COMPANY LAW IN KENYA

Introduction

The formation and winding up of a company in Kenya is governed by the

Company’s Act Cap 486 of the Laws of Kenya. The company legislation in Kenya

owes its origin to the English company law. The companies Act of Kenya which

came into force on 1st January 1962 is based on English companies Act of 1948.

This Act is still applicable together with later amendments. The Act provides a

basic legal framework for the regulation of companies in Kenya. It makes

provision for the legal incorporation of companies and lays down rules for their

constitution, management and winding up.

A part from the companies Act, there is also case law which has been developed

by the courts such doctrines of ultra vires. The case law and companies practice

have developed so many rules which are useful for filling in the gaps which have

not been provided by the companies Act. 

Definition of a Company

A company can be defined as a group of persons associated together for the

purpose of attaining a common objective, social or economic.

According to Lord Justice Lindley a company is “an association of many persons

who contribute money or money’s worth to a common stock and employs it in

some trade or business and who share the profit and loss there from. The

common stock so contributed is denoted in money and is the capital of the

company. The persons who contribute it or to whom it belongs are members. The

proportion of capital to which each member is entitled is his share. The shares

are always transferable although the right to transfer is often more or less

restricted”.

Justice Marshall defines a company as an artificial being, invisible, intangible,

existing only in contemplation of the law. Being a mere creation of law, it

possesses only the properties, which the charter of its creation confers upon it,

either expressly or as incidental to its very existence.

According to Haney “a company is an incorporated association which is an

artificial person created by law, having separate entity, with a perpetual

succession and a common seal”.

 

Section 2 (1) of the company Act (cap 486) provides that “a company means a

company formed and registered under this Act or an existing company”. Existing

company only means a company formed and registered under any of the

repealed ordinances. For the purposes of companies Act of Kenya the

companies includes: -

a)     A registered company under this Act.

b)     An existing company.

c)     An unregistered company covered under section 357-364.

d)     A produce company covered under section 388.

e)     A foreign company covered under section 365-381.

 

Characteristics of a company

1.      Artificial legal person

A company is an artificial legal person. It acts through a board of directors

elected by the share holders. It was stated in Bates vs standard Land company

that “The Board of Directors are the brains and the only brains of the company,

which is the body and the company can and does act only trough them”.

A company has the right to acquire and dispose of the property, to enter into

contract with third parties in its own name and can sue or be sued in its own

name.

2.      Separate legal Entity

A company is a separate entity quite distinct from its shareholders. A company or

body corporate is formed once a certificate of incorporation is given. Such a body

corporate is capable of having perpetual succession, power to hold land, has a

common seal with liabilities of its members limited as per the provisions of the

Act.

In England legal personality of a company was recognized in 1867 in Oakes vs

Turquand. Importance or separate entity was firmly established by Salomon vs.

Salomon (1897) AC 22. In the case Solomon sold his boots business to a new

formed company for $30000. His wife a daughter and four sons took up sh of

$1each. Salomon took 23000 shares of $1 and $10000 debentures. When the

company was wound up Salomon was able to rank any of secured (or preferred)

creditors for his debentures.

In the case Lord Machagater observed the company is at law quite different

person altogether from the subscribers of the memorandum and though it might

be that after incorporation the business is precisely. The same as it was before

and the same persons are managers, and the same hands receive the profits,

the company is not in law the agent of the subscribers or trustee liable in any

shape or form except to the extent and in the manner provided by the Act”.

Other case laws in support of separate legal personality are the Lee vs Lee Air

Farming Ltd and the Maccaura vs Northern Assurance Company Limited 1952

Act 6119.

 

3.      Perpetual Succession

A company has a common seal, with the name of the company is not affected by

the death, insanity or bankruptcy of shareholders. Change of membership also

does not affect continuity of the company.

 

4.      Common Seal

A company has a common seal, with the name of the company engraved on it as

a substitute for its signatures. For a document to be binding it must bear the

common seal of the company and the seal witnessed by two or more directors.

 

5.      Limited    Liability

A shareholder is only liable to the debts of the company during it’s        life or

during winding up only to the extent of share taken by him and only to the

balance taken by him or up to the guarantee given by him or both. The personal

property of a shareholder can’t be attached for the debts of the company.

 

6.      Transferability of shares   

 Members of a public company are free to transfer shares held by them to

anybody. However for private company transferability of shares may be restricted

by articles.

 

7.      Capacity to sue or be sued

 A company can sue or be sued all in its own name. Thus is the case of for suits

for and against the company is the proper plaintiff and proper defendant.

 

8.      Separation of ownership and management

Board of directors elected by members in the general meeting governing the

affairs of the company.

 

9.      Separate property   

A company is capable of owning, enjoying and disposing the property in its own

name. Thus a shareholder does not have an insurable interest in the property of

the company.

 

Lifting the Corporate Veil

Since a company is a legal person distinct from its members there is assumed to

be a curtain, a veil or a shield between the company and its members. The

principle of separate legal entity was established in the case of Salomon vs

Salomon and company Ltd. Thus once a company is formed there is a veil

between the company and its members. Based on this principle it is not easy to

go behind the curtain and see who are the real persons composing the company.

There are however cases when the corporate veil has to be lifted to look at the

individual members who are in fact the real beneficial owners of all corporate

property. Thus lifting corporate veil means identification of a company with its

members and when the corporate veil is lifted the individual members may be

held liable for its acts or entitled to its property.

Some of the instances when the corporate veil may be lifted include where it is

for the benefit of revenue, where it is essential to secure justice and where it is in

public interests. The corporate veil may be lifted by: -

a)     The courts

b)     The statute

a)     Lifting by the courts

1.      Determination of the character of the company.

A company may be declared an enemy character when its directors are

residents of an enemy country. Therefore courts may lift the veil to ascertain the

nationality of persons controlling the company.

In Daimler company Ltd vs continental Tyres and rubber company Ltd 1916 AC

307 Daimler company was sued by continental tyre company for recovery of a

debt of Tyres supplied continental tyres was incorporated in England for

purpose of selling in England tyres made in Germany. The shareholders of

continental tyres were Germany except one and all directors were Germany .

During the First World War continental tyres commenced an action to recover a

debt from Daimler. Daimler contested arguing that continental tyres was an

enemy company. It was held that continental tyres was an alien company and

the payment of debt would amount to trading with an enemy.

 

2.      Prevention of fraud or improper conduct.

The veil may also be lifted if a company is formed for a fraudlent purpose or to

avoid legal obligations.

Professor Leower says that the veil of a corporate body will be lifted where the

corporate personality is being blantantly used as a clock for fraud or improper

conduct.

Case law Jones vs Limpman 1962

 

3.      Where a company is a shaw.

This refers to a situation where a company is formed and used for some illegal or

improper purpose.

Case law Luniford motors Company Ltd vs Horne (1933)

 

4.      Where the company is acting as the agent of the shareholders.

When a company is acting as an agent of its shareholders or of another

company, it will be liable for its acts. There may be express agreement to the

effect or an agreement (of agency) may be implied from the circumstances of

each particular case.

Case law relating to this is the F.G Film Ltd in Re (1953) I ALL E.R 615.

An American company financial the production of a film in India in the name of a

British company. The president of the British company, the board of trade of

Great Britain refused to register the film as a British film. The decision was held

as a valid in view of the fact that British company acted merely as the agent or

nominee or the American company.

 

5.      Protection of Revenue.

This is especially the case when a company is formed to assist shareholders

evade taxes. In such case the shareholders may be held liable to pay income

tax.

Case law illustrating is that of Sir Dinshaw Maneckfen Pefi Re AIR (1927) Bom

371.D.

 

6.      Protecting public policy.

Courts lift the corporate veil to protect the public policy and prevent transactions

contrary to public policy. Where there is a conflict between the separate entity

principled and public policy the courts ignore form and take into account the

substance (Conners vs Connors Ltd (1940) for ALL ER 174).

 

Lifting by statute.

1.      When members fall below statutory minimum. As per section 33 of the

Act, a business is not allowed to carry on business for more than six months

if membership falls below seven incase of a public company and below two

in case of a private company. Anyone aware of the fall of membership and

continues to carry on business will be held liable for all debts of the company

contracted after six months.

2.      Misdescription of the company.

Sec 109 of the Act states that the name of the company must be fully and

properly mentioned on all documents issued by it. Where an officer of a company

signs, on behalf of the company, a bill of exchange, promissory note. Cheque,

order for money or goods in which the company’s name is not mentioned the

officer is personally liable to the holder of the bill of exchange.

Case law in this case, Hendon vs. Alderman (1973) 117s 631.

3.      Holding and subsidiary companies.

Although both holding and subsidiary companies are separate entities there are

instances where a subsidiary may loose its separate identity to a certain extent.

a)     Where at the end of the financial year a company has

subsidiaries, it may lay before the members in a general meeting

not only its own account but also a set of group accounts showing

the profits and loss earned by the company and its subsidiaries

and their collective state of affairs at the sixth schedules.

b)     Section 167 empowers the inspector appointed by the court to

regard the subsidiary and the holding company as one entity for

the purpose of investigation.

 

4.      Investigation of company membership.

Section 173 (s) empowers the registrar to appoint one or more competent

inspectors to investigate and report on the membership of any company for the

purpose of determing the true persons who are or have been financially

interested in the success or failure of the company or able to control or to

influence the policy of the company. To investigate the corporate veil is lifted to

ascertain the real persons controlling it.

5.      Take over Bids.

Section 210 provides that where scheme or contract inviting the transfer of

shares or class of shares in the company to another company has been

approved by the holders of not less than nine tenths in the value of shares whose

transfer is involved the transferee company may at any time within two months

after the making of the offer by the transferor company, give notice in the

prescribed manner to any dissenting shareholder that it deserves to acquire his

shares. This is illustrated in the case Re Bufle press Ltd.

6.      Fraudlent conduct of Business.

Section 323 of company’s Act in the course of winding up to a company it

appears that any business of the company has been carried on with intention to

defraud creditors, the court may declare that any person who were knowingly,

parties to the carrying on such business are to be personally liable for the debts

and other liabilities of the company.

 

7.      Prosecution of deliquent officers and members of company.

Section 325 of Act if in the course of winding up of a company it appears that any

past or present officer or any member of the company has been guilty of any

offence in relation to the company then the court may declare such a person

liable for his offence.

 

Advantages of Incorporation.

1.      Limited liability.

As observed in Jenkin vs pharmaceutical society of lirent Britain (1921) ich 392

“limited companies are offsprings of preview necessity, that is, men should be

entitled to engage in a commercial pursuit without involving the whole of their

fortune in that particular pursuit in which they are engaged”.

2.      Transferability of shares.

Shares in a company can be transferred (subject to restrictions in the articles of

associations) from one person to another without the consent of other members.

3.      Separate Legal entity.

A company is not affected by the death, insanity or bankruptcy of a member.

4.      Control

Control can be gained by acquisition of majority shares which carry voting power.

5.      Permanent existence.

A company’s life is permanent.

6.      Separation of ownership and management.

Shareholders are owners of the company. Shareholders elect their

representatives to the board of directors, which manages the affairs of the

company.

 

7.      Expert management.

Companies run large-scale business and have adequate financial resources and

as such can afford the services of specialists. Thus companies are run

professionally.

 

8.      Public confidence.

Formation and running of a company is regulated by the provisions of the

companies Act and various other acts. Provisions regarding the appointment and

remuneration of directors, compulsory audit and publication of accounts

protection of minority shareholders have credited greater public confidence.

9.      Social Advantages

A company helps to gather savings from the public and invests them in sound

industrial and commercial ventures. Companies provide employment opportunity

to many and since they operate in large scale they ensure economic use of

national resources And provisions of goods and services to the public at lower

prices.

 

Disadvantages of incorporation

1.      Formation of companies is a complicated procedure and is costly.

Documents requited like the memorandum of Association, the articles, the

prospectus or statement in lieu of prospectus are usually drawn by legal

experts who charge high fees for their preparation. 

2.      There is no secrecy regarding the affairs of a company. Wide publicity

of the company affairs may lead to economic sabotage by its rivals.

3.      It is very expensive to administer a company. This relates to

requirements pertaining the holding of general and statutory meetings and

returns of annual accounts. The accounts and audit reports require

expenses.

4.       Doctrine of ultra vires. A company can only trade on the business

specified in its object clause of the memorandum of association.

5.      Taxation. A company must pay taxes as a legal person while this is not

a requirement for partnerships.

6.      There are many formalities before a business starts trading.

7.      The winding up of a company is widely published thus exposing the

property of the company to an insecure position.  

 

02. CLASSIFICATION OF COMPANIES CORPORATIONS.

 

  Corporation is a person in law i.e. quite distinct from the individuals who are its

members. Corporations can own property, have rights and are subject to

liabilities.

 

Types of corporations:

a) Corporate sole.

Has only one member.

Can continue even after death of those members. 

b) Corporation aggregate.

Have more than one member.

Are classified according to the means the artificial corporate personality has been

granted: - thus

(i) Chartered corporations

Are incorporated by the grant of a royal charter by the crown.

Nowadays charters are given to non-profit making bodies of public importance

(good).

(ii) Statutory corporations

Created by passing an act of parliament e.g. the national coal board.

(iii) Registered corporations.

Are those created by compliance with the terms of an act of parliament.

Companies act 1844 provided a third and easier method of incorporation by

registration following compliance with formalities. In 1855 limited liability concept

was introduced.

 

Types of registered companies

1. Public companies

Under section 1 (1) are formed by seven or more members, the purpose being to

attract investment from the general public.

2. Private companies.

   Formed by two or more members. Defined by sec.28 (1) as a company which

by its articles: -

a)     Restricts rights to transfer shares e.g. by clause that members must

offer their shares first to other members or to directors or a clause under

which directors have a right to refuse to register a transfer.

b)     Limits the number of its members to 50 (excluding present or past

employees). Joint holders of shares are treated as a single member.

c)     Prohibits any invitation to the public to subscribe for its shares or

debentures.

 

Limited companies

Liability of a company is unlimited in the sense that it must pay all debts due from

it so long as its assets are sufficient to meet them. Liability of members may be

limited when the company is formed by;

 

a) Shares.

Members are liable to the extent of the amount paid on their shares, including

share premium if any.

There is no liability regarding unissued capital.

In case of private companies a guarantee is usually required before credit is

given.

 

b) Guarantee

Normally these companies don’t have share capital.

They are non-profit making organizations.

Where there is no share capital, there is no liability or the members unless and

until the company goes into liquidator in which case they were liable to the extent

to which they have agreed by the memorandum of association to contribute to

the assets of the company.

The guarantee is usually to contribute Sh1 though it may be more.

The guaranteed sum is payable by those who are members at the time of

winding up and if they can’t pay the liquidator may proceed against those who

were members previously but only in respect of debts incurred while they were

members.

An unlimited company may re-register as a limited company (by shares or

guarantors) unless it has previously been converted from a limited to an unlimited

company.

Members must pass a special resolution agreeing to the change, and the

resolution must make the appropriate alterations so that it confirms to the

requirements.

The special resolution is then sent to the register of company’s and re-

registration is effected by a director or a company secretary of the company by

signing an application form sending it to the registrar together with a printed copy

of the company’s memorandum and articles in their new form, the register then

issues a new certificate.

 

Unlimited companies.

There is no limit to the liability of the members.

Mostly used by stockbrokers because stock exchange can’t admit a company as

a member unless its members are personally liable for its debts.

An unlimited company can avoid giving publicity to its financial affairs.

An unlimited company can be formed by: -

 

a) By being formed as such;

Either with or without share capital and as a public or private company.

Where there is no share capital members contribute equally to the debts and

liabilities of the company.

b) By being re-registered

Sec. 43 CA 1967 allows a company limited by shares or guaranteed to re-

register as an unlimited company.

All members must consent in writing and all the consents together with a

statutory declaration by the directors that the consents have been obtained and a

copy of the memorandum and articles altered so as to confirm to those of an

unlimited company.

The registrar may then issue a certificate and publish the fact of issue in the

Gazette.

 

Special features of unlimited companies.

a)     It need not deliver copies of its annual accounts, directors and auditors

reports to the registrar with its annual return

      It enjoys privacy as regards its financial affairs.

      This privilege is not extended to an unlimited company, which is a

subsidiary or holding of a limited company, or unlimited company, which is

potentially under control of two or more limited companies.

b)     Provisions of CA 1948 governing the alteration of capital do not apply to

unlimited companies.

      A company may alter its capital structure by a special resolution altering

the articles.

      Notice of any alteration must be given to the registrar within one month

unless alteration increases the company’s nominal capital, when notice must

be given within 15 days.

c)     An unlimited company may acquire any of its own shares if its articles

authorize it to do so, even though it uses its own assets to purchase them.

(Re Borough commercial and building society (1893) ).

If at the time it acquires the shares the company knows that its existing assets

and amounts which it could expect to exact from its members on winding up will

not be enough to satisfy its liabilities the acquisition of the shares will be set a

side as a fraud on its creditors (Mitchell vs. city of clas gow Bank (1879)).

d)     An unlimited company need not give a more than seven days notice to its

members of an extra ordinary general meeting called to pass a resolution

other than a special one. The period for other company’s is 14 days.

e)     An unlimited company may issue shares of no porr value.

f)       An unlimited company has no statutory power to issue redeemable

preference shares, but since it can purchase its own shares if articles provide,

it could in practice issue redeemable preference shares and provision of

section 58 would not apply.

 

Other instances of unlimited liability.

(a) Section 31

Under this if a company carries on business for more than six months with less

than seven members (or two in a private company), every member who knows

of the fact is liable for the debts of the company which are incurred of the period

of six months has expired.

The section does not apply as regards damages after awarded e.g. a breach of

contract by the company.

(b) Section 332

The section applies if the company is being wound up. The court must be

satisfied that the company’s business has been carried on with intent to defraud

creditors.

Person carrying on business fraudulently must be made personally liable for the

company’s debts.

Example directors could be held liable if knowing that the company is unable to

pay its debts as they fall due, they ordered goods on credit or received money

from customers for goods, which the company might not be able to supply.

(c) Section 202

The memorandum of a company may provide or be altered to provide, that the

liability of its members shall be limited but the liability of its directors shall be

unlimited. This alternative is hardly ever adopted in practice.

 

 

 

Separate legal personality of a company

The case, which established the independent legal personality of a company,

Salomon vs. Salomon and company Ltd (1897) (1,1).

Major consequences of the Salomon case.

a)     It established the validity of registration as a means of creating a

corporation formerly these was done by charter for statute.

b)     Registration was established as a method of creating a company with a

separate legal personality.

c)     A registered company has perpetual succession.

d)     Separate personality is made to function by the board of directors which is

the agent. There is thus need for members to have some control over the

board. Some of the ways the member can achieve this control was:-

a.      The ultra vires rule.

Shareholders can seek a court injunction wherever directors involve in

transaction that are beyond the company powers.

These days the courts construct objects clause widely so that this control is often

more apparent than real ( Re New Finance and Mortgage Co. Ltd (1975)).

Also acts by directors which are defective whether because of lack of authority or

quorum or because of some defect I their appointment or because of their

motives were improper, can be validated by ordinary resolution of the members

after full disclosure of the facts to them in a general meeting, provided the acts in

question are not ultra vires the company (e.g. Barnford vs. Barnford (1969) Y4).

 

b)     Accounts and audits

The board is required to account for its financial stewardship by ensuring the

production of annual accounts which must be audited and presented to the

members at the

c)     Sec. 184 removal of directors is made easy. 

A company may by ordinary resolution remove a director before the expiration of

his period of office regardless of the way in which he was appointed not

withstanding anything in its articles or any agreement in his favour section 184

(1).

Special notice of 28 days to the company is required of the intention to move the

resolution (sec.184 (2)).

Following the acceptance of limited liability in Salomon, certain protections are

given to creditors and potential creditors.

a)     Publicity as to financial standing - Companies must file the annual

returns.

b)     Share capital (creditors fund) cannot be returned to shareholders.

(i)                 Capital reductions must be a approved by the court

under section 66.

(ii)               A limited company may not purchase its own shares

(Trevor and Whortworth 1887 (1/6)), nor, subject to certain

exceptions, lend money to persons so that they may buy the

companies shares (s.54)

There is an exception when shares are issued as redeemable preference shares

(section 58).

            (iii) Dividends must be paid out of profits and not out of capital.

There are provisions to prevent the capital of a company being watered down as

it comes into the company by the control of the issue of shares at a discount

(section 57) and of underwriting commission paid on shares on the issue of

shares.

Exceptions to the rule of separate legal personality.

1.      Companies act 1948

If the membership fall below the statutory minimum for six months.

There is also liability where on winding up the court is satisfied that a company’s

business has been carried on within intent to defraud its creditors.

 

2.      Public interest

Personal qualities of shareholders may be investigated in public interest (Daimler

Co. Ltd vs. continental Tyre (1916)(1/7).

 

3. Evasion of legal obligations

When a company is formed to evade legal obligations (e.g. Gilford motor Co. Ltd

vs. Horne (1933)) shareholders may be personally liable.

4. Personal relationship company sec. 184 of 1948 act,

Which allows removal of a director by an ordinary resolution after 28 days has

also given rise to abuse of the corporate entity theory in the private company.

This is because a director can be easily be removed without a mistake of in part,

unless there is a special clause in articles as in Bushell v. Feith.

However in Ebrahim vs. Westborne Leallaries (1972)(1/9) the House of Lords

decided that a removal under section 184 could be ground for winding up under

section 222 in private company. This rule applies not to all private companies but

to personal relationship companies.

Personal relationship companies are in essence partnerships where each

member assumes continuing involvement in management. In order to ascertain

whether the company is a personal relationship company, it is necessary to lift

the corporate veil and discover the hopes and aspirations of the members.

In Re. A&B, C chewing gum (1975)1/40 the court took a view that entitlement to

management participation was an obligation so basic that, if broken, the

association must be dissolved even though it was not a company  arising out of

partnership.   

 

 

03. FORMATION OF A COMPANY

INTRODUCTION

There are several formalities, which have to be followed before a company is

incorporated (formed). The process is grouped in the following stages: -

1.      Promotion

2.      Incorporation or Registration

3.      Capital subscription

4.      Commencement of business

It should be noted that a private company need only to go through the first two

stages only. A public company must go through all the four stages.

 

1.      Promotion

L.W Leertenberg defines promotion “the discovery of business opportunities and

the subsequent organization of funds, property and managerial ability into a

business concern for the purpose of making profits there from”.

Promotion therefore has to do with the discovery of a business idea which can be

profitably undertaken by a company and includes preliminary and detailed

investigation of the feasibility of the idea, assembling of business elements and

making provisions of the funds necessary to launch the enterprise as a going

concern.

Thus stages can be summarized as under: -

i) Preliminary analysis and examining the proposed idea to see whether the

business is profitable.

ii) Estimating the cost of production, selling price of goods and services and the

amount of profits likely.

iii) Arranging for he acquisition of labour, materials, capital and managerial

ability.

iv) Presentation to the public and underwrites the business proposition in order to

make people to manage in the venture. This is done through the issue of a

prospectus.

 

2.      Registration or incorporation

This involves registering the company with the registrar of companies under the

companies Act. For a public company membership should be at least seven and

at least two for a private company. The people who are involved in registration of

a company are called promoters. The following activities or steps are taken by

promoters in order to register the company.

a)     Obtaining approval of the proposed name from registrar of the

companies.

Promoters are free to choose any name for their new company; section 19 of

companies Act however has put restrictions on the names to be chosen. Section

19 (2) provides that “no name shall be reserved and no company shall be

registered by a name which in the opinion of the registrar is undesirable”.

Section 17 of the business names Act cap 499 lists instances when a name is

deemed undesirable: -

      Where the name chosen suggests a criminal or immoral intent.

      Where the name suggests association with the president or head of

state or a government ministry or department or a local authority or suggests

connection with an international organization such as World Bank e.t.c.

      If the name is misleading especially as to the nature of the business the

company will undertake or as to the nationality or religion of the people

behind the company.

      Where the name is similar to the name of an existing company,

partnership or co-operative society.

 

Section 109 of the companies name requires publication of the name of the

company by:

a)     Painting or affixing and keeping painted or affixed name on the outside

of every office or place where its business is carried on, in a conspicuous

position; in easily legible roman letters.

b)     Having its name engraved in legible roman letters on its seal which shall

take the form of an embossed metal die;

c)     Having its name mentioned in legible roman letters in all business

letters of the company and in all notices and other official publications of the

company and in all its bills of exchange, promissory notes, endorsements,

cheques and orders for money or goods purporting to be signed by or on

behalf of the company; and in all bills or parcels, invoices, receipts and

letters of credit of the company.

Section 20 of companies Act provides that a company can change its names

subject to the following: -

      It’s the company itself that can change its name i.e. members in a general

meeting.

      The resolution changing the name must be a special resolution.

      After changing the name the company must within fourteen days give notice

of its change of name to the register of companies. The registrar will make the

change and publish the fact in the official Kenya Gazette.

 

b) Presentation of documents

The following have to be prepared and presented to the registrar of companies

1.      Memorandum of Association

Contains conditions upon which the company is allowed to be incorporated. It

defines and sets the limits of the powers of the company. The memorandum also

sets the objects of the company.

2.      Articles of Association

Contains the rules, regulations, by laws for the internal management of the affairs

of a company. Articles enable the company operate in a way to achieve the aims

and objectives set out in the memorandum of association.

3.      A statement of the company’s nominal capital.

Nominal capital is the maximum amount of capital that a company aims to raise.

4.      A declaration that all the requirements of the companies Act and other

formalities relating to registration have been complied with. The declaration

has to be signed by an advocate, a person named as director or company

secretary.

5.      A list of the company directors and their written consent to become

company directors. Immediately after registration, the following true

documents are required: -

(i)                 Notice of the situation of the registered office.

(ii)               Particulars of directors and the secretary.

The registered office can’t be changed but if it changes notice of change must be

given to the registrar within 14 days. Particulars of the directors and the secretary

need to be filed with the registrar within fourteen days of their appointment.

 

c) Issuance of a certificate of incorporation

On receipt of necessary documents the registrar opens a file for the particular

company. If all requirements of the Act have been complied with, he will register

the company and place, its name in the register of companies. A certificate of

incorporation will be issued where upon the registrar shall certify under his hand

that the company is incorporated. The original copy is given to the promoters and

a copy will be left in the company’s file (s. 12).

It should be noted that presentation of documents does not mean automatic

registration of the company. The registrar of company’s powers to refuse

registration are inherent. If the registrar’s reasons for refusal to register a

company are not valid the promoters can seek order of mandamus from the high

court to compel the registrar to issue the certificate.

In R vs. registrar of joint stock companies (1913) 2k B 197; the promoters of the

company sought mandamus to issue the registrar of the joint stock companies on

grounds that he had without reasonable cause refused to register their company.

It was held that where promoters are aggrieved by the decision of the registrar

they can apply for order of mandamus to issue against the registrar. However

where the registrar is justified in law and infact not to issue the certificate the

order of mandamus shall not be issued.

 In the above case the promoters failed in their attempt because issuing the

certificate would mean allowing an English company commit an illegality.

Section 17(1) once the certificate is issued it acts as conclusive evidence that the

company was properly formed in accordance with all the requirements of either

the company’s Act or the company practice. If it is later found that the granting of

the certificate was made in ignorance of some irregularity on the part of

promoters; it cannot be withdrawn.

Incase in this point is Barnard’s Banking company Re Poel’s case (1867) L.R.2

ch. 674. it was held by Lord Cairns in this case that:

When once the memorandum is registered and the company holds out to the

world as a company undertaking business willing to receive shareholders and

ready to contract engagements then it would be of most disastrous

consequences if at all that has been done, any person was allowed to go back

and enter into examination of the circumstances attending original registration

and the regularity of the execution of the documents.

The certificate cannot be disputed on any grounds and cannot be challenged

even: -

a)     Where the memorandum is altered after signatories put their signatures

on memorandum but before it is registered with the registrar.

b)     When memorandum is signed by only one person for all the seven.

c)     Where all the signatories are minors.

d)     Signatures to the memorandum are forged.

Other case law relation to incorporation is Jubilee cotton mills Ltd vs. Lewis

(1924) AC 958.

Circumstances when incorporation can be withdrawn: -

(i) Where it is discovered that the company was formed with blasphemous

objectives. This is the case in Bowman and others vs. the secular society limited

(1917) AC 406 where the company thought against Christianity and urged its

members to stop Salvation Army members from attending their Sunday worship.

This was found that the activities of this company were blasphemous to the

doctrines of that religion and the certificate was withdrawn and cancelled.

However on technical grounds the action failed.

(ii) Where the objects of the company are found to be immoral. In R vs. Registrar

of joint stock companies (Ex-parte the A.G) (1980) QBX a firm of Accountants

sought to register a company on behalf of their client. They intended to register

the company in the name “prostitutes ” but the name was rejected and the

reserved another “ Hooker Ltd, which was also refused by registrar. The

accountants then submitted the name “Lindi St. Claire French Lessons Ltd”. The

registrar accepted the name and registered the company issuing a certificate.

Later it was discovered that the company’s sole purpose was to enable clients

either alone or with others provide prostitution service for gain.

Judge Ackner LS stated that though prostitution per se was not unlawful under

the English law it was contra Moros bonus. Hence the registrar was entitled to

quash registration and with draw the certificate.

(iii) Where the entity that was registered as a company is not a company in

nature. In Salomon vs. Salomon and company Ltd (1897) AG 22 Lord Parker in

the course of his judgement suggested that courts would be ready to go behind

the certificate and nullify the registration of a company on the grounds that the

entity which was not corporate body with the status and capacity conferred by the

Act.

(iv) Where the company to which the certificate has been issued turns out to be

an enemy of the state. A company becomes an enemy if persons controlling it

defacto are resident in an enemy country or wherever resident are adherent of

taking instruction from or acting under the control of the enemy Lord Parker.

A company becomes an enemy if it draws its membership from an enemy

country. A case law relating the above is Daimler company Ltd vs. continental

Tyres company (1916) 2 AC 307.

d) Acquisition of legal personality

 Where a company is registered it becomes a legal person by the name

contained in its memorandum of association. S 16 (2) incorporation of a company

as a legal person was established in the case of Salomon vs. Salomon and

company Ltd (1897) AC 22. In this case it was held that upon incorporation and

in essence of any fraud on the part of the promoters the company becomes a

legal person separate and distinct from its members, however closely it may be

controlled by those members.

Another cases supporting the separate entity are tulstail vs. Stegmann (1962) 2

QB 593. In Lee vs. Lee Air farming company Ltd (1960) WIR 758, Lee formed a

company and he secured a job in his company. He died while on duty and it was

held that a company being a legal person separate and distinct from its members

is capable of employing and dismissing workers. As an employer, the company is

subject to amongst laws, the workman’s compensation law and must

compensate an injured or deceased worker (employee) accordingly. However the

case failed on a procedural technically since the widow sued on her own name.

Another case in support of separate entity is the Mc Aura vs. Northern Assurance

company Ltd 1925 AC 619. in this case MC Aura formed a company and

transferred his timber estate to it and he also owned the company. He affected

an insurance policy on the timber in his own name with several companies. The

timber was destroyed by fire but he was not compensated for he had no

insurable interest in the timber.

 

3.      CAPITAL SUBSCRIPTION

This involves steps taken to raise capital for the company. Promoters are the first

directors of the company. To raise capital directors will be called to deliberate on

the following: -

a)     Appointment of secretary and fixing the terms and conditions of this

appointment.

b)     Appointment of bankers, brokers, solicitors and Auditors.

c)     Adoption of preliminary contracts entered by promoters on behalf of the

company in the per-incorporation stage.

d)     Securing underwriting contracts in order to secure minimum subscription.

e)     Adoption of the draft prospectus or statement in lieu of prospectus.

f)       Appointment of managing director or manger and other officers.

g)     Approval of the design of the common seal of the company and the

authorizing the custody thereof.

h)     Listing of shares on the stock exchange.

If the directors wish to invite the public to subscribe for its shares, they will file a

copy of the prospectus with the registrar of companies. On the advertised date,

the prospectus will be issued to the public investors can obtain the prospectus

from the registered office or from the bankers.

Investors then forward their applications for shares along with application money

to the company’s bankers’ mentioned in the prospectus. The bankers will then

forward all applications to the company and the directors will consider the

allotment of shares.

If the share applications meet a minimum subscription as disclosed in the

prospectus, directors will allot shares to the applicants. Allotment letters are then

sent to those given shares and regret letters to those who are not. If applications

fall below the minimum subscription as in the prospectors within 120 days after

prospectus issue, no allotment is made and all money will be refunded.

When a public company does not intend to raise money from the public the

company will file a statement in lien of prospectus with the registrar at least 3

days before allotment of shares.

 

4.      COMMENCEMENT OF BUSINESS.

Section 3 of the Act gives conditions and restrictions which a company must

observe before it is allowed to start business. This includes issuance of

prospectus, and whether the minimum subscription was raised.

Form 211 which must be given to the registrar confirms the following: -

a)     The minimum subscription has been raised.

b)     Every director of the company has paid the company or made the shares

taken or contracted to be taken by him.

Having given for 211 and 212 and the statement in lieu of prospectus the

registrar shall certify that the company is entitled to commence business and

issue it with a Trade certificate.

If the company defaults on the above, contracts entered by it will be provisional

only and not binding on it. Section 3 (b) provides a penalty for breaching the

conditions (i.e. $1000 each day as contravention continues).

Section 3 subsections 7 exempts private companies from the conditions and

restrictions thus a private company can start business without the trading

certificate.

 

04. PROMOTERS.

A promoter is the person who conceives the idea of forming a company and who

undertakes, does and goes through all the formalities and incidental preliminaries

of incorporating a company. Promoter help to incorporate a company, provide it

with a share and loan capital and acquire business or properly which it is to

manage.

In Whaley Bridge Calico printing company vs. Green and Smith (1850) 5 Q BD

109’s Bowen LS stated a promoter is not a term of law but of business, usually

summing up in a single word number of business operations familiar to the

commercial world by which a company is generally brought in existence.

Lord Blackburn stated that “it is a short and convenience way of designating

those who set in motion the machinery by which the act enables them to create

an incorporated company”.

Justice Cockburn defines a promoter as “one who undertakes to form a company

with reference to a given project and to set it going and who undertakes the

necessary steps to accomplish that purpose”.

Section 45 (5) of the company’s act (cap 486) excludes persons acting on

professional capacity from being called promoters.

Section 45 (5) (a) provides that promoter means a promoter who has party to the

separation of the prospectus; or the portion thereof containing the untrue

statement, but does not include any person acting in a professional capacity for

persons engaged in the formation of the company. If any such person acts

beyond the scope of his professional duty and helps in any way in the formation

of a company or in preparations for the management of its affairs, he will become

a promoter (great wheal polgooth company Ltd; Re (1883) 53 LS ch. 42).

N/B however a registered company may also act as a promoter.

 

Function of the promoters

The following are the functions of the promoters: -

1.      Decide on the company name and ascertain that it is accepted by the

registrar.

2.      Prepare memorandum and Articles of Association.

3.      Nomination of directors, Bankers, auditors and secretary and the

registered office of the company.

4.      Printing memorandum and articles of association.

5.      Registration of the company.

6.      Issue of prospectus.

Legal status of promoter

 

In Lindley and Wigpool Iron ore vs. Bird (1866) 33, Lindley described the position

of a promoter as “although not an agent for the company, nor a trustee for it

before its formation, the old familiar principles of the law of agency and its

trusteeship have been extended and very popularly extended to meet such

cases”.

A promoter is thus not an agent nor a trustee of the company but certain fiduciary

duties have been imposed on him under the company’s Act.

 

Fiduciary position of a promoter

In Er Langer vs new Sombrero Phosphate company 1878 3A Ac 1218 Lord Cais

observed that promoters in equity cannot find the company by any contract with

themselves as promoters without fully disclosing to the company all material facts

which the company ought to know. Promoters are in a fiduciary position: -

a)     Not to make profit at the expense of the company. Cape Breton company

Re.(1885) 29 Ch.D 795

b)     To give benefit of negotiation to the company.

Thus where the promoter purchases an item he can’t rightfully sell that item at a

higher price that he gave in for. (Erlanger vs. new Sombrero phosphate company

(1878) AC 1218). The right of rescission is lost if the parties cannot be relegated

to their original position this happens: -

(i) Where the character of the property has been altered.

(ii) Where flird parties have acquired valuable rights.

Where a promoter sells or wishes to sell his own property to the company he

should: -

(i) See that there is a Board of independent persons appointed as

directors of the new company.

(ii) Disclose his interest in the property to the intended members or to the

public by means of a prospectus. He must also disclose the profit he is

making out of the deal.

c)     To make full disclosure of interest of profit. Promoters need to fully disclose

his profit and his personal interest in a transaction. A case in support of this is

the Liluck vs. Barress AC 240. in this case a syndicate bought property worth

$140000 property at $120000, which they later sold to a company which they

formed at $180000. A prospectus was issued disclosing a profit of $ 40000. it

was held that the $ 20000 was a secret profit and promoters are sound to refund

the company. Lady well winning company Ltd B Brookers (1887) 35 ch. D400 in

the above case five persons bought a nine for $5000 on 1/2/1873 and sold it to a

company on 4/4/1873 for $18000, making a profit of $13000.

It was held that the vendors were not promoters when they bought the mine and

they were therefore under no fiduciary duty to disclose their interest and account

for the profit they had made.

d)     Not to make unfair use of position. He must avoid seeking. He must guard

against taking advantage of position or seek under influence or participate in

fraud.

 

Duty of promoters as regards prospectus

Promoters must ensure that a prospectus is issued (public company) and the

prospectus.

(i) Contains necessary particulars

(ii) Does not contain an untrue or misleading statements or does not omit

any material facts.

Section 39 of the act states that a prospectus shall be dated; and that date

unless the contrary is proved be taken as the date of publication of the

prospectus.

Section 40 provides that a prospectus issued shall state the matters specified in

part 1 of the third schedule. Chapter 7 specifies the form and contents of a

prospectus.

A prospectus must be truthful and promoters can be held responsible (liable) for

any misstatement in the prospectus. If a prospectus is found untruthful: -

a)     Allotment of shares may be set a side in the case of fraudulent

misrepresentation.

b)     Promoters may be sued for damages.

c)     They may be sued for compensation for misrepresentation.

d)     They may be sued for damages by shareholders who have suffered by

reason of their non-compliance with the statutory requirements as with the

contents of prospectus.

e)     They may become liable for criminal proceedings.

The company’s act provides both criminal and civil liability for both civil and

criminal liability for any untrue statement contained in the prospectus.

For civil liability 3. 45 (1) provide.

Section 45 (1) provides that the following persons shall be liable to pay

compensation to all persons who subscribe for any untrue statement included

therein.

a)     Every person who is a director at the time of issue of the prospectus.

b)     Every person who has agreed to be named as a director in the prospectus

or any one who has agreed to be a director immediately or after an interval.

c)     Every person being a promoter of the company.

d)     Every person who has authorized issue of the prospectus. However an

expert can only be held responsible for an untrue statement made by him.

Section 45 (2) provides defences to liabilities under section 45 (1) such persons

shall not be liable if he proves.

a)     He withdrew from being a director before issue of the prospectus and it was

issued without his authority or consent.

b)     Prospectus was issued without his knowledge or a consent and on

becoming aware he gave reasonable public notice that it was issued without

his knowledge.

c)     That after the issue of the prospectus and before allotment there under,

then on becoming aware of any untrue statement there in withdrew his consent

there to and gave reasonable notice of the withdrawal and reason thereto that:

-

(i) Of every untrue statement not made by an expert he had reasonable ground

to believe and did up to the time of allotment believe that the statement was

true.

(ii) That he relieved on an expert and untrue statement is a fair representation

of the expert report and he had reasonable ground to believe that the person

making the statement was competent to make it.

(iii) As regards every untrue statement purporting to be a statement made by

an official person or contained in what purports to be a copy of an extract from

the document.

Section 46 (1) of the Act a prospectus may attract criminal liability.

An untrue statement in prospectus may lead to imprisonment for a term not

exceeding two years or to a time not exceeding ten thousand shillings or both

unless he proves either that the statement was immaterial or that he had

reasonable ground to believe and did up to the time of issue, believe that the

statement was true.

Criminal proceedings are only made where there is willful untrue statement and

not otherwise.

 

Remuneration of promoters

A promoter has not right for compensation unless there is a contract. In Clintons

claim (1908) 2 ch. 515 promoters were unable to recover fees and stamp duty

incidental to formation of the company as there was. A promoter takes

remuneration for his services in one of the following ways: -

a)     Selling his own property to the company at a profit provided there in full

disclosure.

b)     He may be given an option to buy shares at par.

c)     He may take commission on the shares sold.

d)     He may be paid a Lumpson by the company.

Article 80 table A provides that directors can pay all expenses incurred in

promoting and registering the company.

 

Pre-incorporation or preliminary contracts

These are contracts entered by promoters to acquire properly or some right for

the company. In Kelner vs. Baxter (1866) LR Z. Kelner agreed to sell a hotel to

Baxter who was acting agent for a company which was about to be formed. It

was held that Baxter was personally liable on the contract as the company was

not in existence after its incorporation.

The company is not liable for the Act of the promoters done before incorporation.

In Newborne vs.Sensolid Ltd 1954 1Q B45 Newborne a director, entered into a

contract in the name of a company before its incorporation. He signed his name

a contract on behalf of the company. It was held that there was no contract.

 

Position of promoters as regards pre-incorporation contracts

1.      Company is not bound by pre-incorporation contract even where it takes

the benefit of the contract entered into on its behalf.

A case law in this is in English and colonial produce company Ltd Re (1906) 2 ch

435. A solicitor prepared the memorandum and articles of a company and paid

necessary taxes and other expenses to obtain the registration of the company.

He did this on the instructions of promoters. It was held that the company was

not liable to pay the solicitors’ costs although it had taken benefit of his work.

2.      The company cannot enforce pre-incorporation contract. A case law in

this point is Natal Land and colonization company Ltd vs. Pauline Colliery

and development syndicate Ltd Ac 120. a company can’t enforce a contract

made before its incorporation.

3.      Promoters are personally liable for contracts made on behalf of the

company before the company’s incorporation.

 

Ratification of a pre-incorporation contract.

A company cannot ratify a contract entered into by promoters before

incorporation. Where contract is entered into by with both parties aware of the

non-existence of the company, the contract isa deserved to have been entered

into personally and promoters are liable.

To validate the pre-incorporation contracts a new contract has to be entered into

with the other party (in which case promoters cease to be liable)

For promoters acting on behalf of the company about to be formed it is safe

(advisable) to provide in the contract that: -

a)     If the company makes a fresh contract in terms of the incorporation contract,

the liability of the promoters shall come to an end.

b)     If the company does not make a fresh contract within a limited time either of

the parties may rescind the contract.

 

 

 

05.  MEMORANDUM OF ASSOCIATION

A memorandum of Association sets the fundamental conditions upon which the

company is allowed to be incorporated. It defines the relationship of the company

and creditors the outside public as well as the shareholders. It also enables

creditors and the outside public knows the range of permitted business of the

company.

In Ashbury Railway Carriage and company vs. Rich it was noted that “the

memorandum is as it were, the area beyond which the action of the company

cannot go inside that area the shareholders may make such regulations for their

own government as they think fit”.

Importance of memorandum

a)     Provides basis of incorporation.

b)     It determines the areas of operations of the company.

c)     It defines the relationship of the company with the outsiders.

d)     It is a charter of the company, which can be altered only under special

circumstances.

 

Purpose of memorandum

There are two purposes of memorandum: -

a)     To enable shareholders know where their funds are to be used and risks

they are undertaking in making such investments.

b)     To enable outsiders of the company know the objectives of the company

and whether the contracts they intend to make with the company are within the

objects of the company.

Preparation of the memorandum

 

Schedule 1 of the act gives examples of various types of memoranda. Promoters

can adopt any of these tables with necessary modifications. These prescribe

forms of memoranda are as under: -

Table B for a company limited by shares,

Table C for a company limited by guarantee and not having share capital,

Table D for a company limited by guarantee and having share capital,

Table E for unlimited company that has share capital.

Section 5 provides that memorandum of every company shall be in English and

printed.

Section 6 states that memorandum shall be signed by each subscriber (with

postal address and occupation) in the presence of at least one witness who shall

affect the signature and shall likewise add his address and occupation if any.

 

Contents of memorandum

Section 5 of the companies Act stipulated the memorandum should compose the

following clauses.

Clause 1 The name

Promoters must enquire from the register as to whether the proposed name of

the company is available for registration and is not considered undesirable; this

should be done before filling the memorandum or even before its preparation.

Section 19 provides that promoters may reserve a name pending registration of

the company for a period of thirty to sixty days.

Section 5 (1) requires accompany if limited to use the word “limited” as the word

in its name.

Section 21 provides that a company may drop the word “limited” if it obtains a

licence to do so from the Attorney General. Such licence is given if the Attorney

General is satisfied that: -

(i) The company to be formed is to promote commerce, art science, religion,

charity or any useful object.

(ii) It intends to apply its profits or other income to promoting its objects.

(iii) It prohibits the payment of any dividends to its members.

Under section 20 a company can charge its name by special resolution and with

the approval of the registrar signified in writing. A special resolution usually

requires twenty-one days not to the members and three fourths majority of the

votes at general meeting.

The above section provides that the company may change its name if it is almost

like that of an existing company, if the registrar so directs within six months of its

registration.

The name does not affect any rights or obligations of the company or any legal

proceedings by or against it (section 20 (4)).

 

Clause 2 Registered office

Every company must have a registered office from the day on which it begins to

carry on business or within fourteen days after incorporation whichever is

earliest; to which notices and all communications can be made (section 107)

Section 108 states that notice of the address of the registered office, and of any

change therein, must be given to the register within 14 days after incorporation or

of the change.

The registered office is not necessarily the headquarters of the company.

Documents that must be kept at the registered office include: -

(i) Register of members and index of members, unless made up elsewhere or

kept by an agent (section 112&113).

(ii) Minute books of general meetings section 146.

(iii) The register of director’s interests in shares or debentures.

(iv) A copy of every instrument creating any charge requiring registration.

(v) The company’s register of charges affecting properly of the company.

 

Clause 3 the objectives of the company

Objects clause defines the sphere of the company’s activities, the aims that its

formation seeks to achieve and the kind of activities or business that it proposes

to conduct.

Objects give protection to the shareholders and creditors as they are sure where

the funds will be applied. Objects also help outsiders know the powers of the

company.

 

Choice of the company’s objects

Subscribers to the memorandum may choose any object for the proposed

company. When drawing the object the subscribers should note the following: -

(i) Objects should not include committing an illegality.

(ii) The objects should not contradict the Act.

(iii) Objects should not be against public policy.

Objects clause in the memorandum has to state.

(i) The main objects of the company and objects incidental or auxiliary to the

attainment of the main objects

(ii) Other objects of the company not included in (i) above.

A c company cannot continue to peruse subsidiary objects after the main object

has come to an end. In crown bank Re (1890) 44 ch D634. A company objects

clause enabled it to act as a bank and further invest in securities and land and to

underwrite issue of securities. Its banking business was abandoned and it

confined itself to financial speculation. It was held that the company was not

entitled to do so.

 Incidental acts: -

A company may do anything which is fairly related to its core business. Anything

incidental to the attainment or pursuit of any of the express objects of the

company will unless expressly prohibited to be within the implied powers of the

company.

1.      Evans vs. Brunner, mond and company (1921) 1 ch 359.

A company engaged in manufacture of chemicals proposed to devote substantial

sum of money to the encouragement of scientific education. It was proved that

this will in the end benefit the company, but a shareholder objected that this was

beyond the powers of the company. It was held that the proposal was fairly

incidental to the company’s objects.

2.      Foster vs. London, Chatham and Dover company (1895) 1 QB 711.

A company acquired a piece of land for the purpose of its railway. The railway

was erected on arches. The company left the arches as workshops e.t.c. The

neighbours objected of an account of noise and claimed that the act was ultra

vires to the company it was held that letting of the arches was valid.

3.      Forrest vs. Manchester etc Rly company (1861) 4 Ltd 666.

A railway company had the authority to keep boats to be supplied for a ferry. It

employed the boats for excursion trips to the sea when they were not wanted for

the ferry. It was held that the use of the boats was incidental to the main purpose

and was within the powers of the company.

The following activities have also been held incidental to carrying of business: -

a)     Appointing agents and hiring servants.

b)     Borrowing money and giving security for loans.

c)     Paying gratuities to employees.

d)     Paying pensions to former officers and employees or their dependants.

In the following cases companies were found to engage in activities beyond their

powers.

1.      London county council vs. Attorney General (1902) AC 165. The council

had the power to run tramways. It ran omnibuses to feed the tramways. It

was held that this was outside its powers as the omnibuses business was in

no way incidental to the business of working tramways.

2.      Stephenes vs. Mysore reefs (Kangudry Minin Company Ltd (1902) 1 ch

745. the company object authorized to it acquire gold mines in Mysore and

elsewhere and it had other clauses. The company wanted to work in Ghana .

It was held that elsewhere could not be taken to mean any other place

outside India .

Ways a company can engage in a wide variety of business: -

a)     Inflated object clause.

Promoters have given a list of several businesses that the company may engage

itself.

b)     Independent object clause

Courts usually take the first object in the memorandum as the core business and

others subsidiary. To avoid this interpretation experts drafting the objects may

specify;

    ‘Each of the foregoing clause shall in no way unless otherwise provided as

forming part of or being dependent upon or shall in no way be severally formed

and object clause of an independent company.’

c)     Subjective objects clause

Here experts can simply say that the company can engage in any business,

which in the opinion of the directors, the company can advantageously engage

in.

 

Clause IV.  Liability clause

Promoters must indicate 

a)     Whether the liability of the company is limited or unlimited.

b)     If limited, is it by shares or guarantee.

c)     If the company is public promoters have to indicate the liability of directors

whether limited or unlimited.

 Liability clause is entirely omitted from the memorandum in an unlimited

company.

 

Clause V The capital clause

States the registered share capital divided into shares of a fixed amount.

Registered capital is also called nominal or authorized capital.

The clause is omitted in the companies with unlimited liability and the companies

limited by guarantee having not shown capital.

 

Clause VI. Association or subscription clause.

This is a declaration by subscribers that they desire to form a company and

agree to take shares stated against their names. The signature of each

subscriber may be any of the subscribers. Each subscriber must indicate his

address, description and occupation.

 

 

 

General form of clause.

If the several persons whose names and address are subscribed are desirous of

being formed into a company in pursuance of the memorandum of association

and we respectively agree to take the members of shares in the company set

opposite of our respective names.

After registration no subscriber to the memorandum can with withdraw his

description on any ground. 

Alteration of the memorandum

Section 7 provides that a company cannot alter the conditions contained in the

memorandum except in the cases; in the mode and to the extent for which

express provision has been made in the companies Act.

Section 8 gives seven instances where a company may alter its objects  after a

special resolution.

i) To enable the company carry its business more economically and efficiently.

ii) To attain its main purpose by new or more improved means.

iii) To enlarge or change the local area of its operation.

iv) To carry on some business which may be conveniently combined with its

own.

v) To restrict or abandon any of its objects.

vi) To sell or dispose part of or whole of its business.

vii) To amalgamate with another company.

The proposed alteration become effective unless within thirty days of the

resolution, objection is made to the courts in which case the alteration will be

effective if the court affirms it.

Section 8 (2) provides not such application may be made

a)     By holders of that less than 15% of the company’s members if the company

is not limited by shares.

b)     By holders of not less that 15% of the company’s debentures entitling the

holders to object to the alteration of its objects.

Section 8 (7) after a resolution altering the objects, a printed copy of the

memorandum must be delivered to the registrar within fourteen days after the

expiry of the period allowed for objection.

Section 8 (2) the fact that an alteration does not come within on of the seven

clauses specified in section 8 does not render the alteration invalid unless

objection is submitted within thirty days.

No alteration can be made requiring a member to take up further shares or

increasing his liability unless he agrees in writing (section 24).

The courts cannot allow an alteration, which is incompatible with the original of

the objects of the company. A case in this point is in Recyclists Touring Club

(1970). A company was registered to promote, assist and protect the use of

bicycles, tricycles and similar vehicles on public roads. The company proposed to

alter its powers by admitting all tourists and motorists, it was held by the court

that the alteration must not be allowed as one of the objects was to protect

cyclists against motorists.

 

DOCTRINE OF ULTRA VIRES

Ultra vires is a term given to refer to a situation a company does anything beyond

powers given in the memorandum. A company must not engage in activities

which are not expressly or impliedly authorized by the memorandum, otherwise

any act which exceeds the powers of the company will be ultra vires and void

and thus cannot be ratified even by the assent of the whole body of directors.

An Act of “Intra vires” the company if it is within the company’s powers, this is the

case when;

(i) The act is within the company’s objects as stated in the memorandum of

association of the company.

(ii) The act is reasonably incidental to the company’s objects, which are

expressly stated in the memorandum of association and is done in order to

effectuate or achieve the stated objectives. The doctrine was explained by the

House of Lords in the case of Attorney General VGE Rly.

The doctrine of ultra vires is illustrated in “Ashbury railway carriage and Iron

company vs. Riche” in this case the memorandum give the company powers to

make and sell railway carriages. The directors entered in to a contract to lay a

railway in Belgium and the company in a general meeting subsequently

purported to ratify the act of the directors by passing a special resolution to that

effect. The company later dishonoured (repudiated) the contract and the other

party sued for breach of contract. House of Lords held that there could be no

ratification of a contract made by a company ultra vires even though every single

member consented there to. The contract to make a railway in a foreign country

was a nature not included in the memorandum. The company was therefore held

not liable for the breach of contract.

The doctrine of ultra vires approved but qualified in Attorney General vs. Great

Eastern Rly company (1880) 5 AC by adding that the doctrine ought to be

reasonably understood and applied and whatever may fairly be regarded as

incidental to or as consequential upon those things which the legislature has

authorized ought not to be held ultra vires to the company.

In Re Germany Date coffee company (1882) it was held that where the

substratum of the company fails, the heart of the company fails and the body

cannot function without the heart. However in a recent case Re Litson R. co.

(1946) it was held that the company will not be wound up if the carrying on of the

general business is still possible.

The main issue in the doctrine of ultra vires is that a company not being a natural

person should not be held responsible for its own acts or agents acts that are

beyond its powers and privileges. But there is nothing to prevent a company from

protecting its property. A case on this point is national Telephone co. vs. St.

Peter Port constables (1900) AC 317. A telephone company put wires where it

didn’t have powers to put the defendant cut them down. It as held the company

could sue for damages for the wires.

If transaction is beyond powers of directors but within powers of the company,

the shareholders can ratify it by a resolution in a general meeting provided they

have all facts relating to the transaction to be ratified.

 

Effects of ultra vires transactions

1.      Any member may obtain an injunction of the court to restrain the company

from committing an ultra vires act.

2.      Directors may be held personally liable for ultra vires payments. But the

directors having refunded the money could get indemnity as against the

person who received the payment with the knowledge that the payment to

him was ultra vires.

3.      Directors entering into ultra vires contracts may be liable to the third party

for breach of warranty of authority. Directors will be liable to the losses

incurred to third parties provided the third party does not know that they have

no authority to enter in a particular contract.

In weeks vs. property a company invited applications for a loan on debentures

but the company had already issued a maximum limit of debentures. Directors

were held personally liable to a plaintiff who offered a loan of $500. In order to

make directors personally liable it must be established that their act amounts to

an implied misrepresentation of facts and not of law.

4.      If funds have been spent ultra vires in purchasing some property, its right

over the property will be protected.

5.      Ultra vires contracts have no legal effect and are void. A company cannot

sue or be sued on those contracts because they are void. Every person

dealing with the company is expected to know its powers and if he enters into

a contract that is inconsistent with them he does so at his own risk.

 

Exceptions where a party can sue on an ultra vires contract.

i) If the company takes an ultra loan and uses it to pay off the lawful debts of the

company then the second creditor (render) steps to the position of the paid off

creditor and to that extent will have the right to recover his loan from the

company. But he cannot claim any right to securities held by the original creditor.

ii) If the property handed over to the company exists in specie or if it can be

traced, the party handing it over can reclaim it.

iii) If money is lent by a company that does not have the power to lend it, it can

be recovered because the debtor will be stopped from taking the plea that the

company had no power to lend.

6.      A company will be liable for any tort of its employees if: -

a)     The tort is committed in pursuance of its stated objects.

b)     It is committed by employees within the course of their employment.

A company will not be liable for ultra vires torts.

 

06.  ARTICLES OF ASSOCIATION

Articles of association are the rules and regulations of a company formed for the

purpose of internal management. According to the Lord Justice Bowen “the

memorandum contains the fundamental conditions upon which alone the

company is allowed to be incorporated. They are conditions introduced for the

benefits of creditors and the outside public. The articles of association are the

internal regulations of the company and are for the benefit of shareholders”.

Lord Cairns said “the articles play a part subsidiary to the memorandum of

association. They accept the memorandum as a charter of incorporation of the

company and so accepting the articles proceed to define duties, rights and

powers of the governing body as between themselves and the company at large

and the mode and form in which business of the company is to be carried on and

the mode and form in which changes in the internal regulations of the company

may from time to time be made”.

Section 2 (1) Articles include the regulations contained in table A schedule 1 to

the Act in so far as they apply to the company. Articles were to be framed

carefully so that they do not go beyond the powers of the company. They should

not violate any provision of the companies Act as these will make them null and

void. In Perneril Gold mines Ltd (1898) 1 ch. 122 the articles of a company

provided that no petition for a winding up could be presented unless: -

a)     Two directors consented in writing,

b)     The petitioner held is of the issue of the share capital of these

conditions were fulfilled. It was held that the restrictions were invalid and

a petition could be presented.

 

Functions of the Articles of Association

1.      Define duties, rights and powers of the governing body.

2.      Determine the mode and the form in which the business of the company

may from time to time be made. Section 9 stipulates that the articles must be

registered before incorporation. Section 11 states a company limited by shares

may adopt all or any part of the regulations of table A are not excluded or

modified, these regulations shall be the regulations of the company so far as

they are applicable.

Table A in the first schedule to the act is provided as a specimen form of articles

of association. Part I may be adopted in whole/part by public companies and part

II may be adopted in whole part by private companies where a private company

does not adopt part II of task A are registers its own articles they must include

the restrictions required by section 30.

Section 12 provides that if special articles are registered they must be: -

a)     Printed in English

b)     Divided into paragraphs

c)     Dated

d)     Signed by each subscriber and witnessed.

 

Contents of Articles of Association.

 

As an internal constitution promoters and later the members can indicate any

rules they may wish to have so long as such rules are permissible. The following

are expected to be included in the articles of association.

a)     Share capital, rights of shareholders, and variation, of the rights

payments of commissions share certificates.

b)     Lien on shares

c)     Calls on shares.

d)     Transfer of shares

e)     Transmission of shares

f)       Forfeiture of shares

g)     Conversion of shares into stock

h)     Share warrants

i)        Alteration of capital

j)        General meetings and proceedings there at

k)     Voting rights of members voting and poll proxies.

l)        Directors their appointments remuneration, qualifications, powers

and proceedings of board of directors.

m)   Manager.

n)     Secretary.

o)     Dividends and reserves

p)     Accounts, audit and borrowing powers

q)     Capitalization of profits

r)       Winding up.

Alteration of articles of association

Section 13of companies act cap 486 provides that a company can alter or add to

its articles by passing a special resolution. Any alteration some made in the

articles shall; subject to the provisions of the act; be as valid as if originally

contained therein.

 

Limitations to alterations.

The following limitations should be observed regarding alteration of articles: -

a)     Such alteration should not be inconsistent to the act.

i) Restrict the members right to petition for winding up under section 221.

ii) Authorize the company to purchase its own shares.

iii) Authorize payment of dividends out of capital.

b)     It must not contradict the memorandum of association. However

articles may be referred to where there is an ambiguity in the

memorandum or where the memorandum is silent on an issue.

c)     Alteration should not sanction anything illegal.

d)     Alteration must be made bona fide and for the benefit of the company

as a whole. In Alten vs. Gold Reefs of west Africa Ltd (1900) ch. 656. it

was observed that the power of alteration must be exercised subject to

those overall principles of law and equity which are applicable to all

powers conferred on majorities and enabling them to bind minorities.

In Shittleworth vs. Cox bros and company (Minden-lead Ltd (1927)) 2 k B g (CA)

the articles of a company provided that 5 and four others should be permanent

directors to the company. They could be disqualified by any six specific events. S

failed to account for the company’s money on twenty-two occasions within twelve

months. The articles were accordingly altered and a 7th event disqualified a

director added. The event added was that if a director was so requested in wring

by all the other directors he should resign. S was so requested to resign, it was

held that the alteration was bona fide for the benefit of the company as a whole

and was valid.

Other rulings in support of this point were made in Greenhalgh vs. Ardene

cinemas ltd (1951) ch. 286 and side Bottom vs. Kershaw Lees company Ltd

(1920) 1 ch 154 (ca).

e)     An alteration to increase the members’ liability will only bind those

who consent to it.

Section 24 provides that no member is bound by an alteration of the

memorandum or articles which requires him to increase his holding of shares or

increase his liability to pay money to the companies unless: -

i) Alteration is made before he became a member.

ii) He agrees in writing to be bound by such alteration.

An alteration of articles subject to restrictions in section 24 may be retrospective

in effect, but this will not enable the company to achieve a lien over shares after

they have been transferred for value by a debtor.

 

The relationship between the Articles and memorandum of Association.

1.      The articles are subordinate to the memorandum. The memorandum states

the objectives of the company while the articles provide the manner in which

the internal management of the company is to be carried out.

2.      The memorandum must be read in conjunction with articles where it is

necessary to;

a)     Explain any ambiguity in terms of the memorandum.

b)     Supplement the memorandum on matters where it is silent but

cannot extend the scope of the memorandum.

3.      The terms of the memorandum cannot be modified or controlled by the

articles.

 

Legal effects of memorandum and articles:

1.      Section 22 provides that after the articles and memorandum of association

have been signed by bind the members as if they have been signed by each

individual member of the company. The legal implications of the articles and

memorandum may be dissolved in four categories.

 

a)     Members to the company.

Each member is bound to the company as if each member has actually signed

the memorandum and the articles. In Borland Trustee vs. Steel Brus and

company Ltd (1901) 1 ch. 279, the articles of a company were altered and

provided that the shares of any member who became bankrupt should be sold to

certain persons at a fair price. B a shareholder became bankrupt and his trustee

in bankruptcy claimed that he was not bound by the altered articles. It was held

that the articles were personal contract between B and the rest of the members

and B and his trustee was bound.

Another case law is that of Hickman vs. Kent or Romney Marsh sheep breeders

Assn (1915) 1 ch. 881.

b)     Company to the member.

A company is bound to the members and the company can exercise its rights as

against any member only in accordance with the provisions in the memorandum

and articles. A member can obtain an injunction restraining the company from

doing ultra vires act.

In wood vs. Odesa water works company Ltd (1889) 42 ch. D630 the articles of

company provided that the directors may with the sanction of the company at

general meeting declare a dividend to be paid to the members.

A resolution was passed to give the shareholders debenture bonds instead of

paying the dividend in cash. It was held that the words “to pay” meant paid in

cash; and a shareholder could restrain the company from acting on the resolution

on the ground that it contravened the articles.

A member can also obtain an injunction restraining the company from committing

a breach of the memorandum and the articles, which would affect his rights as a

member.

c)     Members to members.

The memorandum and articles constitute a contract between the members and

each member is bound to as against the other or others. Lord Herschell in

Welton vs. Saffery (1897) AC 299 observed “it is quite true that the articles

constitute a contract between each member and the company and there is no

contract in terms of between the individual members of the company but the

articles do not any the less, regulate their rights inter se. such rights can only be

enforced by or against a member through the company or through the liquidators;

representing the company but no member has between himself and other

members any right beyond that which the contract of the company gives”.

In Ray field vs. Hands (1960) 1 is a leading case in this point.

d)     Company to outsiders.

The articles do not constitute any binding contract as between a company and an

outsider. In general law a stranger to a contract cannot acquire any rights under

such a contract.

Cases on this  points are: -

i) Brown vs. La Trinidad (1887) 37 ch. D1.

The articles of a company contained a clause whereby B was to be a director

irremovable for a period of time. He was removed from office before the period, it

was held that it could not restrain the company from removing him as there was

no contract between him and the company.

ii) Elay vs. positive government security life Ass.Co. 1876 1 Ex D 88.

The articles of a company provided that it should be the solicitor of the company

for life and could be removed from office only for misconduct L took office and

became a shareholder, after some time the company dismissed him without

alleging misconduct. E sued the company for damages for breach of contact. It

was held that the articles did not constitute any contract between the company

and outsiders and as such no action could lie.

The case in Eley has brought in some problems. The courts have therefore in

some cases acted on the footing that a clause in the articles not dealing with the

rights of a member as such but apparently intended to operate as a contract with

him is to be regarded as the basis of a contract.

In Swabey vs. ports Danwin Gold mining company (1889) 1 Meg 385, the articles

provided that a director should receive a specified sum per annum by way of

remuneration. In July, the company passed a special resolution reducing the sum

as from the end of the proceeding year. The plaintiff, who was a director,

resigned and sued for the services, it was held that he was entitled to sue for

remuneration up for the date of his resignation.

 

Constructive notice of memorandum and articles

Each person dealing with the company is assumed to know the contents of the

memorandum and articles of association. It is presumed the individuals dealing

with the company have read and understood the documents. This is called the

doctrine of constructive notice.

Memorandum and articles are open and accessible to all special resolution

become public documents once registered and an outsider is in notice of their

contents in the same way as he is of the articles and memorandum.

Lord Hartheley in Mahoney vs East Hollyford mining company (1875) LR7 HL

869 observed. But whether he actually reads them or not it will be presumed that

he has read them. Every joint stock company has its memorandum and articles

of association open to all who are minded to have any dealings whatever with the

company and those who sue deal with them must be affected with notice of all

that is contained in these two documents.

Anyone dealing with a company is presumed not only to have read the

memorandum and articles but have understood them properly (Oak Bank Oil Co.

vs. Crum (1882) 8 A. 65). The doctrine also prevents one from alleging that he

did not know that the memorandum and articles rendered a particular act ultra

vires to the company (Freeman and Lookeyer vs. Buckhusst park properties ltd

(1964) 1 ALL ER 630).

 

Doctrine of indoor management.

This doctrine imposes a limitation on the doctrine of constructive notice. Persons

dealing with the company once they are satisfied that the company has powers

to enter the proposed transaction, they are not required enquire into the

regularity of any internal proceedings they are entitled to assume that provisions

of Articles have been complied with by the company in its internal working.

If the proposed contract is within the powers of the company the company will be

bound to the outsider and claims of the outsider will not be affected in any way by

the internal irregularity of the company. This is the doctrine of indoor

management or the rule in royal British Bank v. Turquand.

In Royal British Bank vs. Turquand the articles empowered the directors to

borrow money provided they were authorized by a resolution passed at a general

meeting of the company. The directors borrowed money from T and issued a

bond to him without the authority of resolution passed at the general meeting. It

was held that the company was liable for the money to T because once the

articles authorized directors to borrow subject to a resolution of the general

meeting of the company T, was entitled to assume that the directors were

borrowing on the authority of the resolution passed at a general meeting of the

company, T was not required to enquire into the regularity of the company’s

internal proceedings.

In Premier industrial Bank Ltd Vs. Calton Manufacturing company, it was stated

that “if the directors have power and authority to bind the company, but certain

preliminaries are required to be gone through on the part of the company before

that power can be duly exercised, then the person contracting with the directors

is not bound to the section, that all these preliminaries have been observed he is

entitled to presume that the directors are acting lawfully in what they do”.

The rule is also held in Fuontain vs. Carmarthen Rly co. (1868) LR5 ESQ 316.

The general rule here is that persons dealing with limited liability are not bound to

inquire into the regularity of the internal proceedings and will not be affected by

irregularities of which they had no notice.

 

Exceptions to the Doctrine of indoor management.

The doctrine of indoor management will not apply in the following instances: -

i) Where the outsider has notice (actual or constructive) that the prescribed

procedure has not been complied with by the company.

In Howard Patent Ivory Company, the directors were empowered to borrow up to

1000 and such further sums as the company in the general meeting might

authorize without such consent they issued to themselves debentures for sums in

excess of $1000. it was held they had knowledge of irregularity in the internal

proceedings of the company, the company would be liable for $1000 only. Sums

borrowed in excess of this were held invalid.

ii) A company cannot be held liable for forgeries committed by its officers. In

Ruben vs. Great Fingall Ltd, the company secretary issued a share certificate by

forging the signatures of the two directors under the seal of the company. The

plaintiff contended that it was not his duty to verify the signatures. Whether

signatures were genuine or not was part of internal management. It was held that

the certificate was not binding on the company as the rule in Turquand’s case

does not protect forgery. Lord Loreburn observed in the case “it is quite true that

persons dealing with limited liability companies are not bound to inquire into their

indoor management and will not be affected by irregularities of which they have

no notice. But this doctrine applies only to irregularities that otherwise might

affect a genuine transaction, it can apply to forgery”.

iii) When the outsider is negligent: -

any person entering into a contract with the company ought to make proper

inquires, and in the absence of this he cannot claim benefit under the Turquard

case.

In wood vs. bank of Liverpool the sole director paid cheques drawn in the name

of the company in his account. It was held that the bank was put upon inquiry

before crediting the cheques drawn in favour of the company in the account of

the director. The bank was not entitled to rely upon the onstable authority of the

director.

In Arand Bihari Lal vs. Dinshaw and company, the plaintiff accepted transfer on

the company’s property from its accountant. The transfer was held to be void

because such a transaction is apparently beyond the scope of the accountant’s

powers. It puts the person dealing with the company into inquiry, the plaintiff

should have insisted on seeing the power of Attorney executed in favour of the

accountant by the company. Even delegation clause is not enough to make the

transaction valid unless the accountant is in fact authorized.

iv) When an outsider does not have any knowledge of the articles. A person who

did not consult the company’s memorandum and articles and consequently did

not act in reliance on those documents, cannot be protected under the rule in

Turquand’s case.

v) Where an act is ordinarily beyond the apparent authority.

An outsider will not be protected by the rule in Turquard’s case if the act of the

agent is one which would not ordinarily be within his powers simply because

under the articles the power of making such a contract might have been

entrusted to him. The outsider can only hold the company liable if only the power

had infact been delegated. The facts of Anard bihari Lal vs. Dinshaw and

company illustrate this point.

 

Statutory declaration of compliance.

This is a document required by section 17(2) and it contains a declaration made

to the registrar of companies telling him that the persons who have formed the

company have complied with all the requirements of the companies Act as

regards formation of a company.

The declaration should be prepared and signed by an advocate of the high court

or by a person who was named in the articles as a director or secretary of the

company. The declaration must be in the prescribed format usually on form 203

A.

The Act requires the promoters to prepare: -

a)     Written consent of every director of public companies stating that each

has agreed to act as a director.

b)     A return of the first directors i.e. particulars of the first directors.

c)     A statement on the authorized share capital of the company. This is

required by the stamp duty act section 39.

d)     A document indicating notice of the company’s registered office

(sec.108).

 

 

07.  PROSPECTUS:

When a company wants to raise fund from the genera public it issues a

prospectus. A prospectus is a document issued by the company to arouse public

interest in the proposed company and induce the general public to buy its shares

and debentures.

A prospectus central theme is that it sets out the prospectus of the company and

the purpose for which the capital is required. A prospectus is an invitation to treat

and the application for shares on the basis of the prospectus is the officer.

 

Definition of a prospectus:

Sec.2 of companies act: -

“A prospectus means any prospectus, notice, circular advertisement or other

invitation; offering to the public or for subscription or purchase any shares or

debentures of a company”.

Any document inviting deposits from the public or inviting offers from the public

for subscription of shares or debentures of a company is a prospectus.

A prospectus must be in writing an oral invitation or an advertisement in

television or film is not treated as a prospectus.

 

Subscription:

The word when used in relation to a prospectus means to take shares for cash.

In government stock and other securities investment company Ltd vs.

Christopher an offer was made by company A to the members of company B and

C to acquire all their shares in exchange for allotment in the company. The offer

cannot be held to be an offer made to the public because it does not invite

subscription for share since subscription means taking shares for cash. Also this

can not be said to be an offer to the public.

 

Invitation to the public:

Section 57 defines “public” as including any section of the public, whether

selected as members or debenture holders of the company concerned or as

clients of the person issuing the prospectus or in any other manner. The section

also provides that a public offer: -

a)     Must be calculated to result in the shares or debentures becoming

available to persons other than those receiving the offer.

b)     Should not be a domestic concern of those making and receiving the

offer or invitation.

 In Nash vs. Lynde  the managing director of a company prepared a document

that was marked strictly private and confidential and it did not contain particulars

required to be disclosed in a prospectus, a copy of the document along with

application forms were sent to solicitor who in turn sent it to the plaintiff. The

document was held to be prospectus and as such the claim of the plaintiff for

compensation was dismissed.

In another case distribution of 3000 copies of a prospectus among members of a

certain company was held to be a public offer because persons other than those

receiving the offer could also accept it. The main issue is that an offer or

invitation to any section of the public, whether selected as members or debenture

holders of the company or as clients of the person making the invitation, will be

deemed to be an invitation to the public.

 

 

Form and contents of a prospectus.

A prospectus gives a picture of the company’s intended activities and position. It

provides all the necessary and material particulars about given company. The

following provisions of he act must be observed in the preparation of the

prospectus.

a)     Section 43 a copy of the prospectus must be delivered to the register of

companies and must be signed by every person named therein as a director

or proposed director.

b)     Section39 every prospectus must be dated; and the date unless the

contrary is proved, is taken to be the date of publication of the prospectus. It

is advisable to insert a date two or three days later than actual date.

c)     Section 40 (1) every prospectus issued must include the matters

specified in part 1 of the third schedule to the act and set out the reports

specified in part 11 of that schedule.

As per third schedule to the act the prospectus must contain the following: -

1.      The number of founders or management or deferred shares if any and the

nature and extent of the interest of the holders in the property and the profits

of the company.

2.      The minimum shares a director can have and the remuneration of

directors.

3.      Names, occupation and postal addresses of the directors.

4.      Where shares are offered to the public for subscription, particulars as to;

a)     Minimum amount that must be raised by the issue of those shares to

provide funds for the following;

i)                    The purchase price of property purchased or to be

purchased, which is to be defrayed in whole of the issue.

ii)                  Preliminary expenses payable by the company and any

commission so payable to any person in consideration of his

agreeing to procure subscription for any shares in the company.

iii)                Repayment of any moneys borrowed by the company

without use the issue proceeds and sources out of which

amounts are to be provided.

5.      The time of the opening of the subscription lists.

6.      the amount payable on applications and allotment on each share. In the

case of second or subsequent offer, the amount offered for subscription on

each previous allotment made within the two proceeding years, the amount

paid for the allotted shares.

7.      The number, description and amount of any shares in or debentures of the

company which any person has, or is entitled to be given, an option to

subscribe for; together with the following particulars of the option: -

a)     The period during which it is exercisable.

b)     The prices to be paid for shares or debentures subscribed for under it.

c)     Consideration (if any) given or to be given for it for the right to it.

d)     The names and postal address of the persons to whom it or the right

to it was given.

8.      The number and amount of shares and debentures issued or agreed to

be issued with the two preceding years as fully or partly paid otherwise than

in cash and the extent to which they are paid up.

9.      (i) In respect of any property to which this paragraph applies;

a)     the names and postal addresses of the renders.

b)     The amounts payable in cash, shares or debentures to the vendor and

where there are many vendors amount payable to each vendor.

c)     Short particulars of any transaction relating to the property completed

within the two preceding years in which any vendor of the property to the

company was at the time of the transaction, a promoter or a director or

proposed director of the company had any interest direct or indirect.

(ii) The property to which this paragraph applies is property purchased or by

the company or proposed so to be purchased, which is to be paid for wholly

or partly out of the proceeds of the issue offered for subscription by the

prospectus or the purchase of which has not been completed at the date of

the issue of the prospectus, other than property: -

a)     The contract for the purchase whereof was entered in to the

ordinary course of the company’s business, the contract not being

made in contemplation of the issue nor the issue in consequence of

the contract.

b)     As respects which the amount of the purchase money is not

material.

10. The amounts, if any, payable as purchase money in cash, shares or

debentures for any property referred to in 9 above specifically the amount of

goodwill.

11. The amount if any payable or paid within the two preceding years as

commission for subscribing or agreeing to subscribe on procuring or agreeing

to procure subscriptions for any shares in or debentures of the company or

the rate of any such commission.

12. The amount or estimated amount of preliminary expenses and the

persons by whom any of those expenses have been paid or are payable and

the amount of he expenses of the issue and the persons by whom any of

those expenses have been paid or are payable.

13. Any amount or benefit paid within two proceeding years or intended to be

paid to any promoter and the consideration for the payment or benefit.

14. General nature of any material contract not being a contract entered in the

ordinary course of the business carried on or intended to be carried on by the

company or a contract entered into more than two years before date of issue

of prospectus. The dates of the contract and parties to such contract should

also be disclosed.

15. The names and postal address of the auditors if any by the company.

16. Full particulars of the nature and extent and interest, if any of every

director in the promotion of or in the property proposed to be acquired by the

company or where the interest of such a director consists in being partner in a

firm, the nature and extent of the interest of the firm, with a statement of all

sums paid or agreed to be paid to him or to the firm in cash or shares or

otherwise by any person either to induce him to become or to qualify him as a

director, or otherwise for services rendered by him or by the firm in

connection with the promotion or formation of the company.

17. If the prospectus invites the public to subscribe for shares in the company

and the share capital of the company is divided into different classes of

shares, the right of voting at meetings of the company conferred thereby, and

the rights in respect of capital and dividends attached to the several classes

of shares respectively.

18. In the case of a company which has been carrying on business or of a

business which has been carried on for less than three years, the length of

time during which the business of the company or the business to be

acquired, as the case may be, has been carried on.

 

Reports to be set out in prospectus.

Part II of the third schedule stipulates reports to be included in the prospectus.

These reports are prepared by the company’s auditors and state: -

a)     The profits or losses of the company in each of the five preceding

years.

b)     The rate of dividends paid by the company in each in respect of each

class of shares in each of those years.

c)     The assets and liabilities at the last date to which the accounts of the

company were made up.

d)     If the proceeds or parts of the proceed are to be used directly or

indirectly to purchase a business the report must be made up of the

profits or losses of the business for the last five years.

Where the company has subsidiaries the performance of such subsidiaries has

to be reported or the consolidated accounts have to be prepared.

 

Reports of experts in prospectus

Section 42. A prospectus must not be issued purporting to contain a statement

by an expert unless: -

a)     He has given and has not before delivery of a copy of the prospectus for

registration, withdrawn by written consent to the issue thereof with the

statement included in the form and context in which it is included.

b)     A statement that he has given and not withdrawn his consent appears in

the prospectus.

 

Experts:

Refers to any person whose profession gives authority to a statement made by

him. Experts include engineers, valuers and accountants.

Exemption from requirements of third schedule matters and reports.

Requirements of the third schedule do not apply in the following: -

a)     Where the prospectus is used to existing holders of shares or

debentures (whether allotment letters are renounceable or non-

renounceable).

b)     Where prospectus relates to shares or debentures similar to shares or

debentures previously issued.

A prospectus thus issued without the requirements of the third schedule is called

a bridged prospectus.

 

Issue of forms of application;

Forms of application must be accompanied with a prospectus. This requirement

does not apply where the form of application was issued either: -

In connection with a bonafide invitation to a person to enter into an underwriting

agreement with respect to shares or debentures.

In relation to shares or debentures which were not offered to the public section

40 (3)(ii) (iii).

 

 

Issuing of shares to the public:

Issuing shares to the public is done by public companies wishing to raise capital

through;

a)     Public issue by prospectus,

Done through a direct invitation,

To the public to subscribe for its shares or debentures invitation is made through

a prospectus, which specified the purpose for which the capital will be used.

b)     Offer for sale

The provisions relating to the prospectus are cumbersome and companies in the

past used evaded the requirements by allotting the whole of an issue of shares

and debentures to an issuing house at a certain price. The issued house then

published an advertisement in the nature of an offer for sale inviting the public to

buy shares from it at a higher price. Section 47 of the act provides that a

document by which an offer for sale is made to the public is within the definition

of prospectus.

An allotment with a view to offer for sale is evidenced when;

a)     An offer of shares or debentures was made within six months after

allotment or agreement to allot.

b)     At the date when the offer was made the whole consideration to be

received by the company had not been received per section 47 (2).

In addition to complying with requirements of section 40 matters to be stated and

reports to be made out in prospectus an offer for sale must state: - 

a)     The net commission received or receivable in respect of shares or

debentures to which the offer relates.

b)     The place and time at which the contract of allotment or shares or

debentures may be respected per section 47 (3).

An offer for sale must be signed by two directors of the company or not less than

half of two partners of the issuing form that a partner may sign through an agent.

Persons making the offer are prima facie liable to pay compensation under

section 45 caused by misstatements in the offers as if they were directors.

 

Placings:

This case when a company issues its shares through one or more stockholders

who sell them to clients. This method is ideal when making a small issue of

shares.

Companies raising money through placing are required by stock exchange to

make a substantial proportion of their securities available to the general market.

 

Prospectus and duty of disclosure:

A part from requirements set out under section 40 any other information may be

volunteered. The intending purchaser of shares is entitled to all true disclosure in

the prospectus.

In New Brunswick and Canada Rly and land Co. vs. Muggeridge (1860) VC

Kindersley said.

“Those who issue prospectus holding out to the public the great advantages

which will accrue to persons who will take shares in a proposed undertaking and

inviting them to take shares on faith of the representations therein contained are

bound to state everything with strict and scrupulous accuracy and not only to

abstain from stating as fact that which is not so but to omit no one fact within their

knowledge the existence of which might in any degree affect the nature or extent

and quality of the privileges and advantages which the prospectus holds as

inducement to take shares”.

 

Effects of disclosure

Misstatement and non-disclosure are both fatal to the validity of the contract and

a subscriber for shares or debentures may rescind the contract within a

reasonable time before the company goes into liquidation.

The contract can be rescinded if the following conditions are satisfied: -

a)     The statement must be a material misrepresentation of fact. In

Greenwood vs. Leather shod Wheel company (1900) as company formed to

manufacture leather tyre wheels for trolleys issued a prospectus stating in

large type “orders have already been received from the house of the house

commons to be followed by large orders later”. Infact all orders received were

trial orders and no customers had yet expressed any intention to buy in large

scale. It was held that the prospectus was misleading.

Statements of the fact can lead to the rescission of a contract but opinions in

prospectus cannot nullify a contract.

In Edington vs. Fizmaurice (1825) a company issued a prospectus inviting

subscriptions for debentures. The object of the issue was stated to be that the

money would be used for effecting certain alterations in the company’s buildings

and for developing the business of the company. The money however was

needed to pay off pressing liabilities. The plaintiff applied for debentures in

reliance on the statements in the prospectus. It was held that the plaintiff could

rescind the contract and directors were liable.

Other cases where subscribers were given the right to rescind the contract for

misleading prospectus are: -

1.      Kerberg’s case Re Metro politan coal consumer’s Association (1882).

2.      Ross vs. Estates investment company (1868).

 

b)     The statement must have induced the shareholder to take shares.

In Jennings vs. Brought, (1854) LJ ch. 999. A subscriber for shares in a mining

company offered by a prospectus which inaccurately described the capacity of

the company’s mine. He inspected the mine himself. It was held that he was not

entitled to rescind the contract to take shares as he had inspected the mine

himself. It was held that he was not entitled to rescind the contract to take the

shares as he had inspected the mine himself and must have therefore, relied on

his own observation and not on the content of the prospectus.

 

c)     The statement must be untrue.   

 A statement is untrue if it is misleading in the form and context in which it is

included or where the omission from a prospectus of any matter is calculated to

mislead. A mere non-disclosure does not amount to misrepresentation unless the

concealment has prevented an adequate appreciation of what was stated.

A statement can be false because of what it has said, concealed, omitted or

implied.

In Rex vs. Lord Kylsant (1932) KB 442 a prospectus was issued by a company

stating that the company had paid a dividend every year between 1921 and 1927

(years of depression) thus giving the impression that the company was stable.

However, the company had infact incurred considerable trading losses and was

able to pay dividends only out of realized capital profits. This fact was not

disclosed. It was held that the prospectus was false in material particular in that it

conveyed a false impression.

d)     The deceived shareholder is an allotee and he must have relied on

the statement in the prospectus. If a person purchases shares in the open

market he has no right against the company.

In Peck vs. huirney (1873) LR 6HL, 377, a company issued a prospectus with a

misstatement. A relying on the misstatement applied and was allotted shares,

which he later sold to P. The company was wound up and P had to pay $100 and

as a contributory. P sought an indemnity for his loss from the directors; it was

held that the directors were not liable to P.

Lord Claemosford observed “the office of a prospectus is to invite persons to

become allotees, and the allotment having been completed, such office is

exhausted and the liability to allotees does not follow the shares into the hands of

the subsequent transferees. Directors cannot be made liable “ad infinitum” for all

the subsequent dealings, which may take place with regard to those shares upon

the stock exchange.

e)     The omission of material fact must be misleading before recession

is granted. If a person relies as aground for the rescission of a contract on

the omission of a statement, he must show that the omission of the

statement makes what is stated misleading. An omission must be of such a

nature to make a statement actually misleading.

In Coles vs. White Greyhound Assn Ltd (1929) 45 TLR 230. a prospectus

described land as eminently suitable for Greyhound racing, local authority

refused approval, it was held that he description of land was misleading and

rescission was granted.

f)       The proceedings of rescission must be started as soon as the

allotee comes to know of a misleading statement and before the

company goes into liquidation. Where an allotee decides to rescind a

contract on grounds of fraudulent mispresentation, a mere notice to the

company is not enough. He must make effective steps for the rectification of

register of members and removal of his name there from.

 

Loss of rights of rescission:

The right to rescind a contract based on fraudulent statement or withholding

material fact is lost in the following instances: -

1.      When after discovering the misstatement he treats the contract as

subscribing or does any act adopting the contract by: -

a)     Attempting to sell the shares.

b)     Executing a transfer.

c)     Paying calls or receiving dividends.

d)     Attending and voting at a general meeting of the company in

person or by proxy.

2.      When there is unreasonable delay upon discovering a misstatement. A

delay of 15 days may be held to be too long and amounted to waiver of the

right to rescind (Scottish petroleum co. Re. Wallace’s case (1883) 23 chi. 413).

3.      Where the winding up of the company has commenced and the rights of

the creditors of the company have intervened, the right of rescission is lost.

Where the shareholder has started active proceedings to be relieved of his

shares, passing of the winding up order during their pendency would not

prejudice his right of getting relief.

 

Damages for deceit

Anyone induced by fraudulent statement to take share is entitled to sue the

company for damages. He cannot both retain the shares and get damages

against the company.

 

Liability for false statement in prospectus

Section 46 where a prospectus has any untrue statement any person who

authorized its issue is liable for convictions, to a term of two years imprisonment

or fine to ten thousand unless he proves.

a)     That the statement was immaterial.

b)     That he had reasonable ground for believing and did believe up

to the time the issue of prospectus that the statement was true.

In Derry vs. Peak (1889) the court held that the directors might not be liable on a

statement contained in a prospectus, which in their honest opinion was true and

not made carelessly.

Section 45 also provides that civil liability to pay damages may be incurred by: -

i)                    Directors of the company

ii)                  Persons who have agreed to become directors at a later

date.

iii)                Promoters

iv)               Other persons who have authorized the issue of the

prospectus.

 

Defences for directors or promoters:

Section 45 (2) provides the following defences, which the directors have to

establish to avoid liability: -

a)     That one had withdrawn his consented to become a director before the

issue of prospectus and it was issued without his consent.

b)     That the issue was made without his knowledge or consent and that

on becoming aware of the issue, he forth with gave reasonable public

notice of the fact.

c)     That he withdrew his consent after the issue of the prospectus and

gave reasonable public notice before allotment.

d)     He had reasonable ground to believe that the statements were true

and believed them to be true.

e)     That the statement was correct and fair summary of an experts report

or a statement made by official or in an official documents.

Experts liability:

An expert who gives a report to be included in the prospectus is placed in a

similar position for untrue statement like the person who authorized the issue of

the prospectus; section 45 (3) provides the following defences to an expert: -

a)     That he withdrew his consent in writing before the registration of the

prospectus.

b)     That offers registration sued before allotment, on becoming a ware of

the untrue statement, he withdrew his statement in writing and gave

reasonable public notice of such withdrawals and the reason for it.

c)     That he was competent to make the statement and up to the time of

allotment he believed on reasonable grounds that it was true.

 

STATEMENT IN LIEN PROSPECTUS

A statement in lieu of prospectus is to be filled with registrar on two occasions.

Under section 50 a public company having privately arranged for its capital

subscription need not issue a prospectus, but in that event a statement in lien of

prospectus must be filled with the registrar three days before any allotment of

any shares or debentures can be made.

Under section 32 if a company alters its articles such that provisions of section

30 are excluded, the company will cease to be a private company and must

within fourteen days after the said date file with the registrar a statement in lieu of

prospectus.

For a public company a statement in lieu of prospectus has to be in the form of

the fourth schedule while in the case of a private company it has to be in the form

of the second schedule.

 

   Form of statement:

The statement must be signed by every person named therein as a director or

proposed director or his agent authorized in writing. The statement must contain

same information as a prospectus complying with the third schedule.

Section 50 provides that if a statement in lien of prospectus includes any untrue

statement, the directors and others who authorized its delivery for registration are

liable to imprisonment up to two years or a fine up to ten thousand shillings or

both, unless it is established by the person liable that: -

i)                    The untrue statement was immaterial.

ii)                  He had reasonable ground to believe that such a

statement was true.

 

Contents of statement in lieu of prospectus:

Contents of this statement depend on whether that statement is delivered under

section 32 (1) or section 11 (2). A statement delivered under section 32 (1) must

contain the following particulars.

The nominal share capital of the company and shares into which it is divided.

The amount (if any) of the capital constituted by redeemable preference shares.

The earliest date in which the company has power to redeem the redeemable

preference shares, if any.

a)     Names, occupation and postal address of directors or proposed

directors.

b)     Amount of issued shares and commission or discount allowed

therewith.

c)     Amount of preliminary expenses and by whom they have to be paid or

are payable.

d)     Amount given or any other benefit given to any promoter and the

consideration for the payment of the benefit.

e)     Voting, capital and dividend attached to the different classes of shares.

f)       Shares and debentures issued in the preceding two years as fully paid

up otherwise than for cash and consideration for the issue.

g)     Number description and amount of any shares which any person has

or is entitled to be given an option to subscribe for and the period the

option is exercisable.

h)     Name and postal address of vendors of the property of the company

the amount payable for any such property to each separate vendor.

i)        Dates, parties to and general nature of material contracts, and the

time and place at which the contract or copies there of may be.

j)        Names and address of auditors.

k)     Full particulars of the nature and extent of the interest of every director

in any of the interests of every director in any property of the company

purchased or acquired by the company within the preceding two years.

l)        Rates of dividend (if any) paid by the company in respect of each

class of shares in the company in each of the five financial years

immediately preceding the issue of the statement or financial years

immediately preceding the issue of the statement or since incorporation of

the company, whichever period is short and particulars.

m)   The case in which no dividend have been paid in any class of shares

in any of these years.

 

 STOCK EXCHANGE REQUIREMENTS:

The stock exchange is a market where stocks or shares are bought and sold

through stockbrokers. The stock exchange is governed by governed by a council

elected by the members from amongst themselves.

The following conditions are fulfilled before a company is listed in the stock

exchange: -

a)     A completion of an application form and signing an agreement.

b)     A short history of the company.

c)     A certificate from the auditors that the company is public within the

terms of the companies act.

d)     Issued share capital must not be less than $ 25000.

e)     Payment of a hearing fee of five hundred shillings.

f)       Further five hundred shillings for all quotations granted.

g)     Council has to be satisfied that a reasonable number of shares are

offered in order to start a market.

h)     Submission of three copies of the articles of association, which may

be referred after perusal by the committee members.

 

ALLOTMENT OF SHARES ACT ON STOCK EXCHANGE

Section 53 where a prospectus states that application has been made for

permission for the shares or debentures offered thereby to be dealt in any stock

exchanges, allotment made will be void if: -

a)     The permission has not been applied for before the third day after the

first issue of the prospectus.

b)     Permission has been refused before the expiration of three weeks

from the date of the closing of the subscription list or such longer period

not exceeding six weeks.

Section 53 (2) states that where the permission has not been applied for or has

been refused, the company must immediately repay all money received from

applicants. But if such money is not paid within eight days after the company

became liable to repay the directors became  liable to pay with interest at five

percent per annum from the expiration of the eight day, unless a director can

prove that the default was not due to any misconduct or negligence on his part.

Section 53 provides further that all money received from applicants must be kept

in a separate account so long as the company may become liable to repay it.

 

Underwriting commission

Underwriting refers to a situation where one agrees to take shares or debentures

specified in an agreement. If the public fails to subscribe for them, consideration

for this undertaking is commission.

Section 55 provides that a company may pay a commission to any person in

consideration of his subscribing or agreeing to subscribe or his procuring or

agreeing to procure subscriptions for shares in or debentures of the company.

Before commission is paid the following conditions have to be fulfilled: -

i)        The payment of commission should be authorized by the articles.

ii) Commission cannot exceed ten percent the price of shares.

3.      The amount and rate of the commission and number of shares which

underwriters have agreed to subscribe must be disclosed as: -

a)     In the case of shares offered to the public for subscription, the

disclosure must be in the prospectus.

b)     In the case of shares not offered to the public for subscription, the

same disclosure must be made in the statement in the prescribed from

delivered to the registrar before payment of the commission.

Section 55 (4) a vendor or promoter of a company or any other person who

receives payment in money or shares from the company, has power to apply any

part of the money or shares so received in payment of any commission, the

payment which if made by the company would have been legal under this

sections.

A part from the above exceptions no company may apply its shares or capital to

pay commission discount or allowance to any one in consideration of his

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

Section 55 applies to private and public companies alike.

 

Brokerage

Section 55 permits companies to pay brokerage if its articles so provide. Brokers

are professional persons such as stockbrokers, bankers who exhibit prospectus

and send them to their customers and by whose mediation the customers are

induced to subscribe unlike underwriters brokers do not undertake to subscribe

shares or debentures, which are not subscribed by the public.

Brokerage must be payable to brokers only: -

In Andreae vs. Zinc mines of Great Britain Ltd (1918) 2 KB 454. A company

agreed to pay a lady ten percent commission on any capital the company as a

result of an introduction by her. The lady was not carrying on any business as a

broker, it was held that she could not recover the agreed sum as she did not

carry on business as a broker and it was a mere accident that she came into the

company’s office and was consulted on this matter.

 

08.  MEMBERSHIP

A person is a member of a company if the subscribes to the memorandum of

association of a company and upon registration his name entered in the register

of members. Members are also called cooperators or shareholders.

A shareholder is a person who holds shares in a company while a member is one

whose name appears in the register of members.

The terms members and shareholders are used synonymously specifically in the

case of a company limited by guarantee and having a share capital and unlimited

company whose capital is held in definite shares. There are circumstances where

a person may become a member of a company without being its shareholder

without being a member.

The following are instances where a person becomes a member without being a

shareholder of the company.

1.      In the case of companies limited by guarantee or unlimited companies,

because such companies may not have share capital.  

2.      A deceased member continues to be a member as long as his name is on

the register of members, but he cannot be a shareholder of the company.

3.      A transferor of shares continues to be a member until the transfer is

registered and the name replaced.

4.      Subscribers to the memorandum are treated as members by the fact of

subscription on registration of the company they are entered in the members

register even before they are allotted any shares.

The following are instances where a person becomes a shareholder of a

company without being its member.

a)     A person who holds a share warrant.

b)     A transferee or legal representative of deceased or insolvent member is

not a member until his name appears in the register although he is a

shareholder.

 

Modes of acquiring membership:

Section 28 of the companies act provides that a person may become a member

of a company by: -

a)     Subscription to the memorandum:

Subscribers to the memorandum are deemed to have agreed to become

members. The names are entered in the register of members upon registration of

the company.

In official liquidation vs. Suleman Bhai, S subscribed to a company’s

memorandum for two hundred shares, but actually took 20 shares. It was held

that he was liable in the winding up of the company for all the 200 shares, as he

became a member by the very fact of subscription.

A subscriber to the memorandum cannot rescind the contract to take shares on

the ground of misrepresentation made by a promoter (metal constituents Ltd, Re

Lord Lurgen’s case (1902) Ich 707 because: -

i) By his name act he brought the company into existence.

ii) The company could not appoint an agent before it came into existence and it

is therefore not liable for the promoters act.

iii) By signing the memorandum he became bond as between himself and the

company and also between himself and other persons who became members.

 

b)     Agreement and registration:

Every person who agrees in writing to become a member and whose name is

entered in the register of members is a member of the company. Registration of

a name as a member of a company may be obtained through: -

1.      Application and allotment.

An application for shares is an offer to take shares; allotment is acceptance of

that offer by the company, which creates a binding contract between the

applicant and the company. An application may be absolute or conditional. If

conditional the allotment must be in accordance to the terms of the application

(Aldborough Hotel Co. Re. Simpson’s case (1986) 4 ch. 484).

2.      Transfer.

One becomes a member when the transfer of shares is affected and his name is

entered in the register of members.

 

3.      Succession.

The company has power to register any person as a shareholder to whom the

right to any shares (or debentures) in the company has been transmitted by the

operation of law, and in such a case an instrument of transfer is not necessary.

 

c)     Qualification shares:

Before one is appointed a director of a public company, he must take or sign an

agreement to take and pay for qualification shares (if any) in which case he is in

the same position as a subscriber to the memorandum.

 

d)     Estoppel: 

Any one who allows his name to remain in the register of members or otherwise

holds himself out or allows himself to be held out as a member is estopped from

denying being a member of the company.

 

CESSATION OF MEMBERSHIP

 

A person ceases from being a member once his name is removed from the

register. A shareholder may cease from being a member of a company by: -

1.      An act of the parties.

2.      Operation of law.

 

1.      Act of parties.

The following are instances where a person may cease to be a member through

act of parties: -

a)     If one transfers his shares to another.

b)     If one’s shares are forfeited.

c)     If the company sells the person’s shares under a provision in the

articles.

d)     If one rescinds the contract to take shares on grounds of

misrepresentation.

e)     If redeemable preference shares are redeemed.

f)       If one surrenders his shares, if such is permitted by articles.

g)     If share warrants are issued in exchange of fully paid shares.

 

2.      Operation of law.

One may cease membership through operation of law in any one of the following

ways:-

a)     Insolvency – shares of insolvent vest in the official receiver or

assignee.

b)     Death – shares of the deceased are vested in the legal representative,

however the deceased’s estate remain liable as long as the name of the

deceased is in the register.

c)     Sales of shares in execution of a court decree.

d)     Winding up of a company.

 

 

Rights and liabilities of members.

Rights of members.

The rights are conferred either by company’s act, the memorandum and articles

of association or by the general law. Rights conferred by the companies act are

called the statutory rights. The following are statutory rights: -

(1)   Right to obtain copies of the memorandum and articles on request and

on payment of the prescribed fee.

(2)   Right in priority to have shares offered incase of increase of capital.

(3)   Right to transfer shares.

(4)   Right to vote on resolutions at meetings of the company.

(5)   Right to apply to court to have any variation of his rights set a side by the

court section 7 (4).

(6)   Right to have a share certificate for shares held.

(7)   Right to inspect register of members, register of debenture holders and

copies of annual return.

(8)   Right to receive a copy of the statutory report.

(9)   Right to apply to the BOD to call an annual general meeting when the

company fails to call such a meeting.

(10)        Right to receive notice of meetings, attend and vote at meeting.

(11)        Right to appoint a proxy and inspect proxy register.

(12)        Right to demand poll alone or with others.

(13)        Right of a body corporate to appoint a representative to attend and

vote at the general meetings.

(14)        Right to require the company to circulate resolution.

(15)        Right to have any request minutes of proceedings of a general

meeting.

(16)        Right to receive dividends when declared.

(17)        Right to receive copies of annual accounts of the company with the

auditors’ report.

(18)        Right to participate in the appointment of directors and auditors in the

annual general meetings.

(19)        Right to petition to the court for the winding up of the company.

(20)        Right to share surplus.

The rights conferred on members by memorandum of association are called

documentary rights, while rights conferred on members by the general law are

called legal rights.

 

Liability of members

Liability of members depends on the nature of the nature company. Liability may

be summarized as follows: -

1.      for unlimited companies each member is liable in full for all the debts

contracted by the company during the period he was a member.

2.      In case of limited by shares each member is liable to pay the full nominal

value of the shares held by him.

3.      For a deceased member, his estate is liable in respect of partly paid

shares and where the shares have been registered to the name of

representatives they become liable.

4.      When one (a member) is adjudicated bankrupt, the official receiver may

sell the partly paid shares in which case the buyer becomes liable thereof or

he may disclaim them as onerous property.

5.      When membership is reduced below seven and two for public and private

companies, every member aware of the fact becomes severally liable for the

payment of debts of the company after six months of trading from such

reduction in number.

6.      For companies limited by guarantee each member is liable to contribute

the amount guaranteed by him to be paid in the event of winding up.

 

Register of members.

Section 112 requires every company to maintain a register with the following

particulars:-

a)     The name and address of each member.

b)     For a company with share capital, shares held by each member

distinguished each share by its number and extent to which the shares

have been paid up.

c)     The date each person was entered in the register as a member.

d)     The date on which any person ceased to be a member.

Where the company has converted any of its shares into stock a notice of the

conversion has to be given to the registrar. If default is made in maintaining the

register, the company and every officer in default shall be liable to a default fine.

Section 114 provides that on issue of a share warrant, the company must strike

out of the register, the name of the member because of the issue of the share

warrant he ceases to be a member in which case the following particulars should

be entered in the register: -

a)     The fact of the issue of the warrant.

b)     Statement of the shares included in the warrant

c)     Date of issue of the warrant

 

Index of members.

Section 113 states that every company with more than fifty members is required

to keep an index that may be in the form of a card index. The index should be

kept where the register is kept. Any alteration in the register should be noted in

the index within fourteen days. Failure to comply with any of the above may

attract a fine.

 

Location of the register.

Section 112 (2) requires that the register must be kept at the company’s

registered office. It may be kept elsewhere provided.

a)     The work of making it up is done at another office.

b)     The register is prepared by another person.

 

Inspection of register of members.

Inspection of the register of members and debenture holders is open to the public

for at least two hours a day.

Inspection is free for members and a fee of Ksh 2 is charged for every inspection.

The right to inspect includes the right to make extracts from the register. A fine of

Ksh 40 is imposed for refusal to inspect or refusal to supply extracts. The object

of inspecting the register is immaterial. Extracts have to be supplied within

fourteen days upon receipt of the demand.

The right to inspect ceases upon the commencement of winding up and an order

of the court must be obtained if inspection is required after that date.

 

 

Closure of register of members.

Under section 117 a company can close a register for 30 days after an

advertisement in a local daily. Closure is usually done prior to payment of

dividends or issue of new shares.

 

Rectification of register of members

Section 118 provides that courts can order rectification of register of members in

the following cases: -

a)     Where one’s name is entered or omitted from the register of members

without any sufficial cause. 

b)     Where default is made or unnecessary delay take place in entering on

the register the fact that any person having ceased to be a member. Courts

may require companies to pay damages to the aggrieved person.

 

No notice of trust on register.

Section 119 states that no notice of any trust express, implied or constructive,

shall be entered on the register of members or debenture holders.

The trustee can be entered in the register in his personal capacity and not as a

trustee, and he will exercise the rights of a shareholder, and is alone liable for

shares calls and to be put in the list of contributories.

 

Branch register.

Section 121 a company carrying business outside Kenya in any part of the

commonwealth countries may keep a branch register in that part.

Notice must be given to the registrar of the situation of the office where a branch

register is kept within one month of the opening of the office and any change in

its situation or discontinuation of such a register.

A branch register is deemed to be part of the company’s register of members.

 

Annual return.

Section 125 provides that every company with share capital must file an annual

return with the register once in every year. The return must be filed with the

registrar forty two days after the annual general meeting (sec. 127).

The following particulars must be included in the annual return in accordance to

part of the fifth schedule.

1.      The address of the registered office.

2.      The place where the register of members or debenture holders is kept is

not kept at the registered office.

3.      Summary distinguishing between shares issued for cash and shares

issued as fully paid or otherwise than in cash specifying.

a)     Amount of share capital and the number of shares.

b)     The number of shares taken up to date of the return.

c)     The amount called up, received and unpaid.

d)     Commission and discount in respect of shares or debentures.

e)     The total number of shares forfeited.

f)       Total amount of shares for which share warrants are outstanding,

the number of shares compared in each warrant and the amount of

share warrants issued and surrendered since the last return.

4.      The total amount of indebtedness in respect of all registrable charges.

5.      A listing containing: -

a)     The names and addresses of those who are members on the

fourteenth day after the annual general meeting and those who have

ceased to be members since the date of the last return.

b)     The number of shares held by each member.

c)     Particulars of the directors and the secretary.

Section 125 (1) if the company has converted its shares into stock, the return

should give the same particulars with regard to the stock as required for shares.

Section 126 for a company with no share capital, the following facts should be

included: -

a)     The situation and the postal address for the registered office.

b)     The address of the place if the register of member is kept elsewhere.

c)     The address and place if the register of debenture holders is kept

elsewhere.

d)     Particulars relating to directors and the company secretary.

A statement containing the particulars of the total amount of in indebtness of the

company in respect of all charges which are or were required to be registered

with the registrar under the act.

 

Documents to be annexed to annual return.

Sec 128(1) the following documents must be annexed to the annual return.

a)     A copy of the balance sheet with all notes thereto duly certified by

a director a or company secretary.

b)     A copy of auditors report and director’s report certified by a

director and company secretary.

Section 156(1) the profit and loss account and group account should be annexed

to the balance sheet.

Section (129) requires that also a private company must also submit with annual

return the following certificates:-

a)     The company has not invited the public to subscribe its shares or

debentures.

b)     Any excess of fifty members consists of entirely present and ex-

employees.

 

09.  SHARES

Shares are indivisible units of the capital of the company. Fawell I in Barland’s

trustee vs. Steel Bros (1901) 1 ch. 279 defined a share as 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 place, but also consists

of a series of mutual covenants entered into by the shareholders “inter se” in

accordance with section 22 of the company’s act.

Shares represent the equal portions into which capital is divided each

shareholder is entitled to a portion of a company’s profits in proportion to the

number of shares held by him.

A shareholder’s liability is usually measured against his indebtedness to the

company on the amount unpaid on shares held by him.

Section 76 requires that each class of shares be distinguished by its

appropriate number. The distinction is not necessary if all shares rank equally.

 

SHARE CAPITAL

Capital is a particular amount of money with which a business is started. For a

company is usually called share capital.

Types of capital

1.      Authorized or nominal capital

This is the nominal value of the shares which a company is authorized to issue

by its memorandum of Association. It is the maximum amount of capital which

the company will have. This amount can be increased or reduced only if the

company changes the memorandum. Nominal capital is also called registered

capital.

 

2.      Issued capital

This is the nominal value of the shares which are offered to the public for

subscription. It represents the portion of the nominal capital that has been given

out to be subscribed by the public or by any persons concerned.

3.      Subscribed capital

This is the part of issued capital which has been taken up by the public. When all

the issued capital has been subscribed then subscribed and issued capital are

equal.

4.      Called up capital

This is part of the issued capital which has been called up on the shares. This is

the part of the issued capital which shareholders are liable to pay as and when

called.

5.      Paid up capital

This is part of the issued capital which has been paid up by the shareholders.

When calls are made on the shares and shareholders fail to pay up the amount

thus owing is called calls in arrears or “calls unpaid”.

6.       Reserved capital

This is any part of the company’s share capital which a company may resolve by

a special resolution not to be called except in the event of a winding up. Section

62 of the companies Act provides that a company by special resolution determine

that any portion of its uncalled capital be reserve capital.

Reserve capital can only be turned into uncalled capital by leave of the court.

Reserve capital is different from reserves or reserve fund. Reserve fund or

reserves refers to undistributed profits kept by the companies to cater for

emergencies.

 

 

Application and allotment of shares:

Application is an offer by a prospective shareholder in lieu of a prospectus

issued by the company. Allotment is the acceptance of an application and it

results to a contractual relationship between the company and the applicant,

allotment of shares is an allocation (appropriation) by the board of directors of

a given number of shares in response to an application.

As the post is the medium of communication allotment is deemed completely

on the instant, the letter of allotment is posted even though the allotment letter

is delayed in the post or it never reaches the offeree (applicant) household fire

insurance Co. vs. Grant (1879) 4 Ex. 216.

 

Provisions regarding allotment

1.      Allotment must be by a resolution of the board of directors unless there is

clause in the articles providing otherwise.

2.      Allotment must be made within a reasonable time, in Ramsgate Viction

Hotel vs. Monte fiore (1866) Lr1 Ex 109. Monte fiore was entitled to refuse an

allotment as his offer had lapsed due to undue delay in allotment.

3.      Allotment must be communicated to the applicant where the post is used

allotment is completed as soon as the company posts the letter of

acceptance, provided the letter is sufficiently stamped and correctly

addressed.

4.      The allotment must be absolute and unconditional. The allotment must

be made in accordance to the conditions of the offer subject to provisions of

the articles.

In Ramabhai vs. Ghai Ram (1918) Born LR 595, R applied for 400 shares in a

company on condition that he was appointed a branch manager of the company.

He was allotted shares but was not appointed a branch manager. It was held that

he was not bound by the allotment. 

5.      An offer may be withdrawn any time before communication of its

acceptance. An applicant can withdraw his offer any time be fore his offer

has been accepted sec. 52 (5) an applicant cannot withdraw his application

until after the expiration of the third day after the opening of the subscription

list.

 

Requirements of allotment.

1.      A public company must file a prospectus or a statement in lieu of

prospectus must be subscribed before allotment.

2.      The minimum subscription as provided in the prospectus must be

subscribed before allotment. If the minimum subscription is not met within

sixty days all money received from applicants must be returned forthwith

otherwise the money will attract default interest at 5% p.a from the seventy

fifth day.

3.      Section 52 provides that no allotment should be made of shares applied

for until the third day from the date of issue of the prospectus.

4.      Under section 53; if prospectus states that application has been or will be

made to the stock exchange, then such permission must be applied before

the third day of the issue of prospectus, failure to which allotment would be

void.

 

Irregular allotment

Under sec.51 an allotment made by the company to an applicant in contravention

of provisions of sec. 49 (failure to meet minimum subscription) or section 50

(failure to issue a statement in lieu of prospectus) is voidable at the discretion of

the applicant within one month after the holding the statutory meeting of the

company within one month after the date of allotment. The above applies

regardless of the fact that the company is in the course of winding up.

If any director knowingly contravenes provisions of section 49 or 50 he must

compensate the company and the allotee respectively for any loss or damages or

costs incurred.

 

Return of allotment (section 54)

A company is required to deliver within sixty days the following to the registrar of

companies for registration: -

a)     Return of allotment

A return has details of the number and nominal amount of shares, names,

addresses and description of the allotees and amount paid or payable on each

share.

b)     A contract in writing (or if not in writing particulars of the contract,

stamped with the same stamp duty as if the contract has been in writing)

constituting the title of the allotee to any shares allotted as fully or partly paid

up otherwise than in cash; together with any contract of sale of services or

other consideration for allotment, such contracts being duly stamped and a

return stating the number and the nominal amount of shares so allotted, the

amount credited as paid up and the consideration for allotment.

Issue of shares at premium.

Section 58 provides that shares can be issued at a higher price than the nominal

value. Such constitutes a share premium which must be transferred to a share

premium account. The amount so transferred can only be held for the following: -

a)     Paying up unissued shares which are then issued to members as fully

paid bonus shares.

b)     Writing off preliminary expenses.

c)     Writing off the expenses or commission paid or discount allowed on any

issue of share or debentures.

d)     Providing for the premium payable on the redemption of any debenture

of the company.

 

Issue of shares at a discount.

Section 59 permits issue of shares at a discount to the following conditions: -

a)     The issue must be of a class of shares already issued.

b)     It must be authorized by a resolution passed in a general meeting and

sanctioned by the courts.

c)     The resolution must specify the maximum rate of discount.

d)     The company must have commercial business for not less that one year.

e)     Shares must be issued within one month of the sanction by the courts

within the time courts may allow.

 

Share of no par value.

Under section 4 (2) and section 23 (2) of the act, companies are prohibited from

issuing of no par value.

 

SHARE CERTIFICATE

Every one whose name is entered in the register of members has a right to

receive a share certificate in respect of those shares he holds in the company. A

certificate should be issued within sixty days of the allotment or lodgement of

transfer. In case of default, the company and every director, manager, secretary

and every other officer who knowingly is part to the default is liable to a max

penalty one hundred shillings in respect of every day during which the default

continues. One can however escape liability if he/she proves that he was not

aware of the fact that the certificate had not been issued.

To be valid, a certificate must have a common seal of the company affixed to it

and must also be stamped, one or more directors must sign it. It must state the

name, address and occupation of the holder, number of shares and their

distinctive number and amount paid.

 

Legal effects of share certificate:

A certificate is a prima facie evidence of the title of the member to the shares

specified in the certificate per section 83. lord Caris says that a share certificate

is a solemn affirmation under the seal of the company that a certain amount of

shares or stock stands in the name of the individual mentioned in the certificate.

In Bahia & San Francisco Rly (1868) C R 30 B 584 the object of a share

certificate was stated “the power of granting certificates is to give the

shareholders opportunity of more easily dealing with their shares in the market

and to afford facilities to them of selling their shares  at once showing a

marketable title and the effect of this facility is to make the shares of greater

value”.

In addition to the above the certificate makes the company liable in two ways: -

1.      Estoppel as to title

the company will in no way deny that a holder to a share certificate is entitled to

those shares. In Dixon vs. Kenmery & Co. (1900) 1 ch. 833 L was the secretary

of a company and also a stock broker. D applied for 300 shares in the company

and paid for them. L’s clerk who owned no shares executed transfer in favour of

D. the company without requiring the production of a share certificate from the

clerk, registered the transfer and gave D a new certificate. It was held that the

company was estopped from denying the validity of D’s certificate and was liable

to D in damages.

The company may not be bound by a certificate issued without the authority or

the board of directors or where the certificate is a forgery e.g. in the case of

Ruben vs. Great Fingal consolidated (1906) of C439.

2.      Estoppel as to payment.

If the certificate indicates that the shares are fully paid the company is estopped

as against a bonafide purchaser from alleging that the amount stated in the

certificate as being paid has been paid. A case in support of the above is in

Bloomenthal vs. Ford (1897) AC 156 B.

When the person named in the certificate knew that the shares were not fully

paid for in such a case he has not been misled by the certificate and the rule of

estoppel does not apply. (Crickman’s case Re Carobbeam Co. (1875) LR 10 ch.

App. 614).

 

Loss of certificate

Articles authorize directors to issue duplicate if such a certificate is proved to

have been lost or destroyed, defaced, mutilated or torn on payment of two and

half shillings or such s a lesser sum.

 

Transfer of shares

Section 75 states “the shares or other interests of any member shall be movable

properly transferable in manner provided by the articles of the company provided

by the articles of the company.

   The articles of a public company may and those of a private company must

restrict rights to transfer.

    Article 23 of table A of the first schedule to the Act states

“Subject to such of the restrictions of these regulations as may be applicable, any

member may transfer all or any of these shares by instrument in writing in all

usual or common form or any other form in which directors may approve.

    Article 24 of fable A of the first schedule states

“The directors may decline to register the transfer of shares to a person whom

they shall not apply; and they may also decline to register the transfer of a share

on which the company has lien. Articles restrict but not forbid the transfer of

shares.

  In case of refusal, the company must send a notice to the transferee and the

transferor within sixty days from the date on which the date of instrument of

transfer was delivered to the company.

 

                 Procedure of transfer

The following are the usual steps taken when transferring shares.

a)     For a share warrant a mere delivery of the share warrant transfers

ownership of the shares.

b)     To transfer shares a written instrument of transfer is executed by the

transferor and the transferee, duly stamped, specifying the name, address

and occupation of the transferee, which is delivered to the company for

registration together with a share certificate.

  

               Certificate of transfer 

When the shareholder is selling only part of the share he does not deliver share

certificate but the selling broker produces it along with the transfer instrument to

an officer of a company who “certificates the transfer” by writing its margins the

words “certificate lodged ” and mentions the number of shares for which it is

lodged: the officer then hands the certificated instrument back to the broker

together with the balance ticket for any share not registered.

   The transferor to get a new certificate uses the ticket and the certificated

instrument is given to the transferee, which he uses to acquire a new certificate.

   The company thus conceals the old certificate and prepares two certificates

a)     One for share sold

b)     For the unsold portion of the shares.

If a company after certifying returns the original certificate together with the

certificated transfer to the transferor who uses it to commit fraud on the

transferee, the third party has no right against the company.

    The terms implied between seller and buyer

a)     That the seller will give to the purchaser genuine of transfer and share

certificate required to enable the purchaser to be registered.

b)     The seller will not prevent the buyer from registering the transfer.

c)     The seller will compensate the buyer for any calls or liability which may

arise in respect of shares sold. The purchaser must also indemnify the seller

against calls made after date of contract.

          

 

Effect of transfer:

 

   Position of the transferee before he is registered as a member

1        The transferor continues to be the legal owner of the shares set as

a trustee of the transferee

2        The transferee has no rights as a shareholder of the company.

3        The transferee has equitable claim

4        If calls are made, the transferor must pay and recover the amount

from the transferee

5        If dividends are paid the transferor  is entitled to them.

6        Transferor must vote as the transferee directs [massel white vs v.h

massel white $son limited] (1962) ch. 964

 

Priority between transferees

When two or more persons lay their claim to the same shares, the priorities as

between the different claimants will be decided in accordance with the following

rules:

1        The first to secure registration will get priority irrespective of the

date when his claim arose.

2        As between claimants, the earlier in point of time will be preferred,

irrespective of the date when notice was given to the company.

 

Notice of transfer

It is not mandatory, but it is advisable to give notice of the lodgement of transfer

to the transferor.

 

 

Forged transfer

Consequences of forged transfer

1        Forged transfer does not pass any legal title to the transferee

2        In instances where the company has issued a share certificate to

the transferee of forged  transfer and he sold these to an innocent

buyer, the buyer gets no right to be registered as a shareholder, in

such case he can claim damages from the company.

3        If the company has been put to loss by reason of the forged

transfer, it may recover the loss from the person who procured

registration, even though he might have acted in good faith.

 

Blank transfer

This is a transfer of shares which is executed without the name of the transferee

being filled in the transfer form of deed which a transferor hands over to

purchaser or pledgee.

  The transferor also hands over to the purchaser the share certificate along with

the blank transfer form or deed, the date the date of sale and name of the

transferor are left blank

    The blank transfer is thus used as negotiable instrument. The advantage in

giving a blank transfer form is that the buyer or pledgee will be at liberty to sell

again without his name and signature to subsequent buyer.

    At the end of the transfer the first seller is treated as the transferor and the last

buyer as a shareholder and his name is registered in the company register.     

 

10.  DEBENTURES

Section 2 of the company act defines debentures as including debentures stock,

bonds and any other securities of a company, whether consisting a charge on the

assets of the company or not. The section does not actually describe what a

debenture really is.

In Level vs. Abercorris state and slab Company (1897) 37 ch D 260. Debenture

was defined as a document, which either creates a debt or acknowledges it.

In Edmonds vs. Blaina Co. (1887) 36 ch. D 215 chitly S. debenture was defined.

“The term itself imports a debt an acknowledgement of a debt an obligation or

covenant to pay. This obligation or covenant is in most cases accompanied by

some charge or security”.

 A debenture is thus an acknowledgement in writing a debt by a company to

some persons and it is issued to the public by means of a prospectus. The

prospectus has provisions for interest payment and repayment of loans lenders

are usually given a security against the non-repayment of their loan, by a charge

against the assets of the company.

 

 Characteristic features of a debenture

 In Lemon vs. Asustin Friars investment Trust Ltd (1926) ch. 1 debenture was

defined as follows “a debenture is a document containing an acknowledgement

of indebtedness which need not be, although it usually is, under seal, which need

not give, although it is usually does give a charge on the assets of the company

by way of security and which may or may not be one of the services”.

The following are characteristics of a debenture:

1.      It is used by a company and is usually in the form of a certificate.

2.      It is issued under the company’s seal.

3.      It is one of a series issued to a number of lenders although there can be

a single debenture, for example a mortgage of a company’s property to a

single individual.

4.      It specifies the period and date of repayment.

5.      It creates a charge on the undertaking of the company or parts of the

company property, but this is not always necessary.

6.      Debenture holders do not vote in company meetings.

 

Debenture stock

A debenture stock is borrowed capital consolidated into a unit with each leder

having a certificate entitling him to a certain sum being a portion at one large

loan. The debenture stock is usually secured by a trust deed and in case there is

no charge, the stock is called unsecured loan stock.

Debenture stock can be issued directly as such it is not necessary for an issue of

debentures to be fully paid and then turned into stock.

 

Classes of debentures

Debentures are classified according to the following characteristics: -

1.      Negotiability

2.      Security

3.      Convertibility

4.      Priority

 

1.      Classification according to negotiability

a)     Bearer debentures

 These are also known as unregistered debentures and are payable to the

bearer. These are negotiable instruments and are transferable by delivery and a

bonafide transferee for value is not affected by the defect in the title of the prior

holder.

In Bechuanaland Exploration company vs. London Trading Bank Ltd (1898) 2

QB. 648 Co. held debentures of an English company, payable to bearer. It kept

them in a safe of which the secretary had the key. The secretary pledged the

debentures with a bank security for a loan taken by him. The bank took the

debenture’s bonafide. It was held that the bank was entitled to the debentures as

against the company.

b)     Registered debentures

These are debentures payable to registered holders. A holder is one whose

name is on the certificate and in the company’s register of debentures.

A registered debenture is issued under the seal of the company and contains the

following clauses: -

(i)                 A covenant to pay the principal sum.

(ii)               Covenant to pay interest.

(iii)             A description of the charge on the company’s

undertaking property.

(iv)             A statement that is issued subject to the conditions

endorsed thereon.

 

2.      Classification according to security

a)     Secured debentures

These debentures create a charge on the property of the company. The charge

may be fixed or floating.

b)     Unsecured or naked debentures

These do not create any charge on the assets of the company.

 

3.      Classification according to permanence

a)     Redeemable debentures

These are issued on condition that they shall be redeemed after a given period.

b)     Irredeemable or perpetual debentures

These are debentures with no fixed period for repayment of the principal amount

or repayment of it is made conditional on the happening of an event which may

not happen or may happen is specified events like winding up.

c)     Debentures with ‘Pari Passu’ clause

These are debentures payable ratebly, though issued at different and varying

times. When assets are insufficient to pay all debts the debentures rank

proportionately. If there is no Pari passu change in the terms of issue,

debentures are payable according to the date of issue.

A company cannot however issue a new batch of debentures to rank Pari Passu

with an on batch.

 

Debentures trust Deed

Debenture holders may appoint persons as their trustees. When the trustees are

appointed a trust deed is executed conveying the property of the company to the

trustees. Under the terms of the deed the company commits itself to pay the

debenture holder their principal and interest and charges its property to the

trustees as security.

The trust deed contains the terms and conditions endorsed on the debentures

and defines the rights of debenture holder and the company. It empowers the

trustees to appoint a receiver to protect the interest of debenture holders.

Other contents of debentures are provisions concerning meetings of the

debenture holders, supervisions of the assets charged and the keeping of a

register of debenture holders.

Incase of default by the company the trustees take action on behalf of the

debenture holders.

 

Advantages of the trust deed

1.      it gives trustees a legal mortgage over the company’s property.

2.      Trustees Act are at better position of safeguarding the interests of the

debenture holders.

3.      it specifies the events upon which principal and interest are payable and

trustees ensure that the money is paid.

4.      The company is given power to deal with its own property advantageously

for the purpose of its business without prejudicing the interests of debenture

holders.

5.      The trustees act as watchdogs for the debenture holders.

6.      The trustees have power to appoint a receiver to run the company.

7.      In case of doubt or contingency the trustees can call a meeting of

debenture holders to make a decision.

8.      In case of default by the company the company can act to protect

debenture holders.

 

Liability of trustees

A trustee is liable for any breach of trust where he fails to show the degree of

care and deligence required of him as trustees.

Any clause in the trust deed releasing the trustee exempting him from liability for

breach of trust or indemnifying him against liability for breach of trust is void

except in the following cases.

1.      Where the trustee can show that he took such care and deligence as is

required of him as trustee.

2.      Where the trustee acted honestly and reasonably, section 402.

3.      Where a majority of not less than ¾ th in value of the debenture holders

present and voting in person or where proxies are permitted by proxy at a

meeting summoned for the purpose, agree and the voting relates to specific

Acts or omissions or to a trustee who is dead or has ceased to act.

 

Rights to copy the trust deed

A registered debenture holder is entitled to require a copy of a printed trust deed

section 89 (2).

 

Priority of charges

1.      A fixed charge over the same assets has priority over the floating

charge.

2.      Specific charge first in point of time takes priority.

3.      A company is prohibited from creating mortgages ranking in priority after

crystallization of floating charge. On crystallization of floating charge

becomes a specific mortgage.

4.      A company is prohibited from creating a second floating charge having

priority over the first.

5.      A company can create a specific charge after a floating charge.

Floating charge is postponed to the rights of the following persons if they act

before the security crystallizes.

a)     A landlord who distrains for rent

b)     A judgement creditor, if the goods are sold by the sheriff.

c)     A creditor who obtains a garnishee order absolute

d)     A supplier of goods on hire purchase agreement has priority over such

until goods are paid for in full.

e)     Preferential debts e.g. rates, taxes, wages and salaries.

 

11.  DIRECTORS

In Ferguson vs. Wilson (1866) LR 2 ch. 77 Carris LJ observed “the company

itself cannot act in its own person for it has no person, it can only act through

directors, and the case is as regards those directors merely the ordinary case of

principal and agent”.

In Aberdeen Rly company vs. Blaike Bros (1854) Lord Cranworth LC said, “The

directors are a body to whom is delegated the duty of managing the general

affairs of the company”. A corporate body can act by agents and it is of course

the duty of those agents to act as best to promote the interests of the corporation

whose affairs they are conducting.

Directors are thus persons in charge of the management of the affairs of a

company and are collectively called board of directors.

 

Jurisdiction of the board of directors

CAP 486 and articles give the power to manage the company to the board of

directors. In Isle of Wight Railway Co. vs. Tahourdin (1884) Collins M.R said

“directors have great powers and the court generally refuses to interfere with

their management of the company affairs if they keep within those powers”.

Shareholders may complain about conduct of the directors but while the directors

keep within those powers conferred upon them by the company constitution to

manage the company, the courts cannot allow the members to interfere with the

jurisdiction of the directors to manage the company. All that the court can say to

the members is “if you want to interfere in the management of the company

affairs, convene a general meeting and alter the company’s constitution by

passing a resolution obliging the directors to act the way you want”.

Members however have a right to intervene and take a way such management in

the following circumstances: -

a)     Where directors are improperly using the name of the company.

b)     Where the board of directors is unable to function due to some reason.

c)     Where the directors have acted ultra vires the powers granted to them or

to the company itself.

 

Meaning of director

A director is any person occupying the position of director. One is a director

because of the position of the office and its duties.

In Re. Forest of Dean Mining Co. (1878) Jessel M.R. Said “it does not much

matter what you call them so long as you understand what their real position is,

which is that they are really commercial men managing a trading concern for the

benefit of themselves and shareholders in it”.

In R vs. Camps (1962) Judge of the court of appeal of Eastern Africa, Sinclare P,

affirmed that a person occupying the position of a director though not duly

appointed is still held a director.

 

Appointment of directors

There are several stages of appointment of the directors: -

a)     The first directors of a company – are appointed by the promoter of the

company, where promoters have not appointed the directors subscribers to

the memorandum will become and are regarded the first directors.

b)     Subsequent appointment – are appointed when the company already

exists. The company will make these appointments in the following

circumstances: -

a)     To replace directors who have retired on rotation or otherwise.

b)     To replace directors who have been removed from office.

c)     To replace retired directors.

d)     To replace deceased directors.

 

Casual vacancies

These are vacancies occurring in the ranks of directors any time before the next

annual general meeting by death or registration of a director. Casual vacancies

are filled by appointment made by the existing directors.

 

Alternative directors

These are directors appointed temporarily to represent the director during his

absence or inability in the board of director.

 

Managing director

Guidelines for appointment of the managing director are given in the articles of

association.

 

Qualification of directors

The Act does not require a director to hold shares, thus one can be a director

unless articles provide otherwise. Article 77 table A provides that the share

qualification for directors may be fixed by the company in a general meeting and

unless fixed no qualification shares shall be required. If the articles of a company

contain a provision that the qualification of a director shall be holding a specified

number of shares, section 183 provides that;

(i) Each director must acquire and retain such qualification shares within two

months after appointment.

(ii) Share warrant to bearer may not count as qualification shares.

(iii) If shares are not acquired within two months one ceases to be director.

(iv) One cannot be re-appointed unless he has obtained his qualification shares.

(v) A fine of one hundred per day will accrue for the period in office without

qualification shares. 

 

Age of directors

Every director must retire on or shortly after the seventieth birthday, but he can

continue if allowed at a general meeting and after a special notice has been

given.

The minimum age for appointment is twenty-one years. The limits do not apply to

private companies unless they are subsidiaries of public companies.

 

Bankruptcy

Bankruptcy disqualifies one from holding the office of a director.

 

Effects of disqualification

The acts of a director or manager shall be valid not withstanding any defect that

may afterwards, be discovered in his appointment or qualification. Acts done

after disclosure by the company will not be binding on the company.

Disqualification of directors

The following are grounds for disqualification of a director: -

1.      Failure to take up prescribed share within two months section 183.

2.      When one becomes bankrupt or makes any arrangement or composition

with his creditors generally (sec.188).

3.      If one is prohibited from being a director for any reason under section

189.

4.      If one becomes of unsound mind.

5.      Resigning by notice in writing to the company.

6.      Absence without permission for more than six months from meetings of

directors.

 

Vacation or removal of a director

A director can leave office either by

(a) Vacation

This arises when a director voluntarily quits office by whatever reason. A director

is liable for all acts committed while in office but not thereafter.

(b) Removal from office

These are situations when one is forced to quit the position of a director. A

director can be forced to quite by:

a)     Operation of law

Instances where a director is removed by operation of law.

(i)                 Breach of statutory qualifications.

(ii)               Liquidation of the company.

b) The company

The company may remove a director by an ordinary resolution after special

notice is given. A removed director may claim compensation for the loss of office.

 

Position of directors

Position of directors may be considered or described from different perspectives

as follows:-

(i) Directors as agents

A company acts through directors who are representatives of directors, in the

eyes of law they are agents for the companies they act for. However directors are

at times not just agents as they have independent powers in certain matters.

Directors not personally liable as agents:

Directors are not personally liable for acts done on behalf of the company

provided they act within the scope of their authority and contracts are not in their

own names. Directors are however personally liable where: -

1.      They contract in their own names.

2.      They use the name of the company incorrectly.

3.      The contract is signed in such a way that it is not clear, whether it is the

principal or agent who signed.

4.      They exceed powers given to them by the memorandum or articles.

 

Directors as trust employees

Directors are not employees or servants of the company but there is nothing

preventing a director from being an employee of the company under a special

contract of service, which he may enter into with the company.

 

Directors as trustees

Directors are treated as trustees: -

1.      Of the company’s money and property.

2.      Of the powers entrusted to them.

Directors are trustees of the company’s money and property because they must

account for all the company’s money and property and to refund to the company

any of its money or property, which they have improperly paid away or

transferred.

The director is a fiduciary position as regards to the protection of the company

properly. The duties of directors involve;

(i) A fiduciary duty not to profit himself personally from the property of the

company.

(ii) As fiduciary to be honest to account for the profit of the company.

Directors however are not trustees in the real sense as they not vested with

ownership of the company’s property. They are quasi trustees because: -

a)     They are not vested with the ownership of the company property.

b)     Their functions are not the same as those of trustees.

c)     Their duties of care are not as onerous as those of trustees.

 

Directors’ remuneration

In Re George Newman and co (1895) 1 ch. 674 Lindley LS observed “directors

have no right to be paid for their services and cannot pay themselves or each

other or make presents to themselves out of the company’s assets unless

authorized to do so by the instrument which regulates the company (articles) or

by the shareholders at properly convened meeting”.

Directors can be paid expenses incurred while conducting the business of the

company. In the absence of a provision a salaried director is not entitled to

expenses incurred as they are usually covered by his remuneration.

 

Compensation for loss of office

The powers of directors are spelt out in the articles. There is usually a clause

delegating to the directors the powers to manage the company. Some of the

functions directors included:-

(i)                 Entering into contracts on behalf of the company.

(ii)               Engaging and dismissing employees.

The powers of directors may also be restricted by the articles.

 

 Disclosure of interest

If a director has an interest in a contract which is being considered by the

company he must declare his interest when the contract is being discussed. A

director who fails to declare his interest is liable to a fine of up to two thousand

shillings.

According to Lord Cairn one declares his interest not when he states that he has

an interest but when he states what his interests are.

The disclosure should be made at the time the contract in question comes before

the board of directors for discussion, section 200(1).

Legal effect of non-disclosure of interest by directors.

There are two categories of consequences.

a)     Statutory consequences

Section 200 (4) such directors shall be liable to a fine not exceeding two

thousand shillings.

b)     Common law consequences

At common law the contract itself becomes voidable at the instance of the

company. The director in question who also made secret profits on the contract

must refund the same to the company.

 

Duties of directors

The following are some of the duties of directors: -

1.      To exercise their powers honestly for the benefit of the company as a

whole.

2.      Not to place themselves in position in which there is a conflict between

their duties to the company and their personal interests.

3.      To carry out their duties with reasonable care and exercise such degree

of skill and diligence as is reasonably expected of persons of their knowledge

and status.

4.      To attend board meetings.

5.      Not to delegate his functions except to the extent authorized by the Act or

constitution of the company.

6.      To disclose his interest.

 

  SECRETARY

Introduction - Every Company must have a secretary but a sole director cannot

also be a secretary

Appointment – it is usual for the secretary to be appointed by the directors on

such terms as they think fit. The directors may also remove the secretary.

Qualifications – the directors must take all reasonable steps to ensure that the

secretary is a person who appears to them to have the requisite knowledge and

experience. He must be one who: -

(i)                 Already hold office as secretary, assistant secretary or

deputy secretary of the company or,

(ii)               For at least three out of five years immediately

proceding his appointment held office as a secretary of a public

company, or

(iii)             Is a barrister, advocate or solicitor, or

(iv)             Is a member of any of the following bodies; ICA, ACCA,

ICSA, CIMA, CPA, or CIPFA, CPS, e.t.c.

(v)               Is a person who by virtue of having held any position or

being a member of any other body, appears to the directors to

be capable of discharging the functions of secretary.

Powers

The secretary is the chief administrative officer of the company and on matters of

administration he has ostensible authority to make contracts on behalf of the

company. Such contracts include: -

a)     Hiring office staff

b)     Contracts for the purchase of office equipment

c)     Hiring cars for business purposes.

IN PANORAMA DEVELOPMENTS V.FIDELIS FURNISHING FABLICS 1971 the

secretary of the defendant company entered into a number of contracts for the

hire of cars.The cars were ostensibly to be used to collect important customers

from Hearthrow Airport, but infact the secretary used them for his own private

purposes. The court of appeal held that the defendant company was liable. Lord

Dinning M.R. Said;

‘a company with extensive duties and responsibilities’. He is certainly entitled to

sign contracts connected with the administrative side of the company’s affairs,

such as employing staff, ordering cars and so forth.

(vi) Although a secretary has ‘extensive duties and responsibilities’ there are a

number of decisions where it has been held that he does not have authority for

particular acts. Thus he may not: -

        Bind the company on a trading contract

        Borrow money on behalf of the company

        Issue a writ or lodge a defence in the company’s name

        Register a transfer of shares

        Strike a name of the register of members.

        Summon a general meeting on his own authority.

 

DUTIES  

The secretary duties include: -

a)     Ensuring that the company’s documentation is in order, that the

requisite returns are made to the companies registry, and that the

company’s register are maintained,

b)     Taking minutes of meetings,

c)     Sending notices to members and,

d)     Counter signing documents.

 

 

12. MEETINGS

A meeting is an assembly of people for lawful purpose or the coming together of

at least two persons for the same reason. A company meeting is a coming

together of at least a quorum of members in order to transact either the ordinary

or special business of the company.

In Sharp vs. Dawes (1876) a meeting was defined as an assembly of people for

a lawful purpose or the coming together of at least two persons for any lawful

purpose. Meetings are divided into two types: -

a)     Public meetings

These are meetings open to all members of the public and which consider

matters of public concern.

b)     Private

These are meetings attended by people who have a specific right or special

capacity to attend.

 

Importance of company meetings

It is in meetings that important matters relating to the business of the company

are decided. Shareholders meetings are also important as they help them look

after their interests by exercising powers conferred on them by statute. There are

also certain matters that can only be decided only by shareholders.

 

Classification of company meeting

Company meetings are classified as below: -

1.      Meetings of shareholders.

(i)                 Statutory meetings

(ii)               Annual general meetings

(iii)             Extra – ordinary general meetings

(iv)             Class meetings

2.      Meetings of directors

(i)                 Meetings of the board of directors

(ii)               Meeting of committees of directors

3.      Meetings of debenture holders

4.      Meetings of creditors.

5.      Meetings of creditors and contributories on winding up of the company.

 

Statutory meeting

This is the first meeting of a public company. Every company limited by shares

and every company limited by guarantee and having a share capital shall within a

period of not less than three months from the date on which the company is

entitled to commence business; hold a general meeting of members of the

company which shall be called the statutory meeting.

The purpose is to accord members an opportunity to discuss matters relating to

the formation of the company or matters arising out of the statutory report,

whether previous notice has been given or not.

Statutory report

This is a report sent to all members at least fourteen days before the statutory

meeting. If all the members entitled to attend and vote agree the report can be

forwarded in less than fourteen days to the meeting.

Contents of the statutory report: -

a)     Total shares allotted distinguishing shares allotted as fully or partly paid

up.

b)     Cash received in respect of shares allotted.

c)     An abstract of receipts and payments of the company made up to date

without the seven days of the reports.

d)     Names, address and occupation of the directors, auditors and managers

and secretary and changes, which have occurred in such names, address,

and occupations.

e)     The particulars of any contract the modification of which is to be

submitted to the meeting for approval, together with the particulars of the

modification or proposed modification.

Section 130 (8) provides that the meeting may adjourn from time to time and at

any adjourned meeting a resolution can be passed after due notice in

accordance with articles.

 

Default

If default is made as regards to holding of the statutory meeting and delivering

the statutory report a ground for petition for winding up order against the

company is created. In usual practice courts order such meetings to be held and

reports delivered at the cost of persons in default.

The person in default is also liable to a fine of up to one thousand shillings.

 

Annual general meetings

These are meetings held annually and the interval between one meeting and the

next one shall be not more than fifteen months. A company however may hold its

first annual general meeting within a period of eighteen months from the date of

corporation.

The registrar may for any special reason, extend the time for holding any annual

general meeting by a given period of time. No extension of time is granted for

holding the first annual general meeting.

In case of default a member may apply to the registrar of companies to call or

direct the calling of such meeting.

If default is made in holding the annual general meeting in year one the annual

general meeting held in year two is treated as an annual general meeting for the

year one.

Default to holding the annual general meeting, renders the company and its

officers in default to a fine up to two thousand shillings.

 

Requirement of notice

Section 133 provides the minimum notice required for company meetings as

follows: -

a)     In the case of a meeting, twenty-one days notice in writing.

b)     In the case of a meeting then an annual general meeting for passing a

special resolution, fourteen days in writing and seven days notice for an

unlimited company.

 

 

 

Ordinary business of the annual general meeting.

The objects depend on the articles, but article 52 of table A provides that the

ordinary business of an annual general meeting shall be: -

a)     Consideration of dividend

b)     Consideration of accounts

c)     Election of directors to replace the retiring

d)     Appointment of and fixing the remuneration of auditors.

Although appointment of auditors must be made by the company in the general

meeting they are made by the company in the general meeting they are

automatically re-elected, provided they are qualified, without any resolution to

that effect, unless;

a)     They have resigned.

b)     They are unwilling

c)     A resolution has been passed expressly providing that they shall not be

re-appointed.

 

Extra ordinary general meeting

These are called for transacting some special business, which may not be

postponed till the next annual general meeting. All meetings other than the

annual general meeting and statutory meeting are called extra ordinary general

meeting.

The extra ordinary general meeting may be convened;

a)     By the board of directors on its own or on the requisition of the members.

b)     By the requisitions on failure of the board of directors.

Extra ordinary meeting convened the board of directors.

(i) On its own

Board of directors may call an extraordinary general meeting to allow members

decide on matters that cannot be postponed to the next annual general meeting.

(ii) On requisition of the members

 The required number of members of a company may also as for an

extraordinary general. The requisition for such a meeting by the members shall

be signed.

a)     In the case of a company having share capital holders if not less than one

tenth of the paid up capital of the company.

b)     In the case of a company not having a share capital, by members

representing not less than one tenth of the total voting power in regard to the

matter in requisition.

The directors are required by section 132 to convene such a meeting within

twenty-one days from the date of the requisition and if they fail to do so, the

requisitionists may convene the meeting. The company must compensate the

requisitionists for any reasonable expenses incurred.

 

Class meetings

These are called when the company’s share capital is divided into different

classes of shares. These meetings are required when it is proposed to alter, vary

or affect the rights of a particular class of shares.

A class meeting should be attended only by members of the class. A class

meeting can include strangers if there is no objection to their presence by a

member of the class.

The rights of a particular class of shares may be varied with the consent in

writing of the holders of three fourths of the issued shares of that class.

 

Rights of minority

Section 74 stipulates that the holders of not less than 15% of the issued shares

of that class being persons, who did not consent to the resolution, abstained or

did not vote all may object within thirty days to the alteration approved by the

majority of the class. The court must disallow the variation if it is satisfied that it

would unfairly prejudice the shareholders of the class, but if not satisfied, it will

confirm the variation.

2.      (a) Meetings of the board of directors

These are the most frequent meetings of the company. These meetings discuss

matters of the company and decide on policy issues concerning the company.

 

Meetings of committees of directors

Committees are common in large companies where it is convenient to delegate

certain matters. Delegation to committees can only be allowed if the articles so

provided. Committees may be standing or ad hoc committees.

 

Meetings of debenture holders

These meetings are held in accordance with the rules and regulations that are

either entered in the trust deed or endorsed on the debenture bond and are

binding on the company and the debenture holders.

These meetings are called wherever the interests of the debentures are involved

as in reconstruction, reorganizations, amalgamation and winding up.

The rules and regulations entered in the trust deed relate to notice of meeting,

appointment of a chairman and the writing and signing of minutes.

 

Meeting of creditors

These are called when the company proposes to make a scheme or

arrangement with its creditors.

Meeting of creditors and contributions on winding up.

These are held when the company has gone into liquidation. These are called to

ascertain the indebt ness of the company to its creditors and also to appoint

either a liquidator or a committee of inspection.

 

Requisites of a valid meeting

The following are requirements for a valid meeting: -

1.      The meeting must be duly commenced by a proper authority.

2.      A proper notice must be served in the prescribed manner.

3.      A quorum must be present.

4.      A chairman must preside.

5.      Minutes of proceedings must be kept.

 

 

 

 

 

 

 

13. ACCOUNTS

There are certain prescribed books of account which must be kept by registered

companies. The accounts of the company have then to be presented to members

at some interval.

 

Books of account

Section 147(1) requires all companies to keep proper books of account with

respect to

(i)                 All sums of money received and spent by the company.

(ii)               All sales and purchases of goods made by the company.

(iii)             The assets and liability of the company.

Section 147 (2) provides that proper books of account are only said to have seen

kept with respect to the matters aforesaid if such books give a true and fair view

of the state of the companies affairs and to explain its transactions.

Section 147(3)(a) provides that the books of account should be kept at the

registered office of the company or with consent of registrar and subject to

conditions he may give at any other place as the directors think fit.

 

Profit and loss account

Section 148 (1) stipulates that the directors of every company must, at some date

not later than eighteen months after incorporation of the company and

subsequently once at least in every calendar year, lay before the company in

general meeting profit and loss account for the period. A company which does

not trade for profit is required to lay an income and expenditure account instead

of a profit and loss account. The period during which accounts are to be laid

before the general meeting will be extended by the registrar on special

circumstances.

 

Balance sheet

Section 148 (2) provides that directors should prepare at the end of every year,

and to lay before the company in a general meting, a balance sheet as at the

date to which the profit and loss accounts (or income and expenditure account) is

made up.

 

Contents

Section 149 (1) provides that the balance sheet should give a true and fair view

of the state of affairs of the company as at the end of its financial year and the

profit and loss account should give a true and fair view of the profit or loss of the

company for the financial year.

 

Group accounts

Section 150 (1) states that if at the end of the financial year, a company has

subsidiaries then it must include in it annual accounts group accounts which

incorporates the affairs of the subsidiaries.

Section 150 (2)(b) provides that group accounts need not include a subsidiary of

the company if the company’s directors are of the opinion that;

a)     It is impracticable, or would be of no real value to the members

of the company in view of the insignificant amounts involved.

b)     The result would be misleading.

c)     The result would be harmful to the business of the company or

any of its subsidiaries.

d)     The business of the holding company and that of the subsidiary

are so different that they cannot reasonably be treated as a single

undertaking.

Approval of the registrar will be required for not dealing in group accounts with a

subsidiary on grounds (c) or (d).

Section 150 (2)(a) exempts a company that is a wholly owned subsidiary of

another company from the obligation of preparing group accounts.

Form

Section 151 (1) provides that the group account laid before holding company

shall be consolidated accounts comprising: -

(a)      Consolidated balance sheet

(b)     Consolidated profit and loss account.

The directors can however decide to prepare the accounts in another form if they

are of the view that the form could be more appropriate.

 

Contents

Group accounts laid before the company should give a true and fair view of the

state of affairs and profit or loss of the company and the subsidiaries dealt with

thereby as a whole, section 152 (1).

The consolidated accounts shall comply with the requirements of the sixth

schedule to the Act; so far as applicable thereto.

 

Financial year

Section 153 (1) provides that a holding company’s directors shall ensure that,

except where in their opinion there are good reasons against it, the financial year

of each of its subsidiaries shall coincide with the company’s own financial year.

Under 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.

 

Balance sheet

Section 148 requires the directors to prepare and lay before the company in a

general meeting a balance sheet as at the date to which the profit and loss

account or the income and expenditure account is made up.

The accounts may be signed on behalf of the board by two directors or if there is

only one director by such director section 155 (1). If the balance sheet is not

signed as required but a copy issued, circulated or published, the company every

officer who is default shall be liable to a fine not exceeding one thousand

shillings.

 

Accounts annexed

By section 156 (1) the profit and loss account and any group accounts laid before

the company in a general meeting shall be annexed to the balance sheet.

Section 156 (2) requires that the account so annexed be approved by the board

of directors before the balance sheet is signed on their behalf.

Section 156 (3) provides if any copy of the balance sheet is issued, circulated or

published without having annexed thereto a copy of the profit and loss account to

be annexed, the company and every officer of the company who is in default

shall be liable to a fine not exceeding one thousand shillings.

 

Directors report

Section 156 provides that the balance sheet must have attached to it a director’s

report on the company’s affairs, including the amount if any, which they

recommend should be paid by way of dividend and amount if any to be

transferred to reserves.  

           

 

  14.  AUDITORS AND INVESTIGATION

The subscribers of capital are not in direct control of the application of the

capital, which is left, to the control of directors and superior officers of the

company. In these circumstances it becomes necessary to have someone to

safeguard their interests. The persons who safeguard the interests of

shareholders are called auditors.

The auditor is a servant of the shareholders and his duty is to examine the

affairs of the company on their behalf at the end of the year and report to them

what he has found.

 

 Appointment of auditors

 A company is required at each annual general meeting to appoint an auditor(s)

to hold office until the conclusion of the next annual general meeting.

Failure by a company to appoint auditor(s) entitles members to make an

application to the registrar to appoint an auditor.

A retiring auditor is to be reappointed without any resolution being passed at the

meeting unless: -

a)     He is not qualified for re-appointment

b)     A resolution has been passed appointing someone else.

c)     A resolution has been passed that he shall not be reappointed.

d)     He has given the company a written notice of his unwillingness to be

reappointed.

Any casual vacancy in the office of auditor may be filled by the directors, but

while such vacancy continues the serving auditors may act.

No person than a retiring auditor may be appointed at an annual general meeting

unless a special notice of the resolution has been given and a copy of it has been

sent to the retiring auditor forthwith.

The retiring auditor is entitled to make representations in writing and have them

circulated among the members, and speak at the meeting.

 

Disqualification for appointment as auditor

A part from private companies, a person is not qualified for appointment as

auditor unless:-

1.      he is a member of one or more professional bodies specified in the first

column of the schedule to the accountants.

2.      He is authorized by the registrar to be appointed as having similar

qualifications obtained outside i.e. United Kingdom, South Africa, Zimbabwe or

India has adequate knowledge and experience acquired in the course of his

employment.

3.      He has practiced in Kenya as an accountant before 26th may 1959.

4.      He has been appointed and practiced before 26th may 1959 as auditor of

an existing company.

The following persons are not qualified to be appointed as directors: -

a)     An officer or servant of the company.

b)     A person who is a partner or in the employment of an officer or servant

of the company.

c)     A body corporate.

d)     A person disqualified for appointment as auditor of a subsidiary or

holding company.

Appointment of an unqualified person as auditor renders such person and the

company and every officer in default liable to a fine up to four thousand shillings.

 

Remuneration of auditor

Remuneration of the auditors of a company may be fixed by the company in a

general meeting or in such a manners as the company in general meeting may

determine. 

In case of an auditor appointed by directors or registrar his remuneration is

determined by the directors or the registrar as the case may be (sec. 159(75).

 

Position of auditors

1.      Auditors as agents of the members

An auditor is an agent of the company even when he is not appointed by them

and his duty is to examine the affairs of the company on their behalf and at the

end of the year report to them what he has found.

It was observed in Spackman vs. Evans (1868) that although an auditor is an

agent of the shareholders, the shareholders are not necessarily bound by notice

of everything of which notice is given to the auditor.

     If the auditor is negligent in the course of his audit and this result in loss to the

shareholders he is liable to the shareholders, but his liability would not extend to

third parties.

     (2) Auditor as an officer of the company

as an auditor is liable for default in the performance of his duty to the company;

he may to some extent be regarded as an officer of the company

     (3) Auditor as an employee

The relationship between an auditor and a company is that of a professional man

and a client rather than that of an employee and employer.

 

Auditors report

As per the seventh schedule, an auditors report must contain the following; -

a)     The accounts examined by him.

b)     The balance sheet and profit and loss account.

c)      Every document annexed to be balance sheet and profit and loss

account (i.e. notes to the accounts) laid before the company in a general

meeting during his tenure of officer.

An auditor is said to have reported if after having affixed his signature to the

report annexed to the balance sheet; he forwards that report to the secretary of

the company or directors.

Matters to be expressly stated in the auditors report.

1.      Whether auditors have received all information necessary for their audit.

2.      Whether proper books of accounts of account have been kept by the

company and proper returns have been received from the branches not

visited by them.

3.      (a) Whether the company’s balance sheet and profit and loss account (or

consolidated accounts) dealt with by the report are in agreement with the

books of accounts and returns.

(b) Whether, in their 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 Act in the manner so required and give a true and

fair view.

(i)                 In the case of the balance sheet, of the state of affairs

as at the end of its financial year.

(ii)               In the case of profit and loss account of the profit or

loss in its financial year.

 

Rights and powers of auditors

1.      Right to access books of account and vouchers. An auditor has a right to

access at all times to the books and vouchers of the company and is entitled

to require from the officers of the company such information and explanations

as he thinks necessary for the performance of his duties as auditor.

2.      Right to attend any general meetings of the company and to receive any

notices which members are entitled to receive.

 

Duties of auditors

Duties of auditors are set out in section 159 to 162 of the act. The duties of

auditors: -

1.      They must acquit themselves with their duties as laid down by articles and

companies Act.

2.      They must report to members on the accounts laid before the company in

general meeting, during that tenure of office.

3.      They must be honest and must exercise a reasonable skill and care or

else they may be sued for damages.

 

15.  MAJORITY RULE AND MINORITY RIGHTS

 

MAJORITY RULE

A majority of members of a company is entitled to exercise the powers of the

company and to control its affairs. Directors who enjoy a wide range of powers

are elected by the majority. It will therefore be seen that in all aspects the affairs

of the company are conducted by the majority.

 

Principle of majority rule

The principle was recognized in Foss vs. Harbottle and the principle was called

the majority rule or the proper plaintiff principle.

The rule is that the proper plaintiff in action to redress a wrong to a company on

the part of any one, is the company and where the alleged wrong is any

irregularity which might be made binding on the company, by a simple majority of

members, no individual member can bring an action in respect of it.

In Foss vs. Harbottle two majority shareholders in a company alleged that its

directors were guilty of buying their own land for the company’s use and paying

themselves a price greater than its value. This act of the directors resulted in a

loss to the company. The minority shareholders therefore decided to take action

for damages against the directors. The shareholders in a general meeting by

majority resolved not to take any action against the directors saying that they

were not responsible for the loss, which had been incurred. The court dismissed

the suit on grounds that the act of directors were capable of confirmation by

majority of members and held that the proper plaintiff for wrongs done to the

company is the company is the company itself not the minority and the company

can only act through its majority shareholders.

The principle of majority rule as laid down in Foss vs. Harbottle was also upheld

in Maldangall vs. Eardinor by Mellish L.J & in Burland vs. Earle by Lord Davery.

 

 

Advantages of the rule in Foss vs. Harbottle.

1.      Recognition of the separate legal personality of a company.

2.      It preserves the right of majority of members to make decisions.

3.      Multiplicity of futile suits is avoided.

4.      Litigation at the suit of a minority is futile if majority do not wish it.

 

Protection of minority shareholders or Exceptions to the rule in Foss vs

Harbottle.

The wide powers of the majority if not used carefully may be used to exploit the

minority shareholders. Palmer pointed out that “a proper balance of the rights of

majority and minority shareholders is essential for the smooth functioning of the

company”.

The following are exceptions to the Foss vs. Harbottle Rule.

(iv)             When the acts of the majority are ultra vires or illegal.

(v)               When acts are supported by insufficient majority for

certain acts the act or articles require a special majority of three

fourths of the shareholders.

(vi)             Where the act of majority constitutes a fraud on minority.

A resolution would constitute a fraud on minority if it is not bonafide for the

benefit of the company as a whole.

The cases which illustrate the concept of fraud on minority are: -

Menier vs. Hoopers Telegraph Works Ltd; Cooks vs. Deeks and brown vs. British

Abrasive Wheel co.

(iv) Where the personal membership rights of the plaintiff shareholder have been

infringed.

Individual membership rights include right to attend meetings, the right to receive

dividends, the right to insist on strict observance of legal rules e.t.c. if such rights

are violated then a single shareholder can defy the majority.

(v) Where there is a breach of duty

Where there is a breach of duty by the directors and majority shareholders to the

detriment of a company the minority can bring action against the company. A

case illustrating this point is in Daniels vs. Daniels (1978).

(vi) Oppression and mismanagement

 Where oppression of the minority and mismanagement of the company affairs is

alleged the rule in Foss vs. Harbottle does not apply. A member thus can bring

an action against the management of the company on grounds of oppression and

mismanagement.

 

16.  AMALMAGATION

The term implies creation of a new company by complete consolidation of

combining units. Two or more companies may liquidate themselves under the

law and sell their assets and transfer their liabilities to a new company which

issues its own shares in exchange of value received from the amalgamating

companies.

After amalgamation none of the companies retains its entity or existence.

Amalgamation may take any of the following forms: -

1.      By a scheme of arrangement.

2.      By sale of undertaking

3.      By sale of shares

4.      By amalgamation in case of a company in course of winding up.

 

 

1.      Arrangement.

Arrangement includes a reorganization of the share capital of the company by

the consultation of shares of different classes or division of shares of different

classes or by division of shares of all modes of reorganizing the share capital

even when involving an interference with prefential or4 special rights attached to

the share by the memorandum.

2.      Sale of undertaking

This involves the sale of the whole of the undertaking of the transferor company

as a going concern. An amalgamation of two or more companies involves the

transfer of the whole part of the undertaking of the company; the court may make

an order for the following matter

(i)                 The transfer to the transferee company of the whole part

of the undertaking and the property.

(ii)               The allotting or appropriation by the transferee of any

share, debentures, policies or other like interests in that by that

company to or for any person.

(iii)             The continuation by or against the transferee company

of any legal proceedings pending or against any transferor

company.

(iv)             The dissolution without winding up of any transfer

company

(v)               Provision to be made for any persons who, within such

time and in such manner as the court directs, dissent from the

compromise or arrangement

(vi)             Such incidental, consequential and supplemental

matters as are necessary to secure the reconstruction in

amalgamation shall be fully and effectively carried out.

 

Sale of shares

Shares are sold and registered in the name of the purchasing company. The

selling shareholders receive either money or share into acquiring company.

Approval the sale of shares must be approved by nineth .of the shareholders

whose is transfer is involved.

The number must exclude any shares already held by the transferee company or

its nominees or its subsidiary. When approval of nine-tenths majority is acquired,

the transferee company can acquire two months, after expiry of a four months

the transferee company may give a notice to dissenting shareholders that within

one month, it desires to acquire their shares.

 

The dissenting shareholders may apply to court but if no application is made, the

transferee company gets the final right to acquire all the shares. The court will

infer fairness from the fact that the scheme has been approved by nine tenths of

the members.

When an application is made to the court by a shareholder that the terms are not

fair it is not upon the applicant to establish his allegation. Where however the

offer is being made by the same majority shareholders who have accepted it, the

burden of proof is reversed and it is up to the offeror to show the scheme is fair.

 

Amalgamation in case of a company in course of winding up: -

Section 280 provides that a company may transfer or sell the whole or part of its

business or property to another company and a company may pass a special

resolution authorizing the liquidator to receive as a consideration cash or shares,

policies or like interest in transferee company for distribution among the

members of the transferor company according to their rights and interests in that

company. The sanction of the court is unnecessary.

Section 280 also provides that such an arrangement is binding on all the

members of the transferor company whether they agree to it or not but the

members who did not vote in favour of the resolution may leave his dissent in

writing addressed to the liquidator at the company’s registered office within seven

days after the passing of the resolution.

The liquidator must then either abstain from carrying the resolution into effect or

purchase the members interests at a price agreed by them or determined by

arbitration.

If there are many dissentients the liquidator may be forced by circumstance to

abandon the scheme.   

 

17.  WINDING UP OR LIQUIDATION

Winding up represent the proceeding by which a company is dissolved. The

assets of the company are disposed of, the debts are paid from assets proceeds

(or from contributories) and the surplus is distributed to the shareholders.

Winding up or liquidation is the process by which the management of a

company’s affairs is taken out of its directors hands, its assets are realized by a

liquidator and its debts are paid out of the proceed of realization.

Professor Gower gave the following definition “winding up of a company is a

process whereby its life is ended and its property administered for the benefit of

its creditors and members. An administrator called a liquidator, is appointed and

he takes control of the company collects its assets, pays its debts and finally

distributes any surplus among the members in accordance with their rights”

(modern company law, 4th edition page 789).

Pennington gives the following definition of winding up. Winding up is a process

by which the management of a company’s affairs is taken out of its directors

hands; its assets are realized by the liquidator and debts are paid out of the

proceeds of realization and any balance remaining is returned to its members. At

the end of the winding up, the company will have no assets or liabilities and will

therefore be simply a formal step for it to be dissolved, that is its legal personality

as a corporation to be brought to an end” (company later 2nd edition).

 

Winding up and dissolution

A company is said to be dissolved when it ceases to exist as a corporate entity.

Winding up proceeds dissolution; it is the process by which the dissolution of a

company is brought about.

 

Winding up and insolvency

The following can be noted as regard to winding up and insolvency.

a)     Winding up order can be made even when the company is solvent.

b)     On winding up, the company continues to exist it only its administration

that is carried on through the medium of a liquidator.

c)     Even where a company is wound up because it is in insolvent

circumstances, all the provisions of insolvency law do not apply to it.

 

Modes of winding up

There are three modes of winding up.

1.      Winding up by court

2.      Voluntary winding up.

(a)   Members’ voluntary winding up

(b)  Creditors voluntary winding up

3.      Winding up subject to the supervision of the court

 

Winding up by the court (sec.219)

Winding by court is also called compulsory winding up. This may occur in the

following circumstances: -

a)     If the company has by special resolution resolved that it be wound up

by court.

b)     Default is made in delivering the statutory report to the registrar or in

holding the statutory meeting.

Only a shareholder may present a petition on this ground and where reason is

failure to hold the statutory meeting, fourteen days must have elapsed from the

date meeting was due to be held. The courts may instead of making the winding

up order direct that the statutory report shall be delivered or the meeting be held

and the costs to be paid by any persons who are responsible for the default.

c)     Where there is failure to commence business within a year or where

the business is suspended for a whole year by the company.

The court may order winding up if the company has no intention of carrying on its

business or if is not possible to carry on its business.

An example of a company that was wound up because of failure to continue

business is in Orissa Trunks and Enamel Works Ltd (1973) where the company

suspended business for ten years due to embezzlement.

If a company has not begun to carry on business within a year from its

incorporation or suspends its business for a whole year the court will not wind it

up if: -

(i)                 There are reasonable prospects of a company

starting business within a reasonable time.

(ii)               There are good reasons for the delay.

An example where courts declined to wind a company on the above reasons is in

Middleborough Assembly Rooms Co. Re (1880) where the company suspended

business for three years due to depression in trade.

d)     The number is reduced in case of private company below two or in the

case of any other company below seven. If the company carries on

business for more than six months while the member is so reduced, every

member who is aware of the fact that the number is below the statutory

minimum will be severally liable for the payment of the debts of the

company contracted after six months.

This is also one of the situations under the act where the veil of incorporation is

lifted.

e)     Where the company is unable to pay its debts.

(i)                 A creditor to whom the company owns more than one

thousand shillings has left at the company’s registered office a

demand under his hand for the payment of the sum due and the

company has for three weeks or thereafter neglected to pay the

sum, to secure or compound for it to the reasonable satisfaction

of the creditor or;

(ii)               Execution or other process in favour of creditors of the

company is returned unsatisfied in whole or part or;

(iii)             It is proved to the satisfaction of the court that the

company is unable to pay its debts; taking into account the

contingent and prospective liabilities of the company.

f)       When it is just and equitable.

The petition should be allowed only as a last resort or for compelling reasons

when other remedies are not efficacious enough to protect the general interests

of the company.

In Westbourne Galleries Ltd Re. (1973) AC 360 it was observed that “a petitioner

who relies on the just equitable” clause must come to the court with a clean

hand, and if the breakdown is confidence between him and other parties to the

dispute appears to have been due to his misconduct, he cannot insist on the

company being wound up if they wish to continue.

What is a just and equitable clause

The courts may order winding up under the just and equitable clause in the

following

Case: -

1.      when the substratum is said to have disappeared. This occurs when the

object for which the company was formed has substantially failed or when it is

impossible to carry business except at loss or the existing and possible

assets are insufficient to meet the existing liabilities. In making the winding up

order the courts should consider the interests of the shareholders and

creditors.

The substratum of a company disappears: -

(i) When the subject matter of the company is gone. This was the case in Perie

vs. Sterwart (1904)

(ii) When the main object of the company has substantially failed or become

impractible.

When a company’s main object fails its substratum is gone and it may be

wound up even though it is carrying on its business in pursuit of a subsidiary

object.

A company wound up on this ground was the German date coffee Co. in

German date coffee company Re. (1882) 20 ch. D 169.

(iii) When the company is carrying on its business at a loss and there is no

reasonable hope that the object of trading can be attained.

Where the majority shareholders are against winding up, the court will not order

a company to be wound up merely because it is making a loss.

(iv) Where the existing and probable assets of the company are insufficient to

meet its existing liabilities.  

2.      When the management is carried in such a way that the minority are

disregarded or oppressed. The court will not make an order for winding up

unless it is proved that wrong has been done to the company by abuse of

majority voting power, and it is impossible for the business of the company as

a whole, owing to the way in which voting is held and used.

In ReHarnets Mining co. Ltd WC (winding case no 12 of 1977) the petitioner

Mrs Beth Wambui Mugo wanted the company to be wound up on the just and

equitable ground, the reasons were as follows: -

(i) The affairs of the company were conducted in manner oppressive to her.

Though she had 50% of shareholding she did not participate in decision-making

but was expected to sign resolutions by other directors.

(ii) The substratum of the company had gone and that the company had no

alternative business to engage in.

(iii) The directors had loss confidence and probity in each other to the extent

that the company could no longer be managed at all. It was held that the

company could be wound up.

3.      Where there is a deadlock in the management of a company.

This is usually real when the shareholding between the two competing sides

is equal and thus there is a complete deadlock in the company on account of

lack of probity in the management of the company and there is no possibility

of efficient continuance of the company as a commercial concern.

Cases of companies wound up on those grounds are in American Pioneer

Leather Core (1988) and in Yenidje Tobacco Co. Ltd (1916).

4.      When the company was formed to carry out fraud or the illegal business

or the business of the company becomes illegal.

A case in which the company was wound up is the above ground is in

Brinsmead (Thomas Edward) & sons Re (1897) 1 ch. 45.

5.      In the case of a company incorporated outside Kenya and carrying on

business in Kenya, winding up proceedings have been commenced in respect

of it either: -

(i)                 In the country of its incorporation.

(ii)               In any country in which it has established a place of

business sec. 219.

 

Petitioners for compulsory winding up.

An application to the courts for winding up by petition may be presented.

a)     By the company

 A company in general meeting may resolve that the company be wound up by

the court.

b)     By a creditor or creditors (including any contingent or prospective

creditors).

Persons included in the category of creditors

1.      A contingent or prospective creditor

2.      A secured creditor

3.      A debenture holder

4.      Any person who has a pecuniary claim against the company.

5.      The legal representations of a deceased creditor.

6.      The government or local authority to which any tax or public charge

is due.

 

Disputed debt

A creditor whose debt is disputed cannot get a winding up order.

 

c)     By petition of any contributory

A contributory is any person liable to contribute to the assets of the company in

the event its being wound up. The definition does not include debtors. A holder of

fully paid shares is regarded as a contributory although no further calls can

normally be imposed upon him in liquidation of the company.

d)     By official receiver.

e)     By the attorney general after receiving a report of inspectors on the

company’s affairs.

f)       Section 221 (2) provides that when a company is already in the course of

being wound up voluntarily or subject to supervision, the courts if satisfied

that voluntary winding up or winding up subject to supervision cannot be

continued with due regard to the interest of the creditors and contributories.

 

Right of assignee of a debt

The assignee of a debt has the same right which his assignor had to present a

petition for winding up order, unless the assignment was made after a petition

had already been presented.

 

Commencement of winding up

The commencement of winding up by the court is deemed to have started from

the date a petition is presented. When the order is made for winding up, it relates

back to the date of the presentation of petition.

Powers of court (section 218,221&222)

Courts have jurisdiction to receive winding up petition hear it and make

determination. The interest of the applicant alone is not of predominant

consideration. The interests of the shareholders of the company as a whole apart

from those other interests have to be kept in mind at the time of consideration as

to whether the application should be admitted on the allegations mentioned in the

petition.

The court may delay the order to enable the company to: -

a)     Settle a list of contributories.

b)     Order any person in possession of any property of the company to

surrender it to the liquidator immediately.

c)     Make the last calls on the shares and debentures the members hold.

d)     Where the company’s business are running the company has power to

appoint a special manager to take care of the business until it determines.

e)     Prevent any creditor from participating in the distribution of the

company’s assets when the company is paying off its liabilities.

f)       The courts have also power to prepare a priority list detailing the order

in which payment shall be made (sec.262).

g)     If at the time of winding it appears that promoters might have committed

fraud to the company, the court may order that they be examined.

 

Procedure for winding up by the courts

A petition for winding up order against a company may be presented to the high

court of Kenya such a petition must be supported by an affidant of the petitioner

(sec.218).

When determining the case (petition) the court may (sec.222): -

a)     Dismiss it with or without costs.

b)     Adjourn the hearing conditionally or unconditionally.

c)     Make an interim order.

d)     Make any other order (for compulsory winding up or winding up under

supervision of the court).

 

Consequences of winding up order

The consequences date back to the commencement of winding up. A winding up

order operates in favour of all creditors and contributories as if made on the joint

petition of a creditor and a contributory.

In the case of compulsory winding up by courts, the winding up dates from the

presentation of the petition unless before that date a resolution was passed to

winding up voluntarily, in which case the commencement is the time of

resolution.

Any subsequent disposition of the property and any transfer of shares or

alteration in the status of members is void unless the court otherwise orders.

When winding up order has been granted or an interim liquidator has been

appointed, no action may be preceded with or commenced against the company

except with the leave of the courts and subject to such terms as the courts may

impose.

The powers of directors are terminated and the company’s servants are Ispo

facto dismissed. The official receiver (of the court) becomes the principal

liquidator to the company until he or another person becomes liquidator

(sec.236).

 

Special manager

Upon an application by the official receivers a special manager may be

appointed, acting as a liquidator, whether provisional or not by the courts. Such

an application may be made if the official receiver is satisfied that the nature of

the company ‘s business or interests of the creditors or contributories generally

require the appointment of a special manager other than himself.

The remuneration of the special manager may be fixed by the courts.

 

Official receiver as liquidator.

The courts are empowered by section 235 to appoint a provisional liquidator at

any time after presentation of a petition and before winding up order is made.

Once the winding up order has been made the official receiver becomes Ispo

facto, a provisional liquidator until a liquidator is appointed.

 

Duties of an official receiver

An official receiver as a provisional liquidator can call on the directors to furnish

him with a statement of the company’s affairs that has to be made out in

accordance to a statutory form and verified by a affidant. This statement must

show: -

a)     Particulars of assets, debts, and liability of the company.

b)     Names, residence and occupation of its creditors.

c)     The security held by creditors and the dates when they were given

and such other information as may be required.

The above statement must be submitted and verified by affidant if: -

(i)                 By one or more directors and secretary or,

(ii)               By persons who are or have been officers or were

engaged in the formation of the company within the past

years in its employment during such a time.

Report by official receiver

After receiving a statement of affairs the official receiver has to submit a

preliminary report to the courts as soon as practible. The report should contain

the following: -

a)     Amount of capital issued, subscribed and paid and the estimated

amount of assets and liabilities.

b)     The cause of failure of the company (if the company failed).

c)     Whether in his opinion there is need for further inquiry to any matter

relating to the promotion formation or failure of the company or the conduct

of its business.

 

First meeting of creditors and contributories

The official receiver is under obligation to convene separate meetings of the

creditors and contributories to find out whether they would like to appoint a

liquidator in place of the official receiver.

The above meeting should be held within sixty days from the date when the order

was given unless the courts provide otherwise.

A notice of seven days is required to hold both meetings. Rule 114 requires that

the official receiver must send to the creditors and contributories a summary of

the company’s statement of affairs including causes of failure of the company

and any observation he may think fit to make.

Where such meetings are called the official receiver or (or liquidator) or his

nominee is the chairman at the meeting.

The object of the meetings is to find out;

a)     Whether creditors or contributories desire a liquidator of their choice.

b)     Whether there shall be a committee of inspection and whom shall it

consist.

 

Powers of the liquidator

After winding order is granted or after a provisional liquidator is appointed he will

take into his custody or under his control all the property of the company and

other right of the company.

The liquidator has power with leave of the court or committee.

a)     To institute or defend suits and other legal proceedings, civil, criminal in

the name of the company.

b)     To carry on the business of the company so far as necessary for the

beneficial winding up pf the company.

c)     To appoint an advocate to assist him perform his duties.

d)     Pay any class of creditors in full.

e)     Make any compromise with creditors or persons claiming to be creditors.

f)       Compromise calls debts and other claims between the company and any

contributory or debtor and,

A liquidator may, without sanction of the courts,

a)     Sell company’s movable and immovable property.

b)     Do all acts and execute all documents in the company’s seal.

c)     Prove and receive dividends in the bankruptcy of any contributory.

d)     Draw, accept and endorse bills and notes in the name of the company.

e)     Borrow money on the security of the company assets.

f)       Take out his official name letters of administration to a deceased

contributory.

g)     Appoint an agent to do any business which the liquidator is unable to do

himself.

h)     Where winding up proceeding have been commenced in Uganda,

Tanzania or in Kenya to make such payments to a liquidator therein as a

necessary for the distribution of the company’s assets.

 

Additional powers

These are powers of the courts delegated to the liquidator.

a)     To call and hold meeting of creditors and contributories.

b)     Settling the list of contributories and rectifying the register of members.

c)     Paying, delivery, conveyance, surrender or transfer of money, property

and documents to the liquidator.

d)     Making calls on the contributories.

e)     Fixing time within which debts and claims must be proved. The above

powers are exercised by the liquidator as an officer of the court.

 

Disclaimer by a liquidator

Section 315 empowers a liquidator with leave of the courts to disclaim any

onerous property of the company. The liquidator has to disclaim the property

within one year from the date of commencement winding up or from the date he

became a ware of the onerous property.

The disclaimer extinguishes the rights, interests and liabilities of the company in

the property disclaimed. If any person suffers a loss (or damages by a disclaimer

of the property, he may prove for the amount as a creditor).

 

Termination of liquidators powers

A liquidator will cease to function if : -

a)     He resigns

b)     He is removed

c)     He is released.

 

 

 

Committee of inspection

Creditors and contributories may apply to the courts to appoint a committee of

inspection. There is no given limit of members of the committee of inspection.

There is no given limit of members of the committee. The function of the

committee is to assist and supervise the acts of the liquidator.

The committee must meet one in a month but the liquidator may call for meetings

of inspection as often as he thinks.

 

Power of the court to stay winding up

The courts at any time after an order of winding up have a discretion on the

application of the liquidator, official receiver or creditor or contributor, so stay

proceedings in relation to winding up. The courts may stay the proceedings

altogether or for a limited time.

 

Dissolution of the company

When the affairs of the company have been wound up the court will, if the

liquidator makes an application, make an order dissolving the company and the

company is dissolved from the date of such order.

The liquidator must within fourteen days deliver a copy of the order to the

registrar for registration.

 

Voluntary winding up

This is winding up by members or creditors without interference by the court. The

members, creditors may however apply to the court for any direction, if and when

necessary.

A company may be wound up voluntarily on the following circumstances

(sec.271).

a)     When the period for the duration of the company have come to an end or

the event which the company is to be wound up has happened and the

company has in a general meeting passed a resolution which may be an

ordinary resolution unless articles provide otherwise.

b)     If the company passes a resolution to wind up voluntarily.

 

Types of winding up

a)     Members voluntary winding up

b)     Creditors voluntary winding up.

 

 

a)     Members voluntary winding up

This is allowed if a declaration of solvency of the company is made. The

declaration shall be made by a majority of the directors at a meeting to of the

board that they have made a full inquiry into the affairs of the company and that

having done so they are of the opinion that

a)     That the company has no debts

b)     That the debts can be paid in full within twelve months from the

commencement of the winding up. Such declaration is infective unless: -

(i)                 it is made within thirty days immediately preceeding

the dates of passing of the resolution and delivered to the

registrar.

(ii)               It embodies a statement of the company’s assets and

liabilities at the latest practicable date before the making of the

declaration.

 

DECLARATION OF SOLVENCY

 

This is declaration by a director that a company is able to pay all its debts within

one year. If late it is proved that a director has made the declaration of solvency

without reasonable grounds he may be liable to imprisonment up to a year or a

fine or both.

 

Notice of declaration

The notice of the resolution to voluntarily wind up a company must be advertised

in the Gazette within fourteen days.

 

Summoning a general meeting

If the winding continues for more that a year the liquidator must summon a

general meeting at the end of the first and subsequent years.

The liquidator must lay before the meeting an account of his acts and dealing of

winding up during the preceding year.

 

Final meeting

When the affairs of company are wound up the liquidator must make up a final

account and call a general meeting of the company, which must be advertised in

the Gazette.

The liquidator must send a copy of the accounts to the registrar and make a

return of the holding of the meeting within fourteen days.

 

Creditors voluntary winding up

This arises when the company is insolvent in which case the company must call

a meeting of the creditors on the same day of the general meeting of member on

a day after.

The meeting must be advertised in the gazette and directors must lay before the

meeting .a statement of the position of the company with a list of its creditors.

The directors can appoint one of their numbers to preside at the meeting

Appointment of liquidator

The creditors and the company in their separate meetings may nominate a

liquidator for the purpose of winding up the affairs of the company.

If the creditors and the company nominate different persons the nomination of

creditors will prevail.

The liquidator must within fourteen days of his appointment, publish in the

Gazette and deliver to the registrar of companies notice of his appointment in the

form prescribed by the register (sec.299).

 

Committee of inspection

Creditors at their meeting may appoint a committee of inspection, and the

committee may appoint not more than five persons to the members of the

committee subject to the power of the creditors to disapprove persons so

appointed (sec 288).

A liquidator is to call a meeting of members and creditors after each year-end

and has to lay before the meeting an account of his acts and dealings of the

winding up of the preceeding year.

 

Final meeting and dissolution

When the company is fully wound up, the liquidator has to hold a general

meeting of the company and a meeting of creditors and has to produce an

account of the winding up showing how it has been conducted and property of

the company disposed of. These meetings are to be advertised in the gazette,

published thirty days before the meeting.  

Within fourteen days after the meeting the liquidator must send to the registrar a

copy of the accounts and a return of the meetings.

 

WINDING UP SUBJECT TO SUPERVISION OF COURT.

Section 304 provides that when a company has passed a resolution to wind up

voluntarily, the courts may order the continuation of voluntary winding up subject

to their supervision on any terms or conditions.

The liquidator will continue to exercise all powers subject to any restrictions laid

by the courts. A petition for winding subject to court supervision may be

presented by any person entitled to petition for the compulsory winding up.

 

Effects of supervision order.

Powers for the exercise of which such liquidation would require sanction may be

exercised only with the sanction of the courts or the committee of inspections

otherwise in all other instances ordinary voluntary liquidation procedures are

followed.

 

Preferential payment

Section 302 provides that the company’s assets must be used to pay all costs,

charges and expenses properly incurred in the winding up including liquidation.

Thus winding up charges and expenses rank in priority to all other claims.

The following preferential payments are required to be made in priority to all

other debts and such debts rank “Pari Passu” i.e. they rank equally amongst

themselves.

a)     All government and local rates payable with 12 months before the date

of winding up.

b)     All government rents not more than one year in arrear.

c)     Wages and salary of any clerk or servant for services rendered during

four months preceding the relevant date not exceeding four thousand

shillings.

d)     All amounts done in respect of any compensation under the workmen’s

compensation act, which have accrued before the relevant date.

Proceeds left may be given to the shareholders and if any portion remains

unclaimed, if goes to the public trustee as Bona vacantia i.e. owner’s property.

 

 

REFERENCES

 

 

 

1.    N .A SALEEM – COMPANY LAW SIMPLIFIED

 

 

N.A Saleemi publishers.

 

2.    KEITH ABBOT – BUSINESS LAW

 

 

 

3.    MARSH AND SOULSBY – BUSINESS LAW

MC Graw – Hill Book Company

 

 

4.    OGOLA – COMPANY LAW.

 

 

5.    ACCA STUDY PACK – COMPANY LAW

                Financial Training Publication Limited, 1977.

 

 

 

 

 

 

 

 

 

 

 

 

--- On Mon, 5/4/09, Rita Agata <ragataus@yahoo.com> wrote:

From: Rita Agata <ragataus@yahoo.com>

Subject: Hey

To: maaych4j@yahoo.com

Date: Monday, May 4, 2009, 11:00 PM

Hey,

 

You were supposed to e-mail me the company law thing. What happened?

 

Regards,

Rita

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