Notesale: Turn your study into money

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PAPER NO
...

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the copyright owner
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ISBN NO: 9966-760-20-2
© 2009 STRATHMORE UNIVERSITY PRESS
First Published 2009

STRATHMORE UNIVERSITY PRESS
P
...
Box 59857, 00200,
Nairobi, Kenya
...
O Box 22586-00400 Nairobi
...
com

ACKNOWLEDGMENT

iii

S T U D Y

We gratefully acknowledge permission to quote from the past examination papers of Kenya
Accountants and Secretaries National Examination Board (KASNEB)
...
iii

...
v

PART A
...
1
NATURE AND CLASSIFICATION OF COMPANIES
...
13
REGISTRATION OF A COMPANY
...
61
CHAPTER FOUR
...
95
CHAPTER FIVE
...
111
CHAPTER SIX
...
127

PART C
...
149
MEETINGS
...
170
DIRECTORS
...
195
THE SECRETARY
...
215
AUDITORS
...
59

T E X T

PART B
...
229

CHAPTER ELEVEN
...
233
CHAPTER TWELVE
...
247
CHAPTER THIRTEEN
...
281
CHAPTER FOURTEEN
...
297

PART E
...
309

S T U D Y

T E X T

ANSWER BANK
...
379
INDEX
...
389

T E X T

PART A
S T U D Y

vii

S T U D Y

T E X T

viii

C O M PA N Y L A W

1

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

CHAPTER ONE

NATURE AND
CLASSIFICATION OF
COMPANIES

S T U D Y

T E X T

2

C O M PA N Y L A W

3

CHAPTER ONE
NATURE AND CLASSIFICATION OF COMPANIES
OBJECTIVES
By the end of this chapter, the student should be able to:
•
•
•

Explain the various forms of business organisations
Distinguish the company from other forms of business organisations
Explain the law relating to other form of business organisations such as cooperatives

KEY DEFINITIONS
•
•
•
•
•

Sole proprietorship: Simplest form of business what is also called one man business
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
Incorporated association: An artificial person that has a legal identity
Limited liability: This is a company whereby any liability members in times of liquidation
of the company is limited to the amounts if any unpaid on member’s shares

EXAM CONTEXT

This is one of the new chapters that the examiner has added to the revised curriculum
...
This will enable the student to be in a position to respond to any question
in the form of differences or even similarities that exist among the various forms of business
...
It then distinguishes
these other forms of business associations from the company, which is our main focus
...


T E X T

INTRODUCTION

4

C O M PA N Y L A W

INDUSTRY CONTEXT
This is a very practical chapter as it recognises that there are other forms of business organisations
other than the company
...
There are so many companies, sole traders, partnerships and even co-operatives
in existence
...




1
...
A business may
include the following activities:
•
•
•

Commercial e
...
running a shop or kiosk
Agricultural e
...
farming
Direct services e
...
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
...
SOLE TRADER
This business is owned and controlled by one person
...
It’s very easy to start as all that one needs is capital
and a trading license obtained from the relevant local authority
...


NATURE AND CLASSIFICATION OF COMPANIES

5

ADVANTAGES
1
...

3
...


DISADVANTAGES
1
...

3
...


Owner has to provide all the capital
Owner bears and suffers all the losses
Owner has to work for long hours to increase profits and this in the long run affects his
health
There is no scope in sharing ideas for the improvement of the business

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

2
...


Partners provide capital on terms agreed
...

2
...


3
...
It is a form of
self-help organisation
...
Members hold shares in
the society

S T U D Y

This is a business is owned by at least two people or more but not more than 20 people
...


T E X T

2
...
Examples include
1
...
Afya Cooperative Savings and Credit Society Limited, formed by employees of the
Ministry of Health
The secondary this is a cooperative whose membership comprises Primary
societies
...


S T U D Y

T E X T

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

Cooperative Bank of Kenya
Kenya Union of Savings and Credit Cooperative Limited (KUSCCO)
National Housing cooperative union Limited (NACHU)
Kenya Cooperative Creameries (KCC)
Kenya Planters Cooperative Union Ltd
...
It is the mouthpiece for Kenyan cooperatives to preserve
and propagate (both in the country and abroad) the cooperative principles and values
on which the movement was founded
...
The concentration is however within
agriculture and finance sectors
...
The financial sub-sector provides savings and credit facilities
to their members
...


BENEFITS OF COOPERATIVE ORGANISATIONS
Basically cooperatives are vehicles for social economic development
...
The major benefits that come out of cooperative
organisations can be summarised as follows:
1
...

3
...

Mobilisation of savings and channelling the income of individual members to specific
development projects
Support to agricultural production through distribution of farm inputs

NATURE AND CLASSIFICATION OF COMPANIES

4
...

6
...


7

Dissemination of applied technology to members
Assisting in income distribution by participation through enabling large sections of the
population to engage in various income generating economic activities
Provision of credit to members for defraying urgent expenses at affordable rates and
costs
Creating employment directly through hiring of various cadres of staff besides providing
self-employment for farmers, artisans among others
...
2 DISTINCTION BETWEEN COMPANIES AND OTHER FORMS OF


BUSINESS ORGANISATIONS

Fast Forward
The main distinction between a company and other forms of business organisations is to be
found in the two fundamental principles of company law as discussed below:

1
...
It becomes a body corporate with an independent
legal existence with limited liability, perpetual succession, capacity to contract, own property and
sue or be sued
...

This principle is now contained in section 16(1) of the Companies Act which provides inter alia
that from the date of incorporation, the subscribers to the memorandum together with such other
persons that may become members of the company are a body corporate by the name contained
in the memorandum capable of exercising the functions of an incorporated company with power
to hold and having perpetual succession and a common seal
...

2
...


That even the so called one man companies were legal persons distinct and separate
from the members and managers
That incorporation was available not only to large companies but to partnerships and
sole proprietorships as well
That in addition to membership, it was possible for a member to subscribe to the
company’s debentures

T E X T

Legal/Corporate personality
Theory of limited liability

S T U D Y

•
•

8

C O M PA N Y L A W

2
...
In company law, the liability of members may be limited
or unlimited
...


We then pay attention to the main differences between a company and a partnership
...



The Partnership Act does not prescribe registration as a condition precedent to
partnership formation
...

(b) Legal Status

A registered company enjoys the legal status of a body corporate, which is conferred on
it by the Companies Act
...

Such business as appears to be carried on by it is, in fact, carried on by the individual
partners
...
A
public registered company must have at least seven members under section 4 of the
Companies Act but without a prescribed upper limit
...

(d) Transfer of Shares

Shares in a registered company are freely transferable unless the company’s articles
incorporate restrictive provisions
...


(e) Management

A company’s members have no right to participate in the company’s day-to-day
management
...



Partners have the right to participate in the firm’s day-to-day management since section
3 of the Partnership Act requires the business to be carried on “in common”
...

(f) Agency

A member is not, per se, an agent of the company (Salomon v Salomon & Co Ltd
(3)
...
The Partnership Act, section 7 also expressly provides
that every partner is an agent of the firm and his other partners for the purpose of the
partnership
...


(h) Powers

The ultra vires doctrine limits a company’s powers to the attainment of the company’s
objects under its memorandum of association
...

(i)


(j)


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 the
partnership unless the partnership agreement provides otherwise
...
A partnership cannot
borrow on a “floating charge”
...
Consequently, a member cannot insure the property since he has no
insurable interest therein: Macaura v Northern Assurance Co (4)
...


T E X T

A partner is personally liable for the firm’s debts
...


S T U D Y



10

C O M PA N Y L A W



1
...
They are also governed by the Cooperative Society Rules enacted in
1969
...

2
...

4
...

6
...

8
...
The Partnership Act
is based on the English Partnership Act 1890
...




CHAPTER SUMMARY

There are four main forms of business associations in Kenya, though there may be others in
existence, which are beyond the scope of this book
...
Name two forms of business organisations
2
...
What is the maximum number of persons in a sole trader?
4
...

Mobilisation of savings and channelling the income of individual members to specific
development projects
10
...
Dissemination of applied technology to members
12
...

13
...
Creating employment directly through engaging various cadres of staff besides creating
self-employment for farmers, artisans among others
...

9
...


Sole proprietorship and partnership

2
...


One (1)

4
...


S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

13

CHAPTER ONE
TWO

REGISTRATION OF A
COMPANY

S T U D Y

T E X T

14

C O M PA N Y L A W

15

CHAPTER TWO
REGISTRATION OF A COMPANY
OBJECTIVES
By the end of this chapter, the student should be able to:

INTRODUCTION
This chapter mainly deals with formation of a company that is the procedures that those who
wish to form a company should follow in order to be incorporated
...
It later focuses on promoters who, simply put, are charged
with the responsibility of ensuring all the formalities are in place
...


T E X T

Appreciate the legal principles relating to the nature and registration of companies
Describe the contents and nature of the Memorandum and Articles of Association
Explain the effect of legal personality
Give instances when the veil of incorporation is lifted
Explain the role and duties of promoters
Explain the liability of promoters for pre-incorporation contracts
Explain the doctrine of ultra vires

S T U D Y

•
•
•
•
•
•
•

16

C O M PA N Y L A W

EXAM CONTEXT
The examiner has tended to be very fond of this topic in certain years than in others
...
Between 2000 and 2002 the examiner set many questions from this
area
...
The documents identified below them, must in law, be delivered to the registrar
within 14 days after the registration of the company
...
1 REGISTRATION PROCEDURES

Under section 4(1) of the Companies Act any seven or more persons, or where the company
to be formed is Private any two or more persons, associated for any lawful purpose may by
subscribing their names to the Memorandum of Association and by complying with the provisions
of the Act form an incorporated company with or without limited liability
...

(b) Form No 209 and 210 are not delivered for registration because section 182 (5) of the
Act exempts promoters of a private company from the obligation to deliver them for
registration
...

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

Number of members is limited to 50 excluding current and former employees of the
company who are members
Transfer of shares is restricted
Any invitation to the Public to subscribe for shares is prohibited
Must have at east one director
It’s entitled to start business operations on the date of incorporation

REGISTRATION OF A COMPANY

It’s empowered to give loans to its directors
It’s not entitled to publish annual accounts
It’s not obliged to hold statutory meetings

•
•
•





17

SIGNIFICANCE OF REGISTRATION

Section 389 provides that “no company, association or partnership consisting of more than 20
persons shall be formed
...
The provision has
been interpreted by the English and Kenyan courts to the effect that registration is the condition
precedent to the formation of a registered company and failure to register a proposed company
will mean that it does not legally exist: Fort- Hall Bakery Supply Co v Wangoe (1)
...
It becomes “a legal
person”, or “corpora corporata”, whose name is the name chosen for it by its promoters
and written in its Memorandum of Association
...

The concept of a registered company as “a person” was consummated in the celebrated case of
Salomon v Salomon & Co Ltd (3)
...
2

THE COMPANY’S CONSTITUTION

The constitution of a registered company consists of two documents, namely, the Memorandum
of Association and the Articles of Association
...


S T U D Y

(a) The date mentioned (i
...
written) in the certificate of incorporation is the date from
which the company’s legal existence commences
...
This legal position was explained by the House of Lords,
under the English Companies Act whose provisions in this regard are identical to section
16(2) of the Kenya Companies Act, in the case of Jubilee Cotton Mills v Lewis (2)

T E X T

Section 16 (2) of the Act provides that “from the date of incorporation mentioned in the certificate
of incorporation the subscribers to the Memorandum of Association
...
This section has been judicially explained as follows:

18

C O M PA N Y L A W



THE MEMORANDUM OF ASSOCIATION


Definition
In relation to companies registered under the Companies Act, a Memorandum of Association was
judicially defined by Lord Cairns in Ashbury Railway Carriage Co Ltd v Riche as “the charter”
which “defines the limitation of the powers of a company to be established under the Act”
...

Statutory Form
Section 14 of the Act provides that the form of the Memorandum of Association of a company that
is limited by shares shall be in accordance with the form set out in Table B, or as near there to as
circumstances admit
...




TABLE B




FORM OF MEMORANDUM OF ASSOCIATION OF A COMPANY
LIMITED BY SHARES

1st — The name of the company is “The Lake Victoria Steam Packet Company Limited”
...

3rd — The objects for which the company is established are, “the conveyance of passengers and
goods in ships or boats between such places as the company may from time to time determine,
and the doing all such other things as are incidental or conducive to the attainment of the above
object”
...

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





Names, Postal Addresses, and
Signature of subscriber

Number of shares
Taken by each Subscriber



Occupation of Subscribers



1



2



3



4



5



6



7



Total Shares taken

T E X T



Dated the
...
, 19
...


THE NAME CLAUSE
Choice of Name
The promoters of a proposed company have freedom to choose its name but the freedom is
limited by section 19 (2) of the Act, which provides that a proposed name must not, in the opinion
of the registrar, be undesirable
...
However, it might be relevant to note that the registrar of English
companies, 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
proposed name as undesirable if:

20

C O M PA N Y L A W

i
...


ii
...


iii
...


iv
...


v
...


S T U D Y

T E X T

vi
...

vii
...

viii
...


It is probably that the registrar of Companies in Kenya is guided by the above rules,
modified mutatis mutandis, when deciding on the desirability of any proposed name
...
After obtaining confirmation that the
name is a registerable one they should immediately make a written application for its reservation
under section 19 (1) (a) of the Act
...
No other company shall be entitled to be registered with the reserved name
...
Because it lacks physical attributes, which could assist
its 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
...


REGISTRATION OF A COMPANY

21

Name to end with the word “Limited”

Section 5(1)(a) provides that the word “limited” must be the last word of the name of a company
which is to be limited by shares or by guarantee
...

Accordingly, a generally accepted abbreviation will serve this purpose as well as the word in full
...

The use of the mystic word “limited’ as the last word of a company’s name is explicable only in
the context of the historical evolution of English Company law
...
A member of the public dealing
with a business organisation whose name ended with “ltd” was to be made aware that he was not
dealing with a partnership and so could only blame himself if he burnt his fingers in the process
...


An existing registered company may obtain a licence to make, by special resolution, a change in
its name so as to omit the word “Limited”
...

A licence may be granted on such conditions as the Minister thinks fit and may, upon the
recommendation of the registrar, be revoked by him subject to the company’s right to be heard
in opposition to the revocation
...
109 (1) which relate to the publication of the company’s
name
...


Under section 20 (1) if a special resolution is passed by the company for that purpose
after obtaining the written approval of the registrar
...


S T U D Y

Although section 5 provides that the last word of the name of a limited company must be “limited”,
this would not be so if the Minister empowers the company to dispense with it
...


T E X T

Power to dispense with the word “Limited”

22

C O M PA N Y L A W

ii
...
No particular type of resolution is prescribed by the section and
the change may, therefore, be made by ordinary resolution
...
Any delay entails the risk of a passing-off action being
instituted against the company
...


Under Section 21(2) if the Minister, by licence, authorises a company to make a change
in its name
...


S T U D Y

T E X T

(b) Compulsory Change

Section 20(2) of the Act provides that within six months of registration under a particular name,
the registrar may direct a change in name if, in his opinion, the name is “too like” that of a preexisting company
...
A change
of name under this section may be made by ordinary resolution
...
100 for every day during which the default continues
...
Upon receipt of the notice, the registrar shall -

i
...

iii
...


Where a company changes its name either voluntarily or compulsorily, the change will not affect
any of its rights or obligations or render defective any legal proceedings by or against it, and any
such proceedings may be continued or commenced against it by its new name
...

If a company does not paint or affix its name as prescribed, the company and every officer in
default are liable to a fine not exceeding one hundred shillings and if the company does not keep
its name painted or affixed as prescribed, the company and the officer in default shall be liable
to a default fine
...
1000 and the officer may be made personally liable
to any creditor who has relied on the document, if the company fails to pay
...
10
...


Business Names

(b) The general nature of the business
...


(d) The full address of every other place of business
...

(f)

The date of the commencement of business
...


If there is a default in registration, the persons in default are liable to a fine and, unless the court
gives relief, the rights of the defaulter in relation to the business in question are unenforceable by
the defaulter by action: Registration of Business Names Act, section10 - 11
...


T E X T

If a company has a place of business in Kenya and carries on business under a business
name which does not consist of its corporate name without any addition, the company must,
within 28 days after commencing business under the business name, submit to the registrar of
business names a statement, called the Statement of Particulars, which contains the following
particulars-

24

C O M PA N Y L A W

(a) Which contains any word which, in the opinion of the registrar, is likely to mislead the
public as to the nationality, race, or religion of the person by whom the business is
wholly or mainly owned or controlled;
(b) Which includes any of the words “Imperial”, “Royal”, “Crown”, “Empire”, “Government”,
“Municipal” or any other word, which imports or suggests that the business enjoys the
Queen’s patronage or the patronage of any member of the Royal Family or of the
government;
(c) Which includes the word “Co-operative” or its equivalent in any other language or any
abbreviation thereof, or
(d) Which is identical with or is similar to that of a business or corporation existing, or is
already registered under the Act or under the Companies Act, if in the opinion of the
registrar, such registration would be likely to mislead the public
...

The registrar is empowered to cancel the registered business name if the company fails to change
it after he directed it to do so
...


Publication of True Names
Section 23(1) of the Registration of Business Names Act provides that a company using a
business name distinct from its corporate name must disclose its corporate name in all trade
circulars and business letters on or in which the business name appears and which are issued
or sent by the company to any person
...
1000
...
The situation of the registered office in Kenya
fixes the company’s nationality as Kenyan and its domicile as Kenya, though not its residence
...
Thus, a company may be resident in a number of countries where it has several centres of
control in different countries
...


Failure to comply with the requirements of these sections renders the company, and every officer
of the company who is in default, liable to a default fine
...
It provides
a convenient place where legal documents, notices, and other communications can be served
...

The following registers and documents are also kept at the company’s registered office:
i
...
Where the register and index (if any) are made up by an agent, they may be kept at
the agent’s office (Section 112 - 113)
...
The register of directors and secretaries (Section 201 (1)
...
The company’s register of charges (if the company is a limited company) (Section105
(1)
...
A copy of any instrument creating any charge requiring registration under Part IV of the
Act (Section 104)
...
The register of debenture holders (Section 88 (1)
...
The register of directors’ interests in shares in, or debentures of, the company or
associated companies (Section 196 (1)
...
The minute books of general meetings (Section 146 (1)
...
Section 108 (1) requires notice of the situation of the registered office and
the registered postal address, and of any change therein, to be given within 14 days after the
date of incorporation of the company or of the change, as the case may be, to the registrar for
registration
...

(b) Debenture holders of the company are entitled to inspect, free of charge, the register
of debenture holders and, during the period beginning 14 days before the date of the
company’s annual general meeting and ending three days after the date of its conclusion,
the register of directors’ shareholding
...




THE OBJECTS CLAUSE

S T U D Y

T E X T

Reasons for Stating Objects
Section 5 (1) (c) requires the Memorandum of Association to state the objects of the company
...
In Cotman v Brougham (21) Lord Parker stated that
the statement of a company’s objects in its Memorandum of Association is intended to serve the
following purposes:
(a) To protect subscribers who learn from it the purpose to which their money can be
applied
...

These propositions will become clearer after a study of the doctrine of Ultra Vires
...
The contract is void, illegal and unenforceable
...
His Lordship observed that any purported ratification would mean
that “the shareholders would thereby, by unanimous consent, have been attempting to do the
very thing which, by Act of Parliament, they were prohibited from doing”
...
It must
therefore be deduced, for example, that a company whose object has been stated to be “gold
mining” cannot engage in “fried fish” business
...
That would be a startling proposition
because, in practice, companies have to do so many things in the course of their business that
if all those things were to be written down in the Memorandum of Association, the Memorandum
would be such a gigantic document that nobody would print or read
...
His Lordship then
explained that it is not necessary for a company to write down in its memorandum everything that
it would or could do in the course of its business because whatever may fairly be regarded as
incidental to, or consequential upon, those things which have been stated in the memorandum
ought not, and would not, be held by the courts to be Ultra Vires
...
The range of transactions that could be encompassed within the “implied powers
rule” was illustrated by Lord Buckley in 1907 when, in Attorney - General v Mersey Railway
Co, he stated:

S T U D Y

(b) The statutory requirement that a company must state its objects in its Memorandum of
Association would be rendered purposeless if, despite having stated the objects, the
company was legally entitled to embark on any other activity
...
In other
words, the statutory requirement that the objects are to be stated implies that what has
not been stated as an object cannot become a legitimate activity of the company
...
If they bought the company’s shares they did so because they
intended their money to be used in pursuance of the gold mining business
...
If the company tries to use the money on a different
venture, such as frying fish and chips, they can go to court for an injunction to restrain
it from doing so
...
By way of illustration, let me suppose that the
(stated object) found in the Memorandum of Association of a (registered) company is to establish
and carry on a hotel, and that express power is given to buy land at a particular place and to build
and that as to anything further the
...
It is quite clear that
all such acts as are reasonably necessary for effectuating that purpose are intra vires, such, for
instance, as the purchase of furniture, and of linen, of provisions, and of wines and spirits, the
hiring of servants, the payment of licences, the ownership probably of horses and carriages, the
maintenance and working of an omnibus which shall attend at the railway station to take intending
guests to the hotel and the like
...
The maintenance of tennis lawns or of a bowling green
would, in many circumstances, be legitimate
...
All these and the like will without express mention be within the
company’s powers
...
If, for instance, the hotel were at Bundoran or Rosapenna or elsewhere in the
country it might be intra vires to lay out and maintain in good order a golf links or to acquire
rights of fishing and to own boats and supply gullies for the purpose of fishing upon the lakes
...
If the hotel in question were the Savoy Hotel in the Strand or the Great Central
Hotel in the Marylebone Road, the proposition would cease to be true
...
It would
in such a case be analogous to the omnibus, which the hotel in the country town sends to the
railway station
...
Is the particular act in that case
incidental to or consequential upon or reasonably necessary for effectuating the object, which
the Memorandum defines?


The gist of Lord Buckley’s statement, above, may be summarised as follows: The judges will not
regard a transaction undertaken by a company as Ultra Vires merely because it is not written in
the company’s Memorandum of Association as one of the company’s objects
...


It was reasonably incidental to any of the objects which have been written in the
company’s Memorandum of Association, and

ii
...


Regarding the criteria to be used when deciding on whether a proposed transaction is “reasonably
incidental” to the objects written in the memorandum, it was stated in Henderson v Bank of
Australia (1888) that what other companies with similar objects do may be a good guide for
a company regarding its implied powers
...


It has also been clarified in numerous English cases that a trading company has implied
power:
i
...

iii
...


To borrow money and mortgage its property as security for the loan
...

To pay gratuities and pensions to employees and ex-employees and their dependants
whilst the company is a going concern
...

For purposes of the ultra vires doctrine, a person transacting business with a company will be taken
to have read the objects clause in the company’s Memorandum of Association
...
He cannot successfully sue the company for breach of the
contract, as illustrated by the facts of, and the decision in, Ashbury Railway & Carriage Co v
Riche (22)
...
He would then have realised that
the contract was not within the company’s objects
...
He cannot therefore be allowed
to enforce it
...
“Public documents” in this context are those documents which a company is
required by the Companies Act to deliver to the Registrar of Companies for registration at the
Companies Registry
...
I will, therefore, not take you to the
river again today but will do so tomorrow when the drinking time comes”
...
It is
rather tempting to say that the law, like God, protects only those who also protect themselves
...


S T U D Y

T E X T

The fact that a perusal of the company’s objects clause does not guarantee its correct interpretation
is amply demonstrated by a number of English cases in which judges of the High Court, having
read a disputed clause, concluded that the transaction was intra vires but the decision was later
on reversed by the Court of Appeal or the House of Lords
...

There seems to be no legal justification for retention of the constructive notice rule
...
And there appears to be no moral justification for blaming a
person for not making a decision that was beyond his technical competence to make
...

The remedies available against the company will be as follows
...
Property Transferred

If specific property is transferred to a company pursuant to a transaction, which, unknown to the
transferor, is ultra vires to the company, the ownership of the property is not transferred
...
This is because an ultra vires transaction cannot constitute a “contract” which, pursuant to the
Sale of Goods Act, Section 3, is capable of vesting or transferring the ownership of the property
in the transferee company
...
This remedy is known as
“tracing”
...

The other consequence of this rule is that, since there was no contract of sale, the transferor
cannot sue the company for breach of contract, or the agreed price
...
It is probable that the company cannot recover its property by
tracing if the transferee is willing to pay the agreed price
...


According to the decision in Re: David Payne & Co Ltd (23), a person lending money to a
company is not bound to enquire as to why the company requires the money
...
His legal right to
enforce the transaction will not be affected by the company’s application of the borrowed funds
to a ultra vires purpose
...
If he does not do so and the purpose turns out to
be an ultra vires one, he will be deemed to have financed an ultra vires transaction knowingly: Re
Introductions Ltd (25)
...


Remedies of the Ultra Vires Lender
In Sinclair v Brougham (26) the House of Lords explained that no action or suit lies at law or
in equity to recover money lent to a company which has borrowed for an ultra vires purpose
...
However, he might avail himself of one or other of the following remedies which were
summarised by Buckley, J
...


ii
...
In such a
case the ultra vires loan “is not to be regarded as a borrowing transaction”
...
e
...

The basis of this remedy is that, since the company could legally become indebted in respect
of the future debt, the lender whose money discharged it would be subrogated to the rights of
the discharged creditor
...


T E X T

2
...




iv
...

The basis of this remedy was explained by Lord Parker in Sinclair v Brougham (26)
as follows:
“A company or other statutory association cannot by itself or through an agent be party
to an ultra vires act
...
”
If the lender cannot bring himself within any of the above propositions he would have
no remedy except to participate in the division of the company’s surplus assets, if any,
which would be divisible among the ultra vires creditors rateably during the company’s
liquidation after all the company’s members have received back their capital in full
...
e
...
This provision confers a special status on the Memorandum of Association as
the basic document of the company whose contents are statutorily prescribed and protected
...



ii
...



iv
...

In Re: Cyclists Touring Club (27) Warrington, J
...
to be an alteration which will leave the business
of the company substantially what it was before, with only such changes in the mode
of conducting it as will enable it to be carried on more economically or more efficiently”
...

To attain its main purpose by new or improved means
...
It seems to be intended to facilitate the introduction of new
powers, which would assist in the achievement of the company’s main “purpose” or
object
...
e
...

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

To carry on some business, which under existing circumstances may conveniently or
advantageously be combined with the business of the company
...
The businesses must be of different kinds so that they may be
“combined” and carried on by the company
...
The key word in this
clause is “combined”
...


Cancelling the alteration
...

ii
...
The power to confirm in part was exercised in Re: Parent Tyre Co (30), while
the power to confirm on conditions was exercised in Re: Egyptian Delta Land and
Investment Co Ltd (28)
...
Adjourning the proceedings in order that an arrangement may be made for the purchase
of the interests of the dissenting members
...
However, no part of the capital of the company can be
expended in any such purchase
...
If an application is made the company shall:

(a) Forthwith give notice of that fact to the registrar, and

(b) Within 14 days from the date of the order cancelling or confirming the


alteration wholly or in part, (or within such extended time as the court may


allow) deliver to the registrar a certified copy of the order and, if the alteration


is confirmed wholly or in part, a printed copy of the memorandum as altered
...


S T U D Y

To restrict or abandon any of the objects specified in the memorandum: See Re:
Hampstead Garden Suburb Trust Ltd (29)
...
To sell or dispose of the whole, or any part, of the undertaking of the company
...
To amalgamate with any other company or body of persons
...
The general
meeting may however change the text of the resolution so as to conform to its wishes
provided that it falls within one or other of the specified clauses
...
This would be so even if the purpose of the alteration does not fall within
the restrictions prescribed by the Act since no application could be made to the court to
cancel the alteration
...

An application to the court cannot, however, be made by a person who consented to or voted in
favour of the alteration
...


Companies limited by shares

S T U D Y

T E X T

Most registered companies, both public and private, are companies limited by shares
...

It should be noted that it is the liability of the company’s members which is limited and not the
company’s own liability
...

In such a company the capital is divided into shares of a specified amount, for example, capital
of Kshs 100,000 divided into 10,000 shares of Kshs 10 each
...
10, he is not liable
...


Companies limited by guarantee
Section 4(2)(b) defines a company limited by guarantee as “a company having the liability of
its members limited by the memorandum to such amount as the members may respectively
thereby undertake to contribute to the assets of the company in the event of its being wound
up”
...
such amount as may be required, not exceeding (so many)
shillings”
...

A company limited by guarantee may also have a share capital
...

The members of such a company have dual liability, that is, to pay the amount unpaid on their
shares and the amount of the guarantee
...


Unlimited companies
Section 4 (2) (c) defines an “unlimited company” as a company not having any limit on the liability
of its members”
...

An unlimited company may also have a share capital
...




CAPITAL CLAUSE
Section 5(4) (a) provides that, in the case of a company having a share capital, the memorandum
shall also (unless the company is an unlimited company) state “the amount of share capital with
which the company proposes to be registered and the division thereof into shares of a fixed
amount”
...
200,000 divided into one thousand shares of Kshs
...


THE ASSOCIATION CLAUSE
What has generally come to be known as “the association clause” is not provided for in Section
5 of the Companies Act, which prescribes the contents of the Memorandum of Association
...
agree to take
the number of shares in the company” set opposite their respective names
...


S T U D Y

The Act does not expressly state the reasons why the capital of a company should be stated
...

This means that if a company has a share capital but is registered as an unlimited company, the
amount of the capital need not be stated in the memorandum
...
They need not, therefore,
be informed about its quantum
...
It may, therefore be said that the proposed capital of a limited company is
stated in its Memorandum of Association so that the company’s potential creditors may read the
memorandum in order to ascertain the amount of the capital as stated therein
...
This is so because,
legally, the capital is their primary security for any money they lend to the company
...


T E X T

Reasons for stating capital

36

C O M PA N Y L A W

OTHER CLAUSES
The clauses enumerated and explained above form part of the Memorandum of Association
pursuant to the provisions of Section 5 of the Companies Act
...
Such a clause is usually placed in the Articles of Association but is occasionally
incorporated into the memorandum if it is the intention of the promoters that it should, as it were,
be “entrenched” (i
...
one which is more difficult to alter or is unalterable)
...
In addition
to the methods of alteration of the name clause and the objects clause, which have already been
explained in paragraph 3
...
5
...
1
...
7, respectively, section 25 allows a company
to alter clauses that are included in its memorandum but could lawfully have been contained in
the articles
...
Holders of 15%
of the issued shares have 30 days to apply to the court to challenge the alteration
...






THE ARTICLES OF ASSOCIATION

The Articles of Association are the regulations for the management of a company
...


FORM OF ARTICLES
Table A, Part I is the model form of articles for a public company limited by shares
...

Part I of Table A has 136 paragraphs which, pursuant to Section 12, are divided into paragraphs,
which are numbered consecutively
...
In practice,

REGISTRATION OF A COMPANY

37

advocates acting for company promoters usually copy nearly all the provisions of Table A and
merely change a few clauses here and there to suit the requirements of the proposed company
...


(a) The articles constitute a statutory contract, which binds the members to the company,
and also binds the company to the members
...


ii
...
This is
illustrated by Hickman v Kent or Romney Marsh Sheep breeders Association (31)
in which the company obtained an injunction restraining a member (Hickman) from
going to court in breach of the articles, which provided for arbitration proceedings
...

This is illustrated by Wood v Odessa Waterworks Ltd (32) in which a member (Wood)
successfully sued for an injunction restraining the company from paying dividends in
the form that was not provided for by the articles
...
This is illustrated by the following cases:
i
...


Eley v Positive Life Assurance Co (34) in which Eley failed in his contention that the
company had committed a breach of the contract in the articles which appointed him as
the company’s lawyer for life because he was, in the court’s view, suing qua lawyer and
not qua member
...

The court explained that Mrs Beattie was suing qua director and not qua member
...


S T U D Y

Section 22 provides that “the Memorandum and Articles shall, when registered, bind the company
and the members thereof to the same extent as if they respectively had been signed and sealed
by each member, and contained covenants on the part of each member, to observe all the
provisions of the memorandum and of the articles”
...
e
...
In Hickman’s case (31) Ashbury J
...
This is illustrated by Rayfield v Hands (35) in which it was held
that the defendants were bound, qua members, to buy the shares of the plaintiff (another
member) as provided by the company’s articles of association
...
This is illustrated
by Lyle & Scott Ltd v Scott’s Trustees (36)



ALTERATION OF ARTICLES

S T U D Y

T E X T

Section 13 (1) provides that a company may by special resolution alter or add to its articles
...




LIMITATIONS ON POWER TO ALTER ARTICLES

The following are the legal restrictions on a company’s power to alter its articles:
(a) Section 13 (1) provides that the alteration is subject to the conditions contained in the
company’s memorandum of association
...

(b) Under Section 13 (1) a proposed alteration is subject to the provisions of the Act
...

(c) Section 24 provides that no member of a company shall be bound by an alteration
made in the articles after the date on which he became a member if and so far as the
alteration requires him to take or subscribe for more shares than the number held by
him at the date on which the alteration is made, or in any way increases his liability
as at that date to contribute to the share capital of, or otherwise to pay money to, the
company
...

(d) An alteration that varies the rights attached to any class of shares is invalid unless the
variation of rights clause, if any, in the company’s articles has been complied with
...
Once such an application has been
made the variation will not have effect unless and until it is confirmed by the court
...


REGISTRATION OF A COMPANY

(f)


In Allen v Gold Reefs of West Africa (37) Lindley, M R stated:
“Wide, however, as the language of Section 13 is, the power conferred by it must, like
all other powers, be exercised subject to the general principles of law and equity which
are applicable to all powers exercised not only in the manner required by law, but also
bona fide for the benefit of the company as a whole”
...
Examples are:
i
...

ii
...







2
...

However, the registration is preceded by what is called “promotion”
...




PROMOTERS

There is no general statutory or judicial definition of the word “promoter”
...
Kenya
has adopted the applicable English law
...

(b) “The term ‘promoter’ is a term not of law, but of business, usefully summing up in a
single word a number of business operations familiar to the commercial world by which
a company is generally brought into existence”, (per Bowen, J): Whaley Bridge Calico
Printing Co v Green
...
It merely defines the word for purposes of sub-section (1) of
Section 45 by excluding from the category of promoters persons who give professional
services in connection with the formation of a company
...


Legal Status

S T U D Y

T E X T

A promoter is not an agent of the company he promotes as it does not exist and at common law
one cannot be an agent of a non-existent principal
...
” This is an equitable relationship based on trust, confidence and good faith
...


Duties/obligations of promoters
A promoter’s duties fall into two main categories:
•
•

Fiduciary
General/common aw duties



Fiduciary duties

1
...
Their acts must be guided by the principle of utmost fairness
...
The account must be
complete and honest
...
The
disclosure may be made to an independent board of directors or to all members in
the prospectus
...
If a promoter makes a secret profit without disclosure the company is entitled
to rescind the contract or sue for the recovery of the profit
...


3
...

2
...

4
...


To determine and settle the company’s name
To prepare the constitutive and other documents necessary for incorporation
To cause registration of the company
To secure the services of directors
To meet the preliminary expenses

REGISTRATION OF A COMPANY

6
...

8
...




41

To ensure that the company in formation has an independent board of directors
To prepare the prospectus, if any
To acquire the assets for the use by the company
To enter into business transactions on behalf of the company
...


3
...


5
...




Before incorporation a company has no legal existence it can’t contract or have agents
(it was so held in Kelner v Baxter)
At common law a person who purports to contract as an agent but who at the time
has no principle is personally liable on the contract
...
In Kelner v Baxter, it was held that where a contract is signed by
one who professes to be signing as an agent but who has no principle existing at
the time the contract would altogether be inoperative unless made binding upon the
person who signed it
...

At common law, a contract purporting to have been entered into by or with a nonexistent person is void
...

At common law a company can’t, after incorporation, ratify a pre-incorporation contract,
this is because it could not have entered into the contract before it was formed
...

At common aw the mere adoption or confirmation by directors of a re-incorporation
contract creates no contractual relationship between the company and the other party
At common law, a pre-incorporation is enforceable by or against the company if after
incorporation, the company enters into a new contract similar to the previous agreement
...


REMUNERATION OF PROMOTERS

A promoter is not entitled to remuneration for incorporating a company nor is he entitled to
recover the expenses incurred in the process
...

However, in practise the articles provide for the recovery of the expenses
...

This article is unenforceable by a promoter by reason of Section 22 of the Act
...

2
...

Upon disclosure, a promoter may sell an undertaking to the company in return for fully
paid shares
...


T E X T

A pre-incorporated contract is an agreement that is entered into, usually by a promoter or promoters,
on behalf of a company at a time when the company’s formation has not been completed by its
registration
...
Few cases
have been contested in English courts regarding the effect of such agreements
...

4
...

6
...

A promoter may be afforded the option to take up extra shares at their par value after
the market price has risen
...
RESERVATION OF NAME
Under Section 19(1) of the Act, the registrar may on written application reserve a name ending
the registration or change of name of a company
...
However, the registrar is empowered
to extend the reservation by any number of days not exceeding thirty
...


B
...
This is the
primary document for purposes of incorporation
...
It’s the company’s charter or external constitution
...
Its contents include:

• Name of the company

• Objects

• Capital

• Liability

• Association

• Particulars of subscribers

• Date
The memorandum of a company may be limited by shares or by guarantee must state that the
liability of the company's members is limited
...


REGISTRATION OF A COMPANY

43

(ii) Articles of Association

This document contains the regulations for management of a company
...
Table A is
a sample of the articles of a company limited by shares
...
The provisions of Part I of Table A in the First Schedule to the Act will be
automatically applicable to the company
...
It contains the rules of internal management hence it is the internal
constitution of the company
...






NOTE
The documents identified here in below must in law be delivered to the registrar within
14 days after registration of the company but which in practice must accompany the
constitutive documents
...
This is a personal commitment by the
director to act as such
...
It is to be delivered for registration only if the
prospective directors have been appointed by the articles delivered for registration in
lieu of Table A, or as complementary thereto
...


S T U D Y

(iv) Declaration of Compliance (Form No 208)

Form No 208, when duly completed and signed, constitutes the statutory declaration
by the advocate engaged in the formation of the proposed company, or by the person
named 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
and incidental thereto have been complied with
...
It sets out the name of the company and the capital with which the company
purposes to be registered
...


44

C O M PA N Y L A W

C
...
e
...
On payment, the duty imprint is
fixed on the documents
...
PRESENTATION OF DOCUMENTS TO THE REGISTRAR
Under Section 15 of the Companies’ Act the constitutive and other documents must be lodged
with the registrar for registration of the company
...


S T U D Y

T E X T

E
...
Thereby certifying
that the company is duly incorporated
...




CERTIFICATE OF INCORORATION

This is a document issued by the registrar on registration of a company
...
its contents include:
1
...

3
...




Name of the company
Serial number
Signature of the registrar
Seal of the registrar’s office

PRACTICAL CONSEQUENCES OF INCORPORATION

In the course of delivering his judgment in Salomon’s case, Lord Halsbury stated that “once the
company is incorporated, it must be treated like any other independent person with rights and
liabilities appropriate to itself”
...
This is the fundamental
attribute of corporate personality, which is given practical effect in the following ways:

REGISTRATION OF A COMPANY

45

1
...
If the company has borrowed money, it and it alone is under an obligation to repay the
loan
...
This is
illustrated by the case of Salomon v Salomon & Co Ltd (3) in which it was held that Salomon,
as a member, was not under an obligation to repay the company’s debts
...
During the winding up the members will be called upon to pay
the amount which is unpaid on the shares they hold, if any, in the case of a company limited
by shares, or the amount prescribed by the memorandum, in the case of a company limited by
guarantee, as provided for in section 4(2) of the Act
...
Perpetual succession
According to the Concise Oxford Dictionary, “perpetual” means, inter alia, “applicable, valid,
forever or for indefinite time” while “succession” means “a following in order”
...
The “perpetual succession”
occurs because a company and its members are separate persons and so the company’s legal
life is not terminated by a member’s death
...
Owning of property
Under Section 16 (2) of the Act, a registered company, as a person, has power to own movable
and immovable property
...
But it is important to note that, legally, the company’s property does not belong to
the members, either individually or as a group
...
This rule has
been explained by the English courts in numerous cases among which Macaura v Northern
Assurance Co (4) may be referred to as an example
...
Any member who
uses the company’s money to purchase personal items or discharge personal obligations will be
liable to the company for conversion
...


S T U D Y

The other point to be noted is that a company’s creditor cannot institute legal proceedings against
a company’s member in order to recover from him what he owes the company
...


T E X T

It should be noted that, in the case of a company limited by shares, what the members are paying
are the amounts they owe to the company as its debtors in respect of shares that were sold to
them on credit and have not been paid for in full
...


46

C O M PA N Y L A W

4
...
Consequently:
(a) A member or members cannot institute legal proceedings to redress a wrong to the
company
...

This is illustrated by the facts of, and the decision in, Foss v Harbottle (6)
...
This is illustrated by
Salomon v Salomon& Co Ltd (3) in which it was held that Salomon was not liable for the
company’s debts and should not, therefore, have been sued to recover them
...
Capacity to contract
As a legal person, a registered company has capacity to enter into contractual relationships in
furtherance of its objects
...
It was so held in lee v lee’s
Air farming company limited where Mr
...
Mr
...

Mr
...
He died in a crash while working
for the company
...
Lee sued for compensation under the Workman’s Compensation Act and
she was entitled as to compensation
...
Common seal
Under Section 16 (1) of the Companies Act an incorporated company has a common seal to
authenticate its transactions
...

There are common law and judicial exceptions
...
It becomes a
body corporate with an independent legal existence
...

As a general rule the law does not go behind the veil to the individual members
...
These circumstances are collectively referred to as
lifting the veil of incorporation
...
Such instances may arise under statutory provisions or case law
...
It does not make the member liable for any debts incurred during the
six months, which follow the reduction of membership
...



(b) Section 109 (4): Non-publication/Mis-description of a company’s name








Subsection (1) of Section 109 of the Act requires a company’s officers and other agents
to write its name on its seal, letters, business documents and negotiable instruments
...

Subsection (4) of the section provides that any officer or agent of the company who
does not comply with the aforesaid statutory requirements shall be liable to a fine
not exceeding Kshs
...

The imposition of personal liability on the company’s agent is what is regarded, in a
somewhat loose sense, as “lifting the veil of incorporation”
...
That, in effect, is what happens if a company’s
agent does not comply with the statutory requirement
...
In the latter case the plaintiff told the court that she was
NOT aware that the company was limited till after the bills were accepted
...
The section is regarded as an instance of “lifting the veil” because it
modifies the principle established in Salomon v Salomon & Co Ltd that a member
is not liable for the company’s debts, and permits the company’s creditors to sue him
directly in order to recover the debts
...


S T U D Y



48

C O M PA N Y L A W

therefore, been misled as to the legal status of the company
...

(c) Section 150: Group accounts


S T U D Y

T E X T




Section 150 requires a company which has subsidiaries to lay before the company in
general meeting accounts or statements dealing with the state of affairs and profit or
loss of the company and the subsidiaries at the time when the company’s own balance
sheet and profit and loss account are laid before the company’s general meeting
...

These provisions constitute what is regarded in a loose sense as an instance of “lifting
the veil” because a member (the holding company) is obliged to incorporate into its
balance sheet the assets and liabilities of the company of which it is a member (the
subsidiary company) as if they were its own assets and liabilities
...


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





Section 167 gives an inspector appointed by the court powers to investigate the affairs
of that company’s subsidiary, or holding company, if the inspector thinks it necessary
to do so for the purpose of his investigation
...

Generally speaking, a company and its member (in this case, the holding company) are
altogether separate entities and a court order to investigate the affairs of a subsidiary
company would not authorise an investigation of its holding company, and vice versa
...

For the purpose of that investigation, Subsection 5 of the section confers on the inspector,
or inspectors, power to investigate the membership of the company’s subsidiary or
holding company for the same purpose
...


(f) Section 210: Take-over Bids


Section 210 provides that where a scheme or contract involving the transfer of shares

REGISTRATION OF A COMPANY

49



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
...
The citation, though hallowed
by English academic tradition, is logically untenable
...
However, the relevant
English cases do suggest that to be “knowingly parties” to fraudulent trading under the
section some positive step must have been taken by those concerned: Re: Maidstone
Building Provisions Ltd (10)
...
It can also be invoked against directors, members or
anybody else who participated in the fraudulent trading
...




If the liquidator applies to the court any money received is distributed to creditors
generally and forms part of the general assets of the company: Re William C Leitch
Ltd (No 2) (II)
...




S T U D Y

(g) Section 323: Fraudulent Trading


Section 323 provides that if, in the course of the winding up of a company, it appears
that any business of the company has been carried on with intent to defraud creditors of
the company or creditors of any other person, or for any fraudulent purpose, the court,
on the application of the official receiver or the liquidator or any creditor or contributory
of 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 be
personally responsible, without any limitation of liability, for all or any of the debts or
other liabilities of the company as the court may direct
...

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
...
This is illustrated by Re: Bugle Press Ltd (9) in which an
offer made by a company was regarded as having been made, in substance, by the
company’s members
...


50

C O M PA N Y L A W



COMMON LAW OR JUDICIAL EXCEPTIONS

Numerous English cases have been variously classified by English writers as instances of “lifting
the veil of incorporation”
...
But it should be noted
that the particular judges were merely ascertaining the facts of the case before them and making
the appropriate decision rather than consciously or deliberately “lifting the veil of incorporation”
...
These cases may be explained under the following headings
...
This proposition was affirmed
by the English Court of Appeal and extended to associated companies in Ebbw Vale
Urban District Council v South Wales Traffic Area Licensing Authority when Lord
Cohen stated:



“Under the ordinary rules of law, a parent company and a subsidiary company, even a
100% subsidiary company, are distinct legal entities, and in the absence of an agency
contract between the two companies, one cannot be said to be the agent of the other
...




From this statement, it can be inferred that, if a court held that a company acted in a
particular instance as an agent of its holding company, the veil of incorporation would
have been lifted
...


S T U D Y

T E X T



(b) Fraud or Improper Conduct


English courts have intervened on numerous occasions and lifted the veil of incorporation
in order to circumvent a fraudulent or improper design by a bunch of scheming promoters
or shareholders
...
The court’s order in the
latter case is usually cited as an instance of lifting the veil but it should be noted that the
defendant (Horne) was not a member of the company and, in principle; no veil existed
between him and the company, which would have been lifted by the court
...


(c) Enemy Character


A company may be regarded as an enemy if, inter alia, all or substantially all of its
shares are held by alien enemies
...
Since there appears to be no Kenya case
on the point, the principles summarised by Lord Parker may be useful guidance to a
Kenyan who might have to determine, in a given case, whether a particular company is
to be regarded as a friend or enemy of Kenya
...

In each of these cases the court regarded a decision of the members as the decision of
the company itself and thereby lifted the veil of incorporation
...


(e) Group Enterprises


Numerous cases have been decided by English courts the general tenor of which is to
regard a subsidiary and its holding company as one entity
...
Examples are Harold Holds worth & Co Ltd v Caddies
(18), Hellenic and General Trust Ltd (19) and DHN Food Distributors v London
Borough of Tower Hamlets (20)
...
To ascertain a company’s residence entails lifting the veil of incorporation
...
In DeBeers Consolidated Mines td
...


S T U D Y



T E X T

(f) Determination of Residence

52

C O M PA N Y L A W



SUMMARY OF CHAPTER TWO

A company’s constitution consists of two documents, namely, Memorandum and Articles of
Association

The doctrine of ultra vires limits the capacity of a company to contract
...
These circumstances are collectively referred to as
lifting the veil of incorporation

S T U D Y

T E X T

The series of acts which precede company registration are referred and generally summarised
as “promotion”
...
It should, however, be noted that there is no general statutory or judicial definition of
promoter
...
A pre-incorporation contract is an agreement, which is entered into usually
by a promoter on behalf of the company at a time when the company’s formation has not been
completed
...


The consequences of incorporation are as follows:

1
...

3
...

5
...


Limited liability
Perpetual succession
Owning of property
Suing and being sued
Capacity to contract
Common seal

REGISTRATION OF A COMPANY



53

CHAPTER QUIZ

Explain the expression “lifting the veil”



2
...


Name the constitutive documents of a company



4
...


S T U D Y



54

C O M PA N Y L A W



ANSWERS TO QUIZ

1
...
This is where
the company and its member’s even subsidiaries are treated as one

2
...


Articles and memorandum of association

4
...
They are those transactions
that are outside the contracting capacity of the company
...
They are seeking your
legal advice on the issues listed below
...

Cite a relevant case law to support your answer
...
He invited bids from
members of the public to buy two Lorries
...
Mwangangi,
his own brother
...
80, 000 each
...
350, 000 each
...
The prospectus gave Mwangangi as the vendor of the lorries and
did not disclose the profit Kioko was making
...




Advise Musembi
...
Discuss
Discuss



















(20 marks)

S T U D Y

T E X T

Kindly refer to the following sittings: - 12/01; 12/00; 07/00; 12/00; 06/12; 05/02; 06/01; 1/06;
06

S T U D Y

T E X T

56

C O M PA N Y L A W

T E X T

PART B
S T U D Y

57

S T U D Y

T E X T

58

C O M PA N Y L A W

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

59

CHAPTER THREE

SHARE CAPITAL

S T U D Y

T E X T

60

C O M PA N Y L A W

61

CHAPTER THREE
SHARE CAPITAL
OBJECTIVES
At the end of this chapter, the student should be able to:
•
•
•
•
•

Explain the meaning of capital and what it consists of
Examine liability in respect of prospectuses
State when shares may be issued at a discount and at a premium
Explain how capital may be altered
Explain when and how to issue a prospectus

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 - The difference between the nominal value and the issue price; its normally
lower than the nominal value
Prospectus - Document issued by a public company which wants to raise capital
CA - Companies Act chapter 486
Void - Means the contract cannot be enforced it confers no rights and imposes no
obligations
Voidable - Can be enforced at the option of the innocent party

EXAM CONTEXT
The examiner in this area has tended to confine himself on testing the student’s understanding
on the statutory provisions
...
This chapter concerns itself with the floatation
procedures and the formalities to be met
...
It
should be noted that floatation is restricted to public companies since private companies are
prohibited by their articles
...
In the current year and even the previous year,
many companies have made floatation for instance Safari Com, Eveready East Africa, Kengen
just to mention but a few
...
The prospectus, for instance, is a vital document
that brings to light many issues such as its contents and liability in respect of it
...
1 RAISING AND MAINTENANCE OF CAPITAL

Fast forward
Ø
Ø

S T U D Y

T E X T





The ways in which a company raises capital
There are statutory rules relating to capital, bonus, discounts and premiums to ensure
the company does not deplete its capital

RAISING OF CAPITAL

MEANING OF CAPITAL
In commercial speech, the word `capital’ is generally used to denote the amount by which the
assets of a business exceed its liabilities
...


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) of the Act
...
It is “authorized” in
the sense that, once the Memorandum of Association is registered, the company can
take immediate steps to raise the capital from the public without applying for a permit or
license to collect the money
...
It is also known
as the “subscribed capital” or “allotted capital”
...


c)

PAID-UP CAPITAL



63

The paid-up capital is constituted by the aggregate of the amount of money that is paidup on each share issued by the company
...


d) CALLED-UP CAPITAL

e)

UNCALLED CAPITAL



The uncalled capital is the amount not called up on shares which a company has issued
...


f)

RESERVE CAPITAL



The reserve capital is defined by Section 62 of the Act as the portion of the issued
but uncalled capital of a limited company which the company’s members, by special
resolution, have resolved that the company shall not call up unless and until it is in
liquidation
...
As soon as the
resolution is passed, the capital is, as it were, “put on reserve”
...
It is referred to in the marginal note to
Section 62 as “the reserve liability” of a limited company
...


T E X T

A company’s called-up capital is constituted by the amount due is respect of calls made
by the directors on issued shares
...
Broker
...
Public

(Acts as the Company’s agent)


The shares are said to be “placed” with the broker
...


b) OFFER FOR SALE


An “offer for sale” is an arrangement whereby a company sells some of its shares to a
financial institution called “Issuing House”
...



Company
...
Resells the shares
...
This obviates the
necessity of having to register the name of the issuing house in the company’s register
of members when shares are allotted to it and having its name removed from the register
shortly afterwards when the public buy the shares
...



Company
...
Public

(Issues a document Called “prospectus”)





THE PROSPECTUS ISSUE AND STATUTORY PROVISIONS

Fast forward
Ø A document that invites the public to subscribe to the shares of a company
...

Ø People likely to be liable are those who take part in its preparation
...
Consequently, the common law rule known
as “caveat emptor” applied to their sale
...
Buyers
were therefore left without a legal remedy if they bought shares which they would not have
bought if the relevant material facts had been disclosed by the company’s agents
...
The provisions are as follows:

SHARE CAPITAL

65

THE STATUTORY PROVISIONS



A prospectus is defined by Section 2 of Companies Act as “any prospectus, notice,
circular, advertisement or other invitation offering to the public for subscription or
purchase any shares or debentures of a company” This particular definition was
intended 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”
...
Regarding the
word “offering” in the definition it should be remembered that the issue of a prospectus
by a company is not an offer as such but is a mere “invitation to treat”
...
The date shall,
unless the contrary is proved, be taken as the date on which the prospectus was issued
to the public
...
Section 40(3) provides that, except as provided therein,
it shall not be lawful for a company to issue any form of application for shares in or
debentures of a company unless the form is issued with a prospectus which complies
with the statutory requirements
...



THE MATTERS AND REPORTS
The matters and reports to be stated in a prospectus may be summarized as follows:

T E X T

Definition of “Prospectus”

S T U D Y

i)

66

C O M PA N Y L A W

1
...

b) Directors’ qualification shares, if any, and their remuneration (if there is a provision

in the articles)
...

d) Auditors’ names and postal addresses
...

b) Promoters’ remuneration
...

d) Underwriting commission and brokerage
...

b) The time of the opening of the subscription lists
...

d) Voting and class rights
e) Deferred shares
...

b) Particulars of material contracts
...

d) Amount paid for property to be bought by the company, stating the amount paid
for goodwill
...




2
...


b) Rate of dividend during the last five years
...

d) Similar details with regard to subsidiary companies, if any
...


iii) Where the proceeds of the issue are to be used to buy shares in a subsidiary, a similar
report as in (ii) above
...
”
In Re: South of England Natural Gas Co
...
” However, a “circular” by which a company offered to acquire
the shares of another company in exchange for its own shares was held not to be a “prospectus”
within the statutory definition: Government Stock and other Securities Investment Co
...


LIABILITIES IN RESPECT OF PROSPECTUSES

1
...
10, 000/- (Section 40 (4)
...
46 (1)
iii) Knowingly issuing a prospectus containing a statement purporting to be made by
an expert without the expert’s consent to the issue thereof: fine not exceeding Kshs
10,000/- (Section 42 (2)
...
100/- per day for:

a) Issuing a prospectus without delivering a signed copy thereof to the registrar for
registration
...


T E X T

REGISTRATION OF PROSPECTUS

S T U D Y



68

C O M PA N Y L A W


c) Issuing a prospectus and delivering a signed copy thereof to the registrar for

registration, but the copy so delivered does not have endorsed thereon (or

attached thereto):

i) A copy of every material contract (or a memorandum thereof) or

ii) A written statement signed by the named accountants or auditors indicating

any adjustments to their reports and the reasons for the adjustments
...
CIVIL LIABILITIES
i)


S T U D Y

T E X T



LIABILITY FOR FAILURE TO STATE ANY MATTER OR REPORT
At Common Law, a contract of allotment is not a contract Uberimae Fidei
...
The allottee of shares has; therefore, no remedy against the company
if he bought the shares which he would not have bought had the company made the
relevant disclosure
...

However, the allot tee may have a remedy for an omission if the failure to state any
relevant fact had the indirect effect of rendering a stated fact untrue, with Section 48
(a) of the Act
...
No mention was made of the fact that
approval of the local council was required in order to build public stands and kennels
...


ii)


LIABILITY FOR MISSTATEMENT OR MISREPRESENTATION
This will be governed by the general principles of the law of contract, depending on
whether the misstatement was:






a)




A FRAUDULENT MISREPRESENTATION because the company made it:
i) Knowingly, or
ii) Recklessly, careless whether it be true or false, or
iii) Without belief in its truth: DERRY v PEEK (42)



b) AN INNOCENT MISREPRESENTATION because the company made it honestly,
believing what was stated to be true: DERRY v PEEK (42)

1 If the statement amounted to a fraudulent misrepresentation, the allot tee may


sue for damages; DERRY v PEEK
...
If


the rescission is no longer possible, there will be no remedy
...

2 If the statement amounted to an INNOCENT misrepresentation, the allottee


CAN ONLY SUE FOR RESCISSION (i
...
asking the court to order the

company

SHARE CAPITAL









69

to remove his name from the members’ register and refund the money he paid for
the shares and he in turn returning the shares to the company)
...
This was held by the House of
Lords in DERRY v PEEK (42)

However, the allottee’s right of rescission (whether for innocent or fraudulent
misrepresentation) will be lost if:

EFFECT OF RESCISSION
Where a contract of allotment is rescinded, the former shareholder will be entitled to his money
back (normally with interest) and to a refund of any expenses to which he has been put: RE:
BRITISH GOLD FIELDS OF WEST AFRICA LTD
...
AFRICA
...



The section is limited to prospectuses issued by or on behalf of the company and will
afford no relief on an offer for sale or placing by existing holders (unless the company
has made the allotment with that in view, so that Section 47 applies)
...









The only persons who can be made liable under the section are:
a) Directors at the time of the issue of the prospectus;
b) Persons who consented to be named in the prospectus as directors or future
directors;
c) Promoters of the company, and
d) Every person who authorised the issue of the prospectus
...
V
...
A seven months’ delay was held to be unreasonable
delay
...
g
...

Third party rights acquired in the meantime would be interfered with, or
The company has gone into liquidation and so the rights of creditors have
crystallised and precede other claims: HOULDSWORTH Vs CITY OF GLASGOW
BANK
...
if he proves
...
e
...




In CLARK V URQUHART (44), the court explained that the amount of compensation
payable under Section 45 of the Act is calculated or measured in the same way as
damages for fraudulent misrepresentation is measured
...
The specified persons were to be made
liable as a matter of policy, irrespective of their moral innocence
...
45 can rebut the presumption of liability by proving that:

S T U D Y

T E X T

i)

Having consented to become a director he withdrew his consent before the issue of the
prospectus and that it was issued without his authority or consent; or
ii) the prospectus was issued without his knowledge or consent, and that on becoming
aware of its issue he forthwith gave reasonable public notice that it was issued without
his knowledge or authority; or
iii) After the issue of the prospectus and before allotment there under he, on becoming
aware of the untrue statement, withdrew his consent to the prospectus and gave
reasonable public notice that he had done so and why; or
iv) As regards every untrue statement not purporting to be made on the authority of an
expert or of a public official document or statement, he had reasonable ground to
believe that the statement was true; or
v) The statement was made by an expert and the expert consented to the inclusion of his
statement in the prospectus and that he believed the expert to be competent to make
the statement; or
vi) The statement was taken from a public official document or was made by an official,
and was a correct and fair representation of the document or statement
...


Section III (1) provides that a public company which has issued a prospectus cannot
commence business or exercise any borrowing powers unless:a)
b)

The minimum subscription has been raised;
Every director of the company has paid to the company on each of the shares taken
or contracted to be taken by him and for which he is liable to pay in cash, a proportion
equal to the proportion payable on application and allotment on the shares offered for
public subscription; and

SHARE CAPITAL

c)

d)

71

No money is or may become liable to be repaid to applicants for any shares or debentures
which have been offered for public subscription by reason of any failure to apply for or to
obtain permission for the shares or debentures to be dealt in on any stock exchange;
There has been delivered to the registrar a statutory declaration by the secretary or
one of the directors, in Form No
...


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

c)

The registrar shall, on delivery to him of the relevant form, or statement in lieu of prospectus,
certify that the company is entitled to commence business
...

Section III (4) provides that any contract made by a company before the date at which it is entitled
to commence business shall be provisional only, and shall not be binding on the company until
that date
...

In Re “Otto” Electrical Manufacturing Co (Clinton’s Claim), it was held that the company was
not liable to pay for the goods which had been sold to it before it obtained the trading certificate
...

Section 219 (c) provides that a company which does not commence its business within a year
from its incorporation may be wound up by court
...




MAINTENANCE OF CAPITAL

The issued share capital of a company limited by shares is the primary security for the company’s
creditors
...
R
...
It cannot reduce its capital except in the manner and with the safeguards
provided by statute
...
The

T E X T

b)

There has been delivered to the registrar for registration a statement in lieu of
prospectus;
Every director of the company has paid to the company, on each of shares taken or
contracted to be taken by him and for which he is liable to pay in cash, a proportion
equal to the proportion payable on application and allotment on the shares payable in
cash;
There has been delivered to the registrar for registration a statutory declaration in Form
No
...


S T U D Y

a)

72

C O M PA N Y L A W

creditor has no debtor but that impalpable thing the corporation, which has no property except
the assets of the business
...
”
The Companies Act, therefore, incorporated various provisions which are intended to ensure that
a company’s capital:
i)
ii)

Is not “watered down” as it comes into the company; and
Does not go out of the company once it has been received
...
Issuing shares at a discount
In Ooregum Gold Mining Co of India Ltd v Roper (45) the House of Lords held that it is illegal
for a limited company to issue its shares at a discount
...

Since the nominal value of a share is fixed by the Memorandum, the company cannot issue the
share at a discount
...

The market value would provide a basis upon which the company’s directors would
recommend, and the members resolve on, the amount of the discount
...

The issue is authorised by a resolution passed in general meeting
This provision places upon the company’s member’s ultimate responsibility for the issue
at a discount
...
They
can therefore jointly decide on the amount below which they would not be willing to sell
their shares in the market
...

Not less than one year has elapsed since the company was entitled to commence
business
...
The
statutory assumption appears to be that, having been in business for at least one year,
the company would most likely have published its first balance sheet and declared a
dividend, which could induce a greater demand for its shares
...
However, the directors may ask the court to extend
the time for issuing the shares at the prescribed discount if they are of the view, and the court
concurs, that the market conditions have not materially changed
...


2
...

For purposes of company law, it denotes the amount of money paid by a company to a person “in
consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for
any shares in the company, or procuring or agreeing to procure subscriptions, whether absolute
or conditional, for any shares in the company”
Section 55 (1) Companies Act allows a company to pay the commission if:a)
b)

c)




d)


The payment is authorised by the company’s articles;
The commission paid or agreed to be paid does not exceed 10% of the price at which
the shares are issued or the amount or rate authorised by the articles, whichever is the
less; and
The amount or rate per cent of the commission paid or agreed to be paid is:
i) In the case of shares offered to the public for subscription, disclosed in the
prospectus; or
ii) In the case of shares not offered to the public for subscription, disclosed in the
statement in lieu of prospectus, or in Form No
...

Section 55 (2) of the Companies Act provides that, except as provided by subsection (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
subscribing or agreeing to subscribe, whether absolutely or conditionally, or procuring

T E X T

f)


The issue is sanctioned by the court
...
This is so because creditors were
not 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
...

The issue is made within one month after the court’s sanction
...
If a company’s members pass a resolution authorising an issue at a discount
because of the prevailing market conditions, the directors must act on the resolution
before the market conditions change
...
If the directors were to issue the shares at a discount despite the changed
conditions, the issue could not be justified
...



In Andréa V Zinc Mines of Great Britain Ltd (45) it was explained that any agreement
to pay commission in contravention of Section 55 is null and void
...
Section 55 is, therefore, intended to provide some
measure of statutory control over a company’s power to pay commission
...
Brokerage
Brokerage is a payment made by a company to a broker, or brokers, in consideration for “placing”
the company’s shares
...
In Andréa V Zinc Mines of Great Britain Ltd (45) Bailhache, J
...
Consequently, a payment which was made to a lady of a percentage on
the amount of capital which she induced third parties to subscribe for shares in the defendant
company was held not to be brokerage
...
The person to whom the payment is made must be one
who carries on the business of a broker, either exclusively or as part of his general business, as
in the case of a banker
...
It was previously
held in Metropolitan Coal Consumers’ Association V Scrimgeour (1895) that brokerage of
a reasonable amount paid by a company in the ordinary course of its business was legal
...
5%
...
25% - 0
...
The
reasonableness of the commission does not depend on mere percentages but on what it would
cost the company to sell the shares by itself
...
Although the payment of brokerage is a derivation from mercantile usage, it is usual for
companies to incorporate in their articles a clause which expressly authorises the company to
pay brokerage
...


Although payment of brokerage means that the company will ultimately receive less money for
the shares it has issued, the payment is not prohibited by the Act
...


SHARE CAPITAL



PROVISIONS THAT PREVENT CAPITAL GOING OUT



75

OF THE COMPANY

In Trevor v Whitworth (1887) Lord Watson stated:
“Paid-up capital may be diminished or lost in the course of the company’s trading; that is a result
which no legislation can prevent, but persons who deal with, and give credit to a limited company,
naturally rely upon the fact that the company is trading with a certain amount of capital already
paid, as well as upon the responsibility of its members for the capital remaining at a call; and
they are entitled to assume that no part of the capital which has been paid into the coffers of the
company has been subsequently paid out, except in the legitimate course of its business”
...
e
...

This may be necessitated by the fact that the company’s shares which have already been issued
are being sold in the open market at a price which is above their nominal value
...
However, Section 58 (1) provides that where a company
issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount
or value of the premiums on those shares shall be transferred to an account called “the share
premium account”
...
This means, in effect,
that the funds credited to the share premium account are not paid out by the company except in
the legitimate course of its business
...




S T U D Y



T E X T

As Lord Watson acknowledged, no legislation can prevent a company’s capital from being lost
or diminished in the course of the company’s business
...
They are:

76

C O M PA N Y L A W

MERGER ACCOUNTING
It may happen that, during a “take-over” of one company (A) by another company (B), shares in
the latter company are issued to shareholders of the former company in exchange
...
Should a share premium
account be established by company B when the assets of company A exceed the nominal value
of company A’s shares? If a share premium account is opened the pre-acquisition profits of
company A would not be distributed by company B
...
This method of accounting is known as “merger accounting”
...
This method
of accounting is known as “acquisition accounting” and means that the pre-acquisition profits of
company A cannot be distributed by company B
...
The Kenya Companies Act does not provide “merger
relief” that was introduced by the English Companies Act of 1981
...
It was, therefore, held in Trevor v Whitworth (48) that it is illegal for a limited company to
purchase its own shares
...

This is the general rule that is applicable in Kenya
...
The said provisions were incorporated
in the English Companies Act of 1948 which in turn became our Companies Act (Cap
...

It may, however, be criticised for its assumption that whenever a company buys its shares, it
would do so by utilising its paid-up capital
...
Such a purchase might, in fact, be beneficial to the company, which could use
it as a mechanism for propping up the market value of its shares at a time when there is panic
selling by its shareholders, which has been precipitated by adverse rumours about the company
...


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

Where it acquires its own fully paid shares otherwise than for valuable consideration, as
in Re: Castiglione’s Will Trusts (49)
...
This is

SHARE CAPITAL

permitted because the redemption “shall not be taken as reducing the amount of the
company’s authorised share capital” if it is done in accordance with the provisions of the
section
...
Such acquisition is permitted because the interests
of the company’s creditors would have been protected by the court at the time of
confirming the proposed reduction
...

Where the shares are forfeited for non-payment of a call, or where they are surrendered
in lieu of forfeiture
...
The consequences of a contravening the section are:
a) The contract for the financial assistance is void and illegal, and cannot be enforced
against a party thereto: Standard Bank v Mehotoro Farm (50);
b) The company and every officer of the company who is in default shall be liable to a fine
not exceeding Kshs 20,000;
c) Every director who is a party to the contravention is guilty of a breach of trust and is
liable to recoup any losses which the company suffers as a result: Waller Steiner v
Moir (51)

Exceptions
Section 56 (1) permits a company to give financial assistance for a purchase of, or subscription
for, its shares in the following circumstances:
a)

Where the lending of money is part of the ordinary business of the company and the
money is lent by the company in the ordinary course of its business
...
This
is so because no company can be constituted for the sole purpose of lending money
to persons who would be buying its shares so that a loan it gives for any other purpose
would be regarded as an “unusual” or “extraordinary”, loan
...


T E X T

d)

S T U D Y

c)



77

78

C O M PA N Y L A W

b)

Where the loan is to trustees to enable them to purchase fully paid shares in the
company to be held under an employees’ share scheme
...
If a company gives a loan to an employee
to 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
...


c)



ALTERATION OF CAPITAL

A company is empowered by Section 63 Companies Act to alter the provisions of its Memorandum
of Association which relates to its registered or authorised capital
...
If they do not, they may be
altered by special resolution and the authority incorporated therein
...

The alteration must be authorised by an ordinary resolution (See Table A, Article 45)
...
This mode of alteration is also known as diminution
of capital
...


The registrar must be notified of an alteration of capital within 30 days after the passing of the
resolution authorising the alteration
...


SHARE CAPITAL

79

REDUCTION OF CAPITAL
The general rule is that it is illegal for a company to reduce its capital
...
However, Section 68 (1) authorises a company to reduce its capital
if:
a)
b)
c)

The company’s articles authorise it to do so
...

The company passes a special resolution to that effect
...

The court confirms the proposed reduction
...


a
...
Kshs
...
”




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



The company passes a special resolution to reduce the capital to Kshs
...
The
resolution is confirmed by the court
...
Kshs
...
”





— Amount already paid per share is Kshs
...
5 per share ceases to be payable and the liability
thereon is “extinguished
...
There is,
therefore, no statutorily prescribed mode of reduction and the actual scheme adopted by the
company will depend on the ingenuity of its directors or accountants
...
Kshs
...
100,000 Ordinary Shares of
Kshs
...
”




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



The company passes a special resolution to reduce the capital to Kshs
...
The
resolution is confirmed by the court
...


“
...
750,000 divided into 100,000 Ordinary Shares of Kshs
...
50 each
...
5
— Amount unpaid per share becomes Kshs
...
50 (i
...
the liability on unpaid shares
has been reduced from Kshs
...
2
...


c
...
Kshs
...
10 each
...
5
— Amount unpaid on each share is Kshs
...


The Kshs
...

Kshs
...

After the goods were paid for and received, they were kept in the company’s store
pending delivery to customers the following day
...
A fire completely destroyed the goods during the
night
...
100, 000 used to buy the goods represents the capital which, according
to the Act, “is lost or unrepresented by available assets
...
100, 000
...




The amended memorandum will read:

The company’s memorandum reads:

The company’s memorandum reads:

SHARE CAPITAL



“
...
”





— Amount unpaid on each share is Kshs
...
e
...

— Amount paid per share becomes Kshs
...




81

This mode of reduction is legally possible but may be questioned from a practical point
of view
...

It should be noted that, despite the above reduction, the members will receive the same
amount 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
their Kshs
...


d
...




Example:



The company’s memorandum reads:



“
...
1, 000,000/- divided into 100,000 Ordinary Shares of Kshs
...
”




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

T E X T



Assume that the same type and quantity of goods are destroyed by fire in the same
circumstances as in example (c) above
...
200, 000
...


S T U D Y







The amended memorandum will read:



“
...
800,000/- divided into 100,000 Ordinary Shares of Kshs
...
”




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

e
...
Kshs
...
10”


— Amount paid per share is Kshs
...
1

82

C O M PA N Y L A W



The Kshs
...

Kshs
...




The goods are destroyed by fire in circumstance identical with those in example (c)
above
...
200, 000 so that the amended memorandum
will read as follows:


“
...
800, 000/- divided into 100,000 Ordinary Shares of kshs
...
8

— Amount unpaid per share is NIL (i
...
the liability of Kshs
...


S T U D Y

By paying off paid-up share capital which is in excess of the wants of the company
without extinguishing or reducing liability on any shares




T E X T

f
...
Kshs
...
10each
...
5 has been paid on each share
— Kshs
...
7,500,000 by
paying back to the shareholders Kshs
...
5, 000,000 they have
already paid to the company if the directors convince the members that the paid-up
amount of shs
...


i) The company’s memorandum reads:




The company’s memorandum will be amended to read:



“
...
7, 500,000 divided into 1,000,000 Ordinary Shares of Kshs
...
50 each
...
2
...
5
...


g
...




Example:



Read the scheme of reduction that was adopted by the British and American Trustee
and Finance Corporation Ltd
...


SHARE CAPITAL



Example:



A company’s authorised and issued capital is Kshs
...
10 each
...
5 has been paid on each share
...
5 million
paying to the shareholders Kshs
...
5 million out of the Kshs
...
5m/- is in excess of the company’s current needs
...
Kshs
...
5 each
...
2
...
5
is reduced to Kshs
...
50”
...
Wilson’s & Clyde Coal Co
...
The
court would therefore, not confirm a scheme of reduction if it is of the view that it is not “fair and
equitable” to any of shareholders
...
The court will then
confirm the reduction if satisfied that the creditors:
i)

Have consented thereto;

ii)

Have been secured (i
...
given alternative security so that they will no longer rely on the
reduced capital as their security),

iii) Have been discharged or paid off (Section 70 (1)
...


83

84

C O M PA N Y L A W



b)

PROTECTION OF MEMBERS

1
...


S T U D Y

T E X T



A majority of the company’s members are protected by the requirement that a special
resolution must be passed by the company’s members in order to initiate the reduction
process
...

A minority of the company’s members are protected by their judicially acknowledged
right to seek the court’s protection where they are of the view that the resolution passed
by the majority is not “fair and equitable”: British and American Trustee and Finance
Corporation Ltd, and Reduced V Cooper (53) and Re: Thomas de la Rue and Co
...


c)

PROTECTION OF GENERAL PUBLIC

It may happen that a resolution reducing a company’s capital was passed in circumstances which
indicate that the shareholders had not been properly and correctly informed about the real causes
of the reduction
...
Section 70 (2) (b) empowers the court
where appropriate, to make an order requiring the company to publish, as the court directs, the
reason for reduction or such other information in regard thereto as the court may think expedient
with a view to giving proper information to the public, and, if the court thinks fit, the causes which
led to the reduction
...
Section 71 (2) provides that, on the registration of
the order and minute, and not before, the resolution for reducing share capital as confirmed by
the order so registered shall take effect
...


SHARE CAPITAL



85

REDEMPTION OF SHARES

b)
c)

d)



No such shares shall be redeemed except out of the profits of the company which
would otherwise be available for dividend or out of the proceeds of a fresh issue of
shares made for the purposes of the redemption;
No such shares shall be redeemed unless they are fully paid;
The premium, if any, payable on redemption must have been provided for out of the
profits of the company or out of the company’s share premium account before the
shares are redeemed;
Where any such shares are redeemed otherwise than out of the proceeds of a fresh
issue, there shall out of profits which would otherwise have been available for dividend
be transferred to a reserved fund, to be called the capital redemption reserve fund, a
sum equal to the nominal amount of the shares redeemed
...
These provisions are intended to prevent a company’s authorised capital
from being reduced by any redemption of the redeemable preference shares of the
company
...
For purposes of company law, it denotes the payments that a company
makes out of its profits to the shareholders in the company
...
For purposes of this rule, “Capital” means the money subscribed
pursuant to the Memorandum of Association, or what represents that money: Verner v General
& Commercial Investment Trust
...
It is, therefore, governed by
the provisions of the company’s articles, failing which the provisions of Table A, which are as
follows:

S T U D Y

a)

T E X T

Section 60 (1) empowers a company limited by shares to issue preference shares which are, or
at the option of the company are to be liable, to be redeemed, if the articles authorise such an
issue
...
The use of the word “may” means that the
company at a general meeting is not bound to declare dividends even if the directors
have recommend a particular amount
...


ii)


Article 115
The directors may, from time to time pay to the members such interim dividends as
appear to the directors to be justified by the profits of the company
...
Scott v
Scott (56)
...
In Verner v General & Commercial
Investment Trust Lindley, J
...
Provided the dividend is not paid out of capital, it does
not matter from whatever fund it is paid, whether called profits or otherwise
...
This provision modifies the
common law rule that dividends are paid on the nominal value of the shares: Oak Bank
Co
...

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,
debentures or any one or more of such ways
...
In the absence of such a provision, dividend is payable in cash
and the company may be restrained from paying it in any other form: Wood v Odessa
Waterworks Co
...
Every such cheque or
warrant shall be made payable to the order of the person to whom it is sent
...
If the dividend cheque or warrant is lost in transit, the loss prima facie
falls on the shareholder
...


SHARE CAPITAL

87

vii) Article 122

No dividend shall bear interest against the company
...

CASE LAW RELATING TO DIVIDENDS

The above provisions of Table A supplement the following common law rules:
1) Losses in previous years need not be provided for
...

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

4)

Unrealised capital profits on a revaluation of assets can be distributed by way of a
dividend, or used to pay a bonus issue of fully paid shares: Dimbula Valley (Ceylon) Tea
Co v Laurie (1961)
...




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
be raised

Liability in respect of prospectuses can either be criminal or civil

T E X T

Losses on fixed assets in the current year need not be made good by provision for
depreciation before treating a revenue profit as available for dividend: Lee v Neuchatel
Asphalte Co (1889)

S T U D Y

3)

88

C O M PA N Y L A W

As a general rule shares should not be issued at a discount
...

2
...

4
...

6
...

The issue is authorised by a resolution passed at a general meeting
The resolution specifies the maximum rate of discount
The issue is sanctioned by a court and is made within one month of the sanction
Not less than a year has passed since the company was entitled to start business
Particulars of the discount on the shares must be disclosed on every prospectus of the
company
...


S T U D Y

T E X T

2
...


Redemption of redeemable reference shares in accordance with the articles and the
Companies Act
Purchase of validly surrendered shares
If compelled by the court pursuant to a court order

Provisions relating to the payment of dividends are:
1
...

3
...

5
...

7
...

9
...


The company at a general meeting may declare dividends
The directors may pay interim dividends,
Dividends may only be paid out of profits,
The company must be solvent and a going concern,
Directors recommend dividends and members declare the same,
Directors are empowered to deduct from a member’s share any amount due,
Generally, dividend is payable within 42 days of declaration
...
A company is not legally obliged to make provision for depreciation before paying
dividends
12
...


List the various classes of capital
...


List the methods of public issue
...


What document is prepared before shares are floated?

T E X T

1
...


2
...
Prospectuses



A SAMPLE OF EXAM QUESTIONS

QUESTION ONE
a) Outline the contents of a register of members of a company
...
, inspected the register of members of the
company and noted that his name had been omitted therein
...

(4 marks)
c) It is a fundamental principle of company law that the share capital of a company must
be maintained
...
(10 marks)



(Total: 20 marks)

QUESTION TWO
a)

Explain three ways in which a company may raise capital
...
(10 marks)

c)


Explain two terms implied in a contract of sale of shares between a seller and
purchaser
...
A part of it may be lost in carrying
on the business operations authorised
...
But creditors have the right to rely and were intended by
the legislature to have the right to rely on the capital remaining undistributed by any
expenditure outside these limits or by the return of any of it to the shareholders”
...
J
...
Cap 409 at 415
...
(14 marks)

b)


State what is meant by underwriting commission and distinguish it from brokerage
...
The main focus of this chapter is the capital that is obtained from non owners
...
Its capital in the sense that is
used in expansion of the business
...


KEY DEFINITIONS
•
•
•
•
•

Debenture - A long-term loan
...

Trust deed: An agreement entered into between a company and trustees
Charge - This is an encumbrance that secures a debt
...


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
...

It’s a relatively short chapter and can be easily read and understood
...
Various
companies have floated debentures; loan stock and bonds
...




4
...

There is no precise legal definition of a “debenture”
...
He also stated that, etymologically, the word is a derivation from
the Latin Debenture mihi, which were the opening words of certain documents, which used to
be issued by English companies in the 1860s as an acknowledgement of a loan the companies
had received from the person to whom the document was issued
...
Primarily, the word
“debenture” is applied not to the indebtedness itself but to the document evidencing it
...
1
...
The main types, which a
company can issue, are:
(a) A Single Debenture

A single debenture is usually a formal document in printed form and sealed
...
The bank
would normally insist that the company signs and seals one of the bank’s standard
forms of debenture which would not only create a charge in favour of the bank but
would also give it certain powers in relation to the charged property
...
Each lender receives a
debenture in identical form in respect of his loan and the debentures are expressed to
form a series ranking pari passu
...
Each lender has a right to be repaid his capital at the due time and,
before that time, to receive interest on it at the agreed rate
...
g
...
100 or Kshs
...


Types of debentures
Debentures may be issued as:






i
...

iii
...
1
...
Table A, Article 79 provides that “the directors may
exercise all the powers of the company to borrow money
...
Such authority is, however, not required in the case of a trading
company, which has implied power to borrow money for the purposes of its business and to give
security for the loan by creating a mortgage or charge over its property
...

(a) Similarities

i
...


S T U D Y

Under American law, these are obligations often referred to as subordinated debts, junior
debts or inferior debts, upon which the right to receive payment is subordinated or deferred
by a subordination agreement or clause, to the prior payment of certain other indebtedness,
sometimes referred to as senior, superior or prior debts
...
If complete, the payment of principal and interest on the subordinated debt is deferred
until the obligations on the senior debt are satisfied
...


T E X T

Subordinated debentures

98

C O M PA N Y L A W


ii
...



(b) Differences

i
...
e
...
e
...


ii
...
A

debenture holder has no interest in the company but has an interest in the

company’s property, which constitutes his security
...


A shareholder cannot insure the company’s property whereas a debenture holder

can do so (unless the debenture is a `naked’ one)
...
Interest on debentures must be paid even if the company does not make a profit

and can therefore be paid out of capital
...


iv
...


v
...


T E X T
S T U D Y

Debentures, as well as shares are long-term investments in the company and are
transferable in the same manner
...




4
...
3 DEBENTURE CERTIFICATES

Section 82(1) provides that debentures or debenture stock certificates must be completed
and ready for delivery within 60days after allotment or after the lodging of a transfer,
unless the conditions of issue otherwise provide
...
1
...
The trustees are appointed and paid by the
company to act on behalf of the debenture holders
...

A debenture stockholder, unlike debenture holder, is not a creditor of the company
...
The trustees
are technically the creditors of the company for the whole debenture debt while the stockholder
is an equitable beneficiary of the trust
...
1
...


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


A description of the property charged, whether specifically or by way of a floating
charge
...


The events in which the security is to become enforceable, such as failure to pay the
principal sum or interest as agreed
...


99

A clause empowering the trustees to take possession of the property charged in the
event of the security becoming enforceable, and to carry on the business and to sell the
property charged
...


vi
...


4
...
4 - ii Advantages of a Trust Deed

A trust deed has several advantages some of which are:
(a) The circumstances in which the principal sum may become repayable are clearly spelt
out
...

(c) The trustees are empowered to appoint a receiver to carry on the business in case of
urgency
...

(e) The trustees have a legal mortgage over the company’s land
...
1
...
In particular, they cannot purchase the debentures without the
consent of all the debenture-holders
...
This provision does not,
however, invalidate:

S T U D Y



T E X T

vii
...


100

C O M PA N Y L A W

i
...


iii
...






4
...
If the work of making up the register is
done at some other office of the company, or of another person, it may be kept at that other office
...




4
...

i
...
It may also be
legal or equitable
...



Floating Charges
According to the decision of Romer, L J in Re: Yorkshire Wool combers Association
Ltd a charge is a “floating charge” if it has the following three characteristics:



§ It is a charge on a class of assets of a company, present and future;

§ The class is one which changes from time to time in the ordinary course of the

company’s business;

§ It is contemplated by the charge that, until some event occurs, which causes the
charge to crystallise, the company may use the assets charged in the ordinary

course of its business
...
Under the current Kenya and English law, a floating charge cannot be
issued by a partnership or sole trader
...
The actual assets in that class

owned by the company change from time to time
...
On crystallisation, a floating charge becomes a fixed or


specific equitable charge
...
The power to do so exists only
by virtue of the charge contract, which must, therefore, specify the circumstances in
which the power is exercisable
...
g
...

(iii) When the company ceases to carry on business
...

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

company to cease business
...

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

ii
...

iv
...

Enables companies without fixed assets to borrow
...


Enhances the borrowing capacity of a company of floating charges
...

ii
...

A floating charge created within six months before the commencement of winding up is

deemed to be a fraudulent preference and is void
...
It is postponed to a later fixed charge
...
The charge may be avoided, during the company’s liquidation, under Section 314 of the
Act; unless it is proved that the company immediately after the creation of the charge
was solvent
...
Where a seller of goods reserves title until payment, a floating charge will not, on

crystallisation, attach to these goods
...

vi
...
g
...


PRIORITY OF CHARGES

S T U D Y

T E X T

The priorities between charges are as follows:
(a) Legal fixed charges rank according to their order of creation
...
e
...

(c) A floating charge will be postponed to a later fixed charge over the same property
...



The floating charge would, however, have priority over the later fixed charge if:







i
...
The holder of the fixed charge actually knew of the prohibition
...


(d) If two floating charges are created over the general assets of the company, they rank in

order of creation
...
g
...


DEBT CAPITAL



103

4
...
The specified charges are:



THE PRESCRIBED PARTICULARS

The “prescribed particulars” of registered charges are enumerated in Form No 214 and are:
i
...

iii
...

v
...


GENERAL AIM

The purpose of registering the aforesaid particulars is to enable a would-be creditor to know the
company’s existing indebtedness and the assets available for their settlement
...
The certificate shall be conclusive evidence that the statutory requirements,
as to registration, have been complied with
...
L
...


T E X T

d)
e)
f)
g)
h)
i)

A charge to secure an issue of debentures;
A charge on uncalled share capital;
A charge created by an instrument, which, if executed by an individual, would
require registration as an instrument under the Chattels Transfer Act (e
...
a Letter of
hypothecation);
A charge on land;
A charge on book debts of the company;
A floating charge;
A charge on calls made but not paid;
A charge on a ship or any share in a ship;
A charge on goodwill, a patent, a copyright or a trademark
...
The charge is deemed
to have been made in due compliance with the provisions of the Companies Act
...
Charnley
...


The money secured becomes immediately repayable
...


The court is empowered by Section 102 to extend the time for registration of the charge
on being satisfied that the omission to register the charge within the prescribed time was
accidental or was due to inadvertence or other sufficient cause, provided that neither
creditors nor shareholders would be prejudiced by the extension
...
The
person shall be entitled to recover from the company the amount of any fees properly
paid by him to the registrar on registration
...


Failure to comply with Section 105 (1) does not invalidate the charge but the officers of the
company responsible for the omission shall be liable to a fine not exceeding Kshs
...
4 REMEDIES OF DEBENTURE HOLDERS

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

iii
...


To appoint a receiver to carry on the business or sell the charged property
To sue as creditors for arrears of interest or principal, or both
To petition the High Court for a winding up order (on grounds of the company’s inability
to pay its debts), and
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
...
5 BORROWING BY COMPANIES

It has been observed that most companies, like individuals, require to borrow from time to time
for the exigencies of their business
...
Whether a company has or has no power to borrow depends on
its objects and powers specified in the objects and powers specified in the objects clause of
the memorandum
...
However,
an implied power is sufficient
...
This is the case
with a non-trading company
...
If a company has no
power by its Memorandum to borrow, it can remedy the defect by altering its objects pursuant to
Section 8(1) of the Companies Act
...
Article 79 of Table A is emphatic that
“the directors may exercise all the powers of the company to borrow money and to mortgage or
charge its undertaking, property and uncalled capital, or any part thereof and to issue debentures,
debenture stock and other securities whether outright or as security for any debt, liability or
obligation of the company or of any third party
...

Directors’ power to borrow may be general as above or special i
...
a clause empowering the
directors to borrow or raise money
...
It can therefore
raise money on a legal mortgage of any specific portions of its property or by equitable charge by
bonds, promissory notes or by debentures or debenture stocks
...

If the company has unlimited powers of borrowing but the directors having only limited powers,
exceed them the borrowing is irregular for want of authority
...
Additionally, the lender is protected by the rule in Turquands Case

S T U D Y

Sometimes, borrowing powers of a company are restricted by the Memorandum or Articles e
...

to a specific sum or to a sum not exceeding the paid up capital
...
It, therefore, follows that if a company has an express or implied
power to borrow, it may from time to time borrow as much as it wants subject to any restrictions
in its articles
...


106

C O M PA N Y L A W

The lender of money borrowed ultra vires the company has in some cases a right against the
directors personally for breach by them of their implied warranty of authority, if their acts amount
to an implied representation of fact and it makes no difference as to the liability of the directors in
such a case that they did not know that they were exceeding their powers
...

Debentures may be issued as:

S T U D Y

T E X T

•
•
•

Redeemable or irredeemable
Registered or bearer
Secured or unsecured

A charge is issued to secure a debenture and may either be fixed or floating
...


To appoint a receiver to carry on the business or sell the charged property

2
...


To petition the High Court for a winding up order (on grounds of the company's inability
to pay its debts),
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
...


DEBT CAPITAL

107




State two types of debentures

2
...



A floating charge may crystallise when a company goes into liquidation (TRUE
OR FALSE)

4
...


S T U D Y











CHAPTER QUIZ

108

C O M PA N Y L A W







S T U D Y

T E X T



ANSWERS TO QUIZ
1
...

3
...


Redeemable and registered
Fixed and floating
TRUE
When a company ceases business
...
(20
marks)

QUESTION TWO
What are trust deeds? (20 marks)

QUESTION THREE
Discuss the various types of debentures
...

Liability: This is a duty owed to the company by a member, and by a member to other
members
Acquisition: Process by which a person becomes a member of a company
Termination: Process by which a person loses membership in a company
...
Some of the questions found in this area have been set in the following sittings
12/07; 06/06; 05/02; 12/00

INDUSTRY CONTEXT
The current trend in the industry is to embrace of the Central Depository System
...
Companies are now encouraging investors to

S T U D Y

This chapter deals with ways through which a person ceases to be a member of a company
...
The chapter ends by looking at various
rights and liabilities of members
...
Most companies
are keen to phase out share certificates
...




5
...
Rather, it states the two basic ways in which a person may become a member
of a company, namely:

S T U D Y

T E X T

(a) By subscribing to the memorandum of the company, or
(b) By agreeing to become a member and the entry of his name in the company’s register
of members
...
2 WHO MAY BECOME A MEMBER?

Capacity to be a member of a company is governed by the rules of the common law relating
to contracts
...
The following are some of the special cases, which require some explanation:



(a) Infants

An infant is any person who has not attained the age of 18 years; the Age of Majority Act 1974
...
The contract, is however voidable at his option, and the
infant may avoid it at any time during his infancy or within a reasonable time after attaining the
age of 18 years
...
A company’s articles may, however, restrict membership of the company to adults
only, in which case an infant would not become a member of the company
...
The personal representative
would be entitled to be registered as a member of the company unless the company’s articles
provide otherwise
...
It
would authorise “such person as it thinks fit to act as its representative at any meeting of the
company”
...

Section 29(1) provides that a body corporate cannot be a member of a company, which is its
holding company
...





M, who is a member of Z Bank Ltd, appoints its subsidiary, Z Bank (Executor
& Trustee) Ltd, as his executor
...






ii
...


2
...
Such a member would have no right to vote at meetings
of the holding company or any class of members thereof except in respect of shares it
holds as personal representative or trustee
...
3 METHODS OF BECOMING A MEMBER


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

T E X T

Where the subsidiary is concerned as personal representative or trustee, unless the
holding company or its subsidiary is beneficially interested under the trust and is not so
interested only by way of security for the purposes of a transaction entered into by it in
the ordinary course of business which includes the lending of money
...


11 4

C O M PA N Y L A W



i
...

The provision regarding entry in the register is an administrative directive for the company’s
implementation and non-compliance with it does not affect the pre-existing membership
...


Allotment

T E X T



S T U D Y

A person to whom a company’s shares have been allotted acquires his membership by virtue
of sub-section 2 of Section 28, being a person who has agreed to become a member
...
If the company wrongfully refuses to enter the name in the
register, the allot tee must take rectification proceedings for a court order directing the company
to enter the name in its members’ register
...


iii
...
The principle in NICOL’s case applies to transferees as
well, and a transferee becomes a member from the moment his name is entered in the register
of members
...


Transmission on death of a member

A transmission is a legal process by which ownership of shares in a company changes automatically
on the death of a member to his personal representative
...
the personal representatives of the
deceased where he was a sole holder shall be the only persons recognised by the law as having
any title to his interest in the shares”
...


MEMBERSHIP OF A COMPANY



v
...
The company’s articles may give the trustee an
option of being personally registered as a member, as is provided for by Table A, Article 30
...
e
...




vi
...


T E X T



S T U D Y

A person who has consented to be a director, and has given the statutory undertaking to take and
pay for his qualification shares, is declared by Section 182(2) to be, “in the same position as if he
had signed the memorandum
...
Estoppel

A person who, without having agreed to be a company’s member, is aware that his name is
wrongly entered in its register of members but takes no steps to have his name removed there
from, may be estoppel from denying his apparent membership to somebody who relied on it and
extended credit to the company
...
4 THE REGISTER OF MEMBERS

Section 112(1) requires every company to keep a register of its members and prescribes the
contents of the register
...


The names and postal addresses of the members;

11 6

C O M PA N Y L A W

b
...

d
...


A statement of the shares held by each member, distinguished by its number if it has
one;
The amount paid or agreed to be considered as paid on the shares of each member;
The date at which each person was entered in the register as a member;
The date at which any person ceased to be a member
...


Failure to keep a register of members renders the company and every officer of the company
who is in default liable to a default fine [Section 112 (4)]
...




Location

Section 112(2) requires the register of members to be kept at the registered office of the company
...


The registrar must be informed of the place, other than the registered office, where the register
is kept
...




Index of Members

Section 113(1) provides that a company with more than 50 members must, unless the register
of members constitutes an index, keep an index (which may be in the form of a card index) of
the names of the members of the company, and must alter the index within 14 days after any
alteration in the register
...


Closure of Register: Under Section 117 of the Act, a company may, on giving notice by
advertisement in some newspaper circulating in Kenya, or in that area of Kenya in which the
registered office of the company is situate, close the register for any time or times not exceeding
30 days in each year
...
Any person
may 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 100 words or fractional part thereof required to be copied
...


If a company officer refuses an inspection or fails to provide a required copy, the company and
every officer of the company who is in default shall be liable in respect of each offence to a fine
not exceeding Kshs
...
40
...


Section 117 permits a company, on giving notice by advertisement in some newspaper circulating
in Kenya or in that area of Kenya in which the registered office of the company is situate, to close
the register of members for any time or times not exceeding in the whole 30 days in each year
...




Rectification of the Register

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


If the name of any person is, without sufficient cause, entered in or omitted from the
company’s register of members; or
Default is made or unnecessary delay takes place in entering on the register the fact of
any person having ceased to be a member
...

ii
...


The aggrieved person;
Any member;
The company
...


S T U D Y

i
...


11 8

C O M PA N Y L A W

Where an application is made the court may:
i
...


Refuse the application;
Order rectification of the register and payment by the company of any damages
sustained by any party aggrieved
...

The case of Burns v Siemens Bros Dynamo Works Ltd (60) shows that the circumstances set
out in Section 118(1), above, are not the only ones in which the court can order rectification
...

The court may also order rectification of the register by deleting a reference to some only of the
registered shareholder’s shares
...
This is illustrated by Re
Transatlantic Life Assurance Co Ltd (1979) in which the court deleted an additional number
of shares, which had been issued to the applicant in breach of the prevailing Exchange Control
Regulations but left the register intact as regards his previous shareholding
...




Notice of Trusts

Section 119 provides that no notice of any trust, expressed, implied or constructive, shall be
entered on the register, or be receivable by the registrar
...


The company is entitled to treat every person whose name appears on the register as
the beneficial owner of the shares even though he may, in fact, hold them in trust for
another
...


b
...
The owner of an equitable interest in shares,
such as an equitable mortgagee or the recipient of a bequest of shares, may protect
his interest by serving on the company a stop notice (or what is sometimes called a
notice in lieu of distringas), informing the company that he is interested in the shares
and requiring the company to notify him of a receipt of a transfer of the said shares
to a transferee other than himself
...


MEMBERSHIP OF A COMPANY

11 9

Branch Register



Section 121(1) empowers a company having a share capital, if authorised by its articles, to keep
a branch register in any part of the Commonwealth outside Kenya of its members resident in
that part of the Commonwealth
...
The registrar of companies must be informed of the situation of the office
where the branch register is kept within one month of its opening
...





The ownership of at least a share of one or other of the aforesaid classes constitutes the “holder”
a member of the company which has issued the shares
...


Secondary Rights
-
-
-
-
-

Notices of general meetings
Copies of balance sheet lay before the general meeting
Copies of memorandum and articles
Inspection of minutes of general meetings and registers
Petition for the alternative remedy
...
5 RIGHTS OF SHAREHOLDERS

120

C O M PA N Y L A W



5
...


Transfer

A “transfer” of shares occurs if an existing member sells them to a third party
...


S T U D Y

T E X T

However, the transferee does not automatically cease to be a member as a consequence of the
transfer
...
Table
A, Article 23, permits members to transfer all or any of their shares
...




ii
...

Table A, Article 38 provides that “a statutory declaration in writing that the declaring is a director
or the secretary of the company, and that a share in the company has been duly forfeited on a
date stated in the declaration, shall be conclusive evidence of the facts therein stated
...

He, therefore, ceases to be a member of the company only if all of the shares previously held by
him are forfeited
...


Surrender of Shares

The precise nature of surrender and the machinery by which it is effected are not clear since it
is not provided for by the Companies Act or Table A
...

A person’s membership will, therefore, come to an end if he surrenders all his shares to the
company with the approval of the directors
...


121

Death

When a person dies, his membership of a company will come to an automatic end by virtue of
the provisions of the Law of Succession
...
(See Table A, Article 29)



v
...


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
security for the balance of their price
...

If the company sells ALL the shares held by a member, the membership will come to an end from
the moment the buyer’s name is entered in the register
...




vii
...




viii
...




ix
...


T E X T

vi
...


Rescission of contract

A shareholder who rescinds a contract of purchase of shares or allotment by reason of a vitiating
element or otherwise ceases to be a member

xi
...


S T U D Y

T E X T

SUMMARY OF CHAPTER
The following are the ways of becoming a member:
•
•
•
•
•
•
•

Subscribing to the memorandum
Allotment
Transfer
Transmission on death of a member
Transmission on bankruptcy of member
Estoppel
Minimum qualification of a director


The main rights and liabilities of members are:

Primary Rights

They will generally comprise the right to:
•
•
•

Attend general or class meetings of the company;
Vote at the said meetings
Receive a properly declared dividend
...


The main ways of terminating membership are:

CHAPTER QUIZ


1
...


Give one way in which a person can cease being a member of a company



3
...


TRUE



2
...


By Death and by bankruptcy



SAMPLE OF EXAMINATION QUESTIONS

T E X T

Highlight the circumstances under which a person can acquire membership of a company
...


QUESTION THREE
Discuss the salient features of the register of members
...


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
...


INDUSTRY CONTEXT


Shares are growing in acceptance as more and more companies are using them as a form of
raising funds
...
A share is an asset and thus many banks are accepting shares
as security for the loans they issue
...

The chapter also focuses on transfer and transmission of shares
...
This provision creates more problems than it solves although it may be
regarded as the statutory definition of a share
...
in Borland’s Trustee v Steel Brothers to the effect that “a share is the interest of
a shareholder in the company measured by a sum of money, for the purpose of liability in the first
place, and of interest in the second, but also consisting of a series of mutual covenants entered
into by all the shareholders inter se in accordance with (Section 22 of the Companies Act )
...
A
share is not a sum of money
...


(b) Is the yardstick of the holder’s right in the company, particularly the dividends payable
by the company to the shareholders, voting rights and return of capital on a winding
up;
(c) Is the foundation, as it were, of the bundle of rights and liabilities arising from the
statutory contract contained in the Articles of Association
...
A person who owns one or more shares in
a company is ipso facto, a member of the company (unless the company did not enter
his name in its register of members as a consequence of which he is technically not
regarded as a member of the company: Nicoll’s case)
...




SHARES



129

6
...
They depend on the provisions of the company’s constitution, usually the
Articles of Association, or the contract pursuant to which they are issued
...

2
...

4
...

6
...
The decisions may be summarised as follows:
1
...
g
...
This is the only preferential
right that it would have over the other shares, particularly the ordinary shares
...


2
...
It is a priority right to whatever
dividend may be declared
...
This issue is likely to arise if the company decides

to transfer profits to reserve or makes a provision in its accounts for a liability or

loss instead of using the profits to pay the preference dividend
...
e
...
Bond and other preference
shareholders contended that the company had available reserves of 240,000
pounds from which it could have declared the dividend on their shares
...
It, therefore, decided to
retain the funds in question to make good losses
...













T E X T



It was also held in Re Buenos Aires Great Southern Rly Co Ltd that if the
company’s articles entitle the preference shareholders to receive a fixed dividend
for each year “out of the profits of the company”, the words “profits of the
company” means the profits available for dividend after setting aside such
reserves as the directors think fit
...



(b) The right to receive a preference dividend is deemed to be cumulative unless the
contrary is stated
...
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
...
But

words such as “a dividend of X% payable out of the net profits of each year”

sufficiently indicate that arrears may not be paid in a later year
...


(c) If the company which has arrears of unpaid cumulative preference dividends goes
into liquidation, the preference shareholders cease to be entitled to the arrears
unless:










i
...
The articles (or other terms of issue) expressly provide that in liquidation

arrears are to be paid in priority to return of capital to members
...
If, for example, a 7% dividend is paid

on 7% preference shares, the entire balance of available profit may then be

distributed to the holders of ordinary shares
...
For example, the articles may provide that the

preference shares are to receive a priority 7% dividend and are also to participate

equally in any dividends payable after the ordinary shares have received a 7%

dividend
...
These
preference shares are called participative preference shares
...

3
...
If they do rank equally, they carry the same rights, no more and no
less, to return of capital and distribution of surplus assets and to vote
...
It is more usually expressly provided
that:


(a) The preference shares are to carry a priority right to return of capital; and


(b) They are not to carry a right to vote except in specified circumstances, such as
failure to pay the preference dividend, variation of their rights or on a resolution to
wind up
...


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

6
...


7
...
They cannot object that to do this is a variation of their rights; it is strict
observance of them (unless their rights are so expressed as to prevent it): Scottish
Insurance Corporation Ltd v Wilson’s & Clyde Coal Co Ltd
...
But
in a period of persistent inflation, the entitlement to a fixed income and to capital fixed
in money terms is an illusion
...
g
...
The type of investor to
whom preference shares were attractive is better protected by investing in debentures
since he then has a contractual right to his interest (whether or not the company makes
profits) and as a creditor he is entitled to repayment of his capital before any class
of shares is repaid
...


REDEEMABLE PREFERENCE SHARES

A company with a share capital may, if authorised by its articles, issue preference shares, which
are redeemable: Companies Act Section 60 (1)

S T U D Y

5
...
g
...


132

C O M PA N Y L A W



6
...
But to obtain transfer of the legal ownership of
shares, two conditions must be satisfied:
(a) A “proper instrument of transfer” must be delivered to the company, which may not
enter the transfer in its register until this is done: Companies Act Section 77
(b) If, as is the general practice with private companies, the articles give to the directors
power to refuse to register a transfer and the directors exercise their power in a proper
way, the restriction imposed by the articles will prevent a transfer of legal ownership
...


S T U D Y

T E X T



TRANSFER PROCEDURE

It was explained in Re Greene (63) that the rule which requires a “proper instrument” of transfer
enforces the payment of stamp duty, normally at ad valorem rate on the consideration or (in
the case of a gift) on the nominal value of the shares transferred
...


This rule does not, however, apply to registration of shares in the names of personal representatives
or trustees in bankruptcy since they are merely asserting powers of control and disposal of the
shares of members whom they represent given to them by law under the rules of transmission
...


The articles usually provide that:
(a) The instrument of transfer must be “in any usual or common form” (i
...
the forms used
by stockbrokers);
(b) The transferor’s share certificate must accompany the transfer when presented for
registration: Table A, Articles 23 and 25
...
The transferee becomes a member and legal owner of
the shares only when his name is entered in the register of members
...


SHARES



133

CERTIFICATION OF TRANSFERS

If the holder is not transferring his entire holding by a single transfer, it would be inappropriate for
him to hand to the transferee a share certificate for a larger number of shares than are comprised
in the transfer
...
If the transferor is retaining some
shares the company sends him a new share certificate for the reduced number of shares still
registered in his name
...
It is explained by the
following diagram:
The transfer of registered debentures or of debenture stock is subject to the same rules as
transfer of shares
...
Before
the certificate was issued, B signed a transfer of the shares to H and this transfer was sent to
the company for certification
...
By mistake the company then sent to B the
share certificate in his name
...
L later
claimed that he was entitled to the shares
...
He had never seen (and therefore did not rely on) the certified
transfer to H and mere possession of B’s share certificate gave him no claim against the company
since the certificate at the time of issue correctly described B as still the registered holder of the
shares (i
...
the transfer to H had not at that point been delivered for registration)
...


S T U D Y

Under Section 81(2), any person who acts on a negligent certification can claim damages from
the company for his loss if the company did not either receive or fail to retain the share certificate
...
If, for example, the company returns
the certified transfer form and the share certificate to the holder who sells the shares to A giving
him the certified transfer form and also to B, giving B a second transfer form of the same shares
with the transferor’s certificate and A’s transfer is then registered first, B has no claim against the
company if it refuses to register the second transfer to him
...


T E X T

Certification is a representation by the company to any person acting on the faith of the certification
that documents have been produced to the company which on the face of them show a prima
facie title of the transferor to the shares comprised in the transfer
...
Balkis Consolidated Ltd
...
Thereafter, any dividend received by the vendor (pending registration of his transfer)
must be paid over to the purchaser (unless the shares are sold “ex-div”)
...

The vendor is, however, free to vote at meetings as he wishes until the purchase price has been
paid to him
...
If he fails to
deliver such a transfer, he is liable to pay damages
...
If the company rejects
the transfer, the vendor as registered shareholder holds the shares in trust for the purchaser as
his nominee
...
The model articles Table A contains provisions which give the
directors power to refuse to register a transfer of any share, whether fully or partly paid
...

Unless the directors have power under the articles to refuse a transfer and exercise that power
properly, the transfer must be registered and the court may order rectification of the register for
that purpose
...









In RE HACKNEY PAVILION
A transfer of shares was sent in by the executors of a deceased director and shareholder
...
There was no casting vote
...

Held:
This was incorrect since a positive act of refusal was necessary and there had been
none
...


(b) The directors in reaching their decision must act bona fide in what they consider to be
the best interests of the company: RE: Smith & Fawcett (64)
(c) Where the articles specify grounds of refusal, the directors may be required to identify
the grounds of refusal
...
If nonetheless the directors do disclose
their reasons, the court will consider whether the directors acted bona fide or whether
their reasons accord with the grounds specified in the articles (if that is the case)
...
The directors
rejected transfers of small numbers of shares (and of single shares) on the ground that
it was prejudicial to the company that its issued share capital should be fragmented
...
There was only one director
then in office and he purported to refuse to register the transfers in exercise of a power of
refusal given by the articles
...
On December
11, 1967 proceedings were begun for rectification of the register, i
...
, a court order that
the transfers should be entered in the register
...






Held:



The articles may also restrict the right to transfer shares by giving to members a right of
first refusal of the shares, which other members may wish to transfer
...
e
...


The attempt to exercise the power of refusal on December 18,1967 was invalid since, in
the interval of 4 1/2 months (since the transfers were presented), the power had expired
(as regards those transfers)
...




S T U D Y

(d) The power of refusal must be exercised within a reasonable time from the receipt of the
transfer
...
If the power is not exercised within a reasonable time it lapses and can no longer
be used
...


T E X T

The reason given could be challenged and was invalid
...
In this case the directors were objecting to the
small amount of shares transferred which was not an objection to the transferees
personally
...
Certain members agreed to sell their shares to an outsider and, while
remaining the registered holders, gave the purchaser their proxies so that he could
secure control of the company
...

The cases cited above show that when there is a dispute over refusal to register, the
proper remedy is to apply to the court for rectification
...


SHARE CERTIFICATES
(a) Section 82 (1) provides that within 60 days of allotting shares or receiving a transfer, a
company must have ready for delivery a certificate of the shares allotted or transferred
(unless the transfer is rejected)
...

(b) A share certificate is a document on which is printed the name of the shareholder and
the number of shares held (with any particulars such as “1 pound ordinary”) is written
(or typed)
...
The standard printed wording on a share certificate reads:

“This is to certify that (name of shareholder) is the holder of (number and any description) shares
fully paid of (nominal value) each numbered
...
inclusive in the above named company
subject to the memorandum and articles of association thereof
...
The reference to the memorandum and articles is a
reminder of the statutory rule that every member is bound by these documents as a contract with
the company, under Section 22 of the Companies Act
...

b
...

d
...

f
...


Name of the company
Common seal of the company
Registered holder of the shares
Number of shares held
Serial number
Date of issue
Signature of directors

A share certificate is not a document of title but is prima facie evidence of ownership
...
If the company issues a share certificate, which is incorrect it is estoppel from
denying that it is correct but only against a person who has relied upon it and thereby suffered
loss
...
S and G forged a transfer of the shares to
themselves and presented it for registration with T’s share certificate, which they held
as her brokers
...
S and G sold the shares to B and another person who were
duly registered as holders
...
B and the other purchaser claimed the value of the shares from
the company as damages
...
with the
intention that it shall be acted upon in the sale and transfer of shares”
...


S T U D Y

Although the share certificate is only prima facie evidence of title, its contents may render the
company liable under the equitable doctrine of estoppel
...
The company cannot be heard to say that it never made the representation or that it was
false
...
e
...
The position must remain or be resolved as if the statement made had been
true
...
For example, if the certificate states that
the shares are fully paid, the company cannot deny that this is so
...
B believed that the amount due on shares had been paid by a previous holder
...
The company went into liquidation and the liquidator claimed from B
the amount due on his shares
...
The claim must fail
...
(65)

(c) A person who is in possession of a share certificate in his name or the name of another
person may have a valid claim (i
...
the company may be estoppel from denying that the
certificate is valid)
...














If he has not relied on the share certificate in a transaction from which he will
incur loss if the share certificate is repudiated by the company
...


In BALKIS CONSOLIDATED v TOMPKINSON
P sold shares to T (but P had no title to the shares) and the company was induced by
fraud on the part of P to issue a share certificate to T in the name of T
...
The company refused to register the transfers by T to the persons who
had bought the shares from him on the ground that T had no title (like P before him)
...
The company said that it was not estoppel from denying
that T had any title to his shares
...
(NB
...
)

ii
...


If he has obtained the certificate by presenting a forged transfer to himself for
registration
...






In RUBEN v GREAT FINGALL CONSOLIDATED





Held:

The company secretary forged the necessary signature of a director on a share certificate
and issued it
...
It was
not a certificate issued by the company
...
On the contrary, he is liable to compensate the company for its liability
...
C is not
disqualified from making the company liable on the certificate since C has not delivered
a forged transfer to the company (Bahia case above)
...
But as the company cannot deny that B’s share certificate
is correct, it must compensate C either by paying C the amount which C paid to B for
the shares or by buying other shares in order to be able to register those shares in the
name of C
...




S T U D Y

Most of the case-law is concerned with share certificates issued as a result of the delivery to the
company of a forged transfer together with a stolen or misappropriated share certificate of the
registered holder
...
The result is then as follows:

T E X T

STOLEN CERTIFICATES AND FORGED TRANSFERS

140

C O M PA N Y L A W

In SHEFFIELD CORPORATION v BARCLAY



Held:



B was liable to compensate the corporation since he had caused it to issue a false
share certificate by delivering a forged transfer to himself for registration
...
But if he does so, even innocently, he may be estoppel from
asserting his ownership of the shares
...
But if he delivers a signed transfer to another person for a limited purpose, he
gives him apparent authority to use the transfer and so may be unable to repudiate an
unauthorised use of the transfer
...
e
...
The agent exceeded
his authority by mortgaging the shares for a larger sum
...


S T U D Y

T E X T








Stock was registered in the joint names of T and H
...
T delivered the transfer to B (who was unaware of the forgery)
and B obtained registration of the transfer to himself
...
When the forgery
was discovered, H claimed to be restored to the register as holder of the shares (T had
died meanwhile) and the corporation, being estoppel against C, purchased shares in
the market for registration as replacement in the name of H
...


Held:



The shareholder was estoppel from asserting that the agent had exceeded his
authority
...







Some companies in Kenya issue a “transfer notice” to the registered holder to the
effect that a transfer of his shares had been presented for registration
...
Hence the
issue of a transfer notice is of no value to the company and so in England the practice
has been generally abandoned
...


SHARES



141

STOCK

A company may, if authorised by its articles, convert its issued shares into stock (or reconvert
stock into shares)
...
The effect of conversion is that, for example, one
hundred one pound shares become a single block of 100 pound stock owned and transferable in
units of defined value (usually the same amount as the value of the shares from which they are
derived)
...
But this result can now be achieved in other ways
...

(Companies Act Section 2)

This is a transaction whereby shares are used as collateral security for loans
...


Under a legal mortgage, the borrower transfers his shares to the mortgagee who becomes
the registered holder subject to a separate agreement by which he undertakes to re-transfer
the shares to the mortgagor on repayment of the loan
...
As registered holder, the mortgagee can transfer the shares to a purchaser
who buys from him
...
There is again
an agreement containing the terms of the loan and the mortgage
...


The equitable mortgagee’s other potential difficulty is that since he is not a registered shareholder
he has no direct means of transferring the shares to a purchaser if the borrower defaults and he
decides to sell
...
e
...
This usually
gives the mortgagee an implied power to insert his own name as transferee in case of default
...
Alternatively, the mortgagee
may obtain from the mortgagor a power of attorney giving him power to insert the name of a
purchaser on the transfer
...
3 MORTGAGE OF SHARES

S T U D Y



142

C O M PA N Y L A W



CALLS ON SHARES

Unless shares are already fully paid for, the registered holder is liable to pay the balance due
when called on to do so
...
The
procedure must be correctly applied
...
If a shareholder defaults in the payment of calls, the company may, if
the articles so provide, forfeit his shares
...


S T U D Y

T E X T



LIEN ON SHARES

A lien is an equitable charge on the shares of a member to secure sums owing by the member
to the company
...


Private companies, however, usually have a lien over fully paid as well as partly paid shares to
secure sums owing by members whether in respect of their shares or other liabilities such as
loans
...


The company’s lien gives it a first claim on the shares unless the company has notice of some
existing claim to the shares before the holder becomes indebted to the company
...
The bank gave notice to the company of its
interest as mortgagee
...








BRADFORD BANKING COMPANY v BRIGGS & CO (1886)

Held:
As the company had prior notice of the bank’s mortgage, its lien (although the right to
a lien existed when the notice was received) was postponed to the mortgage since the
company’s claim under the lien arose after the bank’s notice was received
...
4 SHARE WARRANTS

Section 114(1) provides that on the issue of a share warrant, the company shall strike out of its
register of members the name of the member to whom the warrant has been issued and shall
enter in the register:
(a) The fact of the issue of the warrant;
(b) A statement of the shares included in the warrant, distinguishing each share by its
number; and
(c) The date of the issue of the warrant

The bearer of the warrant shall, subject to the articles of the company, be entitled, on
surrendering it for cancellation, to have his name entered as a member in the register
of members
...


S T U D Y



T E X T

The articles of private companies often provide that a member who wants to sell his shares must
first offer them to the existing members at a price to be fixed by the auditors
...
In valuing the shares for this purpose, the
auditor is not obliged to explain the basis of his valuation or to give his reasons for it, and he is
not liable to an action by a party who is dissatisfied with it unless he is dishonest
...
e
...

In Arenson v Casson Beckman Rutley & Co
...
An auditor of a private company who, on
request, values its shares in the knowledge that this valuation will determine the price to be paid
under a contract owes a duty of care to both the vendor and the purchaser
...


144

C O M PA N Y L A W




SUMMARY OF THE CHAPTER

Mortgage of shares is a transaction whereby shares are used as collateral security for loans
...

8
...

10
...

12
...


A share is by its nature transferable but to obtain transfer, a proper instrument (of transfer) must
be delivered to the company and the directors must authorise the transfer

A mortgage may either be legal or equittable
...


SHARES



145

CHAPTER QUIZ
Name any two classes of shares

2
...


A transaction whereby shares are used as collateral is referred to as



4
...


S T U D Y





146

C O M PA N Y L A W









S T U D Y

T E X T



ANSWERS TO QUIZ

1
...

3
...


Ordinary and Preference Shares
Equitable
Mortgage
Participating or irredeemable

SAMPLE OF EXAMINATION QUESTIONS

QUESTION ONE
Discuss the procedure used to effect a transfer of shares
...

A clear understanding of the statutory meeting is useful
...
Past papers show this chapter has appeared in the
following sittings: Kindly refer to the following sittings: - 05/02; 12/01; 12/00; 07/00; 05/02;06/98
12/00; 07/00;

INDUSTRY CONTEXT
Meetings are very important in an industry
...
It is in these meetings resolutions are made which affect the
company
...


T E X T

INTRODUCTION

152

C O M PA N Y L A W

Dawes, which emphasised that one man cannot constitute a meeting
...
Meetings also result in passing of resolution,
which is used as a tool for making decisions
...
1 CLASSIFICATION OF MEETINGS

Company General Meetings

Company general meetings are held from time to time in order:

(a) To comply with statutory provisions which require certain general meetings to be held in
order to transact specified business
...


S T U D Y

T E X T

Neither the Companies Act nor case law has attempted to define the term meeting
...
It denotes an assembly of
persons
...




(c) To enable the directors and members to exchange views regarding the running of the
company’s affairs or resolve some existing dispute
...
The statutory meeting is held for the specific purpose of enabling the members of the
company to consider the statutory report
...
” But no resolution of which notice has not been given in accordance with the articles
may be passed at the meeting
...

By Section 130(4) the statutory report shall, so far as it relates to the shares allotted by the
company, the cash received in respect of such shares and the receipts any payments of the
company on capital account, be certified as correct by the auditors, if any, of the company
...
However, there is a proviso that if the report is forwarded later than prescribed, it shall be
deemed to have been duly forwarded if it is so agreed by all the members entitled to attend and
vote at the meeting
...


List of Members

Section 130(6) provides that the directors shall cause a list showing the names and postal
addresses of the members of the company, and the number of shares held by them respectively,

S T U D Y

(c) An abstract of the receipts of the company and of the payments made therein, up to a
date within seven days of the report, exhibiting under distinctive headings the receipts
of the company from shares and debentures and other sources, the payments made
and particulars concerning the balance remaining in hand and an account or estimate
of the preliminary expenses of the company;

T E X T

(b) The total amount of cash received by the company in respect of all the shares allotted,
distinguished as aforesaid;

154

C O M PA N Y L A W

to be produced at the commencement of the meeting and to remain open and accessible to any
member of the company during the continuance of the meeting
...

It should be noted that the statutory meeting is not held by a private company, and that it is
held only once in the lifetime of a public company
...
Its timing is important because the members are in fact being given a
chance to ascertain, before it is too late, whether the minimum subscription was raised and, in
the event of the minimum subscription not having been raised, to decide on whether to avoid
the contract of allotment
...


S T U D Y

T E X T

The Annual General Meeting

Section 131(1) provides that “every company shall in each year hold a general meeting as its
annual general meeting in addition to any other meetings in that year, and shall specify the
meeting as such in the notices calling it”
...
The word “year” was defined in Gibson v Barton as “calendar year”, i
...
the period January
1 to December 31
...
Thus a
company incorporated on October 1, 1992, need not hold its first annual general meeting until
March 1994
...

The registrar is not bound to call or direct the calling of the meeting but, in the event of his
refusing to do so, the aggrieved member may apply to the court for an order: Re: El Sombrero
Ltd (88), in which the court made an order after the registrar had declined to do so
...


Declaring a dividend;

ii
...


The election of directors in the place of those retiring, and

iv
...


Subsection 5 makes it a criminal offence punishable with a fine not exceeding two thousand
shillings for the company and every officer of the company to fail to hold the annual general
meeting or comply with any directions of the registrar regarding the calling and conduct of the
meeting
...

The company’s articles cannot deprive the members of the right to requisition a meeting under
Section 132 because the section requires the directors to proceed to convene a meeting on
requisition “notwithstanding anything” in the company’s articles
...
They may therefore defeat the purposes of the section
by calling the meeting for a date, say, six months ahead, provided they do so within the 21day period
...
K) Ltd (1982)
...
The company’s articles may also contain such a provision although the current Table A lacks
one
...
Further, by Section 132 (1), despite anything in the articles of a
company, the directors are bound to convene an extraordinary general meeting of the company
on 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, of members representing not less than one-tenth of the total voting rights
...
Section132 (3) provides that
if 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
...
Neither is the word “extraordinary” defined in any other section of the Act
...


156

C O M PA N Y L A W

Section 135(1) provides that, if for any reason it is impracticable to call or conduct a meeting of
a company in accordance with the articles or the Act, the court may, either of its own motion or
on application by any director or any member entitled to voted at the meeting, order a meeting
to be called, held and conducted in such manner as the court thinks fit
...
The power of the court in this regard is illustrated by Re: El Sombrero Ltd
(88)
...
However, a class meeting may be
held pursuant to the provisions of the company Articles of Association, if any
...


The provisions of Table A in relation to general meetings shall apply to every such separate
general meeting, except that the necessary quorum shall be two persons at least holding or
representing by proxy one-third of the issued shares of the class
...
C
...
Ltd, infra, they cannot vote thereat
...




a) Table A, Article 49 empowers any director or any two members of the company
to convene an extraordinary general meeting if at any time there are not within Kenya
sufficient directors capable of acting to form a quorum
...




b) Section 132(3) empowers members holding not less than one-tenth of the paid-up
capital of a company, or representing not less than one-tenth of the total voting rights
of all the members, to convene an extra-ordinary general meeting of the company if the
directors have failed to do so despite their requisition
...


The company secretary or other officer of the company has no power to call a general meeting:
Re: State of Wyoming Syndicate (89)
...


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
...
An injunction stopping the meeting from being held was granted
...
For example, in Smith v
paring a Mines Ltd, a notice was issued purporting to postpone the holding of a general meeting
of shareholders which had previously been duly convened
...
It was held that resolutions passed at the meeting were valid and effective
...

The proper course is for the meeting to be held and, with the consent of the majority of those
present and voting, adjourned
...
2 NOTICE OF MEETINGS





LENGTH OF NOTICE

Section 133 (1) provides that any provision of a company’s articles shall be void in so far as it
provides for the calling of a meeting of the company (other than an adjourned meeting) by a
shorter notice than 21 days
...


Section 133(2) provides that, except in so far as the articles of a company make other provision
in that behalf (not being a provision avoided by Section 133(1), a meeting of the company (other
than an adjourned meeting) may be called giving 21 days notice in writing
...


T E X T

Good Faith

S T U D Y



158

C O M PA N Y L A W

By Section133 (3) a meeting of a company, if called by a shorter period of notice than that
prescribed in Section 133(1) or by the company’s articles, shall be deemed to have been duly
called if it is so agreed: a)
b)

In the case of the annual general meeting, by all the members entitled to attend and
vote at the meeting; and
In the case of any other meeting, by a majority in number of the members having a right
to attend and vote at the meeting, being a majority together holding not less than 95%
in nominal value of the shares giving a right to attend and vote at the meeting; or in the
case of a company not having a share capital, a majority together representing no less
than 95% of the total voting rights at that meeting of all the members
...
Ltd that the mere fact all the members are present
at the meeting and pass a particular resolution, either unanimously or by a majority holding 95%
of the voting rights, does not imply consent to short notice
...


S T U D Y

T E X T

Section133 does not indicate whether the days of notice must be “clear days”
...




SERVICE OF NOTICE

Section 134 (a) provides that, unless the articles of the company make other provision in that
behalf, notice of the meeting of a company shall be served on every member of the company in
the manner in which notices are required to be served by Table A
...
stated: “It is well settled that as regards
a general meeting, failure to give notice to a single person entitled to receive notice renders the
meeting a nullity”
...
They must invite all the members to the meeting and not just those
whom they believe are likely to support private property to be run according to their personal
whims
...
Needless to say, a single member can influence the
entire general meeting without necessarily having to be a Mark Anthony
...


MEETINGS

159

The common law rule applies irrespective of whether the failure to give notice of the meeting was
deliberate or unintentional
...
For example, Table A, Article 51 provides that “the accidental omission
to give notice of a meeting to
...
In such a case, notice of the meeting would be deemed to have
been given despite an “accidental omission” to give the notice: Re: West Canadian Collieries
Ltd (90) commenting on the apparent attempt of the article to validate “the proceedings at” the
meeting rather than the meeting itself, Plowman, J
...
that a meeting, the proceedings of which are to be taken to be valid
notwithstanding the omission to be deemed to have been duly convened for the purposes of the
articles
...


a)

Every member of the company except those members who (having no registered
address within Kenya) have not supplied to the company an address within Kenya for
the giving of notices to them;

b)

The personal representation or trustee in bankruptcy of a member who, but for his
death or bankruptcy, would be entitled to receive notice of the meeting, and

c) The auditor for the time being of the company
...
Where a notice is sent by post, service of the notice shall be deemed to be effected
within 72 hours of properly addressing, prepaying and posting a letter containing the notice
...

Under Article 133, a notice may be given to the personal representative or trustee in bankruptcy
by sending it through the post in a prepaid letter addressed to them by name, or by any official
description, at the address, if any, within Kenya-supplied by them for the purpose, if no address
has been supplied, the notice shall be given in any manner in which it might have been given if
the death or bankruptcy of the registered holder had not occurred
...
H
...
The meeting, was therefore, declared null and void
...
This is the fundamental legal requirement
...
For example, Table A, Article 50 states that the notice “shall specify the place, the day
and the hour of meeting and, in case of special business, the general nature of that business”
...
If the meeting is convened to pass a special resolution, the notice
must specify “the intention to propose the resolution as a special resolution” (Section 141(1))
...
3 AGENDA

The word literally means ‘things to be done,’ but in practice, it is commonly applied to the agenda
paper, which lists the items of business to be dealt with at a meeting
...
An agenda paper is thus matters to be transacted at a meeting and is
known as the order paper or the order of business
...
As a rule, this form is used when it is to be included as part of the notice circulated
to those intended to attend the meeting
...

The chairman’s copy of agenda
This may be supplied with more details than the copies issued to those attending
the meeting and a wide margin may also be left on his copy for the purpose of notetaking
...


•


Items of business included
No business should be placed on the agenda paper unless it comes within the scope
of the notice convening the meeting and is within the power of the meeting to deal with
it
...


•


Ease of reference
Ease of reference in an agenda paper is very important
...


S T U D Y

•




7
...


Under Table A, article 53, no business is to be transacted at a general meeting unless a quorum
of members is present “at the time when the meeting proceeds to business”
...
There need, therefore, be no
quorum after the meeting has began and it may be legally continued - provided there are at least
two persons present who would constitute a valid meeting at common law
...
This
provision is modified by Table A, part II, Article 4, which states that the members may
be present in person or by proxy
...
Table A, Article 53, adopts
this provision
...
This is so because as was explained in Sharp v Dawes (93),
“the word `meeting’ prima facie means a coming together of more than one person”
...
In such a case, the section empowers the
registrar to direct “that one member of the company present in person or by proxy shall
be deemed to constitute a meeting”
...


If the meeting is one which has been called pursuant to a court order under Section135
(1)
...
This is illustrated by
Re: El Sombren Ltd (88)

3
...


4
...


5
...


If in the course of liquidation a creditor has roved its debt pursuant to section 309,such
a creditor constitutes a valid creditor’s meeting for purposes of winding up
...




ADJOURNMENT

Table A, Article 54 provides that if within half an hour from the time appointed for the meeting
a quorum is not present, the meeting, if convened upon the requisition of members, shall be
dissolved, 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
...
5 PROXIES

By Section 136 (1), any member of a company entitled to attend and vote at a meeting of the
company shall be entitled to appoint another person (whether a member or not) as his proxy to
attend and vote instead of him
...


However, unless the articles otherwise provide: (i) No proxy shall be appointed by a member of a company not having a share capital;
(ii) A member of a private company shall not be entitled to appoint more than one proxy to
attend on the same occasion;

Section136 (3) renders void any provision contained in a company’s article requiring the instrument
appointing a proxy to be received by the company or any other person more than 48 hours before
a meeting or adjourned meeting in order that the appointment may be effective



RIGHTS OF A PROXY
1
...

3
...
6 PROCEEDINGS AT MEETINGS

(a) Each item of business contained in the notice of meetings should be taken separately,
discussed and put to the vote
...

The chairman should reject any amendment, which is outside the limits set by the notice
convening the meeting
...
If the special business is an ordinary

S T U D Y

By Section 136 (2), every notice of a meeting must state the member’s right to appoint a proxy or
proxies and those they need not be members
...
1, 000
...


164

C O M PA N Y L A W




resolution it may be possible to amend it so as to reduce its effect to something less
(provided that the change does not entirely alter its character) e
...
an ordinary resolution
authorising the directors to borrow 100,000 pounds might be amended to substitute a
limit of 50,000 pounds (but not to increase it to 150,000 pounds as 100,000 pounds
would have been stated in the notice)
...

Case: RE MOORGATE MERCANTILE HOLDINGS (1980)

Held:



S T U D Y

A special resolution set out in the notice provided for the total cancellation of a share
premium account balance of 1,356,900
...
At the meeting, the resolution was
amended, for technical reasons, to reduce the balance to 321
...




T E X T



The resolution as passed was invalid since it was not the special resolution of which
notice had been given
...
4m pounds is a
change of substance
...
If he allows the amendment to be discussed it should

be put to the vote before the original resolution
...


(c) The rights of members to vote and the number of votes to which they are entitled

to in respect of their shares are fixed by the articles
...
g
...
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
...
one vote may be given by each member present in person: proxies do not
vote
...
Unless a poll is then demanded, the
chairman’s declaration (duly recorded in the minutes) is conclusive
...
The
result of the previous show of hands is then disregarded
...
A poll need not be held
forthwith but may be postponed so that arrangements to hold it can be made
...
It prevents
subsequent argument about the count of hands raised on a show of hands
...


MEETINGS



Case: RE CARATAL (NEW) MINES LTD (1902)



A special resolution was put to the vote on show of hands
...
This declaration was later challenged in
court
...
Proxies may vote on a poll (which had not been held) but not on show
of hands and should have been disregarded
...
e
...
(Section 137)


(e) When a poll is held, it is usual to appoint “scrutinisers” and to ask members and
proxies to sign voting cards or lists
...









(f)





In voting, either by show of hands or on a poll, it is the number of votes cast which
determines the result
...
Hence the majority
vote may be much less than half or three quarters) of the total votes which could
be cast
...
7 RESOLUTIONS

A meeting reaches a decision by passing a resolution
...


There are three kinds of

An ordinary resolution, which is carried by a simple majority of votes cast
...
By not less than five members


ii
...
By member(s) holding shares which represent not less than one-tenth of



the paid-up capital;

T E X T

(a) To exclude the right to demand a poll on any question other than the election

of a chairman by the meeting or an adjournment;

166

C O M PA N Y L A W

ii
...

iii
...

Apart from the required size of the majority and period of notice, the main differences
between the types of resolutions are:
(a) The text of special resolutions must be set out in full in the notice convening the meeting
(and it must be described as special resolution): Companies Act Section 142
...
Some ordinary
resolutions, particularly those relating to share capital, have to be delivered for filing but
many companies do not do so
...

A special resolution is required for major changes in the company such as a change of name,
alteration of objects or of the articles, reduction of share capital, and winding up the company
voluntarily (except on grounds of insolvency or under the provisions of the articles) or presenting
a petition by the company for an order for compulsory winding up
...
8 MINUTES

Separate minutes or proceedings of directors and general meetings must be kept; the latter are
open to inspection by members
...




WHEN A MEETING IS UNNECESSARY

The purpose of holding general meetings with all the formality, which this entails is to give to each
member the opportunity of voting (in person or by proxy) on the resolutions before the meeting
...
His right to do so exists whether he was
absent from the meeting or attended it but was in the minority
...
If every member, in fact, agrees it would be pointless and wrong to
allow any non-member to dispute the validity of the unanimous decision because unanimity was
achieved in some informal way
...




The five individuals who were both the directors and all the members of the company
held a directors’ meeting and resolved unanimously to issue debentures
...




Held:



The decision was valid since it had been agreed on by everyone who could have voted
on it at a general meeting
...
But the principle was later extended to cases
where, without holding any meeting at all, the members had all, even if informally,
agreed to the relevant decision
...

These were:






(a) Compensation paid to a director for loss of office
...





(c) The remuneration paid in advance of approval by shareholders was made in
accordance with previous practice
...




Finally the assent principle of unanimity of the members has been extended to cover
cases where every member had the opportunity to object and either voted in favour or
merely abstained
...
At the meeting, two members voted in
favour of a resolution to wind up the company and the other three abstained
...
The
same principle may be given formal recognition by articles which provide that a written
resolution signed by all the members should have the same effect as a resolution duly
passed at a general meeting
...
The
assent principle is more flexible since it recognises as valid an unanimous agreement
of the members reached without any meeting or other formality at all
...


REGISTRATION OF RESOLUTIONS

S T U D Y

T E X T

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) Special resolutions
...

(c) Resolutions agreed to by all the members of a class of shareholders
...


By Section 144 where a resolution is passed at an adjourned meeting of: (a) A company
...

(c) The directors of a company; the resolution is treated as having been passed on the date
on which it was, in fact, passed on the date of the original meeting
...

The total amount of cash received
...

The particulars of any contract entered into
...

An ordinary resolution is passed by a simple majority of the votes cast
...


The following resolutions are registerable:
a
...

c
...


Special resolutions
...

Resolutions agreed to by all the members of a class of shareholders
...


CHAPTER QUIZ



1
...

3
...


Which case is for the authority that one person cannot constitute a meeting?
Which meeting is held once in the life of a company?
What is the main agenda of the meeting referred to in 2 above
Which type of meeting is not provided for in the Companies Act?

S T U D Y

A proxy is a person appointed by any person to attend and vote at a meeting to represent him
...

2
...

4
...


Sharp v Dawes
Statutory meeting
Statutory reports
Class meeting
Resolutions



SAMPLE OF EXAMINATION QUESTIONS
SAMPLE OF EXAMINATION QUESTIONS

S T U D Y

T E X T

QUESTION ONE
In relation to company law, explain and distinguish the following:
A) Annual general meeting
...

c) Class meeting
...
486) of the Laws of Kenya,
outline general provisions relating to meetings and votes
...


QUESTION THREE
Who is a chairman? Discuss his powers and functions

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

171

CHAPTER EIGHT

DIRECTORS

S T U D Y

T E X T

172

C O M PA N Y L A W

173

CHAPTER EIGHT
DIRECTORS
OBJECTIVES
At the end of this chapter, the student should be able to:
•
•
•
•

Explain the appointment and restrictions on appointment of directors
...

Explain Rule in Turquand’s case and the organic theory
...




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
was in before a loss occurred

EXAM CONTEXT
The examiner has a tendency to test the student’s understanding on director’s duties, appointment
and restriction on director’s appointment
...
Sittings that have recorded questions from this chapter are 05/02; 12/01;
12/00; 07/00; 05/02

S T U D Y

A company, being an artificial person, cannot manage its own affairs
...
For example, Table A, Article 80 provides that
“the business of the company shall be managed by the directors”
...


T E X T

INTRODUCTION

174

C O M PA N Y L A W

INDUSTRY CONTEXT
Directors are charged with the responsibility of managing company affairs
...
Therefore, it is vital that directors
exercise their duties with care and skill
...





S T U D Y

T E X T



8
...
177Companies Act provides that every company (other than a private company) shall
have at least two directors
...
Under Table A,
Article 75, the actual number of directors would initially be decided upon by the subscribers of the
Memorandum, or a majority of them, and until so determined, the signatories to the Memorandum
of Association shall be the first directors
...




APPOINTMENT OF DIRECTORS

In the absence of other provisions in a company’s articles, the directors of the company would be
appointed in accordance with the following provisions of Table A
...
If there is a deadlock, all the signatories to the Memorandum
of Association shall be the company’s first directors
...
The retiring directors are,
however, eligible for election under Article 89
...
As between persons who became directors on the same day, those
to retire shall (unless they otherwise agree among themselves) be determined by lot
...




CASUAL APPOINTMENTS

Article 95 permits the board of directors to fill a vacancy in the board or to get an additional
director to join the board for practical reasons provided that the appointment does not cause the
number of directors to exceed the limit imposed by the articles
...
He will then be eligible for reelection, but his appointment will not be taken into account when deciding on the directors who
shall retire from office
...



Section 182 (1): Appointment by the Articles
Section 182(1) provides that a person shall not be capable of being appointed director
of a company by the articles unless, before the registration of the articles, he has by
himself or by his agent authorized in writing:


i
...
Either:

a) Signed the memorandum for a number of shares not less than his


qualification, if any;

b) Taken and paid or agreed to pay for his qualification shares, if any;

c) Signed or made and delivered to the registrar for registration an undertaking


to take and pay for his qualification shares, if any, or the statutory declaration


that a number of shares not less than his qualification, if any, are registered in

his name
...







Section 183: Qualification Shares
Section 83(1) provides that it shall be the duty of every director who is by the
articles of the company required to hold a specified qualification, and who is not
already qualified, to obtain his qualification within two months after his appointment, or
within the shorter time (if any) fixed by the articles
...
If he does
not actually do so but continues to act as director he becomes a de facto director: Rv
Ivan Arthur Camps (67)
...



Section 186: Age Limit
Section 186 provides that no person shall be capable of being appointed a director of
a public company or a private company which is a subsidiary of a public company if at
the time of his appointment:-



(a) He has not attained the age of twenty-one years or is more than 70 years
...

The company must also have given notice of it (i
...
the special notice) to its members
and stated the age of the proposed director
...


4
...
10,000 or both
...



Section 189: Fraudulent Persons
Section 189(1) empowers the court to make an order restraining a person from being
appointed, or acting, as a company’s director for a period not exceeding five years if—







i
...




6
...




A resolution moved in contravention of this provision is void {Section 184 (2)}
...


DEFECTS IN APPOINTMENT

Section 181 provides that a director’s acts shall be valid despite any defect that may afterwards
be discovered in his appointment or qualification
...
An example is R v Camps (67)
...
V Ennion that a
verbal notice of resignation which is given to, and is accepted by, the general meeting is effective
and cannot be withdrawn
...
By implication, a purported
oral notice of resignation which is given to, and purportedly accepted by, the board of directors
would be invalid since the directors cannot legally alter the company’s articles of association
...
Such a provision would have disqualified the director only
if the absence in question was voluntary, as in cases where he was ill and could not attend
the board meetings
...




VACATION OF OFFICE

In addition to vacating office under the aforesaid provisions of Article 88, a person may cease to
be a director for various reasons, such as:







(a)
(b)
(c)
(d)

Death
Retirement by rotation under the articles
Court order restraining him from acting as director
Dissolution of the company
...
Special notice must be given of any resolution to remove the director, or to
appoint another director in his place
...
183 (i
...
failure to obtain a share qualification) or
Section 186 (i
...
age limit); or
Becomes bankrupt or makes any arrangement or composition with his creditors
generally; or
Becomes prohibited from being a director by reason of any order made under Section189
of the Act
Becomes of unsound mind
Resigns his office by notice in writing to the company
Shall for more than six months have been absent without permission of the directors
from meetings of the directors held during that period
...


S T U D Y

a)

178

C O M PA N Y L A W

On receipt of the special notice, the company must send a copy to the director concerned who
is entitled, if he so wishes, to make written representations (not exceeding a reasonable length)
to the company
...
In such a case, the representations would be read out at the meeting at which the director
would also be entitled to be heard
...

The removal will be effective if it is decided on by an ordinary resolution
...


S T U D Y

T E X T



COMPENSATION FOR REMOVAL

Subsection (6) provides that nothing in Section 185 shall be taken as depriving a removed director
of compensation or damages payable to him in respect of the termination of his appointment as
director or of any appointment terminating with that as director
...
The director might also, if he is a
member of the company, be entitled to an order for the winding up of the company by the court
on the “just and equitable” ground: Ebrahimi v Westbourne Galleries Ltd
...
They, therefore, have no right to be paid for their services unless
there is a provision for payment in the articles
...
” In Re: Duomatic Ltd it was explained that a
provision in the articles authorising payment of directors’ remuneration does not, per se, give the
right to be paid any specific amount
...

Provided the resolution has been passed, the remuneration is payable whether profits are earned
or not: Re: Lundy Granite Co
...
This means that a director who vacates office before completing a year
or a month in office is entitled to a proportionate part of his yearly or monthly salary: Moriarty v
Regent’s Garage Co
...
Any provision

DIRECTORS

179

in the articles regarding tax-free payments “shall have effect as if it provided for payment, as a
gross sum subject to income tax and surtax, of the net sum for which it actually provides”
...
If the payment is not disclosed and approved, the director to whom it is paid
shall be deemed to have received it in trust for the company
...


If a payment is made to a director as compensation for loss of office or on his retirement in any of
the aforesaid circumstances, he must take reasonable steps to ensure that the particulars of the
proposed payments are disclosed in the offer
...

Section 195(3) provides that references under sections 192, 193 and 194 to payments made to
any director by way of compensation for loss of office do not include any bona fide payment by
way of damages for breach of contract or by way of pension in respect of past services
...
It is also unlawful for the company to guarantee a loan given to its director by
any other person
...
It applies where the transfer results from:

i
...


ii
...


iii
...
Any other offer, which is conditional on acceptance to a given extent
...
If such a payment is not disclosed, the
director holds it upon trust for the company
...





DUTIES OF DIRECTORS

The duties of directors are usually considered under two broad headings, namely:
i
...


S T U D Y

T E X T



Duties of care and skill at common law
Fiduciary duties as enunciated by courts of equity
...
Duties of Care and Skill

The directors’ duties of care and skill have been formulated in a series of cases brought against
directors in order to make them liable in negligence for the manner in which they conducted the
company’s affairs
...
in RE CITY EQUITABLE FIRE
INSURANCE CO LTD as follows:
i
...




This rule prescribes a duty which is partly objective (the standard of the reasonable
man) and partly subjective (the reasonably man is deemed to have the knowledge
and experience of the particular director)
...
It would be unreasonable to expect a foolish director to make wise
decisions
...
On the other hand, a wise director will be liable
if he makes unwise decisions, since it is unreasonable to expect him, a wise man, to
make unwise or foolish decisions
...
In the
circumstances, anybody (even a six-months-old baby) can become a director
...
In RE: MARQUIS OF BUTE’S CASE the director became the director at the age
of six months by inheriting the office from his father who had died
...


A director is not bound to give continuous attention to the affairs of his company
...
He is
not, however, bound to attend all such meetings, though he ought to attend whenever,

DIRECTORS

181

in the circumstances, he is reasonably able to do so
...
See, for example, Table A, Article 88(f)
...


In respect of all duties that, having regard to the exigencies of business, and the articles
of association, may properly be left to some other official, a director is, in the absence of
grounds for suspicion, justified in trusting that official to perform such duties honestly
...




In DOVEY v CORY, a director was held not liable for negligence merely because he had
failed to verify false information regarding the company’s accounts which he had been
given by the company’s manager and managing director
...
Men in responsible positions
must be trusted by those above them, as well as by those below them, until there is
reason to distrust them
...
”



2
...

The application of this rule is illustrated by the following cases:
1
...
Section 200(5) adopts this rule by providing
that nothing in Section 200(5) shall be taken to prejudice the operation of “any rule of
law” restricting directors of a company from having any interest in contracts with the
company”
...
He must disclose the
interest at the first board meeting at which the contract is to be discussed or, if he did
not have an interest at that time, at the first board meeting after his interest arose
...
) A similar holding was made in Re Denham Company limited

S T U D Y



182

C O M PA N Y L A W







i
...
If he does vote, his vote

shall not be counted
ii
...


Industrial Development Consultants Ltd v Cooley (69) in which the director
became personally interested in a contract he had been assigned to negotiate for the
company
...


Cook v Deeks (70) in which some of the company’s directors diverted to themselves a
contract that was intended to be for the company
...
In law the benefit of the contract belonged to
the company which the directors had formed for the purpose of obtaining the contract
but in equity the contract belonged to the company for which it was intended
...


In Bray v Ford Lord Herschell stated that the aforesaid rule is not “founded upon
principles of morality” but is based on the consideration that human nature being what
it is, there is danger, in such circumstances, of the person holding a fiduciary position
being swayed by interest rather than by duty and thus prejudicing those whom he was
bound to protect”
...
This rule is essentially a restatement of the
fundamental rule of the law of agency that an agent must not make a secret profit
...






In Percival v Wright (72) it was held that the directors owe their fiduciary duties to
the company alone and not to the members
...


RELIEF FROM LIABILITY

Under Section 402 (1), the court has power in an action against an officer for breach of duty to
grant relief where, although the officer is in breach, it appears that he has acted honestly and
reasonably and, having regard to all the circumstances of the case, including those connected
with his appointment, he ought fairly to be excused for the negligence, default, breach of duty or
breach of trust
...
They can only exercise
those powers for the benefit of the company; otherwise the purported exercise will be regarded
as “ultra vires” and invalid
...
This is illustrated by:

DIRECTORS

i
...
The extraneous purpose was consideration of the widow’s welfare
rather than the company’s benefit
...


Hutton v West Cork Railway Co
...
The resolutions had not given adequate
consideration to the question whether the company would benefit from the proposed
payments
...


183

Hogg v Cramp horn (75)
...
The directors had not exercised their power for the benefit of the company
...




THE RULE IN ROYAL BRITISH BANK V TURQUAND

Fast forward:
Ø
Ø

A company will be bound by its indoor management as outsiders are in position
to know the internal rules of management
The general rule is the rule in Turquand’s case though it has exceptions


In Royal British Bank v Turquand (80), a company was ordered to repay a loan which its
directors had borrowed on its behalf without the authority of an ordinary resolution prescribed by
the Articles of Association
...
But they are not
bound to do more
...
Finding that the
authority might be made complete by a resolution, he would have a right to infer the fact of
a resolution authorising that which on the face of the document appeared to be legitimately
done”
...


T E X T

Section 196(1) requires every company to keep a register showing the number, description and
amount of any shares or debentures which are held by or in trust for the director, or of which he
has any right to become the holder (whether on payment or not) in:-

184

C O M PA N Y L A W

This statement can be reduced to two propositions which constitute what is compositely known
as “the rule in Turquand’s case”, namely:
i
...


A person dealing with a company is bound to read the relevant restrictive provisions
of the Companies Act, the company’s Memorandum of Association and the company’s
Articles of Association
...

In so far as the articles provide that a transaction may be effected by some internal
procedure, the person dealing with the company (called “outsider”) may assume that
the procedure has been duly complied with
...
An “internal procedure” for this
purpose would usually be a decision of the company which is made by an ordinary resolution
passed by the company in general meeting, or a resolution of the directors passed at a board
meeting
...
Rather than compel him to
go to the relevant office of the company to make enquiries, the courts decided to, as it were, “give
him the benefit of the doubt” by holding that the resolution will be deemed to have been passed
even if it had not actually been passed
...
The bank, relying on the “resolution”,
honoured cheques signed in accordance with its provisions
...
The
liquidator’s contention that the cheques, which had been signed by the “directors” and
the “secretary” had been wrongly paid and the bank must refund the money that was
rejected
...


(b) Freeman & Lockyer v Buckhurst Park Properties Ltd


The articles of a company formed to purchase and resell an estate empowered the
directors to appoint one of their body managing director
...
On
behalf of the company he instructed the plaintiffs, a firm of architects and surveyors, to

DIRECTORS

185

apply for planning permission with a view to developing the estate
...



Held, the company was bound by the contract and liable for the plaintiffs’ fees
...
It was sufficient that under
the articles there was a power to appoint a managing director, and that the board of
directors had allowed one of them (Kapoor) to act as such
...


(c) HelyHutchinson v Brayhead Ltd (81)

Exceptions

The person suing the company is, in fact, an insider, such as a director of the
company:



Howard v Patent Ivory Co (82)
...
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
...


The company’s articles prescribed a special resolution, which had not been passed, as
illustrated by Irvine v Union Bank of Australia (83)
...
Its absence
shall have warned the outsider that it had not been passed
...


There were special circumstances which should have put the outsider on inquiry:
Underwood Ltd v Bank of Liverpool (case No 5); Liggett v Barclays Bank (84)
...


The transaction is ultra vires the company, since a company’s agent cannot have
authority to transact a business which the company itself lacks capacity to transact
...


The transaction relates to the issue of a forged document, such as a forged share
certificate issued by the secretary without the authority of the board, as illustrated by
Ruben v Great Finggall Consolidated Ltd
...
Knowledge of irregularity: Liggett v Barclays Bank

S T U D Y

i
...

For example, where a company director who is aware that the company is in a bad financial state
sells his shares knowing that this information will be made public with an announcement of a cut
in dividend payment
...
However,
a person who buys something which turns out to be worthless than the price paid for it may feel
aggrieved
...
Information generally used
by those involved in company securities relate to:

S T U D Y

T E X T

(i) World trade in the particular market in which the company is trading
(ii) Economy of the country
(iii) How the company is handling its affairs
...




CASE FOR REGULATION


In the realm of company law, it may be necessary to regulate insider trading or dealing since
the insider with access to confidential information is in potential conflict of interest situation, in
particular where his position in the company enables him to dictate or influence when the public
disclosure of price-sensitive information is to be made
...
It is thereof
recognised that it is wrong for a director or another to deal in a company’s securities knowing of
some development which is likely to affect the price of the securities, which other members of
the public are generally privy to
...

2
...

4
...

There is no equality in information access
...

Lack of confidence in the market
...
In Britain, the problem is dealt with by the provisions
of the Companies Act, Company Securities (Insider Dealing) Act, 1985 and the Criminal Justice
Act, 1993
...

However, use of confidential information is actionable
...
However, the colliery was never sold
...


The decision in Percival v Wright was upheld in Tent v Phoenix Property & Invest Co
...

(1984
...
v Multinational Gas and Petrochemical
Services Ltd
...
J
...

However, in Allen v Hyatt 1914 where shareholders had engaged directors to investigate on
their behalf and the directors benefited, it was held that since the directors were agents of the
shareholders, they were liable to account to the shareholders
...

Under the section:

(1) A person who is, or at any time in the preceding six months has been, connected with a
body corporate shall not deal in any securities of that body corporate he is in possession
of information that is not generally available but, if it were, would be likely to materially
affect the price of those securities
...
I am of the opinion that directors are not in that position
...


188

C O M PA N Y L A W

his so being, or having been, connected with the first mentioned body corporate he is
in possession of information that: –

(a) Is not generally available but, if it were, would be likely materially to affect the

price of those securities; and

(b) Relate to any transaction (actual or expected) involving both bodies corporate or
involving one of them and securities of the other
...

(4) A person shall not, at any time when he is precluded by subsections (1), (2) or (3)
from dealing in any securities, cause or procure any other person to deal in those
securities
...

(6) Without prejudice to subsection (3) but subject to subsections (7) and (8), a body
corporate shall not deal in any securities at a time when any officer of that body corporate
is precluded by subsections (1), (2) or (3) from dealing in those securities
...


(b) It had in operation at that time arrangements to ensure that the information was
not communicated to that person and that no advice with respect to the

transaction was given to him by a person in possession of the information;

(c) The information was not so communicated and such advice was not so given
...

(9) For the purpose of this section, a person is connected with a body corporate if, being a
natural person: –

(a) He is an officer of that body corporate or of a related body corporate
...


(10) This section does not preclude the holder of a broker’s or dealer’s licence from dealing
in securities, or rights or interests in securities, of a body corporate, being securities or
rights or interests that are permitted by a securities exchange to be traded on the stock
market of that securities exchange, if:

(a) The holder of the licence enters into the transaction concerned as agent for

another person pursuant to a specific instruction by that other person to effect that

transaction;

(b) The holder of the licence has not given any advice to the other person in relation

to dealing in securities, or rights or interests in securities, of that body corporate

that are included in the same class as the first-mentioned securities;

(c) The other person is not associated with the holder of the licence
...


(12) A person who contravenes this section shall be guilty of an offence and shall be
liable:
(a) On a first conviction:

(i) In the case of a person being a body corporate, to a fine not exceeding

Kshs
...
5 million

(ii) In the case of any other person, including a director or officer of a body

T E X T







S T U D Y







190

C O M PA N Y L A W









corporate, to a fine not exceeding Kshs 500,000 or to imprisonment for a term
not exceeding five years or to both;


(b) On any subsequent conviction:

(i) In the case of a person being a body corporate, to a fine not exceeding

Kshs
...
1 million or to imprisonment for a term


not exceeding seven years or to both
...

(14) Nothing in subsection (12) affects any liability that a person may incur under any other
section of this Act or any other law
...


The restriction on directors’ appointments is as follows:
•
•
•
•
•
•

Appointment by the articles
...

Age limit
...

Persons disqualified by the court
...


The office of the director shall be vacated if the director:
•
•
•
•
•
•

Fails to obtain the share qualification
Becomes bankrupt or makes any arrangement or composition with his directors
Is prohibited by the court
Is of unsound mind
Resigns his office in writing
Has been absent for more than six months without permission

It is unlawful for the company to issue a loan to its director unless:
•

It’s a private company
...

•
•

It’s payment to meet expenses incurred by him on behalf of the company
...


Director’s act as trustees, agents but their real position is that of a fiduciary

Director’s duties are divided into two broad categories namely:
•
•

Duties of care and skill at common law
...


The rule in Turquand’s case is the rule of indoor management which holds that a company will
be bound by a transaction even if the prescribed procedure was in fact not followed or complied
with
...

The transaction refers to a forged document
...


What is the minimum and maximum age of a director?

2
...


What is the true legal position of directors?



4
...


A private company has at least how many directors?

192

C O M PA N Y L A W



ANSWERS TO QUIZ


1
...



3
...


5
...

Directors are fiduciaries
Royal British bank v Turquand
Two

QUESTION ONE
a)

b)






Discuss the rules relating to appointment and vacation of office of directors
...
Fair is the managing director and Undertaker is the chairperson of the
company
...
500,000 to purchase a car for his wife Stephane for her
personal use;
ii) Advance Kshs
...


Booker T, the company secretary informs you that Stone Cold a shareholder claims that this
transaction should have been approved by the members and that he intends to raise the matter
during the next general meeting
...
Explain the legal implication of
each of the following situations:

DIRECTORS

a)

Vulture’s son has recently come of age and Vulture wishes to appoint him a director of
the company
...
, in which sparrow has a large shareholding through he is not a director Peacock and
vulture are unaware of sparrow’s interest in Fly ltd
...
(4 marks)

d)

193

In view of the adverse publicity, Vulture and Sparrow decide to exclude Peacock from
participation in the company’s affairs
...
, the company’s auditors, that there is no
possibility of the company trading at a profit in the foreseeable future and no reasonable
prospect of its paying its debts
...


T E X T

QUESTION THREE

S T U D Y

T E X T

194

C O M PA N Y L A W

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

195

CHAPTER NINE

THE SECRETARY

S T U D Y

T E X T

196

C O M PA N Y L A W

197

CHAPTER NINE
THE SECRETARY
OBJECTIVES
At the end of this chapter, the student should be able to:
1
...

3
...


Explain the qualification, appointment and removal of a secretary
Discuss the position and duties of the secretary
Explain the liability of the secretary
Discuss the register of directors and secretaries as provided for in the Companies Act

INTRODUCTION

KEY DEFINITIONS
•
•
•

Ordinary resolutions: Used for all routine business
Extraordinary resolution: This is passed by a majority of not less than three-fourths
of members entitled to vote and actually voting (in person or by proxy)
Special resolution: This is defined in the Companies Act as “a resolution passed by
the same majority as required for an extraordinary resolution at a general meeting of
which not less than 21 days notice has been given

EXAM CONTEXT
This is a chapter has been separated from the original topic of directors, secretaries and auditors
under the old syllabus
...

However, a clear understanding of the chapter is important
...




INDUSTRY CONTEXT
This chapter discusses a very important company official, the secretary
...
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
...
It later describes the secretary’s duties and their legal position
...
1 APPOINTMENT OF THE SECRETARY

By section 178, every company must have a secretary
...
Section 179also provides that a corporation cannot be a
secretary if its sole director is also the sole director of the company
...
However, subsection 2 provides that the
Minister may on the advice of the Council and the Registration Board; exempt certain classes
of companies, non-profit organisations and charitable organisations from the provisions of that
section
...
100,000
and all companies of public nature registered as limited by guarantee are supposed to comply
with the provision of Section 178
...

No person shall qualify for appointment as a company secretary unless he is registered under the
Certified Public Secretaries Act
...

He holds a qualification approved by the Registration Board
He is at the commencement of this Act, both a citizen of Kenya and a member of the
professional body known as the Institute of Chartered Secretaries and Administrators
He is at the commencement of this Act both ordinarily resident in Kenya, and a
member of the professional body known as the Institute of Chartered Secretaries and
Administrators
He is at the commencement of this Act, registered as an accountant under Section 24(1)
of the Accountants Act he is qualified as an advocate of the High Court of Kenya
...
The
following are disqualified from being registered
•
•
•
•

If convicted by a court of competent jurisdiction in Kenya or elsewhere of an offence
involving fraud or dishonesty
...

If during the period when the Registration Board has determined under section 28(1)(d)
that he shall not be registered or during any such period as varied by the High Court
under Section 29
...
However, an
aggrieved person may appeal such a decision to the High Court
...

He is also an officer of the company, according to Section 2 of the Companies Act and
therefore, liable to penalties in that capacity
...


If the office of the secretary is vacant, or if for any other reason, there is no secretary capable of
acting e
...
due to illness, his functions and responsibilities may be undertaken by:
1
...




An Assistant or Deputy Secretary
Any Officer of the Company authorized generally or specifically for the purpose by the
directors, if there is no assistant or deputy secretary capable of acting
...

The secretary should be careful when signing documents on behalf of the company to negate
his own personal liability, by signing in a representative capacity
...


S T U D Y

However, in Panorama Development (Guilford) Ltd
...
Fidelis Furnishing Fabrics Ltd (1971)
it was recognised that a company secretary is the company’s chief administrative officer, and, as
such, has apparent authority to act on behalf of the company
...
A company
secretary is a much more important person nowadays than he was in 1887
...
This appears not only in the modern
Companies Act, but also by the role which he plays in the day-today business of a company
...
He regularly makes representations on behalf of the company and
enters into contracts on its behalf, which come within the day to day running of the company’s
business
...
He is certainly entitled to sign contracts connected with the
administrative side of a company’s affairs, such as employing staff, and ordering cars, and so
forth
...
”

T E X T

The traditional view was that a company was a “mere servant; his position is that he is to do what
he is told, and no other person can assume that he has any authority to represent anything at all
...
R
...
v
...
(1887)
...
2 POWERS AND DUTIES

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
...

On the instructions of the board, to issue notices of meetings to members and others
...

To conduct and record transfer of shares and conduct correspondence with shareholders
as regards calls, transfers, forfeiture, e
...
c
...
g
...

To make all the returns of the company, e
...
the annual returns, notice of special
resolutions, etc
...

For banks he ensures compliance with Central Bank of Kenya statutory requirements
...


Bridging the Information Gap between the Executive and Non-Executive Directors

The developing role of the Company Secretary was first recognised in the Cadbury Report, made
by the Cadbury Committee in 1992, which stated:
“The Chairman and the Board will look to the Company secretary for guidance on what their
responsibilities are under the rules and regulations to which they are subject and on how these
responsibilities should be discharged
...

The Company Secretary’s role is to protect the interests of the company as a whole
...
He should constantly monitor the internal
activities of the company, take responsibility for internal disclosure, interpret the decisions of the
Board and help to ensure that they are properly implemented throughout the organisation
...
In protecting the interests of
the company, the company secretary not only serves the interests of the third party shareholders
who may be involved but is also able to represent the interests of numerous other stakeholders
such as creditors, employees and local communities
...


6
...




Register of Member Section 112
Register of Directors and Secretaries, Section 201
Register of Directors’ Shareholdings, debentures Section 196
Register of Mortgages and Charges, Section 105
Minute Books of all proceedings of general meetings and of all proceedings at the
meetings of its directors
...

Books of Account
Register of Debenture holders, Section 88(1): This is only necessary for a company
that issues debentures
...

(2) The said register shall contain the following particulars with respect to each director, that is to
(a) in the case of an individual, his present Christian name and surname, any
former 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 him
and, in the case of a company subject to Section 186, the date of his birth
(b) In the case of a corporation, its corporate name and registered or principal office and
postal address
...

2
...

4
...


T E X T

They include:

202

C O M PA N Y L A W




owned subsidiary, or which are the wholly-owned subsidiaries either of the company
or of another company of which the company is the wholly-owned subsidiary; and for
the purposes of this proviso:
(i) “company” includes any body corporate incorporated in Kenya;
(ii) a body corporate shall be deemed to be the wholly-owned
subsidiary of another if it has no members except that other and
that other’s wholly-owned subsidiaries and its or their nominees
...

(4) The company shall, within the periods respectively mentioned in subsection

(5) deliver to the registrar for registration a return in the prescribed form containing the
particulars specified in the said register and a notification in the prescribed form of any
change among its directors or in its secretary or in any of the particulars contained in
the register, specifying the date of the change
...

(6) The register to be kept under this section shall during business hours (subject to such
reasonable restrictions as the company may by its articles or in general meeting impose, so that
not less than two hours in each day be allowed for inspection) be open to the inspection of any
member of the company without charge and of any other person on payment of two shillings, or
such less sum as the company may prescribe, for each inspection
...

(8) In the case of any such refusal, the court may by order compel an immediate inspection of
the register
...


Non-statutory books may be purchased and kept
...

Register of Important Documents: e
...
Power of Attorney, Probates and Letters of
Administration, etc
...
An annual
return is made up to the 14th day after the Annual General Meeting
...


T E X T

(ii)






(iii)


In the case of a peer or a person usually known by a British title different from
his surname, the name by which he was known previous to the adoption of or
succession to the title; or

S T U D Y




(i)



204

C O M PA N Y L A W

Contents of Annual Return
The Annual Return’s contents are specified in Part I of the Fifth Schedule and they
include:
•
•
•

S T U D Y

T E X T


1
...


The situation of the registered office of the company and the company’s registered
postal address
...

A summary, distinguishing between shares issued for cash and shares issued as fully
or partly paid up, and debentures specifying the following particulars:

Amount of share capital
Number of shares taken from the commencement of the company up to the date of the
return
3
...
The total amount of calls received
5
...
The total amount of the sums (if any) paid by way of commission in respect of any
shares or debentures
7
...

8
...
The total amount of shares forfeited
...
The total amount of shares for which share warrants are outstanding at the date of the
return and of share warrants issued and surrendered respectively since the date of the
last return, and the number of shares comprised in each warrant
...
Particulars of the total indebtedness of the company as at the date of this return in
respect of all mortgages and charges which are required to be registered with the
registrar under this Act
...


• Number of shares held by each of the existing members at the date of the return,

specifying shares transferred since the date of the last return by persons who are

still members and have ceased to be members respectively and the dates of
registration of the transfers
...


• Particulars of the directors and secretaries holding office as at the date of return
...


• If full particulars of members and their holdings have been given in one year, it will

only be necessary to give particulars of persons ceasing to be members since
the date of the last return and to shares transferred since that date or to changes

as compared with that date in the amount of stock held by a member
...


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:

•

There shall be annexed to the annual return, a statement giving particulars of indebtedness in
respect of all mortgages and charges
...

Section 128 provides that a copy of every balance sheet laid before the company in general
meeting during the period to which the return relates and certified as a true copy by a director
and the secretary shall be annexed to the annual return
...

Section 129 provides that the annual return required by Section 125 shall in the case of a private
company be accompanied by a certificate signed by both a director and the secretary to the effect
that the company has not, since the date of incorporation of the company issued any invitation
to the public to subscribe for any shares or debentures of the company; and where the annual
return discloses the fact that the number of members of the company exceeds 50, a certificate
so signed that the excess consists wholly of persons who are not to be included in reckoning the
number of 50
...

2
...

4
...

Alteration of Memorandum and Articles of Association: Registrar must be notified within
14 days
...

Increase of Share Capital: Return must be made within 30 days
...

In a case in which any register of holders of debentures of a company or part of any
such register is kept in Kenya, elsewhere than at the registered office, the address of
the place where it is kept and
All particulars of directors and secretaries occupying their respective positions at the
date of the return
...

6
...

Directors and Secretaries: Changes in the particulars of directors and secretaries must
be submitted to the Registrar within 14 days from the happening thereof
...
Failure to do so would entitle those
entitled to attend or any other interested person to challenge the legitimacy or validity of the
decisions made at such meetings
...

As Secretary of the Board, the Company Secretary should ensure that the agenda and the papers
containing the business to be discussed are dispatched well before the date of the meeting
...

The Secretary should also ensure that there is a quorum prior to the commencement of the
meeting
...
A quorum should be present throughout the duration of the meeting
...

In convening general meetings, it is also important to comply with requirements to serve notice
to those entitled to attend as prescribed by the Act and the company’s Memorandum and Articles
of Association
...
This requirement will not apply if it is so agreed
by all the members entitled to attend and vote at the meeting
...

The Act also provides that special notice (i
...
not less than 28 days) is required in the
following cases: 1
...

3
...

To appoint a director who is over 70
...


THE SECRETARY

207

Before the commencement of the meeting, the Secretary should ensure that there is a quorum
and this can be established by the number of proxies received and number of members present
at the meeting
...
The following resolutions are referred to in the Act:

•










1
...

3
...

5
...

To alter the Articles of Association
...

To reduce the share capital
...


Preparation for meetings
•
•
•
•
•
•







•

Fixing the date and time
...

Make logistical arrangements (catering, stewards, audio visuals, print signs for AGM,
design the stage, setting tables and name boards)
Plan the mailing list of invitations to the meeting
Draft the notice and the agenda for the meeting and agenda
Hold a Board meeting to authorise the convening of an AGM and approve the
following:
i
...

iii
...

v
...


Prepare schedule of proxies appointed and the number of votes held by them for use
...


T E X T

•

Ordinary resolutions: Used for all routine business
...

Extraordinary resolution: This is passed by a majority of not less than three-fourths of
members entitled to vote and actually voting (in person or by proxy)
...

Special resolution: This is defined in the Act as “a resolution passed by the same
majority 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
resolution has been given
...

b
...

d
...




Day of the AGM

S T U D Y

T E X T

•
•
•
•
•
•
•
•
•
•
•



How to assist the chairman conduct an effective meeting
...


Ensure registration process is working smoothly

•
•
•
•
•
•
•



Arranging “proposers” and “seconders” of resolutions
Finalise the chairman’s brief on the agenda and hold briefing session with him/her
...


Check whether a quorum is present and advise the chairman
Read the notice of the meeting
Ensure that the Auditors Report is read at the meeting
Assist the chairman in identifying “proposers” and “seconders” of motions/resolutions
during the meeting
Keep detailed notes of the proceedings to prepare the minutes
Ensure that the directors are present and seated in front at the AGM
For those directors standing for re-election, make available brief details of their ages,
relevant experience, dates of their first appointment and details of any committee they
have served on

THE SECRETARY



209

Enhancing the AGM

At least one of the top executives of the company should make an oral report to the AGM on
important areas of the company business
The company should provide an updated Income and Expenditure statement during the AGM to
show progress made during the current trading period
...




Preparations for the voting process

By show of hands – Needs a chief registrar to be appointed assisted by stewards
who will do the physical count of those in favour of a resolution and those against
...


•

By ballot at the AGM – Requires that sufficient voting cards be printed and made
available for distribution to each member present at a meeting
...
One card is issued to
each member to vote for a resolution, by marking it for or against
...
The Returning Officer will supervise the
process of votes casting and the counting by a team of at least four scrutinisers
...
It would be useful if at least one “proposer” is
invited to act as scrutiniser during the counting of votes
...
The Secretary should
be prepared for a recount if this is requested at the close of the exercise especially in
elections
...

The member should however send the vote in good time to reach the secretary by the
day that the meeting scheduled to take place
...

One must ensure that clear decisions are made and a specific person made accountable
for action within a specified time frame
...
For the sake of good order, separate minute books should be maintained of the
company’s board meetings and where there are Board Committees, each committee should
have a separate minute book as well
...
When a Secretary is taking minutes, it is important to consider
the following:
1
...


S T U D Y

T E X T

3
...


Minutes must give a precise account of the discussions at the meeting
...

Minutes must be concise and free from any ambiguity
...


In practice, minutes of the previous meetings are confirmed at the subsequent meeting and
signed by the chairperson as a true record of the deliberations
...

Article 113 provides that the directors shall provide for the safe custody of the seal, which shall
only be used by the authority of the directors (or of a committee of the directors authorised by the
directors on that behalf) and every instrument to which the seal shall be affixed shall be signed by
a director and shall be countersigned by the secretary or by a second director or by some other
person appointed by the directors for the purpose
...

A deed or other document to which an official seal is duly affixed shall bind the company as if it
had been sealed with the common seal of the company
...
It is most commonly used in documents where it is legally required to affix the

company seal, such as:
•
•
•

Section 36: A Power of Attorney to allow for execution of deeds on its behalf abroad
...

He holds a qualification approved by the Registration Board,
He is at the commencement of this Act, both a citizen of Kenya and a member of the
professional body known as the Institute of Chartered Secretaries and Administrators,
He is at the commencement of this Act both ordinarily resident in Kenya and a
member of the professional body known as the Institute of Chartered Secretaries and
Administrators,
He is at the commencement of this Act, registered as an accountant under Section
24(1) of the Accountants Act
He is qualified as an advocate of the High Court of Kenya
...

He is also an officer of the company, according to Section 2 of the Companies Act and
therefore liable to penalties in that capacity
...


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
...

On the instructions of the board, to issue notices of meetings to members and others
...

To conduct and record transfer of shares and conduct correspondence with shareholders
as regards calls, transfers, forfeiture, e
...
c
...
g
...

To make all the returns of the company, e
...
the annual returns, notice of special
resolutions, etc
...

For banks, he ensures compliance with Central Bank of Kenya statutory requirements
...


THE SECRETARY

213

They include:
Register of Members, Section 112
Register of Directors and Secretaries, Section 201
Register of Directors’ shareholdings, Debentures etc, Section 196
Register of Mortgages and Charges, Section 105
Minute Books of all proceedings of general meetings, and of all proceedings at the
meetings of its directors
...

vi
...
Register of Debenture holders, Section 88(1): This is only necessary for a company
that issues debentures
...


Powers of the secretary can also be described as




2
...
TRUE or FALSE?



3
...


Vote can be carried out in how many ways?

S T U D Y



T E X T

i
...

iii
...

v
...

2
...

4
...


S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

215

CHAPTER TEN

AUDITORS

S T U D Y

T E X T

216

C O M PA N Y L A W

217

CHAPTER TEN
AUDITORS
OBJECTIVES
By the end of this chapter, the student should be able to:
•
•
•

Explain the appointment and subsequent removal of Auditors from office
Explain the duties of an auditor
...
It then goes on to bring the familiar topic of an audit and a summarized version of some
of the concepts tested in Section 2 of CPA Part 1
...
An understanding of the appointment procedure of an auditor is
useful
...
Most companies conduct the examination
through independent audit firms like Deloitte and Touché
...


218

C O M PA N Y L A W

Fast forward:
Ø

An auditor is an officer of the company who performs an audit of the financial statements
of a company
An auditor owes a legal duty of care and the standard set is that of a competent auditor
in the circumstances
An auditor is appointed by the board of directors, registrar or members at a general
meeting

Ø
Ø





T E X T

APPOINTMENT

Section 159 (1) of the Companies Act provides that “every company shall at each annual general
meeting appoint an auditor or auditors to hold office from the conclusion of that, until the conclusion
of the subsequent annual general meeting”
...
1 QUALIFICATION, APPOINTMENT AND REMOVAL



REAPPOINTMENT

By Section 159 (2) a retiring auditor shall be deemed to be reappointed without any resolution
being passed unless:
a)
b)

A resolution has been passed at that meeting (i
...
annual general meeting) appointing
somebody instead of him or providing expressly that he shall not be appointed

c)



He is not qualified for reappointment

He has given the company notice in writing of his unwillingness to be reappointed
...


AUDITORS



219

APPOINTMENT BY DIRECTORS

The first auditors of a company may be appointed by the directors at any time before the first
annual general meeting, and auditors so appointed shall hold office until the conclusion of that
meeting
...
Where the
directors have appointed the first auditors, the company may “at a general meeting remove such
auditors and appoint in their place any other persons who have been nominated for appointment
by any member of the company
...




CASUAL VACANCIES

QUALIFICATIONS

By Section 161 (1) “A person or firm shall not be qualified for appointment as auditor of a company
unless he or, in the case of a firm, every partner in the firm is the holder of a practicing certificate
issued pursuant to Section 21 of the Accountants Act



PERSONS WHO CANNOT BE APPOINTED

Under Section 161 (2) none of the following persons shall be qualified for appointment as auditor
of a company
a)
b)
c)
d)



An officer or servant of the company
...

A body corporate
...


PENALTY FOR IMPROPER APPOINTMENT

Section 161 (4) provides that if any unqualified person is appointed as auditor, the person
appointed, the company and every officer in default, shall be liable to a fine not exceeding
Kshs
...


S T U D Y



T E X T

By Section 159 (6) “The directors may fill any casual vacancy in the office of auditor, but while
any such vacancy continues the surviving or continuing auditor or auditors, if any, may act”
...
2 DUTIES OF AUDITORS

The duties of auditors are explained in the following cases:
1
...
(1896) (CHANCERY)



For some years before a company was wound up, balance sheets signed by the auditors
were published by the directors to the shareholders in which the value of the company’s
stock-in-trade at the end of each year was grossly overstated
...
, one of the directors who was also manager, as
to the value of the stock-in-trade
...


i)
T E X T

In each case the amount of stock-in-trade at the end of the year was entered in the
balance sheet “as per manager’s certificate”
...


QUESTION:


Was it the duty of the auditors to test the accuracy of the manager’s certificate by a
comparison of the figures in the books, and were they liable for the dividends which
had been paid in consequence of the erroneous balance sheets?

HELD:


It being not part of the duty of the auditors to take stock, they were justified in
relying on the certificates of the manager, a person of acknowledged competence and
high reputation, and they were not bound to check his certificates in the absence of
anything to raise suspicion
...


NOTE:
i)

An auditor is not bound to be suspicious where there are no circumstances to arouse
suspicion; he is only bound to exercise a reasonable amount of care and skill
...


AUDITORS



221

The object of the section is to facilitate the recovery by the liquidator of assets of a
company improperly dealt with by its promoters, directors and other officers
...

LINDLEY, LJ stated:

...




The duty of an auditor generally was very carefully considered by this court in RE:
LONDON AND GENERAL BANK (1895) and I cannot usefully add anything to what
will be found there
...
But it was
also 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
...
These are the general
principles which have to be applied to cases of this description
...
To substitute the one expression for the other
may easily lead to serious error
...
Ignorance of the articles and
of exceptional duties imposed by them would not afford any legal justification

for not observing them
...
The complaints made against the
auditors in this particular case
...
There is no
charge of dishonesty on the part of the auditors
...
It is said, however, that they were
culpably careless
...
I confess I cannot see that their omission to check his (i
...
manager’s) returns
was a breach of their duty to the company
...
He must rely on other people for details of the stock in trade on hand
...
In
this case the auditors relied on the manager
...
He was trusted by every one who knew him
...
The auditors had no suspicion that he
was not to be trusted to give accurate information as to the stock-in-trade in hand, and
they trusted him accordingly in that matter
...
The stock journal showed the quantities, that is, the weight in pounds of the
cotton and yarn at the end of each year
...
If these

T E X T

1)
2)

S T U D Y




222

C O M PA N Y L A W

S T U D Y

T E X T

books had been compared by the auditors, they would have found that the quantity
of cotton and yarn in hand at the end of the year ought to be much less than the
quantity shown in the stock journal, and so much less that the value of the cotton and
yarn entered in the stock journal could not be right, or at all events was so abnormally
large as to excite suspicion and demand further inquiry
...
It is not sufficient to say that the frauds must

have been detected if the entries in the books had been put together in a way which
never occurred to any one before suspicion was aroused
...

I cannot think there was
...
His position was not similar to that of a cashier who was to account for the
cash which he receives, and whose own account of his receipts and payments could
not reasonably be taken by an auditor without further inquiry
...
(1) What is a misfeasance within the meaning of Section
324(1)?


Have the auditors in the circumstances of this case committed a misfeasance? It has
been held that an auditor is an officer within the meaning of the Section:- In RE LONDON

AND GENERAL BANK
...
The learned judge in the court below held that misfeasance covered any
misconduct by an officer of the company as such for which such officer might have been


sued apart from the section
...
It would cover any act of
negligence - any actionable wrong by an officer of a company which did not involve any

misapplication of the assets of the company
...
It

doubtless covers any breach of duty by an officer of the company in his capacity of officer


resulting in any improper misapplication of the assets or property of the company
...
What
is reasonable skill, care and caution must depend on the particular circumstances of
each case
...
He
is a watchdog, but not a blood bound
...
He is entitled to assume that

they are honest, and so rely upon their representations, provided, he takes reasonable
care
...
It is not the duty of an auditor to take stock; he is not a stock expert; there
are many matters in respect of which he must rely on the honesty and accuracy of
others
...
The duties of auditors
must not be rendered too onerous
...
I should be sorry to see the liability of auditors extended any
further than in RE LONDON AND GENERAL BANK
...
So to hold would make the position of an auditor intolerable
...
The words of the section are “any misfeasance or breach of trust in relation
to the company
...
it does
not mean mere non-feasance: RE WEDGWOOD COAL AND IRON CO
...
”



An auditor represented a confidential report to the directors calling their attention to the
insufficiency of the securities in which the capital of the company was invested, and the
difficulty of realising them, but in his report to the shareholders merely stated that the
value of the assets was dependent on realization, and in the result the shareholders
were deceived as to the condition of the company and a dividend was declared out of
capital and not out of income
...
3s)
...
it is the duty of the directors, and not of the auditors, to recommend
to the shareholders the amounts to be appropriated for dividends and it is the duty of
the directors to have proper accounts kept, so as to show the true state and condition
of the company
...
It is impossible to read the section of the Companies
Act without being struck with the importance of the enactment that the auditors are to
be appointed by the shareholders, and are to report to them directly, and not to or
through the directors
...
It evidently is to secure
to the shareholders independent and reliable information respecting the true financial
position of the company at the time of the audit
...
An auditor has
nothing to do with the prudence or imprudence of making loans with or without security
...
It is nothing to him whether dividends are properly
or improperly declared, provided he discharges his own duty to the shareholders
...
But then comes the question,
how is he to ascertain that position? The answer is, by examining the books of the

T E X T

2
...
But he does not discharge his duty by doing this without inquiry and without
taking any trouble to see that the books themselves show the company’s true position
...
Unless he does this, his
audit would be worse than idle farce
...
But his first duty is to examine the books, not merely for the
purposes of ascertaining what they do show, but also for the purposes of satisfying
himself that they show the true financial position of the company
...
He is not an insurer; he does not guarantee that the books do correctly
show the true position of the company’s affairs; he does not even guarantee that his
balance sheet is accurate according to the books of the company
...

His obligation is not as onerous as this
...
i
...
he must not certify
what he does not believe to be true, and he must take reasonable care and skill before
he believes that what he certifies is true
...




Where there is nothing to excite suspicion, very little inquiry will be reasonably sufficient,
and in practice I believe businessmen select a few cases at haphazard, see that they
are right, and assume that others like them are correct also
...

It is satisfactory to find that the legal standard of duty is not too high for business
purposes, and is recognised as correct by businessmen
...

Information and means of information are by no means equivalent terms
...
an auditor who gives shareholders means of information
instead of information respecting a company’s financial position does so at his peril and
runs the very serious risk of being held judicially to have failed to discharge his duty
...
Theo bald did fail to discharge his duty to
the shareholders in certifying and laying before them the balance sheet
...
It is a mere truism to say that the value of loans and
securities depends on their realization
...
But, as already stated, the duty of an auditor might infer from an
unusual statement that something was seriously wrong, it by no means follows that
ordinary people would have their suspicion aroused by a similar statement, if, as in this
case, its language expresses no more than any ordinary person would infer without
...
But they were, nevertheless, entirely misleading,

AUDITORS

225

and misrepresented the real position of the company
...
Theo Bald failed to discharge his duty to the shareholders
...
The
fact, however, remains, and cannot be got over, that the balance sheet and certificate
of February 1892 did not show the true position of the company at the end of 1891and
that this was owing to the omission by the auditor to lay before the shareholders the
material information, which he had obtained in the course of his employment as auditor
of the company and to which he called the attention of the directors
...
”



The words “as shown by the books of the company” seem to me to be introduced
to relieve the auditors from any responsibility as to affairs of the company kept out of
the books and concealed from them, but not to confine it to a mere statement of the
correspondence of the balance sheet with entries in the books
...
”




3
...
(LONDON) LTD
...
The reports annexed to these balance sheets were
signed by the auditors
...
The directors never called a general meeting
to consider theses balance sheets and reports
...
”



BENNET, J:



“
...
The Articles of Association cannot absolve the auditors from any
obligation imposed upon them by the statute
...


S T U D Y



226

C O M PA N Y L A W

imposed on them
...
I do not think it
is possible to hold that the words “the members”
...
It
cannot be that the auditors are to be at the expense and trouble not merely of sending
their report through the post but of delivering a copy to every member
...

if the report is to be made to the members in general meeting, then it would not be
right, I think, to hold that the duty of the auditors is to make that report themselves to
the members in general meeting unless they can themselves call a general meeting or
can compel someone else to call 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
...


S T U D Y

T E X T





In my judgment, the duty of the auditors, after having affixed their signatures to
the reports annexed to a balance sheet, is confined to forwarding that report to the
secretary 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 duty of the auditors is discharged by sending the report
to the secretary of the company
...


An auditor may be appointed by the registrar or by the directors

Persons who cannot qualify for appointment as auditors are:
-
-
-

An officer or servant of the company
A person who is a partner, employee or servant of an officer of the company
A person disqualified to act as an auditor of the subsidiary of the holding company

The main duty of an auditor is to examine the accounts for a financial year and to make a report
on those accounts
...


Who may appoint an auditor?



3
...
TRUE or FALSE

T E X T

1
...

2
...




ANSWERS TO QUIZ
To examine the accounts for a financial year and to make a report on those accounts
Director, Registrar and the AGM
TRUE

SAMPLE OF EXAMINATION QUESTIONS

QUESTION ONE

S T U D Y

T E X T

Explain the role of public company auditors paying particular regard to their appointment and
removal
(20 marks)

QUESTION TWO
State and then explain with reference to case law the duties of an Auditor of a company
...

(4 marks)

Kindly refer to the following sittings: - 07/00; 12/99

T E X T

PART D
S T U D Y

229

S T U D Y

T E X T

230

C O M PA N Y L A W

231

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

CHAPTER ELEVEN

COMPANY ACCOUNTS,
AUDIT AND INSPECTION

S T U D Y

T E X T

232

C O M PA N Y L A W

COMPANY ACCOUNTS, AUDIT AND INSPECTION

233

CHAPTER ELEVEN
COMPANY ACCOUNTS, AUDIT AND INSPECTION
OBJECTIVES
At the end of this chapter, the student should be able to:
1
...

3
...

2
...


Balance sheet - This is an account that shows the financial position of a company
Profit and Loss account - This gives the income that is generated by a business and
the expenses incurred by a business
Group accounts - These are accounts of the holding company and its subsidiaries

EXAM CONTEXT
This chapter has been split from the original topic on directors, auditors and secretaries in the old
syllabus
...

However, a sample of exam questions from other sources is provided at the end of the chapter
...
Its application is inevitable in the numerous companies in
existence today
...


S T U D Y

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
...
1 BOOKS OF ACCOUNT

By Section 147 (1), every company shall cause to be kept in the English language “proper books
of account” with respect to:
(a) All sums of money received and expended by the company and the matters in respect
of which the receipt and expenditure takes place
...

(c) The assets and liabilities of the company
...


S T U D Y

Section 147(2) provides that “proper books of account” shall be deemed not to have been kept
with respect to the matters aforesaid if there are not kept such books as are necessary to give a
true and fair view of the state of the company’s affairs and to explain its transactions
...


The amount charged to revenue by way of provision for depreciation, renewals or
depreciation of fixed assets
...
The amount of the interest on the company’s debentures and other fixed loans
...
The amount of the charge for income tax and any other taxation on profits to date
4
...
The amount, if material, set aside or proposed to be set aside to reserves
...
The amount of income from investments, distinguishing between trade investments and
other investments
...
The aggregate amount of the dividends paid and proposed
...
If the remuneration of the auditors is not fixed in general meeting, the amount shall be
shown under a separate heading
...
The following matters shall be stated by way of notes, if not otherwise shown:
10
...

11
...

12
...


COMPANY ACCOUNTS, AUDIT AND INSPECTION

235

13
...

14
...





11
...


•
•

It Is Impracticable, or would he of moral value to the members of the company, in view of
the Insignificant amounts Involved, or would involve expense or delay out of proportion
to the value to members of the company
The result would be misleading the result would be harmful to the business of the
company or any of its subsidiaries
The business of the holding company and that of the subsidiary are so different that
they cannot reasonably be treated as a single undertaking
...


By Section l50 (2)(a), a company is exempt from the obligation to prepare group accounts if it is
a wholly owned subsidiary of another body corporate incorporated in Kenya
...


S T U D Y

•

T E X T

By Section l50 (2)(b) group accounts need not deal with a subsidiary of the company if the
company’s directors are of the opinion that:

236

C O M PA N Y L A W

However, the group accounts need not be prepared in this form if the directors are of the view
that they could be prepared in another form which would be readily appreciated by the company's
members (Section l51 (l))
...

Section 153(1) further provides that the group accounts, if prepared as consolidated accounts,
shall comply with the requirements of the Sixth Schedule to the Act, so far as applicable thereto
and if not so prepared, shall give the same or equivalent information
...

By Section 153(2), the registrar is empowered to postpone the submission of a company’s
accounts to a general meeting from one calendar year to the next for purposes of enabling the
company’s financial year to end with that of the holding company
...
However, if the Minister is satisfied that any licensed
bank or any scheduled bank is not complying with the requirements of any such enactment of its
country of incorporation, or if there are no such requirements in such enactment, he may order
that such bank shall comply with the requirements of Part I of the Sixth Schedule
...
3 DIRECTOR’S REPORT

As stated earlier, Section 157 requires that the directors’ report must be attached to the balance
sheet of the company
...

2
...

4
...

6
...

Proposed dividend (Section 157(1))
Proposed transfers to reserves (Section 157(1))
Names of directors at any time in the period concerned
...

Significant changes in the fixed assets of the company or of any subsidiaries during the

COMPANY ACCOUNTS, AUDIT AND INSPECTION

7
...


237

period
...


Section 157(2) provides that the said directors’ report shall deal, so far as is material for the
appreciation of the state of the company’s affairs by its members and will not in the directors’
opinion be harmful to the business of the company or of any of its subsidiaries
...
In preparing those financial statements the directors are
required to:



11
...


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
...


3
...

Whether, in their opinion, proper books of account have been kept by the company, so
far as appears from their examination of those books, and proper returns adequate for
the purposes of their audit have been received from branches not visited by them
...


S T U D Y

State whether applicable accounting standards have been followed and, if not, give
a statement of the reasons for any significant departure from standard accounting
practices
...

•
Indicate whether anything has come to their attention of the directors to indicate that
the company and its subsidiaries will not remain a going concern for at least the next 12
months
...


T E X T

•

238

C O M PA N Y L A W

4
...
In the case of the balance sheet, of the state of the company’s affairs as at the end of
its financial year
6
...
Or as the case may be, give a true and fair view thereof subject to the non-disclosure
of any matters (to be indicated in the report) which by virtue of Part III of the Sixth
Schedule are not required to be disclosed
...
In the case of a holding company submitting group accounts whether in their opinion,
the group accounts have been properly prepared in accordance with the provisions of
this Act so as to give a true and fair view of the state of affairs and profit or loss of the
company and its subsidiaries dealt with thereby, so far as concerns members of the
company, or, as the case may be, so as to give a true and fair view thereof
...
(Section 162(2))
...
5 INVESTIGATION BY THE REGISTRAR

Where the registrar has reasonable cause to believe that the provisions of this Act are not being
complied with, or where, on perusal of any document which a company is required to submit to
him under the provisions of this Act, he is of the opinion that the document does not disclose a full
and fair statement of the matters to which it purports to relate, he may, by a written order, call on
the company concerned to produce all or any of the books of the company or to furnish in writing
such information or explanation as he may specify in his order
...

On receipt of an order it shall be the duty of all persons who, are or have been, officers of the
company to produce such books or to furnish such information or explanation so far as lies within
their power
...

If after examination of such books or consideration of such information or explanation the registrar
is of the opinion that an unsatisfactory state of affairs is disclosed or that a full and fair statement
has not been disclosed, the registrar shall report the circumstances of the case in writing to the
court
...
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
more competent inspectors to investigate and report on the membership of any company and
otherwise with respect to the company for the purpose of determining the true persons who are
or have been financially interested in the success or failure (real or apparent) of the company
or able to control or materially to influence the policy of the company
...

Subject to the terms of an inspector’s appointment, his powers shall extend to the investigation
of any circumstances suggesting the existence of an arrangement or understanding which,
though not legally binding, is or was observed or likely to be observed in practice and which is
relevant to the purposes of his investigation
...

The expenses of any investigation under subsection (1) shall be defrayed by the registrar
...


S T U D Y

Where an application for an investigation under this section with respect to particular shares
or debentures of a company is made to the registrar by members of the company and the
number of applicants or the amount of shares held by them is not less than that required for
an application for the appointment of an inspector, the registrar shall appoint an inspector
to conduct the investigation unless he is satisfied that the application is vexatious, and the
inspector’s appointment shall not exclude from the scope of his investigation any matter which
the application seeks to have included therein, except in so far as the registrar is satisfied that it
is unreasonable for that matter to be investigated:

T E X T

The appointment of an inspector under this section may define the scope of his investigation,
whether as respects the matter or the period to which it is to extend or otherwise and in
particular may limit the investigation to matters connected with particular shares or debentures
...
7 INSPECTOR’S REPORT

An inspector may, and, if so directed by the court, shall, make interim reports to the court, and on
the conclusion of the investigation shall make a final report to the court
...
The Court shall:

S T U D Y

T E X T

(a) Forward a copy of any report made by an inspector to the company and to the
registrar
(b) If the court thinks fit, forward a copy thereof on request and on payment of the prescribed
fee to any other person who is a member of the company or of any other body corporate
dealt with in the report by virtue of Section 167, or whose interests as a creditor of
the company or any such other body corporate as aforesaid appear to the court to be
affected;
(c) Where any inspector is appointed under Section 165, furnish, at the request of the
applicants for the investigation a copy to them and may also cause the report to be
printed and published




CHAPTER SUMMARY

By Section 147 (1), every company shall cause to be kept in the English language “proper books
of account” There shall be shown:
1
...

2
...

3
...
The amounts respectively provided for redemption of share capital and loans
5
...

6
...

7
...

8
...

9
...

10
...

11
...

12
...


COMPANY ACCOUNTS, AUDIT AND INSPECTION

241

13
...

14
...


By Section l50 (2)(b) group accounts need not deal with a subsidiary of the company if
the company’s directors are of the opinion that:

•
It is impracticable, or would be of no real value to the members of the company,


in view of the insignificant amounts involved, or would involve expense or delay


out of proportion to the value to members of the company; or

•
The result would be misleading

•
The result would be harmful to the business of the company or any of its


subsidiaries

•
The business of the holding company and that of the subsidiary are so different


that they cannot reasonably be treated as a single undertaking
...

3
...

5
...

7
...


A fair review of the development of the business of the company and its subsidiaries
during the financial year and of their position at the end of it
...

Principal activities of the company and of its subsidiaries during the period and any
significant changes therein
...

An indication of the difference between the book and market values of land and buildings
of the company or any of its subsidiaries
Interests in shares or debentures of group companies as recorded in the register of
directors’ interests
...
The auditors should state whether they have obtained all the information and explanations
which to best of their knowledge and belief were necessary for the purposes of their
audit
...
Whether, in their opinion, proper books of account have been kept by the company, so
far as appears from their examination of those books, and proper returns adequate for
the purposes of their audit have been received from branches not visited by them
...
Whether the company’s balance sheet and (unless it is framed as a consolidated Profit
and Loss account) Profit and Loss account dealt with by the report are in agreement
with the books of account and returns
...
Whether, in the auditors’ opinion and to the best of their information and according to
the explanations given to them, the said accounts give the information required by the

S T U D Y

1
...

14
...


16
...

In the case of a holding company submitting group accounts whether in their opinion,
the group accounts have been properly prepared in accordance with the provisions of
this Act so as to give a true and fair view of the state of affairs and profit or loss of the
company and its subsidiaries dealt with thereby, so far as concerns members of the
company, or, as the case may be, so as to give a true and fair view thereof
...
(Section 162 (2))
...


Consolidated accounts comprise of…



3
...
TRUE or FALSE?



4
...


S T U D Y





244

C O M PA N Y L A W









ANSWERS TO QUIZ
1
...

3
...


Proper books of account
...

Auditor’s and Director’s report
...

Explain the appointment and powers of the liquidator
...

Explain the appointment of liquidators, their duties and release from their duties
...
There is also need to understand the
powers of the liquidator
...
In other words the procedure that
results in a company, ceasing to exist
...
It then looks at liquidators, their appointment, duties and
release from their duties
...
Many know the procedure involved to register a company but
few are aware of the procedures taken to dissolve
...
This chapter shows what happens in the
industry behind closed doors
...

Ø They are mainly compulsory, voluntary (members and creditors) and subject to the
court’s supervision
...
1 WINDING-UP




METHOD OF DISSOLUTION
(a) A company is dissolved, i
...
ceases to exist, when its name is removed from the register
...
e
...
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
...

(b) Liquidation begins with a formal decision to liquidate
...
Creditors have a decisive
part in the liquidation of an insolvent company since the remaining assets belong to
them
...
A company
may, however, be obliged to wind up by a compulsory liquidation ordered by the court
on a petition usually presented by a creditor or a member
...
Although liquidation
may begin in different ways and there are differences of procedure, the working method
is much the same in every type of liquidation and the same legal problems can arise
...
The legal problems, with which
the liquidator may be concerned, are considered in the next following session
...
The petition
will specify one of the seven grounds for compulsory winding up and be presented (usually)
either by a creditor or by a member (called a “contributory” in the context of liquidation)
...

(c) The company has not commenced its business within a year from its incorporation or
has suspended its business for a whole year
...

(e) The number of members of the company has reduced, in the case of a private company,
below two, or, in the case of a public company, below seven
...

(f)

In the case of a company incorporated outside Kenya and carrying on business in
Kenya, liquidation proceedings have been commenced in respect of it in the country of
its incorporation or territory in which it has established a place of business
...




S T U D Y

(a) The company has by, special resolution, resolved that it should be wound up by the
court

T E X T

The nine standard grounds for compulsory winding up are listed in Section 219 as
follows:

250

C O M PA N Y L A W



WHO MAY PETITION FOR WINDING UP?


Under Section 221 of the Act, a winding up petition may be presented to court by any of the
following persons:
1
...


3
...


5
...


7
...
Such petitions are not common
Creditors: - A creditor may petition for the winding up of a company on the ground
that it’s unable to pay its debts
...

Contributory: Under Section 214 of the Act, contributory means every person liable to
contribute to the assets of the company in the event of its being wound up
...

Member/shareholder other than a contributory: This is a petition by a fully paid up
member
...
And for continuation of a voluntary winding up or a winding up subject to the
supervision of the court as a compulsory winding up
...


COMPANY UNABLE TO PAY ITS DEBTS

By Section 220, a creditor who petitions on grounds of the company’s insolvency may rely on any
of the following situations to show (as he is required to do) that the company is unable to pay its
debts:
(a) A creditor (or creditors) to whom the company owes more than Kshs
...
If, however, the company denies on apparently reasonable grounds that
it owes the money, the court will dismiss the petition and leave the creditor to establish
his claim by taking legal proceedings for debt
...
e
...

(c) A creditor satisfies the court that taking account of the contingent and prospective
liabilities of the company it is unable to pay its debts
...
But this is the residual category and
any suitable evidence of actual or prospective insolvency may be adduced
...
1, 000 or more)
...
e
...


The petitioner need not be the original creditor but may have acquired the debt, e
...
a debt
collection agency may petition if the debt then owes to it
...
If so, the court is likely
to decide in favour of those to whom the larger amount is owing
...
(1979)

Held:

The court might consider the reasons for the petition and the opposition to it and was not bound
to accede to the wishes of the larger creditor
...


WINDING UP ON
“THE JUST AND EQUITABLE GROUND”
Unlike the other five grounds, this one is widely interpreted and it is no objection that the petition

is based on facts unlike the other grounds, (i
...
the ejusdem generis rule does not apply) or
facts without precedent (as regards the just and equitable ground itself
...
But something more than dissatisfaction is needed to make it just and equitable that
the company should be wound up
...
e
...
The holding company, as a creditor, later petitioned for the compulsory
winding up of the subsidiary in order to oust the original liquidator
...


252

C O M PA N Y L A W

Case: RE GERMAN DATE COFFEE CO
...
The German government
refused to grant a patent
...
A contributory petition for compulsory winding up
...




But if there are two or more alternative objects (in the proper sense objects rather
than ancillary powers) inability to achieve one of them does not justify winding up: (Re
Kitson & Co
...


S T U D Y

T E X T



Cases:

(i) RE YENIDJE TOBACCO CO
...
They quarrelled bitterly and one sued the other for fraud
...
The defendant in the fraud action
petitioned for compulsory winding up, which was opposed by the other member
...


c)

The members or directors are associated in the company on the basis of certain
understandings but one (or more) exercises his legal rights against another in breach
of those understandings with results which are unfair
...
WESTBOURNE GALLERIES (1973)



E and N carried on business together for 25 years, originally as partners and for the last
10 years through a company in which each originally had 500 shares
...
When N’s son joined the business, he became a third director and E and N each
transferred 100 shares to N’s son
...
E sued to have the company wound up
...
The petitioner must rove that there has
been a consistent course of conduct on the art of the management, which justifies the

winding up
...
It was
so held in Re London and County Coal company limited

T E X T

e)


Oppression on the minority
It’s just and equitable to wind up a company if its affairs are being carried on in a
manner oppressive to the minority
...
N and his son were within their legal rights in
removing E from his directorship but the past relationship made it “unjust or inequitable”
to insist on legal rights and the court could intervene on equitable principles to order
liquidation
...

d)


f)


Expulsion or Exclusion from management
If a member is unfairly excluded from participating in the affairs of the company as a
director, it becomes just and equitable to wind up the company as was the case in Re
Westbourne Galleries limited
...
At the
hearing, a creditor whose debt is unpaid is likely to secure an order for compulsory liquidation (as
his remedy of last resort) unless the company (paragraph 8) or opposing creditors (paragraph 9)
persuade the court to dismiss the petition
...
The court will not order compulsory liquidation on a member’s petition if he
has nothing to gain from it
...

(b) He has been a registered shareholder for at least six of the 18 months up to the date of
his petition
...

A personal representative of a deceased shareholder may petition but he must first obtain a grant
of probate etc
...
The
trustee in bankruptcy of a bankrupt contributory may also petition on his behalf: Companies Act,
Section
...


S T U D Y

T E X T



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 to
bankruptcy of individuals) becomes provisional liquidator; Section 236
(b) The liquidation is deemed to have begun at the time (possibly several months earlier)
when the petition was first presented
...

(c) Any disposition of the company’s property and transfer of its shares subsequent to the
commencement of liquidation is void unless the court orders otherwise, Section 224
...
Any seizure of the company’s assets
after commencement of liquidation is void: Sections 225 and 228
...
The provisional liquidator
assumes the powers of management previously held by the directors
...
The business of the company may
continue but it is the liquidator’s duty to continue it with a view only to realisation, e
...
by sale as
a going concern
...
Liquidation may invalidate charges and other
previous transactions
...
The statement shows the assets and liabilities of the company and
includes a list of creditors with particulars of any security which creditors may hold: Companies
Act, Section 232
...
These may be (at the Official Receiver’s
discretion unless the court has given directions):
(a) Present or past officers of the company, i
...
its management,
(b) Employees who are or who have been in the service of the company within the previous
year if it is considered that they can provide the information required,

The Official Receiver also calls separate meetings of creditors and of contributories within one
month of the order for liquidation: Section 236
...
The Official Receiver reports to the court,
which may appoint a permanent liquidator and a committee of inspection
...
A
liquidator must be an individual and may not be an undischarged bankrupt
...
When the liquidator completes his task, he reports to
the court, which examines his accounts, and makes an order for dissolution of the company
...


If while the liquidation is in progress the liquidator decides to call meetings of contributories or
creditors, he may arrange to do so under powers vested in the court: Section 336
...
If he does so, this may lead on to the public examination in open
court of those believed to be implicated (a much-feared sanction)
...


256

C O M PA N Y L A W

(a) If the articles provide for liquidation at the end of a specified period or on the happening
of an event, e
...
the completion of the transaction for which the company was formed,
an ordinary resolution (referring to the articles) suffices; or
(b) A company may, by special resolution (giving no reason), resolve to wind up
voluntarily
The winding up commences on the passing of the resolution
...






DECLARATION OF SOLVENCY

S T U D Y

T E X T

A voluntary winding up is a members’ voluntary winding up only if the directors make and
deliver to the registrar a declaration of solvency: Section 276 (4)
...


The declaration is made by all the directors or, if there are more than two directors, by a majority
of them
...


The declaration must be:
(a) Made within the 30 days immediately preceding the date of the passing of the resolution
for winding up, and
(b) Delivered to the registrar for registration before that date: Section 276 (2)
If the liquidator later concludes that the company will be unable to pay its debts he shall further
notify the registrar accordingly and call a meeting of creditors and lay before them a statement of
assets and liabilities: Section 281(1)

It is a criminal offence punishable by fine or imprisonment for a director to make a declaration of
solvency without having reasonable grounds for it, i
...
if the company proves to be insolvent, he
will have to justify his previous declaration or be punished
...
There is no committee of inspection (on which creditors would
be represented)
...

(b) When the liquidation is complete, the liquidator calls a meeting to lay before it his final
accounts
...

To commence a creditors’ voluntary winding up the directors convene a general meeting of
member to pass a special resolution
...
286 (2)
...

(b) To appoint a liquidator
(c) To nominate representatives to be members of the committee of inspection
...
One of the directors presides at the creditors’ meeting and lays
before it a full statement of the company’s affairs and a list of creditors with the amounts owing
to them
...
If the creditors nominate a different person to be
liquidator, their choice prevails over the nomination by the members (subject to a right of appeal
to the court)
...
(This device was first developed in Re Centrebind (1966) and is colloquially called
“centre binding”)
...


S T U D Y



T E X T

After holding the final meeting, the liquidator sends a copy of his accounts to the registrar who
dissolves the company three months later by removing its name from the register: Section
283(4)
...
In a members’ voluntary winding up he is
appointed by the members;
(b) In a creditors’ voluntary winding up, the liquidator must obtain the approval (usually) of
the committee of inspection for the exercise of certain statutory powers
...
There
is no committee in a members’ voluntary winding up
...
This
is reasonable since it is assumed (in the absence of a statutory declaration of solvency) that the
company is unable to pay its debts in full
...


Meetings are held in the same sequence as in a members’ voluntary winding up but the meetings of
creditors are called at the same intervals as the meetings of members and for similar purposes
...

It is not retrospective,
(b) The Official Receiver does not become provisional liquidator
...
But the liquidator in a voluntary winding up
has a general right to apply to the court to make any order which the court can make
in a compulsory liquidation
...
The employees are not automatically dismissed by

CORPORATE INSOLVENCY

259

commencement of voluntary liquidation
...




WINDING UP SUBJECT TO THE SUPERVISION OF



THE COURT







LIQUIDATORS

APPOINTMENT AND DUTIES
a) The official receiver shall by virtue of his office become the provisional liquidator and
shall continue to act as such until he or another person becomes liquidator and is
capable of acting as such
...

Provided that where the court has dispensed with the settlement of a list of contributories it
shall not be necessary for the official receiver to summon a meeting of contributories
...


S T U D Y

Under Section 306 of the Act, the court may while making the continuation order or by a subsequent
order, appoint an additional liquidator
...


T E X T

A hybrid category of winding up created by Section 304 of the Act
...


260

C O M PA N Y L A W

(d) In a case where a liquidator is not appointed by the court, the official receiver shall be
the liquidator of the company
...

(f) A liquidator shall be described, where a person other than the official receiver is
liquidator, by the style of “the liquidator”, and, where the official receiver is liquidator,
by the style of “the official receiver and liquidator”, of the particular company in respect
of which he is appointed and not by his individual name
...
He may always apply to the court for an order to resolve any
unusual difficulty
...


S T U D Y

(b) To carry on the business of the company so far as may be necessary for the beneficial
winding up thereof
...

(d) To pay any classes of creditors in full
...

(a) To compromise calls: Section 241 (1)
...

(2) Where the release of a liquidator is withheld, the court may, on the application of any creditor or
contributory or person interested, make such order as it thinks just, charging the liquidator with
the consequences of any act or default which he may have done or made contrary to his duty
...

(4) Where the liquidator has not previously resigned or been removed, his release shall
operate as a removal of him from his office
...
It usually comprises such number of representatives of members and of creditors
as may be agreed on by the meeting of creditors and contributors
...
The
committee meets once a month unless otherwise agreed and may be summoned at any time by
the liquidator or by a member of the committee: Section 249
...
Like the
liquidator himself, members of the committee are in a fiduciary position and may not secure
unauthorised personal advantages, e
...
by purchase of the company’s assets
...
Present and past members are therefore called
“contributories”
...
But if the company is limited
by shares and its issued shares are fully paid, the contributories have no liability to contribute
anything in normal circumstances
...

(b) If the company is limited by guarantee
...

As explained below the persons who are members at the time when liquidation commences are
primarily liable (when there is any liability)
...


If it is necessary to make calls on contributories, the liquidator draws up a list “A” of contributories
who were members at the commencement of the winding up and a list “B” of contributories who
were members within the year preceding the commencement of winding up
...

(b) He can only be required to contribute (within the limits stated in (a) above) in order to
pay those debts of the company incurred before he ceased to be a member which are
still owing
...






TRANSACTIONS ARISING IN LIQUIDATION

In collection in and realisation of assets in order to pay the company’s debts and then to distribute
any surplus to members the liquidator will have dealings with creditors, secured and unsecured,
with members and others
...
He has also to consider whether the charges on
the company’s assets on which secured creditors rely are still valid
...





ASSETS IN THE POSSESSION OF CREDITORS

If the creditor has seized assets in the course of executing a judgment for debt against the
company and at the commencement of the winding up or on receiving notice that it is about to
begin the creditor has not completed the process of recovering what is owed to him, the liquidator
may compel him to return the asset to the company
...
The rules are:
(a) He must obtain leave of the court
...

(ii) Shares
...

(iv) Other property which is difficult to sell because of the burdens attached to it
...

The liquidator must obviously require satisfactory evidence that a creditor’s claim is properly
admissible as a liability
...


If the company is solvent, every kind of debt which is legally enforceable may be admitted
...
But the injured party may be permitted
to bring an action against the company in tort so that his claim may be converted by the award of
damage into a liquidated sum so long as it is liquidated when the claimant comes into prove
...
But in a members’
voluntary winding up, the liquidator may with the consent of all contributories pay such a debt
...
e
...

(b) The company becomes liable again to pay a statute-barred debt (after six years) if it

S T U D Y

(d) Any person who suffers loss by the disclaimer becomes a creditor of the company for
the amount of his loss
...


T E X T

(c) The liquidator must disclaim within a period of 12 months (unless the court extends the
period)
...
Moreover, the other party may serve on the liquidator a notice
requiring him within 28 days, to state whether he intends to disclaim
...


264

C O M PA N Y L A W

issues to the creditor a written acknowledgement of its indebtedness
...
The liquidator must according to his judgment of the legal position
either
...

(b) Consider claiming compensation from the directors who made the unauthorised contract
on the grounds of their misfeasance under Section 323
...

(b) Value the security and prove for any balance
...

(c) Rely on his security and not prove at all; the liquidator may then redeem by payment in
full
...

A secured creditor who proves his debt must disclose his security and prove only for the balance
as an unsecured creditor
...
The liquidator
should consider whether the charge has become invalid by reason of the commencement of
liquidation (paragraph 10 below)
...
The sequence of
events may be reversed i
...
the liquidator causes a floating charge to crystallise and a receiver
is appointed after the liquidator has taken control
...


The liquidation itself may render a charge over the company’s assets void in any of the following
circumstances:

CORPORATE INSOLVENCY

265

(a) The charge was not registered within 42 days of creation as required by Section 96;
(b) The charge is a floating charge created within the period of 12 months before
commencement of liquidation (paragraph 24 below)
...


If the charge is void, the receiver’s powers and appointment lapse and he must account to the
liquidator for his transactions and the assets of the company still under his control
...
It is the duty of the liquidator to
ensure that debts are paid in their due order of priority
...
e
...
Unsecured creditors are paid out of the remaining assets, i
...
the aggregate
of:
(a) Any surplus value obtained by secured creditors in realising the assets, which are their
security and paid over to the liquidator
...

But two special claims have to be given their due priority, i
...

(a) Costs of winding up including the legal expenses and liquidator’s remuneration
...

The order of application of assets is, therefore, as follows:

(a) Secured creditors who have fixed charges are entitled to be paid out of their security so
far as it suffices
...
e
...

(c) Preferential unsecured debts (paragraph 15 below) are paid next, i
...
they rank before

T E X T

UNSECURED ORDINARY DEBTS

S T U D Y



266

C O M PA N Y L A W

floating charges in so far as there are no other assets available to pay preferential
debts
...

(d) Debts secured by floating charges come next in order
...

(f)

Deferred debts come last in order
...
e
...
The relevant date is defined as:



(i)


The date of the order for compulsory liquidation (or any earlier order for
appointment of a provisional liquidator)
...




If more than one year’s tax is outstanding, the Income Tax Department may select
whichever year yields the largest amount of corporation tax; in other cases it is the
latest year’s tax which is a preferential debt
...
e
...
4,000 owed to each individual employee, accrued holiday pay
and employer’s National Social Security Fund (NSSF) contributions
...

Loan creditors and landlords are subject to special rules in certain circumstances:
(a) If a person (usually a bank) lends money to the company to enable it to pay wages
which, if unpaid, would be preferential debts, he himself becomes a preferential creditor
in respect of that part of his loan, which is used to pay preferential wage debts
...
If he does not within six months before compulsory
liquidation commence, he must give up the proceeds if the liquidator requires them
for payment of preferential debts
...


CORPORATE INSOLVENCY



267

DEFERRED DEBTS

A debt owed to a member as member, i
...
an unpaid dividend, is a deferred debt paid only when
ordinary debts have been paid in full
...
Payments to employees made
after the company has ceased to carry on or has sold its business are not within its powers:





AVOIDANCE OF FLOATING CHARGES

Under Section 314, liquidation automatically renders void any floating charge created within the
period of 12 months before commencement of liquidation subject to the following exceptions:

(a) Valid if the company was solvent, at the time when the charge was created
...

(b) If the company was not solvent the floating charge is still valid as security for cash paid
to the company (with interest at six per cent per annum) after the charge was created
and in consideration of the loan
...
It is only the charge (as
security) not the debt itself which becomes void
...
Unless otherwise
stated, all shares rank equally
...


T E X T

The effect of liquidation is often to terminate the contracts of service of employees of the company
...


268

C O M PA N Y L A W

If the charge is created to secure a loan of new money, the rule is generously interpreted
...
The
money was lent but the charge was not created until afterwards
...


Held:
The charge was valid since the loan was made in consideration of the promise of
security
...




On the other hand, if money is lent after a floating charge is created but is used (as
was intended) to pay off an unsecured debt (of the same creditor) existing when the
charge was created, this will not be treated as a new loan and the charge will be void
(as security for the later loan)
...
e
...


S T U D Y

Case: RE YEOVIL GLOVE CO (1965)


At the time when the floating charge was created, the company had a bank overdraft
of about 68,000 pounds
...
At the commencement of liquidation
(within 12 months of creating the charge) the debt balance on the account was 67,000
pounds, i
...
almost the same as when the charge was created
...
The balance of 67,000
pounds owing at the commencement of liquidation was “new money” lent after the
charge was created (i
...
part of the 110,000 pounds drawn out) and so the charge was
a valid security for that loan
...


CORPORATE INSOLVENCY

269

(c) At a time when the company was insolvent, i
...
unable to pay its debts in full
...
Payment of one creditor with the intention
of preferring him to others is a common example of fraudulent preference (if the other
conditions are met)
...
They
arranged that the company should pay its trade receipts into the account but should
not pay its trade debts as they fell due with the result that the bank overdraft was paid
off
...


Held:



A payment made or charge created under threat of legal proceedings is not voluntary
and so it cannot be treated as fraudulent preference even though its purpose and effect
is to treat one creditor more favourable than the rest
...

However, it has recently been held that a payment will constitute a fraudulent preference
if the debtor, at the time of making it, knew that he could not pay his debts as they arose
and intended to pay one of his creditors in full ahead of the others
...
Two days later, the company ceased
trading and two days after that the proprietors notified the bank of the termination of
their personal guarantees of the company’s borrowing
...

When a transaction is void as a fraudulent preference any charge created is void and
any cash paid or property transferred by the company must be returned to the liquidator
...
g
...
The purpose of the fraudulent preference (as in the Kushler Case
above) is often to release a third party from his involvement in the company’s debt
...
When the lender has to return to the liquidator
the payment received he cannot require the guarantor to reinstate his security but the
latter continues to be (or if there is no previous personal guarantee by him becomes)
personally liable to the lender as a guarantor of the debt: Companies Act Section 313

T E X T

This was fraudulent preference and the bank must repay the sums received
...


It has been said that “if a company continues to carry on business and to incur debts at a time
when there is to the knowledge of the directors, no reasonable prospect of the creditors receiving
payment of those debts, it is, in general, a proper inference that the company is carrying on
business with intent to “defraud” (per Maugham J
...

But in another case, the same judge said that there must be evidence of “real dishonesty”
...


S T U D Y

T E X T

Various rules have been established to determine what is fraudulent trading:
(a) Only persons who take the decision to carry on the company’s business in this way or
play some active part are liable
...

Case: RE MAIDSTONE BUILDING PROVISIONS (1971)


The secretary of the company also acted as a financial adviser to the directors
...
Proceedings were brought
against the secretary for fraudulent trading
...
In so far as he had failed to provide information and advice which it
was his duty to give, he might have been negligent but that was not an issue in these
proceedings
...

Case: RE SARFLAX (1979)


The company owed money to trade creditors and also had outstanding against it a
large claim for breach of contract which it disputed (though the claimant had obtained
judgment in his favour in the Italian courts)
...
When the company went into liquidation, the liquidator
sought a declaration that the directors had carried on business with intent to defraud the
Italian creditor
...
(The
issue of possible fraudulent preference of the trade creditors was not raised)
...
If the liquidator does
not do this a creditor, might be able to obtain an order that those at fault must pay the
creditor direct: Re Cyone Distributors (1967)
...


The most obvious case of misfeasance is where a director or other officer of the company is
found to have misappropriated property of the company
...
His conduct may also be criminal misappropriation of property for which
he can be prosecuted
...
It is not, however, easy to establish that
there has been breach of a fiduciary duty such that an order should be made (on grounds of
misfeasance) for payment of compensation
...


In the context of misfeasance proceedings, an auditor is exceptionally an “officer” who can be
liable: he is not an “officer” in any other situation since he has no management functions
...


Case
...
g
...


S T U D Y

Under Section 324, misfeasance proceedings may be instituted against a director, promoter,
manager, liquidator or “officer” (including an auditor) of a company in liquidation either to recover
the company’s property from him or to claim compensation for the loss to the company caused
by his misfeasance
...
He is not
an officer of the company who can be liable for misfeasance
...
e
...




OTHER LEGAL PROCEDURES

The court may order the examination in private or public (i
...
open court) of an officer of a
company in liquidation or of any person known or suspected to have its property or information
about it in his possession
...


S T U D Y

T E X T

Concealment of information from a liquidator, falsification of company records and wrongful
disposal of property of a company in liquidation may give rise to criminal proceedings against the
person at fault
...
The court may, however, within the ensuing
two years order that dissolution be rescinded and the company restored to the register - usually
because some asset or liability previously overlooked has come to light: Companies Act, Section
338
...
e
...
If the debt
is paid, the receiver vacates office and the directors resume full control
...
His task is to take control of all the company’s
assets with a view of their realisation and the payment of all debts of the company
and distribution of any surplus to members
...


CORPORATE INSOLVENCY

273

There are a number of points of similarity:
(a) In a compulsory (but not a voluntary) liquidation the directors have to submit a statement
of affairs to the Official Receiver as provisional liquidator
...

(b) Accountants who specialise in insolvency may be appointed as liquidators or as receivers
(sometimes they combine these positions in the same company but professional opinion
in the U
...
has hardened against this position since there can be difficult conflicts of
interest to resolve between unsecured creditors and members on one side and secured
creditors on the other)
...
A receiver must rely on the few powers
given by the debenture under which he is appointed (or by the court)
...
A
liquidator has no such liability
...


Offences Antecedent to or in Course of Winding Up
Section 318(1) states that If any person, being a past or present officer of a company which at
the time of the commission of the alleged offence is being wound up, whether by or under the
supervision of the court or voluntarily, or is subsequently ordered to be wound up by the court or
subsequently passes a resolution for voluntary winding up:

(a) Does not to the best of his knowledge and belief fully and truly discover to the liquidator
all the property, movable and immovable of the company, and how and to whom and
for that consideration and when the company disposed of any part thereof, except such
part as has been disposed of in the ordinary way of the business of the company

S T U D Y

(d) Neither liquidator nor receiver usually has the assets of the business vested in his
legal ownership (though a liquidator may obtain a court order for assets to be vested in
him under Companies Act, Section 240 - but this is not common)
...


T E X T

(c) A receiver appointed under a floating charge is also a manager of the business (or a
manager is appointed to assist him)
...
The liquidator’s function is to sell the company’s assets on
the best terms he can get
...
)
can be heavy a liquidator may decide to carry on the business with a view to selling it
as a going concern
...

(d) Within 12 months before the commencement of the winding up or at any time thereafter
conceals any part of the property of the company to the value of Kshs
...

(e) Within 12 months next before the commencement of the winding up or at any time
thereafter fraudulently removes any part of the property of the company to the value of
Kshs 200 or upwards
...


S T U D Y

T E X T

(g) Knowing or believing that a false debt has been proved by any person under the winding
up, fails for the period of a month to inform the liquidator thereof
...

(i) Within twelve months next before the commencement of the winding up or at any time
thereafter, conceals, destroys, mutilates or falsifies, or is privy to the concealment,
destruction, mutilation or falsification of, any book or paper affecting or relating to the
property or affairs of the company
...

(k) Within 12 months next before the commencement of the winding up or at any time
thereafter 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
...

(m) Has within 12 months next before the commencement of the winding up or at any time
thereafter, by any false representation or other fraud, obtained any property for or on
behalf of the company on credit which the company does not subsequently pay for
...


CORPORATE INSOLVENCY

275

(o) Within 12 months next before the commencement of the winding up or at any time
thereafter pawns, pledges or disposes of any property of the company which has
been obtained on credit and has not been paid for, unless such pawning, pledging or
disposing is in the ordinary way of the business of the company
...

(q) Has within 12 months next before the commencement of the winding up been privy to
the carrying on of the business of the company knowing that the company was unable
to pay its debts
...


(2)










Where any person pawns, pledges or disposes of any property in circumstances
which amount to an offence under paragraph (O) of Subsection (1), every
person who takes in pawn or pledge or otherwise receives the property knowing
to be pawned, pledged or disposed of in such circumstances as aforesaid shall
be liable to be punished in the same way as if he had been convicted of an
offence under subsection (1) of Section 322 of the Penal Code
...


S T U D Y

(1)







T E X T

(r) Has been privy to the contracting by the company of any debt provable in the liquidation
without having at the time when the debt was contracted any reasonable or probable
ground of expectation (proof whereof shall lie on him) that the company would be able to
pay that debt, he shall, in the case of the offences mentioned respectively in paragraphs
(m), (n) and (o), be liable to imprisonment for a term not exceeding five years and in the case
of any other offence shall be liable to imprisonment for a term not exceeding three years:

276

C O M PA N Y L A W



SUMMARY OF CHAPTER

Winding up or dissolution is the dissolution of a company i
...
it ceases to exist
...

Members’ voluntary winding up of an insolvent company
...


S T U D Y

T E X T

Once winding up proceedings have been commenced:
•
•
•
•
•

Official receiver becomes provisional liquidator
...

Servants of the company are ipso facto dismissed
...

The company ceases to carry on business

The main difference between a members’ voluntary winding up and creditors winding up is that
a member’s winding up is characterised by a declaration of solvency but in a creditor’s voluntary
winding up there is no declaration of solvency

Powers of a liquidator:
•
•
•
•
•
•
•

To conduct legal proceedings in the name of and on behalf of the company
To carry on the business of the company for beneficial winding up
Appoint an advocate to assist him
To pay any class of creditors in full
To make any compromise with creditors
To comprise all calls
A liquidator is appointed by the court whereas a receiver is a representative of secured
creditors appointed by them
...
It is not retrospective as in a compulsory winding up
...
The employees are not automatically
dismissed by commencement of voluntary liquidation
...




CHAPTER QUIZ





1
...


A representative of secured creditors appointed by them is called



3
...
TRUE or FALSE?



4
...


Compulsory liquidation is also referred to as-----

S T U D Y

(c) In a compulsory winding up there is no automatic stay of legal proceedings against the
company nor are previous dispositions or seizure of its assets void
...
He would do so to prevent any creditor
obtaining an unfair advantage over other creditors;

T E X T

(b) In a voluntary winding up the Official Receiver does not become a provisional liquidator;
as in a compulsory winding up
...

2
...

4
...




Members or creditors
A receiver
TRUE
Statement of declaration
Winding up by the court

SAMPLE OF EXAMINATION QUESTIONS

QUESTION ONE

S T U D Y



In relation to corporate insolvency:
i)
Explain what is meant by a contributory
...
(5 marks)

Distinguish between fraudulent and wrongful trading
...
(10 marks)
Without the court sanction
...

Discuss the rights of share holders
...


KEY DEFINITIONS
•
•
•
•
•

Reconstruction- An alteration of the capital structure of a single company
Amalgamation - Is a transaction whereby two or more companies are combined in
some way in a united ownership
Merger- The uniting of two companies
Scheme of arrangement- Essentially, it is suitable for making a change in the rights of
shareholders or creditors of an existing and continuing company
Take over- The acquisition by one company of sufficient shares in another company

EXAM CONTEXT
As has been pointed out, this chapter has been split from the original chapter of corporate
insolvency
...
Nonetheless,
at the end of this chapter there is a sample of exam questions from different sources
...
The chapter recognizes the fact that liquidation is not always the solution
...
This chapter, therefore, looks at reconstruction, amalgamation and mergers and even
scheme of arrangements as alternatives
...
Many companies are opting for the alternatives that will be discussed in
this chapter
...




INTRODUCTION

Schemes involving reconstruction, amalgamation, take-overs, arrangements, and other forms of
reorganisation are carried out for the following reasons:

T E X T

To overcome the company’s financial difficulties
To make arrangements with creditors
To reorganise the company’s capital structure
To extend the company’s objects
...
A reconstruction may be an
alternative of the structure of a group of companies or an alteration of the capital structure of a
single company
...

2
...

4
...

“Merger”, on the other hand, means the uniting of two companies but, as this is possibly done
through an acquisition by one company of a controlling holding of shares in another
...

A merger (also called an amalgamation) is a transaction whereby two or more companies are
combined in some way in united ownership
...
A more complex type of merger entails
the transfer of a business (and the assets employed in it) from one company to another
...


A company may absorb a minority shareholding in its partly owned subsidiary in exchange for
cash or shares
...
g
...


ALTERNATIVES TO WINDING UP

283

In these transactions, it is first necessary to select the only available (or if more than one) the
most convenient method to effect the proposed change
...
The essential elements
of every method are that if a decisive majority of members or creditors can be obtained by the
correct procedure, the minority (if any) who dissent will be bound by the majority decision
...
Although a minority cannot frustrate the change by their opposition, they
are entitled to a fair deal
...
Essentially, it is suitable
for making a change in the rights of shareholders or creditors of an existing and continuing
company
...


It will be seen that methods (a) and (b) relate to specific types of transaction
...
The flexibility of a scheme of arrangement has led to its extended
use though there is some doubt whether it is correct to use it in a situation where company law
affords some other and more specific procedures
...
The considerations affecting the choice are explained
overleaf
...
The acquiring company may be a new company
formed for the purpose
...
It is a form of reconstruction
...


T E X T

Where one company offers to acquire the shares of another company and its offer is accepted by
holders of 90 per cent or more of the shares for which the offer is made the acquiring company
may compel the non-accepting minority to transfer their shares on the same terms
...
It is no objection that the acquiring company already owns (directly or through subsidiaries)
some shares of the other company
...


284

C O M PA N Y L A W



1
...


Application is made to the court (usually by the company itself) for an order that one
or more meetings of members and or of creditors (if the scheme will affect the rights
of creditors (if the scheme will affect the rights of creditors) shall be held
...
If the court is satisfied that the scheme is generally suitable
for consideration as a “scheme of arrangement” under Section 207, it will order that a
meeting of meetings be held to consider it
...
The court
merely looks at the outline of the scheme and if it seems suitable orders that meeting(s)
be held
...


A meeting or several meetings is or are held as the court has ordered
...



Requirement (ii) is imposed to safeguard a minority in numbers who have a larger
financial stake than the numerical majority following approval of the scheme at meeting(s)
where application is made to the court for an order to approve and implement the
scheme
...


A copy of the court order approving the scheme is delivered to the registrar and the
scheme then takes effect, i
...
, the changes are made automatically as soon as this is
done
...


A scheme of arrangement is very flexible since it may be used to effect any “compromise
or arrangement” with members or a class of members with creditors or a class of
creditors
...
But if there is
a specific procedure, such as a reduction of capital or a variation of class rights, which
can be used, the court would not permit the use of a scheme of arrangement to avoid
some safeguard of minority interests available under that specific procedure
...
Obviously if two or more companies
are involved or if one company has two classes of shares, e
...
preference and ordinary, or is
proposing a compromise with different classes of creditors, e
...
debenture holders and unsecured
trade creditors, it must ask the court to order that separate meetings be held of each group and
it must obtain the required majority approval at each meeting
...
If within say one class of shareholders there are groups whose interests in the proposed
scheme are clearly different, the court must be asked to order that separate meetings be called
of each group
...


The Greek bank opposed the approval of the scheme before the court on two grounds
...
MIT was Hambros indirectly; it was seeking to acquire the 47% of Hellenic, which
it did not (through MIT) already own
...

At such a meeting, the Greek bank (with 14% out of 47%) could have prevented approval by the
required three quarters majority
...
(The device of canceling the shares for cash and issuing new ones to Hambros was
to save the stamp duty payable on a straightforward transfer of the shares - an example of the
advantages of a scheme of arrangement
...
Under take-over bid rules, the required 90% acceptance
(from the independent shareholders) would not have been obtained since the Greek bank held
more than one-tenth of the outstanding 47% minority shareholdings
...
Hambros was to pay the compensation and
then receive the same number of shares in Hellenic
...
But a wholly owned subsidiary of Hambros (MIT) held 53% of the shares in
Hellenic and voted for the scheme
...
Its objections were that it wished to retain its
membership and also that the cash received for its shares would be subject to heavy capital
gains tax liability in Greece
...


286

C O M PA N Y L A W

When the scheme is before the court for final approval, a minority may object on any of the
various grounds indicated above i
...
that Section 207 procedure is inappropriate or has not been
correctly observed, or that approval has not been obtained in a proper way or that the court in its
discretion should reject the scheme since it would be unfair
...
t
...
in that company without winding up;
The continuation of any legal proceedings
...

Provision for dissentients
...


S T U D Y

T E X T

An official copy of the order must be delivered to the registrar
...
As
explained above, it has only to be an “arrangement or compromise” of some sort with
members or creditors
...
This is a
less stringent requirement than Section 210 imposes since Section 210 operates only
if holders of 90 per cent of all the shares for which the offer is made accept the offer
...
But if (as in the Hellenic & General Trust Case) the court concludes that
an identified minority has been denied the veto which Section 210 would have given it
is unlikely to give its approval under Section 207
...

(iii) The court order to implement the approved scheme under Section 209(1) often saves
substantial expense, which could otherwise be incurred if the arrangement were effected
in some other way
...




The disadvantage of a scheme of arrangement is that it requires the preparation of
elaborate documents and the observance of a strict procedure, including an initial and
final application to the court and the holding of meetings
...
Hence a
scheme of arrangement is only suitable for large companies where substantial values
or assets are affected
...


ALTERNATIVES TO WINDING UP



If a company, which is or is about to be in voluntary liquidation proposes to make a
composition with its creditors it has a choice between the following alternatives:

•
•

A scheme of arrangement under Section 207;
An arrangement sanctioned by three quarters (in number and in value) of the creditors
under Section 300
...

A compromise made by the liquidator in exercise of statutory powers under section 241
or Section 297(l)(a)
...

It is usual to proceed under Section 207 as there are technical difficulties over Section
300 procedure
...
g
...
15 in 1 pound to be accepted in full settlement
...
e
...


2
...

This form of reconstruction is often used when additional working capital is needed and other
means of raising it are not available
...

Reconstruction under this section is subject to several disadvantages and is little used
...

This procedure also applies to a company, which is proposed to be, or is in course of being
wound up voluntarily
...
The special feature of
a Section 280 reconstruction is that the business or property of Company P is transferred to
Company Q in exchange for shares of the latter company which are allotted direct or distributed
by the liquidator to members of Company P
...
A dissenting minority of members of Company P can also require to be paid in
cash
...
This is one of the drawbacks
...
But any member who did not vote in favour of the special resolution
(dissentient member) may in the ensuing seven days deliver to the registered office a notice
addressed to the liquidator requiring him either to pay that member the value of his interest in
cash or to abandon the proposed sale; Section 280
...
Moreover, a creditor can at any time within a year of the passing of
the special resolution (in a members’ voluntary winding up) render it invalid by obtaining a court
order for compulsory liquidation; Section 280(5)
...


S T U D Y

T E X T



Hence the usual procedure is

First, to dispose of possible objections by creditors by paying their debts or providing security
for their due payment of their debts
...
It thus becomes evident how many
members may demand to be bought out for cash since only members who did not vote in favour
of the resolution can opt for the cash payment
...

If it is to be a creditors’ voluntary liquidation then a committee of inspection must be appointed
and asked to approve the sale under Section 292
...
The member must make out his own case before
the arbitrator in support of his claim; the company is not under a duty to answer his questions
...


The disadvantages of Section 280 are that cash may have to be provided to pay off creditors and
dissenting members or alternatively the sale may have to be abandoned
...
But Section 280 procedure is obligatory
in the situation to which it relates
...
For example, the company to which the business is to be transferred might
make a take-over bid (using Section 210 to achieve 100 per cent success) for the share capital
of the company whose business it wishes to acquire
...

There is no obligatory cash alternative in a Section 210 transaction though it is sometimes
provided as an extra inducement
...
This procedure can also be
used to effect a merger of two companies each with an existing business
...


It is standard procedure in making a take-over bid to state that if 90 per cent acceptance is
attained compulsory acquisition under Section 210 will follow
...
The procedure is available
if Company A already owns shares of Company B and offers to acquire those which it does not
already own (but see Para 22 below
...
The rules of procedure are explained
below
...
Section 210 is not available
to an individual who makes a take-over bid (but he can always form a company for the purpose:
provided no fraud or improper conduct is involved: Re Bugle Press Ltd
...
4
...
Section 210 applies separately to shares of
each class for which 90 per cent acceptance is obtained
...


If Company A directly or through subsidiaries owns more than one-tenth of the shares of Company
B, then (in order to be able to use Section 210) Company A must:

T E X T



S T U D Y



290

C O M PA N Y L A W

(a) Offer the same terms for all the shares which it does not already own
...

The wording of Section 210 is ambiguous but it is generally taken that Company A must offer to
acquire all of the shares of Company B which it does not already own if it is then to use Section
210 to acquire the remaining shares in Company B (or all the shares of the class) for which the
offer is made
...
The position then is that:

S T U D Y

T E X T

a
...
This notice may be given at any time within a two - month period following
the four-month period
...


On receiving the notice from Company A each non-accepting shareholder of Company
B has one month in which he may apply to the court to order that Company A shall not
acquire his shares (see paragraphs 27-28 below)
...


One month after serving notice on non-accepting shareholders (or if they apply to the
court but fail then as the court has disposed of their application) Company A may require
Company B



(i) To transfer the shares of its non-accepting shareholders to Company A, and


(ii) To receive the purchase consideration to hold in trust for the non-accepting
shareholders
...




The non-accepting shareholders have a further statutory safeguard
...
But as soon as Company A’s
total ownership of shares in Company B reaches 90 per cent (or 90 per cent of a class) it
must within one month give notice of that fact to the holders of the outstanding shares
...
By this means the shareholders who at first did not accept the offer
for their shares may accept it in order to escape from the unsatisfactory position or
remaining as a very small minority of members in a company (B) dominated by a single
shareholder (A): Companies Act, Section 210(2)
...
Acceptance by holders of 90 per cent or more of the shares
indicates that the terms offered are fair
...
g
...
Objection on
those grounds only are likely to fail
...


Case: RE BUGLE PRESS (1900)


X, Y and Z held 4,500, 4,500 and 1,000 one-pound shares respectively, of Company B
...
X and Y wished to
eliminate Z
...
So X and Y formed a
new company (Company A) in which they were the only two shareholders
...
X and Y accepted the offer but
Z did not
...
Z
applied to court
...
Section 210 could not be used in these circumstances
...




The alternative to acquisition under Section 210 (in a take-over bid) is a scheme of
arrangement under Section 207
...
3
...
3
...
Stamp duty is payable (at the two per cent ad
valorem rate) on transfers of shares of Company B in a transaction to which Section
210 applies
...
But under Section 210 procedure,

T E X T

The minority whose shares are acquired compulsory under Section 210 are entitled
to all the benefits included in the original offer and accepted by the holders of 90 per
cent or more of the shares
...
When
Company A offers its own shares in exchange for shares of Company B it is a common
practice to make the offer more attractive by arranging with a third party that the latter
will make a simultaneous offer (for a limited period only) to purchase from shareholders
of Company B their consideration shares (allotted by Company A) if they do not wish
to retain them
...
When Section 210 is used to acquire the outstanding
shares of Company B, the bidder (Company A) must arrange for a cash alternative to
be provided since that was part of the terms (although it came from a third party) which
induced a high level of acceptance: Re Carlton Holdings (1971)

S T U D Y



291

292

C O M PA N Y L A W

there is usually no expense of court proceeds as few minority shareholders persist
in their objections to the point of making application to the court (at some expense to
themselves)
...
It is particularly useful when Company A is seeking to acquire those shares of
a partly-owned subsidiary (Company B) which it does not own
...
There is often a delicate balance of
conflicting risks and considerations in choosing between Section 207 and Section 210
in such situations
...
Its generally used to denote instances in which
the property or business of a company is transferred to another company which is already in
existence
...
In either case, procedure followed is the same as that followed in a
reconstruction
...
Section 210(1) provides that a dissenting can apply to courts within one month after
the notice is given to the company
...

The scheme will not benefit the company as a whole
...


RIGHTS OF DISSENTING CREDITORS

The creditor must pay the creditors of the transferor company in the usual way as in a winding up
...
The section provides that if an order is made for winding up
by the courts or subject to supervision, a special resolution authorizing the arrangement within a
year will not be valid unless sanctioned by the courts or committee of inspection
...

2
...

4
...








CHAPTER QUIZ
1
...


Name any alternative to winding up-----------

3
...

2
...


Amalgamation
Reconstruction
Share holders and creditors

A SAMPLE OF EXAM QUESTIONS

QUESTION ONE

S T U D Y

T E X T

Describe the procedure followed to effect a scheme of arrangement (20 marks)

QUESTION TWO
Discuss reconstructions under section 280 (20 marks)

QUESTION THREE
Discuss take over bids (20 marks)

295

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

CHAPTER FOURTEEN

COMPANIES INCORPORATED
OUTSIDE KENYA

S T U D Y

T E X T

296

C O M PA N Y L A W

297

CHAPTER FOURTEEN
COMPANIES INCORPORATED OUTSIDE KENYA
OBJECTIVES
At the end of this chapter, the student should be able to:
1
...

3
...

Discuss the procedure for incorporating a foreign company
...


KEY DEFINITIONS
•

•

Foreign companies: companies incorporated outside Kenya which, after the appointed
day, establish a place of business within Kenya and companies incorporated outside
Kenya which have, before the appointed day established a place of business within
Kenya
Cessation: Dissolution or stopping to carryout business

EXAM CONTEXT

As mentioned earlier, this is an addition and as such there are no questions from the past paper
sittings
...
The
examiner might just test to see whether the student have thoroughly understood and complied
to the new syllabus

INDUSTRY CONTEXT
It has been said that no man is an island and the company being a juridical person is no exception
...
In the recent
past, various foreign companies have been incorporated in Kenya including Oilibya from Libya
...
The chapter is nearly similar to incorporation
but with special attention given to foreign companies
...


T E X T

INTRODUCTION

298

C O M PA N Y L A W

Covered by part X of the Companies Act cap 486 of the Laws of Kenya



14
...




14
...


COMPANIES INCORPORATED OUTSIDE KENYA



299

14
...




14
...


S T U D Y

Where a foreign company has, before the appointed day, delivered to the registrar of
companies, the documents and particulars required by any provision of any of the repealed
Ordinances corresponding to Section 366 of this Act and to the like effect, it shall, subject to the
provisions 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

T E X T

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
...
5 REGISTRATION OF CHARGES CREATED

S T U D Y

T E X T

369
...




14
...

(1) Every foreign company shall, in every calendar year, make out a balance
sheet and profit and loss 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 (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
of this section if -

COMPANIES INCORPORATED OUTSIDE KENYA

301


(i) It was incorporated in the Commonwealth

(ii) It would, had it been incorporated in Kenya, have been exempt from the

provisions of section 128 by virtue of subsection (4) of that section

(iii) In every calendar year there is delivered to the registrar for

registration a certificate signed by a director and the secretary of
the company verifying the conditions requisite for such exemption
...




14
...


(a) in every prospectus inviting subscriptions for its shares or debentures in Kenya
state the country in which the company is incorporated; and
(b) Conspicuously exhibit in easily legible roman letters on every place where it
carries on business in Kenya the name of the company and the country in which
the company is incorporated; and




(c) cause the name of the company and of the country in which the company is
incorporated to be stated in legible roman letters in all bill-heads and letter paper,
and in all notices and other official publications of the company; and






(d) if the liability of the members of the company is limited, cause notice of that fact
to be stated in the English language in legible roman letters in every such
prospectus as aforesaid and in all bill-heads, letter paper, notices and other official
publications of the company in Kenya and to be affixed on every place where it
carries on its business
...
8 SERVICE OF FOREIGN COMPANIES

372
...
9 CESSATION OF BUSINESS

373
...

(2) Where the registrar has reasonable cause to believe that a foreign company has ceased
to have a place of business in Kenya, he may send by registered post to the person
authorised to accept service on behalf of the company and, if more than one, to all such
persons, a letter inquiring whether the company is maintaining a place of business in
Kenya
...


COMPANIES INCORPORATED OUTSIDE KENYA



14
...


S T U D Y

T E X T

If any foreign company fails to comply with any of the foregoing provisions of this Part, the company
and every officer or agent of the company who knowingly and wilfully authorises or permits the
default shall be liable to a fine not exceeding Kshs
...


Documents to be presented to the registrar
Every foreign company shall, in every calendar year, make out a balance sheet and profit and
loss 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) in every prospectus inviting subscriptions for its shares or debentures in Kenya state
the country in which the company is incorporated
...

(c) Cause the name of the company and of the country in which the company is incorporated
to be stated in legible roman letters in all bill-heads and letter paper, and in all notices
and other official publications of the company
...


COMPANIES INCORPORATED OUTSIDE KENYA

305

(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) his present Christian name, or the initials thereof, and present surname;
(b) any former Christian names and surnames;
(c) his nationality, if he is not a Kenya citizen
...


What part of the Companies Act relates to foreign companies?

2
...
TRUE or FALSE?

3
...

2
...


Part X
FALSE
12-calender year

SAMPLE OF EXAM QUESTIONS

QUESTION ONE
What documents must be presented to the registrar of companies (20 marks)

QUESTION TWO
Discuss returns made to the registrar (20 marks)

QUESTION THREE
Discuss provisions relating to the name of foreign companies (20 marks)

T E X T

PART E
S T U D Y

307

S T U D Y

T E X T

308

C O M PA N Y L A W

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

309

CHAPTER FIFTEEN

ANSWER BANK

S T U D Y

T E X T

310

C O M PA N Y L A W

3 11

CHAPTER FIFTEEN
ANSWER BANK
CHAPTER ONE
QUESTION ONE
There are four main forms of business associations in Kenya
...
These forms are:

1
...
The owner is in complete control and thus
receives all profits and suffers all losses
...
This form of business is found in
retail trade and service industries such as hair cutting, plumbing, painting, kiosks, and vegetables
and so on
...

2
...


Owner receives all profits since he is in complete control of the business
It has no formalities in starting as all one requires is a trading license
A sole trader is his own master and thus makes all decisions alone he does not have to
consult any person which tends to delay decision making in other business forms

DISADVANTAGES
1
...

3
...


He has to provide all the capital
He bears and suffers all the losses
He has to work for long hours to increase profits and this in the long run affects his
health
There is no scope in sharing ideas for the improvement of the business

2
...
Section 3
(1) of the Partnership Act defines a partnership as the relation which subsists between persons
carrying on a business in common with view to making a profit
...
The general
partnership operates quite similarly to a sole trader but in a limited partnership the liability of the
partners is limited
...


ADVANTAGES
•
•
•

Partners provide capital on terms agreed
...


S T U D Y

T E X T

3
...
It is a form
of self-help organisation
...
Members hold shares in the society
...
Legal/Corporate personality
This principle is to the effect that when a company is incorporated it becomes a legal person distinct
and separate from its members and managers
...
The principle of legal personality was first formulated by the House of Lords in
its famous case of Salomon v Salomon and company limited where Lord Macnaghten was
emphatic that the company is at law a different person from the subscribers to the memorandum
...


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

ANSWER BANK

1
...

3
...

That incorporation was available not only to large companies but to partnerships and
sole proprietorships as well
...


2
...
In company law the liability of members may be limited or
unlimited
...

The basic differences between registered companies and partnerships are as follows:

The Partnership Act does not prescribe registration as a condition precedent to
partnership formation
...


(b) Legal Status

A registered company enjoys the legal status of a body corporate which is conferred on
it by the Companies Act
...

Such business as appears to be carried on by it is, in fact, carried on by the individual
partners
...
A
public registered company must have at least seven members under Section 4 of the
Companies Act but without a prescribed upper limit
...

(d) Transfer of Shares

Shares in a registered company are freely transferable unless the company’s articles
incorporate restrictive provisions
...


S T U D Y



T E X T


(a) Formation

Registration is the legal pre-requisite for the formation of a registered company: Fort
Hall Bakery Supply Co v Wangoe (1)
...
Such management is vested in the board of directors
...

The right of participation in the firm’s management is however not given to a partner
who has limited his liability for the firm’s debts
...
A
partner is an agent of the firm because the business is carried on “in common” by the
partners themselves
...


(g) Liability of Members

A company’s member is not personally liable for the company’s debts because, legally,
they are not his debts
...
This rule has been codified by Section
11 of the Partnership Act which provides that “every partner in a firm is liable jointly with
the other partners for all debts and obligations of the firm incurred while he is a partner”,
unless the partner is a limited partner
...
Partnerships are not affected by the ultra
vires doctrine and partners enjoy relative freedom to diversify the firm’s operations
...


Borrowing Money
A company can borrow on the security of a “floating charge”
...


(k) Ownership of Property

A company’s property does not belong to the shareholders, either individually or
collectively
...
A firm’s property is
the property of the partners who can, therefore, insure it and, in the case of cash, make
drawings from it
...
They are also governed by the cooperative society rules enacted in
1969
...

2
...

4
...

6
...

8
...

Contents of by-laws and amendment procedures
...

Maintenance of books
...

Financial control through meetings
...

Arbitration

CHAPTER TWO

QUESTION ONE
a) Memorandum of Association
1
2
3

This is one of the constitutive documents
...

It provides for the relationship between the company and third parties
...

Its contents are prescribed by Section 5 and 6 of the Companies Act e
...
name, object,
and capital
...
It provides for the internal constitution
...
It regulates the
relations between the company and its members
...


S T U D Y

The law relating to partnerships in Kenya is contained in the Partnership Act Chapter 29 of the laws
of Kenya and the Limited Partnership Act chapter 30 of the laws of Kenya
...
These two statutes codify the law on partnerships
in Kenya
...

2
...

4
...

6
...

8
...

Objects clause – the purposes for which the company is incorporated
...

Capital clause – this is the authorised or nominal capital
...

Association clause/declaration clause – states the desire of members to be
incorporated
...


Details in the Articles of Association

S T U D Y

T E X T

Assuming the company adopts the model article in Table A of the first schedule to the Companies
Act, the Articles of Association must contain inter alia
...

2
...

4
...

6
...

8
...

10
...

Calls
...

Declaration and payment of dividend
...

Office of the managing director
...

Winding up
...

Lien on shares
...


Rules governing pre-incorporation contracts

• A pre-incorporation contract does not bind the company
...
v Pauline Colliery Syndicate


Price v Kelsal

• A promoter is personally liable on a pre-incorporation contract
Kelner v Baxter

R V Kyslant

• The company may be bound by a pre-incorporation contract if it enters into a new
contract similar to the previous agreement
...
v Kayanja and others

•


Before incorporation the company lacks contractual capacity and cannot have
agents

ANSWER BANK

b)

Kioko was a promoter of the company and he stood in a fiduciary position towards the
company he was promoting
...







Therefore my advice to Musembi as to the company’s rights is:
• The company can rescind the contract
...

• To sue for damages for breach of fiduciary duties
...
,
Gluckstein V Barnes

QUESTION THREE
Statutory Provisions



This section provides that a company’s member is personally liable for the company’s
debts incurred after the six months during which the company’s membership had fallen
below the statutory minimum, provided he was cognisant of the fact that the membership
had so fallen
...
Liability under the section may arise on the death
of a member if the death reduces the membership below the statutory minimum for the
particular company and:





(i) No transferee is registered as a new member
(ii) The personal representative of the deceased member does not elect to be
registered as a member, within the prescribed six months
...
It does not make the member liable for any debts incurred during the
six months which follow the reduction of membership
...


(b) Section 109 (4): Non-publication/Misdescription of a Company’s Name


Subsection (1) of Section 109 of the Act requires a company’s officers and other agents
to write its name on its seal, letters, business documents and negotiable instruments
...


S T U D Y

(a) Section 33: Membership fallen below statutory minimum

T E X T

The following are the sections of the Kenya Companies Act which correspond to those sections of
the English Companies Act 1948, which are usually listed in English Company law textbooks as
the instances in which the veil of incorporation will be lifted under express statutory provisions:

318

C O M PA N Y L A W



Subsection (4) of the section provides that any officer or agent of the company who
does not comply with the aforesaid statutory requirements shall be liable to a fine
not exceeding Kshs 1,000, and shall further be personally liable to the holder of any
bill of exchange, promissory note, cheque or order for goods, which did not bear the
company’s correct name, unless the amount due thereon is duly paid by the company
...
A probably better view
would be to regard the section as a codification of the common law rule which makes an
agent personally liable under a contract which he enters into with a third party without
disclosing that he is acting for a principal
...




Liability under this section is illustrated by Nassau Steam Press v Tyler & Others (7)
and Penrose v Martyr (8)
...
She had,
therefore, been misled as to the legal status of the company
...




Section 150 requires a company which has subsidiaries to lay before the company in
general meeting accounts or statements dealing with the state of affairs and profit or
loss of the company and the subsidiaries at the time when the company’s own balance
sheet and profit and loss account are laid before the company’s general meeting
...




These provisions constitute what is regarded in a loose sense as an instance of “lifting
the veil” because a member (the holding company) is obliged to incorporate into its
balance sheet the assets and liabilities of the company of which it is a member (the
subsidiary company) as if they were its own assets and liabilities
...


S T U D Y

T E X T

(c) Section 150: Group Accounts

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





Section 167 gives an inspector appointed by the court powers to investigate the affairs
of that company’s subsidiary, or holding company, if the inspector thinks it necessary
to do so for the purpose of his investigation
...

Generally speaking, a company and its member (in this case, the holding company) are
altogether separate entities and a court order to investigate the affairs of a subsidiary
company would not authorise an investigation of its holding company, and vice versa
...
A company and its subsidiary, or subsidiaries,
are thereby regarded as one entity for the purpose of the investigation and the veil of
incorporation thereby lifted
...

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
...
This is illustrated by Re: Bugle Press Ltd (9) in which an
offer made by a company was regarded as having been made, in substance, by the
company’s members
...


(g) Section 323: Fraudulent Trading


Section 323 provides that if, in the course of the winding up of a company, it appears
that any business of the company has been carried on with intent to defraud creditors of
the company or creditors of any other person, or for any fraudulent purpose, the court,
on the application of the official receiver or the liquidator or any creditor or contributory
of 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 be
personally responsible, without any limitation of liability, for all or any of the debts or
other liabilities of the company as the court may direct
...

The corresponding section of the English Companies Act is invariably cited in English
company law textbooks as an instance of lifting the veil
...




No Kenya case appears to have been decided under the section
...


T E X T

Section 173(1) empowers the registrar to appoint one or more competent inspectors to
investigate and report on the membership of any company for the purpose of determining
the true persons who are or have been financially interested in the success or failure of
the company or able to control or materially to influence the policy of the company
...
It can also be invoked against directors, members or
anybody else who participated in the fraudulent trading
...




If the liquidator applies to the court any money received is distributed to creditors
generally and forms part of the general assets of the company: Re William C Leitch Ltd
(No 2) (II)
...


S T U D Y

T E X T

Lifting the veil under Case Law
Numerous English cases have been variously classified by English writers as instances of “lifting
the veil of incorporation”
...
But it should be noted
that the particular judges were merely ascertaining the facts of the case before them and making
the appropriate decision rather than consciously or deliberately “lifting the veil of incorporation”
...
These cases may be explained under the following headings
...
This proposition was affirmed
by the English Court of Appeal and extended to associated companies in Ebbw Vale
Urban District Council v South Wales Traffic Area Licensing Authority when Lord Cohen
stated:



“Under the ordinary rules of law, a parent company and a subsidiary company, even a
100% subsidiary company, are distinct legal entities, and in the absence of an agency
contract between the two companies, one cannot be said to be the agent of the other
...




From this statement, it can be inferred that, if a court held that a company acted in a
particular instance as an agent of its holding company, the veil of incorporation would
have been lifted
...


(b) Fraud or improper conduct


English courts have intervened on numerous occasions and lifted the veil of incorporation
in order to circumvent a fraudulent or improper design by a bunch of scheming promoters

ANSWER BANK

321

or shareholders
...
The court’s order in the latter case
is usually cited as an instance of lifting the veil but it should be noted that the defendant
(Horne) was not a member of the company and, in principle; no veil existed between
him and the company which would have been lifted by the court
...

(c) Enemy Character


A company may be regarded as an enemy if, inter alia, all or substantially all of its
shares are held by alien enemies
...
Since there appears to be no Kenya case
on the point, the principles summarised by Lord Parker may be useful guidance to a
Kenyan who might have to determine, in a given case, whether a particular company is
to be regarded as a friend or enemy of Kenya
...

In each of these cases the court regarded a decision of the members as the decision of
the company itself and thereby lifted the veil of incorporation
...


(e) Group Enterprises


Numerous cases have been decided by English courts the general tenor of which is to
regard a subsidiary and its holding company as one entity
...
Examples are Harold Holds worth & Co Ltd caddies (18),
Hellenic and General Trust Ltd (19) and DHN Food Distributors v London Borough of
Tower Hamlets (20)
...
Name and address of every shareholder
...
Number of shares or stocks held
...
Date of entry of the name
...
Date of removal of the name
...
Amount paid on each share
...
Postal address of every member
...
My advice is based on the Provisions of the
Companies Act
...
A company cannot purchase its own shares
...
A company must not give financial assistance for the purchase of its own shares
...
Dividends must not be paid except out of distributable profits
...
Where a public company suffers a serious loss of capital, a meeting of the company
must be called to discuss the issue
...
Shares must not be issued at a discount
...
Reduction of capital must strictly comply with the provisions of the Companies Act
...
Offer of shares through the issue of a prospectus, offer for sale, placing etc
...
Borrowing
...
Bonus issues
...
Issues on take-overs
...
The shares must belong to a class already issued by the company
...
One year must have elapsed from the date the company was entitled to

commence business
...
It must be authorised by a resolution of members in general meeting

4
...


5
...


6
...


7
...

c) Terms implied in a contract of sale of shares between a seller and purchaser
...


2 That the seller has the right to sell
...


4 The seller will give to the purchaser a genuine share certificate required to enable

the purchaser to be registered as member
...


6 The seller will compensate the buyer for any calls or liability which may arise in
respect of the shares sold
...

2
...


The issued capital of the company whether paid up or not must be maintained
...

The capital of a registered company must remain certain
...
Creditors are entitled to insist that no part of the company’s

ANSWER BANK

4
...

6
...

Creditors and other persons who deal with companies are aware that the companies
have an amount of capital and are entitled to insist no part thereof is returned to members
without due compliance with law
...

Company Law has evolved both statutory provisions and prepositions of common
law to facilitate the raising and maintenance of capital
...
These provisions of the Companies Act prescribe the circumstances
and conditions under which a company may reduce capital
...
This
resolution is referred to as “resolution for reducing share capital”
...







Cancellation of any paid up capital, which is lost or unrepresented by available
assets
...



iii)

















Application to court for confirmation
Under Section 69(1) of the Act, after the special resolution is passed, an
application must be made to the High Court for confirmation of the reduction
...
In
particular the court must settle a list of all creditors and must satisfy itself that any
creditor entitled to object to the reduction has either objected or consented to the
same
...
If the court is so
satisfied, it may confirm the reduction
...
The court may for any
special reason if it deems fit order the company to add the words “and reduced” to
it’s name for a specified duration
...



v) Registration of the reduction

Under Section 71 (1) of the Act, upon production of a certified court order
approving the reduction and the minute of the same the registrar registers the

T E X T

Authority of the Articles
Under Section 68 (1) of the Companies Act, a company limited by shares or
guarantee and having a share capital may reduce its capital of authorised by its
articles
...
A
reduction of capital by a company take effect when registered and notice of registration
must be published in accordance with the courts direction

Underwriting Commission
This is the amount or sum paid by the company to a person who agrees to underwrite the
company’s shares i
...
take up all the shares or a specified number of the shares not taken up by
the public
...
It must be
disclosed in the company’s prospectus
...
e
...

It is an amount only payable to brokers
...


CHAPTER FOUR
QUESTION ONE
Crystallization of Floating Charges
A floating charge is a charge on a class of assets of a company
...
The assets that the chargee is entitled to
utilise for payment of the secured debt are the assets in the class that the company owns at
the time when the charge crystallises
...


A floating charge crystallises:
(i)








When the chargee appoints an administrative receiver
...
e
...

1
2
3
4
5

Liquidation or winding up
Appointment of a receiver
Levy of execution or distress
Insolvency
Cessation of business

ANSWER BANK

325

(ii) When the company goes into liquidation
...

(iv) If the charge contract so provides, when the chargee gives notice that the charge is
converted into a fixed charge on whatever assets of the charged class are owned by
the company at the time the notice is given
...

(vi) When there is Commencement of recovery proceedings against the company
...

(a) Advantages of floating charges

iv
...

Enables companies without fixed assets to borrow
...

Enhances the borrowing capacity of a company of floating charges
...

ii
...

A floating charge created within six months before the commencement of winding up is
deemed to be a fraudulent preference and is void
...
It is postponed to a later fixed charge
...
The charge may be avoided, during the company’s liquidation, under Section 314 of the
Act; unless it is proved that the company immediately after the creation of the charge
was solvent
...
Where a seller of goods reserves title until payment, a floating charge will not, on
crystallisation, attach to these goods
...

vi
...
g
...


QUESTION TWO
Debenture Trust Deed
When debentures are offered for public subscription, the company usually enters into a trust
deed with trustees (usually a trust corporation)
...
The charge securing the debentures is made
in favour of the trustees who hold it on trust for the debenture stockholders
...

ii
...


T E X T

From the company’s point of view, a floating charge may be regarded as conferring the following
advantages:

326

C O M PA N Y L A W

A debenture stockholder, unlike debenture holder, is not a creditor of the company
...
The trustees
are technically the creditors of the company for the whole debenture debt while the stockholder
is an equitable beneficiary of the trust
...


A covenant (promise) by the company to pay to the debenture holders the agreed
instalments of the loan and accrued interest
...
A description of the property charged, whether specifically or by way of a floating
charge
...
The events in which the security is to become enforceable, such as failure to pay the
principal sum or interest as agreed
...
A clause empowering the trustees to take possession of the property charged in the
event of the security becoming enforceable, and to carry on the business and to sell the
property charged
...
Appointment of a receiver
vi
...

vii
...

Advantages of a Trust Deed
A trust deed has several advantages some of which are:
(a) The circumstances in which the principal sum may become repayable are clearly spelt
out
...

(c) The trustees are empowered to appoint a receiver to carry on the business in case of
urgency
...

(e) The trustees have a legal mortgage over the company’s land
...
In particular, they cannot purchase the debentures without the consent of all the
debenture-holders
...
This
provision does not, however, invalidate:

ANSWER BANK

i
...


iii
...


QUESTION THREE



Debentures and debenture stock
A debenture is usually a formal document in printed form
...
It is usually
issued when a company obtains a loan from a single lender, such as its bank
...

(b) Debentures Issued as a Series

Debentures are issued as a series if the company decides to borrow money from
different lenders on different dates but in such a way that the lenders would rank equally
in their right to repayment and in any security given to them
...

(c) Debenture Stock

“Debenture stock” is created when a public company issues “debenture stock certificates”
to a class of debenture holders, evidencing the portion of the total to which each one
of them is entitled
...
Each debenture will be for
a specified sum, e
...
Kshs
...
1,000, as stipulated in the conditions of issue
...
In Levy v Abercorris Slate & Rubber Co
Chitty, J stated that he could not find any precise legal definition of the term “debenture” and
went on to observe that the word “is not, either in law or commerce, a strictly technical term, or
what is called a term of art”
...
With the passage of time
the word “debenture” acquired the meaning it generally has today, namely, a document issued
by a registered company to acknowledge, or evidence, an indebtedness
...


T E X T

Section 2 of the Act defines “debenture” as including “debenture stock, bonds and any other
securities of a company whether constituting a charge on the assets of the company or not”
...

ii
...


Redeemable or irredeemable
Registered or bearer
Secured or unsecured (naked)

Subordinated debentures
Under American law, these are obligations often referred to as subordinated debts, junior
debts or inferior debts, upon which the right to receive payment is subordinated or deferred
by a subordination agreement or clause, to the prior payment of certain other indebtedness,
sometimes referred to as senior, superior or prior debts
...
If complete, the payment of principal and interest on the subordinated debt is deferred
until the obligations on the senior debt are satisfied
...


S T U D Y

T E X T

Issue of Debentures
Debentures are usually issued by a resolution of the board of directors under powers conferred
by the company’s articles of association
...
and to issue debentures, debenture
stock, and other securities”
...


Debentures and Shares
Debentures and shares have the following similarities and differences
...
A debenture is usually one of a “series” or “class”, which is similar to a “class” of
shares
...
Debentures, as well, as shares are long-term investments in the company and are

transferable in the same manner
...
Debentures and shares may be issued in the same way through a prospectus
issue
...
A shareholder is a member (i
...
an insider) whereas a debenture holder is a
creditor (i
...
an outsider)
...
A shareholder has an interest in the company but not in the company’s property
...
Consequently:



A shareholder can attend a meeting of the company and vote at the meeting whereas
a debenture holder cannot do so
...






329

iii
...
Dividends on shares are payable only if
profits are made and cannot be paid out of capital
...
A company can purchase its own debentures but cannot, as a general rule,
purchase its own shares
...
As a general rule, shares cannot be issued at a discount, whereas debentures
may be issued at a discount
...






Subscribing to the Memorandum
Section 28 (1) provides that the subscribers to the company’s Memorandum shall be
deemed to have agreed to become members of the Company and on the registration
of the memorandum shall have their names entered in the company’s register of
members
...


ii
...
However, it was held in NICOL’S case that the membership commences from
the moment the name is entered in the members’ register
...


iii
...





A transferee also acquires his membership by virtue of sub-section 2 of Section 28,
being a person who has agreed to become a member
...


S T U D Y

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

T E X T

Methods of becoming a member

330

C O M PA N Y L A W

iv
...



Transmission on death of a member
A transmission is a legal process by which ownership of shares in a company changes
automatically on the death of a member to his personal representative
...
the personal representatives of the deceased where he was a sole holder
shall be the only persons recognized by the law as having any title to his interest in the
shares”
...

Transmission on bankruptcy of member
A bankrupt member’s shares in a company will be transmitted to his trustee in bankruptcy
according to the principles of bankruptcy law
...
If the trustee elects or decides to be registered as the holder of the
shares the election constitutes the agreement to be a member and the provisions of
sub-section 2 of s
...
e
...


vi
...
”


The provisions of Section 28 (1) accordingly apply to him, and he becomes a member
of the company when Memorandum of Association is registered
...
Estoppel

A person who, without having agreed to be a company’s member, is aware that his
name is wrongly entered in its register of members but takes no steps to have his
name removed there from, may be estoppel from denying his apparent membership to
somebody who relied on it and extended credit to the company
...






Transfer
A “transfer” of shares occurs if an existing member sells them to a third party
...

However, the transferee does not automatically cease to be a member as a consequence
of the transfer
...
Table A, Article 23, permits members to transfer all or any of their shares
...




Table A, Article 38 provides that “a statutory declaration in writing that the declaring is
a director or the secretary of the company, and that a share in the company has been
duly forfeited on a date stated in the declaration, shall be conclusive evidence of the
facts therein stated
...




He therefore ceases to be a member of the company only if all of the shares previously
held by him are forfeited
...



Surrender of Shares
The precise nature of surrender and the machinery by which it is effected are not clear
since it is not provided for by the Companies Act or Table A
...




A person’s membership will therefore come to an end if he surrenders all his shares to
the company with the approval of the directors
...



Death
When a person dies, his membership of a company will come to an automatic end by
virtue of the provisions of the Law of Succession
...
(See Table A, Article 29)

v
...


vi
...
For example, Table A Article 11 gives
the company “a first and paramount lien” on every unpaid share
...
Table A, Article 12
gives the company power to sell “any shares on which the company has a lien”
...


S T U D Y

ii
...
Redemption of redeemable preference shares

If a member’s entire holding consist exclusively of redeemable preference shares and
all of these shares are redeemed by the company under the provisions of Section 60 of
the Companies Act, he will cease to be a member from the date on which his name is
removed from the register of members
...
Repudiation by an infant

An infant member has a common law right to repudiate his membership of a company
if there has been a total failure of consideration because the shares have become
worthless: Steinberg v Scala (Leeds) Ltd (58)
...
Liquidation or winding up

A company’s liquidation terminates membership of all former members, from the
moment it becomes effective
...


Rescission of contract: A shareholder who rescinds a contract of purchase of shares or
allotment by reason of a vitiating element or otherwise ceases to be a member

S T U D Y

T E X T

xi
...


QUESTION THREE
THE REGISTER OF MEMBERS
Section 112(1) requires every company to keep a register of its members and prescribes the
contents of the register
...

ii
...

iv
...


The names and postal addresses of the members;
A statement of the shares held by each member, distinguished by its number if it has
one;
The amount paid or agreed to be considered as paid on the shares of each member;
The date at which each person was entered in the register as a member; and
The date at which any person ceased to be a member
...

Failure to keep a register of members renders the company and every officer of the company
who is in default liable to a default fine [s
...


Section 120 provides that the register of members shall be prima facie evidence of the
matters it contains
...

If it is made up at another office of the company, or at some other office, it may be kept at that
other office provided the office is not at a place outside Kenya
...
Any change in that office must be notified to the registrar within 14 days failing which the
company and every officer of the company who is in default shall be liable to a default fine
...
200 for each inspection, as the company may prescribe
...
The copy must be supplied within a period of 14days commencing on the day next
after the day on which the requirement is received by the company
...
40 and further to a default fine of Kshs
...
The court may by order—
(a) Compel an immediate inspection of the register and index, or
(b) Direct that the copies required shall be sent to the person requiring them
...

Section 117 permits a company, on giving notice by advertisement in some newspaper circulating
in Kenya or in that area of Kenya in which the registered office of the company is situate, to close
the register of members for any time or times not exceeding in the whole 30 days in each year
...


S T U D Y

Closure of Register: Under Section 117 of the Act, a company may, on giving notice by
advertisement in some newspaper circulating in Kenya, or in that area of Kenya in which the
registered office of the company is situate, close the register for any time or times not exceeding
30 days in each year
...
The index shall in respect of each member contain a sufficient indication
to enable the account of that member in the register to be readily found and shall be at all times
kept at the same place as the register of members
...


If the name of any person is, without sufficient cause, entered in or omitted from the
company’s register of members; or

ii
...


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

iii
...

Any member
...


Where an application is made the court may:

S T U D Y

T E X T

i
...


Refuse the application;
Order rectification of the register and payment by the company of any damages
sustained by any party aggrieved
...

The case of Burns v Siemens Bros Dynamo Works Ltd (60) shows that the circumstances set out
in Section 118(1), above, are not the only ones in which the court can order rectification
...

The court may also order rectification of the register by deleting a reference to some only of the
registered shareholder’s shares
...
This is illustrated by Re
Transatlantic Life Assurance Co Ltd (1979) in which the court deleted an additional number of
shares, which had been issued to the applicant in breach of the prevailing Exchange Control
Regulations but left the register intact as regards his previous shareholding
...


CHAPTER SIX
QUESTION ONE
TRANSFER PROCEDURE
It was explained in Re Greene (63) that the rule which requires a “proper instrument” of transfer
enforces the payment of stamp duty, normally at ad valorem rate on the consideration or (in
the case of a gift) on the nominal value of the shares transferred
...


ANSWER BANK

335

This rule does not, however, apply to registration of shares in the names of personal representatives
or trustees in bankruptcy since they are merely asserting powers of control and disposal of the
shares of members whom they represent given to them by law under the rules of transmission
...


The articles usually provide that:
(a) The instrument of transfer must be “in any usual or common form” (i
...
the forms used
by stockbrokers);
(b) The transferor’s share certificate must accompany the transfer when presented for
registration: Table A, Articles 23 and 25
...


In such a case the holder sends his signed transfer with his share certificate to the company
for cancellation and the transfer form is returned to the transferor who then delivers it to the
transferee for stamping and representation to the company
...
This procedure is called “certification” of a transfer
...


Certification is a representation by the company to any person acting on the faith of the certification
that documents have been produced to the company which on the face of them show a prima
facie title of the transferor to the shares comprised in the transfer
...
Section 81; Bishop v
...


Under Section 81(2), any person who acts on a negligent certification can claim damages from
the company for his loss if the company did not either receive or fails to retain the share certificate
...
If, for example, the company returns
the certified transfer form and the share certificate to the holder who sells the shares to A giving

S T U D Y

CERTIFICATION OF TRANSFERS

T E X T

The basic transfer procedure is that the transferor and transferee complete and sign the transfer
form and have it stamped before delivering it to the company (with the transferor’s share certificate)
for registration
...
The company issues to the transferee a new share
certificate and cancels the old one
...
B does not in this case rely on the
certified transfer (of which he is unaware) and the share certificate was correct when first issued
to the holder
...
Before
the certificate was issued, B signed a transfer of the shares to H and this transfer was sent to
the company for certification
...
By mistake the company then sent to B the
share certificate in his name
...
L later
claimed that he was entitled to the shares
...
He had never seen (and therefore did not rely on) the certified transfer to H
and mere possession of B’s share certificate gave him no claim against the company since the
certificate at the time of issue correctly described B as still the registered holder of the shares (i
...

the transfer to H had not at that point been delivered for registration)
...


If identified shares are sold under a preliminary contract, the rights and obligation incidental
to ownership of the shares pass at once to the purchaser under the contract unless otherwise
agreed
...
The purchaser must
indemnify the vendor against any calls made on the shares before registration of the transfer
...


A vendor of shares has a duty (implied by the contract of sale) to deliver a transfer of the shares
(in exchange for the price) which will give the purchaser good title to the shares
...
But the vendor does not (unless the contract
expressly so provides) guarantee that the company will register the transfer
...


ANSWER BANK

337

QUESTION TWO
MORTGAGE OF SHARES
This is a transaction whereby shares are used as collateral security for loans
...

Under a legal mortgage, the borrower transfers his shares to the mortgagee who becomes
the registered holder subject to a separate agreement by which he undertakes to re-transfer
the shares to the mortgagor on repayment of the loan
...
As registered holder, the mortgagee can transfer the shares to a purchaser
who buys from him
...
The power of the directors to make calls is defined by the articles
...
The rules or principles governing calls are embodied in
Articles 15 – 21 of Table A
...
Articles 33-39 of Table A contain provisions which will
apply if the company’s articles do not provide for forfeiture
...
The model articles Table A contains provisions which give the
directors power to refuse to register a transfer of any share, whether fully or partly paid
...


S T U D Y

The equitable mortgagee’s other potential difficulty is that since he is not a registered shareholder
he has no direct means of transferring the shares to a purchaser if the borrower defaults and he
decides to sell
...
e
...
This usually
gives the mortgagee an implied power to insert his own name as transferee in case of default
...
Alternatively, the mortgagee
may obtain from the mortgagor a power of attorney giving him power to insert the name of a
purchaser on the transfer
...
There is again
an agreement containing the terms of the loan and the mortgage
...


338

C O M PA N Y L A W

Unless the directors have power under the articles to refuse a transfer and exercise that power
properly, the transfer must be registered and the court may order rectification of the register for
that purpose
...

In RE HACKNEY PAVILION

A transfer of shares was sent in by the executors of a deceased director and shareholder
...
There was no casting vote
...

Held:

This was incorrect since a positive act of refusal was necessary and there had been
none
...


S T U D Y

T E X T

(b) The directors in reaching their decision must act bona fide in what they consider to be
the best interests of the company: RE: Smith & Fawcett (64)
(c) Where the articles specify grounds of refusal, the directors may be required to identify
the grounds of refusal
...
If nonetheless the directors do disclose
their reasons, the court will consider whether the directors acted bona fide or whether
their reasons accord with the grounds specified in the articles (if that is the case)
...
The directors
rejected transfers of small numbers of shares (and of single shares) on the ground that
it was prejudicial to the company that its issued share capital should be fragmented
...
The power to refuse registration
must (on the formula used in the articles) be confined to cases of objection to the
transferees on personal grounds
...

(d) The power of refusal must be exercised within a reasonable time from the receipt of the
transfer
...
If the power is not exercised within a reasonable time it lapses and can no longer
be used
...

In RE SWALEDALE CLEANERS LTD (1968)

On August 3, 1967, transfers of shares were presented
...
But a quorum for meetings of the directors was two
and so the one director was not competent to exercise the powers of the board
...
e
...
On 18th December 1967
a second director was appointed and there was a board meeting at which the two
directors refused to register the transfers (4 months, 14 days)
...
Since the power of refusal had not been exercised, the
transfers must be entered in the register
...
Certain members agreed to sell their shares to an outsider and, while
remaining the registered holders, gave the purchaser their proxies so that he could
secure control of the company
...



The cases cited above show that when there is a dispute over refusal to register the
proper remedy is to apply to the court for rectification
...


CHAPTER SEVEN
QUESTION ONE
The Annual General Meeting
Section 131(1) provides that “every company shall in each year hold a general meeting as its
annual general meeting in addition to any other meetings in that year, and shall specify the
meeting as such in the notices calling it”
...
The word “year” was defined in Gibson v Barton as “calendar year”, i
...
the period January
1 to December 31
...
Any such rights
are strictly construed, i
...
a member who wishes to accept must observe the terms of
the articles and a member will not be permitted to evade his obligation to make the
offer
...
Thus a
company incorporated on October 1, 1992, need not hold its first annual general meeting until
March 1994
...

The registrar is not bound to call or direct the calling of the meeting but, in the event of his
refusing to do so, the aggrieved member may apply to the court for an order: Re: El Sombrero
Ltd (88), in which the court made an order after the registrar had declined to do so
...

ii
...

iv
...


Subsection 5 makes it a criminal offence punishable with a fine not exceeding two thousand
shillings for the company and every officer of the company to fail to hold the annual general
meeting or comply with any directions of the registrar regarding the calling and conduct of the
meeting
...
Neither is the word “extraordinary” defined in any other section of the Act
...

Table A, Article 49 further provides that the directors may, whenever they think fit, convene an
extraordinary general meeting
...
Section 132(2)
provides that the requisition must state the objects of the meeting, and must be signed by the
requisitionists and deposited at the registered office of the company
...


ANSWER BANK

341

Section 132(5) entitles the requisitionists to recover any reasonable expenses incurred in
convening the meeting from the company, and the company may in turn recover these from the
fees or other remuneration of the defaulting directors
...
However, a class meeting may be
held pursuant to the provisions of the company Articles of Association, if any
...

The provisions of Table A in relation to general meetings shall apply to every such separate
general meeting, except that the necessary quorum shall be two persons at least holding or
representing by proxy one-third of the issued shares of the class
...

The requisite number of days must be given
...

Must specify all resolutions proposed and passed, as a special and notice of their
intention to be passed as such must be given
...
Where the court makes
an order, it may give such ancillary or consequential directions as it thinks expedient including
a direction that one member of the company present in person or by proxy shall be deemed to
constitute a meeting
...


T E X T

The company’s articles cannot deprive the members of the right to requisition a meeting under
Section 132 because the section requires the directors to proceed to convene a meeting on
requisition “notwithstanding anything” in the company’s articles
...
They may therefore defeat the purposes of the section by
calling the meeting for a date, say, six months ahead, provided they do so within the 21-day period
...
K) Ltd (1982)
...
The company’s
articles may also contain such a provision although the current Table A lacks one
...


b) The Companies Act, recognises the following meetings:
1
...

3
...

5
...


Statutory Meeting
...

Extra Ordinary General Meeting
...

Directors meetings
Creditors meeting
...

2
...

4
...


Notice of the meeting
...

Quorum for the meeting
...

Taking of minutes of the meeting
...
By show
of hands – one member has one vote
...
Under Table A one share is one vote
...

Members are free to appoint a proxy who can only vote by a poll
...
He derives his authority from his appointment, and the mode of
his appointment will depend upon the type of meeting over which he is called upon to preside
...
stated:

“It is the duty of the chairman, and his function, to preserve order, and to take care that the
proceedings 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”
...

Informing himself as to the business and objects thereof
Preserving order in the conduct of those present
...

Deciding whether proposed motions and amendments are in order
...

(vii) Deciding points of order and other incidental matters which require decision at the
time
...
)

(b) Declaring the result, and

(c) Causing a poll to be taken if duly demanded
(ix) In the case of a meeting, which is recurrent or is one of a series, to deal with the record
or minutes of the proceedings
...


QUESTION ONE
a)
Appointment
The names of the first directors are determined in writing by the subscribers or a majority of them
failing which the signatories to the memorandum are the first directors
...

To qualify for appointment as a director one must:
-
-
-
-

Be between the ages of 21-70
Be of sound mind
...

Not have been disqualified by the court
...

If the articles require a director to hold any share qualification a person must take them up within
two months of appointment or such shorter time as the articles may prescribe
...


S T U D Y

CHAPTER EIGHT

T E X T

Regarding this point, it should be noted that the chairman has no power to adjourn a meeting
merely because the proceedings have taken a turn which he himself does not like: National
Dwellings Society v Sykes (95)
...


344

C O M PA N Y L A W

Vacation
The office of director must be vacated if the director:
1
2
3
4
5
6
7

8
9

Is disqualified by the court pursuant to Section 189 of the Act
...

Is declared bankrupt or makes an arrangement or composition with his creditors
generally
...

Resigns his office by notice in writing to the company
...

Is removed by an ordinary resolution of members in general meeting absents himself
from directors meeting held in over six months without permission of the other
directors
...


b)

T E X T

•

S T U D Y

•

The transaction to advance Kshs
...

Under Section 191 (3) of the Act if the requisite approval is not given by the company in
general meeting the directors authorizing the making of the loan are jointly and severally
liable to indemnify the company against any loss arising therefrom
...
Explain the legal
implication of each of the following situations:

a)
•
•
•

Appointment of directors is a power vested in the general meeting by the articles and
directors have no power to appoint other directors let alone their own sons
...

Vultures wish to appoint his son a director is untenable since he has no power to do
so
...

In this case Sparrow is bound to disclose the nature of his interest at board meeting
failing which the contract is voidable at the option of the company
...
v Blaikie Brothers
...
2, 000
...

Directors cannot remove one of their number from the office of director
...


d)
•
•
•
•

Being a director of the company, Peacock has the right to take part in the affairs of the
company
...

Peacock has the right to sue the other directors for an order to restrain them from
excluding him from the affairs of the company
...
As was the case in Re: Lundie Brothers Ltd
...

The company may, therefore, be wound up compulsorily or voluntarily by creditors
...



Section 182 (1): Appointment by the Articles
Section 182(1) provides that a person shall not be capable of being appointed director
of a company by the articles unless, before the registration of the articles, he has by
himself or by his agent authorized in writing:-

i
...



a)


b)

c)




2
...


Section 183: Qualification Shares
Section 183(1) provides that it shall be the duty of every director who is by the articles of
the company required to hold a specified qualification, and who is not already qualified,

S T U D Y

•

T E X T

e)

346

C O M PA N Y L A W

to obtain his qualification within two months after his appointment, or within the shorter
time (if any) fixed by the articles
...






This provision does not apply if:
(a) The company’s articles provide otherwise
(b) “Special notice” of the resolution to appoint the director was given to the company
...
If he does
not actually do so but continues to act as director he becomes a de facto director: R v
Ivan Arthur Camps (67)
...



T E X T



The company must also have given notice of it (i
...
the special notice) to its members
and stated the age of the proposed director
...




4
...
10,000, or both
...



Section 189: Fraudulent Persons
Section 189 (1) empowers the court to make an order restraining a person from being
appointed, or acting, as a company’s director for a period not exceeding five years if:



i
...






The person is convicted of any offence in connection with the promotion,
formation or management of a company
In the course of a winding up, it appears that the person has been guilty of
fraudulent trading (under Section 323) or has otherwise been guilty, while an
officer of the company, of any fraud or breach of duty to the company
...



Section 184: Individual Voting
Section 184(1) provides that appointment of directors is to be voted on individually
unless a motion for the appointment of two or more persons as directors by a single
resolution was agreed upon by the meeting without any vote being given against it
...




The duties of directors are usually considered under two broad headings, namely:



ANSWER BANK

1
...
These duties were summarised by Romer, J
...


A director need not exhibit in the performance of his duties a greater degree of skill than
may reasonably be expected from a person of his knowledge and experience
...
It may also be expressed by saying that, if a
foolish director makes foolish decisions resulting in loss to the company, he cannot be
liable for negligence
...
However, if the director made very foolish decisions resulting in loss to the
company, he will be liable in negligence since it is not reasonable to expect a foolish
director to make very foolish decisions
...

A directorship is not a professional job with a legally prescribed qualification
...
All that
the law can expect him to do is to serve the company honestly and to the best of his
ability
...






ii
...






A director is not bound to give continuous attention to the affairs of his company
...
He is
not, however, bound to attend all such meetings, though he ought to attend whenever,
in the circumstances, he is reasonably able to do so
...
)
A company is, however, free to impose a duty on its directors to attend board meetings
within a certain period of time and to prescribe the consequences of a breach of the
duty
...

In respect of all duties that, having regard to the exigencies of business, and the articles
of association, may properly be left to some other official, a director is, in the absence of
grounds for suspicion, justified in trusting that official to perform such duties honestly
...

In DOVEY v CORY a director was held not liable for negligence merely because he had
failed to verify false information regarding the company’s accounts which he had been
given by the company’s manager and managing director
...
Duties of care and skill at common law
ii
...


S T U D Y




347

348

C O M PA N Y L A W



“Business cannot be carried on upon principles of distrust
...
We agree that care and prudence do not involve distrust
...



Fiduciary Duties
The fiduciary duties of directors arising from their fiduciary relation to the company
have been the subject of consideration in an enormous body of case law but the ratio
decidendi of the cases can be reduced to two fundamental propositions:

(a) A director is not allowed to put himself in a position where his interest and duty
conflict
...


S T U D Y

T E X T




Aberdeen Rly Co v Blaikie Brothers (68)
...

Section 200 requires a director who is in any way interested in a contract with the
company to declare the nature of his interest at a board meeting
...
This
provision is supplemented by Article 84 of Table A which provides that:




i
...
If he does vote, his vote
shall not be counted



ii
...


2
...


3
...
It was held that they had to surrender
the benefit of the contract to the company
...




In Bray v Ford Lord Herschell stated that the aforesaid rule is not “founded upon
principles of morality” but is based on the consideration that human nature being what
it is, there is danger, in such circumstances, of the person holding a fiduciary position
being swayed by interest rather than by duty and thus prejudicing those whom he was
bound to protect”
...
This rule is essentially a restatement of
the fundamental rule of the law of agency that an agent must not make a secret profit
...



In Percival v Wright (72) it was held that the directors owe their fiduciary duties to
the company alone and not to the members
...


CHAPTER NINE

QUESTION ONE
Powers and Duties

•
•
•
•
•
•
•

To be present at all meetings, including board meetings and take minutes of such
proceedings
...

To countersign instruments to which the company seal has been affixed (see Article 113
of Table A)
...
t
...

To keep the books of the company, particularly those relating to the internal administration
of the company, e
...
the shares register and register of charges
...
g
...

For quoted companies, he ensures compliance with Nairobi Stock Exchange and
Capital Markets Authority Requirements
...


Section 180 provides that a provision requiring or authorising a thing to be done by or to a
director and the secretary is not satisfied by it being done by or to the same person acting as
secretary and director
...
”
All directors should have access to the advice and services of the Company Secretary who is
responsible to the Board for ensuring that the Board procedures are followed and applicable
rules and regulations are complied with
...
However, a company secretary
usually has the following powers and duties:

350

C O M PA N Y L A W

The Company Secretary’s role is to protect the interests of the company as a whole
...
He should constantly monitor the internal
activities of the company, take responsibility for internal disclosure, interpret the decisions of the
Board and help to ensure that they are properly implemented throughout the organization
...
In protecting the interests of
the company, the company secretary not only serves the interests of the third party shareholders
who may be involved but is also able to represent the interests of numerous other stakeholders
such as creditors, employees and local communities
...
Section 20 of the Certified Public Secretaries Act provides that
subject to this section, a person is qualified to be registered as a Certified Public Secretary if:
•
•
•
•

•
•

He has been awarded by the Examinations Board a certificate designated the Final
Certificate of the Certified Public Secretaries Examination
...


Section 21(1) provides for disqualification from being registered as a company secretary
...

If an undischarged bankrupt
If he is of unsound mind, and has been certified to be so by a medical practitioner
...

Section 28 gives the Registration Board power to cancel the registration of a member
amongst other penalties if found guilty of professional misconduct
...


ANSWER BANK

351

QUESTION THREE
REGISTER OF DIRECTORS AND SECRETARIES
201
...

(2) The said register shall contain the following particulars with respect to each director

(i) “Company” includes any body corporate incorporated in Kenya; an

(ii) A body corporate shall be deemed to be the wholly-owned subsidiary of another

if it has no members except that other and that other’s wholly-owned subsidiaries
and its or their nominees
...


(4) The company shall, within the periods respectively mentioned in subsection
(5) deliver to the registrar for registration a return in the prescribed form containing the
particulars specified in the said register and a notification in the prescribed form of any
change among its directors or in its secretary or in any of the particulars contained in
the register, specifying the date of the change
...

(6) The register to be kept under this section shall during business hours (subject to such
reasonable restrictions as the company may by its articles or in general meeting impose, so
that not less than two hours in each day be allowed for inspection) be open to the inspection
of any member of the company without charge and of any other person on payment
of two shillings, or such less sum as the company may prescribe, for each inspection
...

(8) In the case of any such refusal, the court may by order compel an immediate inspection
of the register
...

Non-statutory books may be purchased and kept
...

Register of Important Documents: e
...
Power of Attorney, Probates and Letters of
Administration, etc
...


REAPPOINTMENT:

c)

He is not qualified for reappointment
A resolution has been passed at that meeting (i
...
annual general meeting) appointing
somebody instead of him or providing expressly that he shall not be appointed
He has given the company notice in writing of his unwillingness to be reappointed
...


APPOINTMENT BY DIRECTORS
The first auditors of a company may be appointed by the directors at any time before the first
annual general meeting and auditors so appointed shall hold office until the conclusion of that
meeting
...
Where the
directors have appointed the first auditors, the company may “at a general meeting remove such
auditors and appoint in their place any other persons who have been nominated for appointment
by any member of the company
...


CASUAL VACANCIES
By Section 159 (6) “The directors may fill any casual vacancy in the office of auditor, but while
any such vacancy continues the surviving or continuing auditor or auditors, if any, may act”
...
RE: KINGSTON COTTON MILL CO
...
The auditors relied on certificates, wilfully
false, given by J
...
Dividends were paid for some years on the footing that the balance sheets were correct
but if the stock-in-trade had been stated at its true value it would have appeared that there were
no profits out of which a dividend could be paid
...

The manager was a man of great business ability and of high repute, and up to the
stoppage of the company was trusted by everyone; but he had designedly exaggerated
the value of the stock-in-trade in order to make the company appear prosperous
...

They were not liable for the dividends wrongfully paid
...


ii)

Where an officer of a company has committed a breach of his duty to the company,
the direct consequence of which has been a misapplication of its assets, for which he
could be made responsible in an action, such breach of duty is a “misfeasance’ for
which he may be summarily proceeded against under the Companies Act, and it is not
necessary that an action should be brought
...
The section applies to
breaches of trust and to misfeasances by such persons, but is inapplicable to cases of breach
of contract, trespass, negligence, etc
...
To decide this question, it is necessary to consider -

The duty of an auditor generally was very carefully considered by this court in RE: LONDON AND
GENERAL BANK (1895) and I cannot usefully add anything to what will be found there
...
But it was also 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
...
These are the general principles
which have to be applied to cases of this description
...
To substitute the one expression for the other may easily lead to
serious error
...
Ignorance of the articles and of exceptional duties imposed by them
would not afford any legal justification for not observing them
...

The complaints made against the auditors in this particular case
...
There is no charge of dishonesty on the part of the auditors
...
It is said, however, that they
were culpably careless
...
I confess I cannot
see that their omission to check his (i
...
manager’s) returns was a breach of their duty to the
company
...
He must rely on other people for
details of the stock in trade on hand
...
In this case the auditors relied on the manager
...
He was trusted by every one who knew him
...
The auditors had no suspicion that he was not
to be trusted to give accurate information as to the stock-in-trade in hand, and they trusted him
accordingly in that matter
...

The stock journal showed the quantities that is, the weight in pounds of the cotton and yarn at the
end of each year
...
If these books had been compared by the auditors
they would have found that the quantity of cotton and yarn in hand at the end of the year ought
to be much less than the quantity shown in the stock journal, and so much less that the value

T E X T

What their duty was;
How they performed it, and in what respects (if any) they failed to perform it
...
But although it is no
doubt true that such a process might have been gone through, and that, if gone through, the fraud
would have been discovered, can it be truly said that the auditors were wanting in reasonable
care not thinking it necessary to test the managing director’s return? I cannot bring myself
to think they were not, nor do I think that any jury of businessmen would take a different view
...

The question is whether, no suspicion of anything wrong being entertained, there was a want
of reasonable care on the part of the auditors in relying on the returns made by a competent and
trusted expert relating to matters on which information from such a person was essential
...
The manager had no apparent conflict between his interest and his
duty
...


S T U D Y

T E X T

LOPES, LJ
...
But has there been any misfeasance by the auditors? This depends upon what meaning
is to be assigned to the word “misfeasance” as used in this section
...
In my judgment this is too wide
...
The object of this section of the
Act is to enable the liquidator to recover any assets of the company improperly dealt with by
any officer of the company, and must be interpreted bearing that object in mind
...
It is the duty of an auditor
to bring to bear on the work he has to perform that skill, care, and caution which a reasonably
competent, careful and cautious auditor would use
...
An auditor is not bound to be a
detective, or, as was said, to approach his work with suspicion or with a foregone conclusion
that there is something wrong
...
He is justified in
believing, tried servants of the company in whom confidence is placed by the company
...
If there is anything calculated to excite suspicion, he should probe it to
the bottom; but in the absence of anything of that kind he is only bound to be reasonably cautious
and careful
...
He does not
guarantee the discovery of all frauds
...

Their work is responsible and laborious, and the remuneration moderate
...


Auditors must not be made liable for not tracking out ingenious and carefully laid schemes of
fraud when there is nothing to arouse their suspicion, and when those frauds are perpetrated by

ANSWER BANK

357

tried servants of the company and are undetected for years by the directors
...




KAY, LJ
...
misfeasance means something other than a breach of trust
...
I think the only
safe interpretation to adopt is that it includes all cases other than breaches of trust in which an
officer of the company has been guilty of a breach of his duty as such officer which has caused
pecuniary loss to the company by misapplication of its assets, and for which he might have been
made liable in an action
...
RE LONDON AND GENERAL BANK

The auditors had been guilty of misfeasance under S
...
3s)
...
it is the duty of the directors, and not of the auditors, to recommend to the
shareholders the amounts to be appropriated for dividends and it is the duty of the directors to
have proper accounts kept, so as to show the true state and condition of the company
...
It is
impossible to read the section of the Companies Act without being struck with the importance of
the enactment that the auditors are to be appointed by the shareholders, and are to report
to them directly, and not to or through the directors
...
It
evidently is to secure to the shareholders independent and reliable information respecting the
true financial position of the company at the time of the audit
...
An auditor has nothing
to do with the prudence or imprudence of making loans with or without security
...
It is nothing to him whether dividends are properly or improperly declared, provided
he discharges his own duty to the shareholders
...

But then comes the question, how is he to ascertain that position? The answer is, by examining
the books of the company
...

He must take reasonable care to ascertain that they do so
...
Assuming the books to be so kept as to show the company’s true
financial position, the auditor has to frame a balance showing that position according to the

S T U D Y

HELD:

T E X T

An auditor represented a confidential report to the directors calling their attention to the
insufficiency of the securities in which the capital of the company was invested, and the difficulty
of realizing them, but in his report to the shareholders merely stated that the value of the assets
was dependent on realization, and in the result the shareholders were deceived as to the condition
of the company, and a dividend was declared out of capital and not out of income
...
But his first
duty is to examine the books, not merely for the purposes of ascertaining what they do show,
but also for the purposes of satisfying himself that they show the true financial position of the
company
...
He is not an insurer; he does not guarantee that the
books do correctly show the true position of the company’s affairs; he does not even guarantee
that his balance sheet is accurate according to the books of the company
...
His obligation is not as
onerous as this
...
i
...
he must not certify what
he does not believe to be true, and he must take reasonable care and skill before he believes
that what he certifies is true
...

Where there is nothing to excite suspicion, very little inquiry will be reasonably sufficient, and
in practice I believe businessmen select a few cases at haphazard, see that they are right,
and assume that others like them are correct also
...
It is satisfactory to find that the legal standard of
duty is not too high for business purposes, and is recognised as correct by businessmen
...
Information and means of information are by no means equivalent terms
...
an auditor who gives shareholders means of information instead of information
respecting a company’s financial position does so at his peril and runs the very serious risk of
being held judicially to have failed to discharge his duty
...
Theo bald did fail to discharge his duty to the shareholders in certifying and laying
before them the balance sheet
...
It is a mere truism to say that the
value of loans and securities depends on their realization
...
But, as already stated, the duty of an auditor might infer from an unusual
statement that something was seriously wrong, it by no means follows that ordinary people would
have their suspicion aroused by a similar statement, if, as in this case, its language expresses
no more than any ordinary person would infer without
...
But they
were, nevertheless, entirely misleading, and misrepresented the real position of the company
...
Theo Bald failed to discharge his
duty to the shareholders
...
The fact,
however, remains, and cannot be got over, that the balance sheet and certificate of February
1892 did not show the true position of the company at the end of 1891 and that this was owing
to the omission by the auditor to lay before the shareholders the material information which he
had obtained in the course of his employment as auditor of the company, and to which he called
the attention of the directors
...
”



RIGBY, LJ
...
Under the statute the members of the company
are entitled to have the safeguard of an expression of opinion of the auditors to the effect, first,
that the balance sheet, is properly drawn up so as to exhibit a true and correct view of the state
of the company’s affairs
...
A full and fair balance sheet must be such a balance sheet as to convey
any known causes of weakness in the financial position, or suggest anything which cannot be
supported as fairly correct in a business point of view
...
The directors never called a general meeting to consider
theses balance sheets and reports
...
”

BENNET, J:

“
...
But when you begin to reflect on the question, it cannot, I think, have been the intention
of the legislators to impose that duty on the auditors and it certainly has never been the practice,
since the obligation has been imposed, for auditors themselves to send their reports to every
member of the company
...

mean “all the members”
...
It seems
that 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”
...
The reports annexed to these balance sheets were signed by the
auditors
...
RE ALLEN CRAIG & CO
...
(1934) Chapter 483

360

C O M PA N Y L A W

unless they can themselves call a general meeting or can compel someone else to call 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
...


In my judgment, the duty of the auditors, after having affixed their signatures to the reports annexed
to a balance sheet, is confined to forwarding that report to the secretary of the company, leaving
the 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 duty of the auditors is
discharged by sending the report to the secretary of the company
...


The auditors should state whether they have obtained all the information and explanations
which to the best of their knowledge and believe were necessary for the purposes of
their audit
...
Whether, in their opinion, proper books of account have been kept by the company, so
far as appears from their examination of those books, and proper returns adequate for
the purposes of their audit have been received from branches not visited by them
...
Whether the company’s balance sheet and (unless it is framed as a consolidated profit
and loss account) profit and loss account dealt with by the report are in agreement with
the books of account and returns
...
Whether, in the auditors’ opinion and to the best of their information and according to
the explanations given to them, the said accounts give the information required by the
Companies Act in the manner so required and give a true and fair view:
5
...
In the case of the profit and loss account, the profit or loss for its financial year,
7
...

8
...

The report drawn up by the auditors must be attached to the accounts when sent to the members
(Section 156) and it shall be read before the company in general meeting and shall be open to
inspection by any member
...


ANSWER BANK

361

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
more competent inspectors to investigate and report on the membership of any company and
otherwise with respect to the company for the purpose of determining the true persons who are
or have been financially interested in the success or failure (real or apparent) of the company or
able to control or materially to influence the policy of the company
...

Subject to the terms of an inspector’s appointment, his powers shall extend to the investigation of
any circumstances suggesting the existence of an arrangement or understanding which, though
not legally binding, is or was observed or likely to be observed in practice and which is relevant
to the purposes of his investigation
...


The expenses of any investigation under subsection (1) shall be defrayed by the registrar
...


S T U D Y

Where an application for an investigation under this section with respect to particular shares or
debentures of a company is made to the registrar by members of the company and the number of
applicants or the amount of shares held by them is not less than that required for an application for the
appointment of an inspector, the registrar shall appoint an inspector to conduct the investigation unless
he is satisfied that the application is vexatious, and the inspector’s appointment shall not exclude
from the scope of his investigation any matter which the application seeks to have included therein,
except in so far as the registrar is satisfied that it is unreasonable for that matter to be investigated:

T E X T

The appointment of an inspector under this section may define the scope of his investigation,
whether as respects the matter or the period to which it is to extend or otherwise and in
particular may limit the investigation to matters connected with particular shares or debentures
...

Section 147(2) provides that “proper books of account” shall be deemed not to have been kept
with respect to the matters aforesaid if there are not kept such books as are necessary to give a
true and fair view of the state of the company’s affairs and to explain its transactions
...


Contents of Profit and Loss Account
Part I of the Sixth Schedule provides there shall be shown:
1
...

3
...

5
...

7
...

9
...


11
...

13
...


The amount charged to revenue by way of provision for depreciation, renewals or
depreciation of fixed assets
...

The amount of the charge for income tax and any other taxation on profits to date
The amounts respectively provided for redemption of share capital and loans
The amount, of material, set aside or proposed to be set aside to reserves
...

The aggregate amount of the dividends paid and proposed
...

The following matters shall be stated by way of notes, if not otherwise shown:
If depreciation or replacement of fixed assets is provided for by some method other
than a depreciation charge or provision for renewals, or is not provided for, the method
by which it is provided for or the fact that it is not provided for, as the case may be
...

Whether or not the amount stated for dividends paid and proposed is for dividends
subject to deduction of income tax
...

Any material respects in which any items shown in the profit and loss account are
affected by transactions of a sort not usually undertaken by the company or otherwise
by circumstances of an exceptional or non-recurrent nature; or by any change in the
basis of accounting
...


By Section l50(2)(b) group accounts need not deal with a subsidiary of the company if the
company’s directors are of the opinion that:
•

•
•
•

It is impracticable, or would he of no real value to the members of the company, in
view of the insignificant amounts involved, or would involve expense or delay out of
proportion to the value to members of the company
The result would be misleading
The result would be harmful to the business of the company or any of its subsidiaries
The business of the holding company and that of the subsidiary are so different that
they cannot reasonably be treated as a single undertaking
...


However, the group accounts need not be prepared in this form if the directors are of the view
that they could be prepared in another form which would be readily appreciated by the company's
members (Section l51 (l))
...

Section 153(1) further provides that the group accounts, if prepared as consolidated accounts,
shall comply with the requirements of the Sixth Schedule to the Act, so far as applicable thereto
and if not so prepared, shall give the same or equivalent information
...


T E X T

The approval of the registrar shall be required for not dealing in group accounts with a subsidiary
on grounds (iii) or (iv)
...
”
1
...

2
...

3
...


i) Under Section 323 (1) (a) of the Act, if in the course of winding up a company, it

appears that any business of the company has been carried on,
1 With intent to defraud its creditors or creditors of any other person
2 For any fraudulent purpose
...


1 All persons who are knowingly parties to the carrying on of the company’s

business are liable to an imprisonment for a term not exceeding two years or a

fine not exceeding Kshs
...


2 If the person(s) is a creditor to the company, the court may order that he ranks

behind all other creditors in the satisfaction of claims
...


S T U D Y

T E X T



b)
Under Section 222 of the Companies Act, on hearing a winding up petition the court may:
1
2
3
4

Dismiss it
...

Make an interim order
...


However, the court cannot refuse to make a winding up order on the ground only that the assets
of the company have been mortgaged to an amount equal to or in excess of those assets or that
the company has no assets
...


• To bring or defend actions and legal proceedings in the name and on behalf of the
company
...


• To appoint an advocate to assist him in the performance of his duties
...


ANSWER BANK



i)

•
•

365

To make any compromise or arrangement with creditors
...


On his own responsibility and without obtaining any sanction the liquidator can:













•
•

•
•

•
•

•
•


Sell the property of the company by public auction or private contract
...

Prove, rank and claim in the bankruptcy or insolvency or any contributory
...

Raise money on the security of the company’s assets
...

Appoint an agent to do any business which the liquidator cannot do himself
...

Winding up subject to the supervision of the court
...


Who may commence proceedings?
Compulsory winding up
1
...

3
...

5
...


The company
Creditors
Contributories
The attorney general
The official receiver
Members other than contributories
...

2
...


The creditors
The official receiver
Members

Voluntary winding-up
1
...


Shareholders
Creditors

S T U D Y

a)

T E X T

QUESTION THREE

366

C O M PA N Y L A W

b)

How the creditor can prove insolvency
1
...

3
...
1,000 or more remain unpaid three weeks after demand
Execution or other process has been returned unsatisfied wholly or in part
...


Course of action open to a secured creditor in liquidation
1
...

3
...


Value the security and prove the balance, if any
...

Surrender the security and prove the entire debt
...


QUESTION ONE
The following sequence of action is necessary:
1
...






Application is made to the court (usually by the company itself) for an order that one
or more meetings of members and or of creditors (if the scheme will affect the rights
of creditors (if the scheme will affect the rights of creditors) shall be held
...
If the court is satisfied that the scheme is generally suitable
for consideration as a “scheme of arrangement” under Section 207, it will order that a
meeting of meetings be held to consider it
...
The court
merely looks at the outline of the scheme and if it seems suitable orders that meeting(s)
be held
...
A substantial
quorum, say members (present in person or by proxy) holding one-third of the shares,
is required and the scheme must be approved by members (or, as the case may be,
creditors) voting at each meeting who:
(i) Are a majority in number, and
(ii) Represent three-quarters in value of the shares (or at a creditors’ meeting, of the
amounts owing)
...
At this stage any minority
which opposes the scheme may state its objections for consideration by the court

ANSWER BANK



Section 207 refers to a “class” of members or of creditors
...
g
...
g
...
But the principle is carried even further
...
It has been said that each meeting “must be confined to those persons
whose rights are not so dissimilar as to make it impossible for them to consult together
with a view to their common interest” (Sovereign Life Assurance Co v Dodd)
...




In Re: Hellenic and General Trust (1976), a scheme of arrangement was agreed
between Hambros and Hellenic whereby the shareholders of Hellenic were to have
their shares in the company cancelled in return for cash compensation
...

The scheme was approved at a meeting of Hellenic by a majority in number of the
shareholders holding three quarters in value of the shares involved
...
Hellenic applied for approval of the scheme and was opposed by a Greek
Bank, a 14% shareholder in Hellenic
...





The Greek bank opposed the approval of the scheme before the court on two grounds
...
MIT was Hambros indirectly; it was seeking to acquire
the 47% of Hellenic, which it did not (through MIT) already own
...
At such a meeting, the Greek bank (with 14%
out of 47%) could have prevented approval by the required three quarters majority
...


A copy of the court order approving the scheme is delivered to the registrar and the
scheme then takes effect, i
...
, the changes are made automatically as soon as this is
done
...
It has been used to vary the rights attached to debentures or preference
shares (when there are obstacles to a straightforward reduction of capital or variation
of class rights) or to reorganize the capital structure of a company or to acquire shares
of a company (instead of a take-over bid to which section 210 will apply)
...


S T U D Y

3
...
Under take-over bid rules the required
90% acceptance (from the independent shareholders) would not have been obtained
since the Greek bank held more than one-tenth of the outstanding 47% minority
shareholdings
...
e
...




If the court approves the scheme and makes an order providing for any of the following
under section 209(1):-

•

S T U D Y

Secondly, the purpose of the scheme was to enable Hambros to acquire 47% of the
shares of Hellenic
...
)



T E X T



The transfer of the whole or part of the undertaking and property or liabilities to the
“new” company;
The allotment of shares and debentures etc
...


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
...
This is a less stringent
requirement than Section 210 imposes since Section 210 operates only if holders of 90 per cent
of all the shares for which the offer is made accept the offer
...
But if (as in the Hellenic
& General Trust Case) the court concludes that an identified minority has been denied the veto
which Section 210 would have given it is unlikely to give its approval under Section 207
...

The Company need not be wound up in order to carry out this scheme of arrangement under this
section
...
All this is expensive
...
Otherwise it
is uneconomical
...
This liquidation procedure is binding on a minority unless the court
on the application of a creditor or contributory (member) orders otherwise;
A compromise made by the liquidator in exercise of statutory powers under section 241
or Section 297(l)(a)
...


It is usual to proceed under Section 207 as there are technical difficulties over Section 300
procedure
...
g
...
15 in 1
pound to be accepted in full settlement
...
e
...


QUESTION TWO
Reconstruction under Section 280
Section 280 provides that where a company is proposed to be, or is in course of being wound
up voluntarily, and the whole or part of its business or property to be transferred or sold to
another company, the liquidator of the first-mentioned company (transferee company) may with
the 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 other
arrangement whereby the members of the transferor company may, in lieu of receiving cash,
shares or other like interests, participate in the profits of or receive any other benefit from the
transferee company
...
It has also been used for alteration of the company’s
objects; variation of shareholders rights and effecting a compromise with creditors
...
But when

S T U D Y

•
•

T E X T

If a company, which is or is about to be in voluntary liquidation proposes to make a composition
with its creditors it has a choice between the following alternatives:

370

C O M PA N Y L A W

a reconstruction takes this form Section 280 procedure must be followed so that a dissenting
minority does have the appropriate safeguard
...
A company in liquidation must dispose of its assets (other than cash) by
sale in order to pay its debts and distribute any surplus to its members
...
Obviously, the creditors of Company P will have to
be paid in cash
...
Hence substantial sums may have to be found in cash
...


S T U D Y

T E X T

A company in (or about to go into) members’ voluntary liquidation may, by special resolution,
authorise the liquidator to sell the business or property for shares (of some other company) to
be distributed to members
...
280
...
Moreover a creditor can at any time within a year of the passing of
the special resolution (in a members’ voluntary winding up) render it invalid by obtaining a court
order for compulsory liquidation; Section 280(5)
...


2
...
Alternatively, the company may seek to obtain the consent of
the creditors to the transfer of liability for their debts to the transferee company (as part of the
terms on which the business is sold);
Then to convene a general meeting and propose a special resolution to approve the sale of the
business in exchange for shares of the purchasing company
...
If it is clear that the cash expenditure will be
prohibitive, the scheme can be abandoned before the company goes into liquidation;
Finally (as the second step at the same general meeting) to move a resolution to go into liquidation
...

If a dissentient member claims to be paid the value of his interest in cash the amount (if it cannot
be agreed) is to be determined by an arbitrator
...
If a
member fails to give notice within the seven days period to the liquidator of his demand for cash,
he is entitled to his proportion of the transferee company’s shares or if he refuses to accept them
they may be sold and the proceeds paid over in settlement since (by failing to observe Section
280 procedure) he has forfeited his entitlement under section 280
...
Secondly, the company
must go into liquidation, which is an irreversible process
...
It may be preferable to make the desired reconstruction in
some other way
...
When the latter company is a wholly-owned
subsidiary, there is no procedural difficulty in transferring its business to the holding company
...

The advantage of transferring a business from one company to another (with the same
shareholders in the end) is that by this means the business may be moved away from a company
with a tangled history to a new company which makes a fresh start
...


It is standard procedure in making a take-over bit to state that if 90 per cent acceptance is
attained compulsory acquisition under Section 210 will follow
...
The procedure is available
if Company A already owns shares of Company B and offers to acquire those which it does not
already own (but see Para 22 below
...
The rules of procedure are explained
below
...
Section 210 is not available
to an individual who makes a take-over bid (but he can always form a company for the purpose:
provided no fraud or improper conduct is involved: Re Bugle Press Ltd
...
4
...
Section 210 applies separately to shares of
each class for which 90 per cent acceptance is obtained
...

If Company A directly or through subsidiaries owns more than one-tenth of the shares of Company
B then (in order to be able to use Section 210) Company A must:
(a) Offer the same terms for all the shares which it does not already own;
(b) Obtain acceptances from holders who are three-quarters in number as well as holders
of 90 per cent of the shares
...


T E X T

QUESTION THREE

372

C O M PA N Y L A W

The wording of Section 210 is ambiguous but it is generally taken that Company A must offer to
acquire all of the shares of Company B which it does not already own if it is then to use Section
210 to acquire the remaining shares in Company B (or all the shares of the class) for which the
offer is made
...
The position then is that:

(a) At the end of the four month period (not earlier than that even if 90 per cent acceptance
is attained before the period expires) Company A may (but it need not do so if it does not
wish-however see paragraph 25 below) serve notice on the non-accepting shareholders
of its intention to acquire their shares on the same terms as have been accepted by the
majority
...


By this means the outstanding shares are transferred without any further action on the part of the
non-accepting shareholders
...
Company A is not obliged
to serve notice of intention to acquire their shares
...
Those shareholders
may then within the ensuing three months require Company A to acquire their shares on
the same terms as have been accepted by the approving shareholders
...

The minority whose shares are acquired compulsory under Section 210 are entitled to all the
benefits included in the original offer and accepted by the holders of 90 per cent or more of the
shares
...
When Company A offers its own shares in
exchange for shares of Company B it is a common practice to make the offer more attractive by
arranging with a third party that the latter will make a simultaneous offer (for a limited period only)
to purchase from shareholders of Company B their consideration shares (allotted by Company
A) if they do not wish to retain them
...
When Section 210 is used to acquire the outstanding shares

ANSWER BANK

373

of Company B the bidder (Company A) must arrange for a cash alternative to be provided since
that was part of the terms (although it came from a third party) which induced a high level of
acceptance: Re Carlton Holdings (1971)
A non-accepting shareholder who applies to the court to set aside the proposed compulsory
acquisition of his shares under Section 210 will fail unless he can make out a very strong case
...
This is so even if the objector contends that he had need of more information in order
to reach a decision or that Company A in acquiring control of Company B will obtain special
advantages (e
...
elimination of a competitor) which are not reflected in the price offered for his
shares
...


But the court will not permit s
...


Held:

Company A was a sham since (lifting the veil of incorporation) it was merely the majority
shareholders (X and Y) in Company B seeking to expropriate the shares of the minority (Z)
...
Z’s objections were upheld
...
The choice may be determined by comparative costs (see paragraphs
8
...
7(c) and 8
...
8)
...
210 applies
...
But under Section 210 procedure there is usually no expense of court proceeds as few
minority shareholders persist in their objections to the point of making application to the court (at
some expense to themselves)
...
It is particularly
useful when Company A is seeking to acquire those shares of a partly-owned subsidiary (Company
B) which it does not own
...
There is often
a delicate balance of conflicting risks and considerations in choosing between Section 207 and
Section210 in such situations
...
They were
the only shareholders and X and Y were the directors
...
Section
210 however is not available to individuals
...
Company A then offered to acquire all the shares
of Company B
...
Company A served notice on Z that it
has secured 90 per cent acceptance (the shares of X and Y) and intended to acquire Z’s 1,000
shares under Section 210
...


T E X T

Case: RE BUGLE PRESS (1900)

374

C O M PA N Y L A W

CHAPTER FOURTEEN
QUESTION ONE
DOCUMENTS TO BE PRESENTED TO THE REGISTRAR

S T U D Y

T E X T

Foreign companies which, after the appointed day establish a place of business within Kenya
shall, within 30 days of the establishment of the place of business deliver to the registrar for
registration:(a) a certified copy of the charter, statutes or memorandum and articles of the company
or other instrument constituting or defining the constitution of the company, and, if the
instrument is not written in the English language, a certified translation thereof;
(b) a list of the directors and secretary of the company containing the particulars mentioned
in subsection (2);
(c) a statement of all subsisting charges created by the company, being charges of the
kinds set out in subsection (2) of section 96 and not being charges comprising solely
property situate outside Kenya
(d) the names and postal addresses of some one or more persons resident in Kenya
authorised to accept on behalf of the company service of process and any notices
required to be served on the company; and
(e) the full address of the registered or principal office of the company
...

Where in the case of a company to which this Part applies:(a) a winding-up order is made by
(b) proceedings substantially similar to a voluntary winding up of the company under this
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 the
commencement of such proceedings, as the case may be, deliver to the registrar a
return containing the prescribed particulars relating to the making of such order or the
commencement of such proceedings and shall cause the prescribed advertisements in
relation thereto to be published

ANSWER BANK

375

QUESTION THREE
The sections in part X shall apply to all foreign companies, that is to say, companies incorporated
outside Kenya which, after the appointed day, establish a place of business within Kenya and
companies incorporated outside Kenya which have, before the appointed day established a
place of business within Kenya and continue to have a place of business within Kenya on and
after the appointed day: A foreign company shall not be deemed to have a place of business in
Kenya solely on account of its doing business through an agent in Kenya at the place of business
of the agent
...


REGISTRATION OF CHARGES CREATED
369
...


S T U D Y

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
...


S T U D Y

T E X T

376

C O M PA N Y L A W

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

377

GLOSSARY

S T U D Y

T E X T

378

C O M PA N Y L A W

379

GLOSSARY
A
Annexture: Attachments or documents fixed to another
Auditor: This a person appointed by the company to carry out an audit
Audit: This is an independent examination of the final statements as to whether they show a true
and fair view
Allotment: It: It is, legally speaking, the company’s acceptance of an offer to buy its shares
Articles of association: A document which regulates the internal affairs of a company
Artificial person: A person recognised by law in the form of companies

B
Balance sheet: This is a financial statement that shows the company’s state of affairs

Body corporate: This is an artificial which comes into existence through incorporation
Brokerage: This is the commission paid to a broker

C
Capital: amount of money which a company raises from issuing shares
Central depository system: A computerised ledger that enables the transfer and holding of
securities without need for physical movement
Caveat emptor: A Latin term that means buyer beware
Class: refers to people whose rights are so similar that it is hard to separate
Cessation: This refers to loss of company membership or to share entitlement

D
Discount: The difference between the nominal value and the issue price; it’s normally lower than
the nominal value
Derivative action: A suit brought by a person in the name of and behalf of the company 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

S T U D Y

Bearer: This is a person in possession of a particular thing

T E X T

Bankrupt: This is a person adjudicated by a court as unable to pay his debts

380

C O M PA N Y L A W

E
Equitable mortgage: This is a share certificate deposited without executing transfer
Equity: This is capital provided by shareholders
Estoppel: This is an equitable doctrine that prevents a person from going against his word
Extra ordinary general meetings: These are all other meetings other than general meetings

F
Financial Year: This is the duration within which a company specifies as a time when an audit
should reflect normally one year
Floating charge: This is a charge that hovers over all the assets of a company
Floatation: This is an invitation from a company to the public to subscribe for its shares
Foreign companies: These are companies that are incorporated outside Kenya
Forfeiture: This is the cessation of a person’s membership for failure to pay a call

T E X T

General meetings: These are meetings chaired by a chairman held annually to discuss matters
affecting the company’s management

S T U D Y

G

Group accounts: These are financial statements which consist those of a holding company and
its subsidiaries

Good faith: This is doing a deed with good intentions and no malice

Group enterprises: This is an enterprise that consists of a holding company and its
subsidiaries
Guarantee: This is an agreement whereby a person undertakes to pay the creditor should the
debtor default

I
Insider trading: This is dealing in company securities with information that is not available in the
public domain
Incorporated association: An artificial person that has a legal identity
Indemnity: This is a payment that reinstitutes the aggrieved to the position he was in before the
loss 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: liability of members is limited to the amounts if any unpaid on their shares
Liquidator: a person appointed by court to take control of the company’s assets and realize
them

GLOSSARY

381

Lien: An equitable or legal charge on the shares of a member
Mortgage: A transaction whereby an asset is used as collateral for a loan

M
Memorandum of Association: A document which regulates the affairs of the company and
outsiders
Member: a person who subscribes to the memorandum or whose name is entered in the register
of members
Merger: Denotes instances in which the property of the company is transferred to another which
is already in existence
Minority: A share holder who holds the least number of shares
Meeting: coming together of two or more people

N

Negligence: This is failing to do what a reasonable man given those circumstances would have
done
Nullity: Means a transaction which is unenforceable

O
Oppression: A situation where those in power take unfair advantage of the minority
Oral transfer: This is a transfer by word of mouth
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: Document issued by a public company which wants to raise capital
Proxy: A person appointed by a shareholder to vote on behalf of that shareholder at a company
meeting
Pre-incorporation contract: This is a contract entered into on behalf of a company before it
comes into existence
Prima facie: A Latin term which means on the face of it

S T U D Y

Name clause: This is a clause in the memorandum that gives the name of the incorporated
association

T E X T

Natural person: An individual human being

382

C O M PA N Y L A W

Q
Quorum: The requisite number of members to be present for a meeting to take place
Qualification shares: These are the shares that are prescribed in the articles for the director to
take up before e he can qualify as one

R
Receiver: A representative of secured creditors to enforce their security
Reconstruction: Recreation of a company building it a new
Redeemable preference shares: these are shares that rank above ordinary shares and are
bought back by the company during its existence

S
Share: The basic unit of ownership in a company

S T U D Y

T E X T

Secured creditor: This is a creditor whose debt is secured on a fixed or floating asset of the
company
Stock: This is a block of shares

T
Transfer: Occurs when shares are bought from a member rather than the company

U
Ultra vires: A Latin term which means beyond the contracting powers of a company

V
Void: Means the contract cannot be enforced it confers no rights and imposes no obligations
Voidable: A contract that can be enforced at the option of the innocent party

W
Warrant: This is a warranty that the bearer is the owner of the shares specified there insurance
Winding up:- Process by which a company is dissolved and ceases to exist

S T S TDUYD Y E T E X T
S T U D Y T E X T
U
T
X T

383

INDEX

S T U D Y

T E X T

384

C O M PA N Y L A W

385

INDEX
A
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

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

S T U D Y

Burkinshaw v Nicolls: 136

T E X T

Board: 152

386

C O M PA N Y L A W

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

S T U D Y

T E X T

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

INDEX

387

P
Pre-incorporation contract: v, 52
Preliminary expenses: 64
Premium: 59, 349
Private companies: 140
Prospectus: 59, 63, 349
Proxy: 147, 349

Q
Qualification shares: 350
Quorum: 147, 310, 350

R
Ratification: 51

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

S T U D Y

Reduction: 290

T E X T

Redeemable preference shares: 350

388

C O M PA N Y L A W

Unlimited companies: 34

V
Voting: 64, 284, 310

W

S T U D Y

T E X T

Warrant: 350

S T S TDUYD Y E T E X T
U
T
X T
S T U D Y T E X T

389

REFERENCES

S T U D Y

T E X T

390

C O M PA N Y L A W

391

REFERENCES
2
...



COMPANY LAW 2ND EDITION
JOHN JOSEPH OGOLA 1994

4
...
DAVIES

5
...




CHARLESWORTH’S BUSINESS LAW
16TH EDITION
PAUL DOBSON

7
...



COMPANIES ACT
CHAPTER 486 OF THE LAWS OF KENYA

9
...



S T U D Y

T E X T

392

C O M PA N Y L A W



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