Company Law Notes

JOMO KENYATTA UNIVERSITY OF
AGRICULTURE AND TECHNOLOGY

SCHOOL OF LAW, KAREN CAMPUS
COMPANY LAW: LSC 2208
Bachelor of Laws, Year 2 Sem.2
Lecture Notes by
Dr. Stephen P.M. Aming’a, PhD (Law),
Advocate, commissioner of Oaths and
Notary Public
THE CONCEPT OF A COMPANY
• A company is a common feature in modern commercial, professional and non-commercial activities/life.
• Interesting enough, neither English Law to which the Laws of Kenya trace their origin nor the
contemporary Laws of Kenya define a Company.
• Past and current Acts of Parliament on the formation, governance and control of companies do not define
a company; instead they vaguely describe a company e.g. That a Company is a company formed under
this (Companies ) Act
• In law and practice, a Company is one of the recognised forms of business organization. It does not enjoy
monopoly since there are other forms of business e.g. sole proprietorships, Partnerships and cooperative
societies .
• The modern company is primarily a product of the industrial revolution that started in Europe in the 18th
Century and spread to America, Asia and the rest of the world in subsequent centuries.
• A company is the most flexible form of business association: For carrying on business whether for profit or
not-for-profit or charity.
• It has presence in national and transnational jurisdictions and varies in types and sizes.
• It is corporation with attributes of a natural person including a name, date of birth (Date of
Incorporation), place of birth (Registry of Companies), birth certificate( Certificate of incorporation), and
indefinite lifespan(perpetual succession). It also has contractual capacity and capacity to acquire, hold,
and transfer or dispose of property and of course it has rights, duties, liabilities ; it even has power to sue
and liability to be sued in its own corporate name and status.
• In Re Stanley (1912) The Court observed that the term company has no technical meaning.. That
means, it is not a legal or technical term, but one of art.
COMPANIES AND PARTNERSHIPS
• Kenya’s Companies Act No. 17 of 2015 does not define a company.
Instead, section 2 of the Act simply describes it vaguely as a follows:
“…a company formed and registered under this Act or any existing
company”
• However under English Common Law, a company was defined as an
association of persons established for a common object or objects.
This definition would not apply to one person companies which are
now recognised in Companies Act of Kenya. Therefore, this definition
has limitations.
• The Oxford Dictionary of Law, defines a company as an association
formed to conduct a business or any other activities in the name of the
association.
• In Mozley’s and Whiteley’s Law Dictionary (12th Edition, 2001),
J.E.Penner defines a Company as a body of persons associated
together for the purposes of trade or business.
COMPANIES AND PARTNERSHIPS
UNDER THE LAWS OF KENYA
• As a general rule, in a Limited liability Company, there is separation of the company and the members,
hence liability of the company does not necessary extend to members. In a general partnership, there is
no such separation, hence the liability of the business and is shared by the business and the partners:
Unlimited liability. In limited liability partnerships, the liability of the partners is limited to the extent that
they have not fully paid -up for their contribution in the partnership.
• Secondly, a general partnership has no separate legal existence from the partners. However, in limited
liability partnerships, the partnership enjoys a separate legal existence.
• Thirdly, a Limited liability Company is a juristic or artificial person with legal attributes akin to those of a
natural person e.g. a name, contractual capacity, rights and liabilities, power to sue and liability to be sued
in its own name and corporate status, power to acquire, hold and dispose of property of all kinds, and
perpetual succession. Save for a name, the rest of the attributes do not apply to general partnerships.
However, limited liability partnerships have same attributes as limited liability companies. partnership
generally has no perpetual succession the death,, resignation, bankruptcy or retirement of one partner
ends it. However, limited liability partnerships have perpetual succession and survive the death,
resignation, retirement or
• Fourthly, n Kenya, the principal law governing formation, registration, management and control of
companies is the Companies Act No. 17 of 2015. Other laws include the Insolvency Act no. 18 of 2015, The
Income tax Act, The Value Added Tax among others. Depending on the core business of the Company,
there business or industry- specific laws that apply to some Companies e.g. Banks and Insurance
Companies, On the other hand, general partnerships do not need registration and if partners so desire,
they have choices between The partnerships Act No. 16 of 2012, The Limited Liability Partnerships Act and
The Registration Of Business Names Act. The Companies Act does not apply to partnerships..
• -A Company may be formed and incorporated by one human being with all the attributes of a corporation.
On the other hand, a partnership requires a minimum of two people to form.
Types and Functions of a modern Company: Refer to Davies L. Paul; Gower and
Davies’ Principles of Modern Company Law, 16th Edition, pp10-11
From a functional perspective, there are four types of Companies

a) Companies formed for purposes other than profit e.g. for social, charitable or
quasi-charitable purposes. In this context, incorporation is a convenient and
more advanced substitute for the trust.
b) Companies formed for conduct of trade: by a one or more traders. In this
category incorporation is a legal device for personifying the business , with all
the attendant benefits including limited liability and perpetual succession. In
such a company, member retain control and share profits in form of a dividend.
c) Companies formed as vehicles for professional investment: To enable the
investing public to invest and share in the profits [and losses] of the enterprise
without taking part in the management of the enterprise.
d) Hybrid or multi-purpose companies combining trade and investment: Could be a
public company listed at a stock exchange or a small company with employees as
majority shareholders and may not be listed in the stock exchange markets
Types of Companies by Mode of
Formation and Incorporation
In Kenya, by mode of formation and incorporation, there are three types of companies:
a) Chartered Companies formed by grant of royal or statutory charter pursuant to a specific Act of
Parliament e.g. all Universities in Kenya are chartered under The Universities Act, 2012 . In England,
examples include the British Broadcasting Corporation (BBC). Such Companies do not enjoy the Charter
indefinitely. Its subject to periodical review.
b) Statutory Companies incorporated by a specific or special Act of Parliament e.g. The Kenya Literature
Bureau, a Publishing Company incorporated under The Kenya Literature Bureau Act, 1972; The Kenya
Pipeline Company, The Kenya Railways Corporation; The National Oil Corporation of Kenya; The Kenya
Broadcasting Corporation; the Kenya Tourist Development Corporation, The Kenya Ports Authority,
among others. Such Companies are formed and incorporated under an Act bearing their name. There
are also government companies established under the State Corporations Act, cap 446, Laws of Kenya
c) Companies formed and registered under The Companies Act No. 17 of 2015. These are commonly
known as registered companies.
Note:
i) In Mozley’s and Whiteley’s Law Dictionary; Penner defiines incorporation as follows: To establish as a
corporation by grant from the Crown or Act of parliament.
ii) In Osborne Concise Law Dictionary, incorporation is the process of “ to form a single whole, conferring legal
personality upon an association of individuals, or the holder of a certain office, pursuant to royal charter or
an Act of Parliament.” In Kenya, there are no royal charters but statutory ones.
TYPES OF COMPANIES BY LIABILITY
STATUS
By reference to liability, there are three types of Companies namely;
a) Companies limited by shares held each member: These are companies
in which liability of each member for debts and obligations/liabilities of
the company, is limited by the Memorandum of Association of the
Company , to the amount, if any, unpaid on the shares held by each
member.
b) Companies limited by guarantee of each member of the company:
Liability of each member for debts and obligations of the company, is
limited by the Memorandum of Association of the Company, to the
amount each member has undertaken to contribute to the assets of the
Company in the event of insolvent winding up and liquidation of the
Company, during their tenure as members of the company.
c) Unlimited Companies: In such companies, debts and obligations of the
company fall on both the company and the members individually and
collectively and the liability has no limit, hence the term unlimited
liability companies. Such companies are rare indeed and are unattractive
for trade or investment in modern society.
Types of companies by Nationality
Companies have nationality. In this regard, the following
companies are recognised under the laws of Kenya:
a) Local or domestic Companies: Companies formed and
incorporated under the laws of Kenya and whose
registered office and principal place of business is in
Kenya.
b) Foreign Companies: Companies formed and incorporated
in a foreign jurisdiction or country but has presence in
Kenya by way of a branch or subsidiary company.
c) Multinational Companies: Countries registered and
carrying on business in multiple jurisdictions: Usually, such
companies have a Parent or holding Company with
subsidiaries in different jurisdictions.
Types of companies by Shareholding
Two types exist namely;
a) Holding or Parent Company
b) Subsidiary Company
For accounting purposes and for purposes of tax
liability, parent and subsidiary companies
constitute a group of companies e.g. The Kenya
Bank of Kenya Group.
Types of companies by capital: source
Under this category, there are two types of registered companies namely;
a) Private Companies: Companies not legally allowed to offer their
securities to the public. These ones can only secure capital from private
sources e.g. the shareholders and Banks. They cannot invite the public to
subscribe for their shares/invest in them or take their securities.
b) Public Companies: These are companies permitted to offer their
securities: whether shares, bonds or debentures, to the public. These
are companies permitted to invite the members of the public to
subscribe for their shares or take their securities in return for capital.
Such companies can issue an initial public offering or issue (IPO) or a
second or subsequent issue. Such companies are also eligible to have
their securities listed and tradeable at the securities or bourse market,
e.g. Kengen, Kenya Commercial Bank, Kenya Power and Lighting
Company, Safaricom, Kakuzi , Kenya Airways, Barclays (ABSA)etc. Even if
a company is public, it is not a must that it offers its securities to the
public unless there is a need e.g. business expansion, or diversification
TYPES OF COMPANIES BY
LISTING/TRADING FORUM
• Public companies which offer their securities to the public may apply to have those
securities listed and traded at the securities market e.g. The Nairobi Securities
Market, London Stock Exchange.
• In Kenya, the regulator for capital or securities markets is , The Capital Markets
Authority (CMA). A Company can be listed or delisted according to rules or
regulations set by the CMA.
• Companies whose securities are listed normally have those securities publicly
traded.
• Often, public offerings of shares of a company and its listing for its shares to be
traded or sold and bought on a public stock or securities market go hand in hand.
• Such shares are freely and easily sold or bough in the market by existing or new
shareholders.
• A company can be public but without having its securities listed on the public
securities bourse or market.
• Companies whose securities are not listed on the securities bourse, are traded on
“secondary” or “Alternative Investment Markets “(“AIM”) using private treaty or
contracts.
TYPES OF COMPANIES BY SIZE
• Based on shareholding , number of
employees, and annual turnover; there are
three main types of companies namely;
a) Small or micro-companies
b) Medium Enterprises
c) Large Companies including multinationals
TYPES OF COMPANIES BY OWNERSHIP
• There are government companies established
by charter or An Act of Parliament to provide
public utilities e.g. Kengen, Kenya Power,
Kenya Pipeline and other state corporations.
corporation.
The objects of statutory companies are set out
either in the Act of Parliament or the legal
instrument –Kenya Gazette, Charter, etc-by
which they are created. It can only carry on the
STATUTORY COMPANIES
actions are ultra vires and its actions are null
and void. The capital of a statutory company is
raised by borrowing guaranteed or approved by
the treasury, or budgetary allocation by the
government, while its profits and gains are
injected back into its undertaking.
When a statutory company is indebted it can be
sued,
TYPES OF COMPANIES BY OWNERSHIP
and even its property attached, but it
cannot be wound up for indebtedness.
Companies may also be registered.
• The rest of the Companies are non-
government companies: whether private
or public.
LEGAL BASIS OF LIMITED LIABILITY FOR
REGISTERED COMPANIES IN KENYA
• Section 5 of The Companies Act 2015 provides
that a company is a limited company if it is
limited by shares or guarantee.
• Section 6 provides that a company is limited
by shares if the liability of its members is
limited by the company’s articles to any
amount unpaid on the shares held by the
members. The members in these companies
contribute
LEGAL BASIS OF LIMITED LIABILITY
money to a joint stock (capital) and share profits
arising from the common venture. The
proportion of the capital to which each member
is entitled is his shares. The liability of the
members for the debts of the company is
limited to the extent that they have not fully
paid up for their shares. These companies are
COMPANIES LIMITED BY GUARANTEE
most suitable for industry and commerce
because they raise their working funds, other
than by borrowing or earning, by the issue of
shares.
Section 7 of the Companies Act 2015 provides
for company limited by guarantee. This type of
company has three characteristics: First, it does
COMPANIES LIMITED BY GUARANTEE
not have a share capital. However companies
limited by guarantee that were formed and
registered before the Act are not prohibited
from having a share capital. Second, the liability
of the members is limited by the company’s
articles to the amount each member has
undertaken to contribute to the assets of the
UNLIMITED COMPANY
company in the event of its liquidation. Third,
the certificate of incorporation of the company
states that it is a company limited by guarantee.
Second, unlimited companies. Section 8
provides that an unlimited company is a
company which has two characteristics: First,
there is no limit on the liability of its members;
PRIVATE COMPANY
and secondly , its certificate of incorporation
states that the liability of its members is
unlimited.
Third, private company. A private company is
described in section 9 as a company :(i) whose
articles (a) restricts the right of members to
transfer shares, (b) limits the number of
PRIVATE COMPANY
members to fifty excluding present and past
employees who acquired their shares while they
were employees and still retain them, and (c)
prohibits invitation to the public to subscribe for
shares or debentures; (ii) is not a company
limited by guarantee; and (iii) its certificate of
incorporation states that it is a private company.
PUBLIC COMPANY
Fourth, public company. This is a company in
respect of which section 10 prescribes the
following characteristics: First, the articles of ass
grants its members the right to transfer their
shares in the company, second, does not
prohibit invitations to the public to subscribe for
shares and debentures of the company; third,
PUBLIC COMPANY
its certificate of incorporation states that it is a
public company.
A person who wishes to register a company is
required to lodge with the Registrar of
Companies: 1. an application for registration of
the company, section 13(1)(a) CA. The
application must state the name of the
REGISTRATION OF COMPANIES
company, the proposed location of the
registered office of the company, whether the
liability of the members is to be limited, and if
so whether by shares or guarantee, and
whether the company is a private or public
company. If the application is submitted by an
agent the name and address of the agent must
also be set out: s. 13(3) CA. The application must
be accompanied by: (i) a statement of capital
and initial shareholding where the company is to
have a share capital.
Section 14 requires that the statement must
state the total number of shares to be taken on
formation by the subscribers to the
memorandum and articles, the aggregate
nominal value of the shares, and for each
class of shares, the particulars of the rights
attached to the shares, the total number of
shares of that class, the nominal value of
shares of that class and the amount to be
paid up, and the amount to be unpaid for
each share. The statement must also state,
with respect to each subscriber to the
memorandum, the nominal value of each share,
etc; (ii) if it is a company that is to be limited by
guarantee, a statement of guarantee; and
(iii) a statement of the company’s proposed
officers. The statement of the company’s officers
must state the persons to be the first directors
of the company, and the person to be appointed
as first secretary or joint secretary in the case of
a public company, and any person who is
appointed as an authorised signatory of the
company in the same particulars to be stated in
the company’s register of directors, secretaries
and authorised signatories. Each of the
persons must consent to act in the relevant
capacity. 2. A memorandum of association of
the company: s. 13(1)(b). The memorandum of
association must state that the subscribers wish
to form a company under the Act, and agree to
become members of the company, and in the
case of a company that is to have a share
capital, to take at least one share each: s. 12 CA.
It must also be in the prescribed form,
and authenticated by each subscriber: s. 12(2)
CA. 3. A copy of the Articles of Association is
also required by section 13(1)(c) to be
submitted. However when the articles are not
registered, or are registered but do not exclude
or modify the model articles prescribed for the
kind of companies, the relevant model is
deemed to form part of the company’s articles
as if it had been duly registered: s. 21 CA.
The articles are required to be contained in a
single document, be printed, divided into
paragraphs numbered consecutively, dated and
signed by each subscriber to the articles. The
subscribers’ signatures must be attested by a
witness.
Section 17 CA provides that when the Registrar
is satisfied that the application complies with
the requirements of the Act he will register the
company and allocate it a unique identifying
number. The Registrar will then issue a
certificate of incorporation signed by him and
authenticated by the official seal which states; a.
the name of the company and its unique
identifying number; b. the date of incorporation;
c. whether the liability of the members is
CONSEQUENCES OF INCORPORATION
limited or unlimited, and in the former
case, by shares or guarantee; d. whether the
company is a private or public company.
Section 19 of the Companies Act, 2015 provides
that from the date when the company is
registered; first, the subscribers to the
memorandum and all such other persons as may
EFFECTS OF REGISTRATION
from time to time become members become a
body corporate by the name stated in the
certificate of incorporation. The registered
company is a body corporate meaning that it is a
legal person separate and distinct from its
members. In Salomon v. Salomon & Co.
[1897]A.C. 22, Salomon carried on business as a
boot manufacturer and leather trader. He
formed a company limited by shares in which he
and his wife, daughter and four sons each held
one share. He then sold the business to the
company for the price of £39,000, on terms
approved by all the shareholders that he would
be paid £9,000 in cash, allotted 20,000 fully
paid up shares of £1 each, while the rest of the
price would be a loan, for which the company
gave him debentures secured by a charge on the
company’s assets. After a depression the
company went into liquidation. The assets were
sufficient to satisfy the debentures, but the
unsecured creditors with debts amounting to
£7,000 received nothing. The creditors
challenged the payment of Salomon’s debt
arguing that Salomon and the company were
one and the same, and the payment was a fraud
on the other creditors. The court held that a
company is at law a different person from the
subscribers, and as a secured creditor, Salomon
was entitled to payment in priority to all the
other unsecured creditors.
Similarly in Macaura v. Northern Assurance Co.
[1925]A.C. 619 Macaura owned the Killymoon
estate in Ireland, and had insured some timber
on the estate. Subsequently he transferred the
estate and timber to a company in return for
shares but did not apparently have the
insurance re-issued in the name of the company.
The timber was substantially destroyed by fire.
The insurance company successfully resisted his
claim on the policy arguing that the company
was a separate legal person from him, and since
the timber was not his to insure, he lacked
insurable interest in the timber. See also in Lee v.
Lee’s Air Farming Company [1961]A.C. 12
A second effect as appears from Macaura is that
the property of the company belongs to the
company itself and not to the individual
shareholders, so that even the largest
shareholder does not have insurable interest in
the property of the company. A managing
director of the company, even if he owns all
shares except one cannot lawfully pay cheques
due to the company into his own banking account
or draw cheques for his own purposes upon the
company’s banking account: A.L. Underwood Ltd v.
Bank of Liverpool & Martins Ltd 1924 1 K.B. 775.
It also denotes that the companies debts are the
responsibility of the company alone and normally
cannot be enforced against the members, however
many shares they own. The liability of the members
of a company limited by shares is limited to the
amount, if any, unpaid on its shares. Second, a
registered company can do all of the things that an
incorporated company can do: it can hold property,
it can sue and be sued, it can enter into contracts.
Third, the registered office of the company is as
stated in the application for registration; fourth,
the status of the company is as stated in its
certificate of incorporation; fifth, in the case of a
company having a share capital, the subscribers to
the memorandum become holders of the shares
specified in the statement of capital and initial
shareholdings; and sixth, the persons named in the
statement of proposed officers as directors of the
company, secretary or joint secretary in the case
of a public company, and authenticated
signatory became holders of such offices.
DISCLOSURE OF NAME BY COMPANY
• Section 67 requires every registered company to display its
name and other prescribed information in specified places;
state prescribed information in prescribed kinds of the
company’s documents and communications; and provide
prescribed information on request to those with whom the
company deals with in the course of its business.
• Failure to disclose the name is a crime, for which each
officer of the company who is in default, risks prosecution
and upon conviction, is liable to pay not exceeding
KES500,000/=
• Any person who suffers financial loss due to the non-
disclosure can institute civil proceedings against the
company for damages.
CHANGE OF COMPANY NAMES
• Under sections 62-64, a company may change its name on the orders of
the Registrar under s.60; by special resolution of the company as per
articles; by resolution of the directors acting in accordance with a
direction of the Registrar; on the restoration of the Company to the
Register according to the relevant provisions of the Act; or as provided in
the articles of association.
• The Registrar may direct change of name under section 60, if misleading
information was given to the Registrar for registration of a company or the
name gives misleading indication of its activities that is so misleading as to
be likely to cause harm to the public.
• Any directive for change of company name can only be effectual if given
within five years after the company’s registration and the directive
specifies the period within which the company is to comply.
• The Registrar’s order is subject to judicial review: s. 61 C.A
• Any such change is subject to approval of and registration by the Registrar
of Companies. Upon registration, the Registrar has to issue a certificate to
that effect ( S.65).
EFFECT OF CHANGE OF NAME
Under section 66 of the Act, a change of a
company’s name is effective from the date of issue
of the certificate of change of name.
The Change does not affect rights or obligations of
the company or invalidate any legal proceedings by
or against it.
Any legal proceedings continued or commenced
against the company under it former name may be
continued or started against it by its new name.
ALTERATION OF STATUS OF COMPANY
Part VI of the Act makes provisions pertaining to
change of legal status of a company.
Section 69 permits conversion of a company from
being a private company into being a public
company; from being a public company into being a
private company; from being a private limited
company into being an unlimited company; from
being an unlimited private company into being a
limited company; or from being a public company
into being an unlimited private company.
CONVERSION OF COMPANY STATUS
• Section 70: Conversion of a Private Company
whether limited or unlimited, to public company
limited by shares: This can take place if:
a) The company passes a resolution to that effect;
b) satisfies conditions in subsection 2; c) an
application for registration of the conversion is
lodged with the Registrar in accordance with
section 74, together with the required
documents.
The conditions in s. 70(2) are as follows:
Conditions: Sections 70(2); 71-73
• The Company has a share capital
• The nominal value of the company’s alloted share capital
are not less than the authorised minimum
• Each of the company’s alloted shares is paid up at least as
to one-quarter of the nominal value of that share and the
whole of any premium; the Company has not previously
converted itself into an unlimited company; the company
has made necessary changes to its name and to its articles
in order to become a public company; and if the company is
unlimited; it has also made such changes as are necessary
to the articles in order to become a public company.
Conditions for conversion of private to
public company
• Under section 72, a private company seeking
conversion into a public company may not apply
for registration of the conversion, unless it
submits a balance sheet prepared as at a date not
more than seven months prior to the date of
lodging the application; an unqualified report by
the company’s auditor on that balance sheet; and
a written statement by the company’s auditor
that in the auditor’s opinion, as at the balance
sheet date, the company’s net assets was not less
than the aggregate of its called-up share capital
and undistributtable reserves.
REQUIREMENTS FOR REGISTRATION OF A CONVERSION
OF PRIVATE COMPANY
• Section 74(2): The application for the registration

of the conversion must contain a statement of
the company’s new name after conversion; the
particular’s of the secretary, if any, or proposed
secretary in terms of section 75. The application
must also be accompanied by a copy of the
special resolution for conversion; a copy of the
company’s articles as proposed to be amended; a
copy of the balance sheet and other documents
required under section 72(1), and where
applicable, a copy of the valuation report in terms
of section 73.
DENIAL OF REGISTRATION OF A CONVERSION
• Under section 71(4); the Registrar may not

register a conversion of a private company into a
public company if it appears to the Registrar that
the Company has resolved to reduce its capita;
the reduction is made under section 407, has
been confirmed by a Court order under section
410; or is supported by a solvency statement; and
that the effect of the reduction is, or will be, that
the nominal value of the company’s alloted share
capital is below the authorised minimum/
Certificate of Incorporation on Conversion
• Section 76 requires the Registrar to register a

compliant aplication and issue a certificate of
incorporation on conversion.
• Upon issuance of the certificate, the conversion
takes effect; the changes in the company’s name
and articles also take effect; and the person
named or proposed as secretary assumes office.
• The certificate is conclusive evidence of
compliance with the requirements of the Act as
pertains conversion of the private company into a
public company.
Conversion of Public Company into a
Private Limited Company
Required: Under section 77: A special resolution to that
effect; no application has been made under section 78 for
cancellation of the resolution; the application for
conversion is lodged with the Registrar as required under
s.80.The application must be accompanied by a copy of
the resolution, a copy of the company’s articles as
proposed to be amended.
If compliant, the Registrar can register the conversion and
issue a certificate to that effect: s.81. The change from
public to private Limited company takes effect upon the
Registrar’s issue of certificate of registration of
incorporation on registration of conversion; so do the
changes in the company’s name and articles.
Conversion of Private Limited
Company into Unlimited Company
Section 82: Requirements: All the members of the
company have assented; the company has not previously
been registered as a unlimited company; an application is
lodged in accordance with section 83. The company must
make necessary changes in its name and articles in line
with its proposal to become unlimited and if it has to
have a share capital, upon becoming unlimited. Incase of
a bankrupt member of the company, a bankruptcy trustee
for the estate of the bankrupt can give assent to the
company becoming unlimited. In case of the estate of a
deceased member of the company; the executor or
administrator of the deceased member’s will or estate
may assent on behalf of the deceased.
Requirements for Registration of Unlimited
company as private Limited Company
• Under section 86: An application for
registration of a conversion; a statement of
the Company’s new name on registration of
the conversion; a copy of the special
resolution converting the company into
private limited; a statement of guarantee, if
the company is to be limited by guarantee; a
copy of the company’s articles as proposed to
be amended. The statement of guarantee
should comply with section 86(2) of the Act.
Effective date and other requirements
• On registration and issue of certificate of incorporation, the
company becomes a limited company; the changes in name
and articles take effect: Section 87(6)
• Under section 88, If the company is limited by shares and
has already allotted shares, within fourteen days of
registration, it shall lodge with the Registrar, a statement of
capital save where a statement of capital and initial
holdings had been lodged with the Registrar, or and a
statement of capital was contained in an annual return.
• The statement must indicate the total number of shares of
the company; the nominal value of those shares; and for
each class the particulars, if any, of the rights attached to
the shares; the total number of shares of each class and the
aggregate nominal value of shares of that class .
Requirements for registration of
conversion
• Section 86(2), the statement of guarantee should state that
the person who is a member undertakes that, if the
company is liquidated while the person is a member, or
within one year after the person ceases to be a member,
the person will contribute to the assets of the company
such amount as may be required for payment of the debts
and liabilities of the company before the person ceased
being a member; payment of costs, charges and expenses
of liquidation; and adjustment of the rights of the
contributories among themselves not exceeding a specified
amount.
• Under section 87, upon being satisfied that the application
is compliant; the registrar may register and issue a
certificate of incorporation on registration of conversion
REQUIREMENTS FOR APPLICATION
FOR REGISTRATION OF CONVERSION
Section 83: A statement of the company’s new
name on conversion; the prescribed form of assent
of all the members, authenticated by or on behalf
of all the members of the company; and a copy of
the company’s articles as proposed to be amended.
Upon being satisfied that the application is
compliant; the Registrar to register the conversion
and issue a certificate of incorporation of
conversion: Section 84.
Conversion of Unlimited company into
private Limited Company
Section 85: Conditions: There must be a special
resolution to that effect; the company has not
previously been registered as a private limited; an
application for registration of the conversion is
lodged with the Registrar in accordance with
section 86; and the company has made changes to
its name and articles in line with its proposal to
become a private company limited by shares.
The special resolution must state whether the
company is to be limited by shares or guarantee.
Conversion of Public Company Limited by Shares into
unlimited private company with share Capital
Required: Section 89: All members of the

company must have assented to the conversion;
the company has not previously been registered
as a limited company or as unlimited company;
an application for conversion is lodged with the
Registrar according to section 90; the company
has made necessary changes to its name and
articles with a view of becoming an unlimited
private company.
Conversion of public company limited
by shares to private Ltd. company
• S.89(4): In case of a bankrupt member or a
deceased member; the assent can be given by a
bankruptcy trustee to the exclusion of the
member, or an executor or administrator of the
will or estate of a deceased member in that order.
• If the application and all attachments are
compliant; the Registrar may register the
incorporation on conversion and issue a
certificate to that effect: sections 90 and 91.
Required: s.90
• The application for registration of a conversion
from public to private limited company must
be accompanied with a statement of the
company’s new name on conversion;
members’ assent to the conversion,
authenticated by or on behalf of all the
members of the company; and a copy of the
company’s articles as proposed to be
amended.
Registration of Conversion: s. 91
• If the Registrar finds the application is compliant, the
Registrar shall register the Registrar shall register the
conversion of a public company into an unlimited
private company and issue a certificate to that effect.
• On the issue of the certificate of incorporation, the
conversion from public limited company to unlimited
private company takes effect, and the name and
changes in articles of association also take effect.
• The certificate of incorporation is conclusive evidence
that the requirements of the Act as to registration of
the conversion have been complied with.
LIFTING THE CORPORATE VEIL
Under certain circumstances, the veil of
incorporation may be pierced on the orders of a
court or in exercise of statutory powers. The veil
of incorporation is thus said to be lifted so that
the law disregards the corporate entity and
instead pays regard to the economic reality
behind the legal façade. The Companies Act
recognises that parent companies have a duty to
produce group accounts. Similarly provides that
the parent company should provide details of
The principle established in Salomon v. Salomon &
Co. that a company is a separate legal entity from
its members may be referred to as the veil of
incorporation. In general the law will not go behind
the separate personality of the company to the
members. However there are exceptions when the
legislature or the judiciary may decide that the
separation of the personality of the company and
the subsidiaries’ names, country of activity and
the shares it holds in the subsidiary.
Similarly the Companies Act provides for the
offence of fraudulent trading, a situation where in
the course of liquidation, it becomes apparent that
the business of the company has been carried on
with intent to defraud creditors, the liquidator may
apply to court to declare the persons who were
knowingly parties to the carrying on of the
business liable to make such contributions to
the company’s assets as the court thinks proper.
In Re Patrick and Lyon Ltd this involved proving
‘actual dishonesty, involving, accordingly,
accordingly to current notions of fair trading
among commercial men, real moral blame’,
which is a relatively high standard to meet.
Similarly the Companies Act provides for the
offence of wrongful trading where, if in the course
of liquidation, it appears that a company is carrying
on trade without any reasonable prospect that the
company would avoid going into insolvent
liquidation, any person who was a director of the
company may on the application of the liquidator
be ordered to make such contribution to the
company’s assets as the court deems fit.
In Adams v Cape Industries Plc, Cape an English
company which mined and marketed asbestos had
a worldwide marketing subsidiary called Capasco
which was also an English company. It also had a US
marketing subsidiary NAAC which it later closed
down but formed other subsidiaries with the
express purpose of reorganising the business in the
USA to minimise its presence there for taxation and
other liability purposes. It was sued in several suits.
In 1979, Cape sold its asbestos mining and
marketing business and therefore had no assets
in the USA.
Several claimants sought to enforce the judgments
in England where Cape had most of its assets. At
issue was whether Cape was present in the US
jurisdiction by virtue of its US subsidiaries. That
could only be so if the Court lifted the veil of
incorporation, either treating the Cape group as
one entity or finding the subsidiaries were a mere
façade or agents for Cape.
The judgment in Adams leaves only three
circumstances in which the veil of incorporation can
be lifted. First, is where the court is interpreting a
Statute or document. There has to be some lack of
clarity about a statute or document which would
allow the court to treat a group as a single entity.
Thus the Court of Appeal in Samengo-Turner v. J &
H Marsh & McLennan (Services) Ltd treated a
group of companies as a single legal entity on
the basis of their single economic interest in
interpreting the application of an EU Regulation.
Similarly in Beckett Investment Management
Group Ltd v. Hall in interpreting a clause in an
employment contract in the context of a group of
companies that formed a single economic entity the
Court of Appeal considered that it was
inappropriate to be inhibited by considerations of
corporate personality.
Second, where ‘special circumstances exist
indicating that it is a mere façade concealing the
true facts’ the court may lift the veil of
incorporation. These are cases where there is some
injustice involved in maintaining the veil of
incorporation, which was placed there deliberately
to facilitate the injustice complained of.
In Jones v. Lipman, Mr Lipman’s sole motive in
creating the company was to avoid the transaction.
The third exception is an application of the agency
principle. It could be established where there is an
express agreement between the members and the
company or it could be implied from their conduct.
Parent companies and their subsidiaries are unlikely
to have express agency agreements. They are also
unlikely to have express agreements if avoidance of
liability was the reason for setting up the subsidiary
in the first place.
LIFTING THE CORPORTAE VEIL
In Adams, the court found that first ground
inapplicable. As to the second ground, whereas the
motive of Cape in restructuring its US business was
to try to minimise its presence in the USA for tax
and other liabilities, there was nothing wrong with
this. As to the third ground, it found that the
subsidiaries were independent businesses free from
the day to day control of the parent with no general
power to bind the parent. Accordingly, none of
the three veil lifting circumstances applied and
Cape was not present in the USA through its
subsidiaries.
LEGAL EFFECTS OF THE CONSTITUTION OF A
REGISTERED COMPANY
• The company’s constitution means only the
articles of association and associated resolutions
of the general meeting (Part III of the Act).
• The memorandum still exists but it is not part of
the constitution and acts purely as a statement
by the founders of the company that they wish to
form the company and become members of it
(s. 12).
• Everything else that was formerly in the
LEGAL EFFECTS OF THE CONSTITUTION
OF A COMPANY
memorandum now forms part of the articles of
association or the application for registration.
that the company’s constitution binds the
company and its members to the same extent as
if the company and its members had
covenanted and agreed with each other to
observe the constitution. The implication of the
REGISTERED COMPANY
provision is three-fold; First, the constitution forms
a contract binding the members to the company. In
Hickman v. Kent or Romney Marsh Sheep-Breeders’
Association [1915]1 Ch. 881 the articles provided
that any differences between the company and any
of the members should be referred to arbitration.
H. a shareholder brought an action against the
company in connection with a dispute as to his
REGISTERED COMPANY
expulsion from the company. It was held that the
company was entitled to have the action stayed as
the articles constituted a contract between the
company and its members in respect of their
ordinary rights as members. Astbury J. stated at
p.900: “…articles regulating the rights and
obligations of the members generally as such do
create rights and obligations between them
REGISTERED COMPANY
and the company respectively.” The courts will for
this purpose imply terms into the articles where the
meaning encompasses what the instrument
conveys to a reasonable person having all the
background which would reasonably be available to
the audience to whom the instrument is addressed.
Thus in Equitable Life Assurance Society v. Hyman
[2002]1 AC 408 (HL), the relevant article gave the
REGISTERED COMPANY
directors a wide discretionary power to pay
bonuses on its members’ life assurance policies,
and in exercise of this power the directors paid
some policy holders a larger bonus than others.
This was contrary to ‘guarantees’ which had been
given when certain of the members took out their
policies. Lord Steyn stated that the articles should
be read as containing an implied term that the
REGISTERED COMPANY
directors would not exercise their discretion ‘in a
manner which deprived the guarantee of any
substantial value’. Similarly in Cream Holdings Ltd v.
Stuart Davenport [2010] EWHC 3096 (Ch.) the
Defendant was removed as a director, and pursuant
to the articles the removal brought about the
deemed service of a transfer notice in respect of his
shareholding, that is, deeming his intention to sell
OF A COMPANY
his shareholding.
The articles then provided procedures for the
valuation and transfer of the shares including
the appointment of a third party valuer where
the parties could not agree. The defendant
obstructed these procedures. The court held
that terms should be implied into the
procedures imposing an obligation to co-operate
REGISTERED COMPANY
and a requirement not to withhold consent
unreasonably to the nominated appointment.
These implied terms were ‘necessary…and
represent the minimum machinery necessary to
make these articles work’, the court asserted [85].
The articles cannot however be supplemented by
additional terms implied from extrinsic
circumstances.
REGISTERED COMPANY
In Bratton Seymour Service Co. v. Oxborough [1992]
BCLC 693 (CA) the company was set up to manage
the commercial aspects of a development
consisting of a number of flats, the shares being
held by the flat owners. The question for the court
was whether it was possible to imply into the
company’s articles a term that the members should
make contributions for the upkeep of the garden,
REGISTERED COMPANY
registration, a contract between a company and
members. It is, however, a statutory contract of a
special nature with its own distinctive features. It
derives its binding force not from a bargain struck
between parties but from the terms of a statute. It
is binding only insofar as it affects the rights and
obligations between the company and the
members acting in their capacity as members. If it
OF A REGISTERED COMPANY
confers provisions conferring rights and
obligations on outsiders, then those provisions
do not bite as part of the contract between the
company and the members, even if the
outsiders is coincidentally a member...Similarly if
the provisions are not truly referable to the
rights and obligations of members as such it
does not operate as a contract. Moreover, the
REGISTERED COMPANY
contract can be altered by a special resolution
without the consent of all the contracting parties. It
is also, unlike an ordinary contract, not defeasible
on the grounds of misrepresentation, common law
mistake, mistake in equity, undue influence or
duress. Moreover…it cannot be rectified on the
ground of mistake.”
However in most cases the court will not enforce
LEGAL EFFECTS OF CONSTITUTION OF
COMPANY
the contract as between individual members,
and is enforceable only through the company or,
if the company is being wound up, by the
liquidator except where a personal right is
infringed.
In Wood v. Odessa Water-works Co. (1889)42 Ch
636 a company declared a dividend and passed
a resolution to pay it by giving to the shareholders
REGISTERED COMPANY
debenture bonds bearing interest and redeemable
at par, by an annual drawing, over thirty years. The
articles empowered the company to declare a
dividend ‘to be paid’ to the shareholders. It was
held that the words ‘to be paid’ meant paid in cash,
and a shareholder could restrain the company from
acting on the resolution on the ground that it
contravened the articles. Second, members are only
REGISTERED COMPANY
bound by and entitled under the contract qua
members. In Rayfield v Hands [1960]Ch. 1 the
articles of a private company provided that a
member intending to transfer shares should inform
the directors, who would take the shares equally
between themselves at fair value. It was held that
the articles bound the defendant directors to buy
the plaintiff’s shares and related to the relationship
REGISTERED COMPANY
between the plaintiff as a member and the
defendants, not as directors, but as members of
the company, and it was not necessary for the
company to be party to the action. Third, the
constitution does not constitute a contract binding
the company or any member to an outsider i.e. a
person who is not a member of the company. This is
on the general principle that a person not a party to
REGISTERED COMPANY
a contract has neither rights nor liabilities under it.
In Eley v. Positive Government Life Assurance Co. Ltd
(1876)1 Ex.D. 88 (C.A.) the articles provided that E.
should be the solicitor to the company. He was
employed as such for a time but subsequently the
company ceased to employ him. It was held that he
was not entitled to claim damages for breach of
contract against the company as the articles did not
LEGAL EFFECTS OF CONSTITUTION OF
COMPANY
constitute a contract between E and the company.
However where a director takes office on the
footing of an article providing for remuneration for
the director, although the article is not in itself a
contract between the company and the director, its
terms may be implied into the contract between
the company and the director. In Re New British
Iron Co. [1898]1 Ch. 324 an article provided that
REGISTERED COMPANY
the remuneration of the directors should be the
annual sum of £1,000. the directors were
employed and accepted office on the footing of
the articles. For some time the directors, who
were also members, acted as directors but were
not paid. The company went into liquidation. It
was held that the article was embodied in
the contract between the company and the
DISCUSSION QUESTION
directors and they were entitled to recover the
arrears of remuneration.
The articles of association of company Q provide
that where the office of a director becomes
vacant by reason of the death, resignation,
disqualification or removal during the period of
office, the board of directors may fill the casual
vacancy. It is further provided that such a
DISCUSSION QUESTION
director may have his contract terminated by the
board of directors but he must be given three
months notice prior to the termination. Chebii, who
had no shares in the company, was appointed as
Executive Director by the board of directors to fill a
casual vacancy occasioned by the death of
Chemng’oren. A few months into the job, the
prevailing opinion among the other directors was
DISCUSSION QUESTION
that he had a penchant for making decisions
which expose the company to unnecessary risk.
The board of directors therefore decided to
‘relieve *him+ of *his+ responsibilities as an
executive director with immediate effect’. Chebii
wants the company to retain him until the
required notice period in the articles elapses.
DISCUSSION QUESTION
With the aid of decided cases discuss whether
Chebii can sue the company to compel it to
retain him until the notice period provided in
the articles of association passes.
PROMOTION AND INCORPORATION OF
COMPANIES
Promotion is the process of forming a company. A
promoter is a person who forms the intention to
form a company, and takes the necessary steps to
carry that intention into operation. In Twycross v.
Grant (1877) 2C.P.D. 469, 541 Lord Cockburn
defined a promoter as “one who undertakes to
form a company with reference to a given project
and to set it going, and who takes the necessary
PROMOTERS
steps to accomplish that purpose.” Legally the
persons who form a company are the founders,
in the Companies Act called the ‘subscribers to
the memorandum’.
A promoter is not an agent for the company he
is forming because a company cannot have an
agent before it comes into existence. In Kelner v.
POSITIONS AND DUTIES OF
PROMOTERS
Baxter (1866) LR 2CP 174, Kelner sold wine to
Baxter and others who were described as acting ‘on
behalf of the proposed Gravesend Royal Alexandra
Hotel Company, Limited’. The wine was delivered
and used. Later on when the company failed, Kelner
successfully sued Baxter personally. Erle, CJ
said:“Where a contract is signed by one who
professes to be signing ‘as agent’, but who has no
POSITION AND DUTIES OF
PROMOTERS
principal existing at the time, and the contract
would be altogether inoperative unless binding
upon the person who signed it, he is bound
thereby: and a stranger cannot by a subsequent
ratification relieve him from that responsibility.”
A promoter is also not strictu sensu a trustee for
a company that is yet to be formed. However
from the moment he acts with the company in
DUTIES OF PROMOTERS
mind, he stands as a fiduciary towards the
company. Accordingly, first, he must not make
secret profits out of the promotion such as a profit
on a sale of property to the company, and if he does
he must account to the company for the same. In
Gluckstein v. Barnes [1900] AC 240, Gluckstein and
3 others bought the Olympia exhibition premises in
liquidation proceedings for £140,000 and then
DUTIES OF PROMOTERS
promoted a company, Olympia Ltd to which they
sold the property for £180,000. There were no
independent directors. In a prospectus inviting
applications for shares and debentures the £40,000
profit was disclosed, but not a further profit of
£20,000 which they had made by buying securities
on the property at a discount and then enforcing
them at their face value. The company went into
DUTIES OF PROMOTERS
liquidation and the liquidator claimed part of the
profit of £20,000 received by Gluckstein. It was held
that he has to account for the profit to the
company.
Second, a promoter must disclose to either to an
independent board of directors or to the existing or
intended shareholders, for example by making a
disclosure in the prospectus, any material facts
DUTIES OF PROMOTERS
relating to a contract with the company, and the
company must agree to the terms otherwise the
contract is voidable at the company’s option.
In Erlanger v. New Sombrero Phosphate Co.
(1878) 3 App. Cas. 1218 (PC) A syndicate of
which E was the head, purchased an island in
the West Indies said to contain valuable mines
of phosphates for £55,000. E formed a company
DUTIES OF PROMOTERS
to buy this island, and a contract was made
between X, a nominee of the syndicate and the
company for its purchase at £110,000. It was held
that as there had been no disclosure by the
promoters of the profit they were making, the
company was entitled to rescind the contract and
recover the purchase money from E and the other
members of the syndicate. Per Lord Cairns LC at
DUTIES OF PROMOTERS
1236: “ I do not say that an owner of property
may not promote and form a joint stock
company, and then sell his property to it, but I
do say that if he does he is bound to take care
that he sells it to the company through the
medium of the board of directors who can and
do exercise independent and intelligent
judgment on the transaction.”
DUTIES OF PROMOTERS
In reality, some or all of the promoters will
usually be the first directors, or the promoter
will usually sell his business to the company in
which he is the largest shareholder, and
therefore the requirement of an independent
board may be difficult to achieve. Lindley MR in
Lagunas Nitrate Co. v. Lagunas Syndicate (1899)2
Ch 392 (CA) at 426: “After Salomon’s Case I think it
DUTIES OF PROMOTERS
is impossible to hold that it is the duty of the
promoters of a company to provide it with an
independent board of directors, if the real truth
is disclosed to those who are induced by the
promoters to join the company.”
If a promoter makes secret profit by selling
property to the company, the latter may among
other remedies, rescind the contract and recover
REMEDIES OF COMPANIES AGAINST
PROMOTERS
the purchase money paid. The company may
also compel the promoter to account for any
profit he has made, and may also sue the
promoter for damages for breach of his fiduciary
duties. However the company cannot affirm the
contract and at the same time ask for account of
profits or for damages as this would in effect be
asking the court to vary the contract.
REMUNERATION OF PROMOTERS
A promoter has no right against the company for
payment for his services rendered before the
formation of the company in the absence of a
contract under seal, because the services would
constitute past consideration. Companies are also
not bound by pre-incorporation contracts made on
their behalf before they are incorporated, nor can
they ratify, and enforce such contracts. In Kelner v.
PRE-INCORPORATION CONTRACTS
Baxter, Erle CJ stated at 1236 : “When the company
came afterwards into existence it was a totally new
creature, having rights and obligations.
Section 44(1) of the Companies Act 2015 provides
that a contract that purports to be made by or on
behalf of a company at a time when the company
has not been formed has effect, subject to any
agreement to the contrary, as a contract made with
the person purporting to act for the company or
as agent for it, and the person is personally
liable on the contract accordingly. Subsection (2)
states that such liability applies to a deed as it
applies to the making of a contract.
Denning MR stated in Phonogram Ltd v. Lane
[1982]QB 938 that the words ‘subject to any
agreement to the contrary’ mean that if there
was an express agreement that the man who
was signing was not liable, the section would
not apply. But unless there is a clear exclusion of
personal liability, where a person purports to
contract on behalf of a c company not yet
formed then however he expresses his signature
he himself is personally liable on the contract.
In Braymist Ltd v. Wise Finance Co. Ltd [2002]
EWCA Civ 127; [2002] Ch 273 CA, it was held that
the provision not only confers liabilities on the
agent, but also rights of enforcement. Thus the
underlying contract is subject to all the normal rules
of contract. In Braymist the court held that the
identity of the vendor (whether it was Braymist or
the firm of solicitors) was immaterial to the
purchaser, and so the solicitors (the agents who had
signed the contract) could enforce the contract
of sale.
A company cannot by adoption or ratification,
obtain the benefit of a contract purportedly
made on its behalf before it came into existence.
A new contract must be made under seal after its
incorporation in the same terms as the old one.
In Natal Land Co. & Colonisation Ltd v. Pauline
PRE-INCOPRORATION CONTRACTS
Colliery and Development Syndicate Ltd [1904]
AC 120 (PC) N Co. agreed with a person acting on
behalf of a future company, P. Co. that N Co. would
grant a mining lease to P Co. P Co. discovered coal
whereupon N Co. refused to grant the lease. It was
held that P Co. could not compel N Co. to grant the
lease.
Persons who purport to act on behalf of a company
before it is incorporated, cannot enforce any
liabilities arising from such action against the
company. It is essential that a principal for whom an
agent purports to act should be in existence at the
time the contract is entered into on its behalf. In Re
English and Colonial Produce Co. Ltd [1906]2 Ch
435, solicitors, on the instructions of persons who
afterwards became directors of the company
prepared the memorandum and articles of
association of the company, and paid
registration fees. It was held that the company
was not liable to pay their costs.
This principle is recognised in section 44 of the Act
which provides that a contract that purports to be
made on behalf of a company before its formation, is a
contract made with the person purporting to act for
the company or as agent for the company, and the
person is personally liable on the contract accordingly.
The same applies to a deed or instrument.
PROVISIONS ON PROMOTION OF A
COMPANY UNDER THE ACT
Under Part V of the Act, promotion entails
satisfying the general requirements for forming a
company namely;
• Coming up with the idea of forming a company.
• Doing a name search with the Registrar to
establish if the proposed name is available for
registration as a company: Section 48(1).
• If the name is available, the Registrar reserves it
for thirty days or such extended period not
exceeding sixty days ( 48(2).
PROHIBITED NAMES
Section 49 of the Companies Act identifies the
following as prohibited names:
a) A name, whose use will constitute an
offence;
b) A name which consists of abbreviations or
initials not authorised by or under the Act;
c) An offensive or undesirable name, as per the
Registrar’s opinion; e.g. Majambazi Limited;
Malaya Limited; Walanguzi Limited.
PROHIBITED NAMES
• Under section 52; names, characters, signs or symbols
which are prohibited under the regulations, cannot be
registered.
• Under section 50, the approval of the Registrar is required
for a company to be registered by a name that is likely to
give the impression that the company is connected with a
state organ; a county government; or any public authority
• Where required, the Registrar has to consult with a public
officer, prior to making the decision. Examples: Nairobi
Water and Sewerage Company Limited; JKUATES Limited,
Kiambu Water and Sewerage Company Limited; Nakuru
Water and Sewerage Company Limited
DISCUSSION QUESTION
Mutheithie Limited is a private company whose
shareholders were Mr Munga, his wife and seven
children. Mr Munga and his wife were the initial
directors for two years, until their two youngest
children were appointed directors. Kagia & Co.
Advocates were the advocates involved in the
registration of Mutheithie Limited. The articles of
association of the company provided that the
DISCUSSION QUESTION
directors may pay any person for services provided
during the promotion of the company. There is also
a provision in the articles of association that Kagia
& Co. shall be the company’s legal advisors. When
Mr Munga and his wife were directors, they
promised Kagia & Co. Advocates that they would
pay their fees for services provided during the
promotion of the company. However, by the time
DISCUSSION QUESTION
their directorships ended payment had not
been made. The new directors have convinced
the other shareholders to replace Kagia & Co.
Advocates as the company’s legal advisors,
and refused to pay their fees for legal services
provided during the promotion.
(a) Explain the legal position with respect to
payment for legal services provided in the
promotion of the Company.
DISCUSSION QUESTION
(b) Discuss whether Kagia & Co. Advocates may

successfully seek legal redress for the
termination of their appointment as legal
advisors.
1. COMPANY’S FULL LEGAL CAPACITY
Section 28 of The Companies Act 2015 provides
that unless the articles of a company
specifically restrict the objects of the company,
its objects are unrestricted. It is important to
note that in the Act, the objects clauses are
contained in the company’s articles (if they are
included at all). Section 26 provides that
provisions that were previously contained in a
TRADITIONAL ENGLISH LAW ON ULTRA VIRES
company’s memorandum of association except

those specified to be contained therein by section
12 become provisions of the company’s articles.
Section 28 is, therefore, intended to confer on
companies full legal capacity of a natural person. It
altered the traditional English law position on ultra
vires expressed in the cases discussed below. In
Ashbury Railway Carriage v. Riche (1875) L.R. 7 H.L.
653, a company was incorporated with the objects

inter alia, to make and sell or lend on hire railway
carriages and wagons, and to carry on the business
of mechanical engineers and general contractors.
The directors contracted to purchase a concession
for making a railway line in Belgium. It was held that
the contract was ultra vires the company and void,
so that not even the subsequent assent of the
whole body of shareholders could ratify it. Besides

objects expressly stated in the memorandum of
association, even objects incidental to the stated
objects were covered by the principle. Lord
Selbourne in Att. Gen. v. Great Eastern Railway
[1880]5 App. Cas. 473 at 478 said that the doctrine
of ultra vires “ought to be reasonably…understood
and applied, and…whatever may fairly be regarded
2. PROTECTION OF THIRD PARTIES
as incidental to, or consequent upon, those things
which the Legislature has authorised ought not
(unless expressly prohibited) to be held …to be ultra
vires.”
In addition, section 33 provides that the validity of
an act or omission of a company may not be called
into question on the ground of lack of capacity
because of a provision in the constitution of the
company. The section was intended to ensure

that a third party dealing with a company is
not disadvantaged by the possibility that the
company was acting beyond its capacity. It was
intended to change the traditional position of
English law which avoided transactions with
third parties which contravened the express or
incidental objects of the company.
In Mahony v. East Holyford Mining Co. (1875)
L.R.7H.L. 869 at 893 Lord Hatherley said that person
dealing with the company even if they do not have
actual notice of the company’s objects because
they have not inspected the memorandum, have
constructive notice of the powers as they are
deemed to know them since the memorandum like
most documents registered with the Registrar of
companies is open to public inspection and could
have been inspected. Accordingly if they make a
contract which is ultra vires the company, they
cannot enforce it. In Re Jon Beauforte (London) Ltd
[1953]Ch. 131 the company authorised by its
memorandum to carry on business as costumiers
and gown makers, started the business of making
veneered panels. Builders were employed to build a
factory, suppliers sold veneers and coke merchants
sold coke. Correspondence showed that the coke
suppliers had actual notice that the business being
carried on and for which coke was required was
that of veneered panel manufacturers, and they
had constructive notice of the contents of the
memorandum, and hence that the transaction was
ultra vires the company. It was held that they could
not prove their debt in the company’s liquidation.
The contract would however not have been void if
the coke merchant had not had clear notice of the
veneered panels business since coke may be used
for other businesses such as costumiers, and thus
the merchants could not have discovered from the
memorandum alone the ultra vires nature of the
transaction. Accordingly if a person dealing with a
company enters into a contract which could come
within the objects clause but in fact does not, he is
only subject to the ultra vires rule if he knew that
the goods supplied under the contract were not in
fact being used for a purpose within that clause.
This type of ultra vires cases have been described as
being ultra vires ‘in the wider sense’: Rolled Steel
Ltd v. British Steel Corpn [1982]2 W.L.R. 715, 734.
Such cases are distinguishable from ultra vires in
the narrow sense where the activities are
patently outside the objects clause such as the
supply of veneers to a theatrical costumier. In
this sense the contracts are caught by the ultra
vires doctrine even if the supplier had no actual
knowledge because he is bound by his
constructive notice of he objects clause.
3. STATUTORY OUSTER OF CONSTITUTIONAL
LIMITATIONS ON DIRECTORS’ POWERS
Section 34 (1) C.A. provides that the power of
directors to bind the company, or authorise others
to do so, is free of any limitation contained in the
company’s constitution in favour of a person
dealing with a company in good faith. A person
deals with a company if he is a party to a
transaction or other act to which the company is a
party: s. 34(2). Such a person dealing with a
STATUTORY OUSTER OF CONSTITUTIONAL
company is not bound to enquire as to any
limitation on the powers of the directors to bind the
Company, or to authorise others to do so, and is
presumed to have acted in good faith unless the
contrary is proved. In Smith v. Henniker-Major and
Co. [2002]EWCA Civ. 762, the chairman of a
company sought to rely on a similar provision in the
English CA to validate a resolution passed at the
meeting, attended only by himself, to assign to
himself certain causes of action of the company.
The chairman believed he had power under the
company’s articles to act alone, but in fact the
‘meeting’ was inquorate since the articles provided
that the quorum for a board meeting was two. The
majority of the judges in the CA held that he could
not bring himself within the scope of person dealing
with the company since he was not simply a
director dealing with the company; he was the
chairman with the duty to ensure that the
constitution was properly applied. In EIC Services
Ltd v. Phipps [2004]EWCA Civ 1069 the Court of
Appeal held that shareholder receiving a bonus
share was not a person dealing with a company
within the meaning of a similar provision, and so
the share issue was void as it had not been formally
authorised by the members. In TCB Ltd v. Gray
[1986]Ch 621 affd on other grounds [1987]Ch 458,
G was sued on a guarantee he had given to the
Plaintiff TCB to secure the indebtedness of a
company called Link. The debenture evidencing
Link’s debt had been signed by one Rowan
purporting to act as Gray’s attorney, but Link’s
articles required a director to sign personally. The
court ruled that TCB, which acted on the debenture
in good faith was protected. To the argument that
TCB did not act in good faith since it was put on
inquiry by the unusual manner in which the
debenture had been executed, the Court held that
it is impossible to establish lack of good faith within
the meaning of the sub-section solely by alleging
that inquiries ought to have been made which the
second part of the subsection says need not be
made. Moreover, transactions which a company
purports to enter into are deemed to be validly
entered into.
The person is also not to be regarded as having
acted in bad faith only because the person knew
that a particular act is beyond the powers of the
directors under the constitution of the company: s.
34(2)(b)(iii).
The limitations on the directors’ powers under the
company’s constitution include limitations deriving
from a resolution of the company or any class of
shareholders of the company, and an agreement
between the members of the company or any class
of shareholders of the company.
4. ULTRA VIRES FOR INTERNAL PURPOSE
Section 34(4) preserves the right of a member of
the company to bring proceedings to restrain the
doing of an act beyond the powers of the directors,
although such proceedings may not be brought in
respect of an act done in fulfillment of a legal
obligation arising from a previous act of the
company. Similarly, by section 34(5), the liability
incurred by the directors, or by any other person
ULTRA VIRES FOR INTERNAL PURPOSE
because of exceeding their powers is not affected.
In effect, section 34 (4) and (5) have preserved the
ultra vires doctrine for internal purposes. Thus the
abolition of the traditional connection between the
company’s objects clause and its capacity does not
mean that those acting on behalf of the company
have a to do as they wish in the company’s name. A
member has a right to seek an injunction to prevent
the company from entering into what would be
an ultra vires transaction. Moreover, directors must
also observe any limitations on their powers
arising from the company’s constitution, and they
will be liable to the company for any breaches. In
pursuing the claim against the directors the
company will have to prove that its constitution
prohibited the director’s actions, and that will
involve construing the objects’ clause. Some powers
may be construed restrictively as incidental powers.
In Re Introductions Ltd, [1970]Ch 199 the dispute
concerned the validity of a secured loan where the
company was carrying on the business of pig
farming which was ultra vires. The bank argued that
the company’s objects included the power to
borrow, since the objects made the power to
borrow an independent object, by a clause which
provided that ‘each of the proceeding sub-clauses
shall be construed independently of and shall be in
no way be limited by reference to any other sub
-clauses and the objects set out in each sub-clause
are independent objects of the company. The court
held that borrowing cannot be exercised in the air,
since it is not an end in itself, and must be for some
purpose of the company. Thus the sub-clause on
borrowing must be construed as a power, which
is exercisable for a purpose within the
company’s objects. In this case the borrowing
was not for a legitimate purpose of the
company.
However, an act which comes within the scope
of a power conferred expressly or impliedly by
the company’s constitution is not beyond the
company’s capacity by reason of the fact that the
directors entered into it for some improper
purpose. Thus in Rolled Steel Products (Holdings)
Ltd v. British Steel Corpn [1986] Ch 246, Browne
-Wilkinson LJ suggested that Re Introductions was
‘not a decision relating to ultra vires in the strict
sense: it is an example of a case in which a third
party has entered into a transaction with a
company with actual notice that the transaction
was an abuse of power and accordingly could not
enforce the transaction against the company.”
The judgment in Rolled Steel also refers throughout
to ratification by the unanimous consent of all the
shareholders where the transaction is an abuse of
corporate powers. Browne-Wilkinson, LJ stated,
“Only if the question of ratification by all the
shareholders arises will it be material to consider
whether the transaction is beyond the capacity of
the company since it is established that, although
all the shareholders can ratify a transaction within
the company’s capacity, they cannot ratify a
transaction falling outside the objects.”
The distinction is thus important for the issue of
directors’ abuse of corporate power.
DISCUSSION QUESTION
Mutei Coffee Estates Company Limited was formed
in 1973. The members of the company comprise
mainly of coffee farmers from Muranga, Kirinyaga
and Nyeri counties. Its objects clause provides that
it will operate coffee estates, sell through wholesale
or otherwise coffee seeds and other by-products of
coffee, process and add value to coffee and other
DISCUSSION QUESTION
coffee products, acquire land for purposes of its
business and sell the same, and undertake such
other business as the directors may deem
profitable and convenient.
In the late 1970s and 1980s, the company was
highly profitable as a result of the coffee boom.
However, from the year 2000, as a result of the
decline in coffee prices and near collapse of the
DISCUSSION QUESTION
coffee sector, the company began to make losses.
Its coffee business has now nearly collapsed.
Recently, the shareholders passed a resolution that
the company should subdivide and sell to its
members at market rates several of its vast estates,
and focus on processing coffee from farmers in its
factories at a fee.
Two shareholders want the company wound up on
DISCUSSION QUESTION
the grounds that the company is no longer able
to undertake its core functions, and has
deviated to other unrelated activities.
Examine the merits of the two shareholders’
contention.
RULE IN TURQUAND’S CASE
In Ernest v. Nicholls (1857)6 HL Cas 401, the House
of Lords held that a person dealing with a company
should be deemed to have notice of the contents of
the company’s registered constitutional documents.
This is because once the memorandum and articles
of a company are registered they become public
documents. It follows that such a person dealing
with the company, even if he does not have actual
notice, has constructive notice of the contents of
the public documents of the company such as the
memorandum and articles of association, special
resolutions and list of directors because they are
open for public inspection at the Companies
Registration Office.
Section 34(2) of the Companies Act, 2015 provides
that “a person dealing with a company is not bound
to enquire as to any limitation on the powers of the
directors to bind the company or to authorise
others to do so”. In addition, the
presumptions in section 34(1) apply to all those
dealing with the company in good faith, and a
person “ is not to be regarded as acting in bad faith
by reason only of his knowing that an act is beyond
the powers of the directors under the company’s
constitution”. These provisions effectively abolish
the doctrine of constructive notice of the contents
of the company’s registered documents so far as
relates to the powers of the directors, and
imposes no penalty for failure to take time to
search.
The constructive notice doctrine developed
contemporaneously with the indoor management
or internal management rule which to an extent
mitigated its effects. In Royal British Bank v.
Turquand (1856)6 El. & Bl. 327; 119 E.R. 886, the
Royal British Bank sued Turquand as the liquidator
of a mining and railway company for the repayment
of money borrowed on the security of a bond
signed by the company’s two directors and the
secretary under the company seal. The liquidator
argued unsuccessfully that the bond was not valid
Because under its constitution the directors had
power to borrow only such sums as had been
authorised by an ordinary resolution of the
company, and in this case no such resolution had
been passed. It was held that the bond was binding
on the company as the lenders were entitled to
assume that a resolution authorising the borrowing
had been passed: “…the replication shews a
resolution, passed at a general meeting, authorising
the directors to borrow on bond such sums for such
periods as and at such rates of interest as they
might deem expedient…but the resolution does not
otherwise define the amount to be borrowed…
parties dealing with [these companies] are bound
to read the statute and the deed of settlement. But
they are not bound to do more. And the party here,
on reading the deed of settlement, would find,
not a prohibition from borrowing, but a
permission to do so on certain conditions.
Finding that the authority might be made
complete by a resolution, he would have a right
to infer the fact of a resolution authorising that
which on the face of the document appeared to
be legitimately done”, Per Jervis CJ.
The companies Act provides that the acts of a
director or manager are valid notwithstanding
any defect that may afterwards be discovered in
his appointment or qualification. This effectively
validates the acts of a director who has not
been validly appointed because there was some
irregularity in his appointment. Thus an outsider
dealing with the company or a member is
entitled to assume that a person who appears to
be a duly appointed director is in fact so. The
principle is consistent with ostensible or
apparent authority in the law of agency, so that
an outsider may be protected where an
individual director acts on behalf of the
company without actual authority but with
apparent authority, which may arise from
a representation that he had authority made by the
board of directors or such a representation
contained in the company’s public documents. If a
person acts on behalf of a company without actual
authority the company, usually the board of
directors may ratify the contract in which case the
company will be bound. Further if in such a case the
company does not ratify then it will still be bound if
the other party can prove:1. that he was induced to
make the contract by the agent being held out as
occupying a certain position in the company; 2. that
the representation, which is usually by conduct was
made by the persons with actual authority to
manage the company generally or in respect of the
matters to which the contract relates, who are
usually the board of directors; and 3. that the
contract was one which a person in the position
which the agent was held out as occupying would
usually have actual authority to make. In Freeman &
Lockyer v. Buckhurst Park Properties (Mangal) Ltd
[1964]2 QB 480 (C.A.) the articles of a company
formed to purchase and resell real estate
empowered the directors to appoint one of their
body managing director. K., a director was never
appointed managing director but, to the knowledge
of the board, he acted as such. On behalf of the
company he instructed architects to do certain
work in connection with the estate. It was held that
the company was bound by the contract and liable
for the architect’s fees. K had apparent authority
because he had been held out by the board as
managing director to do what a managing director
would usually be authorised to do on behalf of the
company, and his act was within the usual authority
of a managing director. Accordingly the Plaintiff
could assume that he had been properly appointed.
According to Diplock LJ at 505, 506, “It must be
shown: (1) that a representation that the agent had
authority to enter on behalf of the company into
the contract of the kind sought to be enforced was
made to the contractor; (2) that such
representation was made by a person or persons
who had ‘actual’ authority to manage the business
of the company either generally or in respect of
those matters to which the contract relates; (3) that
he (the contractor) was induced by such
representation to enter into the contract, that is,
that he in fact relied upon it; and (4) that under the
memorandum or articles of association the
company was not deprived of the capacity to enter
into a contract of the kind sought to be enforced or
to delegate authority to enter into a contract of that
kind to the agent.” Requirement (4) above has now
been reversed by section 33 of the Companies Act
2015. In Mahoney v East Holyford Mining Co.
(1875)L.R.H.L. 869 the persons who signed the
articles of a company, and who under the articles
were entitled to appoint directors, treated some of
themselves as directors although there was no
proper appointment. The articles provided that
cheques should be signed as directed by the board.
The person acting as secretary informed the
company’s bank that the ‘board’ had resolved that
cheques should be signed by two of three named
directors and countersigned by the secretary. The
bank acted on the communication and honoured
cheques so signed. It was held that the bank was
entitled to honour the cheques and was not liable
to refund the money paid. The rule in Turquand’s
case does not apply, and thus the company is not
bound in the following cases: 1. where the outsider
knew of the irregularity or lack of actual authority.
In Howard v. Patent Ivory Manufacturing Co. (1888)
38 Ch.D 156, the articles of a company allowed the
directors to borrow up to £ 1,000 on behalf of the
company without the consent of a general meeting
and further money with such consent. The directors
themselves lent £3,500 to the company without
such consent, and took debentures. It was held that
the company was liable, and the debentures were
valid, only to the extent of £1,000. 2. Where the
outsider purported to act as a director in the
transaction, that is to act for and on behalf of the
company in the transaction. 3. Where there are
suspicious circumstances putting the outsider on
inquiry. In A.L. Underwood Ltd v. Bank of Liverpool
and Martins [1924]1 K.B. 775 (C.A.) the sole
director and main shareholder in a company paid
cheques drawn in favour of the company, into his
own account. It was held that the bank was put on
inquiry and not entitled to rely on his ostensible
authority, nor on the rule in Turquand’s case. 4.
Where a document is forged so as to purport to be
the company’s document unless it is held out as
genuine by an officer of the company acting within
the scope of his authority: See Ruben v. Great
Fingall Consolidated [1906] AC 439. In Lovett v.
Carson Country Homes [2009] EWHC 1143
administrators were appointed to Carson Homes
by Barclays Bank pursuant to powers conferred
by a debenture. Carter, a director and shareholder
asserted that his signature had been forged by the
co-director, whose signature was however genuine,
and that the debenture was therefore a nullity. The
judge found that Carter’s signature was indeed a
forgery and that the co-director had no actual
authority to apply his signature in this way, but
there had been a practice of this, sometimes
authorised or at least ratified by Carter after the
event. He further decided that both the directors
were authorised signatories for the purpose of the
equivalent of section 37 and the bank was a
purchaser. The court held that the co-director had
been clothed with ostensible authority to warrant
to the Bank that all formalities relating to approval
and execution of the debenture had been complied
with, and that the signatures could be relied upon
as genuine.
PROSPECTUSES
Section 2 of the Companies Act No. 17 of 2015,
defines a prospectus as ‘any prospectus, notice,
circular, advertisement or other invitation,
offering to the public for subscription or purchase
any shares or debentures of a company’.
A prospectus is therefore any document used to
induce the public to purchase shares or debentures
in a company. It is only in a public company that the
PROSPECTUSES
invitation can be made. A private company raises its
capital privately. The public for purposes of a
prospectus is not restricted to the public at large
but includes any section of the public, whether
selected as members or debenture holders of the
company or as clients of the person issuing the
prospectus or in any manner. In Re South of
England Natural Gas Co. Ltd [1911] only 3000
PROSPECTUSES
copies of a document which offered shares for
Subscription, and which was headed “for private
circulation only” were distributed to the
shareholders of a number of gas companies. It
was held, that there was an offer of shares to
the public.
However an offer or invitation is not treated as
made to the public if it can be regarded as not
PROSPECTUSES
calculated to result in the shares or debentures
becoming available for subscription or purchase by
persons who have not received the offer or
invitation or if it is otherwise a domestic concern of
the persons making and receiving it. In Nash
v. Lynde [1929] A.C. 158, a prospectus was sent by
N., the managing director of a company, to a co
-director. The co-director sent it to a client, who
PROSPECTUSES
sent it to a brother in law, L. The intention was to
induce L to become a director, which he did and he
also took some shares in the company. It was held
that the prospectus had not been issued.
An offer by a private company to existing members
of the company or to existing employees under an
employees’ share scheme is a domestic concern of
the persons making and receiving the offer.
PROSPECTUSES
In the Jenkin’s Report(1962) Cmnd 1749 noted with
respect to the expression ‘subscription or purchase’,
“it is generally accepted that “subscription or
purchase” involves the payment of money and
accordingly that a document containing an offer of
securities for a consideration other than cash (e.g.
shares) cannot be a prospectus although it may be
a circular…”
CONTENTS OF PROSPECTUS
The prospectus should include all matters relevant
to the issue of shares or debentures such as
names, occupations and addresses of directors,
qualification and remuneration of directors,
minumum subscription, the amount payable on
allotment of each share, particulars of the vendors
of any property to be purchased and the
CONTENTS OF PROSPECTUS
consideration to be paid, preliminary expenses of
the issue, the rights attached to various classes of
shares and the dates of, parties to and the general
nature of every material contract entered into. The
prospectus must also include the reports by the
company’s auditors setting out the profits and
losses, rates of dividend, assets and liabilites.
LIABILITY
Since a company is liable for the misrepresentation
of its directors and other agents within the scope of
their authority, a person induced to subscribe for
shares or debentures in a company by a
misrepresentation may have a remedy against the
company or the individuals responsible.
The main remedy against the company is rescission
of the contract with or without an action for
LIABILITY
damages. A shareholder cannot recover
damages for fraud against the company without
rescission because that would be inconsistent
with the contract between him and the other
shareholders. The same is true of a claim to
damages such as for breach of contract which a
shareholder qua shareholder may seek to
enforce against the company. The main remedy
LIABILITY
against the individuals responsible are
compensation for negligent misrepresentation and
damages for fraud. A promoter, director at the time
or a person authorising the issue of a prospectus is
prima facie liable to pay compensation to those
who subscribe on the faith of the prospectus for the
loss they sustain by reason of any untrue statement
LIABILITY
contained therein. The expression promoter
means a promoter who was party to the
preparation of the relevant portion of the
prospectus. Experts who give reports for
inclusion in a prospectus are also liable for
the untrue statement in their report, but not
for any other part of the prospectus. It may
also be possible to claim negligent
LIABILITY
misrepresentation under the principle in Hedley
Byrne & Co. Ltd v. Heller & Partners Ltd [1964]A.C.
465 which is that a negligent, although honest,
misrepresentation, spoken or written, may give rise
to an action for damages for financial loss caused
thereby. The law places a duty of care where one
party seeks information or advice from another
party, trusts the other to exercise due care, it is
LIABILITY
reasonable for him to do so, the other knows or
ought to know that reliance is being placed on
his skill and judgment or ability to make careful
inquiry and he does not expressly disclaim
responsibility for his representation.
With respect to damages for fraud, liability will
arise if a prospectus is issued which contains a
false statement which the person issuing does
Liability
Not believe to be true with the intention that
the other person should act upon it to his
detriment.
ORGANS OF THE COMPANY
• The organs of a company encompass
the members and the directors: they
each have constitutional authority
to act as the company rather than
merely to represent the company as
its agent.
ORGANS OF THE COMPANY
• Traditionally, the relationship between the
organs of a company has been the subject of
debate from the perspective of agency theory
which considers them as delegates of the
company with defined powers exercisable on
behalf of the company, and organic theory
which considers them as epitomisation of the
SHAREHOLDERS AS AN ORGAN OF THE
COMPANY
company. The latter theory is now more
generally accepted as applying to the organs of a
company.
As regards the shareholders, the Companies Act
recognises a limited but nevertheless significant
role for them. It gives members certain rights and
reserves to them certain important prerogatives to
SHAREHOLDERS AS AN ORGAN OF THE COMPANY
the exclusion of the directors. This is done when

there is a substantial risk associated with leaving
power in the hands of the directors. Thus it is
members, not directors who must approve
certain types of contracts between the company
and its directors, members have the right to
decide upon changes to the constitution of the
SHAREHOLDERS AS AN ORGAN OF THE COMPANY
company, and to the rights attached to their

shares. Members also have the right to
remove the directors. And when wrongs
have been committed against the company
but the directors, perhaps because of selfish
interest are not inclined to pursue the
claims, members can sometimes pursue
COMPANY
these claims and obtain a remedy for the
company.
Besides the rights bestowed on members by the
Act additional rights of control are derived from
the articles of association itself. This is the
agreement that divides a company’s power
between the directors and the members. It sets
SHAREHOLDERS AS ORGANS OF A
COMPANY
out the constitutional framework of the
company. Companies are free to draft their own
articles, but the Companies Act 2015 provides
default sets of Model Articles of Association for
different types of companies. These default
models will automatically apply to companies
that do not register their own articles, and will
COMPANY
in any event apply to the extent that any
registered articles do not exclude or modify the
relevant Model Articles. The basic rule in the
Model Articles is that the directors, not the
members, will manage the business of the
company, subject to any exceptions in the Act.
However the shareholders may by special
COMPANY
resolution direct the directors to take, or refrain
from taking specified action, although no such
special resolution invalidates anything which the
directors have done before the passing of the
resolution. Where the general management of
the company is vested in the directors, the
members have no power by ordinary resolution
COMPANY
to give directions to the board or to overrule its
business decisions. In Automatic Self-Cleansing
Filter Syndicate Co. Ltd. V. Cuninghame [1906]2
Ch 34 (CA), article 96 of the company’s articles
of association vested in the directors ‘the
management of the business and the control of
the company’, and article 91 specifically
COMPANY
empowered them to sell any property of the
company on such terms and conditions as they
might think fit. At a general meeting a resolution
was passed directing the board to sell the
company’s undertaking to a new company
formed for the purpose, but the directors
disapproved of the proposed terms and declined
COMPANY
to carry out the sale. It was held that the
shareholders had no say in the matter, which
was for the board alone to decide.
In Quin & Axtens Ltd v. Salmon [1909] 1 Ch. 311
(CA) the articles contained an article like Table A,
article 80, and also provided that no resolution
of the directors to acquire or dispose of
SHAREHOLDERS AS ORGANS OF A
COMPANY
premises was to be valid unless neither A nor B
(the managing directors) dissented. The
directors resolved to acquire premises, but B
dissented. An ordinary resolution to the same
effect as the board resolution was passed at an
extraordinary general meeting of the company.
It was held that the ordinary resolution was
COMPANY
inconsistent with the articles and the company
was restrained from acting on it: [Approved by
the House of Lords sub nom without the
Respondents even being called in Quin & Axtens
Ltd v. Salmon [1909] AC 442]. The directors’
powers can however be altered for the future by
an alteration of the articles in the proper
COMPANY
way, but the articles cannot be altered with
retrospective effect. If the directors are unable
to exercise any of their powers because of a
deadlock on the board or because their number
has fallen below the number required for a
quorum, the company in general meeting may
exercise that power. The company in general
COMPANY
meeting may however act if there is no board
competent or able to exercise the powers
conferred upon it such as because of a deadlock.
In Barron v. Potter [1914] 1 Ch. 895, the articles
gave the board of directors power to appoint an
additional director and, owing to differences
between the directors, no board meeting could
COMPANY
be held for the purpose. Held, the company
retained the power to appoint the additional
director in general meeting. The position is
similar where the company has no directors, per
Lord Halisham in Alexander Ward & Co. Ltd v.
Samyang Navigation Co. Ltd 1975 S.C. (H.L.) 26
at 47. The ruling in Cuninghame’s case does not
HOW A PESRON BECOMES A MEMBER
OF A COMPANY
apply to decisions outside the company’s
business and its management. Thus in Re
Emmadart Ltd [1979] Ch 540, it was held that
directors had no power under such an article to
resolve to put the company into liquidation.
S. 92 CA provides that the subscribers to the
memorandum and articles become members of
The Register of members
the company on registration of the company.
However, as soon as the company has been
registered, it should enter in its register of
members the names and addresses of persons
who subscribed to the memorandum and the
date on which they became members. Any other
person who later agrees to become a member
Shareholding by Subsidiary prohibited
of the company becomes a member when their
name is entered into the register of members.
The company is prohibited from entering on its
register of members, notice of any trust,
whether express, implied or constructive: S. 104
CA. A company is also generally prohibited from
being a member of its holding company, and any
Exceptions to shareholding by
subsidiary
transfer or allotment of shares in a company to
its subsidiary is void: S. 108 CA. The prohibition
does not however apply where the subsidiary is
acting only in the capacity of executor or
administrator or trustee (except where the
holding company is beneficially interested under
the trust): S. 109 CA. A subsidiary company may
Shareholding
thus hold shares in a holding company as a
trustee for the purposes of a pension scheme or
an employees’ share scheme: S. 110 CA. The
prohibition also does not apply if the shares are
held by a subsidiary in the ordinary course of its
business as an intermediary which carries on
business of dealing in securities and is an
Where register of members kept
authorised dealer in securities.
The company must lodge with the Registrar a
copy of the its register of members within
fourteen days after its preparation is complete,
and so must an amended register within
fourteen days after amendment. It must also
keep the register at its registered office: S. 93
Rectification of register
CA. In a public company the register as well as
the index of members is open to inspection and
copying without charge for members, and
subject to payment of any reasonable charges
for copies on request by non members: S. 96 CA.
If the name of a person is improperly entered
into or omitted from the register of members, or
Decision making in and by companies
the cessation of a person from membership has
not been entered in the register, the affected
person or the company or any member of the
company may apply to court for rectification of
the register: S. 103.
General meetings, which all the members are
entitled to attend, and class meetings which
COMPANY
only members of a class of shareholders are
entitled to attend, are assumed to be the
preferred forum for decision making in public
companies. Thus S. 255(2) CA provides that a
resolution of the members or of a class of
members of a public company may be passed
only at a meeting of the members.
DECISION MAKING IN COMPANIES
By contrast, section 255(1) CA allows private
companies to pass resolutions by members
either by written resolution or at a meeting of
members. As regards the thresholds for voting,
most corporate decisions can be taken by an
ordinary resolution, which is passed by a simple
majority with each member having one vote for
Decision-making in and by Companies
each share or one vote for each one hundred
shillings of stock in the case of companies with a
share capital, and one vote for each member in
the case of companies without a share capital,
unless the articles provides otherwise: S. 258
CA. Where a written resolution is passed by
simple majority, it should be supported by
SHAREHOLDERS
members representing a simple majority
of the total voting rights of eligible members:
S. 256(1) & (2) CA. On the other hand, when the
decision is taken by a show of hands at a
meeting, a resolution is passed by a simple
majority of members entitled to vote, voting in
person or by duly appointed proxies to support
Decision-making in and by Companies
the resolution: S. 256(3) CA.
Where an ordinary resolution is passed on a poll
at a meeting, the resolution should be
supported by members representing a majority
of the total voting rights of members who are
entitled to vote, and vote in person or by proxy:
S. 256(4) CA. On matters where there is added
risk, however, a special majority of not less
than seventy-five percent is required: s. 257(1)
CA. Such decisions include amending the
company’s articles, disapply members’
preemption rights when shares are issued,
reduce share capital, and resolve that the
company be liquidated. A resolution taken by
such special majority is called a special
resolution.
Ordinary and special majorities are assessed
differently depending on whether decisions are
made by written resolution or at a meeting.
Decisions taken by written resolution must be
passed by the required percentage of all
members with voting rights, while decisions
taken at meetings need only be passed by the
INFORMAL DECISION MAKING: THE
DUOMATIC PRINCIPLE
appropriate percentage of those present and
voting either on a show of hands or by poll,
whether in person, by proxy or in advance.
Members may make decisions formally by
written resolutions or by vote in meetings.
However informal assent is also possible. The
informal unanimous assent rule
DUOMATIC PRINCIPLE
provides that a formal general meeting or
written resolution is unnecessary in a private
company if all the members entitled to vote on
the matter informally assent to the transaction.
A company is bound in a matter intra vires by
the unanimous but informal agreement of its
Voting members. In Re Duomatic Ltd [1969]2 Ch
Informal Decision-making
365, the liquidator of Duomatic Ltd claimed
a refund of remuneration from one of the
company’s directors on the ground that the
payment was not formally authorised by
the company in general meeting. The court
held that where it can be shown that all the
shareholders who have the right to attend
DUOMATIC PRINCIPLE
and vote at a general meeting of the company
assent to a matter which a general meeting
of the company could carry into effect, the
assent is as binding as a resolution in a general
meeting.
What type of informal consent is sufficient to
trigger the Duomatic principle remains topical.
DUOMATIC PRINCIPLE
In Schoffield v. Schoffield [2011] EWCA Civ 103
N representing the corporate holder of 99.9% of
the shares in the company unsuccessfully
argued that he and his son who held the
remaining shares had agreed informally to treat
as valid and effective a meeting which was
called without the 14 days notice required by
DUOMATIC PRINCIPLE
the Companies Act and at which amongst other
matters, the son was dismissed as director and
N was appointed sole director. The court held
that an unqualified agreement by the son had
not been objectively established.
The informal consent of the members must be
unanimous. In Re D’Jan of London Ltd [1994] 1
Informal Decision-making
BCLC 561 (Ch), the principal shareholder held
99% of the shares and his wife 1%. He could not
argue that there had been a unanimous informal
members’ resolution ratifying his negligence
because although his wife was likely to have
supported him, the issue was never in fact
raised.
DUOMATIC PRINCIPLE
The Duomatic principle not only applies to
decisions which formally require special and
ordinary resolutions, but also to decisions
formally required to be taken by a group or class
of shareholders, and to decisions by members to
ratify breaches of directors’ duties. In Shahar v.
Tsitsekkos [2004] EWHC 2659 (Ch) the principle
DUOMATIC PRINCIPLE
was extended so that the agreement of the
beneficial owner of the shares is effective where
the trustee can be compelled to vote in
accordance with the beneficial owner’s wishes.
However if shares are held for more than one
beneficial owner jointly the assent of one of a
number of these owners will not suffice.
DUOMATIC PRINCIPLE
Similarly where a person holds some shares for
himself and other shares as a trustee or
executor, his assent will prima facie apply only in
relation to his shares, and not the shares he
holds on trust for a beneficial owner unless he
intends or purports to be making a decision in
relation to those shares: Rolfe v. Rolfe [2010]
EWHC 244.
DUOMATIC PRINCIPLE
There are limits to the application of the
principle. First, in Re New Cedos Engineering Co.
Ltd [1994] 1 BCLC 797 it was emphasised that
the Duomatic principle cannot be invoked in
order to enable something to be done informally
which those concerned would not be competent
to do formally at a general meeting or in other
DUOMATIC PRINCIPLE
specified formal manner. In the case the number
of registered members had reduced to one, so
that no meeting complying with the company’s
articles could effectively be held. It was ruled
that nothing done informally by this sole
member was equivalent to a decision of the
members reached at a meeting. Similarly in Re
DUOMATIC PRINCIPLE
Oceanrose Investments Ltd [2008] EWHC 3475
(Ch) approval by the sole member of a UK
company to the terms of a proposed cross
-border merger did not over-come the
requirement for meeting under reg. 13 of the
Companies (Cross-Border Mergers) Regulations
2007.
SHAREHOLDER’S INTERESTS
Controlling members are members of a
company who between them possess sufficient
voting power to pass the appropriate resolution
in general meeting. In general the majority of
the company may exercise their votes to control
the company provided that they comply with
the Companies Act, and in general “when voting
SHAREHOLDER’S INTEREST
a shareholder may consult his own interests”:
per Megarry V-C in Estmanco (Kilner House) v.
G.L.C. [1982]1 All E.R. 437 at 444.
It was for long held that a share is a piece of
property which is to be enjoyed and exercised
for the owner’s advantage. Section 323 CA
provides that the shares or other interest of a
Shareholders’ Interests
member in a company are personal property
and are not in the nature of real estate. Thus a
shareholder may bind himself by contract to
vote in a particular way: “When a director votes
as a director for or against any particular
resolution in a directors’ meeting he is voting as
a person under a fiduciary duty to the company
for the proposition that the company should
take a certain course of action. When a
shareholder is voting for or against a particular
resolution he is voting as a person owing no
fiduciary duty to the company and who is
exercising his own right of property, to vote as
he thinks fit. The fact that the result of the
voting at the meeting (or at a subsequent poll)
will bind the company cannot affect the position
that, in voting, he is voting simply in exercise of
his own property rights”, per Walton J. in
Northern Counties Securities Ltd v. Jackson &
Steeple Ltd [1974]1 W.L.R. 1133 at 1144.
THE MAJORITY RULE
The general rule in companies is majority rule,
whether by directors or members, although in the
latter case sometimes with the additional
protection of super majority. Majority rule applies
not only to decisions to pursue business activities,
but also to decisions not to pursue corporate
wrongdoers.
As has been seen the law normally allows members
THE MAJORITY RULE
to treat their vote as an incident of property
which they may exercise prima facie to their
advantage. Moreover even the strict fiduciary
duties of directors do not go as far as prohibit
them altogether from acting in matters where
their own personal interests are affected by
what they do as directors, still less from voting
as they like in their capacity as members.
MAJORITY RULE
The majority rule meant that substantial power was
placed in the hands of those who control more than
half the votes on the board or at a members’
meeting. Indeed where shares were dispersed
among a large number of members, comparable
power is exercisable by persons who command less
than fifty per cent of the votes. Minority members
must, in principle, accept the decisions of the
THE MAJORITY RULE
majority and must also acknowledge that their
power is a fact of business life. In reality minority
tend not to have clout in the company.
The law must thus provides some remedies to meet
the cases in which majority power is abused in
recognition of the idea that there can be no power,
including over other people’s investment, without
corresponding responsibility. The law must thus
THE MAJORITY RULE
strike a balance between so that it does not
readily support the majority and condone unfair
and wrongful acts and decisions, or extend too
great an indulgence to the minority so that they
are able to obstruct the company’s legitimate
business.
Both the legislature and judiciary have
attempted to reconcile the opposing interests.
THE MAJORITY RULE
Statutory protection is given to minorities by
formalities of several kinds including requiring a
special resolution rather than simple majority vote
in important matters such as constitutional
alteration; requiring court’s sanction in matters like
reduction of capital or scheme of arrangement; and
giving dissentients a right to apply to court to have
a resolution cancelled where for example there is
THE MAJORITY RULE
variation of class rights, and sometimes
empowering the court to order alternatively that
they be bought out. Some checks are imposed on
the use of these measures by safeguards such as
that dissentients must hold at least 15% in value of
share capital.
Other provisions give members direct access to the
courts, for example the right to petition to have the
THE MAJORITY RULE
company compulsorily wound up, and the right
to seek relief for unfairly prejudicial conduct.
Courts also developed rules to curb abuse of
power by those in control such as the fiduciary
duties of directors. Majority members are also
bound to act bona fide and in the common
interest in the alteration of articles and variation
of class rights.
THE MAJORITY RULE
Apart from these well known limitations, a
significant problem for members seeking to cure
maladministration of the company by legal
action was that courts’ resistance to such claims
on several grounds: avoiding multiplicity of suits,
majority rule should prevail, and courts cannot
adjudicate on matters of business policy but on
matters of law.
THE RULE IN FOSS V. HARBOTTLE
Historically, the main judicial instrument by which
the policy of non-intervention was maintained was
the rule in Foss v. Harbottle. Minority members who
complained of a wrong or irregularity found this a
formidable, and perhaps insurmountable barrier to
their quest for justice, even where they had a real
and well founded grievance. The main criticism
against the rule was that it was complex, and
FOSS V. HARBOTTLE
it was considered unjust to recognise a substantive
right but deny a remedy on procedural grounds.
The rule provided that subject to certain limited
exceptions; first, the proper claimant in an action
for a wrong alleged to have been done to the
company by anyone, whether director, member or
outsider, or to recover money or damages alleged
to be due to it is prima facie the company itself (the
THE RULE IN FOSS V HARBOTTLE
proper claimant principle); and second, if the
alleged wrong is a matter which it is competent
for the company to settle itself (the internal
management principle) or, in the case of an
irregularity to ratify or condone by its own
internal procedure (the irregularity principle),
then no individual member may bring action.
This is because a general meeting may be held
so that the members may by ordinary
resolution decide whether to sue or not. In Foss
v. Harbottle (1843)2 Hare 461; 67 E.R. 189, two
members took proceedings against the
company’s five directors and others alleging that
the property of the company had been
misapplied and wasted and certain mortgages
improperly given over the company’s
property. They asked that the Defendants
should be held accountable to the company, and
also sought appointment of a receiver. It was
held that it was incompetent for the Plaintiffs to
bring such proceedings, the sole right to do so
being that of the company in its corporate
character.
In Pavlides v. Jensen [1956] Ch 565 a minority
shareholder sought to bring an action on behalf of
himself and all other shareholders, save three who
were directors, against those directors and the
company for damages, alleging that the directors
had been negligent in selling an asset of the
company for less than its market value. Most of the
shares in the company were held by another
company the directors of which were also the
directors of the first company. It was held that since
the sale of the mine was intra vires the company
and there was no allegation of fraud by the
directors or appropriation of assets of the company
by the majority shareholders in fraud of the
minority, the action was not maintainable. It was
open to the company, on the resolution of a
RATIONALE FOR RULE
majority of the shareholders, to sell the mine at a
price decided by the company in that manner, and
it was open to the company by a vote of the
majority to decide that, if the directors by their
negligence had sold the mine at an undervalue,
proceedings should not be taken by the
company against the directors.
The rule avoids multiplicity of suits. The reason for
RATIONALE FOR RULE IN FOSS V.
HARBOTTLE
the last part of the rule is that litigation at the suit
of a minority of the members is futile if the majority
do not wish it. In (1875)1 Ch.D. 13 at 25, Mellish L.J.
MacDougall v. Gardiner stated, “If the thing
complained of is a thing which in substance the
majority of the company are entitled to do, or if
something has been done irregularly which the
majority of the company are entitled to do regularly
HARBOTTLE
, or if something has been done illegally which the
majority of the company are entitled to do legally,
there can be no use in having litigation about it, the
ultimate end of which is only that a meeting has to
be called, and then ultimately the majority gets its
wishes.”
The court would thus not interfere with
irregularities at meetings at the instance of a
HARBOTTLE
shareholder. In MacDougall v. Gardiner (1875)1 Ch.
D. 13 (C.A.), the articles empowered the chairman,
with the consent of the meeting, to adjourn a
meeting, and also provided for taking a poll if
demanded by five shareholders. The adjournment
was moved, and declared by the chairman to be
carried; a poll was then demanded and refused by
the chairman. A shareholder suing on behalf of
HARBOTTLE
himself and all other shareholders except those
who were directors brought an action against the
directors and the company for a declaration that
the chairman’s conduct was illegal and an
injunction to restrain the directors from carrying
out certain arrangements without the shareholders’
approval. It was held that the action could not be
brought by a shareholder; if the chairman was
HARBOTTLE
wrong, the company alone could sue. In Devlin v.
Slough Estates Ltd, The Times, June 16, 1982 it was
held that the court will not grant a declaration that
the accounts are not in the correct form at the
instance of a shareholder.
The rule was subject to a number of exceptions, in
which cases a minority of shareholders, or even
an individual shareholder, may bring a minority
FORM OF ACTION
shareholder’s action, i.e. the minority shareholders
sue on behalf of themselves and all other
shareholders except those who are defendants, and
may join the company as a defendant. The directors
are usually defendants. This action was brought
instead of an action in the name of the company.
Lord Denning M.R. in Wallersteiner v. Moir (No. 2)
[1975] Q.B. 373 at 390 stated, “The form of the
FORM OF ACTION
action is always ‘A.B. (a minority shareholder) on
behalf of himself and all other shareholders of
the company’ against the wrongdoing directors
and the company”.
This type of action is a derivative action, i.e. the
right to sue derives from that of the company.
The shareholders as such have no such right. If
their own personal rights are being infringed
EXCEPTIONS OF RULE (LIMITS ON SHAREHOLDER’S
INTEREST): 1. FRAUD ON THE MINORITY
they should bring a representative action.

The exceptions are: first, where the wrong
complained of is a ‘fraud on the minority’ by the
majority and the wrongdoers are in control of the
Company. The wrongdoers control the majority of
the shares in the company, and will not permit an
action to be brought in the name of the company. If
the aggrieved minority could not bring a minority
LIMITS ON SHAREHOLDER’S INTEREST:
FRAUD ON THE MINORITY
shareholders’ action in this case their grievance
would never reach the courts. Where an action is
brought under this exception the wrongdoers are
usually both directors and controlling shareholders.
In Cook v. Deeks [1916] 1 A.C. 554 an individual
shareholder brought an minority shareholders’
action to compel the directors to account to the
company for the profits made out of the
construction contract which they took in their own
names, and who, by their voting power, prevented
the company itself from suing. As to the meaning of
fraud, in Daniels v. Daniels [1978]2 All E.R. 89 the
minority shareholders of a company were allowed
to bring an action where the directors had
authorised the sale of company land to one of them
at a price alleged to be well below its market price.
The directors objected that since fraud had not
been alleged the action should not be allowed.
Templeman J. laid down a wider definition of
‘fraud’ for this purpose thus: “If minority
shareholders can sue if there is fraud, I see no
reason why they cannot sue where the action of
the majority and the directors, though without
fraud, confers some benefit on those directors
and majority shareholders themselves.”
The judge distinguished Pavlides v. Jensen on the
grounds that the directors had not benefited from
this “negligence”. In essence since fraud is often
impossible to prove, it may be presumed from such
obvious facts.
In Estmanco (Kilner House) Ltd v. Greater London
Council [1982]1 All E.R. 437 the majority
shareholder proposed to alter a contract it had with
company in order to deprive the minority
shareholders of certain rights. The majority
shareholder then proposed a resolution whereby
the company should not sue for breach of contract.
When the minority shareholder sought to sue on
the company’s behalf the majority shareholder
argued that since it had acted bona fide for the
benefit of the company there was no fraud on the
minority to allow such an action. Megarry V-C
refused to accept that test of fraud on the
minority as applicable for the purposes of
bringing an action. It only related to the
alteration of the company’s articles. In this case
the action of the shareholder injured one
category of shareholder to the benefit of
another. Fraud in this sense is abuse of power.
The second element concerns the control by the
majority. In Prudential Assurance Co. Ltd v. Newman
Industries Ltd (No. 2) [1982]1 All E.R. 354 Vinelott J.
was prepared to extend the exception beyond
control denoting actual voting power, as appeared
to have been settled, when the alleged fraud was
committed by directors who did not exercise actual
voting control but who exercised control in practice.
The majority cannot waive a breach of a director’s
fiduciary duty by approving a misappropriation by
him of the company’s property which would be a
fraud on the minority: Cook v. Deeks [1916]1 A.C.
554. The same is true where there is an attempted
confirmation of a share issue made by a director in
FRAUD ON MINORITY
order to give him control of the company and
benefit the majority to the detriment of the
minority i.e. the general meeting cannot then
waive the director’s breach of duty: Ngurli v.
McCann (1954) 90 C.L.R. 425.
Members cannot by resolution at general
meeting, expropriate the company’s property. In
Menier v. Hooper’s Telegraph Works (1874) L.R.
FRAUD ON MINORITY
9 Ch. App. 350 the shareholders in E Co. which
was formed with the object of constructing a
submarine telegraph, were H Co. with 3,000 shares,
M with 2,000 and thirteen other persons with 325
between them. H Co. was to make and lay cables
for E Co. The directors of E Co., who were nominees
of H Co., and H Co. decided not to pursue an action
in which E Co. was claiming a concession to
FRAUD ON MINORITY
construct the telegraph, procured the passing of a
resolution in general meeting to put E Co. into
voluntary winding up and concealed the fact that
they had agreed to end the agreement between E
Co. and H Co. so that H Co. could sell the cable to a
third company. M brought an action on behalf of
himself and the other shareholders except those
who were defendants, in which he joined E Co. as
Defendant. He claimed inter alia a declaration
that H Co. was a trustee of the resulting profit
for M and other shareholders in E Co. It was
held that M succeeded. The majority
shareholder had obtained certain advantages by
dealing with something which was the property
of the whole company.
Similarly, an alteration of the articles by special
BEST INTERESTS OF THE COMPANY
resolution in general meeting in order to enable
some members to acquire the shares of other
members must be bona fide for the benefit of the
company as a whole. Thus in Sidebottom v. Kershaw
, Leese & Co. [1920]1 Ch. 154 (CA) a private
company in which the directors held a majority of
the shares, altered its articles so as to give the
directors to power to require any shareholder who
competed with the company’s business to transfer
his shares, at their fair value to nominees of the
directors. S who had a minority of the shares and
was in competition with the company, brought an
action for a declaration that the special resolution
was invalid. It was held that as a power to expel a
shareholder by buying him out was valid in the case
of original articles it could be introduced in altered
articles provided the alteration was made bona
fide for the benefit of the company as a whole.
At the same time cases such as Greenhalgh v.
Arderne Cinemas Ltd [1951] Ch. 286 (CA)
established the rule that in making any
alteration to the articles the general meeting
must act bona fide for the benefit of the
company as a whole. In the case the articles of a
private company prohibited a transfer of shares
to a non-member so long as another member
was willing to buy them at a fair value. The
holder of the majority of the shares wished to
transfer them to a non-member, so the articles
were altered so as to permit a transfer to any
person with sanction of an ordinary
resolution. It was held that the alteration was
BEST INTERESTS OF COMPANY
bona fide and valid although the minority lost their
rights of pre-emption. (see also Shuttleworth v. Cox
Bros Ltd [1927]2 K.B. 9 (CA)). Thus Shareholders are
the best judges of their own affairs, and it is only
where it appears that some sinister motive has
operated, or that interests other than the interest
of the company has plainly prevailed, that the Court
will entertain a complaint. The test always is
whether the resolution complained of can be
held to be so oppressive and extravagant that
no reasonable man could consider it to be for the
benefit of the company. Thus controlling members
do owe a duty to the company i.e. the corporators
as a body, to act bona fide for the benefit of the
company as a whole and not to commit fraud on
the minority.
BEST INTERESTS OF CLASS
Similarly a class meeting of preference
shareholders sanctioning a modification of the
special rights of the preference shares must act
bona fide for the benefit of the class as a whole:
In Re Holders Investment Trust Ltd [1971]1
W.L.R. 583 a reduction of capital was to be
effected by cancelling the five percent £1
cumulative preference shares and allotting the
BEST INTERESTS OF CLASS
holders an equivalent amount of six percent
unsecured loan stock repayable 1985/90. The
majority of the preference shareholders who
supported the reduction, were also holders of 52
percent of the company’s ordinary stock and
non-voting ordinary shares. Minority preference
shareholders opposed the reduction. The court
refused to confirm it. The majority preference
BEST INTEREST OF CLASS
shareholders had considered what was best in their
own interests, based on their large equity
shareholding, without considering what was best
for preference shareholders as a class. Further the
reduction was unfair-the advantages of the
exchange into unsecured stock did not compensate
for the disadvantages.
EQUITY
The controlling members may in fact be subject to
more stringent controls than the accepted doctrine
of a fraud on the minority, although not being
subject to the full fiduciary duties of a director. In
Clemens v. Clemens Bros Ltd [1976]2 All E.R. 268 the
Defendant owned 55 percent of the issued shares
of a family company. She was one of five directors
and proposed to give the other directors shares
EQUITY
and to set up a trust for long service employees.
The Plaintiff, who was the Defendant’s niece, held
40 percent of the shares and was not a director. The
defendant proposed resolutions to increase the
capital so that the Plaintiff’s shares would fall below
25 percent of the total and her right to veto special
resolutions would be lost. It was clear that she
would never now obtain control of the company.
EQUITY
The judge held that the defendant was not entitled
to exercise her majority votes as an ordinary
shareholder in any way she pleased. That right was
subject to equitable considerations which could
make it unjust to exercise them in a particular way.
In this case such considerations applied and the
resolutions would be set aside.
The importance of Clemens is that it shows that the
EQUITY
majority do not have unrestricted voting rights if it
is unjust in the particular circumstances.
In Estmanco (Kilner House) v. Greater London
Council [1982]1 All E.R. 437 Megarry V-C however
accepted the general proposition that the
shareholders do not owe any fiduciary duties but
affirmed that in altering the articles they are subject
to the doctrine of fraud on the minority, i.e. they
EQUITY
must act in what they believe to be in the best
interest of the company as a whole. In that case the
majority shareholder wished to deprive the
company of a right of action under a contract and
proposed, and carried a resolution to that effect. A
minority shareholder sought to bring an action on
behalf of the company to prevent this. Megarry V-C
considered the situation at 444 thus: “Plainly there
EQUITY
must be some limit to the power of the majority to
pass resolutions which they believe to be in the
best interests of the company and yet remain
immune from interference by the courts. It may be
in the best interests of the company to deprive the
minority of some of their rights or some of their
property, yet I do not think that this gives the
majority an unrestricted right to do this, however
ILLEGALITY OR ULTRA VIRES
unjust it may be, and however much it may
harm shareholders whose rights as a class differ
from those of the majority.”
Where the act is one which is illegal, or ultra vires
the company, it cannot be condoned by the
majority of the members. Also, where the matter is
one which can be validly done or sanctioned not by
simple majority, but only by some special majority
A JUSTICE EXCEPTION?
such as a special resolution, which has not been
obtained. In Baillie v. Oriental Telephone Co.
[1915]1 Ch. 503 a shareholder was able to bring a
minority shareholder’s action to restrain the
company from acting on a special resolution of
which insufficient notice had been given.
It was assumed though not decided in Heyting v.
Dupont [1964]1 W.L.R. 843 that where justice
demands that an action be brought such as where
all that is alleged is damage to the company arising
from a director’s misfeasance in withholding an
asset of the company without fraud or ultra vires.
The company was to exploit an invention of the
defendant consisting of a machine for making
plastic pipes and the defendant withheld the
company’s patent application. However the
company could not have exploited the invention
because it was in a state of paralysis owing to
discord so there was no damage to the company
and so justice did not require the exception to be
made. In Prudential Assurance Co. Ltd v. Newman
Industries Ltd (No. 2), Vinelott J. based his decision
on the derivative action against the directors on the
doctrine that a minority action could be allowed if
“the interests of justice require that a minority
action should be permitted”. The Court of Appeal
however expressed the opinion that any exception
based on the justice of the case was not a practical
one.
The difficulty is that the question whether a
minority should be allowed to bring a derivative
action ought to be a preliminary issue tried before
the merits of the case. A justice exception will
however require a full trial of the issue to
determine how justice will best be served. The
court of Appeal in Prudential thought that in such a
preliminary action the minority shareholder should
be required to establish at least a prima facie case
that (a) the company is entitled to the relief
claimed, and (b) the action falls within the proper
REPRESENTATIVE ACTIONS
boundaries of the rule restricting members’ actions
on behalf of the company. In Hogg v. Cramphorn
[1967] Ch. 254 the Plaintiff was held to be justified
in suing in a representative capacity in respect of
the alleged wrongful disposition of the company’s
money by the directors which could be condoned
by a resolution in general meeting, so that the
action should have been dismissed unless it was not
a derivative representative action but an individual
rights representative action.
A member of a company may enjoy a right alone or
in common with other members of the company
and the rule in Foss v. Harbottle has no application
where individual members sue, not in right of the
company, but in their own right to protect their
individual rights as members. In such a case a
member can bring an action in his own name, and
may sue on behalf of himself and other members.
The breach of duty owed to an individual
shareholder cannot be ratified by a majority of
shareholders. Thus in Pender v. Lushington (1866)6
Ch. D. 70, a shareholder was able to enforce the
articles giving him the right to vote at a meeting
and compel the directors to record his vote.
Similarly actions for damages by shareholders in
their own right do not come within the rule.
Circumstances in which an individual member
can sue in his own name are; first, where the
company is acting illegally or ultra vires; second,
where a special majority is required and has not
been obtained; and third, where the company is
acting contrary to its articles.
In the Prudential case, the minority shareholder
used this form of action in addition to the
derivative action. The claim was based on the loss
suffered by the shareholders as a result of the
director’s alleged fraud on the company. Because
the company had lost money, the shareholder’s
profit expectations had been diminished. The
argument failed in the Court of Appeal. The alleged
loss to the shareholders was neither separate
nor distinct from that suffered by the company.
Only one loss had occurred and only one action
could be allowed. Such actions could subvert the
Rule in Foss v Harbottle.
MISFEASANCE PROCEEDINGS
Section 324 provides that misfeasance proceeding
may be taken, if in winding up it appears that any
promoter, or director, manager or liquidator or any
officer of the company has misapplied or retained
or has become liable or accountable for any money
or property of the company or has been guilty of
any misfeasance or breach of trust in relation to
the company.
The official receiver, liquidator, any creditor or
contributory may make the application, and the
court examine the conduct of such a person and
order him to repay or restore the money or
property or any part thereof, with interest. It
may also order him to contribute to the assets
of the company as it thinks fit.
In Coventry and Dixon’s Case (1880)14 Ch.D. 660
it was said that the section does not create any
new liability, any new right, but only provides a
summary mode of enforcing rights which must
otherwise be enforced by the ordinary
procedures of the courts. Further, the applicant
must show something which would have been the
ground of an action by the company if it had not
been wound up. James L.J. defined misfeasance at
670 as “misfeasance in the nature of a breach of
trust, that is to say, it refers to something which the
officer…has done wrongly by misapplying or
retaining in his own hands any moneys of the
company, or by which the company’s property has
been wasted, or the company’s credit
improperly pledged. It must be some act
resulting in some actual loss to the company.”
The section is therefore not available in all cases
in which the company has a right of action
against an officer of the company. In Re Etic
Limited [1928] Ch.861, a misfeasance summons
was taken out by the liquidator against the
secretary of a company for sums overdrawn by
him on account of his salary on the instructions
of the managing director. It was held that this
was a claim for repayment of an ordinary debt
due from the secretary without any wrongful
conduct on his part, and no order on the
summons ought to be made.
INSPECTION
Section 165 empowers the members of a
company to apply to the courts to appoint one
or more inspectors to carry out investigations
and report their findings, in the case of a
company having a share capital, by not less than
two hundred members or by members who hold
not less than one-tenth of the issued shares,
and in the case of a company not having a share
INSPECTION
capital by not less than one-fifth of members. The
court must be convinced that the application is
based on good reason and may require the
applicants to give security to cover the cost of the
investigation. The inspector’s function is
investigatory and judicial, but they must in view of
the consequences which may follow from their
report, act fairly. In Telestro Bros. Pty Ltd v. Tait
INSPECTION
(1963)109 C.L.R. 353 the majority of the High
Court held that the inspector need not, before
making a report on the company’s affairs, give
the company an opportunity of answering or
explaining matters which, if unanswered or
unexplained, might give rise to adverse findings
or comment in the report.
DERIVATIVE CLAIM
The rule in Foss v. Harbottle has been replaced by
the derivative claim in the Companies Act 2015.
Section 239 provides that such claims mean
proceedings by a member of the company in
respect of a cause of action vested in the company
and seeking relief on behalf of the company.
A derivative claim may be brought only in respect of
a cause of action arising from an actual or proposed
GROUNDS OF DERIVATIVE CLAIM
act or omission involving negligence, default,
breach of duty or trust by a director of the
company, and provided the cause of action is in
respect of a relevant breach by a director, which
includes former director, third parties may also be
made defendants in the derivative claim either in
lieu of or in addition to the corresponding director:
s. 239(4)
PERMISSION TO CONTINUE CLAIM BY
COMPANY
When a member commences a derivative claim
he must apply to the court for permission to
continue the action: s. 240.
In addition if a company brought a claim and the
cause of action on which the claim is based could
be pursued as a derivative claim, a member of the
company may apply to court for permission to
continue the claim as a derivative claim on the
COMPULSORY REFUSAL OF
PERMISSION: S. 242(1)
grounds that the manner in which the company
commenced or continued the claim amounts to an
abuse of the process of the court, the company has
failed to prosecute the claim diligently, and it is
appropriate for the member to continue the claim
as a derivative claim.
Section 242(1) provides that the court will refuse
permission to continue the proceedings where a
DISCRETIONARY REFUSAL OF
PERMISSION: 242(2)
person acting in accordance with the director’s duty
to promote the success of the company under
section 144 would not seek to continue the claim,
or if the cause of action arises from an act or
omission that has occurred or is yet to occur but
has been authorised or ratified by the company.
In exercise of its discretion as to whether to permit
the continuation of the claim, section 242(2)
PERMISSION: 242(2)
requires the court to consider the following factors:
first, whether the member is acting in good faith in
seeking to continue the action; second, the
importance that a person acting in accordance with
a director’s duty to exercise independent judgment
as required by section 145 would attach to
continuing the claim. Thus in Mission Capital Plc v.
Sinclair [2008]EWHC 1339 two former executive
PERMISSION: 242(2)
directors who were father and daughter
unsuccessfully sought permission to continue a
derivative claim. The company via its three non
executive directors had terminated the former’s
employment and dismissed them as directors on
the basis that they had failed to meet financial
forecasts and submit important financial
information to the board. They brought a
PERMISSION: 242(2)
derivative claim against M, the non-executive
directors and their replacement director P claiming
M would suffer damage from their wrongful
dismissal and that P would act improperly. It was
held that if a person acting to promote the success
of the company would seek to continue the claim,
the court must in its discretion consider the
importance that the person would attach to
PERMISSION: 242(2)
continuing with the claim. The court must also
consider whether the member has alternative
personal claims which could be pursued in his own
right rather than on behalf of the company.
The third factor the court must consider in the
exercise of its discretion under section 242(2) is if
the cause of action results from an act or omission
that is yet to occur and whether the act or omission
PERMISSION: 242(2)
is likely in the circumstances to be authorised
before it occurs or ratified by the company after
it has occured. Fourth, the court will consider
whether the company has decided not to pursue
the claim; fifth, whether the act or omission in
respect of which the claim is brought gives rise to a
cause of action that the member could pursue in
the member’s own right rather than on behalf of
PERMISSION: 242(2)
the company. In Franbar Holdings Ltd v. Patel
[2008] EWHC 1534, Medicentres (M) was a
company established to provide primary health care
and medical services. It was wholly owned by F until
July 2005 when F sold 75% of the shares to Casualty
Plus (C). F an C entered into a shareholder
agreement pursuant to which C appointed two
directors to M, P and F appointed L. The agreement
PERMISSION: 242(2)
also gave each party an option to sell and call for
the remaining shares at a price nine times M’s
earnings. F brought derivative proceedings
against C and P claiming negligence, default and
various breaches of duty of care owed by P to
M, including claims that P drove down M’s share
price by driving business away from it. The High
Court refused permission to continue the claim
PERMISSION: 242(2)
because the judge thought that a person acting
under the equivalent of s. 145 would not attach
great importance to the claim, and that there were
alternative modes of redress, namely an unfair
prejudice claim and a petition, which would enable
F to claim what it was now seeking.
Section 242(3) also requires the court to give
particular regard to any evidence before it as to the
PERMISSION: 242(2)
views of the members of the company who have no
direct or indirect personal interests in the matter. In
Smith v. Croft (No. 2) [1988] Ch. 114, a case that
predated the changes to the law, the claimants
were minority shareholders claiming the power to
recover, on behalf of the company, sums which had
been paid away in a transaction which were both
ultra vires and in breach of the statutory prohibition
PERMISSION: 242(2)
on financial assistance (financial assistance by a
company for the acquisition of its own shares).
With their supporters, the Plaintiffs had 14% of the
voting rights in the company and the Defendants
63%, and there were other shareholders
commanding 21% of the votes who did not wish the
litigation to proceed. Knox J held that a prima facie
case of ultra vires and illegality had been made out
CLAIM BY MAJORITY SHAREHOLDER
for which the company was entitled to relief, the
plaintiffs accordingly had standing to bring a
derivative action but that the Plaintiff’s
nevertheless had no right to sue if a majority of
the shareholders who were independent of the
Defendants did not want the action to continue.
Permission will also rarely be granted to a majority
shareholder. In Cinematic Finance Ltd v. Ryder
[2010] All ER 283, the corporate claimant had
become a majority shareholder in various
investment companies set up for film financing,
when those companies failed to repay loans the
claimant had made to them. The claimant alleged
various breaches of duty by the defendant directors
and shadow directors. The directors responded that
this was not an appropriate case for a derivative
action, given the claimant’s control over the
companies in question. The judge refused to
grant permission to continue stating, “…only in
very exceptional circumstances could it be
appropriate to permit a derivative claim brought
by a shareholder in control of the company.”
MEMBERS PERSONAL RIGHTS
Members’ claims for a personal remedy are
generally based on wrongs committed in relation
to: (1) contractual rights derived from the
company’s constitution, which claims are subject to
the internal regularity rule in Foss v. Harbottle.
Thus in Pender v. Lushington (1877)6 Ch D 70. P had
split his shareholding among nominees in order to
defeat a provision in the articles that fixed a
maximum number of votes to which any member
was entitled. The chairman refused to accept the
nominees’ votes and accordingly declared lost a
resolution proposed by P, which would otherwise
have been carried. P brought a representative
action on behalf of himself and the other
shareholders, and also an action in the name of the
company, in which the court granted an injunction
restraining the directors from acting on the basis
that the nominees votes had been bad. The
court also held that P had a right to sue in the
company’s name at least until a general meeting
resolved otherwise, and a further right to sue in
his own name.
(2) Contractual rights derived from outside
contracts, such shareholders’ agreements. Thus
in Southern Foundries (1926) Ltd v Shirlaw, [1940]
AC 701 in which the Respondent was appointed a
managing director of Southern by a written
agreement for ten years, and later the company
altered its articles so as to allow another company
which had taken it over to remove the Respondent
from his directorship, the Respondent sued
Southern for breach of contract and was awarded
damages. (3) The duties owed by directors to
members individually can be asserted
successfully; (4) the entitlement inherent in the
unfair prejudice claims; and (5) the
entitlements inherent in the ‘just and equitable’
liquidation provisions.
UNFAIRLY PREJUDICIAL CONDUCT OF
THE COMPANY’S AFFAIRS
The Companies Act gives the court on the
application of a member a wide ranging power to
remedy conduct of a company’s affairs that is
‘unfairly prejudicial to the interests of the members
generally or to some part of its members’: S. 781
The most common complaint is that a controlling
majority has acted in a manner that is ‘unfairly
prejudicial’, and the most common remedy is an
order that the majority should purchase the shares
of the minority at a price that reflects their
proportion of the company’s value. The
circumstances of oppression of the minority governed by
section
211 of the old Companies Act involving persistent and
persisting course of unjust conduct by the majority in the
conduct of the company’s affairs as explained in Scottish Co-
operative Wholesale Society Ltd v. Meyer [1959] AC 324 would
fall squarely within this principle.
In Meyer v. Scottish Co-operative Wholesale Society
[1959] A.C. 324 a
holding company engaged in the same class of
business as its subsidiary which had an independent
minority of members, ruined the subsidiary in the
interests of the holding company and its controllers
by cutting off supplies. Three of the subsidiary’s
directors were nominated by, and were also
directors of the holding company. These nominee
directors actively supported the policy of the
holding company. The minority shareholders of
the subsidiary petitioned for an order that the
holding company should purchase their £1
shares. At one time the shares were had been
worth £6 but by the time of the action they
were practically worthless. It was held that the
conduct of the holding company through the
nominee directors was conduct of the affairs of
the subsidiary and was oppressive to the
minority. The holding company was ordered to
buy the minority’s shares at a fair price. Lord
Viscount Simonds at page 48 stated: “Whenever
a subsidiary isformed…with an independent
minority of shareholders, the parent company
UNFAIRLY PREJUDICIAL
must, if it is engaged in the same class of
business, accept …an obligation so to conduct
what are in a sense its own affairs as to
deal fairly with its subsidiary.˝ See also Lord
Keith at 63.
In Re H.R. Harmer Ltd [1959]1 W.L.R. 62, an 88
year old controlling shareholder and his wife
OPPRESSION OF THE MINORITY
had the majority of the shares carrying a right to
vote but the minority of a different class of
shares carrying a right to share in the distributed
profits of a private company. The majority of the
latter class of shares were held by his sons,
whose shares he had given to them. The
controlling shareholder, who had founded the
OPPRESSION OF THE MINORITY
company and transferred his business to it,
continued to regard the business as his own and
ignored the wishes of the older shareholders
and of his co-directors, including the petitioners,
his sons. The court approved the definition of
oppressive as meaning burdensome, harsh and
wrongful. It also made an order that the
controlling shareholder was not to interfere in
the company’s affairs except in accordance with
board decisions.
The conduct complained of must be both unfair
and prejudicial, not merely unfair. The test is
objective, and the emphasis is not on the motive
or intention of the controllers, as it is on the
UNFAIRLY PREJUDICIAL CONDUCT
effect that the conduct has had on the
complaining member. In Re Guidezone Ltd
[2000]2BCLC 321 at 355 the court stated:
“unfairness’ …is not to be judged by reference to
subjective notions of fairness, but rather by
testing whether, applying established equitable
principles, the majority has acted, or is
proposing to act, in a manner which equity
would regard as contrary to good faith.”
Prejudice was explained in Re Coroin Ltd
[2012]EWHC 2343: “Prejudice will certainly
encompass damage to the financial position of a
member. The prejudice may be damage to the
value of his shares but may also extend to other
financial damage which in the circumstances of
the case is bound up with his position as a
member…moreover, prejudice need not be
financial in character. A disregard of the rights of
a member as such, without any financial
consequences, may amount to prejudice falling
within the section.”
Some of the actions that have been held
unfairly prejudicial include, taking excessive
remuneration-Re Cumana [1986] BCLC 430,
exclusion from the management of a company
-Re RA Noble & Sons (Clothing) Ltd [1983]BCLC
273, not paying dividends-Re a Company, ex p
Glossop [1988]1 WLR 1068, making or proposing
a rights issue which the minority cannot take
up-Re Cumana [1986] BCLC 430,
mismanagement but only if serious-Re Macro
(Ipswich) Ltd [1994]2 BCLC 354, misuse of
fiduciary powers-Scottish Co-operative
Wholesale, dilution of a shareholder’s interest:
Re Zetnet Ltd [2011] EWHC 1518
DISCUSSION QUESTION
Kimara Agencies is a company with six
shareholders who initially held equal numbers of
shares. It had two directors out of four of the
shareholders who are also shareholders in another
company, Wakulima Motels Limited.
Over the course of the past one year, the four
shareholders have deliberately sidelined the other
two from the activities of Kimara Agencies Limited.
DISCUSSION QUESTION
While the two shareholders are given notices of
meetings, they are hardly allowed to express
themselves during the meetings and their
contributions and suggestions are invariably
overruled by the four shareholders. During one
such meeting, the four shareholders pushed
through a resolution requiring the directors to
conduct a call on shares, as a result of which the
DISCUSSION QUESTION
two shareholders, who had not fully paid up for
their shares forfeited some of their shares, while
the two directors who also had not fully paid up
for all their shares, merely had a lien placed on
their shares. The forfeiture and the lien were
conducted procedurally in accordance with the
articles of association of the company. The
forfeited shares were subsequently sold to two
DISCUSSION QUESTION
of the four shareholders who were not directors. As
at the beginning of this year, the four shareholders,
who also hold shares in Wakulima Motels Limited,
collectively held over three-quarters of the shares
in Kimara Agencies Limited. Recently, the majority
shareholders approved a proposal by the directors
of Kimara Agencies Limited to sell several buildings
owned by the company to Wakulima Motels
DISCUSSION QUESTION
Limited which wants to convert them into
student hostels to tap into the lucrative student
accommodation business. The two minority
shareholders find the sale objectionable. They
have determined that they would be moving to
court to contest all the activities by the majority
shareholders over the course of the past one
year.
DISCUSSION QUESTION
Discuss two legal issues likely to be raised by the
minority shareholders in their challenge of the
action of the majority.
DIRECTORS
The management of companies is entrusted to
directors, by whatever name called. Section 3 of
the Companies Act 2015 provides that a director
is any person occupying the position of a director of
the body by whatever name called; and any person
in accordance with whose directions or instructions
not being given in a professional capacity, the
directors of the body are accustomed to act.
POSITION OF DIRECTORS
Directors are officers of a company and sometimes
also employees. As directors they owe strict
fiduciary obligations to the company requiring a
high standard of honesty and loyalty, but relatively
undemanding standards of competence. They are
not the agents of the shareholders in running the
business of the company. In Great Northern Railway
v. Turner (1872)L.R. 8 Ch. 149 at 152, directors were
described as trustees of the company’s money and
property, and of the powers entrusted to them.
More properly they are in a fiduciary position to the
Company: They control the company’s property and
must apply it for the specified purposes of the
company and a misapplication of it is a breach of
duty. They must also exercise the powers for the
purpose for which they were conferred and bona
fide for the benefit of the company as a whole.
Piercy v. S. Mills & Co. Ltd [1920]1 Ch 77, directors
had power to issue the unissued shares of the
company. Whereas the company was in no need of
Further capital, the directors made a fresh issue of
shares to themselves and their supporters with the
object of maintaining control of the company and
DIRECTORS AS FIDUCIARIES
resisting the election of three additional directors. It
was held that the allotment of shares was invalid
and void as directors are not entitled to use their
power of issuing shares for purposes other than
bona fide and for the benefit of the company.
Directors are strictu sensu not trustees since the
company’s money and property are not vested in
them but in the company, and their functions are
DIRECTORS AS FIDUCIARIES
the same as those of trustees. Also their duties of
care are not as onerous as those of trustees. In
Smith v. Anderson (1880) 15 Ch.D. 247 (CA) at 275
James L.J. stated: “A trustee is a man who is the
owner of the property and deals with it as principal,
as owner, and as master, subject only to an
equitable obligation to account to some persons to
whom he stands in the relation of trustee, and who
DIRECTORS AS AGENTS
are his cestui que trust…The office of director is
that of a paid servant of the company.”
Directors are agents through whom a company acts,
and it is largely because they are agents that they
owe fiduciary duties and certain duties of care to
the company. In Mills v. Mills (1936)60 C.L.R. 150
Dixon J. stated: “Directors of a company are
fiduciary agents, and a power conferred upon them
DIRECTORS AS AGENTS
cannot be exercised in order to obtain some
private advantage or for any purpose foreign to
the power.”
Like other agents directors incur no personal
liability on contracts made by them on behalf of the
company, within the scope of their authority. If
however they exceed the power given to them by
the memorandum and articles they will be liable for
DIRECTORS AS AGENTS
breach of warranty of authority. Their actions may
however be ratified by the company in general
meeting if they act within the powers in the
memorandum and articles but outside the powers
conferred on them by the articles.
The directors may be specifically appointed agents
for the shareholders to negotiate a sale of the
company’s shares, and if so, the shareholders are
DIRECTORS AS AGENTS
liable for their fraud. In Breiss v. Woolley 1954 A.C.
333, R managing director of N ltd, by frauds of
which the other directors were ignorant, made N ltd
profitable, and negotiated with E ltd for the sale of
the shares in N ltd without disclosing that the
profits were based on dishonest trading. The
negotiations were reported to the shareholders
who, in ignorance of R’s fraud, authorised R to
DIRECTORS AS AGENTS
complete the sale on the basis of negotiations.
The fraud was subsequently discovered and the
shareholders were sued for damages. Held, they
were liable for his fraud even though it preceded
his appointment as agent.
If directors hold themselves out as agents for
the shareholders they must disclose any profit
made by them to the shareholders. In Allen v.
DIRECTORS AS AGENTS
Hyatt (1914)30 T.L.R. 444, Directors entered into
negotiations for the amalgamation of the company
with other companies. Before the negotiations
were completed they induced a number of
shareholders to give them options on their shares
at par, representing that this was necessary to
effect the amalgamation. The directors then
exercised the option and thereby made a
handsome profit. It was held that they had to
account for this profit to the shareholders.
APPOINTMENT OF DIRECTORS
that a public company should have at least two
directors, while a private company must have at
least one director.
A company’s articles typically provide that the
first directors will be appointed by the
subscribers to the memorandum and articles
and that thereafter directors will be elected by
the members in general meeting, and that a
proportion, such as one-third, should retire
every year but be eligible for re-election.
Section 132 of Companies Act (section 181 of
the old Companies Act) provides that a motion
for the appointment of two or more persons as
directors of a public company by a single
resolution during a general meeting can only be
moved if a resolution that it be moved has first
been agreed to by the meeting without any vote
being cast against it. A resolution moved to the
contrary is void, and any provision in the
company’s constitution for the automatic
re-appointment of retiring directors in defaultof
another appointment does not apply: s. 132(3).
Accordingly in public companies vacancies in the
board of directors cannot normally be filled by a
single resolution appointing a number of candidates
en bloc, unless a resolution for a single vote has first
been passed without objection, and at least one of
the directors must be a natural person: s. 129.
The general meeting, it would seem, is required to
act for proper purposes in appointing a director.
In Theseus Exploration NL v. Mining and Associated
Industries Limited [1973] Qd R 81, the court issued
an interim injunction to prevent members of the
company electing certain persons as directors,
because there was sufficient evidence that those
persons intended to use the company’s assets
solely for the benefit of the majority member. See
also Re HR Harmer Ltd [1959]1WLR 62.
Quoted companies and public interest companies
must establish and appoint a board nomination
committee in which at least 2/3 of the members are
shareholders of the company and together
represent 2/3 of the share capital of the company:
s. 133 (1).
A public interest company is defined in section
133(4) as a company that has the responsibility of
receiving, handling or spending public funds.
The board nomination committee is responsible
for nominating candidates for appointment to
the company’s board of directors.
A person who is employed by a quoted company
is not eligible to be appointed as a member of
the board nomination committee.
ELIGIBILITY FOR APPOINMENT AS
DIRECTORS
A person who has not reached 18 years of age
cannot be appointed a director of a company,
and any such appointment is void: s. 131. An
undischarged bankrupt or a person who has
made an arrangement or composition with his
creditors generally must not act as director, and
in the former case be involved in the formation
of a company without leave of the court by
DIRECTORS
which he was adjudged bankrupt.
A person of unsound mind, and a person who
has been disqualified by court order under Part
X of the Companies Act 2015 or Insolvency
Law. Further restrictions are imposed by the
Insolvency Act to prevent the ‘phoenix
syndrome’, where directors of companies that
have gone into insolvent liquidation become
DIRECTORS
directors of companies that use the same or
substantially the same registered business or
trading name as that used by the insolvent
company during the insolvency period. Breach
of the restrictions is an offence, in addition to
the individual being personally liable for the
debts and liabilities incurred by the company
during the period he was involved in its
VACATION OF OFFICE: 1. RETIREMENT
management. A director may cease to be such for
various reasons, such as death, dissolution of the
company, retirement by rotation under the articles
or retirement under an age limit under section 183
unless the articles provide otherwise or the
company is a private company which is not a
subsidiary of a public company or he was appointed
by the company in general meeting after special
2. DISQUALIFICATION
notice was given notwithstanding his age.
A director also vacates offices on being
disqualified by a disqualification order issued by
court . Section 215 provides for disqualification
on conviction for an offence related to
promotion, management, liquidation or
administration of a company. Section 216
provides for disqualification for fraud or breach
DISQUALIFICATION
of duty committed while the company is in
liquidation or under administration. Section 217
provides for disqualification on conviction for an
offence related to failure to lodge returns or
other documents with Registrar, while Section
221 provides for disqualification in the public
interest at the instance of the Attorney General.
3. REMOVAL
Section 139(1) of the Companies Act 2015 provides
that a company may remove a director before the
end of his period of office by ordinary resolution,
despite anything to the contrary in any agreement
between the company and the director. However
special notice must be given of any resolution to
remove the director or to appoint another person
to replace the director at the meeting at which the
REMOVAL OF DIRECTOR
removal takes place.
The replacement is deemed to have become a
director for purposes of determining when he
will retire, on the day on which the director in
whose place he is appointed was last appointed.
If the vacancy is not filled at the general meeting at
which the director is removed, it will be filled as
a casual vacancy: s. 139(4)
REMOVAL OF DIRECTOR
The person removed as director is still under a
duty to avoid conflicts of interest with respect to
exploitation of any property, information or
opportunity that he became aware of while a
director, and also not to accept benefits from
third parties with regard to things done or
committed to be done by that person before
ceasing to be a director: s. 139(5).
REMOVAL OF DIRECTORS
The Act does not however prevent the articles
giving a director’s shares special voting rights. In
Bushell v. Faith [1970] AC 1099, Bushell Court
(Southgate) Ltd had three shareholders, a
brother and two sisters, each holding 100
shares. The two sisters purported to remove
their brother as a director by casting 200 votes
on a resolution against his 100. He challenged
REMOVAL OF DIRECTORS
the removal on the grounds of Article 9 which
said that on a resolution to remove a director
from office ‘any shares held by that director
shall on a poll in respect of such resolution carry
the right to three votes per share’ (thus
defeating the resolution to remove by 300 to
200). The House of Lords held that the brother
had not been validly removed as a director.
COMPENSATION FOR LOSS OF OFFICE
If there is a contract between the director and the
company, then dismissal from office under section
139 may amount to a breach of that contract by the
company. This will be the case where the contract is
for a fixed period which has not expired, or if the
director is entitled to a period of notice.
Alternatively dismissal of a person from office of
director may breach a second contract between the
COMPENSATION FOR LOSS OF OFFICE
director and the company if the director can
perform the second contract only by being a
director. For example, a contract between a
company and the managing director may
depend on the person continuing to be a
director. The company will then be liable in
damages, and damage payments may be large.
This is why provision has been made in the Act
VALIDITY OF ACTS OF DIRECTORS
to ensure that members can discover the terms of
their directors’ contracts of service: Ss. 191-193.
The Companies Act 2015 provides that the acts of a
director are valid even if it is later discovered that
the appointment was defective, or the director was
disqualified or ceased to hold office, or that the
director was not entitled to vote on the matter. The
acts of a director are valid even if the resolution for
POWERS OF DIRECTORS
the director’s appointment is void: s. 133(1). The
powers of directors depend on the Act as well as
the articles since apart from requiring that certain
things shall be done by members in general
meeting such as alteration of the articles, the Act
leaves the distribution of power between the
general meeting and the board to the articles. Table
A, article 80 for example provides that the business
POWERS OF DIRECTORS
of the company shall be managed by the directors,
who may pay all expenses incurred in promoting
and registering the company, and may exercise all
such powers of the company as are not, by the Act
or by the regulations, required to be exercised by
the company in general meeting, subject to the Act
and the regulations, and not inconsistent with the
regulations or provisions as may be prescribed by
POWERS OF DIRECTORS
the company in general meeting. However no
regulation made by the company in general
meeting shall invalidate any prior act of the
directors which would have been valid if that
regulation had not been made.
Thus if the directors act within the powers given
to them by such articles, they are not bound to
obey resolutions passed by the shareholders at a
POWERS OF DIRECTORS
general meeting; such resolutions cannot override a
decision of the directors or control the exercise of
their powers in the future. In Bamford v. Bamford
[1970] Ch 212 at 220 Plowman J. stated:
“A company cannot by ordinary resolution dictate
to or overrule the directors in respect of matters
entrusted to them by the articles. To do that it is
necessary to have a special resolution.” In Salmon v.
POWERS OF DIRECTORS
Quin & Axtens Ltd [1909] 1 Ch. 311 (CA) the articles
contained an article like Table A, article 80, and also
provided that no resolution of the directors to
acquire or dispose of premises was to be valid
unless neither A nor B (the managing directors)
dissented. The directors resolved to acquire
premises. B dissented. An ordinary resolution to the
same effect as the board resolution was passed at
POWERS OF DIRECTORS
an extraordinary general meeting of the company. It
was held that the ordinary resolution was
inconsistent with the articles and the company was
restrained from acting on it: [Approved by the
House of Lords sub nom without the Respondents
even being called in Quin & Axtens Ltd v. Salmon
[1909] AC 442]. The directors’ powers can however
be altered for the future by an alteration of the
POWERS OF DIRECTORS
articles in the proper way, but the articles cannot be
altered with retrospective effect. If the directors are
unable to exercise any of their powers because of a
deadlock on the board or because their number has
fallen below the number required for a quorum, the
company in general meeting may exercise that
power. In Barron v. Potter [1914] 1 Ch. 895, the
articles gave the board of directors power to
POWERS OF DIRECTORS
appoint an additional director and, owing to
differences between the directors, no board
meeting could be held for the purpose. Held, the
company retained the power to appoint additional
directors in general meeting. The position is similar
where the company has no directors, per Lord
Halisham in Alexander Ward & Co. Ltd v. Samyang
Navigation Co. Ltd 1975 S.C. (H.L.) 26 at 47.
POWERS OF DIRECTORS
If the directors improperly refuse to exercise a
power to initiate an action in the name of the
company, a minority shareholders’ action may
be brought by way of an unfairly prejudicial conduct
claim: Foss v. Harbottle: Cook v. Deeks [1916]1 A.C.
554.
The directors cannot delegate their powers unless
empowered to do so by the articles. The articles
REMUNERATION OF DIRECTORS
usually provide for delegation to the managing
director.
Directors are not employees of the company and
accordingly have no claim to payment of their
services unless there is provision for payment in the
articles. At times some directors hold executive
positions in the company such as managing director
in which event they are servants of the company
and receive a fixed salary.
The Act requires that the accounts laid before
the company in the annual general meeting must
show certain particulars of directors salaries,
pensions etc.
It is unlawful for a company to pay a director
compensation for loss of office, or as consideration
for retirement unless particulars of the proposed
payment including the amount, are disclosed to
the members and the proposal is approved by
the company: section 189. It was held in Re
Duomatic Ltd [1969]2 Ch. 365 that disclosure
must be made to all members, even those with
no right to attend and vote at general meetings,
while the payment is still a proposed payment. In
LOANS TO DIRECTORS
Wallersteiner v. Moir [1974] 1 WLR 991 at 1016,
Lord Denning stated that he imagined that
payment could be later approved by the
company in general meeting.
Section 191 renders illegal loans by a company
to any person who is its director or director of its
holding company, nor may the company
guarantee or provide security in connection with
LOANS TO DIRECTORS
a loan made to any director. Exception : (i) private
companies, (ii) subsidiaries, the director of which is
its holding company, (iii) loans made with the
approval of the company in a general meeting to
provide the director with funds to meet
expenditure for the benefit of the company, and (iv)
where the company’s business includes the lending
of money or the giving of guarantee in connection
with loans made to other persons.
DUTIES OF DIRECTORS
The Companies Act 2015 has supplanted general
rules on directors duties which are based on the
common law rules and equitable principles.
Section 141 provides that the general duties are
owed by a director of a company to the
company. The basis of the provision is to
exclude a pluralist
DUTIES OF DIRECTORS: THE ENLIGHTENED
SHAREHOLDER VALUE APPROACH
perspective in which the directors’ duties were
perceived as extending to all stakeholders of the
enterprise including shareholders, creditors and
employees, and to affirm the ‘enlightened
shareholder value’ approach which adopts a
shareholder oriented approach but recognises
that in assessing what might likely promote success
of the company for the member’s benefit, directors
DUTIES OF DIRECTORS
should take into account the interest of the
stakeholders and wider interests such as
environment in so far as they believed in good
faith that these factors were relevant.
The corollary is that directors do not generally
owe their duties to anyone other than the
Company, nor fiduciary duties to individual
members. In Percival v. Wright [1902]2 Ch 421
DUTIES OF DIRECTORS
The Plaintiffs offered to sell their shares and the
Defendant Chairman and two other directors
agreed to buy them at £12.50, but did not
disclose that the board had been negotiating
with an outsider for the sale of all the
company’s shares at a higher price than that
asked by Plaintiffs. The negotiations proved
abortive. The Plaintiffs sued to have their
DUTIES OF DIRECTORS
sale set aside on the ground that the directors
ought to have disclosed the negotiations. It was
held that the sale was binding, as the directors
were in no fiduciary relationship with
shareholders individually, and were under no
obligation to disclose the negotiations to the
Plaintiffs.
However exceptionally directors may owe duties
DUTIES OF DIRECTORS
to individual members such as when they
undertake to act as agents of the individual
members. In Coleman v. Myers [1977]2 NZLR 225
the Defendants were directors of a family company.
The 1st Defendant made a takeover offer to all other
shareholders and ultimately succeeded in acquiring
total control of the company. The Plaintiffs were
minority shareholders who had reluctantly agreed
DUTIES OF DIRECTORS
to sell when the 1st Defendant invoked statutory
powers of compulsory purchase. They then
brought action against the Defendants alleging
breaches of fiduciary duty owed by the
Defendants as directors to them as
shareholders. The Court of Appeal of New
Zealand held that a fiduciary relationship existed
between the directors and the Plaintiffs in the
DUTIES OF DIRECTORS
special circumstances: the company was a
private company with shares held largely by
members of one family, and the other members
had habitually looked to the Defendants for
business advice, and information affecting the
true value of the shares had been withheld from
the other family members by the Defendants. The
Defendants were thus liable to compensate the
1. FIDUCIARY DUTIES: (a) Exercise of
power for benefit of company
Plaintiffs.
The fiduciary duties of directors are two fold. First,
to exercise their powers for the purposes for which
they were conferred and bona fide for the benefit
of the company as a whole. This is now expressed in
sections 142 and 143 of the Companies Act 2015,
and has two elements. (a) Section 142 provides
that the directors have a duty to act within the
Exercise of power for benefit of
company
constitution of the company, and to exercise
powers for the purpose for which they are
conferred.
The directors’ power to issue shares is a
fiduciary duty, and its exercise is invalid if it is not
for the purpose for which it was granted,
which is primarily to raise capital when required by
the company: Piercy v. S. Mills & Co. Ltd
company
(b) Section 143 on the other hand provides that a
director of a company shall act in the way in which
the director considers in good faith would promote
the success of the company for the benefit of its
members as a whole. In so doing the director
shall have regard to; first, the long term
consequences of any decision of the directors;
second, the interests of the employees of the
company
company; third, the need to foster the company’s
business relationships with suppliers, customers
and others; fourth, the impact of the operations of
the company on the community and the
environment; fifth the desirability of the company
to maintain a reputation for high standards of
business conduct; and sixth the need to act fairly as
between the directors and the members of the
company
company. The listed criteria affirm the enlightened
shareholder value approach as a philosophical
underpinning of the duties of the directors to the
company.
The directors’ discretionary power to refuse to
register a transfer of shares is a fiduciary power. In
Re Smith and Fawcett Ltd [1942] CH 304 (CA), the
company
articles gave the directors “an absolute and
uncontrolled discretion” to refuse to register any
transfer of shares. The two directors each held
4,001 of the 8,002 ordinary shares. F died and his
son, as his executor, applied for the shares to be
registered in his name. S refused, but offered to
register 2,001 shares if 2000 were sold to him at a
fixed price. F’s son applied for rectification of the
(b) Conflict of interest
register but failed. There was nothing to show that
the director’s power was not exercised in the
company’s interest.
The second fiduciary duty of directors is expressed
in section 146 which provides that a director has a
duty to avoid a situation in which he has or can
have a direct or indirect interest that conflicts or
may conflict with the interest of the company. Thus
Conflict of interest
an issue of shares is invalid if the directors are
motivated by self-interest e.g. desire to preserve
their control of the company. In Hogg v.
Cramphorn Ltd [1967] Ch 254, directors, in an
endeavour to secure control in order to forestall
a take-over bid, issued unissued shares in the
company to trustees to be held for the benefit of
employees, the shares being paid for by the
trustees out of an interest free loan from the
company. It was held that the issue exceeded the
directors’ fiduciary power, it being immaterial that
it was made in the bona fide belief that it was in the
interest of the company. Since the directors did not
hold the majority of the shares before the new
issue, the issue could be ratified by the company
in general meeting, the votes carried by the
shares issued to the trustees not being exercised.
In Howard Smith Ltd v. Ampol Petroleum Ltd
[1974] A.C. 821, the directors were by contrast
not motivated by any purpose of personal gain
but the allotment was set aside because they issued
the shares for the purpose of destroying the
existing majority block of shares.
The phrase “bona fide in the interest of the
company as a whole” does not limit the justification
for the directors’ action to the simple interest of the
company, but extends in some instances to action
that is fair between different classes of
shareholders. In Mills v. Mills (1938) 60 C.L.R. 150
Latham J. stated of cases where directors act
partially by improperly favouring one section of
shareholders against another: “ The question
which arises is sometimes not a question of the
interest of the company at all, but a question of
what is fair between different classes of
shareholders. Where such a case arises some
other test than that of the ‘interest of the
company’ must be applied.”
Thus where the interest of two or more classes
of shareholders are fundamentally different and
opposed, and it is virtually impossible to
determine the interest of the company as a
whole, the directors must act fairly between the
classes of shareholders.
If directors exercise a power for the proper
purpose and in good faith, their judgment is not
open to review by the courts.
Where a director is also a shareholder in the
company he may promote his own interest so
long as his dominant motive is to benefit the
company. In Mills v. Mills (1938) 60 C.L.R. 150
the directors believed that the bonus issue was
in the best interest of the company and it was
immaterial that one director derived some benefit
from the passing of the board resolution.
The duty of directors to the company however has
effect subject to any law requiring directors in
certain circumstances to consider or act in the
interests of creditors of the company: section
144(3). In Rubin v. Cobalt Pictures Limited [2010]
EWHC 2240 (Ch) the court affirmed that in the area
of borderline insolvency, the directors must have a
paramount regard for the interests of creditors, and
in deciding whether to enter into a transaction on
behalf of the company the directors ‘have a duty to
give consideration to the separate interests of the
company and its creditors’ [50]. Similarly in
Westpac Banking Corporation v. The Bell Group Ltd
(In Liquidation) (No 3) [2012] WASCA 157 the Court of
Appeal of Western Australia found that the
directors’ implementation of a scheme to prioritise
the interests of certain banks when the corporate
group was on the verge of insolvency had
prejudiced the different companies’ respective
ability to meet the claims of other creditors.
Accordingly it was held that directors had breached
their duties to act in the best interest of the
companies. Outside insolvency however the general
law does not recognise any duties owed to creditors
nor does the law give any standing to creditors,
individually or collectively to sue to redress any
breach of any supposed duty owed by the directors:
Yukong Line Ltd v. Rendsburg Investments Corp of
Liberia [1998]2 BCLC 485; see also A Keay, “The
Duty of Directors to Take Account of Creditors’
Interests: Has it Any Role to Play?” [2002]JBL
379
RELIEF OF DIRECTORS FROM LIABILITY
Since directors’ fiduciary duties are owed to the
members as a body, the majority of the
members in general meeting may after full
disclosure of all material circumstances waive a
breach of fiduciary duty by a director, and if he
is a member the director may vote in favour of
the waiver provided there is no fraud on the
minority. In Cook v. Deeks [1916]1 A.C. 554 (PC)
Two directors of a construction company
negotiated for a construction contract in the usual
way in which the company’s business was carried
on, and then took the contract in their own names.
A meeting of the company was called and by their
votes as holders of three-quarters of the shares a
resolution was passed declaring that the company
had no interest in the contract. It was held that the
benefit of the contract belonged to the company
and the directors must account to the company
for it, and the purported ratification was a fraud
on the minority and ineffective.
The Companies Act however provides that any
provision whether in the articles or in any
contract with the company or otherwise for
exempting a director or other officer or auditor
from liability for negligence, default, breach of
duty or breach of trust in relation to the company,
or indemnifying him from such liability is void.
However the company may pursuant to a provision
in the article indemnify such person from liability
for costs of proceedings concluded in his favour or
in which relief is granted to him under section 1005
by the court: see also Table A, article 136.
Section 1005 provides that if, in proceedings for
negligence, default breach of duty or breach of
trust against a director or other officer or auditor of
a company, it appears that he has acted honestly
and reasonably, having regard to all the
circumstances including those connected to his
appointment, he ought fairly to be excused, the
court may relieve him wholly or partly, from liability
on such terms as it thinks fit. A director does not act
reasonably unless he does everything which a
normal man would do in the conduct of his own
affairs. In Selangor United Rubber Estates Ltd v.
Cradock (No. 3) [1968]1 W.L.R. directors of a public
company who disposed of virtually all its assets
without regard for minority shareholders, and
without consideration, but blindly at the behest of
the majority shareholder who nominated them to
the board, did not act reasonably and could not be
relieved. Similarly in Re Duomatic Ltd [1969] 2 Ch
365, a director dealing with payment to another
director of compensation for loss of office, who did
not seek legal advice but dealt with the matter
himself without a proper exploration of what
should be done on the company’s behalf did not act
reasonably.
Section 1005 only applies to proceedings against a
director by or on behalf of or for the benefit of the
company as a whole, or penal proceedings against a
director for breach of the Companies Act. It does
not apply to claims against a director by a third
party to enforce a debt: Customs and Excise
Commissioners v. Hedon Alpha [1981] 2 All E.R. 697.
2. SECRET BENEFITS OF DIRECTORS
At common law, the fiduciary position of a director
requires that he must not make a secret profit out
of that position. If he does, he must account for it
to the company. It is immaterial that the company
itself could not have obtained the profit. The
company in general meeting could consent to such
profit being made or kept. In Regal (Hastings) Ltd v.
Gulliver [1967] 2 A.C. 134, R Ltd owned one cinema
SECRET BENEFITS OF DIRECTORS
and wanted to buy two others with a view to selling
the three together. R Ltd formed a subsidiary
company to buy the two cinemas, but was unable
to provide all the capital required, so all the
directors of R Ltd except one subscribed for some of
the shares in the subsidiary themselves. The
cinemas were acquired and the shares in R Ltd and
the subsidiary sold at a profit. It was held that the
former directors who subscribed for shares in the
subsidiary must account for to R Ltd for the profit
they made, because it was only through the
knowledge and opportunity they gained as
directors of R Ltd that they were able to obtain the
shares. The one former director who did not
himself subscribe but merely found someone else
to do so was under no liability nor was the solicitor
who was invited to subscribe by the directors.
Lord Russell stated: “The liability arises from the
mere fact of a profit having, in the
circumstances, been made. The profiteer,
however honest and well intentioned, cannot
escape the risk of being called upon to account,”
(at 144).
In the Regal Case the directors could have
protected themselves by a resolution (either
antecedent or subsequent) of the Regal
shareholders in general meeting (per Lord Russell of
Killowen at 150) and the case was distinguished
from Lindgren v. L. & P. Estates Ltd [1968] Ch 572
(CA) where the directors were released from
liability by the company retaining them on the
board, after it had knowledge of the facts (the
alleged breach of duty was that the directors
had merely rubber stamped the decision of
other persons).
The Companies Act addresses secret benefits by
directors within the scope of conflict of interest by
making separate rules on conflict of interest, and
benefits from third parties. The notion of conflict of
interest is wide and refers to a conflict of interest
SECRET BENEFITS OF DIRECTORS: (a)
Conflict of Interest
and duty and to a conflict of duties: s. 146(7) and
147(4).
Section 146 provides that a director of a company
should avoid a situation in which he has or can have
a direct or indirect interest that conflicts or may
conflict with the interest of the company, especially
where exploitation of any property, information or
opportunity in concerned. It does not matter
SECRET BENEFITS OF DIRECTORS:
whether the company would take advantage of the
property, information or opportunity: s. 146(2).
However the duty is not infringed if the situation
could not reasonably be regarded as likely to give
rise to a conflict of interest or the matter has been
authorised by the other directors.
Such authorisation may be given by the directors
when the matter concerned is proposed to them
and authorised. However in private companies
there should be nothing in the companies
constitution invalidating the giving of such
authorisation, while in public companies there
should be a provision in the company’s
constitution enabling the directors to give such
authorisation, which must then have been
complied with by the directors: s. 146 (4) & (5).
Further safeguards to the integrity of the
authorisation process set out in the Act are that
the meeting at which the matter is considered
must have quorum which does not reckon the
concerned director and any other director with
interest, and the authorisation must be given
without the vote of the concerned director and
any other director with an interest: s. 146(6).
SECRET BENEFITS OF DIRECTORS: (b)
Benefit from third party
Section 147 regulates benefits from third
parties. A third party means a person other than
the company, an associated body corporate or a
person acting on behalf of the company or
associated body corporate: s. 147(7) .
A person who is a director of a company
should not accept a benefit from a third party
if the benefit is attributable to either the fact
that the person is a director of the company, or
the act or omission of the person as a director.
The duty is not infringed if the acceptance of the
benefit cannot reasonably be regarded as likely
to give rise to a conflict of interest: s. 147(3).
The receipt of benefits from a third party in
circumstances giving or likely to give rise to conflict
of interest is also a crime punishable by
a fine of not more than one million shillings, and
forfeiture of the benefit to the company.
3. CONTRACTS WITH DIRECTORS
A consequence of the general duty of a director
towards the company not to allow conflict
between duty and interest is that even if he
makes no profit, a director must not be
interested in a contract or proposed contract
with the company unless the articles permit it,
as they usually do. If this rule
CONTRACTS WITH DIRECTORS
is broken the contract is prima facie voidable by
the company. This is so even if his interest is
only that of a shareholder in another company
which contracts with the company of which he is
a director.
Transvaal Lands Co. v. New Belgium (Transvaal)
Land, etc [1914] 2 Ch. 488 (CA), T bought some
some shares in L Co. from N.B. Co. H was a
shareholder in both T Co. and N.B. Co. and also a
director in T Co. As such director he voted for the
purchase and N.B Co. had notice of it. H did not
disclose the nature of his interest (his shareholding
in N.B Co) as required by the articles of T Co., which
also provided that a director was not to vote in
respect of any contract in which he was concerned.
It was held that the contract was voidable at the
option of T Co.: “Where a director of a company has
an interest as shareholder in another company or is
in a fiduciary position towards and owes a duty to
another company which is proposing to enter into
engagements with the company of which he is a
director, he is in our opinion within this rule. He has
a personal interest within this rule or owes a duty
which conflicts with his duty to the company of
which he is a director. It is immaterial whether this
conflicting interest belongs to him beneficially or as
trustee for others”: per Swinfen Eady L.J. at 503.
It is usual to provide in the articles that a director
who is interested in a contract with the company
must declare his interest as required by the Act,
that he shall not vote on any contract, and that if he
does vote, his vote shall not be counted. The effect
DECLARATION OF INTEREST
of this is to allow the director to contract with
the company, on disclosing his interest, and to
keep any profit he may make.
that if a director of a company is directly or
indirectly interested in a proposed transaction
or arrangement with the company or which the
company has already entered into, the director
should declare the nature and extent of his
interest to the other directors, and in the case of
a public company, also to the members of the
company.
In a public company if the transaction or
arrangement is for an amount, or goods or services
valued at an amount exceeding ten percent of the
value of the assets of the company, the declaration
should also be made to the members of the
company either at a general meeting or by a
declaration given to the other directors: s.
152(2). The declaration must have a valuation
of the goods or services and assets of the
company duly certified by the company’s
auditor as being the true market value: s.
152(3). The director must make the declaration
before the company enters into the transaction or
arrangement concerned: s. 152(5).
However the director need not make a declaration
of an interest if he is not aware of the transaction or
arrangement to which the interest relates: s.
155(6). The director is however taken to be aware
of matters which a director ought reasonably to be
aware: s. 152(7).
Section 152(8) provides that a director need not
declare an interest where it can reasonably be
regarded as likely to give rise to a conflict of
interest, or if the other directors are already
aware of the interest, or if it concerns the terms
of the director’s service contract that has been
or is to be considered by a meeting of the
directors, or a committee of directors appointed
4. COMPETING WITH THE COMPANY
for the purpose. Directors are treated as being
aware of anything of which they ought reasonably
to be aware: s. 152(9).
Under the general law, apart from the case where a
director has a service agreement with the company
which requires him to serve only the company,
there is authority to the effect that he may become
a director for a rival company so as to compete with
DIRECTORS COMPETING WITH
COMPANY
the first provided he does not disclose to the rival-
second company any confidential information
obtained by him as a director of the first company,
and that what he may do for a rival company he
may do for himself or a rival firm [per Lord
Blanesburgh in Bell v Lever Bros Ltd [1932]A.C.
161 at 195]. However he must not subordinate the
interest of the first company to those of the rival
DUTIES OF DIRECTORS
and if he does he runs the risk of an application
relating to unfairly prejudicial conduct: per Lord
Denning in Meyer v. Scottish C.W.S. Ltd [1959]
A.C. 324 at 368.
5. REASONABLE CARE, SKILL, AND
DILIGENCE
In Re City Equitable Fire Insurance Co. Ltd [1925]Ch.
407 at 428 Romer J. laid down three propositions:
first, a director need not exhibit in the performance
of his duties a greater degree of skill than may
reasonably be expected from a person of his
knowledge and experience. Directors are thus not
liable for mere errors of judgment. However a
greater degree of skill must be shown by an
REASONABLE CARE, SKILL, AND
DILIGENCE
executive director such as a finance or legal director
. It is an implied term of his contract of service that
he will use reasonable skill in the performance of
the duties of his office i.e. the degree of skill which
may reasonably be expected of a person in such a
position: Lister v. Ramford Ice and Cold Storage Co.
Ltd [1957] A.C. 555. Further the duties of directors
vary according to the nature of the company and of
DILIGENCE
its business. Second, a director is not bound to give
continuous attention to the affairs of his company.
His duties are of an intermittent nature to be
performed at periodical board meetings. He is not
however bound to attend all such meetings, though
he ought to attend whenever in the circumstances
he is reasonably able to do so. Greater diligence
than that indicated is required of an executive
DILIGENCE
director, whose contract of service requires him to
work full time for the company. Third, in respect of
all duties that having regard to the exigencies of
business and the articles of association may
properly be left to some other official, a director is
in the absence of grounds of suspicion justified in
trusting that official to perform such duties
honestly. In Re City Equitable Fire Insurance Co.
DILIGENCE
[1925] Ch. 407, the directors of an insurance
company left the management of the company’s
affairs almost entirely to B, the managing director.
Owing to B’s fraud a large amount of the company’s
assets disappeared. Items appeared in the balance
sheet under the headings of “loans at call or at
short notice” and “cash at bank or in hand”, but the
directors never inquired how these items were
DILIGENCE
made up. Had they done so, they would have
discovered that the loans were chiefly to B., and
to the company’s general manager, and that the
“cash at bank or in hand” included £73,000 in
the hands of a firm of stockbrokers in which B
was a partner. It was held that the directors
were negligent. However since the articles
protected the directors from liability except in
DILIGENCE
case of wilfull neglect or default, they were held
not liable. Relief of directors from liability for
breach of duty in connection with their fiduciary
duties applies also to the duties of care. As to relief
by a resolution of the company in general meeting,
it was held in Pavlides v. Jensen [1956] Ch. 565 that
if the directors by their negligence had sold the
company’s mine at an undervalue, it was open to
REASONABLE CARE, SKILL AND
DILIGENCE
the company by a vote of the majority to decide
that proceedings should not be taken against
them.
The Companies Act, 2015 has brought to an end
the subjective standard in Re City Equitable Fire
Insurance Co Ltd. Section 145 requires that in
performing the functions of director, a director is
bound by both objective and subjective standards.
DILIGENCE
It provides that a director owes a duty to the
company to exercise the same standards of care,
skill and diligence that would be exercisable by a
reasonably diligent person with: (1) the general
knowledge, skill and experience that may
reasonably be expected of a person carrying out the
functions performed by the director in relation to
the company (the objective test); and (2) the
DILIGENCE
general knowledge skill and experience that the
director has (the subjective test). The Act thus
adopts as the minimum standard that
objectively expected of a person in the director’s
position; that standard may then be raised by
the subjective element of the test if the
particular director has any special knowledge,
skill and experience. Directors thus have a duty to
DILIGENCE
keep themselves informed. In Lexi Holdings Plc (In
Administration) v. Luqman [2009] EWCA Civ 117,
[2009] BCC 716, the Court of Appeal held two
sisters liable as directors for the consequences of
failing to exercise oversight of the company’s affairs
which would have ended their brother’s dishonest
dealings. As managing director, he had stolen
almost £60,000 that banks had lent the company
DILIGENCE
for use in its business. Because of their
negligence the sisters were held liable jointly with
their brother for the stolen money. Similarly in
Weavering Capital (UK) Ltd (In Liquidation) v.
Peterson [2012] EWHC 1480 (Ch) affd [2013] EWCA
Civ 71 where the court held both husband (the only
active director) and his wife (also a director) liable
for losses resulting from a fraudulent scheme
DILIGENCE
involving swap agreements and misrepresentation
to investors. The wife argument that she had only a
‘confined area of responsibility’ was rejected. The
court held that her conduct fell short of what was
expected of a reasonable director of a hedge fund
management company in her position, with her
experience, actual knowledge and intelligence, and
she simply failed to acquire a sufficient knowledge
6. DUTY TO EXERCISE INDEPENDENT
JUDGMENT
of the business to discharge such duties.
Section 145 requires a director to exercise
independent judgment. However the duty is not
infringed by a director who acts in accordance with
an agreement duly entered into by the company
that restricts the future exercise of discretion by the
directors, or in a way authorised by the constitution
of the company. In Fulham Football Club Ltd v.
DUTY TO EXERCISE INDEPENDENT
JUDGMENT
Cabra Estates Plc [1994] 1 BCLC the football club
and its directors contracted with the landlords of
the football ground which they held on lease that in
return for a substantial payment they would not
oppose any future application to the planning
authorities which the landlords might make for the
development of the grounds. Later the directors
wished to go back on this undertaking and they
JUDGMENT
argued that it was an unlawful fetter on their
ability to act in the best interest of the company
and was therefore void. The court noted that by
the undertaking the company had entered into a
contractual arrangement which conferred upon
them substantial benefits, and it could not be
said that the directors improperly fettered the
future exercise of their powers.
JUDGMENT
In the case of nominee directors, the nominator
expects them to look after its interests, yet
the directors’ duties in law are owed to the whole
company, not a specific nominator. In Scottish Co-
operative Wholesale Society Ltd v. Meyer [1959] AC
324 it was held that a nominated director must not
put the principal’s interests above those of the
company.
DISCUSSION QUESTION
The articles of association of Wambu Limited
provide that a document shall be executed by the
company where it is signed by two directors or a
director and a secretary, and the seal of the
company duly affixed. The managing director of
the company signed a charge over the company’s
assets in favour of a bank as security for a loan, and
on the strength thereof the bank advanced
DISCUSSION QUESTION
the company money. The bank was also
provided with a resolution of the directors
approving the borrowing, although the articles
of association require a resolution of the general
meeting. The company has refused to pay back
the loan arguing that the transaction did not
comply with the articles.
(a) Assess the applicable legal doctrine to the
DISCUSSION QUESTION
dispute.
(b) Advise the bank on two exceptions to the
doctrine.
THE SECRETARY
Every company must have a secretary and a sole
director cannot be a secretary: section 177. A
corporation cannot be the secretary if its sole
director is also the sole director of the company:
section 178.
The secretary is usually appointed by the
directors.
THE SECRETARY
Table A article 110 provides that the secretary
shall be appointed by the directors for such
term, at such remuneration and shall upon such
conditions as they think fit, and any secretary
appointed may be removed by them. A
secretary’s role was described in Barnett, Hoares
& Co. v. South London Tramways Co. (1887)18
THE SECRETARY
QBD 815 at 817 by Lord Esher M.R. thus: “*A+
secretary is a mere servant; his position is that
he is to do what he is told, and no person can
assume that he has any authority to represent
anything at all; nor can anyone assume that
statements made by him are necessarily to be
accepted as trustworthy without further
inquiry.”
THE SECRETARY
Thus the company was in the case held not to be
liable for the acts of its secretary in fraudulently
making representations to induce persons to take
shares in the company. It has also been held that
the secretary has no independent authority to bind
the company by contract. In Houghton & Co. v.
Nothard, Lowe & Wills Ltd [1928]A.C. 1, L. a director
of N. Co. without any authority from the company
THE SECRETARY
made a contract with H. The contract was
confirmed by a letter written by the secretary on
behalf of the company. It was held that the
secretary as such had no power to bind the
company. The secretary cannot borrow money
on behalf of the company, nor can he issue a
writ in the company’s name or lodge defences
in the
THE SECRETARY
company’s name without the authority of the
company. The secretary cannot also register a
transfer until he is authorised to do so by the
directors, nor can he strike a name off the register
of shareholders without authority. He cannot also
summon a general meeting on his own authority.
In modern time the company secretary is the chief
administrative officer of the company. He is no
THE SECRETARY
longer a mere clerk, and regularly makes
representations on behalf of the company and
enters into contracts which come within the day
to day running of its business on its behalf. He is
certainly entitled to sign contracts connected
with the administrative side of the company’s
affairs, such as employing staff and ordering
cars. In Panorama Developments (Guildford) Ltd
THE SECRETARY
v. Fidelis Furnishings Fabrics Ltd [1971]2 Q.B. 711
(CA) the secretary purportedly on behalf of the
company, fraudulently hired cars, ostensibly for the
purpose of meeting customers, and used the cars
for his own private purposes. It was held that the
secretary had ostensible authority to enter into
contracts for the hire of cars on behalf of the
company and the company was liable to pay the
THE SECRETARY
hire charges.
The duties of the company secretary depend on the
size of the company, and on the arrangements with
him. He attends meetings of the company, and of
directors, and makes proper minutes of the
proceedings. He issues under the direction of the
board, all notices to members and others. In
practice he usually countersigns every instrument
THE SECRETARY
to which the seal of the company is affixed. He and
his department conducts all correspondence with
shareholders regarding transfers of their shares,
and keep the books of the company, or at least
those of them that relate to the internal business of
the company such as register of members, share
ledger, transfer book. He also makes the necessary
returns to the Registrar such as annual returns.
THE SECRETARY
The secretary is an officer of the company, and
therefore the court can relieve him from liability
in certain cases. The appointment of the
secretary may be terminated by giving the
agreed notice, or if non is agreed, reasonable
notice, but it may be terminated without notice
if the secretary makes secret profit: McKay’s
Case (1875)2 Ch. D 1.
SHARE CAPITAL
The capital clause in the memorandum of the
company states the amount of capital with
which it is registered. This capital can have any
of four meanings. First, Nominal capital. This is
the authorised capital with which a company
proposes to be registered. It must be set out in
the statement of capital and shareholding
Nominal Capital
divided into shares of fixed amount. The
nominal capital represents the maximum
amount which the company’s directors may
raise by issue of shares at different stages,
depending on the company’s business
requirements. The nominal capital may be
increased or reduced subject to future
business requirements of the company.
Issued or subscribed capital
Secondly, the issued capital of a company is that

part of the nominal capital which has actually
been issued and taken up by shareholders who
have agreed to pay in cash or kind for the shares
issued to them.
Thirdly, paid-up capital. This is that part of the
issued capital which has actually been paid-up
Reserve Capital
by the shareholders. The difference between the
issued and paid- up capital is the uncalled
capital which may become payable by
instalments on such fixed dates as if they were
paid on call.
Fourthly, reserve capital. This is that part of the
share capital of a company which it may
Reserve Capital
resolve by special resolution not to be called
except in the event of liquidation. Generally, a
limited company may by special resolution
resolve that any portion of its share capital
which has not already been called up shall not
be capable of being called up except in the
event and for the purpose of the company being
liquidated.
Shares not convertible into stock
It is no longer possible for shares to be offered
in multiples since S. 322 CA provides that the
shares of a company may not be converted into
stock, and any attempt to do so has no effect.
Moreover, the Act requires that shares in a
limited company having a share capital must
have a fixed nominal value and be denominated
Allotment, subscription and
conversion of any security into shares
in shillings: S. 324 CA.
The directors of a company can only exercise a
power of the company to allot shares in the
company or to subscribe for or convert any
security into shares in the company as follows:
in the case of a private company with only
one class of shares, where they are not
SHARES
prohibited from doing so by the company’s
articles: S. 328 CA. As for other types of
companies, they can only exercise the power
where they are authorised to do so by the
company’s articles of association or by a
resolution of the company: S. 329 CA. The
authorisation may be given for a particular
SHARES
exercise of the power or for its exercise
generally, and may be conditional or
unconditional: S. 329 CA. The resolution must,
however, state the maximum amount of shares
that may be allotted under it, and specify the
date on which it will expire which should not be
more than five years from the date of
Prohibition against application of
shares or capital money
incorporation where the authorisation is in the
articles, or the date on which the authorising
resolution is passed. A resolution of a company
to give, vary, revoke or review an authorisation
may be by ordinary resolution: S. 329(8) CA.
Companies are prohibited to apply any of their
shares, or capital money in payment of any
SHARES
commission, discount or allowance to any
person subscribing or agreeing to subscribe for
shares in the company or procuring or agreeing
to procure subscription of shares in the
company: S. 330 CA. This may be because such
application would result in reduction of share
capital.
Right of pre-emption of existing
shareholders
Where a company seeks to grant a right to
subscribe for or convert any securities into
ordinary shares in the company or sell ordinary
shares in the company that immediately before
the sale were held by the company as treasury
shares, it cannot allot equity securities to any
person on any terms unless it has made an offer
SHARES
to each person who holds ordinary shares in the
company to allot to the person on the same or
more favourable terms a proportion of those
securities that is as near as practicable equal to
the proportion in nominal value held by the
person of the ordinary share capital of the
company, and the period during which such
Exception to pre-emption rights
offer was to be accepted has expired or the
company has received notice of the acceptance
or refusal of every offer so made.
The pre-emption right does not apply in cases
of: (a) bonus shares; (b) any allotment of equity
securities which are to be wholly or partly paid
up otherwise than in cash (Ss. 341 & 342 CA); (c)
SHARES
allotment of securities that would be held under
an employees’ share scheme: S. 343 CA; (d)
where the company’s articles prohibits the
company from allotting ordinary shares of a
particular class unless the offer is made to each
person who holds ordinary shares of that class
and the company makes an offer to allot shares
SHARES
to such persons who either renounce or accept
the offer in which event the company may allot
the shares accordingly: S. 345 CA; (e) where the
directors of the company are authorised to allot
the shares either specifically or generally by the
articles or a resolution, and the company has by
special resolution resolved that the pre-emption
SHARES
rights of shareholders does not apply or applies
to a specified allotment of securities with
modification: S. 348 CA. The resolution may only
be proposed where it is recommended by
directors, and the directors have made a written
statement circulated to the members setting out
the reasons for making the recommendation,
SHARES
the amount to be paid to the company in
respect of the equity securities to be allotted,
and the justification of the amount. (f) the
taking of shares by the subscribers to the
memorandum on the formation of the
company: S. 351 CA.
A public company should notwithstanding the
Shares
foregoing, allot shares of the company offered
for public subscription unless the issue is
subscribed for in full.
COMPANY ACCOUNTS AND AUDIT
COMPANY ACCOUNTING
RECORDS AND FINANCIAL
STATEMENTS
1. ACCOUNTING RECORDS
Every company is obliged to keep proper
accounting records which show and explain the
transactions of the company, disclose with
reasonable accuracy the financial position of the
company for the period in issue, and enable the
directors to ensure that every financial
ACCOUNTING RECORDS
statement required to be prepared complies
with the Act. The accounting records must: (a)
contain (i) entries from day to day of money
received, and spent and the items of receipt and
expenditure; (ii) record of assets and liabilities of
the company; and (b) comply with prescribed
financial accounting standards: S. 628(3) CA.
Preservation of accounting records
The accounting records are kept at the
registered office of the company and are open
to inspection by the officers of the company.
They should be preserved for not less than
seven years from the date when they were
created: S. 630 CA.
2. FINANCIAL STATEMENTS
Annual financial statement means company’s
individual financial statement for a financial year
and includes any group financial statement.
For quoted companies, annual financial
statement and reports for financial year consist
of annual financial statement, directors’ report,
auditors’ report on the financial statement and
FINANCIAL STATEMENTS
directors report (unless the company is exempt
from audit): S. 620 CA. However, for quoted
companies annual financial statement and
reports for financial year consist of annual
financial statement, directors’ remuneration
report, directors’ report and auditors’ report on
rhe financial statement, directors’ remuneration
report and directors’ report: S. 620 CA.
The financial statement must give a true and fair
view of the assets, liabilities and profit or loss of
the company or undertakings comprising a
group of companies in the case of a
consolidated financial statement: S. 636 CA. The
directors should approve the annual financial
statement only where it gives a true and fair
view, and arrange for one of them to sign it: S.
638 CA.
The requirements regarding individual financial
statement for the financial year are that the
statement (a) comprises: (i) a balance sheet as
at the last day of the financial year which
provides a true and fair view of the financial
position of the company and signed by the
directors; (ii) profit and loss account which gives
a true and fair view of profit or loss of the
company for the financial year; (iii) statement of
cash flow; (iv) statement of change in equity;
and (b) complies with prescribed financial
accounting standards relating to the form and
content of balance sheet and profit and loss
account, and additional information is provided
in the form of notes to the statement.
Holding companies that are not subject to the
small companies regime must in addition have
group financial statements prepared unless
they are exempted from the requirement: S. 639
CA. The directors must also ensure that
individual financial statements of the parent
company and each of its subsidiary undertakings
are all prepared using the same financial
reporting framework except to the extent that in
their opinion there are goods reasons for not
doing so: S. 645 CA.
As for companies that are not subject to the
small companies regime, the directors must
include notes to the company’s annual financial
statement showing the average number of
persons employed by the company, and the
average number of employees employed in each
DIRECTORS’ REPORT
category in the financial year, as well as the
specific categories of benefits received by the
directors such as long term incentive schemes,
benefits on exercise of share options, and
payments for loss of office: Ss. 649-650 CA.
The directors should include in their report for a
financial year the names of the persons who at
any time during the financial year were directors
of the company. The directors report should be
approved by them, and signed by one of them
or the company secretary.
In a financial year in which the company is a
parent company and the directors have
prepared a group financial statement, they
should also prepare a group directors report
relating to the undertakings to which the
financial statement relates.
The group directors report may lay emphasis on
matters of significance to the undertaking taken
as a whole. The directors’ report, must, however
Business Review in Directors Report
also include a business review whose purpose is
to inform members of the company and assist
them to assess how the directors have
performed their duty: S. 655 CA.
The business review must contain a fair review
of the company’s business and a description of
the principal risks and uncertainties facing the
Business Review Report
company. It must be a balanced and
comprehensive analysis of the development and
performance of the business of the company
during the financial year, and the position of the
company at the end of the year, consistent with
size and complexity of the business.
In quoted companies, the directors should
specify in the business review, to the extent
necessary for a better understanding of the
development, performance or position of the
company, the main trends and factors likely to
attract future development, performance and
position of the business of the company;
information about environmental matters
including impact of the business of the company
on the environment; the employees of the
company; and social and community issues,
including information on any policies of the
company in relation to these matters and the
effectiveness of the policies.
The business review should also have
information about persons with whom the
company has contractual or other arrangements
that are essential to the business of the
company.
Moreover, to the extent necessary for a better
understanding of the development,
performance or position of the company’s
business, the directors should include in the
review an analysis of key financial performance
indicators, other key performance indicators
including those relating to environmental
matters and employee matters and references
to and additional explanations of amounts
included in the company’s annual financial
Statement on information
statement: S. 655(6) CA.
The directors report should also include a
statement that with respect to each of the
persons who was a director at the time the
report was approved, that so far as the person is
aware, there is no relevant audit information of
which the company’s auditor is unaware, and
Director’s Remuneration Report
the person has taken all steps to be aware of the
information and to establish that the company’s
auditor is aware of the information: S. 657 CA.
The directors’ remuneration report is prepared
by directors of quoted companies for each
financial year of the company: S. 659 CA. For
this purpose, each person who is a director of a
Circulation of annual financial
statement and reports
company should give such personal details as
may be necessary for preparation of the report.
When the directors have prepared the report,
they are required to approve it, and designate
one of them or the company secretary to sign it:
S. 661 CA.
The annual financial statements and reports for
Circulation of Annual Reports
each financial year should be sent to every
member of the company, every holder of the
company’s debentures and every person
entitled to receive notice of general meeting.
However, for companies without share capital,
the copy of the financial statements and reports
need not be sent to anyone who is not entitled
to receive notices of general meetings of the
company.
Public companies should do this at least 21 days
before the date of the general meeting at which
the relevant financial statement and reports are
to be laid: S. 663 CA. Companies that are not
quoted may also in certain circumstances send
to members a summary financial statement
instead of the copy of the financial statement
required to be sent. The summary financial
statement must be derived from the annual
financial statement, and may contain additional
information derived from the directors’ report.
It should affirm that it has been prepared in
accordance with the law as well as whether in
the opinion of the auditors it is consistent with
the company’s annual financial statement and
complies with the requirements of the law. It
should also state whether the auditors report in
the annual financial statement was qualified or
unqualified: S. 665-667 CA.
Publicity of Financial Statements
A quoted company must ensure that its annual
financial statement and directors report is
available on its website until the annual financial
report for the next financial year is made
available: S. 670 CA. All precautionary
statements of its annual results as required by
listing rules must also be made available on its
Publicity of Financial Statement
website: S. 671 CA.
When a company publishes its statutory
financial statement, it must enclose or annex to
the statement a copy of the auditors report on
that financial statement: S. 676 CA. The financial
statement and reports must be lodged with the
Registrar of Companies: S. 684 CA.
Lodgement of Financial Statement and
Reports with Registrar
The directors of a company that is subject to the
small companies regime should also lodge with
the Registrar a copy of the balance sheet and
auditors report on the balance sheet, profit and
loss account and directors report: S. 686 CA. The
directors of an unquoted company that is not
subject to the small companies regime must
Lodgement of Reports with Registrar
lodge with the Registrar for each financial year a
copy of the annual financial statement, directors
report, and auditors report on the statement
and the report unless the company has been
exempted from audit requirements: S. 687 CA.
The directors of a quoted company must also
lodge with the Registrar for each financial year
Laying financial statements and
reports before general meeting
copies of the annual financial statement,
directors report, directors remuneration report
and a copy of the auditors report on the
statement and the reports: S. 688 CA.
AUDITING OF COMPANY’S FINANCIAL STATEMENTS
Exemption from audit requirements
The directors are obliged to ensure that the

company’s annual financial statements are
audited unless the company is exempt from audit,
or from the requirements relating to audit.
Companies that are exempt from the
requirements of the CA relating to the audit of
accounts for that year must meet the following
conditions:
Audit of Financial Statements &
Reports of the Company
i. qualify as a small company; ii. Turnover not
more than 50 million shillings; iii. Value of net
assets specified in balance sheet at the end of
the year not more than 200 million shillings.
A company is not entitled to exemption if it is a
public company, or carried on banking or
insurance business at any time within the
Exemption from Audit
relevant financial year: S. 712 CA.
A company is also not entitled to exemption in
respect of a financial year during any part of
which it was a group company unless it qualifies
as a small group in relation to that financial year,
and was not at any time in that year an ineligible
group; and the group aggregate turnover is not
Audit of Financial Statements
more than 720,000,000 shillings net or
865,500,000 shillings in gross; and the aggregate
value of net assets of the companies comprising
the group is not more than 360,000,000
shillings.
A company is exempt from the requirements
relating to audit of financial statements in
respect of a financial year if: i. it has been
dormant since its formation; ii. it has been
dormant since the end of the previous financial
year; and iii. is entitled to prepare a financial
statement in accordance with the small
companies regime or would be so entitled but
for having been a public company or a member
of an ineligible group, and is not required to
prepare group financial statements for the year:
S. 714 CA.
However, insurance companies, banking
companies, e-money issuing companies and
other prescribed companies are not exempt: S.
715 CA.
Appointment of auditors
Private companies must appoint an auditor(s)
each financial year unless the directors
reasonably resolve otherwise on the grounds
that an audited financial statement is unlikely to
be required: S. 717. The directors are
empowered to appoint the auditors in three
circumstances. First, at any time before the
Appointment of Auditors
company’s first deadline for the company to
appoint auditors; second, following a period
during which the company was exempt from
audit and did not have any auditor and before
the next deadline for the company to appoint
auditors; and third, to fill a casual vacancy in the
office of auditor: S. 717 CA.
Appointment of Auditor
The members may appoint an auditor(s) by
ordinary resolution not later than the deadline
for appointing auditors; or if the directors were
entitled to appoint auditors but did not do so;
and if the company should have appointed an
auditor by a deadline for appointing auditors but
did not do so: S. 717(5) CA.
Terms of office of auditor
If a private company fails to appoint an auditor
within the period for appointing auditors, it
must notify the Cabinet Secretary who is
entitled to appoint an auditor to fill the vacancy:
S. 718 CA.
An auditor of a private company holds office in
accordance with the terms of their appointment
Terms of holding office by Auditor
provided that they do not take office until any
previous auditor ceases to hold office and they
cease to hold office at the end of the next
period for appointing auditors unless re
-appointed: S. 719
If no auditor has been appointed by the end of
the next period for appointing auditors, any
Terms of holding Office by Auditor
auditor in office immediately before that time is
taken to have been appointed unless the auditor
was appointed by the directors, or the
company’s articles require actual re
-appointment, or the re-appointment is blocked
by the member by issuing a notice supported by
members who hold at least 5 per cent or other
Auditor’s Terms of holding office
percentage of voting rights specified in the
articles who would be entitled to vote on a
resolution that the auditor should not be re
-appointed.
In addition, where the members or the directors
have resolved that the auditor should not be re
-appointed for the financial year concerned,
Appointment of auditors of public
companies
the auditor in office is not taken to have been
re-appointed by the failure to appoint an auditor
by the end of the next period for appointing
auditors.
Public companies are required to have an
auditor for each financial year of the company
unless the directors reasonably resolve
Auditor: Terms of holding Office
otherwise on grounds that audited financial
statement is unlikely to be required for that
particular year.
The appointment of auditors in public
companies must be made before the end of
general meeting at which the company’s
financial statement for the previous year is
Appointment by directors
presented.
The directors of a public company may appoint
an auditor of the company: i. at any time before
the general meeting at which the company’s
first financial statement is presented; ii.
following a period during which the company
having been exempt from audit did not have
any auditor but before the next general meeting
at which the company’s annual financial
statement is to be presented; iii. to fill a casual
vacancy in the office of auditor.
The members may appoint an auditor by
ordinary resolution: i. at a general meeting at
which the company’s annual financial statement
is presented; ii. If the company should have
appointed an auditor at such a meeting but did
not do so; and iii. If the directors had power to
appoint auditors but did not make the
appointment.
If the auditors have not been appointed for a
public company within the period for appointing
Terms of office of auditors of public
companies
auditors, the company is required to notify the
Cabinet Secretary of the failure and the CS
would then appoint the auditors to fill the
vacancy unless there are good reasons not to do
so.
The auditors of a public company hold office in
accordance with the terms of their appointment
Remuneration of auditors
provided that they do not take office until the
previous auditors have ceased to hold office;
and cease to hold office at the conclusion of the
financial statement meeting next following their
appointment unless re-appointed: S. 723.
The remuneration of auditors appointed by
members is fixed by the members either by
Remuneration of Auditor
ordinary resolution or in such manner as
members by ordinary resolution may determine.
When an auditor is appointed by the directors,
the directors are entitled to fix the
remuneration, and when appointment is by the
CS, he or she is entitled to receive from the
company remuneration at a reasonable rate
Disclosure of terms of appointment of
auditor
fixed by the CS.
A company is required to disclose the terms on
which the company’s auditors are appointed,
remunerated or is required to carry out his or
her responsibilities and specify the place in a
note to its annual financial statement or group
statement, in the auditor’s report, or in the
Functions of auditor
directors’ report: S. 725 CA
The auditor has the following functions: 1. make
a report to the members of the company on all
annual financial statements of the company of
which copies are during the tenure of office to
be sent out to members in the case of a private
company, and presented at a general meeting of
Functions of Auditor
the company in the case of a public company: S.
727 CA. 2. The auditor should state in the report
whether in his opinion, the annual financial
statements whether individual or consolidated
for the group fulfil the following: i. give a true
and fair view of;  the financial position of the
company as at the end of the relevant financial
year in the case of an individual balance sheet;
profit and loss of the company for the financial
year in the case of an individual profit and loss
account; financial position as at the end of the
financial year and of the profit or loss for the
financial year of the undertakings to which the
statements relate taken as a whole in the case
of a group financial statements. ii. (the annual
financial statement) has been properly prepared
in accordance with the relevant financial
reporting framework; and iii. (the annual
financial statement) has been prepared in
accordance with the requirements of the Act. 3.
the auditor should also state in the report
whether it is qualified or unqualified and must
include in the report a reference to any matters
to which the auditor wishes to draw attention
without qualifying the report. 4. The auditor
should also state in the auditor’s report on the
company’s annual financial statement whether
in the auditor’s opinion the information given in
the director’s report for the financial year for
which the financial statement is prepared is
consistent with that statement: S. 728 CA. 5.
with respect to the annual financial statement of
a quoted company, the auditor should report to
the company’s members on the auditable part
of the directors’ remuneration report and state
Responsibilities of Auditor: S. 730 CA
whether in the auditors’ opinion the directors
remuneration report has been prepared in
accordance with the Act: S. 729 CA.
a. The auditor must carry out such investigations
as will enable him to form an opinion: i. whether
adequate accounting records have been kept by
the company and returns adequate for their
Responsibilities of Auditor
audit have been received from the company’s
branches not visited by the auditor; ii. whether
the company’s individual financial statement is
in agreement with the company’s accounting
records and returns, and in the case of a quoted
company whether the auditable part of the
director’s remuneration report is in agreement
Responsibilities of Auditor
with those accounting records and returns. The
auditor should so state if he or she establishes
otherwise. b. The auditor should also state in his
report if he fails to obtain all the information
and explanations that to the best of his
knowledge and belief are necessary for the
purpose of the audit.
Rights of Auditor
An auditor of a company has the following
rights: a. to access at all times the company’s
accounting records and financial statements in
whatever form they are held; b. to require the
provision of such information or explanations as
the auditor thinks necessary for carrying out the
responsibilities of auditor from an officer or
Rights of Auditor
employee of the company, any person holding
or accountable for any of the company’s
accounting records or financial statements, a
subsidiary undertaking of the company
incorporated in Kenya and its officer, employee
or auditor and any person who held the said
positions at a time to which the information or
Rights of Auditor
explanation required by the auditor relates. It is
an offence to make a false or misleading
statement knowingly, or recklessly without
caring whether the statement is true or false to
an auditor: S. 733 CA. c. to receive all such
communications relating to any written
resolution proposed to be agreed to by a private
Rights of Auditor
company, as well as all notices of and any other
communication relating to any general meeting
which a member of the company is entitled to
receive. d. to attend any general meeting of the
company and to be heard on any part of the
business of the meeting in the capacity of
auditor: S. 734 CA. If the auditor is a firm, the
Rights of Auditor
right to attend or be heard at a meeting is
exercisable by a natural person authorised by
the firm in writing to act as its representative at
the meeting.
The auditor is obliged to sign and date the
auditor’s report and ensure the auditor’s name
is prominently displayed in the report. Moreover
Cessation of office of auditor
A company can only publish a copy of the
auditor’s report relating to the company if the
copy states the name of the auditor, or where
the auditor is a firm, the name of the person
who signed the report as senior statutory
auditor.
The members of a company may remove an
Cessation of term of Auditor
auditor from office at any time by ordinary
resolution at a general meeting upon serving
special notice: S. 739 CA. When a notice of such
an intended resolution is received the company
must serve the auditor with it and the auditor is
entitled to make written representations to the
company, which the auditor is entitled to
Cessation of term of auditor
request the company to circulate to the
members: S. 740 CA. If such circulation is not
possible within reasonable time, the auditor is
entitled to require that the representation be
read at the meeting. In any event, the auditor is
entitled to be heard at the meeting.
Where the auditor has been removed before the
Cessation of office/term of Auditor
end of his term by resolution, he is entitled to
claim compensation or damages for the
termination: S. 739 CA. Within fourteen days
after a resolution to remove the auditor has
been passed, a copy thereof should be lodged
with the Registrar of Companies for registration:
S. 741 CA.
Failure to re-appoint Auditor: S. 744
A resolution at a general meeting of a company
whose effect would be to appoint another
auditor requires a special notice in the case of a
private company where the period for
appointing auditors has not ended or such
period has ended and an auditor was not
appointed. In the case of a public company, a
Failure to re-appoint Auditor
special notice is required for the purpose of
appointing another auditor where no general
meeting has been held at which a financial
statement of the company was presented since
the outgoing auditor ceased to hold office or a
general meeting has been held at which an
auditor should have been appointed but was
Failure to re-appoint Auditor
not. The notice of the proposed resolution must
be sent to the person proposed to be appointed
as well as the outgoing auditor. The latter is
entitled to make written representations and
request the company to circulate it to the
members and if it is not circulated in reasonable
time the auditor may require the representation
Resignation of Auditor: Ss. 745-746
to be read at the meeting and is in any event
entitled to be heard at the meeting.
An auditor of a company may resign by giving
notice to that effect at the registered office of
the company. The company is then bound to
lodge with the Registrar for registration a copy
of the notice of resignation.
Resignation of Auditor
An auditor of a quoted company who ceases to
hold office is required to lodge a statement of
the circumstances surrounding the cessation
with the company, which would be circulated to
the members and all other persons entitled to
receive a copies of the financial statement. The
auditor is also required to lodge a copy of the
statement with the Registrar for registration: S.
749 CA. An auditor who ceases to hold office
before the end of his term is also required to
notify the appropriate audit authority and
provide a copy of the statement of the
circumstances lodged by the auditor with the
company: S. 751 CA.
The company is also bound to notify the
appropriate audit authority where an auditor
ceases to hold office before the end of the
auditor’s term of office and provide a copy of
the auditor’s statement as well as include in its
notice a statement of the reasons that gave rise
to the cessation of office: S. 752 CA.
Auditor’s liability
An auditor is liable for negligence, default,
breach of duty or breach of trust in relation to
the company whose financial statement the
auditor has been auditing.
A quoted company is required to have an audit
committee of a size and capability appropriate
for the business conducted by the company
Audit Committee: S. 769 CA
appointed by the shareholders.
The responsibility of the audit committee is to
set out appropriate corporate governance
principles for the nature and scope of the
company’s business, establish policies and
strategies for achieving them and annually
assess the extent to which the company has
Audit Committee
observed the policies and strategies: S. 770 CA.
For this purpose, it may organise the company
to promote effective and prudent management
of the company and the directors oversight of
that management, establish standards of
business conduct and ethical behaviour, oversee
the operations of the company and provide
Audit Committee
directions to it on a day to day basis, provide
directors with recommendations for their review
and approval and comprehensive relevant and
timely information on the company’s business
objectives, strategy and policies.
LIQUIDATION OF COMPANIES
Liquidation refers to the process by which the
affairs of the company are wound up with a view
to bringing the company’s existence to an end.
Liquidation of companies are of two types:
i. Liquidation by the court
ii. Voluntary liquidation
LIQUIDATION BY THE COURT
Section 424 provides that a company formed and
registered may be liquidated by the court on several
grounds.
First, where the company has by special resolution
resolved that it be liquidated by the court. Second,
for a public company which was registered as such
on its incorporation, where it has not been issued
with a trading certificate within twelve months of
its registration.
Third, the number of members is reduced below
two except in the case of a private company
limited by shares. Fourth, the company does not
commence its business within twelve months
after its incorporation, or suspends its business
for a whole year. A liquidation order will only be
made on this ground if the company has no
intention of carrying on business.
In Re Middleborough Assembly Rooms Co (1880)14
Ch. D. 104, a company was formed to build and use
assembly rooms. Owing to a depression in trade in
the neighbourhood, building was suspended for
more than three years although the company
intended to continue its operations when trade
prospects improved. A shareholder presented a
winding up petition which was opposed by four
-fifths of the shareholders. It was held that the
petition should be dismissed. Since the conduct of
the majority was not unreasonable or something of
which the minority had a right to complain, the
wishes of the majority were not to be disregarded.
It would have been different if business could not
have been carried on or there was an intention to
abandon the undertaking. However where a
company has been formed abroad and carried
on business there, it will not be wound up
merely on the ground that it has not started its
business in Kenya within the year if it intends to
do so as soon as possible: Re Capital Fire
Insurance Association (1882)21 Ch. D 209.
However there is no need to wait for a year if it
is apparent within the year that the company
cannot carry out the objects for which it was
formed: Re German Date Coffee Co.: (1882) 20
Ch.D. 169.. Fifth, the company is unable to pay
its debts. A company is deemed to be unable to
pay its debts if; first, a creditor to whom the
company owes more than Kshs. 100,000 has left
at the company’s registered office demand
under his hand for the payment of the sum due
and the company has for 21 days thereafter
neglected to pay the sum or to secure or
compound it to the reasonable satisfaction of
the creditor ; or execution or other process in
favour of a creditor of the company is returned
unsatisfied in whole or in part ; or it is proved
to the satisfaction of the court that the company
is unable to pay its debts such as when the
value of the company’s assets is less than the
amount of its liabilities including contingent and
prospective liabilities: Section 384(2). Sixth, if a
moratorium for the company ends and the
voluntary arrangement between the company
and its creditors as to debt repayment does not
have effect in relation to the company.
Seventh, where the court is of the opinion that it is
just and equitable that the company be liquidated:
(a)Where the mutual rights of the members are not
exhaustively defined in the articles such as where
they entered into membership on the basis of
personal relationship involving mutual confidence
or an understanding as to the extent to which each
is entitled to participate in the management of the
company’s business and the right to transfer shares
in the company is restricted, and the confidence is
not maintained or the petitioner is excluded from
the management. The classic case is Ebrahimi v.
Westbourne Galleries Ltd [1973]A.C. 360, the
company was established to take over the oriental
rug business which the respondent and the
petitioner had run in partnership for over a decade.
Initially the two were equal shareholders and the
only directors. Eventually the respondent’s son
joined the company as a director and shareholder
with the effect that the petitioner now became a
minority both within the board and the general
meeting and could be outvoted by the respondent
and his son. Friction developed between the parties
and the petitioner was voted off the board. After
this he was not consulted on the running of the
business and neither did he continue to share in
its profits. No dividends were paid because all
profits were distributed by way of directors’
remuneration. The House of Lords held that
because the petitioner had agreed to the
formation of the company on the basis that the
essence of their business relationship would
remain the same as with their prior relationship, his
exclusion from the company’s management was in
breach of that understanding, and it was therefore
just and equitable to wind up the company. Lord
Wilberforce stated at pages 379: “The words [just
and equitable] are a recognition of the fact that a
limited liability company is more than a mere legal
entity, with a personality of its own: that there is
room in company law for recognition of the fact
that behind it, or amongst it, there are individuals,
with rights, expectations and obligations inter se
which are not necessarily submerged in the
company structure. The structure is defined by the
Companies Act and by the articles of association by
which shareholders agree to be bound… the ‘just
and equitable’ provision does not…entitle one party
to disregard the obligation he assumes by entering
a company, nor the court to dispense him from it. It
does, as equity always does, enable a court to
subject the exercise of legal rights to equitable
considerations; considerations, that is, of a personal
character arising between one individual and
another, which may make it unjust, or inequitable,
to insist on legal rights, or exercise them in a
particular way…The superimposition of equitable
considerations requires something more [than the
fact that the company is a small one, or a private
company], which typically may include one, or
probably more, of the following elements: (i) an
association formed or continued on the basis of a
personal relationship, involving mutual confidence
-this element will often be found where a pre-
existing partnership has been converted into a
limited company; (ii) an agreement, or
understanding, that all, or some (for there may be
‘sleeping members’), of the shareholders shall
participate in the conduct of the business; (iii)
restrictions on the transfer of the members’ interest
in the company-so that if confidence is lost, or one
member removed from management, he cannot
take out his stake and go elsewhere.” A member is
not confined to such circumstances as affect him as
a shareholder i.e. he is not confined to cases where
his position as a shareholder has been worsened by
the action of which he complains. He is entitled
only to rely on any circumstances of justice or
equity which affect him in his relations with the
company or with other shareholders.
The case also shows that it may be just and
equitable to wind up a company where one party
has simply exercised his or her legal rights, but in an
unjust or inequitable way.
In Re Yenidje Tobacco Co. Ltd [1916]2 Ch. 426,
Weinberg and Rothman were the shareholders
in and directors of a company, with equal rights of
management and voting power. After a time
they became bitterly hostile to one another and
disagreed about the appointment of important
servants of the company. All communications
between them were made through the
secretary. The company made large profits
inspite of the disagreement. It was held that
mutual confidence had been lost between W
and R and the company should be wound up.
See also Loch v. John Blackwood Ltd [1924] A.C.
783 and Re A. and B.C. Chewing Gum Ltd [1975]
1 W.L.R. 579. It is just and equitable to wind up
a company where there is such a justifiable (and
it seems insoluble) lack of confidence in the
management of the company’s affairs that it is
unjust and inequitable to require the petitioner
to remain a member. In Loch v. John Blackwood
Ltd [1924]AC 783, the engineering business of John
Blackwood had after its death, been formed into a
company and run by one of his trustees, Mclaren,
for the benefit of the three beneficiaries in his
estate: McLaren’s wife (who was to take one half),
Mrs. Loch (one-quarter) and Rodger (since
deceased, one quarter). The business had been run
very profitably by Mclaren, but (as is described in
the judgment) he had run it in a manner which was
oppressive to the beneficiaries other than his wife.
They accordingly petitioned for the winding up of
the company on the ground that it was just and
equitable to do so.
However the Court will not as a rule order a
liquidation on a contributory’s petition unless he
alleges and proves at least to the extent of a prima
facie case, that there will be assets for distribution
among the shareholder, so that a purely private
advantage will not suffice: Re Chesterfield Catering
Co. Ltd [1976]3 All E.R. 294. The reason is that
unless there are such assets the contributory has no
interest in a liquidation. A contributory’s petition
which is opposed by the majority of the
contributories will usually not be granted
except where the conduct of the majority is
something of which the minority have a right to
complain: [Re Middlesborough Assembly Rooms
Co. (1880)14 Ch.D. 104 where the company
suspended its business for more than three
years due to a depression intending to resume in
more favourable circumstances].
(b). the main object of the company has failed [Re
German Date Coffee Co. (1882)20 Ch. D. 169 where
the company was unable to acquire a German
patent which it was to use to manufacture coffee
from dates]. This ground is of much less importance
in view of section 28 of the Companies Act which
provides for unlimited objects of companies. (c).
The company may also be wound up on just and
equitable grounds where it was formed to carry out
a fraud, or an illegal business as distinguished from
fraud in the course of business with the outside
world. In Re Thomas Edward Brinsmead & Sons
[1897] 1 Ch. 45, T and his sons were relatives of,
and had been employed by persons who carried on
the business of piano manufacturers as J.B. & Sons.
They left J.B & Sons and formed a company T &
Sons for carrying out a similar business. A
prospectus was issued which stated that the
price paid for the business was £76,650 when it
was really only £1,000 in cash together with
£5,000 in shares in the company. Money was
subscribed by the public and most of it found its
way into the hands of the promoters. J.B. & Sons
obtained an injunction restraining T & Sons from
using the name of J.B., and it was found that T &
Sons had been formed to filch as much trade as
possible from J.B & Sons. Numerous other
actions were brought against the company for
fraud in the prospectus. It was held that the
company should be wound up.
WHO MAY APPLY FOR LIQUIDATION BY
COURT (S. 425)
Application for liquidation by the court may be
made by: (a) the company or its directors; (b)
creditor(s), including contingent or prospective
creditors. A secured creditor may apply but
will normally rely on his security, so that the
application is almost always by an unsecured
creditor. However where the creditor’s debt is
disputed on a substantial ground, the court will
WHO MAY APPLY FOR LIQUIDATION BY
COURT
usually restrain the prosecution of the
application as an abuse of the process of the
court, even if the company appears to be
insolvent. In Stonegate Securities Ltd v. Gregory
[1980] Ch 576, prior to the presentation of a
petition to wind up the plaintiff company, the
defendant in accordance with the Act, served a
notice on the company demanding the payment
WHO MAY PETITION FOR
COMPULSORY WINDING UP BY COURT
of a debt within 21 days.
The company, while accepting that there was a
contingent or prospective liability to the
defendant, denied that the debt was presently
due. It filed suit seeking to restrain the
defendant from presenting a petition. The trial
judge found that there was a bona fide dispute
whether the Defendant was a creditor for a sum
presently due and granted an injunction restraining
the defendant from presenting a petition in respect
of the alleged debt provided that within three
weeks, the directors of the company made a
declaration of solvency of the company. The
company successfully appealed. The Court of
Appeal held that winding up proceedings are not
suitable proceedings in which to determine a
genuine dispute about whether the company does
or does not owe the sum in question. Similarly,
winding up proceedings are not suitable
proceedings in which to determine whether that
liability is an immediate liability or only prospective
or contingent liability.
A creditor whose debt is presently due and who
cannot obtain payment normally has a right as
between himself and the company ex debito
justitiae to a winding up order even if the company
is being wound up voluntarily or is in receivership:
Re Chapel House Colliery Co. (1883)24 Ch.D 259.
Thirdly, by a contributory or cotributories. Section
383 defines a contributory as any person liable to
contribute to the assets of the company being
liquidated.
wound up. On the basis of section 385, it includes
all person who at the date when a liquidation
commences are members of the company, or had
been members within the year immediately
preceding that date. Every contributory has a
statutory right to petition, which cannot be
excluded or limited by any provisions in the articles.
In Re Peveril Gold Mines Ltd [1898]1 Ch 122 the
company’s articles provided that no member should
petition for the winding up of the company unless
two directors had consented in writing, or a general
meeting had so resolved, or the petitioner held at
least 20% of the issued capital. A member
presented a petition without satisfying any of these
conditions. It was held that the articles were
ineffective to prevent him from doing so.
However the court will not as a rule make an order
on a contributory’s petition unless the contributory
alleges and proves prima facie that there will be
assets for distribution among the shareholders, or
that the affairs of the company require investigation
in respects which are likely to produce a surplus of
assets available for distribution: Re Expanded Plugs
Ltd [1966]1 W.L.R. 514, Re Othery Construction Ltd
[1966] 1 W.L.R. 69. This is because unless there are
such assets, a contributory has no interest in a
winding up.
If a petition is presented by a holder of a small
parcel of fully paid up shares on facts similar to Re
German Date Coffee Co. (1882)20 Ch 169 or Re
Thomas Edward Brinsmead & Sons [1897]1 Ch 406
should the court apply the available assets for
distribution rule?
However the rule does not apply where the basis of
the contributory’s petition is just and equitable
grounds. At the same time, such a petition which is
opposed by the majority will not be granted except
where the conduct of the majority is something of
which the minority have a right to complain: Re
Middlesborough Assembly Rooms Co. (1882)14
COMPULSORY LIQUIDATION BY COURT
Ch.D 104.
(c) Provisional liquidator or an administrator; (d)
liquidator in the case of a voluntary
liquidation; (f) official receiver in a voluntary
liquidation only where
WHO MAY PETITION FOR LIQUIDATION
UP BY COURT
mentioned above as being entitled to present
a petition. Fourth, the official receiver; and last,
the A-G in consequence of a report of inspectors
on the company’s affairs under section 170(2)
on the basis of which he concludes that it is
expedient in the public interest to liquidate the
company compulsorily. He brings the petition
under Section 211.
PROCEDURE ON LIQUIDATION
In the case of compulsory winding up by the courts
the commencement of the winding up dates from
the presentation of the petition unless before that
date a resolution was passed to wind up voluntarily
in which case the commencement is the time of
resolution: Section 226
Section 235 empower the court to appoint a
provisional liquidator
PROCEDURE ON WINDING UP
time after presentation of a petition and before a
winding up order is made. When the court has
heard the petition it may either dismiss it with or
without costs, or adjourn the hearing
unconditionally or conditionally, or make an
interim order or any other order such as for
compulsory winding up or winding up under the
supervision of the court as it thinks fit: Section
CONSEQUENCES OF WINDING UP
ORDER
222. Where the grounds of the petition are that a
statutory meeting has not been held, or a statutory
report given, the court may require that the
meeting be held and the report filed instead of
making the winding up order, and also order the
costs to be paid by any persons responsible for the
default: Section 222(3).
(1) Section 229 provides that an order of winding
CONSEQUENCES OF LIQUIDATION
ORDER
up a company operates in favour of all creditors
and contributories as if made on a joint petition
of a creditor and a contributory.
(2) Any disposition of property and any transfer of
shares or alteration in the status of members after
the order is void unless the court orders otherwise:
Section 224. The liquidation order thus divests the
company of beneficial ownership of its assets,
CONSEQUENCES OF WINDING UP
ORDER
although it still has legal ownership: Ayerst v. C & K
(Construction) Ltd [1976] A.C. 167. The object is to
prevent, during this period, the improper alienation
and dissipation of the property of the company in
extremis. But where the company is a trading
company, the court can sanction transactions in the
ordinary course of business, for otherwise the
presentation of the petition whether well- or ill-
ORDER
founded, would paralyse the company’s trade. The
disposition includes dispositions of the company’s
property made by third parties whether directly or
indirectly: Re Leslie Engineers Co. Ltd [1976] 1
W.L.R. 292. (3) Any attachment, distress or
execution put in force against the estate or effects
of the company is void: Section 225. (4) Moreover
when the liquidation order has been made or an
ORDER
interim liquidator appointed, no action may be
proceeded with or commenced against the
company except by leave of the courts and
subject to such terms as the court may impose:
Section 228. The purpose is to ensure that when
a company goes into liquidation the assets are
administered for the benefit of all the creditors.
(5) The official receiver becomes the provisional
ORDER
liquidator of the company by virtue of his office
until he or another person becomes liquidator:
Section 236. (6) The liquidation order has the effect
of terminating most of the powers of the directors,
which are then assumed by the liquidator. The
directors continue to have a duty to disclose
confidential information. (7) The company’s
employees are ipso facto dismissed, but may sue for
ORDER
damages for breach of contract, although an
employee who continues to discharge the same
duties and receive the same wages may be deemed
to have entered a tacit relocation into a contract of
service with the liquidator.
Section 239 provides that when a liquidation order
is made, or a provisional liquidator appointed, he
takes into his custody and control all the property
of the company.
THE WINDING UP ORDER AND
COMPANY PROPERTY
liquidation does not, as does bankruptcy or
sequestration, operate as a cessio bonorum or
transfer of the property, as the it remains vested
in it as before: Per Warrington L.J. in Re H. J.
Webb & Co. (Smithfield, London) Ltd [1922]2
Ch.D 369 at 388. He must therefore get the
property into his possession.
A special manager may be appointed on the
SPECIAL MANAGER
application of the Official Receiver acting as
liquidator whether provisional or not by the
court. The official receiver may make the
application where he is satisfied that the nature
of the company’s business, or the interests of
the creditors or contributories generally require
the appointment of a special manager other
than himself. The court when making the
PROCEEDINGS AFTER WINDING UP
ORDER
appointment will usually fix the term and
remuneration of the special manager and confer
such powers on him as it thinks fit. The special
manager is required to give such security as the
Official Receiver requires: Section 258.
Section 232 empowers the official receiver as
provisional liquidator to call on the directors to
furnish him with a statement of the company’s
1. STATEMENT OF COMPANY’S AFFAIRS
affairs, which has to be made in accordance with
the statutory form and verified by affidavit. This
report must be submitted within fourteen days
after the appointment of a provisional liquidator
unless the court orders otherwise. A director
who refuses to comply is liable to a fine.
The statement must show : (a) the particulars of
assets, debts and liabilities of the company; (b)
STATEMENT OF COMPANY’S AFFAIRS
the names, residences and occupations of its
creditors ; (c) the security held by them and dates
when they were given, and such other information
as may be required. The statement is made by one
or more of the directors and the secretary, or if the
Official Receiver so requires, by persons who are or
have been officers of the company. The statement is
open for inspection to anyone who states in writing
2. REPORT OF OFFICIAL RECEIVER
that he is a creditor or contributory. Section 233(1)
requires that as soon as practicably possible after
receipt of the statement of affairs the Official
Receiver must submit a preliminary report to the
court as to the amount of capital issued, subscribed
and paid up, and the estimated amount of assets
and liabilities, the cause of failure of the company
where it has failed, and whether in his opinion
3. FIRST MEETING OF CREDITORS AND
CONTRIBUTORIES
further inquiry is desirable as to any other matter
relating to promotion, formation or failure of the
company or the conduct of its business.
Section 236 requires the official receiver to
convene separate meetings of (i) creditors and (ii)
contributories of the company. The object of these
meetings is for the creditors and contributories to
decide whether an application should be made to
FIRST MEETING OF CREDITORS AND
CONTRIBUTORIES
court to appoint a liquidator other than the Official
Receiver, and if so, whether to apply for
appointment of a liquidation committee to act
with him: Section 248. These first meetings must be
held within sixty days after the winding up order
unless otherwise ordered by the court: Rule 109
Companies Winding Up Rules.
The official receiver must give notice of least
CONTRIBUTORIES
seven days of the time and place appointed for
each meeting to each creditor and contribuotry
of the company. The notice may be personally
delivered or sent by post: Rule 113 Companies
Winding Up Rules.
Rule 114 requires that the official receiver must
send to the creditors and contributories a
summary of the company’s statement of affairs,
CONTRIBUTORIES
including the causes of its failure and any
observations thereon he may think fit to make. The
official receiver may also summon any director or
other officer to attend such meeting.
Rule 121 provides that the official receiver (or
liquidator) or his nominee will be chairman at the
meeting. If there is a difference of opinion the
court will decide. Where a person other than the
4. APPOINTMENT OF LIQUIDATOR
official receiver is appointed as liquidator, the court
fixes his remuneration: Section 238. The appointed
liquidator must then notify the Registrar of
Companies of his appointment and give security to
the satisfaction of the Official Receiver.
A liquidation committee is appointed by the
court after the meeting of creditors and
contributories have been held. It consists of
5. LIQUIDATION COMMITTEE
creditors or contributories or persons holding
general powers of attorney from them as may
be agreed at the meeting, or determined by the
court. Its function is to assist and supervise the
actions of the liquidator.
There is no statutory limit to the number of
members. The committee must meet once a
month, or more often if required. The liquidator
COMMITTEE OF INSPECTION
or any member of the committee may summon a
meeting of the committee when he thinks
necessary. The committee acts by a majority of the
members present, and a majority of the members
present constitutes a quorum. A person ceases to
be a member of the committee if he sends his
resignation in writing to the liquidator; or becomes
bankrupt or compounds or arranges with his
COMMITTEE OF INSPECTION
creditors; or is absent from five consecutive
meetings without leave; or is removed by ordinary
resolution of creditors, if he represents creditors, or
of the contributories, if he represents
contributories: section 249. On a vacancy occuring
the liquidator will summon a meeting of creditors
or contributories to fill the vacancy, but if he thinks
it is unnecessary he may apply to the court for an
POWERS OF THE LIQUIDATOR
order that the vacancy be filled: Section 249.
Section 241 provides that the liquidator may with
the sanction of the court or liquidation committee:
(i) bring or defend actions in the name
of the company ; (ii) carry on business so far as
necessary for beneficial winding up ; (iii) appoint an
advocate to assist him in the performance of his
duties ; (iv) pay any class of creditors in full ; (v)
make any compromise with creditors or persons
claiming to be such ; (vi) compromise calls, debts,
and other claims between the company and any
contributory or debtor.
The liquidator may on his own responsibility
without the sanction of the court : (i) sell the
company’s movable and immovable property by
public auction or privately ; (ii) do all acts and
execute all documents in the company’s name
and use the company’s seal ; (iii) prove and
receive dividends in the bankruptcy of any
contributory ; (iv) draw, accept and endorse bills
and notes in the name of the company ; (v)
borrow money on the security of the company’s
assets ; (vi) take out in his official name, letters
of administration to a deceased contributory ;
(vii) appoint an agent to do any business which
the liquidator is unable to do himself ; (viii) do
all such other things as are necessary for
winding up the affairs of the company and
distributing its assets.
Section 264 empowers the court, after a
provisional liquidator has been appointed or a
winding up order made, to summon any officer
PRIVATE EXAMINATION
of the company or person who knows or is
suspected to have in his possession any property
of the company or who is indebted to the
company, or from whom the court considers
that it can obtain information concerning
promotion, trade, dealings, affairs or property of
the company to appear before it. If he fails he
may be arrested. Where the official receiver has
PUBLIC EXAMINATION
made a report arising from the statement of
company’s affairs stating that in his opinion a fraud
has been committed in the promotion or formation
of the company, or a by an officer of the company
since its incorporation, the court can, based on the
report, direct that that person or officer appear
before it on a day fixed by the court for that
purpose and be publicly examined on oath as to the
PUBLIC EXAMINATION
promotion or formation or conduct of the business
of the company or as to his conduct and dealings as
officer thereof. The person’s answers are taken
down and signed by him and may thereafter be
used as evidence against him: section 265.
A liquidator who wishes to resign must offer his
resignation to separate meetings of creditors
and contributories and they must accept the
CESSATION OF LIQUIDATOR’S POWERS
resolution by ordinary resolution.
A liquidator may also be removed by the court if
sufficient cause is shown. (Section 238) This may
be due to the personal character of the
liquidator or failure to perform his statutory
duties or because the court is satisfied that he
should not manage the company’s assets. In
addition, after the liquidator has realised the
CESSATION OF LIQUIDATOR’S POWERS
property or as much of it as possible and has
distributed the final dividends to the creditors and
made a final return to the contributories, he can
then apply to the court and make a report to it on
his account, and after considering the report and
any objections of creditors and contributories, the
court grant the release or not as the case may be:
Section 247. An order of the court discharging the
CESSATION OF POWERS OF
LIQUIDATOR
liquidator indemnifies him from all liability in
the administration of the affairs of the company
unless it is subsequently discovered that the
release order was obtained by fraud or by
suppression or concealment of any material fact.
When the affairs of the company have been
completely wound up, the court will make an
order dissolving the company if the liquidator
DISSOLUTION OF COMPANY
applies for the same. The liquidator must then
within fourteen days of such an order being
made deliver a copy of the same to the Registrar
of Companies and he is liable to a fine if he
defaults: Section 269.
VOLUNTARY LIQUIDATION
Since a company is created by its members
voluntarily it can also be voluntarily ended. The
advantages of voluntary liquidation include less
formalities to be complied with. Section 393 of the
Insolvency Act 2015 provides that a company may
be liquidated voluntarily: (i) when the period, if any,
fixed by the articles for the duration of the
company has come to an end, or an event the
GROUNDS FOR VOLUNTARY
LIQUIDATION
occurrence ofwhich the articles provides that the
company should be dissolved, occurs, and the
company has in a general meeting passed an
ordinary resolution that it be liquidated voluntarily;
(ii) if the company passes a special resolution to be
liquidated voluntarily.
Section 396 provides that voluntary liquidation
commences when the resolution for voluntary
liquidation is passed. Section 393(2) provides that
before passing the resolution for voluntary
liquidation, the company must to give notice of the
intention to pass the resolution to the holder of any
qualifying floating charge-whose security
constitutes the whole or substantially the whole of
the company’s property- in respect of the company
property, and the resolution can only be passed
after seven days from the giving of the notice or if
the person consents in writing. Within fourteen
days after the company has passed the resolution,
it must publish a notice thereof once in the gazette
and in at least two newspapers circulating in the
area where the company’s principal place of
business in located and on the company’s website.
A copy of the resolution must also be submitted to
the Registrar of Companies.
EFFECTS OF VOLUNTARY LIQUIDATION
Section 396 provides that on the commencement of
a voluntary liquidation the company shall cease to
carry on its business except as may be necessary for
its beneficial liquidation although its corporate
status and corporate powers continue to have
effect until the company is dissolved. Section 397
makes void any transfer of the company’s shares
except to, or with the sanction of the liquidator,
EFFECT OF VOLUNTARY LIQUIDATION
and any alteration in the status of the
company’s members if made after the
commencement of the voluntary liquidation.
1. MEMBERS VOLUNTARY
LIQUIDATION
A members voluntary liquidation takes place
only when the company is solvent. It is entirely
managed by the members, and the liquidator is
appointed by them. No meeting of creditors is
held, and no liquidation committee is
appointed. To obtain the benefit of this form of
liquidation, a declaration of solvency is filed.
Section 382 provides that a liquidation in the
MEMBERS VOLUNTARY LIQUIDATION
case where a directors’ statutory declaration
has been made is a members’ voluntary
liquidation. Section 398 provides that if it is
proposed to liquidate a company voluntarily, the
directors may at a directors’ meeting make a
statutory declaration to the effect that they have
made a full inquiry into the company’s affairs
and formed the opinion that the company will
DECLARATION OF SOLVENCY
be able to pay its debts in full within a period not
exceeding twelve months from the commencement
of the liquidation. The declaration must be made
within five weeks immediately preceding the
passing of the resolution for liquidation and
includes a statement of the company’s assets and
liabilities as at the latest practicable date before the
making of the declaration.
DECLARATION OF SOLVENCY
A copy of the declaration must be lodged the
Registrar of Companies for registration within
fourteen days after the date on which the
resolution for voluntary liquidation was passed.
A director who makes a declaration without
reasonable grounds for the opinion that the
company will be able to pay its debts in full
commits a crime.
THE LIQUIDATOR
In a members voluntary liquidation, the company in
general meeting may appoint one or more
liquidators for the purpose of liquidating the
company’s affairs (s. 399). The liquidator in a
voluntary liquidation is an agent of the company.
His remuneration is fixed by the company in general
meeting. Section 399(3) provides that only an
authorised insolvency practitioner may be
THE LIQUIDATOR
appointed as liquidator.
On the appointment of a liquidator all the powers
of the directors cease except so far as the general
meeting or the liquidator sanctions their
continuance.
If a vacancy occurs in the office of liquidator by
death, resignation or otherwise, the company in
general meeting will subject to any arrangement
THE LIQUIDATOR
with the creditors appoint another authorised
insolvency practitioner, and a general meeting
for this purpose may be convened by the
contributories, or if there was more than one
liquidator, by the continuing liquidator.
Contributories are defined by section 383 as all
persons liable to contribute to the assets of a
company during liquidation.
CONDUCT OF THE LIQUIDATION
Section 401 requires that if the liquidation

continues for twelve months or more the liquidator
must within three months after the end of the first
year and each successive year, convene a general
meeting of the company and lay before it an
account of his acts and dealings and of the conduct
of the liquidation during the preceding year.
As soon as practicable after liquidation of the
affairs of the company is complete, the liquidator
must prepare an account of the liquidation
showing how it has been conducted and how the
company’s property has been disposed of, and then
convene a general meeting of the company for
purposes of laying before it the account and giving
an explanation of it (s. 402). Within seven days after
the meeting the liquidator must lodge with the
Registrar a copy of the account, together with a
return giving details of the holding of the
meeting and its date. It is an offence not to
lodge the returns.
If the liquidator forms the opinion that the
company will not be able to pay its debts in full
within the period stated in the declaration of
solvency, he must convene a meeting of creditors not
later than 30 days thereafter, by a seven days notice, and
also publish notice of the meeting in the gazette and once
in at least two newspapers circulating within the area of
the company’s principal place of business (s. 403). He
must also provide creditors with such information
concerning the affairs of the company as they may
require and indicate his duty to provide the same in the
CONDUCT OF LIQUADATION
notice. He must also prepare a statement specifying
details of the company’s assets, debts, liabilities,
names and addresses of creditors, and securities.
The statement must be verified by a statutory
declaration. The liquidator must lay the statement
before the creditors’ meeting which the liquidator is
bound to attend and preside over.
Section 404 provides that as from the date on
CREDITORS’ VOLUNTARY LIQUIDATION
which the creditors’ meeting is held, the liquidation
will become a creditors’ voluntary liquidation.
Section 382 provides that a voluntary liquidation in
which no director’s declaration of solvency has
been made is a creditor’s voluntary liquidation.
A company that is in the course of liquidation is
required to convene a meeting of the company’s
creditors not later than fourteen days after the date
on which the resolution for voluntary liquidation is
passed. Notice of the meeting must be published in
the gazette and in at least two newspapers
circulating in the area in which the company has a
principal place of business, and on the company’s
website, if any.
Section 407 requires the directors to prepare a
statement setting out the financial position of the
company and containing details of the
company’s assets, debts and liabilities, names
and addresses of the company’s creditors, the
securities given and when given, and other
relevant information, verified by statutory
declaration. The directors will lay the statement
before the creditors’ meeting, and appoint one
of them to preside at the meeting
MEETING OF CREDITORS
The business of the meeting is : (i) to receive a
full statement by the directors of the position of
the company’s affairs, together with a list of
creditors and the estimated amount of their
claims (Section 286); (ii) to nominate an authorised
insolvency practitioner as liquidator for purposes
of liquidating the company’s affairs and
distributing its assets (Section 408); and (iii) to
appoint a liquidation committee (Section 288).
APPOINTMENT OF LIQUIDATOR
Section 408 provides that the creditors and the
company at their respective meetings may
nominate
an authorised insolvency practitioner to be a
liquidator for the purpose of liquidating the affairs
and distributing the assets of the company. If the
company and the creditors nominate different
persons, the nomination of the creditors will
prevail. If the creditors fail to nominate, the
of the company will be the liquidator. If different
insolvency practitioners are nominated, any
director, member or creditor of the company
may apply to the High Court for an order
directing the insolvency practitioner nominated
on liquidation to be liquidator instead of, or
jointly with the creditors’ nominee, or even
appointing some other person be liquidator:
section 408.
If a vacancy arises in the office of the liquidator, the
creditors may fill the vacancy unless the
liquidator was appointed by or under the direction
of the court.
The creditors may also at their meeting or at a
subsequent meeting appoint a liquidation
committee of not more than five persons: s. 409.
LIQUIDATION COMMITTEE
In such an event the company may also at a general
meeting appoint five persons to be members of the
committee. However the creditors retain the
prerogative to reject any or all of the persons
appointed by the company to be members of the
liquidation committee, and if they do, only the
court can reverse the resolution of the creditors: s.
409(3)
Section 411 provides that on the appointment
of the liquidator all the powers of the directors
cease except so far as the liquidation committee
may sanction the continuance . In any event, in
a voluntary liquidation, where a liquidator has
not been appointed or nominated by the
company, the directors may exercise their
powers only with the approval of the court, and
in the case of a creditors’ liquidation, as is
necessary to convene the meetings of the
creditors and the company, and to prepare the
required statement of the financial position of
the company to be laid before the meetings.
The court has power to appoint a liquidator if
for any reason there is no liquidator, or the
liquidator is unable to act, and may on cause
shown remove a liquidator and appoint another
one. The liquidator must be an authorised
insolvency practitioner.
The liquidator must within seven days of his
appointment publish in the gazette and two
newspapers and in the company website, and
lodge with the Registrar a notice of his
appointment:section 417.
FINAL MEETING
If the creditors’ voluntary liquidation continues for
more than one year, the liquidator must within
three months after the end of the year summon a
general meeting of the company and a meeting of
the creditors at the end of the first and every
succeeding year and to lay before the meetings an
account of his acts and dealings and of the conduct
of the liquidation during the preceding year: s. 413
APPLICATION OF COMPANY’S
PROPERTIES
Section 415 provides that on liquidation, the
company’s property in the voluntary
liquidation are to be applied in satisfaction of
the company’s liabilities equally and without
preference, and then subject to the articles,
the surplus be distributed among the
members according to their rights and
interests in the company.
FINAL MEETING
After the liquidation of the company’s affairs
has been completed, the liquidator is required
to prepare an account of the liquidation and
an explanation showing how it was
conducted, and how the company’s property
has been disposed off, and within thirty days
after preparing the account, he shall by notice
in the gazette and two newspapers convene
meetings of the company and creditors to
consider the account and
FINAL MEETING
explanations: s. 414. Within seven days after the
meetings, the liquidator must lodge with the
Registrar a copy of the account and a return of
the holding of the meetings showing when they
were held: s. 414(3). If a quorum is not present
at either of the meetings the liquidator should
make a return to the effect that the meeting was
duly convened but no quorum was present.
In every voluntary liquidation, it is the duty of
the liquidator to pay the debts of the company
and adjust the rights of the contributories
among themselves: section 297. He may for this
purpose, without sanction: settle a list of
contributories, make calls, summon general
meetings of the company for any purpose he
may think fit; exercise all the powers of a
liquidator in a liquidation by the court under
Section 241 except those described below.
In a members voluntary winding up, with the
sanction of a special resolution of the company, and
in a creditors voluntary winding up with the
sanction of the court or a committee of inspection,
or if there is no committee a meeting of creditors,
the liquidator may: pay any class of creditors in full,
make any compromise or arrangement with
creditors, and compromise all calls and liabilities
to calls and other debts and liabilities.
The consequences of voluntary winding up are as
follows: First, after such commencement the
company must cease to carry on its business except
to the extent required for the beneficial winding up
although the corporate powers of the company
CONSEQUENCES OF VOLUNTARY
LIQUIDATOR
continue until it is dissolved: Section 274.
Section 275 provides that shares may still be
transferred by the members if sanctioned by the
liquidator, but any alteration in the status of the
members made after commencement of a
voluntary liquidation is void. Second, on
appointment of the liquidator, the powers of the
directors cease except so far as the company in
WINDING UP
general meeting or the liquidator (in a members
voluntary winding up) or the committe of
inspection or, if there is no such committee the
creditors (in a creditors’ voluntary liquidation),
sanction their continuance.
A voluntary liquidation does not necessarily
operate as a discharge of the company’s employees,
but if it takes place because the company is
WINDING UP
insolvent, it will operate as a discharge. In
Fowler v. Commercial Timber Co. Ltd [1930]2
K.B. 1, by a written agreement, F was appointed
managing director of a company for five years
certain. Before the expiration of the five years
the company passed a resolution for voluntary
winding up as it could not by reason of its
liabilities continue its business. F voted for this
WINDING UP
resolution. It was held that the voluntary winding
up operated as a wrongful dismissal of F and a term
could not be implied that if the company went into
voluntary liquidation with the assent of F he should
lose his right to damages. Per Greer L.J. at 6: “An
order for the compulsory winding up of a company
puts an end to the employment of the managing
director…and in my judgment the same result must
WINDING UP
necessarily follow where there is a resolution for
the voluntary winding up of the company which
depends upon the company being unable to meet
its obligations.”
A compulsory winding up does not bar the right of
any creditor or contributory to have the company
wound up by the court. A creditor of a company in
voluntary winding up is entitled ex debito justitiae
COMPULSORY WINDING UP AFTER
COMMENCEMENT OF VOLUNTARY
WINDING UP
as between himself and the company to a
compulsory winding up order. However the
court is bound to have regard to the wishes of
all the creditors, and if the majority favour the
continuance of the voluntary liquidation an
order will not be made unless the petitioner can
show special circumstances: Re B. Karsberg Ltd
[1956]1 W.L.R. 57
WINDING UP UNDER SUPERVISION
Section 304 provides that when a company has
passed a resolution to wind up voluntarily the
court may order the continuation of voluntary
winding up subject to its supervision on any
terms or conditions. The liquidator will continue
to exercise all powers subject to any restrictions
laid down by the court.
A petition for the winding up of a company
WHO MAY PETITION
subject to supervision of the court may be
presented by any person entitled to petition for
the compulsory winding up of the company.
Before the court can make a supervision order it
must call a meeting for ascertaining the wishes
of creditors and contributories: section 336.
If an order for winding up under court’s
supervision is made the liquidator proceeds to
EFFECT OF SUPERVISION ORDER
wind up the company in the same manner as if
the liquidation were an ordinary voluntary
winding up, exercising without sanction those
powers which a liquidator in a voluntary winding
up may ordinarily exercise without sanction but
the powers for the exercise of which such
liquidator would require sanction may be
exercised only with the sanction of the court, or
EFFECT OF SUPERVISION ORDER
in a case where the order for the winding up
was on a creditors’ winding up, with the
sanction of the court or committee of
Inspection: section 308.
Section 307 empowers the courts to appoint an
additional liquidator when a supervision order is
made. Such a liquidator has the same powers
and duties and stands in the same position as a
ADDITIONAL LIQUIDATOR
liquidator appointed in a voluntary winding up.
The powers of a liquidator in a winding up under
supervision are listed in Section 308.
Section 338 empowers the court at any time
within two years to declare a dissolution void on
the application of the liquidator, or any other
interested person.
DISCUSSION QUESTION
Kirago and Mutune who are alumni of JKUAT
University always vowed that by the age of fourty
-five they would have made enough money to avoid
the hustles of looking for money. When they
graduated, they formed a company for purposes of
supplying government tenders. The articles of the
company provided that its terms would be a period
of twenty years. The company operated for twenty
DISCUSSION QUESTION
years, but by the twentieth year, the relations
between Kirago and Mutune had deteriorated so
much that they hardly spoke to each other,
although the company continued to receive
lucrative tender awards.
Kirago seeks your legal advise with respect to two
grounds on which the company may be wound up.
Write for him an detailed legal opinion thereon.
COMPANY ADMINISTRATION
Administration of companies is a mechanism meant
to rescue a company from insolvent liquidation.
It involves the appointment of an administrator
with the following objectives: (i) to maintain the
company as a going concern; (ii) to achieve a
better outcome for the company’s creditors as a
whole than would likely be the case if the
company were liquidated.; and (iii) to realise
Appointment of administrator: s. 523
the property of the company in order to make a
distribution to one or more secured or
preferential creditors: s. 522 Insolvency Act
The administrator of a company performs his
functions in the interest of the company’s
creditors as a whole. He must be an authorised
insolvency practitioner, and may be appointed
Appointment by company or directors
by the court, by the holder of a floating charge
or by the company or its directors.
An administrator cannot be appointed if the
company is in liquidation or under the
Insolvency Act for a company that is a bank, a
finance company or an insurance company.
The latter are subject to different statutory
measures driven by the sector regulators.
Appointment by court: s. 530
When the court appoints an administrator, it
makes an administration order providing for
administration of the company by the person
appointed. The order is made in the following
circumstances: (i) where the company is or is
likely to be unable to pay its debts; and (ii) the
administration order is reasonably likely to
Application by company, directors,
creditors
achieve the objective of administration.
An application to the court for an administration
order may be made by the company, the
directors of the company, one or more creditors
of the company, or a combination.
A company or its directors should not however
appoint an administrator where an application
Appointment by courts
for liquidation of the company is pending in
court or an administrative receiver is in office.
When the company or its directors make the
appointment, they must file documents in court
showing that they have given notice to the
proposed administrator and he has agreed to be
appointed, as well as a notice of the
Application by holder of qualifying
charge
appointment that states that the administrator
agrees to the appointment, and a statutory
notice to the effect that the company or the
directors are entitled to make the appointment:
s. 548. Where an administrator has been
appointed by the company or its directors, the
holder of a qualifying charge may apply to court
Application by holder of qualifying
charge
to have a specified person appointed as
administrator, and the choice prevails unless
there are special circumstances exist: s. 555
If the holder of a qualifying charge could appoint
an administrator but a liquidation is ongoing, he
may apply to the court to make an
administration order and the court will
Application by liquidator
discharge the liquidation order and make other
appropriate orders including specifying which
powers are exercisable by the administrator: s.
556 Insolvency Act.
The liquidator of a company may also make an
application for an administration order and the
court will discharge any liquidation order
Effects of administration order
existing and make other appropriate orders
including specifying the powers exercisable by
the administrator: s. 557 Insolvency Act.
When an administrator order is made, it has the
following are the effects: first, an application for
liquidation of the company may not be made,
and where such application is pending, it is
suspended while the company is in
administration: s. 558. Second, a resolution for
the liquidation of the company cannot be made.
Third, the court cannot also make an order for
liquidation of the company: s. 559. Fourth, when
a company is under administration, a person
may take steps to enforce a security over the
company’s property only with the consent of
of the administrator or with the approval of the
Court. Fifth, a landlord may also exercise a right
of forfeiture by peaceable re-entry in relation to
the premises only with the consent of the
administrator or the court. Sixth, a person may
also only begin or continue legal proceedings
Statement of company’s affairs
(including execution and distress) against the
company or the company’s property only with
the consent of the administrator or with the
approval of the court. Seventh, when a company
is under administration the companies business
documents and websites must state that it is
under administration, and also the name of the
Statement of Company’s Affairs
administrator: s. 562
When an administrator is appointed he is
required to notify the company, and the
creditors of the company, and also publish the
appointment. He will then require relevant
people to provide him with a statement of the
company’s affairs verified by a statutory
Statement of proposals
declaration which gives particulars of the
company’s creditors, properties, debts and
liabilities and any security held and any other
relevant information. The administrator will
then make a statement setting out proposals for
achieving the purpose of administration and
send a copy (with an invitation for an initial
Statement of proposals
creditors’ meeting) to every creditor and every
member, and lodge a copy with the Registrar for
registration. The administrator’s statement of
proposals should not include any action that
affects the right of a secured creditor to enforce
his security, or would result in preferential debts
of the company being paid otherwise than in
First meeting of creditors
priority to its non-preferential debts, or in a
preferential creditor being paid a smaller
proportion of the creditor’s debt than another:
s.590. A creditor or member may challenge the
actions of the administrator where his actions or
proposals affect their interests detrimentally.
The administrator will present a copy of the
Creditors’ meeting
administrator’s statement of proposals to the
initial creditor’s meeting: s. 569
The creditors meeting must be held within
seventy days from the commencement of the
administration: s. 565-568. The administrator
will however not be required to convene the
meeting if the proposal states that the company
has sufficient property to enable each creditor
to be paid in full. He nevertheless has to
convene an initial meeting of creditors if the
creditors holding at least ten percent of the total
debts of the company request him to do so.
The creditors meeting to which the
administrator’s proposals are presented may
approve them with or without modifications to
which the administrator must consents, and
thereafter the administrator will report the
decision to the court, other entitled persons and
lodge a copy with the Registrar of Companies for
registration.
If the administrator revises his proposals and the
proposed revision is substantial he has to
convene a creditors’ meeting and send a
statement of the proposed revision to creditors
and to each member of the company and
present a copy of the statement to the meeting
for approval; after which he will report to the
court and lodge a copy of the report with the
Registrar of Companies for registration.
If the creditors’ meeting fails to approve the
administrator’s proposals the court may
terminate the appointment of the administrator,
or adjourn the hearing or make an interim order
or make any other order it considers
appropriate: s. 572
Creditors’ committee
A creditors’ meeting may establish a creditors’
committee to which the administrator reports
regarding the performance of his administrator’s
functions: s. 574
Section 584 provides that immediately an
administrator is appointed, he assumes control
of all the property which he believes the
Powers of administrator
company is entitled to. He will also manage the
affairs and property of the company in
accordance with the approved proposals, or the
direction given by the court in connection with
any aspect of the administrator’s management
of the company’s affairs, business or property.
The administrator also has power to appoint or
remove a director of the company. He may also
take any action which contributes to the
effective and efficient management of the affairs
and property of the company: s. 580.
A company under administration or an officer
thereof cannot perform or exercise a
management function without the consent of
the administrator: s. 581.
The administrator may make a distribution to
creditors of the company, but for a creditor who
is neither secured nor a preferential creditor the
payment may be made as part of a distribution
with the approval of the court.
The administrator may dispose of or take action
relating to property that is subject to a floating
charge as if it were not subject to the charge: s.
587. He may also apply to the court to enable
him to dispose of property that is subject to a
security as if it were not subject to the security:
s. 588. When the administrator performs his
functions and powers, he acts as an agent of the
Power of court to examine conduct of
administration
company: s. 586.
The court may examine the conduct of any
person who is or purports to be, or has been or
has purported to be an administrator of the
company where there are allegations of
misappropriation or retention of money,
accountability regarding money or property of
Court’s power to examine conduct of
administration
the company or breach of fiduciary or other
duty to the company or misfeasance.
An application for such examination may be
made by the official receiver, a creditor,
administrator, contributory of the company or
liquidator of the company: s. 592
The court may order the person to repay,
Termination of administrator’s
appointment
restore, or account for money or property, pay
interest or contribute an amount to the
company’s property as compensation.
The appointment of the administrator
automatically ends at the end of twelve months
from the date it took effect, although it may be
extended : s. 593 Nevertheless, the court may
appointment
terminate the appointment of the administrator
on application by the administrator where he
believes that the company should not have
entered administration, or the objectives of
administration cannot be achieved, or a
creditors’ meeting requires the administrator to
apply to court to terminate his appointment: s.
appointment
595 Insolvency Act. A creditor may also make an
application for the court to terminate an
administrator’s appointment: s. 597. The court
may also terminate the administrator’s
appointment on making a public interest
liquidation order: s. 598
The administrator may also lodge a notice with
Termination of Administrator’s tenure
the Court and Registrar of Companies where
s/he believes the purpose of the
administration has been sufficiently achieved
whereupon the appointment ends.

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JOMO KENYATTA UNIVERSITY OF

AGRICULTURE AND TECHNOLOGY

From a functional perspective, there are four types of Companies

• Section 74(2): The application for the registration

• Under section 71(4); the Registrar may not

• Section 76 requires the Registrar to register a

Required: Section 89: All members of the

(b) Discuss whether Kagia & Co. Advocates may

company’s memorandum of association except

653, a company was incorporated with the objects

whole body of shareholders could ratify it. Besides

company. The section was intended to ensure

the exclusion of the directors. This is done when

company, and to the rights attached to their

they should bring a representative action.

Secondly, the issued capital of a company is that

The directors are obliged to ensure that the

Section 401 requires that if the liquidation

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