................................................................................................229

CHAPTER ELEVEN ..............................................................................................................231

COMPANY ACCOUNTS, AUDIT AND INSPECTION ........................................................... 233

CHAPTER TWELVE .............................................................................................................245

CORPORATE INSOLVENCY ................................................................................................ 247

CHAPTER THIRTEEN ..........................................................................................................279

ALTERNATIVES TO WINDING UP ....................................................................................... 281

CHAPTER FOURTEEN ........................................................................................................295

COMPANIES INCORPORATED OUTSIDE KENYA ............................................................. 297

PART E ..................................................................................................................................307

CHAPTER FIFTEEN ..............................................................................................................309

ANSWER BANK ................................................................................................................... 311

GLOSSARY ...........................................................................................................................379

INDEX ....................................................................................................................................385

REFERENCES ......................................................................................................................389

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PART A

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CHAPTER ONE

NATURE AND CLASSIFICATION OF COMPANIES

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CHAPTER ONE

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CHAPTER ONE


OBJECTIVES

By the end of this chapter, the student should be able to:

• Explainthevariousformsofbusinessorganisations• Distinguishthecompanyfromotherformsofbusinessorganisations• Explainthelawrelatingtootherformofbusinessorganisationssuchascooperatives

INTRODUCTION

Thischapterstartsbyappreciatingthatbesidesthecompanythereareotherformsofbusinessassociations, such as cooperatives, partnerships and sole proprietorships. It then distinguishes theseother formsof businessassociations from thecompany,which isourmain focus.Thechapterthengoesaheadtolookatthelawgoverningotherformsofbusinessassociationswithspecial attention to cooperative societies.

KEY DEFINITIONS

• Soleproprietorship:Simplestformofbusinesswhatisalsocalledonemanbusiness• Partnership: A business owned by a minimum of two and a maximum of twenty

people• Cooperative:An association in which people pool their resources for their common

good• Incorporatedassociation:Anartificialpersonthathasalegalidentity• Limitedliability:Thisisacompanywherebyanyliabilitymembersintimesofliquidation

ofthecompanyislimitedtotheamountsifanyunpaidonmember’sshares

EXAM CONTEXT

This is one of the new chapters that the examiner has added to the revised curriculum. It is importantthatthestudentunderstandsthevariousformsofbusinessassociationsandhowtheydifferfromthecompany.Thiswillenablethestudenttobeinapositiontorespondtoanyquestionintheformofdifferencesorevensimilaritiesthatexistamongthevariousformsofbusiness.Thestudentwillalsobeabletoidentifywhatlawsgoverntheotherformsofbusinessassociations

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INDUSTRY CONTEXT

Thisisaverypracticalchapterasitrecognisesthatthereareotherformsofbusinessorganisationsotherthanthecompany.Thesedifferentformsofbusinessassociationsareapartandparcelofour daily lives. There are so many companies, sole traders, partnerships and even co-operatives inexistence.Thecooperativebank isagoodexampleofacooperativesociety,whilemobileservices provider Safaricom is an example of a limited company.

1.1 FORMS OF BUSINESS ORGANISATIONS

>>>>>> Fast forward

• Soleproprietorshipalsosoletrader-onemanbusiness• Partnership-businessconsistingofbetweentwoto20peopleownedbusiness• Company-Alegalpersonhasdutiesandrights• Cooperative–“Harambee”(Poolingresources)

Abusinessisanyactivitycarriedonforthepurposeofmakingaprofit.Abusinessmayinclude the following activities:

• Commerciale.g.runningashoporkiosk• Agriculturale.g.farming• Directservicese.g.barber,tailor

There are four main forms of business associations in Kenya, though there may be others in existences, which are beyond the scope of this book. These forms are:

• Soleproprietorship/soletrader• Partnership• Companies• Cooperative

1. SOLE TRADER

Thisbusinessisownedandcontrolledbyoneperson.Theownerisincompletecontrolandthusreceivesallprofitsandsuffersalllosses.It’sveryeasytostartasallthatoneneedsiscapitalandatradinglicenseobtainedfromtherelevantlocalauthority.Thisformofbusinessisfoundinretailtradeandserviceindustriessuchashaircutting,plumbing,painting,kiosks,andvegetablesamong others.

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ADVANTAGES

1. Ownerreceivesallprofitsandisincompletecontrolofthebusiness2. It has no major legal and administrative formalities in starting as all one requires is a

trading license3. A sole trader is his own master and thus makes all decisions, he does not have to consult

anotherperson,whichtendstodelaydecisionmakinginotherbusinessentities.

DISADVANTAGES

1. Owner has to provide all the capital2. Ownerbearsandsuffersallthelosses3. Ownerhastoworkforlonghourstoincreaseprofitsandthisinthelongrunaffectshis

health4. Thereisnoscopeinsharingideasfortheimprovementofthebusiness

2. PARTNERSHIP

Thisisabusinessisownedbyatleasttwopeopleormorebutnotmorethan20people.Section3(1)ofthePartnershipActdefinesaPartnershipastherelationship,whichsubsistsbetweenpersonscarryingonabusinessincommonwithaviewtomakeaprofit.

Under Kenyan law there are two types of Partnerships, namely General and Limited. The General partnershipoperatesquitesimilarlytoasoletraderbutinaLimitedpartnershiptheliabilityofthepartners is limited. A partnership deed regulates the relationships among the partners.

ADVANTAGES

1. Partnersprovidecapitalontermsagreed.Theysharethenetprofitorbearthelossesin proportions as set out in the partnership agreement

2. Morecapitalisavailableandthereisascopeofexpandingbusiness3. Sharingofideasbythepartnersleadstogrowthandimprovementofbusiness

DISADVANTAGES

1. Disagreementamongpartnerssometimescanruinthebusiness2. Business may stop temporarily after death of one of the partners.

3. COOPERATIVE SOCIETIES

This isanassociationofpeoplewhocome togetherwithacommonobjective. It isa formofself-helporganisation.It’sformedbyatleast10peopleandthereisnomaximummembershipisopentoanynumberofpeoplerequiredtostartacooperativesociety.Membersholdsharesinthe society


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STRUCTUAL FRAMEWORK OF THE COOPERATIVE

MOVEMENT IN KENYA

The structural framework of the cooperative is organised in a four-tier system consisting of:

• ThePrimary thishasbeendefinedasa cooperative societywhosemembership isrestricted to individual persons. Examples include

1. HarambeeCooperativeSavingsandCreditSocietyLimited,formedbythe employeesoftheOfficeofthePresident 2. AfyaCooperativeSavingsandCreditSocietyLimited,formedbyemployeesofthe

MinistryofHealth• The secondary this is a cooperative whose membership comprises Primary

societies.• The National Cooperative Movement (NACOS) The NACCOS offer specialised

servicestotheiraffiliates.

The services include insurance and banking currently there are nine NACCOS, namely:

• CooperativeBankofKenya• KenyaUnionofSavingsandCreditCooperativeLimited(KUSCCO)• NationalHousingcooperativeunionLimited(NACHU)• KenyaCooperativeCreameries(KCC)• KenyaPlantersCooperativeUnionLtd.(KPCU)• KenyaFarmersCooperativeAssociationLimited(KFA)• CooperativeDataandInformationCentre(CODIC)• CooperativeInsuranceCompanyLimited(CIC)• The Apex organisation: The apex organisation in Kenya is the Kenya National

Federation of Cooperatives. It is the mouthpiece for Kenyan cooperatives to preserve andpropagate(bothinthecountryandabroad)thecooperativeprinciplesandvalueson which the movement was founded.

Themovementcutsacrossallsectorsincludingfinance,agriculture,livestock,housing,transport,construction and manufacturing and consumer industry. The concentration is however within agriculture and finance sectors. In theagriculture sector cooperativesare largely involved inmarketingofAgriculturalproduce.Thefinancialsub-sectorprovidessavingsandcreditfacilitiesto their members. Cooperatives also provide transportation, bookkeeping, stores for resale,education and training.

BENEFITS OF COOPERATIVE ORGANISATIONS

Basically cooperatives are vehicles for social economic development. They contribute toeconomicgrowthanddevelopmentinmanyways.Themajorbenefitsthatcomeoutofcooperativeorganisationscanbesummarisedasfollows:

1. Collection, transportation, processing and marketing agricultural produce.2. Mobilisationofsavingsandchannellingtheincomeofindividualmemberstospecific

development projects3. Supporttoagriculturalproductionthroughdistributionoffarminputs

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4. Disseminationofappliedtechnologytomembers5. Assistinginincomedistributionbyparticipationthroughenablinglargesectionsofthe

population to engage in various income generating economic activities6. Provisionofcredittomembersfordefrayingurgentexpensesataffordableratesand

costs7. Creatingemploymentdirectlythroughhiringofvariouscadresofstaffbesidesproviding

self-employment for farmers, artisans among others.

1.2 DISTINCTION BETWEEN COMPANIES AND OTHER FORMS OF

BUSINESS ORGANISATIONS

Fast Forward

Themaindistinctionbetweenacompanyandother formsofbusinessorganisations is tobefoundinthetwofundamentalprinciplesofcompanylawasdiscussedbelow:

• Legal/Corporatepersonality• Theoryoflimitedliability

1. Legal/Corporate personality

Fast forward:

Ø A company is a legal person distinct and separate from the subscribers to thememorandum

Ø Acompanythushasrightsanddutiessimilartothoseofhumanbeings

Thisprincipleholdsthatwhenacompanyisincorporateditbecomesalegalpersondistinctandseparatefromitsmembersandmanagers.Itbecomesabodycorporatewithanindependentlegalexistencewithlimitedliability,perpetualsuccession,capacitytocontract,ownpropertyandsueorbesued.TheprincipleoflegalpersonalitywasfirstformulatedbytheHouseofLordsinits famous case of Salomon v Salomon and Company limited where Lord Macnaghten was emphaticthatthecompanyisatlawadifferentpersonfromthesubscriberstothememorandum.Thisprincipleisnowcontainedinsection16(1)oftheCompaniesActwhichprovidesinter alia thatfromthedateofincorporation,thesubscriberstothememorandumtogetherwithsuchotherpersonsthatmaybecomemembersofthecompanyareabodycorporatebythenamecontainedinthememorandumcapableofexercisingthefunctionsofanincorporatedcompanywithpowerto hold and having perpetual succession and a common seal.

The decision in Salomon’s case lay to rest certain principles:

1. That even the so called one man companies were legal persons distinct and separate fromthemembersandmanagers

2. Thatincorporationwasavailablenotonlytolargecompaniesbuttopartnershipsandsole proprietorships as well

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2. Theory of limited liability

Liabilitymeanstheextenttowhichapersonmaybecalledupontocontributetotheassetsofthecompanyintheeventofwindingup.Incompanylaw,theliabilityofmembersmaybelimitedorunlimited.Iflimiteditmaybelimitedbysharesorbyguaranteeasshallbeexplainedlaterinthis chapter.

Wethenpayattentiontothemaindifferencesbetweenacompanyandapartnership.Thebasicdifferencesbetweenregisteredcompaniesandpartnershipsareasfollows:

(a) Formation Registration is the legal pre-requisite for the formation of a registered company: Fort

Hall Bakery Supply Co v Wangoe(1). The Partnership Act does not prescribe registration as a condition precedent to

partnership formation. A partnership may therefore be formed informally or, if thepartners deem it prudent, in writing under a Partnership Deed or Articles.

(b) Legal Status Aregisteredcompanyenjoysthelegalstatusofabodycorporate,whichisconferredon

itbytheCompaniesAct. Apartnershipisnotabodycorporateandisnon-existentinthecontemplationofthelaw.

Suchbusinessasappearstobecarriedonbyitis,infact,carriedonbytheindividualpartners.

(c) Number of Members A registered private companymust have at least twomembers under section 4 of

the CompaniesAct and amaximum of 50members (excluding current and formeremployeesofthecompanywhoarealsoitsmembers),undersection30oftheAct.Apublicregisteredcompanymusthaveatleastsevenmembersundersection4oftheCompaniesActbutwithoutaprescribedupper limit.Apartnershipcannotconsistofmorethan20partners.

(d) Transfer of Shares Sharesinaregisteredcompanyarefreelytransferableunlessthecompany’sarticles

incorporate restrictive provisions.

Apartnershiphasnosharesassuchbutapartnercannottransferhisinterestinthefirmto a third party unless all the partners have agreed to the proposed transfer.

(e) Management A company’s members have no right to participate in the company’s day-to-day

management.Suchmanagementisvestedintheboardofdirectors.

Partnershavetherighttoparticipateinthefirm’sday-to-daymanagementsincesection3ofthePartnershipActrequiresthebusinesstobecarriedon“incommon”.Theright

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ofparticipationinthefirm’smanagementis,howevernotgiventoapartnerwhohaslimitedhisliabilityforthefirm’sdebts.

(f) Agency Amemberisnot,per se, an agent of the company (Salomon v Salomon & Co Ltd

(3).Apartnerisanagentofthefirmbecausethebusinessiscarriedon“incommon”by thepartners themselves.ThePartnershipAct, section7 also expressly providesthateverypartnerisanagentofthefirmandhisotherpartnersforthepurposeofthepartnership.

(g) Liability of members Acompany’smemberisnotpersonallyliableforthecompany’sdebtsbecause,legally,

theyarenothisdebts.

Apartnerispersonallyliableforthefirm’sdebts.Thisrulehasbeencodifiedbysection11ofthePartnershipAct,whichprovidesthat“everypartnerinafirmisliablejointlywiththeotherpartnersforalldebtsandobligationsofthefirmincurredwhileheisapartner”,unless the partner is a limited partner.

(h) Powers Theultraviresdoctrinelimitsacompany’spowerstotheattainmentofthecompany’s

objectsunderitsmemorandumofassociation.Partnershipsarenotaffectedbytheultraviresdoctrineandpartnersenjoyrelativefreedomtodiversifythefirm’soperations.

(i) Termination A member’s death, bankruptcy or insanity does not terminate the company’s legal

existence whereas a partner’s death, bankruptcy or insanity may terminate thepartnership unless the partnership agreement provides otherwise.

(j) Borrowing money A company can borrow on the security of a “floating charge”.A partnership cannot

borrowona“floatingcharge”. (k) Ownership of property A company’s property does not belong to the shareholders, either individually or

collectively. Consequently, a member cannot insure the property since he has noinsurableinteresttherein:Macaura v Northern Assurance Co(4).Afirm’spropertyisthe property of the partners who can, therefore, insure it and, in the case of cash, make drawings from it.


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1.3 LAW RELATING TO OTHER ORGANISATIONS

COOPERATIVES

CooperativesinKenyaaregovernedbytheCooperativeSocietiesActChapter490ofthelawsofKenyaenactedin1966.TheyarealsogovernedbytheCooperativeSocietyRulesenactedin1969.The rules provided for the following matters:

1. Registration of cooperatives and maintenance of related documents2. Contentsofby-lawsandamendmentprocedures3. Societymembership4. Maintenanceofbooks5. Servicestoberenderedbydistrictcooperativeunions6. Financial control through meetings7. Property and funds of the society8. Arbitration

PARTNERSHIPS

The law relating to partnerships in Kenya is contained in the Partnership Act Chapter 29 of the laws ofKenyaandtheLimitedPartnershipActchapter30ofthelawsofKenya.ThePartnershipActisbasedontheEnglishPartnershipAct1890.Thesetwostatutescodifythelawonpartnershipsin Kenya.

CHAPTER SUMMARY

Thereare fourmain formsofbusinessassociations inKenya, thoughtheremaybeothers inexistence,whicharebeyondthescopeofthisbook.Theseformsare:

• Soleproprietorship/soletrader• Partnership• Companies• Cooperative

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The structural framework of the cooperative is organised in a four-tier system consisting of:

The primary

The secondary

The National Cooperative Movement (NACOS)

The apex organisation

Themajorbenefits thatcomeoutofcooperativeorganisationscanbesummarisedasfollows:

8. Collection, transportation, processing and marketing agricultural produce.9. Mobilisationofsavingsandchannellingtheincomeofindividualmemberstospecific

development projects10. Supporttoagriculturalproductionthroughdistributionoffarminputs11. Disseminationofappliedtechnologytomembers12. Assistinginincomedistribution,byparticipation,throughenablinglargesectionsofthe

population to engage in various income generating economic activities.13. Provisionofcredittomembersfordefrayingurgentexpensesataffordableratesand

costs14. Creatingemploymentdirectlythroughengagingvariouscadresofstaffbesidescreating

self-employment for farmers, artisans among others.Themaindistinctionbetweenacompanyandother formsofbusinessorganisations is tobefound in the two fundamental principles of company law

Legal/Corporate personality

Theory of limited liability

CooperativesinKenyaaregovernedbytheCooperativeSocietiesActChapter490ofthelawsof Kenya enacted in 1966

The law relating to partnerships in Kenya is contained in the Partnership Act Chapter 29 of the lawsofKenyaandtheLimitedPartnershipActChapter30ofthelawsofKenya

CHAPTER QUIZ

1.Nametwoformsofbusinessorganisations

2. What are the two fundamental principles of company law?

3.Whatisthemaximumnumberofpersonsinasoletrader?

4.WhatchapternumberofthelawsofKenyaistheCooperativesSocietiesAct?


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ANSWERS TO QUIZ

1. Sole proprietorship and partnership 2. LimitedliabilityandLegalpersonality 3. One(1) 4. 490

SAMPLE OF EXAM QUESTIONS

QUESTION ONE

DiscussanyfourformsofbusinessassociationspresentinKenyatoday

QUESTION TWO

WhatarethemaindifferencesbetweenapartnershipandacompanyinKenya?

QUESTION THREE

Discuss the various laws governing cooperatives and partnerships.

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CHAPTER ONE

REGISTRATION OF A COMPANY

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CHAPTER TWO


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CHAPTER TWOREGISTRATION OF A COMPANY

OBJECTIVES


• Appreciate the legal principles relating to the nature and registration of companies• DescribethecontentsandnatureoftheMemorandumandArticlesofAssociation• Explain the effect of legal personality• Give instances when the veil of incorporation is lifted• Explain the role and duties of promoters• Explaintheliability of promoters for pre-incorporation contracts• Explain the doctrine of ultra vires

INTRODUCTION

This chapter mainly deals with formation of a company that is the procedures that those who wishtoformacompanyshouldfollowinordertobeincorporated.Itoutlinesalltheformalitiesincludingdocumentstobeprepared.Itlaterfocusesonpromoterswho,simplyput,arechargedwiththeresponsibilityofensuringalltheformalitiesareinplace.

KEY DEFINITIONS

• Incorporatedassociation:Anartificialpersonthathasalegalidentity

• Limitedliability:liabilityofmembersislimitedtotheamountsifanyunpaidontheirshares

• Ultravires-ALatintermwhichmeansbeyondthecontractingpowersofacompany

• Articles of Association - A document which regulates the internal affairs of a company

• Memorandumofassociation - A document which regulates the affairs of the company and outsiders

• Naturalperson-Anindividual/humanbeing

• Artificialperson -Apersoncreatedby law through theprocessof incorporation inother words incorporated associations.


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EXAM CONTEXT

Theexaminerhastendedtobeveryfondofthistopicincertainyearsthaninothers.Beingthetopicthatbringsthecompanyintoexistenceunderstandingitwillbecrucialinunderstandingoftheotherchaptersaswell.Between2000and2002theexaminersetmanyquestionsfromthisarea.Abriefanalysisshowedthatthetopicwasbeingfeaturedinthefollowingsittings12/01;12/00;07/00;12/00;06/12;05/02;06/01(year,month)

INDUSTRY CONTEXT

Apart from Memorandum and Articles of Association, Statement of Nominal capital and Declaration ofCompliance.Thedocumentsidentifiedbelowthem,mustinlaw,bedeliveredtotheregistrarwithin 14 days after the registration of the company.

2.1 REGISTRATION PROCEDURES

Undersection4(1)oftheCompaniesActanysevenormorepersons,orwherethecompanytobe formed isPrivateany twoormorepersons,associated forany lawfulpurposemaybysubscribingtheirnamestotheMemorandumofAssociationandbycomplyingwiththeprovisionsoftheActformanincorporatedcompanywithorwithoutlimitedliability.

PRIVATE COMPANY

Inordertosecuretheregistrationofaprivatecompany,theproceduredescribedaboveisfollowedexcept that theMemorandumofAssociationwill besignedbyat least twoof thecompany’spromoters.

(b) FormNo209and210arenotdeliveredforregistrationbecausesection182(5)oftheActexemptspromotersofaprivatecompany from theobligation todeliver them forregistration.

(c) IfArticlesofAssociationarenotdelivered for registration, theprovisionsofPart IofTableAwillbecomethecompany’sArticles,asmodifiedbyPartIIthereof.

Under Section 30 (1) a private company has the following characteristics:

• Numberofmembers is limited to50excludingcurrentand formeremployeesof thecompanywhoaremembers

• Transfer of shares is restricted• AnyinvitationtothePublictosubscribeforsharesisprohibited• Must have at east one director• It’sentitledtostartbusinessoperationsonthedateofincorporation

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• It’sempoweredtogiveloanstoitsdirectors• It’snotentitledtopublishannualaccounts• It’snotobligedtoholdstatutorymeetings

SIGNIFICANCE OF REGISTRATION

Section389providesthat“nocompany,associationorpartnershipconsistingofmorethan20personsshallbeformed...unlessitisregisteredasacompanyunderthisAct”.TheprovisionhasbeeninterpretedbytheEnglishandKenyancourtstotheeffectthatregistrationistheconditionprecedent to the formation of a registered company and failure to register a proposed company will mean that it does not legally exist: Fort-HallBakerySupplyCovWangoe(1).

EFFECT OF REGISTRATION

Section16(2)oftheActprovidesthat“fromthedateofincorporationmentionedinthecertificateofincorporationthesubscriberstotheMemorandumofAssociation...shallbeabodycorporatebythenamecontainedintheMemorandum”.Thissectionhasbeenjudiciallyexplainedasfollows:

(a) The datementioned (i.e. written) in the certificate of incorporation is the date fromwhichthecompany’s legalexistencecommences.Consequently, ifanincorrectdatewerewritteninthecertificate,thatdatewouldberegardedastheactualdateonwhichthecompanywasregistered.ThislegalpositionwasexplainedbytheHouseofLords,under the English Companies Act whose provisions in this regard are identical to section 16(2)oftheKenyaCompaniesAct,inthecaseofJubilee Cotton Mills v Lewis(2)

(b) Thecompany’s registrationconstitutes itas “abodycorporate”. Itbecomes “a legalperson”,or“corporacorporata”,whosenameisthenamechosenforitbyitspromotersandwritten in itsMemorandumofAssociation.The certificate of incorporationmay,therefore,beregardedasthecompany’sbirthcertificate and the date written therein as thecompany’sbirthday.

Theconceptofaregisteredcompanyas“aperson”wasconsummatedinthecelebratedcaseofSalomon v Salomon & Co Ltd (3).

2.2 THE COMPANY’S CONSTITUTION

The constitution of a registered company consists of two documents, namely, the Memorandum ofAssociationand theArticles ofAssociation.The contents of thesedocumentswill nowbeexamined in detail.



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THE MEMORANDUM OF ASSOCIATION

Definition

In relation to companies registered under the Companies Act, a Memorandum of Association was judiciallydefinedbyLordCairnsinAshbury Railway Carriage Co Ltd v Richeas“thecharter”which“definesthelimitationofthepowersofacompanytobeestablishedundertheAct”.

Contents

ThecontentsofaMemorandumofAssociationareprescribedbySection5oftheCompaniesActand comprise the following six clauses:

(a) Nameclause(b) Registeredofficeclause(c) Objectsclause(d) Limitationofliabilityclause(e) Capital clause (f) Associationclause

The“Associationclause”isnotprescribedbySection5butismentionedasoneoftheclausesinTableBinthefirstScheduletotheAct.

Statutory Form

Section 14 of the Act provides that the form of the Memorandum of Association of a company that islimitedbysharesshallbeinaccordancewiththeformsetoutinTableB,orasneartheretoascircumstancesadmit.TableBisreproducedonthenextpage.

TABLE B

FORM OF MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY SHARES

1st—Thenameofthecompanyis“TheLakeVictoriaSteamPacketCompanyLimited”.

2nd—TheregisteredofficeofthecompanywillbesituateinKenya.

3rd—Theobjectsforwhichthecompanyisestablishedare,“theconveyanceofpassengersandgoodsinshipsorboatsbetweensuchplacesasthecompanymayfromtimetotimedetermine,andthedoingallsuchotherthingsasareincidentalorconducivetotheattainmentoftheaboveobject”.

4th—Theliabilityofthemembersislimited.

5th — The share capital of the company is two hundred thousand shillings divided into one thousand shares of two hundred shillings each.

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We, theseveralpersonswhosenamesandaddressesaresubscribed,aredesirousofbeingformed into a company, in pursue of this memorandum of association, and we respectively agree totakethenumberofsharesinthecapitalofthecompanysetoppositeourrespectivenames.

Names, Postal Addresses, and Number of shares Signature of subscriber Taken by each Subscriber

Occupation of Subscribers

1

2

3

4

5

6

7

Total Shares taken

Dated the ........................................ day of ........................................, 19.....

Witnesstotheabovesignatures

Table B is taken from the English CompaniesAct 1862 and has beenmodified in practice,especially as regards the 3rd clause.

THE NAME CLAUSE

Choice of Name

Thepromotersofaproposedcompanyhave freedomtochoose itsnamebut the freedom islimitedbysection19(2)oftheAct,whichprovidesthataproposednamemustnot,intheopinionoftheregistrar,beundesirable.Theregistrarofcompanieshasnotissuedacircularexplainingthe criteria he is likely to use when deciding, in a particular case, whether a proposed name is undesirableunderthesection.However,itmightberelevanttonotethattheregistrarofEnglishcompanies, pursuant to his powers under the corresponding section of the English Companies Act 1948, issued Practice Note No C 186 in which he stated that he would normally regard a proposednameasundesirableif:



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i. It is too similar to the name of an existing company.

ii. It is misleading, for example, if the name of a company likely to have small resources suggeststhatitisgoingtotradeonagreatscaleoverawidefield.

iii. ItsuggestssomeconnectionwiththecrownormembersoftheRoyalFamilyorroyalpatronage, including names containing such words as “Royal”, “King”, “Queen”,“Princess”and“Crown”.

iv. It suggests connection with a government department or any municipality or other local authorityoranybodyincorporatedbyRoyalCharterorbystatuteorwiththegovernmentof any part of the Commonwealth or of any foreign country.

v. Itcontainsthewords“British”,unlesstheundertakingisBritish-controlledandentirelyoralmostentirelyBritish-ownedand isalsoofsubstantialsizeand importance in itsparticularfieldofbusiness.

vi. Itincludes“Imperial”,“Commonwealth”,“National”,“International”,“Corporation”,“Co-operative”, “Building Society”, “Bank”, “Bankers”, “Banking”, “Investment Trust”, or“Trust”,unlessthecircumstancesjustifytheinclusion.

vii. It includes a surname, which is not that of a proposed director, unless the circumstances justify the inclusion.

viii. Itincludeswords,whichmightbetrademarks,unlessatrademarkclearancehasbeenobtained.

It isprobablythattheregistrarofCompaniesinKenyaisguidedbytheaboverules,modifiedmutatis mutandis,whendecidingonthedesirabilityofanyproposedname.

Reservation of Name

Toobviatetheriskofchoosinganamethatultimatelyturnsouttobeundesirable,thepromotersshouldenquirefromtheregistrarwhetherthenametheyintendtogivethecompanyis“toolike”thatofa companyalready in the registerof companies.Afterobtainingconfirmation that thenameisaregisterableonetheyshouldimmediatelymakeawrittenapplicationforitsreservationundersection19(1)(a)oftheAct.Anysuchreservationshallremaininforceforaperiodof30daysorsuchlongerperiod,notexceeding60days,astheregistrarmay,forspecialreasons,allow.Noothercompanyshallbeentitledtoberegisteredwiththereservedname.

Thesestatutoryprovisionsregardingthechoiceofacompany’snameareintendedtoconfer,onthecompany,legalmonopolyofitsname.Becauseitlacksphysicalattributes,whichcouldassistits customers to differentiate it from another company with a similar name, a company can only rely on the legal monopoly of its name as its ultimate protection against what might constitute unfair instances of passing-off. They also avoid a situation in which two or more companies use onenamewiththeresultantproblemofidentifyingthecompanythatisthecontractingpartyinacommercial transaction.

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Name to end with the word “Limited”

Section5(1)(a)providesthattheword“limited”mustbethelastwordofthenameofacompanywhich is to be limited by shares or by guarantee. In Durham Fancy Goods Ltd v Michael Jackson (Fancy Goods) Ltd Donaldson, J, it is stated:

“Theword“Limited”isincludedinacompany’snamebywayof“description”andnotidentification.Accordingly,agenerallyacceptedabbreviationwillservethispurposeaswellasthewordinfull.Therestofthename,bycontrast,servesasameansofidentification”.

Theuseofthemysticword“limited’asthelastwordofacompany’snameisexplicableonlyinthecontextofthehistoricalevolutionofEnglishCompanylaw.ItwasprescribedforthefirsttimeforEnglishcompaniesin1856bytheJointStockCompaniesActofthatyearand,inthewordsofProfessorGower,“wasintendedtoactasaredflagwarningthepublicofthedangerswhichtheyraniftheyhaddealingswiththedangerousnewinvention”.Amemberofthepublicdealingwithabusinessorganisationwhosenameendedwith“ltd”wastobemadeawarethathewasnotdealingwithapartnershipandsocouldonlyblamehimselfifheburnthisfingersintheprocess.Itsfunctionmaybelikenedtothatoftheringonamarriedperson’sfinger.

Power to dispense with the word “Limited”

Althoughsection5providesthatthelastwordofthenameofalimitedcompanymustbe“limited”,thiswouldnotbesoiftheMinisterempowersthecompanytodispensewithit.TheMinisterwoulddoso“bylicence”ifheissatisfiedthatanassociationabouttobeformedasalimitedcompanyistobeformedforpromotingcommerce,art,science,religion,charityoranyotherusefulobject,anditisintendedthatitsprofits,ifany,orotherincomewouldbeusedinpromotingitsobjectsandthepaymentofanydividendstotheassociation’smembersisprohibited.

Anexistingregisteredcompanymayobtainalicencetomake,byspecialresolution,achangeinitsnamesoastoomittheword“Limited”.Thiscanbedoneonlyafterproving,inter alia, that the companyisformedtopromotecharityandisprohibitedfrompayingdividendstoitsmembers.

A licence may be granted on such conditions as the Minister thinks fit and may, upon therecommendationoftheregistrar,berevokedbyhimsubjecttothecompany’srighttobeheardin opposition to the revocation. A company granted exemption under section 21 of the Act is also exemptfromtherequirementsofsection.109(1)whichrelatetothepublicationofthecompany’sname.

Change of Name

A company’s name may be changed voluntarily or compulsorily

(a) Voluntary Change

A company’s name may be changed voluntarily:

i. Undersection20(1)ifaspecialresolutionispassedbythecompanyforthatpurposeafterobtainingthewrittenapprovaloftheregistrar.Theregistrar’sapprovalisrequiredto ensure that he does not later on reject the proposed name on the ground that it is undesirable.



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ii. Under section 20(2) if the namewas inadvertently registered by a namewhich, inthe opinion of the registrar, is too like thenamebywhichacompanyinexistenceispreviouslyregistered.Noparticulartypeofresolutionisprescribedbythesectionandthechangemay,therefore,bemadebyordinaryresolution.

Although the section does not make it mandatory for the company to change its name, it isadvisableforthecompanytotakeimmediatestepstoeffectthechangeassoonasitbecomesawareofthesituation.Anydelayentailstheriskofapassing-offactionbeinginstituted against the company.

iii. UnderSection21(2)iftheMinister,bylicence,authorisesacompanytomakeachangeinitsname.Thechangehastobemadebyspecialresolutionsoastoomittheword“limited”fromthecompany’sname.

(b) Compulsory Change

Section20(2)oftheActprovidesthatwithinsixmonthsofregistrationunderaparticularname,theregistrarmaydirectachangeinnameif,inhisopinion,thenameis“toolike”thatofapre-existingcompany.Intheeventofsuchdirection,thechangeshallbemadewithinaperiodofsixweeksfromthedateofthedirectionorsuchlongerperiodashemaythinkfittoallow.Achangeofnameunderthissectionmaybemadebyordinaryresolution.

Failuretocomplywiththeregistrar’sdirectiveisanoffencepunishablebyafinenotexceedingKshs.100foreverydayduringwhichthedefaultcontinues.

Afteracompanychangesitsnameunderanyoftheaboveprovisions,itshallgivetotheregistrarnotice within 14 days. Upon receipt of the notice, the registrar shall -

i. Enter the new name on the register in place of the former name,ii. Issuetothecompanyacertificateofchangeofnameiii. PublishthechangeofnameintheKenyaGazette.

Where a company changes its name either voluntarily or compulsorily, the change will not affect anyofitsrightsorobligationsorrenderdefectiveanylegalproceedingsbyoragainstit,andanysuchproceedingsmaybecontinuedorcommencedagainstitbyitsnewname.

Publication of Name

Section109(1)requireseverycompany(exceptoneexemptedundersection21):

(a) Topaintoraffix itsnameinaconspicuouspositionontheoutsideofeveryofficeorplaceinwhichitsbusinessiscarriedonandtokeepitsopaintedoraffixed;

(b) To mention its name on all letters, notices, official publications, bills of exchange,promissorynotes,endorsements,cheques,billsofparcels,orders, invoices,receiptsandlettersofcreditofthecompany;and

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(c) Toengraveitsnameonitsseal,thisshallbeintheformofanembossedmetaldie.

Ifacompanydoesnotpaintoraffixitsnameasprescribed,thecompanyandeveryofficerindefaultareliabletoafinenotexceedingonehundredshillingsandifthecompanydoesnotkeepitsnamepaintedoraffixedasprescribed,thecompanyandtheofficerindefaultshallbeliabletoadefaultfine.

Intheeventoffailuretocomplywith(b)or(c)above,thecompanyandtheofficerresponsibleshallbeliabletoafinenotexceedingKshs.1000andtheofficermaybemadepersonallyliabletoanycreditorwhohasreliedonthedocument,ifthecompanyfailstopay.Thispersonalliabilityhasbeenexplainedinparagraph1.10.1(b)above,under“liftingtheveilofincorporation”.

Business Names

If a company has a place of business in Kenya and carries on business under a businessname which does not consist of its corporate name without any addition, the company must, within28daysaftercommencingbusinessunderthebusinessname,submittotheregistrarofbusinessnamesastatement,calledtheStatementofParticulars,whichcontainsthefollowingparticulars-

(a) Thebusinessname.

(b) Thegeneralnatureofthebusiness.

(c) The full address of the principal place of business and the postal address of thecompany.

(d) Thefulladdressofeveryotherplaceofbusiness.

(e) Thecompany’scorporatenameandregisteredandprincipaloffice.

(f) Thedateofthecommencementofbusiness.

Changesintheregisteredparticulars(otherthan(e)and(f))mustbenotifiedontheappropriateform within 28 days after such change.

Ifthereisadefaultinregistration,thepersonsindefaultareliabletoafineand,unlessthecourtgivesrelief,therightsofthedefaulterinrelationtothebusinessinquestionareunenforceablebythedefaulterbyaction:RegistrationofBusinessNamesAct,section10-11.

Restricted Names

Section 17(1) of the Registration of Business Names Act provides that no company shall be registered under a business name:



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(a) Whichcontainsanywordwhich,intheopinionoftheregistrar,islikelytomisleadthepublicas to thenationality, race,or religionof thepersonbywhom thebusiness iswhollyormainlyownedorcontrolled;

(b) Whichincludesanyofthewords“Imperial”,“Royal”,“Crown”,“Empire”,“Government”,“Municipal”oranyotherword,whichimportsorsuggeststhatthebusinessenjoystheQueen’s patronage or the patronage of anymember of theRoyal Family or of thegovernment;

(c) Whichincludestheword“Co-operative”oritsequivalentinanyotherlanguageoranyabbreviationthereof,or

(d) Whichisidenticalwithorissimilartothatofabusinessorcorporationexisting,orisalready registered under the Act or under the Companies Act, if in the opinion of the registrar,suchregistrationwouldbelikelytomisleadthepublic.

Change of Business Name

Section17(4)oftheRegistrationofBusinessNamesActprovidesthatif-

(a) Anycompanyis,throughinadvertenceorotherwise,registeredunderabusinessnameunderwhichregistrationundertheActoughttohavebeenrefused;or

(b) Anychangeofownershipofabusinessoccursasaresultofwhichacompanycarryingonabusinessunderabusinessname,which,onanapplicationforregistrationundertheAct,oughttohavebeenrefused,theregistrarshall,bynoticeinwriting,requirethecompanytochangesuchbusinessnamewithinatimespecifiedinthenotice.

Theregistrarisempoweredtocanceltheregisteredbusinessnameifthecompanyfailstochangeit after he directed it to do so.

Prohibition

Section18oftheRegistrationofBusinessNamesActprovidesthattheregistrationofacompany’sbusinessnameundertheActshallnotbeconstruedasauthorisingtheuseofabusinessnameif,apartfromsuchregistration,theusethereofcouldbeprohibited.

Publication of True Names

Section 23(1) of the Registration of Business NamesAct provides that a company using abusinessnamedistinct from itscorporatenamemustdisclose itscorporatename inall tradecircularsandbusinesslettersonorinwhichthebusinessnameappearsandwhichareissuedorsentbythecompanytoanyperson.FailuretocomplywiththisprovisionrendersthecompanyguiltyofanoffencepunishablebyafinenotexceedingKshs.1000.

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THE REGISTERED OFFICE CLAUSE

Section5(1)(b)providesthat theMemorandumofAssociationshallstate that“theregisteredofficeofthecompanyistobesituateinKenya”.ThesituationoftheregisteredofficeinKenyafixesthecompany’snationalityasKenyananditsdomicileasKenya,thoughnotitsresidence.Residenceisdecidedbyascertainingwherethecompany’scentreofmanagementandcontrolis.Thus,acompanymayberesidentinanumberofcountrieswhereithasseveralcentresofcontrol in different countries. The residence of a company is important in connection with its liabilitytopaytaxationtotheGovernmentofKenya.

FunctionoftheRegisteredOffice

Section107(1)providesthatacompanyshall,asfromthedayonwhichitbeginstocarryonbusinessorasfromthefourteenthdayafterthedateofitsincorporation,whicheveristheearlier,havearegisteredofficeandaregisteredpostaladdresstowhichallcommunicationsandnoticesmaybeaddressed.Section108(1)requiresnoticeofthesituationoftheregisteredofficeandtheregisteredpostaladdress,andofanychangetherein,tobegivenwithin14daysafterthedateofincorporationofthecompanyorofthechange,asthecasemaybe,totheregistrarforregistration.

Failuretocomplywiththerequirementsofthesesectionsrendersthecompany,andeveryofficerofthecompanywhoisindefault,liabletoadefaultfine.

Theprimaryfunctionoftheregisteredofficeistoactasthecompany’sofficialaddress.Itprovidesaconvenientplacewherelegaldocuments,notices,andothercommunicationscanbeserved.Section391(1)providesthatadocumentmaybeservedonacompanyby;inter alia, leaving it at theregisteredofficeofthecompany.

Thefollowingregistersanddocumentsarealsokeptatthecompany’sregisteredoffice:

i. Theregisterofmembers,andifthecompanyhasone,theindexofmembers,unlesstheregisterismadeupelsewhere,inwhichcasetheycanbekeptwheretheyaremadeup.Wheretheregisterandindex(ifany)aremadeupbyanagent,theymaybekeptattheagent’soffice(Section112-113).

ii. Theregisterofdirectorsandsecretaries(Section201(1).iii. Thecompany’sregisterofcharges(ifthecompanyisalimitedcompany)(Section105

(1).iv. AcopyofanyinstrumentcreatinganychargerequiringregistrationunderPartIVofthe

Act(Section104).v. Theregisterofdebentureholders(Section88(1).vi. The register of directors’ interests in shares in, or debentures of, the company or

associatedcompanies(Section196(1).vii. Theminutebooksofgeneralmeetings(Section146(1).



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The registers and documents are then subject to the following rights of inspection:

(a) Thecompany’smembersareentitledtoinspectthem,freeofcharge,duringbusinesshours for at least two hours each day.

(b) Debentureholdersofthecompanyareentitledtoinspect,freeofcharge,theregisterofdebentureholdersand,duringtheperiodbeginning14daysbeforethedateofthecompany’sannualgeneralmeetingandendingthreedaysafterthedateofitsconclusion,theregisterofdirectors’shareholding.

(c) Anymemberofthepublicisentitledtoinspecttheregisterofdirectorsandsecretariesandtheregisterofdebentureholdersonpaymentofaprescribedfeenotexceedingtwoshillings for each inspection.

THE OBJECTS CLAUSE

Reasons for Stating Objects

Section5(1)(c)requirestheMemorandumofAssociationtostatetheobjectsofthecompany.The section does not, however, indicate why a company’s objects have to be stated in thecompany’sMemorandumofAssociation.InCotman v Brougham(21)LordParkerstatedthatthestatementofacompany’sobjectsinitsMemorandumofAssociationisintendedtoservethefollowing purposes:

(a) To protect subscribers who learn from it the purpose to which theirmoney can beapplied.

(b) Toprotectpersonswhodealwiththecompanyandwhocaninferfromittheextentofthecompany’spowers.

ThesepropositionswillbecomeclearerafterastudyofthedoctrineofUltra Vires.

The Doctrine of ‘UltraVires’

Fast forward

Ø These are instances when the company acts beyond the powers in its objects clause

Ø The instances are either common law or judicial

The doctrine of Ultra ViresisalegalrulethatwasarticulatedbytheHouseofLordsinthecaseof Ashbury Railway, Carriage and Iron Co Ltd v Riche (22) to the effect that, where a contract madebyacompany(usuallybythedirectorsonitsbehalf)isbeyondtheobjectsofthecompanyaswritteninthecompany’sMemorandumofAssociation,itisbeyondthepowersofthecompanytomakethecontract.Thecontractisvoid,illegalandunenforceable.LordCairnsstatedinan

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obiterdictumthatsuchacontractcannotberatifiedevenbytheunanimousconsentofalltheshareholdersofthecompany.HisLordshipobservedthatanypurportedratificationwouldmeanthat“theshareholderswouldthereby,byunanimousconsent,havebeenattemptingtodotheverythingwhich,byActofParliament,theywereprohibitedfromdoing”.

A company’s objects are stated pursuant to the provisions of anAct of Parliament. It mustthereforebededuced,forexample,thatacompanywhoseobjecthasbeenstatedtobe“goldmining”cannotengagein“friedfish”business.Thisisbecause:-

(a) Prospective investors who read the objects clause realised that the company wasformedtominegold. If theybought thecompany’ssharestheydidsobecausetheyintendedtheirmoneytobeusedinpursuanceofthegoldminingbusiness.Theydidnotgivethemoneyforanyotherbusinessandthecompanydoesnothavetheirconsenttouseitonanyotherbusiness.Ifthecompanytriestousethemoneyonadifferentventure,suchasfryingfishandchips,theycangotocourtforaninjunctiontorestrainit from doing so.

(b) ThestatutoryrequirementthatacompanymuststateitsobjectsinitsMemorandumofAssociationwouldberenderedpurposelessif,despitehavingstatedtheobjects,thecompanywaslegallyentitledtoembarkonanyotheractivity.Topreventthishappening,thecourtsconcludedthatthestatementofobjectswouldbetakentomeanthatwhatisnotstatedasanobjectcannotbepursued,orundertaken,bythecompany.Inotherwords,thestatutoryrequirementthattheobjectsaretobestatedimpliesthatwhathasnotbeenstatedasanobjectcannotbecomealegitimateactivityofthecompany.

IMPLIED POWERS

The statement of Lord Cairns in 1875 in Ashbury Rail Co Ltd v Riche (22) to the effect that a contractbeyondtheobjectsofthecompany“intheMemorandumofAssociation” is “beyondthepowers” of the company gives the impression that a company has no legal power to do anything which isnotwritten in theMemorandumofAssociation.Thatwouldbeastartlingpropositionbecause,inpractice,companieshavetodosomanythingsinthecourseoftheirbusinessthatifallthosethingsweretobewrittendownintheMemorandumofAssociation,theMemorandumwouldbesuchagiganticdocumentthatnobodywouldprintorread.Itwas,therefore,awelcomeclarificationofthelegalpositionwhen,in1880,LordSelborne,LC,statedinAttorney-Generalv Great Eastern Railway Co that the doctrine of Ultra Vires, as explained in the Ashbury case, “ought to be reasonably, and not unreasonably, understood and applied”. His Lordship thenexplained that it is not necessary for a company to write down in its memorandum everything that itwouldorcoulddointhecourseofitsbusinessbecausewhatevermayfairlyberegardedasincidentalto,orconsequentialupon,thosethingswhichhavebeenstatedinthememorandumoughtnot,andwouldnot,beheldbythecourtstobeUltra Vires. The courts would regard such thingsasimpliedlywithinthecompany’spowersunlesstheyare“expresslyprohibited”bythememorandum.Therangeoftransactionsthatcouldbeencompassedwithinthe“impliedpowersrule”wasillustratedbyLordBuckleyin1907when,inAttorney-GeneralvMerseyRailwayCo, he stated:



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“Toascertainwhetheranyparticularact isUltra Viresornot the(statedobjects)mustfirstbeascertained; then thespecialpowers foreffectuating those (objects)mustbe looked for,andthen, if theact isnotwithineither the (statedobjects)asdescribed in thememorandum, theinquiryremainswhethertheactisincidentaltoorconsequentialuponthe(statedobjects)andisathingreasonablytobedoneforeffectuatingit...Bywayofillustration,letmesupposethatthe(statedobject)foundintheMemorandumofAssociationofa(registered)companyistoestablishandcarryonahotel,andthatexpresspowerisgiventobuylandataparticularplaceandtobuildand that as to anything further the... Memorandum of Association is silent. It is quite clear that allsuchactsasarereasonablynecessaryforeffectuatingthatpurposeareintra vires, such, for instance, as the purchase of furniture, and of linen, of provisions, and of wines and spirits, the hiringofservants,thepaymentoflicences,theownershipprobablyofhorsesandcarriages,themaintenanceandworkingofanomnibuswhichshallattendattherailwaystationtotakeintendinggueststothehotelandthelike.Inalargenumberofcasesthemaintenanceofagardenandpleasuregroundswouldbeintra vires...Themaintenanceoftennislawnsorofabowlinggreenwould, inmany circumstances, be legitimate.Under circumstances such as presently put, agolflinksmightbe intra vires. Alltheseandthelikewillwithoutexpressmentionbewithinthecompany’spowers.ThenImayinstanceotheractsastowhichitwouldbeaquestionoffactinthecaseoftheparticularhotelwhetheritwassuchanactaswasreasonablyincidentalorconsequential. If, for instance, the hotel were at Bundoran or Rosapenna or elsewhere in the country itmightbe intra vires to lay out and maintain in good order a golf links or to acquire rightsoffishingandtoownboatsandsupplygulliesforthepurposeoffishinguponthelakes.Itmaybethatintheparticularlocality,customerscouldonlybereasonablyexpectedorobtainedbyofferingtheseattractions,andtheymightbeasnecessaryasasmoking-roomorabowlinggreenelsewhere.IfthehotelinquestionweretheSavoyHotelintheStrandortheGreatCentralHotelintheMaryleboneRoad,thepropositionwouldceasetobetrue.So,again,ifthehotelweresituatedinaplaceinaccessibleunlessspecialmeansofcommunicationwereprovidedsay,atalovely spot at the end of a Scotch Loch to which there is no road, or at a place to which there is accessbyroadbutwhichisnotservedbyanycoachormailcartserviceitmightbeintra vires forthathoteltorunasteamlaunchoramotor-cartobringitsgueststotheirdestination.Itwouldinsuchacasebeanalogoustotheomnibus,whichthehotelinthecountrytownsendstotherailway station. The question is in each case a question of fact. Is the particular act in that case incidentaltoorconsequentialuponorreasonablynecessaryforeffectuatingtheobject,whichtheMemorandumdefines?

ThegistofLordBuckley’sstatement,above,maybesummarisedasfollows:ThejudgeswillnotregardatransactionundertakenbyacompanyasUltra Viresmerelybecauseitisnotwritteninthecompany’sMemorandumofAssociationasoneofthecompany’sobjects.Theywouldinfactregard the transaction as intra viresbyimplicationif:

i. It was reasonably incidental to any of the objects which have been written in thecompany’sMemorandumofAssociation,and

ii. Itwasundertakenforthesolepurposeofeffectuating,orachieving,thewrittenobjects,or any of them.

Regardingthecriteriatobeusedwhendecidingonwhetheraproposedtransactionis“reasonablyincidental” to theobjectswritten in thememorandum, itwasstated inHenderson v Bank of Australia (1888) thatwhatothercompanieswithsimilarobjectsdomaybeagoodguide fora company regarding its implied powers. But it appears that, provided a transaction is decided

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onbythecompany(ataboardorgeneralmeeting)inthebona fidebeliefthatitspursuitwouldenablethecompanytogetmorecustomersordomorebusiness,thecourtwouldnotregardthetransaction as ultra vireseventhoughitmaydoubtits“reasonableness”.

IthasalsobeenclarifiedinnumerousEnglishcasesthatatradingcompanyhasimpliedpower:

i. Toborrowmoneyandmortgageitspropertyassecurityfortheloan.ii. Toinstituteanddefendlegalproceedings;iii. Tosellthecompany’sassets(butnottheentireundertaking).iv. To pay gratuities and pensions to employees and ex-employees and their dependants

whilst the company is a going concern.

The Doctrine of “Constructive Notice”

The doctrine of “Constructive Notice” is a rule of company law to the effect that a persontransactingbusinesswitha company is taken tobeawareof thecontentsof thecompany’spublicdocuments.“Publicdocuments”inthiscontextarethosedocumentswhichacompanyisrequiredbytheCompaniesActtodelivertotheRegistrar of Companies for registration at the Companies Registry. Examples of such documents are:

(a) TheMemorandumofAssociation(b) TheArticlesofAssociation(c) Theannualreturn(d) Specialresolutions

BecausetheCompaniesRegistryisa“publicoffice”thedocumentskeptthereinaregenerallyreferred to as “public documents” since the public is free to inspect them on payment of aprescribedfee.

For purposes of the ultra viresdoctrine,apersontransactingbusinesswithacompanywillbetakentohavereadtheobjectsclauseinthecompany’sMemorandumofAssociation.Consequently,if he concludes a contract with the company and it turns out that the contract was for a purpose whichisneitherexpresslynorimpliedlywithinthecompany’sobjectsandhenceultra vires, he is regarded as having entered into an ultra vires contract knowingly even though he was not actually awareofitsbeingultra vires.Hecannotsuccessfullysuethecompanyforbreachofthecontract,asillustratedbythefactsof,andthedecisionin,Ashbury Railway & Carriage Co v Riche (22).

Thelegaljustificationforthisruleisthatsincethecompany’spublicdocumentsinitsfileattheCompaniesRegistry are available for inspection by any interestedmember of thepublic, heshouldhavegonetotheRegistry,askedfortheCompany’sfile,inspectthecontentsand,havingfoundtheMemorandumofAssociation,readtheobjectsclauseinordertoascertainwhethertheproposedcontract isconsistentwiththecompany’sobjects.Hewouldthenhaverealisedthatthecontractwasnotwithinthecompany’sobjects.Ifhefailstodosoandithappensthattheconcludedcontractwasneitherexpresslynorimpliedlywithinthecompany’sobjects,hewillberegarded as havingbeenaware that the contract was ultra vires.Hecannotthereforebeallowedtoenforce it.The“constructivenotice’ rulemaybe likened to theoldadage, “youcan takeadonkeytotheriverbutyoucannotforceittodrink”,butwiththeadditionthat,onyourwayback



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home,youwouldbeentitledtotellthedonkey:“Sinceyouhavesimplyrefusedtodrinkfornoapparent reason, I will, take it that you have drunk for today. I will, therefore, not take you to the riveragaintodaybutwilldosotomorrowwhenthedrinkingtimecomes”.

Thereappearstobenomoraljustificationforallowingapersoncontractingwithacompanytorelyonhisowninactionasthebasisforinstitutinglegalproceedingsagainstthecompany.Itisrather tempting to say that the law, like God, protects only those who also protect themselves.

Theonlyplausiblecriticismthatcouldbemadeagainsttheconstructivenoticeruleisitsassumptionthatapotentialcontractingpartywhoreadsacompany’sobjectswillbeabletomakethecorrectlegal conclusion regarding the vires of the proposed transaction, and its refusal to validate the transactionincaseswherethepartymistakenlybelievedtheproposedcontracttobeintra vires the company.

Thefactthataperusalofthecompany’sobjectsclausedoesnotguaranteeitscorrectinterpretationisamplydemonstratedbyanumberofEnglishcasesinwhichjudgesoftheHighCourt,havingread a disputed clause, concluded that the transaction was intra viresbutthedecisionwaslateronreversedbytheCourtofAppealortheHouseofLords.Ifsuchseniorjudgescandifferoverthe viresofaparticulartransaction,whyshouldanordinarybusinessman,orhislegaladvisor,beexpected to decide the matter correctly?

A close study of some of the relevant English cases pertaining to this issue, particularly the Ashbury case,seemstoindicatethatthedecisionofthehighercourtwhichfinallydisposedofthecasewas“correct”onlyinthesensethatthehighercourt,beingconstitutionallymandatedtomakethefinaldecision,alsomadethe“correct”decision.

Thereseemstobenolegaljustificationforretentionoftheconstructivenoticerule.Thefactthatapersonintendingtocontractwithacompanyreadthecompany’sobjectsdoesnotguaranteethathewill interpret it correctly.And thereappears tobenomoral justification forblamingapersonfornotmakingadecisionthatwasbeyondhistechnicalcompetencetomake.

Effect of Ultra Vires Transaction

An ultra vires transaction with a company may result in:

(a) Atransferofspecificpropertytothecompany,or (b) Moneybeinglenttothecompany.

The remedies available against the company will be as follows.

1. Property Transferred

Ifspecificpropertyistransferredtoacompanypursuanttoatransaction,which,unknowntothetransferor, is ultra vires to the company, the ownership of the property is not transferred. The property remains the property of the transferor while the company only acquires possession of it.Thisisbecauseanultra virestransactioncannotconstitutea“contract”which,pursuanttotheSaleofGoodsAct,Section3,iscapableofvestingortransferringtheownershipofthepropertyinthetransfereecompany.Thetransferor,onbecomingawareofthelegalposition,wouldbe

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entitledtotracehispropertyand,onfindingit,takepossessionofit.Thisremedyisknownas“tracing”.

The company has no right to retain the property and its attempt to do so would constitute the tort of detinue.

The other consequence of this rule is that, since there was no contract of sale, the transferor cannotsuethecompanyforbreachofcontract,or theagreedprice.The legalposition in theconversesituation isnotclear. It isprobablethat thecompanycannotrecover itspropertybytracingifthetransfereeiswillingtopaytheagreedprice.However,thecompanymightbeabletorecoveritifthetransfereehasfailedorrefusedtopayforitbecausetoallowhimtoretainitafterrefusingtopayforitwouldconstitute“unjustenrichment”whichacourtofequityisunlikelyto condone.

2. Money Lent

According to the decision in Re: David Payne & Co Ltd (23), a person lending money to a companyisnotboundtoenquireastowhythecompanyrequiresthemoney.Heisentitledtoassumethatthemoneyisbeingborrowedforthecompany’slegitimateobjects.Hislegalrighttoenforcethetransactionwillnotbeaffectedbythecompany’sapplicationoftheborrowedfundsto a ultra virespurpose.However,ifthelenderistoldthepurposeoftheloan,hemustreadthecompany’sMemorandumofAssociationtoascertainifthestatedpurposeisconsistentwiththecompany’sobjects,expresslyorbyimplication.Ifhedoesnotdosoandthepurposeturnsouttobeanultra viresone,hewillbedeemedtohavefinancedanultra vires transaction knowingly: Re Introductions Ltd (25).Hewouldnotbeentitledtosuethecompanyforbreachofcontract.

Remedies of the Ultra Vires Lender

In Sinclair v Brougham (26)theHouseofLordsexplainedthatnoactionorsuitliesatlaworinequity torecovermoney lent toacompanywhichhasborrowedforanultra vires purpose. This means that the ultra vires lender cannot sue, as lender, to recover the money he lent to the company.However,hemightavailhimselfofoneorotherofthefollowingremedieswhichweresummarisedbyBuckley,J.inReBirkbeckPermanentBenefitBuildingSociety:

i. Iftheresultofthetransactionisthattheindebtednessofthecompanyisnotincreasedbecausethenewloanwasappliedindischarginganolddebt, the invalid lender can betreatedasstandingintheplaceofthosewhosedebtshavebeenpaidoff.Insuchacase the ultra viresloan“isnottoberegardedasaborrowingtransaction”.

ii. Theaforesaidremedywouldalsobeavailableiftheloanwasappliedindischargingafuturedebt(i.e.anindebtednessthatwasincurredafterthemoneywasborrowed).

Thebasisofthisremedyisthat,sincethecompanycouldlegallybecomeindebtedinrespectofthefuturedebt,thelenderwhosemoneydischargeditwouldbesubrogatedtotherightsofthedischargedcreditor.However,hewouldbeentitledtorankasacreditorofthecompanyonlyto the extent to which his money was applied in discharging the intra viresdebtandwouldnotobtainthebenefitofanysecurityheldbytheintra virescreditor(althoughhewouldbeentitledtoenforceanysecuritythatwasgiventohim).



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iii. If the lender can identify his money or the investment of his money in the hands of the borrowingcompany,hecancallforitsreturn.

ThebasisofthisremedywasexplainedbyLordParkerinSinclair v Brougham (26) as follows:

“Acompanyorotherstatutoryassociationcannotbyitselforthroughanagentbepartyto an ultra viresact.Ifitsdirectorsoragentsaffectingtoactonitsbehalfborrowmoneywhichithasnopowertoborrow,themoneyborrowedisintheirhandsthepropertyofthelender.”

iv. Ifthelendercannotbringhimselfwithinanyoftheabovepropositionshewouldhavenoremedyexcepttoparticipateinthedivisionofthecompany’ssurplusassets,ifany,whichwouldbedivisibleamongtheultra virescreditorsrateablyduringthecompany’sliquidationafterallthecompany’smembershavereceivedbacktheircapitalinfull.

Alteration of Objects

Section7oftheActprovidesthatacompanyshallnotalterthe“conditions”(i.e.contents)ofitsmemorandum except in the cases, in the mode and to the extent for which express provision is made in the Act. This provision confers a special status on the Memorandum of Association as thebasicdocumentofthecompanywhosecontentsarestatutorilyprescribedandprotected.

Regardingalterationofobjects,Section8providesthatacompanymay,byspecialresolutionaltertheprovisionsofitsmemorandumwithrespecttoitsobjectsifthealterationwouldenablethe company:

i. Tocarryonitsbusinessmoreeconomicallyormoreefficiently. In Re: Cyclists Touring Club (27)Warrington,J.stated that thealterationwhich is

contemplatedinthisclause“seems...tobeanalterationwhichwillleavethebusiness ofthecompanysubstantiallywhatitwasbefore,withonlysuchchanges in the mode of conducting itaswillenableittobecarriedonmoreeconomicallyormoreefficiently”.Theclausedoesnotpermitalterationsinthetypeofbusiness,whichthecompanyisconducting.

ii. Toattainitsmainpurposebyneworimprovedmeans. Thisprovisionisnotclear.Itseemstobeintendedtofacilitatetheintroductionofnew

powers,whichwouldassist in theachievementof thecompany’smain “purpose”orobject.Ifso,itwouldbeasuperfluousprovisionsinceacompanyhasimpliedpower to doanything,whichwouldenableittoachieveitsmain(i.e.stated)objects.

iii. To enlarge or change the local area of its operations. Ifaproposedalterationunderthisclausewasopposedbytheprescribednumberof

thecompany’smembers,thecourtcouldmakeitaconditionofitsconfirmationthatthecompany alters its name as well: Re: Egyptian Delta Land and Investment Co Ltd (28).

iv. To carry on somebusiness, which under existing circumstances may conveniently or advantageouslybecombined with thebusiness of the company.

In Re: Cyclists Touring Club (27) itwasheld that, foraproposedalteration to fallunder this clause, itmustbe “aproposal to combineabusinessofonekindwithabusinessofanotherkind”.Thebusinessesmustbeofdifferentkindssothattheymaybe“combined”andcarriedonbythecompany.Iftheywereofthesamekindthecompanywouldmerelyhaveenlargedorexpandedtheexistingbusiness.Thekeywordinthisclauseis“combined”.

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v. To restrict or abandon any of the objects specified in the memorandum: SeeRe: Hampstead Garden Suburb Trust Ltd(29).

vi. To sell or dispose of the whole, or any part, of the undertaking of the company.vii. Toamalgamatewithanyothercompanyorbodyofpersons. Inordertoeffectaproposedalteration,thecompany’sdirectorswouldhavetoconvene

an extraordinary general meeting of the company to consider and, if approved, pass aspecialresolutionthatthecompany’sobjectsbealteredasproposed.Thegeneralmeeting may however change the text of the resolution so as to conform to its wishes providedthatitfallswithinoneorotherofthespecifiedclauses.Theresolutionwouldbeeffectiveimmediatelyitispassedifitwasvotedforbytheholdersofatleast86%innominalvalueofthecompany’sissuedsharecapitaloranyclassthereofor,ifthecompany isnot limitedbyshares,at least86%of themembers (assuming that thecompanydoesnothavedebentureholderswhoareentitledtoobjecttoalterationsofitsobjects).ThiswouldbesoevenifthepurposeofthealterationdoesnotfallwithintherestrictionsprescribedbytheActsincenoapplicationcouldbemadetothecourttocancelthealteration.Suchanapplicationcanonlybemadebyoronbehalfof:-

(a) Theholdersofnotlessintheaggregatethan15%innominalvalueofthe company’sissued share capital or any class thereof or, if the company is not limitedbyshares,notlessthan15%ofthecompany’smembers;or (b) Theholdersofnotlessthat15%ofthecompany’sdebenturesentitlingthe holderstoobjecttoalterationsofitsobjects.

Anapplicationtothecourtcannot,however,bemadebyapersonwhoconsentedtoorvotedinfavour of the alteration.

Intheeventoftheapplicationforcancellationbeingmade,thecourtisempoweredtomakeanorder:

i. Cancellingthealteration.ThisisillustratedbyRe: Cyclists Touring Club(27)inwhichthecourtrefusedtoconfirmtheproposedalterationbecauseitdidnotfallwithinanyoftheprescribedexceptions.

ii. Confirmingthealterationeitherwhollyorinpartandonsuchtermsandconditionsasitthinksfit.ThepowertoconfirminpartwasexercisedinRe: Parent Tyre Co(30),whilethepower toconfirmonconditionswasexercised inRe: Egyptian Delta Land and Investment Co Ltd(28).

iii. Adjourningtheproceedingsinorderthatanarrangementmaybemadeforthepurchaseof the interestsof thedissentingmembers. Insuchacase, thecourtmaygivesuchdirections and make such orders as it may think expedient for facilitating or carrying thearrangement intoeffect.However,nopartof thecapitalof thecompanycanbeexpended in any such purchase.

Whereacompanypassesaresolutionalteringitsobjectsandnoapplicationismadetothe court for its cancellation it shall, within 14 days from the end of the period allowed for making such an application, deliver to the registrar a printed copy of its altered memorandum. If an application is made the company shall: -

(a) Forthwith give notice of that fact to the registrar, and (b) Within14daysfromthedateoftheordercancellingorconfirmingthe alterationwhollyorinpart,(orwithinsuchextendedtimeasthecourtmay allow)delivertotheregistraracertifiedcopyoftheorderand,ifthealteration isconfirmedwhollyorinpart,aprintedcopyofthememorandumasaltered.



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LIMITED LIABILITY CLAUSE

Contents of the Clause

Section 5(2) provides that the memorandum of a company limited by shares or by guarantee shall also state that “the liability of its members is limited”.

Companies limited by shares

Mostregisteredcompanies,bothpublicandprivate,arecompanieslimitedbyshares.SuchacompanyisdefinedbySection4(2)(a)as“acompanyhavingtheliabilityofitsmemberslimitedby thememorandumto theamount, ifany,unpaidon theshares respectivelyheldby them”.Itshouldbenotedthatitistheliabilityofthecompany’smemberswhichislimitedandnotthecompany’sownliability.Tothatextent,theword“Ltd”attheendofthenameofsuchacompanyis actually misleading.

Insuchacompanythecapitalisdividedintosharesofaspecifiedamount,forexample,capitalofKshs100,000dividedinto10,000sharesofKshs10each.Everymemberofthecompanyisliabletopay10/-foreveryshareheholdsandif,hehasalreadypaidtheKshs.10,heisnotliable.Ifhehasnotpaidthewholeamount,hewillbeliabletopaythebalanceonly.

Companies limited by guarantee

Section4(2)(b)definesacompany limitedbyguaranteeas“acompanyhaving the liabilityofitsmembers limited by thememorandum to suchamount as themembersmay respectivelytherebyundertaketocontributetotheassetsof thecompanyintheeventof itsbeingwoundup”.Thememorandumof sucha companywouldhavea clausestating that “everymemberofthecompanyundertakestocontributetotheassetsofthecompanyintheeventofitsbeingwoundupwhileheisamember...suchamountasmayberequired,notexceeding(somany)shillings”.Themember’sliabilityiscontingentandhecanonlybecalledupontopaytheamount“guaranteed”ifthecompanyisinliquidation.

Acompanylimitedbyguaranteemayalsohaveasharecapital.ThemodelMemorandumandArticlesofAssociationofsuchacompanyisTableDintheFirstScheduletotheCompaniesAct.Themembersofsuchacompanyhavedualliability,thatis,topaytheamountunpaidontheirshares and the amount of the guarantee. The model Memorandum and Articles of Association of acompanylimitedbyguaranteeandnothavingasharecapitalisTableCintheFirstScheduleto the Companies Act.

Unlimited companies

Section4(2)(c)definesan“unlimitedcompany”asacompanynothavinganylimitontheliabilityofitsmembers”.Insuchacase,althoughthecompanyisaseparatelegalentity,themembers’

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liabilityresemblesthatofpartnersexceptthat,technically,theirliabilityistothecompanyitselfand not to the creditors.

An unlimited company may also have a share capital. The Memorandum and Articles of AssociationofsuchacompanywouldsubstantiallycorrespondtoTableEintheFirstScheduleto the Companies Act.

CAPITAL CLAUSE

Section5(4)(a)providesthat,inthecaseofacompanyhavingasharecapital,thememorandumshallalso(unlessthecompanyisanunlimitedcompany)state“theamountofsharecapitalwithwhich thecompanyproposes tobe registeredand thedivision thereof intosharesofafixedamount”.TableBintheFirstScheduletotheAct,inpursuanceofthisprovision,statesthat“Thesharecapitalof thecompany isKshs.200,000divided intoone thousandsharesofKshs.200each”.

Reasons for stating capital

TheActdoesnotexpresslystatethereasonswhythecapitalofacompanyshouldbestated.However,thereisaclueinthequalifyingwords“unlessthecompanyisanunlimitedcompany”.Thismeansthatifacompanyhasasharecapitalbutisregisteredasanunlimited company, the amountofthecapitalneednotbestatedinthememorandum.Thisissobecausethecompany’screditors would NOT rely on that capital as their primary security. They need not, therefore, be informedabout itsquantum.Thecreditorsofsuchacompanywould relyprimarilyon themembers’privateassetsand theirpersonal liabilityas theirsecurity foranymoney they lendto the company. Itmay, therefore be said that the proposed capital of a limited company isstatedinitsMemorandumofAssociationsothatthecompany’spotentialcreditorsmayreadthememoranduminordertoascertaintheamountofthecapitalasstatedtherein.Havingascertainedtheamounttheycouldthendecideontheamounttolendtothecompany.Thisissobecause,legally, the capital is their primary security for any money they lend to the company. In Ooregum Gold Mining Co of India Ltd v RoperLordHalsburystatedthat“thecapitalisfixedandcertainandeverycreditorofthecompanyisentitledtolooktothatcapitalashissecurity”.

THE ASSOCIATION CLAUSE

Whathasgenerallycometobeknownas“theassociationclause”isnotprovidedforinSection5oftheCompaniesAct,whichprescribesthecontentsoftheMemorandumofAssociation.Itis,however,thepopularoracademicdesignationofthelastparagraphofTableB,whichcontainsa declaration that the subscribers to theMemorandumofAssociation “are desirous of beingformed into a company, in pursuance of this Memorandum of Association and ... agree to take thenumberofsharesinthecompany”setoppositetheirrespectivenames.

Thedeclarantsthensignthememorandumandtheirsignaturesarethenwitnessedbyatleastonepersonwhoisnotasubscriber.



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OTHER CLAUSES

The clauses enumerated andexplained above formpart of theMemorandumofAssociationpursuanttotheprovisionsofSection5oftheCompaniesAct.However,otherclausesmaybeincluded in the memorandum, such as a clause providing special rights for different classes of shares. Such a clause is usually placed in theArticles ofAssociation but is occasionallyincorporated into the memorandum if it is the intention of the promoters that it should, as it were, be“entrenched”(i.e.onewhichismoredifficulttoalterorisunalterable).

Alteration of the Memorandum Generally

Everyclauseofthememorandummaybealteredexcepttheregisteredofficeclause.Inadditiontothemethodsofalterationofthenameclauseandtheobjectsclause,whichhavealreadybeenexplained in paragraph 3.1.5.5 and paragraph 3.1.7.7, respectively, section 25 allows a company toalterclausesthatareincludedinitsmemorandumbutcouldlawfullyhavebeencontainedinthearticles.Suchclausescanbealteredbyspecialresolutionexceptwherethememorandumitselfprovidesfororprohibitsthealterationofalloranyofthesaidconditions.Holdersof15%oftheissuedshareshave30daystoapplytothecourttochallengethealteration.Intheeventofsuchapplication,thealterationshallnothaveeffectexceptinsofarasitisconfirmedbythecourt.

THE ARTICLES OF ASSOCIATION

The Articles of Association are the regulations for the management of a company. The heading toTableAis“regulationsformanagementofacompany”.

FORM OF ARTICLES

TableA, Part I is themodel form of articles for a public company limited by shares. Part IIthereof:

(a) DeclaresPartItobeapplicabletoaprivatecompanyaswell,withtheexceptionsofarticles24and53;

(b) Incorporatestheprovisionswhich,underSection30oftheAct,mustbeincorporatedin the Articles of a company in order to constitute the company as a private company, and

(c) Modifies articles 24 and 53 of Part I in order tomake themapplicable to a privatecompany.

PartIofTableAhas136paragraphswhich,pursuanttoSection12,aredividedintoparagraphs,whicharenumberedconsecutively.Section11(2)providesthatifarticlesarenotregisteredinthecaseofacompanylimitedbyshares,TableAshallbetheregulationsofthecompanyinthesamemanner and to the same extent as if they were contained in duly registered articles. In practice,

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advocatesactingforcompanypromotersusuallycopynearlyalltheprovisionsofTableAandmerely change a few clauses here and there to suit the requirements of the proposed company.

STATUTORY REQUIREMENTS

Section12providesthatarticlesshallbe-

(a) IntheEnglishlanguage;(b) Printed;(c) Dividedintoparagraphsnumberedconsecutivelyand(d) Dated;and(e) Signedbyeachsubscriber to theMemorandumofAssociation in thepresenceofat

least one witness, who shall attest the signature and add his occupation and postal address.

Legal effect of articles

Section22providesthat“theMemorandumandArticlesshall,whenregistered,bindthecompanyandthemembersthereoftothesameextentasiftheyrespectivelyhadbeensignedandsealedby eachmember, and contained covenants on the part of eachmember, to observe all theprovisionsof thememorandumandof thearticles”.TheEnglish courts have interpreted thissection as follows:

(a) Thearticlesconstituteastatutorycontract,whichbindsthememberstothecompany,andalsobindsthecompanytothemembers.Consequently:

i. Acompanymaysueamembertorestrainanimminentbreachofthearticles.ThisisillustratedbyHickman v Kent or Romney Marsh Sheep breeders Association(31)inwhich the company obtained an injunction restraining amember (Hickman) fromgoingtocourtinbreachofthearticles,whichprovidedforarbitrationproceedings.

ii. Amembermaysuethecompanyforanyactualor`imminent’breachof thearticles.ThisisillustratedbyWood v Odessa Waterworks Ltd(32)inwhichamember(Wood)successfully sued for an injunction restraining the company from paying dividends in theformthatwasnotprovidedforbythearticles.

(b) Themembersareboundtothecompany,andthecompanyisboundtothemembers,only intheircapacityasmembers.Thisisillustratedbythefollowingcases:

i. Eley v Positive Life Assurance Co(34)inwhichEleyfailedinhiscontentionthatthecompanyhadcommittedabreachofthecontractinthearticleswhichappointedhimasthecompany’slawyerforlifebecausehewas,inthecourt’sview,suingqua lawyer and not quamember.

ii. Beattie v E F Beattie Ltd and Another(33)inwhichthecompanyfailedtorestrainMrsBeattiefromsuinginallegedbreachofthearticleswhichprovidedforarbitration.The court explained that Mrs Beattie was suing qua director and notquamember. She was,therefore,notboundbythearbitrationclause,whichrequiredmembers to refer disputesbetweenthemandthecompanytoarbitration.



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(c) Thearticlesalsoconstituteastatutorycontract,whichbindsthemembersinter se(i.e.amemberisboundtoothermembers).InHickman’s case(31)AshburyJ.stated,interalia:“Inmyjudgment,generalarticlesdealingwiththerightsofmembers`assuch’aretreated as a statutory agreementbetweenthemandthecompanyaswellasbetweenthemselvesinterse”.ThisisillustratedbyRayfieldvHands(35)inwhichitwasheldthatthedefendantswerebound,quamembers,tobuythesharesoftheplaintiff(anothermember)asprovidedbythecompany’sarticlesofassociation.

Members are also bound inter se by the pre-emption clauses in the company’sArticles ofAssociation,whichrequiremembersintendingtoselltheirsharestoofferthemfirsttoexistingmemberswhoaregivenarighttobuythesharesinpreferencetothirdparties.Thisisillustratedby Lyle & Scott Ltd v Scott’s Trustees(36)

ALTERATION OF ARTICLES

Section13 (1)provides thatacompanymaybyspecial resolutionalteroradd to itsarticles.Section13(2)providesthatanyalterationoradditionsomadeinthearticlesshallbeasvalidasiforiginallycontainedthereinandsubjecttoalterationinlikemannerbyspecialresolution.

LIMITATIONS ON POWER TO ALTER ARTICLES

Thefollowingarethelegalrestrictionsonacompany’spowertoalteritsarticles:

(a) Section13(1)providesthatthealterationissubjecttotheconditionscontainedinthecompany’smemorandumof association.Thismeans that an alteration to include aclause which contravenes a provision in the company memorandum is of no effect.

(b) UnderSection13(1)aproposedalterationissubjecttotheprovisionsoftheAct.Analteration that contains a clause which contravenes a provision in the Act is null and void.

(c) Section24provides thatnomemberofa companyshall beboundbyanalterationmadeinthearticlesafterthedateonwhichhebecameamemberifandsofarasthealterationrequireshimtotakeorsubscribeformoresharesthanthenumberheldbyhimat thedateonwhichthealteration ismade,or inanyway increaseshis liabilityasatthatdatetocontributetothesharecapitalof,orotherwisetopaymoneyto,thecompany.Itshouldbenotedthatthealterationisvalidbutdoesnotbindmemberswhohavenotagreedinwritingtobeboundbyit.

(d) Analterationthatvariestherightsattachedtoanyclassofsharesisinvalidunlessthevariationofrightsclause,ifany,inthecompany’sarticleshasbeencompliedwith.Inaddition,Section74permitstheholdersofnotlessintheaggregatethan15%oftheissued shares of that class who did not vote in favour of the resolution for the variation toapplytothecourttohavethevariationcancelled.Oncesuchanapplicationhasbeenmadethevariationwillnothaveeffectunlessanduntilitisconfirmedbythecourt.

(e) Section211(3)providesthatwhereanordermadebythecourtunderSection211(2)makesanyalteration inoraddition toacompany’sarticles, thecompanyconcernedshall not have power without leave of the court to make any further alteration in or addition to the articles which are inconsistent with the provisions of the order.

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(f) InAllen v Gold Reefs of West Africa(37)Lindley,MRstated: “Wide,however,asthelanguageofSection13is,thepowerconferredbyitmust,like

allotherpowers,beexercisedsubjecttothegeneralprinciplesoflawandequitywhichareapplicabletoallpowersexercisednotonlyinthemannerrequiredbylaw,butalsobonafideforthebenefitofthecompanyasawhole”.

Tobevalid,therefore,aproposedalterationofarticlesmustalsobemadebona fide and forthebenefitofthecompanyasawhole.Examplesare:

i. Sidebottom v Kershaw, Leese & Co Ltd(38)inwhichthealterationwasheldtobeforthebenefitofthecompany.

ii. Dafen Tinplate Co Ltd V Llanelly Steel Co Ltd (39)inwhichthealterationwasdeclaredtohavebeenmade“malafides”andwasnotforthebenefitofthecompanyasa whole.

2.3 PROMOTION

Fast forward

Ø The steps that are taken before a company is formed

Ø Promotersdutiesfallintofiduciaryandcommonlawduties

Acompanycomesisformedfromthemomentofitsregistrationbytheregistrarofcompanies.However,theregistrationisprecededbywhatiscalled“promotion”.Thepromotionconsistsintakingthenecessarystepstoincorporatethecompanyandensuringthatithassufficientcapitalto commence its operations.

PROMOTERS

There isnogeneralstatutoryor judicialdefinitionof theword “promoter”.This issobecausethe lawmakers in England as well as the English judges were of the view that a comprehensive definition of thewordwould be limiting, andmight prevent the court fromcatching “thenextingeniousrogue”whomightbebroughttothecourttoaccountforhisactionsaspromoter.KenyahasadoptedtheapplicableEnglishlaw.

Englishjudgeshave,however,describedtheword‘promoter’invaryingterminologyofwhichthefollowingmaybequoted:

(a) Apromoteris“onewhoundertakestoformacompanywithreferencetoagivenprojectandtosetitgoingandwhotakesthenecessarystepstoaccomplishthatpurpose”(perCockburn,J): Twycross v Grant.

(b) “Theterm‘promoter’ isa termnotof law,butofbusiness,usefullysummingup inasinglewordanumberofbusinessoperationsfamiliartothecommercialworldbywhichacompanyisgenerallybroughtintoexistence”,(perBowen,J):Whaley Bridge Calico Printing Co v Green.



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ItshouldbenotedthatSection45(5)oftheCompaniesActdoesnotcontainageneraldefinitionof ‘promoter’. Itmerelydefinesthewordforpurposesofsub-section(1)ofSection45byexcludingfromthecategoryofpromoterspersonswhogiveprofessionalservices in connection with the formation of a company.

Theanswertothequestion“whoisa‘promoter?’must,therefore,dependonthefactsof a particular case.

Legal Status

A promoter is not an agent of the company he promotes as it does not exist and at common law onecannotbeanagentofanon-existentprincipal.ApromoterisnotatrusteeofthecompanyinformationasitdoesnotexistHowever,theEnglishcourtshaveheldthathestandsinafiduciaryrelationshiptothecompanyhepromotes,justasanagentstandsinafiduciaryrelationshiptohisprincipal: In Erlanger v New Sombrero Phosphates company limitedLordCairnsstated“theystandinmyopinioninafiduciarypositiontheyhaveintheirhandsthemouldingandcreationofacompany.”Thisisanequitablerelationshipbasedontrust,confidenceandgoodfaith.Itimposesonpromoterscertainequitableobligations.

Duties/obligations of promoters

A promoter’s duties fall into two main categories:

• Fiduciary• General/commonawduties

Fiduciary duties

1. Bonafide-Promotersareboundtoactingoodfaithforthebenefitofthecompanyinformation.Theiractsmustbeguidedbytheprincipleofutmostfairness.

2. Properaccounting:-Apromoterisboundtoexplaintheapplicationofmoneyorassetscoming to his hands from the date he becomes a promoter. The accountmust becomplete and honest.

3. Disclosure: -As a fiduciary promoter must avoid conflict of interest by disclosinganypersonal interest incontractsmadeonbehalfof thecompany in formation.Thedisclosuremaybemade toan independentboardof directorsor toallmembers intheprospectus.Anysecretprofitmadewithoutdisclosuremustbeaccounted to thecompany.Ifapromotermakesasecretprofitwithoutdisclosurethecompanyisentitledtorescindthecontractorsuefortherecoveryoftheprofit.

General/common law duties

1. Todetermineandsettlethecompany’sname2. To prepare the constitutive and other documents necessary for incorporation3. To cause registration of the company4. To secure the services of directors5. To meet the preliminary expenses

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6. Toensurethatthecompanyinformationhasanindependentboardofdirectors7. To prepare the prospectus, if any8. Toacquiretheassetsfortheusebythecompany9. Toenterintobusinesstransactionsonbehalfofthecompany.

PRE-INCORPORATIONCONTRACTS

Apre-incorporatedcontractisanagreementthatisenteredinto,usuallybyapromoterorpromoters,onbehalfofacompanyatatimewhenthecompany’sformationhasnotbeencompletedbyitsregistration.Asageneralrule,are–incorporationcontractisgenerallyunenforceable.FewcaseshavebeencontestedinEnglishcourtsregardingtheeffectofsuchagreements.Thefollowingruleswereenunciatedbythejudgesinthecourseofdecidingthesaidcases:

1. Beforeincorporationacompanyhasnolegalexistenceitcan’tcontractorhaveagents(itwassoheldin Kelner v Baxter)

2. Atcommon lawapersonwhopurports tocontractasanagentbutwhoat the timehasnoprinciple ispersonally liableon thecontract.This isnecessary togiveeffectto the contract. In Kelner v Baxter, itwas held thatwhere a contract is signed byonewho professes to be signing as an agent but who has no principle existing atthe timethecontractwouldaltogetherbe inoperativeunlessmadebindingupon thepersonwhosignedit.Astrangercannotbyasubsequentratificationrelievehimfromtheresponsibility.

3. At common law, a contract purporting to have been entered into by orwith a non-existentpersonisvoid.Foracontracttoexisttheremustbeatleasttwoparties.

4. Atcommonlawacompanycan’t,afterincorporation,ratifyapre-incorporationcontract,thisisbecauseitcouldnothaveenteredintothecontractbeforeitwasformed.Itwasso held In Price v Kelsal.

5. Atcommonawthemereadoptionorconfirmationbydirectorsofa re-incorporationcontractcreatesnocontractualrelationshipbetweenthecompanyandtheotherparty

6. Atcommonlaw,apre-incorporationisenforceablebyoragainstthecompanyifafterincorporation, the company enters into a new contract similar to the previous agreement. Thenewcontractmaybeexpressorimpliedfromtheconductofthecompanywhenincorporated.

REMUNERATION OF PROMOTERS

A promoter is not entitled to remuneration for incorporating a company nor is he entitled to recovertheexpensesincurredintheprocess.Thisisbecausethereisnocontractualrelationshipbetweenhimandthecompanyhencethecompanycouldnothavecontractedfortheservices.However,inpractisethearticlesprovidefortherecoveryoftheexpenses.ForinstanceArticle80ofTableAprovidesthatthedirectorsmayrecovertheexpensesofincorporatingthecompany.ThisarticleisunenforceablebyapromoterbyreasonofSection22oftheAct.However,promotersmayberewardedinotherways:

1. Upondisclosure,thepromotermayselltheundertakingtothecompanyataprofit.2. Upon disclosure, a promoter may sell an undertaking to the company in return for fully

paid shares.



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3. Apromotermayfacilitateatransactionbetweenathirdpartyandthecompanyforacommission,whichmustbedisclosed.

4. Apromotermaybeaffordedtheoptiontotakeupextrasharesattheirparvalueafterthe market price has risen.

5. Traditionalpromotershavebeen rewardedbybeingoffereddeferredor foundersormanagement shares,

6. Apromotermaybeappointedoneofthefirstdirectors,

INCORPORATION

FORMAL STEPS OF INCORPORATION

A. RESERVATION OF NAME

UnderSection19(1)oftheAct,theregistrarmayonwrittenapplicationreserveanameendingthe registrationor changeofnameofa company .Thename is reserved for30daysat firstinstanceduringwhichtimeitsunavailabletootherpersons.However,theregistrarisempoweredtoextend the reservationbyanynumberofdaysnotexceeding thirty.UnderSection19 (2),the registrarcan’t reserveanameor registeracompanybyaname,which inhisopinion isundesirable.

B. PREPARATION OF CONSTITUTIVE AND OTHER DOCUMENTS

To facilitatecompanyregistrationthefollowingdocumentsmustbeprepared:

(i) Memorandum of Association Section2 (1)of theCompaniesActprovidesMemorandummeansMemorandumof

Association of a company as originally framed or as altered from time to time. This is the primarydocumentforpurposesofincorporation.It’soneoftheconstitutivedocumentsandmustbepreparedinallcases.It’sthecompany’scharterorexternalconstitution.Itregulatestherelationsbetweenthecompanyandthirdparties.Itscontentsinclude:

• Name of the company • Objects • Capital • Liability • Association • Particularsofsubscribers • Date

Thememorandumofacompanymaybelimitedbysharesorbyguaranteemuststatethattheliabilityofthecompany'smembersislimited.Thememorandumofacompanylimitedbyguaranteeshallalsostatetheamount“guaranteed"byeachmemberofthecompany.

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(ii) Articles of Association This document contains the regulations for management of a company. Under section

2(1) of the CompaniesAct,Article meansArticles of association of a company asoriginallyframedorasalteredbyspecialresolutionincludingsofarastheyapplytothecompanytheregulationscontainedinTableAoftheFirstscheduletotheAct.TableAisasampleofthearticlesofacompanylimitedbyshares.

Iftheproposedcompanyistobelimitedbyshares,thepromotersneednotdeliveritforregistration.TheprovisionsofPartIofTableAintheFirstScheduletotheActwillbeautomaticallyapplicabletothecompany.

The Articles of Association is thus a constitutive document that contains the rules of regulation. It contains the rules of internal management hence it is the internal constitutionof thecompany. It regulates the relationsbetween thecompanyand itsmembers.

(iii) Statement of the Nominal Share Capital This statement is delivered for taxation purposes pursuant to Section 39 of the Stamp

Duty Act. It sets out the name of the company and the capital with which the company purposestoberegistered.Itfacilitatesassessmentandpaymentofdutyforthepurposeof incorporation.

(iv) Declaration of Compliance (Form No 208) FormNo208,whendulycompletedandsigned,constitutesthestatutorydeclaration

bytheadvocateengagedintheformationoftheproposedcompany,orbythepersonnamed in the articles as a director or secretary of the company, that all the requirements of the Companies Act in respect of matters precedent to the registration of the company andincidentaltheretohavebeencompliedwith.

NOTE Thedocumentsidentifiedhereinbelowmustinlawbedeliveredtotheregistrarwithin

14daysafterregistrationofthecompanybutwhichinpracticemustaccompanytheconstitutive documents.

(v) Consent to act as director (Form No 209) UnderSection182(1)anypersonwhohasbeenappointeddirectormustdelivertothe

registrarforregistrationhiswrittenconsenttoactassuch;whichmustbesignedbyhiminpersonorbyanagentauthorisedinwriting.Thisisapersonalcommitmentbythedirector to act as such.

(vi) List of persons who have consented to be directors (Form No 210) This form, when duly completed and signed, constitutes the statutory list of persons

whohavegiventheirindividualconsents.ItistobedeliveredforregistrationonlyiftheprospectivedirectorshavebeenappointedbythearticlesdeliveredforregistrationinlieuofTableA,orascomplementarythereto.Thedocumentsetsout:

• The names of directors • Their postal addresses • Occupation • Dateofbirth • Other directorships, if anyTheseparticularsenabletheregistrartoascertainwhetherthepersonsqualifyasdirectors.



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C. STAMPING OF DOCUMENTS

Thememorandum,articlesandstatementofnominalcapitalmustbedeliveredforstampingi.e.paymentofthetaxpayableforthepurposesofincorporation.Onpayment,thedutyimprintisfixedonthedocuments.

D. PRESENTATION OF DOCUMENTS TO THE REGISTRAR

UnderSection15oftheCompanies’Acttheconstitutiveandotherdocumentsmustbelodgedwith the registrar for registration of the company. The registrar must satisfy himself that the documentshavebeenrearedinaccordancewiththelaw.

E. REGISTRATION OF THE COMPANY AND ISSUE OF CERTIFICATION OF INCORPORATION

Under Section 16 (1), if the registrar is satisfied with the documentation, he registers thememorandumandissuesacertificateofincorporationunderhisnameandseal.Therebycertifyingthat the company is duly incorporated. Under Section 16 (2) from the date of incorporationmentioned in the certificate of incorporation, the subscribers to thememorandum and otherpersonswhobecomemembersareabodycorporate.

CERTIFICATE OF INCORORATION

Thisisadocumentissuedbytheregistraronregistrationofacompany.itisthebirthcertificateor right of the company .its contents include:

1. Name of the company2. Serialnumber3. Signature of the registrar4. Sealoftheregistrar’soffice

PRACTICAL CONSEQUENCES OF INCORPORATION

In the course of delivering his judgment in Salomon’s case,LordHalsburystatedthat“oncethecompanyisincorporated,itmustbetreatedlikeanyother independent person with rights and liabilitiesappropriatetoitself”.Thismeansthatthecompanyisanindependentperson,hasrightsandobligations,whicharenotthesameastherightsandobligationsofthesubscriberstoitsmemorandumandtheotherpersonswhowilljoinitlaterasitsmembers.Thisisthefundamentalattributeofcorporatepersonality,whichisgivenpracticaleffectinthefollowingways:

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1. Limited liability

Thefactthataregisteredcompanyisadifferentpersonaltogetherfromthesubscriberstoitsmemorandumanditsothermembersmeansthatthecompany’sdebtsarenotthedebtsofitsmembers.Ifthecompanyhasborrowedmoney,itanditaloneisunderanobligationtorepaytheloan.Themembersareundernosuchobligationandcannotbeaskedtorepaytheloan.Thisisillustratedbythecaseof Salomon v Salomon & Co Ltd(3)inwhichitwasheldthatSalomon,asamember,wasnotunderanobligationtorepaythecompany’sdebts.

Incaseacompanyisunabletopayitsdebtsthecreditors,oracreditor,maypetitiontheHighCourtforanordertowinditup.Duringthewindingupthememberswillbecalledupontopaythe amount which is unpaid on the shares they hold, if any, in the case of a company limited byshares,ortheamountprescribedbythememorandum,inthecaseofacompanylimitedbyguarantee,asprovidedforinsection4(2)oftheAct.

Itshouldbenotedthat,inthecaseofacompanylimitedbyshares,whatthemembersarepayingaretheamountstheyowetothecompanyasitsdebtorsinrespectofsharesthatweresoldtothemoncreditandhavenotbeenpaidforinfull.Thecompany’sliquidatorwillinturnusethemoneysopaidtopayoff,orreduce,thecompany’sdebts.

Theotherpointtobenotedisthatacompany’screditorcannotinstitutelegalproceedingsagainstacompany’smemberinordertorecoverfromhimwhatheowesthecompany.Thisisbecausethememberdoesnot,legally,becomehisdebtormerelybecausethecompanyishisdebtor.

2. Perpetual succession

According to the ConciseOxford Dictionary, “perpetual”means, inter alia, “applicable, valid,forever or for indefinite time”while “succession”means “a following in order”.Whenused inrelationtoregisteredcompaniesthephrase“perpetualsuccession”denotesaprocesswherebyacompany’smembershipchangesinadefiniteorderprescribedbythecompany’sarticlesandgoesonforanindefiniteperiodoftimeuntilthecompany’sliquidation.The“perpetualsuccession”occursbecauseacompanyanditsmembersareseparatepersonsandsothecompany’slegallifeisnotterminatedbyamember’sdeath.

3. Owning of property

UnderSection16(2)oftheAct,aregisteredcompany,asaperson,haspowertoownmovableand immovable property. It can actually do so if it can afford to buy them, or receives themasa gift.But it is important to note that, legally, the company’s property doesnot belong tothemembers,eitherindividuallyorasagroup.Itbelongstothecompanyalone.Thisrulehasbeenexplainedby theEnglishcourts innumerouscasesamongwhich Macaura v Northern Assurance Co(4)maybereferredtoasanexample.ItwasalsoexplainedinA L Underwood Ltd v Bank of Liverpool(5)thatacompany’smoneyisnotmembers’money.Anymemberwhousesthecompany’smoneytopurchasepersonalitemsordischargepersonalobligationswillbeliabletothecompanyforconversion.Thisruleappliesirrespectiveofwhetherthecompanyisofaclasspopularlyreferredtoas‘aone-mancompany’.



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4. Suing and being sued

Because a company is in lawa different person altogether from itsmembers, it follows thatawrong to,orby, thecompanydoesnot legallyconstituteawrong to,orby, thecompany’smembers.Consequently:

(a) Amemberormemberscannot institute legalproceedings to redressawrong to thecompany. The company as the injured party is, generally speaking, the proper plaintiff. Thisisillustratedbythefactsof,andthedecisionin,FossvHarbottle(6).

(b) Amembercannotbesuedtoredressawrongbythecompany.Thisis illustratedbySalomon v Salomon& Co Ltd(3)inwhichitwasheldthatSalomonwasnotliableforthecompany’sdebtsandshouldnot,therefore,havebeensuedtorecoverthem.

5. Capacity to contract

As a legal person, a registered company has capacity to enter into contractual relationships in furtheranceofitsobjects.Inadditionit’sempoweredtohireandfire.Itwassoheldinlee v lee’s Air farming company limited whereMr.Leeformedacompanywithacapitalof3,000sharesof$1each.Mr.Leeheld2,999ofthesharestheothersharewasheldbyasolicitoronhisbehalf.Mr.Leewasthegoverningdirectorandthecompanychiefpilot.Hediedinacrashwhileworkingforthecompany.Mrs.LeesuedforcompensationundertheWorkman’sCompensationActandshe was entitled as to compensation.

6. Common seal

UnderSection16(1)of theCompaniesActan incorporatedcompanyhasacommonseal toauthenticate its transactions.

LIFTING THE VEIL OF INCORPORATION

Fast forward

• Exceptions to the rule in Salomon v Salomon constitute lifting the veil of incorporation.

• There are common law and judicial exceptions.

The decision in Salomon v Salomonestablishedthatwhenaregisteredcompanyisincorporateditbecomesalegalpersondistinctandseparatefromitsmembersandmanagers.Itbecomesabodycorporatewithanindependentlegalexistence.Thisisreferredtoastheveilofincorporation.Asageneralrulethelawdoesnotgobehindtheveil totheindividualmembers.However, inexceptional circumstances the law ignores the separate legal personality of the company in favourof the realitiesbehind the facade.Thesecircumstancesarecollectively referred toasliftingtheveilof incorporation.Theyareexceptionsormodificationstotherule inSalomon’s case. Such instances may arise under statutory provisions or case law.

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Statutory provisions/legislative/parliamentary

The following are the sections of the Kenya Companies Act which correspond to those sections oftheEnglishCompaniesAct1948whichareusuallylistedinEnglishCompanylawtextbooksastheinstancesinwhichtheveilofincorporationwillbeliftedunderexpressstatutoryprovisions:

(a) Section 33: Reduction of number of members

Thissectionprovidesthatacompany’smemberispersonallyliableforthecompany’sdebtsincurredafterthesixmonthsduringwhichthecompany’smembershiphadfallenbelowthestatutoryminimum,providedhewascognisantofthefactthatthemembershiphad so fallen.The section is regardedasan instanceof “lifting the veil” because itmodifies theprincipleestablished inSalomon v Salomon & Co Ltd thatamemberisnotliableforthecompany’sdebts,andpermitsthecompany’screditorstosuehimdirectlyinordertorecoverthedebts.Liability under the section may arise on the death ofamemberifthedeathreducesthemembershipbelowthestatutoryminimumfortheparticular company and:

(i) Notransfereeisregisteredasanewmember,and (ii) Thepersonalrepresentativeofthedeceasedmemberdoesnotelecttobe registeredasamember,withintheprescribedsixmonths.

Itshouldbenotedthatthesectionlimitsamember’sliabilitytodebtscontractedafter thesixmonths.Itdoesnotmakethememberliableforanydebtsincurredduringthesixmonths,whichfollowthereductionofmembership.Neitherdoesitmakeamemberliableforanytortcommittedbythecompanyduringtherelevanttime.

(b) Section109(4):Non-publication/Mis-descriptionofacompany’sname

Subsection(1)ofSection109oftheActrequiresacompany’sofficersandotheragentstowriteitsnameonitsseal,letters,businessdocumentsandnegotiableinstruments.This is tobedoneprimarily for thebenefitof thirdpartieswhomightcontractwithalimited company without realising that it is a limited company.

Subsection(4)ofthesectionprovidesthatanyofficeroragentofthecompanywho

does not comply with the aforesaid statutory requirements shall be liable to a finenotexceedingKshs.1000,andshall furtherbepersonally liable to theholderofanybillofexchange,promissorynote,chequeororder forgoodswhichdidnotbear thecompany’scorrectname,unlesstheamountduethereonisdulypaidbythecompany.The impositionofpersonal liabilityonthecompany’sagent iswhat isregarded, inasomewhat loose sense, as “lifting the veil of incorporation”.A probably better viewwouldbetoregardthesectionasacodificationofthecommonlawrulewhichmakesanagentpersonallyliableunderacontractwhichheentersintowithathirdpartywithoutdisclosingthatheisactingforaprincipal.That,ineffect,iswhathappensifacompany’sagent does not comply with the statutory requirement.

LiabilityunderthissectionisillustratedbyNasau Steam Press v Tyler & Others(7)

and Penrose v Martyr (8). In the lattercasetheplaintiff told thecourt thatshewasNOTawarethat thecompanywas limitedtillafter thebillswereaccepted.Shehad,



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therefore,beenmisledasto the legalstatusof thecompany. Itshould,however,benotedthatthesectiondoesnotrequirethatthethirdpartysuingthecompany’sofficershouldhavebeenmisledbytheofficer’sfailuretowritethecompany’snamecorrectly.

(c) Section 150: Group accounts

Section150requiresacompanywhichhassubsidiariestolaybeforethecompanyingeneralmeetingaccountsorstatementsdealingwiththestateofaffairsandprofitorlossofthecompanyandthesubsidiariesatthetimewhenthecompany’sownbalancesheetandprofitandlossaccountarelaidbeforethecompany’sgeneralmeeting.ThegroupaccountsaretobepreparedinaccordancewiththeprovisionsofSections150-154 and paragraphs 17-18 of the Sixth Schedule to the Companies Act so as to appear “astheaccountsofanactualcompany”.

Theseprovisionsconstitutewhatisregardedinaloosesenseasaninstanceof“lifting

theveil”becauseamember (theholdingcompany) isobliged to incorporate into itsbalancesheet theassetsand liabilitiesof thecompanyofwhich it isamember(thesubsidiarycompany)asiftheywereitsownassetsandliabilities.Thisisamodificationof the general principle that a company’s assets and liabilities are not amember’sassetsandliabilitiesandwouldnot,therefore,beincorporatedintothemember’sownbalancesheet.

(d) Section 167: Investigation of Company’s Affairs

Section167givesaninspectorappointedbythecourtpowerstoinvestigatetheaffairsofthatcompany’ssubsidiary,orholdingcompany,iftheinspectorthinksitnecessaryto do so for the purpose of his investigation. An investigation instituted pursuant to this powerwouldberegarded,inaloosesense,asaninstanceof“liftingtheveil”becausetheordertoinvestigateacompanysufficedtoinvestigatethecompany’smember,orvice versa, as if they were one entity.

Generallyspeaking,acompanyanditsmember(inthiscase,theholdingcompany)are

altogetherseparateentitiesandacourtordertoinvestigatetheaffairsofasubsidiarycompany would not authorise an investigation of its holding company, and vice versa.

(e) Section 173 (5): Investigation of Company’s Membership

Section173(1)empowerstheregistrartoappointoneormorecompetentinspectorstoinvestigateandreportonthemembershipofanycompanyforthepurposeofdeterminingthetruepersonswhoareorhavebeenfinanciallyinterestedinthesuccessorfailureofthecompanyorabletocontrolormateriallytoinfluencethepolicyofthecompany.

Forthepurposeofthatinvestigation,Subsection5ofthesectionconfersontheinspector,or inspectors, power to investigate themembership of the company’s subsidiary orholdingcompanyforthesamepurpose.Acompanyanditssubsidiary,orsubsidiaries,aretherebyregardedasoneentityforthepurposeoftheinvestigation,andtheveilofincorporationtherebylifted.

(f) Section210:Take-overBids

Section210providesthatwhereaschemeorcontractinvolvingthetransferofshares

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oranyclassofsharesinacompanytoanothercompanyhasbeenapprovedbytheholders of not less than nine-tenths in value of the shares whose transfer is involved, the transferee company may, at any time within two months after the expiration of fourmonthsafterthemakingoftheofferbythetransfereecompany,givenoticeintheprescribedmannertoanydissentingshareholderthatitdesirestoacquirehisshares.The dissenting shareholder must then apply to the court within one month from the date on which the notice was given for an order restraining the transferee company from compulsorily acquiring his shares. The court order may, in an appropriate situation, lifttheveilofincorporation.ThisisillustratedbyRe: Bugle Press Ltd(9)inwhichanoffermadebyacompanywasregardedashavingbeenmade, insubstance,bythecompany’smembers.Thecourttherebyliftedtheveilofincorporationbytreatingthecompanyanditsmembersasoneentityforpurposesofacceptanceoftheoffer.

(g) Section 323: Fraudulent Trading Section 323 provides that if, in the course of the winding up of a company, it appears

thatanybusinessofthecompanyhasbeencarriedonwithintenttodefraudcreditorsofthe company or creditors of any other person, or for any fraudulent purpose, the court, ontheapplicationoftheofficialreceiverortheliquidatororanycreditororcontributoryof the company may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall bepersonallyresponsible,withoutanylimitationofliability,foralloranyofthedebtsorotherliabilitiesofthecompanyasthecourtmaydirect.

The personal liability of the person concerned for the company’s debts is what

constitutes, in an extremely loose sense, an instance of lifting the veil of incorporation. ThecorrespondingsectionoftheEnglishCompaniesActisinvariablycitedinEnglishcompanylawtextbooksasaninstanceofliftingtheveil.Thecitation,thoughhallowedbyEnglishacademictradition,islogicallyuntenable.

NoKenyacaseappearstohavebeendecidedunderthesection.However,therelevantEnglishcasesdosuggestthattobe“knowinglyparties”tofraudulenttradingunderthesectionsomepositivestepmusthavebeentakenbythoseconcerned: Re: Maidstone Building Provisions Ltd(10).

Itshouldbenotedthat,onitsliteralconstruction,Section323appearstobewiderthanSection33becauseitalsocoversliabilitiesotherthandebts,suchasliabilityintort,ordamagesforbreachofcontract.Itcanalsobeinvokedagainstdirectors,membersoranybodyelsewhoparticipatedinthefraudulenttrading.However,theobviouslimitationof thesection is that itcanonlybe invokedonawindingupandtheapplicantmustprove fraud.

If the liquidator applies to the court any money received is distributed to creditorsgenerally and forms part of the general assets of the company: Re William C Leitch Ltd(No2)(II).However,ifacreditorappliesthecourtmayawardhimhisactuallossor,alternatively,orderthedefendantstopayhisactualdebt:Re: Cyona Distributors Ltd (12).



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COMMON LAW OR JUDICIAL EXCEPTIONS

NumerousEnglishcaseshavebeenvariouslyclassifiedbyEnglishwritersasinstancesof“liftingtheveilof incorporation”.Afewofthesecasesaresummarisedbelow.Butitshouldbenotedthattheparticularjudgesweremerelyascertainingthefactsofthecasebeforethemandmakingtheappropriatedecisionratherthanconsciouslyordeliberately“liftingtheveilofincorporation”.Itisthewriterswhohavecategorisedthesaidcasesasinstancesofliftingtheveilbecausethedecisions in thosecasesappearedto themtobeamodificationof theprinciple inSalomon’scase.Thesecasesmaybeexplainedunderthefollowingheadings.

(a) Agency/Trustee/Nominee

One of the ratio decidendi in Salomon’s casewasstatedbyLordMacnaghten that“thecompanyisnotinlawtheagentofthesubscribers”.ThispropositionwasaffirmedbytheEnglishCourtofAppealandextendedtoassociatedcompaniesinEbbw Vale UrbanDistrictCouncilvSouthWalesTrafficAreaLicensingAuthority when Lord Cohen stated:

“Undertheordinaryrulesoflaw,aparentcompanyandasubsidiarycompany,evena100%subsidiarycompany,aredistinctlegalentities,andintheabsenceofanagencycontractbetweenthetwocompanies,onecannotbesaidtobetheagentoftheother.Thatseemstometobeclearlyestablishedby Salomon v Salomon & Co Ltd(3).

Fromthisstatement,itcanbeinferredthat,ifacourtheldthatacompanyactedinaparticular instance as an agent of its holding company, the veil of incorporation would havebeenlifted.ThisisillustratedbythedecisioninFirestone Tyre & Rubber Co v Llewellyn(12)inwhichitwasheld,onthebasisofthetradingarrangementsbetweentheholdingcompanyanditssubsidiary,thatthesubsidiarywastheagentoftheholdingcompany.

(b) Fraud or Improper Conduct

English courts have intervened on numerous occasions and lifted the veil of incorporation inordertocircumventafraudulentorimproperdesignbyabunchofschemingpromotersorshareholders.ThisisillustratedbythedecisionsinJones and Another v Lipman and Another(13)andGilford Motor Co Ltd v Horne(14).Thecourt’sorder inthelattercaseisusuallycitedasaninstanceofliftingtheveilbutitshouldbenotedthatthedefendant(Horne)wasnotamemberofthecompanyand,inprinciple;noveilexistedbetweenhimandthecompany,whichwouldhavebeenliftedbythecourt.ItisratheraninstanceofthecourtregardingthecompanyasMrHorneinanotherform(“alterego”).

(c) Enemy Character

Acompanymaybe regardedasanenemy if, inter alia, all or substantiallyall of itssharesareheldbyalienenemies.ThisisillustratedbyDaimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd(15).SincethereappearstobenoKenyacaseonthepoint,theprinciplessummarisedbyLordParkermaybeusefulguidancetoaKenyan who might have to determine, in a given case, whether a particular company is toberegardedasafriendorenemyofKenya.

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(d) Ratification of Corporate Acts

AnumberofEnglishcaseswhichareregardedasinstancesofliftingtheveilarethoserelatingtoinformalratificationbythemembersofactsdoneonbehalfofthecompany.Ineachofthesecasesthecourtregardedadecisionofthemembersasthedecisionofthecompanyitselfandtherebyliftedtheveilofincorporation.ThisisillustratedbyRe: Duomatic Ltd (16)andRe: Express Engineering Works Ltd(17).

(e) Group Enterprises

NumerouscaseshavebeendecidedbyEnglishcourtsthegeneraltenorofwhichistoregardasubsidiaryanditsholdingcompanyasoneentity.Thereisnobasicprinciplegoverningtheliftingoftheveilintheseinstancesandeachdecisionwasbasedonthefacts of the particular case. Examples are Harold Holds worth & Co Ltd v Caddies (18),Hellenic and General Trust Ltd (19)andDHN Food Distributors v London Borough of Tower Hamlets(20).

(f) Determination of Residence

Likeanindividual,acompanyhasaresidencewhereitcarriesonbusinessandkeepsonhouse.Toascertainacompany’sresidenceentailsliftingtheveilofincorporation.Thisisbecauseacompanyresidesinthecountryinwhichitsaffairsarecontrolledandmanaged from. In DeBeers Consolidated Mines td. V Howe, the court was emphatic thatacompany’sresidenceisthecountryinwhichitscentralmanagementandcontrolactuallyabides.



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SUMMARY OF CHAPTER TWO

A company’s constitution consists of two documents, namely, Memorandum andArticles ofAssociation

The doctrine of ultra vires limits the capacity of a company to contract.

In exceptional circumstances the law ignores the separate legal personality of the company in favourof the realitiesbehind the facade.Thesecircumstancesarecollectively referred toaslifting the veil of incorporation

The series of acts which precede company registration are referred and generally summarised as“promotion”.

Apromoter formsa companyand is chargedwith theduty of reasonable careand skill anddisclosure.Itshould,however,benotedthatthereisnogeneralstatutoryorjudicialdefinitionofpromoter.

Pre-incorporation contracts is null and void unless the company enters into a similar contract after incorporation. A pre-incorporation contract is an agreement, which is entered into usually byapromoteronbehalfofthecompanyatatimewhenthecompany’sformationhasnotbeencompleted.

Thecompanyisundernoobligationtore-imbursethepromoterApromoterhasnolegalrightsagainstthecompanyhepromotes;butcanrewardhiminotherwayssuchasgivinghimfoundermembersharesorappointinghimasadirector.

The consequences of incorporation are as follows:

1. Limitedliability2. Perpetual succession3. Owning of property4. Suingandbeingsued5. Capacity to contract6. Common seal

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CHAPTER QUIZ

1. Explaintheexpression“liftingtheveil”

2. Who is a promoter?

3. Name the constitutive documents of a company

4. What is Ultra Vires?



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ANSWERS TO QUIZ

1. This is an exception to the legal rule that a company has legal personality. This is where thecompanyanditsmember’sevensubsidiariesaretreatedasone

2. A promoter is a person who undertakes to form a company with reference to a given purpose and to set it going

3. Articles and memorandum of association

4. ThisisaLatintermthatliterallymeansbeyondthepowers.Theyarethosetransactionsthat are outside the contracting capacity of the company.

A SAMPLE OF EXAM QUESTIONS

QUESTION ONE

JanetandJacksonOnyangoareformingaLimitedLiability Company. They are seeking your legaladviceontheissueslistedbelow.RespondtotheenquiriesbyJanetandJacksonOnyangoon:

a) What are the Memorandum and Articles of Association and is there a difference betweenthetwo?(5marks)

b) Whatdetailswouldyouexpectthetwodocumentsin(a)abovetocontainandwhatotherinformationmightyoubeabletogiveaboutthesedetails? (15marks)

QUESTION TWO

a) Outline the rules that govern pre-incorporation contracts. Citearelevantcaselawtosupportyouranswer.(12marks)

b) Kioko, an Under Secretary in the Ministry of Viwandani was entrusted with theresponsibility of selling theMinistry’s boardedmotor vehicles. He invitedbids frommembersofthepublictobuytwoLorries.Healsobid,throughanominee.Mwangangi,hisownbrother.

Subsequently, he sold the lorries toMwangangi, at Ksh.80, 000 each. Kioko then

formed Kima Company Ltd and instructed Mwangangi to sell the lorries to the company atKsh.350,000each.AprospectusasissuedtothepublictosubscribeforsharestoKima Company Ltd. The prospectus gave Mwangangi as the vendor of the lorries and didnotdisclosetheprofitKiokowasmaking.Musembi,ashareholderofthecompany,

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haslearntofthesaleofthelorriestothecompanyandtheprofitKiokomadeandseeksyouradviceonthecompany’srightsinrespectofthesame.

Advise Musembi.

QUESTION THREE

Thecourtsandalsostatutoryprovisionshaveprovidedjustificationsforignoringthefundamentalprinciple of legal personality through the so-called doctrine of lifting the veil. Discuss

Discuss (20marks)

Kindlyrefertothefollowingsittings:-12/01;12/00;07/00;12/00;06/12;05/02;06/01;1/06;06



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PART B


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CHAPTER THREE

SHARE CAPITAL

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CHAPTER THREESHARE CAPITAL

OBJECTIVES

Attheendofthischapter,thestudentshouldbeableto:

• Explain the meaning of capital and what it consists of• Examineliabilityinrespectofprospectuses• Statewhensharesmaybeissuedatadiscountandatapremium• Explainhowcapitalmaybealtered• Explain when and how to issue a prospectus

INTRODUCTION

Capitalisintroducedtothepublicthroughfloatation.Thischapterconcernsitselfwiththefloatationproceduresand the formalities tobemet. Itgives theclasses intowhichcapital isdivided. Itshouldbenoted thatfloatation is restricted topubliccompaniessinceprivatecompaniesareprohibitedbytheirarticles.

KEY DEFINITIONS

• Capital - amount of money which a company raises from issuing shares • Premium - The money received in excess over the par value of shares• Discount -Thedifferencebetweenthenominalvalueandtheissueprice;itsnormally

lower than the nominal value• Prospectus-Documentissuedbyapubliccompanywhichwantstoraisecapital• CA-Companies Act chapter 486• Void -Means the contract cannot beenforced it confers no rights and imposesno

obligations• Voidable -Canbeenforcedattheoptionoftheinnocentparty

EXAM CONTEXT

Theexaminerinthisareahastendedtoconfinehimselfontestingthestudent’sunderstandingonthestatutoryprovisions.Questionslikelytobeaskedincludewhatrequirementsthecompanyshouldmeet before issuing a certain securities; or when can a company issue shares at adiscount, at premium?Somequestions from thisarea canbe found in the following sittings:05/02;06/01;12/00;07/00


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INDUSTRY CONTEXT

This is a very practical chapter in the industry. In the current year and even the previous year, manycompanieshavemadefloatationforinstanceSafariCom,EvereadyEastAfrica,Kengenjust tomentionbuta few.Through thischapterone isable tounderstand the formalitiesandprocedurestobefollowedinfloatingshares.Theprospectus,forinstance,isavitaldocumentthatbringstolightmanyissuessuchasitscontentsandliabilityinrespectofit.

3.1 RAISING AND MAINTENANCE OF CAPITAL

Fast forward

Ø The ways in which a company raises capitalØ Therearestatutoryrulesrelatingtocapital,bonus,discountsandpremiumstoensure

the company does not deplete its capital

RAISING OF CAPITAL

MEANING OF CAPITAL

Incommercialspeech,theword`capital’isgenerallyusedtodenotetheamountbywhichtheassetsofabusinessexceeditsliabilities.However,inlegalspeech,theword“capital”isusedto denote the amount of money which a company raises from a sale of its shares, or what represents that money.

TYPES OF CAPITAL

A company’s capital at any given moment may consist of:

a) NOMINAL OR AUTHORISED CAPITAL This is the capital that is stated in the Memorandum of Association pursuant to Section

5(4)a)oftheAct.Itiscalled“nominalcapital”becauseitiscalculatedonthebasisofthe“nominal”orbookvalueofthesharesintowhichitisdivided.Itis“authorized”inthe sense that, once the Memorandum of Association is registered, the company can takeimmediatestepstoraisethecapitalfromthepublicwithoutapplyingforapermitorlicense to collect the money.

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b) ISSUED CAPITAL

The issued capital is that portion of the nominal capitalwhich is constituted by thenominalvalueoftheshareswhichhavebeenissuedbythecompany.Itisalsoknownas the “subscribedcapital”or “allottedcapital”. Itmaybe less than,orequal to, thenominalcapitalbutcannotexceedit.

c) PAID-UPCAPITAL

Thepaid-upcapitalisconstitutedbytheaggregateoftheamountofmoneythatispaid-uponeachshareissuedbythecompany.Itmaybeequaltoorlessthan,theissuedcapitalbutcannotexceedit.

d) CALLED-UPCAPITAL

Acompany’scalled-upcapitalisconstitutedbytheamountdueisrespectofcallsmadebythedirectorsonissuedshares.

e) UNCALLED CAPITAL

The uncalled capital is the amount not called up on shares which a company has issued. It is the nominal capital minus the called up and the paid-up capital.

f) RESERVE CAPITAL

The reservecapital isdefinedbySection62of theActas theportionof the issuedbutuncalledcapitalofa limitedcompanywhichthecompany’smembers,byspecialresolution, have resolved that the company shall not call up unless and until it is in liquidation. It is tobecalleduponly forpurposesof the liquidation.Assoonas theresolutionispassed,thecapital is,asitwere,“putonreserve”.Thedirectors’powerunder thearticles tomakecallsonshareswill notbeexercisable in respectof thatcapital,unlessthecompanyisbeingwoundup.ItisreferredtointhemarginalnotetoSection62as“thereserveliability”ofalimitedcompany.

METHODS OF PUBLIC ISSUE

Fast forward

Placing, offer for sale and prospectus issue are the main methods

Acompany’sauthorisedcapitalmayberaisedinoneortheotherofthefollowingways:

a) PLACING A `placing’occurs if thecompany, insteadofselling itssharesdirectly to thepublic,

arrangeswithabrokertosellthemonitsbehalf.

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Company.....................Broker.......................sellsthesharesto..............Public (Acts as the Company’s agent)

Thesharesaresaidtobe“placed”withthebroker.Aplacingmaybe“aprivateplacing”if thesharesare tobeoffered forsale toselectedcustomersof thebroker (usuallyinstitutionalinvestors)ratherthanmadeavailabletothegeneralpublic.

b) OFFER FOR SALE

An“offerforsale”isanarrangementwherebyacompanysellssomeofitssharestoafinancialinstitutioncalled“IssuingHouse”.Theissuinghousewillprepareandissueaprospectusthenre-sellthesharestothepublic.

Company......sellssharestoIssuingHouse..........Resellstheshares.........toPublic (Issues a document called “Offer for sale”)

Thecompanynormallyissuesrenounceableallotmentletterstotheissuinghousetofacilitate the transfer of specific shares todesignatedpurchasers.Thisobviates thenecessityofhavingtoregisterthenameoftheissuinghouseinthecompany’sregisterofmemberswhensharesareallottedtoitandhavingitsnameremovedfromtheregistershortlyafterwardswhenthepublicbuytheshares.

c) PROSPECTUS ISSUE (DIRECT OFFER TO THE PUBLIC)

Underaprospectusissuethecompanysellsthesharesdirectlytothepublicratherthanselling them through intermediaries.

Company.........................................sellssharesto.......................................Public (Issues a document Called “prospectus”)

THE PROSPECTUS ISSUE AND STATUTORY PROVISIONS

Fast forward

Ø Adocumentthatinvitesthepublictosubscribetothesharesofacompany.Ø Liabilityinrespectofprospectusescaneitherbecivilorcriminal.Ø Peoplelikelytobeliablearethosewhotakepartinitspreparation.

PURPOSE OF THE STATUTORY PROVISIONS

Acompany’ssharesarelegallyregardedasgoods.Consequently,thecommonlawruleknownas“caveatemptor”appliedtotheirsale.Inparticular,thecompanyasasellerwasnotboundtosayanythingtopotentialbuyerswhichwouldenablethemtoassesstherisksinvolved.Buyerswere therefore leftwithout a legal remedy if they bought shareswhich theywould not haveboughtiftherelevantmaterialfactshadbeendisclosedbythecompany’sagents.InanattempttoremedythissituationtheCompaniesActincorporatedanumberofstatutoryprovisionswhichmustbecompliedwith.Theprovisionsareasfollows:

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THE STATUTORY PROVISIONS

i) Definitionof“Prospectus”

Aprospectus isdefinedbySection2ofCompaniesActas “anyprospectus,notice,circular, advertisement or other invitation offering to the public for subscription orpurchase any shares or debentures of a company” This particular definition wasintended to prevent companies from evading the legal duties pertaining to the issue of a prospectus by issuing a prospectus under such name as “notice”, “circular” or“advertisement”.Whetheraparticulardocumentisaprospectuswillultimatelydependonthefunctionitfulfilsratherthanthenamegiventoitbyitsauthors.Regardingtheword“offering”inthedefinitionitshouldberememberedthattheissueofaprospectusbyacompanyisnotanofferassuchbutisamere“invitationtotreat”.Itistheapplicationmadeinresponsetotheprospectusthatwillconstitutethe“offer”

ii) Dating of the prospectus

Section39CompaniesActprovidesthataprospectusshallbedated.Thedateshall,unlessthecontraryisproved,betakenasthedateonwhichtheprospectuswasissuedtothepublic.

iii) Contents of the prospectus

The authors of a prospectus are legally free to state therein whatever they deem appropriate to state but the contents must include, where applicable, the eighteenmattersspecifiedinPartIoftheThirdScheduletotheActandthethreereportsspecifiedinPartIIofthesaidSchedule.Section40(3)providesthat,exceptasprovidedtherein,itshallnotbe lawful foracompany to issueany formofapplication forshares inordebenturesofacompanyunlesstheformisissuedwithaprospectuswhichcomplieswiththestatutoryrequirements.However,aformofapplicationforsharesneednotbeissued with a prospectus if the form was issued either:

i) Inconnectionwithabona fide invitation to a person to enter into an underwriting agreementwithrespecttothesharesordebentures;or ii) Inrelationtosharesordebentureswhichwerenotofferedtothepublic;or iii) Toexistingmembersordebentureholdersofthecompany(irrespectiveof whethertheapplicanthadtherighttorenounceinfavourofotherpersons);or iv) Inrelationtosharesordebentureswhichareoraretobeinallrespectsuniform withsharesordebenturepreviouslyissued.

THE MATTERS AND REPORTS

Themattersandreportstobestatedinaprospectusmaybesummarizedasfollows:

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1. The Matters

The matters to be stated in a prospectus are:

i) Directors ’andAuditors of the company a) Directors ’names,addressesandoccupations. b) Directors ’qualificationshares,ifany,andtheirremuneration(ifthereisaprovision inthearticles). c) Directors ’interestinthecompany’spromotion. d) Auditors ’namesandpostaladdresses.

ii) Formation expenses a) Preliminaryexpenses . b) Promoters’remuneration. c) Particularsofoptionsonsharesordebentures. d) Underwritingcommissionandbrokerage.

iii) Investorinformation a) Theminimumsubscription. b) Thetimeoftheopeningofthesubscriptionlists. c) Amountpayableonapplicationandallotment. d) Voting and class rights e) Deferredshares.

iv) Company’spropertyandbusiness a) Particularsofsharesanddebenturesissuedotherwisethanforcash. b) Particularsofmaterialcontracts. c) Vendorsofpropertytothecompany. d) Amountpaidforpropertytobeboughtbythecompany,statingtheamountpaid for goodwill. e) Lengthoftimethebusinesshasbeencarriedon,iflessthanthreeyears.

2. The Reports

i) Anauditor’sreportshowing: a) ProfitsorlossesineachofthelastFIVEyears. b) Rateofdividendduringthelastfiveyears. c) Assetsandliabilitiesatthedateofthelastaccounts. d) Similardetailswithregardtosubsidiarycompanies,ifany.

ii) Wheretheproceedsoftheissuearetobeusedtobuyabusiness,areportbynamedaccountantsontheprofitsorlossesofthebusinessforthelastfiveyears,anditsassetsandliabilitiesatthedateofthelastaccounts.

iii) Wheretheproceedsoftheissuearetobeusedtobuysharesinasubsidiary,asimilar

reportasin(ii)above.

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MEANING OF “PUBLIC”

Forthepurposesoftheprospectusissuetheword“public”isdeclaredbySection57(1)toinclude“anysectionofthepublic,whetherselectedasmembersordebentureholdersofthecompanyconcernedorasclientsofthepersonissuingtheprospectusorinanyothermanner.”

In Re: South of England Natural Gas Co. Ltd (40) it was held that a document invitingapplicationsforsharesincertaingascompanieswasanoffertothepubliceventhoughitwasmarked“forprivatecirculationonly.”However,a“circular”bywhichacompanyofferedtoacquirethesharesofanothercompanyinexchangeforitsownshareswasheldnottobea“prospectus”withinthestatutorydefinition:Government Stock and other Securities Investment Co. Ltd v Christopher(41)

REGISTRATION OF PROSPECTUS

Section43(1)providesthatnoprospectusshallbeissuedbyoronbehalfofacompanyunless,onorbeforethedateofitspublication,therehasbeendeliveredtotheregistrarforregistrationacopythereofsignedbyeverypersonwhoisnamedthereinasadirectororproposeddirectorofthecompany,orbyhisagentauthorisedinwritingandhavingendorsedthereonorattachedthereto

a) Anexpert’sconsenttoitsissue(iftheprospectuscontainsastatementbyhim),andb) Acopyormemorandumofevery“materialcontract”andawrittenstatementsignedby

the named accountants or auditors indicating any adjustments to their report and the reasonsfortheadjustments(iftheprospectuswasissuedgenerally).

LIABILITIES IN RESPECT OF PROSPECTUSES

1. CRIMINAL LIABILITIES

i) Issuingaformofapplicationunaccompaniedbyafullprospectus:afinenotexceedingKshs.10,000/-(Section40(4).

ii) Whereaprospectus“includesanyUNTRUESTATEMENTS”: a) FinenotexceedingKShs10,000or b) Imprisonmentforatermnotexceedingtwoyears, or c) BothsuchfineandimprisonmentS.46(1)iii) Knowingly issuing a prospectus containing a statement purporting to be made by

anexpertwithout theexpert’sconsent to the issuethereof:finenotexceedingKshs10,000/-(Section42(2).

iv) Section43(5)imposesafinenotexceedingKshs.100/-perdayfor: a) Issuingaprospectuswithoutdeliveringasignedcopythereoftotheregistrarfor registration. b) Issuingaprospectuscontaininganexpert’sstatementanddeliveringasigned copythereoftotheregistrarforregistration,butthecopysodelivereddoesnot haveendorsedthereon(orattachedthereto)theexpert’sconsenttotheissueof the prospectus.

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c) Issuingaprospectusanddeliveringasignedcopythereoftotheregistrarfor registration,butthecopysodelivereddoesnothaveendorsedthereon(or attachedthereto): i) Acopyofeverymaterialcontract(oramemorandumthereof)or ii) Awrittenstatementsignedbythenamedaccountantsorauditorsindicating any adjustments to their reports and the reasons for the adjustments.

2. CIVIL LIABILITIES

i) LIABILITY FOR FAILURE TO STATE ANY MATTER OR REPORT At Common Law, a contract of allotment is not a contract Uberimae Fidei. The company

isthereforenotunderalegalobligationtodiscloseorstateinitsprospectusanyrelevantmatterorreport.Theallotteeofshareshas;therefore,noremedyagainstthecompanyifheboughttheshareswhichhewouldnothaveboughthadthecompanymadetherelevantdisclosure.Thisrulehasnotbeenchangedbythedisclosurerequirementsofthe Companies Act.

However, theallot teemayhavearemedyforanomission if thefailuretostateanyrelevant fact had the indirect effect of rendering a stated fact untrue, with Section 48 (a)oftheAct.Forexample,inCOLES v WHITE CITY (MANCHESTER) GREYHOUND ASSOCIATION LTDtheprospectusstatedthatthelandtobeacquiredbythecompanywas“eminentlysuitable”forgreyhoundracing.Nomentionwasmadeofthefactthatapprovalofthelocalcouncilwasrequiredinordertobuildpublicstandsandkennels.ThiswasheldbytheCourtofAppealtobeagroundforrescissionbytheplaintiff.

ii) LIABILITY FOR MISSTATEMENT OR MISREPRESENTATION Thiswillbegovernedby thegeneralprinciplesof the lawofcontract,dependingon

whether the misstatement was:

a) A FRAUDULENT MISREPRESENTATIONbecausethecompanymadeit: i) Knowingly,or ii) Recklessly,carelesswhetheritbetrueorfalse,or iii) Withoutbeliefinitstruth:DERRY v PEEK(42)

b) AN INNOCENT MISREPRESENTATIONbecausethecompanymadeithonestly, believingwhatwasstatedtobetrue:DERRY v PEEK(42)

1 If the statement amounted to a fraudulent misrepresentation, the allot tee may suefordamages;DERRY v PEEK.ButtheHouseofLordsheldin HOULDSWORTH v CITY OF GLASGOW BANK that the allot tee can only get damages if he is also in a position to rescind the contract of allotment. If therescissionisnolongerpossible,therewillbenoremedy.Thisisan exception to the general principle of the law of contract that a person who has beeninducedtoenterinacontractbyafraudulentmisrepresentationhasthe optionofaffirmingthecontractbutsuingfordamages.

2 If the statement amounted to an INNOCENT misrepresentation, the allottee CANONLYSUEFORRESCISSION(i.e.askingthecourttoorderthe company

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toremovehisnamefromthemembers’registerandrefundthemoneyhepaidfor thesharesandheinturnreturningthesharestothecompany).Damagescannot beawardedforaninnocentmisrepresentation.ThiswasheldbytheHouseof Lords in DERRY v PEEK (42)

However,theallottee’srightofrescission(whetherforinnocentorfraudulentmisrepresentation)willbelostif:

a) Hedidnotinstituterectificationproceedingswithinareasonabletimeafter becomingawareofthemisrepresentation:FIRST NATIONAL REINSURANCE CO. V. GREENFIELD(43).Asevenmonths’delaywasheldtobeunreasonable delay. b) Heaffirmed,orisdeemedtohaveaffirmedthecontractafterdiscoveringthetruth (e.g.byacceptingdividends,attendingandvotingatmeetings,sellingor attemptingtoselltheshares). c) Thirdpartyrightsacquiredinthemeantimewouldbeinterferedwith,or d) Thecompanyhasgoneintoliquidationandsotherightsofcreditorshave crystallised and precede other claims: HOULDSWORTH Vs CITY OF GLASGOW BANK.

EFFECT OF RESCISSION

Whereacontractofallotmentisrescinded,theformershareholderwillbeentitledtohismoneyback(normallywith interest)andtoarefundofanyexpensestowhichhehasbeenput:RE: BRITISH GOLD FIELDS OF WEST AFRICA LTD. The plaintiff will also be entitled to havethecompany’sregistersRECTIFIEDbydeletinghisnametherefrom,andhecanproveinthecompany’sliquidationfortheamountduetohim:

RE: BRITISH GOLD FIELDS OF W. AFRICA.

iii) CIVIL LIABILITY OF DIRECTORS AND PROMOTERS Any person who subscribedforanysharesordebenturesonthefaithoftheprospectus

may sue for compensation under Section 45 of the Companies Act.

Thesectionislimitedtoprospectusesissuedbyoronbehalfofthe company and will afford no relief on an offer for sale or placingbyexistingholders(unlessthecompanyhasmadetheallotmentwiththatinview,sothatSection47applies).

Thesectioncannotbe invokedbymarketpurchasersof securitiesafter theoriginalallotment.

The only persons who can be made liable under the section are: a) Directorsatthetimeoftheissueoftheprospectus; b) Personswhoconsentedtobenamedintheprospectusasdirectorsorfuture directors; c) Promotersofthecompany,and d) Everypersonwhoauthorisedtheissueoftheprospectus.

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Section45(2)statesthat“nopersonshallbeliable...ifheproves...”Thismeansthatthedirectors or promoters are prima facieliablethereunderunlesstheysuccessfullyavailthemselvesofthestatutorydefencesunderthesubsection,(i.e.theyarepresumedtobeliableuntiltheyprovetheirinnocence).

In CLARK V URQUHART (44),thecourtexplainedthattheamountofcompensationpayableunderSection45of theAct iscalculatedormeasured in thesamewayasdamages for fraudulent misrepresentation is measured. The court also explained that theword“compensation”waschosen inorder toavoid the“invidiousassociation”ofdamageswithdishonestyinsuchasituation”.Thespecifiedpersonsweretobemadeliableasamatterofpolicy,irrespectiveoftheirmoralinnocence.

A person sued under S.45 can rebut the presumption of liability by proving that:

i) Havingconsentedtobecomeadirectorhewithdrewhisconsentbeforetheissueoftheprospectusandthatitwasissuedwithouthisauthorityorconsent;or

ii) theprospectuswas issuedwithouthisknowledgeorconsent,andthatonbecomingawareofitsissueheforthwithgavereasonablepublicnoticethatitwasissuedwithouthisknowledgeorauthority;or

iii) After the issueof theprospectusandbeforeallotment thereunderhe,onbecomingaware of the untrue statement, withdrew his consent to the prospectus and gave reasonablepublicnoticethathehaddonesoandwhy;or

iv) Asregardseveryuntruestatementnotpurportingtobemadeontheauthorityofanexpert or of a public official document or statement, he had reasonable ground tobelievethatthestatementwastrue;or

v) Thestatementwasmadebyanexpertandtheexpertconsentedtotheinclusionofhisstatementintheprospectusandthathebelievedtheexperttobecompetenttomakethestatement;or

vi) Thestatementwastakenfromapublicofficialdocumentorwasmadebyanofficial,and was a correct and fair representation of the document or statement.

If an expert consented to the inclusion of his report in the prospectus and the report is falsehewouldnotbeliableifheproves:

i) Thathewithdrewhisconsentinwritingbeforetheprospectuswasdeliveredfor registration;or ii) Thataftertheprospectuswasdeliveredforregistrationbutbeforetheallotment, he,onbecomingawareoftheuntruestatement,withdrewhisconsentinwriting andgavereasonablepublicnoticeofthewithdrawal,andthereasontherefore;or iii) Thathewascompetenttomakethestatementanduptothetimeofallotment believedonreasonablegroundsthatitwastrue.

Section III (1) provides that a public company which has issued a prospectus cannot commencebusinessorexerciseanyborrowingpowersunless:-

a) Theminimumsubscriptionhasbeenraised;b) Everydirectorofthecompanyhaspaidtothecompanyoneachofthesharestaken

orcontractedtobetakenbyhimandforwhichheisliabletopayincash,aproportionequaltotheproportionpayableonapplicationandallotmentonthesharesofferedforpublicsubscription;and

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c) Nomoneyisormaybecomeliabletoberepaidtoapplicantsforanysharesordebentureswhichhavebeenofferedforpublicsubscriptionbyreasonofanyfailuretoapplyforortoobtainpermissionforthesharesordebenturestobedealtinonanystockexchange;

d) Therehasbeendelivered to theregistrarastatutorydeclarationby thesecretaryoroneofthedirectors,inFormNo.211,thattheaforesaidconditionshavebeencompliedwith.

If the minimum subscription was not raised, the company can only commence business or exercise borrowing powers if:

a) There has been delivered to the registrar for registration a statement in lieu of prospectus;

b) Everydirectorofthecompanyhaspaidtothecompany,oneachofsharestakenorcontractedtobetakenbyhimandforwhichheisliabletopayincash,aproportionequaltotheproportionpayableonapplicationandallotmentonthesharespayableincash;

c) TherehasbeendeliveredtotheregistrarforregistrationastatutorydeclarationinFormNo. 212by the secretary or oneof thedirectors that condition (b) abovehasbeencomplied with.

The registrar shall, on delivery to him of the relevant form, or statement in lieu of prospectus, certifythatthecompanyisentitledtocommencebusiness.Thecertificateisconclusiveevidencethatthecompanyisentitledtocommencebusiness.

SectionIII(4)providesthatanycontractmadebyacompanybeforethedateatwhichitisentitledtocommencebusinessshallbeprovisionalonly,andshallnotbebindingon the company until thatdate.Thisprovision issomewhatambiguousand it isnotclearwhether the “provisional”contractbindstheotherparty.

In Re “Otto” Electrical Manufacturing Co(Clinton’sClaim),itwasheldthatthecompanywasnotliabletopayforthegoodswhichhadbeensoldtoitbeforeitobtainedthetradingcertificate.Since itwasput into liquidationbeforeobtaining thecertificate, thecontractdidnot “becomebinding”andtheliquidatorhad,therefore,rightlyrejectedtheclaim.

Section219(c)providesthatacompanywhichdoesnotcommenceitsbusinesswithinayearfromitsincorporationmaybewoundupbycourt.

Section III does not apply to a private company which may, therefore, legally commence its businessassoonasitisincorporated.

MAINTENANCE OF CAPITAL

Theissuedsharecapitalofacompanylimitedbysharesistheprimarysecurityforthecompany’screditors. In Re: Exchange Banking Co (Flit croft’s Case) Jessel, M.R. stated: “A limitedcompanyby itsMemorandumofAssociationdeclares that its capital is to beapplied for thepurposeofthebusiness.Itcannotreduceitscapitalexceptinthemannerandwiththesafeguardsprovidedbystatute.Onereason for this is that there isastatement that thecapitalshallbeappliedforthepurposesofthebusiness,andonthefaithofthatstatement,whichissometimessaidtobeanimpliedcontractwithcreditors,peopledealingwiththecompanygiveitcredit.The

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creditorhasnodebtorbutthatimpalpablethingthecorporation,whichhasnopropertyexcepttheassetsofthebusiness.Thecreditor,therefore,givescredittothatcapital,givescredittothecompanyonthefaithoftherepresentationthatthecapitalshallbeappliedonlyforthepurposesofthebusiness...”

The Companies Act, therefore, incorporated various provisions which are intended to ensure that acompany’scapital:

i) Isnot“watereddown”asitcomesintothecompany;andii) Doesnotgooutofthecompanyonceithasbeenreceived.

PROVISIONS WHICH PREVENT CAPITAL BEING

“WATERED DOWN”

Thefollowingaretheprovisionswhichareintendedtopreventacompany’scapitalbeing“watereddown”asitcomesintothecompany:

1. Issuing shares at a discount

In Ooregum Gold Mining Co of India Ltd v Roper(45)theHouseofLordsheldthatitisillegalforalimitedcompanytoissueitssharesatadiscount.ThisdecisionwasmadeonthebasisofwhatisnowSection5(4)oftheActwhichprovidesthatthememorandumshallstatetheamountwithwhichthecompanywillberegisteredand“thedivisionthereofintosharesofafixedamount”.Since the nominal value of a share is fixedbytheMemorandum,thecompanycannotissuetheshare at a discount.

After theabovecasewasdecided,Section59of theActwas incorporatedsoas topermitacompany to issue its shares at a discount if:-

a) The shares are of a class already issued If the shares are of a class already issued, they will most likely have a market value.

Themarketvaluewouldprovideabasisuponwhich thecompany’sdirectorswouldrecommend,andthemembersresolveon,theamountofthediscount.Intheabsenceof such a market value any amount decided on as the new price for the shares would beasarbitraryastheoriginalnominalvalue.

b) The issue is authorised by a resolution passed in general meeting Thisprovisionplacesuponthecompany’smember’sultimateresponsibilityfortheissue

at a discount.c) Theresolutionspecifiesthemaximumrateofdiscount Itisthememberswhodetermine,toalargeextent,themarketvalueoftheshares.They

canthereforejointlydecideontheamountbelowwhichtheywouldnotbewillingtoselltheir shares in the market. The amount so decided on would guide the directors on the maximumamountofdiscountatwhich theywouldbewilling to issue the remainingshares, or some of them.

d) Not less than one year has elapsed since the company was entitled to commence business.

This provision obviates the risk of a hasty or premature issue at a discount. Thestatutoryassumptionappearstobethat,havingbeeninbusinessforatleastoneyear,thecompanywouldmostlikelyhavepublisheditsfirstbalancesheetanddeclaredadividend, which could induce a greater demand for its shares.

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e) The issue is sanctioned by the court. Although the grounds upon which the court is to exercise its discretion to sanction or

rejecttheproposedissuearenotspeltout,itappearsthatitwouldprimarilybeactingasthecreditors’watchdogtoprotecttheirinterests.Thisissobecausecreditorswerenot represented at the general meeting which passed, the resolution authorising the company to issue the shares at a discount and so the court steps in to protect their interests. If the issue of shares at a discount would adversely affect any creditor, the courtwouldprobablynotsanctiontheissue.

f) The issue is made within one month after the court’s sanction. Thisprovisionacknowledgesthefactthatthestockexchangemarketisahighlyfluid

market.Ifacompany’smemberspassaresolutionauthorisinganissueatadiscountbecauseoftheprevailingmarketconditions,thedirectorsmustactontheresolutionbeforethemarketconditionschange.Thestatutoryassumptionappearstobethatthemarketconditionswouldhavemateriallychangedwithinonemonthafter thecourt’sconfirmation.Ifthedirectorsweretoissuethesharesatadiscountdespitethechangedconditions,theissuecouldnotbejustified.

Anothergeneralmeetingshouldbeheld toenable themembers to reconsider their decisionin thecontextof thechangedconditions.However, thedirectorsmayask thecourt toextendthetimeforissuingthesharesattheprescribeddiscountiftheyareoftheview,andthecourtconcurs,thatthemarketconditionshavenotmateriallychanged.Theflawwiththisprovisionisthat it does not provide a time limit for applying to the court for its sanction.

2. Payment of Underwriting Commission

Commission“isdefinedbyOsborn’sConciseLawDictionaryas,interalia”anagent’sremuneration.Forpurposesofcompanylaw,itdenotestheamountofmoneypaidbyacompanytoaperson“inconsiderationofhissubscribingoragreeingtosubscribe,whetherabsolutelyorconditionally,foranysharesinthecompany,orprocuringoragreeingtoprocuresubscriptions,whetherabsoluteorconditional,foranysharesinthecompany”

Section55(1)CompaniesActallowsacompanytopaythecommissionif:-

a) Thepaymentisauthorisedbythecompany’sarticles;b) Thecommissionpaidoragreedtobepaiddoesnotexceed10%ofthepriceatwhich

thesharesareissuedortheamountorrateauthorisedbythearticles,whicheveristheless;and

c) Theamountorratepercentofthecommissionpaidoragreedtobepaidis: i) Inthecaseofsharesofferedtothepublicforsubscription,disclosedinthe prospectus;or ii) In the caseof sharesnot offered to thepublic for subscription, disclosed in the

statementinlieuofprospectus,orinFormNo.225signedbyallthedirectorsortheiragentsauthorisedinwriting;and

d) Thenumberofshareswhichithasbeenagreedtosubscribeabsolutelyisdisclosedinmanner aforesaid.

Section55(2)oftheCompaniesActprovidesthat,exceptasprovidedbysubsection(1),no company shall apply any of its shares or capital money, either directly or indirectly, in payment of any commission, discount or allowance to any person in consideration of his subscribingoragreeingtosubscribe,whetherabsolutelyorconditionally,orprocuring

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or agreeing to procure subscriptions, absolute or conditional, for any shares in thecompany,whether thesharesormoneybeappliedbybeingadded to thepurchasemoneyofanypropertyacquiredbythecompanyortothecontractpriceofanyworktobeexecutedforthecompany,orthemoneybepaidoutofthenominalpurchasemoneyor contract price, or otherwise.

In Andréa V Zinc Mines of Great Britain Ltd (45)itwasexplainedthatanyagreementto pay commission in contravention of Section 55 is null and void.

Theeffectofpaymentofunderwritingcommission is that thecompany’sshareswillhavebeen issuedatadiscount.Section55 is, therefore, intended toprovidesomemeasureofstatutorycontroloveracompany’spowertopaycommission.

3. Brokerage

Brokerageisapaymentmadebyacompanytoabroker,orbrokers,inconsiderationfor“placing”thecompany’sshares.Itdiffersfromunderwritingcommissioninthatitisapaymentmadetoanagentwhoissellingthecompany’ssharesonitsbehalfwithoutundertakingtobuytheshareswhich he fails to sell. In Andréa V Zinc Mines of Great Britain Ltd(45)Bailhache,J.explainedthatapaymentisbrokerageonlyifitismadeto“stockbrokers,bankersandthelike,whoexhibitprospectusesandsend them to theircustomers,andbywhosemediation thecustomersareinducedtosubscribe”.Consequently,apaymentwhichwasmadetoaladyofapercentageontheamountofcapitalwhichsheinducedthirdpartiestosubscribeforsharesinthedefendantcompanywasheldnot tobebrokerage.Theladycouldnotberegardedasa“broker”onthebasisofsuchanisolatedtransaction.Thepersontowhomthepaymentismademustbeonewhocarriesonthebusinessofabroker,eitherexclusivelyoraspartofhisgeneralbusiness,asinthecaseofabanker.

Subsection (3)provides thatnothing inSection55“shallaffect thepowerofanycompany topaysuchbrokerageasithasheretoforebeenlawfulforacompanytopay”.Itwaspreviouslyheld in Metropolitan Coal Consumers’ Association V Scrimgeour(1895)thatbrokerageofa reasonableamountpaidbyacompany in theordinarycourseof itsbusinesswas legal. Inthat case thebrokeragewas2.5%.Theusualbrokeragevariesbetween0.25% -0.5%.Thereasonablenessofthecommissiondoesnotdependonmerepercentagesbutonwhatitwouldcostthecompanytosellthesharesbyitself.If,bypayingthebrokerage,thecompanywouldspendlessmoneyinsellingtheshares,thenthepaymentwouldberegardedasareasonableone.Although thepaymentofbrokerage isaderivation frommercantileusage, it isusual forcompanies to incorporate in their articles a clause which expressly authorises the company to paybrokerage.Forexample,Article6ofTableAprovidesthat“thecompanymayalsoonanyissueofsharespaysuchbrokerageasmaybelawful”.

Althoughpaymentofbrokeragemeansthatthecompanywillultimatelyreceivelessmoneyforthesharesithasissued,thepaymentisnotprohibitedbytheAct.Itisessentiallyanexpensewhich is incidental to the issue of the shares and a company cannot avoid incurring such an expense.

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PROVISIONS THAT PREVENT CAPITAL GOING OUT

OF THE COMPANY

In Trevor v Whitworth (1887)LordWatsonstated:

“Paid-upcapitalmaybediminishedorlostinthecourseofthecompany’strading;thatisaresultwhichnolegislationcanprevent,butpersonswhodealwith,andgivecredittoalimited company, naturally rely upon the fact that the company is trading with a certain amount of capital already paid,aswellasupontheresponsibilityof itsmembersforthecapitalremainingatacall;andthey are entitled to assume that nopartofthecapitalwhichhasbeenpaidintothecoffersofthecompanyhasbeensubsequentlypaidout,exceptinthelegitimatecourseofitsbusiness”.

AsLordWatsonacknowledged,nolegislationcanpreventacompany’scapitalfrombeinglostor diminished in the course of the company’s business. However, various provisions of theCompaniesAct,andcase law,are intended toensure thatnopartof thecompany’spaid-upcapitalispaidoutbythecompanyexceptinthelegitimatecourseofitsbusiness.Theyare:

i) SHARES ISSUED AT A PREMIUM

Acompanymayattimesissueitssharesatapriceabovetheirnominalvalue,i.e.atapremium.Thismaybenecessitatedbythefactthatthecompany’sshareswhichhavealreadybeenissuedarebeingsoldintheopenmarketatapricewhichisabovetheirnominalvalue.Sincesuchanissuedoesnotjeopardisethepositionofthecompany’screditors,thereisnolegalrequirementthattheissuebeconfirmedbythecourt.However,Section58(1)providesthatwhereacompanyissues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount orvalueofthepremiumsonthosesharesshallbetransferredtoanaccountcalled“thesharepremiumaccount”.ThesectionfurtherprovidesthatthesharepremiumaccountshallbegovernedbytheprovisionsoftheCompaniesActrelatingtothereductionofthesharecapitalofacompanyas if the share premium account were paid share capital of the company. This means, in effect, thatthefundscreditedtothesharepremiumaccountarenotpaidoutbythecompanyexceptinthelegitimatecourseofitsbusiness.

Sub-section2providesthatthesharepremiumaccountmay,however,beappliedbythecompany:

a) Topayupunissuedsharesofthecompanywhicharetobeissuedtomembersofthecompanyasfullypaidbonusshares;

b) Towriteoffthepreliminaryexpensesofthecompany;c) Towriteofftheexpensesofanyissueofsharesordebenturesofthecompany,orthe

commission paid or discount allowed on such issue, ord) To provide for the premium payable on redemption of any redeemable preference

sharesordebenturesofthecompany.

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MERGER ACCOUNTING

Itmayhappenthat,duringa“take-over”ofonecompany(A)byanothercompany(B),sharesinthe latter company are issued to shareholders of the former company in exchange. Company AwouldthenbedissolvedandcompanyBwouldacquireitsshares.ShouldasharepremiumaccountbeestablishedbycompanyBwhentheassetsofcompanyAexceedthenominalvalueof companyA’s shares? If a share premiumaccount is opened the pre-acquisition profits ofcompanyAwouldnotbedistributedbycompanyB.Itmaythereforebedecidedthatno share premiumaccountistobeopened.Thismethodofaccountingisknownas“mergeraccounting”.

ACQUISITION ACCOUNTING AND “MERGER RELIEF”

In SHEARER V BERCAIN(1980),itwasheldthat“mergeraccounting”isillegalandthata“truevalue”mustbeattributedtothenon-cashassetsacquiredandtheexcessofthe“truevalue”overthenominalvalueofthesharesmustbetransferredtoasharepremiumaccount.Thismethodofaccountingisknownas“acquisitionaccounting”andmeansthatthepre-acquisitionprofitsofcompanyAcannotbedistributedbycompanyB.ItisyetunclearastowhetherKenyacourtswilladopt the decision in Shearer v Bercain.TheKenyaCompaniesActdoesnotprovide“mergerrelief”thatwasintroducedbytheEnglishCompaniesActof1981.

ii) PURCHASE OF OWN SHARES

Anotherpossiblewayinwhichacompany’spaid-upcapitalmayleavethecompanyotherthanintheordinarycourseofthecompany’sbusinesswouldbeifthecompanypurchaseditsownshares. It was, therefore, held in Trevor v Whitworth(48)thatitisillegalforalimitedcompanytopurchase its own shares. Such a purchase, if permitted, would constitute an indirect reduction of the paid-up capital without compliance with the statutory provisions relating to reduction of capital. ThisisthegeneralrulethatisapplicableinKenya.Thisdecisionwassaidtobebasedontheimplied provisions of the English Companies Act of 1862. The said provisions were incorporated in theEnglishCompaniesActof1948which in turnbecameourCompaniesAct (Cap.486).Itmay,however,becriticised for itsassumption thatwheneveracompanybuys itsshares, itwoulddosobyutilisingitspaid-upcapital.Itis,infact,possibleforacompanytobuyitsshareswithoutusingitspaid-upcapitalbutusingthemoneyfromareservefund,whichwasconstitutedforthatpurpose.Suchapurchasemight,infact,bebeneficialtothecompany,whichcoulduseit as a mechanism for propping up the market value of its shares at a time when there is panic sellingbyitsshareholders,whichhasbeenprecipitatedbyadverserumoursaboutthecompany.Thecompanywouldlaterresellthesharesinsuchawayastopreventhighfluctuationsintheirmarket prices.

Despite the rule in Trevor V Whitworth, a company may purchase or acquire its own shares in the following cases:

a) Whereitacquiresitsownfullypaidsharesotherwisethanforvaluableconsideration,asin Re: Castiglione’s Will Trusts(49).

b) Where it is a purchase of redeemable shares under Section 60 of theAct. This is

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permittedbecausetheredemption“shallnotbetakenasreducingtheamountofthecompany’sauthorisedsharecapital”ifitisdoneinaccordancewiththeprovisionsofthesection.

c) Wherethesharesareacquiredpursuanttotheresolutionforreducingthecompany’scapitalunderSection68oftheAct.Suchacquisitionispermittedbecausetheinterestsof the company’s creditors would have been protected by the court at the time ofconfirmingtheproposedreduction.

d) WherethesharesarepurchasedinpursuanceofacourtorderunderSection211(2)onanapplicationbytheoppressedmembers,thesharespurchasedwouldbecancelledandthecompany’scapitalreducedaccordingly.

e) Wherethesharesareforfeitedfornon-paymentofacall,orwheretheyaresurrenderedin lieu of forfeiture.

iii) FINANCIAL ASSISTANCE FOR PURCHASE OF OWN

SHARES

Section56(1)oftheActrendersitunlawfulforacompanytogive,whetherdirectlyorindirectlyandwhetherbymeansofaloan,guarantee,theprovisionofsecurityorotherwise,anyfinancialassistancefor thepurposeofor inconnectionwithapurchaseorsubscriptionmadeor tobemadebyanypersonoforforanysharesinthecompany,or,wherethecompanyisasubsidiarycompany, in its holding company. The consequences of a contravening the section are:

a) Thecontract for thefinancialassistance isvoidand illegal,andcannotbeenforcedagainst a party thereto: Standard Bank v Mehotoro Farm(50);

b) ThecompanyandeveryofficerofthecompanywhoisindefaultshallbeliabletoafinenotexceedingKshs20,000;

c) Everydirectorwhoisapartytothecontraventionisguiltyofabreachoftrustandisliabletorecoupany losseswhichthecompanysuffersasaresult:Waller Steiner v Moir(51)

Exceptions

Section56(1)permitsacompanytogivefinancialassistanceforapurchaseof,orsubscriptionfor, its shares in the following circumstances:

a) Wherethelendingofmoneyispartoftheordinarybusinessofthecompanyandthemoneyislentbythecompanyintheordinarycourseofitsbusiness. In Steen v Law (52)thePrivyCouncilexplainedthatthisprovisiondoesnotvalidatealoangivenfortheexpresspurposeofenablingtheloaneetopurchasethelendingcompany’sshares.Thisissobecausenocompanycanbeconstitutedforthesolepurposeoflendingmoneytopersonswhowouldbebuyingitssharessothataloanitgivesforanyotherpurposewouldberegardedasan“unusual”or“extraordinary”,loan.Tobevalid,therefore,theloanmusthavebeengivenforoneofthepurposeforwhichthecompanyordinarilyorusually lendsmoneybutwasdiverted(whollyorpartly)toapurchaseofthelendingcompany’sshares.

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b) Where the loan is to trustees to enable them to purchase fully paid shares in thecompanytobeheldunderanemployees’sharescheme.

c) Wheretheloanistoemployees(otherthandirectors)toenablethemtopurchaseorsubscribe for fully-paidshares in thecompanyor itsholdingcompany tobeheldbythemselvesbywayofbeneficialownership.Ifacompanygivesaloantoanemployeeto purchase shares in the company, the employee must have the shares registered in his own name and not the name of a spouse or child. This is intended to induce the employee to bemoremotivatedandproductive by ensuring that hepersonally anddirectly reaps the fruits of his increased productivity.

ALTERATION OF CAPITAL

AcompanyisempoweredbySection63CompaniesActtoaltertheprovisionsofitsMemorandumof Association which relates to its registered or authorised capital. However, the power isexercisablesubjecttothefollowingconditions:

a) Thearticlesmustconfertheauthoritytoalterthecapital.Iftheydonot,theymaybealteredbyspecialresolutionandtheauthorityincorporatedtherein.

b) Thecompanymustholdageneralmeetingforthepurposeofalteringthecapital.c) Thealterationmustbeauthorisedbyanordinaryresolution(SeeTableA,Article45).

MODE OF ALTERATION

The alteration of capital may be made by:

1) Increasingthecompany’ssharecapitalbynewsharesofsuchamountastheresolutionprescribes;

2) Consolidating anddividing all or any, of the company’s share capital into shares oflargeramountthantheexistingshares;

3) Convertingall,orany,ofthecompany’spaid-upsharesintostock,orreconvertingthestockintopaid-upsharesofanydenomination;

4) Subdividingall,orany,ofthesharesintosharesofsmalleramountthanisfixedbythememorandum;

5) Cancelingshareswhichhavenotbeentakenoragreedtobetakenbyanyperson,anddiminish the amount of the capital. This mode of alteration is also known as diminution ofcapital.Subsection(3)providesthatitshallnotbedeemedtobeareduction of share capital within the meaning of the Act.

Theregistrarmustbenotifiedofanalterationofcapitalwithin30daysafterthepassingoftheresolution authorising the alteration. In the event of a failure to do so, the company and every officerofthecompanywhoisindefaultshallbeliabletoafine.

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REDUCTION OF CAPITAL

Thegeneralruleisthatitisillegalforacompanytoreduceitscapital.Thisissobecausesuchareductionwouldbetantamounttoreducingthesecurityavailabletothecompany’screditors:Trevor v Whitworth(48).However,Section68(1)authorisesacompanytoreduceitscapitalif:

a) Thecompany’sarticlesauthoriseittodoso.Ifthearticlesdonotconfertheauthoritytheycanbeamendedbytheinclusionthereinoftherequisiteauthority.

b) Thecompanypassesaspecialresolutiontothateffect.Theresolution isdefinedbySection68(2)as“aresolutionforreducingsharecapital”.

c) Thecourtconfirmstheproposedreduction.Thecourt’sconfirmationisrequiredinordertoprotecttheinterestsofthecompany’screditors,minoritymembersandthegeneralpublic,asexplainedbelow.

MODE OF REDUCTION

Section68(1)expresslystatesthatacompanymayreduceitscapital“inanyway”.Thereis,therefore,nostatutorilyprescribedmodeof reductionand theactualschemeadoptedby thecompanywilldependontheingenuityofitsdirectorsoraccountants.However,theActgivesthecompany an option of reducing its capital in one of the following ways:

a. By extinguishing the liability on any of its shares in respect of share capital not paid up: Section 68 (1) (a)

Example:

Thecompany’smemorandumreads:

“... Kshs.1, 000,000 divided into 100,000 Ordinary Shares of Kshs 10 each.”

— Amount already paid per share is Kshs. 5 — Amount unpaid per share is Kshs. 5

ThecompanypassesaspecialresolutiontoreducethecapitaltoKshs.500,000.Theresolutionisconfirmedbythecourt.

The amended memorandum will read as follows:

“... Kshs.500, 000 divided into 100,000 Ordinary Shares of Kshs 5 each.”

— Amount already paid per share is Kshs. 5 — TheunpaidamountofKshs.5pershareceasestobepayableandtheliability thereonis“extinguished.”

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b. By reducing the liability on any of its shares in respect of share capital not paid up: Section 68 (1) (a)

Example: Thecompany’smemorandumreads:

“... Kshs. 1, 000,000 divided into Kshs. 100,000 Ordinary Shares of Kshs.10each.”

— Amount already paid per shares is Kshs.5 — Amount unpaid per share is Kshs.5

ThecompanypassesaspecialresolutiontoreducethecapitaltoKshs.750,000.Theresolutionisconfirmedbythecourt.

The amended memorandum will read as follows:

“... Kshs.750,000 divided into 100,000 Ordinary Shares of Kshs.7.50 each.”

— Amount already paid per share is Kshs.5 — AmountunpaidpersharebecomesKshs.2.50(i.e.theliabilityonunpaidshares hasbeenreducedfromKshs.5toKshs.2.50).

c. Bycancellinganypaid-upsharecapital,whichislostorunrepresentedbyavailableassets without extinguishing or reducing liability on any shares: Section 68 (1) (b):

Example: Thecompany’smemorandumreads:

“... Kshs.1, 000,000 divided into 100,000 Ordinary Shares of Kshs.10 each...”

— Amount already paid per share is Kshs.5 — Amount unpaid on each share is Kshs.5

d. The Kshs.500, 000 received from the shareholders was banked by the company.Kshs.100,000/-waslaterwithdrawnfromthebankandusedtobuygoodsforresale.After thegoodswerepaid for and received, theywere kept in the company’s storepending delivery to customers the following day. The directors felt that it was unnecessary toinsurethegoodsforonenightonly.Afirecompletelydestroyedthegoodsduringthenight.TheKshs.100,000usedtobuythegoodsrepresentsthecapitalwhich,accordingtotheAct,“islostorunrepresentedbyavailableassets.”

ThecompanypassesaspecialresolutiontoreduceitscapitalbyKshs.100,000.Theresolutionisconfirmedbythecourt.

The amended memorandum will read:

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“...Kshs 900, 000 divided into 100,000 Ordinary Shares of Kshs 9.”

— AmountunpaidoneachshareisKshs.5(i.e.theliabilityonunpaidshareshasnot beenreducedorextinguished). — AmountpaidpersharebecomesKshs.4(byconsentofshareholders).

Thismodeofreductionislegallypossiblebutmaybequestionedfromapracticalpointof view. The truth is that it is the shareholders who have in fact lost their capital.

Itshouldbenotedthat,despitetheabovereduction,thememberswillreceivethesameamount of dividend from the company as they would have received if, for psychological reasons, the directors did not ask them to reduce the capital so that the shares retained theirKshs.10nominalvalue.

d. By canceling any paid up share capital, which is lost or unrepresented by available assets and also reducing liability on any shares: Section 68 (1) (b).

Example:


“...Kshs.1,000,000/-dividedinto100,000OrdinarySharesofKshs.10each.”

— Amount already paid per share is Kshs.5 — Amount unpaid per share is Kshs.5

Assumethatthesametypeandquantityofgoodsaredestroyedbyfireinthesamecircumstancesasinexample(c)above.

ThecompanypassesaspecialresolutiontoreduceitscapitalbyKshs.200,000.Theresolutionisconfirmedbythecourt.

The amended memorandum will read:

“...Kshs.800,000/-dividedinto100,000OrdinarySharesofKshs.8each.”

— Amount already paid per share is Kshs.5 — AmountunpaidpersharebecomesKshs.3

e. By cancelling any paid-up share capital, which is lost or unrepresented byavailable assets and also extinguishing liability on any shares: Section 68 (1) (b)

Example:


“...Kshs.1,000,000/-dividedinto100,000/-OrdinarySharesofKshs.10” — Amount paid per share is Kshs.9 — Amount unpaid per share is Kshs.1

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The Kshs.900, 000/- received by the company from the shareholders is banked.Kshs.100,000/-islaterwithdrawntobuygoodsforresale.

Thegoodsaredestroyedbyfire incircumstance identicalwith those inexample (c)above.

ThecompanycanreduceitscapitalbyKshs.200,000sothattheamendedmemorandumwill read as follows:

“...Kshs.800,000/-dividedinto100,000OrdinarySharesofkshs.8” — AmountpaidpersharebecomesKshs.8 — AmountunpaidpershareisNIL(i.e.theliabilityofKshs.1hasbeenextinguished).

f. Bypayingoffpaid-upsharecapitalwhichisinexcessofthewantsofthecompanywithout extinguishing or reducing liability on any shares

Example: i) Thecompany’smemorandumreads:

“...Kshs.10, 000,000 divided into 1,000,000 Ordinary Shares of Kshs.10each.”

— Kshs.5hasbeenpaidoneachshare — Kshs.5 is unpaid on each share

ThecompanycanpassaspecialresolutiontoreducethecapitaltoKshs.7,500,000bypayingbacktotheshareholdersKshs.2,500,000outoftheKshs.5,000,000theyhavealreadypaid to thecompany if thedirectorsconvince themembers that thepaid-upamountofshs.5,000,000isinexcessofthecompany’scurrentneedsanditwilltakealongtimebeforethecompanywouldrequiremorecapital.

Thecompany’smemorandumwillbeamendedtoread:

“...Kshs.7, 500,000 divided into 1,000,000 Ordinary Shares of Kshs.7.50 each.”

— AmountpaidoneachsharebecomesKshs.2.50; — Amount unpaid on each share remains Kshs.5.

ii) Study the scheme adopted by the British and American Trustee & Finance Corporation Ltd.

g. By paying off paid-up capital which is in excess of the company’s needs byextinguishing liability on any shares.

Example:

ReadtheschemeofreductionthatwasadoptedbytheBritishandAmericanTrustee andFinanceCorporationLtd.andconfirmedbytheHouseofLords.

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h. Bypayingoffpaid-upcapitalwhich is inexcessof thecompany’sneedsandreducing liability on any shares

Example:

Acompany’sauthorisedandissuedcapitalisKshs.10,000,000dividedinto1,000,000OrdinarySharesofKshs.10each.Kshs.5hasbeenpaidoneachshare.

The company can pass a special resolution to reduce the capital to Kshs.5 million paying to the shareholders Kshs.2.5 million out of the Kshs.5 million which they have alreadypaidtothecompanyifthedirectorstellthemembersthatthepaidupamountofshs.5m/-isinexcessofthecompany’scurrentneeds.

Thecompany’samendedmemorandumwillreadasfollows:

“...Kshs.5,000,000 divided into 1,000,000 Ordinary Shares of Kshs.5 each.” Amount paid on each share becomes Kshs.2.50 and the unpaid amount of Kshs.5 is reduced to Kshs.2.50”.

THE FUNCTION OF THE COURT

In Scottish Insurance Corporation Ltd v. Wilson’s & Clyde Coal Co. Lord Simmons stated:

“Butimportantthoughitstaskistoseethattheprocedurebywhichareductionofcapitaliscarriedthrough is formally correct and that creditors are not prejudiced, it has the further duty of satisfying itselfthattheschemeisfairandequitablebetweenthedifferentclassesofshareholders”.Thecourt would therefore, notconfirmaschemeofreductionifitisoftheviewthatitisnot“fairandequitable”toanyofshareholders.

a) PROTECTION OF CREDITORS

Where the reduction of capital involves diminution of unpaid capital or repayment to shareholders ofpaid-upcapital,creditorshaveastatutoryrightunderSection69(2)toobjecttotheproposedreductionand,uponobjection;alistofcreditorsmustbegiventothecourt.Thecourtwillthenconfirmthereductionifsatisfiedthatthecreditors:

i) Haveconsentedthereto;

ii) Havebeensecured(i.e.givenalternativesecuritysothattheywillnolongerrelyonthereducedcapitalastheirsecurity),

iii) Havebeendischargedorpaid off(Section70(1).

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b) PROTECTION OF MEMBERS

1. Amajorityofthecompany’smembersareprotectedbytherequirementthataspecialresolutionmustbepassedbythecompany’smembersinordertoinitiatethereductionprocess.Itismostunlikelythatathree-fourthsmajorityofmemberscouldfreelypassaresolution to reduce capital if the resolution is detrimental to their interests.

2. Aminorityof thecompany’smembersareprotectedbytheir judiciallyacknowledgedrighttoseekthecourt’sprotectionwheretheyareoftheviewthattheresolutionpassedbythemajorityisnot“fairandequitable”:British and American Trustee and Finance Corporation Ltd, and Reduced V Cooper(53)andRe: Thomas de la Rue and Co. Ltd and Reduced(55).

c) PROTECTION OF GENERAL PUBLIC

Itmayhappenthataresolutionreducingacompany’scapitalwaspassedincircumstanceswhichindicatethattheshareholdershadnotbeenproperlyandcorrectlyinformedabouttherealcausesofthereduction.Insuchacase,itisdesirablethatthegeneralpublic,aspotentialmembersofthecompany,shouldbetoldthetruthaboutthereduction.Section70(2)(b)empowersthecourtwhereappropriate,tomakeanorderrequiringthecompanytopublish,asthecourtdirects,thereason for reduction or such other information in regard thereto as the court may think expedient withaviewtogivingproperinformationtothepublic,and,ifthecourtthinksfit,thecauseswhichled to the reduction.

Thecourtorderconfirmingthereductionandtherelevantminuteasapprovedbythecourt,mustbedeliveredtotheregistrarforregistration.Section71(2)providesthat,ontheregistrationoftheorderandminute,andnotbefore,theresolutionforreducingsharecapitalasconfirmedbythe order so registered shall take effect.

LIABILITY OF MEMBERS

Section72(1)providesthatinthecaseofareductionofsharecapital,amemberofthecompany,pastorpresent,shallnotbeliableinrespectofanysharetoanycallorcontributionexceedinginamountthedifference,ifany,betweentheamountoftheshareasfixedbytheminuteandtheamountpaid,orthereducedamount,ifany,whichisdeemedtohavebeenpaidontheshares.

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REDEMPTION OF SHARES

Section60(1)empowersacompanylimitedbysharestoissuepreferenceshareswhichare,orattheoptionofthecompanyaretobeliable,toberedeemed,ifthearticlesauthorisesuchanissue. It, however, provides that:

a) No such shares shall be redeemedexcept out of the profits of the companywhichwouldotherwisebeavailable fordividendoroutof theproceedsofa fresh issueofsharesmadeforthepurposesoftheredemption;

b) Nosuchsharesshallberedeemedunlesstheyarefullypaid;c) Thepremium,ifany,payableonredemptionmusthavebeenprovidedforoutofthe

profits of the company or out of the company’s share premium account before thesharesareredeemed;

d) Whereanysuchsharesareredeemedotherwisethanoutoftheproceedsofafreshissue,thereshalloutofprofitswhichwouldotherwisehavebeenavailablefordividendbetransferredtoareservedfund,tobecalledthe capital redemption reserve fund, a sum equal to the nominal amount of the shares redeemed. The provisions of the Act relating to the reduction of the share capital of a company shall apply to the reserve fund as if it were paid-up share capital of the company, but Subsection 5 providesthatthecapitalredemptionreservefundmaybeappliedbythecompanyinpayingupunissuedsharesofthecompanytobeissuedtomembersofthecompanyasfullypaidbonusshares.Theseprovisionsareintendedtopreventacompany’sauthorisedcapitalfrombeing reducedbyany redemptionof the redeemablepreferencesharesof thecompany.

DIVIDENDS

Asa commercial term, theword “dividends” has a variablemeaning,which depends on thecontext in which it is used. For purposes of company law, it denotes the payments that a company makesoutofitsprofitstotheshareholdersinthecompany.

BASIC RULE

Thebasicruleisthat“dividendsmustnotbepaidoutofcapital”:Verner v General & Commercial Investment Trust(perLindley,J).Forpurposesofthisrule,“Capital”meansthemoneysubscribedpursuant to the Memorandum of Association, or what represents that money: Verner v General & Commercial Investment Trust.

DECLARATION AND PAYMENT

ThereisnoprovisionintheActdealingwithpaymentofdividends.Itis,therefore,governedbytheprovisionsof thecompany’sarticles, failingwhichtheprovisionsofTableA,whichareasfollows:

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i) Article 114 Thecompanyatageneralmeetingmaydeclaredividends,butnodividendshallexceed

theamountrecommendedbythedirectors.Theuseoftheword“may”meansthatthecompanyatageneralmeetingisnotboundtodeclaredividendsevenifthedirectorshaverecommendaparticularamount.Ontheotherhand,nodividendcanbedeclaredif the directors have recommended none.

ii) Article 115 Thedirectorsmay, from time to timepay to thememberssuch interimdividendsas

appeartothedirectorstobejustifiedbytheprofitsofthecompany.Aresolutionpassedat a general meeting directing the directors to pay interim dividends is invalid. Scott v Scott(56).

iii) Article 116 Nodividendshallbepaidotherwisethanoutofprofits.InVerner v General & Commercial

Investment TrustLindley,J.expressed theview that,because theword “profits” issomewhat ambiguous, this provision should beunderstood tomean that “dividendsmustnotbepaidoutofcapital”.Providedthedividendisnotpaidoutofcapital,itdoesnotmatterfromwhateverfunditispaid,whethercalledprofitsorotherwise.

iv) Article 118 Subjecttotherightsofpersons,ifany,entitledtoshareswithspecialrightsastodividend,

alldividendsshallbedeclaredandpaidaccordingtotheamountspaidorcreditedaspaidontheshares inrespectwhereof thedividendpaid.Thisprovisionmodifiesthecommon law rule that dividends are paid on the nominal value of the shares: Oak Bank Co. v Cram.

v) Article 120 Any general meeting declaring a dividend may direct payment of such dividend wholly

or partly by the distribution of specific assets and in particular of paid-up shares,debenturesoranyoneormoreofsuchways.Thisarticlegivesthecompanypowertopaydividendinkind.Intheabsenceofsuchaprovision,dividendispayableincashandthecompanymayberestrainedfrompayingitinanyotherform:Wood v Odessa Waterworks Co.(57)

vi) Article 121 Anydividend, interestorothermoneyspayableincashinrespectofsharesmaybe

paidbychequeorwarrantsentthroughthepost directed to the registered address of the holder or, in the case of joint holders, to the registered address of that one of the jointholderswhoisfirstnamedontheregisterofmembersortosuchpersonandtosuch address as the holder or joint holders may in writing direct. Every such cheque or warrantshallbemadepayabletotheorderofthepersontowhomitissent.

This provision gives the company express authority to remit the dividend cheque or warrantbypost.Ifthedividendchequeorwarrantislostintransit,thelossprima facie fallsontheshareholder.Intheabsenceofsuchaprovision,thecompanywouldhavenoauthoritytoremitthedividendsbypostand,ifitdoesandthedividendchequeislostin transit, it must issue a fresh cheque to the shareholder: Thairlwall v Great Northern Rly.

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vii) Article 122 Nodividendshallbearinterestagainstthecompany.Atcommonlaw,thedeclaration

ofadividendcreatesasimplecontractdebtduefromthecompanytotheshareholder,whichwillbetime-barredinsixyearsformthedateofdeclaration.

CASE LAW RELATING TO DIVIDENDS

TheaboveprovisionsofTableAsupplementthefollowingcommonlawrules:

1) Lossesinpreviousyearsneednotbeprovidedfor.Adividendcanbepaidifthereisaprofitonthecurrentyear’strading:Re:NationalBankofWales(1899).

2) Profits of previous years can be brought forward and distributed even if there is arevenue loss in the current trading year: Re:Hoare&Co(1904)

3) Lossesonfixedassets in thecurrentyearneednotbemadegoodbyprovision fordepreciationbeforetreatingarevenueprofitasavailablefordividend:Lee v Neuchatel AsphalteCo(1889)

4) Unrealised capital profits ona revaluation of assets canbedistributedbywayof adividend,orusedtopayabonusissueoffullypaidshares:DimbulaValley(Ceylon)TeaCovLaurie(1961).

5) Dividendsmustnotbepaidoutofcapital:VernervGeneral&CommercialInvestmentTrust.

SUMMARY OF THE CHAPTER

Capital refers to the amount that a company raises from selling shares to the public

A company’s capital may consist of:

• Nominal or authorised capital• Issued capital• Paid-up capital• Called up capital• Uncalled capital

Placing, offer offer for sale and prospectus issue are the main ways through which capital may beraised

Liabilityinrespectofprospectusescaneitherbecriminalorcivil

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As a general rule shares should not be issued at a discount. This rule is, however, subject to the following exceptions:

1. If the shares are of a class already in issue.2. Theissueisauthorisedbyaresolutionpassedatageneralmeeting3. Theresolutionspecifiesthemaximumrateofdiscount4. Theissueissanctionedbyacourtandismadewithinonemonthofthesanction5. Notlessthanayearhaspassedsincethecompanywasentitledtostartbusiness6. Particularsofthediscountonthesharesmustbedisclosedoneveryprospectusofthe

company.

A company may purchase its own shares as an exception to the rule in Trevor v Whitworth in the following circumstances:

1. RedemptionofredeemablereferencesharesinaccordancewiththearticlesandtheCompanies Act

2. Purchase of validly surrendered shares3. Ifcompelledbythecourtpursuanttoacourtorder

Provisions relating to the payment of dividends are:

1. The company at a general meeting may declare dividends2. The directors may pay interim dividends, 3. Dividendsmayonlybepaidoutofprofits,4. Thecompanymustbesolventandagoingconcern,5. Directorsrecommenddividendsandmembersdeclarethesame,6. Directorsareempoweredtodeductfromamember’sshareanyamountdue,7. Generally,dividendispayablewithin42daysofdeclaration.8. Dividend does not earn interest against the company9. Acompanycan’tpaydividendsifitresultsinitsinabilitytopaydebts10. Lossesonfixedassetsneednotbemadegoodbeforetreatingrevenueasavailablefor

paying dividends11. A company is not legally obliged to make provision for depreciation before paying

dividends12. Arealisedprofiton thesaleoffixedassetsmaybe treatedasrevenueavailable for

paying dividends

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CHAPTER QUIZ

1. What is capital? 2. List the various classes of capital. 3. Listthemethodsofpublicissue. 4. Whatdocumentispreparedbeforesharesarefloated?

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ANSWERS TO QUIZ

1 Amount of money which a company raises from a sale of its shares.

2. (i) Nominalcapital (ii) Issuedcapital (iii)Paidupcapital (iv)Called-upcapital (v) Uncalledcapital

3 (i) Placing (ii) Offerforsale (iii)Prospectusissue

4. Prospectuses


QUESTION ONE

a) Outlinethecontentsofaregisterofmembersofacompany.(6marks)

b) Njoroge,amemberofTusongeCompanyLtd.,inspectedtheregisterofmembersofthecompanyandnotedthathisnamehadbeenomittedtherein.

Advise Njoroge on how he should proceed to have his name entered in the register.(4marks)c) Itisafundamentalprincipleofcompanylawthatthesharecapitalofacompanymust

bemaintained. Discussthelegalconsequencesofthisprinciple.(10marks)

(Total: 20 marks)

QUESTION TWO

a) Explainthreewaysinwhichacompanymayraisecapital.(6marks)

b) Explainfivecircumstanceswhensharesmaybeissuedatadiscount.(10marks)

c) Explaintwotermsimpliedinacontractofsaleofsharesbetweenasellerand purchaser.(4marks)

(Total: 20 marks)

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QUESTION THREE

a) ”Thecapitalofacompanymaynodoubtbediminishedbytheexpenditureuponandreasonably incidental toall theobjectsspecified.Apartof itmaybelost incarryingonthebusinessoperationsauthorised.Ofthis,allpersonstrustingthecompanyareawareand take the risk. But creditorshave the right to relyandwere intendedbythe legislaturetohavetheright torelyonthecapitalremainingundistributedbyanyexpenditureoutsidetheselimitsorbythereturnofanyofittotheshareholders”.

PerLordHerchellL.J.inTrevor v Whitworth (1837) 12App.Cap409at415.

Discuss this statement outlining the circumstances and conditions under which companiesmayreducetheircapital.(14marks)

b) Statewhatismeantbyunderwritingcommissionanddistinguishitfrombrokerage. (6marks)

(Total: 20 marks)

Kindlyrefertothefollowingsittingsalso:-05/02;06/01;12/00;07/00

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CHAPTER FOUR

DEBT CAPITAL

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CHAPTER FOURDEBT CAPITAL

OBJECTIVES

At the end of this chapter, the student should be able to:

• Definewhatadebentureisandexplainthevarioustypesinexistence• Differentiateadebenturefromashare• Haveaclearunderstandingofchargesandtheirregistration• Definethevarioustypesofchargesandtheirorderofpriority• Discusstheborrowingpowersofacompany

INTRODUCTION

Thisisachapterthatwasinitiallypartofthedividendsanddebentureschapterintheprevioussyllabus.Themainfocusofthischapteristhecapitalthatisobtainedfromnonowners.Thesearethecurrentandlongtermliabilitiesobtainedfromnonowners.Itscapitalinthesensethatisusedinexpansionofthebusiness.Itfocusesondebenturesandchargesandlatertheborrowingpowers of a company.

KEY DEFINITIONS

• Debenture-A long-term loan.• Share-A unit of ownership.• Trust deed: Anagreemententeredintobetweenacompanyandtrustees• Charge-Thisisanencumbrancethatsecuresadebt.• Crystallisation: thisiswhenachargebecomespayable.

EXAM CONTEXT

The main focus of the examiner in this chapter is on charges, thus, a clear understanding of charges their registration and how they are ranked is vital. There are no questions in the previous questionbankonthischapterexclusivelyasthequestionstendtohavebeenmixedwithdividends.It’sarelativelyshortchapterandcanbeeasilyreadandunderstood.


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INDUSTRY CONTEXT

Intoday’sworld,variousbusinesses,inabidtoexpand,borrowfundsfromoutsiders.Variouscompanies have floated debentures; loan stock and bonds. Companies even prefer debt tosharesastheyarelesscostlyintermsoffloatation.

4.1 DEBENTURES

Section2of theActdefines “debenture”as including “debenturestock,bondsandanyothersecuritiesofacompanywhetherconstitutingachargeontheassetsofthecompanyornot”.

Thereisnopreciselegaldefinitionofa“debenture”.InLevy v Abercorris Slate & Rubber Co Chitty,Jstatedthathecouldnotfindanyprecise legaldefinitionof theterm“debenture”andwentontoobservethattheword“isnot,eitherinlaworcommerce,astrictlytechnicalterm,orwhatiscalledatermofart”.Healsostatedthat,etymologically,thewordisaderivationfromthe Latin Debenture mihi, which were the opening words of certain documents, which used to beissuedbyEnglishcompaniesinthe1860sasanacknowledgementofaloanthecompanieshad received from the person to whom the document was issued. With the passage of time theword“debenture”acquiredthemeaningitgenerallyhastoday,namely,adocumentissuedbya registered company toacknowledge, or evidence, an indebtedness.Primarily, theword“debenture”isappliednottotheindebtednessitselfbuttothedocumentevidencingit.

4.1.1 DEBENTURES AND DEBENTURE STOCK

A debenture is usually a formal document in printed form. The main types, which a company can issue, are:

(a) A Single Debenture Asingledebentureisusuallyaformaldocumentinprintedformandsealed.Itisusually

issuedwhenacompanyobtainsaloanfromasinglelender,suchasitsbank.Thebankwouldnormally insist that thecompanysignsandsealsoneof thebank’s standardformsofdebenturewhichwouldnotonly createa charge in favourof thebankbutwould also give it certain powers in relation to the charged property.

(b) Debentures Issued as a Series Debentures are issued as a series if the company decides to borrowmoney from

differentlendersondifferentdatesbutinsuchawaythatthelenderswouldrankequallyin their right to repayment and in any security given to them. Each lender receives a debentureinidenticalforminrespectofhisloanandthedebenturesareexpressedtoform a series ranking pari passu.

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(c) Debenture Stock “Debenturestock”iscreatedwhenapubliccompanyissues“debenturestockcertificates”

toaclassofdebentureholders,evidencingtheportionofthetotaltowhicheachoneofthemisentitled.Eachlenderhasarighttoberepaidhiscapitalattheduetimeand,beforethattime,toreceiveinterestonitattheagreedrate.Eachdebenturewillbeforaspecifiedsum,e.g.Kshs.100orKshs.1,000,asstipulatedintheconditionsofissue.

Types of debentures

Debentures may be issued as:

i. Redeemableorirredeemable ii. Registeredorbearer iii. Securedorunsecured(naked)

Subordinated debentures

Under American law, these are obligations often referred to as subordinated debts, juniordebts or inferior debts, uponwhich the right to receive payment is subordinated or deferredbya subordinationagreementor clause, to thepriorpaymentof certainother indebtedness,sometimesreferredtoassenior,superiororpriordebts.Thesubordinationmaybeincompleteorcomplete.Ifcomplete,thepaymentofprincipalandinterestonthesubordinateddebtisdeferreduntiltheobligationsontheseniordebtaresatisfied.Thesubordinationisvalidasbetweentheparties.

4.1.2 ISSUE OF DEBENTURES

Debenturesareusuallyissuedbyaresolutionoftheboardofdirectorsunderpowersconferredby thecompany’sArticlesofAssociation.TableA,Article79provides that “thedirectorsmayexerciseallthepowersofthecompanytoborrowmoney...andtoissuedebentures,debenturestock,andothersecurities”.Suchauthority is,however,not required in thecaseofa tradingcompany,whichhasimpliedpowertoborrowmoneyforthepurposesofitsbusinessandtogivesecurityfortheloanbycreatingamortgageorchargeoveritsproperty.

Debentures and Shares

Debentures and shares have the following similarities and differences.

(a) Similarities i. Adebentureisusuallyoneofa“series”or“class”whichissimilartoa“class”,of shares.

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ii. Debentures, as well as shares are long-term investments in the company and are transferableinthesamemanner. iii. Debenturesandsharesmaybeissuedinthesamewaythroughaprospectus issue.

(b) Differences i. Ashareholderisamember(i.e.aninsider)whereasadebentureholderisa creditor(i.e.anoutsider). ii. Ashareholderhasaninterestinthecompanybutnotinthecompany’sproperty.A debentureholderhasnointerestinthecompanybuthasaninterestinthe company’sproperty,whichconstituteshissecurity.Consequently: A shareholder can attend a meeting of the company and vote at the meeting whereasadebentureholdercannotdoso. Ashareholdercannotinsurethecompany’spropertywhereasadebentureholder candoso(unlessthedebentureisa`naked’one). iii. Interestondebenturesmustbepaidevenifthecompanydoesnotmakeaprofit andcanthereforebepaidoutofcapital.Dividendsonsharesarepayableonlyif profitsaremadeandcannotbepaidoutofcapital. iv. Acompanycanpurchaseitsowndebenturesbutcannot,asageneralrule, purchase its own shares. v. Asageneralrule,sharescannotbeissuedatadiscount,whereasdebentures maybeissuedatadiscount.

4.1.3 DEBENTURE CERTIFICATES

Section82(1)providesthatdebenturesordebenturestockcertificatesmustbecompletedand ready for deliverywithin 60daysafter allotment or after the lodgingof a transfer,unless the conditions of issue otherwise provide.

4.1.4 DEBENTURE TRUST DEED

Whendebenturesareoffered forpublicsubscription, thecompanyusuallyenters intoa trustdeedwith trustees (usually a trust corporation).The trustees are appointed and paid by thecompanytoactonbehalfofthedebentureholders.Thechargesecuringthedebenturesismadeinfavourofthetrusteeswhoholditontrustforthedebenturestockholders.

Adebenturestockholder,unlikedebentureholder,isnotacreditorofthecompany.Hecannottherefore present a petition to wind up the company: Re Dunderland Iron Co Ltd. The trustees aretechnicallythecreditorsofthecompanyforthewholedebenturedebtwhilethestockholderisanequitablebeneficiaryofthetrust.

4.1.4-iContentsofaTrust Deed

The main terms of a trust deed are usually some or all of the following:

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i. A covenant (promise) by the company to pay to the debenture holders the agreedinstalments of the loan and accrued interest.

ii. A description of the property charged, whether specifically or by way of a floatingcharge.

iii. Theeventsinwhichthesecurityistobecomeenforceable,suchasfailuretopaytheprincipal sum or interest as agreed.

iv. A clause empowering the trustees to take possession of the property charged in the eventofthesecuritybecomingenforceable,andtocarryonthebusinessandtoselltheproperty charged.

v. Appointment of a receiver

vi. Meetingsofdebentureholders.

vii. Covenantsbythecompanyto insurethepropertychargedandtokeepthepropertycharged in good repair.

4.1.4-iiAdvantagesofaTrust Deed

A trust deed has several advantages some of which are:

(a) Thecircumstancesinwhichtheprincipalsummaybecomerepayableareclearlyspeltout.

(b) Theappointmentoftrusteesfacilitatestheefficientadministrationofthetrustsincetheyaretheretoexercisecontinuoussupervisionofthedebentureholders’rightsandtotakeprompt action if the need arises.

(c) Thetrusteesareempoweredtoappointareceivertocarryonthebusinessincaseofurgency.

(d) Covenantsareentered intobythecompanyfor insurance,repairandothermatters,whichcanbeenforcedbythetrustees.

(e) Thetrusteeshavealegalmortgageoverthecompany’sland.

4.1.4-iiiLiability of Trustees

Trusteesfordebentureholdersowethesamedutiestotheirbeneficiariesasareowed

bytrusteesingeneral.Inparticular,theycannotpurchasethedebentureswithouttheconsentofall thedebenture-holders.Section90(1)provides thatanyprovision inatrustdeed,or inacontractwith theholdersofdebenturessecuredbya trustdeed,forexemptingatrusteefrom,or indemnifyinghimagainst, liability forbreachof trustwhere he fails to show the degree of care and diligence required of him as trustee (havingregardtotheprovisionsofthetrustdeed)shallbevoid.Thisprovisiondoesnot,however, invalidate:

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i. Anyreleasegivenaftertheliabilityhasarisen,ii. Aprovisioninatrustdeedforthegivingofsuchareleasebyamajorityofnotlessthan

three-fourthsinvalueofthedebentureholderspresentandvotinginpersonorbyproxyat a meeting summoned for the purpose

iii. Aprovisioninatrustdeedforthegivingofsuchareleaseeitherwithrespecttospecificacts or omissions or on the trustee dying or ceasing to act.

4.2 REGISTER OF DEBENTURE HOLDERS

Section 88 (1) requires every company, which issues a series of debentures to keep at itsregisteredofficearegisterofholdersofsuchdebentures.Iftheworkofmakinguptheregisterisdoneatsomeotherofficeofthecompany,orofanotherperson,itmaybekeptatthatotheroffice.Theregistrarshallbenotifiedofsuchplaceandofanychangethereof.

4.3 CHARGES SECURING DEBENTURES

A charge on the assets of a company given by a debenture or a trust deed may be either aspecific(fixed)chargeorafloatingcharge.

i. Fixed Charges Achargeisa“fixedcharge”ifitisamortgageofascertainedorspecificpropertysuch

asplantandmachinery,freeholdorleaseholdland,oruncalledcapital.Itmayalsobelegalorequitable.

ii. Floating Charges According to the decision of Romer, L J in Re: Yorkshire Wool combers Association

Ltdachargeisa“floatingcharge”ifithasthefollowingthreecharacteristics:

§ Itisachargeonaclassofassetsofacompany,presentandfuture;

§ The class is one which changes from time to time in the ordinary course of the company’sbusiness; § Itiscontemplatedbythechargethat,untilsomeeventoccurs,whichcausesthe charge to crystallise, the company may use the assets charged in the ordinary courseofitsbusiness.

Becausethechargedoesnotattachorfixatthetimeofitscreationuponanyparticularasset,itisequitablebynature.UnderthecurrentKenyaandEnglishlaw,afloatingchargecannotbeissuedbyapartnershiporsoletrader.

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CRYSTALLISATION OF FLOATING CHARGES

Afloatingchargeisachargeonaclassofassetsofacompany.Theactualassetsinthatclassownedby thecompanychange fromtime to time. Theassets that thechargee isentitled toutilise forpaymentof thesecureddebtare theassets in theclass that thecompanyownsatthetimewhenthechargecrystallises.Oncrystallisation,afloatingchargebecomesafixedorspecificequitablecharge.

Afloatingchargecrystallises:

(i) When the chargee appoints an administrative receiver. The power to do so exists only byvirtueof thechargecontract,whichmust, therefore,specify thecircumstances inwhichthepowerisexercisable.e.g.

1 Liquidation or winding up 2 Appointment of a receiver 3 Levy of execution or distress 4 Insolvency 5 Cessationofbusiness

(ii) When the company goes into liquidation.(iii) Whenthecompanyceasestocarryonbusiness.(iv) If the charge contract so provides, when the chargee gives notice that the charge is

convertedintoafixedchargeonwhateverassetsofthechargedclassareownedbythe company at the time the notice is given.

(v) When another floating charge on the company’s assets crystallises it causes the companytoceasebusiness.

(vi) WhenthereisCommencementofrecoveryproceedingsagainstthecompany.(vii) Occurrence of an event, which under the terms of the debenture causes

crystallisation.

(a)Advantagesoffloatingcharges

Fromthecompany’spointofview,afloatingchargemayberegardedasconferringthefollowing advantages:

i. Thecompanyisfreetodealwiththeassetschargedasiftheyhadnotbeencharged.ii. Enablescompanieswithoutfixedassetstoborrow.iii. It enables the company to charge property which otherwise would not have been

chargedsincesuchpropertycannotbesubjecttoafixedcharge.iv. Enhancestheborrowingcapacityofacompanyoffloatingcharges.

(b)Disadvantagesoffloatingcharges

Fromthelender’spointofview,afloatingchargehasthefollowingdisadvantages:

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i. The value of the assets charged is uncertain since no particular assets are charged.ii. Afloatingchargecreatedwithinsixmonthsbeforethecommencementofwindingupis

deemedtobeafraudulentpreferenceandisvoid.iii. Itispostponedtoalaterfixedcharge.iv. Thechargemaybeavoided,duringthecompany’sliquidation,underSection314ofthe

Act;unlessitisprovedthatthecompanyimmediatelyafterthecreationofthechargewas solvent.

v. Where a seller of goods reserves title until payment, a floating charge will not, oncrystallisation, attach to these goods. This is illustrated by Aluminium Industries Vaassen v Romalpa Aluminium (647).

vi. Certain other interests e.g. landlord’s distress for rent has priority over floatingcharges.

PRIORITY OF CHARGES

The priorities between charges are as follows:

(a) Legalfixedchargesrankaccordingtotheirorderofcreation.

(b) Ifanequitablefixedcharge(i.e.aninformalmortgagecreatedbyadepositoftitledeedsto landorasharecertificatewiththelender) iscreatedfirstandalegalchargeoverthesameproperty iscreated later, the legalcharge takespriorityover theequitablecharge.

(c) A floating chargewill be postponed to a later fixed chargeover the sameproperty.Thisissobecausethefixedchargeattachestothechargedpropertyatthetimeofitscreationwhereasthefloatingchargeattachesatthetimeofcrystallisation.

Thefloatingchargewould,however,havepriorityoverthelaterfixedchargeif:

i. Thefloatingchargecontaineda“negativepledge”clause,whichprohibitedthe companyfromlateroncreatingfixedchargeswithpriorityoverit,and ii. Theholderofthefixedchargeactuallyknewoftheprohibition.InRe: Valletort Sanitary Coitwasexplainedthatregistrationofthefloatingchargewouldbe constructivenoticeofthechargeitselfbutnotconstructivenoticeofthecontents of the charge, including the negative pledge clause.

(d) Iftwofloatingchargesarecreatedoverthegeneralassetsofthecompany,theyrankinorder of creation.

(e) Ifacompanycreatesafloatingchargeoveraparticularkindofassets,e.g.bookdebts,the chargewill rank before an existing floating charge over the general assets:Re Automatic Bottle makers.

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4.3 REGISTRATION OF CHARGES

Section96(1)requirestheprescribedparticularsofspecifiedchargesonacompany’spropertyorundertakingtobedeliveredtotheregistrarforregistrationwithin42daysafterthedateonwhichthechargewascreated.Thespecifiedchargesare:

a) Achargetosecureanissueofdebentures;b) Achargeonuncalledsharecapital;c) A charge created by an instrument, which, if executed by an individual, would

require registration as an instrument under the Chattels TransferAct(e.g.aLetterofhypothecation);

d) Achargeonland;e) Achargeonbookdebtsofthecompany;f) Afloatingcharge;g) Achargeoncallsmadebutnotpaid;h) Achargeonashiporanyshareinaship;i) Achargeongoodwill,apatent,acopyrightoratrademark.

THE PRESCRIBED PARTICULARS

The“prescribedparticulars”ofregisteredchargesareenumeratedinFormNo214andare:

i. The date and description of the instrument creating or evidencing the mortgage or charge;

ii. Theamountsecuredbythemortgageorcharge;iii. Shortparticularsofthepropertycharged;iv. Names,postaladdressesanddescriptionsofthepersonsentitledtothecharge;andv. Amountofratepercentofcommission,allowanceordiscount(ifany)paid.

GENERAL AIM

Thepurposeofregisteringtheaforesaidparticularsistoenableawould-becreditortoknowthecompany’sexistingindebtednessandtheassetsavailablefortheirsettlement.

CERTIFICATE OF REGISTRATION

Section99requirestheregistrartogiveacertificate,underhishand,oftheregistrationofanyofthespecifiedcharges.Thecertificateshallbeconclusiveevidencethatthestatutoryrequirements,astoregistration,havebeencompliedwith.Consequently,thechargewouldnotberenderedvoidonthegroundsthatoneoftheprescribedparticulars,suchasthedateofthecreationofthecharge,islaterfoundtobeincorrect:ReC.L. NYE LTD(66).

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EFFECTOFNON-REGISTRATION

Registration of charge cures all defects characterising the charge. The charge is deemed tohavebeenmadeinduecompliancewiththeprovisionsoftheCompaniesAct.Aswasthe case in National Provincial and Union Bank of England V. Charnley.

i. Themoneysecuredbecomesimmediatelyrepayable.Thismeansthatthelenderisnotboundbythetermsofthechargeandcantakeimmediatestepstorecoverhismoney;and

ii. ThecourtisempoweredbySection102toextendthetimeforregistrationofthechargeonbeingsatisfiedthattheomissiontoregisterthechargewithintheprescribedtimewasaccidentalorwasduetoinadvertenceorothersufficientcause,providedthatneithercreditorsnorshareholderswouldbeprejudicedbytheextension.

Althoughitisthecompany’sdutytoeffecttheregistrationSection97(1)permitstheregistrationtobeeffectedontheapplicationofanypersoninterestedinthecharge.Thepersonshallbeentitledtorecoverfromthecompanytheamountofanyfeesproperlypaidbyhimtotheregistraronregistration.

REGISTER OF CHARGES

Section105(1)providesthateverylimitedcompanyshallkeepatitsregisteredofficearegisterof charges and enter therein:

(a) Ashortdescriptionofthepropertycharged;(b) Theamountofthecharge;and(c) Thenamesofthepersonsentitledtothecharge.

Failure to complywithSection105 (1) doesnot invalidate the chargebut theofficers of thecompanyresponsiblefortheomissionshallbeliabletoafinenotexceedingKshs.1,000

4.4 REMEDIES OF DEBENTURE HOLDERS

The remediesofdebentureholdersaregenerallyconferredby the trustdeedbutwillusuallyinclude the power:

i. Toappointareceivertocarryonthebusinessorsellthechargedpropertyii. Tosueascreditorsforarrearsofinterestorprincipal,orbothiii. TopetitiontheHighCourtforawindinguporder(ongroundsofthecompany’sinability

topayitsdebts),andiv. To apply to the court for the appointment of a receiver or for an order for sale if there is

no power in the trust deed.

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4.5 BORROWING BY COMPANIES

Ithasbeenobservedthatmostcompanies,likeindividuals,requiretoborrowfromtimetotimefortheexigenciesoftheirbusiness.Toentitleacompanytoborrow,itmusthavepowertoborrowgiventoitbyitsconstitution.Whetheracompanyhasorhasnopowertoborrowdependsonitsobjectsandpowersspecified in theobjectsandpowersspecified in theobjectsclauseofthememorandum.Usually,theobjectsclausecontainsanexpresspowertoborrow.However,animpliedpowerissufficient.Animpliedpowerariseswhenevertheobjectsaresuchthatapowertoborrowmayfairlyberegardedasincidentaltothecompany’sobjects.Thisisthecasewithanon-tradingcompany.TheremustbesomethingintheMemorandumorArticlestoshowexpresslyorinferentiallythatthecompanyistohavepowertoborrow.IfacompanyhasnopowerbyitsMemorandumtoborrow,itcanremedythedefectbyalteringitsobjectspursuanttoSection8(1)oftheCompaniesAct.

AnewlyregisteredpubliccompanymustnotexerciseanyborrowingpowersunlesstheregistrarofcompanieshasissueditwithacertificateoftradingpursuanttoSection111(3)oftheAct.

Sometimes,borrowingpowersofacompanyarerestrictedbytheMemorandumorArticlese.g.toaspecificsumortoasumnotexceedingthepaidupcapital.However,inthevastmajorityof cases no limit is imposed. It, therefore, follows that if a company has an express or implied powertoborrow,itmayfromtimetotimeborrowasmuchasitwantssubjecttoanyrestrictionsin its articles.

Thepowertoborrowisgenerallyexercisedbydirectors.Article79ofTableAisemphaticthat“thedirectorsmayexerciseallthepowersofthecompanytoborrowmoneyandtomortgageorchargeitsundertaking,propertyanduncalledcapital,oranypartthereofandtoissuedebentures,debenture stock and other securitieswhether outright or as security for any debt, liability orobligationofthecompanyorofanythirdparty.”

Ifacompanyhaspowertoborrow,ithasanincidentalpowertheretosecuretherepaymentofborrowedmoneybymortgageorchangeofalloranyofitsproperty,realorpersonalpresentorfuture.

Directors’power toborrowmaybegeneralasaboveorspecial i.e.aclauseempoweringthedirectorstoborroworraisemoney.

Acompanywithpowertoborrowmayborrowinsuchmannerasitthinksfit.Itcanthereforeraisemoneyonalegalmortgageofanyspecificportionsofitspropertyorbyequitablechargebybonds,promissorynotesorbydebenturesordebenturestocks.

WhereacompanyhasnoborrowingpowerorwheretheMemorandumofAssociationfixesalimittotheborrowingpowersofthecompany–ararethingaltogether–anyborrowingintheonecaseandanyborrowinginexcessofsuchlimitintheothercaseispotentiallyUltra Vires the company.

Ifthecompanyhasunlimitedpowersofborrowingbutthedirectorshavingonlylimitedpowers,exceedthemtheborrowingisirregularforwantofauthority.Itisintra vires the company and may beratifiedbyshareholders.Additionally,thelenderisprotectedbytheruleinTurquands Case

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Thelenderofmoneyborrowedultra vires the company has in some cases a right against the directorspersonallyforbreachbythemoftheirimpliedwarrantyofauthority,iftheiractsamounttoanimpliedrepresentationoffactanditmakesnodifferenceastotheliabilityofthedirectorsinsuch a case that they did not know that they were exceeding their powers.

CHAPTER SUMMARY

A debenture is a document issued by a registered company to acknowledge or evidenceindebtness.


• Redeemableorirredeemable• Registeredorbearer• Securedorunsecured

Achargeisissuedtosecureadebentureandmayeitherbefixedorfloating.

Afloatingchargecrystalliseswhen:

• Thechargeeappointsanadministrativereceiver• Thecompanygoesintoliquidation• Thecompanyceasestocarryonabusiness

The remedies of debenture holders are generally conferred by the trust deed but will usually include the power:

1. Toappointareceivertocarryonthebusinessorsellthechargedproperty

2. Tosueascreditorsforarrearsofinterestorprincipal,orboth

3. TopetitiontheHighCourtforawindinguporder(ongroundsofthecompany'sinabilitytopayitsdebts),

4. To apply to the court for the appointment of a receiver or for an order for sale if there is no power in the trust deed.

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CHAPTER QUIZ

1. Statetwotypesofdebentures 2. Achargemaybe 3. Afloatingchargemaycrystallisewhenacompanygoesintoliquidation(TRUE ORFALSE) 4. Give an instance when a charge crystallises

DEBT CAPITAL


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ANSWERS TO QUIZ

1. Redeemableandregistered 2. Fixedandfloating 3. TRUE 4. Whenacompanyceasesbusiness.


QUESTION ONE

Discuss the crystallisation of floating charges and the advantages of a floating charge. (20marks)

QUESTION TWO

Whataretrustdeeds?(20marks)

QUESTION THREE

Discussthevarioustypesofdebentures.Howdotheydifferfromshares?(20marks)

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CHAPTER FIVE

MEMBERSHIP OF A COMPANY

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CHAPTER FIVEMEMBERSHIP OF A COMPANY

OBJECTIVES


• Explaintheacquisitionandcessationofcompanymembership• Explaintheregisterofmembersanditscontents• Definetherightsandliabilitiesofmembers

INTRODUCTION

Thischapterdealswithwaysthroughwhichapersonceasestobeamemberofacompany.Itlaterlooksattheregisterofmembersanditscontents.Thechapterendsbylookingatvariousrightsandliabilitiesofmembers.

KEY DEFINITIONS

• Member:apersonwhosubscribestothememorandumorwhosenameisenteredintheregisterofmembers

• Right: This is simply refers to entitlement.• Liability:Thisisadutyowedtothecompanybyamember,andbyamembertoother

members• Acquisition:Processbywhichapersonbecomesamemberofacompany• Termination:Processbywhichapersonlosesmembershipinacompany.

EXAM CONTEXT

The examiner has tended to test the students, understanding on acquisition and cessation of membership.Someofthequestionsfoundinthisareahavebeenset inthefollowingsittings12/07;06/06;05/02;12/00

INDUSTRY CONTEXT

ThecurrenttrendintheindustryistoembraceoftheCentralDepositorySystem.TheCentralDepositorySystemActwasputinplacein2000.Companiesarenowencouraginginvestorsto


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openCDSCaccountsinabidtohastentransactionsandenhanceaccuracy.Mostcompaniesarekeentophaseoutsharecertificates.DuringInitialPubicOffersinKenyaincludingtherecentonebySafaricom,investorswereencouragedtoopenCDSCaccounts.

5.1 DEFINITION OF MEMBER

AlthoughthemarginalnotetoSection28is“definitionofmember”,thesectiondoesnotdefinetheword“member”.Rather,itstatesthetwobasicwaysinwhichapersonmaybecomeamemberof a company, namely:

(a) Bysubscribingtothememorandumofthecompany,or(b) Byagreeingtobecomeamemberandtheentryofhisnameinthecompany’sregister

ofmembers.

5.2 WHO MAY BECOME A MEMBER?

Capacity tobeamemberofacompany isgovernedbytherulesof thecommonlawrelatingto contracts.Anyonewhohas the capacity tomakea contractmaybecomeamember of acompany. The following are some of the special cases, which require some explanation:

(a) Infants

Aninfantisanypersonwhohasnotattainedtheageof18years;theAgeofMajorityAct1974.Aninfanthasacommonlawrighttoenterintoacontracttobuysharesinacompany,andtherebybecomeamemberof thecompany.Thecontract, ishowevervoidable at his option, and the infantmayavoiditatanytimeduringhisinfancyorwithinareasonabletimeafterattainingtheageof18years.However,itwasexplainedinSteinberg v Scala (Leeds) Ltd(59)thatalthoughtheinfanthasarighttorepudiatethecontract,hewouldonlybeentitledtogetbacktheamountalreadypaidiftherehasbeenatotalfailureofconsiderationbecausetheshareshavebecomevalueless.Acompany’sarticlesmay,however, restrictmembershipof thecompany toadultsonly,inwhichcaseaninfantwouldnotbecomeamemberofthecompany.

(b) Personal Representatives

Onashareholder’sdeath,ownershipofthesharespreviouslyheldbyhimistransmittedtohispersonalrepresentative,whomaybeanexecutororadministrator.Thepersonalrepresentativewouldbeentitledtoberegisteredasamemberofthecompanyunlessthecompany’sarticlesprovide otherwise.

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(c) Corporations

A corporation,whether a registered company or not,may, if authorised by itsmemorandum(expresslyor impliedly), takeshares ina registeredcompanyandbecomeamemberof it. Itwouldauthorise“suchpersonasit thinksfittoactasitsrepresentativeatanymeetingofthecompany”.TheauthorisationwouldbemadebyaresolutionofitsdirectorsorothergoverningbodyunderSection139(1)(a).

Section29(1)providesthatabodycorporatecannotbeamemberofacompany,whichis itsholdingcompany.Anyallotmentortransferofsharesinacompanytoitssubsidiaryshallbevoidexcept:

1. Wherethesubsidiary isconcernedaspersonalrepresentativeor trustee,unlesstheholdingcompanyoritssubsidiaryisbeneficiallyinterestedunderthetrustandisnotsointerestedonlybywayofsecurityforthepurposesofatransactionenteredintobyitintheordinarycourseofbusinesswhichincludesthelendingofmoney.

This somewhat lengthy provision may be explained with the aid of some examples:

i. M,whoisamemberofZBankLtd,appointsitssubsidiary,ZBank(Executor & Trustee)Ltd,ashisexecutor.OnM’sdeath,thesubsidiarymayberegistered asamemberoftheholdingcompanyinrespectofMshares.

ii. Mtransfershissharestothesubsidiary(intheaboveexample)ontrustfora beneficiaryB,whoborrowsmoneyfromtheholdingcompanyandsecures repaymentbymortgaginghisinterestinthesharestothecompany.

2. WherethesubsidiarywasamemberoftheholdingcompanyatthecommencementoftheActonJanuary1,1962.Suchamemberwouldhavenorighttovoteatmeetingsoftheholdingcompanyoranyclassofmembersthereofexceptinrespectofsharesitholds as personal representative or trustee.

(d) A person, upon whom shares have devolved pursuant to the Provisions of Bankruptcy Act, may become a member of the company

5.3 METHODS OF BECOMING A MEMBER

A person may become a member of a company in one or other of the following ways:

MEMBERSHIPOFACOMPANY


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i. Subscribing to the Memorandum

Section28(1)providesthatthesubscriberstothecompany’sMemorandumshallbedeemedtohaveagreedtobecomemembersoftheCompanyandontheregistrationofthememorandumshallhavetheirnamesenteredinthecompany’sregisterofmembers.

Theprovision regarding entry in the register is an administrative directive for the company’simplementationandnon-compliancewithitdoesnotaffectthepre-existingmembership.

ii. Allotment

Apersontowhomacompany’sshareshavebeenallottedacquireshismembershipbyvirtueofsub-section2ofSection28,beingapersonwhohasagreedtobecomeamember.However,it was held in NICOL’Scase that themembershipcommencesfromthemoment thename isentered in themembers’ register. If the company wrongfully refuses to enter the name in the register, the allot tee must take rectificationproceedings for a court order directing the company toenterthenameinitsmembers’register.

iii. Transfer

Atransfer isapurchaseofshares fromacompany’sshareholderandnot from thecompanyitself.

Atransfereealsoacquireshismembershipbyvirtueofsub-section2ofSection28,beingapersonwho has agreedtobecomeamember.TheprincipleinNICOL’scase applies to transferees as well,andatransfereebecomesamemberfromthemomenthisnameisenteredintheregisterofmembers.

iv. Transmission on death of a member

A transmissionisalegalprocessbywhichownershipofsharesinacompanychangesautomaticallyonthedeathofamembertohispersonalrepresentative.ThisisacknowledgedbyTableA,Article29,whichprovidesthat“incaseofthedeathofamember...thepersonalrepresentativesofthedeceasedwherehewasasoleholdershallbetheonlypersonsrecognisedbythelawashaving any title to hisinterestintheshares”.

If the personal representative elects ordecides tobe registeredhimself as theholderof theshares, the election constitutes the agreementtobeamemberandtheprovisionsofSection28(2)becomeapplicable,namely,hewillbecomeamemberfromthemomenthisnameisenteredintheregisterofmembers.

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v. Transmission on bankruptcy of member

A bankrupt member’s shares in a company will be transmitted to his trustee in bankruptcy accordingtotheprinciplesofbankruptcylaw.Thecompany’sarticlesmaygivethetrusteeanoptionofbeingpersonallyregisteredasamember,asisprovidedforbyTableA,Article30.Ifthetrusteeelectsordecidestoberegisteredastheholderofthesharestheelectionconstitutesthe agreement to be a member and the provisions of sub-section 2 of Section 28 becomeapplicable—i.e.thetrusteeinbankruptcywillbecomeamemberfromthemomenthisnameisenteredintheregisterofmembers.

vi. Compliance with Section 182 (2)

Apersonwhohasconsentedtobeadirector,andhasgiventhestatutoryundertakingtotakeandpayforhisqualificationshares,isdeclaredbySection182(2)tobe,“inthesamepositionasifhehadsignedthememorandum.”

TheprovisionsofSection28(1)accordinglyapply tohim,andhebecomesamemberof thecompany when the Memorandum of Association is registered.

vii. Estoppel

Apersonwho,withouthavingagreed tobeacompany’smember, isaware thathisname iswronglyenteredinitsregisterofmembersbuttakesnostepstohavehisnameremovedtherefrom,maybeestoppel fromdenyinghisapparentmembershiptosomebodywhoreliedonitandextended credit to the company.

5.4 THE REGISTER OF MEMBERS

Section112(1) requireseverycompany tokeeparegisterof itsmembersandprescribes thecontents of the register.

Contents

The register of members must contain the following particulars:

a. Thenamesandpostaladdressesofthemembers;



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b. Astatementofthesharesheldbyeachmember,distinguishedbyitsnumberifithasone;

c. Theamountpaidoragreedtobeconsideredaspaidonthesharesofeachmember;d. Thedateatwhicheachpersonwasenteredintheregisterasamember;e. Thedateatwhichanypersonceasedtobeamember.

Where the company has converted any of its shares into stock, the register shall show the amount ofstockheldbyeachmember insteadof theamountofsharesand theaforesaidparticularsrelating thereto.

Failuretokeeparegisterofmembersrendersthecompanyandeveryofficerofthecompanywhoisindefaultliabletoadefaultfine[Section112(4)].

Section120providesthattheregisterofmembersshallbeprima facie evidence of the matters it contains.

Location

Section112(2)requirestheregisterofmemberstobekeptattheregisteredofficeofthecompany.Ifitismadeupatanotherofficeofthecompany,oratsomeotheroffice,itmaybekeptatthatotherofficeprovidedtheofficeisnotataplaceoutsideKenya.

Theregistrarmustbeinformedoftheplace,otherthantheregisteredoffice,wheretheregisteriskept.Anychangeinthatofficemustbenotifiedtotheregistrarwithin14daysfailingwhichthecompanyandeveryofficerofthecompanywhoisindefaultshallbeliabletoadefaultfine.

Index of Members

Section113(1)providesthatacompanywithmorethan50membersmust,unlesstheregisterofmembersconstitutesanindex,keepanindex(whichmaybeintheformofacardindex)ofthenamesofthemembersofthecompany,andmustaltertheindexwithin14daysafteranyalterationintheregister.Theindexshallinrespectofeachmembercontainasufficientindicationtoenabletheaccountofthatmemberintheregistertobereadilyfoundandshallbeatalltimeskeptatthesameplaceastheregisterofmembers.

Closure of Register: Under Section 117 of the Act, a company may, on giving notice byadvertisement in some newspaper circulating in Kenya, or in that area of Kenya in which the registeredofficeofthecompanyissituate,closetheregisterforanytimeortimesnotexceeding30daysineachyear.

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Inspection of Register

Section115(1)providesthattheregisterandindexofmembersshallduringbusinesshoursbeopentotheinspectionofanymemberwithoutcharge,andofanyotherpersononpaymentofafee,notexceedingtwoshillingsforeachinspection,asthecompanymayprescribe.Anypersonmay require a copy of the register or any part thereof, on payment of one shilling or such fewer sumsasthecompanymayprovide,for100wordsorfractionalpartthereofrequiredtobecopied.Thecopymustbesuppliedwithinaperiodof14dayscommencingonthedaynextafterthedayonwhichtherequirementisreceivedbythecompany.

Ifacompanyofficerrefusesaninspectionorfailstoprovidearequiredcopy,thecompanyandeveryofficerofthecompanywhoisindefaultshallbeliableinrespectofeachoffencetoafinenotexceedingKshs.40andfurthertoadefaultfineofKshs.40.Thecourtmaybyorder:

i. Compel an immediate inspection of the register and index, orii. Directthatthecopiesrequiredshallbesenttothepersonrequiringthem.

The court ordermay also bemade against the company’s agentwho keeps the company’sregisterofmembersifthecompany’sfailuretoprovideacopy,orpermitaninspection,isduetohis default.

Section117permitsacompany,ongivingnoticebyadvertisementinsomenewspapercirculatinginKenyaorinthatareaofKenyainwhichtheregisteredofficeofthecompanyissituate,toclosetheregisterofmembersforanytimeortimesnotexceedinginthewhole30daysineachyear.Thepurposeofthisprovisionistokeeptheregisterstaticsothatmembers’holdingsmaybeextracted as at a particular date for the purpose of computing dividends.

RectificationoftheRegister

Section 118(1) empowers the High Court to rectify the register of members in two cases, namely:

i. Ifthenameofanypersonis,withoutsufficientcause,enteredinoromittedfromthecompany’sregisterofmembers;or

ii. Default is made or unnecessary delay takes place in entering on the register the fact of anypersonhavingceasedtobeamember.

The application to the court to rectify the register may be made by:

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Where an application is made the court may:

i. Refusetheapplication;ii. Order rectification of the register and payment by the company of any damages

sustainedbyanypartyaggrieved.

Anorder rectifying the registercanbemadeevenwhen thecompany isbeingwoundup:Re Sussex Brick Co(59).

The case of Burns v Siemens Bros Dynamo Works Ltd(60)showsthatthecircumstancessetoutinSection118(1),above,arenottheonlyonesinwhichthecourtcanorderrectification.Itmayalsodosowhereanamestandsontheregisterwithoutsufficientcause.

Thecourtmayalsoorderrectificationoftheregisterbydeletingareferencetosomeonlyoftheregisteredshareholder’sshares.Itneednotdeletehisnameentirely.This is illustratedbyRe Transatlantic Life Assurance Co Ltd (1979)inwhichthecourtdeletedanadditionalnumberofshares,whichhadbeenissuedtotheapplicantinbreachoftheprevailingExchangeControlRegulationsbutlefttheregisterintactasregardshispreviousshareholding.

BySection118(4), ifanorder ismadeinthecaseofacompanyrequiredtosenda listof itsmemberstotheregistrar,thecourt,whenmakinganorderforrectificationoftheregister,shallbyitsorderdirectnoticeoftherectificationtobegiventotheregistrar.

Notice of Trusts

Section119provides thatnonoticeofany trust,expressed, impliedorconstructive, shallbeenteredontheregister,orbereceivablebytheregistrar.Theconsequencesofthisprovisionareas follows:

a. The company is entitled to treat every person whose name appears on the register as thebeneficialowneroftheshareseven though he may, in fact, hold them in trust for another.Inparticular,ifthecompanyregistersatransferofsharesheldbyatrustee,itisnotliabletothebeneficiariesunderthetrustevenifthesaleofthesharesbythetrusteewasmadeinbreachofthetrust:Simpson v Molson’s Bank (61).

b. Thecompany isnota trusteeforpersonsclaimingthesharesunderequitable titles:SocieteGeneraledeParisvWalker(62).Theownerofanequitableinterestinshares,suchasanequitablemortgageeortherecipientofabequestofshares,mayprotecthis interestbyservingonthecompanyastop notice(orwhat issometimescalledanotice in lieu of distringas),informingthecompanythatheisinterestedinthesharesand requiring the company to notify him of a receipt of a transfer of the said shares to a transferee other than himself. When the company eventually informs him of the proposed transfer, he would then apply to the court for an injunction restraining the transfer.

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Branch Register

Section121(1)empowersacompanyhavingasharecapital,ifauthorisedbyitsarticles,tokeepabranchregister inanypartof theCommonwealthoutsideKenyaof itsmembersresident inthatpartoftheCommonwealth.Abranchregistershallbedeemedtobepartofthecompany’sregisterofmembers,whichshallbeknownastheprincipalregister,andmustbekeptinthesamemanner(Section122).Theregistrarofcompaniesmustbeinformedofthesituationoftheofficewherethebranchregisteriskeptwithinonemonthofitsopening.Asimilarnoticemustalsobegivenofitschangeordiscontinuance[Section121(2)].

5.5 RIGHTS OF SHAREHOLDERS

Primary Rights

Theownershipofatleastashareofoneorotheroftheaforesaidclassesconstitutesthe“holder”amemberofthecompanywhichhasissuedtheshares.Asamember,theshareholderwillenjoycertainrightsinthecompanywhich,unlessmodifiedorexcludedbythecompany’sarticles,willgenerally comprise the right to:

• Attendsgeneralorclassmeetingsofthecompany,• Voteatthesaidmeetings,• Receiveaproperlydeclareddividend.

Secondary Rights

- Notices of general meetings- Copiesofbalancesheetlaybeforethegeneralmeeting- Copies of memorandum and articles- Inspection of minutes of general meetings and registers- Petition for the alternative remedy.



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5.6 CESSATION OF MEMBERSHIP

A person’s membership of a company may cease or come to an end in many ways, some of which are:

i. Transfer

A“transfer”ofsharesoccursifanexistingmembersellsthemtoathirdparty.Ifthethirdpartyisnotyetamember,hewillbecomeamember fromthemomenthisname isentered in thecompany’sregisterofmembers.

However,thetransfereedoesnotautomaticallyceasetobeamemberasaconsequenceofthetransfer.Amemberisnotboundtosellallofhisshareswheneverhecontemplatesasale.TableA,Article23,permitsmemberstotransferallor anyoftheirshares.Amember,therefore,ceasestobeamemberonlyifhetransfersALL of his shares.

ii. Forfeiture

Whereacompany’sarticlesauthorisethedirectorstoforfeitamember’ssharesandthedirector’sforfeit ALLofthesharesheldbyamember,thememberwillceasetobeamemberfromthedatespecifiedinthearticles as the effective date for forfeiture.

TableA,Article38providesthat“astatutorydeclarationinwritingthatthedeclaringisadirectororthesecretaryofthecompany,andthatashareinthecompanyhasbeendulyforfeitedon a date stated in the declaration,shallbeconclusiveevidenceofthefactsthereinstated.”

Article37providesthatapersonwhoseshareshavebeenforfeitedshallceasetobeamemberin respect of the forfeited shares.

He,therefore,ceasestobeamemberof the company only if allofthesharespreviouslyheldbyhim are forfeited.

iii. Surrender of Shares

Theprecisenatureofsurrenderandthemachinerybywhichitiseffectedarenotclearsince it isnotprovidedforbytheCompaniesActorTableA.However,inTrevor v Whitworth, the judge statedthatasurrender“doesnot involveanypaymentoutof thefundsof thecompany,”andthat“ifitwereacceptedinacasewherethecompanywereinapositiontoforfeitthesharesthetransactionwouldseemtomeperfectlyvalid,”presumablyevenifnotexpresslyauthorisedbythe articles.

Aperson’smembershipwill, therefore,come toanend ifhesurrendersall his shares to the company with the approval of the directors.

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iv. Death

Whenapersondies,hismembershipofacompanywillcometoanautomaticendbyvirtueoftheprovisionsoftheLawofSuccession.Thesharespreviouslyheldbyhimbecome,legally,thepropertyofhispersonalrepresentative.(SeeTableA,Article29)

v. Bankruptcy

Whenapersonbecomesbankrupt,hismembershipofacompanywillcometoanendundertheprovisions of the Bankruptcy Act, which vestabankrupt’spropertyinhistrusteeinbankruptcy(seeTableA,Article32).

vi. Sale by a company in exercise of lien

A company, like an unpaid seller under the Sale of Goods Act, has a right of lien on its shares as securityforthebalanceoftheirprice.Forexample,TableAArticle11givesthecompany“afirstandparamountlien”oneveryunpaidshare.

If the company sells ALLthesharesheldbyamember,themembershipwillcometoanendfromthemomentthebuyer’snameisenteredintheregister.TableA,Article12givesthecompanypowertosell“anysharesonwhichthecompanyhasalien”.

vii. Redemption of redeemable preference shares

Ifamember’sentireholdingconsistexclusivelyofredeemablepreferencesharesandall of these sharesareredeemedbythecompanyundertheprovisionsofSection60oftheCompaniesAct,hewillceasetobeamemberfromthedateonwhichhisnameisremovedfromtheregisterofmembers.

viii. Repudiation by an infant

Aninfantmemberhasacommonlawrighttorepudiatehismembershipofacompanyiftherehasbeenatotalfailureofconsiderationbecausetheshareshavebecomeworthless:SteinbergvScala(Leeds)Ltd(58).

ix. Liquidation or winding up

A company’s liquidation terminatesmembership of all formermembers, from themoment itbecomeseffective.


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x. Rescission of contract

Ashareholderwhorescindsacontractofpurchaseofsharesorallotmentbyreasonofavitiatingelementorotherwiseceasestobeamember

xi. Disclaimer by trustee in bankruptcy

UnderEnglishlaw,ifatrusteeinbankruptcy refuses to take up the shares of an undischarged bankrupt,heceasestobeamemberofthecompany.

SUMMARY OF CHAPTER

The following are the ways of becoming a member:

• Subscribingtothememorandum• Allotment • Transfer • Transmissionondeathofamember• Transmission onbankruptcyofmember• Estoppel • Minimumqualificationofadirector

The main rights and liabilities of members are:

Primary Rights

They will generally comprise the right to:

• Attendgeneralorclassmeetingsofthecompany;• Voteatthesaidmeetings• Receiveaproperlydeclareddividend.

Secondary Rights

- Notices of general meetings- Copiesofbalancesheetlaybeforethegeneralmeeting- Copies of memorandum and articles

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- Inspection of minutes of general meetings and registers- Petition for the alternative remedy.

The main ways of terminating membership are:

• Transfer • Forfeiture • Surrenderofshares• Death• Bankruptcy• Saleinexerciseofcompany'slien• Repudiationofaninfant • Liquidation • Recessionofacontract• Disclaimerbyatrusteeinbankruptcy

CHAPTER QUIZ

1. Aninfantcanbecomeamemberofacompany A TRUE B FALSE

2. Giveonewayinwhichapersoncanceasebeingamemberofacompany

3. Inwhattwowaysmaysharesbetransmitted?



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ANSWERS TO QUIZ

1. TRUE

2. Transfer of shares

3. ByDeathandbybankruptcy

SAMPLE OF EXAMINATION QUESTIONS

QUESTION ONE

Highlightthecircumstancesunderwhichapersoncanacquiremembershipofacompany.

QUESTION TWO

Discussthevariouswaysinwhichamembermayceasebeingamemberofacompany.

QUESTION THREE

Discussthesalientfeaturesoftheregisterofmembers.

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CHAPTER SIX

SHARES

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CHAPTER SIXSHARES

OBJECTIVES


• Explain the transfer and mortgage of shares• Explain the various classes of shares• Explain issue and allotment of shares• Explain the mortgage, transfer and transmission of shares• Explain pertinent issues to share warrants

INTRODUCTION

The main security looked at is the share and all the formalities relating to its issue and allotment. The chapter also focuses on transfer and transmission of shares.

KEY DEFINITIONS

• Share:A unit of ownership in a company• Stock:Consolidation of many shares• Mortgage:Atransactionwherebysharesareusedascollateralsecurityforloans• Lien:Anequitablechargeonthesharesofamember tosecuresumsowingbythe

membertothecompany.

EXAM CONTEXT

In this chapter the examiner in this chapter is interested in knowing whether the student understands the various classes of shares, their issue and allotment. Mortgage of shares and share warrants are also often tested.

INDUSTRY CONTEXT

Shares are growing in acceptance as more and more companies are using them as a form of raising funds.

Alookatthefinancialmarketsshowsanexistenceofotherclassesofsharesasopposedtothecommonsharesknowntomany.Ashareisanassetandthusmanybanksareacceptingsharesas security for the loans they issue.


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INTRODUCTION

Section75provides that “thesharesorother interestofanymember inacompanyshallbemovable property”. This provision createsmore problems than it solves although it may beregardedasthestatutorydefinitionofashare.

ThedefinitionofasharewhichisgenerallyquotedinEnglishtext-booksonCompanyLawisthatof Farwell, J. in Borland’s Trustee v Steel Brotherstotheeffectthat“ashareistheinterestofashareholderinthecompanymeasuredbyasumofmoney,forthepurposeofliabilityinthefirstplace,andofinterestinthesecond,butalsoconsistingofaseriesofmutualcovenantsenteredintobyalltheshareholdersinter seinaccordancewith(Section22oftheCompaniesAct).Thecontract contained in the Articles of Association is one of the original incidents of the share. A shareisnotasumofmoney.butisaninterestmeasuredbyasumofmoneyandmadeupofvarious rights contained in the contract, including the right to a sum of money of a more or less amount”.

Itshouldbenotedfromthisdefinitionthatashare:

(a) Is a yardstick of the holder’s liability to the company (if the company is limited byshares);

(b) Istheyardstickoftheholder’sright in the company, particularly the dividendspayablebythecompanytotheshareholders,votingrightsandreturnofcapitalonawindingup;

(c) Is the foundation, as it were, of the bundle of rights and liabilities arising from thestatutorycontractcontainedintheArticlesofAssociation.Itshouldalsobenotedthatashareisaformofpropertywhich,beingtransferable,canbebought,sold,givenassecurity for a loan or disposed of under a will. A person who owns one or more shares in a company is ipso facto,amemberofthecompany(unlessthecompanydidnotenterhisnameinitsregisterofmembersasaconsequenceofwhichheistechnicallynotregardedasamemberofthecompany:Nicoll’scase).

Note: Companieslimitedbyguaranteeandnothavingasharecapitalhavememberswhodonot own shares in the company.

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6.1 CLASSES OF SHARES

Theclassesortypesofshares,whichcanbecreatedandissuedbyacompany,arenotprescribedbytheCompaniesAct.Theydependontheprovisionsofthecompany’sconstitution,usuallytheArticles of Association, or the contract pursuant to which they are issued. Legally, therefore, a companycancreateanytypeorclassofsharesitpleasesbutinpracticethefollowingaretheclassesofsharesgenerallyissuedbyregisteredcompanies:

1. Ordinary shares2. Preference shares3. Participating preference shares4. Redeemablepreferenceshares5. Deferred or founders or management shares6. Employee shares

PREFERENCE SHARES

Thenatureof“preference”sharesandtherightsattachedtothemhavebeenexplainedbytheEnglishcourtsinvariouscases.Thedecisionsmaybesummarisedasfollows:

1. The essential characteristic of a preference share is that it carries a prior right to receive anannualdividendofafixedamount,e.g.71/2%dividends.Thisistheonlypreferential right that it would have over the other shares, particularly the ordinary shares. If the share is to have any otherpreferentialright,sucharightmustbeexpresslyconferredbythecontractunderwhichitwasissuedor,exceptionally,thecompany’smemorandumor articles of association.

2. As regards the priority dividend entitlement,fourpointsshouldbenoted: (a) Therightismerelytoreceiveadividendatthespecifiedratebeforeanydividend maybepaidonordinaryorotherclassesofshares. It is a priority right to whatever dividend maybe declared. It is not a right to compel the company to pay the dividend if it declines to do so. This issue is likely to arise if the company decides totransferprofitstoreserveormakesaprovisioninitsaccountsforaliabilityor lossinsteadofusingtheprofitstopaythepreferencedividend.

In BOND v BARROW HAEMATITE STEEL CO (1902), The company did not pay(i.e.“passed”)itspreferencedividend.Bondandotherpreference shareholderscontendedthatthecompanyhadavailablereservesof240,000 pounds from which it could have declared the dividend on their shares. The companyrepliedthatithadsufferedrealisedlossesof200,000poundsonthe disposalordemolitionofcurrentassetsand,inaddition,itsretainedfixedassets haddiminishedinvaluegenerallyby50,000pounds.It,therefore,decidedto retain the funds in question to make good losses. It was held that the court could

SHARES


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notoverrulethedirectorsintheirdecisionthatthe“stateoftheaccountsdidnot admitofanysuchpayment”(ofpreferencedividend).

It was also held in Re Buenos Aires Great Southern Rly Co Ltd that if the company’sarticlesentitlethepreferenceshareholderstoreceiveafixeddividend foreachyear“outoftheprofitsofthecompany”,thewords“profitsofthe company”meanstheprofitsavailablefordividendaftersettingasidesuch reservesasthedirectorsthinkfit.Ifthewholeoftheprofitsaretransferredto reserve the preference shareholders are NOT entitled to any dividends.

(b) Therighttoreceiveapreferencedividendisdeemedtobecumulativeunlessthe contrary is stated.If,therefore,a7%dividendisnotpaidinyear1,thepriority entitlement is normally carried forward to year 2, increasing the priority right for thatyearto14%andsoon.When arrears of cumulative dividend are paid, the holders of the shares at the time when the dividend is declared are entitled to the whole of it even though they did not hold the shares in the year to which the arrears relate. An intention that preference shares could not carry forward anentitlementtoarrearsisusuallyexpressedbytheword“non-cumulative”.But wordssuchas“adividendofX%payableoutofthenetprofitsofeachyear” sufficientlyindicatethatarrearsmaynotbepaidinalateryear. If nothing is expressed(thoughcumulativepreferencesharesareusuallydescribedas “cumulative”toremoveallpossibledoubt)theyaredeemedtobecumulative: Webb v Earle (1875).

(c) If the company which has arrears of unpaid cumulative preference dividends goes intoliquidation,thepreferenceshareholdersceasetobeentitledtothearrears unless:

i. Adividendhasbeendeclaredthoughnotyetpaidwhenliquidation commences; ii. Thearticles(orothertermsofissue)expressly provide that in liquidation arrearsaretobepaidinprioritytoreturnofcapitaltomembers.

(d) Holdersofpreferenceshareshavenoentitlementtoparticipateinanyadditional dividendoverandabovetheirspecifiedrate.If,forexample,a7%dividendispaid on7%preferenceshares,theentirebalanceofavailableprofitmaythenbe distributedtotheholdersofordinaryshares.Butthisrulealsomaybeexpressly overriddenbythe terms of issue. For example, the articles may provide that the preferencesharesaretoreceiveapriority7%dividendandarealsotoparticipate equallyinanydividendspayableaftertheordinaryshareshavereceiveda7% dividend.Thecompanymightthendistribute,say,9%toitsordinaryshareholders andanextra2%(making9%inall)toitspreferenceshareholders.These preference shares are called participative preference shares. Since there is no limitontheamountofdividend,whichmaybepaidonthem,theyareaformof “equitysharecapital”eveniftheirentitlementtocapitalisrestricted.

3. In all other respects, preference shares carry the same rights as ordinary shares unless otherwise stated. If they do rank equally, they carry the same rights, no more and no less,toreturnofcapitalanddistributionofsurplusassetsandtovote.Inpractice,itis

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usualto issuepreferencesharesonthisbasis.It ismore usually expressly provided that:

(a) Thepreferencesharesaretocarryapriorityrighttoreturnofcapital;and (b) Theyarenottocarryarighttovoteexceptinspecifiedcircumstances,suchas failure to pay the preference dividend, variation of their rights or on a resolution to wind up.

4. When preference shares carry a prior right to a return of capital the result is that:

(a) Theamountpaiduponthepreferenceshares,e.g.1poundoneach1pound share,istobepaidinliquidationorreductionofcapitalbeforeanythingisrepaid toordinaryshareholders;but (b) Unlessotherwisestated,the holders of the preference shares are not entitled to shareinsurplusassetswhentheordinarysharecapitalhasbeenrepaid.

5. Onareductionofsharecapital(wherethepreferencesharescarryanentitlementtopriorityinrepayment)itisinaccordancewiththerightsofpreferenceshareholderstopaythemofffirst.Theycannotobjectthattodothisisavariationoftheirrights;itisstrictobservanceof them(unlesstheirrightsaresoexpressedastoprevent it):Scottish Insurance Corporation Ltd v Wilson’s & Clyde Coal Co Ltd.

6. If preference shares carry no right to attend and vote at general meetings, the preference shareholders are still entitled to receive a copy of the annual accounts since these must besentto“everymember”andtheyaremembers.

7. The advantages obtained by holders of preference shares are greater security ofincomeand(iftheycarrypriorityinrepaymentofcapital)greatersecurityofcapital.But inaperiodofpersistentinflation,theentitlementtoafixedincomeandtocapitalfixedin money terms is an illusion.Anumberofdrawbacksandpitfalls,e.g.lossofarrearsinwindingupandenforcedrepayment,havebeenindicatedabove.Thetypeofinvestortowhompreferenceshareswereattractiveisbetterprotectedbyinvestingindebentures since hethenhasacontractualrighttohisinterest(whetherornotthecompanymakesprofits)andasacreditorhe isentitled to repaymentofhis capitalbeforeanyclassof shares is repaid. It is also advantageous to a company for tax reasons to issue debentures rather than preference shares.

REDEEMABLE PREFERENCE SHARES

Acompanywithasharecapitalmay,ifauthorisedbyitsarticles,issuepreferenceshares,whichareredeemable:CompaniesActSection60(1)

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6.2 TRANSFER OF SHARES

Ashareis,byitsnature,transferableproperty.Buttoobtaintransferofthelegalownershipofshares, twoconditionsmustbesatisfied:

(a) A “proper instrumentof transfer”must bedelivered to the company, which may not enter the transfer in its register until this is done: Companies Act Section 77

(b) If,asisthegeneralpracticewithprivatecompanies,thearticlesgivetothedirectorspower to refuse to register a transfer and the directors exercise their power in a proper way, therestrictionimposedbythearticleswillpreventatransferoflegalownership.

Both principles, especially (b), require some explanation in detail.

TRANSFER PROCEDURE

It was explained in Re Greene(63)thattherulewhichrequiresa“properinstrument”oftransferenforces the payment of stamp duty, normally at ad valorem rateon theconsiderationor (inthecaseofagift)on thenominalvalueof theshares transferred.Acompanymust rejectanunstamped transfer under the provisions of Stamp Duty Act.

This rule does not, however, apply to registration of shares in the names of personal representatives ortrusteesinbankruptcysincetheyaremerelyassertingpowersofcontrolanddisposalofthesharesofmemberswhomtheyrepresentgiventothembylawundertherulesoftransmission.Amember,however,cannotarrangeforthedirecttransferofhissharestoabeneficiaryafterhisdeathwithoutapropertransfer(signedbyhisexecutors):ReGreene(63).

The articles usually provide that:

(a) Theinstrumentoftransfermustbe“inanyusualorcommonform”(i.e.theformsusedbystockbrokers);

(b) The transferor’s share certificatemust accompany the transfer when presented forregistration:TableA,Articles23and25.

Thebasictransferprocedureisthatthetransferorandtransfereecompleteandsignthetransferformandhaveitstampedbeforedeliveringittothecompany(withthetransferor’ssharecertificate)forregistration.Thetransfereebecomesamemberandlegalownerofthe shares onlywhen his name is entered in the register ofmembers.The companyissuestothetransfereeanewsharecertificateandcancelstheoldone.

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CERTIFICATION OF TRANSFERS

Iftheholderisnottransferringhisentireholdingbyasingletransfer,itwouldbeinappropriateforhimtohandtothetransfereeasharecertificateforalargernumberofsharesthanarecomprisedin the transfer.

Insuchacasetheholdersendshissignedtransferwithhissharecertificateto thecompanyfor cancellation and the transfer form is returned to the transferor who then delivers it to the transferee for stamping and representation to the company. If the transferor is retaining some sharesthecompanysendshimanewsharecertificateforthereducednumberofsharesstillregisteredinhisname.Thisprocedureiscalled“certification”ofatransfer.Itisexplainedbythefollowing diagram:

The transfer of registered debentures or of debenture stock is subject to the same rules astransfer of shares.

Certificationisarepresentationbythecompanytoanypersonactingonthefaithofthecertificationthatdocumentshavebeenproducedtothecompanywhichonthefaceofthemshowaprima facie title of the transferor to the shares comprised in the transfer. It is not a representation that the transferorhasany title to thembut it does imply that thecertificatewill be retained:CompaniesActSection81;Bishop v. Balkis Consolidated Ltd.

UnderSection81(2),anypersonwhoactsonanegligentcertificationcanclaimdamagesfromthecompanyforhislossifthecompanydidnoteitherreceiveorfailtoretainthesharecertificate.Butthecompanyhasnodutyandnoliabilitytoanyoneelse.If,forexample,thecompanyreturnsthecertifiedtransferformandthesharecertificatetotheholderwhosellsthesharestoAgivinghimthecertifiedtransferformandalsotoB,givingBasecondtransferformofthesameshareswiththetransferor’scertificateandA’stransferisthenregisteredfirst,Bhasnoclaimagainstthecompany if it refuses to register the second transfer to him. B does not in this case rely on the certifiedtransfer(ofwhichheisunaware)andthesharecertificatewascorrectwhenfirstissuedto the holder.

In LONGMAN v BATH ELECTRIC TRAMWAYS

A transferof shares toBwas registeredanda certificatewasprepared inhisname.Beforethecertificatewasissued,BsignedatransferofthesharestoHandthistransferwassenttothecompanyforcertification.Thecompanycertifiedthetransfer(asitstillhadB’snewsharecertificate)andreturnedthecertifiedtransfertoB.BymistakethecompanythensenttoBthesharecertificateinhisname.BdepositedthesharecertificatewithLassecurityforaloan.Llaterclaimed that he was entitled to the shares.

ItwasHeldL’sclaimmustfail.Hehadneverseen(andthereforedidnotrelyon)thecertifiedtransfertoHandmerepossessionofB’ssharecertificategavehimnoclaimagainstthecompanysincethecertificateatthetimeofissuecorrectlydescribedBasstilltheregisteredholderoftheshares(i.e.thetransfertoHhadnotatthatpointbeendeliveredforregistration).

IftovarythefactsofLongman’scaseLhadbeenabletosecureregistrationasholderofthesharesandthecompanyhadthenrejectedthetransfertoH,HcouldclaimcompensationfromthecompanysincethecertifiedtransferdeliveredtohimwouldhavebeenarepresentationbythecompanythatitheldB’scertificateandthatthetransfertoHwasvalid.

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If identifiedsharesaresoldunderapreliminarycontracttherightsandobligationincidentaltoownership of the shares pass at once to the purchaser under the contract unless otherwise agreed.Thereafter,anydividend receivedby thevendor (pending registrationofhis transfer)mustbepaidovertothepurchaser(unlessthesharesaresold“ex-div”).Thepurchasermustindemnifythevendoragainstanycallsmadeonthesharesbeforeregistrationofthetransfer.Thevendoris,however,freetovoteatmeetingsashewishesuntilthepurchasepricehasbeenpaid to him.

Avendorofshareshasaduty(impliedbythecontractofsale)todeliveratransferoftheshares(inexchangefortheprice)whichwillgivethepurchasergoodtitletotheshares.Ifhefailstodeliversuchatransfer,heisliabletopaydamages.Butthevendordoesnot(unlessthecontractexpresslysoprovides)guaranteethatthecompanywillregisterthetransfer.Ifthecompanyrejectsthe transfer, the vendor as registered shareholder holds the shares in trust for the purchaser as his nominee.

RESTRICTIONS ON TRANSFER

Section30oftheCompaniesActrequiresthearticlesofprivatecompaniestorestricttherighttotransferthecompany’sshares.ThemodelarticlesTableAcontainsprovisionswhichgivethedirectors power to refuse to register a transfer of any share, whether fully or partly paid. The articlesofapubliccompanymayalsorestricttherighttotransferthecompany’ssharesusuallyif the shares are not fully paid or if the company has a lien on them.

Unless the directors have power under the articles to refuse a transfer and exercise that power properly,thetransfermustberegisteredandthecourtmayorderrectificationoftheregister for that purpose. The rules on the restriction of transfer are:

(a) Toexercisetheirpower,thedirectorsmustconsiderthetransferandtakeadecisiontorefuse to register it.

In RE HACKNEY PAVILION Atransferofshareswassentinbytheexecutorsofadeceaseddirectorandshareholder.

The two surviving directors held a boardmeeting anddisagreed as to whether the transfershouldberegistered.There was no casting vote. The secretary wrote to the executors to inform them that the directors had declined to register the transfer.

Held: This was incorrect sinceapositiveactofrefusalwasnecessaryandtherehadbeen

none.Theregistermustberectifiedbyregisteringthetransfer.

(b) Thedirectorsinreachingtheirdecisionmustactbona fideinwhattheyconsidertobethebestinterestsofthecompany:RE: Smith & Fawcett(64)

(c) Wherethearticlesspecifygroundsofrefusal,thedirectorsmayberequiredtoidentifythegroundsofrefusal.However,theyarenotobligedtodisclosethedetailedreasons

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fortheirdecision(unlessthearticlessoprovide).Ifnonethelessthedirectorsdodisclosetheir reasons, the court will consider whether the directors acted bona fide or whether theirreasonsaccordwiththegroundsspecifiedinthearticles(ifthatisthecase).

In RE BEDE SS CO LTD (1971)

The directors were authorised to refuse transfers if in their opinion it was contrary to the interestsof thecompanythat the transfereesshouldbemembers.Thedirectorsrejectedtransfersofsmallnumbersofshares(andofsingleshares)onthegroundthatitwasprejudicialtothecompanythatitsissuedsharecapitalshouldbefragmented.

Held: Thereasongivencouldbechallengedandwasinvalid.Thepowertorefuseregistration

must (on the formula used in the articles) be confined to cases of objection to thetransferees on personal grounds. In this case the directors were objecting to thesmall amount of shares transferred which was not an objection to the transfereespersonally.

(d) Thepowerofrefusalmustbeexercisedwithinareasonabletimefromthereceiptofthetransfer.UnderSection80,acompanyisrequiredtogivenoticeofanyrefusalwithin60days.Ifthepowerisnotexercisedwithinareasonabletimeitlapsesandcannolongerbeused.Therequirementofnoticeofrefusalwithin60dayseffectuallymakesthatthe“reasonable”period.

In RE SWALEDALE CLEANERS LTD (1968)

On August 3, 1967, transfers of shares were presented. There was only one director theninofficeandhepurportedtorefusetoregisterthetransfersinexerciseofapowerofrefusalgivenbythearticles.Butaquorumformeetingsofthedirectorswastwoandsotheonedirectorwasnotcompetenttoexercisethepowersoftheboard.OnDecember11,1967proceedingswerebegunforrectificationoftheregister,i.e.,acourtorderthatthetransfersshouldbeenteredintheregister.OnDecember18,1967aseconddirectorwasappointedandtherewasaboardmeetingatwhichthetwodirectorsrefusedtoregisterthetransfers(4months,14days).

Held: The attempt to exercise the power of refusal on December18,1967 was invalid since, in

theintervalof41/2months(sincethetransferswerepresented),the power had expired (asregardsthosetransfers).Sincethepowerofrefusalhadnotbeenexercised,thetransfersmustbeenteredintheregister.

Thearticlesmayalsorestricttherighttotransfersharesbygivingtomembersarightoffirstrefusaloftheshares,whichothermembersmaywishtotransfer.Anysuchrightsarestrictlyconstrued,i.e.amemberwhowishestoacceptmustobservethetermsofthearticlesandamemberwillnotbepermitted toevadehisobligation tomake theoffer.

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In LYLE & SCOTT v SCOTT’S TRUSTEES

Thearticlesrequiredanymemberwhomightbe“desirousoftransferring”hissharestogivenoticetothecompanysecretarysothat thesharescouldbeofferedtoothermembers. Certain members agreed to sell their shares to an outsider and, whileremaining the registered holders, gave the purchaser their proxies so that he could secure control of the company.

Held: Thesemembers were indeed “desirous of transferring” their shares andmust give

formal notice as the articles required.

Thecasescitedaboveshowthatwhenthereisadisputeoverrefusaltoregister,theproperremedyistoapplytothecourtforrectification.Amemberwhoappliedforanorderforcompulsorywindingupofthecompanyonthejustandequitablegroundwasrefused (Charles Forte {Investments} v Amanda)as“awindinguppetitionisnotaproperremedy” insuchacasebecauseto liquidatethecompanywouldbeunfair toothermembersnotinvolvedinthedispute.

SHARE CERTIFICATES

(a) Section82(1)providesthatwithin60daysofallottingsharesorreceivingatransfer,acompanymusthavereadyfordeliveryacertificateofthesharesallottedortransferred(unless the transfer is rejected).This is a formalwritten declaration (usually issuedunderthesealofthecompany)thatthepersonnamedisenteredintheregisterastheholderofthesharesspecified.

(b) Asharecertificateisadocumentonwhichisprintedthenameoftheshareholderandthenumberofsharesheld(withanyparticularssuchas“1poundordinary”)iswritten(or typed).Thesealof thecompany isaffixedandwitnessedbysignatures (unlessdispensedwith).Thestandardprintedwordingonasharecertificatereads:

“Thisistocertifythat(nameofshareholder)istheholderof(numberandanydescription)sharesfullypaidof (nominal value)eachnumbered ... to ... inclusive in theabovenamedcompanysubjecttothememorandumandarticlesofassociationthereof.”

Thedistinguishingnumbersmaybeomitted.Thereferencetothememorandumandarticlesisareminderofthestatutoryrulethateverymemberisboundbythesedocumentsasacontractwiththe company, under Section 22 of the Companies Act.

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Contentsofthesharecertificate

a. Name of the companyb. Commonsealofthecompanyc. Registered holder of the sharesd. Numberofshareshelde. Serialnumberf. Date of issueg. Signature of directors

Asharecertificateisnota documentoftitlebutisprima facie evidence of ownership. The company thereforerequirestheholdertosurrenderhiscertificateforcancellationwhenhetransfersalloranyofhisshares.Ifthecompanyissuesasharecertificate,whichisincorrectitisestoppel from denyingthatitiscorrectbutonlyagainstapersonwhohasrelieduponitandtherebysufferedloss.

EstoppelbyShareCertificate

Althoughthesharecertificateisonlyprima facie evidence of title, its contents may render the companyliableundertheequitabledoctrineofestoppel. This isbecausethecontentsof thesharecertificatearearepresentationbythecompanytothirdpartiesandabonafidethirdpartywhosufferslossordamagebyreasonofrelyingupontherepresentationwillholdthecompanyliable.Thecompanycannotbeheardtosaythatitnevermadetherepresentationorthatitwasfalse.

RE BAHIA & SAN FRANCISCO RAILWAY CO

Twastheregisteredholderoffiveshares.SandGforgedatransferofthesharestothemselvesandpresenteditforregistrationwithT’ssharecertificate,whichtheyheldasherbrokers.ThetransferwasregisteredandanewsharecertificatewasissuedtoS and G as shareholders. S and G sold the shares to B and another person who were duly registered as holders. T had the shares re-registered in her name since the forged transfer was a nullity. B and the other purchaser claimed the value of the shares from the company as damages.

Held:

TheclaimwasvalidsincethesharecertificateinthenameofSandGwas“adeclarationbythecompanytoalltheworldthatthepersoninwhosenamethecertificateismadeoutandtowhomthecertificateisgiven,isashareholderofthecompany...withtheintentionthatitshallbeacteduponinthesaleandtransferofshares”.(NBInthiscase,thesharecertificate issuedtoSandGwasgenuine(althoughobtainedbya forgedtransfer)andtheclaimantshadnotthemselvespresentedaforgedtransfersincethetransfertothembySandGwasgenuine(althoughitrelatedtosharestowhichSandGhadnotitle).

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The principle of estoppel which applied in the case cited above is that if a person:

(a) Makesastatementoffactwiththeintentionthatitshallbereliedon;and

(b) Thepersontowhomitismadedoesactinrelianceonitandwouldsufferloss ifthestatementweresubsequentlydeniedasuntrue,thenthepersonwhomadethe

statementisestoppel,i.e.,isnotpermittedtodenyhisownstatementbyassertingthetruefacts.Thepositionmustremainorberesolvedasifthestatementmadehadbeentrue.

Apart from ownership, the company may be similarly estoppel from denying thecorrectnessofthecertificatein other respects.Forexample,ifthecertificatestatesthatthe shares are fully paid, the company cannot deny that this is so.

In BLOOMENTHAL v FORD (1897) ThecompanyborrowedmoneyfromBandassecuritygavehimsharecertificatesfor

10,000sharesof1poundeachinhisnameinwhichthesharesweredescribedasfullypaid.Bbelievedthattheamountdueonshareshadbeenpaidbyapreviousholder.Butthis was not true. The company went into liquidation and the liquidator claimed from B the amount due on his shares.

Held: Thecompanywasestoppedbyitsownstatementonthecertificatethattheshareswere

fully paid. The claim must fail. Read also the case of Burkinshaw v Nicolls.(65)

(c) Apersonwhoisinpossessionofasharecertificateinhisnameorthenameofanotherpersonmayhaveavalidclaim(i.e.thecompanymaybeestoppelfromdenyingthatthecertificateisvalid).Buttheclaimantwillfailinanyofthefollowingcircumstances:

i. Ifhehasnotreliedonthesharecertificateinatransactionfromwhichhewill incurlossifthesharecertificateisrepudiatedbythecompany.InTompkinson’s casebelow,theclaimonlysucceededbecauseThadre-soldthesharesin relianceonthecertificate.

In BALKIS CONSOLIDATED v TOMPKINSON PsoldsharestoT(butPhadnotitletotheshares)andthecompanywasinducedby

fraudonthepartofPtoissueasharecertificatetoTinthenameofT.Tlaterre-soldtheshares.Thecompany refused to register the transfersbyT to thepersonswhohadboughtthesharesfromhimonthegroundthatThadnotitle(likePbeforehim).Tpurchased other shares to satisfy the claims of those to whom he had sold and claimed damages from the company. The company said that it was not estoppel from denying that T had any title to his shares.

Held: T could rely on the principle of estoppel since, in reliance on the share certificate

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issuedtohim,hehadincurredliabilitiesbyresellingtheshares.(NB.Thimselfwasnotimplicated,evenindirectly,inprocuringtheissueofthecertificate,whichwasarrangedbyP.)

ii. Ifhehasobtainedthecertificatebypresentingaforgedtransfertohimselffor registration. iii. Ifthecertificateisaforgeryorissuedwithoutauthority.

In RUBEN v GREAT FINGALL CONSOLIDATED Thecompanysecretaryforgedthenecessarysignatureofadirectoronasharecertificate

and issued it.

Held: Thecompanywasnotestoppelfromdenyingthatthecertificatewasworthless.Itwas

notacertificateissuedbythecompany.

STOLEN CERTIFICATES AND FORGED TRANSFERS

Mostofthecase-lawisconcernedwithsharecertificatesissuedasaresultofthedeliverytothecompanyofaforgedtransfertogetherwithastolenormisappropriatedsharecertificateoftheregisteredholder.Thecompanyacceptsthetransferforregistrationandissuesanewcertificateto the transferee who then re-sells the shares to another person. The result is then as follows:

(a) Theoriginalregisteredholder(A)canusuallyrequirethecompanytorestorehisnameto the register since a forged transfer is a nullity which cannot deprive him of his title to the shares;

(b) Theperson (B)whoobtained registrationof the forged transferofshares tohimselfcannotrelyonthesharecertificateissuedtohimsinceheobtaineditbypresentingaforgedtransfer.Onthecontrary,heisliabletocompensatethecompanyforitsliability.This is so even if B is unaware of the forgery;

(c) Thesecondpurchaser(C)hasrelieduponthesharecertificateissuedtoB.CisnotdisqualifiedfrommakingthecompanyliableonthecertificatesinceChasnotdeliveredaforgedtransfertothecompany(Bahiacaseabove).Cisnottheowneroftheshares(sincehisclaimisbasedonforgedtransferbyAtotheperson(B)whopurportedtotransfer the shares to him. ButasthecompanycannotdenythatB’ssharecertificateiscorrect,itmustcompensateCeitherbypayingCtheamountwhichCpaidtoBforthesharesorbybuyingothersharesinordertobeabletoregisterthosesharesinthename of C.(Alternatively,thecompanymayleaveC’snameontheregisterandbuyothersharestoregisterinthenameofAasinthefollowingBarclay’scase).

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In SHEFFIELD CORPORATION v BARCLAY StockwasregisteredinthejointnamesofTandH.TforgedH’ssignatureonatransfer

and added his own. T delivered the transfer to B (whowasunawareof the forgery)andBobtainedregistrationofthetransfertohimself.BlatertransferredthesharestoCtowhomBdeliveredatransferandthecertificateissuedtohim.Whentheforgerywasdiscovered,Hclaimedtoberestoredtotheregisterasholderoftheshares(Thaddiedmeanwhile)andthecorporation,beingestoppelagainstC, purchased shares in themarketforregistrationasreplacementinthenameofH.Thecorporationclaimedcompensation from B.

Held:

Bwas liable tocompensate thecorporation since he had caused it to issue a false sharecertificatebydeliveringaforgedtransfertohimselfforregistration.

Intheexamplegivenabove,itisassumedthattheoriginalregisteredholderhasnotcontributedtothefraud.Butifhedoesso,eveninnocently,hemaybeestoppelfromassertinghisownershipoftheshares.Heisnotestoppelinthiswaymerelybecausehe leaveshissharecertificate in thepossessionofanotherperson(seeBahiacaseabove).Butif he delivers a signed transfer to another person for a limited purpose, he gives him apparent authoritytousethetransferandsomaybeunabletorepudiateanunauthorised use of the transfer.

In FRY v SMELLIE

Theregisteredholderofsharesgavetoanagentablanktransfer(i.e.atransfersignedbytransferorbutwithoutthenameofatransfereeinserted)withaviewtotheagentborrowingaspecifiedsumofmoneyusingthesharesassecurity.Theagentexceededhisauthoritybymortgagingthesharesforalargersum.Theshareholderdeniedthatthe transferwas valid since it hadbeenused in a transaction,whichexceeded theactual authority given to his agent.

Held:

The shareholder was estoppel from asserting that the agent had exceeded his authority.

Theprivatelimitationofauthoritycouldnotbepleadedagainstathirdpartywhowasnotaware of it.

Some companies in Kenya issue a “transfer notice” to the registered holder to the

effectthatatransferofhisshareshadbeenpresentedforregistration.However,if the registered holder ignores the notice(ashappenedintheBahiacase)he is not estoppel fromlaterassertingthatthetransferwasnotsignedorauthorisedbyhim.Hencetheissue of a transfer notice is of no value to the company and so in England the practice hasbeengenerallyabandoned.Itwouldhoweverbeadvisableforpubliccompaniestoinsureagainstliabilityarisingfromacceptingaforgedtransfer.

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STOCK

Acompanymay,ifauthorisedbyitsarticles,convertitsissuedsharesintostock(orreconvertstockintoshares).Butsharesmustbeallottedassharesrankingpari passuandbemadefully paidbeforetheycanbeconvertedintostock.Theeffectofconversionisthat,forexample,onehundredonepoundsharesbecomeasingleblockof100poundstockownedandtransferableinunitsofdefinedvalue(usuallythesameamountasthevalueofthesharesfromwhichtheyarederived).Itusedtobecommonpracticetoconvertfullypaidsharestostocktodispensewithuseofidentifyingnumbersforshares.Butthisresultcannowbeachievedinotherways.Itshouldbenoted that reference to shares in the Companies Act includes stock unless otherwise indicated. (CompaniesActSection2)

6.3 MORTGAGE OF SHARES

Thisisatransactionwherebysharesareusedascollateralsecurityforloans.Thetransactioniseitherlegalorequitable.

Under a legal mortgage, the borrower transfers his shares to themortgagee who becomesthe registeredholdersubject toaseparateagreementbywhichheundertakes to re-transferthe shares to the mortgagor on repayment of the loan. The agreement also determines who is entitled to the dividends and gives the mortgagee the right to sell the shares if the mortgagor defaults on the loan. As registered holder, the mortgagee can transfer the shares to a purchaser whobuysfromhim.

The essential feature of an equitableorinformalmortgageisthattheborrowerdepositshissharecertificatewiththemortgageebutremainstheregisteredholderoftheshares.Thereisagainan agreement containing the terms of the loan and the mortgage. The mortgagee may protect himselfbyservinga“stopnotice”onthecompanybuthispossessionofthesharecertificateisaneffectualbartodealingswiththesharesbytheborrower.

Theequitablemortgagee’sotherpotentialdifficultyisthatsinceheisnotaregisteredshareholderhehasnodirectmeansoftransferringthesharestoapurchaseriftheborrowerdefaultsandhedecidestosell.Heusuallyobtainsfromthemortgagora“blanktransfer”,i.e.atransfersignedbythemortgagorasregisteredholderbutwithoutthenameofatransfereeinserted.Thisusuallygivesthemortgageeanimpliedpowertoinserthisownnameastransfereeincaseofdefault.Hecan then dispose of the shares after transferring them into his name. Alternatively, the mortgagee mayobtain fromthemortgagorapowerofattorneygivinghimpower to insert thenameofapurchaser on the transfer.

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CALLS ON SHARES

Unlesssharesarealreadyfullypaidfor,theregisteredholderisliabletopaythebalanceduewhencalledontodoso.Thepowerofthedirectorstomakecallsisdefinedbythearticles.Theproceduremustbecorrectlyapplied.TherulesorprinciplesgoverningcallsareembodiedinArticles15–21ofTableA.Ifashareholderdefaultsinthepaymentofcalls,thecompanymay,ifthearticlessoprovide,forfeithisshares.Articles33—39ofTableAcontainprovisionswhichwillapplyifthecompany’sarticlesdonotprovideforforfeiture.

LIEN ON SHARES

Alienisanequitablechargeonthesharesofamembertosecuresumsowingbythememberto the company. The company has a lien only if its articles so provide and to the extent that the articles provide.

Private companies, however, usually have a lien over fully paid as well as partly paid shares to securesumsowingbymemberswhetherinrespectoftheirsharesorother liabilitiessuchasloans.Thearticlesalsogivethecompanyapowertoenforceitslien(incaseofthemember’sdefault)bysaleoftheshares.

Thecompany’sliengivesitafirstclaimonthesharesunlessthecompanyhasnoticeofsomeexistingclaimtothesharesbeforetheholderbecomesindebtedtothecompany.

BRADFORD BANKING COMPANY v BRIGGS & CO (1886)

Amemberdepositedhissharecertificatewiththebankasanequitablemortgageofthesharestosecurealoantohimbythebank.Thebankgavenoticetothecompanyofitsinterestasmortgagee.Later,thememberbecameindebtedtothecompany.

Held: Asthecompanyhadpriornoticeofthebank’smortgage,itslien(althoughtherightto

alienexistedwhenthenoticewasreceived)waspostponedtothemortgagesincethecompany’sclaimunderthelienaroseafterthebank’snoticewasreceived.

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VALUATION OF SHARES

Thearticlesofprivatecompaniesoftenprovidethatamemberwhowantstosellhissharesmustfirstofferthemtotheexistingmembersatapricetobefixedbytheauditors.Similarprovisionsareoftenapplicableinthecaseofamember’sdeath.Invaluingthesharesforthispurpose,theauditorisnotobligedtoexplainthebasisofhisvaluationortogivehisreasonsforit,andheisnotliabletoanactionbyapartywhoisdissatisfiedwithitunlessheisdishonest.If,however,he does give an explanation, the court can inquire into it and, if satisfied that the valuationhasbeenmadeonthewrongbasis,candeclarethatitisnotbinding,i.e.thevaluationcanbeimpeachedforfraud,mistakeormiscarriage,butonmattersofopinionthecourtwillnotinterfere.In Arenson v Casson Beckman Rutley & Co.,itwasheldthatforavaluertoestablishimmunityfromsuit,hemustshowthatadisputebetweenatleasttwopartieswassenttohimtoresolveinsuch a way that he had to exercise a judicial discretion. An auditor of a private company who, on request,valuesitssharesintheknowledgethatthisvaluationwilldeterminethepricetobepaidunderacontractowesadutyofcaretoboththevendorandthepurchaser.Accordingly,onthefactsofthecase,theplaintiff’sstatementofclaimdisclosedacauseofaction.

6.4 SHARE WARRANTS

Section114(1)providesthatontheissueofasharewarrant,thecompanyshallstrikeoutofitsregisterofmembersthenameofthemembertowhomthewarranthasbeenissuedandshallenter in the register:

(a) Thefactoftheissueofthewarrant;

(b) A statement of the shares included in thewarrant, distinguishing each share by itsnumber;and

(c) Thedateoftheissueofthewarrant Thebearerofthewarrantshall,subjecttothearticlesofthecompany,beentitled,on

surrenderingitforcancellation,tohavehisnameenteredasamemberintheregisterofmembers.Ifthearticlessoprovide,thebearerofasharewarrantshallbedeemedtobeamemberofthecompanyeithertothefullextentorforanypurposesdefinedinthearticles.

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Mortgageofshares isatransactionwherebysharesareusedascollateralsecurity for loans.Thetransactioniseitherlegalorequitable

The following are the classes of shares generally issued by registered companies:

7. Ordinary shares8. Preference shares9. Participating preference shares10. Redeemablepreferenceshares11. Deferred or founders or management shares12. Employee shares

Asharecertificateisadocumentonwhichisprintedthenameoftheshareholderandthenumberofsharesheld(withanyparticularssuchas“1poundordinary”)iswritten(ortyped).

Ashareisbyitsnaturetransferablebuttoobtaintransfer,aproperinstrument(oftransfer)mustbedeliveredtothecompanyandthedirectorsmustauthorisethetransfer

Amortgagemayeitherbe legalorequittable. Ina legalmortgage theborrower transfershisownershipbutforanequitablemortgage,theshareholderremainstheregisteredholder.

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CHAPTER QUIZ

1. Name any two classes of shares 2. Amortgagemayeitherbelegalor

3. Atransactionwherebysharesareusedascollateralisreferredtoas

4. Preference shares are of types namely

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ANSWERS TO QUIZ

1. Ordinary and Preference Shares 2. Equitable 3. Mortgage 4. Participatingorirredeemable


QUESTION ONE

Discusstheprocedureusedtoeffectatransferofshares.(20marks)

QUESTION TWO

Whatisamortgageonsharesanddiscusshowtheywork(20Marks)

QUESTION THREE

Discusstherulesthatareputinplaceforrestrictionoftransferofshares(20Marks)

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PART C


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CHAPTER SEVEN

MEETINGS

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CHAPTER SEVENMEETINGS

OBJECTIVES


• State and explain the different types of meetings• Definethedifferenttypesofresolutionsthatmaybepassedatmeetings• Explain the rule in Sharp v Dawes

INTRODUCTION

Thischapterisdealswiththevariousmeetingsthatacompanyholdsandthebusinessoperationsconducted at those meetings. It is in these meetings resolutions are made which affect the company.The chapter later introduces resolutionswhich final decisions onmotions that aremoved in the various meetings.

KEY DEFINITIONS

• Quorum:Therequisitenumberofmemberswhomustbepresentforameetingtotakeplace

• Proxy:Apersonappointedbyashareholdertovoteonbehalfofthatshareholderatacompany meeting

• Meeting: coming together of two or more people to discuss an agenda

EXAM CONTEXT

Theexaminermainlyseekstotestthestudent’sunderstandingofthedifferenttypesofmeetings.A clear understanding of the statutory meeting is useful. A clear interpretation of the resolutions and what they are used for is encouraged. Past papers show this chapter has appeared in the followingsittings:Kindlyrefertothefollowingsittings:-05/02;12/01;12/00;07/00;05/02;06/98

12/00;07/00;

INDUSTRY CONTEXT

Meetingsarevery important inan industry.Thiscanbeshown fromcasestudy likeSharp v


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Dawes, which emphasised that one man cannot constitute a meeting. For a meeting to take placeitmustbeconstitutedasprescribedbytheAct.Meetingsalsoresultinpassingofresolution,which is used as a tool for making decisions.

7.1 CLASSIFICATION OF MEETINGS

Company General Meetings

NeithertheCompaniesActnorcaselawhasattemptedtodefinethetermmeeting.However,prima faciethetermmeanscomingtogetheroftwoormorepersons.Itdenotesanassemblyofpersons.

Company general meetings are held from time to time in order:

(a) Tocomplywithstatutoryprovisionswhichrequirecertaingeneralmeetingstobeheldinordertotransactspecifiedbusiness.Suchmeetingsincludethestatutorymeeting,theannual general meeting and class meetings.

(b) Totransactbusinessthatmayonlybetransactedatageneralmeetingofthemembersorshareholders,suchasalterationorreductionofthecompany’scapital.

(c) Toenablethedirectorsandmemberstoexchangeviewsregardingtherunningofthecompany’saffairsorresolvesomeexistingdispute.

Types of General Meetings

The Statutory Meeting

Fast forward:

Ø The main agenda of this meeting is the statutory reportØ It is held once in the life of a company

According tosection130everypubliccompany limitedbysharesandeverypubliccompanylimitedbyguaranteeandhavingasharecapitalshall,withinaperiodofnotlessthanonemonthnormorethanthreemonthsfromthedatewhenthecompanyisentitledtocommencebusiness,hold a generalmeeting of themembers of the company,which shall be called the statutory

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meeting.Thestatutorymeetingisheldforthespecificpurposeofenablingthemembersofthecompanytoconsiderthestatutoryreport.However,Section130(7)providesthat“themembersofthecompanypresentatthemeetingshallbeatlibertytodiscussanymatterrelatingtotheformationofthecompany,orarisingoutofthestatutoryreport,whetherpreviousnoticehasbeengivenornot.”Butnoresolutionofwhichnoticehasnotbeengiveninaccordancewiththearticlesmaybepassedatthemeeting.

Contents of the statutory report: Section 130(3) provides that the statutory report shall be certifiedbynotlessthantwodirectorsofthecompanyandshallstate:-

(a) Thetotalnumberofsharesallotted,distinguishingsharesallottedasfullyorpartiallypaid up otherwise than in cash, the consideration for which the shares have beenallotted and, in the case of shares partly paid up, the extent to which they are so paid up;

(b) Thetotalamountofcashreceivedbythecompanyinrespectofallthesharesallotted,distinguishedasaforesaid;

(c) Anabstractofthereceiptsofthecompanyandofthepaymentsmadetherein,uptoadatewithinsevendaysofthereport,exhibitingunderdistinctiveheadingsthereceiptsofthecompanyfromsharesanddebenturesandothersources,thepaymentsmadeandparticularsconcerningthebalanceremaininginhandandanaccountorestimateofthepreliminaryexpensesofthecompany;

(d) Thenames,postaladdressesanddescriptionsofthedirectors,auditors,ifany,managersifany,andthesecretaryofthecompany;and

(e) Theparticularsofanycontractthemodificationofwhichistobesubmittedtothemeetingforitsapproval,togetherwithparticularsofthemodificationorproposedmodification.

BySection130(4) thestatutory report shall, so faras it relates to thesharesallottedby thecompany, the cash received in respect of such shares and the receipts any payments of the companyoncapitalaccount,becertifiedascorrectbytheauditors,ifany,ofthecompany.

BySection130(2)acopyof thestatutoryreport is tobeforwardedbythedirectors toeverymemberofthecompanyatleast14daysbeforethedayonwhichthestatutorymeetingistobeheld.However,thereisaprovisothatifthereportisforwardedlaterthanprescribed,itshallbedeemedtohavebeendulyforwardedifitissoagreedbyallthemembersentitledtoattendandvote at the meeting.

Thedirectorsshallcauseacertifiedcopyofthestatutoryreporttobedeliveredtotheregistrarforregistrationforthwithafterthesendingthereoftothemembersofthecompany(Section130(5).

List of Members

Section 130(6) provides that the directors shall cause a list showing the names and postaladdressesofthemembersofthecompany,andthenumberofsharesheldbythemrespectively,

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tobeproducedatthecommencementofthemeetingandtoremainopenandaccessibletoanymemberofthecompanyduringthecontinuanceofthemeeting.

BySection130(9)ifthereisanydefaultincomplyingwiththeprovisionsofSection130,everydirectorofthecompanywhoisknowinglyandwillfullyguiltyofthedefaultshallbeliabletoafinenot exceeding one thousand shillings.

It shouldbenoted that thestatutorymeeting isnotheldbyaprivatecompany,and that it isheld only once in the lifetime of a public company. It is the first official coming-together ofthecompany’smembersand isheldwithinaveryshort timeafter thecompany isentitled tocommencebusiness. Its timing is importantbecause themembersare in factbeinggivenachancetoascertain,beforeitistoolate,whethertheminimumsubscriptionwasraisedand,intheeventoftheminimumsubscriptionnothavingbeenraised,todecideonwhethertoavoidthecontractofallotment.Thesearemattersinrespectofwhichanyprocrastinationcouldbefinanciallydisastrousforthememberssincethecompanycouldbeputintoliquidationbeforethemembershadcometogethertoascertainwhathadhappenedsincethetimetheprospectuswasissued.

The Annual General Meeting

Section131(1)providesthat“everycompanyshall ineachyearholdageneralmeetingasitsannual general meeting in addition to any other meetings in that year, and shall specify the meetingassuchinthenoticescallingit”.

Notmorethan15monthsmustelapsebetweenthedateofoneannualgeneralmeetingandthenext.Theword“year”wasdefinedinGibsonvBartonas“calendaryear”,i.e.theperiodJanuary1toDecember31.

Section131(1)hasaprovisototheeffectthat,solongasacompanyholdsitsfirstannualgeneralmeeting within 18 months of its incorporation, it need not hold it in the following year. Thus a companyincorporatedonOctober1,1992,neednotholditsfirstannualgeneralmeetinguntilMarch 1994.

Subsection(2)providesthatifdefaultismadeinholdinganannualgeneralmeetinginaccordancewith the aforesaid provisions, the registrar may, on the application of any member of thecompany, call or direct the calling of a general meeting of the company and give such ancillary orconsequentialdirectionsashethinksexpedient,includingadirectionthatonememberofthecompanypresentinpersonorbyproxyshallbedeemedtoconstituteameeting.

The registrar is not bound to call or direct the callingof themeetingbut, in theevent of hisrefusingtodoso,theaggrievedmembermayapplytothecourtforanorder:Re:ElSombreroLtd(88), inwhichthecourtmadeanorderafter theregistrarhaddeclinedtodoso. Section131doesnotprovideforthebusinesswhichmaybetransactedattheannualgeneralmeetingbutTableA,Article52mentionsthefollowingasthe“ordinary”orusualbusinessatanannualgeneral meeting:

i. Declaringadividend;

ii. Theconsiderationoftheaccounts,balancesheetsandthereportsofthedirectorsandauditors;

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iii. The election of directors in the place of those retiring, and

iv. Theappointmentof,andthefixingoftheremunerationof,theauditors.

Subsection5makes itacriminaloffencepunishablewithafinenotexceeding two thousandshillings for thecompanyandeveryofficerof thecompany to fail tohold theannualgeneralmeeting or comply with any directions of the registrar regarding the calling and conduct of the meeting.

Extraordinary General Meetings

Section132(1)providesfortheconveningof“extraordinary”generalmeetingbutdoesnotdefineit.Neitheristheword“extraordinary”definedinanyothersectionoftheAct.However,TableA,Article48providesthatallgeneralmeetingsotherthanannualgeneralmeetingsshallbecalledextraordinary general meetings.

TableA,Article49furtherprovidesthatthedirectorsmay,whenevertheythinkfit,conveneanextraordinarygeneralmeeting.Further,bySection132(1),despiteanythinginthearticlesofacompany,thedirectorsareboundtoconveneanextraordinarygeneralmeetingofthecompanyon the requisition of the holders of not less than one-tenth of the paid-up capital of the company carrying the right of voting at general meetings of the company, or, if the company has no share capital,ofmembersrepresentingnotlessthanone-tenthofthetotalvotingrights.Section132(2)providesthattherequisitionmuststatetheobjectsofthemeeting,andmustbesignedbytherequisitionsanddepositedattheregisteredofficeofthecompany.Section132(3)providesthatif the directors do not within 21 days from the date of the deposit of the requisition proceed to convene a meeting, the requisitions, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a meeting, so long as they do so within three months of the requisition.

Section32(5)entitlestherequisitionstorecoveranyreasonableexpensesincurredinconveningthe meeting from the company, and the company may in turn recover these from the fees or other remuneration of the defaulting directors.

Thecompany’sarticlescannotdeprivethemembersoftherighttorequisitionameetingunderSection132because thesection requires thedirectors toproceed to conveneameetingonrequisition“notwithstandinganything”inthecompany’sarticles.However,thesectionisdefectivein the sense that, although the directors are required to convene the meeting, they need not hold it within any particular limit of time. They may therefore defeat the purposes of the section bycalling themeeting foradate,say,sixmonthsahead,provided theydosowithin the21-day period. In the event of their doing so the requisitions cannot convene another meeting, asillustratedbyRe:WindwardIslandsEnterprises(U.K)Ltd(1982).TheJenkinsCommitteerecommendedthattherequisitionsshouldbeempoweredtocallthemeetingthemselvesifthedirectorscallthemeetingtobeheldlater than 28 days after the notice convening it was sent out.Thecompany’sarticlesmayalsocontainsuchaprovisionalthoughthecurrentTableAlacksone.

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Section135(1)providesthat,ifforanyreasonitisimpracticabletocallorconductameetingofa company in accordance with the articles or the Act, the court may, either of its own motion or onapplicationbyanydirectororanymemberentitledtovotedatthemeeting,orderameetingtobecalled,heldandconductedinsuchmannerasthecourtthinksfit.Wherethecourtmakesan order, it may give such ancillary or consequential directions as it thinks expedient including adirectionthatonememberofthecompanypresentinpersonorbyproxyshallbedeemedtoconstituteameeting.ThepowerofthecourtinthisregardisillustratedbyRe:ElSombreroLtd(88).

Class Meetings

“Classmeetings”arenotprovidedforbytheCompaniesAct.However,aclassmeetingmaybeheld pursuant to the provisions of the company Articles of Association, if any.

TableA,Article4allowsa company to vary the rightsattached toanyclassof shares if thevariationisconsentedtoinwritingbytheholdersofthree-fourthsoftheissuedsharesofthatclass or is sanctioned by a special resolution passed at “a separate generalmeeting of theholdersofthesharesoftheclass”.

TheprovisionsofTableA in relation togeneralmeetings shall apply toevery suchseparategeneralmeeting,except that thenecessaryquorumshall be twopersonsat leastholdingorrepresentingbyproxyone-thirdoftheissuedsharesoftheclass.

Itshouldbenotedthat,althoughholdersofotherclassesofsharesmayattendthemeetingashappened in Carruth v I.C.I. Ltd, infra, they cannot vote thereat.

Convening of General Meetings

General meetingsarenormallyconvenedby theBoard of Directors pursuant, to the relevant provisionofthecompany’sarticles,suchasTableA,Article49.

a) TableA,Article49empowersanydirectororanytwomembersofthecompanyto convene an extraordinary general meeting if at any time there are not within Kenya sufficientdirectorscapableofactingtoformaquorum.Suchameetingistobeconvenedinthesamemannerasnearlyaspossibleasthatinwhichmeetingsmaybeconvenedbythedirectors.

b) Section132(3)empowersmembersholdingnotlessthanone-tenthofthepaid-upcapital of a company, or representing not less than one-tenth of the total voting rights ofallthemembers,toconveneanextra-ordinarygeneralmeetingofthecompanyifthedirectors have failed to do so despite their requisition.

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c) Section134(b)empowerstwoormoremembersholdingnotlessthanone-tenthoftheissuedsharecapital,notlessthanfivepercentinnumberofthemembersofthecompany, to call a meeting of the company if the articles do not provide otherwise.

Thecompanysecretaryorotherofficerofthecompanyhasnopowertocallageneralmeeting:Re:StateofWyomingSyndicate(89).However,thedirectorsmayratifytheunauthorisedact.

Good Faith

The directors must act in good faith when calling a meeting, thus, in Cannon v Tasks, the directors called the annual general meeting at an earlier date than was usual for the company to hold it. Their intention in doing so was to ensure that transfers of shares to certain persons who were likelytoopposesomeoftheirproposalswouldnotberegisteredintimesothattheywouldbeunabletovote.Aninjunctionstoppingthemeetingfrombeingheldwasgranted.However,oncethe directors have called the meeting they cannot postpone or cancel it. For example, in Smith v paring a Mines Ltd, a notice was issued purporting to postpone the holding of a general meeting ofshareholderswhichhadpreviouslybeendulyconvened.Oneofthedirectorsofthecompanywhowasindisagreementwiththeremainderoftheboardattendedthemeetingtogetherwithseveral shareholders. It was held that resolutions passed at the meeting were valid and effective. The purported postponement of the meeting was inoperative since the articles pursuant to which themeetinghadbeenconveneddidnotgivespecificpowertopostponeaconvenedmeeting.Thepropercourseisforthemeetingtobeheldand,withtheconsentofthemajorityofthosepresent and voting, adjourned.

7.2 NOTICE OF MEETINGS

LENGTH OF NOTICE

Section133(1)providesthatanyprovisionofacompany’sarticlesshallbevoidinsofarasitprovides for thecallingofameetingof thecompany(other thananadjournedmeeting)byashorternoticethan21days.Thenoticemustbeinwriting.

Section133(2)providesthat,exceptinsofarasthearticlesofacompanymakeotherprovisioninthatbehalf(notbeingaprovisionavoidedbySection133(1),ameetingofthecompany(otherthananadjournedmeeting)maybecalledgiving21daysnoticeinwriting.Thisineffectmeansthatacompany’sarticlesmayprovide fora longerperiodofnotice than twenty-onedaysbutcannot provide for a shorter period.

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BySection133 (3) ameeting of a company, if called by a shorter period of notice than thatprescribedinSection133(1)orbythecompany’sarticles,shallbedeemedtohavebeendulycalled if it is so agreed: -

a) Inthecaseoftheannualgeneralmeeting,byallthemembersentitledtoattendandvoteatthemeeting;and

b) Inthecaseofanyothermeeting,byamajorityinnumberofthemembershavingarighttoattendandvoteatthemeeting,beingamajoritytogetherholdingnotlessthan95%innominalvalueofthesharesgivingarighttoattendandvoteatthemeeting;orinthecase of a company not having a share capital, a majority together representing no less than95%ofthetotalvotingrightsatthatmeetingofallthemembers.

It was explained in Re: Pearce Duff & Co. Ltdthatthemerefactallthemembersarepresentatthemeetingandpassaparticularresolution,eitherunanimouslyorbyamajorityholding95%of the voting rights, does not imply consent to short notice. Anyone who voted for the resolution can, therefore, change his mind afterwards and challenge it.

Section133doesnotindicatewhetherthedaysofnoticemustbe“cleardays”.However,TableA,Article50providesthatthenotice“shallbeexclusiveofthedayonwhichitisservedordeemedtobeservedandofthedayforwhichitisgiven”.

SERVICE OF NOTICE

Section134(a)providesthat,unlessthearticlesofthecompanymakeotherprovisioninthatbehalf,noticeofthemeetingofacompanyshallbeservedoneverymemberofthecompanyinthemannerinwhichnoticesarerequiredtobeservedbyTableA.Wherethecompany’sarticlesprovides,asSection134(a)does,thatnoticeofthemeetingshallbeservedoneverymember,afailuretogivenoticetoasinglememberwouldrenderthemeetinganullityatcommonlaw:Re:WestCanadianCollieriesLtd(90)inwhichPlowman,J.stated:“Itiswellsettledthatasregardsa general meeting, failure to give notice to a single person entitled to receive notice renders the meetinganullity”.

Theprimarypurposeofthecommonlawruleappearstobetoimposeonthecompany’sofficerswhoareentrustedwiththepowerofconveningitsmeetingstheobligationofactingfairlytowardseverymemberofcompany.Theymustinviteallthememberstothemeetingandnotjustthosewhomtheybelieveare likely tosupportprivateproperty toberunaccordingto theirpersonalwhims.

Althoughitmightatfirstsightappearunfair to invalidateameetingatwhichamajorityof thecompany’smemberspassed relevant resolutions, it shouldbeborne inmind that thosewhoattended the meeting and voted might not, after all, have voted the way they did if the aggrieved memberhadbeenpresentanddrawntheirattentiontosomeaspectofthematterwhichtheydidnotadverttoduringtheirdeliberations.Needlesstosay,asinglemembercaninfluencetheentiregeneralmeetingwithoutnecessarilyhavingtobeaMarkAnthony.Anditisvitalforthepropermanagementofthecompany’saffairsthatnodecisionofitsmembersshouldbeadoptedasitsown,andimplemented,unlessthereissomereasonableassurancethat,asitwere,`nostonewasleftunturned’duringtheprocessofarrivingattheparticulardecision.

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The common law rule applies irrespective of whether the failure to give notice of the meeting was deliberateorunintentional.However,itiscompetentforthecompany’smemberstoreflectonthematterand,iftheydeemitappropriate,amendthecompany’sarticlesbyincorporation,thereinofasuitableprovision.Forexample,TableA,Article51providesthat“theaccidentalomissionto give notice of a meeting to.... any person entitled to receive notice shall not invalidate the proceedingsatthatmeeting”.Insuchacase,noticeofthemeetingwouldbedeemedtohavebeengivendespitean“accidentalomission”togivethenotice:Re: West Canadian Collieries Ltd(90)commentingontheapparentattemptofthearticletovalidate“theproceedingsat”themeeting rather than the meeting itself, Plowman, J. stated:

“Itmust,Ithink,beimplicit...thatameeting,theproceedingsofwhicharetobetakentobevalidnotwithstandingtheomissiontobedeemedtohavebeendulyconvenedforthepurposesofthearticles...intheabsenceofsuchanimplication,therewouldbenomeetingtheproceedingsofwhichwouldbevalidatedbythearticles”.

In Musselwhite v C. H. Musselwhite & Son Ltd(91)itwasexplainedthatadeliberatefailuretogivenoticeofameetingtoamemberonthemistakengroundsthatthememberwasnotentitledtothenoticewouldnotberegardedasan“accidentalomission”withintherelevantarticle,sinceit was a mistake of the law. The meeting, was therefore, declared null and void.

Table A, Article 134 provides that notice of every general meeting shall be given to:

a) Every member of the company except those members who (having no registeredaddresswithinKenya)havenotsuppliedtothecompanyanaddresswithinKenyaforthegivingofnoticestothem;

b) The personal representation or trustee in bankruptcy of amemberwho, but for hisdeathorbankruptcy,wouldbeentitledtoreceivenoticeofthemeeting,and

c)Theauditorforthetimebeingofthecompany.

METHOD OF SERVICE

Article131providesthatanoticemaybegivenbythecompanytoanymembereitherpersonallyorbysendingitbyposttohimathisregisteredaddressorattheaddress,ifany,forthegivingofnoticetohim.Whereanoticeissentbypost,serviceofthenoticeshallbedeemedtobeeffectedwithin 72 hours of properly addressing, prepaying and posting a letter containing the notice.

Article132providesthatanoticemaybegivenbythecompanytothejointholdersofasharebygivingthenoticetothejointholderfirstnamedintheregisterofmembersinrespectoftheshare.

UnderArticle133,anoticemaybegiventothepersonalrepresentativeortrusteeinbankruptcybysendingitthroughthepostinaprepaidletteraddressedtothembyname,orbyanyofficialdescription,attheaddress,ifany,withinKenya-suppliedbythemforthepurpose,ifnoaddresshasbeensupplied,thenoticeshallbegiveninanymannerinwhichitmighthavebeengivenifthedeathorbankruptcyoftheregisteredholderhadnotoccurred.

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CONTENTS OF THE NOTICE

Thenoticeconveningameetingmustbeclearandexplicitsothatthepersonreceivingitmaybein a position to decide whether or not he ought in his own interest to attend the meeting: Tiessen v Henderson(92).Thisisthefundamentallegalrequirement.

Inpractice,however,thearticlesgenerallymentionsomeoftheitemsthathavetobestatedinthenotice.Forexample,TableA,Article50statesthatthenotice“shallspecifytheplace,thedayandthehourofmeetingand,incaseofspecialbusiness,thegeneralnatureofthatbusiness”.Ifthemeetingistheannualgeneralmeeting,thenoticemust“specifythemeetingassuch”asprescribedbySection131(1).Ifthemeetingisconvenedtopassaspecialresolution,thenoticemustspecify“theintentiontoproposetheresolutionasaspecialresolution”(Section141(1)).

7.3 AGENDA

Thewordliterallymeans‘thingstobedone,’butinpractice,itiscommonlyappliedtotheagendapaper,whichliststheitemsofbusinesstobedealtwithatameeting.Theagendaisanimportantdocumentsincemattersofwhichappropriatenotificationhavenotbeengivencannotbedealtwith at a meeting unless they are of an informal character and then only under the heading of ‘anyother business’.Anagendapaper is thusmatters to be transactedat ameetingand isknownastheorderpaperortheorderofbusiness.

An agenda may take the following forms:

• Askeletonformagenda Thiskindofagendaisabareoutlineorsummaryform,givingheadingsonlytobedealt

with.Asarule,thisformisusedwhenitistobeincludedaspartofthenoticecirculatedto those intended to attend the meeting.

• Adetailedformofagenda This form of agenda has a complete heading to identify the meeting and sets out, in

draftformtheresolutionstobesubmittedtothechairman.• Thechairman’scopyofagenda This may be supplied with more details than the copies issued to those attending

themeetingandawidemarginmayalsobeleftonhiscopyforthepurposeofnote-taking.

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CONTENTS OF AN AGENDA

The following are the important contents of an agenda paper:

• Heading Theagendapapershouldbesuitablyheaded,toindicatethekindofmeetingwhereand

whenitistobeheld.

• Arrangement Items of the agenda should be arranged in the order, if any, indicated in the rules

governing the meeting.

• Itemsofbusinessincluded Nobusinessshouldbeplacedontheagendapaperunlessitcomeswithinthescope

of the notice convening the meeting and is within the power of the meeting to deal with it.

• Anyotherbusiness Itisnotadvisabletousethisterm,however,whereused,thechairmanmustconfineits

use to the consideration of informal and unimportant matters.

• Easeofreference Ease of reference in an agenda paper is very important.

7.4 QUORUM

Aquorumistheminimumnumberofpersonswhomustbepresentatameetinginorderthatitmayvalidlytransactthebusinessforwhichitwasconvened.

UnderTableA,article53,nobusinessistobetransactedatageneralmeetingunlessaquorumofmembersispresent“atthetimewhenthemeetingproceedstobusiness”.InRe:HartlyBairdLtditwasheldthatthewords“ofthetimewhenthemeetingproceedstobusiness”meanthatthequorumisrequiredonlyatthetimewhenthemeetingbegins.Thereneed,therefore,benoquorumafterthemeetinghasbegananditmaybelegallycontinued-providedthereareatleasttwo persons present who would constitute a valid meeting at common law.

Section134(c)providesthat,unlessthearticlesotherwiseprovide:-

(a) The quorum for a private company shall be twomembers present in person. ThisprovisionismodifiedbyTableA,partII,Article4,whichstatesthatthemembersmaybepresentinpersonorbyproxy.

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(b) Thequorumforapubliccompanyshallbethreemembers.TableA,Article53,adoptsthis provision.

Wherethearticlesprescribeaquorumofatleasttwomembers,andthereisnoquorum,therewouldalsobenovalidmeeting.ThisissobecauseaswasexplainedinSharp v Dawes(93),“theword`meeting’prima faciemeansacomingtogetherofmorethanoneperson”.

>>> EXCEPTIONS

A valid meeting may be constituted by the presence of one person in the following cases:

1. Ifthemeetingisanannualgeneralmeetingwhichwascalledby,oronthedirectionof,theregistrarpursuanttoSection131(2).Insuchacase,thesectionempowerstheregistrartodirect“thatonememberofthecompanypresentinpersonorbyproxyshallbedeemedtoconstituteameeting”.

2. IfthemeetingisonewhichhasbeencalledpursuanttoacourtorderunderSection135(1).Thesectionempowersthecourttodirectthat“onememberofthecompanypresentinpersonorbyproxyshallbedeemedtoconstituteameeting”.ThisisillustratedbyRe: El Sombren Ltd(88)

3. If the meeting is a class meeting held pursuant to the provisions of the articles for the purpose of authorising a variation of a right to those shares and all the shares are held byonemember,asinEastvBennettBrothersLtd(94).

4. If themeeting isanadjournedmeetingandthearticlesprovide that “thememberormemberspresentshallbeaquorum”.

5. If a private company has only one director pursuant to section 177 of the Act, such a directorconstitutesavalidboardmeetingforpurposesofexerciseofpowersconferredupontheboardbythearticles

6. Ifinthecourseofliquidationacreditorhasroveditsdebtpursuanttosection309,suchacreditorconstitutesavalidcreditor’smeetingforpurposesofwindingup.

ADJOURNMENT

TableA,Article54providesthatifwithinhalfanhourfromthetimeappointedforthemeetingaquorum isnotpresent, themeeting, ifconvenedupon the requisitionofmembers,shallbedissolved, in any other case it shall stand adjourned to the same day in the next week, at the same time and place or to such other day and at such other time and place as the director may determine.

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7.5 PROXIES

BySection136(1),anymemberofacompanyentitledtoattendandvoteatameetingofthecompanyshallbeentitledtoappointanotherperson(whetheramemberornot)ashisproxytoattendandvoteinsteadofhim.Aproxyappointedtoattendandvoteinsteadofamemberofaprivatecompanyshallalsohavethesamerightasthemembertospeakatthemeeting.

However,unlessthearticlesotherwiseprovide:-

(i)Noproxyshallbeappointedbyamemberofacompanynothavingasharecapital;

(ii) Amemberofaprivatecompanyshallnotbeentitledtoappointmorethanoneproxytoattendonthesameoccasion;

(iii) Aproxyshallnotbeentitledtovoteexceptonapoll.

BySection136(2),everynoticeofameetingmuststatethemember’srighttoappointaproxyorproxiesandthosetheyneednotbemembers.IfdefaultismadeincomplyingwiththissubsectionasrespectsanymeetingeveryofficerofthecompanywhoisindefaultshallbeliabletoafinenotexceedingKshs.1,000.

Section136(3)rendersvoidanyprovisioncontainedinacompany’sarticlerequiringtheinstrumentappointingaproxytobereceivedbythecompanyoranyotherpersonmorethan48hoursbeforeameetingoradjournedmeetinginorderthattheappointmentmaybeeffective

RIGHTS OF A PROXY

1. To attend general meetings2. Tojoinothermembersorproxytodemandvotingbypoll3. Toparticipateinthedeliberationsincaseofprivatecompany

7.6 PROCEEDINGS AT MEETINGS

(a) Eachitemofbusinesscontainedinthenoticeofmeetingsshouldbetakenseparately,discussedandputtothevote.Membersmayproposeamendmentstotheresolutions.Thechairmanshouldrejectanyamendment,whichisoutsidethelimitssetbythenoticeconvening themeeting. With ordinary business, this rulemay present no difficultywithspecialbusiness,whichhasnecessarilybeendescribed indetails in thenotice;thereareonlylimitedpossibilitiesofamendment.Ifthespecialbusinessisanordinary

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resolutionitmaybepossibletoamenditsoastoreduceitseffecttosomethingless(providedthatthechangedoesnotentirelyalteritscharacter)e.g.anordinaryresolutionauthorisingthedirectorstoborrow100,000poundsmightbeamendedtosubstitutealimitof50,000pounds(butnot to increase it to150,000poundsas100,000poundswouldhavebeenstatedinthenotice).It isnotpossibletopassaspecialresolution,whichdiffersinsubstancefromthetextsetoutinthenotice.

Case: RE MOORGATE MERCANTILE HOLDINGS(1980)

A special resolution set out in the notice provided for the total cancellation of a share premiumaccountbalanceof1,356,900.48poundssincetheassetswhichitrepresentedhadbeenlost(formofreductionofsharecapital).Atthemeeting,theresolutionwasamended,fortechnicalreasons,toreducethebalanceto321.17poundsanditwaspassed in that form.

Held:

The resolution as passed was invalid since it was not the special resolution of which notice had been given. Even the retention of 321 pounds out of 1.4m pounds is achangeofsubstance.

(b) Ifthechairmanwronglyrejectsanamendmentandtheresolutioniscarriedinits originalform,itisinvalid.Ifheallowstheamendmenttobediscusseditshould beputtothevotebeforetheoriginalresolution.Iftheamendmentiscarriedout, the resolution as amended is then put to the vote.

(c) Therightsofmemberstovoteandthenumberofvotestowhichtheyareentitled toinrespectoftheirsharesarefixedbythearticles.Onevotepershareis normalbutsomeshares,e.g.preferenceshares,maycarrynovotingrightsin normal circumstances. To shorten the proceedings at meetings the procedure is:

I. On putting a resolution to the vote the chairman calls for a show of hands, i.e.onevotemaybegivenbyeachmemberpresentinperson:proxiesdonot vote. The chairman declares the result. Unless a poll is then demanded, the chairman’sdeclaration(dulyrecordedintheminutes)isconclusive.Noone can re-count hands after the meeting ii. Ifarealtestofvotingstrengthisrequired,apollmaybedemanded.The result of the previous show of hands is then disregarded. On a poll, every member and also proxies representing absent members may cast the full number of votes to which they are entitled.Apollneednotbeheld forthwithbutmaybepostponedsothatarrangementstoholditcanbemade.

Althoughthechairman’sdeclarationoftheresultofavoteonashowofhandsis made“conclusive”(bythearticles{TableAArt58}andbyCompaniesActSection 141(2)asregardsspecialresolutions)unlessapollisdemanded,thisisnotas absoluteandfinaladecisionastheword“conclusive”suggests.Itprevents subsequentargumentaboutthecountofhandsraisedonashowofhands.But itisstillpossibletochallengethechairman’sdeclarationonthegroundthatitwas fraudulent or manifestly wrong.

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Case: RE CARATAL (NEW) MINES LTD(1902)

A special resolution was put to the vote on show of hands. The chairman counted the handsraised“for”and“against”andsaid“6forand23againstbuttherewere200votingbyproxyandIdeclaretheresolutioncarried”.Thisdeclarationwaslaterchallengedincourt.

Held:

Thedeclarationinvalidsinceonthechairman’sownfigurestherewasnomajorityonashowofhands.Proxiesmayvoteonapoll(whichhadnotbeenheld)butnotonshowofhandsandshouldhavebeendisregarded.

(d) Any provision in the articles is void insofar as its effect is:

(a) Toexcludetherighttodemandapollonanyquestionotherthantheelection ofachairmanbythemeetingoranadjournment;

(b) Tomakeineffectiveademandforapoll: i. Bynotlessthanfivemembers ii. Bymember(s)representingnotlessthanone-tenthofthetotalvoting rights: iii. Bymember(s)holdingshareswhichrepresentnotlessthanone-tenthof thepaid-upcapital;

I.e.,thearticlesmaywellsaythatthreepeoplemaydemandapollbutcannot validlysaythatatleastsixpeoplearerequired-sucharulewouldbevoid andfivepeoplecoulddemandapoll.(Section137)

(e) Whenapollisheld,itisusualtoappoint“scrutinisers”andtoaskmembersand proxies to sign voting cards or lists. The votes cast are checked against the registerofmembersandthechairmandeclarestheresult.

(f) Invoting,eitherbyshowofhandsoronapoll,itisthenumberofvotescastwhich determinestheresult.Voteswhicharenotcast,whetherthememberwhodoes notusethemispresentorabsentaresimplydisregarded.Hencethemajority votemaybemuchlessthanhalforthreequarters)ofthetotalvoteswhichcould becast.

7.7 RESOLUTIONS

A meeting reaches a decision by passing a resolution. There are three kinds of resolutions:

i. An ordinary resolution,whichiscarriedbyasimplemajorityofvotescast.Wherenootherkindofresolutionisspecified“resolution”meansanordinaryresolution;

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ii. A special resolutionwhichrequiresbothathree-quartersmajorityofvotescastand21daysnotice:(Section142).

iii. Resolution requiring special notice, ThisisaresolutioncreatedbySection142oftheActa28-daynoticeofintentiontomoveitmustbegiven.

Apart from the required size of the majority and period of notice, the main differences between the types of resolutions are:

(a) Thetextofspecialresolutionsmustbesetoutinfullinthenoticeconveningthemeeting(anditmustbedescribedasspecialresolution):CompaniesActSection142.Thisisnotnecessaryforanordinaryresolutionifitisordinarybusiness;and

(b) A signed copy of every special resolution (and equivalent decisions by unanimousconsent of members) must be delivered to the registrar for filing. Some ordinaryresolutions,particularlythoserelatingtosharecapital,havetobedeliveredforfilingbutmany companies do not do so.

Theprescribed21daysnoticefora special resolutionmaybewaivedwiththeconsentofamajorityofmembersholdingnotlessthan95%ofissuedsharescarryingvotingrights(unlessofcourseitistobeproposedatanAnnualGeneralMeetingwhen100%consentisrequired).

A special resolution is required for major changes in the company such as a change of name, alterationofobjectsorofthearticles,reductionofsharecapital,andwindingupthecompanyvoluntarily(exceptongroundsofinsolvencyorundertheprovisionsofthearticles)orpresentingapetitionbythecompanyforanorderforcompulsorywindingup.

7.8 MINUTES

Separateminutesorproceedingsofdirectorsandgeneralmeetingsmustbekept;thelatterareopentoinspectionbymembers.Theminuteswhensignedbythechairmanofthemeetingornext succeeding meeting, are prima facieevidenceoftheproceedings(Sections145-146).

WHEN A MEETING IS UNNECESSARY

The purpose of holding general meetings with all the formality, which this entails is to give to each membertheopportunityofvoting(inpersonorbyproxy)ontheresolutionsbeforethemeeting.Ifthemeetingisnotproperlyconvenedandheld,itspurporteddecisionsarenotbindingonanymemberwhodisagreeswithandchallengesthem.His right to do so exists whether he was absent from the meeting or attended it but was in the minority. But this is a protection given to a dissentingmember. Ifeverymember, infact,agreesitwouldbepointlessandwrongtoallowanynon-membertodisputethevalidityoftheunanimousdecisionbecauseunanimitywasachieved in some informal way.

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Accordingly,anunanimousdecisionofthemembersistreatedasasubstituteforaformaldecisionatageneralmeetingproperlyconvenedandheldandisequallybinding.

Case: RE EXPRESS ENGINEERING WORKS(1920)

Thefiveindividualswhowereboththedirectorsandallthemembersofthecompanyheldadirectors’meetingandresolvedunanimouslytoissuedebentures.Fortechnicalreasons, their decision as directors was invalid but could be ratified by a generalmeeting.

Held:

Thedecisionwasvalidsinceithadbeenagreedonbyeveryonewhocouldhavevotedon it at a general meeting.

Intheabovecase,therewasameeting.Buttheprinciplewaslaterextendedtocaseswhere, without holding anymeeting at all, themembers had all, even if informally,agreed to the relevant decision.

Case: RE DUOMATIC(1969)

The company was in liquidation and the liquidator sought to recover three payments, whichheassertedhadnotbeenproperlyapprovedatageneralmeetingaswasrequired.These were:

(a) Compensationpaidtoadirectorforlossofoffice.Thepaymenthadbeen approvedbythreedirectorswhowerealsotheonlyordinaryshareholdersentitled toattendandvotebutithadnotbeendisclosed(asisrequiredbyCompaniesAct Section192)totheholdersofnon-votingpreferenceshares;

(b) Remunerationpaidtodirectorsandlatersanctionedbyallshareholdersthrough approval of the accounts in which these payments were disclosed.

(c) Theremunerationpaidinadvanceofapprovalbyshareholderswasmadein accordancewithpreviouspractice.Itwasirregularbutthedirectorswouldbe excused(underCompaniesActSection402).

Finallytheassentprincipleofunanimityofthemembershasbeenextendedtocovercaseswhereeverymemberhadtheopportunitytoobjectandeithervotedinfavourormerelyabstained.

Case: RE BAILEY HAY & CO LTD(1971)

All fivemembers of the company attended a generalmeeting,which had not beenvalidly convened owing to a defective notice.Atthemeeting,twomembersvotedinfavourofaresolutiontowindupthecompanyandtheotherthreeabstained.

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Held: Therewassufficient“unanimity”tovalidatetheresolutionsinceallmembershadbeen

present and none had dissented.

By this means, informal decisions which would otherwise be invalid are valid. The sameprinciplemaybegivenformalrecognitionbyarticleswhichprovidethatawrittenresolutionsignedbyallthemembersshouldhavethesameeffectasaresolutiondulypassedatageneralmeeting.Articlesinthisformsubstituteoneformality(aresolutionsigned by allmembers) for another (a resolution passed in generalmeeting). Theassentprincipleismoreflexiblesinceitrecognisesasvalidanunanimousagreementofthemembersreachedwithoutanymeetingorotherformalityatall.

REGISTRATION OF RESOLUTIONS

By Section 143 (1), a printed copy of the following resolutions shall, within 30 days after the passing thereof, be delivered to the registrar for registration:

(a)Specialresolutions.

(b) Resolutionsagreedtobyallthememberswhichwouldotherwisenothavebeen effective unless passed as special resolutions.

(c) Resolutionsagreedtobyallthemembersofaclassofshareholders.

(d) Resolutionsrequiringacompanytobewoundupvoluntarily.

BySection144wherearesolutionispassedatanadjournedmeetingof:-

(a)Acompany.

(b)Theholdersofanyclassofsharesinacompany.

(c) Thedirectorsofacompany;theresolutionistreatedashavingbeenpassedonthedateon which it was, in fact, passed on the date of the original meeting.

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A company can hold the following meetings:

• Statutory• Annual general meeting• General meeting• Class meeting

The statutory report has the following matters:

a) Thetotalnumberofsharesallotted.b) Thetotalamountofcashreceived.c) Thenames,postaladdresses,anddescriptionofdirectorsifany.d) Theparticularsofanycontractenteredinto.

Aquorumistheminimumnumberofpersonswhomustbepresentatameetingforittotakeplace

Aproxyisapersonappointedbyanypersontoattendandvoteatameetingtorepresenthim.

There are three types of resolutions:

• Aspecialresolutionmaybepassedformajorchangesinthecompany.• Anordinaryresolutionispassedbyasimplemajorityofthevotescast.• Resolution requiring special notice.

The following resolutions are registerable:

a. Special resolutions.b. Resolutionsagreedtobyallthememberswhichwouldotherwisenothavebeeneffective

unless passed as special resolutions.c. Resolutionsagreedtobyallthemembersofaclassofshareholders.d. Resolutionsrequiringacompanytobewoundupvoluntarily.

CHAPTER QUIZ

1. Which case is for the authority that one person cannot constitute a meeting? 2. Which meeting is held once in the life of a company? 3. Whatisthemainagendaofthemeetingreferredtoin2above 4. Which type of meeting is not provided for in the Companies Act?

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ANSWERS TO QUIZ

1. Sharp v Dawes 2. Statutory meeting 3. Statutory reports 4. Class meeting 5. Resolutions


QUESTION ONE

In relation to company law, explain and distinguish the following:

A) Annualgeneralmeeting.b) Othergeneralmeetings.c) Classmeeting.

QUESTION TWO

a) In relation to theprovisionsof theCompaniesAct (Cap.486)of theLawsofKenya,outline general provisions relating to meetings and votes.

b) Highlighttherequirementstobemetbeforeanoticeofmeetingservedonmemberscanbeheldtobevalid.

QUESTION THREE

Who is a chairman? Discuss his powers and functions

ANSWERS TO QUIZ

1. Sharp v Dawes 2. Statutory meeting 3. Statutory reports 4. Class meeting 5. Resolutions


QUESTION ONE

In relation to company law, explain and distinguish the following:

A) Annualgeneralmeeting.b) Othergeneralmeetings.c) Classmeeting.

QUESTION TWO

a) In relation to theprovisionsof theCompaniesAct (Cap.486)of theLawsofKenya,outline general provisions relating to meetings and votes.

b) Highlighttherequirementstobemetbeforeanoticeofmeetingservedonmemberscanbeheldtobevalid.

QUESTION THREE

Who is a chairman? Discuss his powers and functions

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CHAPTER EIGHT

DIRECTORS

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CHAPTER EIGHTDIRECTORS

OBJECTIVES


• Explaintheappointmentandrestrictionsonappointmentofdirectors.• Explainthedutiesofdirectors.• ExplainRuleinTurquand’s case and the organic theory.• Explainthedivisionofpowersbetweenboardofdirectorsandgeneralmeeting.

INTRODUCTION

Acompany,beinganartificialperson,cannotmanageitsownaffairs.Itis,therefore,notsurprisingtofindthatthearticlesofeveryregisteredcompanyhaveprovisionsregardingthedelegationofpowerspertainingtothecompany’smanagement.Forexample,TableA,Article80providesthat“thebusinessofthecompanyshallbemanagedbythedirectors”.This,therefore,isthemainconcern of this chapter to determine how these directors are appointed and what their duties are.

KEY DEFINITIONS

• Director: This is a person who runs of the day to day affairs of a company• Compensation: These are the total payments that are made to a person• Indemnity: This is a payment that reinstitutes an aggrieved person to the position he

wasinbeforealossoccurred

EXAM CONTEXT

Theexaminerhasatendencytotestthestudent’sunderstandingondirector’sduties,appointmentandrestrictionondirector’sappointment.Otherareasthathavebeentestedareoncompensationandloanstodirectors.Sittingsthathaverecordedquestionsfromthischapterare05/02;12/01;12/00;07/00;05/02


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INDUSTRY CONTEXT

Directors are charged with the responsibility of managing company affairs. In recent times,directorshavebeentakentocourtforbreachoftheirduties.Therefore,itisvitalthatdirectorsexercise their duties with care and skill. In this chapter, various powers and duties of certain officers,includingdirectors,andqualificationsthatareusedintheindustrytodayaregiven.

8.1 APPOINTMENT OF DIRECTORS

NUMBER OF DIRECTORS

Section.177CompaniesActprovidesthateverycompany(otherthanaprivatecompany)shallhaveatleasttwodirectors.Everyprivatecompanyshallhaveatleastonedirector.UnderTableA,Article75,theactualnumberofdirectorswouldinitiallybedecideduponbythesubscribersoftheMemorandum, or a majority of them, and until so determined, the signatories to the Memorandum ofAssociationshallbethefirstdirectors.TableA,Article94empowersthecompanyfromtimetotimebyanordinaryresolutiontoincreaseorreducethenumberofitsdirectors.

APPOINTMENT OF DIRECTORS

Intheabsenceofotherprovisionsinacompany’sarticles,thedirectorsofthecompanywouldbeappointedinaccordancewiththefollowingprovisionsofTableA.

FIRST DIRECTORS

ThenamesofthefirstdirectorsshallbedecidedinwritingbythesubscribersoftheMemorandumof Association or a majority of them. If there is a deadlock, all the signatories to the Memorandum ofAssociationshallbethecompany’sfirstdirectors.

SUBSEQUENT DIRECTORS

Thesubsequentdirectorsareappointedbythemembersatageneralmeetingbeginningfromthefirstannualgeneralmeetingatwhichallthefirstdirectorsretirefromofficeandthemembersaregiventhefirstopportunitytoelectdirectorsoftheirownchoice.Theretiringdirectorsare,however,eligibleforelectionunderArticle89.Atthesecondannualgeneralmeeting,one-thirdof

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thedirectorsaretoretirefromoffice,theonestoretirebeingtheoneswhohavebeenlongestinofficesincetheirlastelection.Asbetweenpersonswhobecamedirectorsonthesameday,thosetoretireshall(unlesstheyotherwiseagreeamongthemselves)bedeterminedbylot.One-thirdoftheboardshallthereafterretireannually.

CASUAL APPOINTMENTS

Article95permits theboardofdirectors tofillavacancy in theboardor togetanadditionaldirectortojointheboardforpracticalreasonsprovidedthattheappointmentdoesnotcausethenumberofdirectorstoexceedthelimitimposedbythearticles.Thepersonappointeddirectorinthiswayshallholdofficeuntilthenextannualgeneralmeeting.Hewillthenbeeligibleforre-election,buthisappointmentwillnotbetakenintoaccountwhendecidingonthedirectorswhoshallretirefromoffice.

RESTRICTIONS ON APPOINTMENT

The following are the restrictions which the Act imposes on appointment of directors:

1. Section 182 (1): Appointment by the Articles Section182(1)providesthatapersonshallnotbecapableofbeingappointeddirector

ofacompanybythearticlesunless,beforetheregistrationofthearticles,hehasbyhimselforbyhisagentauthorizedinwriting:

i. Signed and delivered to the registrar for registration a consent in writing to act as suchdirector;and ii. Either: a) Signedthememorandumforanumberofsharesnotlessthanhis qualification,ifany; b) Takenandpaidoragreedtopayforhisqualificationshares,ifany; c) Signedormadeanddeliveredtotheregistrarforregistrationanundertaking totakeandpayforhisqualificationshares,ifany,orthestatutorydeclaration thatanumberofsharesnotlessthanhisqualification,ifany,areregisteredin his name.

2. Section183:QualificationShares Section83(1)providesthatitshallbethedutyofeverydirectorwhoisbythe articlesofthecompanyrequiredtoholdaspecifiedqualification,andwhoisnot alreadyqualified,toobtainhisqualificationwithintwomonthsafterhisappointment,or

withintheshortertime(ifany)fixedbythearticles. Subsection(3)furtherprovidesthatifthedirectorfailstoobtainhissharequalification,

orceasestoholdtherequirednumberofshares,heshallvacatehisoffice.Ifhedoesnotactuallydosobutcontinuestoactasdirectorhebecomesadefactodirector: Rv Ivan Arthur Camps(67).

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3. Section 186: Age Limit Section186providesthatnopersonshallbecapableofbeingappointedadirectorof

apubliccompanyoraprivatecompanywhichisasubsidiaryofapubliccompanyifatthe time of his appointment:-

(a) Hehasnotattainedtheageoftwenty-oneyearsorismorethan70years.

This provision does not apply if:

(a) Thecompany’sarticlesprovideotherwiseor (b) A“Specialnotice”oftheresolutiontoappointthedirectorwasgiventothe company.

Thecompanymustalsohavegivennoticeofit(i.e.thespecialnotice)toitsmembersand stated the age of the proposed director.

Section142defines“specialnotice”asanoticegiventothecompanynotlessthan28days,beforethemeetingatwhichtherelevantresolutionistobemoved.

4. Section 188: Undischarged Bankrupts Section188providesthatifanundischargedbankruptactsasdirectorofanycompany

withoutleaveofthecourtheshallbeliabletoimprisonmentforatermnotexceedingtwoyearsortoafinenotexceedingKshs.10,000orboth.

5. Section 189: Fraudulent Persons Section189(1)empowersthecourttomakeanorderrestrainingapersonfrombeing

appointed,oracting,asacompany’sdirectorforaperiodnotexceedingfiveyearsif—

i. The person is convicted of any offence in connection with the promotion, formationormanagementofacompany; ii. Inthecourseofawindingup,itappearsthatthepersonhasbeenguiltyof fraudulenttrading(underSection323)orhasotherwisebeenguilty,whilean officerofthecompany,ofanyfraudorbreachofdutytothecompany.

6. Section 184: Individual Voting Section 184(1) provides that appointment of directors is to be voted on individually

unlessamotionfortheappointmentoftwoormorepersonsasdirectorsbyasingleresolutionwasagreeduponbythemeetingwithoutanyvotebeinggivenagainstit.

Aresolutionmovedincontraventionofthisprovisionisvoid{Section184(2)}.

DEFECTS IN APPOINTMENT

Section181providesthatadirector’sactsshallbevaliddespiteanydefectthatmayafterwardsbediscoveredinhisappointmentorqualification.Thisprovisionappliestotechnicaldefectsinappointmentorqualification,suchasafailuretoobtainthedirector’ssharequalificationwithintheprescribedtime.AnexampleisR v Camps (67).

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DISQUALIFICATION OF DIRECTORS

TableA,Article88provides,undertheheading“disqualificationofdirectors”,thattheofficeofdirectorshallbevacated if the director:

a) Ceasestobeadirectorbyvirtueofs.183(i.e.failuretoobtainasharequalification)orSection186(i.e.agelimit);or

b) Becomes bankrupt or makes any arrangement or composition with his creditorsgenerally;or

c) BecomesprohibitedfrombeingadirectorbyreasonofanyordermadeunderSection189of the Act

d) Becomesofunsoundminde) Resignshisofficebynoticeinwritingtothecompanyf) Shallformorethansixmonthshavebeenabsentwithoutpermissionofthedirectors

from meetings of the directors held during that period.g) Isremovedfromofficebyanordinaryresolutionofmembers.

Regardingclause(e)above, itwasheld inLatchford Premier Cinema Co. V Ennion that a verbalnoticeofresignationwhichisgivento,andisacceptedby,thegeneralmeetingiseffectiveandcannotbewithdrawn.This issobecausethegeneralmeetingwouldbedeemedtohaveamendedthecompany’sarticlesbydeletingthewords“inwriting”.Byimplication,apurportedoralnoticeofresignationwhichisgivento,andpurportedlyacceptedby,theboardofdirectorswouldbeinvalidsincethedirectorscannotlegallyalterthecompany’sarticlesofassociation.

Regardingclause(f), itshouldbenotedthatitdoesnotsaythatthedirectorinquestionshallvacateofficeifhe“absentshimself”.Suchaprovisionwouldhavedisqualifiedthedirectoronlyif theabsence inquestionwasvoluntary, as in caseswherehewas ill andcouldnotattendtheboardmeetings.Ontheotherhand,theofficewouldbevacatedifthedirectorwasabsentbecausehisdoctorhadadvisedhimtogoabroadonmedicalgrounds:McConnell’s Claim.

VACATION OF OFFICE

InadditiontovacatingofficeundertheaforesaidprovisionsofArticle88,apersonmayceasetobeadirectorforvariousreasons,suchas:

(a) Death (b) Retirementbyrotationunderthearticles (c) Courtorderrestraininghimfromactingasdirector (d) Dissolutionofthecompany.

REMOVAL OF DIRECTORS

BySection185(1)acompanymaybyordinaryresolutionremoveadirectorbeforetheexpirationofhisperiodofoffice,notwithstandinganythinginthearticlesorinanyagreementbetweenhimandthecompany.Specialnoticemustbegivenofanyresolutiontoremovethedirector,ortoappoint another director in his place.

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On receipt of the special notice, the company must send a copy to the director concerned who isentitled,ifhesowishes,tomakewrittenrepresentations(notexceedingareasonablelength)to the company. If the director so requests, the company must send the representations to the memberswithnoticeofthemeetingunlesstherepresentationsarereceivedbyittoolateforittodoso.Insuchacase,therepresentationswouldbereadoutatthemeetingatwhichthedirectorwouldalsobeentitledtobeheard.Therepresentationsneednotbesentoutbythecompanyorread out at the general meeting if, on the application, either of the company or of any other person whoclaimstobeaggrieved,thecourtissatisfiedthattheyhavebeenmadeinordertosecureneedlesspublicityfordefamatorymatter.

Theremovalwillbeeffectiveifitisdecidedonbyanordinaryresolution.InBushell v Faith and Another (67)Harman, L J defined “an ordinary resolution” as “a resolution depending for itspassing on a simple majority of votesvalidlycastinconformitywiththearticles”.

COMPENSATION FOR REMOVAL

Subsection(6)providesthatnothinginSection185shallbetakenasdeprivingaremoveddirectorofcompensationordamagespayabletohiminrespectoftheterminationofhisappointmentasdirector or of any appointment terminating with that as director. This provision which restates the commonlawrule,wouldenableamanagingdirectortosuethecompanyfordamagesforwrongfuldismissal if the effect of his removal as director was to prematurely terminate his appointment as managing director, and was inconsistent with the contract. The director might also, if he is a memberofthecompany,beentitledtoanorderforthewindingupofthecompanybythecourtonthe“justandequitable”ground:Ebrahimi v Westbourne Galleries Ltd.

DIRECTORS’ REMUNERATION

For technical reasons, the directors are not regarded as servants or employees of the company ofwhichtheyaredirectors.They,therefore,havenoright tobepaidfor theirservicesunlessthere is a provision for payment in the articles. In the case of companies which have adopted TableA,Article76provides that “the remunerationof thedirectorsshall fromtime to timebedeterminedbythecompanyingeneralmeeting.”In Re: Duomatic Ltd it was explained that a provision in the articles authorisingpaymentofdirectors’remunerationdoesnot,perse,givetherighttobepaidanyspecificamount.Theremustalsobearesolutionpassedbythecompanyingeneral meeting authorising the payment.

Providedtheresolutionhasbeenpassed,theremunerationispayablewhetherprofitsareearnedor not: Re: Lundy Granite Co.Article76providesthat“theremunerationshallbedeemedtoaccruefromdaytoday”.Thismeansthatadirectorwhovacatesofficebeforecompletingayearoramonthinofficeisentitledtoaproportionatepartofhisyearlyormonthlysalary:Moriarty v Regent’s Garage Co.

Section190(1)providesthat“itshallnotbelawfulforacompanytopayadirectorremuneration(whetherasadirectororotherwise)freeofincometaxorsurtax”,exceptunderacontractwhichwasinforcetwoyearsbeforethecommencementoftheActonJanuary1,1962whichprovidesexpressly(andnotbyreferencetothearticles)forpaymentoftax-freepayments.Anyprovision

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inthearticlesregardingtax-freepayments“shallhaveeffectasifitprovidedforpayment,asagrosssumsubjecttoincometaxandsurtax,ofthenetsumforwhichitactuallyprovides”.

COMPENSATION FOR LOSS OF OFFICE

(a) Section192makesitunlawfulforacompanytomakeadirectoranypaymentbywayofcompensationforlossofofficeorasconsiderationfororinconnectionwithhisretirement,unless particulars of the proposed payment, including the amount, are disclosed to the membersof thecompanyand theproposal isapprovedby thecompany ingeneralmeeting. If the payment is not disclosed and approved, the director to whom it is paid shallbedeemedtohavereceiveditin trust for the company. The directors who paid the moneyareliabletorepaythemoneytothecompany:Re: Duomatic.

(b) Section 193makes it unlawful, in connectionwith the transfer of thewhole or anypartoftheundertakingorpropertyofacompany,foranypaymenttobemadetoanydirector of the company byway of compensation for loss of office or on retirementunless particulars are disclosed and approved. If such a payment is not disclosed, the director holds it upon trust for the company.

(c) Section 194 deals with the situation where the shares of the company are beingtransferred. It applies where the transfer results from:

i. Anoffermadetothegeneralbodyofshareholders. ii. Anoffermadebyanothercompanywithaviewtothecompanybecomingits subsidiaryorasubsidiaryofitsholdingcompany. iii. Anoffermadebyanindividualwithaviewtohisacquiringatleastone-thirdofthe voting power at any general meeting of the company iv. Any other offer, which is conditional on acceptance to a given extent.

Ifapaymentismadetoadirectorascompensationforlossofofficeoronhisretirementinanyoftheaforesaidcircumstances,hemusttakereasonablestepstoensurethattheparticularsoftheproposed payments are disclosed in the offer. If this is not done, the director holds the payment on trust for the persons who have sold their shares as a result of the offer.

Section195(3)providesthatreferencesundersections192,193and194topaymentsmadetoanydirectorbywayofcompensationforlossofofficedonotincludeanybona fidepaymentbywayofdamagesforbreachofcontractorbywayofpensioninrespectofpastservices.

LOANS TO DIRECTORS

Section191(1)rendersunlawfulanyloanmadebyacompanytoadirectorofthecompanyoritsholdingcompany.Itisalsounlawfulforthecompanytoguaranteealoangiventoitsdirectorbyany other person. These restrictions do not apply to:

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(a) Aprivatecompany(b) Asubsidiarywhosedirectorisitsholdingcompany(c) Paymentsmadetoadirectortomeetexpensesincurredortobeincurredbyhimfor

purposesofthecompany,ortoenablehimproperlytoperformhisdutiesasanofficerof the company

(d) Aloangivenbyamoneylendingcompany,suchasabank,intheordinarycourseofitsbusiness.

DUTIES OF DIRECTORS

The duties of directors are usually considered under two broad headings, namely:

i. Duties of care and skill at common lawii. Fiduciary dutiesasenunciatedbycourtsofequity.

1. Duties of Care and Skill

Thedirectors’dutiesofcareandskillhavebeenformulatedinaseriesofcasesbroughtagainstdirectorsinordertomakethemliableinnegligence for the manner in which they conducted the company’saffairs.ThesedutiesweresummarisedbyRomer,J.inRE CITY EQUITABLE FIRE INSURANCE CO LTD as follows:

i. Adirectorneednotexhibitintheperformanceofhisdutiesagreaterdegreeofskillthanmayreasonablybeexpectedfromapersonofhisknowledgeandexperience.

This ruleprescribesadutywhich ispartlyobjective (thestandardof the reasonableman) and partly subjective (the reasonablyman is deemed to have the knowledgeandexperienceoftheparticulardirector).Itmayalsobeexpressedbysayingthat,ifafoolishdirectormakesfoolishdecisionsresultinginlosstothecompany,hecannotbeliablefornegligence.Itwouldbeunreasonabletoexpectafoolishdirectortomakewisedecisions.However,ifthedirectormadevery foolish decisions resulting in loss to the company,hewillbeliableinnegligencesinceitisnotreasonabletoexpectafoolishdirectortomakeveryfoolishdecisions.Ontheotherhand,awisedirectorwillbeliableifhemakesunwisedecisions,sinceitisunreasonabletoexpecthim,awiseman,tomakeunwiseorfoolishdecisions.ReferencemayalsobemadetoRe Brazilian rubber Plantation Company

Adirectorship isnotaprofessional jobwitha legallyprescribedqualification. In thecircumstances,anybody(evenasix-months-oldbaby)canbecomeadirector.Allthatthe law can expect him to do is to serve the company honestlyandtothebestofhisability. In RE: MARQUIS OF BUTE’S CASEthedirectorbecamethedirectorattheageofsixmonthsbyinheritingtheofficefromhisfatherwhohaddied.

ii. Adirectorisnotboundtogivecontinuousattentiontotheaffairsofhiscompany.Hisdutiesareofanintermittentnaturetobeperformedatperiodicalboardmeetings,andatmeetingsofanycommitteeoftheboarduponwhichhehappenstobeplaced.Heisnot,however,boundtoattendallsuchmeetings,thoughheoughttoattendwhenever,

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inthecircumstances,heisreasonablyabletodoso.

In RE MARQUIS OF BUTE’S CASE a director who had attended only one boardmeetingin38yearswasexoneratedfromliabilityforallegednegligenceonthegroundthat“neglectoromissiontoattendmeetingsisnot,inmyopinion,thesamethingasneglect oromissionof adutywhichought tobeperformedat thosemeetings” (perSterling,J.)AsimilarholdingwasmadeinRe Denham Company limited

Acompanyis,however,freetoimposeadutyonitsdirectorstoattendboardmeetingswithinacertainperiodoftimeandtoprescribetheconsequencesofabreachoftheduty.See,forexample,TableA,Article88(f).

iii. Inrespectofalldutiesthat,havingregardtotheexigenciesofbusiness,andthearticlesofassociation,mayproperlybelefttosomeotherofficial,adirectoris,intheabsenceofgroundsforsuspicion,justifiedintrustingthatofficialtoperformsuchdutieshonestly.

Ifadirectoristobemadeliable,itcanonlybeonthebasisofhispersonalnegligence,anditisnotnegligencetodelegatesomeresponsibilitiestoofficialsoremployeesofthecompany whose previous conduct has given no grounds for distrust or suspicion.

In DOVEY v CORY,adirectorwasheldnotliablefornegligencemerelybecausehehadfailedtoverifyfalseinformationregardingthecompany’saccountswhichhehadbeengivenbythecompany’smanagerandmanagingdirector.Thecourtstated:

“Businesscannotbecarriedonuponprinciplesofdistrust.Meninresponsiblepositionsmustbetrustedbythoseabovethem,aswellasbythosebelowthem,untilthereisreasontodistrustthem.Weagreethatcareandprudencedonotinvolvedistrust.”

2. Fiduciary Duties

Thefiduciarydutiesofdirectorsarisingfromtheirfiduciaryrelationtothecompanyhavebeenthesubjectofconsiderationinanenormousbodyofcaselaw’sbuttheratio decidendi of the cases canbereducedtotwofundamentalpropositions:

(a) A director is not allowed to put himself in a position where his interest and duty conflict.

The application of this rule is illustrated by the following cases:

1. Aberdeen Rly Co v Blaikie Brothers(68).Section200(5)adoptsthisrulebyprovidingthatnothinginSection200(5)shallbetakentoprejudicetheoperationof“anyruleoflaw”restrictingdirectorsofacompanyfromhavinganyinterest incontractswiththecompany”.

Section 200 requires a directorwho is in anyway interested in a contractwith thecompanytodeclarethenatureofhisinterestataboardmeeting.Hemustdisclosetheinterest at the firstboardmeetingatwhichthecontractistobediscussedor,ifhedidnothaveaninterestatthattime,atthefirstboardmeetingafterhisinterestarose.ThisprovisionissupplementedbyArticle84ofTableAwhichprovidesthat:

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i. The director shall not vote in respect of the contract. If he does vote, his vote shallnotbecounted ii. Thedirectorshallnotbecountedinthequorumpresentatthemeeting.

2. Industrial Development Consultants Ltd v Cooley (69) in which the directorbecamepersonallyinterestedinacontracthehadbeenassignedtonegotiateforthecompany.

3. Cook v Deeks (70)inwhichsomeofthecompany’sdirectorsdivertedtothemselvesacontractthatwasintendedtobeforthecompany.Itwasheldthattheyhadtosurrenderthebenefitofthecontracttothecompany.Inlawthebenefitofthecontractbelongedtothecompanywhichthedirectorshadformedforthepurposeofobtainingthecontractbutinequitythecontractbelongedtothecompanyforwhichitwasintended.

In Bray v Ford Lord Herschell stated that the aforesaid rule is not “founded uponprinciplesofmorality”butisbasedontheconsiderationthathumannaturebeingwhatitis,thereisdanger,insuchcircumstances,ofthepersonholdingafiduciarypositionbeingswayedbyinterestratherthanbydutyandthusprejudicingthosewhomhewasboundtoprotect”.

(b) Adirectorisnot,unlessotherwiseexpresslyprovided,entitledtomakeaprofit:Boston Deep Sea Fishing Co v Ansell (71). This rule is essentially a restatement of thefundamental ruleof the lawofagency thatanagentmustnotmakeasecretprofit.Thecasesincompanylawarejustexamplesofhowaparticularagent(thecompanydirector)committedabreachofhisdutiestoaparticularprincipal(thecompany).

In Percival v Wright (72) itwasheld that thedirectorsowe theirfiduciaryduties to

thecompanyaloneandnottothemembers.Thedecisionraisesaproblemthathasbecomeknownas“insiderdealing”.

RELIEF FROM LIABILITY

UnderSection402(1),thecourthaspowerinanactionagainstanofficerforbreachofdutytograntreliefwhere,althoughtheofficerisinbreach,itappearsthathehasactedhonestlyandreasonablyand,havingregardtoallthecircumstancesofthecase,includingthoseconnectedwithhisappointment,heoughtfairlytobeexcusedforthenegligence,default,breachofdutyorbreachoftrust.

DIRECTORS’ POWERS

Equity regards directors as holding their powers on trust for the company. They can only exercise thosepowersforthebenefitofthecompany;otherwisethepurportedexercisewillberegardedas“ultravires”andinvalid.Insuchcases,thecourtwouldregardthetransactionashavingbeenenteredintoforan“extraneouspurpose”.Thisisillustratedby:

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i. Re Roith Ltd(73).Theextraneouspurposewasconsiderationofthewidow’swelfareratherthanthecompany’sbenefit.

ii. Hutton v West Cork Railway Co. (74). The resolutions had not given adequateconsiderationtothequestionwhetherthecompanywouldbenefitfromtheproposedpayments.

iii. Hogg v Cramp horn(75).Theextraneouspurposewasthedesiretopre-emptthetake-overbid.Thedirectorshadnotexercisedtheirpowerforthebenefitofthecompany.

REGISTER OF DIRECTORS’ SHAREHOLDINGS

Section196(1)requireseverycompanytokeeparegistershowingthenumber,descriptionandamountofanysharesordebentureswhichareheldbyorintrustforthedirector,orofwhichhehasanyrighttobecometheholder(whetheronpaymentornot)in:-

(a) Thecompany(b) Thecompany’ssubsidiaryorholdingcompany(c) Asubsidiaryofthecompany’sholdingcompany.

Theregistershallbekeptatthecompany’sregisteredofficeandshallbeopentotheinspectionof any member or debenture holder during business hours during the period beginning 14daysbeforethedateofthecompany’sannualgeneralmeetingandendingthreedaysaftertheconclusionofthemeeting(adaywhichisaSaturday,Sundayorpublicholidaybeingdisregardedincomputingthe14days).

THE RULE IN ROYAL BRITISH BANK V TURQUAND

Fast forward:

Ø A company will be bound by its indoor management as outsiders are in position to know the internal rules of management

Ø The general rule is the rule in Turquand’s case though it has exceptions

In Royal British Bank v Turquand (80), a companywasordered to repaya loanwhich itsdirectorshadborrowedonitsbehalfwithouttheauthorityofanordinaryresolutionprescribedbythe Articles of Association. In the course of delivering his judgment, Jervis, C J stated:

“Thedealingswiththesecompaniesarenotlikedealingswithotherpartnerships,andthepartiesdealingwiththemareboundtoreadthestatuteandthedeedofsettlement.Buttheyarenotbound todomore.And theparty here, on reading thedeedof settlement,would find, not aprohibition fromborrowing, but a permission to do so on certain conditions. Finding that theauthoritymightbemadecompletebya resolution, hewouldhavea right to infer the fact ofa resolution authorising thatwhich on the face of the document appeared to be legitimatelydone”.

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Thisstatementcanbereducedtotwopropositionswhichconstitutewhatiscompositelyknownas“theruleinTurquand’scase”,namely:

i. ApersondealingwithacompanyisboundtoreadtherelevantrestrictiveprovisionsoftheCompaniesAct,thecompany’sMemorandumofAssociationandthecompany’sArticlesofAssociation.Ifhedoesnotdoso,hewillbedeemedtohavereadthemand,asaconsequence,tohavebeenawareoftheirprovisions.

ii. Inso faras thearticlesprovide thata transactionmaybeeffectedbysome internalprocedure,thepersondealingwiththecompany(called“outsider”)mayassumethattheprocedurehasbeendulycompliedwith.

Theeffectofthesepropositionsisthatthecompanywillbeboundbythetransactioneveniftheprescribedprocedurewasinfactnotfollowedorcompliedwith.An“internalprocedure”forthispurposewouldusuallybeadecisionofthecompanywhichismadebyanordinary resolution passedbythecompanyingeneralmeeting,oraresolutionofthedirectorspassedataboardmeeting.SucharesolutionisnotregisterableattheCompaniesRegistrypursuanttoSection143 or any other section of the Companies Act and the outsider who goes to the Registry would notbeinapositiontoascertainwhetherithad,infact,beenpassed.Ratherthancompelhimtogototherelevantofficeofthecompanytomakeenquiries,thecourtsdecidedto,asitwere,“givehimthebenefitofthedoubt”byholdingthattheresolutionwillbedeemedtohavebeenpassedevenifithadnotactuallybeenpassed.

Examples

The following cases are some of the leading examples of the application of “the rule in Turquand’s case:”

(a) Mahoney v East Holy ford Mining Co

Thecompany“secretary”sentthecompany’sbankwhatpurportedtobeafinalcopyofaresolutionoftheboardauthorisingthepaymentofchequessignedbytwoofthreenamed“directors”andbythenamed“secretary”.Thebank,relyingonthe“resolution”,honoured cheques signed in accordance with its provisions. The company later went intoliquidationanditwasthenrealisedthatneitherthe“directors”northe“secretary”hadbeenproperlyappointedandnogeneralorboardmeetingshadeverbeenheld.Theliquidator’scontentionthatthecheques,whichhadbeensignedbythe“directors”andthe“secretary”hadbeenwronglypaidandthebankmustrefundthemoneythatwasrejected.Thebankwasnotboundtoenquirewhetherthe“directors”andthe“secretary”hadbeenproperlyappointedandcouldrelyontheruleinTurquand’scase.

(b) Freeman & Lockyer v Buckhurst Park Properties Ltd

The articles of a company formed to purchase and resell an estate empowered the directorstoappointoneoftheirbodymanagingdirector.Kapoor,adirector,wasneverappointedmanagingdirectorbut,totheknowledgeoftheboard,heactedassuch.Onbehalfofthecompanyheinstructedtheplaintiffs,afirmofarchitectsandsurveyors,to

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apply for planning permission with a view to developing the estate. The company later refusedtopaytheplaintiffs’feesonthegroundthatKapoorhadnoauthoritytoengagethem.

Held, thecompanywasboundby thecontractand liable for theplaintiffs’ fees.Theact of engaging architects was within the apparent authority of a managing director of apropertycompanyandtheplaintiffswerenotobligedtoenquirewhetherthepersontheyweredealingwith(Kapoor)wasproperlyappointed. Itwassufficient thatunderthearticlestherewasapowertoappointamanagingdirector,andthattheboardofdirectorshadallowedoneofthem(Kapoor)toactassuch.Inanycase,aresolutionoftheboardappointingamanagingdirectorisnotregisterableunderSection143andsoitspassingcannotbeascertainedbyavisittothecompanies’registry.

(c) HelyHutchinson v Brayhead Ltd (81)

Exceptions

The rule in Turquand’s case will not apply if:

i. The person suing the company is, in fact, an insider, such as a director of the company:

Howard v Patent Ivory Co(82).Suchapersonhasaccesstothecompany’sdocumentsfrom which he may discover the lack of authority. Exceptionally, he may succeed against the company if he proves that he was a recently-appointed director and had not fully acquainted himself with the internal procedures of the company.

ii. Thecompany’sarticlesprescribedaspecialresolution,whichhadnotbeenpassed,asillustratedbyIrvine v Union Bank of Australia (83).

AspecialresolutionisregisterableunderSection143oftheCompaniesActandifithad

beenpassedacopythereofwouldhavebeendeliveredforregistrationandwouldhavebeenfoundamongthecompany’sdocumentsatthecompanies’registry.Itsabsenceshallhavewarnedtheoutsiderthatithadnotbeenpassed.

iii. There were special circumstances which should have put the outsider on inquiry: Underwood Ltd v Bank of Liverpool(caseNo5);Liggett v Barclays Bank(84).

iv. The transaction is ultra vires the company, since a company’s agent cannot haveauthoritytotransactabusinesswhichthecompanyitselflackscapacitytotransact.

v. The transaction relates to the issue of a forged document, such as a forged share certificateissuedbythesecretarywithouttheauthorityoftheboard,asillustratedbyRuben v Great Finggall Consolidated Ltd.

vi. Knowledge of irregularity: Liggett v Barclays Bank

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INSIDER TRADING OR DEALING

Insiderdealingoccurswhereanindividualororganisationbuysorsellssecuritieswhileknowinglyinpossessionofsomepieceofconfidentialinformationwhichisnotgenerallyavailableandwhichisnotlikely,ifmadeavailabletothegeneralpublic,tomateriallyaffectthepriceofthesecurities.Forexample,whereacompanydirectorwhoisawarethatthecompanyisinabadfinancialstatesellshissharesknowingthatthisinformationwillbemadepublicwithanannouncementofacutin dividend payment.

It is argued that the use of insider information is unfair to those who deal with the insider, though it isdifficulttoidentifytheloosersincethetransactiontakesplaceonthestockexchange.However,apersonwhobuyssomethingwhichturnsouttobeworthlessthanthepricepaidforitmayfeelaggrieved.Inprinciple,dealingsinamarketgenerallyreflectthevalueofthesecurityifalltheinformationusedinvaluationisavailabletobothbuyersandsellers.Informationgenerallyusedbythoseinvolvedincompanysecuritiesrelateto:

(i) Worldtradeintheparticularmarketinwhichthecompanyistrading(ii) Economyofthecountry(iii) Howthecompanyishandlingitsaffairs.

Withtheexpansionofdealingsinstockexchange,ithasbecomeevidentthattakingadvantageof inside information isfraudulentonother investorsandcould lowerpublicconfidenceinthestockexchange,and forofficersof thecompany, thisamounts toabreachof trustsince theinformationisobtainedinthecourseoftheiremployment.

CASE FOR REGULATION

In the realmofcompany law, itmaybenecessary to regulate insider tradingordealingsincetheinsiderwithaccesstoconfidential information is inpotentialconflictof interestsituation, inparticularwherehispositioninthecompanyenableshimtodictateorinfluencewhenthepublicdisclosureofprice-sensitiveinformationistobemade.

Insuchacase,theofficer’sdecisionandhiswondesiretotradeadvantageouslyinthecompany’ssharesmayconflictandsuchconductislikelytobringthecompanyintodisrepute.Itisthereofrecognisedthatitiswrongforadirectororanothertodealinacompany’ssecuritiesknowingofsomedevelopmentwhichislikelytoaffectthepriceofthesecurities,whichothermembersofthepublicaregenerallyprivyto.

In conclusion, insider trading should be regulated for the following reasons:

1. It spoils the reputation of the company.2. There is no equality in information access. 3. Breachofdirector’sduties.4. Lackofconfidenceinthemarket.

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Liability

UndertheUnitedStatesLaw,personsinvolvedininsiderdealingsareboundtoaccounttothecompanyortotheindividualdealtwith.InBritain,theproblemisdealtwithbytheprovisionsoftheCompaniesAct,CompanySecurities(InsiderDealing)Act,1985andtheCriminalJusticeAct, 1993.

Atcommonlaw,officersofthecompanyarefreetoholdanddealinthesharesofthecompany.However,useofconfidential information isactionable. This legalposition is traceable to thedecision in Percival v Wright where joint holders of some shares of an unlisted colliery company offered them for sale to the chairman of the company and two other directors at a price determined byanindependentvalueat£1210sbutafterconclusionofthesale,itwasdiscoveredthatwhilenegotiatingthepurchase,thechairmanwasinvolvedindiscussionsofthepossiblesaleofthewholecollieryatapricethatwouldhavemadeeachshareinthecompanyworthmorethan£1210s.However,thecollierywasneversold.InanactionbyPercivalandhisco-shareholderstohavethesalesetasideonthegroundofnon-disclosurebythechairman,itwasheldthatsincethe directors owed their duties to the company, there was no duty to disclose.

In the words of Swinfen Eady J.

“Thecontraryviewwouldplacedirectorsinamostinvidiousposition,astheycouldnotbuyorsellshareswithoutdisclosingnegotiations,aprematuredisclosureofwhichmightwellbeagainstthebestinterestofthecompany.Iamoftheopinionthatdirectorsarenotinthatposition.”

The decision in Percival v Wright was upheld in Tent v Phoenix Property & Invest Co. Ltd. (1984. In Multinational gas & Petrochemical Co. v Multinational Gas and Petrochemical Services Ltd. (1983),DillonL.J.observed:

“Thedirectorsstandinafiduciaryrelationshiptothecompanyandtheyowefiduciarydutiestothecompanythoughnottoindividualshareholders”.

However, inAllen v Hyatt 1914 where shareholders had engaged directors to investigate on theirbehalfandthedirectorsbenefited,itwasheldthatsincethedirectorswereagentsoftheshareholders,theywereliabletoaccounttotheshareholders.

In Kenya, the problem of insider trading is addressed by Section 33 of theCapital Markets AuthorityAct;Cap485AUnderSection33(1)oftheAct,insidertradingisacriminaloffence.Under the section:

(1) Apersonwhois,oratanytimeintheprecedingsixmonthshasbeen,connectedwithabodycorporateshallnotdealinanysecuritiesofthatbodycorporateheisinpossessionofinformationthatisnotgenerallyavailablebut,ifitwere,wouldbelikelytomateriallyaffect the price of those securities.

(2) Apersonwhois,oratanytimeintheprecedingsixmonthshasbeen,connectedwithabodycorporateshallnotdealinanysecuritiesofanybodycorporateifbyreasonof

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hissobeing,orhavingbeen,connectedwiththefirstmentionedbodycorporateheisinpossessionofinformationthat:–

(a) Isnotgenerallyavailablebut,ifitwere,wouldbelikelymateriallytoaffectthe priceofthosesecurities;and (b) Relatetoanytransaction(actualorexpected)involvingbothbodiescorporateor involving one of them and securities of the other.

(3) Whereapersonisinpossessionofanysuchinformationasismentionedinsubsection(1)and (2) that ifgenerallyavailablewouldbe likelymaterially toaffect thepriceofsecurities but is not precludedbyeither of those subsections fromdealing in thosesecurities, he shall not deal in those securities if:-

(a) Hehasobtainedtheinformation,directlyorindirectly,fromanotherpersonandis aware,oroughtreasonablytobeaware,offactsorcircumstancesbyvirtueof whichthatotherpersonishimselfprecludedbysubsection(1)or(2)fromdealing inthosesecurities; (b) Whentheinformationwassoobtained,hewasassociatedwiththatotherperson or had with him an arrangement for the communication of information of a kind to whichthosesubsectionsapplywithaviewtodealinginsecuritiesbyhimselfand that other person or either of them.

(4) Apersonshall not, at any timewhenhe isprecludedby subsections (1), (2) or (3)from dealing in any securities, cause or procure any other person to deal in those securities.

(5) Apersonshall not, at any timewhenhe isprecludedby subsections (1), (2) or (3)fromdealinginanysecuritiesbyreasonofhisbeinginpossessionofanyinformation,communicatethatinformationtoanyotherpersonif–

(a) Tradinginthosesecuritiesispermittedonanysecuritiesexchange; (b) Heknows,orhasreasontobelieve,thattheotherpersonwillmakeuseofthe information for the purpose of dealing or causing or procuring another person to deal in those securities.

(6) Without prejudice to subsection (3) but subject to subsections (7) and (8), a bodycorporateshallnotdealinanysecuritiesatatimewhenanyofficerofthatbodycorporateisprecludedbysubsections(1),(2)or(3)fromdealinginthosesecurities.

(7) Abodycorporate isnotprecludedbysubsection(6) fromentering intoatransactionatanytimebyreasononlyofinformationinthepossessionofanofficerofthatbodycorporate if:

(a) Thedecisiontoenterintothetransactionwastakenonitsbehalfbyaperson otherthantheofficer. (b) Ithadinoperationatthattimearrangementstoensurethattheinformationwas not communicated to that person and that no advice with respect to the transactionwasgiventohimbyapersoninpossessionoftheinformation; (c) Theinformationwasnotsocommunicatedandsuchadvicewasnotsogiven.

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(8) Abodycorporateisnotprecludedbysubsection(6)fromdealinginsecuritiesofanotherbodycorporateatany timebyreasonofonlyof information in thepossessionofanofficerofthatfirst-mentionedbodycorporate,beinginformationthatwasobtainedbyofficeristhecourseoftheperformanceofhisdutiesasanofficerofthatfirstmentionedbody corporate and that relates to proposed dealings by that first-mentioned bodycorporateinsecuritiesofthatotherbodycorporate.

(9) Forthepurposeofthissection,apersonisconnectedwithabodycorporateif,beinganaturalperson:–

(a) Heisanofficerofthatbodycorporateorofarelatedbodycorporate. (b) Heisasubstantialshareholderinthatbodycorporateorinarelatedbody corporate (c) Heoccupiesapositionthatmayreasonablyexpectedtogivehimaccessto informationofakindtowhichsubsection(1)and(2)applybyvirtueof:

(i) Anyprofessionalorbusinessrelationshipexistingbetweenhimself(orhis employerorabodycorporateofwhichheisanofficer)andthatbody corporateorarelatedbodycorporate;or (ii) Hisbeinganofficerofasubstantialshareholderinthatbodycorporateorina relatedbodycorporate.

(10) Thissectiondoesnotprecludetheholderofabroker’sordealer’slicencefromdealinginsecurities,orrightsorinterestsinsecurities,ofabodycorporate,beingsecuritiesorrightsorintereststhatarepermittedbyasecuritiesexchangetobetradedonthestockmarket of that securities exchange, if:

(a) Theholderofthelicenceentersintothetransactionconcernedasagentfor anotherpersonpursuanttoaspecificinstructionbythatotherpersontoeffectthat transaction; (b) Theholderofthelicencehasnotgivenanyadvicetotheotherpersoninrelation todealinginsecurities,orrightsorinterestsinsecurities,ofthatbodycorporate thatareincludedinthesameclassasthefirst-mentionedsecurities; (c) Theotherpersonisnotassociatedwiththeholderofthelicence. (11) Forthepurposeofsubsection(8),“officer”,inrelationtoabodycorporate,includes–

(a) Adirector,secretary,executiveofficeroremployeeofthebodycorporate; (b) Areceiver,receivermanagerofpropertyofthebodycorporate; (c) Anofficialmanageroradeputyofficialmanagerofthebodycorporate; (d) Aliquidatorofthebodycorporate (e) Atrusteeorotherpersonadministeringacompromiseorarrangementmade betweenthebodycorporateandanotherpersonorotherpersons.

(12) A person who contravenes this section shall be guilty of an offence and shall beliable:-

(a) Onafirstconviction: (i) Inthecaseofapersonbeingabodycorporate,toafinenotexceeding Kshs.1.5 million (ii) Inthecaseofanyotherperson,includingadirectororofficerofabody

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corporate,toafinenotexceedingKshs500,000ortoimprisonmentforaterm notexceedingfiveyearsortoboth;

(b) Onanysubsequentconviction: (i) Inthecaseofapersonbeingabodycorporate,toafinenotexceeding Kshs.3 million or (ii) Inthecaseofanyotherperson,includingadirectororofficerofabody corporate,toafinenotexceedingKshs.1millionortoimprisonmentforaterm notexceedingsevenyearsortoboth.

(13) Anactionunderthissectionfortherecoveryofalossshallnotbecommencedaftertheexpiration of six years after the date of completion of the transaction in which the loss occurred.

(14) Nothinginsubsection(12)affectsanyliabilitythatapersonmayincurunderanyothersection of this Act or any other law.


Insider tradingoccurswhenapersonbuysorsellscompanysecuritiesuses information thatis not available to the public to trade in the company’s securities orwhen thepersonhasarelationship with the company to an extent that he is likely to have access to material information aboutthecompany.

The restriction on directors’ appointments is as follows:

• Appointmentbythearticles.• Qualificationofshares.• Agelimit.• Undischargedbankrupts.• Personsdisqualifiedbythecourt.• Individualvoting.

Theofficeofthedirectorshallbevacatedifthedirector:

• Failstoobtainthesharequalification• Becomesbankruptormakesanyarrangementorcompositionwithhisdirectors• Isprohibitedbythecourt• Isofunsoundmind• Resignshisofficeinwriting• Hasbeenabsentformorethansixmonthswithoutpermission

It is unlawful for the company to issue a loan to its director unless:

• It’saprivatecompany.

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• It’sasubsidiarywhosedirectorisitsholdingcompany.

• It’spaymenttomeetexpensesincurredbyhimonbehalfofthecompany.• It’saloangivenbyamoneylendingcompany.

Director’sactastrustees,agentsbuttheirrealpositionisthatofafiduciary

Director’s duties are divided into two broad categories namely:

• Dutiesofcareandskillatcommonlaw.• Fiduciarydutiesasenunciatedbycourtsofequity.

TheruleinTurquand’scaseistheruleofindoormanagementwhichholdsthatacompanywillbeboundbyatransactioneveniftheprescribedprocedurewasinfactnotfollowedorcompliedwith.

The rule in Turquand’s case will not apply if:

§ The person suing the company is in fact an insider§ Thecompanyprescribedaspecialresolution,whichhadnotbeenpassed§ There were special circumstances, which would have put the outsider on inquiry§ The transaction is ultra vires the company.§ The transaction refers to a forged document.

CHAPTER QUIZ

1. What is the minimum and maximum age of a director? 2. GivefourreasonsthatareunderArticle88ofTableAforofficevacationofoffice

3. What is the true legal position of directors?

4. Indoormanagementruleisexplainedbywhichcase?

5. A private company has at least how many directors?

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ANSWERS TO QUIZ

1. Minimumis21andmaximumis70 2. Death,Retirementbyrotation,Courtorderrestraininghim,Dissolutionofthe company. 3. Directorsarefiduciaries 4. Royal British bank v Turquand 5. Two


QUESTION ONE

a) Discusstherulesrelatingtoappointmentandvacationofofficeofdirectors. (10marks)b) TripleH,UndertakerAustinandFlairaredirectorsofMielekaLtd,acompanyregulated

byTableA. Fair is themanaging director andUndertaker is the chairperson of thecompany.Sometimeagothedirectorsmeetingasaboarddecidedto:

i) LendTripleHKshs.500,000topurchaseacarforhiswifeStephaneforher personaluse; ii) AdvanceKshs.500,000toAustintocoverhisexpensesonaworldwide (promotionaltouronbehalfofthecompany).

Booker T, the company secretary informs you that Stone Cold a shareholder claims that this transactionshouldhavebeenapprovedbythemembersandthatheintendstoraisethematterduring the next general meeting.

Required

i) AdviseBookerT,whichofthetransactionsneedapprovalbymembersinthegeneralmeeting (4marks)

ii) Whataretheconsequencesofthenecessaryapprovalnotbeingobtained?(6marks) (Total: 20 marks)

QUESTION TWO

BirdsLimitedhasthreedirectors:Peacock,SparrowandVulture.Explainthelegalimplicationofeach of the following situations:

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a) Vulture’ssonhasrecentlycomeofageandVulturewishestoappointhimadirectorofthecompany.(4marks)

b) ThecompanyisconsideringthepurchaseofasubstantialquantityofgoodsfromFlyltd., in which sparrow has a large shareholding through he is not a director Peacock and vultureareunawareofsparrow’sinterestinFlyltd.(4marks)

c) BecauseofadversepublicityaboutPeacock’sprivatelife,vultureandsparrowwishtoremovehimasadirector,sinceherefusestoresign.(4marks)

d) Inviewoftheadversepublicity,VultureandSparrowdecidetoexcludePeacockfromparticipationinthecompany’saffairs.(4marks)

e) The directors are advised byWise & co., the company’s auditors, that there is nopossibilityofthecompanytradingataprofitintheforeseeablefutureandnoreasonableprospectofitspayingitsdebts. (4marks)

(Total: 20 marks)

QUESTION THREE

Discuss the restrictions that are imposed on appointment of directors and directors’ legalposition.

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CHAPTER NINE

THE SECRETARY

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CHAPTER NINETHE SECRETARY

OBJECTIVES


1. Explainthequalification,appointmentandremovalofasecretary2. Discuss the position and duties of the secretary3. Explaintheliabilityofthesecretary4. Discuss the register of directors and secretaries as provided for in the Companies Act

INTRODUCTION

This chapter describes the appointment, qualifications for appointment and removal of thecompanysecretary.Itlaterdescribesthesecretary’sdutiesandtheirlegalposition.

KEY DEFINITIONS

• Ordinaryresolutions:Usedforallroutinebusiness • Extraordinaryresolution:Thisispassedbyamajorityofnotlessthanthree-fourths

ofmembersentitledtovoteandactuallyvoting(inpersonorbyproxy) • Specialresolution:ThisisdefinedintheCompaniesActas“aresolutionpassedby

the same majority as required for an extraordinary resolution at a general meeting of whichnotlessthan21daysnoticehasbeengiven

EXAM CONTEXT

Thisisachapterhasbeenseparatedfromtheoriginaltopicofdirectors,secretariesandauditorsundertheoldsyllabus.Mostofthequestionsfromthepastpapersfocusondirectorsandauditors.However,aclearunderstandingofthechapterisimportant.Attheendofthechapterthereisasampleofpossibleexamquestionsfromothersources.

INDUSTRY CONTEXT

Thischapterdiscussesaveryimportantcompanyofficial,thesecretary.Thisofficialischargedsimplywithtakingcareofthelegalmattersthatthecompany,ajuridicalperson,maybeinvolvedin various legal transactions. Today, many companies are hiring company secretaries who work as part of the legal department thus if any legal representation is required, they take up this role.


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9.1 APPOINTMENT OF THE SECRETARY

By section 178, every companymust have a secretary. However, a sole director cannot bea secretary aswell (Section179). Section179alsoprovides that a corporation cannot beasecretary if its sole director is also the sole director of the company.

Section178A(1)statesthateverycompanysecretaryshallholdaqualificationprescribedbySection 20 of theCertifiedPublic SecretariesAct. However, subsection 2 provides that theMinistermayontheadviceoftheCouncilandtheRegistrationBoard;exemptcertainclassesofcompanies,non-profitorganisationsandcharitableorganisationsfromtheprovisionsofthatsection.Allpubliccompanies,allprivatecompanieswithanominalcapitalofatleastKshs.100,000andallcompaniesofpublicnatureregisteredaslimitedbyguaranteearesupposedtocomplywith the provision of Section 178.

TableA,Article110,providesthatthesecretaryshallbeappointedbythedirectorsonsuchtermsandconditionsastheythinkfitandmaybedismissedbythem.

No person shall qualify for appointment as a company secretary unless he is registered under the CertifiedPublicSecretariesAct.Section20oftheCertifiedPublicSecretariesActprovidesthatsubjecttothissection,apersonisqualifiedtoberegisteredasaCertifiedPublicSecretaryif:

• Hehasbeenawardedby theExaminationsBoardacertificatedesignated theFinalCertificateoftheCertifiedPublicSecretariesExamination.

• HeholdsaqualificationapprovedbytheRegistrationBoard• HeisatthecommencementofthisAct,bothacitizenofKenyaandamemberofthe

professionalbodyknownastheInstituteofCharteredSecretariesandAdministrators• He is at the commencement of this Act both ordinarily resident in Kenya, and a

memberoftheprofessionalbodyknownastheInstituteofCharteredSecretariesandAdministrators

• HeisatthecommencementofthisAct,registeredasanaccountantunderSection24(1)oftheAccountantsActheisqualifiedasanadvocateoftheHighCourtofKenya.

Section21(1)providesfordisqualificationfrombeingregisteredasacompanysecretary.Thefollowingaredisqualifiedfrombeingregistered

• IfconvictedbyacourtofcompetentjurisdictioninKenyaorelsewhereofanoffenceinvolving fraud or dishonesty.

• Ifanundischargedbankrupt• Ifheisofunsoundmind,andhasbeencertifiedtobesobyamedicalpractitioner.• IfduringtheperiodwhentheRegistrationBoardhasdeterminedundersection28(1)(d)

thatheshallnotberegisteredorduringanysuchperiodasvariedbytheHighCourtunder Section 29.

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THESECRETARY

• Section28givestheRegistrationBoardpowertocanceltheregistrationofamemberamongst other penalties if found guilty of professional misconduct. However, anaggrievedpersonmayappealsuchadecisiontotheHighCourt.

STATUS OF THE SECRETARY

• Heisaservantofthecompany.• Heisalsoanofficerofthecompany,accordingtoSection2oftheCompaniesActand

therefore,liabletopenaltiesinthatcapacity.• Ifactingwithinthescopeofhisdutiesassecretaryandifexpresslyauthorisedbythe

directors,heisalsotosomeextent,anagentofthecompanywithpowertobindthecompany.

Thetraditionalviewwasthatacompanywasa“mereservant;hispositionisthatheistodowhatheistold,andnootherpersoncanassumethathehasanyauthoritytorepresentanythingatall.”Lord Esther M.R. in Barnett Hoares and Co. v. South London Tramways co.(1887).

However,inPanorama Development (Guilford) Ltd. v. Fidelis Furnishing Fabrics Ltd(1971)itwasrecognisedthatacompanysecretaryisthecompany’schiefadministrativeofficer,and,assuch,hasapparentauthoritytoactonbehalfofthecompany.“Timeshavechanged.Acompanysecretaryisamuchmoreimportantpersonnowadaysthanhewasin1887.Heisanofficerofthecompanywithextensivedutiesandresponsibilities. Thisappearsnotonly in themodernCompaniesAct,butalsobytherolewhichheplaysintheday-todaybusinessofacompany.Heisnolongeramereclerk.Heregularlymakesrepresentationsonbehalfofthecompanyandentersintocontractsonitsbehalf,whichcomewithinthedaytodayrunningofthecompany’sbusiness.Somuchsothathemayberegardedasheldoutashavingtheauthoritytodosuchthingsonbehalfofthecompany.Heiscertainlyentitledtosigncontractsconnectedwiththeadministrativesideofacompany’saffairs,suchasemployingstaff,andorderingcars,andsoforth.Allsuchmattersnowcomewithintheostensibleauthorityofacompanysecretary.”

Iftheofficeofthesecretaryisvacant,orifforanyotherreason,thereisnosecretarycapableofactinge.g.duetoillness,hisfunctionsandresponsibilitiesmaybeundertakenby:

1. An Assistant or Deputy Secretary2. AnyOfficeroftheCompanyauthorizedgenerallyorspecificallyforthepurposebythe

directors,ifthereisnoassistantordeputysecretarycapableofacting.

THE SECRETARY’S SIGNATURE

Thesecretary’ssignature isan important featureonmanydocumentsand in thecaseof theAnnual Return he is one of the recognised signatures.

Thesecretaryshouldbecarefulwhensigningdocumentsonbehalfofthecompanytonegatehisownpersonalliability,bysigninginarepresentativecapacity.Heshouldalsoensurethatthecompanyiscorrectlydescribedbyname,asaslightvariationinthename,orevenanomissionoftheword“limited”fromthenamemayrenderhimasasignatory,personallyliable.


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9.2 POWERS AND DUTIES

Thepowersanddutiesof thesecretarydependon thesizeandnatureof thecompanyandthepersonalcontractualarrangementsthatitmakeswithhim.However,acompanysecretaryusually has the following powers and duties:

• To be present at all meetings, including boardmeetings and takeminutes of suchproceedings.

• Ontheinstructionsoftheboard,toissuenoticesofmeetingstomembersandothers.• Tocountersigninstrumentstowhichthecompanysealhasbeenaffixed(seeArticle113

ofTableA).• Toconductandrecordtransferofsharesandconductcorrespondencewithshareholders

as regards calls, transfers, forfeiture, e.t.c.• Tokeepthebooksofthecompany,particularlythoserelatingtotheinternaladministration

of the company, e.g. the shares register and register of charges.• To make all the returns of the company, e.g. the annual returns, notice of special

resolutions, etc.• For quoted companies, he ensures compliance with Nairobi Stock Exchange and

Capital Markets Authority Requirements.• ForbanksheensurescompliancewithCentralBankofKenyastatutoryrequirements.

Section 180 provides that a provision requiring or authorising a thing to be done by or to adirectorandthesecretaryisnotsatisfiedbyitbeingdonebyortothesamepersonactingassecretary and director.

BridgingtheInformationGapbetweentheExecutiveandNon-ExecutiveDirectors

ThedevelopingroleoftheCompanySecretarywasfirstrecognisedintheCadburyReport,madebytheCadburyCommitteein1992,whichstated:

“The Chairman and the Board will look to the Company secretary for guidance on what their responsibilitiesareundertherulesandregulationstowhichtheyaresubjectandonhowtheseresponsibilitiesshouldbedischarged.”

All directors should have access to the advice and services of the Company Secretary who is responsible to theBoard forensuring that theBoardproceduresare followedandapplicablerules and regulations are complied with.

TheCompanySecretary’s role is toprotect the interestsof thecompanyasawhole. Oftenreferredtoas“theconscienceofthecompany”thecompanysecretaryhasthetaskofinforming,advisingandsupportingthedirectorsbothindividuallyandcollectively,endeavouringtoensurethattheyarefullyawareoftherestrictions,responsibilitiesandobligationsimposeduponthemand thecompanyby thecompany’sownconstitution,company law,other relevant legislationandanyapplicablecodesofbestpracticestandards.Heshouldconstantlymonitortheinternalactivitiesofthecompany,takeresponsibilityforinternaldisclosure,interpretthedecisionsoftheBoard and help to ensure that they are properly implemented throughout the organisation.

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AqualifiedCompanySecretaryhasaclearresponsibilitytoprotecttheprobityoftheorganisationand would have a major impact, for example, in guarding against directors acting, consciously or otherwise, in their own interest rather than those of the company. In protecting the interests of the company, the company secretary not only serves the interests of the third party shareholders whomaybeinvolvedbutisalsoabletorepresenttheinterestsofnumerousotherstakeholderssuch as creditors, employees and local communities.

STATUTORY REGISTERS

TheCompanySecretarymustensurethatallStatutoryRegisters/Booksrequiredtobekeptbythe Companies Act are kept.

They include:

1. RegisterofMemberSection1122. RegisterofDirectorsandSecretaries,Section2013. RegisterofDirectors’Shareholdings,debenturesSection1964. RegisterofMortgagesandCharges,Section1055. Minute Books of all proceedings of general meetings and of all proceedings at the

meetingsofitsdirectors.Section145onlythemeetingbooksofgeneralmeetingsareopen for inspectionbyshareholdersand, therefore, it isadvisable tohaveseparateminutebooks.

6. Books of Account7. RegisterofDebentureholders,Section88(1):Thisisonlynecessaryforacompany

thatissuesdebentures.

REGISTER OF DIRECTORS AND SECRETARIES

Section 21

(1)Everycompanyshallkeepatitsregisteredofficearegisterofitsdirectorsandsecretaries. (2)Thesaidregistershallcontainthefollowingparticularswithrespecttoeachdirector,thatisto

(a) in the case of an individual, his present Christian name and surname, anyformer Christian name or surname, his postal address his nationality and, if that nationality is not his nationality of origin, his nationality of origin, his business occupation, if any, particulars of all other directorships held by himand, in the case of a company subject to Section 186, the date of his birth

(b) Inthecaseofacorporation,itscorporatenameandregisteredorprincipalofficeandpostal address.

Providedthatitshallnotbenecessaryfortheregistertocontainparticularsof

directorshipsheldbyadirectorincompaniesofwhichthecompanyisthewholly-

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ownedsubsidiary,orwhicharethewholly-ownedsubsidiarieseitherofthecompanyorofanothercompanyofwhichthecompanyisthewholly-ownedsubsidiary;andforthe purposes of this proviso: (i) “company”includesanybodycorporateincorporatedinKenya; (ii) abodycorporateshallbedeemedtobethewholly-owned

subsidiaryofanotherifithasnomembersexceptthatotherand thatother’swholly-ownedsubsidiariesanditsortheirnominees.

(3)Thesaidregistershallcontainthefollowingparticularswithrespecttothesecretaryor,

where there are joint secretaries, with respect to each of them, that is to say:

(a) in the case of an individual, his present Christian name and surname any formerChristian name and surname and his postal address

(b) inthecaseofacorporation,itscorporatenameandregisteredorprincipalofficeandpostal address:

Providedthatwhereallthepartnersinafirmarejointsecretaries,thenameandpostal

addressoftheprincipalofficeofthefirmmaybestatedinsteadofthesaidparticulars.

(4)Thecompanyshall,withintheperiodsrespectivelymentionedinsubsection

(5)delivertotheregistrarforregistrationareturnintheprescribedformcontainingthe

particularsspecifiedinthesaidregisterandanotificationintheprescribedformofany

change among its directors or in its secretary or in any of the particulars contained in

the register, specifying the date of the change.

The periods referred to in subsection (4) are the following, namely:

(a) theperiodswithinwhichthesaidreturnistobesentshallbeaperiodof14daysfromtheappointmentofthefirstdirectorsofthecompany;and

(b) theperiodwithinwhichthesaidnotificationofachangeistobesentshallbe14daysfrom the happening thereof: Provided that, in the case of a return containing particulars with respect to any person whoisthecompany’ssecretaryontheappointeddaytheperiodshallbe14daysfromthe appointed day.

(6) The register to be kept under this section shall during business hours (subject to suchreasonablerestrictionsasthecompanymaybyitsarticlesoringeneralmeetingimpose,sothatnotlessthantwohoursineachdaybeallowedforinspection)beopentotheinspectionofanymemberofthecompanywithoutchargeandofanyotherpersononpaymentoftwoshillings,orsuchlesssumasthecompanymayprescribe,foreachinspection.

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(7) If any inspection required under this section is refused or if default is made incomplying with subsection (1), subsection (2), subsection (3) or subsection (4), thecompanyandeveryofficerof thecompanywho is indefault shall be liable toadefault fine. (8)Inthecaseofanysuchrefusal,thecourtmaybyordercompelanimmediateinspectionofthe register.

(9)Forthepurposesofthissection:

(a) Apersoninaccordancewithwhosedirectionsorinstructionsthedirectorsofacompanyareaccustomedtoactshallbedeemedtobeadirectorandofficerofthecompany;

(b) “Christianname”includesaforename(c) Inthecaseofapeerorpersonusuallyknownbyatitledifferentfromhissurname,

“surname”meansthattitle;(d)ReferencestoaformerChristiannameorsurnamedonotinclude:-

(i) InthecaseofapeerorapersonusuallyknownbyaBritishtitledifferentfrom

hissurname,thenamebywhichhewasknownprevioustotheadoptionofor successiontothetitle;or

(ii) Inthecaseofanyperson,aformerChristiannameorsurnamewherethatname

orsurname,waschangedordisusedbeforethepersonbearingthename attainedtheageofeighteenyearsorhasbeenchangedordisusedforaperiod ofnotlessthan20years

(iii) Inthecaseofamarriedwoman,thenameorsurnamebywhichshewasknown previous to the marriage.

Non-statutorybooksmaybepurchasedandkept.Theseinclude:

• Register of documents sealed (or Seal Book): This is for recording particulars ofdocuments issued under seal.

• Register of Important Documents: e.g. Power ofAttorney, Probates and Letters ofAdministration, etc.

Annual Returns and other Forms

Annual Return to be made by a company having a share capital

Section 125 provides that every company having a share capital shall at least once in every year(calendaryear),makeanannualreturnandfailuretocomplywiththissectionrendersthecompanyandeveryofficerofthecompanywhoisindefaultliabletoadefaultfine.Anannualreturn is made up to the 14th day after the Annual General Meeting.

A company need not make a return under this either in the year of its incorporation or, if it is not requiredbySection131toholdanAGMduringthefollowingyearafteritsincorporation.

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Contents of Annual Return

The Annual Return’s contents are specified in Part I of the Fifth Schedule and theyinclude:

• The situation of the registered officeof the companyand the company’s registeredpostal address.

• If the registerofmembers iskept inaplaceother than theRegisteredOfficeof thecompany, the address of the place where it is kept.

• Asummary,distinguishingbetweensharesissuedforcashandsharesissuedasfullyorpartlypaidup,anddebenturesspecifyingthefollowingparticulars:

1. Amount of share capital2. Numberofsharestakenfromthecommencementofthecompanyuptothedateofthe

return3. The amount called upon each share4. The total amount of calls received5. The total amount of calls unpaid6. The totalamountof thesums (ifany)paidbywayofcommission in respectofany

sharesordebentures7. The discount allowed on the issue of any shares issued at a discount or so much of that

discountashasnotbeenwrittenoffatthedateonwhichthereturnismade.8. The totalamountof thesums (if any)allowedbywayofdiscount in respectofany

debenturessincethedateofthelastreturn9. The total amount of shares forfeited.10. Thetotalamountofsharesforwhichsharewarrantsareoutstandingatthedateofthe

return and of share warrants issued and surrendered respectively since the date of the lastreturn,andthenumberofsharescomprisedineachwarrant.

11. Particularsof the total indebtednessof thecompanyasat thedateof this return inrespect of all mortgages and charges which are required to be registered with theregistrar under this Act.

• Alistofpastandpresentmembers,giving: • Alistofnamesandaddressesofmembers,asatthefourteenthdayaftertheday oftheAnnualGeneralMeetingfortheyearandofmemberswhohaveceasedto bememberssincethedareofthelastreturn,orinthecaseofthefirstreturn, since the incorporation of the company. • Numberofsharesheldbyeachoftheexistingmembersatthedateofthereturn, specifyingsharestransferredsincethedateofthelastreturnbypersonswhoare stillmembersandhaveceasedtobemembersrespectivelyandthedatesof registration of the transfers. • Ifthenamesabovearenotinalphabeticalorder,anindexshouldbeannexed. • Particularsofthedirectorsandsecretariesholdingofficeasatthedateofreturn. • Section125(1)(ii)providesthatwherethecompanyhasconvertedanyofits sharesintostockparticularsrequiredintheListofMemberswillrelatetostock instead of shares. • Iffullparticularsofmembersandtheirholdingshavebeengiveninoneyear,itwill onlybenecessarytogiveparticularsofpersonsceasingtobememberssince the date of the last return and to shares transferred since that date or to changes ascomparedwiththatdateintheamountofstockheldbyamember.Section125 (1)(iii)

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Section125(2)providesthatifinthecaseofacompanykeepingabranchregister,particularsfromthebrancharereceivedattheregisteredofficeafterthereturnshavebeenmade,thensuchparticularsmustbeincludedinthenextorsubsequentannualreturn.

Annual Return to be made by a Company not having a share capital, Section 126(1)

Every company not having a share capital shall once, at least in every calendar year, make a return stating:

• Thesituationoftheregisteredofficeofthecompanyanditsregisteredpostaladdress• Inacase inwhich theregisterofmembers iskeptelsewhere thanat theregistered

office,theaddressoftheplacewhereitiskept.• Inacaseinwhichanyregisterofholdersofdebenturesofacompanyorpartofany

suchregisteriskeptinKenya,elsewherethanattheregisteredoffice,theaddressofthe place where it is kept and

• Allparticularsofdirectorsandsecretariesoccupyingtheirrespectivepositionsatthedate of the return.

Thereshallbeannexedtotheannualreturn,astatementgivingparticularsofindebtednessinrespect of all mortgages and charges.

Section127(1)providesthattheAnnualReturnmustbecompletedwithin42daysaftertheAGMfortheyearandthecompanyshallwithinsuchperioddelivertotheregistraracopysignedbothbyadirectorandbythesecretarytothecompany.

Section128provides thatacopyofeverybalancesheet laidbefore thecompany ingeneralmeetingduringtheperiodtowhichthereturnrelatesandcertifiedasatruecopybyadirectorandthesecretaryshallbeannexedtotheannualreturn.CertifiedcopiesoftheAuditorsReport,DirectorsReportshallalsobeannexed.

Section129providesthattheannualreturnrequiredbySection125shallinthecaseofaprivatecompanybeaccompaniedbyacertificatesignedbybothadirectorandthesecretarytotheeffectthat the company has not, since the date of incorporation of the company issued any invitation tothepublictosubscribeforanysharesordebenturesofthecompany;andwheretheannualreturndisclosesthefactthatthenumberofmembersofthecompanyexceeds50,acertificatesosignedthattheexcessconsistswhollyofpersonswhoarenottobeincludedinreckoningthenumberof50.

Apart from Annual Returns, other forms of returns required to be made to the Registrar of Companies include:

1. ChangeofName:Registrarmustbenotifieswithin14days.2. AlterationofMemorandumandArticlesofAssociation:Registrarmustbenotifiedwithin

14 days.3. ReturnastoAllotments:Mustbemadewithin60days.4. IncreaseofShareCapital:Returnmustbemadewithin30days.

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5. RegistrationofCharges:Particularsofachargecreatedmustbedeliveredwithin42days of creation.

6. Directors and Secretaries: Changes in the particulars of directors and secretaries must besubmittedtotheRegistrarwithin14daysfromthehappeningthereof.

Responsibilities regarding meetings and minute books

Board and committee meetings

Board and committee meetings must be convened and conducted in accordance with thecompany’sArticlesofAssociationandtheCompaniesAct.Failuretodosowouldentitlethoseentitled to attend or any other interested person to challenge the legitimacy or validity of the decisionsmadeatsuchmeetings.ItisparticularlyimportanttoobservetheperiodofnoticeifthisisprescribedintheArticles.

As Secretary of the Board, the Company Secretary should ensure that the agenda and the papers containingthebusinesstobediscussedaredispatchedwellbeforethedateofthemeeting.Thesecretary should also ensure that the agenda is properly drawn up and well arranged as this will facilitatesmoothdeliberationsatthemeeting.

The Secretary should also ensure that there is a quorum prior to the commencement of the meeting.Onlypersonscompetenttotakepartinthebusinessofameetingshouldconstituteaquorum.Aquorumshouldbepresentthroughoutthedurationofthemeeting.

GENERAL MEETINGS

General meetings are either classified as annual general meetings or extraordinary generalminutes.

In convening general meetings, it is also important to comply with requirements to serve notice tothoseentitledtoattendasprescribedbytheActandthecompany’sMemorandumandArticlesofAssociation.WhileTable(Article50)providesforwaiverofnotice,itisimportanttorememberthattheAct(Section158)providesthatacompany’saccountsmustbedispatchedtomembersatleast21cleardaysbeforethedateofthemeeting.Thisrequirementwillnotapplyifitissoagreedbyallthemembersentitledtoattendandvoteatthemeeting.Itis,however,difficulttoachievesuchunanimousagreementinthecaseofpubliccompanieswiththousandsofshareholders.

The Act also provides that special notice (i.e. not less than 28 days) is required in the followingcases:-

1. Toremoveadirectorbeforetheexpiryofhisperiodofoffice.2. Toappointadirectorwhoisover70.3. Toappointanauditor,apersonotherthanaretiringauditor;orfillacasualvacancyin

theofficeoftheauditor;orre-appointanauditorwhowasappointedbythedirectorstofillacasualvacancyorremoveanauditorbeforetheexpirationofhisterminoffice.

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Before the commencement of the meeting, the Secretary should ensure that there is a quorum andthiscanbeestablishedbythenumberofproxiesreceivedandnumberofmemberspresentat the meeting.

Thebusiness transactedat thegeneralmeetingswilldetermine the typeof resolutions tobeadopted. The following resolutions are referred to in the Act:

• Ordinaryresolutions:Usedforallroutinebusiness.Itispassedbyasimplemajorityofmembersentitledtovote(inpersonorbyproxy)andactuallyvoting.

• Extraordinaryresolution:Thisispassedbyamajorityofnotlessthanthree-fourthsofmembersentitledtovoteandactuallyvoting(inpersonorbyproxy).Itisarequirementthat notice specifying the intention to propose the resolution as an extra-ordinary resolutionbegiven.

• Specialresolution: This isdefined in theActas“aresolutionpassedbythesamemajority as required for an extraordinary resolution at a general meeting of which not less than 21 days notice specifying the intention to propose the resolution as a special resolutionhasbeengiven.”Someoftheinstanceswhereaspecialresolutionisrequiredare:

1. Toalterthe“objects”clauseoftheMemorandumofAssociation. 2. To alter the Articles of Association. 3. To change the name of the company. 4. To reduce the share capital. 5. To effect a voluntary winding up.

Preparation for meetings

• Fixingthedateandtime.• Fixingthevenue.• Makelogisticalarrangements(catering,stewards,audiovisuals,printsignsforAGM,

designthestage,settingtablesandnameboards)• Planthemailinglistofinvitationstothemeeting• Draftthenoticeandtheagendaforthemeetingandagenda• Hold a Board meeting to authorise the convening of an AGM and approve the

following: i. BalanceSheetandProfitandLossAccount ii. Directorsreportsignedbytwodirectors/chairman iii. Auditorsreportsignedbytheauditors iv. 21dayNoticeoftheAGMsignedbytheSecretaryandtheagenda v. Sendoutthenoticeofthemeetingaccompaniedbyproxyformstoallmembers givingaspecificdatebywhichproxiesmustbereceivedbythesecretary.

• Preparescheduleofproxiesappointedandthenumberofvotesheldbythemforuse.Thechairmanistobeadvisedonvotinginstructionstobeobservedwhenproxiesarehandedtobeauthorisedvotersatthemeeting.

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Immediately before the AGM

Preparations include:

• Arranging“proposers”and“seconders”ofresolutions• Finalisethechairman’sbriefontheagendaandholdbriefingsessionwithhim/her.• Considerquestionsandanswersonmatterslikelytoberaisedbymembers• Allocatestaffdutiesfor:a. Registrationb. Pollingc. Roaming microphoned. Stewardse. Reconfirmarrangementsatthevenue.

Day of the AGM

• Howtoassistthechairmanconductaneffectivemeeting.• Thingstotaketoit:• Sparecopiesofnotice,reportandaccountsandminutes• MemorandumandArticlesofAssociation• CompaniesAct• Registerofmembers• Votingcards• Calculatorsandprintingrollsforcountingvotesonapoll• Nameplatesfortoptableandnamebadgesforstaff• Notepads,pensandpencils• Copiesofthechairman’sspeech.

Ensure registration process is working smoothly

• Checkwhetheraquorumispresentandadvisethechairman• Readthenoticeofthemeeting• EnsurethattheAuditorsReportisreadatthemeeting• Assistthechairmaninidentifying“proposers”and“seconders”ofmotions/resolutions

during the meeting• Keepdetailednotesoftheproceedingstopreparetheminutes• EnsurethatthedirectorsarepresentandseatedinfrontattheAGM• Forthosedirectorsstandingforre-election,makeavailablebriefdetailsoftheirages,

relevantexperience,datesoftheirfirstappointmentanddetailsofanycommitteetheyhave served on

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Enhancing the AGM

At least one of the top executives of the company should make an oral report to the AGM on importantareasofthecompanybusiness

The company should provide an updated Income and Expenditure statement during the AGM to show progress made during the current trading period.

Companiesshouldencourageshareholderstosubmitquestionsinadvanceforresponseduringthe AGM.

Preparations for the voting process

Voting can be carried out in at least three ways:

• Byshowofhands–Needsachief registrar tobeappointedassistedbystewardswho will do the physical count of those in favour of a resolution and those against. The resultswillberecordedintheRegisterandhandedovertothechairmanofthemeetingto declare them to all present.

• Byballot at theAGM–Requires that sufficient voting cardsbeprintedandmadeavailable fordistribution toeachmemberpresentatameeting. Foreachresolutiondifferentcolours,cardsshouldbeselectedforuseonvoting. Onecard is issuedtoeachmembertovoteforaresolution,bymarkingitfororagainst.Votingboxesthatarelockablemustbeavailableforcastingofvotes.TheReturningOfficerwillsupervisetheprocessofvotescastingandthecountingbyateamofatleastfourscrutinisers.TheCompanySecretaryshouldassisthim.Itwouldbeusefulifatleastone“proposer”isinvitedtoactasscrutiniserduringthecountingofvotes.TheresultsaretabulatedbythereturningofficerandpresentedtotheChairmantodeclare.TheSecretaryshouldbepreparedforarecountifthisisrequestedatthecloseoftheexerciseespeciallyinelections.

• Bypostalballot-Requires the person entitled to vote to send his vote through post. Themembershouldhoweversendthevoteingoodtimetoreachthesecretarybytheday that the meeting scheduled to take place.

To make meetings effective:

• Thereisaneedtostrikeabalancebetweentimeforinteractionatmeetingsandtimefor action

• Thepurposeofthemeetingmustbeclearandwellputintheagenda.• Onemustensurethatcleardecisionsaremadeandaspecificpersonmadeaccountable

foractionwithinaspecifiedtimeframe.

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Minute Books

Minutebooksshouldbemaintainedasa recordofmeetingsof thecompany’sdirectorsanditsmembers.Forthesakeofgoodorder,separateminutebooksshouldbemaintainedofthecompany’s boardmeetings andwhere there areBoardCommittees, each committee shouldhaveaseparateminutebookaswell.

Aseparateminutebookshouldalsobemaintainedaswellintowhichminutesofallthecompany’sgeneralmeetingsshouldbefiled.WhenaSecretaryistakingminutes,itisimportanttoconsiderthe following:

1. Minutes must give a precise account of the discussions at the meeting.2. Minutesmustprovideadequateinformationtoenablethosewhoarenotatthemeeting

tounderstandfullythebusinessthatwastransacted.3. Minutesmustbeconciseandfreefromanyambiguity.4. Minutesbeingarecordofwhatwasdecidedinthepastshouldbeinthepasttense.

In practice,minutes of the previousmeetings are confirmed at the subsequentmeeting andsignedbythechairpersonasatruerecordofthedeliberations.

Company/Common Seal

Section109providesthateverycompanymusthaveaCompanySealwithitsnameengravedinlegibleromanletters.

Article 113 provides that the directors shall provide for the safe custody of the seal, which shall onlybeusedbytheauthorityofthedirectors(orofacommitteeofthedirectorsauthorisedbythedirectorsonthatbehalf)andeveryinstrumenttowhichthesealshallbeaffixedshallbesignedbyadirectorandshallbecountersignedbythesecretaryorbyaseconddirectororbysomeotherpersonappointedbythedirectorsforthepurpose.

OfficialSeal

Section37(1)provides thatacompanywhoseobjects requireorcomprise the transactionofbusiness outsideKenyamay, if authorised by its articles, have for use in any place outsideKenya,anofficialseal,whichshallbeafacsimileofthecommonsealofthecompany,withtheadditiononitsfaceofthenameoftheplacewhereitistobeused.

Adeedorotherdocumenttowhichanofficialsealisdulyaffixedshallbindthecompanyasifithadbeensealedwiththecommonsealofthecompany.

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When the seal is required to be used

Althoughthesealisacompany’sofficialsignature,itisnotnecessarytouseitonallcontractdocuments. It ismost commonly used in documentswhere it is legally required to affix thecompany seal, such as:

• Section36:APowerofAttorneytoallowforexecutionofdeedsonitsbehalfabroad.• Section83:ShareCertificatesrequirethecommonseal• Section85:Sharewarrantstobearer

The Law of Contract requires the common seal to be used:

• Oncontractswithoutconsideration• Leasesoflandformorethanthreeyears

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CHAPTER SUMMARY

ApersonisqualifiedtoberegisteredasaCertifiedPublicSecretaryif:


• HeholdsaqualificationapprovedbytheRegistrationBoard,• HeisatthecommencementofthisAct,bothacitizenofKenyaandamemberofthe

professionalbodyknownastheInstituteofCharteredSecretariesandAdministrators,• He is at the commencement of this Act both ordinarily resident in Kenya and a

memberoftheprofessionalbodyknownastheInstituteofCharteredSecretariesandAdministrators,

• He isat thecommencementof thisAct, registeredasanaccountantunderSection24(1)oftheAccountantsAct

• HeisqualifiedasanadvocateoftheHighCourtofKenya.

Status of the Secretary

• Heisaservantofthecompany.• Heisalsoanofficerofthecompany,accordingtoSection2oftheCompaniesActand

thereforeliabletopenaltiesinthatcapacity.• Ifactingwithinthescopeofhisdutiesassecretaryandifexpresslyauthorisedbythe

directors,heisalsotosomeextent,anagentofthecompanywithpowertobindthecompany.

The powers and duties of the secretary depend on the size and nature of the company and the personal contractual arrangements that it makes with him. However, a company secretary usually has the following powers and duties:

• To be present at all meetings, including boardmeetings and takeminutes of suchproceedings.






Capital Markets Authority Requirements.• Forbanks,heensurescompliancewithCentralBankofKenyastatutoryrequirements.

The Company Secretary must ensure that all Statutory Registers/Books required to be kept by the Companies Act are kept.

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They include:

i. RegisterofMembers,Section112ii. RegisterofDirectorsandSecretaries,Section201iii. RegisterofDirectors’shareholdings,Debenturesetc,Section196iv. RegisterofMortgagesandCharges,Section105v. Minute Books of all proceedings of general meetings, and of all proceedings at the

meetingsofitsdirectors.AccordingtoSection145onlythemeetingbooksofgeneralmeetingsareopenforinspectionbyshareholders,andthereforeitisadvisabletohaveseparateminutebooks.

vi. Books of Accountvii. RegisterofDebentureholders,Section88(1):Thisisonlynecessaryforacompany

thatissuesdebentures.

CHAPTER QUIZ

1. Powersofthesecretarycanalsobedescribedas 2. A secretary is also an Advocate. TRUE or FALSE?

3. A company has two seals namely

4. Votecanbecarriedoutinhowmanyways?

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ANSWERS TO QUIZ

1. Duties 2. TRUE 3. CommonandOfficial 4. Three


QUESTION ONE

Discuss the position and duties of the Company Secretary

QUESTION TWO

Whatarethemainqualificationsofasecretary?

QUESTION THREE

Discuss the register of directors and secretaries.

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CHAPTER TEN

AUDITORS

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CHAPTER TENAUDITORS

OBJECTIVES


• ExplaintheappointmentandsubsequentremovalofAuditorsfromoffice• Explainthedutiesofanauditor.• Determine who may be appointed an auditor and the penalty for improper

appointment

INTRODUCTION

Thischaptertakesaquicklookatthevariousfinancialstatementsthatshouldbepreparedbyacompany.Itthengoesontobringthefamiliartopicofanauditandasummarizedversionofsomeof the concepts tested in Section 2 of CPA Part 1.

KEY DEFINTIONS

• Audit:Thisisanindependentexaminationofthefinancialstatementsastowhetherthey show a true and fair view

• Auditor:Thisapersonappointedbythecompanytocarryoutanaudit• Annexure:Attachmentsordocumentsfixed/attachedtoanother

EXAM CONTEXT

Theexaminerinthischapterhastendedtotestthestudent’sunderstandingongroupaccounts;rights and duties of an auditor. An understanding of the appointment procedure of an auditor is useful.Thischapterhasappearedinthefollowingsittings;06/01;12/00;07/00

INDUSTRY CONTEXT

AnauditisoneofTHEmostcompliedwithformality.Mostcompaniesconducttheexaminationthrough independent audit firms like Deloitte and Touché. Audited financial statements arepublishedinthenewspaperswhencompanieswanttofloatsharesorborrowloansfrombanks.


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Fast forward:

Ø Anauditorisanofficerofthecompanywhoperformsanauditofthefinancialstatementsof a company

Ø An auditor owes a legal duty of care and the standard set is that of a competent auditor in the circumstances

Ø Anauditor isappointedby theboardofdirectors, registrarormembersatageneralmeeting

10.1 QUALIFICATION, APPOINTMENT AND REMOVAL

APPOINTMENT

Section159(1)oftheCompaniesActprovidesthat“everycompanyshallateachannualgeneralmeetingappointanauditororauditorstoholdofficefromtheconclusionofthat,untiltheconclusionofthesubsequentannualgeneralmeeting”.

REAPPOINTMENT

BySection159(2)aretiringauditorshallbedeemedtobereappointedwithoutanyresolutionbeingpassedunless:

a) Heisnotqualifiedforreappointment

b) Aresolutionhasbeenpassedatthatmeeting(i.e.annualgeneralmeeting)appointingsomebodyinsteadofhimorprovidingexpresslythatheshallnotbeappointed

c) Hehasgiventhecompanynoticeinwritingofhisunwillingnesstobereappointed.

APPOINTMENT BY REGISTRAR

“Whereatanannualgeneralmeetingnoauditorsareappointedoraredeemedtobereappointed,the Registrarmayappointapersontofillthevacancy”(Section159(3).

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APPOINTMENT BY DIRECTORS

Thefirstauditorsofacompanymaybeappointedbythedirectorsatanytimebeforethefirstannualgeneralmeeting,andauditorssoappointedshallholdofficeuntiltheconclusionofthatmeeting.

Indefaultofappointmentofthefirstauditorsbydirectorsthecompanymaydoso.Wherethedirectorshaveappointedthefirstauditors,thecompanymay“atageneralmeetingremovesuchauditorsandappointintheirplaceanyotherpersonswhohavebeennominatedforappointmentbyanymemberofthecompany.Noticeofnominationtobegiventothemembersatleast14daysbeforethedateofthemeeting.

CASUAL VACANCIES

BySection159(6)“Thedirectorsmayfillanycasualvacancyintheofficeofauditor,butwhileanysuchvacancycontinuesthesurvivingorcontinuingauditororauditors,ifany,mayact”.

QUALIFICATIONS

BySection161(1)“Apersonorfirmshallnotbequalifiedforappointmentasauditorofacompanyunlessheor,inthecaseofafirm,everypartnerinthefirmistheholderofapracticingcertificateissued pursuant to Section 21 of the Accountants Act

PERSONS WHO CANNOT BE APPOINTED

UnderSection161(2)noneofthefollowingpersonsshallbequalifiedforappointmentasauditorof a company

a) Anofficerorservantofthecompany.b) Apersonwhoisapartneroforintheemploymentofanofficerorservantofthecompany

(unlessthecompanyisaprivatecompany).c) Abodycorporate.d) Personswhoaredisqualifiedforappointmentasauditorofthecompany’ssubsidiaryor

holdingcompanyorsubsidiaryofthecompany’sholdingcompany.

PENALTY FOR IMPROPER APPOINTMENT

Section 161 (4) provides that if any unqualified person is appointed as auditor, the personappointed, the company and every officer in default, shall be liable to a fine not exceedingKshs.4,000.

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10.2 DUTIES OF AUDITORS

The duties of auditors are explained in the following cases:

1. RE: KINGSTON COTTON MILL CO. (1896) (CHANCERY)

Forsomeyearsbeforeacompanywaswoundup,balancesheetssignedbytheauditorswerepublishedbythedirectorstotheshareholdersinwhichthevalueofthecompany’sstock-in-trade at the end of each year was grossly overstated. The auditors relied on certificates,wilfully false,givenbyJ.,oneofthedirectorswhowasalsomanager,asto the value of the stock-in-trade. Dividends were paid for some years on the footing thatthebalancesheetswerecorrectbutifthestock-in-tradehadbeenstatedatitstruevalue it would have appeared that therewerenoprofitsoutofwhichadividendcould be paid.

NOTE:

i) Ineachcasetheamountofstock-in-tradeat theendof theyearwasentered inthebalancesheet“aspermanager’scertificate”.

ii) Themanagerwasamanofgreatbusinessabilityandofhighrepute,andupto thestoppageofthecompanywastrustedbyeveryone;buthehaddesignedlyexaggeratedthe value of the stock-in-trade in order to make the company appear prosperous.

QUESTION:

Was it the duty of the auditors to testtheaccuracyofthemanager’scertificatebyacomparison of the figuresinthebooks,andweretheyliableforthedividendswhichhadbeenpaidinconsequenceoftheerroneousbalancesheets?

HELD:

It being not part of the duty of the auditors to take stock, theywere justified inrelyingonthecertificatesofthemanager,apersonofacknowledgedcompetenceandhigh reputation, and they were notboundtocheckhiscertificatesintheabsenceofanythingtoraisesuspicion.Theywerenotliableforthedividendswrongfullypaid.

NOTE:

i) Anauditorisnotboundtobesuspiciouswheretherearenocircumstancestoarousesuspicion;heisonlyboundtoexercise a reasonable amount of care and skill.

ii) Whereanofficerofacompanyhascommittedabreachofhisdutytothecompany,thedirectconsequenceofwhichhasbeenamisapplicationofitsassets,forwhichhecouldbemade responsible inanaction,suchbreachofduty isa “misfeasance” forwhichhemaybesummarily proceeded against under the Companies Act, and it is not necessarythatanactionshouldbebrought.

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Theobjectof thesection is to facilitate the recoveryby the liquidatorofassetsofacompany improperly dealt withby itspromoters,directorsandotherofficers. Thesection applies to breaches of trust and to misfeasances by such persons, but isinapplicabletocasesofbreachofcontract,trespass,negligence,etc.

LINDLEY, LJ stated:

...To decide this question, it is necessary to consider:

1) Whattheirdutywas; 2) Howtheyperformedit,andinwhatrespects(ifany)theyfailedtoperformit.

Thedutyof anauditor generallywas very carefully consideredby this court inRE: LONDON AND GENERAL BANK (1895) and I cannot usefully add anything to what willbefoundthere.Itwaspointedoutthatanauditor’sdutyistoexaminethebooks,ascertainthattheyareright,andtoprepareabalancesheetshowingthetruefinancialposition of the company at the time towhich the balance sheet refers. But it wasalso pointed out that an auditor is not an insurer and that in the discharge of his duty, he is only bound to exercise a reasonable amount of care and skill. It was furtherpointedoutthatwhatinanyparticularcaseisareasonableamountofcareandskilldependsonthecircumstancesofthecase;thatifthereisnothingwhichoughttoexcitesuspicion,lesscaremayoroughttohavebeenaroused.Thesearethe general principles which have to be applied to cases of this description.

I protest, however, against the notion that an auditor is bound to be suspicious as distinguished from reasonably careful.Tosubstitutetheoneexpressionfortheothermay easily lead to serious error. Auditors are,however, inmyopinionboundtoseewhat exceptional duties, if any, are cast upon them by the articles of the company whose accounts they are called upon to audit. Ignorance of the articles and ofexceptionaldutiesimposedbythemwouldnotaffordanylegal justificationfor not observing them...(Suchastakingstock).Thecomplaintsmadeagainsttheauditors in this particular case... is that they failed to detect certain frauds. There is no charge of dishonesty on the part of the auditors. They did not certify or pass anything which they did not honestly believe to be true. It is said, however, that they were culpablycareless...fraudswerecommittedbythemanager,whoinordertobolsterupthecompanyandtomakeitappearflourishingwhenitwasthereverse,deliberatelyexaggeratedboththequantitiesandvaluesof thecottonandyarn in thecompany’smills....IconfessIcannotseethattheiromissiontocheckhis(i.e.manager’s)returnswasabreachoftheirdutytothecompany.It is no part of an auditor’s duty to take stock...Hemustrelyonotherpeoplefordetailsofthestockintradeon hand. In the case of a cotton mill, he must rely on some skilled person for the materials necessary toenablehimtoenterthestock-in-tradeatitsproper valueinthebalancesheet.Inthiscase theauditors reliedon themanager. Hewasamanofhighcharacterandofunquestionablecompetence. Hewas trustedbyeveryonewhoknewhim.... thedirectorsarenottobeblamedfortrustinghim.Theauditorshadnosuspicionthathewasnottobetrustedtogiveaccurateinformationastothestock-in-tradein hand, and they trusted him accordingly in that matter. But it is said that they ought not to have done so. The stock journal showed the quantities, that is, the weight in pounds of the cotton and yarn at the end of each year. Other books showed the quantities of cotton bought during the year and the quantities of yarn sold during the year. If these

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bookshadbeencomparedby theauditors, theywouldhave found that thequantityof cotton and yarn in hand at the end of the yearought tobemuch less than the quantity shown in the stock journal, and so much less that the value of the cotton and yarnenteredinthestockjournalcouldnotberight,oratalleventswassoabnormallylarge as to excite suspicion and demand further inquiry...Butalthoughitisnodoubttruethatsuchaprocessmighthavebeengonethrough,andthat,ifgonethrough,thefraudwouldhavebeendiscovered,canitbetrulysaidthattheauditorswerewanting in reasonable care not thinking it necessary to test the managing director’s return? Icannotbringmyself to think theywerenot,nordo I think thatany juryofbusinessmenwouldtakeadifferentview.Itisnotsufficienttosaythatthefraudsmusthavebeendetectediftheentriesinthebookshadbeenputtogetherinawaywhichnever occurred to any one before suspicion was aroused. The question is whether, no suspicionofanythingwrongbeingentertained,therewasawantofreasonablecareonthepartoftheauditorsinrelyingonthereturnsmadebyacompetentandtrustedexpert relating to matters on which information from such a person was essential. Icannotthinktherewas.Themanagerhadnoapparentconflictbetweenhisinterestandhisduty.Hispositionwasnotsimilartothatofacashierwhowastoaccountforthecash which he receives, and whose own account of his receipts and payments could notreasonablybetakenbyanauditorwithoutfurtherinquiry.

LOPES, LJ.”... (1) What is a misfeasance within the meaning of Section 324(1)?

Havetheauditorsinthecircumstancesofthiscasecommittedamisfeasance?IthasbeenheldthatanauditorisanofficerwithinthemeaningoftheSection:-InRE LONDON AND GENERAL BANK.Buthastherebeenanymisfeasancebytheauditors?Thisdependsuponwhatmeaningistobeassignedtotheword“misfeasance”asusedinthissection.Thelearnedjudgeinthecourtbelowheldthatmisfeasancecoveredanymisconductbyanofficerofthecompanyassuchforwhichsuchofficermighthavebeensued apart from the section. In my judgment, this is too wide. It would cover any act of negligence-anyactionablewrongbyanofficerofacompanywhichdidnotinvolveanymisapplicationoftheassetsofthecompany.TheobjectofthissectionoftheActistoenabletheliquidatortorecoveranyassetsofthecompanyimproperly dealt withbyanyofficerofthecompany,andmust be interpreted bearing that object in mind. It doubtlesscoversanybreachofdutybyanofficerofthecompanyinhiscapacityofofficerresulting in any improper misapplication of the assets or property of the company... It is thedutyofanauditortobringtobearontheworkhehastoperformthatskill,care,andcautionwhichareasonablycompetent,carefulandcautiousauditorwoulduse.Whatisreasonableskill,careandcautionmustdependontheparticularcircumstancesofeachcase.Anauditorisnotboundtobeadetective,or,aswassaid,toapproachhisworkwithsuspicionorwithaforegoneconclusionthatthereissomethingwrong.Heisawatchdog,butnotabloodbound.Heisjustifiedinbelieving,triedservantsofthecompanyinwhomconfidenceisplacedbythecompany.Heisentitledtoassumethattheyarehonest,andsorelyupontheirrepresentations,provided,hetakesreasonablecare.Ifthereisanythingcalculatedtoexcitesuspicion,heshouldprobeittothebottom;butintheabsenceofanythingofthatkindheisonlyboundtobereasonablycautiousandcareful.Itisnotthedutyofanauditortotakestock;heisnotastockexpert;thereare many matters in respect of which he must rely on the honesty and accuracy of others. Hedoesnotguarantee thediscoveryofall frauds... Thedutiesofauditorsmustnotberenderedtooonerous.Theirworkisresponsibleandlaborious,andthe

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remunerationmoderate.Ishouldbesorrytoseetheliabilityofauditorsextendedanyfurther than in RE LONDON AND GENERAL BANK....

Auditors must not be made liable for not tracking out ingenious and carefully laidschemes of fraud when there is nothing to arouse their suspicion, and when those fraudsareperpetratedbytriedservantsofthecompanyandareundetectedforyearsbythedirectors.Sotoholdwouldmakethepositionofanauditorintolerable...

KAY,LJ.“....Thewordsofthesectionare“anymisfeasanceorbreachoftrustinrelationtothecompany....misfeasancemeanssomethingotherthanabreachoftrust...itdoesnot mean mere non-feasance: RE WEDGWOOD COAL AND IRON CO.... I think the onlysafeinterpretationtoadoptisthatitincludesallcasesotherthanbreachesoftrustinwhichanofficerofthecompanyhasbeenguiltyofabreachofhisdutyassuchofficerwhichhascausedpecuniarylosstothecompanybymisapplicationofitsassets,andforwhichhemighthavebeenmadeliableinanaction...”

2. RE LONDON AND GENERAL BANK

Anauditorrepresentedaconfidentialreporttothedirectorscallingtheirattentiontotheinsufficiencyofthesecuritiesinwhichthecapitalofthecompanywasinvested,andthedifficultyofrealisingthem,butinhisreporttotheshareholdersmerelystatedthatthevalueoftheassetswasdependentonrealization,andintheresulttheshareholderswere deceived as to the condition of the company and a dividend was declared out of capital and not out of income.

HELD:

The auditors had been guilty of misfeasance under Section 10 of the Companies(winding-up)Act, 1890, and was liable to make good the amount of dividend paid(amountingto$14,433.3s).

LINDLEY,LJ.:“...itisthedutyofthedirectors,andnotoftheauditors,torecommendtotheshareholderstheamountstobeappropriatedfordividendsanditisthedutyofthe directors to have proper accounts kept, so as to show the true state and condition of the company... It is for the shareholders, but onlyon the recommendationof thedirectors,todeclareadividend.ItisimpossibletoreadthesectionoftheCompaniesActwithoutbeingstruckwiththeimportanceoftheenactmentthattheauditorsareto be appointed by the shareholders, and are to report to them directly, and not to or throughthedirectors.Theobjectofthisenactmentisobvious.Itevidentlyistosecureto the shareholders independent and reliableinformationrespectingthetruefinancialpositionofthecompanyatthetimeoftheaudit...Itisnopartofanauditor’sdutytogiveadvice, either to directors or shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. Itisnothingtohimwhetherthebusinessofacompanyisbeingconductedprudentlyorimprudently,profitablyorunprofitably.Itisnothingtohimwhetherdividendsareproperlyorimproperlydeclared,providedhedischargeshisowndutytotheshareholders.Hisbusiness is toascertainandstatethetruefinancialpositionof thecompany at thetimeoftheaudit,andhisdutyisconfinedtothat.Butthencomesthequestion,how ishetoascertain thatposition?Theanswer is,byexamining thebooksof the

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company.Buthedoesnotdischargehisdutybydoingthiswithoutinquiryandwithouttakinganytroubletoseethatthebooksthemselvesshowthecompany’strueposition.Hemusttakereasonablecaretoascertainthattheydoso.Unlesshedoesthis,hisauditwouldbeworsethanidlefarce.Assumingthebookstobesokeptastoshowthecompany’struefinancialposition,theauditorhastoframeabalanceshowingthatposition according to the booksandtocertifythatthebalancesheetrepresentediscorrect in that sense. Buthisfirstduty is toexaminethebooks,notmerelyfor thepurposesofascertainingwhat theydoshow,butalso for thepurposesofsatisfyinghimselfthattheyshowthetruefinancialpositionofthecompany...Anauditor,however,isnotboundtodomorethanexercisereasonablecareandskillinmakinginquiries,andinvestigations.Heisnotaninsurer;hedoesnotguaranteethatthebooksdocorrectlyshowthetruepositionofthecompany’saffairs;hedoesnotevenguaranteethathisbalancesheetisaccurateaccordingtothebooksofthecompany.Ifhedid,hewouldberesponsibleforerroronhispart,evenifhewerehimselfdeceivedwithoutanywantofreasonablecareonhispart,say,bythefraudulentconcealmentofabookfromhim.Hisobligationisnotasonerousasthis.

SuchItaketobethedutyoftheauditor;hemustbehonest....i.e. he must not certify what he does not believe to be true,andhemusttakereasonablecareandskillbeforehebelievesthatwhathecertifiesistrue.Whatisreasonablecareinanyparticularcasedepends upon the circumstances of that case.

Wherethereisnothingtoexcitesuspicion,verylittleinquirywillbereasonablysufficient,andinpracticeIbelievebusinessmenselectafewcasesathaphazard,seethattheyare right, and assume that others like them are correct also. Where suspicion is aroused,morecareisobviouslynecessary;but,still,anauditorisnotboundtoexercisemorethanreasonablecareandskill,eveninacaseofsuspicion,andheisperfectlyjustified inactingon theopinionofanexpertwherespecialknowledge is required...It is satisfactory to find that the legal standard of duty is not too high for businesspurposes,andisrecognisedascorrectbybusinessmen...Apersonwhosedutyitistoconveyinformationtoothersdoesnotdischargethatdutybysimplygivingthemsomuch information as is calculated to induce them, or some of them, to ask for more. Informationandmeansofinformationarebynomeansequivalentterms....Theauditoristomakeareporttotheshareholders,butthemode of doing so and the form of the reportarenotprescribed...anauditorwhogivesshareholdersmeansof informationinsteadofinformationrespectingacompany’sfinancialpositiondoessoathisperilandrunstheveryseriousriskofbeingheldjudiciallytohavefailedtodischargehisduty.Inthiscase,IhavenohesitationinsayingthatMr.Theobalddidfailtodischargehisdutytotheshareholdersincertifyingandlayingbeforethemthebalancesheet...without any reference to the report which he laid before the directors and with no other warning thanisconveyedbythewords,“Thevalueoftheassetsasshownonthebalancesheetisdependentuponrealization”.Itisameretruismtosaythatthevalueofloansandsecuritiesdependsontheirrealization.Weweretoldthatastatementtothateffect,issounusualinanauditor’scertificatethatthemerepresenceofthosewordswasenoughto excite suspicion. But, as already stated, the duty of an auditor might infer from an unusualstatement thatsomethingwasseriouslywrong, itbynomeans follows thatordinarypeoplewouldhavetheirsuspicionarousedbyasimilarstatement,if,asinthiscase, its language expresses no more than any ordinary person would infer without...the balancesheetandprofitandlossaccountbeingtrueandcorrectinthesensethattheywereinaccordancewiththebooks.Buttheywere,nevertheless,entirelymisleading,

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and misrepresented the real position of the company. Under these circumstances, I am compelled to hold that Mr. Theo Bald failed to discharge his duty to the shareholders... Possiblyhedidnotrealizetheextentofhisdutytotheshareholdersasdistinguishedfrom the directors and he unfortunately consented to leave the Chairman to explain the true state of the company to the shareholders instead of doing so himself. The fact,however,remains,andcannotbegotover,thatthebalancesheetandcertificateofFebruary1892didnotshowthetruepositionofthecompanyattheendof1891andthatthiswasowingtotheomissionbytheauditorto lay before the shareholders the materialinformation,whichhehadobtainedinthecourseofhisemploymentasauditorof the company and to which he called the attention of the directors.... Where did the money come from with which the dividends were paid? The money came from cash atthebankersorinhand;butthiscashcouldnotbeproperlytreatedasprofit and the directorsandauditorsknewthisperfectlywell....”

RIGBY, LJ. “.... TheArticles ofAssociation cannot absolve the auditors from anyobligationimposeduponthembythestatute....Underthestatutethemembersofthecompany are entitled to have the safeguard of an expression of opinion of the auditors totheeffect,first,thatthebalancesheet,isproperlydrawnupsoastoexhibitatrueandcorrectviewofthestateofthecompany’saffairs.

Thewords“as shown by the books of the company”seemtometobeintroducedtorelievetheauditorsfromanyresponsibilityastoaffairsofthecompanykeptoutofthebooksandconcealedfromthem,butnottoconfineittoamerestatementofthecorrespondenceofthebalancesheetwithentriesinthebooks.Afullandfairbalancesheetmustbesuchabalancesheetastoconveyanyknowncausesofweaknessinthefinancialposition,orsuggestanythingwhichcannotbesupportedasfairlycorrectinabusinesspointofview.”

3. RE ALLEN CRAIG & CO. (LONDON) LTD. (1934) Chapter 483

The reportsandbalancesheets for theyearsendingJune30,1925,and,June30,1926,weresignedbytwodirectors.Thereportsannexedtothesebalancesheetsweresignedbytheauditors.Thequestionwas:Whatwasthedutyofauditorsinrespectofthesetwobalancesheets?

Theauditorsmerelysentthereportsandbalancesheetstothesecretaryofthecompany,andtheynevergotbeyondthesecretary.Thedirectorsnevercalledageneralmeetingtoconsiderthesesbalancesheetsandreports.

BySection162 (1) of theCompaniesAct, “Theauditors shallmakea report to themembersontheaccountsexaminedbythem,andoneverybalancesheetlaidbeforethecompanyingeneralmeetingduringtheirtenureofoffice...”

BENNET, J:

“....Doesthestatuteimposeontheauditorsthedutyofmakingtheirreporttoevery member of the company?

Now if yougive thewords theirplainmeaning, itwouldseem that thatobligation is

AUDITORS


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imposedonthem.Butwhenyoubegintoreflectonthequestion,itcannot,Ithink,havebeentheintentionofthelegislatorstoimposethatdutyontheauditorsanditcertainlyhas never been the practice, since the obligation has been imposed, for auditorsthemselvestosendtheirreportstoeverymemberofthecompany...I do not think it is possible to hold that the words “the members”.... mean “all the members”. It cannotbethattheauditorsaretobeattheexpenseandtroublenotmerelyofsendingtheirreportthroughthepostbutofdeliveringacopytoeverymember.Itseemsthatone is forced by circumstances to limit the meaning of the words “the members” and I hold that they mean “the members assembled in the general meeting”.... if thereport is tobemade to themembers ingeneralmeeting, then itwouldnotberight, I think, to hold that the duty of the auditors is to make that report themselves to themembersingeneralmeetingunlesstheycanthemselvescallageneralmeetingorcan compel someone else to call a general meeting. There are no means by which they can call a general meeting or compel other persons to convene a general meeting. The only persons who can call a general meeting are the directors or the meeting who have called upon the directors to do so and they have failed to do so. The audience themselves are powerless.

In my judgment, the duty of the auditors, after having affixed their signatures tothe reportsannexed toabalancesheet, is confined to forwarding that report to thesecretary of the company, leaving the secretary or the directors to perform the duties which the statute imposes of convening a general meeting to consider the report.... The statute compels directors to convene a meeting once a year and compels directors to present reports to the general meeting and it is for the shareholders to see that the directors do their duty...the duty of the auditors is discharged by sending the report to the secretary of the company...”

SUMMARY OF CHAPTER

Everycompanyshallateachannualgeneralmeetingappointanauditor(s)toholdofficefromtheconclusion of that Annual General Meeting

Aretiringauditorshallbedeemedtobere-appointedunlessheisnotqualifiedforre-appointment,a resolution has beenpassedat thatmeeting andhe is given the companya notice for hisresignation

. Anauditormaybeappointedbytheregistrarorbythedirectors

Persons who cannot qualify for appointment as auditors are:

- Anofficerorservantofthecompany- Apersonwhoisapartner,employeeorservantofanofficerofthecompany- Apersondisqualifiedtoactasanauditorofthesubsidiaryoftheholdingcompany

Themaindutyofanauditoristoexaminetheaccountsforafinancialyearandtomakeareporton those accounts.

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CHAPTER QUIZ

1. What is the primary duty of an auditor? 2. Who may appoint an auditor?

3. Anauditormaybeappointedbydirectors.TRUEorFALSE

AUDITORS


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ANSWERS TO QUIZ

1. Toexaminetheaccountsforafinancialyearandtomakeareportonthoseaccounts2. Director, Registrar and the AGM3. TRUE


QUESTION ONE

Explain theroleofpubliccompanyauditorspayingparticularregardto theirappointmentandremoval (20marks)

QUESTION TWO

Stateandthenexplainwithreferencetocase lawthedutiesofanAuditorofacompany.(20marks)

QUESTION THREE

Describethecategoriesofpersonswhodonotqualifytobeappointedauditorsofacompany.(4marks)

Kindlyrefertothefollowingsittings:-07/00;12/99

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PART D


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CHAPTER ELEVEN

COMPANY ACCOUNTS, AUDIT AND INSPECTION

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CHAPTER ELEVENCOMPANY ACCOUNTS, AUDIT AND INSPECTION

OBJECTIVES


1. Explain the form and contents of company accounts2. Discussgroupaccounts,auditor’sanddirector’sreport3. Discuss the appointment of inspectors, their powers and report

INTRODUCTION

This chapter deals with the main forms of company accounts, it introduces an important aspect of inspector who are charged with investigating company affairs and compiling reports on the status of company affairs.

KEY DEFINITIONS

1. Balancesheet-Thisisanaccountthatshowsthefinancialpositionofacompany2. ProfitandLossaccount-Thisgivestheincomethatisgeneratedbyabusinessand

theexpensesincurredbyabusiness3. Groupaccounts-Theseareaccountsoftheholdingcompanyanditssubsidiaries

EXAM CONTEXT

Thischapterhasbeensplitfromtheoriginaltopicondirectors,auditorsandsecretariesintheoldsyllabus.Questionsfromthepastpapersthustendtotestthegeneraltopicintheoldsyllabus.However,asampleofexamquestionsfromothersourcesisprovidedattheendofthechapter.

INDUSTRY CONTEXT

This is a very practical chapter. Its application is inevitable in the numerous companies inexistencetoday.Mostcompaniesprepareandevenpublishtheirfinancialstatements,especiallywhentheywanttofloatshares.



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11.1 BOOKS OF ACCOUNT

BySection147(1),everycompanyshallcausetobekeptintheEnglishlanguage“properbooksofaccount”withrespectto:

(a) Allsumsofmoneyreceivedandexpendedbythecompanyandthemattersinrespectof which the receipt and expenditure takes place.

(b) Allsalesandpurchasesofgoodsbythecompany.

(c) Theassetsandliabilitiesofthecompany.

Section147(2)providesthat“properbooksofaccount”shallbedeemednottohavebeenkeptwithrespecttothemattersaforesaidiftherearenotkeptsuchbooksasarenecessarytogiveatrueandfairviewofthestateofthecompany’saffairsandtoexplainitstransactions.

BySection147(3)(a)thebooksofaccountaretobekeptattheregisteredofficeofthecompanyor,withtheconsentoftheregistrarandsubjecttosuchconditionsashemayimpose,atsuchotherplaceasthedirectorsthinkfit,andshallatalltimesbeopentoinspectionbythedirectors.

CONTENTS OF PROFIT AND LOSS ACCOUNT

Part I of the Sixth Schedule provides there shall be shown:

1. The amount charged to revenue by way of provision for depreciation, renewals ordepreciationoffixedassets.

2. Theamountoftheinterestonthecompany’sdebenturesandotherfixedloans.3. Theamountofthechargeforincometaxandanyothertaxationonprofitstodate4. The amounts respectively provided for redemption of share capital and loans5. Theamount,ifmaterial,setasideorproposedtobesetasidetoreserves.6. Theamountofincomefrominvestments,distinguishingbetweentradeinvestmentsand

other investments.7. The aggregate amount of the dividends paid and proposed.8. Iftheremunerationoftheauditorsisnotfixedingeneralmeeting,theamountshallbe

shown under a separate heading.9. Thefollowingmattersshallbestatedbywayofnotes,ifnototherwiseshown:10. Ifdepreciationor replacementoffixedassets isprovided forbysomemethodother

than a depreciation charge or provision for renewals, or is not provided for, the method bywhichitisprovidedfororthefactthatitisnotprovidedfor,asthecasemaybe.

11. Thebasisonwhichtheamount,ifany,setasideforincometaxiscomputed.12. Whether or not the amount stated for dividends paid and proposed is for dividends

subjecttodeductionofincometax.

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13. Exceptinthecaseofthefirstprofitandlossaccountlaidbeforethecompanyafterthecommencement of the Companies Act, the corresponding amounts for the immediately precedingfinancialyearforallitemsshownintheprofitandlossaccount.

14. Anymaterial respects inwhich any items shown in the profit and loss account areaffectedbytransactionsofasortnotusuallyundertakenbythecompanyorotherwisebycircumstancesofanexceptionalornon-recurrentnature;orbyanychangeinthebasisofaccounting.

11.2 GROUP ACCOUNTS

Section150(1)providesthatif,attheendofitsfinancialyear,acompanyhassubsidiaries,thenitmustincludeinitsannualaccounts“groupaccounts”dealingwiththeaffairsofthesubsidiariesas well.

BySection l50 (2)(b) group accounts need not dealwith a subsidiary of the company if thecompany’sdirectorsareoftheopinionthat:

• ItIsImpracticable,orwouldheofmoralvaluetothemembersofthecompany,inviewoftheInsignificantamountsInvolved,orwouldinvolveexpenseordelayoutofproportiontothevaluetomembersofthecompany

• The result would bemisleading the result would be harmful to the business of thecompanyoranyofitssubsidiaries

• Thebusinessoftheholdingcompanyandthatofthesubsidiaryaresodifferentthattheycannotreasonablybetreatedasasingleundertaking.

Theapprovaloftheregistrarshallberequiredfornotdealingingroupaccountswithasubsidiaryongrounds(iii)or(iv).

BySectionl50(2)(a),acompanyisexemptfromtheobligationtopreparegroupaccountsifitisawhollyownedsubsidiaryofanotherbodycorporateincorporatedinKenya.

Form of Group Accounts

Section 151(1) provides that the group accounts laid before a holding company shall beconsolidated accounts comprising:

• Aconsolidatedbalancesheetdealingwiththestateofaffairsofthecompanyandallthesubsidiariestobedealtwithingroupaccounts;

• AconsolidatedProfitandLossaccountdealingwiththeprofitorlossofthecompanyandthosesubsidiaries.


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However,thegroupaccountsneednotbepreparedinthisformifthedirectorsareoftheviewthattheycouldbepreparedinanotherformwhichwouldbereadilyappreciatedbythecompany'smembers(Sectionl51(l)).

Contents of Group Accounts

BySectionl52(l),thegroupaccountslaidbeforeacompanyshallgiveatrueandfairviewofthestateofaffairsandprofitorlossofthecompanyandthesubsidiariesdealtwiththerebyasawhole,sofarasconcernsmembersofthecompany.

Section153(1)furtherprovidesthatthegroupaccounts,ifpreparedasconsolidatedaccounts,shallcomplywiththerequirementsoftheSixthScheduletotheAct,sofarasapplicabletheretoand if not so prepared, shall give the same or equivalent information.

Financial Year of Holding Company and Subsidiary

Section153(l)provides thataholdingcompany’sdirectorsshallensure that,exceptwhere intheiropiniontherearegoodreasonsagainstit,thefinancialyearofeachofitssubsidiariesshallcoincidewiththecompany’sownfinancialyear.

By Section 153(2), the registrar is empowered to postpone the submission of a company’saccountstoageneralmeetingfromonecalendaryeartothenextforpurposesofenablingthecompany’sfinancialyeartoendwiththatoftheholdingcompany.

PartIIIoftheSixthScheduleprovidesthatsolongasanylicensedbankoranyscheduledbankcomplies with the requirements of any enactment in force in the country of the incorporation of suchbankrelatingtokeepingofaccountsbyabankingcompanyitshallnotbesubjecttotherequirementsofPartIoftheSixthSchedule.However,iftheMinisterissatisfiedthatanylicensedbankoranyscheduledbankisnotcomplyingwiththerequirementsofanysuchenactmentofitscountry of incorporation, or if there are no such requirements in such enactment, he may order thatsuchbankshallcomplywiththerequirementsofPartIoftheSixthSchedule.

11.3 DIRECTOR’S REPORT

Asstatedearlier,Section157requiresthatthedirectors’reportmustbeattachedtothebalancesheet of the company.

The disclosure requirements for the directors’ report are:

1. Afairreviewofthedevelopmentofthebusinessofthecompanyanditssubsidiariesduringthefinancialyearandoftheirpositionattheendofit.

2. Proposeddividend(Section157(1))3. Proposedtransferstoreserves(Section157(1))4. Names of directors at any time in the period concerned.5. Principalactivitiesof thecompanyandof itssubsidiariesduring theperiodandany

significantchangestherein.6. Significantchangesinthefixedassetsofthecompanyorofanysubsidiariesduringthe

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period.7. Anindicationofthedifferencebetweenthebookandmarketvaluesoflandandbuildings

ofthecompanyoranyofitssubsidiaries8. Interests insharesordebenturesofgroupcompaniesas recorded in the registerof

directors’interests.

Section157(2)provides that thesaiddirectors’ reportshalldeal,so faras ismaterial for theappreciationofthestateofthecompany’saffairsbyitsmembersandwillnot inthedirectors’opinionbeharmfultothebusinessofthecompanyorofanyofitssubsidiaries.

Companylawrequiresthedirectorstopreparefinancialstatementsforeachfinancialyearwhichgiveatrueandfairviewofthestateofaffairsofthebankasattheendofthefinancialyearandoftheprofitofthebankforthatperiod.Inpreparingthosefinancialstatementsthedirectorsarerequired to:

• Statewhetherapplicableaccountingstandardshavebeen followedand, if not,givea statement of the reasons for any significant departure from standard accountingpractices.

• Makejudgmentsandestimatesthatarereasonableandprudent.• Indicatewhetheranythinghascometotheirattentionofthedirectorstoindicatethat

thecompanyanditssubsidiarieswillnotremainagoingconcernforatleastthenext12months.

Thisinformationisstatedinastatementofdirectors’responsibilities,whichisalsocontainedinthe annual report.

11.4 AUDITORS’ REPORT

Section162provides that theauditors shallmakea report to thememberson theaccountsexaminedby them,andoneverybalancesheet,everyprofitand lossaccountandallgroupaccountslaidbeforethecompanyingeneralmeeting.

Matters to be expressly stated in Auditors’ Report

This is provided for in the seventh schedule to the Companies Act and includes the following:

1. Theauditorsshouldstatewhethertheyhaveobtainedalltheinformationandexplanationswhichtobestoftheirknowledgeandbeliefwerenecessaryforthepurposesoftheiraudit.

2. Whether,intheiropinion,properbooksofaccounthavebeenkeptbythecompany,sofarasappearsfromtheirexaminationofthosebooks,andproperreturnsadequateforthepurposesoftheiraudithavebeenreceivedfrombranchesnotvisitedbythem.

3. Whetherthecompany’sbalancesheetand(unlessitisframedasaconsolidatedProfitandLossaccount)ProfitandLossaccountdealtwithbythereportareinagreementwiththebooksofaccountandreturns.


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4. Whether,intheauditors’opinionandtothebestoftheirinformationandaccordingtotheexplanationsgiventothem,thesaidaccountsgivetheinformationrequiredbytheCompanies Act in the manner so required and give a true and fair view:

5. Inthecaseofthebalancesheet,ofthestateofthecompany’saffairsasattheendofitsfinancialyear

6. Inthecaseoftheprofitandlossaccount,theprofitorlossforitsfinancialyear,7. Orasthecasemaybe,giveatrueandfairviewthereofsubjecttothenon-disclosure

ofanymatters (tobe indicated in the report)whichbyvirtueofPart III of theSixthSchedulearenotrequiredtobedisclosed.

8. Inthecaseofaholdingcompanysubmittinggroupaccountswhetherintheiropinion,thegroupaccountshavebeenproperlypreparedinaccordancewiththeprovisionsofthisActsoastogiveatrueandfairviewofthestateofaffairsandprofitorlossofthecompanyand itssubsidiariesdealtwith thereby,sofarasconcernsmembersof thecompany,or,asthecasemaybe,soastogiveatrueandfairviewthereof.

Thereportdrawnupbytheauditorsmustbeattachedtotheaccountswhensenttothemembers(Section156)anditshallbereadbeforethecompanyingeneralmeetingandshallbeopentoinspectionbyanymember.(Section162(2)).

11.5 INVESTIGATION BY THE REGISTRAR

WheretheregistrarhasreasonablecausetobelievethattheprovisionsofthisActarenotbeingcompliedwith,orwhere,onperusalofanydocumentwhichacompanyisrequiredtosubmittohim under the provisions of this Act, he is of the opinion that the document does not disclose a full andfairstatementofthematterstowhichitpurportstorelate,hemay,byawrittenorder,callonthecompanyconcernedtoproducealloranyofthebooksofthecompanyortofurnishinwritingsuch information or explanation as he may specify in his order.

Suchbooksshallbeproducedandsuchinformationorexplanationshallbefurnishedwithinsuchtimeasmaybespecifiedintheorder.

Onreceiptofanorderitshallbethedutyofallpersonswho,areorhavebeen,officersofthecompanytoproducesuchbooksortofurnishsuchinformationorexplanationsofaraslieswithintheir power.

IfanysuchpersonrefusesorneglectstoproducesuchbooksortofurnishanysuchinformationorexplanationheshallbeliabletoafinenotexceedingKshs200,000inrespectofeachoffence.

Ifafterexaminationofsuchbooksorconsiderationofsuchinformationorexplanationtheregistraris of the opinion that an unsatisfactory state of affairs is disclosed or that a full and fair statement hasnotbeendisclosed,theregistrarshallreportthecircumstancesofthecaseinwritingtothecourt.

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11.6 APPOINTMENT AND POWERS OF INSPECTORS

Where it appears to the registrar that there is good reason so to do, he may appoint one or morecompetentinspectorstoinvestigateandreportonthemembershipofanycompanyandotherwise with respect to the company for the purpose of determining the true persons who are orhavebeenfinanciallyinterestedinthesuccessorfailure(realorapparent)ofthecompanyorabletocontrolormateriallytoinfluencethepolicyofthecompany. Theappointmentofaninspectorunderthissectionmaydefinethescopeofhisinvestigation,whether as respects the matter or the period to which it is to extend or otherwise and in particularmaylimittheinvestigationtomattersconnectedwithparticularsharesordebentures. Where an application for an investigation under this section with respect to particular shares ordebenturesofacompanyismadetotheregistrarbymembersofthecompanyandthenumberofapplicantsortheamountofsharesheldbythemisnotlessthanthatrequiredforan application for the appointment of an inspector, the registrar shall appoint an inspector toconducttheinvestigationunlessheissatisfiedthattheapplicationisvexatious,andtheinspector’sappointmentshallnotexcludefromthescopeofhisinvestigationanymatterwhichtheapplicationseekstohaveincludedtherein,exceptinsofarastheregistrarissatisfiedthatitisunreasonableforthatmattertobeinvestigated: Providedthattheregistrarmayrefusetoappointaninspectorunderthissubsectionunless,inanycaseinwhichheconsidersitreasonablesotorequire,theapplicantsgivesufficientsecurity for the payment of the costs of the investigation. Subjecttothetermsofaninspector’sappointment,hispowersshallextendtotheinvestigationof any circumstances suggesting the existence of an arrangement or understanding which, thoughnotlegallybinding,isorwasobservedorlikelytobeobservedinpracticeandwhichisrelevant to the purposes of his investigation. TheAFORESAIDshallapplyinrelationtoallpersonswhoare,orhavebeen,orwhomtheinspectorhasreasonablecausetobelievetobeorhavebeenfinanciallyinterestedinthesuccessorfailure,ortheapparentsuccessorfailure,ofthecompanyoranyotherbodycorporatewhosemembershipisinvestigatedwiththatofthecompany,orabletocontrolormateriallytoinfluencethepolicythereof,includingpersonsconcernedonlyonbehalfofothers,astheyapplyinrelationtoofficersandagentsofthecompanyoroftheotherbodycorporate,asthecasemaybe;and

Theregistrarshallnotbeboundtofurnishthecompanyoranyotherpersonwithacopyofanyreportbyaninspectorappointedunderthissectionorwithacompletecopythereofifheisofopinion that there is good reason for not divulging the contents of the report or of parts thereof, butshallkeepacopyofanysuchreportor,asthecasemaybe,thepartsofanysuchreport,as respects which he is not of that opinion. Theexpensesofanyinvestigationundersubsection(1)shallbedefrayedbytheregistrar. Theexpensesofanyinvestigationundersubsection(3)shallbedefrayedbytheapplicantsunlesstheregistrarcertifiesthatitisacaseinwhichhemightproperlyhaveactedundersubsection(1).


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11.7 INSPECTOR’S REPORT

Aninspectormay,and,ifsodirectedbythecourt,shall,makeinterimreportstothecourt,andontheconclusionoftheinvestigationshallmakeafinalreporttothecourt.Anysuchreportshallbewritten or, if the court so directs, printed. The Court shall:

(a) Forward a copy of any report made by an inspector to the company and to theregistrar

(b) Ifthecourtthinksfit,forwardacopythereofonrequestandonpaymentoftheprescribedfeetoanyotherpersonwhoisamemberofthecompanyorofanyotherbodycorporatedealtwith in the reportbyvirtueofSection167,orwhose interestsasacreditorofthecompanyoranysuchotherbodycorporateasaforesaidappeartothecourttobeaffected;

(c) Where any inspector is appointed underSection 165, furnish, at the request of theapplicants for the investigationacopy to themandmayalsocause thereport tobeprintedandpublished

CHAPTER SUMMARY

BySection147(1),everycompanyshallcausetobekeptintheEnglishlanguage“properbooksofaccount”Thereshallbeshown:


2. Theamountoftheinterestonthecompany’sdebenturesandotherfixedloans.3. Theamountofthechargeforincometaxandanyothertaxationonprofitstodate4. The amounts respectively provided for redemption of share capital and loans5. Theamount,ifmaterial,setasideorproposedtobesetasidetoreserves.6. Theamountofincomefrominvestments,distinguishingbetweentradeinvestmentsand


shown under a separate heading.9. Thefollowingmattersshallbestatedbywayofnotes,ifnototherwiseshown.10. Ifdepreciationor replacementoffixedassets isprovided forbysomemethodother



subjecttodeductionofincometax.

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13. Exceptinthecaseofthefirstprofitandlossaccountlaidbeforethecompanyafterthecommencement of the Companies Act, the corresponding amounts for the immediately precedingfinancialyearforallitemsshownintheprofitandlossaccount.


BySectionl50(2)(b)groupaccountsneednotdealwithasubsidiaryofthecompanyifthecompany’sdirectorsareoftheopinionthat:

• Itisimpracticable,orwouldbeofnorealvaluetothemembersofthecompany, inviewoftheinsignificantamountsinvolved,orwouldinvolveexpenseordelay outofproportiontothevaluetomembersofthecompany;or • Theresultwouldbemisleading • Theresultwouldbeharmfultothebusinessofthecompanyoranyofits subsidiaries • Thebusinessoftheholdingcompanyandthatofthesubsidiaryaresodifferent thattheycannotreasonablybetreatedasasingleundertaking.

The disclosure requirements for the directors’ report are:

1. Afairreviewofthedevelopmentofthebusinessofthecompanyanditssubsidiariesduringthefinancialyearandoftheirpositionattheendofit.

2. Proposeddividend(Section157(1))3. Proposedtransferstoreserves(Section157(1))4. Names of directors at any time in the period concerned.5. Principalactivitiesof thecompanyandof itssubsidiariesduring theperiodandany

significantchangestherein.6. Significantchangesinthefixedassetsofthecompany,orofanysubsidiariesduringthe

period.7. Anindicationofthedifferencebetweenthebookandmarketvaluesoflandandbuildings

ofthecompanyoranyofitssubsidiaries8. Interests insharesordebenturesofgroupcompaniesas recorded in the registerof

directors’interests.



9. Theauditorsshouldstatewhethertheyhaveobtainedalltheinformationandexplanationswhichtobestoftheirknowledgeandbeliefwerenecessaryforthepurposesoftheiraudit.


11. Whetherthecompany’sbalancesheetand(unlessitisframedasaconsolidatedProfitandLossaccount)ProfitandLossaccountdealtwithbythereportareinagreementwiththebooksofaccountandreturns.

12. Whether,intheauditors’opinionandtothebestoftheirinformationandaccordingtotheexplanationsgiventothem,thesaidaccountsgivetheinformationrequiredbythe


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Companies Act in the manner so required and give a true and fair view:13. Inthecaseofthebalancesheet,ofthestateofthecompany’saffairsasattheendof

itsfinancialyear14. Inthecaseoftheprofitandlossaccount,theprofitorlossforitsfinancialyear,15. Orasthecasemaybe,giveatrueandfairviewthereofsubjecttothenon-disclosure




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CHAPTER QUIZ

1. Every company must keep… 2. Consolidated accounts comprise of…

3. A holding company should always prepare group accounts. TRUE or FALSE?

4. Whichtworeportsarepreparedbycompanies?


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ANSWERS TO QUIZ

1. Properbooksofaccount. 2. BalancesheetandProfitandLossaccount 3. False. 4. Auditor’sandDirector’sreport.


QUESTION ONE

Discussthemattersexpresslyoutlinedintheauditor’sreport(20marks)

QUESTION TWO

Discusstheappointmentandpowersontheinspector(20marks)

QUESTION THREE

Discusstheformandcontentofbooksofaccount(20marks)

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CHAPTER TWELVE

CORPORATE INSOLVENCY

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CHAPTER TWELVECORPORATE INSOLVENCY

OBJECTIVES


• To explain the different types of winding up.• Explain the appointment and powers of the liquidator.• Explain the offences relating to liquidation.• Explain the appointment of liquidators, their duties and release from their duties.

INTRODUCTION

This chapter deals with, literary put, the death of a company. In other words the procedure that results in a company, ceasing to exist. Simply called winding up, the main types are compulsory winding up and voluntary winding up. It then looks at liquidators, their appointment, duties and release from their duties.

KEY DEFINITIONS

• Windingup:Processbywhichacompanyisdissolvedandceasestoexist• Secured creditor:Thisisacreditorwhosedebtissecuredonafixedorfloatingasset

of the company• Liquidator:Apersonappointedbycourttotakecontrolofthecompany’sassetsand

realise them• Receiver: A representative of secured creditors to enforce their security

EXAM CONTEXT

Theexaminertendstotestthestudent’sunderstandingofthedifferenttypesofwindingupandwill ask questions on differences of the various winding up. There is also need to understand the powersoftheliquidator.Thefollowingquestionshavebeentestedinpastpapers:05/02;12/01;06/01;12/00;07/00:


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INDUSTRY CONTEXT

There aremany companies that have been incorporated so far and as hence this is a veryrelevantchapterintheindustry.Manyknowtheprocedureinvolvedtoregisteracompanybutfewareawareoftheprocedurestakentodissolve.Creditorsandevenmembersareunawareof what to do when the company starts making losses. This chapter shows what happens in the industrybehindcloseddoors.

Fast forward:

Ø Windingupcanbesaidtobethedeathofacompany.Ø They aremainly compulsory, voluntary (members and creditors) and subject to the

court’ssupervision.

12.1 WINDING-UP

METHOD OF DISSOLUTION

(a) Acompanyisdissolved,i.e.ceasestoexist,whenitsnameisremovedfromtheregister.Itisusuallynecessary,beforeitcanbedissolved,toliquidateorwindupofcompanies(“liquidation”and“windingup”havethesamemeaning); i.e. theassetsarerealized,thedebtsarepaid, thesurplus(ifany) is returnedtomembers,andthecompany isthen dissolved. But the registrar has power, if it appears to him that the company is defunct to strike it off the register summarily without a previous liquidation: Companies Act Section 339.Thereisalsoanobsoleteprocedureforvoluntarywindingupunderthesupervisionofthecourt:CompaniesActSection304.

(b) Liquidationbeginswithaformaldecisiontoliquidate.Ifthemembersingeneralmeetingresolvetowindup,thecompanythatisavoluntarywindingup,whichmaybeeitheramembers’orcreditors’voluntarywindingupdependingonthecreditors’expectationthatthecompanywillorwillnotbeabletopayitsdebtsinfull.Creditorshaveadecisivepart in the liquidationofan insolventcompanysincetheremainingassetsbelongtothem.

(c) Althoughvoluntaryliquidationissimpler,quickerandlessexpensive,itispossibleonlyif a majority of votes is cast in general meeting on a resolution to liquidate. A company may,however,beobligedtowindupbyacompulsoryliquidationorderedbythecourtonapetitionusuallypresentedbyacreditororamember.

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(d) Whetherliquidationisvoluntaryorcompulsory,itisinthehandsoftheliquidator(orjointliquidators)whotakeovercontrolofthecompanyfromitsdirectors.Althoughliquidationmaybeginindifferentwaysandtherearedifferencesofprocedure,theworkingmethodismuchthesameineverytypeofliquidationandthesamelegalproblemscanarise.

(e) The sequence of topics below is the procedure by which compulsory, members’voluntaryandcreditors’voluntary liquidationbegins.Thelegalproblems,withwhichtheliquidatormaybeconcerned,areconsideredinthenextfollowingsession.

COMPULSORY LIQUIDATION/WINDING UP BY THE COURT

ApetitionispresentedtotheHighCourtunderSection218oftheCompaniesAct.Thepetitionwill specifyoneof thesevengrounds for compulsorywindingupandbepresented (usually)eitherbyacreditororbyamember(calleda“contributory”inthecontextofliquidation).

The nine standard grounds for compulsory winding up are listed in Section 219 as follows:

(a) Thecompanyhasby,specialresolution,resolvedthatitshouldbewoundupby the court

(b) Thecompanydoesnotdeliverthestatutoryreporttotheregistrarordefaultsinholding

the statutory meeting.

(c) Thecompanyhasnotcommenceditsbusinesswithinayearfromitsincorporationorhassuspendeditsbusinessforawholeyear.

(d) Thecompanyisunabletopayitsdebts;(seeSection220).

(e) Thenumberofmembersofthecompanyhasreduced,inthecaseofaprivatecompany,belowtwo,or,inthecaseofapubliccompany,belowseven.

(e) Thecourtconsidersthatitisjustandequitabletowindupthecompany.

(f) In the case of a company incorporated outsideKenya and carrying on business inKenya,liquidationproceedingshavebeencommencedinrespectofitinthecountryofitsincorporationorterritoryinwhichithasestablishedaplaceofbusiness.

(g) ThecompanyhasfailedtoholdthestatutorymeetinginaccordancewithSection130(5)

(h) Thecompanyhassuspendeditsbusinessforawholeyear.

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WHO MAY PETITION FOR WINDING UP?

UnderSection221of theAct,awindinguppetitionmaybepresented tocourtbyanyof thefollowing persons:

1. Thecompany:Acompanymaypetitionforitswindingupifmembershavesoresolvedbyspecialresolution.Suchpetitionsarenotcommon

2. Creditors: - A creditor may petition for the winding up of a company on the ground that it’s unable to pay its debts. Such a petitionermust prove that the company isinsolvent.

3. Contributory:UnderSection214oftheAct,contributorymeanseverypersonliabletocontributetotheassetsofthecompanyintheeventofitsbeingwoundup.Atcommonlaw,everycontributoryhasarighttopetitionforwindingup.

4. Member/shareholder other than a contributory: This is a petition by a fully paid upmember.SuchamemberhasnoLocus standi to petition for winding up and it is grantedonlyonexceptionalbasis

5. Attorneygeneral:UnderSection221(1)(iv)oftheAct,theAttorneygeneralmaypetitionforwindingupincircumstancesprescribedbySection170(2)oftheAct

6. Official receiver:Hemay petitionwherewinding up proceedings have been startedoutsideKenyaagainstacompanyincorporatedoutsideKenyabutcarryingonbusinessinKenya.Andforcontinuationofavoluntarywindinguporawindingupsubjecttothesupervision of the court as a compulsory winding up.

7. Commissioner of Insurance: Under Section 123 (1) of the Act, the commissionermay resent a winding up petition to wind up an insurance company in certain circumstances.

COMPANY UNABLE TO PAY ITS DEBTS

BySection220,acreditorwhopetitionsongroundsofthecompany’sinsolvencymayrelyonanyofthefollowingsituationstoshow(asheisrequiredtodo)thatthecompanyisunabletopayitsdebts:

(a) Acreditor(orcreditors)towhomthecompanyowesmorethanKshs.1,000servesonthecompanyat itsregisteredofficeawrittendemandforpaymentandthecompanyneglects, within the ensuing 21 cleardays,eithertopaythedebtortoofferreasonablesecurityforit.If,however,thecompanydeniesonapparentlyreasonablegroundsthatitowesthemoney,thecourtwilldismissthepetitionandleavethecreditortoestablishhisclaimbytakinglegalproceedingsfordebt.

(b) A creditor obtains judgment against the company for debt, attempts to enforce thejudgmentbut isunabletoobtainpayment, i.e.noassetsof thecompanyhavebeenfoundandseized.

(c) A creditor satisfies the court that taking account of the contingent and prospectiveliabilitiesofthecompanyitisunabletopayitsdebts.Thepetitionmaybebasedonastatementofestimatedassetsandliabilitiesorthecreditormayshowthatthecompanyisnolongerpayingitstradedebtsastheyfalldue.Butthisistheresidualcategoryandanysuitableevidenceofactualorprospectiveinsolvencymaybeadduced.

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Althoughnominimumamount isspecified for (b)or (c)aKshs1,000minimum is inpracticeapplied(itneednotallbeowedtoonecreditorifotherssupporthispetitionandtogethertheyclaim (Kshs.1,000ormore). Thedebtclaimedmustbeaspecifiedamount, i.e.aclaim forgeneraldamagesorforaspecificsumlessadeductionofuncertainamountwillnotdo.

Thepetitionerneednot be theoriginal creditor butmayhaveacquired thedebt, e.g. adebtcollectionagencymaypetitionifthedebtthenowestoit.

At the hearing, other creditors of the company may oppose the petition. If so, the court is likely to decide in favour of those to whom the larger amount is owing. But the court may also consider thereasonsforthedifferencesbetweenthecreditors:

Case: RE SOUTHARD & CO. (1979)

Aholdingcompanyarranged for itssubsidiary,ofwhich itwas the largestcreditor, togo intovoluntary liquidation. The holding company, as a creditor, later petitioned for the compulsory windingupofthesubsidiaryinordertoousttheoriginalliquidator.Thetradecreditors,towhomthesubsidiaryownedsmallersums,wishedthevoluntaryliquidationtocontinue.

Held:

Thecourtmightconsiderthereasonsforthepetitionandtheoppositiontoitandwasnotboundto accede to the wishes of the larger creditor. The petition was dismissed.

WINDING UP ON

“THE JUST AND EQUITABLE GROUND”

Unliketheotherfivegrounds,thisoneiswidelyinterpretedanditisnoobjectionthatthepetitionisbasedon factsunlike theothergrounds, (i.e. theejusdemgeneris ruledoesnotapply)orfactswithoutprecedent(asregardsthejustandequitablegrounditself.The just and equitable groundisusuallyreliedonbyamember(contributory)whoisdissatisfiedwithorisatloggerheads with the directors or controlling shareholders over the management of the company.Butsomethingmorethandissatisfactionisneededtomakeitjustandequitablethatthecompanyshouldbewoundup.Althoughthecourthasawidediscretionarypower,windingup orders have been made in the following situations:

a) The substratum of the company has gone,i.e.theonlymainobject(s)ofthecompany(itsunderlyingbasisorsubstratum)cannotbeorcannolongerbeachieved:

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Case: RE GERMAN DATE COFFEE CO.(1882)

The objects clause specified with much particularity that the sole object was to

manufacture coffee from dates under a German patent. The German government refused to grant a patent. The company manufactured coffee under a Swedish patent forsaleinGerman.Acontributorypetitionforcompulsory winding up.

Held:

Thecompanyexistedonly to “workaparticularpatent” andas it couldnot do so itshouldbewoundup.

But if there are two ormore alternative objects (in the proper sense objects ratherthanancillarypowers)inabilitytoachieveoneofthemdoesnotjustifywindingup:(Re Kitson & Co.(1946)twobusinesses-onewassold-petitiondismissed):

b) Thereisacompletedeadlockinthemanagementofthecompany’saffairs.

Cases:

(i) RE YENIDJE TOBACCO CO.(1946)

Twosoletradersmergedtheirbusinessesinacompanyofwhichtheyweretheonly

directorsandshareholders.Theyquarrelledbitterlyandonesuedtheotherforfraud.Meanwhile they refused to speak to each other and conducted boardmeetings bypassing notes through the hands of the secretary. The defendant in the fraud action petitionedforcompulsorywindingup,whichwasopposedbytheothermember.

Held:

“In substance these twopeopleare really partners” andbyanalogywith the lawofpartnership(whichpermitsdissolutionifthepartnersarereallyunabletoworktogether)itwasjustandequitabletoorderliquidation.

c) The members or directors are associated in the company on the basis of certainunderstandingsbutone(ormore)exerciseshislegalrightsagainstanotherinbreachof those understandings with results which are unfair. Such situations are sometimes referredtoasa“fraudontheminority”

Case: EBRAHIM v. WESTBOURNE GALLERIES(1973)

EandNcarriedonbusinesstogetherfor25years,originallyaspartnersandforthelast

10yearsthroughacompanyinwhicheachoriginallyhad500shares.EandNwere

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thefirstdirectorsandsharedtheprofitsasdirectors’remuneration;nodividendswerepaid.WhenN’ssonjoinedthebusiness,hebecameathirddirectorandEandNeachtransferred100sharestoN’sson.Eventually,thereweredisputes:Nandhissonusedtheirvotingcontrol ingeneralmeeting(600votesagainst400)toremoveEfromhisdirectorshipunderthepowerofremovalgivenbytheCompaniesAct1948Section184(Kenya,Section185).Esuedtohavethecompanywoundup.

Held:

The company should be wound up. N and his son were within their legal rights in removingEfromhisdirectorshipbutthepastrelationshipmadeit“unjustorinequitable”to insist on legal rightsandthecourtcouldinterveneonequitableprinciplestoorderliquidation.E’spetitionforreliefongroundsofoppressionofminorityfailedsincehefailed to make out a strong enough case for such relief.

d) Lossofconfidence It’sjustandequitabletowindupacompanyifmembershavejustifiablylostconfidence

in themanner inwhich it’sbeingmanaged.Thepetitionermust rove that therehasbeenaconsistentcourseofconductontheartofthemanagement,whichjustifiesthewinding up.

Thecompanyisabubble Acompanywillbewounduponthisgroundifit’sshownthattherewasnobona fi de

intentiontopursuethedeclaredobjectsofthecompanyorpursuethemlawfully.Itwasso held in Re London and County Coal company limited

e) Oppression on the minority It’s just and equitable towind up a company if its affairs are being carried on in a

manner oppressive to the minority. The petitioner must prove oppression and other requirementsprescribedbySection211oftheAct

f) Expulsion or Exclusion from management Ifamemberisunfairlyexcludedfromparticipatingintheaffairsofthecompanyasa

director,itbecomesjustandequitabletowindupthecompanyaswasthecaseinRe Westbourne Galleries limited.

PROCEEDINGS FOR COMPULSORY LIQUIDATION

When the petition is presented to the court a copy is delivered to the company in case it objects, and it is advertised so that other creditors may intervene if they wish. At the hearing,acreditorwhosedebtisunpaidislikelytosecureanorderforcompulsoryliquidation(ashisremedyoflastresort)unlessthecompany(paragraph8)oropposingcreditors(paragraph9)persuade the court to dismiss the petition.

If thepetition ispresentedbyamember (contributory) hemust show (inaddition to suitablegroundsforcompulsoryliquidation)that:

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(a) Thecompany issolventoralternatively refuses tosupply informationof itsfinancialposition.Thecourtwillnotordercompulsoryliquidationonamember’spetitionifhehas nothing to gain from it. If the company is insolvent, he would receive nothing since the creditors then take all the assets.

(b) Hehasbeenaregisteredshareholderforatleastsixofthe18monthsuptothedateofhispetition.Butthisruleisnotappliedifthepetitioneracquiredhissharesbyallotmentdirectfromthecompanyorbyinheritancefromadeceasedmemberorifthepetitionisbasedonthenumberofmembershavingfallenbelowtwo:CompaniesActSection221.

Apersonalrepresentativeofadeceasedshareholdermaypetitionbuthemustfirstobtainagrantofprobateetc.toestablishhisauthoritytorepresenttheestate:CompaniesActSection216.Thetrusteeinbankruptcyofabankruptcontributorymayalsopetitiononhisbehalf:CompaniesAct,Section .217.

EFFECTS OF AN ORDER FOR COMPULSORY LIQUIDATION

The effects of the order are as follows:

(a) The Official Receiver (an Official of the High Court whose duties relate mainly tobankruptcyofindividuals)becomesprovisionalliquidator;Section236

(b) Theliquidationisdeemedtohavebegunatthetime(possiblyseveralmonthsearlier)whenthepetitionwasfirstpresented.Ifthecompulsoryliquidationfollowsvoluntaryliquidationalready inprogress (seeSouthardCaseabove) liquidation runs from thecommencement of the voluntary liquidation: Section 226.

(c) Anydispositionofthecompany’spropertyandtransferofitssharessubsequenttothecommencement of liquidation is void unless the court orders otherwise, Section 224.

(d) Any legal proceedings in progress against the company are halted (and nonemaythereafterbegin)unlessthecourtgivesleave.Anyseizureofthecompany’sassetsafter commencement of liquidation is void: Sections 225 and 228.

(e) Theemployeesofthecompanyareautomaticallydismissed.Theprovisionalliquidatorassumesthepowersofmanagementpreviouslyheldbythedirectors.

Theassetsofthecompanyremainthecompany’slegalpropertybutundertheliquidator’scontrolunlessthecourtbyorderveststheassetsintheliquidator.Thebusinessofthecompanymaycontinuebutitistheliquidator’sdutytocontinueitwithaviewonlytorealisation,e.g.bysaleasagoingconcern.Anyfloatingchargecrystallises.Liquidation may invalidate charges and other previous transactions.

Within14daysofthemakingoftheorderforwindingupastatementofaffairsmustbedelivered

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totheliquidator(OfficialReceiver)verifiedbyoneormoredirectorsandbythesecretary(andpossiblybyotherpersons).Thestatementshowstheassetsandliabilitiesofthecompanyandincludes a list of creditors with particulars of any security which creditors may hold: Companies Act, Section 232.

The Official Receiver may require that others concerned in the recent management of thecompanyshalljoininsubmittingthestatementofaffairs.Thesemaybe(attheOfficialReceiver’sdiscretionunlessthecourthasgivendirections):

(a) Presentorpastofficersofthecompany,i.e.itsmanagement,

(b) Employeeswhoareorwhohavebeenintheserviceofthecompanywithinthepreviousyear if it is considered that they can provide the information required,

(c) Persons who have taken part in the formation of the company within the previousyear.

TheOfficialReceivermakesapreliminaryreporttothecourtonthecausesofthecompany’sfailure and states whether in his opinion he should make further investigation and report on suspectedfraud;Section233.Ifhedoesso,thismayleadontothepublicexaminationinopencourtofthosebelievedtobeimplicated(amuch-fearedsanction).

TheOfficialReceiveralsocallsseparatemeetingsofcreditorsandofcontributorieswithinonemonth of the order for liquidation: Section 236. Each meeting may nominate a permanent liquidator to replace theOfficialReceiverandalso representatives toserveasmembersofacommitteeofinspection(toworkwiththeliquidator).TheOfficialReceiverreportstothecourt,which may appoint a permanent liquidator and a committee of inspection. If no other liquidator isappointed(or if thepost fallsvacant) theOfficialReceivercontinuestoactas liquidator. Aliquidatormustbeanindividualandmaynotbeanundischargedbankrupt.

Notice of the order for compulsory liquidation and of the appointment of a liquidator is given to theregistrarandintheKenyaGazette.Whentheliquidatorcompleteshistask,hereportstothe court, which examines his accounts, and makes an order for dissolution of the company. TheorderissenttotheregistrarwhogivesnoticeofitintheKenyaGazetteanddissolvesthecompany: Sections 247 and 269.

Ifwhiletheliquidationisinprogresstheliquidatordecidestocallmeetingsofcontributoriesorcreditors, he may arrange to do so under powers vested in the court: Section 336.

RESOLUTION TO WIND UP VOLUNTARILY

Thetypeofresolutiontobepassedvarieswiththecircumstancesofthecase,asprovidedinSection271(1):

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(a) Ifthearticlesprovideforliquidationattheendofaspecifiedperiodoronthehappeningof an event, e.g. the completion of the transaction for which the company was formed, an ordinary resolution(referringtothearticles)suffices;or

(b) A company may, by special resolution (giving no reason), resolve to wind upvoluntarily

The winding up commences on the passing of the resolution. The company must within 14 daysafterthepassingoftheresolutiongivenoticeofitbyadvertisementintheKenyaGazette,andalsoinsomenewspaperscirculatinginKenya:Section272(1).

DECLARATION OF SOLVENCY

A voluntary winding up is a members’ voluntary winding up only if the directors make and delivertotheregistraradeclarationofsolvency:Section276(4).

This is a statutory declaration that the directors have made a full inquiry into the affairs of the companyandareoftheopinionthatitwillbeabletopayitsdebtsinfullwithinaspecifiedperiod,not exceeding 12 months.

Thedeclarationismadebyallthedirectorsor,iftherearemorethantwodirectors,byamajorityof them.

The declaration includes a statement of the company’s assets and liabilities as at the latestpracticabledatebeforethedeclarationismade.

The declaration must be:

(a) Madewithinthe30daysimmediatelyprecedingthedateofthepassingoftheresolutionfor winding up, and

(b) Deliveredtotheregistrarforregistrationbeforethatdate:Section276(2)

Iftheliquidatorlaterconcludesthatthecompanywillbeunabletopayitsdebtsheshallfurthernotifytheregistraraccordinglyandcallameetingofcreditorsandlaybeforethemastatementofassetsandliabilities:Section281(1)

Itisacriminaloffencepunishablebyfineorimprisonmentforadirectortomakeadeclarationofsolvencywithouthavingreasonablegroundsforit,i.e.ifthecompanyprovestobeinsolvent,hewillhavetojustifyhispreviousdeclarationorbepunished.

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In amembers’ voluntarywinding up, the creditors play no part since the assumption is thattheirdebtswillbepaid infull. Thereisnocommitteeof inspection(onwhichcreditorswouldbe represented). The liquidator calls special and annualmeetings ofmembers towhomhereports:

(a) Withinthreemonthsaftereachanniversaryofthecommencementofthewindinguptheliquidatormustcallameetingandlaybeforeitanaccountofhistransactionsduringtheyear: Section 282.

(b) Whentheliquidationiscomplete,theliquidatorcallsameetingtolaybeforeithisfinalaccounts.

Afterholdingthefinalmeeting,theliquidatorsendsacopyofhisaccountstotheregistrarwhodissolves the company three months later by removing its name from the register: Section283(4).

CREDITORS’ VOLUNTARY WINDING UP

If no declaration of solvency is made and delivered to the registrar, the liquidation process is a creditors’ voluntary winding upevenifintheendthecompanypaysitsdebtsinfull.

To commence a creditors’ voluntary winding up the directors convene a generalmeeting ofmembertopassaspecialresolution.Theyalsoconveneameetingofcreditors,sendingnoticestocreditorsindividuallyandadvertisingthemeetingonceintheKenyaGazetteandonceatleastinanewspapercirculatinginKenya:s.286(2).

Themeetingofmembersisheldfirstanditsbusinessis:

(a) Toresolvetowindup. (b) Toappointaliquidator (c) Tonominaterepresentativestobemembersofthe committee of inspection.

Thecreditors’meetingisconvenedforthesamedayatalatertimethanthemembers’meetingoritisheldthefollowingday.Oneofthedirectorspresidesatthecreditors’meetingandlaysbeforeitafullstatementofthecompany’saffairsandalistofcreditorswiththeamountsowingtothem.Thecreditors’meetingnominatesaliquidatoranduptofiverepresentativesofcreditorstobemembersofthecommitteeofinspection.Ifthecreditorsnominateadifferentpersontobeliquidator,theirchoiceprevailsoverthenominationbythemembers(subjecttoarightofappealtothecourt).

Itisnolongerpossibletopreventthecreditorsfromappointingthefirstliquidatorbyfailingtocallacreditors’meetingafterholdingamembers’meeting(toappointaliquidatoroftheirchoice)onshortnotice.(ThisdevicewasfirstdevelopedinRe Centrebind(1966)andiscolloquiallycalled“centrebinding”).Anymeetingofmemberscalledtoinitiateawindingupmustbeconvenedwithnot less than seven days notice.

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The main differences between a member’s and a creditor’s voluntary winding up are that:

(a) Inacreditors’voluntarywindingup,theliquidator,althoughresponsibletomembersaswellascreditors,isselectedbythecreditors.Inamembers’voluntarywindingupheisappointedbythemembers;

(b) Inacreditors’voluntarywindingup,theliquidatormustobtaintheapproval(usually)ofthecommitteeofinspectionfortheexerciseofcertainstatutorypowers.Inamembers’voluntarywindingup,heobtainsapprovalfromthemembersingeneralmeeting;

(c) Thereisacommitteeofinspectioninacreditors’voluntarywindingupwithuptofivemembers,amajorityofwhombeingappointedbythecreditors:Section288(1).Thereisnocommitteeinamembers’voluntarywindingup.

Theeffectisthatthecreditorshaveadecisiveinfluenceontheconductoftheliquidation.Thisisreasonablesinceitisassumed(intheabsenceofastatutorydeclarationofsolvency)thatthecompanyisunabletopayitsdebtsinfull.Theremainingassetswill,therefore,berealisedforthebenefitofthecreditorsandthemembersgetnothing(unlessthecompanyprovestobesolventafterall).

Meetingsareheldinthesamesequenceasinamembers’voluntarywindingupbutthemeetingsofcreditorsarecalledatthesameintervalsasthemeetingsofmembersandforsimilarpurposes.

THE EFFECT OF VOLUNTARY WINDING UP

The main difference in legal consequences between a compulsory and voluntary winding up are:

(a) Avoluntarywindingupcommencesonthedaywhentheresolutiontowindupispassed.It is not retrospective,

(b) TheOfficialReceiverdoesnotbecomeprovisionalliquidator.Themembersorcreditorsselectandappointtheliquidatorandheisnotanofficerofthecourt,

(c) Thereisnoautomaticstayoflegalproceedingsagainstthecompanynorarepreviousdispositionsorseizureofitsassetsvoid.Buttheliquidatorinavoluntarywindinguphas a general right to apply to the court to make any order which the court can make inacompulsoryliquidation.Hewoulddosotopreventanycreditorobtaininganunfairadvantage over other creditors,

(d) The liquidator replaces the directors in the management of the company (unlesshe decides to retain them). The employees are not automatically dismissed by

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commencement of voluntary liquidation. But insolvent liquidation may amount to repudiationoftheircontractsofemployment(andprovisionsofthestatutoryemploymentprotectioncodeapply).

WINDING UP SUBJECT TO THE SUPERVISION OF

THE COURT

AhybridcategoryofwindingupcreatedbySection304oftheAct.UnderthisSection,aftertheresolution for voluntary winding up is passed, the court may on application order that the winding up continue as voluntary but subject to such supervision and with such liberty of creditors,contributoriesandotherstoapplyasthecourtmaydeemfit.

UnderSection306oftheAct,thecourtmaywhilemakingthecontinuationorderorbyasubsequentorder,appointanadditionalliquidator.However,suchaliquidatorhasthesamepowersandissubjecttothesameobligationsasoneappointedinavoluntarywindingupbutmayberemovedbythecourtifreasonablecauseisshownthecourthasjurisdictiontofillthevacancyarising.

LIQUIDATORS

APPOINTMENT AND DUTIES

a) Theofficialreceivershallbyvirtueofhisofficebecometheprovisionalliquidatorandshall continue to act as such until he or another person becomes liquidator and iscapableofactingassuch.

(b) Theofficialreceivershallsummonseparatemeetingsofthecreditorsandcontributoriesof the company for the purpose of determining whether or not an application is to bemade to the court for appointinga liquidator in theplaceof theofficial receiver. Providedthatwherethecourthasdispensedwiththesettlementofalistofcontributoriesitshallnotbenecessaryfortheofficialreceivertosummonameetingofcontributories.

(c) Thecourtmaymakeanyappointmentandorder required togiveeffect toanysuchdeterminationand,ifthereisadifferencebetweenthedeterminationsofthemeetingsof the creditors and contributories in respect of the matter aforesaid, the courtshall decide thedifferenceandmakesuchorder thereonas thecourtmay thinkfit.

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(d) Inacasewherealiquidatorisnotappointedbythecourt,theofficialreceivershallbethe liquidator of the company.

(e) Theofficialreceivershallbyvirtueofhisofficebetheliquidatorduringanyvacancy.

(f) Aliquidatorshallbedescribed,whereapersonotherthantheofficialreceiverisliquidator,bythestyleof“theliquidator”,and,wheretheofficialreceiverisliquidator,bythestyleof“theofficialreceiverandliquidator”,oftheparticularcompanyinrespectofwhichheisappointedandnotbyhisindividualname.

THE LIQUIDATORS’ POWERS

Theliquidator(inanytypeofliquidation)hasnumerousstatutorypowersbutintheexerciseofsomeofthem,hemustobtaintheapprovalofthecourtorofthecommitteeofinspectionorofmeetingsofmembersorcreditors.Hemayalwaysapplytothecourtforanordertoresolveanyunusualdifficulty.

The more important statutory powers of the liquidator are:

(a) Toconductlegalproceedingsinthenameandonbehalfofthecompany.

(b) Tocarryonthebusinessofthecompanysofarasmaybenecessaryforthebeneficialwinding up thereof.

(c) Toappointanadvocateandtoassisthimintheperformanceofhisduties.

(d) Topayanyclassesofcreditorsinfull.

(e) Tomakeanycompromisewithcreditors.

(a) Tocompromisecalls:Section241(1).

RELEASE OF LIQUIDATORS

(1) When the liquidator of a company, which is being wound up by the court hasrealised all the property of the company, or so much thereof as can, in his opinion, be realised without needlessly protracting the liquidation, and has distributed afinal dividend, if any, to the creditors, and adjusted the rights of the contributoriesamong themselves, and made a final return, if any, to the contributories, or hasresigned, or has been removed from his office, the court shall, on his application,cause a report on his accounts to be prepared, and, on his complyingwith all therequirementsof thecourt,shall take intoconsideration the reportandanyobjectionwhichmay,beurgedbyanycreditororcontributoryorpersoninterestedagainstthe

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release of the liquidator, and shall either grant or withhold the release accordingly.

(2) Wherethereleaseofaliquidatoriswithheld,thecourtmay,ontheapplicationofanycreditororcontributoryorpersoninterested,makesuchorderasitthinksjust,chargingtheliquidatorwiththe consequences of any act or default which he may have done or made contrary to his duty.

(3) Anorder of the court releasing the liquidator shall dischargehim fromall liability inrespectofanyactdoneordefaultmadebyhimintheadministrationoftheaffairsofthecompanyorotherwiseinrelationtohisconductasliquidator,butanysuchordermayberevokedonproofthatitwasobtainedbyfraudorbysuppressionorconcealmentofany material fact.

(4) Wherethe liquidatorhasnotpreviouslyresignedorbeenremoved,hisreleaseshalloperateasaremovalofhimfromhisoffice.

COMMITTEE OF INSPECTION

Acommitteeofinspectionisappointedinacompulsoryliquidationandinacreditors’voluntaryliquidation.Itusuallycomprisessuchnumberofrepresentativesofmembersandofcreditorsasmaybeagreedonbythemeetingofcreditorsandcontributors.Iftheydisagree,thecourtdecides the number (in a creditors’ voluntary liquidation limited to amaximumof five). Thecommitteemeetsonceamonthunlessotherwiseagreedandmaybesummonedatanytimebytheliquidatororbyamemberofthecommittee:Section249.

The general function of the committee is to work with the liquidator, to supervise his accounts, toapprovetheexerciseofcertainofhisstatutorypowersandtofixhisremuneration.Liketheliquidator himself,membersof the committeeare ina fiduciarypositionandmaynot secureunauthorisedpersonaladvantages,e.g.bypurchaseofthecompany’sassets.

CALLS ON CONTRIBUTORIES

Everypersonwhoisamemberofthecompanyatthecommencementofwindingupandeverypastmember are in principle liable to contribute to the company’s assets whatevermay berequired toenable it topay itsdebts in full. Presentandpastmembersare thereforecalled“contributories”. This serves to give present and pastmembers the status of contributorieswith, for example, the right to petition for compulsory winding up. But if the company is limited bysharesanditsissuedsharesarefullypaid,thecontributorieshavenoliabilitytocontributeanything in normal circumstances.

A contributory may be liable to contribute in the following circumstances:

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(a) Iftheshareswhichheholdsorpreviouslyheldarepartlypaidorifitis,foundthattherulesonconsiderationhavebeenbreachedintheallotmentofsharesasfullypaid.

(b) Ifthecompanyislimitedbyguarantee.

(c) Ifthecompanyisunlimited.

Asexplainedbelowthepersonswhoaremembersatthetimewhenliquidationcommencesareprimarilyliable(whenthereisanyliability).Theliabilityofpastmembersisveryrestricted.

Ifitisnecessarytomakecallsoncontributories,theliquidatordrawsupa list “A”ofcontributorieswhoweremembersatthecommencementofthewindingupanda list “B”ofcontributorieswhowerememberswithintheyearprecedingthecommencementofwindingup.AlistBcontributoryhasliabilitylimitedbythefollowingprinciples:

(a) Heisonlyliabletopaywhatisdueontheshareswhichhepreviouslyheldandonlysomuchoftheamountdueonthosesharesasthepresentholder(alistAcontributory)isunabletopay.

(b) Hecanonlyberequiredtocontribute(withinthelimitsstatedin(a)above)inordertopaythosedebtsofthecompanyincurredbeforeheceasedtobeamemberwhicharestill owing.

Asstatedabove,apastmemberceases tobe liablealtogether (onpartlypaidshares) if thecompanycontinues(withoutgoingintoliquidation)forayear.

TRANSACTIONS ARISING IN LIQUIDATION

Incollectioninandrealisationofassetsinordertopaythecompany’sdebtsandthentodistributeanysurplustomemberstheliquidatorwillhavedealingswithcreditors,securedandunsecured,withmembersandothers.Hemayhavetoenforceclaimsonbehalfofthecompanyagainstthosewhopreviouslymanageditsbusiness.Hehasalsotoconsiderwhetherthechargesonthecompany’sassetsonwhichsecuredcreditorsrelyarestillvalid.Thistopicisconcernedwiththelegalaspectsoftheseproblemsandtransactionsoftheliquidator.

ASSETS IN THE POSSESSION OF CREDITORS

If the creditor has seized assets in the course of executing a judgment for debt against thecompanyandatthecommencementofthewindinguporonreceivingnoticethatitisabouttobeginthecreditorhasnotcompletedtheprocessofrecoveringwhatisowedtohim,theliquidatormay compel him to return the asset to the company.

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DISCLAIMER OF ASSETS

The liquidator has a statutory right of disclaimer of assets: Section 135. The rules are:

(a) Hemustobtainleaveofthecourt.

(b) Therightofdisclaimerislimitedtopropertyofthefollowingkinds:

(i) Landburdenedwithonerouscovenants. (ii) Shares. (iii)Unprofitablecontracts. (iv)Otherpropertywhichisdifficulttosellbecauseoftheburdensattachedtoit.

(c) Theliquidatormustdisclaimwithinaperiodof12months(unlessthecourtextendstheperiod).Theperiodisreckonedfromcommencementofwindinguporthedatawhenthe liquidator becameaware of the property if thiswasmore than onemonth afterthat commencement. Moreover, the other party may serve on the liquidator a notice requiring him within 28 days, to state whether he intends to disclaim. If the liquidator does not within that period declare an intention of disclaimer, he losses the right to do so.

(d) Anypersonwhosufferslossbythedisclaimerbecomesacreditorofthecompanyfortheamountofhisloss.Ifthepropertydisclaimedisaleasewhichhasbeenmortgagedorsub-letthecourtmayvestthepropertydisclaimedinthemortgageeorsub-lessee.

PROOF OF DEBTS

Manyof therulesofbankruptcyapply to thedischargeof thecompany’sdebts:Section310.The liquidatormustobviously require satisfactoryevidence thata creditor’s claim isproperlyadmissibleasaliability.Thisisdone(wherenecessary)byaprocedurefor“proofofdebts”.

Ifthecompanyissolvent,everykindofdebtwhichislegallyenforceablemaybeadmitted.Ifitisinsolvent,unliquidatedclaimsintortarenotadmissible.Buttheinjuredpartymaybepermittedtobringanactionagainstthecompanyintortsothathisclaimmaybeconvertedbytheawardofdamage into a liquidated sum so long as it is liquidated when the claimant comes into prove.

Astatute-barreddebtshouldberejectedsinceitisnotlegallyenforceable.Butinamembers’voluntarywindingup,theliquidatormaywiththeconsentofallcontributoriespaysuchadebt.Thegeneralrulesonstatute-barreddebtsare:

(a) Inanormalcase,adebtbecomesstatute-barred(i.e.thecreditormaynolongertakelegalproceedingstoenforcepayment)ifitremainsunpaidforsixyearsandthecreditordoes not within that time commence legal proceedings to recover it.

(b) Thecompanybecomesliableagaintopayastatute-barreddebt(aftersixyears)if it

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issuestothecreditorawrittenacknowledgementofitsindebtedness.

The liquidator must also consider whether any debts of the company arise fromcontracts, which are ultra vires or ultra vires thecompanybutmadebythedirectorswithout authority. The liquidator must according to his judgment of the legal position either.

(a) Rejectthecreditor’sclaimasinvalidifthatispossible.

(b) Considerclaimingcompensationfromthedirectorswhomadetheunauthorisedcontracton the grounds of their misfeasance under Section 323.

SECURED CREDITORS

A secured creditor may:

(a) Realisehissecurityandproveasanunsecuredcreditorforthebalance(ifany)ofhisdebt.

(b) Valuethesecurityandproveforanybalance.Inthiscase,theliquidatormayeitherredeemthesecurityatthecreditor’svalueorrequireittobesold.

(c) Relyonhissecurityandnotproveatall;theliquidatormaythenredeembypaymentinfull.

(d) Surrenderhissecurityandproveforthewholedebt.

Asecuredcreditorwhoproveshisdebtmustdisclosehissecurityandproveonlyforthebalanceas an unsecured creditor.

Theliquidatormayfindthatthesecuritygivenbyafloatingcharge over the undertaking and assets ofthecompanyhasbeenenforced(beforeliquidationbegan)bytheappointmentofareceiverandmanagerwhoisinchargeoftheentirebusinessandpropertyofthecompany.Theliquidatorshouldconsiderwhether thechargehasbecome invalidby reasonof thecommencementofliquidation(paragraph10below).If,however,itisvalidtheliquidatormustwaittoseewhethertherewillbeanysurplus from thecompany’sassets,which the receiverwillpayover tohimwhenthesecuredcreditorswhoappointedthereceiverhavebeenpaidinfull.Thesequenceofeventsmaybereversedi.e.theliquidatorcausesafloatingchargetocrystalliseanda receiver is appointed after the liquidator has taken control. In that case, the liquidator must hand over thebusinesstothereceiversinceherepresentscreditorswhohaveapriorclaim.

Theliquidationitselfmayrenderachargeoverthecompany’sassetsvoid in any of the following circumstances:

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(a) Thechargewasnotregisteredwithin42daysofcreationasrequiredbySection96;

(b) The charge is a floating charge created within the period of 12 months beforecommencementofliquidation(paragraph24below).

(c) Thechargeisvoidasafraudulentpreference(paragraph28below).

Ifthechargeisvoid,thereceiver’spowersandappointmentlapseandhemustaccounttotheliquidator for his transactions and the assets of the company still under his control.

If there are not sufficient other assets to pay preferential debts those debts are paid out ofpropertysubjecttoafloatingchargeinprioritytothatcharge.Itisthedutyoftheliquidatortoensurethatdebtsarepaidintheirdueorderofpriority.

UNSECURED ORDINARY DEBTS

Asecuredcreditorobtainspayment(totheextentthathissecurityisadequatei.e.ifitexceeds invaluetheamountowingtohim)becausehehasavalidpriorclaimto thatsecurity. Unsecured creditors are paid out of the remaining assets, i.e. the aggregate of:

(a) Anysurplusvalueobtainedbysecuredcreditorsinrealisingtheassets,whicharetheirsecurity and paid over to the liquidator.

(b) Anyassetswhicharenotsubjecttochargesgiventosecuredcreditors.

But two special claims have to be given their due priority, i.e.

(a) Costsofwindingupincludingthelegalexpensesandliquidator’sremuneration.

(b) Preferentialunsecureddebts.

The order of application of assets is, therefore, as follows:

(a) Securedcreditorswhohavefixedchargesareentitledtobepaidoutoftheirsecuritysofarasitsuffices.Ifthesecurityisinsufficientinvaluetopaythedebtinfull,thecreditorrankasanunsecuredcreditorforthebalance;

(b) Thecostsofwindinguparepaidnext,i.e.theyrankbeforefloatingcharges.

(c) Preferentialunsecureddebts(paragraph15below)arepaidnext,i.e.theyrankbefore

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floating charges in so far as there are noother assets available to paypreferentialdebts.Ifthefloatingchargecoverstheentireundertakingandpropertyofthecompany(asisnormalinmodernpractice)therewillbenounchargedassets.

(d) Debtssecuredbyfloatingchargescomenextinorder.

(e) Unsecurednon-preferentialdebtscomenext. (f) Deferreddebtscomelastinorder.

PREFERENTIAL DEBTS

Theseunsecureddebtswhichrankaheadofafloatingchargeandnon-preferentialdebtsare:

(a) Oneyear’s taxes, i.e.corporationtax,PayAsYouEarn incometaxdeducted,rates,ValueAddedTaxunpaidatthe“relevantdate”.Therelevantdateisdefinedas:

(i) Thedateoftheorderforcompulsoryliquidation(oranyearlierorderfor appointmentofaprovisionalliquidator).

(ii) Thedateofpassingtheresolutiontowindupvoluntarily.

Ifmore than one year’s tax is outstanding, the IncomeTaxDepartmentmay selectwhicheveryearyields the largestamountof corporation tax; inothercases it is thelatestyear’staxwhichisapreferentialdebt.

(b) Wagesandsalaryofanemployee,i.e.clerk,servant,workmanorlabourer(includingcommissionorpieceworkpayments)ofthefourmonthsuptotherelevantdatelimitedtoamaximumofKshs.4,000owedtoeachindividualemployee,accruedholidaypayandemployer’sNationalSocialSecurityFund(NSSF)contributions.Adirectorisnotanemployeeinrespectofaclaimforunpaidfees-buthemaybeinrespectofsalaryifhe has a contract of service.

Loan creditors and landlords are subject to special rules in certain circumstances:

(a) Ifaperson(usuallyabank) lendsmoney to thecompany toenable it topaywageswhich,ifunpaid,wouldbepreferentialdebts,hehimselfbecomesapreferentialcreditorinrespectofthatpartofhisloan,whichisusedtopaypreferentialwagedebts.

(b) A landlord’s remedy if rent is unpaid is to seize and sell the tenant’s goods on thepremises(called“levyingdistress”).Ifhedoesnotwithinsixmonthsbeforecompulsoryliquidation commence, he must give up the proceeds if the liquidator requires them forpaymentofpreferentialdebts.Theruledoesnotapplyinavoluntaryliquidation:CompaniesAct,Section311(7).

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DEFERRED DEBTS

Adebtowedtoamemberasmember,i.e.anunpaiddividend,isadeferreddebtpaidonlywhenordinarydebtshavebeenpaidinfull.

RIGHTS OF EMPLOYEES

The effect of liquidation is often to terminate the contracts of service of employees of the company. Thecompanymayowethemarrearsofwagesorsalaries,whichcanbepreferentialdebtswhollyor in part.

Ifthedebtsarepaidinfull,theliquidatorshouldapplywhatremainsinrepaymentofcapitalpaidonsharesand thendistributeany residue to thoseentitled to thesurplus. Unlessotherwisestated, all shares rank equally. But the articles often provide that preference share capital is to berepaidinpriority(withtheimplicationthatpreferencesharesdonotcarryarighttoparticipateinanysurplusleftafterallpaidupsharecapitalhasbeenpaid).

Acompanymay(byitsmemorandumorarticlesorbyaresolutionpassedingeneralmeeting)authorisedistributionofassets(afterpaymentofdebts,whichmusthavepriority)nottomembersbutto,forexample,acharityortoemployeesofthecompany.Paymentstoemployeesmadeafterthecompanyhasceasedtocarryonorhassolditsbusinessarenotwithinitspowers:

AVOIDANCE OF FLOATING CHARGES

UnderSection314,liquidationautomaticallyrendersvoidanyfloatingchargecreatedwithintheperiodof12monthsbeforecommencementofliquidationsubjecttothefollowingexceptions:

(a) Validifthecompanywassolvent,atthetimewhenthechargewascreated.Acompany

isnotsolventunlessitcanpayitsdebtsinfullastheyfalldue.

(b) Ifthecompanywasnotsolventthefloatingchargeisstillvalidassecurityforcashpaidtothecompany(withinterestatsixpercentperannum)afterthechargewascreatedand in consideration of the loan.

The general purpose of the rule is to prevent an unsecured creditor of an insolvent company from gettingadvantageoverothercreditorsbyobtainingafloatingchargetosecureanexistingdebtatatimewhenthecompanyisheadingtowardsinsolventliquidation.Itisonlythecharge(as security)notthedebtitselfwhichbecomesvoid.

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If the charge is created to secure a loan of new money, the rule is generously interpreted.

Case: RE F AND E STANTON(1929)

Alenderagreedtolendmoneytoacompanyonthesecurityofafloatingcharge.Themoneywaslentbutthechargewasnotcreateduntilafterwards.Afewdaysafterthecreation of the charge, the company went into liquidation.

Held:

The charge was valid since the loan was made in consideration of the promise of security.Itwasnotmaterialthatthemoneywaslentbeforethechargewascreated.

Ontheotherhand, ifmoneyis lentafterafloatingchargeiscreatedbut isused(aswasintended)topayoffanunsecureddebt(ofthesamecreditor)existingwhenthechargewascreated,thiswillnotbetreatedasanewloanandthechargewillbevoid(assecurityforthelaterloan).

In determining the date when money is lent through transactions on running account the rule in Clayton’s Case is applied, i.e. any repayment is applied to pay off the earliest advance.

Case: RE YEOVIL GLOVE CO(1965)

Atthetimewhenthefloatingchargewascreated,thecompanyhadabankoverdraftofabout68,000pounds.Overthenextfewmonths,itpaidinchequestotaling111,000poundsanddrewchequestotaling110,000pounds.Atthecommencementofliquidation(within12monthsofcreatingthecharge)thedebtbalanceontheaccountwas67,000pounds, i.e. almost the same as when the charge was created.

Held:

Theloanof68,000poundsatthedatewhenthechargewascreatedhadbeenrepaidbythesubsequentcreditsof111,000poundstotheaccount.Thebalanceof67,000pounds owing at the commencement of liquidationwas “newmoney” lent after thechargewascreated(i.e.partofthe110,000poundsdrawnout)andsothe charge was a valid security for that loan.

Fraudulent Preference

UnderSection312,anydispositionofthecompany’spropertyandanycreationofacharge,fixedorfloating,effectedduringtheperiodofsixmonthsbeforecommencementofliquidationsvoidasa fraudulent preference if:

(a) Donevoluntarily

(b) Donewiththeintentionofpreferringonecreditor(orsurety)overanother.

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(c) Atatimewhenthecompanywasinsolvent,i.e.unabletopayitsdebtsinfull.

A“disposition”includesthepaymentofadebt.Paymentofonecreditorwiththeintentionofpreferringhimtoothersisacommonexampleoffraudulentpreference(iftheotherconditionsaremet).

Case: RE M KUSHLER LTD(1943)

Thedirectorshadgivenpersonalguaranteesofthecompany’sbankoverdraft.Theyarranged that the company should pay its trade receiptsintotheaccountbutshouldnot pay its trade debtsastheyfellduewiththeresultthatthebankoverdraftwaspaidoff. Shortly afterwards, the company went into insolvent liquidation.

Held:

Thiswasfraudulentpreferenceandthebankmustrepaythesumsreceived.

A payment made or charge created under threat of legal proceedings is not voluntary andsoitcannotbetreatedasfraudulentpreferenceeventhoughitspurposeandeffectistotreatonecreditormorefavourablethantherest.

Anordinarycommercialpaymentofdebtsmadewithoutintentionofgivinganadvancemay not amount to fraudulent preference: Re Paraguassu Steam Tramway Co(1974).However,ithasrecentlybeenheldthatapaymentwillconstituteafraudulentpreferenceifthedebtor,atthetimeofmakingit,knewthathecouldnotpayhisdebtsastheyaroseand intended to pay one of his creditors in full ahead of the others.

Case: RE MATHEWS (1982)

Theproprietors of an insolvent small company (whowere awareof the insolvency)paidchequesintothecompany’sbankaccount.Twodayslater,thecompanyceasedtradingandtwodaysafterthattheproprietorsnotifiedthebankoftheterminationoftheirpersonalguaranteesofthecompany’sborrowing.

Held:

Banking cheques after a decision to stop trading was a fraudulent preference in favour ofthebanksinceatthattimetheproprietorsknewthattheothercreditorswouldnotbepaid(eventhoughtheyhonestlybelievedthattheywouldeventuallybepaid).

When a transaction is void as a fraudulent preference any charge created is void and anycashpaidorpropertytransferredbythecompanymustbereturnedtotheliquidator.Therecanbecomplicationswhenathirdparty,usuallyacreditor,hasgivensecurity(e.g.depositwiththelenderofthetitledeedsofthedirector’shouse)assecurityforthecompany’sdebt.Thepurposeofthefraudulentpreference(asintheKushlerCaseabove) isoften to releasea thirdparty fromhis involvement in thecompany’sdebt.Whenthedebtispaid(asafraudulentpreference)thelenderreturnstotheguarantorwhatever security the latter has given. When the lender has to return to the liquidator thepaymentreceivedhecannotrequiretheguarantortoreinstatehissecuritybutthelattercontinuestobe(orifthereisnopreviouspersonalguaranteebyhimbecomes)personallyliabletothelenderasaguarantorofthedebt:CompaniesActSection313


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Fraudulent Trading

UnderSection323, if thecourtfinds that thebusinessofacompany in liquidationhasbeencarried on with intent to defraud creditors or for any fraudulent purpose, it may declare that any personswhowereknowinglypartiestocarryingonthebusinessinthisfashionshallbeliablefordebtsofthecompanyasthecourtmaydecide.

Ithasbeensaidthat“ifacompanycontinuestocarryonbusinessandtoincurdebtsatatimewhenthereistotheknowledgeofthedirectors,noreasonableprospectofthecreditorsreceivingpaymentof thosedebts, it is, ingeneral,aproper inference that thecompany iscarryingonbusinesswith intent to “defraud” (perMaugham J. in William C Leitch Bros (No 1) (1932).Butinanothercase,thesamejudgesaidthattheremustbeevidenceof“realdishonesty”.NoKenyancasehasbeendecidedonthesection.

Various rules have been established to determine what is fraudulent trading:

(a) Onlypersonswhotakethedecisiontocarryonthecompany’sbusinessinthiswayorplaysomeactivepartareliable.Anemployeewhoisawarethatthedebtsincurredmaynotbepaidandwhomerelyfailstoinformthedirectorsofthesituationisnota“party”tocarryingonbusinesssinceitisnotadecisionoractiononhispart.

Case: RE MAIDSTONE BUILDING PROVISIONS(1971)

Thesecretaryofthecompanyalsoactedasafinancialadvisertothedirectors.Thesecretarywasawarebutdidnottellthedirectorsthatincarryingonitsbusiness,thecompanywasincurringdebtswhichitwasnotlikelytopay.Proceedingswerebroughtagainst the secretary for fraudulent trading.

Held:

Asthesecretarydidnottakethedecisiontocontinuetrading,hewasnota“party”tofraudulent trading. In so far as he had failed to provide information and advice which it washisdutytogive,hemighthavebeennegligentbutthatwasnotanissueintheseproceedings.

(b) “Carryingonbusiness”canincludeasingletransactionandalsothemerepaymentofdebtsasdistinctfrommakingtradingcontracts.

Case: RE SARFLAX(1979)

The company owed money to trade creditors and also had outstanding against it a largeclaimforbreachofcontractwhichitdisputed(thoughtheclaimanthadobtainedjudgmentinhisfavourintheItaliancourts).Thedirectorsusedtheremainingassetstodischargethetradedebts.Whenthecompanywentintoliquidation,theliquidatorsoughtadeclarationthatthedirectorshadcarriedonbusinesswithintenttodefraudtheItalian creditor.

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Held:

Inpayingtheotherdebts, thedirectorshad“carriedonbusiness”but thiswasnotacaseof“intenttodefraud”theItalianclaimant,whoseclaimtheydidnotaccept.(Theissueofpossiblefraudulentpreferenceofthetradecreditorswasnotraised).

Iftheliquidatorconsidersthattherehasbeenfraudulenttrading,heshouldapplytothecourtforanorderthatthoseresponsible(usuallythedirectors)areliabletomakegoodtothecompanyallorsomespecifiedpartofthecompany’sdebts.Iftheliquidatordoesnotdothisacreditor,mightbeabletoobtainanorderthatthoseatfaultmustpaythecreditor direct: Re Cyone Distributors(1967).Theliquidatorshouldalsoreportthefacts to the Attorney General so that he may institute criminal proceedings.

Misfeasance

UnderSection324,misfeasanceproceedingsmaybe institutedagainst adirector, promoter,manager,liquidatoror“officer”(includinganauditor)ofacompanyinliquidationeithertorecoverthecompany’spropertyfromhimortoclaimcompensationforthelosstothecompanycausedbyhismisfeasance.

Themostobviouscaseofmisfeasance iswhereadirectororotherofficerof thecompany isfoundtohavemisappropriatedpropertyofthecompany.Hecanbecompelledbymisfeasanceproceedingstoreturnit.Hisconductmayalsobecriminalmisappropriationofpropertyforwhichhecanbeprosecuted.

The other type of misfeasance case is where the company has suffered loss owing to the incompetenceorneglectofadirectororotherofficer.Itisnot,however,easytoestablishthattherehasbeenbreachofafiduciarydutysuchthatanordershouldbemade(ongroundsofmisfeasance)forpaymentofcompensation.Forsomelesserdefault,theliquidatorcouldbringan action for negligence.

Inthecontextofmisfeasanceproceedings,anauditorisexceptionallyan“officer”whocanbeliable:heisnotan“officer”inanyothersituationsincehehasnomanagementfunctions.

Areceiverisnotan“officer”whocanbeheldliable(ifthecompanylatergoesintoliquidation)formisfeasance.

Case. RE B JOHNSON & JOHNSON CO (BUILDERS)(1955)

Misfeasance proceedingswere brought against a receiver on the ground that he had in hismanagement of the company’s business taken decisions which were “detrimental from thecompany’spointofview”,e.g.closingdownpartsofitsbusiness.

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Held:

Areceiverisarepresentativeofthesecuredcreditorsbyorforwhomheisappointed.Heisnotanofficerofthecompanywhocanbeliableformisfeasance.If,however,areceiverdoesnotactbonafide(i.e.honestly)thecompanymighthaveaclaimagainsthimbutnotmisfeasance.

OTHER LEGAL PROCEDURES

The courtmay order the examination in private or public (i.e. open court) of an officer of acompany in liquidation or of any person known or suspected to have its property or information aboutitinhispossession.Publicexaminationisorderedonlyincasesofsuspectedfraud.

Concealment of information from a liquidator, falsification of company records and wrongfuldisposal of property of a company in liquidation may give rise to criminal proceedings against the person at fault.

Revival of a Dissolved Company

Liquidation leads on to dissolution of the company. The court may, however, within the ensuing twoyearsorderthatdissolutionberescindedandthecompanyrestoredtotheregister-usuallybecausesomeassetorliabilitypreviouslyoverlookedhascometolight:CompaniesAct,Section338.

Liquidators and Receivers

The distinction between liquidators and receivers must be kept clear:

(a) Areceiverisarepresentativeofsecuredcreditorsappointedbythem(orbythecourtontheirbehalf)toenforcetheirsecurity,i.e.totakecontrolofthecompany’sassetssubjecttoachargeandtoraisemoneyfromthoseassetstopaythesecureddebt.Ifthedebtispaid,thereceivervacatesofficeand the directors resume full control.

(b) A liquidator is appointed by the court (compulsory liquidation) or by members andcreditors(creditors’voluntaryliquidation).Histaskistotakecontrolofallthecompany’sassetswithaviewof their realisationand thepaymentofall debtsof thecompanyanddistributionofanysurplustomembers.Attheendofliquidation,thecompanyisdissolved.

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There are a number of points of similarity:

(a) Inacompulsory(butnotavoluntary)liquidationthedirectorshavetosubmitastatementofaffairstotheOfficialReceiverasprovisionalliquidator.Ifareceiverisappointedunderafloatingchargecoveringthecompany’sundertakingasawholehetooisentitledtobegiven a statement of affairs.

(b) Accountantswhospecialiseininsolvencymaybeappointedasliquidatorsorasreceivers(sometimestheycombinethesepositionsinthesamecompanybutprofessionalopinionintheU.K.hashardenedagainstthispositionsincetherecanbedifficultconflictsofinteresttoresolvebetweenunsecuredcreditorsandmembersononesideandsecuredcreditorsontheother).

(c) Areceiverappointedunderafloatingchargeisalsoamanagerofthebusiness(oramanagerisappointedtoassisthim).Hisfunctionistocontinuetocarryonthebusinessonagoingconcernbasis.Theliquidator’sfunctionistosellthecompany’sassetsonthebesttermshecanget.Asclosurecosts(redundancypaymentstoemployeesetc.)canbeheavyaliquidatormaydecidetocarryonthebusinesswithaviewtosellingitasagoingconcern.Butthisisonlyoneofthealternativesopentohim;

(d) Neither liquidator nor receiver usually has the assets of the business vested in hislegalownership(thoughaliquidatormayobtainacourtorderforassetstobevestedinhimunderCompaniesAct,Section240-butthisisnotcommon).Bothliquidatorandreceiverhavecontrolofthecompany’sassets.

Therearealsosignificantdifferences:

(a) Aliquidatorhasnumerousstatutorypowers.Areceivermustrelyonthefewpowersgivenbythedebentureunderwhichheisappointed(orbythecourt).

(b) Areceiver ispersonally liableon thecontractswhichhemakes for thecompany. Aliquidatorhasnosuchliability.Buteither,ifhefailstoperformhisdutiesproperly,maybecalledtoaccountinvariousways.

Offences Antecedent to or in Course of Winding Up

Section 318(1) statesthatIfanyperson,beingapastorpresentofficerofacompanywhichatthetimeofthecommissionoftheallegedoffenceisbeingwoundup,whetherbyorunderthesupervisionofthecourtorvoluntarily,orissubsequentlyorderedtobewoundupbythecourtorsubsequentlypassesaresolutionforvoluntarywindingup:

(a) Doesnottothebestofhisknowledgeandbelieffullyandtrulydiscovertotheliquidatoralltheproperty,movableandimmovableofthecompany,andhowandtowhomandfor that consideration and when the company disposed of any part thereof, except such partashasbeendisposedofintheordinarywayofthebusinessofthecompany

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(b) Doesnotdeliveruptotheliquidator,orashedirects,allsuchpartofthemovableandimmovablepropertyofthecompanyasisinhiscustodyorunderhiscontrol,andwhichheisrequiredbylawtodeliverup

(c) Doesnotdeliveruptotheliquidator,orashedirects,allbooksandpapersbelongingtothecompanyandwhichheisrequiredbylawtodeliverup.

(d) Within12monthsbeforethecommencementofthewindinguporatanytimethereafterconcealsanypartofthepropertyofthecompanytothevalueofKshs.200orupwards,orconcealsanydebtduetoorfromthecompany.

(e) Within12monthsnextbefore thecommencementof thewindinguporat any timethereafter fraudulently removes any part of the property of the company to the value of Kshs200orupwards.

(f) Makesanymaterialomissioninanystatementrelatingtotheaffairsofthecompany.

(g) Knowingorbelievingthatafalsedebthasbeenprovedbyanypersonunderthewindingup, fails for the period of a month to inform the liquidator thereof.

(h) After the commencementof thewindingupprevents theproductionof anybookorpaper affecting or relating to the property or affairs of the company.

(i) Withintwelvemonthsnextbeforethecommencementofthewindinguporatanytimethereafter, conceals, destroys,mutilates or falsifies, or is privy to the concealment,destruction,mutilationorfalsificationof,anybookorpaperaffectingorrelatingtotheproperty or affairs of the company.

(j) Within12monthsnextbefore thecommencementof thewindinguporat any timethereaftermakes or is privy to themaking of any false entry in any book or paperaffecting or relating to the property or affairs of the company.

(k) Within12monthsnextbefore thecommencementof thewindinguporat any timethereafter fraudulently parts with, alters or makes any omission in, or is privy to the fraudulent parting with altering or making any omission in, any document affecting or relating to the property or affairs of the company.

(l) After thecommencementof thewindinguporatanymeetingof thecreditorsof thecompany within twelve months next before the commencement of the winding upattemptstoaccountforanypartofthepropertyofthecompanybyfictitiouslossesorexpenses.

(m) Haswithin12monthsnextbeforethecommencementofthewindinguporatanytimethereafter,byanyfalserepresentationorotherfraud,obtainedanypropertyfororonbehalfofthecompanyoncreditwhichthecompanydoesnotsubsequentlypayfor.

(n) Within12monthsnextbefore thecommencementof thewindinguporat any timethereafter,underthefalsepretencethatthecompanyiscarryingonitsbusiness,obtainsoncredit,fororonbehalfofthecompany,anypropertywhichthecompanydoesnotsubsequentlypayfor.

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(o) Within12monthsnextbefore thecommencementof thewindinguporat any timethereafter pawns, pledges or disposes of any property of the company which has beenobtainedoncreditandhasnotbeenpaidfor,unlesssuchpawning,pledgingordisposingisintheordinarywayofthebusinessofthecompany.

(p) Is guilty of any false representation or other fraud for the purpose of obtaining theconsent of the creditors of the company or any of them to an agreement with reference to the affairs of the company or to the winding up.

(q) Haswithin12monthsnextbeforethecommencementofthewindingupbeenprivytothecarryingonofthebusinessofthecompanyknowingthatthecompanywasunabletopayitsdebts.

(r) Hasbeenprivytothecontractingbythecompanyofanydebtprovableintheliquidationwithouthavingatthetimewhenthedebtwascontractedanyreasonableorprobablegroundofexpectation(proofwhereofshalllieonhim)thatthecompanywouldbeabletopaythatdebt,heshall,inthecaseoftheoffencesmentionedrespectivelyinparagraphs(m),(n)and(o),beliabletoimprisonmentforatermnotexceedingfiveyearsandinthecaseofanyotheroffenceshallbeliabletoimprisonmentforatermnotexceedingthreeyears: (1) Providedthatitshallbeagooddefencetoachargeunderanyofparagraphs

(a),(b),(c),(d),(f),(n),(o),(q)and(r)iftheaccusedprovesthathehadno intenttodefraud,andtoachargeunderanyofparagraphs(h),(i)and(j)ifhe proves that he had no intent to conceal the state of affairs of the company or to defeat the law.

(2) Whereanypersonpawns,pledgesordisposesofanypropertyincircumstances

whichamounttoanoffenceunderparagraph(O)ofSubsection(1),every person who takes in pawn or pledge or otherwise receives the property knowing tobepawned,pledgedordisposedofinsuchcircumstancesasaforesaidshall beliabletobepunishedinthesamewayasifhehadbeenconvictedofan offenceundersubsection(1)ofSection322of the Penal Code.

(3) ForthepurposesofthisSection,“officer”includesanypersoninaccordance

withwhosedirectionsorinstructionsthedirectorsofacompanyhavebeen accustomed to act.

CORPORATEINSOLVENCY


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SUMMARY OF CHAPTER

Winding up or dissolution is the dissolution of a company i.e. it ceases to exist.

The three main forms of liquidation are:

• Compulsory winding up.• Members’voluntarywindingupofaninsolventcompany.• Creditors’voluntarywindingupofasolventcompanyandwindingupsubject to the

supervision of the company.

Once winding up proceedings have been commenced:

• Officialreceiverbecomesprovisionalliquidator.• Director'spowersbecomefunctus officio.• Servants of the company are ipso facto dismissed.• Anydispositionofthecompany'spropertyandtransferofitssharesbecomevoid.• Thecompanyceasestocarryonbusiness

Themaindifferencebetweenamembers’voluntarywindingupandcreditorswindingupisthatamember’swindingupischaracterisedbyadeclarationofsolvencybutinacreditor’svoluntarywinding up there is no declaration of solvency

Powers of a liquidator:

• Toconductlegalproceedingsinthenameofandonbehalfofthecompany• Tocarryonthebusinessofthecompanyforbeneficialwindingup• Appoint an advocate to assist him• To pay any class of creditors in full• To make any compromise with creditors• To comprise all calls• Aliquidatorisappointedbythecourtwhereasareceiverisarepresentativeofsecured

creditorsappointedbythem.

UnderSection221of theAct,awindinguppetitionmaybepresented tocourtbyanyof thefollowing persons:

• The company • Creditors

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• Contributory• Member/shareholder• Attorney general• Officialreceiver• Commissioner of Insurance

The main difference in legal consequences between a compulsory and voluntary winding up are:

(a) Inavoluntarywindingupwindingupcommencesonthedaywhentheresolutiontowind up is passed. It is not retrospective as in a compulsory winding up.

(b) InavoluntarywindinguptheOfficialReceiverdoesnotbecomeaprovisionalliquidator;as in a compulsory winding up. Themembers or creditors select and appoint theliquidatorandheisnotanofficerofthecourt;

(c) Inacompulsorywindingupthereisnoautomaticstayoflegalproceedingsagainstthecompanynorarepreviousdispositionsorseizureofitsassetsvoid.Buttheliquidatorina voluntary winding up has a general right to apply to the court to make any order which thecourtcanmakeinacompulsoryliquidation.Hewoulddosotopreventanycreditorobtaininganunfairadvantageoverothercreditors;

(d) Inacompulsorywindinguptheliquidatorreplacesthedirectorsinthemanagementofthecompany(unlesshedecidestoretainthem).Theemployeesarenotautomaticallydismissedbycommencementofvoluntary liquidation. But insolvent liquidationmayamounttorepudiationoftheircontractsofemployment(andprovisionsofthestatutoryemploymentprotectioncodeapply).

CHAPTER QUIZ

1. Voluntarywindingupmaybeeitherby------or---------- 2. Arepresentativeofsecuredcreditorsappointedbythemiscalled

3. A creditor may petition for winding up. TRUE or FALSE?

4. Whatdocumentconstitutesamember’svoluntarywindingup?

5. Compulsory liquidation is also referred to as-----

CORPORATEINSOLVENCY


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ANSWERS TO QUIZ

1. Membersorcreditors 2. A receiver 3. TRUE 4. Statement of declaration 5. Windingupbythecourt


QUESTION ONE

a) Inrelationtocorporateinsolvency: i) Explainwhatismeantbyacontributory.(5marks)

ii) Distinguishbetweenfraudulentandwrongfultrading.Againstwhomay proceedingsbebroughtforbreachesofprovisionsagainstfraudulenttrading andwrongfultrading? (10marks)

b) Highlightthepowersofthecourtonhearingapetition.(5marks)

QUESTION TWO

In the context of voluntary winding up, explain the statutory provisions regarding the powers of theliquidatorwhichmaybeexercisable:

i) Withthecourtsanction.(10marks)ii) Withoutthecourtsanction.(10marks)

QUESTION THREE

a) WhatarethedifferenttypesofLiquidation and who may commence proceedings? (6marks)b) Howdoesacreditordemonstratethatthecompanyisunabletopayitsdebts? (8marks)c) Whatcoursesareopentoasecuredcreditorinliquidation? (6marks)

Please also refer to the following sittings for further practice:

05/02;12/01;06/01;12/00;07/00;06/99;12/98

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CHAPTER THIRTEEN

ALTERNATIVES TO WINDING UP

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CHAPTER THIRTEENALTERNATIVES TO WINDING UP

OBJECTIVES


• Explain alternatives to winding up such as reconstruction, amalgamation and mergers.• Discuss the rights of share holders.• Discuss the rights of creditors.

INTRODUCTION

Thischapterhasbeensplit from thepreviouschapteroncorporate insolvencyunder theoldsyllabus.Thechapterrecognizesthefactthatliquidationisnotalwaysthesolution.Othermethodsreferredtoasalternativestowindingupmaybeemployedtoensurethecompanyisbackonitsfeet again. This chapter, therefore, looks at reconstruction, amalgamation and mergers and even scheme of arrangements as alternatives.

KEY DEFINITIONS

• Reconstruction-An alteration of the capital structure of a single company• Amalgamation - Isa transactionwhereby twoormorecompaniesarecombined in

some way in a united ownership• Merger-The uniting of two companies• Schemeofarrangement-Essentially,itissuitableformakingachangeintherightsof

shareholders or creditors of an existing and continuing company• Takeover-Theacquisitionbyonecompanyofsufficientsharesinanothercompany

EXAM CONTEXT

As has been pointed out, this chapter has been split from the original chapter of corporateinsolvency. The questions therefore, are likely to concentrate more on liquidation. Nonetheless, at the end of this chapter there is a sample of exam questions from different sources.


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INDUSTRY CONTEXT

In the industry today, liquidation is always taken as a last resort as it has many procedures and thusveryexpensive.Manycompaniesareoptingforthealternativesthatwillbediscussedinthischapter.AverygoodexampleisUchumiSupermarket,whichinsteadofbeingwoundupwasplaced under receivership.

INTRODUCTION

Schemes involving reconstruction, amalgamation, take-overs, arrangements, and other forms of reorganisation are carried out for the following reasons:

1. Toovercomethecompany’sfinancialdifficulties2. To make arrangements with creditors3. Toreorganisethecompany’scapitalstructure4. Toextendthecompany’sobjects.

Reconstructions,mergersand takeoversarenotdefined terms. A reconstructionmaybeanalternative of the structure of a group of companies or an alteration of the capital structure of a single company.

The conventional meaning of “take-over” is theacquisition by one company (thebidder) ofsufficient shares in another company (the target) to give the purchaser control of that othercompany.

“Merger”,ontheotherhand,meanstheunitingoftwocompaniesbut,asthisispossiblydonethroughanacquisitionbyonecompanyofacontrollingholdingofsharesinanother.Mergerandtakeoverhavealmostbecomesynonymous.

Amerger(alsocalledanamalgamation)isatransactionwherebytwoormorecompaniesarecombined insomeway inunitedownership.Thesimplestmethod isa takeoverbidwherebyCompany A acquires the issued share capital of Company B so that they form a single group in whichAistheholdingcompanyandBisthesubsidiary.Amorecomplextypeofmergerentailsthetransferofabusiness(andtheassetsemployedinit)fromonecompanytoanother.Iftheacquiringcompany(ineitheratake-overbidforsharesorapurchaseofassets)allotsitsownsharesas consideration for theacquisition themembersof the companywhosebusinessorsharecapitalisacquiredwillbecomeadditionalmembersoftheacquiringcompany.

Acompanymayabsorbaminorityshareholdinginitspartlyownedsubsidiaryinexchangeforcash or shares.

Acompanymayseektoaltertherightsofitscreditors,e.g.byvariationoftherightsofdebentureholdersorbymutualagreement.

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Inthesetransactions,itisfirstnecessarytoselecttheonlyavailable(orifmorethanone)themost convenient method to effect the proposed change. The advantages and disadvantages of eachmethodareexplainedbelowinconnectionwiththemethoditself.Theessentialelementsofeverymethodarethatifadecisivemajorityofmembersorcreditorscanbeobtainedbythecorrectprocedure,theminority(ifany)whodissentwillbeboundbythemajoritydecision.Butineachcasetheminorityisgivensafeguardsorrightsofobjectiontothecourttobalancetheelementofcompulsion.Althoughaminoritycannotfrustratethechangebytheiropposition,theyare entitled to a fair deal.

There are three statutory methods to be considered

Whereonecompanyofferstoacquirethesharesofanothercompanyanditsofferisacceptedbyholdersof90percentormoreofthesharesforwhichtheofferismadetheacquiringcompanymay compel the non-accepting minority to transfer their shares on the same terms. This is the standardprocedurefor“moppingupaminority”andachievingcompletesuccessinatake-overbid.Itisnoobjectionthattheacquiringcompanyalreadyowns(directlyorthroughsubsidiaries)some shares of the other company.Accordingly thismethod is also available to acquire theoutstandingminorityshareholdingofapartlyownedsubsidiary(Section210).

Whereonecompanytransfersitsundertaking(andassets)toanothercompanyinexchangeforsharestobeallotteddirectordistributedtothemembersofthecompany,thecompanywhichmakes the transfermust go into voluntary liquidation and the transfermust be approved byspecialresolutionpassedingeneralmeeting.Theacquiringcompanymaybeanewcompanyformedfor thepurpose.There is thenachangeofcompanybut thesameshareholdersasagroupownthesamebusiness(throughacompany).Itisaformofreconstruction. If however theacquiringcompanyalreadyhasabusinessandadifferentgroupofmembersthismethodeffects an amalgamation so that the two groups of shareholders join together in holding the sharesofasinglecompanywhichownsbothbusinesses,Section280.

A scheme of arrangementmaybeusedinmanydifferentsituations.Essentially,itissuitablefor making a change in the rights of shareholders or creditors of an existing and continuing company.Butitcanalsobeusedtoeffectatake-over(asdescribedin(a)above)ortocarryoutareconstructioninvolvingchangesofcompanystructure(Section207).

Itwillbeseenthatmethods(a)and(b)relatetospecifictypesoftransaction.Theycanonlybeusedinthosetransactions.Theflexibilityofaschemeofarrangementhasledtoitsextendedusethoughthereissomedoubtwhetheritiscorrecttouseitinasituationwherecompanylawaffordssomeotherandmorespecificprocedures.

Wherethereisachoiceofmethod,thechoiceisusuallybetweenaschemeofarrangementandsomemorespecificalternativemethod.Theconsiderationsaffectingthechoiceareexplainedoverleaf.

ALTERNATIVESTOWINDINGUP


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1. SCHEME OF ARRANGEMENT

The following sequence of action is necessary:

1. Applicationismadetothecourt(usuallybythecompanyitself)foranorderthatoneormoremeetingsofmembersandorofcreditors(iftheschemewillaffecttherightsof creditors (if the schemewill affect the rights of creditors) shall be held.With theapplicationthecompanysubmitsadocumentsettingoutindetailthetermsoftheschemeof arrangement and also an explanatory statement to be issued with the notice(s)conveningthemeeting(s).Ifthecourtissatisfiedthattheschemeisgenerallysuitableforconsiderationasa“schemeofarrangement”underSection207,itwillorderthatameetingofmeetingsbeheldtoconsiderit.Thecourtisnotatthisstageconcernedwiththedetailsoftheschemeorwiththeissue(whichmayariselater)astowhetherthereareconflictsofinterest,whichrequirethatseparatemeetingsshouldbeheld.Thecourtmerelylooksattheoutlineoftheschemeandifitseemssuitableordersthatmeeting(s)beheld.

2. Ameetingorseveralmeetingsisorareheldasthecourthasordered.Asubstantialquorum,saymembers(presentinpersonorbyproxy)holdingone-thirdoftheshares,isrequiredandtheschememustbeapprovedbymembers(or,asthecasemaybe,creditors)votingateachmeetingwho:

(i) Areamajorityinnumber,and (ii) Representthree-quartersinvalueoftheshares(oratacreditors’meeting,of theamountsowing).

Requirement (ii) is imposed to safeguard aminority in numberswho have a largerfinancialstakethanthenumericalmajorityfollowingapprovaloftheschemeatmeeting(s)where application is made to the court for an order to approve and implement the scheme.Atthisstage,anyminoritywhichopposestheschememaystateitsobjectionsforconsiderationbythecourt

3. A copy of the court order approving the scheme is delivered to the registrar and the scheme then takes effect, i.e., the changes are made automatically as soon as this is done.

4. Aschemeofarrangementisveryflexiblesinceitmaybeusedtoeffectany“compromiseor arrangement” withmembers or a class of members with creditors or a class ofcreditors. It has been used to vary the rights attached to debentures or preferenceshares(whenthereareobstaclestoastraightforwardreductionofcapitalorvariationofclassrights)ortoreorganisethecapitalstructureofacompanyortoacquiresharesofacompany(insteadofatake-overbidtowhichSection210willapply).Butifthereisaspecificprocedure,suchasareductionofcapitaloravariationofclassrights,whichcanbeused,thecourtwouldnotpermittheuseofaschemeofarrangementtoavoidsomesafeguardofminorityinterestsavailableunderthatspecificprocedure.

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Section207referstoa“class”ofmembersorofcreditors.Obviouslyiftwoormorecompaniesare involved or if one company has two classes of shares, e.g. preference and ordinary, or is proposingacompromisewithdifferentclassesofcreditors,e.g.debentureholdersandunsecuredtradecreditors,itmustaskthecourttoorderthatseparatemeetingsbeheldofeachgroupanditmustobtaintherequiredmajorityapprovalateachmeeting.Buttheprincipleiscarriedevenfurther. If within say one class of shareholders there are groups whose interests in the proposed schemeareclearlydifferent,thecourtmustbeaskedtoorderthatseparatemeetingsbecalledofeachgroup.Ithasbeensaidthateachmeeting“mustbeconfinedtothosepersonswhoserightsarenotsodissimilarastomakeitimpossibleforthemtoconsulttogetherwithaviewtotheircommoninterest”(Sovereign Life Assurance Co v Dodd).

If those who propose the scheme do not, in their application to the court, distinguish each such group(tobeconsultedseparately)thecourtwillatthefinaldecisionstagewithholditsapprovalonthegroundthattherehasnotbeenfairandproperconsultation.

In Re: Hellenic and General Trust (1976), a schemeof arrangementwas agreed betweenHambrosandHellenicwherebytheshareholdersofHellenicwere tohavetheirshares in thecompanycancelledinreturnforcashcompensation.HambroswastopaythecompensationandthenreceivethesamenumberofsharesinHellenic.TheschemewasapprovedatameetingofHellenicbyamajority innumberof theshareholdersholdingthreequarters invalueof thesharesinvolved.ButawhollyownedsubsidiaryofHambros(MIT)held53%ofthesharesinHellenicandvotedforthescheme.HellenicappliedforapprovaloftheschemeandwasopposedbyaGreekBank,a14%shareholderinHellenic.Itsobjectionswerethatitwishedtoretainitsmembershipandalso that thecashreceived for itsshareswouldbesubject toheavycapitalgainstaxliabilityinGreece.

TheGreekbankopposedtheapprovaloftheschemebeforethecourtontwogrounds.First,MITasasubsidiaryofHambroshadadifferentinterestintheschemefromtheothershareholdersofHellenic.MITwasHambrosindirectly;itwasseekingtoacquirethe47%ofHellenic,whichitdidnot(throughMIT)alreadyown.Thereshouldthereforehavebeenaseparatemeetingoftheholdersofthe47%ofHellenicsharesnotalreadyundertheHambros’controlthroughMIT.Atsuchameeting,theGreekbank(with14%outof47%)couldhavepreventedapprovalbytherequired three quarters majority.

Secondly,thepurposeoftheschemewastoenableHambrostoacquire47%ofthesharesofHellenic.(ThedeviceofcancelingthesharesforcashandissuingnewonestoHambroswastosavethestampdutypayableonastraightforwardtransferoftheshares-anexampleoftheadvantagesofaschemeofarrangement.)

Itwasarguedthataschemeofarrangementshouldnotbeusedinasituationforwhichthetake-overbidprocedurewasappropriate.Undertake-overbidrules, therequired90%acceptance(fromtheindependentshareholders)wouldnothavebeenobtainedsincetheGreekbankheldmorethanone-tenthoftheoutstanding47%minorityshareholdings.



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When thescheme isbefore thecourt forfinalapproval,aminoritymayobjectonanyof thevariousgroundsindicatedabovei.e.thatSection207procedureisinappropriateorhasnotbeencorrectlyobserved,orthatapprovalhasnotbeenobtainedinaproperwayorthatthecourtinitsdiscretionshouldrejecttheschemesinceitwouldbeunfair.

If the court approves the scheme and makes an order providing for any of the following under Section 209(1):

• The transferof thewholeorpartof theundertakingandpropertyor liabilities to the“new”company

• Theallotmentofsharesanddebenturese.t.c.inthatcompanywithoutwindingup;• The continuation of any legal proceedings.• The dissolution of the old company without winding up.• Provision for dissentients.• Such incidental and consequential matters necessary to secure the scheme to be

effective.

Anofficialcopyoftheordermustbedeliveredtotheregistrar.

A scheme of arrangement under Section 207 offers the following advantages:

(i) ItcanbeusedincircumstancestowhichSection210andSection280donotapply.Asexplainedabove,ithasonlytobean“arrangementorcompromise”ofsomesortwithmembersorcreditors.

(ii) IncircumstanceswhereSection207isanalternativeprocedureaschemeofarrangementonlyrequiresapprovalbythreequartersofthevotescastateachmeeting.ThisisalessstringentrequirementthanSection210imposessinceSection210operatesonlyifholdersof90percentofallthesharesforwhichtheofferismadeaccepttheoffer.Ifthereisdoubtwhether90percentacceptanceisobtainableaSection207schemeistobepreferred.Butif(asintheHellenic&GeneralTrustCase)thecourtconcludesthatanidentifiedminorityhasbeendeniedthevetowhichSection210wouldhavegivenitisunlikelytogiveitsapprovalunderSection207.Apartfromtechnicalpointsitwouldbeunfairtodoso.

(iii) ThecourtordertoimplementtheapprovedschemeunderSection209(1)oftensavessubstantialexpense,whichcouldotherwisebeincurredifthearrangementwereeffectedin some other way.

TheCompanyneednotbewoundupinordertocarryoutthisschemeofarrangementunder this section.

The disadvantage of a scheme of arrangement is that it requires the preparation of elaboratedocumentsandtheobservanceofastrictprocedure,includinganinitialandfinalapplicationtothecourtandtheholdingofmeetings.Allthisisexpensive.Henceaschemeofarrangementisonlysuitableforlargecompanieswheresubstantialvaluesor assets are affected. Otherwise it is uneconomical.

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Ifacompany,which isor isabout tobe involuntary liquidationproposes tomakeacompositionwithitscreditorsithasachoicebetweenthefollowingalternatives:

• AschemeofarrangementunderSection207;• Anarrangementsanctionedbythreequarters(innumberandinvalue)ofthecreditors

underSection300.Thisliquidationprocedureisbindingonaminorityunlessthecourtontheapplicationofacreditororcontributory(member)ordersotherwise.

• Acompromisemadebytheliquidatorinexerciseofstatutorypowersundersection241orSection297(l)(a).Forthispurpose,hemustobtainapprovalofmembers,creditors,committee of inspection or the court according to the circumstances of the case.

ItisusualtoproceedunderSection207astherearetechnicaldifficultiesoverSection300 procedure. The liquidator’s powers to reach a compromise with creditors arerestricted to cases where all creditors (of the same class) are treated alike, e.g. auniformpaymentofKshs.15in1poundtobeacceptedinfullsettlement.But if theirrightsare tobevariedaschemeofarrangement is required, i.e.Section207 is thecorrect procedure.

2. RECONSTRUCTION UNDER SECTION 280

Section280providesthatwhereacompanyisproposedtobe,orisincourseofbeingwoundup voluntarily, and thewhole or part of its business or property to be transferred or sold toanothercompany,theliquidatorofthefirst-mentionedcompany(transfereecompany)maywiththe sanction of a special resolution conferring either a general authority on the liquidator or an authority in respect of any particular arrangement, receive in compensation or part compensation for the transfer or sale, shares, policies or other like interests in the transferee company for distribution among the members of the transferor company, or may enter into any otherarrangementwhereby themembersof the transferorcompanymay, in lieu of receiving cash, sharesorotherlikeinterests,participateintheprofitsoforreceiveanyotherbenefitfromthetransferee company.

This form of reconstruction is often used when additional working capital is needed and other meansof raising it are not available. It has also beenused for alteration of the company’sobjects;variationofshareholdersrightsandeffectingacompromisewithcreditors.

Reconstructionunderthissectionissubjecttoseveraldisadvantagesandislittleused.ButwhenareconstructiontakesthisformSection280proceduremustbefollowedsothatadissentingminority does have the appropriate safeguard.

Thisprocedurealsoapplies toacompany,which isproposed tobe,or is incourseofbeingwoundupvoluntarily.Acompanyinliquidationmustdisposeofitsassets(otherthancash)bysaleinordertopayitsdebtsanddistributeanysurplustoitsmembers.ThespecialfeatureofaSection280 reconstruction is that thebusinessorpropertyofCompanyP is transferred toCompanyQinexchangeforsharesofthelattercompanywhichareallotteddirectordistributedbytheliquidatortomembersofCompanyP.Obviously,thecreditorsofCompanyPwillhavetobepaidincash.AdissentingminorityofmembersofCompanyPcanalsorequiretobepaidincash.Hencesubstantialsumsmayhavetobefoundincash.Thisisoneofthedrawbacks.



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Acompany in (orabout togo into)members’voluntary liquidationmay,byspecial resolution,authorisetheliquidatortosellthebusinessorpropertyforshares(ofsomeothercompany)tobedistributedtomembers.Butanymemberwhodidnotvoteinfavourofthespecialresolution(dissentient member)mayintheensuingsevendaysdelivertotheregisteredofficeanoticeaddressedtotheliquidatorrequiringhimeithertopaythatmemberthevalueofhisinterestincashortoabandontheproposedsale;Section280.

If the company is in a creditors voluntary liquidation a special resolution to approve the sale must bepassedanditisalsonecessaryforthesaletobeapprovedbythecourtorbythecommitteeof inspection: Section 292. Moreover, a creditor can at any time within a year of the passing of thespecialresolution(inamembers’voluntarywindingup)renderitinvalidbyobtainingacourtorderforcompulsoryliquidation;Section280(5).Itis,therefore,prudenttodisposeofpossibleobjectionsbycreditorsbeforethecompanyentersintothetransaction.

Hence the usual procedure is

First,todisposeofpossibleobjectionsbycreditorsbypayingtheirdebtsorprovidingsecurityfortheirduepaymentoftheirdebts.Alternatively,thecompanymayseektoobtaintheconsentofthecreditorstothetransferofliabilityfortheirdebtstothetransfereecompany(aspartofthetermsonwhichthebusinessissold);

Then to convene a general meeting and propose a special resolution to approve the sale of the businessinexchangeforsharesofthepurchasingcompany.Itthusbecomesevidenthowmanymembersmaydemandtobeboughtoutforcashsinceonlymemberswhodidnotvoteinfavourof the resolutioncanopt for thecashpayment. If it isclear that thecashexpenditurewillbeprohibitive,theschemecanbeabandonedbeforethecompanygoesintoliquidation;

Finally(asthesecondstepatthesamegeneralmeeting)tomovearesolutiontogointoliquidation.Ifitistobeacreditors’voluntaryliquidationthenacommitteeofinspectionmustbeappointedand asked to approve the sale under Section 292.

Ifadissentientmemberclaimstobepaidthevalueofhisinterestincash,theamount(ifitcannotbeagreed)istobedeterminedbyanarbitrator.Themembermustmakeouthisowncasebeforethearbitratorinsupportofhisclaim;thecompanyisnotunderadutytoanswerhisquestions.Ifamemberfailstogivenoticewithinthesevendaysperiodtotheliquidatorofhisdemandforcash,heisentitledtohisproportionofthetransfereecompany’ssharesorifherefusestoacceptthemtheymaybesoldandtheproceedspaidoverinsettlementsince(byfailingtoobserveSection280procedure)hehasforfeitedhisentitlementunderSection280.

ThedisadvantagesofSection280arethatcashmayhavetobeprovidedtopayoffcreditorsanddissentingmembersoralternativelythesalemayhavetobeabandoned.Secondly,thecompanymustgointoliquidation,whichisanirreversibleprocess.ButSection280procedureisobligatoryin thesituation towhich it relates. Itmaybepreferable tomakethedesiredreconstruction in

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someotherway.Forexample, thecompany towhich thebusiness is tobe transferredmightmakeatake-overbid(usingSection210toachieve100percentsuccess)forthesharecapitalofthecompanywhosebusinessitwishestoacquire.Whenthelattercompanyisawhollyownedsubsidiary,thereisnoproceduraldifficultyintransferringitsbusinesstotheholdingcompany.There is no obligatory cash alternative in a Section 210 transaction though it is sometimesprovided as an extra inducement.

The advantage of transferring a business from one company to another (with the sameshareholdersintheend)isthatbythismeansthebusinessmaybemovedawayfromacompanywithatangledhistorytoanewcompanywhichmakesafreshstart.Thisprocedurecanalsobeusedtoeffectamergeroftwocompanieseachwithanexistingbusiness.

TAKE-OVERBID

IfCompanyA(“thetransfereecompany”)offerstoacquiresharesofCompanyB(“thetransferor”)andtheschemeorcontracttowhichtheofferrelatesisacceptedbyholdersofnine-tenthsofthe shares for which the offer is made Company A may then compulsorily acquire the remaining 10percent(orless)ofthesharessoastoachieveacomplete100percentacquisitionoftheshares:CompaniesAct,Section210.

It is standardprocedure inmakinga take-overbid to state that if 90per centacceptance isattainedcompulsoryacquisitionunderSection210willfollow.CompanyAmayresorttoSection210whetheritoffersitsownsharesorcashforsharesofCompanyB.Theprocedureisavailableif Company A already owns shares of Company B and offers to acquire those which it does not alreadyown(butseePara22below.) Thenon-acceptingminoritymayhoweverapplytothecourt to prevent Company A from acquiring their shares. The rules of procedure are explained below.

Theoffermustbemadebyacompanytoacquiresharesofanother.Section210isnotavailabletoanindividualwhomakesatake-overbid(buthecanalwaysformacompanyforthepurpose:provided no fraud or improper conduct is involved: Re Bugle Press Ltd. (see paragraph8.4.11)

If Company B has two or more classes of shares and Company A makes an offer for shares of bothclasses,thisistreatedastwoseparateoffers.Section210appliesseparatelytosharesofeachclassforwhich90percentacceptanceisobtained.Insuchcasesitisusual(butnotlegallynecessary)forCompanyAtoreservetherighttowithdrawitsofferforeitherclassifacceptancefromtheotherclassdoesnotreachthe90percentlevelwhichmakesSection210applicable.

IfCompanyAdirectlyorthroughsubsidiariesownsmorethanone-tenthofthesharesofCompanyB,then(inordertobeabletouseSection210)CompanyAmust:



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(a) Offerthesametermsforalltheshareswhichitdoesnotalreadyown.

(b) Obtainacceptancesfromholderswhoarethree-quartersinnumberaswellasholdersof90percentoftheshares.

ThewordingofSection210isambiguousbutitisgenerallytakenthatCompanyAmustoffertoacquire all of the shares of Company B which it does not already own if it is then to use Section 210toacquiretheremainingsharesinCompanyB(orallthesharesoftheclass)forwhichtheoffer is made.

Acceptance on the required scale must be obtained within a maximum of four months from the date of the offer. The position then is that:

a. At the end of the four month period(notearlierthanthatevenif90percentacceptanceisattainedbeforetheperiodexpires)CompanyAmay(butitneednotdosoifitdoesnotwish-howeverseeparagraph25below)servenoticeonthenon-acceptingshareholdersofitsintentiontoacquiretheirsharesonthesametermsashavebeenacceptedbythemajority.Thisnoticemaybegivenatanytimewithinatwo-monthperiod following the four-month period.

b. OnreceivingthenoticefromCompanyAeachnon-acceptingshareholderofCompanyB has one month in which he may apply to the court to order that Company A shall not acquirehisshares(seeparagraphs27-28below).

c. Onemonthafterservingnoticeonnon-acceptingshareholders(oriftheyapplytothecourtbutfailthenasthecourthasdisposedoftheirapplication)CompanyAmayrequireCompany B

(i) Totransferthesharesofitsnon-acceptingshareholderstoCompanyA,and

(ii) Toreceivethepurchaseconsiderationtoholdintrustforthenon-accepting shareholders.

By this means the outstanding shares are transferred without any further action on the part of the non-accepting shareholders.

The non-accepting shareholders have a further statutory safeguard. Company A is not obligedtoservenoticeofintentiontoacquiretheirshares.ButassoonasCompanyA’stotalownershipofsharesinCompanyBreaches90percent(or90percentofaclass)itmust within one month give notice of that fact to the holders of the outstanding shares.Those shareholders may then within the ensuing three months require Company Atoacquiretheirsharesonthesametermsashavebeenacceptedbytheapprovingshareholders. By thismeans the shareholderswhoat first did not accept theofferfor their shares may accept it in order to escape from the unsatisfactory position or remainingasaverysmallminorityofmembersinacompany(B)dominatedbyasingleshareholder(A):CompaniesAct,Section210(2).

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TheminoritywhosesharesareacquiredcompulsoryunderSection210areentitledtoallthebenefitsincludedintheoriginalofferandacceptedbytheholdersof90percentormoreoftheshares.CompanyAmustnotonlypaythesameprice(orotherconsideration);itmustrepeatallotherinducementssuchasacashalternative.WhenCompany A offers its own shares in exchange for shares of Company B it is a common practicetomaketheoffermoreattractivebyarrangingwithathirdpartythatthelatterwillmakeasimultaneousoffer(foralimitedperiodonly)topurchasefromshareholdersofCompanyBtheirconsiderationshares(allottedbyCompanyA)iftheydonotwishtoretainthem.AholderofsharesofCompanyBthenhasthechoiceof(i)retaininghisnewsharesinCompanyAor(ii)sellingthem(the“cashalternative”)immediatelyatastatedpricetoathirdparty.WhenSection210isusedtoacquiretheoutstandingsharesofCompanyB,thebidder(CompanyA)mustarrangeforacashalternativetobeprovidedsincethatwaspartoftheterms(althoughitcamefromathirdparty)whichinduced a high level of acceptance: Re Carlton Holdings(1971)

A non-accepting shareholder who applies to the court to set aside the proposed compulsoryacquisitionofhissharesunderSection210will failunlesshecanmakeoutaverystrongcase.Acceptancebyholdersof90percentormoreofthesharesindicatesthatthetermsofferedarefair.Thisissoeveniftheobjectorcontendsthathe had need of more information in order to reach a decision or that Company A in acquiringcontrolofCompanyBwillobtainspecialadvantages (e.g.eliminationofacompetitor)whicharenot reflected in thepriceoffered forhisshares. Objectiononthose grounds only are likely to fail.

But the court will not permit Section 210 to be used in an artificial and oppressivemanner.

Case: RE BUGLE PRESS(1900)

X,YandZheld4,500,4,500and1,000one-poundsharesrespectively,ofCompanyB.They were the only shareholders and X and Y were the directors. X and Y wished to eliminateZ.Section210howeverisnotavailabletoindividuals.SoXandYformedanewcompany(CompanyA)inwhichtheyweretheonlytwoshareholders.CompanyAthenofferedtoacquireallthesharesofCompanyB.XandYacceptedtheofferbutZdidnot.CompanyAservednoticeonZthatithassecured90percentacceptance(thesharesofXandY)andintendedtoacquireZ’s1,000sharesunderSection210.Zapplied to court.

Held:

Company A was a sham since (lifting the veil of incorporation) it was merely themajorityshareholders(XandY)inCompanyBseekingtoexpropriatethesharesoftheminority(Z).Section210couldnotbeusedinthesecircumstances.Z’sobjectionswereupheld.

Thealternative toacquisitionunderSection210 (ina take-overbid) isaschemeofarrangementunderSection207.Thechoicemaybedeterminedbycomparativecosts(seeparagraphs8.3.7(c)and8.3.8). Stampduty ispayable(at thetwopercentadvaloremrate)ontransfersofsharesofCompanyBinatransactiontowhichSection210applies.ItcanbeavoidedunderSection207.ButunderSection210procedure,



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there is usually no expense of court proceeds as few minority shareholders persist intheirobjectionstothepointofmakingapplicationtothecourt(atsomeexpensetothemselves).

Ontheotherhand,ifthereisuncertaintyaboutobtaining90percentacceptanceanda scheme of arrangement is not excessive in costs it is an easier route to the intended result. It is particularly useful when Company A is seeking to acquire those shares of apartly-ownedsubsidiary(CompanyB)whichitdoesnotown.Insuchcases,someminorityshareholdersofBmaybeindifferentorpassivelyopposed;CompanyAcannotcountontheiracceptances(toachieve90percent)butreckonsthattheycannotorwillnotdenyitathreequartersmajorityatameeting.ThereisoftenadelicatebalanceofconflictingrisksandconsiderationsinchoosingbetweenSection207andSection210in such situations.

MERGER OR AMALGAMATION

MergeroramalgamationisnotdefinedintheAct.Itsgenerallyusedtodenoteinstancesinwhichthepropertyorbusinessofacompany is transferred toanothercompanywhich isalready inexistence.Alternativelyanewcompanycanbeincorporatedtoacquirethebusinessoftwoormore existing companies. In either case, procedure followed is the same as that followed in a reconstruction.

RIGHTS OF DISSENTING SHAREHOLDERS

Althougha company thatmakesa takeover bidhasa statutorypower tobuyout dissentingshareholders, it does not mean that any minority of shareholders has to tolerate oppression from themajority.Section210(1)providesthatadissentingcanapplytocourtswithinonemonthafterthe notice is given to the company. The court may make a winding up order or sanction some arrangementatitsdiscretionifsatisfiedthat:

• A minority shareholder is oppressed.• Theschemewillnotbenefitthecompanyasawhole.• The transferee company is the same as the majority shareholding in the transferor

company.

RIGHTS OF DISSENTING CREDITORS

The creditor must pay the creditors of the transferor company in the usual way as in a winding up. Butifthecreditorsdissentfromthearrangementtheymaypetitionforthecompanytobewoundup compulsorily under supervision. The section provides that if an order is made for winding up bythecourtsorsubjecttosupervision,aspecialresolutionauthorizingthearrangementwithinayearwillnotbevalidunlesssanctionedbythecourtsorcommitteeofinspection.

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CHAPTER SUMMARY

Schemesinvolvingreconstruction,amalgamation, take-overs,arrangements,andotherforms of reorganisation are carried out:

1. ToovercometheCompany’sfinancialdifficulties2. To make arrangements with creditors3. Toreorganizethecompany’scapitalstructure4. Toextendthecompany’sobjects.

In mergers or amalgamations the rights of creditors and shareholders must always be protected

CHAPTER QUIZ

1. A merger is also referred to as-------- 2. Name any alternative to winding up----------- 3. Whoserightsmustbeprotected?



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ANSWERS TO QUIZ

1. Amalgamation 2. Reconstruction 3. Share holders and creditors


QUESTION ONE

Describetheprocedurefollowedtoeffectaschemeofarrangement(20marks)

QUESTION TWO

Discussreconstructionsundersection280(20marks)

QUESTION THREE

Discusstakeoverbids(20marks)

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CHAPTER FOURTEEN

COMPANIES INCORPORATED OUTSIDE KENYA

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CHAPTER FOURTEENCOMPANIES INCORPORATED OUTSIDE KENYA

OBJECTIVES


1. ExplainprovisionsrelatingtotheestablishmentofaplaceofbusinessinKenya.2. Discuss the procedure for incorporating a foreign company.3. Discusscessationofbusinessforaforeigncompanyandpenaltiesfornon-conformity.

INTRODUCTION

Thischapterisanewadditionintothenewsyllabus.Thechapterisnearlysimilartoincorporationbutwithspecialattentiongiventoforeigncompanies.Itlooksattheprocedureforincorporationof a foreign entity, what documents are required and eventually penalties for non-compliance.

KEY DEFINITIONS

• Foreigncompanies:companiesincorporatedoutsideKenyawhich,aftertheappointedday,establishaplaceofbusinesswithinKenyaandcompaniesincorporatedoutsideKenyawhichhave,before theappointeddayestablishedaplaceofbusinesswithinKenya

• Cessation: Dissolutionorstoppingtocarryoutbusiness

EXAM CONTEXT

As mentioned earlier, this is an addition and as such there are no questions from the past paper sittings.Asampleofpossibleexamquestionshasbeencompliedattheendofthechapter.Theexaminer might just test to see whether the student have thoroughly understood and complied tothenewsyllabus

INDUSTRY CONTEXT

Ithasbeensaidthatnomanisanislandandthecompanybeingajuridicalpersonisnoexception.There is need to incorporate foreign companies to encourage healthy competition .In the recent past,variousforeigncompanieshavebeenincorporatedinKenyaincludingOilibyafromLibya.


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Covered by part X of the Companies Act cap 486 of the Laws of Kenya

14.1 PROVISIONS AS TO ESTABLISHMENT OF

PLACE OF BUSINESS IN KENYA

The sections in part X shall apply to all foreign companies, that is to say, companies incorporated outsideKenyawhich,aftertheappointedday,establishaplaceofbusinesswithinKenyaandcompaniesincorporatedoutsideKenyawhichhave,beforetheappointeddayestablishedaplaceofbusinesswithinKenyaandcontinuetohaveaplaceofbusinesswithinKenyaonandaftertheappointedday: AforeigncompanyshallnotbedeemedtohaveaplaceofbusinessinKenyasolelyonaccountofitsdoingbusinessthroughanagentinKenyaattheplaceofbusinessoftheagent.

14.2 DOCUMENTS TO BE PRESENTED TO THE

REGISTRAR

Foreigncompanieswhich,aftertheappointeddayestablishaplaceofbusinesswithinKenyashall,within 30daysof theestablishment of theplaceof business deliver to the registrar forregistration: -

(a) Acertifiedcopyofthecharter,statutesormemorandumandarticlesofthecompanyorotherinstrumentconstitutingordefiningtheconstitutionofthecompany,and,iftheinstrumentisnotwrittenintheEnglishlanguage,acertifiedtranslationthereof;

(b) Alistofthedirectorsandsecretaryofthecompanycontainingtheparticularsmentionedinsubsection(2);

(c) Astatementofallsubsistingchargescreatedbythecompany,beingchargesofthekindssetoutinsubsection(2)ofSection96andnotbeingchargescomprisingsolelypropertysituateoutsideKenya;

(d) thenamesandpostaladdressesofsomeoneormorepersonsresidentinKenyaauthorisedtoacceptonbehalfofthecompanyserviceofprocessandanynoticesrequiredtobeservedonthecompany;and

(e) Thefulladdressoftheregisteredorprincipalofficeofthecompany.

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14.3 CERTIFICATE OF REGISTRATION AND POWER

TO HOLD LAND

Where a foreign company has delivered to the registrar the documents, the registrar shall, if such documents and particulars are so delivered after the appointed day, certify under his hand thatthecompanyhascompliedwiththerequirements;andsuchcertificate,andanycertificategivenbytheregistrarofcompaniesbeforetheappointeddaythataforeigncompanyhasdeliveredtohimthedocumentsandparticularsrequiredbyanyprovisionofanyoftherepealedOrdinancescorrespondingtothesaidsection,shallbeconclusiveevidencethatthecompanyis registered as a foreign company for the purposes of this Act. Where a foreign company has, after the appointed day, delivered to the registrar the documents and particulars mentioned in Section 366, it shall have the same power to hold land in Kenya as if it were a company incorporated under this Act. Whereaforeigncompanyhas,beforetheappointedday,deliveredtotheregistrarofcompanies,thedocumentsandparticularsrequiredbyanyprovisionofanyoftherepealedOrdinancescorrespondingtoSection366ofthisActandtothelikeeffect,itshall,subjecttotheprovisions of that one of the repealed Ordinances in accordance with which such documents and particulars were so delivered and of this Act, have the same power to hold land in Kenya as if it were a company incorporated under this Act

14.4 RETURNS

If any alteration is made in

(a) thecharter,statutesormemorandumandarticlesofa foreigncompanyoranysuchinstrument as aforesaid

(b) Thedirectorsorsecretaryofaforeigncompanyortheparticularscontainedinthelistof the directors and secretary

(c) Thenamesorpostaladdressesofthepersonsauthorisedtoacceptserviceonbehalfof a foreign company

(d) Theaddressof theregisteredorprincipalofficeofa foreigncompany, thecompanyshall, within sixty days, deliver to the registrar for registration a return containing the prescribedparticularsofthealteration.



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Where in the case of a company to which this Part applies:

(a) Awinding-uporderismadeby;or(b) Proceedingssubstantiallysimilartoavoluntarywindingupofthecompanyunderthis

Act are commenced in, a court of the country in which such company was incorporated, the company shall within thirty days of the date or the making of such order or the commencementofsuchproceedings,as thecasemaybe,deliver to the registrarareturncontainingtheprescribedparticularsrelatingtothemakingofsuchorderorthecommencementofsuchproceedingsandshallcausetheprescribedadvertisementsinrelationtheretotobepublished

14.5 REGISTRATION OF CHARGES CREATED

369.TheprovisionsofPartIVshallextendtochargesonpropertyinKenyawhicharecreated,andtochargesonpropertyinKenyawhichisacquired,afterthecommencementofthisAct,byaforeigncompanywhichhasanestablishedplaceofbusinessinKenya:

ProvidedthatinthecaseofachargeexecutedbyaforeigncompanyoutofKenyacomprisingpropertysituatebothwithinandoutsideKenya-

(i) Itshallnotbenecessarytoproducetotheregistrartheinstrumentcreatingthechargeiftheprescribedparticularsofitandacopyofit,verifiedintheprescribedmanner,aredeliveredtotheregistrarforregistration;and

(ii) Thetimewithinwhichsuchparticularsandcopyaretobedeliveredtotheregistrarshallbe60daysafterthedateofexecutionofthechargebythecompanyor,inthecaseofa deposit of title deeds, the date of the deposit.

14.6 ACCOUNTS OF FOREIGN COMPANIES

370.

(1) Every foreign company shall, in every calendar year, make out a balance sheetandprofitand lossaccountand, if thecompany isaholdingcompany,group accounts, in such form, and containing such particulars and including such documents, as under the provisions of this Act (subject, however, to any prescribed exceptions) it would, if it had been a company within the meaning of this Act, have been required to make out and lay before the company in general meeting, and deliver copies of those documents to the registrar for registration:

Provided that a foreign company shall not be obliged to comply with the provisions

ofthissectionif-

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(i) ItwasincorporatedintheCommonwealth (ii)Itwould,haditbeenincorporatedinKenya,havebeenexemptfromthe provisionsofsection128byvirtueofsubsection(4)ofthatsection (iii)Ineverycalendaryearthereisdeliveredtotheregistrarfor registrationacertificatesignedbyadirectorandthesecretaryof the company verifying the conditions requisite for such exemption.

(2) If any such document as is mentioned under subsection (1) is not written in the Englishlanguagethereshallbeannexedtoitacertifiedtranslationthereof.

14.7 NAME OF FOREIGN COMPANIES

371.

(1) Every foreign company shall:

(a) ineveryprospectusinvitingsubscriptionsforitssharesordebenturesinKenya statethecountryinwhichthecompanyisincorporated;and (b)Conspicuouslyexhibitineasilylegibleromanlettersoneveryplacewhereit carriesonbusinessinKenyathenameofthecompanyandthecountryinwhich thecompanyisincorporated;and

(c) causethenameofthecompanyandofthecountryinwhichthecompanyis

incorporatedtobestatedinlegibleromanlettersinallbill-headsandletterpaper, andinallnoticesandotherofficialpublicationsofthecompany;and

(d) iftheliabilityofthemembersofthecompanyislimited,causenoticeofthatfact

tobestatedintheEnglishlanguageinlegibleromanlettersineverysuch prospectusasaforesaidandinallbill-heads,letterpaper,noticesandotherofficial publicationsofthecompanyinKenyaandtobeaffixedoneveryplacewhereit carriesonitsbusiness.

(2) Every foreign company shall, in all trade catalogues, trade circulars, showcards and business letters on or in which the company’s name appears and which are issued or sent by the company to any person in Kenya, state in legible roman letters, with respect to every director being a corporation, the corporate name, and with respect to every director, being an individual, the following particulars:- (a)hispresentChristiannameortheinitialsthereof,andpresentsurname; (b)anyformerChristiannamesandsurnames; (c)hisnationality,ifheisnotaKenyacitizen:



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Provided that, if special circumstances exist which render it in the opinion of the registrar expedientthatsuchanexemptionshouldbegranted,theregistrarmaygrant,subjecttosuchconditionsasmaybespecified,exemptionfromtheobligationsimposedbythissubsection

14.8 SERVICE OF FOREIGN COMPANIES

372.

AnyprocessornoticerequiredtobeservedonaforeigncompanyshallbesufficientlyservedifaddressedtoanypersonwhosenamehasbeendeliveredtotheregistrarundertheforegoingprovisionsofthisPartandleftatorsentbyregisteredposttotheaddresswhichhasbeensodelivered:

Provided that:

(i) Whereanysuchcompanymakesdefault indelivering to theregistrar thenameandaddressofaperson resident inKenyawho isauthorised toacceptonbehalfof thecompanyserviceofprocessornotices;or

(ii) Ifatany timeall thepersonswhosenamesandaddresseshavebeensodeliveredaredeadorhaveceasedso to reside, or refuse toaccept serviceonbehalf of thecompany,orforanyreasoncannotbeserved,anyprocessornoticemaybeservedonthecompanybyleavingitatorsendingitbyregisteredposttoanyplaceofbusinessestablishedbythecompanyinKenya

14.9 CESSATION OF BUSINESS

373.

(1) IfanyforeigncompanyceasestohaveaplaceofbusinessinKenya,itshallforthwithgive notice in writing of the fact to the registrar for registration and as from the date onwhichnoticeissogiventheobligationofthecompanytodeliveranydocumenttothe registrar shall cease and the registrar shall strike the name of the company off the register.

(2) WheretheregistrarhasreasonablecausetobelievethataforeigncompanyhasceasedtohaveaplaceofbusinessinKenya,hemaysendbyregisteredposttothepersonauthorisedtoacceptserviceonbehalfofthecompanyand,ifmorethanone,toallsuchpersons,aletterinquiringwhetherthecompanyismaintainingaplaceofbusinessinKenya.

(3) IftheregistrarreceivesananswertotheeffectthatthecompanyhasceasedtohaveaplaceofbusinessinKenyaordoesnotwithinthreemonthsreceiveanyreply,hemaystrike the name of the company off the register.

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14.10 PENALTIES

374.

If any foreign company fails to comply with any of the foregoing provisions of this Part, the company andeveryofficeroragentofthecompanywhoknowinglyandwilfullyauthorisesorpermitsthedefaultshallbeliabletoafinenotexceedingKshs.1,000,or,inthecaseofacontinuingoffence,Kshs100foreverydayduringwhichthedefaultcontinues



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CHAPTER SUMMARY

AforeigncompanyshallnotbedeemedtohaveaplaceofbusinessinKenyasolelyonaccountofitsdoingbusinessthroughanagentinKenyaattheplaceofbusinessoftheagent

Foreigncompanieswhich,aftertheappointeddayestablishaplaceofbusinesswithinKenyashall,within 30daysof theestablishment of theplaceof business deliver to the registrar forregistration: -

(a) Acertifiedcopyofthecharter,statutesormemorandumandarticlesofthecompanyorotherinstrumentconstitutingordefiningtheconstitutionofthecompany,and,iftheinstrumentisnotwrittenintheEnglishlanguage,acertifiedtranslationthereof;

(b) Alistofthedirectorsandsecretaryofthecompanycontainingtheparticularsmentionedinsubsection(2);

(c)Astatementofallsubsistingchargescreatedbythecompany,beingchargesofthekindssetoutinsubsection(2)ofsection96andnotbeingchargescomprisingsolelypropertysituateoutsideKenya; (d)thenamesandpostaladdressesofsomeoneormorepersonsresidentinKenyaauthorisedtoacceptonbehalfofthecompanyserviceofprocessandanynoticesrequiredtobeservedonthecompany;and

(e)Thefulladdressoftheregisteredorprincipalofficeofthecompany.

Documents to be presented to the registrar

Everyforeigncompanyshall,ineverycalendaryear,makeoutabalancesheetandprofitandloss account and, if the company is a holding company, group accounts, in such form, and containing such particulars and including such documents, as under the provisions of this Act every foreign company shall-

(a) ineveryprospectusinvitingsubscriptionsforitssharesordebenturesinKenyastatethe country in which the company is incorporated.

(b) ConspicuouslyexhibitineasilylegibleromanlettersoneveryplacewhereitcarriesonbusinessinKenyathenameofthecompanyandthecountryinwhichthecompanyisincorporated.

(c) Causethenameofthecompanyandofthecountryinwhichthecompanyisincorporatedtobestatedinlegibleromanlettersinallbill-headsandletterpaper,andinallnoticesandotherofficialpublicationsofthecompany.

(d) Iftheliabilityofthemembersofthecompanyislimited,causenoticeofthatfacttobestated in theEnglish language in legible roman letters ineverysuchprospectusasaforesaidandinallbill-heads,letterpaper,noticesandotherofficialpublicationsofthecompanyinKenyaandtobeaffixedoneveryplacewhereitcarriesonitsbusiness.

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(2) Everyforeigncompanyshall,inalltradecatalogues,tradecirculars,showcardsandbusinesslettersonorinwhichthecompany’snameappearsandwhichareissuedorsentbythecompanytoanypersoninKenya,stateinlegibleromanletters,withrespecttoeverydirectorbeingacorporation,thecorporatename,andwithrespecttoeverydirector,beinganindividual,thefollowingparticulars: (a) hispresentChristianname,ortheinitialsthereof,andpresentsurname; (b) anyformerChristiannamesandsurnames; (c)hisnationality,ifheisnotaKenyacitizen.

CHAPTER QUIZ

1. What part of the Companies Act relates to foreign companies? 2. Imprisonment is one of the penalties for non-compliance. TRUE or FALSE? 3. Howmanymonthsdoaccountsofforeigncompaniesreflect?



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ANSWERS TO QUIZ

1. Part X 2. FALSE 3. 12-calender year


QUESTION ONE

Whatdocumentsmustbepresentedtotheregistrarofcompanies(20marks)

QUESTION TWO

Discussreturnsmadetotheregistrar(20marks)

QUESTION THREE

Discussprovisionsrelatingtothenameofforeigncompanies(20marks)

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PART E


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CHAPTER FIFTEEN

ANSWER BANK

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CHAPTER FIFTEENANSWER BANK

CHAPTER ONE

QUESTION ONE

TherearefourmainformsofbusinessassociationsinKenya.Thoughtheremaybeothersinexistenceswhicharebeyondthescopeofthisbook.Theseformsare:

• Soleproprietorshiporsoletrader• Partnership• Companies• Cooperative

1. SOLE TRADER

Thisbusinessisownedandcontrolledbyoneperson.Theownerisincompletecontrolandthusreceivesallprofitsandsuffersalllosses.It’sveryeasytostartasallthatoneneedsiscapitalandatradinglicenseobtainedfromtherelevantlocalauthority.Thisformofbusinessisfoundinretailtradeandserviceindustriessuchashaircutting,plumbing,painting,kiosks,andvegetablesand so on.

ADVANTAGES

1. Ownerreceivesallprofitssinceheisincompletecontrolofthebusiness2. It has no formalities in starting as all one requires is a trading license3. A sole trader is his own master and thus makes all decisions alone he does not have to

consultanypersonwhichtendstodelaydecisionmakinginotherbusinessforms

DISADVANTAGES

1. Hehastoprovideallthecapital2. Hebearsandsuffersallthelosses3. Hehas towork for longhours to increaseprofitsandthis in the longrunaffectshis

health4. Thereisnoscopeinsharingideasfortheimprovementofthebusiness

2. PARTNERSHIP

Thisisbusinessownedbyatleasttwopeopleormorebutnotmorethan20persons.Section3(1)ofthePartnershipActdefinesapartnershipastherelationwhichsubsistsbetweenpersonscarryingonabusinessincommonwithviewtomakingaprofit.


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Under Kenyan law, there are two types of Partnerships namely General and Limited. The general partnershipoperatesquitesimilarlytoasoletraderbutinalimitedpartnershiptheliabilityofthepartners is limited. For a partnership there is a deed called a partnership deed that regulates the relationships among the partners.

ADVANTAGES

• Partnersprovidecapitalontermsagreed.Theysharethenetprofitorbearthelossesin proportions as set out in the partnership agreement

• Morecapitalisavailableandthereisascopeofexpandingbusiness• Sharingofideasbythepartnersleadstogrowthandimprovementofbusiness

Its main DISADVANTAGES are:

• Disagreementamongthepartnersoftenruinsthebusiness• Businessmaystoptemporarilyafterdeathofoneofthepartners.

3. COOPERATIVE SOCIETIES

Thisisanassociationofpeoplewhocometogetherwithacommonobjectiveoraim.Itisaformofself-helporganisation.It’sformedbyatleast10peopleandmembershipisopentomaximumnumberofpeoplewiththesameinterest.Membersholdsharesinthesociety.

QUESTION TWO

Themaindistinctionbetweenacompanyandother formsofbusinessorganisations is tobefoundinthetwofundamentalprinciplesofcompanylawasdiscussedbelow:

• Legal/Corporatepersonality• Theoryoflimitedliability

1. Legal/Corporate personality

Thisprincipleistotheeffectthatwhenacompanyisincorporateditbecomesalegalpersondistinctandseparatefromitsmembersandmanagers.Itbecomesabodycorporatewithanindependentlegalexistencewithlimitedliability,perpetualsuccession,capacitytocontract,ownpropertyandsueorbesued.TheprincipleoflegalpersonalitywasfirstformulatedbytheHouseofLordsinits famous case of Salomon v Salomon and company limited where Lord Macnaghten was emphaticthatthecompanyisatlawadifferentpersonfromthesubscriberstothememorandum.ThisprincipleisnowcontainedinSection16(1)oftheCompaniesActwhichprovidesinter alia thatfromthedateofincorporation,thesubscriberstothememorandumtogetherwithsuchotherpersonsthatmaybecomemembersofthecompany,areabodycorporatebythenamecontainedinthememorandumcapableofexercisingthefunctionsofanincorporatedcompanywithpowerto hold and having perpetual succession and a common seal.

The decision in Salomon’s case laid to rest certain principles:

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1. That even the so-called one-man companies were legal persons distinct and separate fromthemembersandmanagers.

2. Thatincorporationwasavailablenotonlytolargecompaniesbuttopartnershipsandsole proprietorships as well.

3. That in addition to membership, it was possible for a member to subscribe to thecompany’sdebentures.

2.Theory of limited liability

Liabilitymeanstheextenttowhichapersonmaybecalledupontocontributetotheassetsofthecompanyintheeventofwindingup.Incompanylawtheliabilityofmembersmaybelimitedorunlimited.Iflimiteditmaybelimitedbysharesorbyguaranteeas

Wethenpayspecialattentiontothemaindifferencesbetweenacompanyandapartnership.Thebasicdifferencesbetweenregisteredcompaniesandpartnershipsareasfollows:

(a) Formation Registration is the legal pre-requisite for the formation of a registered company: Fort

HallBakerySupplyCovWangoe(1).

The Partnership Act does not prescribe registration as a condition precedent topartnership formation. Apartnershipmay, therefore,be formed informallyor, if thepartners deem it prudent, in writing under a Partnership Deed or Articles.

(b) LegalStatus Aregisteredcompanyenjoysthelegalstatusofabodycorporatewhichisconferredon

itbytheCompaniesAct.

Apartnershipisnotabodycorporateandisnon-existentinthecontemplationofthelaw.Suchbusinessasappearstobecarriedonbyitis,infact,carriedonbytheindividualpartners.

(c) NumberofMembers A registered private companymust have at least twomembers under Section 4 of

theCompaniesActandamaximumof fiftymembers (excludingcurrentand formeremployeesofthecompanywhoarealsoitsmembers),underSection30oftheAct.ApublicregisteredcompanymusthaveatleastsevenmembersunderSection4oftheCompaniesActbutwithoutaprescribedupper limit.Apartnershipcannotconsistofmorethan20partners.

(d) Transfer of Shares Sharesinaregisteredcompanyarefreelytransferableunlessthecompany’sarticles

incorporate restrictive provisions. Apartnershiphasnosharesassuchbutapartnercannottransferhisinterestinthefirm

to a third party unless all the partners have agreed to the proposed transfer.

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(e) Management A company’s members have no right to participate in the company’s day-to-day

management.Suchmanagementisvestedintheboardofdirectors. Partners have the right to participate in the firm’s day-to-daymanagement since

Section3ofthePartnershipActrequiresthebusinesstobecarriedon“incommon”.Therightofparticipationinthefirm’smanagementishowevernotgiventoapartnerwhohaslimitedhisliabilityforthefirm’sdebts.

(f) Agency Amemberisnot,perse,anagentofthecompany:Salomon v Salomon & Co Ltd(3).A

partnerisanagentofthefirmbecausethebusinessiscarriedon“incommon”bythepartners themselves. The Partnership Act, Section 7 also expressly provides that every partnerisanagentofthefirmandhisotherpartnersforthepurposeofthebusinessofthe partnership.

(g) LiabilityofMembers Acompany’smemberisnotpersonallyliableforthecompany’sdebtsbecause,legally,

theyarenothisdebts. Apartnerispersonallyliableforthefirm’sdebts.ThisrulehasbeencodifiedbySection

11ofthePartnershipActwhichprovidesthat“everypartnerinafirmisliablejointlywiththeotherpartnersforalldebtsandobligationsofthefirmincurredwhileheisapartner”,unless the partner is a limited partner.

(h) Powers The ultra viresdoctrinelimitsacompany’spowerstotheattainmentofthecompany’s

objectsunderitsMemorandumofAssociation.Partnershipsarenotaffectedbytheultraviresdoctrineandpartnersenjoyrelativefreedomtodiversifythefirm’soperations.

(i) Termination A member’s death, bankruptcy or insanity does not terminate the company’s legal

existencewhereasapartner’sdeath,bankruptcyorinsanityterminatesthepartnershipunless the partnership agreement provides otherwise.

(j) BorrowingMoney A company can borrow on the security of a “floating charge”.A partnership cannot

borrowona“floatingcharge”. (k) OwnershipofProperty A company’s property does not belong to the shareholders, either individually or

collectively. Consequently, a member cannot insure the property since he has noinsurableinteresttherein:Macaura v Northern Assurance Co(4).Afirm’sproperty isthe property of the partners who can, therefore, insure it and, in the case of cash, make drawings from it.

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QUESTION THREE

LAW RELATING TO OTHER ORGANISATIONS

COOPERATIVES

CooperativesinKenyaaregovernedbytheCooperativeSocietiesActchapter490ofthelawsofKenyaenactedin1966.Theyarealsogovernedbythecooperativesocietyrulesenactedin1969.The rules provided for the following matters:

1. Registration of cooperatives and maintenance of related documents.2. Contentsofby-lawsandamendmentprocedures.3. Societymembership.4. Maintenanceofbooks.5. Servicestoberenderedbydistrictcooperativeunions.6. Financial control through meetings.7. Property and funds of the society.8. Arbitration

PARTNERSHIPS

The law relating to partnerships in Kenya is contained in the Partnership Act Chapter 29 of the laws ofKenyaandtheLimitedPartnershipActchapter30ofthelawsofKenya.ThepartnershipactisbasedontheEnglishPartnershipAct1890.Thesetwostatutescodifythelawonpartnershipsin Kenya.

CHAPTER TWO

QUESTION ONE

a) Memorandum of Association

1 This is one of the constitutive documents. It is the external constitution of the company. Itprovidesfortherelationshipbetweenthecompanyandthirdparties.

2 Itisamandatorydocument–everycompanymusthaveit.3 ItscontentsareprescribedbySection5and6oftheCompaniesActe.g.name,object,

and capital.

Articles of Association

1 This is one of the constitutive documents. It provides for the internal constitution. It containstherulesfortheinternalmanagementofthecompany’saffairs.Itregulatestherelationsbetweenthecompanyanditsmembers.

Main difference between the two2 TheMemorandumofAssociationprovidesfortherelationshipbetweenthecompany

and the outside world while the Articles of Association provides for the rules of internal managementofthecompany’saffairs.

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b) Details in the Memorandum of Association

Contains the following clause:

1. Name clause–nameofthecompanywithlimitedasthelastwordthereof.2. Objects clause–thepurposesforwhichthecompanyisincorporated.3. Registeredofficeclause–thisisthedomicileofthecompany.4. Capital clause–thisistheauthorisedornominalcapital.5. Liability clause–statesthatthecompanyislimitedbysharesorguarantee.6. Association clause/declaration clause – states the desire of members to be

incorporated.7. Particularsofsubscribersandsignature8. Date-thememorandummustbedated.

Details in the Articles of Association

AssumingthecompanyadoptsthemodelarticleinTableAofthefirstscheduletotheCompaniesAct, the Articles of Association must contain inter alia.

1. Transfer and transmission of shares.2. Calls.3. Meetings generally.4. Declaration and payment of dividend.5. Powers of directors.6. Officeofthemanagingdirector.7. Bonus issues.8. Winding up.9. Voting.10. Lien on shares.

QUESTION TWO

a) A pre-incorporation contract is a contract entered into before a company isincorporated.

Rulesgoverningpre-incorporationcontracts • Apre-incorporationcontractdoesnotbindthecompany. Kelner v Baxter Company cannot ratify a pre-incorporation contract Natal Land Co. v Pauline Colliery Syndicate Price v Kelsal • Apromoterispersonallyliableonapre-incorporationcontract Kelner v Baxter

RVKyslant • Thecompanymaybeboundbyapre-incorporationcontractifitentersintoanew contract similar to the previous agreement. Mawagola Farmers Co. v Kayanja and others

• Beforeincorporationthecompanylackscontractualcapacityandcannothave agents

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b) Kiokowasapromoterofthecompanyandhestoodinafiduciarypositiontowardsthecompanyhewaspromoting. Thereforehewasboundtodiscloseanysecretprofitsmade in the course of the promotion which he did not.

ThereforemyadvicetoMusembiastothecompany’srightsis: • Thecompanycanrescindthecontract. • TorecoverthesecretprofitmadebyKioko. • Tosuefordamagesforbreachoffiduciaryduties.

My advice is based on the decisions in Erlanger vNewSombrero PhosphateCo., GlucksteinVBarnes

QUESTION THREE

Statutory Provisions

The following are the sections of the Kenya Companies Act which correspond to those sections of theEnglishCompaniesAct1948,whichareusuallylistedinEnglishCompanylawtextbooksastheinstancesinwhichtheveilofincorporationwillbeliftedunderexpressstatutoryprovisions:

(a) Section33:Membershipfallenbelowstatutoryminimum

Thissectionprovidesthatacompany’smemberispersonallyliableforthecompany’sdebtsincurredafterthesixmonthsduringwhichthecompany’smembershiphadfallenbelowthestatutoryminimum,providedhewascognisantofthefactthatthemembershiphad so fallen.The section is regardedasan instanceof “lifting the veil” because itmodifiestheprincipleestablishedinSalomonvSalomon&CoLtdthatamemberisnot liable for the company’sdebts, andpermits thecompany’s creditors to suehimdirectlyinordertorecoverthedebts.Liabilityunderthesectionmayariseonthedeathofamemberifthedeathreducesthemembershipbelowthestatutoryminimumfortheparticular company and:

(i) Notransfereeisregisteredasanewmember (ii) Thepersonalrepresentativeofthedeceasedmemberdoesnotelecttobe registeredasamember,withintheprescribedsixmonths.

Itshouldbenotedthatthesectionlimitsamember’sliabilitytodebtscontractedafter thesixmonths.Itdoesnotmakethememberliableforanydebtsincurredduringthesixmonthswhichfollowthereductionofmembership.Neitherdoesitmakeamemberliableforanytortcommittedbythecompanyduringtherelevanttime.

(b) Section109(4):Non-publication/MisdescriptionofaCompany’sName

Subsection(1)ofSection109oftheActrequiresacompany’sofficersandotheragentstowriteitsnameonitsseal,letters,businessdocumentsandnegotiableinstruments.This is tobedoneprimarily for thebenefitof thirdpartieswhomightcontractwithalimited company without realising that it is a limited company.

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Subsection(4)ofthesectionprovidesthatanyofficeroragentofthecompanywhodoes not comply with the aforesaid statutory requirements shall be liable to a finenotexceedingKshs1,000,andshall furtherbepersonally liabletotheholderofanybillofexchange,promissorynote,chequeororderforgoods,whichdidnotbearthecompany’scorrectname,unlesstheamountduethereonisdulypaidbythecompany.The impositionofpersonal liabilityonthecompany’sagent iswhat isregarded, inasomewhat loose sense, as “lifting the veil of incorporation”.A probably better viewwouldbetoregardthesectionasacodificationofthecommonlawrulewhichmakesanagentpersonallyliableunderacontractwhichheentersintowithathirdpartywithoutdisclosingthatheisactingforaprincipal.That,ineffect,iswhathappensifacompany’sagent does not comply with the statutory requirement.

LiabilityunderthissectionisillustratedbyNassau Steam Press v Tyler & Others(7)and Penrose v Martyr (8). In the lattercase, theplaintiff told thecourt thatshewasNOTawarethat thecompanywas limitedtillafter thebillswereaccepted.Shehad,therefore,beenmisledasto the legalstatusof thecompany. Itshould,however,benotedthatthesectiondoesnotrequirethatthethirdpartysuingthecompany’sofficershouldhavebeenmisledbytheofficer’sfailuretowritethecompany’snamecorrectly.

(c) Section150:GroupAccounts

Section150requiresacompanywhichhassubsidiariestolaybeforethecompanyingeneralmeetingaccountsorstatementsdealingwiththestateofaffairsandprofitorlossofthecompanyandthesubsidiariesatthetimewhenthecompany’sownbalancesheetandprofitandlossaccountarelaidbeforethecompany’sgeneralmeeting.ThegroupaccountsaretobepreparedinaccordancewiththeprovisionsofSections150-154 and paragraphs 17 - 18 of the Sixth Schedule to the Companies Act so as to appear “astheaccountsofanactualcompany”.

Theseprovisionsconstitutewhatisregardedinaloosesenseasaninstanceof“liftingtheveil”becauseamember (theholdingcompany) isobliged to incorporate into itsbalancesheet theassetsand liabilitiesof thecompanyofwhich it isamember(thesubsidiarycompany)asiftheywereitsownassetsandliabilities.Thisisamodificationof the general principle that a company’s assets and liabilities are not amember’sassetsandliabilitiesandwouldnot,therefore,beincorporatedintothemember’sownbalancesheet.

(d) Section167:InvestigationofCompany’sAffairs

Section167givesaninspectorappointedbythecourtpowerstoinvestigatetheaffairsofthatcompany’ssubsidiary,orholdingcompany,iftheinspectorthinksitnecessaryto do so for the purpose of his investigation. An investigation instituted pursuant to this powerwouldberegarded,inaloosesense,asaninstanceof“liftingtheveil”becausetheordertoinvestigateacompanysufficedtoinvestigatethecompany’smember,orvice versa, as if they were one entity.

Generallyspeaking,acompanyanditsmember(inthiscase,theholdingcompany)are

altogetherseparateentitiesandacourtordertoinvestigatetheaffairsofasubsidiarycompany would not authorise an investigation of its holding company, and vice versa.

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(e) Section173(5):InvestigationofCompany’sMembership

Section173(1)empowerstheregistrartoappointoneormorecompetentinspectorstoinvestigateandreportonthemembershipofanycompanyforthepurposeofdeterminingthetruepersonswhoareorhavebeenfinanciallyinterestedinthesuccessorfailureofthecompanyorabletocontrolormateriallytoinfluencethepolicyofthecompany.

Forthepurposeofthatinvestigation,subsection5ofthesectionconfersontheinspector,or inspectors, power to investigate themembership of the company’s subsidiary orholdingcompanyforthesamepurpose.Acompanyanditssubsidiary,orsubsidiaries,aretherebyregardedasoneentityforthepurposeoftheinvestigationandtheveilofincorporationtherebylifted.

(f) Section210:Take-overbids

Section210providesthatwhereaschemeorcontractinvolvingthetransferofsharesoranyclassofsharesinacompanytoanothercompanyhasbeenapprovedbytheholders of not less than nine-tenths in value of the shares whose transfer is involved the transferee company may, at any time within two months after the expiration of fourmonthsafterthemakingoftheofferbythetransfereecompany,givenoticeintheprescribedmannertoanydissentingshareholderthatitdesirestoacquirehisshares.The dissenting shareholder must then apply to the court within one month from the date on which the notice was given for an order restraining the transferee company from compulsorily acquiring his shares. The court order may, in an appropriate situation, lifttheveilofincorporation.ThisisillustratedbyRe: Bugle Press Ltd(9)inwhichanoffermadebyacompanywasregardedashavingbeenmade, insubstance,bythecompany’smembers.Thecourttherebyliftedtheveilofincorporationbytreatingthecompanyanditsmembersasoneentityforpurposesofacceptanceoftheoffer.

(g) Section323:FraudulentTrading

Section 323 provides that if, in the course of the winding up of a company, it appears thatanybusinessofthecompanyhasbeencarriedonwithintenttodefraudcreditorsofthe company or creditors of any other person, or for any fraudulent purpose, the court, ontheapplicationoftheofficialreceiverortheliquidatororanycreditororcontributoryof the company may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall bepersonallyresponsible,withoutanylimitationofliability,foralloranyofthedebtsorotherliabilitiesofthecompanyasthecourtmaydirect.

The personal liability of the person concerned for the company’s debts is whatconstitutes, in an extremely loose sense, an instance of lifting the veil of incorporation. ThecorrespondingsectionoftheEnglishCompaniesActisinvariablycitedinEnglishcompanylawtextbooksasaninstanceofliftingtheveil.Thecitation,thoughhallowedbyEnglishacademictradition,islogicallyuntenable.

NoKenyacaseappearstohavebeendecidedunderthesection.However,therelevantEnglishcasesdosuggestthattobe“knowinglyparties”tofraudulenttradingunderthesectionsomepositivestepmusthavebeentakenbythoseconcerned:Re: Maidstone Building Provisions Ltd(10).

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Itshouldbenotedthat,onitsliteralconstruction,Section323appearstobewiderthanSection33becauseitalsocoversliabilitiesotherthandebts,suchasliabilityintort,ordamagesforbreachofcontract.Itcanalsobeinvokedagainstdirectors,membersoranybodyelsewhoparticipatedinthefraudulenttrading.However,theobviouslimitationsofthesectionarethatitcanonlybeinvokedonawindingupandtheapplicantmustprove fraud.

If the liquidator applies to the court any money received is distributed to creditorsgenerally and forms part of the general assets of the company: Re William C Leitch Ltd (No2)(II).However,ifacreditorapplies,thecourtmayawardhimhisactuallossor,alternatively,orderthedefendantstopayhisactualdebt:Re:CyonaDistributorsLtd(12).

Lifting the veil under Case Law

NumerousEnglishcaseshavebeenvariouslyclassifiedbyEnglishwritersasinstancesof“liftingtheveilof incorporation”.Afewofthesecasesaresummarisedbelow.Butitshouldbenotedthattheparticularjudgesweremerelyascertainingthefactsofthecasebeforethemandmakingtheappropriatedecisionratherthanconsciouslyordeliberately“liftingtheveilofincorporation”.Itisthewriterswhohavecategorisedthesaidcasesasinstancesofliftingtheveilbecausethedecisions in thosecasesappearedto themtobeamodificationof theprinciple inSalomon’scase.Thesecasesmaybeexplainedunderthefollowingheadings.

(a) Agency/Trustee/Nominee

One of the ratio decidendi in Salomon’s casewas stated by LordMacnaghten that“thecompanyisnotinlawtheagentofthesubscribers”.ThispropositionwasaffirmedbytheEnglishCourtofAppealandextendedtoassociatedcompaniesinEbbwValeUrbanDistrictCouncilvSouthWalesTrafficAreaLicensingAuthority when Lord Cohen stated:

“Undertheordinaryrulesoflaw,aparentcompanyandasubsidiarycompany,evena100%subsidiarycompany,aredistinctlegalentities,andintheabsenceofanagencycontractbetweenthetwocompanies,onecannotbesaidtobetheagentoftheother.ThatseemstometobeclearlyestablishedbySalomon v Salomon & Co Ltd(3).

Fromthisstatement,itcanbeinferredthat,ifacourtheldthatacompanyactedinaparticular instance as an agent of its holding company, the veil of incorporation would havebeen lifted.This is illustratedby thedecision inFirestoneTyre&RubberCovLlewellyn (12)inwhichitwasheld,onthebasisofthetradingarrangementsbetweentheholdingcompanyanditssubsidiary,thatthesubsidiarywastheagentoftheholdingcompany.

(b) Fraudorimproperconduct

English courts have intervened on numerous occasions and lifted the veil of incorporation inordertocircumventafraudulentorimproperdesignbyabunchofschemingpromoters

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orshareholders.ThisisillustratedbythedecisionsinJones and Another v Lipman and Another(13)andGilfordMotorCoLtdvHorne(14).Thecourt’sorderinthelattercaseisusuallycitedasaninstanceofliftingtheveilbutitshouldbenotedthatthedefendant(Horne)wasnotamemberofthecompanyand,inprinciple;noveilexistedbetweenhimandthecompanywhichwouldhavebeenliftedbythecourt.ItisratheraninstanceofthecourtregardingthecompanyasMrHorneinanotherform(“alterego”).

(c) EnemyCharacter

Acompanymaybe regardedasanenemy if, interalia,all or substantiallyall of itssharesareheldbyalienenemies.ThisisillustratedbyDaimler Co Ltd v Continental Tyre&RubberCo(GreatBritain)Ltd(15).SincethereappearstobenoKenyacaseonthepoint,theprinciplessummarisedbyLordParkermaybeusefulguidancetoaKenyan who might have to determine, in a given case, whether a particular company is toberegardedasafriendorenemyofKenya.

(d) RatificationofCorporateActs

AnumberofEnglishcaseswhichareregardedasinstancesofliftingtheveilarethoserelatingtoinformalratificationbythemembersofactsdoneonbehalfofthecompany.Ineachofthesecasesthecourtregardedadecisionofthemembersasthedecisionofthecompanyitselfandtherebyliftedtheveilofincorporation.ThisisillustratedbyRe: Duomatic Ltd(16)andRe: Express Engineering Works Ltd(17).

(e) GroupEnterprises

NumerouscaseshavebeendecidedbyEnglishcourtsthegeneraltenorofwhichistoregardasubsidiaryanditsholdingcompanyasoneentity.Thereisnobasicprinciplegoverningtheliftingoftheveilintheseinstancesandeachdecisionwasbasedonthefacts of the particular case. Examples are HaroldHoldsworth&CoLtdcaddies(18),HellenicandGeneralTrustLtd(19)andDHNFoodDistributorsvLondonBoroughofTowerHamlets(20).

CHAPTER THREE

QUESTION ONE

a) ContentsoftheRegisterofMembers 1. Name and address of every shareholder. 2. Numberofsharesorstocksheld. 3. Date of entry of the name. 4. Date of removal of the name. 5. Amount paid on each share. 6. Postaladdressofeverymember.

b) MyadvicetoNjorogeisthatheshouldapplytotheHighCourtforanorderofrectificationof the register to include his name. My advice is based on the Provisions of theCompanies Act.

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c) Theprinciplehasthefollowingconsequences: 1. A company cannot purchase its own shares. 2. Acompanymustnotgivefinancialassistanceforthepurchaseofitsownshares. 3. Dividendsmustnotbepaidexceptoutofdistributableprofits. 4. Whereapubliccompanysuffersaseriouslossofcapital,ameetingofthecompany

mustbecalledtodiscusstheissue. 5. Sharesmustnotbeissuedatadiscount. 6. Reduction of capital must strictly comply with the provisions of the Companies Act.

QUESTION TWO

a) Waysofraisingcapital 1. Offer of shares through the issue of a prospectus, offer for sale, placing etc. 2. Borrowing. 3. Bonus issues. 4. Issues on take-overs.

b) Issueofsharesatadiscount 1. Thesharesmustbelongtoaclassalreadyissuedbythecompany. 2. One year must have elapsed from the date the company was entitled to commencebusiness. 3. Itmustbeauthorisedbyaresolutionofmembersingeneralmeeting 4. Theresolutionmustfixthemaximumrateofdiscountatwhichthesharesareto beissued. 5. Theissuemustbeapprovedbythecourt. 6. Theissuemustbemadewithinonemonthfromthedateofapprovalbythecourt or such extended time as the court may permit. 7. Theissuemustbedisclosedintheprospectusofthecompany.

c) Termsimpliedinacontractofsaleofsharesbetweenasellerandpurchaser. 1 Thatthebuyerwillpaythepriceoftheshares. 2 That the seller has the right to sell. 3 That the purchaser shall indemnity the seller against any calls made after the date of the contract. 4 Thesellerwillgivetothepurchaseragenuinesharecertificaterequiredtoenable thepurchasertoberegisteredasmember. 5 Thesellerwillnotdoanythingpreventingthebuyerfromhavingthetransfer registered or delay the process. 6 Thesellerwillcompensate thebuyer foranycallsor liabilitywhichmayarise in

respect of the shares sold.

QUESTION THREE

a)1. Theissuedcapitalofthecompanywhetherpaidupornotmustbemaintained.2. Itisinprincipalregardedasapermanentfundorafundoflastresortavailabletoall

creditorsintheeventofdefaultbythecompany.3. The capital of a registered company must remain certain. It acts as a guarantee that

creditorswill bepaid. Creditors are entitled to insist that nopart of the company’s

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capitaliswastedorreturnedtomembers.4. Creditors and other persons who deal with companies are aware that the companies

haveanamountofcapitalandareentitledtoinsistnopartthereofisreturnedtomemberswithout due compliance with law.

5. Itis,therefore,afundamentalprincipleofcompanylawthatcapitalbemaintained.6. Company Law has evolved both statutory provisions and prepositions of common

law to facilitate the raising and maintenance of capital. One of these provisions is that the company should only reduce capital in accordance with the provisions of the CompaniesAct.TheseprovisionsoftheCompaniesActprescribethecircumstancesand conditions under which a company may reduce capital.

i) AuthorityoftheArticles UnderSection68(1)oftheCompaniesAct,acompanylimitedbysharesor guaranteeandhavingasharecapitalmayreduceitscapitalofauthorisedbyits articles.

ii) SpecialResolutions UnderSection68(1)oftheActreductionofcapitalofcapitalbyacompanymust beauthorisedbyaspecial,resolutionofmembersingeneralmeeting.This resolutionisreferredtoas“resolutionforreducingsharecapital”.Thereduction of capital may take the form of: Reducingorextinguishingliabilityonanyunpaidupcapital.

Cancellationofanypaidupcapital,whichislostorunrepresentedbyavailable assets. Paying off any paid up capital, which is in excess of the wants of the company.

iii) Applicationtocourtforconfirmation UnderSection69(1)oftheAct,afterthespecialresolutionispassed,an applicationmustbemadetotheHighCourtforconfirmationofthereduction.The essence of the application is for the court to satisfy itself that the reduction does notunfairlyprejudicethepositionofanyclassofmembersorcreditors.In particular the court must settle a list of all creditors and must satisfy itself that any creditorentitledtoobjecttothereductionhaseitherobjectedorconsentedtothe same.Inthecaseofanobjection,thecourtmustbesatisfiedthatthecreditors claimordebthasbeendischarged,determinedorsecured.Ifthecourtisso satisfied,itmayconfirmthereduction.

iv) Confirmationofthereduction UnderSection71(1)oftheAct,ifthecourtissatisfiedthatcreditorsentitledto objecttohaveconsentedorinthecaseofanobjection,thecreditorsclaimordebt hasbeendischarged,determinedorsecureditmaymakeanorderconfirmingthe reductiononsuchtermsandconditionsasitdeemsfit.Thecourtmayforany specialreasonifitdeemsfitorderthecompanytoaddthewords“andreduced”to it’snameforaspecifiedduration.Suchwordsformpartofthecompany’sname for the duration of the order.

v) Registrationofthereduction UnderSection71(1)oftheAct,uponproductionofacertifiedcourtorder approving the reduction and the minute of the same the registrar registers the

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reductionandissuesacertificateofregistration,whichisconclusiveevidencethattherequirementsof theact relating to reductionof capital havebeencompliedwith. Areductionofcapitalbyacompanytakeeffectwhenregisteredandnoticeofregistrationmustbepublishedinaccordancewiththecourtsdirection

Underwriting Commission

This is the amount or sum paid by the company to a personwho agrees to underwrite thecompany’ssharesi.e.takeupallthesharesoraspecifiednumberofthesharesnottakenupbythepublic.It’spayablewhethertheperson(Underwriter)takesupthesharesornot.Itmustbedisclosedinthecompany’sprospectus.

Brokerage

This is an amount paid by the company to a person (or persons) who agrees to place thecompany’sshares i.e.exhibits thecompany’sprospectus in theirpremisesorsendcopies totheirclients,butwithoutincurringanyliabilityontheshares.

Itisanamountonlypayabletobrokers.

Itmustbedisclosedinthecompany’sprospectus.

CHAPTER FOUR

QUESTION ONE

Crystallization of Floating Charges

Afloatingchargeisachargeonaclassofassetsofacompany.Theactualassetsinthatclassownedby thecompanychange fromtime to time. Theassets that thechargee isentitled toutilise forpaymentof thesecureddebtare theassets in theclass that thecompanyownsatthetimewhenthechargecrystallises.Oncrystallisationafloatingchargebecomesafixedorspecificequitablecharge.

Afloatingchargecrystallises:

(i) Whenthechargeeappointsanadministrativereceiver. Thepowertodosoexistsonlybyvirtueofthechargecontract,whichmust,therefore,

specifythecircumstancesinwhichthepowerisexercisable.e.g. 1 Liquidation or winding up 2 Appointment of a receiver 3 Levy of execution or distress 4 Insolvency 5 Cessationofbusiness

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(ii) Whenthecompanygoesintoliquidation.(iii) Whenthecompanyceasestocarryonbusiness.(iv) If thechargecontractsoprovides,whenthechargeegivesnoticethat thechargeis

convertedintoafixedchargeonwhateverassetsofthechargedclassareownedbythe company at the time the notice is given.

(v) When another floating charge on the company’s assets crystallises, it causes thecompanytoceasebusiness.

(vi) WhenthereisCommencementofrecoveryproceedingsagainstthecompany.(vii) Occurrence of an event, which under the terms of the debenture causes

crystallisation.

(a)Advantagesoffloatingcharges

Fromthecompany’spointofview,afloatingchargemayberegardedasconferringthefollowingadvantages:

i. Thecompanyisfreetodealwiththeassetschargedasiftheyhadnotbeencharged.ii. Enablescompanieswithoutfixedassetstoborrow.iii. It enables the company to charge property which otherwise would not have been

chargedsincesuchpropertycannotbesubjecttoafixedcharge.iv. Enhancestheborrowingcapacityofacompanyoffloatingcharges.

(b)Disadvantagesoffloatingcharges

Fromthelender’spointofview,afloatingchargehasthefollowingdisadvantages:

i. The value of the assets charged is uncertain since no particular assets are charged.ii. Afloatingchargecreatedwithinsixmonthsbeforethecommencementofwindingupis

deemedtobeafraudulentpreferenceandisvoid.iii. Itispostponedtoalaterfixedcharge.iv. Thechargemaybeavoided,duringthecompany’sliquidation,underSection314ofthe

Act;unlessitisprovedthatthecompanyimmediatelyafterthecreationofthechargewas solvent.

v. Where a seller of goods reserves title until payment, a floating charge will not, oncrystallisation,attachtothesegoods.ThisisillustratedbyAluminiumIndustriesVaassenvRomalpaAluminium(647).

vi. Certain other interests e.g. landlords distress for rent have priority over floatingcharges.

QUESTION TWO

Debenture Trust Deed

Whendebenturesareoffered forpublicsubscription, thecompanyusuallyenters intoa trustdeedwith trustees (usually a trust corporation).The trustees are appointed and paid by thecompanytoactonbehalfofthedebentureholders.Thechargesecuringthedebenturesismadeinfavourofthetrusteeswhoholditontrustforthedebenturestockholders.

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Adebenturestockholder,unlikedebentureholder,isnotacreditorofthecompany.Hecannottherefore present a petition to wind up the company: Re Dunderland Iron Co Ltd. The trustees aretechnicallythecreditorsofthecompanyforthewholedebenturedebtwhilethestockholderisanequitablebeneficiaryofthetrust.

Contents of a Trust Deed

The main terms of a trust deed are usually some or all of the following:

i. A covenant (promise) by the company to pay to the debenture holders the agreedinstalments of the loan and accrued interest.

ii. A description of the property charged, whether specifically or by way of a floatingcharge.

iii. Theeventsinwhichthesecurityistobecomeenforceable,suchasfailuretopaytheprincipal sum or interest as agreed.

iv. A clause empowering the trustees to take possession of the property charged in the eventofthesecuritybecomingenforceable,andtocarryonthebusinessandtoselltheproperty charged.

v. Appointment of a receivervi. Meetingsofdebentureholders.vii. Covenantsbythecompanyto insurethepropertychargedandtokeeptheproperty

charged in good repair.

Advantages of a Trust Deed

A trust deed has several advantages some of which are:

(a) Thecircumstancesinwhichtheprincipalsummaybecomerepayableareclearlyspeltout.

(b) Theappointmentoftrusteesfacilitatestheefficientadministrationofthetrustsincetheyaretheretoexercisecontinuoussupervisionofthedebentureholders’rightsandtotakeprompt action if the need arises.

(c) Thetrusteesareempoweredtoappointareceivertocarryonthebusinessincaseofurgency.

(d) Covenantsareentered intobythecompanyfor insurance,repairandothermatters,whichcanbeenforcedbythetrustees.

(e) Thetrusteeshavealegalmortgageoverthecompany’sland.

Liability of Trustees

Trusteesfordebentureholdersowethesamedutiestotheirbeneficiariesasareowedbytrusteesin general. In particular, they cannot purchase the debentureswithout the consent of all thedebenture-holders.Section90(1)providesthatanyprovisioninatrustdeed,orinacontractwiththeholdersofdebenturessecuredbyatrustdeed,forexemptingatrusteefrom,orindemnifyinghimagainst,liabilityforbreachoftrustwherehefailstoshowthedegreeofcareanddiligencerequiredofhimastrustee(havingregardtotheprovisionsofthetrustdeed)shallbevoid.Thisprovision does not, however, invalidate:

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i. Anyreleasegivenaftertheliabilityhasarisenii. Aprovisioninatrustdeedforthegivingofsuchareleasebyamajorityofnotlessthan

three-fourthsinvalueofthedebentureholderspresentandvotinginpersonorbyproxyat a meeting summoned for the purpose

iii. Aprovisioninatrustdeedforthegivingofsuchareleaseeitherwithrespecttospecificacts or omissions or on the trustee dying or ceasing to act.

QUESTION THREE

Section2of theActdefines “debenture”as including “debenturestock,bondsandanyothersecuritiesofacompanywhetherconstitutingachargeontheassetsofthecompanyornot”.

There isnoprecise legaldefinitionofa “debenture”. InLevyvAbercorrisSlate&RubberCo Chitty,Jstatedthathecouldnotfindanyprecise legaldefinitionof theterm“debenture”andwentontoobservethattheword“isnot,eitherinlaworcommerce,astrictlytechnicalterm,orwhatiscalledatermofart”.Healsostatedthat,etymologically,thewordisaderivationfromthe Latin Debenturemihi which were the opening words of certain documents, which used to beissuedbyEnglishcompaniesinthe1860sasanacknowledgementofaloanthecompanieshad received from the person to whom the document was issued. With the passage of time theword“debenture”acquiredthemeaningitgenerallyhastoday,namely,adocumentissuedbya registered company toacknowledge, or evidence, an indebtedness.Primarily, theword“debenture”isappliednottotheindebtednessitselfbuttothedocumentevidencingit.

Debentures and debenture stock

A debenture is usually a formal document in printed form. The main types, which a company can issue, are:

(a) ASingleDebenture Asingledebentureisusuallyaformaldocumentinprintedformandsealed.Itisusually

issuedwhenacompanyobtainsaloanfromasinglelender,suchasitsbank.Thebankwouldnormally insist that thecompanysignsandsealsoneof thebank’s standardformsofdebenturewhichwouldnotonly createa charge in favourof thebankbutwould also give it certain powers in relation to the charged property.

(b) Debentures Issued as a Series Debentures are issued as a series if the company decides to borrowmoney from

differentlendersondifferentdatesbutinsuchawaythatthelenderswouldrankequallyin their right to repayment and in any security given to them. Each lender receives a debentureinidenticalforminrespectofhisloanandthedebenturesareexpressedtoform a series ranking pari passu.

(c) DebentureStock “Debenturestock”iscreatedwhenapubliccompanyissues“debenturestockcertificates”

toaclassofdebentureholders,evidencingtheportionofthetotaltowhicheachoneofthemisentitled.Eachlenderhasarighttoberepaidhiscapitalattheduetimeand,beforethattime,toreceiveinterestonitattheagreedrate.Eachdebenturewillbeforaspecifiedsum,e.g.Kshs.100orShs.1,000,asstipulatedintheconditionsofissue.

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Types of debentures


i. Redeemableorirredeemableii. Registeredorbeareriii. Securedorunsecured(naked)

Subordinated debentures

Under American law, these are obligations often referred to as subordinated debts, juniordebts or inferior debts, uponwhich the right to receive payment is subordinated or deferredbya subordinationagreementor clause, to thepriorpaymentof certainother indebtedness,sometimesreferredtoassenior,superiororpriordebts.Thesubordinationmaybeincompleteorcomplete.Ifcomplete,thepaymentofprincipalandinterestonthesubordinateddebtisdeferreduntiltheobligationsontheseniordebtaresatisfied.Thesubordinationisvalidasbetweentheparties.

Issue of Debentures

Debenturesareusuallyissuedbyaresolutionoftheboardofdirectorsunderpowersconferredby thecompany’sarticlesofassociation.TableA,Article79provides that “thedirectorsmayexerciseallthepowersofthecompanytoborrowmoney...andtoissuedebentures,debenturestock, and other securities”. Such authority is however not required in the case of a tradingcompanywhichhasimpliedpowertoborrowmoneyforthepurposesofitsbusiness,andtogivesecurityfortheloanbycreatingamortgageorchargeoveritsproperty.

Debentures and Shares

Debentures and shares have the following similarities and differences.

(a) Similarities i. Adebentureisusuallyoneofa“series”or“class”,whichissimilartoa“class”of shares. ii. Debentures, as well, as shares are long-term investments in the company and are transferableinthesamemanner. iii. Debenturesandsharesmaybeissuedinthesamewaythroughaprospectus issue.

(b) Differences i. Ashareholderisamember(i.e.aninsider)whereasadebentureholderisa creditor(i.e.anoutsider). ii. Ashareholderhasaninterestinthecompanybutnotinthecompany’sproperty.A debentureholderhasnointerestinthecompanybuthasaninterestinthe company’sproperty,whichconstituteshissecurity.Consequently:

A shareholder can attend a meeting of the company and vote at the meeting whereas adebentureholdercannotdoso.

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Ashareholdercannotinsurethecompany’spropertywhereasadebentureholdercandoso(unlessthedebentureisa`naked’one).

iii. Interestondebenturesmustbepaidevenifthecompanydoesnotmakeaprofit andcan,therefore,bepaidoutofcapital.Dividendsonsharesarepayableonlyif profitsaremadeandcannotbepaidoutofcapital.

iv. Acompanycanpurchaseitsowndebenturesbutcannot,asageneralrule, purchase its own shares.

v. Asageneralrule,sharescannotbeissuedatadiscount,whereasdebentures maybeissuedatadiscount.

CHAPTER FIVE

QUESTION ONE

Methods of becoming a member

A person may become a member of a company in one or other of the following ways:

i. SubscribingtotheMemorandum Section28(1)providesthatthesubscriberstothecompany’sMemorandumshallbe

deemedtohaveagreedtobecomemembersoftheCompanyandontheregistrationof the memorandum shall have their names entered in the company’s register ofmembers.

The provision regarding entry in the register is an administrative directive for the

company’simplementationandnon-compliancewithitdoesnotaffectthepre-existingmembership.

ii. Allotment Apersontowhomacompany’sshareshavebeenallottedacquireshismembership

byvirtueofsub-section2ofSection28,beingapersonwhohasagreedtobecomeamember.However,itwasheldinNICOL’Scase that themembershipcommencesfromthemomentthenameisenteredinthemembers’register. If the company wrongfully refuses to enter the name in the register, the allot tee must take rectificationproceedings foracourtorderdirectingthecompanytoenterthenameinitsmembers’register.

iii. Transfer A transfer isapurchaseofshares fromacompany’sshareholder,andnot from the

company itself. A transfereealsoacquireshismembershipbyvirtueofsub-section2ofSection28,

beingapersonwhohasagreedtobecomeamember.TheprincipleinNICOL’scase appliestotransfereesaswell,andatransfereebecomesamemberfromthemomenthisnameisenteredintheregisterofmembers.

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iv. Transmissionondeathofamember A transmissionisalegalprocessbywhichownershipofsharesinacompanychanges

automatically on the death of a member to his personal representative. This isacknowledgedbyTableA,Article29,whichprovides that “incaseof thedeathofamember...thepersonalrepresentativesofthedeceasedwherehewasasoleholdershallbetheonlypersonsrecognizedbythelawashaving any title to his interest in the shares”.

If the personal representative electsordecidestoberegisteredhimselfastheholderof

the shares, the election constitutes the agreementtobeamember,andtheprovisionsofSection28(2)becomeapplicable,namely,hewillbecomeamemberfromthemomenthisnameisenteredintheregisterofmembers.

v. Transmissiononbankruptcyofmember Abankruptmember’ssharesinacompanywillbetransmittedtohistrusteeinbankruptcy

according to the principles of bankruptcy law.The company’s articlesmay give thetrusteeanoptionofbeingpersonally registeredasamember,as isprovided forbyTableA,Article30.Ifthetrusteeelectsordecidestoberegisteredastheholderoftheshares the election constitutes the agreement tobeamemberandtheprovisionsofsub-section2ofs.28becomeapplicable—i.e.thetrusteeinbankruptcywillbecomeamemberfromthemomenthisnameisenteredintheregisterofmembers.

vi. CompliancewithSection182(2) Apersonwhohasconsentedtobeadirector,andhasgiventhestatutoryundertaking

totakeandpayforhisqualificationshares,isdeclaredbySection182(2)tobe,“inthesamepositionasifhehadsignedthememorandum.”

TheprovisionsofSection28(1)accordinglyapplytohim,andhebecomesamemberof the company when Memorandum of Association is registered.

vii. Estoppel Apersonwho,withouthavingagreed tobeacompany’smember, isaware thathis

name iswrongly entered in its register ofmembers but takes no steps to have hisnameremovedtherefrom,maybeestoppel fromdenyinghisapparentmembershiptosomebodywhoreliedonitandextendedcredit to the company.

QUESTION TWO

Cessation of Membership

Aperson’smembershipofacompanymayceaseorcometoanendinmanyways,someofwhich are:

i. Transfer A“transfer”ofsharesoccurs ifanexistingmembersells themtoa thirdparty. If the

thirdpartyisnotyetamember,hewillbecomeamemberfromthemomenthisnameisenteredinthecompany’sregisterofmembers.

However,thetransfereedoesnotautomaticallyceasetobeamemberasaconsequence

ofthetransfer.Amemberisnotboundtosellallofhisshareswheneverhecontemplates

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asale.TableA,Article23,permitsmembers to transferallor any of their shares. A member,therefore,ceasestobeamemberonlyifhetransfersALL of his shares.

ii. Forfeiture Whereacompany’sarticlesauthorisethedirectorstoforfeitamember’ssharesand

thedirector’sforfeitALLofthesharesheldbyamember,thememberwillceasetobeamemberfromthedatespecifiedinthearticles as the effective date for forfeiture.

TableA,Article38providesthat“astatutorydeclarationinwritingthatthedeclaringisadirectororthesecretaryofthecompany,andthatashareinthecompanyhasbeenduly forfeited on a date stated in the declaration,shallbeconclusiveevidenceofthefactsthereinstated.”

Article37providesthatapersonwhoseshareshavebeenforfeitedshallceasetobeamemberin respect of the forfeited shares.

Hethereforeceasestobeamemberof the company only if all of the shares previously heldbyhimareforfeited.

iii. Surrender of Shares Theprecisenatureofsurrenderandthemachinerybywhichitiseffectedarenotclear

since it is not provided for by theCompaniesAct orTableA.However, inTrevor v Whitworth,thejudgestatedthatasurrender“doesnotinvolveanypaymentoutofthefundsofthecompany,”andthat“ifitwereacceptedinacasewherethecompanywereinaposition to forfeit theshares the transactionwouldseem tomeperfectlyvalid,”presumablyevenifnotexpresslyauthorisedbythearticles.

Aperson’smembershipwillthereforecometoanendifhesurrendersall his shares to the company with the approval of the directors.

iv. Death Whenapersondies,hismembershipofacompanywillcometoanautomaticendby

virtueoftheprovisionsoftheLawofSuccession.Thesharespreviouslyheldbyhimbecome,legally,thepropertyofhispersonalrepresentative.(SeeTableA,Article29)

v. Bankruptcy Whenapersonbecomesbankrupt,hismembershipofacompanywillcometoanend

under the provisions of the Bankruptcy Act, which vest a bankrupt’s property in histrusteeinbankruptcy(seeTableA,Article32).

vi. Salebyacompanyinexerciseoflien A company, like an unpaid seller under the Sale of Goods Act, has a right of lien on its

sharesassecurityforthebalanceoftheirprice.Forexample,TableAArticle11givesthecompany“afirstandparamountlien”oneveryunpaidshare.

If the company sells ALLthesharesheldbyamember,themembershipwillcometoanendfromthemomentthebuyer’snameisenteredintheregister.TableA,Article12givesthecompanypowertosell“anysharesonwhichthecompanyhasalien”.

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vii. Redemptionofredeemablepreferenceshares Ifamember’sentireholdingconsistexclusivelyofredeemablepreferencesharesand

allofthesesharesareredeemedbythecompanyundertheprovisionsofSection60oftheCompaniesAct,hewillceasetobeamemberfromthedateonwhichhisnameisremovedfromtheregisterofmembers.

viii. Repudiationbyaninfant Aninfantmemberhasacommonlawrighttorepudiatehismembershipofacompany

if there has been a total failure of consideration because the shares have becomeworthless:SteinbergvScala(Leeds)Ltd(58).

ix. Liquidation or winding up A company’s liquidation terminates membership of all former members, from the

momentitbecomeseffective.

x. Rescission of contract: A shareholder who rescinds a contract of purchase of shares or allotmentbyreasonofavitiatingelementorotherwiseceasestobeamember

xi. Disclaimerbytrusteeinbankruptcy:UnderEnglishlawifatrusteeinbankruptcy refuses totakeupthesharesofanundischargedbankruptheceasestobeamemberofthecompany.

QUESTION THREE

THE REGISTER OF MEMBERS

Section112(1) requireseverycompany tokeeparegisterof itsmembersandprescribes thecontents of the register.

Contents

The register of members must contain the following particulars—

i. Thenamesandpostaladdressesofthemembers;ii. Astatementofthesharesheldbyeachmember,distinguishedbyitsnumberifithas

one;iii. Theamountpaidoragreedtobeconsideredaspaidonthesharesofeachmember;iv. Thedateatwhicheachpersonwasenteredintheregisterasamember;andv. Thedateatwhichanypersonceasedtobeamember.

Where the company has converted any of its shares into stock the register shall show the amount ofstockheldbyeachmember insteadof theamountofsharesand theaforesaidparticularsrelating thereto.

Failuretokeeparegisterofmembersrendersthecompanyandeveryofficerofthecompanywhoisindefaultliabletoadefaultfine[s.112(4)].

Section120providesthattheregisterofmembersshallbeprima facie evidence of the matters it contains.

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Location

Section112(2)requirestheregisterofmemberstobekeptattheregisteredofficeofthecompany.Ifitismadeupatanotherofficeofthecompany,oratsomeotheroffice,itmaybekeptatthatotherofficeprovidedtheofficeisnotataplaceoutsideKenya.

Theregistrarmustbeinformedoftheplace,otherthantheregisteredoffice,wheretheregisteriskept.Anychangeinthatofficemustbenotifiedtotheregistrarwithin14daysfailingwhichthecompanyandeveryofficerofthecompanywhoisindefaultshallbeliabletoadefaultfine.

Index of Members

Section113(1)providesthatacompanywithmorethan50membersmust,unlesstheregisterofmembersconstitutesanindex,keepanindex(whichmaybeintheformofacardindex)ofthenamesofthemembersofthecompany,andmustaltertheindexwithinfourteendaysafteranyalterationintheregister.Theindexshallinrespectofeachmembercontainasufficientindicationtoenabletheaccountofthatmemberintheregistertobereadilyfoundandshallbeatalltimeskeptatthesameplaceastheregisterofmembers.

Closure of Register: Under Section 117 of the Act, a company may, on giving notice byadvertisement in some newspaper circulating in Kenya, or in that area of Kenya in which the registeredofficeofthecompanyissituate,closetheregisterforanytimeortimesnotexceeding30daysineachyear.

Inspection of Register

Section115(1)providesthattheregisterandindexofmembersshallduringbusinesshoursbeopentotheinspectionofanymemberwithoutcharge,andofanyotherpersononpaymentofafee,notexceedingKshs.200foreachinspection,asthecompanymayprescribe.Anypersonmay require a copy of the register or any part thereof, on payment of one shilling or such fewer sums as the company may provide, for every hundred words or fractional part thereof required tobecopied.Thecopymustbesuppliedwithinaperiodof14dayscommencingonthedaynextafterthedayonwhichtherequirementisreceivedbythecompany.

Ifacompanyofficerrefusesaninspectionorfailstoprovidearequiredcopy,thecompanyandeveryofficerofthecompanywhoisindefaultshallbeliableinrespectofeachoffencetoafinenotexceedingKshs.40andfurthertoadefaultfineofKshs.40.Thecourtmaybyorder—

(a) Compelanimmediateinspectionoftheregisterandindex,or(b) Directthatthecopiesrequiredshallbesenttothepersonrequiringthem.

The court ordermay also bemade against the company’s agentwho keeps the company’sregisterofmembersifthecompany’sfailuretoprovideacopy,orpermitaninspection,isduetohis default.

Section117permitsacompany,ongivingnoticebyadvertisementinsomenewspapercirculatinginKenyaorinthatareaofKenyainwhichtheregisteredofficeofthecompanyissituate,toclosetheregisterofmembersforanytimeortimesnotexceedinginthewhole30daysineachyear.Thepurposeofthisprovisionistokeeptheregisterstaticsothatmembers’holdingsmaybeextracted as at a particular date for the purpose of computing dividends.

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RectificationoftheRegister

Section 118(1) empowers the High Court to rectify the register of members in two cases,namely:

i. Ifthenameofanypersonis,withoutsufficientcause,enteredinoromittedfromthecompany’sregisterofmembers;or

ii. Default is made or unnecessary delay takes place in entering on the register the fact of anypersonhavingceasedtobeamember.

The application to the court to rectify the register may be made by:

i. The aggrieved person.ii. Anymember.iii. The company.

Where an application is made the court may:

i. Refusetheapplication;ii. Order rectification of the register and payment by the company of any damages

sustainedbyanypartyaggrieved.

Anorderrectifyingtheregistercanbemadeevenwhenthecompanyisbeingwoundup:Re SussexBrickCo(59).

The case of Burns v Siemens Bros Dynamo Works Ltd(60)showsthatthecircumstancessetoutinSection118(1),above,arenottheonlyonesinwhichthecourtcanorderrectification.Itmayalsodosowhereanamestandsontheregisterwithoutsufficientcause.

Thecourtmayalsoorderrectificationoftheregisterbydeletingareferencetosomeonlyoftheregisteredshareholder’sshares.Itneednotdeletehisnameentirely.This is illustratedbyRe Transatlantic LifeAssuranceCoLtd(1979)inwhichthecourtdeletedanadditionalnumberofshares,whichhadbeen issued to theapplicant inbreachof theprevailingExchangeControlRegulationsbutlefttheregisterintactasregardshispreviousshareholding.

BySection118(4), ifanorder ismadeinthecaseofacompanyrequiredtosenda listof itsmemberstotheregistrar,thecourt,whenmakinganorderforrectificationoftheregister,shallbyitsorderdirectnoticeoftherectificationtobegiventotheregistrar.

CHAPTER SIX

QUESTION ONE

TRANSFER PROCEDURE

It was explained in ReGreene(63)thattherulewhichrequiresa“properinstrument”oftransferenforces the payment of stamp duty, normally at ad valorem rateon theconsiderationor (inthecaseofagift)on thenominalvalueof theshares transferred.Acompanymust rejectanunstamped transfer under the provisions of Stamp Duty Act.

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This rule does not, however, apply to registration of shares in the names of personal representatives ortrusteesinbankruptcysincetheyaremerelyassertingpowersofcontrolanddisposalofthesharesofmemberswhomtheyrepresentgiventothembylawundertherulesoftransmission.Amember,however,cannotarrangeforthedirecttransferofhissharestoabeneficiaryafterhisdeathwithoutapropertransfer(signedbyhisexecutors):ReGreene(63).

The articles usually provide that:

(a) Theinstrumentoftransfermustbe“inanyusualorcommonform”(i.e.theformsusedbystockbrokers);

(b) The transferor’s share certificatemust accompany the transfer when presented forregistration:TableA,Articles23and25.

Thebasictransferprocedureisthatthetransferorandtransfereecompleteandsignthetransferformandhaveitstampedbeforedeliveringittothecompany(withthetransferor’ssharecertificate)forregistration.Thetransfereebecomesamemberandlegalownerofthesharesonlywhenhisnameisenteredintheregisterofmembers.Thecompanyissuestothetransfereeanewsharecertificateandcancelstheoldone.Thisisexplainedbythefollowingdiagram:

CERTIFICATION OF TRANSFERS

Iftheholderisnottransferringhisentireholdingbyasingletransfer,itwouldbeinappropriateforhimtohandtothetransfereeasharecertificateforalargernumberofsharesthanarecomprisedin the transfer.

Insuchacasetheholdersendshissignedtransferwithhissharecertificateto thecompanyfor cancellation and the transfer form is returned to the transferor who then delivers it to the transferee for stamping and representation to the company. If the transferor is retaining some sharesthecompanysendshimanewsharecertificateforthereducednumberofsharesstillregisteredinhisname.Thisprocedureiscalled“certification”ofatransfer.Itisexplainedbythefollowing diagram:

The transfer of registered debentures or of debenture stock is subject to the same rules astransfer of shares.

Certificationisarepresentationbythecompanytoanypersonactingonthefaithofthecertificationthatdocumentshavebeenproducedtothecompanywhichonthefaceofthemshowaprimafacie title of the transferor to the shares comprised in the transfer. It is not a representation that the transferorhasany title to thembut it does imply that thecertificatewill be retained:CompaniesAct.Section81;Bishop v. Balkis Consolidated Ltd.

UnderSection81(2),anypersonwhoactsonanegligentcertificationcanclaimdamagesfromthecompanyforhislossifthecompanydidnoteitherreceiveorfailstoretainthesharecertificate.Butthecompanyhasnodutyandnoliabilitytoanyoneelse.If,forexample,thecompanyreturnsthecertifiedtransferformandthesharecertificatetotheholderwhosellsthesharestoAgiving

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himthecertifiedtransferformandalsotoB,givingBasecondtransferformofthesameshareswiththetransferor’scertificateandA’stransferisthenregisteredfirst,Bhasnoclaimagainstthecompany if it refuses to register the second transfer to him. B does not in this case rely on the certifiedtransfer(ofwhichheisunaware)andthesharecertificatewascorrectwhenfirstissuedto the holder.

In LONGMAN v BATH ELECTRIC TRAMWAYS

A transferof shares toBwas registeredanda certificatewasprepared inhisname.Beforethecertificatewasissued,BsignedatransferofthesharestoHandthistransferwassenttothecompanyforcertification.Thecompanycertifiedthetransfer(asitstillhadB’snewsharecertificate)andreturnedthecertifiedtransfertoB.BymistakethecompanythensenttoBthesharecertificateinhisname.BdepositedthesharecertificatewithLassecurityforaloan.Llaterclaimed that he was entitled to the shares.

Held:

L’sclaimmustfail.Hehadneverseen(andthereforedidnotrelyon)thecertifiedtransfertoHandmerepossessionofB’ssharecertificategavehimnoclaimagainstthecompanysincethecertificateatthetimeofissuecorrectlydescribedBasstilltheregisteredholderoftheshares(i.e.thetransfertoHhadnotatthatpointbeendeliveredforregistration).

IftovarythefactsofLongman’scaseLhadbeenabletosecureregistrationasholderofthesharesandthecompanyhadthenrejectedthetransfertoH,HcouldclaimcompensationfromthecompanysincethecertifiedtransferdeliveredtohimwouldhavebeenarepresentationbythecompanythatitheldB’scertificateandthatthetransfertoHwasvalid.

If identified shares are sold under a preliminary contract, the rights and obligation incidentalto ownership of the shares pass at once to the purchaser under the contract unless otherwise agreed.Thereafter,anydividend receivedby thevendor (pending registrationofhis transfer)mustbepaidovertothepurchaser(unlessthesharesaresold“ex-div”).Thepurchasermustindemnifythevendoragainstanycallsmadeonthesharesbeforeregistrationofthetransfer.Thevendoris,however,freetovoteatmeetingsashewishesuntilthepurchasepricehasbeenpaid to him.

Avendorofshareshasaduty(impliedbythecontractofsale)todeliveratransferoftheshares(inexchangefortheprice)whichwillgivethepurchasergoodtitletotheshares.Ifhefailstodeliversuchatransfer,heisliabletopaydamages.Butthevendordoesnot(unlessthecontractexpresslysoprovides)guaranteethatthecompanywillregisterthetransfer.Ifthecompanyrejectsthe transfer, the vendor as registered shareholder holds the shares in trust for the purchaser as his nominee.

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QUESTION TWO

MORTGAGE OF SHARES

Thisisatransactionwherebysharesareusedascollateralsecurityforloans.Thetransactioniseitherlegalorequitable.

Under a legal mortgage, the borrower transfers his shares to themortgagee who becomesthe registeredholdersubject toaseparateagreementbywhichheundertakes to re-transferthe shares to the mortgagor on repayment of the loan. The agreement also determines who is entitled to the dividends and gives the mortgagee the right to sell the shares if the mortgagor defaults on the loan. As registered holder, the mortgagee can transfer the shares to a purchaser whobuysfromhim.

The essential feature of an equitableorinformalmortgageisthattheborrowerdepositshissharecertificatewiththemortgageebutremainstheregisteredholderoftheshares.Thereisagainan agreement containing the terms of the loan and the mortgage. The mortgagee may protect himselfbyservinga“stopnotice”onthecompanybuthispossessionofthesharecertificateisaneffectualbartodealingswiththesharesbytheborrower.

Theequitablemortgagee’sotherpotentialdifficultyisthatsinceheisnotaregisteredshareholderhehasnodirectmeansoftransferringthesharestoapurchaseriftheborrowerdefaultsandhedecidestosell.Heusuallyobtainsfromthemortgagora“blanktransfer”,i.e.atransfersignedbythemortgagorasregisteredholderbutwithoutthenameofatransfereeinserted.Thisusuallygivesthemortgageeanimpliedpowertoinserthisownnameastransfereeincaseofdefault.Hecan then dispose of the shares after transferring them into his name. Alternatively, the mortgagee mayobtain fromthemortgagorapowerofattorneygivinghimpower to insert thenameofapurchaser on the transfer.

CALLS ON SHARES

Unlesssharesarealreadyfullypaidfortheregisteredholder is liabletopaythebalanceduewhencalledontodoso.Thepowerofthedirectorstomakecallsisdefinedbythearticles.Theproceduremustbecorrectlyapplied.TherulesorprinciplesgoverningcallsareembodiedinArticles15–21ofTableA.Ifashareholderdefaultsinthepaymentofcalls,thecompanymay,ifthearticlessoprovide,forfeithisshares.Articles33-39ofTableAcontainprovisionswhichwillapplyifthecompany’sarticlesdonotprovideforforfeiture.

QUESTION THREE

RESTRICTIONS ON TRANSFER

Section30oftheCompaniesActrequiresthearticlesofprivatecompaniestorestricttherighttotransferthecompany’sshares.ThemodelarticlesTableAcontainsprovisionswhichgivethedirectors power to refuse to register a transfer of any share, whether fully or partly paid. The articlesofapubliccompanymayalsorestricttherighttotransferthecompany’ssharesusuallyif the shares are not fully paid or if the company has a lien on them.

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Unless the directors have power under the articles to refuse a transfer and exercise that power properly,thetransfermustberegisteredandthecourtmayorderrectificationoftheregister for that purpose. The rules on the restriction of transfer are:

(a) Toexercisetheirpower,thedirectorsmustconsiderthetransferandtakeadecisiontorefuse to register it.

In RE HACKNEY PAVILION Atransferofshareswassentinbytheexecutorsofadeceaseddirectorandshareholder.

The two surviving directors held a boardmeeting anddisagreed as to whether the transfershouldberegistered.There was no casting vote. The secretary wrote to the executors to inform them that the directors had declined to register the transfer.

Held: This was incorrect sinceapositiveactofrefusalwasnecessaryandtherehadbeen

none.Theregistermustberectifiedbyregisteringthetransfer.

(b) Thedirectorsinreachingtheirdecisionmustactbona fideinwhattheyconsidertobethebestinterestsofthecompany:RE: Smith & Fawcett(64)

(c) Wherethearticlesspecifygroundsofrefusal,thedirectorsmayberequiredtoidentifythegroundsofrefusal.However,theyarenotobligedtodisclosethedetailedreasonsfortheirdecision(unlessthearticlessoprovide).Ifnonethelessthedirectorsdodisclosetheir reasons, the court will consider whether the directors acted bona fide or whether theirreasonsaccordwiththegroundsspecifiedinthearticles(ifthatisthecase).

In RE BEDE SS CO LTD (1971) The directors were authorised to refuse transfers if in their opinion it was contrary to

the interestsof thecompanythat the transfereesshouldbemembers.Thedirectorsrejectedtransfersofsmallnumbersofshares(andofsingleshares)onthegroundthatitwasprejudicialtothecompanythatitsissuedsharecapitalshouldbefragmented.

Held: Thereasongivencouldbechallengedandwasinvalid.Thepowertorefuseregistration

must (on the formula used in the articles) be confined to cases of objection to thetransferees on personal grounds. In this case the directors were objecting to thesmall amount of shares transferred, which was not an objection to the transfereespersonally.

(d) Thepowerofrefusalmustbeexercisedwithinareasonabletimefromthereceiptofthetransfer.UnderSection80,acompanyisrequiredtogivenoticeofanyrefusalwithin60days.Ifthepowerisnotexercisedwithinareasonabletimeitlapsesandcannolongerbeused.Therequirementofnoticeofrefusalwithinsixtydayseffectuallymakesthatthe“reasonable”period.

In RE SWALEDALE CLEANERS LTD (1968) On August 3, 1967, transfers of shares were presented. There was only one director

theninofficeandhepurportedtorefusetoregisterthetransfersinexerciseofapowerof refusalgivenby thearticles.Butaquorum formeetingsof thedirectorswas twoand so theonedirectorwasnotcompetent toexercisethepowersof theboard. On December11,1967proceedingswerebegunforrectificationoftheregister,i.e.,acourt

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order that the transfers should be entered in the register.On 18thDecember 1967a second directorwas appointed and therewas a boardmeeting atwhich the twodirectorsrefusedtoregisterthetransfers(4months,14days).

Held: The attempt to exercise the power of refusal on December18,1967 was invalid since, in

theintervalof41/2months(sincethetransferswerepresented),the power had expired (asregardsthosetransfers).Sincethepowerofrefusalhadnotbeenexercised,thetransfersmustbeenteredintheregister.

Thearticlesmayalsorestricttherighttotransfersharesbygivingtomembersarightoffirstrefusaloftheshares,whichothermembersmaywishtotransfer.Anysuchrightsarestrictlyconstrued,i.e.amemberwhowishestoacceptmustobservethetermsofthearticlesandamemberwillnotbepermitted toevadehisobligation tomake theoffer.

In LYLE & SCOTT v SCOTT’S TRUSTEES Thearticlesrequiredanymemberwhomightbe“desirousoftransferring”hisshares

togivenoticetothecompanysecretarysothat thesharescouldbeofferedtoothermembers. Certain members agreed to sell their shares to an outsider and, whileremaining the registered holders, gave the purchaser their proxies so that he could secure control of the company.

Held: Thesemembers were indeed “desirous of transferring” their shares andmust give

formal notice as the articles required.

Thecasescitedaboveshowthatwhenthereisadisputeoverrefusaltoregistertheproperremedyistoapplytothecourtforrectification.Amemberwhoappliedforanorder for compulsory winding up of the company on the just and equitable groundwas refused (CharlesForte{Investments}vAmanda)as“awindinguppetitionisnotaproperremedy”insuchacasebecausetoliquidatethecompanywouldbeunfairtoothermembersnotinvolvedinthedispute.

CHAPTER SEVEN

QUESTION ONE

The Annual General Meeting

Section131(1)providesthat“everycompanyshall ineachyearholdageneralmeetingasitsannual general meeting in addition to any other meetings in that year, and shall specify the meetingassuchinthenoticescallingit”.

Notmorethan15monthsmustelapsebetweenthedateofoneannualgeneralmeetingandthenext.Theword“year”wasdefinedinGibsonvBartonas“calendaryear”,i.e.theperiodJanuary1toDecember31.

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Section131(1)hasaprovisototheeffectthat,solongasacompanyholdsitsfirstannualgeneralmeeting within 18 months of its incorporation, it need not hold it in the following year. Thus a companyincorporatedonOctober1,1992,neednotholditsfirstannualgeneralmeetinguntilMarch 1994.

Subsection(2)providesthatifdefaultismadeinholdinganannualgeneralmeetinginaccordancewith the aforesaid provisions, the registrar may, on the application of any member of thecompany, call or direct the calling of a general meeting of the company and give such ancillary orconsequentialdirectionsashethinksexpedient,includingadirectionthatonememberofthecompanypresentinpersonorbyproxyshallbedeemedtoconstituteameeting.

The registrar is not bound to call or direct the callingof themeetingbut, in theevent of hisrefusingtodoso,theaggrievedmembermayapplytothecourtforanorder:Re:ElSombreroLtd(88), inwhichthecourtmadeanorderafter theregistrarhaddeclinedtodoso. Section131doesnotprovideforthebusinesswhichmaybetransactedattheannualgeneralmeetingbutTableA,Article52mentionsthefollowingasthe“ordinary”orusualbusinessatanannualgeneral meeting:

i. Declaringadividend;ii. Theconsiderationoftheaccounts,balancesheetsandthereportsofthedirectorsand

auditors;iii. The election of directors in the place of those retiring, andiv. Theappointmentof,andthefixingoftheremunerationof,theauditors.

Subsection5makes itacriminaloffencepunishablewithafinenotexceeding two thousandshillings for thecompanyandeveryofficerof thecompany to fail tohold theannualgeneralmeeting or comply with any directions of the registrar regarding the calling and conduct of the meeting.

Extraordinary General Meetings

Section132(1)providesfortheconveningof“extraordinary”generalmeetingbutdoesnotdefineit.Neitheristheword“extraordinary”definedinanyothersectionoftheAct.However,TableA,Article48providesthatallgeneralmeetingsotherthanannualgeneralmeetingsshallbecalledextraordinary general meetings.

TableA,Article49furtherprovidesthatthedirectorsmay,whenevertheythinkfit,conveneanextraordinarygeneralmeeting.Further,bySection132(1),despiteanythinginthearticlesofacompany,thedirectorsareboundtoconveneanextraordinarygeneralmeetingofthecompanyon the requisition of the holders of not less than one-tenth of the paid-up capital of the company carrying the right of voting at general meetings of the company, or, if the company has no share capital,ofmembersrepresentingnotlessthanone-tenthofthetotalvotingrights.Section132(2)providesthattherequisitionmuststatetheobjectsofthemeeting,andmustbesignedbytherequisitionistsanddepositedattheregisteredofficeofthecompany.Section132(3)providesthat if the directors do not within 21 days from the date of the deposit of the requisition proceed to convene a meeting, the requisitionists, or any of them representing more than one-half of the total voting rights of all of them, may themselves convene a meeting, so long as they do so within three months of the requisition.

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Section 132(5) entitles the requisitionists to recover any reasonable expenses incurred inconvening the meeting from the company, and the company may in turn recover these from the fees or other remuneration of the defaulting directors.

Thecompany’sarticlescannotdeprivethemembersoftherighttorequisitionameetingunderSection132because thesection requires thedirectors toproceed to conveneameetingonrequisition“notwithstandinganything”inthecompany’sarticles.However,thesectionisdefectivein the sense that, although the directors are required to convene the meeting, they need not hold itwithinanyparticularlimitoftime.Theymaythereforedefeatthepurposesofthesectionbycalling the meeting for a date, say, six months ahead, provided they do so within the 21-day period. Intheeventoftheirdoingsotherequisitionistscannotconveneanothermeeting,asillustratedbyRe:WindwardIslandsEnterprises(U.K)Ltd(1982).TheJenkinsCommitteerecommendedthattherequisitionistsshouldbeempoweredtocallthemeetingthemselvesifthedirectorscallthemeetingtobeheldlaterthan28daysafterthenoticeconveningitwassentout.Thecompany’sarticlesmayalsocontainsuchaprovisionalthoughthecurrentTableAlacksone.

Section135(1)providesthat,ifforanyreasonitisimpracticabletocallorconductameetingofa company in accordance with the articles or the Act, the court may, either of its own motion or onapplicationbyanydirectororanymemberentitledtovotedatthemeeting,orderameetingtobecalled,heldandconductedinsuchmannerasthecourtthinksfit.Wherethecourtmakesan order, it may give such ancillary or consequential directions as it thinks expedient including adirectionthatonememberofthecompanypresentinpersonorbyproxyshallbedeemedtoconstituteameeting.ThepowerofthecourtinthisregardisillustratedbyRe:ElSombreroLtd(88).

Class Meetings

“Classmeetings”arenotprovidedforbytheCompaniesAct.However,aclassmeetingmaybeheld pursuant to the provisions of the company Articles of Association, if any.

TableA,Article4allowsa company to vary the rightsattached toanyclassof shares if thevariationisconsentedtoinwritingbytheholdersofthree-fourthsoftheissuedsharesofthatclass or is sanctioned by a special resolution passed at “a separate generalmeeting of theholdersofthesharesoftheclass”.

TheprovisionsofTableA in relation togeneralmeetings shall apply toevery suchseparategeneralmeeting,except that thenecessaryquorumshall be twopersonsat leastholdingorrepresentingbyproxyone-thirdoftheissuedsharesoftheclass.

QUESTION TWO

a)

1 Thenoticemustbeissuedwiththerequisiteauthorityoftheboard,court,membersorregistrar.

2 Therequisitenumberofdaysmustbegiven.3 Itmustspecifythebusinessofthemeetingwithclarity.4 Must specify all resolutions proposed and passed, as a special and notice of their

intentiontobepassedassuchmustbegiven.

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5 Must specify the date, time and place of the meeting.

b) The Companies Act, recognises the following meetings:

1. Statutory Meeting.2. Annual General Meeting.3. Extra Ordinary General Meeting.4. Class Meetings.5. Directors meetings6. Creditors meeting.

Generally, the following constitutes the requisites of a meeting:

1. Notice of the meeting.2. Proper authority to convene the meeting.3. Quorum for the meeting.4. Chairman of the meeting.5. Taking of minutes of the meeting.

c)

• Votinginacompanymeetingcaneitherbeonapollorbyshowofhands.Byshowofhands–onememberhasonevote.ByPolldependsonthenumberofsharesamemberholds.UnderTableAoneshareisonevote.

• TheresultsofthevotingaredeclaredbytheChairman.• Membersarefreetoappointaproxywhocanonlyvotebyapoll.

QUESTION THREE

The person legally endowed with authority to control and superintend the conduct of a meeting is generallystyled“thechairman”.Hederiveshisauthorityfromhisappointment,andthemodeofhis appointment will depend upon the type of meeting over which he is called upon to preside.

In the case of National Dwellings Society v Sykes Chitty, J. stated:

“It is thedutyof thechairman,andhis function, topreserveorder,and to takecare that theproceedings are conducted in a proper manner, and that the sense of the meeting is properly ascertained with regard to any question which is properly before the meeting”. From thisdictum and other judicial decisions the principal powers and duties of a chairman emerge as the following:

(i) Determiningthatthemeetingisproperlyconstitutedandthataquorumispresent.(ii) Informinghimselfastothebusinessandobjectsthereof(iii) Preservingorderintheconductofthosepresent.(iv) Containingdiscussionwithinthescopeofthemeetingandreasonablelimitsoftime.(v) Decidingwhetherproposedmotionsandamendmentsareinorder.

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(vi) Formulating for discussion and decision questionswhich have beenmoved for theconsideration of the meeting.

(vii) Deciding points of order and other incidentalmatters which require decision at thetime.

(viii) Ascertainingthesenseofthemeetingby- (a) Puttingrelevantquestionstothemeetingandtakingavoteonthem(and,where authorised,givingacastingvote.) (b) Declaringtheresult,and (c) Causingapolltobetakenifdulydemanded

(ix) Inthecaseofameeting,whichisrecurrentorisoneofaseries,todealwiththerecordor minutes of the proceedings.

(xi) Declaringthemeetingclosedwhenbusinesshasbeencompleted.

Regardingthispoint,itshouldbenotedthatthechairmanhasnopowertoadjournameetingmerelybecause theproceedingshave takena turnwhichhehimselfdoesnot like: NationalDwellingsSocietyvSykes(95).However,hemayadjournthemeetingifitbecomesdisorderlyorifthememberspresentagree.

CHAPTER EIGHT

QUESTION ONE

a)

Appointment

Thenamesofthefirstdirectorsaredeterminedinwritingbythesubscribersoramajorityofthemfailingwhichthesignatoriestothememorandumarethefirstdirectors.

Directorsareelectedbymembersingeneralmeetingbyanordinaryresolution.

To qualify for appointment as a director one must:

- Bebetweentheagesof21-70- Be of sound mind.- Notbeanundischargedbankruptorinsolvent.- Nothavebeendisqualifiedbythecourt.

A person appointed director must sign and deliver to the registrar for registration a written memorandum.

Ifthearticlesrequireadirectortoholdanysharequalificationapersonmusttakethemupwithintwomonthsofappointmentorsuchshortertimeasthearticlesmayprescribe.

UnderSection184(1),inthecaseofapubliccompanymeetingamotionfortheappointmentoftwoormorepersonsasdirectorsbyasingleresolutionmustnotbemadeunlessaresolutiontothateffecthasbeenagreedtobythemeetingwithoutanyvoteagainstit.

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Vacation

Theofficeofdirectormustbevacatedifthedirector:

1 IsdisqualifiedbythecourtpursuanttoSection189oftheAct.2 Failstoacquiresharequalification.3 Isdeclaredbankruptormakesanarrangementorcompositionwithhiscreditors

generally.4 Becomes of unsound mind.5 Resignshisofficebynoticeinwritingtothecompany.6 Attainstheageof70unlessre-appointed.7 Isremovedbyanordinaryresolutionofmembersingeneralmeetingabsentshimself

from directors meeting held in over six months without permission of the other directors.

8 Dies9 If the company goes into liquidation.

b)

• ThetransactiontoadvanceKshs.500,000toAustintocoverhisexpensesonworldwidepromotional tour on behalf of the company required prior approval by members ingeneral meeting pursuant to the provisotoSection191(1)oftheActwhichpermitsacompanytoprovidefundstoadirectortomeetexpenditureincurredortobeincurredbyhimforthepurposesofthecompanyorforthepurposeofenablinghimproperlytoperformhisdutiesasanofficeofthecompany.

• UnderSection191(3)oftheActiftherequisiteapprovalisnotgivenbythecompanyingeneralmeetingthedirectorsauthorizingthemakingoftheloanarejointlyandseverallyliabletoindemnifythecompanyagainstanylossarisingtherefrom.

QUESTION TWO

Birds Limited has three directors: Peacock, Sparrow and Vulture. Explain the legal implication of each of the following situations:

a)

• Appointmentofdirectorsisapowervestedinthegeneralmeetingbythearticlesanddirectors have no power to appoint other directors let alone their own sons.

• Theappointmentofadirectoriseffectedbythepassageofanordinaryresolutioninageneral meeting.

• Vultureswishtoappointhissonadirectorisuntenablesincehehasnopowertodoso.

b)

• Sincedirectorsstandinafiduciarypositioninrelationtothecompanywhoseboardtheyform,theyareboundtoavoidconflictofinterest.

• InthiscaseSparrowisboundtodisclosethenatureofhisinterestatboardmeetingfailingwhichthecontractisvoidableattheoptionofthecompany.Aswasthecasein AberdeenRailwayCo.vBlaikieBrothers. Additionally, it is a criminal offence for whichsparrowisliabletoafinenotexceedingKshs.2,000.

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c)

• Removal of a director from office is a power vested in the generalmeeting by thecompanies act.

• Directorscannotremoveoneoftheirnumberfromtheofficeofdirector.• InthecaseSparrowandVulturecannotremovePeacockfromdirectorshipsincethey

have no power to do so.

d)

• Beingadirectorofthecompany,Peacockhastherighttotakepartintheaffairsofthecompany.

• VultureandSparrowcannotlegallyexcludePeacockfromparticipatingintheaffairsofthe company.

• Peacock has the right to sue the other directors for an order to restrain them fromexcluding him from the affairs of the company.

• Additionally,Peacockmaypetitionforthewindingupofthecompanyonthegroundthatitisjustandequitabletodoso.AswasthecaseinRe: Lundie Brothers Ltd.

e)

• Basedontheadviceoftheauditor,thecompanyisinsolventandshouldceasetocarryonbusiness.

• Thecompanymay,therefore,bewoundupcompulsorilyorvoluntarilybycreditors.

QUESTION THREE

The following are the restrictions which the Act imposes on appointment of directors:

1. Section182(1):AppointmentbytheArticles Section182(1)providesthatapersonshallnotbecapableofbeingappointeddirector

ofacompanybythearticlesunless,beforetheregistrationofthearticles,hehasbyhimselforbyhisagentauthorizedinwriting:-

i. Signed and delivered to the registrar for registration a consent in writing to act as such director;and

ii. Either:-

a) Signedthememorandumforanumberofsharesnotlessthanhisqualification,if any b) Takenandpaidoragreedtopayforhisqualificationshares,ifany c) Signedormadeanddeliveredtotheregistrarforregistrationanundertakingto takeandpayforhisqualificationshares,ifany,orthestatutorydeclarationthata numberofsharesnotlessthanhisqualification,ifany,areregisteredinhisname.

2. Section183:QualificationShares Section183(1)providesthatitshallbethedutyofeverydirectorwhoisbythearticlesof

thecompanyrequiredtoholdaspecifiedqualification,andwhoisnotalreadyqualified,

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toobtainhisqualificationwithintwomonthsafterhisappointment,orwithintheshortertime(ifany)fixedbythearticles.

Subsection(3)furtherprovidesthatifthedirectorfailstoobtainhissharequalification,orceasestoholdtherequirednumberofshares,heshallvacatehisoffice.Ifhedoesnotactuallydosobutcontinuestoactasdirectorhebecomesadefactodirector:R v Ivan Arthur Camps(67).

3. Section 186: Age Limit Section186providesthatnopersonshallbecapableofbeingappointedadirectorof

apubliccompanyoraprivatecompanywhichisasubsidiaryofapubliccompanyifatthe time of his appointment:-

(a) Hehasnotattainedtheageof21;or (b) Hehasattainedtheageof70.

This provision does not apply if: (a) Thecompany’sarticlesprovideotherwise (b) “Specialnotice”oftheresolutiontoappointthedirectorwasgiventothecompany.

Thecompanymustalsohavegivennoticeofit(i.e.thespecialnotice)toitsmembersand stated the age of the proposed director.

Section142defines“specialnotice”asanoticegiventothecompanynotlessthan28days,beforethemeetingatwhichtherelevantresolutionistobemoved.

4. Section 188: Undischarged Bankrupts Section188providesthatifanunderchargedbankruptactsasdirectorofanycompany

withoutleaveofthecourtheshallbeliabletoimprisonmentforatermnotexceedingtwoyearsortoafinenotexceedingKshs.10,000,orboth.

5. Section 189: Fraudulent Persons Section189(1)empowersthecourttomakeanorderrestrainingapersonfrombeing

appointed,oracting,asacompany’sdirectorforaperiodnotexceedingfiveyearsif: i. The person is convicted of any offence in connection with the promotion, formation or management of a company ii. Inthecourseofawindingup,itappearsthatthepersonhasbeenguiltyof fraudulenttrading(underSection323)orhasotherwisebeenguilty,whilean officerofthecompany,ofanyfraudorbreachofdutytothecompany.

6. Section184:IndividualVoting Section 184(1) provides that appointment of directors is to be voted on individually

unlessamotionfortheappointmentoftwoormorepersonsasdirectorsbyasingleresolutionwasagreeduponbythemeetingwithoutanyvotebeinggivenagainstit.

Aresolutionmovedincontraventionofthisprovisionisvoid{Section184(2)}.

Thedutiesofdirectorsareusuallyconsideredundertwobroadheadings,namely:

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i. Duties of care and skill at common law ii. Fiduciarydutiesasenunciatedbycourtsofequity.

1. Duties of Care and Skill Thedirectors’dutiesofcareandskillhavebeenformulatedinaseriesofcasesbrought

againstdirectors inordertomakethemliable innegligence for the manner in which theyconductedthecompany’saffairs.ThesedutiesweresummarisedbyRomer,J.inRECITYEQUITABLEFIREINSURANCECOLTD as follows:

i. Adirectorneednotexhibitintheperformanceofhisdutiesagreaterdegreeofskillthanmayreasonablybeexpectedfromapersonofhisknowledgeandexperience.

This ruleprescribesadutywhich ispartlyobjective (thestandardof the reasonableman) and partly subjective (the reasonablyman is deemed to have the knowledgeandexperienceoftheparticulardirector).Itmayalsobeexpressedbysayingthat,ifafoolishdirectormakesfoolishdecisionsresultinginlosstothecompany,hecannotbeliablefornegligence.Itwouldbeunreasonabletoexpectafoolishdirectortomakewisedecisions.However,ifthedirectormadevery foolish decisions resulting in loss to the company,hewillbeliableinnegligencesinceitisnotreasonabletoexpectafoolishdirectortomakeveryfoolishdecisions.Ontheotherhand,awisedirectorwillbeliableifhemakesunwisedecisions,sinceitisunreasonabletoexpecthim,awiseman,tomake unwise or foolish decisions.

Adirectorship isnotaprofessional jobwitha legallyprescribedqualification. In thecircumstances,anybody(evenasix-months-oldbaby)canbecomeadirector.Allthatthe law can expect him to do is to serve the company honestlyandtothebestofhisability. In RE:MARQUISOFBUTE’SCASEthedirectorbecamethedirectorattheageofsixmonthsbyinheritingtheofficefromhisfatherwhohaddied.

ii. Adirectorisnotboundtogivecontinuousattentiontotheaffairsofhiscompany.Hisdutiesareofanintermittentnaturetobeperformedatperiodicalboardmeetings,andatmeetingsofanycommitteeoftheboarduponwhichhehappenstobeplaced.Heisnot,however,boundtoattendallsuchmeetings,thoughheoughttoattendwhenever,inthecircumstances,heisreasonablyabletodoso.

In REMARQUISOFBUTE’SCASEadirectorwhohadattendedonlyoneboardmeetingin 38 yearswasexonerated from liability for allegednegligenceon the ground that“neglectoromissiontoattendmeetingsisnot,inmyopinion,thesamethingasneglectoromissionofadutywhichoughttobeperformedatthosemeetings”(perSterling,J.)

Acompanyis,however,freetoimposeadutyonitsdirectorstoattendboardmeetingswithinacertainperiodoftimeandtoprescribetheconsequencesofabreachoftheduty.See,forexample,TableA,Article88(f).

iii. Inrespectofalldutiesthat,havingregardtotheexigenciesofbusiness,andthearticlesofassociation,mayproperlybelefttosomeotherofficial,adirectoris,intheabsenceofgroundsforsuspicion,justifiedintrustingthatofficialtoperformsuchdutieshonestly.

Ifadirectoristobemadeliable,itcanonlybeonthebasisofhispersonalnegligence,anditisnotnegligencetodelegatesomeresponsibilitiestoofficialsoremployeesofthecompany whose previous conduct has given no grounds for distrust or suspicion.

In DOVEYvCORYadirectorwasheldnotliablefornegligencemerelybecausehehadfailedtoverifyfalseinformationregardingthecompany’saccountswhichhehadbeengivenbythecompany’smanagerandmanagingdirector.Thecourtstated:

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“Businesscannotbecarriedonuponprinciplesofdistrust.Meninresponsiblepositionsmustbetrustedbythoseabovethem,aswellasbythosebelowthem,untilthereisreasontodistrustthem.Weagreethatcareandprudencedonotinvolvedistrust.”

2. Fiduciary Duties The fiduciary duties of directors arising from their fiduciary relation to the company

havebeenthesubjectofconsiderationinanenormousbodyofcaselawbuttheratio decidendiofthecasescanbereducedtotwofundamentalpropositions:

(a) A director is not allowed to put himself in a position where his interest and dutyconflict.

The application of this rule is illustrated by the following cases:

1. AberdeenRlyCovBlaikieBrothers(68).Section200(5)adoptsthisrulebyprovidingthatnothinginsection200(5)shallbetakentoprejudicetheoperationof“anyruleoflaw”restrictingdirectorsofacompanyfromhavinganyinterest incontractswiththecompany”.

Section 200 requires a directorwho is in anyway interested in a contractwith the

companytodeclarethenatureofhisinterestataboardmeeting.Hemustdisclosetheinterest at the firstboardmeetingatwhichthecontractistobediscussedor,ifhedidnothaveaninterestatthattime,atthefirstboardmeetingafterhisinterestarose.ThisprovisionissupplementedbyArticle84ofTableAwhichprovidesthat:

i. The director shall not vote in respect of the contract. If he does vote, his vote shallnotbecounted

ii. Thedirectorshallnotbecountedinthequorumpresentatthemeeting.

2. Industrial Development Consultants Ltd v Cooley (69) inwhich thedirectorbecamepersonally interested in a contract he had been assigned to negotiate for thecompany.

3. Cook v Deeks(70)inwhichsomeofthecompany’sdirectorsdivertedtothemselvesacontractthatwasintendedtobeforthecompany.Itwasheldthattheyhadtosurrenderthebenefitofthecontracttothecompany.Inlaw,thebenefitofthecontractbelongedtothecompanywhichthedirectorshadformedforthepurposeofobtainingthecontractbutinequitythecontractbelongedtothecompanyforwhichitwasintended.

In Bray v Ford Lord Herschell stated that the aforesaid rule is not “founded uponprinciplesofmorality”butisbasedontheconsiderationthathumannaturebeingwhatitis,thereisdanger,insuchcircumstances,ofthepersonholdingafiduciarypositionbeingswayedbyinterestratherthanbydutyandthusprejudicingthosewhomhewasboundtoprotect”.

(b) A director is not, unless otherwise expressly provided, entitled to make a profit:Boston Deep Sea Fishing Co v Ansell (71).This rule isessentiallya restatementofthefundamentalruleofthelawofagencythatanagentmustnotmakeasecretprofit.Thecasesincompanylawarejustexamplesofhowaparticularagent(thecompany

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director)committedabreachofhisdutiestoaparticularprincipal(thecompany).

In Percival v Wright (72) it was held that the directors owe their fiduciary duties tothecompanyaloneandnottothemembers.Thedecisionraisesaproblemthathasbecomeknownas“insiderdealing”.

CHAPTER NINE

QUESTION ONE

Powers and Duties

Thepowersanddutiesof thesecretarydependon thesizeandnatureof thecompanyandthepersonalcontractualarrangementsthatitmakeswithhim.However,acompanysecretaryusually has the following powers and duties:

• Tobepresent at allmeetings, includingboardmeetings and takeminutes of suchproceedings.






Capital Markets Authority Requirements.• Forbanks,heensurescompliancewithCentralBankofKenyastatutoryrequirements.

Section 180 provides that a provision requiring or authorising a thing to be done by or to adirectorandthesecretaryisnotsatisfiedbyitbeingdonebyortothesamepersonactingassecretary and director.

BridgingtheInformationGapbetweentheExecutiveandNon-ExecutiveDirectors

ThedevelopingroleoftheCompanySecretarywasfirstrecognisedintheCadburyReport,madebytheCadburyCommitteein1992,whichstated:

“The Chairman and the Board will look to the Company Secretary for guidance on what their responsibilitiesareundertherulesandregulationstowhichtheyaresubjectandonhowtheseresponsibilitiesshouldbedischarged.”

All directors should have access to the advice and services of the Company Secretary who is responsible to theBoard forensuring that theBoardproceduresare followedandapplicablerules and regulations are complied with.

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TheCompanySecretary’s role is toprotect the interestsof thecompanyasawhole. Oftenreferredtoas“theconscienceofthecompany”thecompanysecretaryhasthetaskofinforming,advisingandsupportingthedirectorsbothindividuallyandcollectively,endeavouringtoensurethattheyarefullyawareoftherestrictions,responsibilitiesandobligationsimposeduponthemandthecompanybytheCompany’sownconstitution,companylaw,otherrelevantlegislation,andanyapplicablecodesofbestpracticestandards.Heshouldconstantlymonitortheinternalactivitiesofthecompany,takeresponsibilityforinternaldisclosure,interpretthedecisionsoftheBoardandhelptoensurethattheyareproperlyimplementedthroughouttheorganization.

AqualifiedCompanySecretaryhasaclearresponsibilitytoprotecttheprobityoftheorganizationand would have a major impact, for example, in guarding against directors acting, consciously or otherwise, in their own interest rather than those of the company. In protecting the interests of the company, the company secretary not only serves the interests of the third party shareholders whomaybeinvolvedbutisalsoabletorepresenttheinterestsofnumerousotherstakeholderssuch as creditors, employees and local communities.

QUESTION TWO

No person shall qualify for appointment as a company secretary unless he is registered under the CertifiedPublicSecretariesAct.Section20oftheCertifiedPublicSecretariesActprovidesthatsubjecttothissection,apersonisqualifiedtoberegisteredasaCertifiedPublicSecretaryif:


• HeholdsaqualificationapprovedbytheRegistrationBoard• HeisatthecommencementofthisAct,bothacitizenofKenyaandamemberofthe

professionalbodyknownastheInstituteofCharteredSecretariesandAdministrators• He is at the commencement of this Act both ordinarily resident in Kenya, and a

memberoftheprofessionalbodyknownastheInstituteofCharteredSecretariesandAdministrators

• He isat thecommencementof thisAct, registeredasanaccountantunderSection24(1)oftheAccountantsAct

• HeisqualifiedasanadvocateoftheHighCourtofKenya.

Section21(1)providesfordisqualificationfrombeingregisteredasacompanysecretary.Thefollowingaredisqualifiedfrombeingregistered

• IfconvictedbyacourtofcompetentjurisdictioninKenyaorelsewhereofanoffenceinvolving fraud or dishonesty.

• Ifanundischargedbankrupt• Ifheisofunsoundmind,andhasbeencertifiedtobesobyamedicalpractitioner.• IfduringtheperiodwhentheRegistrationBoardhasdeterminedunderSection28(1)(d)

thatheshallnotberegisteredorduringanysuchperiodasvariedbytheHighCourtunder Section 29.

• Section28givestheRegistrationBoardpowertocanceltheregistrationofamemberamongst other penalties if found guilty of professional misconduct. However, anaggrievedpersonmayappealsuchadecisiontotheHighCourt.

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QUESTION THREE

REGISTER OF DIRECTORS AND SECRETARIES

201.

(1) Every company shall keep at its registered office a register of its directors andsecretaries.

(2) Thesaidregistershallcontainthefollowingparticularswithrespecttoeachdirector

(a) In the case of an individual, his present Christian name and surname, any formerChristian name or surname, his postal address his nationality and, if that nationality isnothisnationalityoforigin,hisnationalityoforigin,hisbusinessoccupation,ifany,particularsofallotherdirectorshipsheldbyhimand,inthecaseofacompanysubjecttoSection186,thedateofhisbirth;and

(b) inthecaseofacorporation,itscorporatenameandregisteredorprincipalofficeandpostal address:

Provided that it shall not be necessary for the register to contain particulars ofdirectorshipsheldbyadirectorincompaniesofwhichthecompanyisthewholly-ownedsubsidiary, or which are thewholly-owned subsidiaries either of the company or ofanothercompanyofwhich thecompany is thewholly-ownedsubsidiary;and for thepurposes of this proviso

(i) “Company”includesanybodycorporateincorporatedinKenya;an

(ii)Abodycorporateshallbedeemedtobethewholly-ownedsubsidiaryofanother ifithasnomembersexceptthatotherandthatother’swholly-ownedsubsidiaries and its or their nominees.

(3) Thesaidregistershallcontainthefollowingparticularswithrespecttothesecretaryor,where there are joint secretaries, with respect to each of them, that is to say

(a) in the case of an individual, his present Christian name and surname, any formerChristian name and surname and his postal address

(b) Inthecaseofacorporation,itscorporatenameandregisteredorprincipalofficeandpostal address:

Providedthatwhereallthepartnersinafirmarejointsecretaries,thenameandpostaladdressoftheprincipalofficeofthefirmmaybestatedinsteadofthesaidparticulars.

(4) Thecompanyshall,withintheperiodsrespectivelymentionedinsubsection

(5) deliver to the registrar for registrationa return in theprescribed formcontaining theparticularsspecifiedinthesaidregisterandanotificationintheprescribedformofanychange among its directors or in its secretary or in any of the particulars contained in the register, specifying the date of the change.

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(6) Theperiodsreferredtoinsubsection(4)arethefollowing,namely:-

(a) Theperiodswithinwhichthesaidreturnistobesentshallbeaperiodof14daysfromtheappointmentofthefirstdirectorsofthecompany

(b) Theperiodwithinwhichthesaidnotificationofachangeistobesentshallbe14daysfrom the happening thereof:

Provided that, in the case of a return containing particulars with respect to any person whoisthecompany’ssecretaryontheappointeddaytheperiodshallbefourteendaysfrom the appointed day.

(6) Theregistertobekeptunderthissectionshallduringbusinesshours(subjecttosuchreasonablerestrictionsasthecompanymaybyitsarticlesoringeneralmeetingimpose,sothatnotlessthantwohoursineachdaybeallowedforinspection)beopentotheinspectionofanymemberofthecompanywithoutchargeandofanyotherpersononpaymentoftwoshillings,orsuchlesssumasthecompanymayprescribe,foreachinspection.

(7) Ifanyinspectionrequiredunderthissectionisrefusedorifdefaultismadeincomplyingwith subsection (1), subsection (2), subsection (3) or subsection (4), the companyand every officer of the companywho is in default shall be liable to a default fine.

(8) Inthecaseofanysuchrefusal,thecourtmaybyordercompelanimmediateinspectionof the register.

(9) Forthepurposesofthissection:-

(a) apersoninaccordancewithwhosedirectionsorinstructionsthedirectorsofa companyareaccustomedtoactshallbedeemedtobeadirectorandofficerofthe

company;(b) “Christianname”includesaforename;(c) Inthecaseofapeerorpersonusuallyknownbyatitledifferentfromhissurname,

“surname”meansthattitle;(d) ReferencestoaformerChristiannameorsurnamedonotinclude-

(i) InthecaseofapeerorapersonusuallyknownbyaBritishtitledifferentfromhis surname,thenamebywhichhewasknownprevioustotheadoptionofor succession to the title

(ii)Inthecaseofanyperson,aformerChristiannameorsurnamewherethatname orsurnamewaschangedordisusedbeforethepersonbearingthenameattained theageof18yearsorhasbeenchangedordisusedforaperiodofnotlessthan 20years (iii)Inthecaseofamarriedwoman,thenameorsurnamebywhichshewasknown previous to the marriage.

Non-statutorybooksmaybepurchasedandkept.Theseinclude:

• Register of documents sealed (or Seal Book): This is for recording particulars ofdocuments issued under seal.

• Register of Important Documents: e.g. Power ofAttorney, Probates and Letters ofAdministration, etc.

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CHAPTER TEN

QUESTION ONE

APPOINTMENT:

Section159(1)providesthat“everycompanyshallateachannualgeneralmeetingappointanauditororauditorstoholdofficefromtheconclusionofthat,untiltheconclusionofthesubsequent,annualgeneralmeeting”.

REAPPOINTMENT:

BySection159(2)aretiringauditorshallbedeemedtobereappointedwithoutanyresolutionbeingpassedunless:

a) Heisnotqualifiedforreappointmentb) Aresolutionhasbeenpassedatthatmeeting(i.e.annualgeneralmeeting)appointing

somebodyinsteadofhimorprovidingexpresslythatheshallnotbeappointedc) Hehasgiventhecompanynoticeinwritingofhisunwillingnesstobereappointed.

APPOINTMENT BY REGISTRAR

“Whereatanannualgeneralmeetingnoauditorsareappointedoraredeemedtobereappointed,the Registrarmayappointapersontofillthevacancy”(Section159(3).

APPOINTMENT BY DIRECTORS

Thefirstauditorsofacompanymaybeappointedbythedirectorsatanytimebeforethefirstannualgeneralmeetingandauditorssoappointedshallholdofficeuntiltheconclusionofthatmeeting.

Indefaultofappointmentofthefirstauditorsbydirectorsthecompanymaydoso.Wherethedirectorshaveappointedthefirstauditors,thecompanymay“atageneralmeetingremovesuchauditorsandappointintheirplaceanyotherpersonswhohavebeennominatedforappointmentbyanymemberofthecompany.Noticeofnominationtobegiventothemembersatleast14daysbeforethedateofthemeeting.

CASUAL VACANCIES

BySection159(6)“Thedirectorsmayfillanycasualvacancyintheofficeofauditor,butwhileanysuchvacancycontinuesthesurvivingorcontinuingauditororauditors,ifany,mayact”.

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QUESTION TWO

DUTIES OF AUDITORS

The duties of auditors are explained in the following cases:

1. RE: KINGSTON COTTON MILL CO. (1896) (CHANCERY)

Forsomeyearsbeforeacompanywaswoundup,balancesheetssignedbytheauditorswerepublishedbythedirectorstotheshareholdersinwhichthevalueofthecompany’sstock-in-tradeat the end of each year was grossly overstated.Theauditorsreliedoncertificates,wilfully false,givenbyJ.,oneofthedirectorswhowasalsomanager,astothevalueofthestock-in-trade.Dividendswerepaidforsomeyearsonthefootingthatthebalancesheetswerecorrectbutifthestock-in-tradehadbeenstatedatitstruevalueitwouldhaveappearedthatthere were noprofitsoutofwhichadividendcouldbepaid.

NOTE:

i) Ineachcasetheamountofstock-in-tradeat theendof theyearwasentered inthebalancesheet“aspermanager’scertificate”.

ii) Themanagerwasamanofgreatbusinessabilityandofhighrepute,andupto thestoppageofthecompanywastrustedbyeveryone;buthehaddesignedlyexaggeratedthe value of the stock-in-trade in order to make the company appear prosperous.

QUESTION:

Was it the duty of the auditors to testtheaccuracyofthemanager’scertificatebyacomparisonof the figures in thebooks, andwere they liable for thedividendswhichhadbeenpaid inconsequenceoftheerroneousbalancesheets?

HELD:

Itbeing not part of the duty of the auditors to take stock,theywerejustifiedinrelyingonthecertificatesof themanager,apersonofacknowledgedcompetenceandhigh reputation,andthey were notboundtocheckhiscertificatesintheabsenceofanythingtoraisesuspicion.Theywerenotliableforthedividendswrongfullypaid.

NOTE:

i) Anauditorisnotboundtobesuspiciouswheretherearenocircumstancestoarousesuspicion;heisonlyboundtoexercise a reasonable amount of care and skill.

ii) Whereanofficerofacompanyhascommittedabreachofhisdutytothecompany,thedirectconsequenceofwhichhasbeenamisapplicationofitsassets,forwhichhecouldbemade responsible inanaction, suchbreachofduty isa “misfeasance’ forwhichhemaybesummarily proceeded against under the Companies Act, and it is not necessarythatanactionshouldbebrought.

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Theobjectof thesection istofacilitatetherecoverybythe liquidatorofassetsofacompanyimproperly dealt with by itspromoters,directorsandotherofficers. Thesectionapplies tobreaches of trust and to misfeasancesbysuchpersons,butisinapplicabletocasesofbreachof contract, trespass, negligence, etc.

LINDLEY, LJ stated:

...To decide this question, it is necessary to consider -

1) Whattheirdutywas;2) Howtheyperformedit,andinwhatrespects(ifany)theyfailedtoperformit.

ThedutyofanauditorgenerallywasverycarefullyconsideredbythiscourtinRE:LONDONANDGENERALBANK(1895)andIcannotusefullyaddanythingtowhatwillbefoundthere.Itwaspointedoutthatanauditor’sdutyistoexaminethebooks,ascertainthattheyareright,andtoprepareabalancesheetshowingthetruefinancialpositionofthecompanyatthetimetowhichthebalancesheetrefers.Butitwasalsopointedoutthatan auditor is not an insurer, and that in the discharge of his duty he is only bound to exercise a reasonable amount of care and skill.Itwasfurtherpointedoutthatwhatinanyparticularcaseisareasonableamountofcareandskilldependsonthecircumstancesofthecase;thatifthereisnothingwhichoughttoexcitesuspicion, lesscaremayorought tohavebeenaroused. Thesearethe general principles which have to be applied to cases of this description.

I protest, however, against the notion that an auditor is bound to be suspicious as distinguished from reasonably careful. Tosubstitute theoneexpression for theothermayeasily lead toserious error... Auditorsare,however,inmyopinionboundtoseewhatexceptional duties, if any, are cast upon them by the articles of the company whose accounts they are called upon to audit. Ignorance of the articles and of exceptional duties imposed by them wouldnotaffordany legal justification fornotobserving them... (Suchas takingstock).The complaints made against the auditors in this particular case... is that they failed to detect certain frauds. There is no charge of dishonesty on the part of the auditors. They did not certify or pass anything which they did not honestly believe to be true. It is said, however, that they wereculpablycareless...fraudswerecommittedbythemanager,whoinordertobolsterupthecompanyandtomakeitappearflourishingwhenitwasthereverse,deliberatelyexaggeratedboththequantitiesandvaluesofthecottonandyarninthecompany’smills....IconfessIcannotseethattheiromissiontocheckhis(i.e.manager’s)returnswasabreachoftheirdutytothecompany. It is no part of an auditor’s duty to take stock...Hemustrelyonotherpeoplefordetails of the stock in trade on hand. In the case of a cotton mill he must rely on some skilled personforthematerialsnecessarytoenablehimtoenterthestock-in-tradeatitsproper value inthebalancesheet.Inthiscasetheauditorsreliedonthemanager.Hewasamanofhighcharacterandofunquestionablecompetence.Hewastrustedbyeveryonewhoknewhim....thedirectorsarenottobeblamedfortrustinghim.Theauditorshadnosuspicionthathewasnottobetrustedtogiveaccurateinformationastothestock-in-tradein hand, and they trusted him accordingly in that matter. But it is said that they ought not to have done so, and for this reason. The stock journal showed the quantities that is, the weight in pounds of the cotton and yarn at the end of each year. Other books showed the quantities of cotton bought during the year and the quantities of yarn sold during the year.Ifthesebookshadbeencomparedbytheauditorsthey would have found that the quantity of cotton and yarn in hand at the end of the year ought tobemuch less than the quantity shown in the stock journal, and so much less that the value

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of thecottonandyarnentered in thestock journalcouldnotberight,oratalleventswassoabnormallylargeastoexcite suspicion and demand further inquiry... But although it is no doubttruethatsuchaprocessmighthavebeengonethrough,andthat,ifgonethrough,thefraudwouldhavebeendiscovered,canitbetrulysaidthattheauditorswerewanting in reasonable care not thinking it necessary to test the managing director’s return?Icannotbringmyselftothinktheywerenot,nordoIthinkthatanyjuryofbusinessmenwouldtakeadifferentview.Itisnotsufficienttosaythatthefraudsmusthavebeendetectediftheentriesinthebookshadbeenput together inawaywhichneveroccurred toanyonebefore suspicion was aroused. Thequestioniswhether,nosuspicionofanythingwrongbeingentertained,therewasawantofreasonablecareonthepartoftheauditorsinrelyingonthereturnsmadebyacompetentandtrusted expert relating to matters on which information from such a person was essential. Icannotthinktherewas.Themanagerhadnoapparentconflictbetweenhisinterestandhisduty.Hispositionwasnotsimilartothatofacashierwhowastoaccountforthecashwhichhereceives,andwhoseownaccountofhisreceiptsandpaymentscouldnotreasonablybetakenbyanauditorwithoutfurtherinquiry.

LOPES, LJ.”... (1) What is a misfeasance within the meaning of Section 324(1)

Havetheauditorsinthecircumstancesofthiscasecommittedamisfeasance?IthasbeenheldthatanauditorisanofficerwithinthemeaningoftheSection:-InRELONDONANDGENERALBANK.Buthastherebeenanymisfeasancebytheauditors?Thisdependsuponwhatmeaningistobeassignedtotheword“misfeasance”asusedinthissection.Thelearnedjudgeinthecourtbelowheldthatmisfeasancecoveredanymisconductbyanofficerofthecompanyassuchforwhichsuchofficermighthavebeensuedapartfromthesection.Inmyjudgmentthisistoowide.Itwouldcoveranyactofnegligence-anyactionablewrongbyanofficerofacompanywhichdidnotinvolveanymisapplicationoftheassetsofthecompany.TheobjectofthissectionoftheActistoenabletheliquidatortorecoveranyassetsofthecompanyimproperly dealt withbyanyofficerofthecompany,andmust be interpreted bearing that object in mind.Itdoubtlesscoversanybreachofdutybyanofficerofthecompanyinhiscapacityofofficerresultinginanyimproper misapplication of the assets or property of the company... It is the duty of an auditor tobringtobearontheworkhehastoperformthatskill,care,andcautionwhichareasonablycompetent,carefulandcautiousauditorwoulduse.Whatisreasonableskill,careandcautionmustdependon theparticularcircumstancesofeachcase. Anauditor isnotbound tobeadetective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is somethingwrong. He isawatchdog,butnotabloodbound. He is justified inbelieving,triedservantsofthecompanyinwhomconfidenceisplacedbythecompany.Heisentitled to assume that they are honest, and so rely upon their representations, provided, he takesreasonablecare.Ifthereisanythingcalculatedtoexcitesuspicion,heshouldprobeittothebottom;butintheabsenceofanythingofthatkindheisonlyboundtobereasonablycautiousandcareful.Itisnotthedutyofanauditortotakestock;heisnotastockexpert;therearemanymattersinrespectofwhichhemustrelyonthehonestyandaccuracyofothers.Hedoesnotguaranteethediscoveryofallfrauds...Thedutiesofauditorsmustnotberenderedtooonerous.Theirworkisresponsibleandlaborious,andtheremunerationmoderate.IshouldbesorrytoseetheliabilityofauditorsextendedanyfurtherthaninRELONDONANDGENERALBANK...

Auditorsmustnotbemadeliablefornottrackingout ingeniousandcarefully laidschemesoffraudwhenthereisnothingtoarousetheirsuspicion,andwhenthosefraudsareperpetratedby

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triedservantsofthecompanyandareundetectedforyearsbythedirectors.Sotoholdwouldmakethepositionofanauditorintolerable...

KAY,LJ. “....Thewordsof thesectionare“anymisfeasanceorbreachof trustin relation to thecompany....misfeasancemeanssomethingother thanabreachof trust... itdoes not mean mere non-feasance: RE WEDGWOOD COAL AND IRON CO.... I think the only safeinterpretationtoadoptisthatitincludesallcasesotherthanbreachesoftrustinwhichanofficerofthecompanyhasbeenguiltyofabreachofhisdutyassuchofficerwhichhascausedpecuniarylosstothecompanybymisapplicationofitsassets,andforwhichhemighthavebeenmadeliableinanaction...”

2. RE LONDON AND GENERAL BANK

An auditor represented a confidential report to the directors calling their attention to theinsufficiencyofthesecuritiesinwhichthecapitalofthecompanywasinvested,andthedifficultyofrealizingthem,butinhisreporttotheshareholdersmerelystatedthatthevalueoftheassetswasdependentonrealization,andintheresulttheshareholdersweredeceivedastotheconditionof the company, and a dividend was declared out of capital and not out of income.

HELD:

TheauditorshadbeenguiltyofmisfeasanceunderS.10of theCompanies (winding-up)Act,1890,andwasliabletomakegoodtheamountofdividendpaid(amountingto$14,433.3s).

LINDLEY,LJ.: “... it is thedutyof thedirectors,andnotof theauditors, torecommendto theshareholderstheamountstobeappropriatedfordividendsanditisthedutyofthedirectorstohave proper accounts kept, so as to show the true state and condition of the company... It is for theshareholders,butonlyontherecommendationofthedirectors,todeclareadividend.ItisimpossibletoreadthesectionoftheCompaniesActwithoutbeingstruckwiththeimportanceofthe enactment that the auditors are to be appointed by the shareholders, and are to report to them directly,andnottoorthroughthedirectors.Theobjectofthisenactmentisobvious.Itevidently is to secure to the shareholders independent and reliable information respecting the truefinancialpositionofthecompanyatthetimeoftheaudit...Itisnopartofanauditor’sdutytogive advice, either to directors or shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to himwhetherthebusinessofacompanyisbeingconductedprudentlyorimprudently,profitablyorunprofitably.Itisnothingtohimwhetherdividendsareproperlyorimproperlydeclared,providedhedischargeshisowndutytotheshareholders. Hisbusinessisto ascertain and state the truefinancialpositionofthecompanyatthetimeoftheaudit,andhisdutyisconfinedtothat.Butthencomesthequestion,howishetoascertainthatposition?Theansweris,byexaminingthebooksofthecompany.Buthedoesnotdischargehisdutybydoingthiswithoutinquiryandwithouttakinganytroubletoseethatthebooksthemselvesshowthecompany’strueposition.Hemusttakereasonablecaretoascertainthattheydoso.Unlesshedoesthis,hisauditwouldbeworse than idle farce. Assuming thebooks tobesokeptas toshow thecompany’s truefinancialposition, theauditorhasto frameabalanceshowingthatpositionaccording to the

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booksandtocertifythatthebalancesheetrepresentediscorrectin that sense.Buthisfirstdutyistoexaminethebooks,notmerelyforthepurposesofascertainingwhattheydoshow,butalsoforthepurposesofsatisfyinghimselfthattheyshowthetruefinancialpositionofthecompany... Anauditor,however, isnotboundtodomorethanexercisereasonablecareandskillinmakinginquiries,andinvestigations.Heisnotaninsurer;hedoesnotguaranteethatthebooksdocorrectlyshowthetruepositionofthecompany’saffairs;hedoesnotevenguaranteethathisbalancesheetisaccurateaccordingtothebooksofthecompany.Ifhedid,hewouldberesponsibleforerroronhispart,evenifhewerehimselfdeceivedwithoutanywantofreasonablecareonhispart,say,bythefraudulentconcealmentofabookfromhim.Hisobligationisnotasonerous as this.

SuchItaketobethedutyoftheauditor;hemustbehonest.... i.e. he must not certify what he does not believe to be true,andhemusttakereasonablecareandskillbeforehebelievesthatwhathecertifiesistrue.Whatisreasonablecareinanyparticularcasedependsuponthecircumstances of that case.

Wherethere isnothingtoexcitesuspicion,very little inquirywillbereasonablysufficient,andin practice I believe businessmen select a few cases at haphazard, see that they are right,and assume that others like them are correct also. Where suspicion is aroused, more care is obviouslynecessary;but,still,anauditor isnotboundtoexercisemorethanreasonablecareandskill,eveninacaseofsuspicion,andheisperfectlyjustifiedinactingontheopinionofanexpertwherespecialknowledgeisrequired...Itissatisfactorytofindthatthelegalstandardofduty isnot toohigh forbusinesspurposes,and isrecognisedascorrectbybusinessmen...Apersonwhosedutyitistoconveyinformationtoothersdoesnotdischargethatdutybysimplygiving them so much information as is calculated to induce them, or some of them, to ask for more.Informationandmeansofinformationarebynomeansequivalentterms....Theauditoristomakeareporttotheshareholders,butthemode of doing so and the form of the report are notprescribed...anauditorwhogivesshareholdersmeansofinformationinsteadofinformationrespectingacompany’sfinancialpositiondoessoathisperilandrunstheveryseriousriskofbeingheld judicially tohave failed todischargehisduty. In thiscase, Ihavenohesitation insayingthatMr.Theobalddidfailtodischargehisdutytotheshareholdersincertifyingandlayingbeforethemthebalancesheet...without any reference to the report which he laid before the directorsandwithnootherwarningthanisconveyedbythewords,“Thevalueoftheassetsasshownonthebalancesheetisdependentuponrealisation”.Itisameretruismtosaythatthevalueofloansandsecuritiesdependsontheirrealization.Weweretoldthatastatementtothateffect,issounusualinanauditor’scertificatethatthemerepresenceofthosewordswasenoughto excite suspicion. But, as already stated, the duty of an auditor might infer from an unusual statementthatsomethingwasseriouslywrong,itbynomeansfollowsthatordinarypeoplewouldhavetheirsuspicionarousedbyasimilarstatement,if,asinthiscase,itslanguageexpressesnomore thananyordinarypersonwould inferwithout...thebalancesheetandprofitand lossaccountbeingtrueandcorrectinthesensethattheywereinaccordancewiththebooks.Buttheywere, nevertheless, entirely misleading, and misrepresented the real position of the company. Under these circumstances I am compelled to hold that Mr. Theo Bald failed to discharge his dutytotheshareholders...Possiblyhedidnotrealisetheextentofhisdutytotheshareholdersas distinguished from the directors, and he unfortunately consented to leave the Chairman to explain the true state of the company to the shareholders instead of doing so himself. The fact, however,remains,andcannotbegotover, that thebalancesheetandcertificateofFebruary1892 did not show the true position of the company at the end of 1891 and that this was owing totheomissionbytheauditorto lay before the shareholders the material information which he hadobtainedinthecourseofhisemploymentasauditorofthecompany,andtowhichhecalledthe attention of the directors.... Where did the money come from with which the dividends were

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paid? The money came from cashatthebankersorinhand;butthiscashcouldnotbeproperlytreated as profitandthedirectorsandauditorsknewthisperfectlywell....”

RIGBY,LJ.“....TheArticlesofAssociationcannotabsolvetheauditorsfromanyobligationimposeduponthembythestatute....Underthestatutethemembersofthecompanyareentitledtohavethesafeguardofanexpressionofopinionoftheauditorstotheeffect,first,thatthebalancesheet,isproperlydrawnupsoastoexhibitatrueandcorrectviewofthestateofthecompany’saffairs.

Thewords“as shown by the books of the company”seemtometobeintroducedtorelievetheauditorsfromanyresponsibilityastoaffairsofthecompanykeptoutofthebooksandconcealedfromthem,butnottoconfineittoamerestatementofthecorrespondenceofthebalancesheetwithentriesinthebooks.Afullandfairbalancesheetmustbesuchabalancesheetastoconveyanyknowncausesofweaknessinthefinancialposition,orsuggestanythingwhichcannotbesupportedasfairlycorrectinabusinesspointofview.”

3. RE ALLEN CRAIG & CO. (LONDON) LTD. (1934) Chapter 483

ThereportsandbalancesheetsfortheyearsendingJune30,1925,and,June30,1926,weresigned by two directors. The reports annexed to these balance sheetswere signed by theauditors. Thequestionwas: Whatwas thedutyofauditors in respectof these twobalancesheets?

Theauditorsmerelysentthereportsandbalancesheetstothesecretaryofthecompany,andtheynevergotbeyondthesecretary.Thedirectorsnevercalledageneralmeetingtoconsiderthesesbalancesheetsandreports.

BySection162(1)oftheCompaniesAct“Theauditorsshallmakeareporttothemembersontheaccountsexaminedbythem,andoneverybalancesheetlaidbeforethecompanyingeneralmeetingduringtheirtenureofoffice...”

BENNET, J:

“....Does thestatute imposeon theauditors thedutyofmaking their report toevery member of the company?

Nowifyougivethewordstheirplainmeaningitwouldseemthatthatobligationisimposedonthem.Butwhenyoubegintoreflectonthequestion,itcannot,Ithink,havebeentheintentionofthelegislatorstoimposethatdutyontheauditorsanditcertainlyhasneverbeenthepractice,sincetheobligationhasbeenimposed,forauditorsthemselvestosendtheirreportstoeverymemberofthecompany...I do not think it possible to hold that the words “the members”.... mean “all the members”.Itcannotbethattheauditorsaretobeattheexpenseandtroublenotmerelyofsendingtheirreportthroughthepostbutofdeliveringacopytoeverymember.Itseemsthat one is forced by circumstances to limit the meaning of the words “the members” and I hold that they mean “the members assembled in the general meeting”.... if the report is tobemadetothemembersingeneralmeeting,thenitwouldnotberight,Ithink,toholdthatthedutyoftheauditorsistomakethatreportthemselvestothemembersingeneralmeeting

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unless they can themselves call a general meeting or can compel someone else to call a general meeting. There are no means by which they can call a general meeting or compel other persons to convene a general meeting. The only persons who can call a general meeting are the directors or the meeting who have called upon the directors to do so and they have failed to do so. The audience themselves are powerless.

Inmyjudgment,thedutyoftheauditors,afterhavingaffixedtheirsignaturestothereportsannexedtoabalancesheet,isconfinedtoforwardingthatreporttothesecretaryofthecompany,leavingthe secretary of the company or the directors to perform the duties which the statute imposes of convening a general meeting to consider the report.... The statute compels directors to convene a meeting once a year and compels directors to present reports to the general meeting and it is for the shareholders to see that the directors do their duty...the duty of the auditors is discharged by sending the report to the secretary of the company...”

CHAPTER ELEVEN

QUESTION ONE



1. Theauditorsshouldstatewhethertheyhaveobtainedalltheinformationandexplanationswhichtothebestoftheirknowledgeandbelievewerenecessaryforthepurposesoftheir audit.


3. Whetherthecompany’sbalancesheetand(unlessitisframedasaconsolidatedprofitandlossaccount)profitandlossaccountdealtwithbythereportareinagreementwiththebooksofaccountandreturns.

4. Whether,intheauditors’opinionandtothebestoftheirinformationandaccordingtotheexplanationsgiventothem,thesaidaccountsgivetheinformationrequiredbytheCompanies Act in the manner so required and give a true and fair view:

5. Inthecaseofthebalancesheet,thestateofthecompany’saffairsasattheendofitsfinancialyear

6. Inthecaseoftheprofitandlossaccount,theprofitorlossforitsfinancialyear,7. Orasthecasemaybe,giveatrueandfairviewthereofsubjecttothenon-disclosure




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QUESTION TWO

APPOINTMENT AND POWERS OF INSPECTORS

Where it appears to the registrar that there is good reason so to do, he may appoint one or morecompetentinspectorstoinvestigateandreportonthemembershipofanycompanyandotherwise with respect to the company for the purpose of determining the true persons who are orhavebeenfinanciallyinterestedinthesuccessorfailure(realorapparent)ofthecompanyorabletocontrolormateriallytoinfluencethepolicyofthecompany.

Theappointmentofaninspectorunderthissectionmaydefinethescopeofhisinvestigation,whether as respects the matter or the period to which it is to extend or otherwise and in particularmaylimittheinvestigationtomattersconnectedwithparticularsharesordebentures.

Where an application for an investigation under this section with respect to particular shares or debenturesofacompanyismadetotheregistrarbymembersofthecompanyandthenumberofapplicantsortheamountofsharesheldbythemisnotlessthanthatrequiredforanapplicationfortheappointment of an inspector, the registrar shall appoint an inspector to conduct the investigation unless heissatisfiedthattheapplicationisvexatious,andtheinspector’sappointmentshallnotexcludefrom the scope of his investigation any matter which the application seeks to have included therein, exceptinsofarastheregistrarissatisfiedthatitisunreasonableforthatmattertobeinvestigated: Providedthattheregistrarmayrefusetoappointaninspectorunderthissubsectionunless,inanycaseinwhichheconsidersitreasonablesotorequire,theapplicantsgivesufficientsecurityfor the payment of the costs of the investigation.

Subjecttothetermsofaninspector’sappointment,hispowersshallextendtotheinvestigationofany circumstances suggesting the existence of an arrangement or understanding which, though notlegallybinding,isorwasobservedorlikelytobeobservedinpracticeandwhichisrelevantto the purposes of his investigation.

TheAFORESAID shall apply in relation to all personswho are or have been, or whom theinspectorhasreasonablecausetobelievetobeorhavebeenfinanciallyinterestedinthesuccessorfailure,ortheapparentsuccessorfailure,ofthecompanyoranyotherbodycorporatewhosemembershipisinvestigatedwiththatofthecompany,orabletocontrolormateriallytoinfluencethepolicythereof,includingpersonsconcernedonlyonbehalfofothers,astheyapplyinrelationtoofficersandagentsofthecompanyoroftheotherbodycorporate,asthecasemaybe;and

Theregistrarshallnotbeboundtofurnishthecompanyoranyotherpersonwithacopyofanyreportbyaninspectorappointedunderthissectionorwithacompletecopythereofifheisofopinion that there is good reason for not divulging the contents of the report or of parts thereof, butshallkeepacopyofanysuchreportor,asthecasemaybe,thepartsofanysuchreport,asrespects which he is not of that opinion.

Theexpensesofanyinvestigationundersubsection(1)shallbedefrayedbytheregistrar.

Theexpensesofanyinvestigationundersubsection(3)shallbedefrayedbytheapplicantsunlesstheregistrarcertifiesthatit isacaseinwhichhemightproperlyhaveactedundersubsection(1).

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QUESTION THREE

Books of Account

BySection147(1)everycompanyshallcausetobekeptintheEnglishlanguage“properbooksofaccount”withrespectto:-

(a) Allsumsofmoneyreceivedandexpendedbythecompanyandthemattersinrespectof which the receipt and expenditure takes place

(b) Allsalesandpurchasesofgoodsbythecompany;(c) Theassetsandliabilitiesofthecompany.

Section147(2)providesthat“properbooksofaccount”shallbedeemednottohavebeenkeptwithrespecttothemattersaforesaidiftherearenotkeptsuchbooksasarenecessarytogiveatrueandfairviewofthestateofthecompany’saffairsandtoexplainitstransactions.

BySection147(3)(a)thebooksofaccountaretobekeptattheregisteredofficeofthecompanyor,withtheconsentoftheregistrarandsubjecttosuchconditionsashemayimpose,atsuchotherplaceasthedirectorsthinkfit,andshallatalltimesbeopentoinspectionbythedirectors.

ContentsofProfitandLossAccount

Part I of the Sixth Schedule provides there shall be shown:


2. Theamountoftheinterestonthecompany’sdebenturesandotherfixedloans.3. Theamountofthechargeforincometaxandanyothertaxationonprofitstodate4. The amounts respectively provided for redemption of share capital and loans5. Theamount,ofmaterial,setasideorproposedtobesetasidetoreserves.6. Theamountofincomefrominvestments,distinguishingbetweentradeinvestmentsand


shown under a separate heading.9. Thefollowingmattersshallbestatedbywayofnotes,ifnototherwiseshown:10. Ifdepreciationor replacementoffixedassets isprovided forbysomemethodother



subjecttodeductionofincometax.13. Exceptinthecaseofthefirstprofitandlossaccountlaidbeforethecompanyafterthe

commencement of the Companies Act, the corresponding amounts for the immediately precedingfinancialyearforallitemsshownintheprofitandlossaccount.


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Group Accounts

Section150(1)providesthatif,attheendofitsfinancialyear,acompanyhassubsidiaries,thenitmustincludeinitsannualaccounts“groupaccounts”dealingwiththeaffairsofthesubsidiariesas well.

By Section l50(2)(b) group accounts need not deal with a subsidiary of the company if thecompany’sdirectorsareoftheopinionthat:

• It is impracticable,orwouldheofno realvalue to themembersof thecompany, inviewof the insignificantamounts involved,orwould involveexpenseordelayoutofproportiontothevaluetomembersofthecompany

• Theresultwouldbemisleading• Theresultwouldbeharmfultothebusinessofthecompanyoranyofitssubsidiaries• Thebusinessoftheholdingcompanyandthatofthesubsidiaryaresodifferentthat

theycannotreasonablybetreatedasasingleundertaking.

Theapprovaloftheregistrarshallberequiredfornotdealingingroupaccountswithasubsidiaryongrounds(iii)or(iv).

BySectionl50(2)(a),acompanyisexemptfromtheobligationtopreparegroupaccountsifitisawhollyownedsubsidiaryofanotherbodycorporateincorporatedinKenya.

Form of Group Accounts

Section 151(1) provides that the group accounts laid before a holding company shall beconsolidated accounts comprising:

• Aconsolidatedbalancesheetdealingwiththestateofaffairsofthecompanyandallthesubsidiariestobedealtwithingroupaccounts;

• Aconsolidatedprofitandlossaccountdealingwiththeprofitorlossofthecompanyandthosesubsidiaries.

However,thegroupaccountsneednotbepreparedinthisformifthedirectorsareoftheviewthattheycouldbepreparedinanotherformwhichwouldbereadilyappreciatedbythecompany'smembers(Sectionl51(l)).

Contents of Group Accounts

Sectionl52(l),thegroupaccountslaidbeforeacompanyshallgiveatrueandfairviewofthestateofaffairsandprofitor lossof thecompanyandthesubsidiariesdealtwith therebyasawhole,sofarasconcernsmembersofthecompany.

Section153(1)furtherprovidesthatthegroupaccounts,ifpreparedasconsolidatedaccounts,shallcomplywiththerequirementsoftheSixthScheduletotheAct,sofarasapplicabletheretoand if not so prepared, shall give the same or equivalent information.

CHAPTER TWELVE

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QUESTION ONE

a)

(i)UnderSection214of theCompaniesAct “contributory”means “everyperson liable tocontributetotheassetsofacompanyintheeventofitsbeingwoundup.”

1. Theliabilityofacontributorycreatesadebtfromhimtothecompany.2. These are persons who owe the company in respect of shares held.3. Acontributorymaybeapresentorpastmemberofthecompany. i) UnderSection323(1)(a)oftheAct,ifinthecourseofwindingupacompany,it appearsthatanybusinessofthecompanyhasbeencarriedon, 1 With intent to defraud its creditors or creditors of any other person 2 For any fraudulent purpose.

thecourtmay,onapplicationoftheofficialreceiverorliquidatororcreditororcontributoryof the company, declare that any person who was knowingly party to the carrying on of the company’s business as such personally responsiblewithout any limitation ofliability,foranydebtsorotherliabilitiesofthecompanyasthecourtmaydirect.

1 Allpersonswhoareknowinglypartiestothecarryingonofthecompany’s businessareliabletoanimprisonmentforatermnotexceedingtwoyearsora finenotexceedingKshs.10,000orboth. 2 Iftheperson(s)isacreditortothecompany,thecourtmayorderthatheranks behindallothercreditorsinthesatisfactionofclaims. 3 Iftheperson(s)isacreditortothecompany,hisclaimagainstthecompanyis offset against the amount due from him to the liquidator.

b)

Under Section 222 of the Companies Act, on hearing a winding up petition the court may:

1 Dismiss it.2 Adjourn the hearing conditionally or unconditionally.3 Make an interim order.4 Makesuchotherorfurtherorderasitmaydeemfit.

However,thecourtcannotrefusetomakeawindinguporderonthegroundonlythattheassetsofthecompanyhavebeenmortgagedtoanamountequaltoorinexcessofthoseassetsorthatthe company has no assets.

QUESTION TWO

i) Inacompulsorywindingup,theliquidatorincludingaprovisionalliquidatorexercisesthe following powers with the sanction of the court or committee of inspection.

• Tobringordefendactionsandlegalproceedingsinthenameandonbehalfofthe company. • Tocarryonthebusinessofthecompanysofarasmaybenecessaryforbeneficial winding up. • Toappointanadvocatetoassisthimintheperformanceofhisduties. • Topayanyclassesofcreditorsinfull.

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• Tomakeanycompromiseorarrangementwithcreditors. • Tocompromiseallcallsandliabilitiestocalls,debtsandotherliabilities.

i) On his own responsibility and without obtaining any sanction the liquidator can:

• Sellthepropertyofthecompanybypublicauctionorprivatecontract. • Doallactasandexecute,inthenameandonbehalfofthecompanyalldeeds anddocumentsandusethecompany’ssealtherefore. • Prove,rankandclaiminthebankruptcyorinsolvencyoranycontributory. • Draw,accept,makeandendorseanybillofexchangeorpromissorynoteinthe nameandonbehalfofthecompany. • Raisemoneyonthesecurityofthecompany’sassets. • Takeoutlettersofadministrationtoanydeceasedcontributoryandtodoanyother actnecessaryforobtainingpaymentofmoneyfromacontributoryorhisestate. • Appointanagenttodoanybusinesswhichtheliquidatorcannotdohimself. • Doallsuchotherthingsasarenecessaryforwindinguptheaffairsofthe companyanddistributionitsassets

QUESTION THREE

a) Typesofwinding-up

i) Compulsorywindinguporwindingupbythecourt. ii) Windingupsubjecttothesupervisionofthecourt. iii) Voluntarywindingup.

Who may commence proceedings?

Compulsory winding up

1. The company2. Creditors3. Contributories4. The attorney general5. Theofficialreceiver6. Membersotherthancontributories.

Winding up under the supervision of the court

1. The creditors2. Theofficialreceiver3. Members

Voluntarywinding-up

1. Shareholders2. Creditors

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b) How the creditor can prove insolvency

1. ThatadebtofKsh.1,000ormoreremainunpaidthreeweeksafterdemand2. Executionorotherprocesshasbeenreturnedunsatisfiedwhollyorinpart.3. Thattakingintoaccounttheprospectiveandcontingentliabilitiesthecourtissatisfied

thatthecompanyisunabletopayitsdebts.

c) Course of action open to a secured creditor in liquidation

1. Valuethesecurityandprovethebalance,ifany.2. Sellthesecurityandprovethebalance,ifany.3. Surrenderthesecurityandprovetheentiredebt.4. Rely on the security and not prove at all.

CHAPTER THIRTEEN

QUESTION ONE

The following sequence of action is necessary:

1. Applicationismadetothecourt(usuallybythecompanyitself)foranorderthatoneormoremeetingsofmembersandorofcreditors(iftheschemewillaffecttherightsof creditors (if the schemewill affect the rights of creditors) shall be held.With theapplicationthecompanysubmitsadocumentsettingoutindetailthetermsoftheschemeof arrangement and also an explanatory statement to be issued with the notice(s)conveningthemeeting(s).Ifthecourtissatisfiedthattheschemeisgenerallysuitableforconsiderationasa“schemeofarrangement”underSection207,itwillorderthatameetingofmeetingsbeheldtoconsiderit.Thecourtisnotatthisstageconcernedwiththedetailsoftheschemenorwiththeissue(whichmayariselater)astowhetherthereareconflictsofinterest,whichrequirethatseparatemeetingsshouldbeheld.Thecourtmerelylooksattheoutlineoftheschemeandifitseemssuitableordersthatmeeting(s)beheld.

2. Ameetingorseveralmeetingsisorareheldasthecourthasordered.Asubstantialquorum,saymembers(presentinpersonorbyproxy)holdingone-thirdoftheshares,isrequiredandtheschememustbeapprovedbymembers(or,asthecasemaybe,creditors)votingateachmeetingwho:

(i) Areamajorityinnumber,and (ii) Representthree-quartersinvalueoftheshares(oratacreditors’meeting,ofthe amountsowing).

Requirement(ii)isimposedtosafeguardaminorityinnumberswhohavealargerfinancialstakethanthenumericalmajorityfollowingapprovaloftheschemeatmeeting(s)whereapplicationismade to the court for an order to approve and implement the scheme. At this stage any minority whichopposestheschememaystateitsobjectionsforconsiderationbythecourt

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3. A copy of the court order approving the scheme is delivered to the registrar and the scheme then takes effect, i.e., the changes are made automatically as soon as this is done.

4. Aschemeofarrangementisveryflexiblesinceitmaybeusedtoeffectany“compromiseor arrangement” withmembers or a class of members with creditors or a class ofcreditors. It has been used to vary the rights attached to debentures or preferenceshares(whenthereareobstaclestoastraightforwardreductionofcapitalorvariationofclassrights)ortoreorganizethecapitalstructureofacompanyortoacquiresharesofacompany(insteadofatake-overbidtowhichsection210willapply).Butifthereisaspecificprocedure,suchasareductionofcapitaloravariationofclassrights,whichcanbeused,thecourtwouldnotpermittheuseofaschemeofarrangementtoavoidsomesafeguardofminorityinterestsavailableunderthatspecificprocedure.

Section207referstoa“class”ofmembersorofcreditors.Obviouslyiftwoormorecompanies are involved or if one company has two classes of shares, e.g. preference and ordinary, or is proposing a compromise with different classes of creditors, e.g. debentureholdersandunsecuredtradecreditors, itmustask thecourt toorder thatseparate meetings be held of each group and it must obtain the requiredmajorityapproval at each meeting. But the principle is carried even further. If within say one class of shareholders there are groups whose interests in the proposed scheme are clearlydifferent,thecourtmustbeaskedtoorderthatseparatemeetingsbecalledofeachgroup. Ithasbeensaidthateachmeeting“mustbeconfinedto thosepersonswhoserightsarenotsodissimilarastomakeitimpossibleforthemtoconsulttogetherwithaviewtotheircommoninterest”(Sovereign Life Assurance Co v Dodd).

If those who propose the scheme do not, in their application to the court, distinguish each suchgroup(tobeconsultedseparately)thecourtwillatthefinaldecisionstagewithholditsapprovalonthegroundthattherehasnotbeenfairandproperconsultation.

In Re: Hellenic and General Trust (1976), a scheme of arrangement was agreed betweenHambrosandHellenicwhereby the shareholdersofHellenicwere tohavetheirsharesinthecompanycancelledinreturnforcashcompensation.Hambroswasto pay the compensation and then receive the samenumber of shares inHellenic.TheschemewasapprovedatameetingofHellenicbyamajority innumberof theshareholders holding three quarters in value of the shares involved. But a wholly ownedsubsidiaryofHambros(MIT)held53%ofthesharesinHellenicandvotedforthescheme.HellenicappliedforapprovaloftheschemeandwasopposedbyaGreekBank,a14%shareholder inHellenic. Itsobjectionswere that itwished to retain itsmembershipandalsothatthecashreceivedforitsshareswouldbesubjecttoheavycapitalgainstaxliabilityinGreece.

TheGreekbankopposedtheapprovaloftheschemebeforethecourtontwogrounds.

First,MITasasubsidiaryofHambroshadadifferentinterestintheschemefromtheothershareholdersofHellenic.MITwasHambrosindirectly;itwasseekingtoacquirethe47%ofHellenic,whichitdidnot(throughMIT)alreadyown.Thereshouldthereforehavebeenaseparatemeetingoftheholdersofthe47%ofHellenicsharesnotalreadyundertheHambros’controlthroughMIT.Atsuchameeting,theGreekbank(with14%outof47%)couldhavepreventedapprovalbytherequiredthreequartersmajority.

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Secondly,thepurposeoftheschemewastoenableHambrostoacquire47%ofthesharesofHellenic.(ThedeviceofcancellingthesharesforcashandissuingnewonestoHambroswastosavethestampdutypayableonastraightforwardtransferoftheshares-anexampleoftheadvantagesofaschemeofarrangement.)

Itwasarguedthataschemeofarrangementshouldnotbeusedinasituationforwhichthetake-overbidprocedurewasappropriate.Under take-overbidrules therequired90%acceptance(fromtheindependentshareholders)wouldnothavebeenobtainedsince the Greek bank held more than one-tenth of the outstanding 47% minorityshareholdings.

Whentheschemeisbeforethecourtforfinalapprovalaminoritymayobjectonanyofthevariousgroundsindicatedabovei.e.thatasection207procedureisinappropriateorhasnotbeencorrectlyobserved,orthatapprovalhasnotbeenobtainedinaproperwayorthatthecourtinitsdiscretionshouldrejecttheschemesinceitwouldbeunfair.

If the court approves the scheme and makes an order providing for any of the following undersection209(1):-

• The transferof thewholeorpartof theundertakingandpropertyor liabilities to the“new”company;

• Theallotmentofsharesanddebenturesetc.inthatcompanywithoutwindingup;• Thecontinuationofanylegalproceedings;• Thedissolutionoftheoldcompanywithoutwindingup;• Provisionfordissentients;• Such incidental and consequential matters necessary to secure the scheme to be

effective;

Anofficialcopyoftheordermustbedeliveredtotheregistrar.

1 A scheme of arrangement under Section 207 offers the following advantages:

It can be used in circumstances to which Section 210 and Section 280 do not apply. Asexplainedaboveithasonlytobean“arrangementorcompromise”ofsomesortwithmembersorcreditors;

IncircumstanceswhereSection207isanalternativeprocedureaschemeofarrangementonlyrequiresapprovalbythreequartersofthevotescastateachmeeting.ThisisalessstringentrequirementthanSection210imposessinceSection210operatesonlyifholdersof90percentofall thesharesforwhichtheoffer ismadeaccepttheoffer.If thereisdoubtwhether90percentacceptanceisobtainableaSection207schemeistobepreferred.Butif(asintheHellenic&GeneralTrustCase)thecourtconcludesthatanidentifiedminorityhasbeendeniedthevetowhichSection210wouldhavegivenitisunlikelytogiveitsapprovalunderSection207.Apartfromtechnicalpointsitwouldbeunfairtodoso;

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ThecourtordertoimplementtheapprovedschemeunderSection209(1)oftensavessubstantialexpense,which couldotherwisebe incurred if thearrangementwereeffected in someotherway.

TheCompanyneednotbewoundupinordertocarryoutthisschemeofarrangementunderthissection.

Thedisadvantageofaschemeofarrangement isthat itrequiresthepreparationofelaboratedocumentsandtheobservanceofastrictprocedure,includinganinitialandfinalapplicationtothecourtandtheholdingofmeetings.Allthisisexpensive.Henceaschemeofarrangementisonlysuitableforlargecompanieswheresubstantialvaluesorassetsareaffected.Otherwiseitis uneconomical.

Ifacompany,whichisorisabouttobeinvoluntaryliquidationproposestomakeacompositionwithitscreditorsithasachoicebetweenthefollowingalternatives:

• AschemeofarrangementunderSection207;• Anarrangementsanctionedbythreequarters(innumberandinvalue)ofthecreditors

underSection300.Thisliquidationprocedureisbindingonaminorityunlessthecourtontheapplicationofacreditororcontributory(member)ordersotherwise;

• Acompromisemadebytheliquidatorinexerciseofstatutorypowersundersection241orSection297(l)(a).Forthispurposehemustobtainapprovalofmembers,creditors,committee of inspection or the court according to the circumstances of the case.

It is usual to proceed underSection 207 as there are technical difficulties overSection 300procedure.Theliquidator’spowerstoreachacompromisewithcreditorsarerestrictedtocaseswhereallcreditors(ofthesameclass)aretreatedalike,e.g.auniformpaymentofShs.15in1poundtobeacceptedinfullsettlement.Butiftheirrightsaretobevariedaschemeofarrangementisrequired,i.e.Section207isthecorrectprocedure.

QUESTION TWO

Reconstruction under Section 280

Section280providesthatwhereacompanyisproposedtobe,orisincourseofbeingwoundup voluntarily, and thewhole or part of its business or property to be transferred or sold toanothercompany,theliquidatorofthefirst-mentionedcompany(transfereecompany)maywiththe sanction of a special resolution conferring either a general authority on the liquidator or an authority in respect of any particular arrangement, receive in compensation or part compensation for the transfer or sale, shares, policies or other like interests in the transferee company for distribution among the members of the transferor company, or may enter into any otherarrangementwhereby themembersof the transferorcompanymay, in lieu of receiving cash, sharesorotherlikeinterests,participateintheprofitsoforreceiveanyotherbenefitfromthetransferee company.

This form of reconstruction is often used when additional working capital is needed and other meansof raising it are not available. It has also beenused for alteration of the company’sobjects;variationofshareholdersrightsandeffectingacompromisewithcreditors.

Reconstructionunderthissectionissubjecttoseveraldisadvantagesandislittleused.Butwhen

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areconstructiontakesthisformSection280proceduremustbefollowedsothatadissentingminority does have the appropriate safeguard.

Thisprocedurealsoapplies toacompany,which isproposed tobe,or is incourseofbeingwoundupvoluntarily.Acompanyinliquidationmustdisposeofitsassets(otherthancash)bysaleinordertopayitsdebtsanddistributeanysurplustoitsmembers.ThespecialfeatureofaSection280 reconstruction is that thebusinessorpropertyofCompanyP is transferred toCompanyQinexchangeforsharesofthelattercompanywhichareallotteddirectordistributedbytheliquidatortomembersofCompanyP.Obviously,thecreditorsofCompanyPwillhavetobepaidincash.AdissentingminorityofmembersofCompanyPcanalsorequiretobepaidincash.Hencesubstantialsumsmayhavetobefoundincash.Thisisoneofthedrawbacks.

Acompany in (orabout togo into)members’voluntary liquidationmay,byspecial resolution,authorisetheliquidatortosellthebusinessorpropertyforshares(ofsomeothercompany)tobedistributedtomembers.Butanymemberwhodidnotvoteinfavourofthespecialresolution(dissentient member)mayintheensuingsevendaysdelivertotheregisteredofficeanoticeaddressedtotheliquidatorrequiringhimeithertopaythatmemberthevalueofhisinterestincashortoabandontheproposedsale;Section.280.

If the company is in a creditors voluntary liquidation a special resolution to approve the sale must bepassedanditisalsonecessaryforthesaletobeapprovedbythecourtorbythecommitteeof inspection: Section 292. Moreover a creditor can at any time within a year of the passing of thespecialresolution(inamembers’voluntarywindingup)renderitinvalidbyobtainingacourtorder forcompulsory liquidation;Section280(5). It is thereforeprudent todisposeofpossibleobjectionsbycreditorsbeforethecompanyentersintothetransaction.

2.1 Hence the usual procedure is:

Firsttodisposeofpossibleobjectionsbycreditorsbypayingtheirdebtsorprovidingsecurityfortheirduepaymentoftheirdebts.Alternatively,thecompanymayseektoobtaintheconsentofthecreditorstothetransferofliabilityfortheirdebtstothetransfereecompany(aspartofthetermsonwhichthebusinessissold);

Then to convene a general meeting and propose a special resolution to approve the sale of the businessinexchangeforsharesofthepurchasingcompany.Itthusbecomesevidenthowmanymembersmaydemandtobeboughtoutforcashsinceonlymemberswhodidnotvoteinfavourof the resolutioncanopt for thecashpayment. If it isclear that thecashexpenditurewillbeprohibitive,theschemecanbeabandonedbeforethecompanygoesintoliquidation;

Finally(asthesecondstepatthesamegeneralmeeting)tomovearesolutiontogointoliquidation.Ifitistobeacreditorsvoluntaryliquidationthenacommitteeofinspectionmustbeappointedand asked to approve the sale under Section 292.

Ifadissentientmemberclaimstobepaidthevalueofhisinterestincashtheamount(ifitcannotbeagreed)istobedeterminedbyanarbitrator.Themembermustmakeouthisowncasebeforethearbitratorinsupportofhisclaim;thecompanyisnotunderadutytoanswerhisquestions.Ifamemberfailstogivenoticewithinthesevendaysperiodtotheliquidatorofhisdemandforcash,heisentitledtohisproportionofthetransfereecompany’ssharesorifherefusestoacceptthemtheymaybesoldandtheproceedspaidoverinsettlementsince(byfailingtoobserveSection280procedure)hehasforfeitedhisentitlementundersection280.

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ThedisadvantagesofSection280arethatcashmayhavetobeprovidedtopayoffcreditorsanddissentingmembersoralternativelythesalemayhavetobeabandoned.Secondly,thecompanymustgointoliquidation,whichisanirreversibleprocess.ButSection280procedureisobligatoryin thesituation towhich it relates. Itmaybepreferable tomakethedesiredreconstruction insomeotherway.Forexample thecompany towhich thebusiness is tobe transferredmightmakeatake-overbid(usingSection210toachieve100percentsuccess)forthesharecapitalofthecompanywhosebusinessitwishestoacquire.Whenthelattercompanyisawholly-ownedsubsidiary,thereisnoproceduraldifficultyintransferringitsbusinesstotheholdingcompany.There is no obligatory cash alternative in a Section 210 transaction though it is sometimesprovided as an extra inducement.

The advantage of transferring a business from one company to another (with the sameshareholdersintheend)isthatbythismeansthebusinessmaybemovedawayfromacompanywithatangledhistorytoanewcompanywhichmakesafreshstart.Thisprocedurecanalsobeusedtoeffectamergeroftwocompanieseachwithanexistingbusiness.

QUESTION THREE

IfCompanyA(“thetransfereecompany”)offerstoacquiresharesofCompanyB(“thetransferor”)andtheschemeorcontracttowhichtheofferrelatesisacceptedbyholdersofnine-tenthsofthe shares for which the offer is made Company A may then compulsorily acquire the remaining 10percent(orless)ofthesharessoastoachieveacomplete100percentacquisitionoftheshares:CompaniesAct,Section210.

It is standard procedure inmaking a take-over bit to state that if 90 per cent acceptance isattainedcompulsoryacquisitionunderSection210willfollow.CompanyAmayresorttoSection210whetheritoffersitsownsharesorcashforsharesofCompanyB.Theprocedureisavailableif Company A already owns shares of Company B and offers to acquire those which it does not alreadyown(butseePara22below.) Thenon-acceptingminoritymayhoweverapplytothecourt to prevent Company A from acquiring their shares. The rules of procedure are explained below.

Theoffermustbemadebyacompanytoacquiresharesofanother.Section210isnotavailabletoanindividualwhomakesatake-overbid(buthecanalwaysformacompanyforthepurpose:provided no fraud or improper conduct is involved: Re Bugle Press Ltd. (see paragraph8.4.11)

If Company B has two or more classes of shares and Company A makes an offer for shares of bothclassesthisistreatedastwoseparateoffers.Section210appliesseparatelytosharesofeachclassforwhich90percentacceptanceisobtained.Insuchcasesitisusual(butnotlegallynecessary)forCompanyAtoreservetherighttowithdrawitsofferforeitherclassifacceptancefromtheotherclassdoesnotreachthe90percentlevelwhichmakesSection210applicable.

IfCompanyAdirectlyorthroughsubsidiariesownsmorethanone-tenthofthesharesofCompanyBthen(inordertobeabletouseSection210)CompanyAmust:

(a) Offerthesametermsforalltheshareswhichitdoesnotalreadyown;(b) Obtainacceptancesfromholderswhoarethree-quartersinnumberaswellasholders

of90percentoftheshares.

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ThewordingofSection210isambiguousbutitisgenerallytakenthatCompanyAmustoffertoacquire all of the shares of Company B which it does not already own if it is then to use Section 210toacquiretheremainingsharesinCompanyB(orallthesharesoftheclass)forwhichtheoffer is made.

Acceptanceontherequiredscalemustbeobtainedwithinamaximumoffourmonthsfromthedate of the offer. The position then is that:

(a) Attheendofthefour month period(notearlierthanthatevenif90percentacceptanceisattainedbeforetheperiodexpires)CompanyAmay(butitneednotdosoifitdoesnotwish-howeverseeparagraph25below)servenoticeonthenon-acceptingshareholdersofitsintentiontoacquiretheirsharesonthesametermsashavebeenacceptedbythemajority.Thisnoticemaybegivenatanytimewithina two month period following the fourmonthperiod;

(b) OnreceivingthenoticefromCompanyAeachnon-acceptingshareholderofCompanyB has one month in which he may apply to the court to order that Company A shall not acquirehisshares(seeparagraphs27-28below);

(c) Onemonthafterservingnoticeonnon-acceptingshareholders(oriftheyapplytothecourtbutfailthenasthecourthasdisposedoftheirapplication)CompanyAmayrequireCompany B

(i) Totransferthesharesofitsnon-acceptingshareholderstoCompanyA,and

(ii) Toreceivethepurchaseconsiderationtoholdintrustforthenon-accepting shareholders.

By this means the outstanding shares are transferred without any further action on the part of the non-accepting shareholders.

Thenon-acceptingshareholdershaveafurtherstatutorysafeguard.CompanyAisnotobligedtoservenoticeofintentiontoacquiretheirshares.ButassoonasCompanyA’stotalownershipof shares inCompanyB reaches90per cent (or 90per cent of a class) itmustwithinone month give notice of that fact to the holders of the outstanding shares. Those shareholders may then within the ensuing three months require Company A to acquire their shares on the same termsas have beenaccepted by the approving shareholders. By thismeans theshareholderswhoatfirstdidnotaccepttheofferfortheirsharesmayacceptitinordertoescapefromtheunsatisfactorypositionorremainingasaverysmallminorityofmembersinacompany(B)dominatedbyasingleshareholder(A):CompaniesAct,Section210(2).

TheminoritywhosesharesareacquiredcompulsoryunderSection210areentitledtoall thebenefitsincludedintheoriginalofferandacceptedbytheholdersof90percentormoreoftheshares.CompanyAmustnotonlypaythesameprice(orotherconsideration);itmustrepeatall other inducements such as a cash alternative. When Company A offers its own shares in exchangeforsharesofCompanyBitisacommonpracticetomaketheoffermoreattractivebyarrangingwithathirdpartythatthelatterwillmakeasimultaneousoffer(foralimitedperiodonly)topurchasefromshareholdersofCompanyBtheirconsiderationshares(allottedbyCompanyA)iftheydonotwishtoretainthem.AholderofsharesofCompanyBthenhasthechoiceof(i)retaininghisnewsharesinCompanyAor(ii)sellingthem(the“cashalternative”)immediatelyatastatedpricetoathirdparty.WhenSection210isusedtoacquiretheoutstandingshares

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ofCompanyBthebidder(CompanyA)mustarrangeforacashalternativetobeprovidedsincethatwaspartof theterms(although itcamefromathirdparty)which inducedahigh levelofacceptance: Re Carlton Holdings(1971)

A non-accepting shareholder who applies to the court to set aside the proposed compulsory acquisitionofhissharesunderSection210willfailunlesshecanmakeoutaverystrongcase.Acceptancebyholdersof90percentormoreof theshares indicates that the termsofferedarefair.Thisissoeveniftheobjectorcontendsthathehadneedofmoreinformationinorderto reachadecisionor thatCompanyA inacquiringcontrolofCompanyBwillobtainspecialadvantages(e.g.eliminationofacompetitor)whicharenotreflectedinthepriceofferedforhisshares.Objectiononthosegroundsonlyarelikelytofail.

Butthecourtwillnotpermits.210tobeusedinanartificialandoppressivemanner.

Case: RE BUGLE PRESS (1900)

X,YandZheld4,500,4,500and1,000one-poundsharesrespectively,ofCompanyB.TheyweretheonlyshareholdersandXandYwerethedirectors.XandYwishedtoeliminateZ.Section210howeverisnotavailabletoindividuals.SoXandYformedanewcompany(CompanyA)in which they were the only two shareholders. Company A then offered to acquire all the shares ofCompanyB.XandYacceptedtheofferbutZdidnot.CompanyAservednoticeonZthatithassecured90percentacceptance(thesharesofXandY)andintendedtoacquireZ’s1,000sharesunderSection210.Zappliedtocourt.

Held:

Company A was a sham since (lifting the veil of incorporation) it was merely the majorityshareholders (XandY) inCompanyBseeking toexpropriate thesharesof theminority (Z).Section210couldnotbeusedinthesecircumstances.Z’sobjectionswereupheld.

ThealternativetoacquisitionunderSection210(inatake-overbid)isaschemeofarrangementunder Section 207. The choicemay be determined by comparative costs (see paragraphs8.3.7(c)and8.3.8).Stampdutyispayable(atthetwopercentadvaloremrate)ontransfersofsharesofCompanyBinatransactiontowhichs.210applies.ItcanbeavoidedunderSection207.ButunderSection210procedurethereisusuallynoexpenseofcourtproceedsasfewminorityshareholderspersistintheirobjectionstothepointofmakingapplicationtothecourt(atsomeexpensetothemselves).

Ontheotherhandifthereisuncertaintyaboutobtaining90percentacceptanceandaschemeofarrangement is not excessive in costs it is an easier route to the intended result. It is particularly usefulwhenCompanyAisseekingtoacquirethosesharesofapartly-ownedsubsidiary(CompanyB)whichitdoesnotown.InsuchcasessomeminorityshareholdersofBmaybeindifferentorpassivelyopposed;CompanyAcannotcountontheiracceptances(toachieve90percent)butreckons that they cannot or will not deny it a three quarters majority at a meeting. There is often adelicatebalanceofconflictingrisksandconsiderationsinchoosingbetweenSection207andSection210insuchsituations.

ANSWER BANK


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CHAPTER FOURTEEN

QUESTION ONE

DOCUMENTS TO BE PRESENTED TO THE REGISTRAR

Foreigncompanieswhich,aftertheappointeddayestablishaplaceofbusinesswithinKenyashall,within30daysof theestablishmentof theplaceofbusinessdeliver to the registrar forregistration:-

(a) acertifiedcopyofthecharter,statutesormemorandumandarticlesofthecompanyorotherinstrumentconstitutingordefiningtheconstitutionofthecompany,and,iftheinstrumentisnotwrittenintheEnglishlanguage,acertifiedtranslationthereof;

(b) alistofthedirectorsandsecretaryofthecompanycontainingtheparticularsmentionedinsubsection(2);

(c) astatementofallsubsistingchargescreatedby thecompany,beingchargesof thekindssetoutinsubsection(2)ofsection96andnotbeingchargescomprisingsolelyproperty situate outside Kenya

(d) the names and postal addresses of some one or more persons resident in Kenyaauthorised to accept on behalf of the company service of process and any noticesrequiredtobeservedonthecompany;and

(e) thefulladdressoftheregisteredorprincipalofficeofthecompany.

QUESTION TWO

RETURNS

Ifanyalterationismadein:-

(a) thecharter,statutesormemorandumandarticlesofa foreigncompanyoranysuchinstrument as aforesaid

(b) thedirectorsorsecretaryofaforeigncompanyortheparticularscontainedinthelistofthe directors and secretary

(c) thenamesorpostaladdressesofthepersonsauthorisedtoacceptserviceonbehalfofa foreign company

(d) theaddressof the registeredorprincipal officeofa foreigncompany, thecompanyshall, within 60 days, deliver to the registrar for registration a return containing theprescribedparticularsofthealteration.

WhereinthecaseofacompanytowhichthisPartapplies:-

(a) awinding-uporderismadeby(b) proceedingssubstantiallysimilartoavoluntarywindingupofthecompanyunderthis

Act are commenced in, a court of the country in which such company was incorporated, the company shall within 30 days of the date or the making of such order or thecommencementofsuchproceedings,as thecasemaybe,deliver to the registrarareturncontainingtheprescribedparticularsrelatingtothemakingofsuchorderorthecommencementofsuchproceedingsandshallcausetheprescribedadvertisementsinrelationtheretotobepublished

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QUESTION THREE

The sections in part X shall apply to all foreign companies, that is to say, companies incorporated outsideKenyawhich,aftertheappointedday,establishaplaceofbusinesswithinKenyaandcompanies incorporated outside Kenyawhich have, before the appointed day established aplaceofbusinesswithinKenyaandcontinuetohaveaplaceofbusinesswithinKenyaonandaftertheappointedday:AforeigncompanyshallnotbedeemedtohaveaplaceofbusinessinKenyasolelyonaccountofitsdoingbusinessthroughanagentinKenyaattheplaceofbusinessof the agent.

CERTIFICATE OF REGISTRATION AND POWER TO HOLD LAND

Where a foreign company has delivered to the registrar the documents, the registrar shall, if such documents and particulars are so delivered after the appointed day, certify under his hand that the company has complied with the requirements; and such certificate, and anycertificategivenbytheregistrarofcompaniesbeforetheappointeddaythataforeigncompanyhas delivered to him the documents and particulars required by any provision of any of therepealedOrdinancescorrespondingtothesaidsectionandtothelikeeffect,shallbeconclusiveevidence that the company is registered as a foreign company for the purposes of this Act. Where a foreign company has, after the appointed day, delivered to the registrar the documents and particulars mentioned in Section 366, it shall have the same power to hold land in Kenya as if it were a company incorporated under this Act.

Whereaforeigncompanyhas,beforetheappointedday,deliveredtotheregistrarofcompaniesthe documents and particulars required by any provision of any of the repealedOrdinancescorrespondingtosection366ofthisActandtothelikeeffect,itshall,subjecttotheprovisionsofthat one of the repealed Ordinances in accordance with which such documents and particulars were so delivered and of this Act, have the same power to hold land in Kenya as if it were a company incorporated under this Act.

REGISTRATION OF CHARGES CREATED

369.

TheprovisionsofPartIVshallextendtochargesonpropertyinKenyawhicharecreated,andtochargesonpropertyinKenyawhichisacquired,afterthecommencementofthisAct,byaforeigncompanywhichhasanestablishedplaceofbusinessinKenya:

ProvidedthatinthecaseofachargeexecutedbyaforeigncompanyoutofKenyacomprisingpropertysituatebothwithinandoutsideKenya:-

(i) itshallnotbenecessarytoproducetotheregistrartheinstrumentcreatingthechargeiftheprescribedparticularsofitandacopyofit,verifiedintheprescribedmanner,aredeliveredtotheregistrarforregistration;and

(ii) thetimewithinwhichsuchparticularsandcopyaretobedeliveredtotheregistrarshallbe60daysafterthedateofexecutionofthechargebythecompanyor,inthecaseofa deposit of title deeds, the date of the deposit.

ANSWER BANK


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GLOSSARY

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GLOSSARYA

Annexture:Attachmentsordocumentsfixedtoanother

Auditor:Thisapersonappointedbythecompanytocarryoutanaudit

Audit:Thisisanindependentexaminationofthefinalstatementsastowhethertheyshowatrueand fair view

Allotment:It:Itis,legallyspeaking,thecompany’sacceptanceofanoffertobuyitsshares

Articles of association: A document which regulates the internal affairs of a company

Artificialperson:Apersonrecognisedbylawintheformofcompanies

B

Balance sheet:Thisisafinancialstatementthatshowsthecompany’sstateofaffairs

Bankrupt:Thisisapersonadjudicatedbyacourtasunabletopayhisdebts

Bearer: This is a person in possession of a particular thing

Body corporate:Thisisanartificialwhichcomesintoexistencethroughincorporation

Brokerage:Thisisthecommissionpaidtoabroker

C

Capital: amount of money which a company raises from issuing shares

Central depository system:Acomputerised ledger thatenables the transferandholdingofsecurities without need for physical movement

Caveat emptor:ALatintermthatmeansbuyerbeware

Class: refers to people whose rights are so similar that it is hard to separate

Cessation:Thisreferstolossofcompanymembershiportoshareentitlement

D

Discount:Thedifferencebetweenthenominalvalueandtheissueprice;it’snormallylowerthanthe nominal value

Derivative action:Asuitbroughtbyaperson in thenameofandbehalfof thecompany to remedy a wrong

Director: This is a person with running of the day to day affairs of the company

Compensation: These is the total payments that are made to a person

Debenture: A long term loan


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Equitable mortgage:Thisisasharecertificatedepositedwithoutexecutingtransfer

Equity:Thisiscapitalprovidedbyshareholders

Estoppel:Thisisanequitabledoctrinethatpreventsapersonfromgoingagainsthisword

Extra ordinary general meetings: These are all other meetings other than general meetings

F

Financial Year:Thisisthedurationwithinwhichacompanyspecifiesasatimewhenanauditshouldreflectnormallyoneyear

Floating charge: This is a charge that hovers over all the assets of a company

Floatation:Thisisaninvitationfromacompanytothepublictosubscribeforitsshares

Foreign companies: These are companies that are incorporated outside Kenya

Forfeiture:Thisisthecessationofaperson’smembershipforfailuretopayacall

G

General meetings:Thesearemeetingschairedbyachairmanheldannuallytodiscussmattersaffectingthecompany’smanagement

Good faith: This is doing a deed with good intentions and no malice

Group accounts:Thesearefinancialstatementswhichconsistthoseofaholdingcompanyanditssubsidiaries

Group enterprises: This is an enterprise that consists of a holding company and its subsidiaries

Guarantee:Thisisanagreementwherebyapersonundertakestopaythecreditorshouldthedebtordefault

I

Insider trading:Thisisdealingincompanysecuritieswithinformationthatisnotavailableinthepublicdomain

Incorporated association:Anartificialpersonthathasalegalidentity

Indemnity:Thisisapaymentthatreinstitutestheaggrievedtothepositionhewasinbeforetheloss occurred

Infant: This is a person who has not attained the age of majority

Intra vires: This is a transaction within the contracting capacity of a company

L

Limited liability: liabilityofmembersislimitedtotheamountsifanyunpaidontheirshares

Liquidator:apersonappointedbycourt to takecontrolof thecompany’sassetsand realizethem

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Lien:Anequitableorlegalchargeonthesharesofamember

Mortgage:Atransactionwherebyanassetisusedascollateralforaloan

M

Memorandum of Association: A document which regulates the affairs of the company and outsiders

Member:apersonwhosubscribestothememorandumorwhosenameisenteredintheregisterofmembers

Merger: Denotes instances in which the property of the company is transferred to another which is already in existence

Minority:Ashareholderwhoholdstheleastnumberofshares

Meeting: coming together of two or more people

N

Natural person:Anindividualhumanbeing

Name clause: This is a clause in the memorandum that gives the name of the incorporated association

Negligence:Thisisfailingtodowhatareasonablemangiventhosecircumstanceswouldhavedone

Nullity:Meansatransactionwhichisunenforceable

O

Oppression: A situation where those in power take unfair advantage of the minority

Oral transfer:Thisisatransferbywordofmouth

Objects clause: This is a clause that the purposes for which a company is formed

P

Premium: The money received in excess over the par value of shares

Prospectus:Documentissuedbyapubliccompanywhichwantstoraisecapital

Proxy:Apersonappointedbyashareholdertovoteonbehalfofthatshareholderatacompanymeeting

Pre-incorporationcontract:This isacontractentered intoonbehalfofacompanybefore itcomes into existence

Prima facie: A Latin term which means on the face of it

GLOSSARY


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Q

Quorum:Therequisitenumberofmemberstobepresentforameetingtotakeplace

Qualificationshares:Thesearethesharesthatareprescribedinthearticlesforthedirectortotakeupbeforeehecanqualifyasone

R

Receiver: A representative of secured creditors to enforce their security

Reconstruction:Recreationofacompanybuildingitanew

Redeemable preference shares: theseareshares that rankaboveordinarysharesandareboughtbackbythecompanyduringitsexistence

S

Share:Thebasicunitofownershipinacompany

Secured creditor:Thisisacreditorwhosedebtissecuredonafixedorfloatingassetofthecompany

Stock:Thisisablockofshares

T

Transfer:Occurswhensharesareboughtfromamemberratherthanthecompany

U

Ultra vires:ALatintermwhichmeansbeyondthecontractingpowersofacompany

V

Void:Meansthecontractcannotbeenforceditconfersnorightsandimposesnoobligations

Voidable:Acontractthatcanbeenforcedattheoptionoftheinnocentparty

W

Warrant:Thisisawarrantythatthebeareristheownerofthesharesspecifiedthereinsurance

Winding up:-Processbywhichacompanyisdissolvedandceasestoexist

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INDEX

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INDEXA

Account: 204, 330

Allotment: 112, 120, 297

Alteration: 32, 38

Annual general meeting: 166

Annual return: vi

Audit: 189, 347

Auditors: 64, 189, 193, 195, 323, 324

B

Balance sheet: 347

Board: 152

Burkinshaw v Nicolls: 136

C

Called up capital: 85

Capital: 18, 43, 59, 77, 83, 85, 284, 347

Capital clause: 284

Charges: 98, 99, 100, 101, 102, 292

Class: 152, 165, 309, 310, 347

Compensation: vi

Consent: 43

D

Debentures: 94, 95, 96, 98, 295, 296

Directors: 64, 152, 310, 311, 313

E

Equitable mortgage: 348

Estoppel: 113, 120, 135, 298, 348

F

Floating charge: 348


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Forfeiture: 118, 120, 299, 348

Formation: 8, 64, 281

Formation expenses: 64

Fraud: 50

G

General meetings: 152, 348

Group accounts: vii, 348

I

Infants: 110

L

Lender: 31

Liability: 9, 15, 47, 54, 85, 97, 282, 284, 294

Lien: 284, 349

Limited liability: 3, 15, 45, 52, 348

Liquidation: vii, 119, 121, 218, 224, 242, 248, 300

Loans: vii

M

Member: 109, 112, 113, 298, 349

Memorandum of association: 15, 349

Misfeasance: 241

N

Name clause: 284

Negligence: 349

Nominal: 43, 85

O

Offer for sale: 62

Oppression: 349

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P

Pre-incorporationcontract:v, 52

Preliminary expenses: 64

Premium: 59, 349

Private companies: 140

Prospectus: 59, 63, 349

Proxy: 147, 349

Q

Qualificationshares:350

Quorum: 147, 310, 350

R

Ratification:51

Redeemable preference shares: 350

Reduction: 290

Registrar: 29, 190, 200, 321

Removal: vi, 313

Repudiation of an infant: 121

Resolutions: 161, 291

Rights: 117, 120

S

Secured: 95, 217, 296, 350

Stamp duty: 261, 341

T

Termination: 9, 282

Transfer: vi, 8, 101, 112, 118, 120, 281, 284, 297, 298, 350

Transmission: 112, 113, 120, 298

Trust: 20, 33, 50, 51, 80, 82, 83, 84, 85, 96, 97, 111, 126, 293, 294

U

Ultra vires: 15, 350

Uncalled capital: 85

INDEX


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Unlimited companies: 34

V

Voting: 64, 284, 310

W

Warrant: 350

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REFERENCES

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REFERENCES

1. GENERAL PRINCIPLES AND COMMERCIAL LAW OF KENYA ASHIQ HUSSEIN 1978

2. COMMERCIAL LAW(SIMPLIFIED VERSION) NISAR AHMAD SALEEMI 2009

3. COMPANY LAW 2ND EDITION JOHN JOSEPH OGOLA 1994

4. PRINCIPLES OF MODERN COMPANY LAW 8TH EDITION PAUL L. DAVIES

5. CASES AND MATERIALS IN COMPANY LAW 8TH EDITION LENSAEALY AND SARAH WORTHINGTON

6. CHARLESWORTH’S BUSINESS LAW 16TH EDITION PAUL DOBSON

7. SMITH AND KEENAN’S COMPANY LAW 14TH EDITION CHARLES WILD AND STUART

8. COMPANIES ACT CHAPTER 486 OF THE LAWS OF KENYA

9. PAST EXAMINATION PAPERS KASNEB (KENYA SECRETARIES AND ACCOUNTANTS BOARD)


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