TOPIC 2 Remedies for Breach of Duty

The Company has the following rights against a promoter who makes secret profits:
PROMOTION AND FORMATION OF COMPANIES
1. Where a promoter has made profits through the sale of private property to the Company, the Company
Promotion of a Company is that process by which a Company is incorporated by registration under the Companies may rescind (avoid) the contract and recover the purchase price.
Act and established financially as a going concern. 2. The Company can recover secret profit
3. Where fraud is proved, damages may be recovered from the promoters
PROMOTERS 4. If the promoter becomes a director, he may be liable for Mis-application Company funds.

A promoter is generally anyone who assumes primary responsibility with regard to matter relating to promotion. Remuneration of Promoters

In Twycross vs. Grant, justice Cockburn described a promoter as one who undertakes to form a company with a A promoter has no right against the Company for payment of services rendered before the formation of the
given objective, set it going and takes all necessary steps to accomplish that purpose. Company in absence of an express contract with the Company. However, when a Company is registered it may
pay or agree to pay remuneration to a promoter for his services. The usual ways of remunerating /rewarding
Duties of Promoters
promoters include-:

a) Duty to determine the name of the company

i. Being allowed to sell private property to the Company at a profit provided that he discloses, such profit

b) to prepare constitutive documents i.e memorandum and articles of association to the Company
ii. By taking commission on shares sold
c)to nominate the first directors of the company iii. By being allotted fully paid shares or debentures
iv. By being allowed to buy shares at a fair price
d)to act in good faith and in the best interest of the company
v. By being appointed as directors of the Company

e) not to make secret profits from the promotion process otherwise, he will be compelled to surrender it to the
Pre- Incorporation Contracts
company.
These are contracts entered into by promoters on behalf of the Company before incorporation. The following
rules relate to pre-incorporation contracts.
Gluckstein Vs Barnes
1. All pre-incorporation contracts are void as against the Company and they cannot be ratified by the
The promoters bought a property at Kshs.140, 000 from a Company in financial difficulties. They then sold it to Company.

the Company at a profit of Kshs.20, 000 which they failed to disclose. When Company went into liquidation a few In Kelner vs. Baxter

years later, the court held that the promoters were liable to hand over Kshs.20, 000 being secret profit. A company was being formed to buy goods from Mr. Kelner. The contract was made by the promoters on behalf
of the Company for the purchase of wine from Mr. Kelner. When the Company was formed, the wine was
delivered to it but before payment was made, the company went into liquidation. It was held that the promoters
were personally liable on the contract.

Notes by J.L Soita 1

2. If after incorporation, the Company re-negotiates a pre-incorporation contract on similar / different terms d) The promoter may agree with the other party that he shall not be personally liable if the company fails
with a 3rd party this discharges the pre-incorporation contract and the Company become liable on the newly to adopt the contract. This being a binding agreement between the two, the 3 rd party cannot sue the
negotiated contract.
promoter if Company refuses to ratify contract the contract.
In Howard vs. Patent Ivory Limited e) The promoter may enter into a provisional contract with the 3 rd party which shall be subject to
approval by the company on incorporation and therefore he may not be liable if Company fails to
X agreed with Y who was acting on behalf of a Company to be formed to sell a certain property to the Company adopt it.
for cash. After incorporation, X agreed with the Company to take part of purchase money in debentures and the
balance in cash. The contract was held to be valid and the Company was bound by it because the variation of the PROCEDURE FOR INCORPORATION
terms as to the mode of payment amounted to a fresh contract after incorporation.
The promoters engaged in the promotion process must decide -:
3. A person who purports to make a contract on behalf of the Company to be formed does so at his own risk
 Whether they should form a PLC or PVC
and becomes personally liable on the contract.
 Whether the Company will be limited by shares or guarantee
4. A Company cannot after incorporation enforce a pre-incorporation contract made in its name.

After the provisional work has been done the promoters may take the following steps:
Natal Land Company vs. Pauline Colliery Syndicate

1. Application for reservation of the name

N Company agreed with a person acting on behalf of a future Company P that N Company will grant a lease of a
Where promoters wish to give their company a particular name, they must lodge an application for
mine to P.P discovered coal but N Company refused to grant the lease to P.P Company sued for specific
reservation of the proposed name. If the name is available for registration, the registrar will reserve it
performance of the contract. It was held that P could not compel N to grant the lease as specific performance
for 30days during which the other requirements of incorporation can be carried out.
could not be granted due to lack of mutuality because the contract would not have been enforced against P. and
2. Preparation of constitutive documents
therefore P could not also enforce it against N.
They include Memorandum of Association and Article of Association
Avoiding Personal Liability on Pre-Incorporation Contracts 3. Application for Registration (Form CR 1)
The promoters must lodge an application to the registrar for registration of the company accompanied
Although a promoter is generally liable on pre-incorporation contracts, he may overcome liability regarding such by the following documents
contracts in the following ways a) List of directors

a) He may incorporate the Company first before it enters into a contract in which case the problem b) Particulars of directors e.g Copies of ID Card,KRA PIN and a recent passport photo of directors and

relating to pre-incorporation contract does not arise. proposed secretary.

b) He may purchase an already existing Company (off-the-shelf Company) which will then contract with c) Notice of location registered office

the third party in which case the contract will be binding on it from the very beginning. d) the Memorandum of Association and Articles of Association

c) He may agree with the other party that he shall be released from his obligation if the contract is e) a statement of the nominal capital

adopted by the Company and since promoters usually become directors, it would not be difficult to 4. Payment of registration fees

enter into such contract.

Notes by J.L Soita 2

 5. Presentation of the documents for registration The Act requires that the Memorandum of 3) Maintenance of registers: The Company must after incorporation establish the registers required by
Association, Article of Association together with other necessary documents shall then be presented to statute and record in them the necessary particulars. Such registers include:
the registrar for registration. a) Register of members
6. Issue certificate of incorporation b) Register of directors
If the registrar is satisfied that the documents prepared are in accordance with the Act he may register c) Register of secretaries
the Company and on registration, he shall certify under his hand that the Company has been d) Register of debenture holders
incorporated and from the date shown in the certificate, the subscribers to the Memorandum of e) Register of charges
Association together with Company, shall be a body corporate by the name contained in the f) Register of directors’ interests in the shares and debentures of the Company
Memorandum of Association and capable of the functions of an incorporated Company with power to 4) Minute Books: All Companies must establish and maintain minute books in which the minutes of
own property having perpetual succession and a common seal. General Meetings and directors’ meetings are entered.
5) Making Annual Returns: All Companies shall in every year lodge with the registration a return
CONCLUSIVENESS OF CERTIFICATE OF INCORPORATION containing particulars required by the Act.
Once the certificate of incorporation is issued by the registrar, it shall be conclusive evidence that all the 6) Accounts and Audit: A Company must have and maintain accounting records in such a manner that it
requirements of the Act in respect of registration and matters precedent have been complied with and the will enable the preparation of true and fair accounts. The accounts shall be audited by a qualified
association is a Company authorized to be registered under the Act and nothing is to be enquired as to the auditor.
regularity or otherwise of prior procedures of incorporation. 7) Use of Name: Under the Act a Company must paint or affix its name in a conspicuous position outside
Jubilee Cotton Mills V Lewis its registered office as well as outside any premises where its business is carried on. The name must be
Lewis was a promoter of a Company for the purchase of a cotton mill. The Memorandum of Association and engraved on the company seal and also appear on every public document and negotiable instrument
th
Articles of Association of the Company were accepted by the registrar on 6 Jan 1920 and the certificate of including letter heads , invoices and receipts
incorporation was dated the same date. There was however evidence that the registrar signed the certificate on 8 th 8) Maintenance of Bank Account: All Companies must open a bank account to be used for day-to-day
th
of Jan 1920. On 6 Jan 1920 a number of fully paid shares were allotted by the Company. The question arose as to transactions and to receive subscription money from the public
whether allotment of shares was valid. Alteration of the status(conversion) of the company
It was held that the certificate was conclusive evidence as to the date on which the Company was incorporated.
A company may alter its status in the following ways—
The allotment was therefore valid.
(a) from being a private company into being a public company;
Post Incorporation Requirements
(b) from being a public company into being a private company;
(c) from being a private limited company into being an unlimited company
1) Appointment of directors and secretaries: The promoters must nominate the first Directors and
(d) from being an unlimited private company to a limited company
where they fail to do so, the subscribers to the Memorandum of Association shall act as the first
(e) from being a public company into being an unlimited private company
Directors till the next Annual General Meeting when the members shall appoint the Directors.
Subsequent directors will then be appointed at the Annual General Meeting.
2) Common seal: Every Company is required to have a common seal on which the name of Company is Constitutive Documents
engraved in legible roman characters. The seal is usually affixed on certain documents required to be These are documents that define the existence of the company and regulate the structure and control of its
executed by the Company e.g. share certificate. members. They include the Memorandum of association and Articles of association
Notes by J.L Soita 3
Memorandum of Association Where it is proved by the Attorney General that an association to be formed as a limited Company is to be formed
for promoting commerce, art, science, religion or charity and it intends to apply its profit if any to the promotion
Sec 12 of the Act provide that “Memorandum of Association” is a memorandum stating that the subscribers of the objects for which it was formed and prohibits payment of dividends, he may allow it to dispense with use of
the word “limited”.
a) Wish to form a company under the companies Act

Restriction on the Choice of Name

b) Agree to become members of the company and in case of a company having share capital, to take at least
one share Although there is freedom of choice of name of the company, the registrar shall not register a company by a name
which in his opinion is deemed undesirable
The Memorandum of Association is a fundamental document of the Company because it contains the basic
conditions upon which the Company is authorized to be formed. It is the charter / constitution of Company. The name shall be deemed undesirable in following circumstances

FORM OF MOA a) When name is too much like the name of an existing Company. Every Company must have its own
name. This is meant to protect the Company from other people taking advantage of its goodwill. It also
The MOA must be in the form prescribed in the First Schedule of the Act for different types of companies
protects the public from confusing the Company with another Company.

a) FORM CR2-model memorandum for a company limited by shares b) Misleading name-A Company will not be allowed to be registered with a name which in the opinion of
the registrar is misleading to the public e.g. a bakery operating under the name “Wananchi Auto
b) FORM CR3-model memorandum for a company limited by guarantee Spares”
c) A name cannot be ordinarily allowed if it suggests some connection with the government or county
c) FORM CR4-model memorandum for a company whose liability is unlimited
government
d) No name will be registered if it suggests criminal tendencies or propensity towards immoral activities
CONTENTS OF MEMORANDUM OF ASSOCIATION
e.g. Magaidi Limited
1) The Name Clause
e) No name will be allowed if it includes the proper name of a person who is not a director of Company
The clause states that name of the Company shall end with the word limited as the last word of the unless for proper reasons
name in case of a Company limited by shares or guarantee. The name of a Company symbolizes the f) The name will not be registered if it includes such words as co-operative society, building society etc
identity of a Company and its existence. unless the circumstances justify
g) No name will ordinarily be allowed if it suggests some connection with National names or names
prohibited under the National flag and emblems Act.

Dispensing With the Use of the Word Limited

Change of Name
A Company may change its name under the following circumstances
Notes by J.L Soita 4
 1) Voluntarily- a Company may by a special resolution of members in a general meeting voluntarily alter m) Accounting records of the Company
its name with the sanction of registrar. n) Copies of directors’ service contracts setting out the terms of their contracts
2) By the registrar-If the name of Company on its first registration is found to be similar to name of o) Certificate of incorporation
another Company already in existence registrar may order the newly registered Company to change its
name. Change of Registered Office

3) By the court following a passing off action: -passing off involves imitating the use of another A Company may change its registered office within Kenya. Such change requires a special resolution by the

Company’s name thereby confusing the public. Where another Company succeeds in bringing a members in a general meeting. Notice of such change must be given to the registrar within 14 days of the change

passing off action against a newly formed Company, the new Company may be compelled by the court
3. THE OBJECTIVES CLAUSE
to change its name. The Act provides that a Company need not state its objects. A Company’s objects unless otherwise provided in
Any change in the Company name shall be notified to the registrar within 14 days and the registrar the articles shall not be restricted.
shall enter the new name on the register in place of the former name and shall issue the Company with
4. THE LIABILITY CLAUSE
a certificate of change of name and shall notify the change in Kenya Gazette.
The Act provides that the Memorandum of Association of every Company limited by shares or
A change in the Company name shall not have any effect on the rights /obligations of the Company or guarantee shall state that liability of its members is limited. The Memorandum of Association of a
invalidate any legal proceedings by or against the Company which may have commenced during the Company limited by guarantee shall further state that each member undertakes to contribute to the
assets of Company, a certain amount during winding up while he is a member or within one year after
use of the former name.
he ceases to be a member.
Any provision in memorandum of association compelling a member to take more liability than agreed
2. THE REGISTERED OFFICE CLAUSE by him is void However, in the following exceptional case, a member may be liable in excess of his
initial liability:
The Act provides that every Company Memorandum of Association shall state that the registered office is situated
 If a member agrees in writing either before or after alteration is made in the memorandum of
in Kenya. The office fixes the nationality of the Company and its physical address. Under the Act, a Company
association increasing his liability. In this case he is bound by alteration
from the day on which it commences business or the 14 th day after the date of incorporation whichever is the  If every member agrees in writing to conversion of a limited Company to an unlimited Company
earlier shall have a registered office and a postal address to which all communication and notice to the company  If to the knowledge of members number of members has fallen below statutory minimum and the
will be addressed. Company has carried on business for more than 6 months when the number is so reduced. In such case,
the remaining members are liable to an unlimited extent for debt of the Company contracted during
that period.
Documents usually kept at registered office include:
 If subscribers to the memorandum of association include a nominee who fails to pay up his liability,
the other subscribers are liable to contribute towards that liability.
f) Register of members  If a member undertakes to subscribe or acquire more shares in the Company beyond his initial liability,
g) Register of debenture holders he is bound to pay this liability in addition to the initial liability
h) Register of directors
i) Register of secretaries
j) Register of directors’ interests in the shares and debentures of Company
5.CAPITAL CLAUSE
k) Register of charges and instruments creating them
l) Minute books of annual general meetings and directors’ meetings

Notes by J.L Soita 5

In case of a Company limited by shares it must state the capital with which the Company is proposed to be The Act provides that a Company shall provide its articles in any of forms laid down for different types of
registered. This is known as nominal/registered capital. If the capital is divided into different classes it must also Companies in the respective schedules.
state denomination into which capital is divided
Alteration of Capital Clause a) Third Schedule-model articles of public companies limited by shares

A Company may if authorized by its articles alter its share capital in the following ways: b) Fourth Schedule-model articles of private companies limited by shares

a) Increase share capital: this may be done by an ordinary resolution in a general meeting of the c) Fifth Schedule-model articles of companies limited by guarantee
Company. Notice of the increase and a copy of the resolution must be filed with the registrar.
b) Consolidation of shares: a Company may by ordinary resolution and if authorized by its articles A company may adopt all or any of the provisions of the prescribed version of the model articles
consolidate its Capital by amalgamating shares of small amounts to share of large amounts e.g. a
consolidation of 100 shares of shs 18 each to 50 shares of shs36 each. . Under the Act, if Special Articles (made by promoters) are registered they must be:
c) Subdivision of shares: a Company may by ordinary resolution subdivide its shares into shares of g) Printed in English language
smaller amounts h) Divided into paragraphs and numbered consecutively
d) Cancellation of unissued capital: a Company can reduce the amount of share capital available for i) Dated
issue but this does not amount to a reduction of capital because shares have not been issued. j) Signed by each subscriber to the memorandum of association in the presence of at least one witness
e) Reduction of capital-a company may by special resolution and court sanction reduce its nominal
capital. CONTENTS OF THE ARTICLES
It is common for the articles to contain the following regulations or provisions:
6.Association Clause  Extent to which the model articles is applicable
 Different classes of shares and rights attached to them
Under this clause subscribers to memorandum of association agree to be associated and formed into a  Procedure of making calls and forfeiture of shares
Company and to take the shares placed opposite their names.  Transfer and transmission of shares
 Methods of issuing shares
Articles of Association (A.O.A)  calling and conduct of general meetings
 Voting rights of members
‘Articles’ means articles of association of a Company as originally framed or as altered from time to time  Appointment and removal of directors
pursuant to the provisions of the Act  Appointment and removal of auditors
 Borrowing powers of the Company
They include the regulations contained in the model articles prescribed for different types of companies so far as  Declaration of dividends
they apply to the Company. It contains regulations meant for the internal management of the Company affairs.  Capitalization of profits
They prescribe the rules and by-laws meant to govern the Company and for achieving the objectives specified in  Liquidation procedures
the Memorandum of Association.

A Company limited by shares may register its Articles of Association while a Company limited by guarantee or
unlimited Companies shall register the Articles of Association together with the Memorandum of Association at
the time of registration.

A Company limited by shares which does not register its own articles shall adopt model articles in the Act as its
Articles

Form of Articles Alteration of Articles

Notes by J.L Soita 6

Under Section 22 of the Act, the articles of a Company may be altered freely by passing a special resolution in a 6. Where the alteration affects class rights of members, then the class right variation procedure must be
general meeting of members. The power of the Company to alter its articles is provided under the Act and this followed in which holders of not less than 15% of class rights must be given a right to petition to the
right cannot be taken away from the Company. court against the alteration
The altered articles must be filed with the registrar for registration within 14 days after the passing of the 8 An alteration may not be made to have a retrospective (backdating) effect so as to take away the right of a
resolution to alter them (Sec 24). Failure to comply renders the company and each officer in default to a fine not member acquired when forming the contract
exceeding sh200000 9 A private Company which intends to continue enjoying the privileges of a private Company shall not
alter the provisions of its articles to conflict with Section 9 of the Act which defines a private
Restrictions to Alteration of Articles Company

1. The alteration must not be inconsistent with the express provisions of the Act such as to: LEGAL EFFECTS OF MOA AND AOA
 Restrict a member’s right to petition for liquidation
 Authorize payment of dividends out of capital The Act provides that “the Memorandum of Association and Articles of Association when registered bind the
2. The alteration must not produce conflict between the articles and the memorandum and incase of Company to its members to the same extent as if they had been signed and sealed by each member and as if they
conflict the memorandum of association will prevail contain covenants on the part of each member to observe all their provisions”.
3. The alteration must not sanction anything illegal
4. Alteration must not be inconsistent with the order of the court. Thus, where court has made an order to The documents bind: -
prevent oppression of minority, the company may not alter articles in a manner that will be
inconsistent with the court order a) The company to members
5. Alteration must be made in good faith and in best interest of Company as a whole and if this is the case b) Members to the company
it does not matter if it inflicts hardship on the minority. c) Members inter se (among themselves)
d) Members qua members
In Sidebottom vs. Kershaw limited e)
The Company altered its articles so as to give power to the directors to require any shareholder who a) Company to Members
competed with the Company business to transfer his shares to the nominees of the directors. S held a In this case the company is bound to observe the provisions of the articles failure to which a member can obtain
minority of shares and was in competition with the Company. It was held that the alteration was valid an injunction to restrain the Company from doing ultra vires acts
as it was made in the best interest of the Company as a whole. In Wood vs. Odessa Company limited
6 An alteration to increase the members’ liability will only bind those who consent to it. Thus, no The articles of a Company provided that the directors, with the sanction of the Company at the general meeting,
member is bound by an alteration to alter the Memorandum of Association or Articles of Association, which could declare a dividend to be paid to members. A resolution was passed to give shareholders debenture bonds
requires him to increase his shareholding or increase his liability to pay money to the Company unless the instead of paying dividends in cash. It was held that the words to pay meant to pay cash and a shareholder could
alteration was made before he became a member or he agrees in writing to be bound by such alteration restrain the Company from acting on the resolution on ground that it contravened the articles
b) Members to the Company
7. The alteration must not constitute fraud on the minority. The alteration to the articles would be declared This means that members are bound to the Company to observe and follow the provisions of the articles. Thus, the
invalid if it amounts to fraud on minority of members. Company can restrain any member who acts contrary to the provisions of the articles

Brown vs. British Abrasive Wheel Company In Hickman vs. Kent Breeders Association

The majority passed a special resolution altering the articles so as to enable 9/10 of shareholders to buy out any The articles of a Company provided that in case of any dispute between members and the Company, the dispute
other shareholders. It was held that the alteration to the articles could be restrained as it was designed to allow the would be referred to arbitration. A member had a dispute with the Company but brought an action against
majority to compulsorily do what they could not do by agreement Company in court. The Company applied to court for a stay of the proceedings on the ground that it was bound to
go to arbitration. The court granted a stay of the action.

Notes by J.L Soita 7

 c) Members inter se (among themselves) It was held that the Company was liable for the money to T because once the articles authorized directors to
borrow money through a general meeting resolution, T was entitled to assume that the directors had followed the
Generally, the articles do not constitute a binding contract between one member and another. The Articles only necessary procedure. T was therefore not required to enquire into regularity or otherwise of the Company’s
constitute contract between members in which case a member can sue another in his personal capacity is when the internal proceedings.
Articles give him an express right to do so
Exceptions to Rule in Turquands’ case
In Rayfield vs. Hands
5. Knowledge of the irregularity- a person dealing with Company will not be entitled to protection
The Articles of a Company provided that if a member intended to transfer his shares, he had to offer them to the under this rule if he has noticed that the prescribed procedure as laid down in articles has not been
directors who would take the shares in question equally among themselves at a fair value. The directors refused to complied with by Company.
take shares of a shareholder who intended to sell his shares. They contended that Articles did not impose liability 6. Forgery –the rule does not protect a person where forgery is involved. Thus, a Company cannot be
upon them to take the shares. It was held that directors were liable to take the shares as they were bound by the held liable for forgeries committed by its officers.
provisions of the Articles 7. Negligence on part of the outsider
An individual cannot benefit under the rule in circumstances under which he would have discovered
d) Members Qua Members the irregularly had he made proper inquiries
8. Lack of knowledge of the articles
The Articles only confer a right to a person in his capacity as a member but not any other capacity and the right in A person who did not consult the articles or the memorandum and who consequently did not act in
question must be a membership right. Thus, a person can only sue the company to enforce a right conferred by the reliance on these documents cannot be protected under the Turquand rule.
articles if the person is a member and the right in question is a membership right but not any other right.
9. Acts ordinarily beyond the apparent authority-an outsider will not be protected by the rule if the act
Constructive Notice of MOA and AOA of the agent or director of Company is one which is ordinarily beyond their powers
Once registered, the Memorandum of Association and Articles of Association become public documents and are
available to public inspection at the registrar’s office upon payment of a prescribed fee.
Thus, every person dealing with Company is deemed to know the contents of this document. This is known as the
doctrine of constructive notice. It does not operate against Company but only against an outsider dealing with
the Company. It prevents him from alleging that he did not know that memorandum of association or articles of
association rendered a particular act ultra vires.

Doctrine of Indoor Management

Under this doctrine once persons dealing with the Company have read the constitutive documents and are
satisfied that the Company has power to enter into the proposed transactions, such persons are not bound to
enquire into the regularity or otherwise of internal proceedings.
They are thus entitled to assume that the provisions of the articles have been complied with by the Company in its
internal working. Thus, if the proposed transaction is within the Company’s scope the Company would be bound
to outsiders and the claim of such outsiders will not be affected in any way by the internal irregularity of the
Company

This is known as the Rule in Royal British Bank vs. Turquand case. In this case the articles empowered the
directors to borrow money provided they were authorized by a resolution passed at the general meeting of the
Company.
The Directors borrowed money from T without the authority of the appropriate resolution.

Notes by J.L Soita 8