COMPANY LAW BBM 400 CLASS NOTES 2017-2018

SCHOOL OF BUSINESS AND MANAGEMENT

DEPARTMENT OF ACCOUNTING AND FINANCE

COURSE CODE BBM 400

COURSE OBJECTIVE

This course intends to equip the learners with knowledge on the law relating to the formation,
registration and management of the company.

SPECIFIC OBJECTIVES

A student who passes this course should be able to:

 Understand the legal principles relating to the formation of companies and define the
contents of the memorandum and articles of association
 Appreciate the legal principles that govern the raising of capital for companies
 Understand the principles relating to accounts, auditors, payment of dividends meeting
and winding up

COURSE CONTENT

1) Nature And Classification Of Companies

-Definition of a Company
-Procedure for the Registration of Companies
- Effect of Registration
- Classification of Companies
- Public versus Private Companies

2) Memorandum And Articles Of Association And Promotion

- Clauses In The Memorandum Of Association And Its Alteration
- Effect Of The Articles Of Association
- Alteration Of The Clauses In The Articles And Memorandum Of Association
- Promoters ; Duties Of Promoters,
- Payment Of Promotion Services
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- Pre-Incorporation Contract
3) Share Capital
- Types Of Capital
- Methods Of Raising Share Capital
- Allotment Of Shares
- Underwriting And Brokerage, Commencement Of Business
- Prospectus, Misrepresentation And Omission In The Prospectus
- Issue Of Shares At A Premium, And At A Discount, Share Premium Account
- Alteration Of Share Capital
- Maintenance And Reduction Of Capital
4) Membership , Securities And Majority Rule
- Ways Of Becoming A Member, Who Can Become A Member
- Register Of Members
- Classes Of Shares And Share Certificates
- Transfer And Transmission Of Shares; Call And Lien On Shares,
- Forfeiture And Surrender Of Shares
- Share Warrant
- Mortgages On Shares , Dividend ; Debenture
- Charges Securing Debenture
- Majority Rule And Minority Protection( the rule of foss vs harbottle )
5) Company Management
- Number Of Directors , Their Appointment, Disqualifications
- Duties Remuneration, Loans To Directors
- Loans To Directors
- Vacation Of Office , Compensation For Loss Of Office And Relief From
Liability
6) Company Meetings
- Kinds Of General Meetings , Notices Of Meeting
- Preceding At Meetings
- Proxies And Resolutions
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7) Accounts And Audit
- Books Of Accounts , Group Accounts And Audit Of Accounts
8) Investigation
- Investigation Into A Company
- Inspectors Report
- Expenses Of Investigation
- Investigation Of The Companies Membership
9) Winding Up
- Winding Up By Court , Voluntary Winding Up And Winding Up By
Contributories And Creditors
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1) Nature And Classification Of Companies

What is a company?

The term company is used to describe an association of a number of persons formed for some
common purpose and registered according to the law of companies

Lord justice Lindley defines a company as follows: a company is an association of many persons
who contribute money or money’s worth to a common stock and employs it for a common
purpose.

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

The person who contributes capital becomes a member of the said company.

Justice Marshal defines a company as artificial being, invisible, intangible, existing only in the
contemplation of the law. Being a mere creation of the law, it possesses only the properties
which the charter of its creation confers upon it either expressly or as incidental to its very one
existence.

Section 2(1) of the companies act (cap 485) provides that a company means a company formed
and registered under this act or an existing company

From the above definitions it can be concluded that a company is a registered association which
is an artificial legal person having legal, entity with a perpetual succession a common seal for its
signature, a common capital comprised of transferable shares and carring limited liability.

Procedure for the registration of a company in Kenya

Company is an artificial person created by following legal procedure. Before a company is

formed a lot of preliminary work is to be performed. The lengthy process of formation of a
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company can be divided into four distinct stages: i) promotion (ii) incorporation (iii) capital
subscription; and commencement of business

These stages are discussed below

i) Promotion

The term promotion is defined by Haney as the process of organizing and planning the finances
of a business enterprise under corporate form.

Gerstenberg has defined promotion as the discovery business opportunity and the subsequent
organization of funds, property and managerial ability into a business concern for the purpose of
making profit therefrom.

Promoters are only concerned with the formation of the business. The law does not require any
qualification. The promoters stand at a fiduciary position towards the company about to be
formed. From the fiduciary position of promoters the following important results follow:

1) Promoters cannot be allowed to make any secret profits .if any secret profits is made in
violation of this rule, the company may, on discovering it compel the promoter to account
for and surrender such profits.
2) The promoter is not allowed to derive profit from the sale of his own property to the
company unless material facts are disclosed. If he contracts to sell his own property to the
company without making full discovery. The company may rescind the sale or affirm the
contract and recover the profit made out of it by the promoters
3) The promoter must not make unfair or unreasonable use of his position and must take
care to avoid anything which has the appearance of undue influence or fraud.

Promoter’s remuneration

A prompter has no right to get compensation from the company for his services in promoting it
unless the company after incorporation enters into contract with the promoters for this purpose.

Promoter’s liability
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If a promoter does not disclose any profit made out of a transaction to which the company is part
of then the company may sue the promoter and recover the undisclosed profit with interest.

Besides section 62(1) holds the prompters liable to pay compensation to every person who
subscribed for any shares or debenture on the faith of the prospectors for any loss or damage by
reason of untrue statement made.

Promoter contract

Preliminary contracts are contracts made on behalf of a company yet to be incorporated. The
following are some effects of such contracts

1) The company, when it comes into existence, is not bound by any contract made on its
behalf before its incorporation
2) The company cannot ratify a pre-inception contract and hold the other party liable. Like
the company the other party to the contract is not bound by such contract
3) The agents of a proposed company may sometimes incur personal liability under a
contract made on behalf the company yet to be formed.

Kelner vs. brexter (1886) a hotel company was about to be formed and promoters signed an
agreement for the purchase of stock on behalf of the proposed company. The company came into
existence but before paying the price went into liquidation. The promoters were held personally
liable to the plaintiff.

2) Incorporation

This the second stage in the formation of a company. It’s the registration that brings the
company into existence. A company is legally constituted on being registered under the
companies act and after a certificate of incorporation is issued

For the incorporation of the company the promoters take the following procedures

a) Name search

The promoters of the company write to the register of companies to reserve the desired name.
The name might be accepted or rejected based on the similarly named business or offending the
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rules of name reservation. This part takes two working days and the register will reserve the
name for 30 days.

b) Prepare memorandum and articles of association and the statement of nominal capital

These documents describe the objective, rules, and subscribers and authorized share capital of
your company.

c) Payment of stamp duty

The amount of money that one pays depends on the declared nominal capital but the minimum is
KES 2140 on the minimum nominal capital of Ksh 2000

d) Situation of office form

This form notes the registered office address of the company and is to be signed by one of the
directors or the company secretary.

e) Provision of the list of directors

The promoters of the company have a duty to present the names of the directors of the company
by filling the list of director’s form

f) Declaration of compliance

The promoters of the company must sing the declaration of compliance in which they
categorically state that they have complied with the requirements for the formation of a new
company

g) Fill documents at the registers office

The prompters of the company should file the documents which include the memorandum of
association, articles of association, list of directors, situation and the declaration of compliance
with the register of companies

h) Obtain the company seal

This is a device that embosses your company name on documents and is used as the signature of
the company
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i) Compliance with the statutory requirements

- Register for the personal identification number and pay as you earn
- Register for the national hospital insurance fund
- Register for national social security fund

Register for a business license

Effect of registration of a company.

THE CERTIFICATE AND OF INCOPORATION AND THE VEIL OF INCOPORATION

A certificate of incorporation is a document issued by a registrar on the date of the incorporation

it’s the company birth certificate. Its content includes:

a. The name of the company

b. Date of incorporation
c. Signature and seal of the register
d. Serial number

Under section 17 (1) of the Act, a certificate of incorporation issued by the Registrar is
conclusive evidence that the provisions of the Act relating to registration, matters precedent and
antecedent thereto, have been complied with and that the company has been duly incorporated.

It is conclusive evidence as to the date of incorporation as it was held in the case of Jubilee
Cotton Mills (N0. 2) Vs. Lewis (1920) where Lewis was a promoter of a company formed to
purchase a cotton mill and carry on the business of cotton spinning. The memorandum and
Articles were delivered to the Registrar on 1 st January 1920, and the company was registered on
8 Th January 1920, however the certificate of incorporation bore the date of 6 Th January 1920.
On 6 Th January a large number of the company’s shares were allotted to the persons who had
sold the mill to the company and were subsequently transferred to Lewis. The legal question was
whether the allotment was valid. The House of Lords held that it was as if was effected on the
date the company was incorporated. The Court was of the view that the words “from the date of
incorporation” in section 16 (2) of the companies Act meant the whole of that day
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EFFECTS/CONSEQUENCES OF INCORPORATION

Under section 16(2) of the Act, from the date of incorporation mentioned in the certificate of
incorporation, the subscribers to the memorandum shall be a body corporate by the name
contained in the memorandum of association. This is the rule in Salomon’s case i.e. the company
becomes a legal person separate and distinct from its members and managers. The most
fundamental attribute of incorporation from which all other consequences flow is that the
company acquires an independent legal existence. In the words of Lord Macnaghten: “The
company is at law a different person altogether from the subscribers to the memorandum,

1) Separate legal entity

A company is a separate legal person in law from its owners. This has several important
consequences:

a) Separate legal person

The shareholders are not liable for the debts and liabilities of the company and cannot be sued by
the company creditors. A shareholder can be a debtor or creditor of the company.

b) Limited liability

The fact that the company is a separate person from its shareholders makes limited liability
possible

c) Company owns its own assets

A company owns its own property the shareholders have no claim to the assets of the company

d) Contractual capacity

A company has full contractual capacity and only the company can enforce its own contracts

e) Crime

A company can be convicted of a crime, regardless of whether its directors are also convicted but
there are some restrictions which include:
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- A company cannot be convicted of any crime for which the only available
sentence is imprisonment

A company can be a victim of a crime such a petty theft burglary arson etc.

f) Perpetual succession

Separate personality means that the existence of the company does not depend on the existence
of its members. Membership can change or members can die but the company continues in its
existence until its wound up

g) Borrowing

A company can borrow and grant security for a debt. This security can either be a fixed charge
or a floating charge security.

2) Veil of incorporation

A company is a Separate legal personality of company operates as a shield. The courts will not
normally look beyond the façade of the company to the shareholders who comprise it. The screen
separating the company from its individual shareholders and directors is commonly referred to as
"the veil of incorporation".

3) Piercing the corporate veil

Sometimes the law is prepared to examine the reality which lies behind the company façade this
is described as "lifting" or "piercing" the corporate veil. This can happen under the following :-

a) Statute

Some statutory provisions have the effect of piercing the corporate veil to make directors
personally liable Presumption is in favor of separate personality and courts will not normally
infer that legislation is intended to pierce the corporate veil.

Situations where "veil is lifted" by Statute:-

(i) where membership of a company falls below two for more than six months. Member who
knows he is the sole member but continues to trade will be jointly and severally liable with the
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company for company debts contracted after the six month period has elapsed. (this no longer
applies to private limited companies)

(ii) where public company trades without obtaining a trading certificate. If the company fails to
comply with any obligations under a transaction within 21 days of being called on to do so, the
directors of the company are jointly and severally liable to indemnify the third party against any
loss.

(iii) If person acting on behalf of a company signs or authorizes the signing of a bill of exchange,
cheque, order for goods or similar document in which the company’s name is not correctly
stated, the person signing will be personally liable if the company fails to pay

iv) Applies where company is being wound up and it appears that business has been carried on
with intent to defraud creditors.

(ivi) Applies where company is in insolvent liquidation and the director(s) should have known
this, but did not take sufficient steps to minimize losses to creditors

(ivii)The director of a company which has gone into insolvent liquidation cannot become a
director of another company with the same name within a five year period. If he does he can be
made personally liable for all the debts of the new company.

b) Common Law

The courts are willing to pierce the veil of incorporation in some circumstances:

(i) Fraud, Façade or Sham

Courts will examine the reality behind the company where the company was set up purely to
evade a legal obligation, or to allow someone to do something he would not be allowed to do as
an individual

(ii) Agency

Court may lift the veil on the basis that one company is merely carrying on business as the agent
of another so that transactions entered into by the subsidiary can be regarded as transactions of
the holding company:
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(iii) Single Economic Unit

In the past, courts have been willing to lift the veil on the basis that a group of companies was
not a group of separate persons, but a single economic unit

3 Capital subscription

A private company can start business immediately after grant of a certificate of incorporation but
a public limited company has to go capital subscription stage and commencement of business
stage

Public limited companies obtain their capital through floatation of their shares through the
Nairobi securities exchange

If the capital has to be issued through public offer of shares the directors of the public company
will first file a copy of the prospectus with the register of companies

On the scheduled date the prospectus is issued to the public. Investors are required to forward
their monies along with the application of shares to the company’s bankers

The bankers will forward all application to the company and the director will consider allotment
of shares

4. COMMENCEMENT OF BUSINESS

The certificate for commencement of business is issued by the register of companies subject to
the following conditions

1) Shares payable in cash must have been allotted up to the amount of minimum
subscription
2) Every directors of the company had paid the company in cash application and allotment
monies on his shares in the same proportion as others
3) No money should have become refundable for failure to obtain permission for shares or
debentures to be dealt in any recognized securities exchange
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4) A declaration by one of the directors or the company secretary that the above
requirements have been met.

The certificate to commence business granted by the register is a conclusive evidence of the fact
that the company has complied with all the legal formalities and is legally entailed to commence
business.

However the courts have the ability to wound up a company if it fails to start it business within a
period of one year.

Classification of companies

There are different types of company which are based on the basis of formation, liability,
ownership, domicile and control.

1) Types based on the formation or incorporation.

a) Chartered companies

These are companies which are incorporated under special charter issued by the head of state .i.e.
the central bank of Kenya. The powers and nature of business of a chattered company are
defined by the charter which incorporates it. A chattered company has wide powers, it can deal
with its property and bind itself into contracts that any ordinary person can.

b) Statutory companies

These companies are incorporated by a special act passed by the central government. The
activities of such companies governed by the special acts of parliament that created them. These
companies are not required to have their memorandum and article of association.

c) Registered companies

These are companies which are incorporated trough registration under the companies act

2) Types of companies on the basis of liability

a) Companies with limited liability
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These types of companies have a share capital and the liability of each member of the company
is limited to the extent of the face value subscribed by the shareholder

b) Companies limited by guarantee

These types of companies may or may not have share capital. Each member promises to pay a
fixed amount of money specified in the memorandum of association in the event of liquidation of
the company for the payment of debt and liability of the company

c) Unlimited company

This is a company not having any limit on the liability of its members in case of liquidation.
These companies can either be public or private companies

3) Types of companies based on number of members

On the basis of number of members accompany may be:

1) Private company
2) Public company

1) Private company

According to companies act cap 485 a private company is that company that by its article of
association:

1) Limits the number of its members to fifty excluding employees who are members or ex-
employees who continue being members
2) Restrict the transfer of its shares if any
3) Prohibits any invitation to the public to subscribe to any shares or debentures of the
company

Where two or more persons hold shares jointly they are considered and treated as a single
member

4) The minimum amount of persons to form a private company is two

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Characteristics of private companies

i) A private company restricts the right of transfer of its shares. The shares of a private company
are not freely transferable as the case is for public companies. The articles of association states
that if a member wants to sell his share he first has to offers it to the existing members at price
determine by the directors

ii) It limit it members to fifty excluding current employees and ex-employees who are still
members of the organization.

iii) A private company cannot invite the public to subscribe for its capital or share of debenture.
It has to make its own arrangement.

2) Public company

According to the companies act a public company is one where:

i) The articles of association does not restrict transfer of shares to the company

ii) It does not place a limit on the maximum number of its members

iii) It invites the general public to subscribe to it shares and debentures

Differences between a public company and a private company

1) MINIMUM NUMBER ; the minimum number of persons required to form a public
company is seven while it is two in the case of private companies

2) MAXIMUM NUMBER; there is no restriction on the maximum numbers in a public

company where else it cannot exceed fifty in a private company

3) NUMBER OF DIRECTORS: a public company must have at least three directors

where else a company must have at least two directors
4) RESTRICTION ON THE SUBSCRIPTION OF SHARES: A public company does
not place restriction on who owns its shares where else private companies restrict the
transfer of their shares
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5) ISSUE OF PROSPECTORS: unlike a public company a private company is not

expected to issue a prospectus or file a statement in lieu of prospectus with the registrar
before allotting shares
6) SPECIAL PRIVILEGES: A private company enjoys some special privileges a public
company does not enjoy any such privileges
7) COMMENCEMENT OF BUSINESS: a private company may commence its
business immediately after obtaining a certificate of incorporation while a public
company cannot commence it business until it is granted a certificate of commencement
of business
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2. MEMORANDUM AND ARTICLES OF ASSOCIATION

The formation of a company involves the preparation and filling of several important
documents. Two of these basic documents are:
1) Memorandum of association
2) Articles of association
The preparation of the memorandum of association is the first step in the formation of a
company.
A memorandum of association is a memorandum that states that the subscribers:
- Wish to form a company under the companies act
- Agree to become members of the company and in the case of a company that is
to have share capital take at least one share each.
It is the main document of the company which defines its objectives and lays down the
fundamental conditions upon which the company will be formed and serves the following
purpose:
1) It governs the relationship of the company and the outside world and defines the scope
of its activities.
2) Its purpose is to enable shareholders, creditors and those who deal with the company to
know what exactly the permitted range of activities is
3) It enables these parties to know the purpose for which their money is going to be used
by the company and the nature and extent of risk they are undertaking making an
investment in the company.
4) The memorandum of association enable those dealing with the company to know with
certainty t whether the contractual relationship to which they intent to enter with the
company is within the objects of the company
The companies act has given four forms of memorandum of association in schedule
1. These are in schedule;
a) memorandum of companies limited by shares
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b) Memorandum of companies limited by guarantee and not having share capital.

c) Memorandum of companies limited by guarantee and having share capital
d) Memorandum of unlimited companies

The memorandum of association of a company shall be

i) Printed
ii) Divided into paragraphs and numbered consequently
iii) Signed by the prescribed number subscribers (seven or more in the case of public
companies or two in the case of private companies
Each subscriber must provide his/her name, address description and occupation in the
presence of at least one witness who shall add his name signature and address
CONTENTS OF A MEMORANDUM OF ASSOCIATION
1. Name clause
Promoters of a company have to make an application to the register of companies for the
availability of name. The company can adopt a name if:
i. There is no other companies using a similar name or an identical name
ii. The name should not be considered repugnant or obscene
A name is considered inappropriate if:-
A name misrepresents the public any company name that includes the national flag, the
court of arms and emblems of county government
a) If the liability of the members is limited the words limited or private limited as
the case might be shall be added to the company name
b) The name and the address of the company shall be mentioned in all letter heads,
business letters, notices and common seal of the company.
2. REGISTERED OFFICE CLAUSE
Memorandum of association must state the name and the country where the company is to be
situated. Further each company must have a registered from the day it starts business or within
30 days of commencing business for which official communication with the company will be
addressed to.
3 OBJECT CLAUSE
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This the most important clause in the memorandum because it shows the purpose of
the company being formed and the powers the company will exercise to achive those
objects
It is essential for the public to know what kind of business activites the company is going
to engage in before subscribing to their shares.
The objects clause is divided into two:-
a) Main objects
This sub clause has to specify the main business activity to be carried out by the
company on its incorporation.
b) Other objects
This sub class will include other objects that are included in the main objects of the
company.
A company, which has main objects together with a number of subsidiary objectives
cannot continue to pursue subsidiary objects once the main object has come to an end.
Crown bank re (1844) the company objects allowed it to operate as a bank and to further
invest in securities and to underwrite issuing of securities. The company abandoned its
banking business and engaged in investment and financial speculation. Held the company
was not entitled to do so.
Incidental acts. The powers specified in the memorandum of association must not be
construed strictly. The company may do anything that is fairly incidental to these powers
While drafting the objects clause of the company the following points should be kept in
mind
i. The objects of the company must not be illegal
ii. The objects of the company must not be against the provision of the companies
act such as buying its own shares
iii. The objects must not be against the public interest to carry out trade with an
enemy of the country
iv. The objects must be stated clearly and definitely
v. The objects must be quite elaborate also

he statement Lord Cairns in 1875 in Ashbury Railway Co. Ltd vs. Riche to the effect that a
contract beyond the objects of the company in the memorandum of associations, is beyond the
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powers of the company give the impression that a company has no legal power to do anything
which is not written in the memorandum. That would be a starting proposition because, in
practice, companies have to do so many things in the course of their business that if all those
things were to be written down in the memorandum, the memorandum would be such a gigantic
document that nobody would read it. The judges will not regard a transaction undertaken by a
company as ‘ultra vires’ merely because it is not written in the company’s memorandum of
association as one of the company’s objects.

They would in fact regard the transaction as ultra vires by implication if:-
(a) It was reasonably incidental to any of the objects which have been written in the company’s
memorandum.
(b) It was undertaken for the sole purpose of effectuating, or achieving the written objects.

Doctrine of Constructive Notice

This rule regards that a person transacting business with a company is taken to be aware of the
contents of the company’s public documents such as memorandum, articles, annual return and
special resolutions.

Because the company’s registry is a “public office” the documents kept therein are generally
referred to as “public documents” since members of the public are free to inspect them on
payment of a prescribed fee.

A person transacting business with a company will be taken to have read the objects clause in the
company’s memorandum. Consequently if he concludes a contract with the company and it
turns out that the contract was for a purpose which is neither expressly nor impliedly within the
company’s objects and hence ultra vires, he is regarded as having entered into an ultra vires
contract knowingly even though he was not actually aware of its being ultra vires. He cannot
successfully sue the company for breach of the contract.

The legal justification for this rule is that since the company’s public documents in its file at the
company’s Registry are available there for inspection by any interested member of the public he
should have gone to the registry asked for the company’s file, inspected the contents and having
found the memorandum of association read the objects clause in order to ascertain whether the
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proposed contract is consistent with the company’s objects. If he fails to do so, he will be
regarded as having been aware that the contract was ultra vires. He cannot therefore be allowed
to enforce it.

The criticism that could be made against the constructive rule is its assumption that a potential
contracting party who read a company’s objects will be able to make the correct legal conclusion
regarding the vires of the proposed transaction. The fact that a perusal of the company’s object
clause does not guarantee its correct interpretation is amply demonstrated when senior judges
differ over the vires of a particular transaction. Why should an ordinary businessman be
expected to decide the matter correctly? Reading the objects does not guarantee correct
interpretation.

Remedies of the ultra vires lender

No action or suit lies at law to recover money lent to a company which has borrowed for an ultra
vires purpose. This means that the ultra vires lender cannot sue, as lender, to recover the money
he lent to the company. However, he might avail himself of one or any of the following
remedies:-
(a) If the result of the transaction is that the indebtedness of the company is not increased because
the new loan was applied in discharging an old debt, the invalid lender can be treated as standing
in place of those whose debts have been paid off.
In Sinclair vs. Brougham, it was stated that the ultra vires lender would be entitled to rank as
creditor only to the extent to which his money was applied in discharging the intra vires debt.

(b) If the lender can identify his money or the investment of his money in the hands of the
borrowing company, he can call for its return.

(c) If the lender cannot bring himself within any of the above prepositions he would have no
remedy except to participate in the division of the company’s surplus assets if any which would
be divisible among ultra vires creditors during company’s liquidation after all members have
received back their capital in full.

4. CAPITAL CLAUSE
In the case of a company having a share capital unless the company is unlimited
company, memorandum shall also state the amount of share capital with which the
company is to be registered and the division thereof into shares of a fixed amount
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In the case of a company limited by guarantee, the amount promised by each member
to be contributed by them in the case of winding up of the company is to be mentioned
5 LIABILITY CLAUSE

This clause states that the liability of the members of the company is limited.
Section 5(2) provides that memorandum of a company limited by shares or guarantee
shall state that the liability of members is limited.
Companies may either be:-
(i) Limited by shares
(ii) Limited by guarantee
(iii) Unlimited

Companies limited by shares

Section 4(2) (a) defines such a company as a company having the liability of its members
limited by memorandum to the amount, if any, unpaid on the shares held by them.

Companies limited by guarantee

Section 4(2)(b) defines such a company as a company having the liability of its members
limited by the memorandum to such an amount as the members may undertake to
contribute to the assets of the company in the event of its being wound up.

The members can only be called upon to pay the amount guaranteed if the company is in
liquidation.

Unlimited Companies
Section 4(2) (c) defines it as a company not having any limit on the liability of its
members.
Although the company is a separate legal entity, the members’ liability resembles that of
partners.

6 ASSOCIATION OR SUBSCRIPTION CLAUSE

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

In this clause, the subscribers declare that they desire to be formed into a company and
agree to take shares stated against their names no subscriber will take less than one share.
The memorandum has to be signed by at least seven members in the case of public
company and at least two persons in the case of private companies.
The signature of each member has to be attested by at least who cannot be a
subscriber .each subscriber and his witness must provide his address description and
occupation if any.
After registration no subscriber to the memorandum can withdraw his subscription on any
ground

ALTERATION OF THE MEMORANDUM OF ASSOCIATION

Alteration of memorandum of association involves compliance with detailed formalities and

prescribed procedure.

Alterations to the extent necessary for simple and fair working of the company would be
permitted

Alterations should not harm the interests of members and creditors of the company and should
not have the effect of increasing the liability of the members and the creditors
Contents of the memorandum of association can be altered as under:
1. change of name
A company’s name may be changed voluntarily or compulsorily.

(a) Voluntary change of name

A company’s name may be changed voluntarily if:-

i. A Special resolution is passed by the company for that purpose after obtaining a
written approval of the registrar (Section 20(1).
ii. The company was inadvertently registered by a name which, in the opinion of the
registrar, is too like the name by which a company in existence is previously
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

registered .Although the section does not make it mandatory for the company to
change its name it is advisable for the company to take immediate steps to effect the
change as soon as it becomes aware of the situation. Any delay entails the risk of
passing-off action being instituted against it.

iii. (iii) The minister, by license, authorizes a company to make a change in its name.

(b) Compulsory change-

Section 20 (2) of the Act provides that within 6 months of registration with a particular
name, the registrar may direct a change in name if in his opinion the name is “too like”
that of pre-existing company. A change of name under this section may be made by
ordinary resolution.

Failure to comply with the registrar’s directive is an offence punishable by a fine not
exceeding Sh. 100 for every day during which the default continues.
After a company changes its name, it shall give to the registrar notice thereof within
fourteen days. Upon receipt of the notice, the registrar shall:-
(i) Enter the name on the register in place of the former.
(ii) Issue to the company a certificate of change of name.
(iii) Publish the change of name in the Kenya Gazette

2. Change of registered office

This may involve:

i. Change from office from one part of town to another part of the same town in this case
notices are to be issued within 30 days after the date of change to the register who shall
record the same.
ii. Change from registered office from one town to another town in the same country in this
case a special resolution of members is required and a copy will be filled with the
register within 30 days
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

iii. Change of registered office from one country to another requires a special resolution of
the members and confirmation by the central gorvnement. The central gorvnement
before accepting the change of location will consider if:
- Consider the primary interest of shareholders and the company
- If the change is bonafide and against the public interest

3. Alteration of the objects clause

Section 8 of the Act provides that a company may, by special resolution, alter the provisions of
its memorandum with respect to its objects if the alteration would enable the company:

 To enable the company carry out its business more economical and effectively
 To enable a company to attain its main purpose by new improved means
 To enlarge or change the local area of the companies operation
 To carry on some business which under existing curmstances may be combined with the
business of the company
 To restrict or abandon any of the objects specified in the memorandum
 To sell or dispose of the whole or any part of the undertaking
 To amalgamate with any other company or body of persons

Alteration in the objects is to be confined within the above limits any alterations in excess of
these limits in null and void

A company shall file with the register a special resolution within one month from the date of
such a resolution together with the alters objects clause

4) Alteration of capital clause

The procedure for alteration of share capital and the power to make such alteration are generally
provided in the articles of association. If the procedure and power are not given in the articles of
association then the embers need to pass a special resolution to change the articles of association
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The following changes to the capital of the company might take place

(a) It may increase its share capital by new shares of such amount as it thinks expedient.

(b) It may consolidate and divide its capital into shares of larger amount than the existing
shares.

(c) It may convert all or any of its paid up shares into stock and reconvert stock into paid up
shares.

(d) It may subdivide its shares into shares of smaller amount.

(e) It may cancel shares, which at the date of passing of the resolution have not been taken or
agreed to be taken by any person and diminish the amount of its share capital by the amount of
shares so cancelled.

Section 63 (2) provides that this shall be exercised by the company in a general meeting.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

ARTICLES OF ASSOCIATION

The articles of association are the rules and regulations of a company framed for the purpose of
internal management of its affairs. The articles of association of a company are subordinate to
and are controlled by the memorandum of association.

Lord Cairns observed in this regard “The memorandum 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”.

Section 12 of that Act provides that the articles shall be:-

(a) In English language

(b) Printed

(c) Divide into paragraphs numbered consecutively, and

(d) Signed by each subscriber to the memorandum in the presence of at least one witness, who
shall attest the signature and add his occupation and postal address.

Contents of the Articles:

- Adoption of preliminary contracts

- Number and value of shares

- Allotment of shares

- Calls on shares

- Forfeiture of shares

- Alteration of capital
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

- Share certificates

- Conversion of shares into stock

- Voting rights and proxies

- Meetings

- Directors and their appointments

- Accounts and audit

- Winding up

Section 13(1) provides that a company may by special resolutions alter or add to its articles.
Section 13(2) provides that any alteration or addition so made in the articles shall subject to the
provisions of this Act, be as valid as if originally contained therein.

Limitations on Power to alter Articles

The following are the legal restrictions on a company’s power to alter its articles:-

(a) The alteration must not be inconsistent with the provisions of the memorandum. This
means that an alteration to include a clause, which contravenes a provision in the company
memorandum, is of no effect.

(b) Under section 13(1), an alteration which contravenes a provision in the Act is null and
void. For example, articles cannot authorize a company to purchase its own shares.

(c) The alteration of the article must be made in good faith for the benefit of the company as
a whole.

(d) The alteration of articles must not constitute a fraud on minority.

(e) Section 24 provides that no member of a company shall be bound by an alteration made
in the articles after the date on which he became a member if and so far as the alteration requires
him to take or subscribe for more shares than the number held by him at the date on which the
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

alteration was made, or in any way increases his liability as at the date to contribute to the share
capital.

(f) An alteration in the articles which causes a breach of contract with an outsider will be
inoperative.

(g) The alteration must not sanction anything which is illegal.

Legal Effect of Articles

Section 22 provides that the article shall, when registered, build the company and the members
there of to the same extent as if they respectively had been signed by the company and by each
member, and contained covenants on the part of each member, to observe all the provisions of
the articles.

The effect of these provisions is to constitute through the articles of a company a contract
between each member and the company. The effect and the implications of this section may be
appreciated by considering how the articles bind:-

(a) Members to the Company

Each member of the company is bound to observe the various provisions of the articles as if he
had actually signed the same.

Case Law: Hickman vs. Kent (1957)

The articles provided for the reference of disputes between a member and the company to
arbitration, if a shareholder brought an action in court against the company in connection with a
dispute between the company and himself in his capacity as a member. It was held that the
company was entitled to have the action stayed, as the articles amounted to a contract between
the company and Hickman to refer such disputes between them to arbitration.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

But a dispute between the company and a director in his capacity as a director would not be
within the terms of such articles even if the director was also a member (Beattie vs. E & F.
Beattie Ltd, 1938).

(b) Company to the Members

The company is bound to the members by the various provisions contained in the articles. The
company can exercise its rights as against any member only in pursuance of and in accordance
with the articles. Any member is entitled to sue the company to prevent any breach of articles
which would affect his rights as a member of the company. Thus where a right is conferred by
the articles on a shareholder to vote at a company meeting, the chairman of the meeting cannot
deprive him of his right.

Case Law: Wood vs. Odessa Water Works Co. (1889)

The articles of association of the defendant company provided that “the directors may, with the
sanction of the company at a general meeting, declare a dividend to be paid in cash to the
members”. Instead of paying cash dividend to the shareholder, an ordinary resolution was
passed to give them debenture bonds. The plaintiff, a member sued the directors for acting on
the resolution. The directors were restrained from acting on the resolution on the ground that “to
be paid” mean to be paid in cash and the debenture bonds proposed to be issued were not
payment in cash.

The articles provide that the directors may with the sanction of a general meeting declare a
dividend to be paid to shareholders, prime facie that means to be paid in cash.

(c) Members Inter-se

Articles do not constitute express agreement between the members of the company. Yet each
member of the company is bound by the articles on the basis of implied contract to the other
members. The articles regulate the rights of the members’ inter-se but such rights can be
enforced only through the company.

Case Law: Ray field vs. Hands (1960)

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Article II of the articles of association of Field-Davis Ltd provided: “Every member who intends
to transfer shares shall inform the directors who will take the said shares equally between them at
a fair value. Ray field, a member, sought to compel the defendants, the three directors of the
company to purchase his shares in accordance with this provision. The court declared that they
were bound to do so. The relationship here is between the plaintiff as a member and the
defendants not as directors, but as members.

(d) Company to Outsiders

Articles do not constitute any contract between the company and an outsider. An outsider is not
entitled to enforce the articles against the company for any breach of right that is conferred on
him by the articles.

Case Law: Eley vs. Positive Government Life Assurance Company (1876)

The articles of the company provided that Eley should be a solicitor of the company for life and
should not be removed from his office except on account of misconduct. He was also a member
of the company. Eley acted as a solicitor of the company for sometime but ultimately the
company discontinued his services without any allegation of misconduct. He sued the company
for damages for breach of the contract.

It was held that the action was not maintainable because the right which he attempted to enforce
was conferred upon him in a capacity other than of a shareholder.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

3. SHARE CAPITAL

What is share capital?

Shares are units of ownership interest in a corporation that provides for an equal distribution in
any profits, if they are declared in the form of dividends

CLASSES OF SHARES

The classes of shares, which can be created and issued by a company, are not prescribed by the
Company’s Act. They depend on the provisions of the company’s constitution, usually the
articles of association.

Legally, therefore, a company may create any type of or class of shares it pleases, but in practice
the following are the classes of shares generally issued by companies: -

(a) Ordinary shares

(b) Preference shares

Ordinary shares

The word “ordinary” as used in relation to shares, has no legal meaning but was adopted to
denote a share, which has no special rights attached to it.

i. Ordinary shareholders have residual rights of the company in the share of profits and are
the last to be paid during winding up
ii. Ordinary shareholders have voting wright in an annual general meeting or through
proxies

Preference shares

A preference share must satisfy the following two conditions: -

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(i) It shall carry a preferential right as to the payment of dividend at a fixed rate.

(ii) In the event of winding up, these must be a preferential right to the repayment of the paid
up capital.

Types of Preference Shares

(i) Cumulative and non-cumulative preference shares

(ii) Participating and non-participating preference shares

(iii) Convertible and non-convertible preference shares

(iv) Redeemable and non-redeemable preference shares, Section 60(1).

TRANSFER OF SHARES

Section 75 provides that the shares of any member in a company “shall be movable property
transferable in manner provided by the articles of the company”.

According to Table A, Article 24 provides that the directors may decline to register the transfer
of a share not being fully paid share to a person to whom they shall not approve and they may
also decline to register the transfer of a share on which the company has a lien.

Where articles are framed with some limitations on the discretionary power of refusal, it follows
on plain principle that if the directors go outside the matters which the articles say are to be the
matters and the only matters to which they are to have agreed, the directors will have exceeded
their powers. If the directors wrongfully exercise their power of refusal, the transferee may
apply to the court for rectification of the register and the entry of his name therein.

In case of private companies which have adopted Table A, Article 24 provides that the directors
may in their absolute discretion and without assigning any reason therefore, decline to register
any transfer of any share, whether or not it is a fully paid share. Provided that the directors
exercise their discretion bonafide and within a reasonable time they cannot be ordered by the
court to register a transfer of shares which they have declined to register. The directors’ power
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

of refusal must be exercised within a reasonable time from the receipt of the transfer which
according to Section 80(1) is 60 days from the date on which the transfer is lodged with the
company.

Effect of Transfer

Unless shares are being transferred as a gift, a transfer is a contract of sale which is effected
through the agency of a stock broker who is a member of the Nairobi Securities Exchange. The
property in the shares is however not vested in the transferee unless and until his name is entered
into the company’s register of members pursuant to section 28(2) of the Act.

In the interim period, the effect of the transfer is as follows:-

i. If the shares are partly paid, and a call is made the transferor is legally liable and must
pay the amount required and then seek an indemnity from the transferee.
ii. If dividends are declared and paid the transferor is the person who, according to the
company’s records is entitled to them. He would however hold the dividends on trust for
the transferee, unless the shares were bought “ex-dividend” or “ex-all”.
iii. If a meeting of a company is convened and the transferor decides to attend the meeting,
his right to vote or otherwise will depend on whether he has fully paid for the shares.

(a) If he has been fully paid for the shares, he must vote as the transferee directs. In such a
case he is regarded as the transferee’s trustee.

(b) If not fully paid up, he would have a prima facie right to vote in respect of those shares.

In commercial parlance, the word “capital” is generally used to denote the amount by which the
assets of a business exceed its liabilities. However, in legal parlance, the word “capital” is used
to denote the amount of money which a company raises from a sale of its shares.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Types of Capital

(a) Nominal or Authorized Capital

This is the capital that is stated in the memorandum pursuant to Section 5(4) (a) of the Act. It is
authorized in the sense that, once the memorandum of association is registered, the company can
take immediate steps to raise the capital from the public without applying for a permit. It is
nominal because it is calculated on the basis of nominal or book value of the shares.

(b) Issued Capital

It is that position of the nominal capital which has been issued by the company. It is also known
as subscribed or allotted capital. It may be equal or less than nominal capital but cannot exceed
it.

(c) Paid-up Capital

It is that part of issued capital, which has been paid-up by the shareholders. It may be equal to or
less than the issued capital but cannot exceed it.

(d) Called-up Capital

It is that amount of issued capital which the company has asked its shareholders to pay by means
of calls.

(e) Uncalled capital

This is the amount which remains unpaid on shares. The company may at any time, call upon
the shareholders to pay the uncalled capital in accordance with the provisions of the articles.

(f) Reserve capital

Section 62 of the Act defines reserve capital as that portion of the issued but uncalled- up capital
of a limited company, which the company’s members by special resolution, have resolved that
the company shall not call up unless and until it is in liquidation. It is to be called up only for
purposes of liquidation. As soon as a resolution is passed, the capital is put on reserve and the
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

directors’ power under the articles to make calls on shares will not be exercisable in respect of
that capital, unless the company is wound up. It is referred to in Section 62 as “the reserve
liability” of a limited company.

Methods of Raising Share Capital

Methods of Public Issue

(a) Prospectus Issue

Under prospectus issue, the company sells the shares directly to the public rather than selling
them through intermediaries.

Company---->Sells shares to--->Public

The company issues a document generally called a prospectus. As a precaution against

unsuccessful issue, the company may underwrite the issue.

(b) Placing

A placing occurs if the company instead of selling its shares directly to the public arranges with a
broker to sell them on its behalf.

Company---> Broker --->sells the shares to---> Public

(Acts as the company’s agent)

A placing may be “private placing” if the broker ‘places’ them with his clients instead of the
general public.

(c) Offer for Sale

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

An offer for sale is an arrangement whereby a company sells the whole of its shares to an
“issuing house” and the issuing house then resells the shares to the general public, usually at a
profit.

Company---> Sells shares to----> Issuing House---> Resells shares to Public

The issuing house issues a document called “offer for sale”.

(d) Offer by Tender

An “offer by tender” occurs if a company writes tenders for its shares and resells them to the
highest bidder. This is done with a view to obtaining the best price possible for the shares.
Under this method, the company fixes a minimum price for the shares and accepts the highest
tendered price above the minimum price.

(e) Rights Issue

This occurs when a company which has been trading for some time makes an offer to the
existing members to buy shares of a new issue in proportion to the number of shares they hold.

The existing members, rather than the public, are thereby given a ‘right’ to buy new shares. A
member who does not want to keep the shares will have a right to sell them straight away if he
accepts the company’s offer.

(f) Bonus Issue

It is a method by which a company instead of paying a cash dividend to its members retains the
cash but issues new shares to the members. The company thereby increases the nominal capital
and acquires the cash it needs for business expansion.

This method can only be used if the articles make a provision for it because the general rule at
common law is that dividends are payable in cash (Wood vs. Odessa Waterworks Company).

(g) Conversion Issue

Occurs either during a re-organization of a company’s capital structure or when two or more
companies amalgamate. What usually happens is that holders of one type of shares (preference
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

shares) are offered the right to convert them into shares of another type in the same company e.g.
ordinary shares, or in the case of amalgamation, the shares of another company.

ALLOTMENT OF SHARES

An allotment, legally, is the company’s acceptance of an offer to buy its shares. It is governed
by the following rules of the common law relating to contract:-

(a) Where a company issues a prospectus, the issue is an invitation to treat but not an offer: -
It is not regarded as an offer because if it was regarded as an offer, every application made
pursuant thereto would constitute an acceptance and the company would be contractually bound
to allot all the shares applied for. If the shares were oversubscribed, the company would be sued
by the applicants who were not given the shares they had applied for. When applications are
made, they constitute offers, and hence the company cannot be sued because there is no contract
between them and the company.

(b) The company’s, acceptance must be unconditional: - If the application was made for 10
shares and 5 were allotted, allotment would be a counter-offer which the allot tee could reject.
But whenever the issue is oversubscribed companies invariably prepare application forms which
contain a clause to the effect that the applicant “agrees to accept” such number of shares as the
company in its absolute discretion may allot to him.

(c) The acceptance must be communicated to the applicant:-This means that the allot tee
must actually receive the letter of allotment so that he is aware of the allotment. If the letter of
allotment is lost in transit there would be no binding contract. If the applicant authorizes the
company to communicate the acceptance by post, there would be a binding contract the moment
the letter of acceptance is posted.

Case Law: Dunlop vs. Higgins (1849)

‘A’ applied for the shares of a company. The company accepted the offer. The allotment letter
was delayed in the post. ‘A’ repudiated the allotment.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

It was held that the contract was complete when the allotment letter was posted.

(d) The allotment must be made within a reasonable time:-If there is undue delay in the
allotment the offer lapses.

Case Law: Ramsgate Victoria Hotel Co.vs. Montefiore (1866)

X applied for shares on June 28. Shares were allotted on November 23. X refused to take them.
It was held that the offer had lapsed and X was not liable to pay for them.

Section 49 (1) provides that no allotment shall be made of any share capital of a company
offered to the public for subscription unless the amount stated in the prospectus as minimum
amount, which in the opinion of directors must be raised by the issue of share capital and the
sum payable on application for the amount so stated has been paid to and received by the
company.

Section 50 (1) provides that a company having a share capital which has not issued a prospectus,
or which has issued a prospectus but has not proceeded to allot the shares, the company shall not
make a first allotment of its shares unless it has delivered a statement in lieu of prospectus to the
registrar at least 3 days before the allotment.

Section 50 A (1) provides that a company having a share capital shall not allot any of its shares
to a body corporate which is not a company formed and registered under this Act without prior
consent in writing of the Treasury to such allotment, and any allotment made without such
consent shall be void.

Requirement of Allotment

i. Public company must file a prospectus or a statement in lieu of prospectus before making
the first allotment.
ii. Minimum subscription: – No shares which are offered to the public can be allotted until
the minimum subscription stated in the prospectus has been subscribed and the amount
payable on application has been received in cash.
iii. Application money: - The money payable on application for each share shall not be less
than 5% of the nominal value of the shares. If the minimum subscription is not
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

subscribed within 60 days after the issue of prospectus, all money received from
applicants must be returned forthwith.
iv. If the prospectus states that the application has been or will be made to the stock
exchange for permission for the shares or debentures offered thereby to be dealt in on
stock exchange, then the permission must be applied before the third day after the issue
of the prospectus, failing to which the allotment would be void.

Irregular Allotment

An allotment of shares is considered irregular if it contravenes the provisions of Section 49 or

Section 50. Section 49 prohibits allotment unless minimum subscription is received. Section 50
prohibits allotment in certain cases unless statement in lieu of prospectus is delivered to the
registrar.

Incase it contravenes these two sections, it becomes voidable at the instance of the applicant
within one month after holding of statutory meeting of the company and not latter.

Where the director contravenes the provisions of Section 49 and Section 50, he must compensate
the company and the allotee respectively for any loss, damage or costs which the company or
allotee has incurred. But no proceedings to recover any such loss, damage or costs may be
commenced after the expiry of two years from the date of allotment.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

PROSPECTUS

Although Sections 39-48 regulates the contents and issue of prospectus, they do not define a
prospectus

A prospectus is defined by Section 2 of the Act as “any notice, circular advertisement or other
invitation, offering to the public for subscription or purchase any shares or debentures of a
company”.

The definition suggests that a prospectus embrace any document, notice, circular advertisement.
What matters is not the name given to the document by its authors but its effect on the person
reading it. If the person reading the document would conclude that he was being ‘invited’ to
apply for any shares or debentures of a company, the document would legally be a prospectus
even if it is not headed so. The offer must be made to the public

Case Law: Nash vs. Lynde (1929)

The directors of a company prepared a document which was in the form of a prospectus and was
in marked “strictly private and confidential”. The document did not contain all the material facts
required by the Acct to be disclosed. It was circulated among the directors and their friends.
The plaintiff had purchased shares on the footing of these documents which he obtained from a
friend of a director.

It was held that the document received by him was not a prospectus as private communication
between business friends does not constitute a prospectus. The “public” according to Section
57(1) is not restricted to the public at large but includes any section of the public whether
selected as members or debenture holders or as clients of the person issuing the prospectus or in
any other manner.

Case Law: Re. South of England Natural Gas and Petroleum Co. Ltd (1911)

3000 copies of a prospectus headed “for private circulation only” were distributed to
shareholders of gas companies. It was not publicly advertised.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

It was held that the prospectus was an offer of shares “to the public” even though it was marked
“for private circulation only”.

Contents of the Prospectus

A prospectus must contain the necessary information to enable the public to decide whether or
not to subscribe for its shares or debentures. The matters to be included in the prospectus are:-

(i) Directors and auditors of the Company

- Names, occupations, postal address, directors’ qualification shares, directors’

remuneration and directors interest in the company’s promotion.

(ii) Formation Expenses

(iii) Investor Information

- The minimum subscription

- The amount payable on application

- The time of opening of the subscription lists

- Voting and dividend rights attached to different classes of shares.

(iv) Company’s Business and Assets

- Venders of property of the company

- Amount paid for property bought or goodwill

- Length of time business has been carried on.

The prospectus also contains reports such as:-

(i) Auditor’s report showing profit and loss in each of the last five years, rates of dividend paid
during the last five years, assets and liabilities at the date of last accounts and details relating to
subsidiary companies.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(ii) Where the proceeds of the issue are to be used to buy a business, a report by named
accountants on profit and loss of the business for each of the last five years.

(iii) Where the proceeds of the issue are to be used to buy shares in any other body corporate, a
report by named accountants on profit or loss of that body corporate for each of the last five
years.

The aim of the statutory provision is to enable the prospective investor to asses the risk of the
intended investment, each matter is stated for a specific purpose, for example the names,
occupations and postal address of directors enables the prospective investors to know who the
directors of the company are or will be. It is very important to know who the “drivers” will be
since save arrival of the vehicle exclusively depends on the competence of drivers who are called
“directors”. The disclosure of their occupation and qualification would facilitate the
ascertainment of their suitability for appointment as directors by indicating whether they have
relevant business experience

Liability or mis-statement or omission in a Prospectus

Prospectus constitutes the basis of the contract between the company and the person who
purchases shares or debentures. The persons who are behind the company have full knowledge
to the future prospects and the present situation of the enterprise and the investing public has
none. It is but fair that the former should not only disclose all the matters within their knowledge
relating to the enterprise, but should also state them correctly and accurately. Where an untrue
statement occurs in a prospectus, there may be:-

(a) Civil liability

(b) Criminal liability

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(a) Civil Liabilities

A person who has been induced to subscribe for the shares in a company on the strength of mis-
statement or omission in the prospectus may have a remedy either against the company or
against the directors.

Remedies against the Company

A person who has been induced to subscribe for shares may:-

(i) Rescind the contract

(ii) Claim damages

(i) Recession of the Contract:

Where a person has purchased the shares of a company on the faith of a prospectus which
contained an untrue or misleading, but not necessarily fraudulent statement, he can seek
rescission of the contract.

The right to rescind the contract is available if he proves the following:-

(i) That the prospectus included an untrue or misleading statement or misrepresentation.

(ii) That the untrue or misleading statement was in respect of a material matter and was one of
the inducements to apply for shares or debentures.

Case Law: R v. Kylsant (1932)

A prospectus of a company said that the company had paid a dividend every year between 1921
and 1927, years of depression, thus giving the impression of a financially stable company.
However, the company had in each of those years incurred considerable losses on trading
account and was only able to pay a dividend out of reserves accumulated in previous years. This
fact was suppressed.

The court held that the prospectus was false in a material statement and conveyed a false
impression.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(iii) That he has taken action promptly to rescind the contract.

The shareholder must start proceedings for rescission within a reasonable time and before the
company goes into liquidation.

(ii) Claim Damages

Any person induced by fraud to take shares is entitled to sue the company for damages provided
he has rescinded his contract in time. The company is liable in damages where the
misrepresentation is an innocent one.

Remedies against the Directors

Any person who subscribed for any shares or debentures on the faith of the prospectus may sue
for compensation under Section 45 of the Companies Act.

The directors would also be liable under the common law action of deceit for making a statement
which is false and which is known to them to be false or is made by them recklessly or without
care, whether it is true or false. But they would not be liable for damages if they honestly
believed them to be true.

(b) Criminal Liabilities

In order to enforce compliance with its provisions which relate to prospectus, the Companies Act
provides the following penalties for non-compliance:-

(a) Section 40(4) provides that if application form is not accompanied by a prospectus which
contains the prescribed matters and reports, any person responsible is liable to a fine not
exceeding Sh. 10,000.

(b) Section 42(2) provides that if a prospectus includes a statement purporting to be made by
an expert but does not include the expert’s written consent to the issue, the company and every
person who is knowingly a party to the issue shall be liable to a fine not exceeding Sh. 10,000.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(c) Section 43(5) imposes a fine not exceeding Sh. 100 per day for issuing a prospectus
without delivering a signed copy thereon to the registrar for registration.

(d) Section 46(1) provides that where a prospectus includes any untrue statement, any person
who authorized the issue of the prospectus shall be guilty of an offence and liable to
imprisonment for a term not exceeding 2 years or to a fine not exceeding Sh. 10,000 or bot

COMMENCEMENT OF BUSINESS

A public company which has issued a prospectus cannot commence business or exercise any
borrowing powers unless:-

(a) The minimum subscription has been raised.

(b) Every director has paid to the company on each of the shares taken,

or contracted to be taken by him and for which he is liable to pay cash.

(c) No money is or may become liable to be repaid to applicants for any shares or debentures
which have been offered for public subscription by reason of any failure to comply or obtain
permission for the shares or debentures to be dealt in on any stock exchange.

If the minimum subscription was not raised, the company can only commence business if:-

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

prospectus.

(b) Every director of the company has paid to the company on each of the shares taken.

(c) There has been delivered to the Registrar for registration a statutory declaration in Form
No. 212 by the secretary that condition (b) above has been complied with.

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

Issue of Shares at Discount

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

A company issues shares at a discount when shares are issued at a price less that the face value.

Section 59 of the Act permits a company to issue the shares at a discount if:-

(i) The shares to be issued must be of a class already issued.

(ii) Such issue is authorized by a resolution passed in general meeting.

(iii) The resolution specifies the maximum rate of discount.

(i) Not less than one year has elapsed since the company was entitled to commence
business. This provision obviates the risk of hasty or premature issue at a discount.

(ii) The issue is sanctioned by the court.

(iii) The issue is made within one month after the court’s sanction.

Issue of Shares at a Premium

A company is free to sell its shares at a premium, that is, at a price higher than nominal value.
The premium received on issue of shares must be transferred to “Share Premium Account”,
under Section 58 (1).

Subsection 2 of the Act provides that the share premium account may be used for the following
purposes:-

(i) For issuing to the members as fully paid bonus shares, the unissued shares of the
company.

(ii) For writing off preliminary expenses of the company.

(iii) For writing off expenses, commission or discount on the issue of shares or debentures of
the company.

(iv) For providing for the repayment of premium payable on redemption of redeemable
preference shares or debentures.

Note: Dividend cannot be paid out of share premium account as this will amount to reduction of
capital without the confirmation of the court, and hence ultra vires the company
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

ALTERATION OF CAPITAL

A company is empowered by section 63 to alter the provision of its memorandum which relates
to its authorized capital.

The power is exercisable if:-

(i) The articles confer the authority to alter its capital.

(ii) The company holds a general meeting for the purpose of altering the capital.

(iii) The alteration is authorized by an ordinary resolution.

Mode of Alteration

Section 63(1) provides the various modes of altering its capital:-

(a) Increasing its share capital by issuing new shares.

(b) Consolidate and divide all or any of its share capital into shares of larger amount than the
existing ones.

(c) Convert all or any of its fully paid up shares into stock or reconvert that stock into fully
paid up shares of any denomination.

(d) Subdivide its shares into shares of smaller amount than is fixed by the memorandum.

(e) Cancel the shares which have not been taken by any person and diminish the amount of its
share capital. This mode of alteration is called “diminution” of capital.

Increase in Share Capital

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The nominal share capital of a company may be increased by ordinary resolution of the company
in the general meeting. The articles usually contains authority to allow the company to increase
its capital, but incase it does not allow, they must be altered by special resolution to this effect.

Under Section 65, where a company has increased its share capital beyond the registered capital,
notice must be given to the registrar within 30 days from the date of passing such a resolution.
Otherwise, the directors and the company knowingly permitting the default will be liable to a
fine of Sh. 100.

Reduction of Capital

The law regards capital of a company as something sacred. No action resulting in a reduction of
capital of a company should be permitted unless the reduction is effected:-

(i) Under statutory authority or by forfeiture.

(ii) In strict accordance of the procedure set out in the articles of association. Any reduction
contrary to this principle is illegal and ultra vires.

The general rule is that it is illegal for a company to reduce its capital because such a reduction
would be tantamount to reducing the security available to the company’s creditors. However
section 68(1) authorizes a company to reduce its capital if:-

(a) The company’s articles authorize it to do so. If the articles do not confer the authority
the can be amended by the inclusion therein of the requisite authority.

(b) The company passes a special resolution to that effect.

(c) The court confirms the proposed reduction. This is required to protect the interest of the
company’s creditors.

Reduction of capital may be effected in several ways:-

(i) Where redeemable preference share are redeemed.

(ii) Where shares are perfected for non payment of calls.

(iii) Where un issued shares are cancelled.

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(iv) Reduction of liability on any of its shares in respect of share capital not paid-up.

(v) Cancel any paid up share capital which is lost or is unrepresented by the available assets,
that is, “diminution”. For example, some of the capital may, in fact have been lost or diminished,
for instance, Sh. 100 shares may represent asset of Sh. 50.

(vi) Pay off any paid up share capital which is in excess of the wants of the company.

Section 68 gives the company the power to reduce its share capital in any way but specifically
mentions ways in which the reduction of capital may be effected in order to extinguish or reduce
the liability on shares not fully paid.

Under Section 69 where a company has passed a resolution for reduction of capital, it must apply
to the courts for an order confirming the reduction. Where the reduction of share capital
involves diminution of liability for unpaid capital or return to any shareholder of any paid up
share capital, the courts may allow all creditors to object to reduction.

The court will settle a list of company’s creditors and hear their objection and the court will
confirm such a reduction if they are satisfied that:-

(i) The creditors’ consent to reduction has been obtained.

(ii) Their debts have been discharged.

(iii) Their debts have been secured by the company.

Liability of Members on Reduction

On reduction of capital, the members of a company whether present or past are not liable beyond
a certain limit. The liability of members is limited to the difference if any between the amount of
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

the share as fixed by the minute and the amount paid. However, in certain cases, the liability of
the members will not be reduced even though there has been a reduction of capital. If the
company is unable to pay the claim of any creditor entitled to object who was ignorant of the
proceedings for reduction or of their nature and effect and who was not entered on the list of
creditors, then:-

(i) Every member of the company at the date of the registration of the order for reduction will
be liable to contribute for the payment of that claim an amount not exceeding the amount which
he would have been liable to contribute if the company had commenced to be wound up on the
day before that registration.

(ii) If the company is wound up, the courts, on application of such creditor and upon proof of
his ignorance of the reduction, may accordingly settle a new list of contributories who could be
forced to pay as if they were ordinary contributories in a winding up.

Maintenance of Capital

The issued share capital of a company limited by shares is the primary security for the
company’s creditors. A limited company by its memorandum declares that its capital is to be
applied for the purpose of the business. The creditors give credit to a company because of
capital and therefore the capital of the company should not be “watered down”. Many provisions
in the Act attempt to prevent capital being watered down such as making it illegal for a limited
company to issue shares at a discount unless provision of Section 59 is complied with.

Purchase of Own Shares

According to a leading case Trevor vs. Whitworth, it is illegal for a limited company to purchase
its own shares. Such a purchase, if permitted would constitute an indirect reduction of the paid
up capital. It is presumed that whenever a company buys its shares it would do so by utilizing its
paid up capital.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

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

(a) Where it is a purchase of redeemable shares,

(b) Where the shares are purchased pursuant to a court order under Section 211 (2) on
application by oppressed members and

(c) Where the shares are forfeited for non-payment of a call

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

10) Membership , Securities And Majority Rule

- Ways Of Becoming A Member, Who Can Become A Member

- Register Of Members

- Classes Of Shares And Share Certificates

- Transfer And Transmission Of Shares; Call And Lien On Shares,

- Forfeiture And Surrender Of Shares

- Share Warrant

- Mortgages On Shares , Dividend ; Debenture

- Charges Securing Debenture

- Majority Rule And Minority Protection

-WAYS OF BECOMING A MEMBER

COMPANY MEMBERSHIP

Although Section 28 bears the words, definition of a member, the section does not define a
member; rather it states the ways in which a person may become a member of a company as
follows:-

(a) By subscribing to the memorandum of association of the company.

(b) By agreeing to become a member of the company.

Section 28(1) provides that the subscribers to the memorandum shall be deemed to have agreed
to become members of the company and on its registration shall be entered as members in its
register of members.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

When Section 28(1) is read in conjunction with Section 5(4) (b), it binds a subscriber of a
company having a share capital to take at least one share, suggesting that a subscriber
automatically becomes a shareholder on the company’s registration.

Section 28(2) provides that every other person who agrees to become a member of a company,
and whose name is entered in the register of members, shall be a member of the company. This
implies that a person who agrees to become a member of the company does not actually become
one until his name is entered in the register of members. This section makes the placing of the
name of a shareholder on the register a condition precedent to membership. “Registration is
essential for membership”.

HOW TO BECOME A MEMBER

A person may become a member of the company in any of the following ways:-

(a) Membership by Subscription

Every subscriber to the memorandum is deemed to have agreed to become its members and on
its registration must be put on the register of members.

(b) Membership by qualification shares (compliance with Section 182(2)

An agreement to become a member may occur if a person who has consented to be a director
gives the statutory undertaking to take and pay for his qualification shares. Section 182(2)
declares such a director to be in the same position as if he had signed the memorandum.

(c) Membership by Allotment

An allotte membership commences from the moment his name is entered in the company’s
register of members.

(d) Membership by Transfer

A ‘transfer’ occurs if shares are bought from a company’s shareholder rather than from the
company itself. The purchase of shares constitutes the agreement to become a member and the
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

membership commences from the moment the transferee’s name is entered in the register of
members.

(e) Membership by Transmission

A transmission is a legal process by which ownership of shares in a company changes

automatically when the registered holder dies or becomes bankrupt.

Table A, Article 29 provides that “in the case of death of a member, the personal representatives
of the deceased where he was a sole holder shall be the only person recognized by the company
as having any title to his interest in the shares. If the personal representatives elects or decided to
be registered himself as a holder of the shares, the election constitutes the agreement to be a
member”.

Article 30 provides that a bankrupt member’s shares in a company will be transmitted to his
trustee according to rules in bankruptcy law. If the trustee elects or decides to be registered as
the holder of the shares, the election constitutes the agreement to be a member and the provision
of Subsection 2 of Section 28 become applicable.

(f) Membership by Estoppels

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

Cessation of Membership

A person’s membership of a company may cease or come to an end in either of the following
ways: -

(a) When a person transfers his shares: -The transferor ceases to be a member as soon as the
transferee is registered.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(b) When a person’s shares are validly forfeited by the company: -Table A, Article 33 provides
that a member’s shares may be forfeited if the member fails to pay any call. Article 37 provides
that a person whose shares have been forfeited shall cease to be a member in respect of the
forfeited shares. He therefore ceases to be a member if all of the shares previously held by him
are forfeited.

(c) When a person makes a valid surrender of his shares of the company:- A person’s
membership will come to an end if he surrenders all his shares to the company with the approval
of the directors. If the surrender is void, the membership does not come to an end even if the
member’s name is removed from the register.

(d) When a person dies, his ownership of a company’s shares will come to an automatic end
by virtue of the provision of the law of succession.

Table A, Article 24 provides that, in case of death of a member the personal representatives of
the deceased shall be the only persons recognized by the company as having any title to his
interest in the shares.

(e) When a person is declared bankrupt, his ownership of company’s shares will come to an
end under the provisions of the Bankruptcy Act, which vest a bankrupt property in his trustee.

(f) Redemption of redeemable preference shares: - If a member’s entire holding consists

exclusively of redeemable preference shares and all these shares are redeemed by the company
under Section 60 of the Act, he will cease to be a member from the date on which his name is
removed from the register of members.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(g) When a company sells shares under its lien: - A company, like an unpaid seller under the
sale of Goods Act, has a right of lien on its shares as security for the balance of their price.

Table A, Article 11 gives the company “a first and paramount lien” on every unpaid share. If the
company sells all the shares held by a member, the membership will come to an end from the
moment the buyer’s name is entered in the register of the company.

Article 12, gives the company power to sell “any shares on which the company has a lien”.

(h) Repudiation by an Infant: - An infant member has a common law right to repudiate his
membership of a company if there has been a total failure of consideration because the shares
have become worthless.

Case Law: Steinberg vs. Scala (Leeds) Ltd.

Miss Steinberg, an infant, purchased 500 £ 1 shares from the defendant company. She paid Sh.
10 on each share and being unable to meet some calls, repudiated the contract while she was still
a minor and claimed: -

(a) Rectification of the register of members to remove her name there from and thereby
relieve her from liability on future calls.

(b) Recovery of the money already paid.

It was held that: -

(a) She was entitled to rescind and so was not liable for future calls, but

(b) She was not entitled to recover the money already paid because there had not been a total
failure of consideration. She had got the thing for which the money was paid, namely the shares.
Although she had not yet received any dividends on the shares, the shares had some value.

(i) Liquidation: - Company liquidation terminates membership of all former members from
the moment it becomes a member. The members technically become “contributories”.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Who may be a Member?

The general rule is that any person who is competent to contract may be a member. A contract to
purchase shares is like any other contract and both the contracting parties must be competent to
enter into a contract.

The membership rights of some categories of persons are as follows: -

(a) Minor/Infants

An infant is any person who has not attained the age of 18 years. A minor has a common law
right to enter into a contract to buy shares in a company, and thereby become a member of the
company. The contract is however avoidable at his option, and he may avoid it at any time
during his infancy or within a reasonable time after attaining the age of 18 years.

Although the infant has a right to repudiate the contract, he would only be entitled to get back the
amount already paid if there has been a total failure of consideration because the shares have
become valueless.

Case Law: Palaniappa vs. Official Liquidator (1942)

A father as a guardian of his minor daughter applied for the shares of a company. Shares were
allotted to the daughter describing her as a minor. The company went into liquidation and the
father was placed under the list of contributories.

It was held that neither the father nor the minor are liable as contributories.

A company’s articles may, however, restrict membership of the company to adults only in which
case an infant would not become a member of the company.

(b) A corporation

A corporation, whether registered or not, can become member of another company, if so

authorized by its articles. But a company cannot be a member of itself. A company cannot
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

purchase its own shares because it involves reduction of capital, which is not permissible under
Section 29(1).

(c) Personal Representatives

On member’s death, his personal representatives would be entitled to be registered as a member

of the company unless the company’s articles provide otherwise.

REGISTER OF MEMBERS

Section 112(1) requires every company to keep a register of its members and prescribes the
contents of the register as follows: -

(i) The names and postal address of the members.

(ii) A statement of the shares held by each member.

(iii) The amount paid or agreed to be considered as paid on the shares of each member.

(iv) The date at which each person was entered in the register as a member.

(v) The date at which any person ceased to be a member.

Section 122(2) requires the register of members to be kept at the registered office of the
company.

Section 115(1) provides that the register of members shall be open during business hours to the
inspection of any member without charge, and of any other person on payment of a fee, not
exceeding Sh. 2 for each inspection as the company may prescribe.

Section 117 permits a company, on giving a notice by advertisement in some newspaper

circulating in Kenya to close the register of the members for any time or times not exceeding in
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

the whole 30 days in each year. The purpose is to keep the register static so that members’
holdings may be extracted as at a particular date for the purpose of computing dividends

CLASSES OF SHARES

The classes of shares, which can be created and issued by a company, are not prescribed by the
Company’s Act. They depend on the provisions of the company’s constitution, usually the
articles of association.

Legally, therefore, a company may create any type of or class of shares it pleases, but in practice
the following are the classes of shares generally issued by companies: -

(a) Ordinary shares

(b) Preference shares

Ordinary shares

The word “ordinary” as used in relation to shares, has no legal meaning but was adopted to
denote a share, which has no special rights attached to it. Ordinary shareholders have residual
rights of the company.

Preference shares

A preference share must satisfy the following two conditions: -

(i) It shall carry a preferential right as to the payment of dividend at a fixed rate.

(ii) In the event of winding up, these must be a preferential right to the repayment of the paid
up capital.

Types of Preference Shares

(i) Cumulative and non-cumulative preference shares

(ii) Participating and non-participating preference shares

(iii) Convertible and non-convertible preference shares

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(iv) Redeemable and non-redeemable preference shares, Section 60(1).

TRANSFER AND TRANSMISION OF SHARES

Section 75 provides that the shares of any member in a company “shall be movable property
transferable in manner provided by the articles of the company”.

According to Table A, Article 24 provides that the directors may decline to register the transfer
of a share not being fully paid share to a person to whom they shall not approve and they may
also decline to register the transfer of a share on which the company has a lien.

Where articles are framed with some limitations on the discretionary power of refusal, it follows
on plain principle that if the directors go outside the matters which the articles say are to be the
matters and the only matters to which they are to have agreed, the directors will have exceeded
their powers. If the directors wrongfully exercise their power of refusal, the transferee may
apply to the court for rectification of the register and the entry of his name therein.

In case of private companies which have adopted Table A, Article 24 provides that the directors
may in their absolute discretion and without assigning any reason therefore, decline to register
any transfer of any share, whether or not it is a fully paid share. Provided that the directors
exercise their discretion bonafide and within a reasonable time they cannot be ordered by the
court to register a transfer of shares which they have declined to register. The directors’ power
of refusal must be exercised within a reasonable time from the receipt of the transfer which
according to Section 80(1) is 60 days from the date on which the transfer is lodged with the
company.

Effect of Transfer

Unless shares are being transferred as a gift, a transfer is a contract of sale which is effected
through the agency of a stock broker who is a member of the Nairobi securities Exchange. The
property in the shares is however not vested in the transferee unless and until his name is entered
into the company’s register of members pursuant to section 28(2) of the Act.

In the interim period, the effect of the transfer is as follows:-

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(i) If the shares are partly paid, and a call is made the transferor is legally liable and must
pay the amount required and then seek an indemnity from the transferee.

(ii) If dividends are declared and paid the transferor is the person who, according to the
company’s records is entitled to them. He would however hold the dividends on trust for the
transferee, unless the shares were bought “ex-dividend” or “ex-all”.

(iii) If a meeting of a company is convened and the transferor decides to attend the meeting,
his right to vote or otherwise will depend on whether he has fully paid for the shares.

(a) If he has been fully paid for the shares, he must vote as the transferee directs. In such a
case he is regarded as the transferee’s trustee.

(b) If not fully paid up, he would have a prima facie right to vote in respect of those shares.

A COMPANY LIEN

A lien is the right to retain possession of a thing until a claim is satisfied. Incase of a company,
lien on a share means that the member would not be permitted to transfer his shares unless he
pays his debt to the company.

Table A, Article 11 may give the company “a first and paramount” lien on the shares of its
members, either in respect of amounts payable on the shares or any amount due from the
member of the company. The right of lien is not inherent but must be clearly provided for in the
articles.

The lien does not however confer a power to sell the property retained. Consequently, if the
company wishes to be able to enforce its lien by selling the relevant shares, without a court
order, it must insert a suitable clause in the articles.

Table A, Article 12 gives the company power to “sell”, in such a manner as the directors think
fit, any shares which the company has a lien subject to specified conditions.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Since the shares are not physically in possession of the company it appears proper to regard the
company’s lien as an “equitable lien” which does not arise until the registered shareholder incurs
a debt to the company
Case Law: Bradford Banking Co. vs. Briggs & Co. (1886)
A member deposited his share certificate with the bank as an equitable mortgage of the shares to
secure a loan to him by the bank. The bank gave notice to the company of its interest as
mortgage. Later, this member became indebted to the company.

It was held that as the company had prior notice of the bank’s mortgage, its lien was postponed
to the mortgage since the company’s claim under the lien arose after the bank’s notice was
received.

Oral Transfer
Section 77 of the Act provides that, not withstanding anything in the articles of association of a
company, it shall not be lawful for the company to register a transfer of shares unless a proper
instrument of transfer has been delivered to the company.
This means that an oral transfer of shares is illegal and void.
In Re: Greene, the judge explained that the primary object of the section was to “scotch” the
then prevalent practice of registering oral transfers of shares to the great detriment of the
revenue. Its current effect is to enforce payment of the stamp duty that is payable on the transfer
of shares. If the company registers oral transfers, the transferee would not acquire title to those
shares and the transferor would be deemed to remain the registered holder of the shares.

Forged Transfer

An instrument of transfer of shares on which the signature of the transferor is forged is called a
forged instrument, and any transfer based on such instrument is called a forged transfer.
A transfer is usually forged after a person steals another person’s share certificate with the
intention of having the relevant shares registered in his name so that he may thereafter transfer
them to a third party.
 COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The first thing that a company should do when an instrument of transfer is tendered is to inquire
into its validity. The company should sent a notice to the transferor at his address and inform him
that such a transfer has been lodged and that if no objection is made before a specified day it
would be registered.
Because the transferor’s forged signature on the transfer is wholly inoperative, the consequences
of such transfer are as follow: -
(i) A forged transfer is a nullity and cannot affect the title of the shareholder whose signature is
forged. If a company transfers shares under a forged instrument of the transfer, the true owner
can compel the company to have his name restored in the register of members.
(ii) If a company has issued a share certificate under a forged transfer and he has sold the shares to
an innocent person, the company is liable to compensate such a purchaser if it refuses to register
him as a shareholder. In such a case, he can claim damages from the company on the grounds
that he acted on the share certificate of the company.
(iii) If the company has been put to loss by reason of the forged transfer, it can claim an indemnity
from the person presenting the transfer for registration even though he is quite innocent of the
forgery.

Transfer Advice

In order to minimize instances of forged transfers, some companies in Kenya issue a “Transfer
Notice” or “Transfer Advice” to the registered holder to the effect that a transfer of his shares has
been presented for registration.

However, if the registered holder ignores the ‘notice’, he is not estopped from later asserting that
the transfer was not signed or authorized by him.

Blank Transfer

A transfer signed by the transferor, but with a blank for the name of the transferee is called a
blank transfer. In a blank transfer, neither the transferee’s name and the signature nor the date of
sale, are filled in the transfer form. The transferee is at liberty to sell it again without filing his
name and signature to a subsequent buyer. The process of purchase and sale can be repeated any
number of times with the blank deed and ultimately when it reaches the hands of one who wants
to retain the shares, he can fill his name and date and get it registered in the company’s books.

The facility of blank transfer has often been used for illegal purposes particularly to avoid taxes.

MORTGAGE ON SHARES

A shareholder who intends to borrow money on the security of his shares may do so by way of
legal or equitable mortgage on his shares.

(a) Legal mortgage

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

This entails the transfer of shares to the lender as a security for repayment of an old debt. As
long as the mortgagee remains a registered shareholder, he is entitled to all dividends and he is
entitled to vote, unless it is agreed between the lender and borrower that dividends will be paid to
the latter.

A legal mortgagee is for a period when the contract is still in force, a member of the company.
In order to effect a legal mortgage of shares, the legal ownership of shares must be transferred to
the lender by the registration of a form of transfer with the company concerned.

Dividends paid to the lender during the currency of the loan as the registered holder of the shares
are payable by him to the borrower unless the loan agreement provides that they will be applied
towards reduction of the loan. The voting rights exercisable in respect of the shares will depend
on the provisions of the loan agreement.

(b) Equitable mortgage

This is effected by a deposit of share certificate by the borrower with the lender as a security for
the loans, with or without delivery of a blank transfer. Incase the borrower fails to repay the loan
the mortgagee may fill the blank transfer form and dispose the shares.

There are no legal formalities prescribed for an equitable mortgage which can therefore be
created quite informally. Anything done by the lender and the borrower which shows an
intention to mortgage the shares will suffice.
The common options for equitable mortgage are:-

(i) To deposit the share certificate with the lender without executing a transfer: -
If the borrower fails to repay the loan as agreed between him and the lender, the lender must
apply to court for an order for sale of the shares.
Alternatively the lender may apply for an order of fore closure which would vest the ownership
of the shares in him absolutely.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(ii) To deposit the share certificates plus a blank transfer with the lender.

A blank transfer is one which is signed by a named transferor but does not specify the transferee.
On default by the borrower, the lender has an implied authority to sell the shares and to enter the
name of the purchaser in the transfer as the transferee. In Deverges vs. Sandeman Clark Co., it
was observed that no court order is required in order to effect the sale.

Priorities

If a person who has borrowed money on the security of an equitable mortgage by a fraudulent
misrepresentation, induces the company to issue him with another share certificate and uses the
certificate to sell the shares to a bonafide purchaser for value who then obtains registration, that
purchaser will have a priority over the mortgage.

Share Certificates

Section 82(1) provides that within 60 days after the date on which a transfer is lodged with a
company, the company must have ready for delivery, a certificate of the shares transferred.

Section 82(3) provides that a person aggrieved by the company’s failure to issue a share
certificate may serve the company with a notice requiring the company’s compliance with the
section. If the company does not do so within 14 days after the service of the notice he may
apply to the court for an order directing the company and the officer responsible to issue the
certificate with such time as the court may specify. The costs of application shall be borne by
the company or the officer of the company who was responsible for the default.

In Re: Bahia & San Francisco Railway Co., the judge described the share certificate as a
“declaration by the company to all the world that the person in whose name the certificate is
made out and to whom it is given, is a shareholder in the company, and it is given by the
company with the intention that it shall be so used by the person to whom it is given and acted
upon in the sale and transfer of shares”.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

SHARE WARRANTS

Section 85(1) provides that a company limited by shares, if so authorized by its articles may,
with respect to any fully paid up shares, issue under its common seal a warrant stating that the
bearer of the warrant is entitled to the shares therein specified.

Section 114(1) provides that on the issue of a share warrant, the company shall strike out of its
register of members, the name of the member then entered therein as holding the shares specified
in the warrant as if he had ceased to be a member. The company shall then enter in the register
the fact that the issue of the share warrant, a description of the shares included in the warrant and
the date of issue.

Section 114(2) provides that the bearer of the share warrant shall be entitled on surrendering it
for cancellation to have his name entered as a member in the register of members.
The share warrant is a “warranty” that the bearer is the holder of the shares specified therein.
Secondly it is a negotiable instrument which is transferable by simple delivery and a bonafide
transferee for value of the warrant is not affected by any defect in the title of the transferor.

FORFEITURE AND SURRENDER OF SHARES

Forfeiture

1) If a shareholder having been called to pay any call on his shares fails to pay, the company
has two remedies against the shareholder:-
a. To sue him for the amount due.
b. To forfeit the shares.

2) Forfeiture means losing the right of ownership of the shares as a penalty for some act.
Forfeiture for non payment can be instituted if special powers are given by articles to the
directors to do so.
3) The company may forfeit shares of a shareholder for non payment of some call if the
following conditions are satisfied:-
i. In accordance with articles: - Forfeiture must be authorized by articles of
the company.
 COMPANY LAW BBM 400 CLASS NOTES 2017-2018

ii. Notice prior to forfeiture: - Under Section 34, the notice is required to
name a day/date on or before which the payment is to be made, and to
state that in the event of non-payment, the shares will be liable to be
forfeited.
iii. Resolution of the Board: - If the defaulting shareholder does not honor the
notice, the directors must pass a resolution forfeiting such shares. If this
resolution is not passed, the forfeiture is invalid.
iv. Good faith: - The directors must forfeit the shares in good faith and for the
benefit of the company.

Effects of Forfeiture

(i) A person whose shares are forfeited ceases to be a member in respect of the forfeited shares.
(ii) Forfeited shares may be cancelled, sold or re-allotted on such terms and in such manners as the
directors deem fit.

DEBENTURES

Section 2 of the Act defines a debenture as including debenture stock, bonds and any other
securities of the company, whether constituting a charge on the assets of the company or not.

A debenture is a document given by a company as evidence of a debt to the holder usually

arising out of a loan and most commonly secured by a charge.

According to Palmer, the word ‘debenture’ signifies “any instrument under seal evidencing a
deed, the essence of it being the admission for indebtedness”. In other words, debenture is a
document creating or acknowledging an indebtedness of the company which may or may not be
secured.

Debentures are usually issued by a resolution of the Board of Directors under powers conferred
by the company’s articles of association. Table A, Article 79 provides that, the directors may
exercise all the powers of the company to borrow money and to issue debentures, debenture
stock and other securities”.

Charges Securing Debentures

A company can issue secured and unsecured debentures. If the debentures are not secured by the
assets of the company, the debenture holders position is that of an unsecured creditor. Secured
debentures are issued by creating a charge on the assets of the company.

The term “charge” means an interest. It may either be a specific (fixed) charge or a floating
charge.

(a) Fixed Charge

 COMPANY LAW BBM 400 CLASS NOTES 2017-2018

A fixed charge is created in respect of a definite and ascertained property and this prevents the
company from dealing with that property without the consent of debenture holders. In the event
of winding up of a company, debenture holder secured by a specific charge is in the highest
ranking class of creditors. Where there are a number of specific charges on the same property,
their priority is determined by the general rules relating to priority of charges.

(b) Floating Charge

A floating charge is an equitable charge which does not fasten on any ascertained or definite
property and as such can deal with any of its assets in the ordinary course of business.

Lord Gower defined a floating charge as “a charge which floats like a cloud over the whole
assets from time to time falling within the generic description”.

The consent of the debenture holders is not necessary for the company to deal with its assets.

Characteristics of a floating charge

The characteristics of a floating charge have been ably stated by Romer in Re: Yorkshire Wool
Combers Association Ltd (1903) that: -
(i) It is a charge on a class of assets present and future.
(ii) The class is one which changes from time to time in the ordinary course of the company’s
business.
(iii) Is contemplated by the charge that, until some event occurs which causes the charge to
crystallize, the company may use the assets charged in the ordinary course of its business.

Distinction between Fixed and Floating Charge

“A specific/fixed charge is one that fastens on ascertained and definite property or property
capable of being ascertained and defined; a floating charge on the other hand is ambulatory and
shifting in its nature, hovering over and so to speak floating with the property which it is
intended to affect, until some event occurs or some act is done which causes it to settle and
fasten on the subject of the charge within its reach and grasp”, according to Illingworth vs.
House worth (1904).

Crystallization of Floating Charges

A floating charge may crystallize or become fixed in any of the following ways:-
(i) When the company ceases to carry on business.
(ii) When the company defaults and the debenture holders take steps to enforce their
security, either by appointing a receiver or applying to court to do so.

Case Law: Government Stock and Other Securities vs. Manila Railway Co. (1897)
The debentures created a floating charge. After three months, interest become due, but the
debenture holders took no steps. The company then made a mortgage of a specific part of its
property. The House of Lords held that the mortgage has no priority. It was observed that “it is
 COMPANY LAW BBM 400 CLASS NOTES 2017-2018

of essence of floating charge that it remains dormant until the undertaking charged ceases to be a
going concern, or until the person in whose favor the charge is created intervenes. As long as he
does not intervene the business will be carried on. Mere default does not cause crystallization
and that the debenture holders must intervene by taking steps to enforce their security”.

(iii) When the company goes into liquidation.

(iv) When the receiver is appointed.

Priority of Charges

The priority between charges is as follows:-

(a) Legal fixed charges rank according to their order of creation.
(b) If an equitable fixed charge (i.e. an informal mortgage created by a deposit of title deeds or share
certificate to the lender) is created first and a legal charge over the same property is created later,
the legal charge takes priority over the equitable charge.
(c) A floating charge will be postponed to a later fixed charge over the same property.

a. The floating charge would however have priority over the fixed charge if: -
ii. The floating charge contained a clause prohibiting the company from creating fixed
charges with priority over it.
iii. The holder of a fixed charge actually knew about the prohibition.

(d) If two floating charges are created over the general assets of the company, they will rank in the
order of creation.
(e) If a company creates a floating charge over a particular kind of assets, for example book debts,
the charge will rank before an existing floating charge over the general assets

MAJORITY RULE AND MINORITY PRORECTION ( the rule in foss vs harbottle )

The origins of the English rule in Foss v. Harbottle

The origin of what is now known in English law as the rule in Foss v. Harbottle can be traced to
some early-nineteenth-century decisions in the law of partnership. In the previous century, it had
been established that the Chancellor would not interfere in the internal disputes of a partnership
‘except with a view to a dissolution’. Since harmony between partners is not to be had by decree,
equity would not act in vain. In the early nineteenth century, however, the Chancellors relented
from theirprevious refusal to intervene except with a view to dissolution

Majority rule and minority protection

The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in
law for any wrongs done to the corporation and that if an action is to be brought in respect of
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

such losses, it must be brought either by the corporation itself (through management) or by way
of a derivative action

"The rule (in Foss v. Harbottle) is the consequence of the fact that a corporation is a separate
legal entity. Other consequences are limited liability and limited rights. The company is liable for
its contracts and torts; the shareholder has no such liability. The company acquires causes of
action for breaches of contract and for torts which damage the company. No cause of action vests
in the shareholders When the shareholder acquires a share he accepts the fact that the value of his
investment follows the fortunes of the company and that he can only exercise his influence over
the fortunes of the company by the exercise of his voting rights in general meeting. The law
confers on him the right to ensure that the company observes the limitations of its memorandum
of association and the right to ensure that other shareholders observe the rule, imposed on them
by the articles of association. If it is right that the law has conferred or should in certain restricted
circumstances confer further rights on a shareholder the scope and consequences of such further
rights require careful consideration."

"If the corporation is a legal person separate from its members, it follows that for a wrong done
to it the corporation itself is the only proper plaintiff.

The general rule in company law is that the wishes of the majority will prevail.

The rule in foss vs harbottle

When a wrong is done to a company it is for the company to decide what action to take

The courts will not usually hear an action brought by a member or members of the company

Reasons for the rule

The proper plaintiff principle

The company is the proper plaintiff (pursue ) in any action to right a wrong against it i the

Internal management principle

The courts will not interfere with the internal management of a company it is for the company to
decide whether it is being properly managed

irregularities principle

A member cannot sue to rectify a mere informality where the act would be within the
company’s powers if done properly and the wishes of the majority are clear
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

b) problems with the rule

The majority of the shares belong to the directors. The majority are in the best position to
prejudice the company- then decide that the company will not bring an action against them .

There is thus a need for minority protection –enforcement of minority rights fall into three main
categories

2. Exceptions to the rule in foss vs. harbottle

(b) The Recognized Exceptions

Edwards v Halliwell identified four exceptions:

1. -Fraud on the minority by wrongdoers in control

2. -Invasion of members personal rights
3. -Ultra vires acts
4. -Material procedural irregularities
Remedies

The court has wide discretion

1. -it can grant any order it thinks fitting in the circumstances. In particular, it can:
2. -regulate the future affairs of the company.
3. -order the company to bring civil proceedings.
4. -order the purchase of the aggrieved shareholder’s shares. (The most common remedy)
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Company management

A company being an artificial person cannot manage its own affairs and that the articles of
association of every registered company have provisions regarding the delegation of powers
pertaining to the company’s management. Since companies do not have a physical existence, no
soul nor a body of its own, it cannot act by itself, but rather through human beings who act as
agents, that is, directors.

DIRECTORS

“The directors are a body to whom is delegated the duty of managing the general affairs of the
company. A corporate body can only act through agents and it is of course the duty of those
agents so to act best to promote the interest of the corporation whose affairs they are
conducting”.

Directors are said to be the brain of the company and occupies a pivotal position in the structure
of the company, and since the directors are the brains of the company; it is only when the brain
functions that the corporation is said to function.

Board of Directors is given the powers to manage and run the company. Cap. 486 together with
the articles bestows powers to directors to manage. Members have no right to interfere with such
management; in fact if members interfere; the directors have a right to bring an action against the
members to restrain them.

The directors have an express right to manage the company, but if the management want to
interfere with the Board, then they have to convene an extra ordinary general meeting and alter
the constitution of the company to allow them interfere.

Case Law: Automatic Sef Syndicate Ltd vs. Cunningham (1906)

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

By its articles of association, the general management and control of the company was vested in
the directors, subject to regulations as might from time to time be made by extra ordinary
resolutions. In particular, the articles of association conferred on the directors the power to sell or
otherwise deal with any property of the company on such terms as they may consider fit. The
members at a general meeting passed an ordinary resolution forcing the directors to sell certain
property of the company on certain terms. The directors refused to the effect that it was directive
and therefore declined to sell.

It was held that the company’s constitution conferred upon directors the general powers to
manage the company, and in particular to decide when to sell the property of the company and
on what terms.

Notwithstanding the fact that powers to manage the company have been given to the directors,
the members have a right to intervene and take away such management: -

(a) Where the directors are improperly using the name of the co. in litigation.

(b) If the B.O.D. itself cannot function due to one reason or another the members may
intervene.

There were two members who were also directors of the company. A conflict arose which
rendered them impossible to even communicate face to face and the only communication was by
way of memos. One member went to court petitioning for winding up under the clause “just and
equitable”. The court agreed with the application, but it was observed that:-

“If it had been possible to have separate members from these two, the court have ordered that
they take up the management until a new team comes in”.

In another instance, (Foster vs. Foster), there was a disagreement and as a result there was a
deadlock in voting. The court said that under those circumstances where the directors are unable
to exercise powers conferred upon them by the company’s articles, the company/members in a
general meeting would take over the management and appoint a new team.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(c) Where the directors have acted ultra vires the powers granted to them or the company
itself: - The management can ratify that which the directors did in excess of their powers. For
example, if the articles might have conferred upon them some powers but they have exceeded the
powers; in that eventuality, the management can take away those powers.

Secondly, the company did not have the kind of powers the directors exercised, and therefore did
not give them powers. In this case the members can intervene and remove those directors

Meaning of a Director

Under Section 2 of the Act, “A director, includes any person occupying the position of director
by whatever name called”.

“A director may be identified by the functions the person performs even though he may be
named differently.

A director may therefore be defined as, “a person having control over the direction, conduct,
management or superintendence of the affairs of a company”.

What is the position of a person occupying the position of a director but is not duly appointed, is
he still a director?

A person, who acts as a director performs the functions of a director although not duly appointed
and occupies the position of a director, is a director. This is supported by the phrase “by
whatever name called”. This does not limit the meaning. Infact it extends its meaning to include
a person who performs the functions as a director though called by another name.

Section 181 also supports the above case in that if a person is not validly appointed as a director,
but acts as one and the appointment is later on discovered to be defective, anything that he has
done is valid notwithstanding an irregularity in appointment of such a person.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

APPOINTMENT OF DIRECTORS

Section 177 provides that every company shall have at lest two directors while every private
companies and every other company registered before 1962 shall have at least one director.

Under Table A, Article 75, the actual number of the directors would initially be decided upon by
the subscribers of the memorandum (promoters) and until so determined, all of them shall be the
first directors.

Table A, Article 94 empowers the company from time to time by ordinary resolution to increase
or reduce the number of its directors.

The following are the various stages of appointment of directors:-

(a) The first directors of the company.

(b) Subsequent appointment of directors.

(c) Appointment to fill a vacancy.

(d) Appointment of alternate director.

(e) Appointment of Managing Director.

(a) First Directors

Article 75 provides that the names of the first directors shall be decided in writing by the
subscribers of the memorandum of association or a majority of them.

They are usually appointed by promoters of company and normally their names are indicated in
the articles of association.

If promoters do not appoint the first director, then the tradition has been to follow the provision
in the Articles 75 of Table A, that is, people who subscribe to the memorandum of association
will become and be regarded as the first directors, until proper appointment is done. They shall
hold office until the directors are appointed at Annual General Meeting.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The articles may also provide that both the number and the names of the first directors shall be
determined in writing by the subscribers to memorandum.

(b) Subsequent Directors

The subsequent directors are appointed by the members in general meeting beginning from the
first annual general meeting at which all the first directors retire from office and the members are
given the first opportunity to elect directors of their own choice. The retiring directors are
however eligible for election under Article 91.

At the second annual general meeting, one third of the directors are to retire from office, the ones
to retire being the ones who have been longest in office since their last election.

As between persons who became directors on the same day, those to retire shall be agreed upon
amongst themselves otherwise it shall be determined by lot. One third of the board shall
thereafter retire by rotation annually.

(c) Casual Appointment/vacancy

Articles 95 permits the a board of directors to fill a vacancy in the board or to get an additional
director to join the board for practical reasons provided that the appointment does not cause the
number of directors to exceed the limit imposed by the articles. The person appointed this way
will hold office until the next annual general meeting. He will then be eligible for re-election,
but his appointment will not be taken into account when deciding on the directors who shall
retire from office.

(d) Alternate Directors

An alternate director is one appointed by another director to temporarily represent him during his
absence or inability in the Board of Directors. This power can be exercised only if it is permitted
in the articles of association. The common law rule “delegatus non potest delegare”, states that a
director has no authority to appoint an alternate director.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

However where the article of association is silent about the appointment of alternate director, a
director can still appoint an alternate director.

When a director appoints an alternate director, he may indicate the powers which such an
alternate director may exercise on his behalf and those which he may not, for example, he may
participate in Board meetings and sign documents but not more than that.

He cannot hold office for a period longer than that permissible to the original director in whose
place he has been appointed.

The alternate director may be another director or an outsider. If he is a director, he would have
the vote of the absentee in addition to his own vote.

(e) The Managing Director

A Managing Director is part of the subsequent directors. It is governed by company practice

because it is always a company’s affair. The Act itself does not contain direct provisions on the
appointment of a Managing Director. It is found in the articles of association, not the Act.

A Managing Director who by virtue of agreement with the company, or of a resolution passed by
the company in a general meeting, or by virtue of its memorandum or articles, is entrusted with
substantial powers of management.

A director so appointed shall not whilst holding that office be subject to retirement by rotation
but his appointment shall be automatically terminated if he ceases due to any cause, to be a
director.

A Managing Director like any director can be removed at any time from office by a general
meeting irrespective of the fact that this duration of his appointment is not yet over. But where
his services have been terminated in breach of his terms, he is entitled to claim compensation.

Managing Director receives compensation as may be determine by directors.

RESTRICTION ON APPOINTMENT
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

There are various restrictions which the Act imposes on appointment of directors and these
restrictions must be fulfilled for one to be appointed as director.

(1) Appointment by Articles

Section 182(1) states that a person shall not be capable of being appointed director of a company
by the articles unless, before registration of the articles, he has signed and delivered to the
registrar for registration a consent in wanting to act as a director and either: -

(a) signed the memorandum for a number of shares not less than his qualification shares, or

(b) taken from the company and paid or agreed to pay for his qualification shares

(c) Signed and delivered to the registrar for the registration, an undertaking in writing to take
from the company and pay for his qualification shares.

These provisions do not apply to: -

(a) A company without share capital.

(b) A private company.

(c) A company which was a private company before becoming a public company.

(2) Qualification Shares

Under Section 183 (1), it shall be the duty of every director who is by the articles of the company
required to hold a specified share qualification and who is not qualified to obtain his
qualification within 2 months after his appointment or within the shorter time as fixed by the
articles.

Section 183(3) provides that the director shall vacate office if he fails to obtain his share
qualification or ceases to hold the required number of shares

Case: R vs. Camps (1962) Court of Appeal for E.A.

The respondent, in his capacity as a director of a company, had been charged with several
offences under the companies Act. Although the directors of the company had under article 96
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

of the company’s articles of association duly appointed him to be the director and he had acted as
such, he never acquired the required share qualification but in a statutory return, subsequent to
his appointment, he was shown as a director which was fixed at one fully paid up share in his
own right.

Article 87 which agrees with the terms of section 183(1) of the Act provided that the office of the
director shall be vacated if a director ceased to hold the number of shares required to qualify him
for office or fails to acquire the same within 2 months after his appointment.

The court held that as the respondent had never possessed or acquired his qualifying share, his
appointment was invalid and that there were no cases for him to answer.

It was also held that the respondent was never even a de facto director and that in any event a de
facto director was not criminally liable as a director under the Company’s Act.

Against that decision, the Attorney General appealed to the High Court and the case was
dismissed but on further appeal, the High Court held that: -

(i) The word “director” in the Company’s Act includes a de facto director.

(ii) The respondent was duly and validly appointed a de jure director but he ceased to be
a de jure director two months later as he failed to acquire his share qualification within that time.

(iii) If the respondent acted as a director after the expiration of two months from his
appointment, he was then a de facto director and he was a director for the purpose of those
sections of the Company’s Act which it was alleged he had contravened.

“Appeal allowed, acquittal set aside”.

Therefore if a director does not vacate office but continues to act as a director, he ceases to be a
de jure director and becomes a de facto director. Under Section 183(4), a de facto director is
incapable of being reappointed director of the company until he has obtained his qualification
shares and under Section 183(5), he is liable to a fine not exceeding one hundred shilling for
everyday that he acts as a director of the company.

(3) Age Limit

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Section 186 provides that no person shall be capable of being appointed a director if at the time
of his appointment: -

(a) He has not attained the age of 21.

(b) He has attained the age of 70.

This provision does not apply if the company’s articles provide otherwise or a special notice of
the resolution was given to the company.

Section 142 defines “special notice” as a notice given to the company not less than 28 days
before the meeting at which the relevant resolutions are to be moved.

(4) Undischarged Bankrupts

Section 188 provides that if a person who has been declared bankrupt or insolvent by a
competent court and who has not received his discharge, acts as a director of any company, shall
be liable to imprisonment for a term not exceeding 2 years or to a fine not exceeding Sh. 10,000
or both.

(5) Fraudulent Persons

Section 189(1) empowers the court to make an order restraining a person from being appointed,
or act as a company’s director for a period not exceeding 5 years if: -

(a) The person is convicted of any offence in connection with the promotion, formation or
management of the company, or

(b) in course of winding up, it appears that the person had been guilty of fraudulent trading.

(6) Individual Voting

Section 184(1) provides that the appointment of directors of a company which is not a private
company is to be voted on individually, unless a motion for the appointment of the two or more
persons as directors by a single resolution was agreed upon by the meeting without any vote
against it.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

A resolution moved in contravention of this provision is void under Section 184(2) even if no
objection is moved. The aim of this provision is to prevent a company’s members being
virtually forced to vote for directors who they do not want.

QUALIFICATIONS OF A DIRECTOR

There is no requirement in the Act that a director must hold shares, but more frequently, the
articles provides that no person shall act as a director unless he holds certain number of shares or
stock.

If the articles of association contain a provision that the qualification of a director shall be
holding a specified number of shares, then Section 183 provides that:-

(i) Each director must acquire and retain such qualification shares within two months after his
appointment or such a shorter time as may be fixed by Articles.

(ii) The warrant payable to bearer will not count for the purpose of qualification shares.

(iii) If he fails to acquire qualification shares within 2 months he automatically ceases to be a

director.

(iv) He cannot be reappointed director unless he has obtained his qualification shares.

(v) If he acts as a director after expiry of 2 months without taking qualification shares, he is
liable to a fine up to Sh. 100 for everyday until he stops acting.

Retirement Age

Every director is required to retire from office shortly after 70 years and no one should be
reappointed after that age-but this does not apply where the appointment is made or approved in
Annual General Meeting after a special notice has been given.

It does not apply to private companies unless they are subsidiaries of public company. The act
also fixes the minimum age and states that no person is capable of being appointed as a director
if at the time of his appointment, he has not reached or attained the age of 21.

Bankruptcy also disqualifies any person from holding office as a director.

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Effects of Disqualification

Whether a director holds qualification shares or not, the company will be bound to third parties
for the acts of such directors until the effect in appointment or qualification is disclosed.

POSITION OF DIRECTORS

(a) Directors as agents

The directors are elected representatives of shareholders. They are in the eyes of law agents of
the company and the general principles of agency regulate in most cases, the relationship
between the company and its directors.

The directors are more than agents- they have in certain matters, independent powers. They are
not bound to consult shareholders in all maters. Power vested with directors, they and they alone
can exercise these powers.

(b) Directors are not personally liable as agents

Where the directors of a company act on its behalf, they are personally liable for contracts which
they make provided they act within the scope of their authority and they do not make contracts in
their personal names.

It was held that “whenever an agent is liable, directors would be liable, where the principal
would be liable; the liability is the liability of the company”.

The directors are personally liable when:-

(i) The contract is in their names

(ii) They use the company name incorrectly e.g. by omitting the words Ltd & Plv. Ltd.

(iii) The contract is signed in such a way that it is not clear whether it is the agent or
principal who signed it.

(iv) They exceed the powers given to them by memorandum and articles of association.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(c) Directors as Employees

Although directors are agents of the company, they are not employees or servants of the
company for being entitled to privileges and benefits which are granted under the company’s Act
to employees but there is nothing to prevent a director from being a servant of the company
under a special contract of service, which he may enter into with the company.

Palmer’s statement gives an insight into this matter. He states that, “Directors are not as such
employees of the company or employed by the company nor they are servants of the company or
members of its staff. A director can however, hold salaried employment or an office in addition
to that of his directorship which may for this purpose make him an employee or servant and in
such a case, he would enjoy any right given to employees as such but his directorship and his
rights through that directorship are quite separate from his rights as employee”.

(d) Directors as Trustees

Directors are treated as trustees of the company’s property and money and of the powers
entrusted to them.

Directors are the trustees of the company’s money and property in the sense that they must
account for all the company’s money and property to refund to the company any of its money or
property which have been impropriety paid, that is, not to pay dividends out of capital. Company
property includes confidential information and beneficial contracts meant for the company.

The following points in regard to confidential information are worth noting:-

(i) The information itself must be confidential- nothing public.

(ii) The information must have been communicated to the directors or it has reached
them in circumstances obliging them to treat it as confidential.

(iii) The directors must have made an unauthorized use of that information, for example,
converting it to their own use.

The court went a length to explain and define the scope of directors’ duties with emphasis on the
protection of company’s property:-
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(i) A director as a fiduciary is under an obligation not to profit himself personally from
the property of the company. More so in a situation where his interest is likely to conflict with
those of the company to which he is appointed a director.

(ii) Directors as fiduciaries, if they use the property of the company thereby making
profits, must be honest enough to account for this profit to the company.

“Men who assume the complete control of the company’s business must remember that they are
bound to protect the property of the company. They are not at liberty to sacrifice the interests
which they are bound to protect, and while ostensibly acting for the company, divert in their own
favor business which should properly belong to the company they represent”.

Incase director s are guilty of a distinct breach of duty of which they took to secure the contract
which was meant for the company, whatever benefit they must have obtained must be regarded
as being held by them on behalf of the company.

Directors are however not trustees in the real sense of the word because they are not vested with
the ownership of the company’s property. It is only as regards some of their obligations to the
company and certain powers that they are regarded as trustees of the company.

The directors are really only quasi trustees because:

(i) They are not vested with the ownership of the company’s property.

(ii) Their functions are not the same as those of trustees.

(iii) Their duties of care are not as onerous as those of trustees.

True position of directors according to Jessel, M.R. in Forest of Dean Coal Mining Company,
observed that, “Directors have sometimes been called as trustees or commercial trustees and
sometimes they have been called managing partners, it does not matters much 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 benefits of themselves and of all the
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

shareholders. They stand in a fiduciary position towards the company in respect of their powers
and capital under their control”.

DIRECTORS REMUNERATION

For technical reasons the directors are not regarded as employees of the company of which they
are directors. They therefore have no right to be paid their services unless there is a provision for
payment in the articles.

Table A, Article 76 provides that “remuneration of the directors shall from time to time be
determined by the company in general meeting”.

Provided the resolution has been passed, the remuneration is payable whether profits are earned
or not.

The remuneration payable to the directors of a company is determined by the articles of the
company or by a resolution passed by the company in general meeting.

The 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 in writing, for example, articles or by shareholders at a properly convened meeting.

If directors are not entitled to remuneration and they pay themselves remuneration out of
company’s funds, they may be compelled to restore it even though they acted in good faith and
honestly believe that the payment was permissible.

Directors may be paid traveling, hotel and other expenses properly incurred by them in attending
company’s business. In the absence of such a provision, a salaried director is not entitled to
expenses incurred by him as they are usually covered by his remuneration.

The remuneration payable to director is a debt from the company, and a director may sue the
company for non-payment.

In case of absence or inadequacy of profits, it can be paid out of profits with approval of the
company.

Powers of Directors
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The powers of directors are usually set out in the articles, and quite frequently there is a clause
entrusting the management of the company’s affairs in the hands of directors and possess the
following powers which enables them to carry out their functions:-

(a) To enter into contracts on behalf of the company.

(b) To engage or dismiss employees.

The directors’ powers may be restricted by the articles, for instance, some certain acts shall not
be done by them unless they first obtain the sanction of the company in general meeting.

Where such provisions exist in the articles, failure to obtain the sanction may render the
company not bound by the acts and the directors then become personally liable to the third
parties.

If a director has an interest in any contract which is being considered by the company he must
usually declare his interest when the contract is being discussed.

A director is said to have declared 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.

Disclosure is only valid if it is made to sufficient number of directors who are themselves not
interested in the contract. In a case of three directors, if two are interested and declare to one
who is not, it is invalid. This is because the directors who are interested are incapable of voting
in the issue and since they are a majority, there is no quorum to which the disclosure is made.
Quorum in this case means sufficient number of directors who are not interested in the contract.

Legal effect for directors for non-disclosure of interest

The consequences are two fold:-

(i) Statutory consequences.

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(ii) Common Law consequences.

At common law, the contract itself becomes avoidable at the option of the company, that is, the
company can decide to continue with the contract or not or repudiate. If the director in question
has made secret profits on that contract, he must refund the same to the company.

In statutory consequences under Section 200(4), such directors shall be liable to a fine not
exceeding Sh. 2,000.

ASSOCIATE DIRECTORS

A company may appoint one or some of its employees to its board of directors. Such
appointment is primarily intended to provide employees with a forum where they can express
their views on the company’s operations, programs or policies. Employees who are appointed
are usually called “associate directors”.

CORPORATE DIRECTOR

Although the statutory restrictions on appointment of directors tend to suggest that only a natural
person can be appointed as director, in practice it is not so. Holding companies appoint
themselves directors of subsidiary companies with a view to securing and maintaining complete
control of the subsidiaries. This has been made possible by the fact that there is no provision in
the Act which prohibits the practice.

The body corporate would appoint a natural person whom it has formally authorized to attend
board meetings on its behalf.

DISQUALIFICATION OF DIRECTOR

Table A, Article 88 provides that the office of director shall be vacated if the director: -

(i) He has ceased to be a director by virtue of Section 183, that is, he has failed to take-up
prescribed shares within two months of his appointment or under Section 186 which lays down
the minimum and the max age for direct

i. He becomes bankrupt.
ii. He becomes prohibited from being a director by reason of any order made
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

iii. Under Section 189 (restraining fraudulent persons from managing a company).
iv. He becomes of unsound mind
v. He resigns his office by notice in writing to the company.
vi. He is absent without permission for more than 6 months from meetings of directors
held during that period..

VACATION/REMOVAL OF DIRECTOR

A director may leave office either by vacation or by removal.

(a) Vacation

This is the voluntary quitting by a director. It can happen any time during the directors tenure of
office for any reason such as ill health, age, agreement with the Board of Directors, bankruptcy,
ceases to hold qualification shares, of unsound mind, is convicted by the court of an offence
involving moral turpitude absents himself from meetings, restrained by the court from being a
director and so on.

(b) Removal of Directors

Removal means being forced to quit the position of a director. A director can be removed by:-

(i) Operation of law

(ii) Company itself

If a director is in breach of his statutory qualification, the consequence is that the law operates
immediately to remove him. Secondly, when the company goes into liquidation, the directors
ceases to hold office.

Section 185(1) provides that a company may by ordinary resolution remove a director before
expiration of his period of office, notwithstanding anything in the articles or in any agreement
between him and the company. A company may remove a director by ordinary resolution after
giving a notice.

It is vital to note that Section 185 requires that the company observe the rules of natural justice
which insists that a man shall not be condemned unheard. The company must send a copy to the
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

director concerned who is entitled to speak in his defense. A removed director may claim
compensation for the loss of office.

Compensation for Removal

Section 185(6) provides that nothing in the section shall be taken as depriving a removed director
of compensation or damages payable to him in respect of termination of his appointment as a
director.

This provision would enable a managing director to sue the company for damages for wrongful
dismissal if the effect of his removal as a director was to prematurely terminate his appointment
and was inconsistent with the contract.

COMPENSATION FOR LOSS OF OFFICE

(a) Section 192(1) makes it unlawful for a company to make to a director any payment by way
of compensation for loss of office, or consideration for or in connection with his retirement
unless the particulars of the proposed payment are disclosed to the members and approved by the
company in a general meeting. This is necessary because the directors when negotiating the
terms of the proposed settlement would be dealing with one of their own and might as a
consequence give inadequate consideration to the interests of the company.

(b) Section 193 provides that it shall not be lawful to transfer any part of the undertaking or
property for the purpose of making any payment to a director by way of compensation for loss of
office or on retirement unless particulars are disclosed to the members of the company and
approved by the company in a general meeting.

(c) If a payment is made to a director as compensation for loss of office or on his retirement,
he must take reasonable steps to ensure that the particulars of the proposed payment are included
in or sent with any notice of the offer given to the share holders. If this is not done, the director
holds the payment on trust for the persons who have sold their shares as a result of the offer.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(d) Section 194 imposes a duty on directors to disclose payments for loss of office, made in
connection with transfer of shares in a company. This section provides that such payment should
be proposed with a transfer as a result of:-

(i) An offer made to the general body of shareholders.

(ii) An offer made by or on behalf of some other body corporate with a view to the company
becoming its subsidiary or a subsidiary of its holding company.

(iii)An offer made by or on behalf of an individual with a view to his obtaining the right to
exercise or control of not less than 1/3 rd of the voting powers at the general
meeting.

Loans to Directors

Section 191(1) renders unlawful any loan made by a company to a director. It is also unlawful
for the company to guarantee or secure a loan given to a director by any other person. These
restrictions do not apply to:-

(i) A private company, or

(ii) A subsidiary company whose director is its holding company or

(i) Payments made to a director to meet expenses incurred or to be incurred for the
purpose of the company, or to enable him to perform his duties, or

(ii) A loan by a money lending company of a bank in ordinary course of business.

Loans to them must be disclosed in the account laid before the general meeting.

DUTIES OF DIRECTORS

The duties of director are usually considered under two broad categories, namely: -
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(i) Duties of care, skills and diligence.

(ii) Fiduciary duties.

(1) Duty of Care, Skill and Diligence

Directors should 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. The directors are
not liable for mere errors of judgment.

Case Law: Brazilian Rubber Plantation Estates Ltd (1911)

In this case, the directors of the company decided that the company should invest in some rubber
estates in Brazil. They accordingly issued a prospectus inviting members of the public to come
forward and subscribe for the shares and debentures of the company, the purpose of invitation
being to raise money from the subscription in order to finance the rubber estate project.

In the prospectus they declared to the prospective investors that the project in question for which
subscription were being invited was viable or had potential success. Soon after subscription the
project turned out to be a failure and the company was wound up.

The subscribers brought an action against the directors for inserting a misleading/false statement
in the prospectus upon which they had relied or acted upon to their detriment. In their defense,
the directors claimed that they had acted in good faith.

It was held that the directors were not liable because they had made an error of judgment about
viability of the project and in making the judgment, they had applied the care and skill that men
of experience were expected to apply.

Where a director makes an error of judgment, he will be absolved from any liability so long as
the judgment he made or decision he took and considering all surrounding circumstances came
from past experiences and knowledge which he had; but if a director fails to exercise due care
expected of him in the exercise of his duties, he is guilty of negligence.

Standard of Care
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The standard of care, skill and diligence depends upon the nature of the company’s business and
the circumstances of the case.

The standard of care depends upon:-

(i) The type and nature of work.

(ii) Division of powers between directors and other officers.

(iii) General usages and customs in that type of business.

(iv) Whether directors work gratuitously or remuneratively.

Case Law: City Equitable Fire Insurance Co. Ltd

The directors of insurance company left the management of the company’s affairs almost
entirely in the hands of B, the managing director. Owing to B’s fraud, a large amount of
company’s assets disappeared. B and the firm in which he was a partner had taken a huge loan
from the company and the cash at the bank or in hand included £7,300 in the hands of the
company’s stockbrokers, in which B was a partner. The directors never inquired as to how these
items were made up.

It was held that the directors were negligent, though the articles protected them from liability.
Romer therefore observed that “in ascertaining the duties of a director, it is necessary to consider
the nature of the company’s business and the manner in which the work of the company carried
out amongst the directors and other company officials”.

In Dovey vs. Cory, a director was held not liable for negligence merely because he had failed to
verify false information regarding the company’s accounts which he had been given by the
company’s manager and managing director.

The court stated, “The business cannot be carried on upon principles of mistrust. Men in
responsible positions must be trusted by those above them, as well as by those below them until
there is reason to distrust them. We agree that care and prudence do not involve distrust”.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(2) Fiduciary Duties

As fiduciaries, the directors must: -

(a) Exercise their powers honestly and bonafide for the benefit of the company as a whole.
But if for example the power to issue further shares is exercised by the directors, not for the
benefit of the company but simply and solely for their personal aggrandizement and to the
detrimental of the company, the court will interfere and prevent the directors from doing so.

(ii) Not to place themselves in a position in which there is a conflict between their duties
to the company and their personal interests. They must not make any secret profit out of their
position and if they do, they have to account for it to the company.

Case Law: Cook vs. Deek (1916)

Three directors of a company obtained a contract in their own names, under the circumstances
which made it breach of trust by them, and constituted themselves trustees of the contract of the
company. By their votes as holders of ¾th of the shares, they induced the company to pass a
resolution declaring that it had no interest in the contract.

It was held the directors were liable to account to the company for the profit they made on the
contract as in equity, it belonged to the company.

(3) Duty of Disclosure

Except with the consent of Board of Directors, a director or his relative or any firm in which he
is a member or a director, shall not enter into any contract with the company for the sale,
purchase or supply of goods. Even in case of urgent necessity contracts, consent must be
obtained. It is the duty of the director to disclose to the Board the nature of his interest in any
contract or arrangement entered into

(4) Duty to act honestly

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

A director must not act in manner trying to make personal gain out of a transaction in the name
of the company.

(5) Meetings of the Board

A director is not bound to attend all meetings, but he should obviously attend as many as
possible.

(6) Delegation of Authority

A director has duty not to delegate his functions except to the extent authorized by the act or the
constitution of the company.

Can a director be liable for the mistakes of his colleagues?

A director absented himself from Board meetings for 20 years and during this period, his
colleagues paid dividends out of capital. The shareholders brought an action against this
particular director arguing that by absenting himself, he was acting negligently because had he
been attending the meetings, he would have discovered that dividends were being paid out of
capital.

It was held that this director was not negligent in absenting himself unless there were
circumstances warranting non-abstention.

Exceptions to this Rule

Whether a director must attend a Board meeting or not is a question of fact. His compulsory
attendance depends on the exigencies of the company’s life. If he is a member of committee of
the Board, he must attend or is reasonable expected to attend meetings of that committee to
deliberate on issues at hand because by being placed in that committee, his input is considered
important.

If a director is so expected to attend but he fails, then such a director is negligent.

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Can a director be allowed to delegate?

The directors are bound by the principle “delegates no potest delegata”, that is, a delegate cannot
sub-delegate- even then, the exigencies of business allow a director at times to delegate his
duties, though he cannot delegate all his duties.

However, at times a director can rely on other officers in the company to perform those duties.
He shall not be held negligent in such cases once he is satisfied that the various officers of the
company are manning those duties property, and he shall not be held liable for negligence in
such cases.

LIABILITY OF DIRECTORS

(1) Liability to Outsiders

Directors are not personally liable to outsiders if they act within the scope and powers vested in
them. The general rule is that wherever an agent is liable, those directors would be liable, but
where liability would attach to the principal only, the liability is the liability of the company.

The directors would be personally liable to third parties in the following cases:-

(i) They contract with outsiders in their own personal capacity.

(ii) They contract as agents of undisclosed principal.

(iii) When the company is ultra vires the company.

In default of statutory duties, directors shall be personally liable to third in the following cases:-

(i) Misstatement in prospectus

(ii) Irregular allotment

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(iii) Failure to repay application money if the minimum subscription is not

subscribed.

(2) Liability to the Company

The directors shall be liable to the company in the following cases:-

(i) Where they have acted ultra vires the company, for example, they have applied
the funds of the company to objects not specified in the memorandum or when they pay
dividends out of capital.

(ii) When they have acted negligently –negligence may give rise to liability, there
need not be fraud.

(iii) Where there is a breach of trust resulting in a loss to the company, they are bound
to make good the loss.

(iv) Misfeance: - Willful misconduct or willful negligence.

(3) Criminal Liabilities

The act provides penalties by way of fine or imprisonment particularly when directors omit to
comply with or contravene certain provisions of the Act
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Group accounts, Group accounts and Audit

In this chapter we shall consider the main underlying principle of company law in regard to a
company’s accounts, which is to achieve disclosure of a company’s financial affairs for the
benefit of those who have invested in it and those who do business with it. The purpose of an
audit by independent accountants is to add credibility to the financial statements forming part of
the annual accounts and to ensure that they comply with regulations and give a true and fair view
though small companies may take exemption from audit.

Books of accounts

Under the Companies Act 2015 the directors of a company must keep adequate accounting
records sufficient to show and explain the company’s transactions and to disclose with
reasonable accuracy, at any time throughout the financial year, the financial position of the
company at that time . They must also enable the directors to ensure that any accounts required
to be prepared comply with the requirements of the Companies Act 2015 and the IAS Regulation

In addition to this, it goes on to state that the records must contain (a) entries from day to day of
all sums of money received and expended with details of transactions; and (b) a record of assets
and liabilities

Equally, under s 386(4) a company dealing in goods must keep statements of stock held at the
end of the financial year, and of stocktaking from which the year-end statement is made up and
of all goods sold and purchased, other than retail trade transactions, showing goods, buyers and
sellers, so as to allow identification.

Under s 388(1) accounting records must be kept at its registered office or such other place as the
directors think fit, and must be open for inspection by the officers of the company nder s 387(1)
failure to keep accounting records as required is an offence for which officers of the company in
default are liable. The offence is punishable with a maximum of two years’ imprisonment and/or
a fine (s 387(3)).
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

In addition, under s 388(1) if a company fails to comply with s 388(1) to (3) of the Act, an
offence is committed by every officer of the company who is in default.

Group Accounts

If a company has subsidiaries, s the Companies Act provides that group accounts showing the
state of affairs and profit or loss of the company and the subsidiaries must be prepared. The act
goes on to provide details of the requirements for Companies group accounts, while s deals with
IAS groups accounts.

Section 404(1) states that Companies Act group accounts must comprise:

a) a consolidated balance sheet dealing with the state of affairs of the parent company and its
subsidiary undertakings; and

(b) a consolidated profit and loss account dealing with the profit or loss of the parent company
and its subsidiary undertakings. Section 404(2) goes on to provide that the accounts must give a
true and fair view of the state of affairs as at the end of the financial year, and the profit or loss
for the financial year, of the undertakings included in the consolidation as a whole, so far as
concerns members of the company.

Section 405(1) provides that where a parent company prepares Companies Act group accounts,
all the subsidiary undertakings of the company must be included in the consolidation, subject to
the exceptions outlined in s 405(2) and (3). Section 405(2) notes that a subsidiary undertaking
may be excluded from consolidation if its inclusion is not material for the purpose of giving a
true and fair view. Additionally, under s 405(3) a subsidiary undertaking may be excluded from
consolidation where: (a) severe long-term restrictions substantially hinder the exercise of the
rights of the parent company over the assets or management of that undertaking; or (b) the
information necessary for the preparation of group accounts cannot be obtained without
disproportionate expense or undue delay; or (c) the interest of the parent company is held
exclusively with a view to subsequent resale.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Section 407 deals with the consistency of financial reporting within a group, with s 407(1)
providing that the directors of a parent company must secure that the individual accounts of:

(a) the parent company; and (b) each of its subsidiary undertakings, are all prepared using the
same financial reporting framework, except to the extent that in their opinion there are good
reasons for not doing so.

Publication of accounts and Report

A company is under a duty to circulate copies of its annual accounts and reports for each
financial year to every member of the company, every holder of the company’s debentures and
every person who is entitled to receive notice of general meetings (s 423(1)). Section 426 of the
Act though provides that a company may provide a summary financial statement instead of
copies of the accounts and reports required to be sent out in accordance with s 423.

Section 426(4) goes on to state that a summary financial statement must comply with the
requirements of s 427 (form and contents of summary financial statement: unquoted companies),
or s 428 (form and contents of summary financial statement: quoted companies).

However, if default is made in complying with any provision of s 426, 427 or 428, or of
regulations under any of those sections, an offence is committed by the company, and every
officer of the company who is in default (s 429)

If the company defaults in sending out copies of its accounts and reports, then under s 425 an
offence is committed by the company, and every officer of the company who is in default

Requirements in connection with publication of accounts

and reports

Section 433 of the Companies Act 2006 provides that every copy of a document that is published
by or on behalf of the company must state the name of the person who signed it on behalf of the
board. In the case of an unquoted company, this applies to copies of the company’s balance
sheet, and the directors’ report (s 433(2)). In the case of a quoted company, this section applies to
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

copies of the company’s balance sheet, the directors’ remuneration report, and the directors’
report (s 433(3)). If a copy is published without the required statement of the signatory’s name,
then an offence is committed under s 433(4) of the Act by the company, and every officer of the
company who is in default

Section 434 states that if a company publishes any of its statutory accounts, they must be
accompanied by the auditor’s report on those accounts (unless the company is exempt from audit
and the directors have taken advantage of that exemption). The term ‘statutory accounts

Auditors

An audit is a process which is concerned to establish and confirm confidence in the accounting
information yielded by the company’s records and systems so that an opinion may be given upon
the accounts which have been prepared by the company from those records and systems.

The audit is carried out primarily for the shareholders as a check upon the directors’ stewardship,
but it is obviously also of benefit to creditors and potential investors. The statute law relating to
auditors in terms of their appointment, rights, remuneration, removal and resignation are to be
found in the Companies Act.

Appointment of Auditors: Public Companies

To safeguard the interests of shareholders, the Kenya Companies Act provides for the
appointment of auditors. Auditors are servants of shareholders and their duty is to examine the
affairs of the company on their behalf at the end of the year and report to them what they have
found out.

Under Section 159, every company is required to appoint an auditor at each Annual General
Meeting, failure to appoint at this meeting will cause members to make an application to the
registrar to appoint the auditor.

The rule of thumb is that a retiring auditor is to be reappointed without any resolution being
passed at the meeting unless:-

(i) He is not qualified for re-appointment.

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(ii) A resolution has been passed appointing someone else instead of him.

(iii) A resolution has been passed that he shall not be re-appointed.

(iv) He has expressed in writing his unwillingness to be re-appointed.

Under Section 159(6), a casual vacancy of auditors can be filled by directors.

No person other than a retiring auditor may be appointed at an Annual General Meeting unless a
special resolution has been given and a copy of it has been sent to the retiring auditor forthwith.

The retiring auditor is usually entitled to be heard or to make representations in writing and
circulated among the members. The company must state in the notice that the representation has
been made and sent a copy of the representation to each member.

If a copy of representation is not sent, the retiring auditor may request that they may be read at
the meeting.

Disqualification for appointment as an Auditor

A person is not qualified to be an auditor under Kenya law unless:-

(i) He is a member of one or more professional bodies specified in first column of the
schedule to the Accountants Act or

(ii) He is authorized by the registrar to be appointed as having similar qualifications

obtained outside, that is, U.K., South Africa or India.

(iii) He has practiced in Kenya as an accountant before 26th May 1959.

(iv) He has been appointed and practiced before 26th May 1959 as an auditor of an
existing company.

The following persons are not qualified for appointment under Kenya laws:-

(i) An officer/servant of the company.

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(ii) A person who is a partner or in the employment of an officer or servant of the company.

(iii) A body corporate.

(iv) A person disqualified for appointment as auditor of subsidiary or holding company.

Remuneration of Auditors

It may be fixed by the company in an Annual General Meeting.

In case of auditor appointed by directors to fill on casual vacancy or registrar in the event of a
company failing to appoint one, his remuneration is governed by provisions of Section 159(7),
which empowers directors and registrars to fix such remuneration.

POSITIONS OF AUDITORS

(i) Auditors as gents of Members

Auditors are under Kenya law agents of shareholders even where they are not appointed by them
and their duties are to examine the affairs of the company on their behalf and report to them what
they have found out.

Apart from any social contract, an auditor is not an agent of the company.

His certificate on the Balance Sheet is not an acknowledgment of the company’s indebtedness.
But if he is negligent in the performance of his duties and this result in loss to the shareholders,
he is liable to the shareholders; but this liability would not extend to third parties with whom no
contractual relationship exists.

(ii) Auditors as officers of the Company

Since they are normally liable for default in the performance of their duties, they are regarded as
officers.

(iii) Auditor as Employee of the Company

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The nature of the relationship between an auditor of the company is that of a professional man
and a client, rather than that of an employer-employee, but for certain reasons, he is a company
officer.

RIGHTS AND POWERS OF AUDITORS UNDER KENYA LAW

[Section 162(4)]

(i) Right to access of books, accounts and vouchers:-

The phrase book does not limit the scope, rather includes all books whether statutory,
statistical or memorandum.

(ii) Right to attend Annual General Meetings of the company.

(iii) Right to be heard, particularly on any part of the business which concerns him as an
auditor.

DUTIES OF AUDITORSUNDER KENYA LAW

(i) They must acquaint themselves with their duties as laid down by the Act and Articles.

(ii) They must report to the members on the accounts laid down before the company in the
general meeting.

The auditor is to give information in direct and express terms. Auditors occupy a fiduciary
position in relation to the shareholders and in auditing the accounts maintained by the directors;
and they must act in the best interest of the shareholders.

(iii) Duty of care: - Auditors must be honest and must exercise reasonable skill and care;
otherwise they may be sued for damages. An auditor was described as a “watchdog but not a
blood hound”. Thus, the auditors must be alert and careful and ascertain the company’s true
position.

(iv)The auditor has a duty to advice either directors or shareholders as to what they ought to do.
He is not concerned with the policy of the company, whether the company is ill-managed or well
managed.

London and General Bank

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The greater part of the company’s capital was advanced as loans upon securities which were
insufficient and difficult to realize. For several years, the auditors pointed out to the directors the
unsatisfactory nature of these securities and the auditors report to the members on the Balance
Sheet date only stated, “The value of the asset as shown in the Balance Sheet is dependent on
realization”. On the faith of this Balance Sheet, dividends were declared, which were really out
of capital. It was held that it was the duty of the auditors to ascertain the true position of the
company and to report to the shareholders. The auditors had failed in this duty and were liable .

Liability of Auditors

They are liable for negligence, particularly in complying with the provision of the Act
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Company meetings

- Kinds of general meetings

- Notices of meetings
- Procedings at meetings
- Proxies and resolutions

Kinds of general meetings

The meetings of a company are of three kinds

1. Meeting of shareholders
- General meetings
- Class meetings
2. Meeting of directors
3. Meeting of creditors

Statutory meetings section 130

Every company limited by shares and every company limited by guarantee and having a share
capital shall within a period of not less than one month and not more than three months from the
date of the of commencement of business, hold a general meeting called statutory meeting. This
meeting is held once during the lifetime of the company.

A private company, an unlimited company or a company limited by guarantee having no share

capital, is not required to hold a statutory meeting. The notice convening this statutory meeting
must be given at least 21 days before the meeting, and must specifically state that the meeting is
a statutory meeting.

Objects of statutory Meetings

The object of this meeting is to afford the shareholder an early opportunity of obtaining material
information as to the circumstances of the company’s promotion and also its immediate
prospects.

According to Palmer, “the object of the statutory meeting is to put the shareholders of the
company at as early a date as possible in possession of all the important facts relating to the new
company”.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

The members have a statutory right to discuss any matters relating to the formation of the
company or arising out of the statutory report whether previous notice has been given or not. The
other object include: -
1) To put members of the Co. in possession of all the important facts relating to the
company, for example, what shares have been taken up, what money has been received,
what contracts have been entered into and what has been spent on preliminary expenses.
2) To provide the members an opportunity of meeting and discussing the management
methods and prospects of the company.
3) To approve the modification of the terms of any contract named in the prospectus

Statutory Report

The law accordingly requires that the directors send a report known as statutory report to every
member of the company at least 14 days before the date of the meeting. However, if all the
members entitled to attend and vote at the meeting agree, the report can be forwarded less than
14 days before the meeting.
Contents of the Statutory Report

The report contains all the necessary information relating to the informational aspect of the
company, as follows: -

1. Total shares allocated: – Distinguishing shares allocated as fully or partly paid up

otherwise than in cash, and stating shares partly paid up, the extent to which they are so
paid up and in either case the consideration for which they have been allocated.
2. Cash received: – The total amount of cash received by the company in respect of shares
allocated.
3. An abstract of receipts and payments made there out up to the date of the report, and an
account or estimate of the preliminary expenses.
4. Directors and auditors: - The memos and addresses and occupations of the directors,
auditors and managers and secretary and changes that have occurred to such names,
addresses and occupations since the date of incorporation of the company.
5. Particulars of any contract and the modification or the proposed modification of any
contract which is to be submitted for the approval of the members at the meeting.
6. The extent to which the underwriting contracts have not been carried out and reasons
therefore.
7. The arrears, if any, due on calls from any directors and the manager.
8. The particulars of any commission or brokerage paid or to be paid to any director or to
the manager in connection with the issue or sale of shares or debentures of the Co

b) ANNUAL GENERAL MEETING

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Every company must in each year hold, in addition to any other meeting, Annual General
Meeting. The notice conveying the meeting must specify that it is a notice of the Annual General
Meeting.

The first Annual General Meeting must be held within 18 months from the date of incorporation,
meaning that the Co. is not required to hold an Annual General Meeting in the year of
incorporation or in the next year..

Every Annual General Meeting must be held during business hours and on working days.

The registrar may, for any special reason, extend the time for holding any Annual General
Meeting by any given period; but no extension of time is granted for holding the first Annual
General Meeting. There should be at least one Annual General Meeting per year.

Requirements of Notice

Proper length of notice must be provided by statute or articles. Section 133 of the Act provides
that minimum notice required for company meetings, other than the adjourned meeting is as
follows: -

(a) In case of Annual General Meeting, 21 days notice in writing is given.

(b) Incase of a meeting other than AGM or a meeting of passing a special resolution, 14 days
notice in writing and 7 days incase of unlimited company. Any provision contained in the articles
shall be valid in so far as it provides for the calling of a meeting by a short notice than it is
provide by this section

Ordinary Business of Annual General Meeting

The normal business transacted at an Annual General Meeting depends upon the articles. Article
52 of Table A provides that the ordinary business of such a meeting shall be:-

(i) The declaration of dividends.

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(ii) The consideration of accounts.

(iii) The election of directors in place of the retiring.

(iv) Appointment of and fixing of the remuneration of auditors.

The proceedings at the meeting are commenced by the chairman, who usually makes a speech on
the company’s affairs and any other circumstances of interest to the company and also answers
questions from the members if any. After this, he initiates or proposes a motion relating to the
adoption of accounts and payments of dividends if any.

The next item of business deals with the proposal for election or re-election of directors. Section
184 must be complied here. This section stipulates that if single resolution is passed for election
or re-election of more than one director of a public company, such a resolution is invalid unless
resolution was previously passed that all the directors concerned can be elected by a single
composite resolution.

Thirdly, a motion regarding the remuneration of the company’s auditors is proposed. This is
obligatory.

Although the appointment of auditors must be made at this Annual General Meeting, they are
automatically re-elected, provided they are qualified without any resolution to that effect, unless:
-

(a) They have resigned, or

(b) They are unwilling to act, or

(c) A resolution has been passed expressly providing that they shall not be reappointed

(d) Other auditors in their place have been appointed.

Role of an Annual General Meeting

(i) It is only at an Annual General Meeting that shareholders can exercise any control over the
affairs of the company. They can confront the directors, their elected representatives at least once
a year.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(ii) They also get an opportunity to discuss the affairs and review the working of the company.

(iii) They can put necessary measures to protect their interests, for example, they may refuse to
re-elect a director whose actions and policy they disapprove.

(iv) They can also take up any matter of the company for discussion.

(v) Appointment of auditors is done in this meeting.

(vi) Annual accounts are also presented for consideration.

(vii)Dividends are declared

Any business which is not defined as “ordinary business” of an Annual General Meeting is
known as special business

(c) EXTRA –ORDINARY MEETING (Section 312)

A statutory meeting and an Annual General Meeting are called ordinary meetings. Every other
meeting of the company which is not the above is an “extra ordinary meeting”.

Extra ordinary meetings can be convened either by the directors whenever they think fit or on the
requisition of members of the company, under Article 49.

Where directors think fit to convene a meeting, they do so by resolution passed at a duly
convened and constituted meeting of the Board. Article 52 of Table A, states that all business
that is transacted at extra ordinary meeting shall be deemed as special.

The extra ordinary general meeting may be convened:-

(a) By Board of Directors on its own or on the requisition of the members.

(b) By the requisitionists themselves on the failure of Board of Directors to call the meeting.

Extra-ordinary meeting convened by Board of Directors:-

COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(a) On its own:– The BOD may call an extra ordinary meeting whenever some special
business is to be transacted which in the opinion of the Board of Directors, cannot be postponed
till the next Annual General Meeting.

(b) On requisition of members: - The requisite number of members of a company may ask for
an extra ordinary general meeting to be held. The Board of Directors shall proceed to call such a
meeting. The requisition for such a meeting by the members shall be signed:-

d) CLASS MEETINGS

Class meetings are generally held for obtaining the consent of a particular class of shareholders
for altering their rights and privileges or for the conversion, of one class into another, for
instance, there may be a meeting of preference shareholders for varying their rate of dividend.

Prima facie, a class meeting should be attended by the members of the class in order that the
discussion of the matter which the meeting has to consider may be carried unhampered.

The presence of a number of persons with conflicting interests would render it impossible for the
members of the class to adequately discuss the matter from their point of view.

And if the presence of the outsiders is retained in spite of the ascertained wish of the constituents
of the meeting for their exclusion, it cannot be said that a separate meeting of the class had been
fully held. But where the constituents of the meeting meet together and no one in fact raised any
objection to the presence of strangers or outsiders within the same four walls, there is no reason
why their meeting should be a perfectly good meeting, as per Carruth vs. Imperical Chemicals
Industries (1937)

Requisite of a valid meeting

A meeting to be in order must fulfill certain requirements

1. Proper authority

The board of directors is the proper authority to convene a general meeting of a company and for
this purpose the members should pass their resolution at properly convened meeting of the board.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

However if the board of directors fails to convene an annual general meeting then the attorney
general may call such a meeting

2. Notice of a meeting

A proper notice of meeting must be given to the members of the company. The notice must be
given 21 days before the day of the meeting for annual general meeting and 14 days for an extra
ordinary general meeting

The length of the general meeting notice may be waived if:-

 In case of annual general meetings by the consent of all the members

 In the case of any other meeting by the consent of the holders of not less than 95% of the
paid up share capital or total voting power where the company has no share capital

Notice to whom

The notice is required to be given to

- All members of the company who are entitled to vote on the matters which are
proposed to be dealt with at the meeting;
- All the persons who are entitled to a share in consequence of the death and
insolvency of a member.
- The auditors of the company. Deliberate omission to give notice of auditor s or
a single auditor will make the meeting invalid, but an accidental omission of a
member will not invalidate a member

Contents of the notice

Every notice of the meeting is required to specify the place and the day and hours of the meeting
and must contain the content of the business to be transacted at the meeting

If any special business must be transacted at an annual general meeting a statement to that effect
must be annexed to the notice of the meeting. The statement must set out all material facts
concerning the business to be transacted
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

3. Quorum
Quorum means the minimum number of members that must be present at the meeting.
The quorum is generally fixed by the articles of associations. Unless the articles specify a
large number generally five members are accepted in case of public companies and two
members in the case of any other type of company
4. Chairman of the company

Before a meeting of the company is to start the chairman of the meeting must be present. It the
chairman who is to preside over the meeting of the company. He is to conduct the meeting and to
maintain the order, it the chairman who put up the resolution and count the votes and declare the
results. Usually the articles of association provide for their appointment of a chair of the board of
directors

Duties of a chairman

- He must take care of the minority

- He must give the members present a reasonable time to debate any proposed
resolution and it must be ensured that all the views are put into consideration
- He must see that the meeting is properly convened and constituted
- The chairman must conduct the meeting as provided for by the companies act
- He should adjourn the meeting when it is possible by reason of chaos, disorder or
any other reason
- He must keep order in a meeting

5. Minute of meeting

Every company must keep records of all preceding meetings of its board of directors and of
every committee of the board. These records are known a minutes and the book where these
minutes are kept are known as minute books

Rules of keeping minutes

- Within 30 days of every such meeting entry of the proceeding must be made in
the book must be kept for that purpose
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

- Each page of minute book which records proceedings of board meeting must be
initialed or signed by the chairman of that meeting
- The minutes of every meeting must contain a fair and correct summary of the
proceedings at the meeting

Voting

A vote is the formal expression of the will of the members of the house either for or against a
proposal.

The matter proposed and duly recommended in a general meeting of the company is decided by
voting of the members of the company.

Voting may take place in any of the following ways:

1. Voting by show of hands

At any general meeting unless the articles otherwise provide a resolution put the vote as is in the
first instance decided by show of hands except when poll is demanded. While voting by show of
hands each member has only one vote despite the number of shares held.

2. Voting by poll

If there is dissatisfaction among members about the results of voting by show of hands they can
demand for a poll. The voting rights in a poll are equivalent to the number of shares held by
members of the company

Proxies

A proxy is a person appointed by a member to vote on his behalf at an annual general meeting. A
proxy has no right to speak in an annual general meeting. A proxy unless specified in the articles
of association is not allowed to vote by show of hands

Resolutions

The decisions of a meeting take the form of a resolution carried by majority of the votes
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

A question that members are supposed to vote for or against is called a motion. Once a motion
has been voted for it is called a resolution.

A resolution is thus a formal decision of a meeting on a particular proposal before it.

Types of resolution

Resolutions are of the following types.

1. Ordinary resolution
2. Special resolution
3. Resolution requiring special resolution

Ordinary resolution

At a general meeting of which notice has been given if votes have been cast in favor of the
resolution by members exceed those cast against the resolution the resolution passed is an
ordinary resolution.

Transaction where ordinary resolution are required

- Issue of shares at discount

- Alteration of the share capital
- Approval of the statutory report
- The consideration of accounts, the balance sheet and the report of the board of
directors and of auditors
- Appointment of auditors and the fixation of their remuneration
- Appointment of first directors who are to retire by rotation
- Increase or decrease of directors within the limits imposed by the articles of
association
- Removal of directors and the appointment of another director in his place
- Declaration of dividends
- Appointment of liquidator and fixing of his salary
- To rectify the name of the company
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Special resolutions
A resolution is special if
i. The intention to propose the resolution as special resolution has been duly specified in
the notice calling general meeting
ii. The notice required has been duly given of the general meeting
iii. The votes casted in favor of the resolution by members are three time the number voted
by those against the resolution

A copy of the special resolution must be deposited to the register within 30 days of its passing

Special resolution matters

- To alter the memorandum of the company

- To alter the articles of the company
- To issue shares without pre emptive rights
- For creation of reserve capital
- To reduce share capital
- To pay interest out of shares of members
- Voluntary winding up of a company

Resolution requiring special notice

A resolution requiring special notice is not an independent class of resolution it is a kind of

ordinary resolution with the only difference that the mover of the proposed resolution is required
to give a special notice of 14 days to the company before moving the resolution and the company
shall give its members notice of the resolution the same way it gives of meeting

A special notice has to be given for the following matters

1. For a resolution at annual general meeting appointing as auditor a person other than the
retiring auditor and for a resolution providing expressly that a retiring auditor shall not be
re- appointment
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

2. For certain persons who shall not be eligible for appointment as directors whose period of
office is liable to determination by retirement of directors by rotation
3. For removing a director before his retirement time from office
4. Of any resolution to appoint a director in place of a director so removed

11) Investigation into a company

- Investigation Into A Company

- Inspectors Report

- Expenses Of Investigation

- Investigation Of The Companies Membership

a) Investigation into a company 786

Introduction

Section 785 of the companies act identifies that investigation into the affairs of the company can
be carried out by either

- A request by the members of the company

- The register of societies
- Officer of the company

a) Investigation of company affairs on application of members

The courts may appoint one or more competent inspectors to investigate the affairs of a company
and to report on such matters as a court directs if:

- If the application is that of more than two hundred of members or

- Members holding more than one tenth of the nominal value of the share capital
or
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

In the case of a company not having share capital one fifth of number of members of that
company

Before proceeding with the investigations the court might require a sum of five hundred
thousand to meet the cost of the investigation into the company affairs

APPOINTMENT OF INVESTIGATORS BY THE COURTS

The court may decide to hire experienced investigators into the affairs of the company if;-

- If the company business is being conducted-

- With the intent to defraud creditors or any other person or fraudulent or unlawful
purpose or
- If the company conducts its affairs in a manner that is oppressive to its members
or to any part of them
- The company has was formed for fraudulent or unlawful purpose
- That the persons responsible for company formation or the management of its
affairs are or have been guilty of fraud, misfeasance or other misconducts against
members.
- The company members have not been given all the information with the respect
to its affairs that they have reason to believe they should have
- That it would be in the public interest to do so.

An inspector appointed by the courts might look into the affairs of another company if this
company is related to the company under investigation

The inspector are usually given the direction by the court about the investigations to ensure that;-

- The report includes the investigators view on any specified matter

- The report is made in a manner
- Is made by a specific date
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Inspectors report
The inspectors report shall cover all the material issues as directed by the courts this usually
varies from one investigation to another
Investigation into a company membership.
1) Piercing the corporate veil

Sometimes the law is prepared to examine the reality which lies behind the company façade this
is described as "lifting" or "piercing" the corporate veil. This can happen under the following :-

a) Statute

Some statutory provisions have the effect of piercing the corporate veil to make directors
personally liable Presumption is in favor of separate personality and courts will not normally
infer that legislation is intended to pierce the corporate veil.

Situations where "veil is lifted" by Statute:-

(i) where membership of a company falls below two for more than six months. Member who
knows he is the sole member but continues to trade will be jointly and severally liable with the
company for company debts contracted after the six month period has elapsed. (this no longer
applies to private limited companies)

(ii) where public company trades without obtaining a trading certificate. If the company fails to
comply with any obligations under a transaction within 21 days of being called on to do so, the
directors of the company are jointly and severally liable to indemnify the third party against any
loss.

(iii) If person acting on behalf of a company signs or authorizes the signing of a bill of exchange,
cheque, order for goods or similar document in which the company’s name is not correctly
stated, the person signing will be personally liable if the company fails to pay

iv) Applies where company is being wound up and it appears that business has been carried on
with intent to defraud creditors.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

(ivi) Applies where company is in insolvent liquidation and the director(s) should have known
this, but did not take sufficient steps to minimize losses to creditors

(ivii)The director of a company which has gone into insolvent liquidation cannot become a
director of another company with the same name within a five year period. If he does he can be
made personally liable for all the debts of the new company.

b) Common Law

The courts are willing to pierce the veil of incorporation in some circumstances:

(i) Fraud, Façade or Sham

Courts will examine the reality behind the company where the company was set up purely to
evade a legal obligation, or to allow someone to do something he would not be allowed to do as
an individual

(ii) Agency

Court may lift the veil on the basis that one company is merely carrying on business as the agent
of another so that transactions entered into by the subsidiary can be regarded as transactions of
the holding company:

(iii) Single Economic Unit

In the past, courts have been willing to lift the veil on the basis that a group of companies was
not a group of separate persons, but a single economic unit

-
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

WINDING UP OF A COMPANY

- Winding Up By Court , Voluntary Winding Up And Winding Up By

Contributories And Creditors
Introduction
Winding up is the proceeding for the realization of the assets of a company, the payment of
creditors, and the distribution of surplus if any, among the shareholders so that the company
may be finally dissolved
Modes of winding up
1.
2. Compulsory winding up by the courts
3. Voluntary winding up (i) members voluntary wind up
(ii) Creditors voluntary wind up
4. Voluntary winding up subject to the courts supervision

Winding up by the courts

A company may be wound up by the order of the court. This is called compulsory winding up.
The company acts lays down the grounds under which the court

A petition for winding up of the courts may be presented under any of the grounds listed below

1. Special resolution
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

A company may be wound up if by a special resolution it was agreed to be wound up by the

courts

2. Default in filling statutory report or holding statutory meeting

If a company has a default in delivering the statutory report to the register or on holding statutory
meetings a petition for winding up the company may be presented in court. Petition on these
grounds may be presented to the courts by a member of the company or the register or a creditor.
The power of the court is discretionary and generally it does not order winding up the first
instance. The court may in the first instance order the company to file its statutory report or
convene a statutory meeting but if the company fails to comply with the order the court will wind
up the company

3. Failure to commence business within one year or suspension of a business for one
year

Where a company does not commence its business within one year from its incorporation or
suspends it for a whole year a winding up petition may be presented to the courts.

NB: even if the business has been suspended for a whole year this by itself does not entitle a
petiole to get the company wound up as a matter of right but the question whether the company
should be wound up or not is such circumstance is entirely the discretion of the court depending
on the cirmstances and the facts presented to the courts.

The court will not order for winding up on the grounds, if:

a) Suspension of a business is due temporary causes; and

b) There are reasonable prospects for starting of business within a reasonable time
c)
4. Reduction of membership below the minimum
When the minimum number is reduced, in the case of a public company below seven in
the case of a private company below two a petition for winding up a company may be
presented to the court.
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

Company in ability to pay its debts

5 company inability to pay its debts

A winding up petition may be presented if the company is unable to pay its debt. A company will
be deemed unable to pay its debt in the following conditions

a) a creditor of more than shs 500 has served, on the company at its registered office, a demand
under his hand requiring payment and the company has neglected paying for three weeks to the
reasonable satisfaction of the creditor or

b) Execution or other process issued on a judgment or order in favor of a creditor of the

company is returned unsatisfied in whole or part; or

c) it is proven to the satisfaction of the court that the company is unable to pay its debt, taking
account its contingent and prospective liabilities i.e. whether its assets are sufficient to meet its
liabilities

6. Just and equitable

The court may order to wind up a company if it is of the opinion that the company should be
wound up, what is just and equitable depends on the facts of the case.

Winding up by the courts on just and equitable grounds may be ordered in the cases given
below:-

a) When the substratum of the company has gone. Substratum of the company is
said to have gone when the object for which the company was formed has failed
or it is impossible to carry on the business except at a loss, or the existing and
possible assets are insufficient to meet the existing liabilities.
b) when the oppression of the majority shareholders on the minority or there is
mismanagement
c) when the company is formed for fraudulent or illegal objects or when the business
of the company becomes illegal
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

d) When there is dead lock in the management of the company. When there is
complete deadlock in management the company will be wound up even though it
is making profits
e) When the company is a bubble i.e. it had no real business.

Persons Entitled To Apply For Winding Up

The courts do not wind up a company under its own motion but rather it has to be petitioned. The
company act enumerates the persons who can file a case at the courts for winding up of a
company and they include:

1. Petition by the company

A company can make a petition only when it has passed a special resolution to that effect.
However it has been held that where the company is found by the directors to be insolvent due
to cirmstances which out to be investigated by the courts, the directors may apply to the courts
for the order for winding up even if they have not obtained a sanction of the general meeting of
the company

2 Petition by creditors

The word creditors include secured creditors, debenture holders and a trustee for a debenture and
all other “persons “who are owed monies by the company

A creditor has a wright to wind up a company if they can prove beyond reasonable doubt that
the company has failed to pay its debt when they fall due.

3 winding up by contributory

The term contributory means every person who is liable to contribute to the assets of the
company in the event of it being wound up.

A contributory is entitled to present a petition for winding up a company if

1. The number has reduced in the case of public company below seven and in case of
private company below two
COMPANY LAW BBM 400 CLASS NOTES 2017-2018

2. The shares have been registered in his name for at least six months during the period of
18 months immediately before the commencement of wading up

Register petition

The register can present a petition for winding up a company only on the following grounds

1. A default is made in delivering the statutory report to the register or statutory meetings
2. If the company does not commence its business within a year from its incorporation, or
suspends its business for a whole year
3. If the company is unable to pay its debts and
4. If the court is of the opinion that it is just and equitable that the company should be
wound up

Petition by any person authored by the national government

If it appears from any report of the inspectors appointed to investigate the affairs of the company
that it is expedient to wind up the company because its business is being conducted with the
intent to defraud creditors, members or any person, or its business is being conducted for a
fraudulent or unlawful purpose or the management is guilty of fraud misifecense or other
misconduct the law authorizes the inspectors to fill for winding up of a company.