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SLS3127: LAW OF BUSINESS ASSOCIATIONS 1
CLASS NOTES: INTRODUCTION TO COMPANIES AND COMPANY LAW1

The exact scope of company law is difficult to define, on account that the laws of Kenya do not
define the term in testament to the words of Buckley J in Re: Stanley (1906)
“The word company has no strict legal meaning
...
e
...

A company may also be defined as an association of many persons who contribute money or
money’s worth to a common stock and who employ it to a common purpose
...

The Historical Evolution of Companies

This is traceable to early forms of business associations created by the Romans in the early 13th
Century
...


ii
...


The need to limit the liability of investors for debts and other liabilities from the association
...


COMPANY LAW

This is a study of the rules and principles that governs and regulates the affairs of that which the
law recognizes as a company
...
Nyabiosi Vincent, Lecturer SLS

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Kenya’s company law is contained partly in the Companies Act and the substance of common law as
modified by the doctrines of equity
...


The Companies Act came into effect on 1st January 1962 and it was a carbon copy of the English
companies act (1948)
...

THE FOUNDATION OF COMPANY LAW

It is based on two fundamental principles
...

Legal or corporate personality
...

Theory of limited liability
...
Legal or Corporate personality

This principle is set to the effect that when a company is registered it becomes a legal person
separate and distinct from its members and managers
...
This principle was first formulated in the House of
Lords in the matter of Salomon v
...
, where Lord Macnaghten was emphatic
that the company is at law a different person altogether from the subscribers to the memorandum
...
He sold his business to Salomon and Co
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Salomon was both
a creditor because he held a debenture and also a shareholder because he held shares in the company
...
Salomon therefore had 20,101 shares in the company and each member of the family had 1
share as Salomon‘s nominees
...
Its assets were not enough to satisfy the debenture
holder (Salomon) and having done so there was nothing left for the unsecured creditors
...
Salomon should therefore indemnify the company against its trade
loss
...
In the words of Lord Halsbury “Either the
limited company was a legal entity or it was not
...
If it was not, there was no person and nothing at all and it is impossible to say at
the same time that there is the company and there is not”

In the words of Lord Macnaghten “the company is at a law a different person altogether from the
subscribers and though it may be that after incorporation the business is precisely the same as it was
before, and the same persons are managers, and the same hands receive the profits, the company is
not in law the agent of the subscribers or trustee for them nor are the subscribers as members liable in
any shape or form except to the extent and manner prescribed by the Act
...
If those conditions are satisfied, what can it
matter, whether the signatories are relations or strangers
...
When the Memorandum is duly signed and registered though there be only seven (7) shares
taken the subscribers are a body corporate capable forthwith of exercising all the functions of an
incorporated company
...
There is no period of minority and no interval of
incapacity
...
”
This principle is now contained in section 16(2) of the Companies Act which provides inter alia”

“… from the date of incorporation mentioned in the certificate of incorporation, the subscribers
to the memorandum together with such other persons as may be members from time to time,
shall be a body corporate by the name contained in the memorandum capable of exercising all
the functions of an incorporated company with perpetual succession and a common seal
...

1
...


i
...


It also revealed that it is possible for a trader not merely to limit his liability to the money
invested in his enterprise but even to avoid any serious risk to that capital by subscribing
for debentures rather than shares (in addition to shareholding, it is possible for member of
a company to subscribe for its debentures and thus become a creditor
...

The above legal principle as formulated in Salomon’s case was applied in several cases
subsequently such as:
Macaura V
...
Ltd (1925) A
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619

The Appellant owner of a timber estate assigned the whole of the timber to a company known as
Irish Canadian Sawmills Company Limited for a consideration of £42,000
...
No other
shares were ever issued
...
In the course of
these operations, the Appellant lent the company some £19,000
...
The Appellant then insured the timber against fire by policies effected in his
own name
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The insurance company refused to pay any
indemnity to the appellant on the ground that he had no insurable interest in the timber at the time
of effecting the policy
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So
he lost the Company
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(1961) A
...
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Lee’s company was formed with capital of £3000 divided into 3000 £1 shares
...

Lee held 2,999 and the remaining one share was held by a third party as his nominee
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In the
course of his duty as a pilot he was involved in a crash in which he died
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Lee was a
workman under the Act
...
”

Katate v Nyakatukura (1956) 7 U
...
R 47A

The Respondent sued the Petitioner for the recovery of certain sums of money allegedly due to the
Ankore African Commercial Society Ltd in which the petitioner was a Director and also the deputy
chairman
...
The action was filed in the Central Native Court
...
The issue was whether the Ankore African Commercial Society
Ltd of whom all the shareholders were natives was also a native
...
Being a distinct legal entity and abstract in
nature, it was not capable of having racial attributes
...
Theory of limited liability

Liability refers to the extent to which a person may be called upon to contribute to the assets of a
company and in the event of its being wound up
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It may be limited by shares or by guarantee
...
In Salomon’s case, Salomon was not liable to contribute the assets of the company as his
shares were fully paid
...

Unlimited Companies
Under section 4(2) (c) of the Act these are Companies not having the liability of their members
limited by the memorandum
...

TYPES OF COMPANIES

Although company law is concerned with registered companies our Kenyan law recognizes other
corporations which shares attributes similar to those of the registered company
...
Corporations Sole
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It is a legal person in its own right with
limited liability, perpetual succession, capacity to contract, own property and sue or be
sued
...
g
...

2
...
It has an independent legal existence with
limited liability, capacity to contract, own property, sue or be sued and perpetual
succession
...
g
...


3
...
Certain
documents must be delivered to the Registrar of companies to facilitate registration of the
company
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g
...
Examples of registered corporations are; public and private companies
4
...

A state corporation is a legal person with perpetual succession
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E
...
Kenya Wildlife Services, Agricultural Finance Corporation, Public
Universities, Central Bank etc
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Chartered Corporations
These are corporations created by a charter granted by the relevant authority
...
E
...
Private
Universities are chartered corporations under the Universities Act, Chapter 210 Laws of
Kenya
...
The Charter must set out the

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name, membership, powers and functions of the University
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FORMATION OF REGISTERED COMPANIES

Preliminaries
These are the factors to be taken into consideration and to be ascertained before a company is
formed
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The name of the company
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This is because a
company can only be identified by its name
...
However, there are certain statutory restrictions
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Public or private company
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Private companies are identified under section 30(1) of the Companies Act which provides
that a private company is a company which, by its Articles of association,
• Limits the number of members to 50 excluding current and former employees who
are members
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• Prohibits any invitation to the public to subscribe for its shares or debentures
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It must have at least one director
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It must also have at least 2 members
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It is entitled to commence business from the date of incorporation
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It is not required to publish accounts or held statutory meetings
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It is empowered to give loans to its directors
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On the other hand, a public company:
a
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b
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c
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d
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It requires a certificate of trading to commence business or exercise borrowings
powers (This is after getting the certificate of incorporation)
f
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g
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Advantages of a private company over a public company
i
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The formation of a private company requires only a minimum of two
subscribers to the memorandum of association
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Whereas a public company
requires a minimum of seven subscribers to the memorandum of association
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iii
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v
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vii
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Commencement of business
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Statutory meeting
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Issuing of prospectus is prohibited
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Directors
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Under section 177 of the companies Act, a private company shall have at least one
director and a public company two directors
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A private company is exempted from publication of its annual
accounts in the local dailies
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3
...

Companies formed for trading purposes have their liability limited by shares while those
formed for non-commercial purposes have their liability limited by guarantee
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Whether or not the company has share capital
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They are the units of
ownership
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The intention of promoters
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Limitation of liability
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A
company limited by guarantee may or may not have share capital
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Section 4(1) of the Act prescribes the minimum conditions in company formation
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THE FORMAL PROCEDURE OF COMPANY FORMATION

1
...


The Registrar is empowered to extend the reservation, however a name cannot be reserved
for more than 60 days from the date of application
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2
...

This is one of the primary documents of incorporation
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It regulates the relationship
between the company and third parties (outsiders)
Its contents include:
 The name clause
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 The objects clause
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 The capital clause
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 Particulars of subscribers
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Articles of Association (AOA)
Under section 2(1) of the Act, Articles means, the Articles of association of a company
as originally formed or as altered by special resolution including, so far as they apply to
the company, the regulations contained in Table A of the schedule of the Act
...
It is a constitutive
document containing the rules of internal management

It regulates the relations between a company and its members and is thus the internal
constitution of the company
...
However if a company adopts Table
A as its Articles, then the contents of Table A will become its Articles
...
It contains the name of the company and the capital with which it
proposes to be registered
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Declaration of compliance (Form 208)
Under section 17 (2) of the Act, this is a statutory declaration by the advocate engaged
in the formation of a company or by a person named by the Articles as director or
Secretary to the effect that the subscribers to the memorandum have complied with
the provisions of the relating to registration and are desired to being formed into a
company
...


List of persons who have consented to be directors (Form 210)
Under section 182 (4) of the Act, once an application for registration of the company is
made, there must be delivered to the Registrar a list of all persons who have consented
to act as directors of the company
...
It
enables the Registrar to determine whether they qualify to act as directors
...
However
in practice, the documents will accompany the MOA and AOA
...
This
document must be signed by the director or an agent authorized in writing
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Particulars of directors and Secretary (Form 203)
Under section 201 of the Act, within 14 days of incorporation or change in directorship,
there must be delivered to the Registrar, particulars of the directors and the Secretary,
specifically names, occupations, postal address, nationality, date of birth and other
directorships held
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The notice must
identify:
 The city or town in which the office is situated
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 The name of the building
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3
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On payment, the duty imprint is affixed on the
documents as evidence
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Presentation of documents
Under section 15 of the Act, the constitutive and other documents must be presented to the
Registrar for registration of the company
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Registration and issue of certificate of incorporation
Under section 16 (1) of the Act, the Registrar registers the memorandum and issues a
certificate of incorporation under his hand thereby certifying that the company is duly

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incorporated
...


The company seal is formally prepared after the Certificate of incorporation has been issued

LIMITED COMPANIES AND PARTNERSHIPS COMPARED

Section 3 of the Partnership Act defines a partnership as a relationship between two or more
persons carrying on business together with the view of making profit
...
Formation: a company undergoes elaborate legal procedures to come into existence, for
example, a company requires registration with the registrar of companies whereas for a
partnership registration is not compulsory
...
Legal personality
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3
...
The minimum number of members in a partnership is two and a maximum of
twenty whereas the minimum number in a private company is two and maximum of fifty
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4
...
Shares in a company are freely transferable whereas a partner
cannot transfer his shares without consent of the other partners
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Scope of business
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6
...
The business of the company is run by the board of directors whereas every
member of a partnership firm is involved in the business of the firm
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Agency
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8
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An act of the parties
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