DIPLOMA IN ACCOUNTANCY

COMPANY LAW NOTES

Nature and classification of companies

There is no definition of the term company .originally the term was used by merchant to denote
or to refer to entity constituting a number of people or association for purposes of profit
maximization.

-Sec 2 of the company’s act define acompany as a company registered under the company’s act
or an existing company.

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Sec 389provides that a co, association or partnership comprising more than 20 persons shall be
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registered /recognized unless it is registered under the co’s act or formed pursuant to a specific
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act of parliament /formed pursuant to a royal charter. This provision helps us know the type of co
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that are recognized under the Company’s Act.

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The co’s act is a statute legislation /act of parliament that governs co law with respect to
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formation, mgt, winding up of companies and any other incidental matters connected to
company. affairs.

TYPES OF COMPANIES (Sec2 and Sec389)

i. Registered

ii statutory Companies

iii chartered Companies

REGISTERED COMPANY
They are the most common type of companies they are formed, registered/incorporated in
accordance with the provision of the co’s act.Sec 4 Sec 13 provides for the following types of
registered companies.

i. Private Companies
ii. Public Companies
iii. Limited Companies
iv. Unlimited Companies

PRIVATE COMPANIES

-Sec 4 and Sec 13 defines private co as a co that is not public

-Private co has the following attributes among others.

i.It has a minimum of 2 members and a maximum of 50 members excluding member

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ii. It restricts the transfer of its shares to members of the public
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iii.It restricts invitation of public to subscribes for its shares

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iv.It can be either limited /unlimited in nature

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PUBLIC COMPANY SEC 4 AND SEC 30

-Sec 4 and sec 30 defined public company as one that isn’t a private company ,it has the
following attributes.

-Has a minimum of 7 members and maximum of infinite i.e. the maximum is unlimited

-It does not restrict the transfer of its shares to the public

-It doesn’t restrict the invitation of the public to subscribe its share

-It can either be limited or unlimited in nature.

Distinction BTN private and public companies

PRIVATE PUBLIC
-Has one director -Have atleast 2directors

-No restriction on appointment of director of a
provide company
-Private companies are not required to hold
statutory meetings
-private companies aren’t required to issue
prospectus
-Are not required to raise minimum
subscription before commencing business
-Has the following restrictions
-Age the person must not be less than 21yrs
and not more than 70yrs
-consent the person must write a written
consent to all directors and must file that
consent with the registrar of the company.
-Qualification shares, the person must obtain
/undertake to obtain his qualification shares
within a specified time frame.
-Public companies are required to hold
statutory meetings at least once in a life
-public companies are required to issue a
prospectus

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-commences business immediately after receipt -Must raise minimum subscription before
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of certificate of incorporation commencing business to enable thee co to

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continue as agoing.
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-can allot shares to their members by raising -Must obtain a certificate of commencement of
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minimum subscriptions. business (trading licencing) having raised

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minimum subscription.
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-must raise minimum subscription before they

can allot their shares to the public.

NB: The company bill proposes that private companies shall not have a company sector but only
public companies shall have atleast one company sector

LIMITED COMPANIES
-Section 4 provides that a limited co is one in which the extent of the liability of the members id
limited /restricted.

-It is a term that describes the nature of a co. There are 2 types of ltd companies

a)Companies ltd by shares

These are companies which have share capital which is divided into shares of a fixed amount.
The liability of members is limited to the amount that remains unpaid on their shares. They
cannot be called upon to pay for that which they have already paid up.

b) Companies limited b guarantee

These companies don’t have share capital.However,there are times when a company ltd by
guarantee may also have share capital .the liability of a member in a company only limited by
guarantee is restricted to that amount which the member guaranteed /pledged/promised

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/undertook to contribute towards the asset of the company in the event of liquidation.
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-However, if the company is ltd by guarantee and also has share capital, the liability of the
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members is to fold (twice) ie they will be liable to contribute what they had guaranteed but if
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their contributions do not offset the debts of the company they will be called upon the 2nd time to
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pay amount that remains unpaid on their shares.

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NB: Private and public companies can either be limited by shares and or by guarantee.

UNLIMITED COMPANIES

-They are companies in which the liability of the members isn’t restricted to any extent i.e. The
liability of the members is unlimited /open ended and all the personal fortune of the members can
be applied to meet the liabilities of the co. To this end, it is disadvantageous for a person to be a
member of unlimited co.

STATURORY COMPANIES

-Sec 389 provides that a company, association/partnership comprising more than 20 persons shall
not be registered unless it is registered under the companies act or pursuant to a specific act of
parliament of Kenya or Uk or pursuant to letters patent Royal charter.
-Statutory companies are also known as parastals, state corporations.

-Previously they were under specific act of parliament. Presently they are formed under the state
incorporations eg.KBC, KNH, KRA, KCC, KPLC, KENGEN, KMC.

-The statutes make provision for the following matters.

The name of company

-The objectives (purposes) for formation

-The by –law regulation for management

-The borrowing powers

-Dissolution

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The statutory companies don’t have share capital unless they are provided .to this they finance
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their operations by borrowing from the consolidatedfund. Statutory corporations only cease to
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exist when the statute under which they were incorporated is repelled.
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-Statutory companies have an artificial legal personality. As a body corporate they have perpetual
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succession ,they can enter into contracts, in their own name ,they can sue and be sued in their
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own name ,they can own property and they have a common seal just like registered companies.

CHARTERED COMPANIES

These companies are formed pursuant authority from the crown the equivalent of the president.
They were common during colonial era e.g imperial British East African Company.

Presently chartered companies aren’t common since independence. However the institution of
higher learning quality as chartered companies because according to sec 7 of the universities act,
They are required to be granted a charter before they can provide the tertiary education e.g
Mku,Kimathi University college, Technical University of Kenya,Pwani University
college,Chuka University college,Inorere University college.

Forms of business organization

There are 2 main forms

 Corporate entities
 Unincorporated entities

Corporate entities

 They are entities that are registered under the companies act and are recognized as
corporate bodies e.g. registered companies’ statutory companies and chartered
companies.

UNICORPORATE ENTITIES

These are artificial legal person/entities which are not registered under the companies act
although they are unincorporated; some of them have corporate personality e.g. cooperative
societies.

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Example of unincorporated entities includes Partnership, trade unions, societies, sole
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proprietorship.
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NB.Corporate and incorporate entities can either be corporate aggregate or corporate sole.
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Corporate aggregate entities are those which are constituted by more than one person at any
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given time during their lifetime e.g. registered companies, corporative societies, partnership etc.

-corporate sole are entities which constitute only one person at any given time e.g. sole
proprietorship, office of the president, office of the bishop and office of the chief kadhi.

DISTINCTION BTN COMPANIES, PARTNERSHIPS AND CORPORATIVE

SOCIETIES

COMPANIES
-Is a company registered under the companies
act or an existing company
-Are mainly governed by the companies Act
PARTNERSHIPS
-Partnership is an association of 2 to 20
persons carrying on business in common for
profit purposes
-Are mainly governed by the partnership ACT
-Are formed by the process of incorporation
-Can either have a membership of 2 to 50 or 7
to infinite incase of private and public
companies respectively.
-They are artificial legal persons distinct from
the natural member who constitute it
-May/may nst be limited by shares may or may
not have share capital
-Have perpetual succession
-can sue or be sued in their own name
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-Can enter into contracts in its own name
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-It is not the agent of the members infact the
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members act as the agents of the company.
COMPANIES
-They can be formed formally or in formally
-They mainly have a membership of 2 to 20
persons (partners)
-They are artificial legal persons but do not
have separate /distend legal personality from
the partners
-Generally do not have share capital i.e they
do not have shares
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-Do not have perpetual succession.
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-May be joint severally sue/be sued in their
name in the name of the office.
-May/may not own property in its own name
depending on the circumstances.
-May partnership firm and the partners are
each other agents.
CORPORATIVES
Sec 2of companies act defines a company as a
company registered under the company’s act or
an existing company,.
-Companies are mainly governed by the
Company’s Act
-They are incorporated entities formed through
the process of incorporation
-They are registered with the registrar of
companies
-They are issued with certificate of incorporate corporate societies act
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-They are formed mainly for profit
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maximization
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-privates companies comprises 2-50 members
and public companies a minimum of 7
-They have heterogeneous share capital and
shares.
-They are dissolved thro The process of
winding up. There are 3 types of winding up
i.e.
Sec 212 compulsory winding up by court
-Sec 2 read sec 4 of the incorporative act
defines a corporate as a society formed to
promote and improve the economic welfare of
its members as is governed by the international
corporative principles.
-They are mainly governed by the corporative
societies act
-They are unincorporated entities because they
aren’t registered in accordance with the
corporative instead they only require to be
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registered in accordance with the conditions of
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-They are registered with the commissioner of
the societies
-They are registered with the commissioner of
the societies.
-They are issued with the certificate of
registration
-Formed mainly to promote improve the
economic welfare of its members
-primary societies comprise a minimum of 10
qualified persons.
-They have homogeneous share capital and
shares
-They are dissolved by the commissioner of
societies after conducting an enquiry
voluntary winding up by members and /inspection into the affairs of society, sec
creditors winding up subjects to the 58,59,60.
supervision of the high court -They are Managed by central mgt committee

-May be granted provisional i.e. if the

-They are managed by the board of directors commissioner is satisfied that the authorized
representatives shall ensure compliance and
-They do not have provision registration. conformity with the requirements of the within
12 months.

REGISTRATION /INCORPORATION

In the case of fort hall Backery supplies ltd Vs wangoe court said that we can only come into
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existence thro the process of registration /incorporation. Salmon Vs Solomon Company ltd court
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said that upon registration the company shall became an artificial legal person distinct/separate
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from the natural member who constituted it.

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Consequences of registration
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Sec16 of the company act and salmon’s case provide that upon incorporation ,the company
become a body corporate known by the name in the certificate of registration and has the right to
enter into contract in own name, ownproperty. In its own name, sue (d)in its own name have
limited liability have perpetual succession and a common seal

1. Artificial legal personality .The Company becomes a body corporate and can exist in its own
name separate from the members. In Salomon’s case this is referred to as the separate legal
personality /separate corporate personality.

The company acquires a corporate bellshell/shield which distinguishes the company from the
natural members. That is why the company is an artificial legal person which has its own name
while the members are natural legal persons who have individual names and rights.
2.Contracts according to sec 16 and salomons case ,the company can enter into contract in its
own name e.g. in the case of leeVs lee air farming’s Mr. lee decided to form a company in which
he was the soletrader.He also entered into an employment contract with the company to be its.

He died on the course of duty when the plane crashed. Court said that the company was a
separate legal person from Mr. Lee and it had a capacity to enter into a contract of service with
mr.lee and it was liable to compensate him.

3. Property according to sec 16 and salomon’s case, the company is a body corporate capable of
owning property in its own name e.g. In Macaura Vs Nothren assurance company ltd.court said
that it doesn’t matter whether a member is a substantial shareholder in the company because he
does not have any proprietary interest in the property of the company i.e. the company can own
name in that case court said that the only property a shareholder has in the company is the shares
he holds. This is collaborated with sec 75 which provide that the shares of a member are his

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movable property. co
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4. Legal proceedings section 16 and Salomon’s case provide that the company is a separate legal
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person and can among other things be sued in its own name .In salomon case court observed that
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the creditor should have sued the company itself for failing to pay their debentures
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In foss VS Harboilue court said that as a separate legal person the company itself is prima facia
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in the first instance the proper plaintiff to seek a remedy. If any wrong is committed against it
however in exemption circumstance when it is not able to sue the natural member can sue on its
behalf.

5. Perpetual succession

sec .16 and Salomon case provided that the company as the creature of law shall have perpetual
succession. the life of company is continuous and only comes to an end through the legal process
called winding up.
6. Limited liability

Sec 16 and Salomon’s case provide that the company is separate and distinct from the natural
members and is therefore liable for its own actions. The corporate veil distinguishes the liabilities
of the company from the liabilities of the members except in the exceptional circumstances when
the members are called upon to meet the liabilities of company of the company.

NB: the Company liable to carry its own cross.

7. Common seal

Sec 16 and salomon’s case provide that the company is entitled to have a common seal which is
the equivalent of the human signature .The common seal is used to authenticate the official
transaction of the company

Lifting the veil of incorporation

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-It is a major exception to the doctrine of incorporate legal personality or separate legal
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personality as was established originally in salomon’s case .when the veil of incorporation id
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lifted is the separate legal personality of the company from the members will be disregarded
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/ignored and the company will no longer be separate entity from natural members henceforth the
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company and the members will be regarded as one entity in the eyes of the law therefore
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members can be held liable for the acts and commission of the company and viceversa

The veil of incorporation is mainly lifted:

i)To protect public policy

ii) To protect the general public

There are 2 ways by which the veil of incorporation can be lifted

1. Statutory lifting (statute/company’s act)

2. Judiciary lifting (courts)

STATUTORY LIFTING

-Contain provision (or the companies Act) on circumstance when the veil of incorporation can be
lifted e.g. i.sec 33 –reduction of membership below the statutory minimum.

-The section provided that if the no of the members reduces below the statutory minimum of 2
and 7 members for private and public company respectively and the company respectively and
the company continue to conduct business for more than 6 months Any member who was aware
of this reduction shall be personally liable for any debt incurred beyond the 6 months trading
period.

Sec 109-improper publication of the company’s name

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The sec provided that every company shall properly publish its name in a conspicuous manner/in
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legible no man letter-in the following 3 phases

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a. Outside in place of business

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b.On all official publication such as letter head and negotiable instruments
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C.On the common seal

If the name is improperly published the name shall be lifted and the company and the officer
responsible shall be liable to a default fine.

SEC 150-154 Group Accounts

-Every holding company is required to prepare and present its consolidated group A/c relating to
itself and its subsidiary .to this end the veil of incorporation of the holding company and is
subsidiaries is lifted and they are regarded as one entity for purpose of group A/C

Sec 167-investigation into company’s affair

-The section provides that the registrar and the high court may appoint a competent inspector to
look into the affair of the holding company and its subsidiaries. In this regard the veil of
incorporation is lifted and the holding company and the subsidiaries are regarded as one entity in
the eyes of the law for the purposes of investigation.

Sec173 sub section 5-Investigation into membership of company

An inspector may be appointed to investigate the membership of the co in order to determine the
true members who are interested in the financial success/failure of the company. The inspector
will look at the shares /debentures which the members hold to determine how he can influence
the policies of the company hence the veil of incorporation will be lifted and the identity of the
company and the members will be regarded as the one and the same.

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Sec 323-Fraudulent conduct of business co
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The section provide that if at winding up it is discovered that the business of the company was
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conducted with the intension to default the creditor the veil of incorporation will be lifted and the
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officers of the company who knowly participated shall be held personally liable.
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Sec325prosecution of delinquent officers

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The section provide that if it at winding up it is discovered that any officer is guilty of
committing any offence in relation to formation ,mgt or wing up of the company such officer will
be personally be held liable if the veil of incorporation is lifted.

Sec 210-Takeover bids

The section provide that if one company offers to take over 100% of the shareholding of another
company the target company and 90% consents of the members of the target company has to
obtained their decision in favour of takeover bids shall be regarded as the decisions of the
company to be taken over.

-The case of re.Bugie press ltd the court said that the decision of the members in favour or
disfavor of the take over bids is regarded as the one /same decision of the company i.e. the veil
of incorporation is lifted and whatever the member decide is what the company will have
decided.

Judicial Lifting

It is reluctancy conducted by court since court recognizes that a company is a separate legal
person, However, depending on the circumstances court may lift/decline to the lift the veil of
incorporation e.g. in the following scenario.

Sham

If a company is a sham or fake/bogus a puppet/dummy or a nomining of the natural members the

court will lift the veil of incorporation and it regard the company and the natural members as one
and the same entity. InSalomon’s case the creditor sued Mr.Salomon’s instead of the company
arguing that since he was the substance shareholder he and the company were one and the same

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entity court rejected this argument and said that since the company had been properly
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incorporated it was a separate legal person distinct from legal person court declined to lift the
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veil of incorporation.
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Illegality
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-The Salomon’s case court said if a company is formed to persue illegal object the veil
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incorporation will be lifted and the company and the natural members will be regarded as one
and the same entity for purposes of liability. In the case of Gilford Motor Vscourt said that it will
not allow the company to be used as the quak behind which illegality will be perpetuated rather
the veil of incorporation will be lifted if it is discovered that the company is an alter ego of the
members

-In Gilford motor Mr.Horne entered into a restraint of trade agreement/contract with his
employers (Gilford motor) to the effect that upon retirement ha shall solicit for clients for his
formal employers. He incorporated the company in which his wife was the sole director with a
view to soliciting client from Gilford motor .court said that if the company is an alter ego of the
thorne the veil of incorporation will be lifted.

Fraud/improper conduct of business

In salomon’s case court said that if the company is formed for purposes of committing fraud, the
veil of incorporation shall be lifted and the person who knowingly participated in the fraud shall
be personally held liable. In the case of Jones Vs lipman Mr.Lipman agree to sell his property to
mr.jones later he changed his mind and formed a company to which he transferred the property
instead of transferring it to mr.jones.Mr Jones was aggrieved and field an injuction with a view
to ensure that Mr.lipman specifically perform the original contract. Court lifted the veil of
incorporation of the company formed by Mr.lipman and ordered it to contain confine its property
to mr Jones. Court further said that it will not allow the company formed to persue fraud /to
improperly conduct business.

Agency

In the case of Salomon’s Vs salomon, court said that the company is legal separate entity from
the members and cannot be considered the agent of company rather it is the members

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(director)who act as the agent on behalf of the company. Nevertheless court said if the company
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is acting as agent there must be express agent agreement inorder for the veil to be lifted to expose
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the principal
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Rectification of corporate act

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-InAshbury’s case court said that if the contract is ultra-vives if cannot be rectified by the
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directors/members. However if the contract is intra-vives(within the scope of authority )the

contract can be rectified and the decision of the members shall be regarded as decisions of the
company eg the veil of incorporation shall be lifted and whatever the members decide shall be
regarded as having being decided by the company itself.

Protection of public policy

Acourt with lift the veil of incorporation in order to protect the general welfare and well being of
the public. In the case of Connors Vs Connors, Court said that if the company is formed to
persue immoral object the veil of incorporation shall be lifted and the person behind the immoral
activities shall be personally be hale liable

Enemy status.
-In the case of Daimer company ltd Vs Continental tyre and rubber company ltd, court said that
the character of the company is regarded as one and the same as the character of its natural
members Court said that if members are of an enemy status the company will also acquire the
enemy status i.e the nationality of the company is one and same as the nationality of the
members.

Registration process

It is divided into 4 main stages

1. Promotion

2. Incorporation

3. Capital subscription

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4. Commencement of business. co
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1. Promotion
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It is the process the companies go through before it is incorporated .it is conducted by persons
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called promoters. Private company needs at least 2 promoters while public companies needs
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atleast 7 promoters.sec 45 define a promoter as a promoter who was a party to the preparation of
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the prospectus or the untrue statement thereof/

Promotion is divided into several process

I Discovery of ideas

ii Detail investigation

iii Assembly of the factors of production

ivFinancing

I. Discovery of ideas

Discovery involves a situation where the promoter hatch their ideas they can make profit
persuing a given object through a company
Ii.Detail Investigation

-It involve a feasibility study into the market forces of demand and supply as against the cost of
production to determine the profit margin

III.Assembly

-it involves acquisition of the various factors of production i.e land, labour, capital
&entrepreneurship

iv.It involve raising of money /capital from the general public through a prospectus/through
othermeans (New Brunswick vS Muggeridge)

Incorporation

It is subdivided into the following phases

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a. Preservation and registration of the name
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b.Preparation and presentment of the registration document

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c.Issuance of Certificate of Incorporation

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d.Acquisition Of Corporate Personality

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The name

a. There are 5 issues under the name

i. Desivebility-sec19
ii. Publication-sec109
iii. The word limited-sec5
iv. Exemption from the word limited-sec21
v. Change of name-sec20 and,sec17

DESIRABILITY
-sec 19 of the company’s act provides that the name of the company shall not be reversed or
registered if it is undesirables in the opinion of the registrar i.e. the name must be desirable in the
opinion of the registrar in order to be registered.

-However ,the section does not give the criteria of determining whether a name is desirable or
undesirable therefore reliance is obtained from se 17 of the registration of business name act and
on practice note no.186 of the registrar of company of ok.which provide that the name is
undesirable if.

I. Same/similarity i.e if it is the same or similar to that of an already existing entity e.g. Coca-
Cola and Coca-Cola, T.T dubie&DT dubie.

ii.Crime/immoral intent i.e if it is suggestive of a criminal or immoral intent e.g. wafisadi

company ltd Ngeta company ltd, Malaya distribution ltd, wachawi company ltd

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iii.Association with the president i.e. if it suggests an association with the president, the head of
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state the gvt ministry or dept or international organisations such as united nation and world
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bank(WB)
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Iv.Misleading character i.e if the name is misleading with respect to its character, the nationality
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of its members or the nature of its business e.g in the case of daimer company ltd vs continental
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tyre and rubber company where court said that although the company had been incorporated in
Egypt it was misleading in with respect of its nationality of its members and its certificate of its
incorporation was withdrawn.

Ii-sec 5 requires every limited company to have the word ltd whether limited or not as the last
word in its name .however sec 21 provides that the company can be exempted from using the
word

iiiltd if it applies to the attorney general and he is satisfied that

-the company has been formed for the purposes of promoting commerce religion,charter or any
other useful objectives.

That the company shall use its income and profit to promote its objectives
-That the company prohibits the payment of dividends to its members

iv.SEC 109 requires the name of the company to b e properly published in conspicuous manner
and in legible woman letters.

-outside its place of business or register office

-on the office publication of the company

-on the common seal of the company

V Sec 21 and 20 empower the company to change its name either voluntary or involuntary

-Voluntary change occurs when the company itself passes the special resolution with 3-fourth
majority after which it notify the registrar and theregistrar the n replaces the old name with the
new name.

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Involuntary change on other hand is also known as compulsory and it occur when the registrar
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direct the company to change its name e.g. ifit is undesirable (June 2012Q2b)(Dec2010Q4b)
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e.g. Algamation,takeover rebranding ,similar .if the company changes its name the change shall
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not affect any legal obligations or legal proceedings which had areason under its own name such
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obligation and proceedings shall be transferred and shall be continued under the new name (June
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2009Q1)

Sec 70 provides that the high court may direct the company to add the word and reduced as the
last word in its name where the company has passed a special resolution for the reduction of
capital.

B.PREPARATION AND PRESENTATION OF DOCUMENTS

-The Following Documents Must Be Prepared and Presented to the Registrar by the Promoters

-Memorandum of association-Ashbury’s case define memorandum of association as the

fundamental charter which contain the condition upon which the co is formed .it is the external
constitution of the company.
Articles of association-Ashbury’s case defined article of association as the rule and regulation
framed by the members to govern the internal affairs of the company and to help the members
achieve the aim for which the company was formed as set out in the memorandum. It is the
internal constitution of the company.

Written consent to act as director. Every person who has consented to be director of a public
company must file his written consent with the registrar

List of directors and secretary. Thenames, addressesdescription and occupation of the directors
and secretary must be derived to the registrar.

The registered office-The promoters must file to the registrar the statement relating to the
situation/the location of the registered office which is important for correspondence because the
company is an artificial person.

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Declaration of compliance-it is the statement by the directors or advocate to the effect that all the
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requirement relating to registration has too be completed with
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-statement of nominal capital is the statement by the director stating the amount of capital with
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which they proposed to register the company .This statement is important for computation of the
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stamp duty which must be paid.

C.Certificate of incorporation

Sec 17 Provides that if the registrar is satisfied with compliance he may issue certificate of
incorporation under his hand. The certificate is a conducive evidence that there have been
compliance that the company had been registered on the date mentioned in the certificate under
the name mentioned in the certificate even if the date is incorrect .As was observed in the case of
jubilee cotton mills Vs Jewis.

In the jubilee case the constitutive document was devoted to the registrar on 6th January and 2
days later on the 8thJan the registrar issued the certificate of incorporation which was dated 6th
Jan court said that company had been incorporated on 6thJan and that the shares it had allotted on
6th were valid. In Peel’s case court said that as a general rule once a certificate is issued it cannot
be withdrawn however in exceptional circumstances the certificate can be withdrawn e.g.

If the company is formed to pursue a blasphemous as was observed in the case of bowman vs the
secular society where the company was formed to blasphemous against Christian region and in
particular against the salvation army.

Immorality

In the case of the registrar of joint stock companies, exporter AG court said that if the company
is formed for a immoral purpose the certificate of incorporation shall be withdrawn In that case a
company to enable its clients to make gains out of their prostitution services. Court observed
although prostitution perse was not illegal in Britain it was contrary to public policy.

Enemy Status

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In Daincer Company ltd if the company has enemy status its certificate of incorporation shall be
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cancelled.
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Sham
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In Salomon’s case court said that if the company is bogus its certificate of incorporation shall be
withdrawn and cancelled becoz it will not be the real company in the real sense of the word.

Topic 2

Formation of companies
Promoters

SEC45defines a promoter as a promoter who was a party to the preparation of the prospectus or
the untrue statement thereof this definition is vague because of the various reasons including

1 the term promoter is a term of business but not of law

2 the conduct of a promoter only comes into question when a misfortune befalls the company

3. The position of the law is not clear hence many scholars and authors are reluctant to get a
precise definition

4 .A specific definitions would set out a criteria which can have loop holes and unscrupulous
persons can take advantage of the criteria to escape liability

Judicial description of a promoter

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Courts have described a promoter in various termilogies e.g
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1. In Twycross vs Grant court described a promoter as persons who undertake to form a company
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with respect to a project and set it going by taking the necessary steps.
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2. In Whaley Bridge calico printing company v.green court said that the term promoter is aterm
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of business but not of law which refers to business operations in the commercial world by which
an incorporated entity is brought into existence.

3. In Emma silver mining company v Lewis court said the term promoter involves the ideas of
exertion for the purposes of getting up and starting a company

4.In Erlanger V New sombrero phosphate company said that the term promoter is a short and
convenient way of describing persons who set in motion the machinery put in place by the
company’s act to enable them create a company

The Animus and fadum test

The animus and factum test is the litmus test for determining if aperson is a promoter.
Nimus refers to the positive intention to form a company factum refers to the actual fact of
forming a company such that at the end of the day a company is seen to be existing as a separate
legal person.

Both the animus and the factum must be present inorder for a person to qualify as a promoter .If
either the animus or the factum is absent a person will be disqualified from being a promoter .If
either the animus or the factum is absent a person will be disqualified from being a promoter e.g
professionals who give professional input with respect to preparation of the relevant documents
such as advocates.

Statutory liability of promoter

Sec45 provides that a promoter may be liable with respect to the prospectus the liability may be
civil or criminal in nature.

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However the section provides that the promoter may escape liability by relying on the following
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defences among others
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That he did not authorize the issue of prospectus

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That misinterpretation is immaterial (trivial/negligible) and should be reasonably excused by

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court.
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That he had an honest belief that the contents were true and that he had reasonable grounds for
believing so

That he withdrew his consent to act as directors before the pro

sopectus was issued or before altotment was done

That the report he relied on was made by an expert or was published in an official document.

The legal position of a promoter

In Evlanger’s case court said that a promoter stands in a position of an agent or trustee in respect
to the company he is promoting he therefore has the following duties

Duty of care and skill

This duty requires him to act as a prudent and reasonable person so as not to injure the company
he is promoting if he breaches this duty he shall be liable in negligence and can even be
suspended.

2. Fiduciary duty

This duty requires the promoter to act with almost good and for the benefit of a company.
Therefore he must avoid any conflict of interest and ensure he makes a necessary disclosure. If
he breaches this duty he can be liable for misfeasance (abuse of power) and can even be
suspended.

Remuneration of promoters

The promoters do not have a right to be remunerated for their promotional services .The
Company’s act does not have a specific provision that gives them the right to be remunerated

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rather it gives discretion to directors. Therefore a promoter is regarded as the illegitimate child of
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the law who is actively known and formally ignored.
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There are 2 main reasons why apromoter is not entitled to remuneration

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Post consideration i.e. the company did not ask the promoter to incorporate it since there was no
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offer and acceptance instead the promoter offered himself to promote the company.
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No privity of contract privity of contract is a doctrine that identify parties to a contract

In case of promotion there is no privity of contract because at that time the company is not in
existence and does not have competent capacity to enter into a contract.

However in exceptional circumstances promoters may be rewarded for their services

e.g.

If the articles of association expressly provide for their reward.

If a special resolution is passed providing for their reward

If they are given founders’ shares (deferred shares)

If they are given an opportunity to convert the founders’ shares into preference share of
cumulative and participatory nature.

If they are given an opportunity to enter into pre- incorporation contracts on behalf of the
company.

Pre-incorporation contracts

Pre-incorporation means before incorporation, Therefore pre incorporation contracts refer to

contract entered into by promoters on behalf of a company which yet to be formed.(before
incorporation is done)The following rules govern pre-incorporation contracts.

1. In kelner VBaxter court said that if the contract is in writing and it shows that the promoter
contracted in its own name he shall be held personally liable. The company shall escape liability
or shall be bound by the contract

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2. In kelner V Baxter court said that if the company is yet to come into existence it does not have
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competent capacity to enter into a contract therefore the promoter will be liable and the company
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will not be bound or will escape liabilityon a pre-incorporation contract

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3. In Newborne V Sensolid court said that if the contract is in writing and it shows that the
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promoter entered into the contract on behalf of a company his capacity as a director the company
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will be bound and the promoter shall escape personal liability on the contract. Court observed
that the signature of the promoter acting as directors is the signature of the company.

4. In natal land corporation V Pauline colliery syndicate court said that a company can not satisfy
a pre-incorporation contract because in the law of agency satification is only effective if at the
time of making the principal was existing and also had competent capacity to enter into that
contract. That since satification relates back to the time the contract was made it has a
retrospective effect. It is therefore impossible in practice and at law for the company to satisfy
the pre incorporation contract.

NB.if the company pupports to ratify the pre-incorporation contract it will be an absurd situation
because it will be pressured that the company was existing and not existing at the same time.
5. In natal land corporation V Pauline colliery court said that if the company wishes to adopt the
pre incorporation contract it can only do so through the process of novation Novation is
contractual process by which with the consent of all the parties ,an old contract is substituted
with a new or fresh contract between the same or different parties at the end of the process the
old contract id terminated and a new contract comes into existence.

If the company novates the pre-incorporation contract the promoter will be eliminate from the
equation and shall be replaced by the company hence the company will be held liable and the
promoter shall escape personal liability.

The memorandum and article of association

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These two documents are referred to as the constitution of the company. The memorandum is the
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external constitution while the articles are internal constitution.

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Memorandum of Association
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Section 2 of the company’s act defines a memorandum as the memorandum of association

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relating to the Company as originally framed or altered from time to time.

Ashbury case court said that the memorandum is the fundamental charter which contains the
condition upon which the company is formed and that it defines the limitation of the powers of a
company.

Sec 5 requires every memorandum to contain the following matters

1. Name clause

Referto notes on the name

2. Objects clause

It sets out the objects or the purpose for which the company was formed. It serves 2 main
purposesi.e. to inform the public the purposes for which their money will be used.
Inform the public the power of company in terms of the scope of its activities (objects) because
of the limitations brought by the doctrine of ultra-vires promoters have developed different styles
of framing the objects e.g

The main objects-this refer to the substratum/substrata upon which the company is formed
without the main object the company qualifies to wound up.

Incidental object(s)These are other activities which the company carries onto support or enable
it achieve its main object. The company can not carry on incidental object if it is unable to carry
out the main objects.

Subjective objects. These are objects which are left to the discretion of directors if in their
opinion the object can be carried out it shall be carried out and vise versa.

Independent objects these are objects that are regarded as separate and independent from the

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others. The directors would frame these objects as isolated objects and if the company cannot
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carry out any one of the objects it shall not be wound up merely because it is unable to carry out
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of the independent object.

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Inflated objects: these refer to any other imaginary objects which the company can
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advantageously carry on.

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Sec7.empowers the companies to alter its objects so long as the alteration is in accordance with
the company act and within the circumstances set out in sec8.

Sec 8Provides that the company may alter its objects in the following circumstances

 To enable the company achieve its main objects using new or improved means
 To enable the company carry out its objects using more efficient or economic means
 To enable the company enlarge its scope of operations
 To enable the company abandon any of its objects
 To enable the company carry out any other activity which it can advantageous combine
with its other activities
 To enable the company sell the whole or any part of its undertaking
 To enable the company amalgamate/merge
3. The registered office clause

Sec 107requires every company to establish its registered office within 14days from the date of
incorporation or from the date it is to commence business. The registered office is the nerve
centre of company in terms of any communication to and from the company.

Additionally the registered office is important for the location or situation of the company sec
391 therefore provides that any service shall be effect if left at the registered office.

The company’s act also requires certain statutory registers and documents to be kept at the
registered office e.g.

 The register of members

 The index of members
 The register of directors and secretary

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 The register of the directors interest in shares ,debentures and other interest
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 The register of charges
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 The register of debentures holder

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 The minutes book of general meetings

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 Certificate of incorporation
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SEC 108 also requires the company to notify the registrar of its postal address this address shall
also be published on the annual returns of the company.Farlure to comply with this requirements
shall render the company and every officer responsible liable to a default.

4. The capital clause

It sets out the amount of capital with which the company is proposed to be registered with a the
capital of a company is divided into shares of a fixed amount. This clause is required for
companies that are limited by shares

In the case of Doregum Gold mining company of India vs roper court said that the share capital
of a company is the security which the creditors look at.
If the company is limited by guarantee or is unlimited in nature the creditors will look at the
personal liability of the members as security and in this regard the company is required to
indicate the number of members it proposes to be registered with.

5. Liability clause

As a general rule in Salomon’s case the company is a separate legal person from the members
therefore each one of the 2 entities is liable for their own burden. Nevertheless the liability clause
serves 2 main purposes

It describes the nature of a company i.e. whether its limited or unlimited. So that the prospective
investors know the kind of project they are getting involved in

It describes the nature of liability of the members i.e. it is limited by shares, by guarantee or
whether it is unlimited.

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Sec 22(2) provides that any money due from member to the co is a debt
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Sec213-217-provides that past and present members are liable to contribute to the asset of a
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company in the event of winding up

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SEC214-DEFINE THE PEOPLE AS CONTRIBUTORIES

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June 2011 Q5 (a)

6. Association clause

It is also known as the subscription clause. It is the expression of the desire of the subscribers to
be formed into a company and to take the number of shares indicated against their names. Each
subscriber is required to sign against his name and to have his signature attestedto (witnessed)by
at least one person who need not be a member.

Each subscriber is deemed to be a shareholder even before any shares are allotted. The intention
is to prevent them from deserting (disowning) a company based on the fact that there was no
privity of contract between them and the company.
Aperson who has subscribed to the memorandum and articles cannot later onwithdraw the
subscription i.e. once a subscriber always a subscriber.

Articles of Association

Sec 2 of the company’s act define the articles of association of a company .as including the
articles of association, the alternation to the article of association and the motel articles found in
table Ain the schedule to the company act.

ASBURY’S case define the articles as subordinate to the memorandum of association and having
recognized this fact they proceed to define as the rules and regulations, rights duties and
obligations of the members for purpose of internal ngt to enable the company achieve the aims
set out in the memorandum.

Sec.12 requires the articles to take the following form:

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 It must be in English language
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Must be printed
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
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 It must be numbered in consecutive paragraphs

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 It must be dated
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Must be signed and seated by each subscriber whose signature must also be attested to by
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
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at least one witness

The company‘s act does not contain any specific provisions on the contents of every company’s
articles. Therefore each company is free to craft its own articles or to adopt the model articles in
the table A. The contents of table A includes:

i. Shares
ii. Capital
iii. Membership
iv. Directors
v. Secretary
vi. Auditors
vii. Accounts
viii. Dividends
 ix. Meetings
x. Winding up
xi. Arbitration/dispute resolution

Nevertheless sec 30 requires every private company to include the following restrictions in its
articles.

The minimum and maximum number of member’si.e. 2-50

Arestriction on the transfer of its shares to the public

Arestriction on the invitation of public to subscribe for its shares.

SEC13 empowers every company to alter its articles. The alteration shall be deemed as
originally framed by the members and every member and the registrar is entitled to an updated
set of the articles. It is therefore unlawful to prohibit a company from altering its articles since

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the definition in sec 2 also includes the alteration.
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Sec13 requires the alteration to be done by special resolution passed by three fourth majority.
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Nevertheless sec.24 provides that the alteration shall only bind persons who consented to it.
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Any member who did not consent is entitled to go to court to set aside or cancels the alteration
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e.g if the alteration increases his liability to the company without his consent.

There are a no of limitations to the ability of a company to alter its articles e.g

 The alteration must be done in accordance with provisions of the company’s act
otherwise the alteration will be null and void.
 The alteration must be done in accordance with MOA otherwise the alteration shall be
ultra vives and therefore null and void
 The alteration must not permit any illegality i.e. it must not be inconsistent with the
general law of Kenya.
 The alteration must be done in good faith and for the benefit of a company
 The alteration shall only bind members who consented to it or who become members
after the alteration had been done.
Sec 15.requires the memorandum and articles if nay to be delivered to the registrar for the
registration

The relationship between the memorandum and the articles

I.Theyis regarded as the constitution of the company. The memorandum is the external
constitution while the articles constitute the internal constitution

ii .The memorandum is superior to the articles. In Ashbury’s case court said that the
memorandum is the fundamental charter which contains the conditions upon which the company
formed while the articles are subordinate to it and having recognized this fact, they proceed to
the rules and regulations as well as the rights ,duties and obligations of the members.

iii. The memorandum defines the limitation of the power of a company in terms of the scope of
its activities whereas the articles are the rules crafted by the members to enable them achieve the

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aim set out in the memorandum In Ashbury’s case court said that the memorandum is the area
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beyond which the activities of a company cannot and insider this area the members make rules
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and regulations for internal mgt i.e. memorandum is the perimeter wall while the articles are the
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rules that are applied within the perimeter wall.

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MOA=perimeter wall
AOA=

Rules for
internal mgt
Iv.The articles explain and supplement on any matter on which the memorandum is silent.
However this does not apply on matter which the company’s act expressly requires the
memorandum to deal with eg the contents of the memorandum to deal with e.g. the contents of
the memorandum.

V.Where there is an ambiguity in either the memorandum or the article it can be clarified by
referring to each other. In Anderson’s case court said that where there is an ambiguity in 2
contemporaneousdocuments, theambiguity can be clarified by referring to each other.

Contemporaneous documents are 2 documents that were signed and sealed at the same time by
the same parties’e.g. a memorandum and the articles of association.

The legal effect of the memorandum andarticles (statutory contract under sec 22)

Sec 22 provides that once a memorandum and article of association have been signed and

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registered they shall bind the company and members to the same extend as if they were signed
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and sealed by each member and as if they contain covenant or the part of each member to fulfill
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their obligation.
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The legal effect of this section is to create a statutory contract which is in the following
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dimension.
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i. Contractbetween the company and the members

ii. Contract between the members and company
iii. Contract btn the members amongst themselves (among the members inter sec)
iv. Contract btn the company and outsiders subject to the express provisions of the articles.

I.Contract btn the company and the members

Sec 22.provides that the memorandum and articles shall bind the company and members to the
same extend. Underthis statutory contract, the memorandum and articles contain covenants
which create obligations in terms of rights and duties. In this regard the company owes the
members a duty to fulfill their rights. Therefore if the company does not fulfill its duties the
aggrieved member can go to court and enforce his rights e.g.
In the case of pender VS Lushington court said that if a company infringes on the personal rights
of a member egg to attend and vote at company meetings or to be paid dividends that aggrieved
member can apply to court to stop the infringement.

In penders’ case court said that the right of member to vote is a unique species of property which
cannot be taken away by company .unless it proves that the vote is intended to be used fraudently
or in a manner which is detrimental to the company.

Similarly in the case of woods vs odesa water works ltd court said that if a company declares and
pays dividends the members are entitled to be paid their dividends in cash unless the articles
provides for any other form of payment. Therefore if the articles do not permit payment of
dividends in any other form and the company chooses not to pay dividends in cash the aggrieved
member can go to court compel the company to pay him dividends in cash.

Court said that the ordinary meaning of payment of dividend payment in cash. Therefore the

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company cannot pay the members dividends in the form of bonus shares unless the articles
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expressly permit.
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(ii)Contract btn the members and the company

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According to sec 22 the memorandum and articles contains covenants which members have an
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obligation to fulfil.Any member who fail their duties towards then company can be stopped by
the company thro the court the process e.g. in the case of hickman vs Kent or (Romney, mash
sheep breeding association)the articles expressly provided that if there is a dispute between the
company and the members they shall refer it to arbitration first. A dispute arose and a member
totally disregarded the provision of arbitration and went to court first. The company successfully
obtained an injunction and court ordered that the dispute be taken to arbitration first in
accordance with the expressed provision of the articles..Court further observed that the articles
had imposed an obligation on the parties and they were bound to fulfill.

(iii) Contract between the members amongst themselves(among the member inter se)

According sec 22 the memorandum and the articles bind the names as if they are covenant which
impose obligation on them in their capacity as members. Therefore if any member infringes on
the rights of another or fails to fulfill his duties towards another he be compelled to fulfill those
duties e.g in the case of ray field vs hand the articles provided that if any member wishes to
transfer his shares he shall inform the directors and the other shareholders in their capacity s
members and the directors and shareholders shall purchase those shares at a price to be agreed by
themselves (parties).the directors were informed about the intended transfer they refused to
purchase the shares arguing that they did not have any obligation to purchase the shares. Court
said that the articles imposed an obligation on them as members --qua members (as members in
their capacity as members) and they were bound to bury the shares.

Iv.Contract between the company and outsiders subject to the express provisions of the
articles

Sec.22 creates a statutory contract between the company and the members who signed and sealed
them accordingly the section dores not expressly create a contract in respect to outsiders (people
who did not sign the memorandum and articles) Therefore is no privity of contract between the

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company and the outsider. However since n the case of elley V positive government life and
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outsiders if the articles have expressly contempt or provided for it i.e. the contract subject to the
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express provision of the articles.

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14TH AUGUST 2013

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Legal consequences of ultra vires transaction

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In Ashbury case court said that transaction is ultra vives if it is beyond the scope authority or the
prescribed powers of the company such transaction is null and void and cannot be ratified by the
company.

Ultra vires in the opposite of intra vires.The transaction is intra vires if it is within the scope of
authority or the prescribed powers of the company as set out in the MOA (in particular the
objects clause) and AOA.

In the case of Ashbury a company was formed for the purpose of making selling and hiring out
of railway carriages .Instead the directors entered into a contract top contract railway lines. Court
said that contract was ultra vires the MOA and AOA could not be ratified by the company
To this end the doctrine of ultra vires has been described as a nuisance because it limits the
powers of the company to those transactions set out in the object clause and the company cannot
engage in other profitable activity because of the doctrine

It is in this respect that the drafting style of the object clause has been expanded in order to
expand the contracting capacity of the company (refer to notes on object’s clause)

Additionally in the case of Attorney Vs Great Eastern Railway company court said that the
doctrine of ultra vires should not be unreasonably understood instead it should be reasonably
interpreted such that not all transactions which the company engages should be considered ultra
vires but depending on circumstances curtain contract ought to be considered ultra vires e.g.
incidental transaction, inflated transaction and subjective transaction.

Nevertheless the legal effects of ultra vires transactions include the following:

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i.Injuction. co
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In Ashbury’s case court said that the company can be restrained or stopped from engaging in
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ultra vires transaction by any person including members ,directors ,the company itself ,creditors
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debenture holder ,the registrar of companies and court.

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iiUltra vires acquired property

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If the funds of a company are used ultra-vires to acquire property the company can trace the
proceeds of the funds, reclaim the property and secure its legal title or ownership over that
property.

iii.Ultra vires torts

Atort is a civil wrong which visits injury on a neighbor if the tort is committed by an employee
or servant of the company in the course of the duty the company will be vicariously liable.
However if the tort is committed ultra vives the company may escape vicariously liability i.e. it
will not be held liable for the torts committed by the employee outside the course business for
instance while he is on frolic of his own(doing his own private transaction).

iv.Personal liability of the directors

The directors who knowingly participate in ultra vires transaction may be personally held liable
e.g. veil of incorporation is uplifted under sec 323 325 in accordance with Gilford motors V
Horne and Jones V lipman.

v.Breach of warranty of authority

In the case of week Vs property court said that the company cannot give a director any authority
which it does not have .Therefore the director who knowingly breaches his warrant of authority
may be compelted to make good anyloss suffered by a third party who was not aware of his lack
of authority .however, court observed that if the third party was aware that the director did not
have an authority the 3rd party will not be entitled to compensation.

vi.Ultra vires borrowing

If the company borrows any money ultra vires in order to repay any ultra vives loan such

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company will be completed to repay the ultra vires loan based on the doctrine of restitution
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which prevents any person from unjustifiably enriching themselves (it prevents unjustified
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enrichment.)
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DOCTRINE OF CONSTRUCTIVE NOTICE

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Constructive notice refers to the implied knowledge or presumed knowledge which any 3rdparty
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who istransacting with a companyis expected to have regarding the contents and the meaning of
the memorandum and AOA as well as any document which is filed with a registrar.

It is the opposite of actual notice or knowledge. This is because the 3rd party is deemed to have
knowledge of the memorandum and articles regardless of whether he has or has not read them.
This is based on the fact that the memorandum, articles and special resolutions are public
documents and are in the public domain.

In the case of Mahoney Vs East holy ford mining company .court said that the transaction will
bind the parties regardless of whether the 3rd party had actually had or not read the memorandum
and articles.

Additionally in the case of freeman and lokyer Vs Buckhurst park properties ltd court said that
the doctrine of constructive notice is similar to the doctrine of estoppels in that it prevents the 3rd
party or a company which has entered into a transaction on the faith that it is intra vires from
later on turning around to claim that the same transaction is ultra vives (parties who enter into
intra vives transactions are estopped/prevented from claiming that the transactions are ultra vives
i.e once vives always intra vives).

The facts of freeman were that a company was registered as a construction company. The articles
provided that the directors had authority to enter into construction contracts or authorize any
one of them to contract on behalf of the company. One of the directors entered into a
construction contract with freeman and Lockyer who were engineers yet he did not have
authority from the other directors to do so. After conclusion of the contract the other directors
refused to pay the plaintiffs (freeman &Lockyer) Court said that the construction contract was
intra vives, the memorandum and articles of the company was binding on the on the company
and the plaintiffs were entitled to be paid for their services. Court said that the company was not
entitledto argue that the contract was ultra vives.

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Rule in Turquand (indoor management rule)
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The rule in turquand provides that once a third party has actual or constructive notice about the
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contracts and the meaning of the memorandum, articles and special resolutions of the company
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he is entitled to assume that the contract is regular and he is entitled to proceed with the contract,
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if it is ultra vives and if there is no fact that puts him on enquiry (raises doubt)

The 3rd party is not entitled to look behind the mgt doors (the boardroom) hence it is presumed
that he does not have any knowledge of any irregularities behind mgt doors. Accordingly the
contract will bind the party with or without any irregularities.

The facts of the case of Turquand are as follows

The articles empowered the company to borrow. They provided that a resolution should be
passed in case of any excessive borrowing. A director borrowed excessively and court said that
the company was bound to repay the amount because the contract to borrow was intra vives and
there was no possibility of 3rd party being aware of any irregularities in procedures behind the
mgt doors.

The rule in Turquand as such derives from the case of Royal British Bank ltd Vs turquand.
Exceptions to the Rules in turquand

The exceptions refer to circumstances where the rule in tarquand will not be applicable i.e. the
contract will not bind the parties and cannot be enforced by the parties in a court of law e.g.

i.Knowledge of irregularity

If the 3rd party is aware of any irregularity behind the management doors the rule in turquand
shall not be applied i.e. he cannot rely on the rule to bind the company e.g. in the case of Howard
Vs Patent ivory company .The articles empowered company to borrow £1000 and that a special
resolution should be in case of any excessive borrowing .a director borrowed an amount in
excess of £1000 without a special resolution being passed. Court said that the company was only
entitled to repay the £1000 and not the excessive amount since the director had knowledge that in
the special resolution had not been passed and since the 3rd party was presumed to know the
irregularities since no special resolution had been registered with the registrar.

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Sec 143 requires every special resolution passed by the company to be filed with the registrar for
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registration therefore the excessive borrowing without the sanctions of special resolution clearly
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manifested an irregularity in the contract and the 3rd party was presumed to have actual or
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constructive notice (knowledge)of the irregularity.

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ii.Negligence of the 3rd party

A person is negligent if he does not act us prudently as a reasonable person ought to (i.e. if he
acts below the standard of care expected of a reasonableperson) The rule in Turquand does not
protect negligent person hence they cannot rely on it to bind the company.e.g in the case of
Underwood Vs Bank of Liverpool a director deposited a cheque drawn in favour of the company
into his own personal account. Court said that the receiving bank had acted negligently i.e. below
the standard of care expected of a reasonable banker that it had failed to enquire whether the
director had express authority to deposit company cheques into his own personal account given
that according to Salomon case the company and the natural members are separate and distinct
legal persons capable of entering into contracts and owning property in their own name among
other rights.

iii.Doubt
In the case of Turquand court said that the rule in Turquand will apply if there is no fact that
raises no doubt or does not put the 3rd party on enquiry. Accordingly if there is any matter which
raises the eyebrows of the 3rd party he ought to act prudently to clarify the matter failing which
he cannot rely on the protection given b rule in Turquand i.e. the contract will not bind the
parties.

Iv.Special resolution

Sec 143 requires every special resolution to be filed with the registrar hence a 3rd party dealing
with a company is presumed to have constructive notice of its contents. In the case of Turquand
the articles required a resolution to be passed, it did not specify that a special resolution ought to
be passed, court therefore said that it was not possible for the 3rd party to confirm if an ordinary
resolution had been passed. Court observed that if the articles had required a special resolution to
be passes it would have been easy for the 3rd party to know about it. Accordingly the contract

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would not have bound the parties if a special resolution had not been passed, In total disregard of
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the articles.
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v.Illegality /forgery
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The rule in Turquand applies where the transaction is genuine except that it has some procedural
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irregularities. The rule does not apply where the transaction is unlawful e.g in case of forgery
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thus in the case of Ruben Vs Great fingall company.A company secretary forged the signature of
2 directors and the company seal to transfer their shares. Court said that the forged transfer was
not effective because the rule in Turquand was never created to promote forgery that if only
applies to genuine transaction which might otherwise have procedural irregularities.

vi.Estoppel

In the case of freeman and lockyer court said that the presumption is that the 3rd party relied on
the memorandum and articles to enter into an intra vives contract and having done so he is
prevented from claiming that the same contract is ultra vives contract and having done so he is
presented from claiming that the same contract is ultra vives.Similary if the 3rd party did not rely
on the memorandum and the articles he is stopped prevented from claiming that he relied on
them and as such he cannot rely on the rule in Turquand to bind the company.
Vii.Ultra vives

The rule in Turquand applies where the transaction is intra vives.Accordingly the rule with not be
applied if the transaction is ultravives.The 3rd party is presumed to know that the company is
bound only to enter into the transaction set out in the object clause. He cannot vest the company
with powers it is not capable of exercising .In case of an ultra vives transaction

(Refer to Ashbury’s case and the doctrine of ultra vives)

Viii.Breach of warranty of authority

If the 3rd party knows that a director does not have authority to enter into a transaction as the
agent of a company he cannot rely on the rule in Turquand to bind the company as principal thus
in week Vs property court said that the director may be completed to make good any loss
suffered and the company will not be liable.

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SHARE CAPITAL
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It is the amount of money capital with which the company proposes to be registered with various
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terminologies are used to describe the types of share capital; depending on the circumstances e.g
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1. Registered capital-it is the amount of capital the company proposes to be registered with and
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which the company will have during its life time. It may be increase or reduced or altered
depending on the circumstance of a company in the course of its business.
2. Nominal capital-it is the registered capital in monetary terms. It refers to the book value of a
company and it is this capital which is divide into shares of a fixed amount.
3. Authorized capital –it is that part of the registered capital which the company is authorized
by the memorandum and the articles to issue to the public for subscription.
4. Issued capital it is that part of authorized capital which the company has issued to the public
for subscription.
5. Subscribed capital it is that part of the issued capital which the public has actually subscribed
for. The extend of subscription depends on the reputation or good will
6. Paid up capital-it is that of the subscribed capital which has actually been paid up. The
members cannot be held liable in respect to this part of capital.
7. Unpaid capital-it is that part of the subscribed capital which remains unpaid. It is this part of
share capital which determines the extend of liability share holder either when a call is made
when the list of contribution is drawn.

Sec 22(2) provides that any money due from a member to the company is a debt
Sec214 defines a contributory as a person who is liable to contribute to the assets of the
company in the event of winding up e.g. past and present members and debtors of a
company their liability is diverse as seen in sec 213-217.

8. Call-up capital-It is that part of the unpaid capital in respect of which a call has been made
pursuant to a resolution of the directors. If the call remains unpaid it is referred to as calls in
arrears and the shares can be forfeited.

9. Reversed capital – sec 62 describes it as a reserve liability of a company It is that part of the
uncalled capital which has been set aside by special resolution and which shall never be called up

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except in the event of winding up i.e this capital can only be called up when the company goes
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into winding up for the main purpose of meeting the winding up expensation.
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It is distinct from the reverse fund in that the reserve fund is used to meet emergency expenses in
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the course of the company’s business.

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Reserve Capital=Winding Up Expenses

Reserve fund= emergences in course of business

Ways of raising capital

1. Prospectus issue

This occurs when the company directly issues a prospectus to the public

2. Placing

It occurs when the company engages a broker to sell shares on its behalf instead of the company
directly using shares to the public.
It is known as private placing when the broker makes an arrangement with private institutional
investors and sells the shares to them

Offer for sale

It occurs when the company enters into an underrating agreement with an underwriter .Under
this arrangement the underwriter, usually issuing house undertakes to sell the shares on the
behalf of the company and to buy the shares which the public will not have purchased at a
commission. Under this arrangement a company normally issues renounceable letter of allotment
to the issuing house which entiltle the issuing house to transfer or assign is rights in the share to
the 3rd parties who will purchase from it. He 3rd parties are required to fill renunciation forms
which are usually attached to the renounceable letters of allotment.

COMPANY RLA issuing house R.F(ACQUIRING RIGHTS PUBLIC 3RDPARTIES

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Offer by tender co
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It occurs when the company invites the public to make their bids (offers) to buy the shares of the
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company and the company .sell the shares to the highest bidders. Bythis method the company
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raises more capital by selling the shares to the highest bidders.

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At times the company may set a reserve price, below which the shares cannot be sold, in a
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manner similar to an auction sale where the auctioneer sets the reserve price.

Rights issue

It occurs when the existing members are given the 1st opportunity to buy the share of a new issue
before rest of the public is availed the opportunity .usually the existing members buy the shares
at a discount while the rest of the public buy them at a premium.

Rights issue is one of the pre-emptory rights of the existing members in that they are given the
1st opportunity to enjoy certain rights before the rest of the public can access them.

Bonus issue
It occurs when the company retains dividends and instead issues additiona shares whose value is
equivalent to the amount of dividends retained. This method can only be applied if it is permitted
by the articles (woods vs Odessar water works)

Although bonus share are said to be issued free of charge the company retains dividends and
issues shares whose value is equivalent to the dividends retained.

This method is also referred to as capitalization issue because the dividends are retained and
converted into capital.

It is also known as scrip issue because it is a book entry transaction which is similar to a contract
entry since the dividend account of a member is debited,the capital account of the company is
credited with the amount of dividend retained while at the same time the share account of a
member is credited with additional shares (bonus shares)

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Conversion issue co
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It occurs when the members are given an opportunity to convert their shares into shares the same
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or different type in the same or another company e.g.

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In case of re-construction or re-organization the members are given an opportunity to convert the
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shares of the different same company.

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-incase of amalgamation or merger the members are given an opportunity to convert their shares
of the same or different type in another company

This method is not strictly speaking a way of raising capital rather it is a means by which the
company minims certain expenses while at the same time enabling the members to reap certain
benefit.

Flotation

Flotationis the process by which a public company issues its shares to the public for subscription.
Private companies are restricted from flotating off their shares by sec 30 which imposes 3
restrictions i.e

The restriction of minimum and maximum membership i.e. 2-50.

Restriction on transfer of shares to the public

Restriction against the invitation of the public to subscribe for shares or debentures.

Sc 31 provides that any private company that does not comply with the requirements of the
private company shall hence forth be regarded as a public company e.g. if it removes the
restrictions set out in sec 30.

If a private company desires to float its shares it must convert itself into public company it must
remove the restrictions by special resolution and must prepare a statement in lien of a prospectus.
The procedure to be followed by aprivate company which intend to float its shares to the public
is as follows.

The board of director shall convene an extra ordinary general meeting to discuss the proposed
floatation in particular:

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 To convert the private company into a public company in line with sec 18
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Alteration of memorandum and articles to remove the restriction against flotation

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
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 The preparation of a statement of lien of a prospectus

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The directors shall instruct the company secretary to issue the notice to members calling for a
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general meeting to pass a special resolution to allow flotation the notice must indicate the time,
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date, place of the meeting as well as the agenda. It must also specify also specify that the meeting
proposes to pass a special resolution to allow the flotation, in line with sec 141.

iii.The general meeting shall be held as set out in the notice and a special resolution passed by a
¾ thMajority of the members entitled to attend and vote.

iv.The company shall deliver a printed copy of the special resolution to the registrar for
registration in line with sec 143.

v.The company shall prepare in statement in line of a prospectus in line with sec 32 and 50 which
would enable the private company float its shares after converting itself after special resolution
into public company and after making necessary alterations to the memorandum and articles
vi.The company shall deliver a copy of the statement in lien of the prospectus to the registrar for
registration after which it may proceed to float off its shares to the public by issuing the
statement in lien of the prospectus to the public.

The prospectus

Sec 2 defines prospectus as a prospectus notice, circular or advertisement made by the company
to the public inviting the public to subscribe for the shares or debentures of the company

In the case of new brunwick Canada land &railway company vs muggeridge court said
thataprospectus is a window through which prospective investors look into the affairs of
acompany inorder to determine whether to invest in it.

Characteristics of a prospectus.

i.Written form

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Every prospectus must be presented in written form otherwise the provisions of the company’s
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act relating to the preparation of the prospectus will not be achieved e.g. the requirement that the
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prospectus must be dated and signed under sec 39 ,that must be registered under sec 43 and that
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it must contain the matters and reports in the 3rd schedule under sec 40
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ii.Invitation of the public

In the case of Nash Vs Lynde court said that the prospectus must be issued to the public toinvite
them to subscribe for the shares or debentures of a company. Court said that if the shares are not
issued to the public the provision of the company’s act relating to the prospectus will not be
activated.

In the case of Nah a prospectus was addressed as strictly private and confidential court said that
it had not issued to the public to invite the public to subscribe for the shares.

iii.Issue to the public

In the case of Nash vs lynde court said that the prospectus must be issued to the public .

iv.Subscription
The prospectus must invite the public to subscribe for its share

In the case of the registrar of joint stock companies V Christopher court said that to subscribe
mean to take shares for cash i.e. the public must pay for the shares by way of application
(subscription fees)

v.Date and signature

sec 39 requires every prospectus to be dated and signed by the person named in it as directors or
by persons who have consented to become directora failure to comply with this requirement
shall visit a default fine of upto sh 1000 on the officer responsible.

vi.Application forms

Sec 40 requires every prospectus issued to be accompanied with applicationforms. It also

requires every application form to be accompanied with a prospectus failing in which a default

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fine of up to sh 1000 shall be visited on the officer responsible.
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However there are times when the company may be exempted from this requiremente.g.
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 in case of right issue

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In case of bonus issue

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
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 In case of conversion issue

 In case the shares issued are the same as those previously issued
 In case the shares the shares were issued to the private and not to the public
 In case there was a bonus fide underwriting agreement in which the underwriter under for
to buy any shares which were not purchased by the public.
 In case of un a bridged prospectus i.e. a prospectus that is exempted from the schedule 3
matter and reports.

vii.Registration

sec 43 requires every prospectus to be delivered to the registrar for registration before it is issued
or circulated the section also requires the prospectus to contain a statement on the face of it that
assigned copy of the prospectus has been delivered to the registrar for registration failure to
comply with this requirement shall visit default fine of sh 100 per day on the officer’s
responsible for circulating a prospectus that is not registered or which does not contain the
requisite statement on the face of it.

viii.Contents

Sec 40(i) requires every prospectus to contain the matters and reports set out in part I and ii of
the 3RD schedule failure in which a default fine shall be visited on the officers responsible i.e. a
fine of up to sh.10000.

The matters in part of the 3rd schedule

1. Directors and auditors information

 The names ,addresses and description of the directors

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 The number of qualification shares requires of the directors
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 The remuneration to be paid to the directors if any
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 The interests of the directors in promoting the company’s if any

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The names addresses and description of the auditors

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2. Formation information
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 preliminary expenses incurred

 Commission paid if any
 Benefits paid or given to the promoters and the consideration given by the promoters
which entitles them to the benefit.
 The options of shares created by the company

3. Investor information

 The amount of minimum subscription raised or to be raised

 The amount to be paid as application fees(subscription fees)
 The time for opening the subscription lists usually 3 days from the date of publication of
the prospectus or any other time set out in the prospectus.
 The rights attaching to the various types of shares.
4. Business Assets.

 The property bought by the company or goodwill.

 The extend to which the property has been paid or is unpaid.
 The names address and descriptions of vendors of property to the company.
 The consideration paid or to be paid on the property
 Particulars of material contracts e.g. incorporation contracts
 The length of time the company has carried on business if less than 3 yrs.

Reports in part II

An auditor’s report relating to the company which is issuing the prospectus

The contents of these reports are:

 Profits and losses of the company for each of the last 5yrs.

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 The assets and liabilities of the company as at the last date of accounts
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The dividends paid and the % rate for each of the last 5 yrs.
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 The above details in respect of any subsidiary of the company.

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2. A named accountants’ report in respect of business undertaking which will be purchased

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from the proceeds of the issue.

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The contents of the report are;

 The profits and losses of that biz undertaking for each of the last 5yrs.
 The assets and liabilities of that biz undertaking as at the last date of accounts.

3.A named accountant’s report in respect of another company.(body corporate)which will be

purchased from the proceeds of issue. Contents are;

 The profits and losses of that other company for each of the 5yrs
 The assets and liabilities of that other company as at the last date of accounts.

June 2004 Qtn 8.

COMMON LAW AND STATUTORY MODIFICATIONS (Rates relating to allotment)

There are 2 rules that govern allotment of shares;

1. Common law rules (case law)

2. Statutory modifications to the common law rules (company’s act)

Common law rules

i.A prospectus issue is an invitation to treat but not an offer .In the case of Rams gale Victoria
Hostels Vs Monteflore court said that a prospectus is an invitation to the public. Inviting the
public to make offers to purchase or subscribe for the shares of a company.

It is the public which makes the offer while the company accepts or rejects the offer.

ii.Acceptance must be unconditional. In the case of Hyde Vs Wrench court said that if the
acceptance is conditional e.g. if it makes a counter offer, the original offer will be terminated.

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Many companies will therefore issue shares of their own terms and conditional to circumvent the
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legal effects of over subscription and the attendants counter offers so that the public will not
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regard the counter by the company as terminating their application for shares.
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Iii Acceptance must be done within a reasonable time i.e. it must be done within the shortest time
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possible. In the case of ramsgate Victoria hostels vs monteflore court said that if acceptance is
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not done within a reasonable time the offer will lapse i.e. it will be terminated.

Iv.Acceptance must be communicated to the allotee i.e. the applicant must receive a letter of
allotment in order for him to actually know that company has accepted his offer.

Statutory modifications.

The company’s has modified the above common law rules by making the following provisions

i.Void Allotments

These are allotments that are not recognized i.e. they do not vest any legal title to the allotee
since they are null and void e.g.
a) Under sec 50 .If the allotment is made by a company that is not registered, the purpose of this
provision is to protect and prevent the public from investing in bogus companies (fake)

b)under sec 53 if the allotment is made before the company obtains the stock exchange
permission especially if the prospectus had indicated that the permission would be obtained.

ii.Voidable allotments

These are allotments that are defective but still capable of vesting legal title to the allotee unless
or until the aggrieved party decides to repudiate /terminate the contract on account of the defect
e.g.

a. Under sec 50 if the allotment is made before a statement in lien of prospectus is registered or
before the application fees (subscription fees) is paid.

b.Under sec 49 if the allotment is made before minimum subscription is obtained.

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iii.Valid but irregular allotments
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These are allotments which are neither void nor voidable i.e. they are valid except that there has
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been an omission to follow a certain procedure hence it is valid but irregular e.g. under sec 52 if
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the allotment is made before the time set aside for opening subscription list. The date for opening
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the subscription list is usually 3 days from the date of publication of the prospectus (the date on
the prospectus) or any other date prescribed in the prospectus.

iv.Returns on Allotments

Sec 54 (i) require the company makes returns to the registrar in respect of shares allotted for cash
and shares allotted otherwise than for cash.

(a)Returns for cash

The return must indicate;

 The name ,address and description of allotee

 The amount paid or unpaid on the shares
 The extent to which the shares are fully or partly credited as paid
  The number of shares alloted.

b)Returns otherwise than for cash

-The returns must indicate the extent to which the shares are credited as fully or partly paid
to the consideration given in return for shares other than cash e.g. promotional shares
,credited facilities (equity shares)dividend retained etc.

c.Acontract in writing which constitute the ownership by the allotee i.e. the contract specified
that the allotee is the legal holder of the said shares.

Maintance of share capital.

The company’s act common law (cas law) have developed provisions that safeguard or protect
the share capital of a company. If flitcroft’s case court said that the paid up share capital is the
primary security for creditors. The same position was observed by court in the case of Ooregum

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Gold Mining Company of India V.Roper.
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The provisions
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i. Prevent the watering down of share capital

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ii. Prevent paid up capital going out from the company.

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iii. Provision that prevent watering down.

iv. They relate to the prohibition against discount, commission, brokerage and any allowance
to a person who undertakes to buy the shares of a company.

Sec 55 provides that the company shall not pay or allow any discount, commission, brokerage or
allowance to any person who undertakes to buy the shares of the company.

In the case of Andrece vs zinc mines of Great Britain court said that any payment paid
contravention of sec 55 is illegal and therefore null and void.

a)Discount

It occurs when the company issues shares below the par value or the fixed prices yet sec 5
requires shares to have a fixed price.
The prohibition against allowing discount is intended to prevent the share capital from being
watered down or de-valued as was observed in Andrece Vs Zinc mines of Great Britain and in
Ooregum Gold mining company of India vs. roper.

In exceptional circumstances a company may issue shares at a discount e.g.

i. If the shares are the same as those previously issued in which case they will be presumed
to already have a market value and the company may not have absolute control o the
price of the shares.
ii. If a resolution is passed setting the maximum amount of discount to be allowed usually
special resolution has to pass to allow or permit the shares to be issued at a discount.
iii. If the articles permit the shares to be issued at a discount subject to the sanction of the
court and the consent of the creditors
iv. If the sanction of court is obtained i.e if court permit the shares to be issued at discount.

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This is because court acts as a watch dog for the creditors the members public and other
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stake holders
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v. If the shares are issued within less than one month after obtaining the sanction of a court.
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The intention is to ensure that the speculative nature of a market will not increase the
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extent of watering down i.e the extent of watering down is therefore minimized.
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vi. If the company has been carrying on business for more than one year in which case it will
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be presumed to be a going concern and will not be affected even. If the shares are issued
at a discount.

b.Under writing commission

It is the allowance given to an underwriter in consideration for his selling of shares on behalf of a
company and his undertaking to buy any shares which have been purchased by the public.
InAndréa vs zinc mines of Great Britain court said that it is unlawful to pay underwriting
commission unless it is permitted sec 55 also prohibits the payment of underwriting commission
except in the following circumstances.

i. If the articles permit the payment

ii. If the amount of commission doesnot exceed 10% of the value of shares.
 iii. If the shares are issued to the public if the rate of commission is specified in the statement
in lien of a prospectus or in the articles whichever is less.
iv. If the shares are not issued to the public and the rate of commission is set out in the
statement in lien of a prospectus or in the articles whichever is less.
v. If the number of shares in respect of which the commission is paid is specified.

Brokerage

It is the payment made to the stock broker or investment bank in consideration for his placing of
shares on behalf of the company. In Andreae Vs Zinc mines of great Britain court said that
brokerage id different from underwriting commission because it is paid to brokers who act as an
intermediary whereas underwriting commission is paid to an underwriter who undertakes to sell
shares on behalf of the company and to purchase any shares which will not have been purchased.

Although sec 55 makes it unlawful to pay brokerage if exceptionally provides the company may

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pay brokerage in the following circumstances.
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i. Ifthe payment is made in the ordinary course of the company’s business i.e.
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ii. if it is intra vives.

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iii. If the payment is incidental to the issue of shares

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iv. If the amount paid as brokerage is reasonable i.e. if it is less than what the
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company would have expended by directly issuing shares to the public. The
brokerage is therefore reasonable if it minimizes the extent of watering down.

2. Provisions that prevent capital from going out.

In the case of Trevor vs. Whitworth court said that the paid up capital can not be reduced or shall
not have the company except in the legitimate course of the company business. Court said
although the company’s act prohibits the reduction of share capital in various ways it cannot
absolutely the prohibit the company from producing its capital.

The situations relates to the followings

i. Premium
ii. Prohibition against financial assistance
 iii. Prohibition against purchasing its own shares
iv. Redemption of preference shares
v. Prohibition against payment of dividends out of capital
vi. Prohibition against reduction of capital
vii. Prohibition against giving loans to directors.

1. Premium

It is the amount paid on the shares which is above the par value or fixed value of the shares.Sec
58 provides that the aggregate amount of premium raised shall be transfer to a special account
called share premium account. The section further provides that the share premium a/c shall be
regarded as fully paid up share capital and it shall be governed by the provisions relating to
reduction of capital. The provision relating to reduction are intended to ensure that paid up
capital does not go out of the company in this regard the aggregate amount of premium raised

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cannot go out easily out of the company. co
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Sec 588 nevertheless provides that the shares premium a/c may be applied or used for the
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following purposes.
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a) To pay for any premium payable on any unissued share which will be issued as fully paid
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bonus shares
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b) To pay for any preliminary expenses

c) To pay for any expenses incurred in the issue of shares
d) To write off any commission paid
e) To write off any discount allowed
f) To pay any premium payable by the company on the redemption of the redeemable
preference shares

2. Financial assistance

Sec 56 prohibits the company from giving any financial assistance for the purchase of its shares.
The sec provides that the company shall give a loan security or guarantee to anyone to assist
them purchase the shares of the company.

The section provides if the company gives the financial assistance

 i. The contract for allotment of a shares or purchase of the shares shall be null and void
ii. The officers responsible for giving financial assistance shall be liable to default fine for
uptosh20, 000.
iii. The directors or officers responsible shall be liable to make good any loss suffered by the
company i.e. they can be completed to compensate the company for the loss suffered.
iv. The allotee will be liable to have the shares cancelled and his name removed from the
registers of members

However the company may give financial assistance in the following circumstances

i. If money lending is the ordinary business of a company e.g. a bank

ii. If there is an employee share scheme under which the trustee will purchase fully paid
shares on behalf of the employees
iii. If a loan is given to employees other than the director to enable them purchase fully paid

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shares in a company to be owned by them. i.e. the loan is given to employees but not
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directors.
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Purchase of its own shares

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Sec59 prohibits the company from purchasing its own shares. Trevor Vs Whitworth also
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provides that the company shall not purchase its own shares because it will constitute an indirect
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deduction of paid up capital.

However court in Trevor’s case said that the prohibitions by the company’s act can be absolute
because there are various ways by which the company may purchase or acquire its own shares
without necessarily using or reducing its capital.

In this regard the company may purchase or acquire its own shares in the following
circumstances

i. Ifthe company acquires shares without paying any

valuable consideration for them e.g. where the company acquires the shares as gift(Re
roith)
ii. Where the company redeems the redeemable pre shares in accordance with sec 60
iii. Where special resolution is passed to permit the purchase of its own shares
 iv. Where the articles contempt a situation where the company may acquire its own share
e.g. if the company has, aright of lien in respect of the unpaid shares and forfeits the
shares which have not be paid up,.
v. Where court makes an order for the cancellation of shares which remain unpaid in which
case the company will cancel the shares and reduce the capital accordingly.
vi. Where the company forfeitsthe shares for no pay of a call
vii. Where a member surrender the share in lien of forfeiture.

Redemption

Sec 60 provides that the company may issue shares for the purpose of redemption after specified
period of time. These shares are referred to as redeemable preference share

Sec 60 provides that the company may redeem the shares in the following circumstances

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i. If the shares are fully paid co
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ii. If the premium paid for redemption is raised from the profit which would have otherwise
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been available for payment of dividends or if it is raised from the proceeds of the issue of
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shares which are meant for redemption

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iii. Where the premium is paid otherwise from the profit or proceeds of issue, if the amount
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paid in respect of redemption is paid from the share premium account i.e. if the amount
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paid is paid from the share premium account(refer to sec 58) in respect to premium)
iv. If the aggregate amount which should have been used from the profits is paid into a
special account known as capital redemption reserve fund.
v. NB sec 60 provides that if the redemption is done in accordance with the provisions of
sec 60 the redemption shall not be regarded as the reduction of capital. This is because
the company does not pay for the redemption out of the paid up capital instead it pays for
the redemption out of the profits, proceeds of issue of redeemable pref shares and out of
the share premium a/c.
The company redeems its shares where the article permits.

Alteration of capital-sec.63
Sec 63 empowers the company to alter its provisions of the memorandum which relates to share
capital. However, the following conditions must be fulfilled.

The articles must permit the alteration

If the articles do not permit the alteration a special resolution must be passed to permit alteration

The company must hold a general meeting for the purpose of altering the articles and the capital

According to article 45 of table A an ordinary resolution must be passed to authorize the

alteration of capital.

Modes of alteration

They include

1. The company may increase share capital by new shares of such amount as the resolution

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may prescribe.
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2. The company may consolidate and divide any or all of its shares capital into shares of
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larger amount than existing shares

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3. The company may convert all or any of the paid up shares into stock and re-convert the
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stock into shares of any denomination

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4. The company may may sub-divide allor any of the shares into shares of a smaller amount
than what is fixed by the memorandum
5. The company may cancel shares which have not been taken or agreed to be taken by any
person and diminish the amount of capital accordingly a process called dimunition of
capital sec 63 provides that diminution of capital shall not be regarded as reduction of
capital.

Conditions to be fulfilled before a company can convert its share into stock.

i. The company must have share capital which is divided into shares
ii. The articles must permit the conversion
iii. Where the articles do not permit the conversion a special resolution may be passed to
alter the articles or permit conversion.
iv. The share must be fully paid
 v. The company must issue the shareholders whose shares have been converted with stock
certificate
vi. The registrar must be notified about the conversion or re-conversion

Differences shares and stock

i. Share holders who have fully paid for their shares are entitled to a share warrant
subject to the provision of the articles whereas stockholders are entilted to stock
warrant
ii. A share is unit of capital whereas stock comprises several shares.
iii. Shares may be issued directly to the public whereas stock stock is created and issued
subject to the provisions of the articles especially where the articles permits the
company to convert its shares into stock.
iv. Shares must be distinguished by their distinct numbers whereas stock does not have

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any distinguish number co
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v. A share may be fully or partly paid up but stock only constitute of fully paid shares
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Reduction of capital

The general rule as set out in Trevor vs whit worthis that it is illegal for a company to reduce its
capital since reduction of capital will reduce its capital since reduction of capital will reduce the
security available for creditors.

Sec 68 however, provides that the company is authorized to reduce its capital if.

The articles of association permits

Where the articles do not permit if they are altered to include permission

If a special resolution is passed to authorize the reduction. This resolution is called a resolution
for reduction of capital.
If the permission of court (sanction of court)is obtained .This is because court is the watchdog
that protects the interest of the stakeholders such as creditors, members and the general public.

Mode of reduction

Sec 68 provides that a company may reduce its shares capital in any way; however the section
provides that the modes of reduction include the following.

i. By extinguishing the liability on its shares in respect of share capital which is not paid up.
ii. By reducing the liability o any of its shares in respect of shares capital which is not paid
up.
iii. By cancelling any paid up capital which is lost or un represented by available assets
without extinguishing or reducing liability on any shares
iv. By cancelling any paid up share capital which is last or un represented by available asset
and also reducing liability on any shares.

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v. By cancelling any paid up share capital which is lost or un represented by available asset
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and also extinguishing liability on any shares.

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

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vii. By paying off paid up share capital which is in excess of the needs of a company by
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extinguishing or reducing liability on any shares.

Functions of court

In the case of Scottish Insurance Corporation Vs Wilsons and Clyde court coal company
court said that the fix of court is to ensure that the procedure followed forredn is formally
correct, does not prejudice the creditors and is fair and equitable between different classes of
shareholder otherwise it shall not confirm the scheme for redn

Creditors.

Sec 69 provides that the creditors have a statutory right to object to any reduction by
approaching court for protection .In this regard court will only confirm the redng

If it is satisfy that’s;
 i. The consent of the creditors has been obtained
ii. The creditors have been secured or given alternative security
iii. The creditors have been paid off

Members

i. The majority of the members are protected by the requirement that a special resolution
must be passed. Themajority are protected in the sense that they will not vote in favour of
redn if their interests are at stake.
ii. The minority are protected if the resolution is not fair and equitable in the sense that they
are entitled to approach court to object to the reduction they may apply to court for an
order to set aside or to cancel the reduction e.g. in the case of re -chomas de la rue and
company ltd and reduced.

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General public
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Sec 17and 71 provide that the general public which constitute the potential members of a
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company must be protected especially where the company intends to reduce its capital in the
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regard court will direct that;

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i. The company shall the word and reduced as the last word in its name for a
specified period of time.
ii. A company shall publish the reasons for reduction and any other info which will
inform the public the reasons leading to reduction
iii. A sanction of court permitting the redn or confirming the redn shall be delivered
to the registrar before the redn is effected or done by the company.

Redemption of shares.

Sec companies that the company is empowered to issue redeemable pref shares.These are shares
which a company issues for the purpose of redemption in future subject to the provisions of the
articles

The company can only redeem its shares if the following conditions are fulfilled.
 i. The articles must permit the redemption
ii. The shares shall be redeemed out of the profits which would have been available for
dividendsor out of the proceeds of the issue of the redeemable pref shares
iii. The shares must be fully paid up.
iv. The premium if any to be paid for purposes of redemption shall be paid of the profits or
shares premium a/c
v. If the shares are not redeemed out of proceeds of issues, a sum equal to the nominal
amount of shares redeemed shall be paid out of the profits and transferred into the capital
redemption reserve fund.’’
vi. NB sec 60 if the redemption is done in compliance with the above provisions it shall not
be regarded as redn of capital

Dividends

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The meaning varies depending on the context but in company law it means the payment made by
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the company to shareholders out of the profits made.
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The general rule as set out in the case of verner Vgeneral and commercial investment trust is that
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dividends must be paid out of profit but not out of capital. Capital in this regard denotes the
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amount of money raised by the company out of shares issued to the public for subscription.
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Accordingly if a company pays dividends out of capital it will constitute a redn of a paid up
capital a situation that is prohibited (Trevor) VS Whitworth).

Declaration and payment of dividends.

The company’s act does not have clear provision on declaration and payments of dividends
therefore the provision of table A are instructive in particular articles 114-122 i.e

1. Articles 114

i. Dividends shall be declared by the company at the general meeting

ii. Dividends shall not exceed the amount recommended by directors
iii. No dividends shall be declared if the directors have not recommended any.

2. Articles 115
The directors may pay interim if the profits justify therefore in the case of scott v scott court said
that a resolution passed d by the company at a general meeting to directors the directors to pay
dividends whether final or interim is invalid.

Article 116

Dividends shall be paid out ofprofit but not out of capital.

Articles 117

The director’s ma before recommending the payment of dividends set aside any sum of profits as
a reserve.

The directors may carry forward any profits which they deem prudent not to divided.

Articles 118

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Dividends shall be declared unpaid according to the amounts paid or credited as paid or share in
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respect of which dividends are paid

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According to Oak bank company vs cram court said that this provision modify the common law
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that dividends are paid on the nominal value of a share.

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Articles 119

The directors may deduct any proportion of the dividend equivalent to the amount unpaid shares.

Article 120

The company may pay dividends in kind e.g b distribution of the assets ,shares or any other
interest provided the articles permit such mode of payment thus according to wood vs odes water
works ltd court said if the articles do not permit the payment of dividends in any other form they
should be paid in cash.

Article 121
Dividends may be paid by cheque or dividends warrant sent by post to the register address of the
holder or to the senior joint holder depending on the agreement made by the joint share holders.
A senior joint shareholder is a shareholder whose name appear first on the register of members

Articles 122

Dividends shall not bear interest against the company

At common law the declaration of dividends simply creates a simple contractual delt due from
the company to the member. This debt must be enforced within 6 years from the date of
declaration.

Common law rules relating to payment of dividends

1. Losses in previous years need not be provided for when dividends are declared in the
currenty years.

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2. Profits of previous years can be brought forward and distributed even if there is revenue
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loss in the current trading year.

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3. Losses on fixed assets in the current year need not be made good by provision for
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depreciation before treating a revenue profit as available for dividend.

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4. Unrealized capital profits on revaluation of assets can be distributed by way of a

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dividends or used to pay a bonus issue of fully paid shares

5. Dividends shall not be paid out of capital

Membership the marginal note of sec 28 bears the words’’defination of a member but the
section does not define a member instead it states two ways by which a person may become a
member i.e

By subscription to the memorandum

By agreeing to become a member

Nevertheless in practice the word’member’is used to describe a holder and a person whose
name is in the register of members.

Subscription
Sec 28(i) provides that the subscribers to the memorandum of association shall be deemed to
have agreed to become members of the company and on its registration shall be entered as
members in its register of members.

On other hand sec 5 provides that a subscriber to the memorandum is deemed to have taken
or agreed to take shares indicated against his name.

The purpose of these 2 provisions is to prevent subscribes from later on abandoning the
company on the pretext that the contract to subscribe for shares was past consideration and
that there was no privity of contract i.e the subscribes are prevented from claiming contract to
allot shares to them is void. Accordingly a subscriber to the memorandum is regarded as a
shareholder even before shares are allotted to him.

Circumstances when a person can be shareholder without being members

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1. Subscription to the memorandum i.e. sec 5 provides that a subscriber is deemed to
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have taken the shares indicated against his name, he becomes a shareholder before his
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name is entered in the register.

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2. Qualification shares i.e. sec 182 provides that a person who sign undertaking totake
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and pay for his qualifying shares shall be deemed to have taken those share he is in
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the same position as a subscriber to the memorandum in that he is deemed to have

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taken the shares

3. Share warrant i.e. sec 85 and 114 a person who has fully paid for his shares may be
issued with a share warrant if the articles permit and his name is require to be
removed from the register of members as if he had ceased to be a member. There such
a person is a shareholder of the shares included in the share warrant and is not a
member because his name is not in a register of member.
4. Personal representative of a deceased member .articles 29 of table A provides that a
personal representative of a deceased member shall be deemed to be a shareholder of
the shares of the deceased member and shall become a member when his name is
entered in the register members therefore he is a shareholder but not a member if his
name is yet to be entered in the register.
 5. Trustee in bankrupt articles 30 of table Aprovides that he is deemed to be a
shareholder but not a member until his name is entered in the register in the place of
bankrupty member
6. Transferee in the interim period. This is a person to whom shares have been
transferred but to whose name is yet to be entered in the register of member’s
.Articles 22 of table.
A provides that the transferred of the shares is deemed to be holder of the share until
the name of the transferee is entered in the register of members. Therefore is the
interim period the transferee is a shareholder but not a member.

Circumstances when a person can be a member without being a shareholder.

1. Transfer i.e. if a person transfers his shares but his name remain in the register
2. Deceased member i.e. if a member dies but his name or continues to remain in the

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register pending its removal co
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3. Bankrupt member i.e. when a person becomes bankrupt and his shares transmitted to his
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trustee in bankruptcy but his name continues to remain in the register pending his
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removal.
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4. Estoppel i.e. if a person holds himself out or allows himself to be held out as a member
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when he knows that his name has wrongly entered in the register. Such person will be
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deemed to be a member without being a shareholder becomes his name ids in the register.
5. Subscriber to the memorandum sec 28 provides that a subscriber is deemed to be a
member when a company is registered and is name entered in the register of members
even before any shares are formally alloted to him.

Agreement to become a member.

Sec 28 (a) providesthat every person other than other subscriber who agrees to become a
member of company and whose name is entered in the register of its members shall become a
member.

The agreement and subsequent membership may arise in the following circumstances
 1. Allotment it occurs when a person is allotted shares. The agreement arises when he is
allotted shares and his membership begins the moment his name is entered in the register.
2. Transfer it occurs when aperson purchases shares from a shareholder .the purchase
constitute the agreement to become a member and the membership begins the moment
the transfer is made and the name of transferee entered in the register of members
3. Transmission to a personal representative. Articles 29 of table a provides that the survivor
or the personal representative of a deceased member is entitled to become amember
arises whenthe personal representative decides or elects to take shares of the member
arises when the personal representative decides his name is entered in the register of
member in the place of the deceased members.
4. Transmission to a trustee in bankrupty it occurs when a trustee is appointed to hold shares
or property on behalf of a bankrupt member or an insane member, by operation of law the
agreement to become a member arises when the trustee elects or agrees to take over the

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shares and his membership begins the moment his name is entered in the register in place
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of the bankrupty or insane member.

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5. Qualification shares (compliance with section 182)it occurs when a person agrees to
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become a director and the agreement arises when he undertakes to take and pay for his
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qualification shares he becomes a member the moment the memorandum is registered

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and his name entered in the registered.

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6. Estoppel it occurs when a person knows that his name has wrongly entered in the register
and instead of having it removed he continues to hold himself out as a member or allows
himself to be held out as a member.
7. The agreement to become a member arises when the person knows that his name has
wrongly entered in the register and he continues to hold himself out as a member his
membership begins the moment his name is entered in the register and he allows it to
remain in I therefore he will be stopped from claiming that he is not a member.

Cessation

It refers to various ways by which membership can be discharged, terminated come to an end e.g.

1) Transfer; it occurs when a shareholder transfer its shares and his name is subsequently
removed from the register of members
2) Transmission upon death. It occurs when a member dies, his shares transmitted to he is
personal representative and his name removed from the register of member’s .However
his membership will not end if his name continues to remain in the register.
3) Transmission to a trustee in bankruptcy i.e. if the member becomes bankrupt and his
shares transmitted to his trustee in bankruptcy and his name eventually removed from the
register of members. However his membership will continue for long as his name
remains in the register of members.
4) Transmission on insanity it occurs when a member is medically certified to be of unsound
mind and his shares transmitted to a trustee after which his name removed from the
register. However his membership will not cease for as long as his name remains in the
register of members.
5) Forfeiture it occurs when the company cancels the shareholding of a member for a failure
to pay a call and his name subsequently removed from the register of members

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6) Sale by the company under the right of lien .Articles ii of table gives the company a first
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and paramount lien in respect of any unpaid shares .Under this right the company can
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withhold the shares and deal with them in any way it thinks fit. Article 12 of table A
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further provides that the company can sell off any unpaid shares in exercise of its right of
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lien.
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7) Surrender. It occurs when a member surrender his shares to a company in order to be

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effective the approval of the directors must be obtained the membership will come to an
end when the director will have approve to the surrender and subsequently his name be
removed in the register. However the membership will not come to an end and the
surrender will be null and void where approval of the director was not obtained.
8) Redemption it occurs when a company redeems its shares from a redeemable pref
shareholder in line with sec 60 .The memberships will come to an end when the name of
the shareholder is subsequently removed from the register of members.
9) Repudiation by infant it occurs when a minor or an infant terminates his membership
because of total failure of consideration on the part of a company i.eif he applies and pays
for his shares but the company fails to allot any shares to him.
According to Steinberg vs scala (Leeds) ltd.
 10) Liquidation the membership of the members will be automatically be terminated where
the company is wound up. Membership will cease because they cannot continue to be
members in non existent company.

Register of members

Sec 112 requires every company to keep a register of its members at its registered office

If the register is kept elsewhere or by someone else the company must notify the registrar

Additionally if the company has branch register in any other part of the commonwealth the
company must notify the registrar about where it is kept. The content of the register are’s

i. The name postal address of the members

ii. The shares held distinguished by their respective number
iii. The amount paid or credited as paid or the shares of each member

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iv. The date of entry on the register
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v. The date of cessation of membership

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vi. The amount of stock held and the above particulars where the shares have been
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converted into stock

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The content of the register are aregarded as in the first instance evidence of their particular until
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contrary evidence is presented to disapprove them

Failure to keep the register in the prescribed shall render the company and every officer
responsible liable to a default fines.

The index of members

Sec 113 requires every company having more than 50 members to keep an index of its members
unless the register also constitutes an index. The index must be kept at the same place where the
register of members is kept.

The purpose of the index is to contain sufficient info or indication which can enable the account
of its members to be easily traced. The index therefore is similar to a catalogue.
The index is required to be kept at the same place where the register of members is kept and it is
required to be altered within 14 days from the date of alteration of the register.

Inspection of the register and index

Sec 115 provides that’s

i. They shall be opened to the members for inspection free of charge

ii. They shall be opened to other persons for inspection payment for up to sh 2 for each
inspection
iii. They shall be opened during business hours
iv. They shall be availed to any person who request for a copy after payment of sh 1 for 100
words.
v. They shall be supplied within 14days after demand failing which the officer responsible
shall be liable to default fine of sh40.

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vi. Court may direct that a copy be supplied and inspection be allowed upon application by
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any agreed person. This is in addition to a default fine.

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Closure of a register.
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Sec 117 provides that the company may close its register of members for up to 30 days in a
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year after giving notice in local daily (newspaper)

The purpose of closing the register is to make it statistic in order to enable the company
extract the holding of the members for purposes of computing dividends.

Rectification of the register

Sec 118 provides that the company may rectify its registers of members

a. If there is wrongly entry of a name into the register

b. If a name is omitted from the register without sufficient reason
c. If a company fails to enter the fact of cessation of membership
d. If a company unnecessarily delays to enter the facts of cessation

In Nicole’s case court said that an application for rectification can be made to court by’s.
  –any person
 -Any member
 –by the company itself.

Upon application court may

a. Refuse or dismiss the application for rectification

b. Order for rectification
c. Order that the company do pay for any damage or loss sustained by the aggrieved
party

Rectification may also be done;

a. At winding up e.g in order to determine who is eligible to be a contributory in light of sec

214

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b. If shares were obtained through unlawful mean,in which case court may direct that the
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register be rectified by deleting those shares
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In order for the rectification to be effective the order of court directing rectification to be
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done must be delivered to the registrar.

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Capacity to be a member
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Capacity to be a member refers to the competence of a person to be a member. Capacity is

governed by the common law rules relating to capacity of persons to contract. The general rule in
the law of contract is that all persons have capacity to contract. In this regard any person who has
capacity to enter into contract can become a member, subject to the provisions of the articles e.g

a. Infants (minors)

The age of majority act provides that a minor is a person below 18yrs and has capacity to enter
into voidable contracts. Avoidable contract is a contract of long term nature and which a minor
can void/terminate/repudiate/cancel anytime within minority age or within a reasonable
time(the shortest time possible)after attaining the age of majority. In which case the contract
within a reasonable time the contract will bind him.
In this regard court in the case of Steinberg V scaly(Leeds)ltd said that a minor can become a
member if the articles permit but the contract is voidable in nature.

b.Personal representative /trustee in bankruptcy

Articles 29 of table A provides that a personal representative is entitled to take over the shares of
a deceased member while articles 30 provides that a trustee in bankruptcy is entitled to take over
the shares of a bankrupt member thro’ a legal process known as transmission.

In this regard a personal representative and trustee are eligible to become members if articles
permit. The membership begins when their names are entered into the register of members

However, a deceased and bankrupt member will continue to be members for as long as their
names are in the register of member and before their names are remove and replaced by those of
the personal representative or trustee

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c.companies /corporations
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A company is an artificial person and if it is permitted by its memorandum and articles

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It can become a member in another company but it must appoint an authorized person who shall
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represent it at general meeting in line with sec 139.

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However sec 29 provides that a holding shall not make any allotment or transfer its shares to its
subsidiaries unless.

The subsidiary is acting a personal representative or trustee

Unless the subsidiary was a member of a holding company at the commencement of the
company’s act on 1stJan1962.However, such subsidiary shall not be entitled to vote unless it is
voting as a personal representative or trustee.

Rights of a member

 The right to vote

 The right to receive dividend
 Rights to receive information
  Right to attend meeting
 Right to apply to court to restrain/object to the alterations of the memorandum and
articles
 The right to inspect the register an index
 The right to be supplied with a copy of register and index within 14days
 Rights to apply for rectification of register
 Right to petition for the winding up of a company on just and equitable grounds (sec 219)
 Rights to apply to court for the appointment of receiver or liquidator.

Shares

Sec 2 defines a share as a share in the share capital of a company i.e it is a unit of share
capital

In the case of boiland trustees vs steel brothers court said that a share is the interest of a

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member measured in monetary terms for the purpose of
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i. Liability (nature and extent of liability

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ii. Interest(investment/dividends)
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iii. Mutual covenants(se 22 statutory contract)

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Types/classes of shares

The company’s at does not prescribe the classes of shares that can be issued by company it only
provide that the share capital of a company limited by share shall be divided into shares of a
fixed amount. In this regard articles of table Aprovides that a company may issue any classes of
shares having such preferred, deferred or any other right as may be determined by special
resolution

Therefore a company may issue different types of shares each having different types of rights to
atract different types of investors. The common types include ordinary shares (equity shares)

i. Preference shares
ii. Deferred shares(founder shares)
iii. Corporate share
 iv. Unclassified share

Ordinary shares

They are shares that do not have any special rights they are ordinary in nature. Nevertheless the
following rights may attach to them

Incomerights. They are also known as dividend rights in that ordinary shareholders are entitled to
share in dividends or profits realized by the company. The rat of dividend is not fixed. It varies
depending on the profit for distribution as dividends

Additionally if there is any surplus profit available for distribution they are entitled to participate
after the other classes of shares have been paid.

Voting rights

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The articles may discriminate between ordinary shares that share that have voting rights and
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ordinary shares that do not have voting rights.
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Control of a company is usually given the ordinary shareholders who have voting rights.
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Capital rights
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These rights relate to any surplus assets that are available after the company goes into winging
up ordinary shareholders are entitled to share in any surplus assets if the company goes into
winding up.

Preference shares

They are shares that have special rights attached to them. The rights can only be enjoyed or can
only be attached to the shares subject to the express provisions of the articles. Therefore where
the articles do not give any preference priority or special rights no preference shall be given to
them.

Nevertheless the rights attaching to them may relate to income rights and capital rights
depending on the type of preference share and terms of issue. The types of preference shares
include.
Cumulative and non-cumulative preference shares

This class preference shares relates to any arrears of dividends especially when the company
declares interest but does not pay. In case of cumulative preference shares the arrears keep
accumulating and must be paid at the next general meeting or when dividends are next declared.

Additionallythey are entitled to a fixed rate of dividends.

In case of non-cumulative preference. Shares they are not entitled to be paid any arrears of the
dividends. The unpaid dividends do not accumulate and once missed or unpaid they cannot be
paid. However they are entitled to fixed rate of dividends

Participating and non-participating preference share

This classrelates to any surplus profit available for distribution and surplus asset that remains
when the company goes into winding up. In case of participating pref –shares they are entitled to

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share or participate in surplus profits and surplus assets which remain when company goes into
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winding up. They are also entitled to a fixed rate of dividends. In case of non-participating
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preference shares. They are not entitled to participate in sharing any surplus profits surplus
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assets.
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They are only entitled to a fixed rate of dividends.

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NB;If the articles are silent on whether the shares are cumulative or non cumulative or
participating or non-participating the shareholders will be regarded as non-cumulative and non-
participating

Redeemable preference shares

Sec 60 provides that a company limited by shares may issue redeemable pref shares if the articles
permit it to do so. Redeemable preference shares are class of shares which a company issue
specifically for the purpose of redemption after a period of time i.e a company can buy them
back subject to the conditions set out in sec 60.

Deferred shares
They are usually issued to the founder of the company i.e the promoters. They are deferred
because any rights attaching to them are suspended or deferred until after other class a of shares
have enjoyed their rights e.g income rights and dividend rights are enjoyed by the founder after
other classes of shares have enjoyed their rights

For this reason the founder shares are cumbersome, burdensome and onerous hence the founders
have usually an opportunity to convert them into pref shares.

Corporate shares

They are a class of shares that are issued to the employees of the company in order to get their
corporation. The rights attaching to this class depending on the provisions of the articles and the
terms of issue.

Unclassified shares

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It is that portion of authorized shares capital which is yet to be issued hence it is unclassified.
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This class of shares will acquire a specific class when shares are issued i.e. it remains
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unclassified until the time of issue. In this regard articles 2 of table a provides that any share in
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the company may be issued with such preferred deferred or other rights as the company may
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determine by special resolution.

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Transfer of shares

Sec 75 provides that the share of a member in a company is a movable property, subject to the
provisions of the articles i.e it is transferable in a manner provided by the articles.

In the case of re smith &faw cett court said that shares are prima facia transferable property an
any restrictions against transfer must be based on satisfactory reason especially guided by the
articles e.g under sec 30 the articles of private companies are required to contain restrictions
against transfer of shares to the public while public companies allow free transfer of shares to the
public.

If the articles correspond with table A, the restrictions depend on whether the company is public
or private in nature.
Public companies

Articles 24 of table A provides that the directors may decline refuse or restrict a transfer or they
may decline to register a transfer if;

a. The shares have not been fully paid

b. The transfer is made to a person whom they do not approve; however this must not be
based on personal grounds.
c. The company has a lien on the shares e.g. because the shares have not been paid up.
d. The discretion not to register is exercised in good faith bonafide and in the interest of the
company.
e. The discretion not to register the transfer is guided by the consideration set out in the
articles

In the case of Re smith and Fawcett court said that if the directors exercise their discretion in

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a manner not contemplated in the articles their conduct will be ultra vives and the aggrieved
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may apply to court for rectification of register so that his name is entered there in.
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Private companies
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Article 24 of table A makes the following provisions in respect to the restriction against
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transfer for private companies.

i. The directors have absolute discretion not to register a transfer

ii. The directors are not under any duty to give reasons for declining to register a transfer
iii. The discretion of the directors not to register a transfer relates to both fully paid and
unpaid.
iv. The discretion of the directors must be exercised within a reasonable time.sec so
provides that the discretion must be exercised within 60 days after the date on which
the transfer was lodged with the company.

Transfer procedure

The procedure for transfer is detetermine by the articles of each company nevertheless article 22-
28of table A provides that the procedure is as follows.
The transfer shall complete the transfer form/document. The contents of the transfer document
are:

a) Name of the company

b) Number and discretion of shares to be transferred
c) Name and address of the transferor
d) The consideration paid
e) The name and address of the transferee however if it is a blank transfer the name of the
transferee shall not be specified

2. The transferor shall sign the transfer document and have it witnessed by atleast one witness
who must also sign it.

3The transferee shall give the transfer document and his share certificate to the transferee

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4. The transferee shall sign the transfer document in the presence of atleast one witness who must
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also sign t.
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5 The transferee shall affix the appropriate stamp duty on the transfer document after he shall
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lodge it together with the share certificate with the company

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Articles 25 of table provider that the directors may refuse to register the transfer if sh.2.50 has
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not been paid or if the instrument of transfer does not relate to the class of shares being
transferred

6. The transfer is considered and approved by the board of directors

7. The company secretary shall make a new share certificate in the name of transferee

8. The new share certificate shall be counter signed by the director and the company secretary or
any other director before the company seal is affixed on the transfer document. The transfer shall
only be counter signed and sealed if the company does not have a lien on the shares.

9. The name of the transferee shall be entered into the register of members in place of the
transferor.
10. The new share certificate shall be delivered or sent to the transferee within 60 days after
lodgement.sec 82 provides that the new share certificate must be delivered within 60days after
the transfer document has been lodged with the company failing which a default fine shall be
visited on the officers responsible.

Certification of transfer

It is the process by which the transfer document is verified to confirm whether it is authenticate
or whether the transferor has good title

After doing the certification, the certifying officer shall mark the transfer document with the
words” certificate lodged’’

Certification is necessary

i. Where there is partial transfer

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ii. Where the transfer is made to 1 or more persons
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iii. Where the transferor has not received a share certificate from the company but has other
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title documents e.g. letter of allotment

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iv. Where the transferee is not satisfied with title of the transferor
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Liability in respect of false certification

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Sec 81 provides that

i. A negligent certification shall be deemed to be a fraudulent certification by the company

ii. The aggrieved party is entitled to recover damages
iii. If the certification was done by a person who was not authorized to do so on behalf of the
company, the company shall not be liable for the false certification.
iv. The effect of transfer

Transfer of shares is a contract of sale and must be evidenced by a purchase contract note or a
sale contract note unless a transfer is a gift

As soon as the transfer is registered the property in the shares (title/ownership)is transferred from
the transferor to the transferee.
However in the interim period before the transfer is registered ownership is not transferred to the
transferred instead the transferred continues to be regarded as the registered holder of the shares.
Therefore the legal effects of the transfer in the interim period are.

If a call is made in respect of partly paid shares the transfereror shall be liable to pay the call
after whichhe can go to the transferee for reimbursement or indemnity.

If dividends are declared and paid the transfereror shallreceive them as the trustee of the
transferee unless the shares were transferred ‘’ex-div’’or ‘’ex all’’in which case the transferor
shallbe personally receive the dividends for his own benefitsbut not as the trustee of the
transferee.

The voting rights at general meetings will depend on whether has been fully paid or partly passed

If he has been fully paid he can only vote as the trustee of the transferee. He shall vote as a proxy

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as the transferee directs. If he has not been fully paid he can attend and vote as he wishes but not
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necessarily as atrustee for the transferee.
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NB: The above legal effects were explained by the court in the case of mussel white vctl mussel
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white &son ltd.

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VOID TRANSFERS
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Avoid transfer is an unlawful transfer. It is illegal and therefore null and void; the transferee does
not acquire title in case of a void transfer e.g.

a) Oral transfer under sec 77

b) Forged transfer under sec87
c) Transfer by a holding company to its subsidiaries under sec 29 (refer to notes of a
capacity of a company to be a member.
d) Oral transfer under sec 77
e) Sec 77 provides that a transfer shall be unlawful if a proper instrument of transfer is not
delivered to the company therefore in the case of re green court said that an oral transfer
is null and void
f) Sec 77 also applies to debentures and provides that aproper instrument of transfer shall be
delivered to the company for registration otherwise the transfer shall be unlawful
regardless of anything contained in the articles.
g) However this provision does not apply to persons to whom the right to any share or
debenture is transmitted by operation of law i.personal representatives and trustee

NB; since an oral transfer is null and void the transferor shall remain the register holder and
the transferee shall not acquire any title to the shares.

Forged transfers

A forged transfer occurs when a person steals the shares certificate of a shareholder, forges
his signature and pupports to transfer the shares to himself or another person. The person
forging the signature can be an impersonator, broker or any other person.

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Since the forged transfer is not accompanied by the lawful authority of the registered
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shareholder or the positive intention of the registered shareholder the signature is legally not
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effective and is therefore null and void.

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Sec 86 provides that a person who impersonate or deceitfully gets the share certificate or
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share warrant of an another shall be liable to imprisonment of up to 7yrs while sec 87

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provides that a forged transfer is fraudulent in nature and there unlawful.

Therefore the legal consequences (effects)of a forged transfer are as follows

1) The name of the registered shareholder shall be restored to the register of

members
2) The company shall compensate or indemnity or pay the registered shareholder
any benefits or dividends which he missed out white his name was missing from
the register.
3) After paying the registered shareholder the company shall pursue the person who
lodged the forged transfer and recover indemnity or an amount equivalent to what
it paid to the aggrieved shareholder
The same applies ifthe forged transfer was done by animpersonateor broker in
which case the company shall recover indemnity from the broker
 4)if the company has issued a new share certificate to a transferee under the forged
transfer such company shall be estopped or prevented from denying the fact that the transferee is
the valid registered holder of those shares provided the transferee is proved to be a bana fide
purchase foe value of these shares without the notice of forgery.

NB; Under sec 118 the registered can be rectified upon application (refer to notes of rectification
of the register)

Transfer notice /advice

It is a notification given by the company to a shareholder advising him that his shares have been
lodged for transfer. The purpose of the transfer notice is to caution the registered shareholder. to
seek his confirmation about the transfer and to minimize instance of forged transfers.

However, since the company’s act does not have a clear provision for transfer notices they are

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not of any value to the company because they can be ignored or disregarded by the shareholder
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who was notified and when his shares are transferred he is still entitled to recover compensation
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from the company. The company is therefore visited with a double cost of informing a share
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holder and compensating him.

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Share certificate
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Sec 812 provides that a share certificate shall be complete and delivered to the transferee within
60days after any allotment of shares, debentures or debenture stock and within 60days after the
date on which the transfer of shares was lodged with the company unless the conditions of issue
provide otherwise.

The aggrieved shareholder or person can apply to court for an order of specific performance
compelling the company and the directors to issue him with a share certificate where the
company has failed to issue him with one within 14days of demand.

Sec 83 provides that if a share certificate is issued under the common seal of a company it shall
be prima facie evidence that the shareholder is entitled to the shares specified in it.

Sharewarrant.
Sec 2 read together with sec85 defines a share warrant as a share warrant.

Sec 85 provides that a company limited by shares so authorized by its articles may issue a share
warrant under its common seal with respect to fully paid shares, stating that a bearer is entitled to
the shares specified therein and to be paid dividends in respect of those shares. Additionally that
the shares may be transferred by the bearer by simple delivery of the share warrant.

Sec114 provides that if the company issues a share warrant it shall struck the name of the bearer
off from the register of members as if he had ceased to be a member and shall enter the following
details in the register of members

a. The fact that a share warrant has been issued to the bearer
b. A statement of the shares included in the share warrant distinguishing each share with its
distinct number
c. The date on which the share warrant was issued

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NB;These details shall remain in the register for as long as the share warrant has noty been
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surrendered for cancellation and they shall be removed when the share warrant is surrendered
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for cancellation
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Subject to the provisions of the company act and if the articles permit;
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a. The bearer can surrender the shares warrant for cancellation after which his name must be
re-entered in the register

B.The bearer shall be deemed to be a member of a company either to the full extend otr for
any purpose specified in the articles

c.If the company enters a name of the bearer into the register without him surrendering his
share warrant for cancellation ,the company shall be liable for any loss incurred by ny
person because of such wrongly entry.

Nature of share warrant

1. It is evidence that the bearer is the holder of the shares specified in it and a company is
stopped from denying this fact.
 2. It is a negotiable instrument which is transferable by simple delivery.

Circumstances under which a company can issue a share warrant

 Subject to the provision of the company’s act i.e if a company shall comply with the
provisions of a company’s act.
 if the articles permit
 If the shares have been fully paid
 If the company share capital i.e it is limited by shares
 If the name of the bearer shall be removed from the register
 If the common seal of a company shall be affixed on the share warrant.

Distinction between a share certificate and a share warrant.

a. A share certificate relates to both fully paid and partly paid shares whereas a share

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warrant only relates to fully paid shares. co
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b. All shareholders are entitled to share certificate under sec 82 whereas only shareholders
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of fully paid shares are entitled to share warrant under sec 85.
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c. All shareholders are entitled to have their names entered in the register of members
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whereas bearer of the share warrant is entitled to have their names removed from the
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register.
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d. A share certificate is not a negotiable entrustment whereas a share warrant is a negotiable

entrustment.
e. A person who surrender his share certificate ceases to be a member but a bearer of a
share warrant who surrender it for cancellation is entitled to have his name entered in a
registered and is deemed to be a member to the full extend or for any purpose specified in
the articles.

SIMILARITIES

I. Both are issued in respect of shares

II. Both can be surrendered
III. Both can be used to mortgage shares
IV. Both can only be issued if the company has share capital
 V. Both are issued to members or shareholders.

Mortgage of shares

A mortgage is a temporary transfer of security (title or property) in return of a loan obligation

under this arrangement the lender undertakes to re-transfer the security back to the borrower
upon full repayment of the loan

There are 2 types of mortgage

I legal mortgage

II Equitable mortgage

Legal mortgage

It involves the transfer of title in the security by the registration of the transfer of document.

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Technically therefore the lender acquire title to the mortgaged shares until the loan is fully repaid
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at which he shall retransfer title back to the borrower.

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Equitable mortgage
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It is an informed transfer which does not need registration rather all that is needed is a positive
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intention to create a mortgage accompanied by an act of part performance e.g.

i. The borrower can deposit his share certificate with the lender without executing the
transfer and in case of the fault the lender can apply to court for an order to sale or an
order foreclosure.
ii. The borrower can deposit his share certificate together with blank document with the
lender .he shall sign the transfer document but shall not specify the name of the transferee
instead ha shall give the lender authority to transfer the share to a 3rd party (transferee)by
filing in the blank spice.
iii. At times the lender is required to execute a power of attorney which will give a renderer
authority to deal with the shares in case of default.

Debentures
Sec 2 defines a debenture as including a debenture stock, bonds and other securities of a
company whether they constitute a charge on the asset of a company or not .in the case of levy V
Abercoris state and rubber company court said there is no precise definition of the term
debenture rather it derives its meaning from latin words ‘’Debenture mihi’’ which were opening
words of certain documents issued by English company in 1860s to debtness to the lenders.

Over time the word has acquired its present meaning as a long term loan or acknowledge of in
debtness.

Types of debentures

1. Secured and unsecured debentures

A secured debenture is secured against the asset of the company they create a charge on the
security given.

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Unsecured debenture is also known as a naked debenture because it is not secured against any
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asset hence the risk non payment is extremely high.

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The secured debentures are given priority over the unsecured debentures in terms of payment as
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was observed in Salomon’s case where Salomon was a secured debenture holder while the other
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creditor holder were unsecured.

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2. Redeemable and irredeemable debentures

A redeemable debenture is one which canbe redeemed or brought back by a issuing company
after a specified period of time.

It is usually secured against specific asset. An irredeemable debenture is also known as perpetual
debenture because it can only come to an end in the event of liquidation e.g. where a floating
charge is created over the general assets of a company both present and future.

3. Convertible and non convertible debentures

A convertible debenture is one that can be converted into shares. Usually it is never secured e.g
in the uchumi supermarket case where creditors converted the loan obligation into equity shares
pursuant to a scheme of arrangement between the company and the creditors.
Non convertible debentures are those that can never be converted into shares .usually they are
secured against the assets of the company.

4. Surbodinate debentures

They are debentures that rank lower than other superior debentures or prior debts in terms of
repayment.

They are issued pursuant to a subordination agreement or subordination clause which provides
that the subordinate debenture shall be paid after other superior senior or prior debts have been
paid however their claims are superior to those of shareholder i.e. they are entitled to be paid first
before the shareholders are paid.

Usually they carry no security and depend on the goodwill of a company and can be issued with
a maturity period of up to 10yrs and above.

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Forms of debentures
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The company may issue its debentures in various forms including

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1. Single debenture which is a printed form or document issued by the company to a single
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lender e.g. a bank. A single debenture is created when the company borrows money from
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a single lender.
2. Series of debentures
3. It is issued when the company has borrowed money from several lenders and issues to
them a printed document acknowledging its indebtness to them. The rank given to the
debenture holder depends on the provisions of the debentures trust deed.
4. Debenture stock
5. It is issued where the company issues debentures stock certificate to a class of debentures
holders as evidence of the portion of the total to which they are entitled to be paid
6. Usually they rank equally (paripasu)in their right to be paid; none is superior to the other
in terms of repayment.

The borrowing powers of a company /issue of debentures

Articles 79 of table aprovides that the directors may exercise all the power of a company to
borrow money and to issue debenture, debenture stock and other securities

In order for the debentures to e issued a resolution of the board of directors must be passed.
The borrowing powers of a company must be specifically permitted by articles and if the
articles are silent a special resolution must be passed to include the borrowing powers.
However, if the articles prohibit the borrowing the company shall not have the authority to
borrow nevertheless there are 2 presumption in respect to the borrowing powers of company.

Trading companies i.e. profit oriented companies which are commercial in nature have
implied powers to borrow for purposes of their business and to give secure for the same

Non trading companies’ i.e. companies that are not profit oriented are prohibited from
borrowing unless the articles expressly permit them to borrow.

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Similarities and differences between shares and debentures
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Similarities
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They can be classified into different types of classes e.g. ordinary shares preference
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
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shares ,secured debentures ,unsecured debentures etc

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 Both are long term investments .Ashareholder may get divided while a debentures holder
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may get interest.

 Both are transferable in light of light of sec 75 ,sec 80 sec 82 and articles 22-28 of table A
 Both can be issued in the same way e.g. by prospectus issue
 Both are entitled to certificates under sec 82

Differences

1) Shareholder area members of a company but debenture holders are not necessarily
members usually they are outsiders e.g. banks.
2) Shareholders are generally interested in the company but not its
property(macaura’s case) on the other hand debenture holders are generally
interested I the property of a company which constitute their security.(ooregum’s
case)Trevor’s case ,flitcrot case etc)
 3) Share holders can attend and vote at general meetings of a company ,while
debenture holders cannot attend and vote at the general meeting of a rather they
can attend debenture holder meetings or in the event of winding up in voluntary
winding up by creditors.
4) Shareholders cannot insure the company property, while debenture holder can
insure the company property which is their security.
5) Generally shares cannot be issued art a discount while debentures can be issued at
a discount.
6) Generally a company is prohibited from buying its own shares but it is not
prohibited from buying its own debentures
7) Shareholders are entitled to be paid out of the profits realized on the other hand
debenture holder can be paid interest out of the profits realized as well as out of
capital

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The debenture trust deed
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It is a memorandum or agreement entered into be the company and the trustees appointed act on
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behalf of the debenture holders. The contents of the trust deed include;
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1) Convents by the company to pay the principal and the interest in the agreed instalments
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2) The events under which the security will become enforceable e.g. if the company fails to
pay the principal or interest as agreed.
3) A description of the property charged and the nature of a charge whether fixed or floating
in nature.
4) A possession clause which empowers the trustee to take possession of the property
charged or business of a company and deal with it if it becomes enforceable e.g. if a
company defaults.
5) Provisions of the appointment of a receiver if need arises
6) Provision for debenture holder meetings
7) Covenants by the company to insure the property charged
8) Covenants by the company to keep the property charged in good repair.

Advantages of debentures trust deed

 The contents of debenture trust deed can also be applied as the advantagese.g.
 The mode of repayment of the principal and interest is clear and certain because
the company has covenanted to pay.
 The event under which the security may become enforceable makes it easy for the
debenture holder to ensure security e.g. in case of default
 The description of the property charged and nature of the charge makes it easy for
the security to be identified and various rights of debenture holder.
 The possession clause empowers the trustee to take possession of the property
charged if the security becomes enforceable
 The provisions of appointment of a receiver empowers the debentures holder to
appoint a receiver to manage the business of a company of the assets if need
arises
 The provisions for debenture holder meetings ensure that they can meet and

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discuss anything connected to debentures and trustee can be held accountable
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 Covenants by the company to ensure the property charged safeguard it against

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risk
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Covenants by the company to keep the property charged in good repair ensures
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
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that it does not depreciate.

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Remedies of debenture holders

Generally they are conferred by the trust deed although some of them are not captured by the
deed the remedies include:

1) They can appoint a receiver to carry on the business of a company

2) They can appoint a receiver to manage or sale the property charged
3) They can sue for the arrears of interest or the principal or both in their capacity as
creditors.
4) They can petition the high court for winding up grounds of inability to pay debts

Under sec 220 a company is deemed enable the pay its debts if.

i. It is unable to pay at least sh1000 within 3wks of written demand by creditor

 ii. It is unable to excute a court order infavour of a judgment creditors requiring the
company to pay at least sh 1000 within 3 wks.
iii. In the opinion of court the assets are inefficient to pay its liabilities

Under sec 219 inability topay debts is aground for compulsory winding up by court

5. They can apply to court for the appointment of a receiver.

6. They can apply to court for an order for sale court will order the debenture holder to sell the
property at the market price and to render accounts to the incase of any surplus after setting of
the debt

7.They can apply to court for an order of foreclosure In which case court shall legally terminate
the mortgage agreement and vest the property or transfer the property to debenture holder in
which case they can deal with it if they deem fit without any duty to render accounts to the

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company. This remedy is more serious or draconian compared to the order for sale because the
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borrower will loose his title or the property and the lender is not under any duty to render
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account to him or to act in his best interest.

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The register of debenture holder

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Sec 88 requires every company to keep a register of debenture holder at its registered office it
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has issued a series of debentures

If the register is kept or made up elsewhere or kept by someone else or for if there is a change in
respect to the place of custody the company must notify the registrar of this fact.

Charges securing debentures

A charge is a legal or equitable interest which the lender has in the property given by the
borrower as security for a loan obligation.

In the case re Yorkshire wool comber’s association court said that a charge can either be fixed or
floating in nature.

Fixed charge
It involves the mortgage of specificor ascertained property usually the non current assets which
are fixed in nature e.g. plant and machinery, equipment, freehold and leasehold property,
uncalled capital etc.

Generally it is legal in nature. It attaches on specific property at the time of creation and the
company cannot adversely deal with it except with the consent of the creditor e.g. it cannot sell
or dispose of the property charged without the prior written consent of the creditors.

It has priority over floating charges in terms of prepayment i.e they are paid first before the
floating charges can be paid.

Floating charges

They are also known as ambulatory charges, hovering charges or voving charges because they
are not created in respect of any specific property rather they hover over the general assets of

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company both present and future until a crystallization event occurs. In the case of re Yorkshire
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wool combers association court said that a floating charge has the following x-stics.
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1. It is created over the asset of the company which keep changing their nature from time to time
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in the ordinary course of a company’s business eg.the current assets and that is why it is referred
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to as ambulatory
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2. It relates to the general assets of the company both present and future

3.The company can use the assets as if they have not been charged until crystillation events
occur.

Crystillation events

They are circumstances which will cause a floating charge to be converted into a fixed charge. In
his regard the interest of the debenture holder will crystallize or attach on specific assets
examples of crystallization events include;

i. If a company defaults to pay the principal or interest and security become enforceable
ii. If the company goes into liquidation
iii. If the company ceases to carry on business
 iv. If a receiver is appointed in respect of specific assets
v. If court makes an order for the attachment of specific assets
vi. If the debenture holder decide to enforce the security e.g. if their interests are prejudiced.

Advantages of floating charges

They are usually seen from the perspective of a company .They include;
i. The company can deal with the property charged a as if it has not been charged
until crystallization event occur.
ii. It can be created over property which would not be the subject of a fixed charged
i.e. it is created over current and non current assets
iii. Because of the equitable nature company can reserve or retain its title over the
property charged until a crystillation event occurs?

Disadvantages

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They are usually seen from the perspective of the creditors they include
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i. Because of the equitable the creditors does not have automatically legal title over
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property charged
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ii. The value of the property charged is not certain since no particular assets are charged
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iii. It is postponed to a later fixed charge when crystallization event occurs

iv. Under sec 314 it can be avoided if it was created at a time when a company was insduent.

Priority of charges

It refers to the rank or priority given to the different types of charges e.g.

i. Alegal fixed charge takes priority over an equitable fixed charge

ii. Legal fixed charges rank according to their order of creation .the first to be created will
have priority
iii. A fixed charge has priority over a floating charge
iv. If a floating charge contains a –ve pledge clause it shall have priority over a fixed charge
created later on by a person who was aware of a negative pledge clause. However
 floating charge will not have be priority over a fixed charge created by a person who was
not aware of a –ve pledge clause.
Anegative pledge clause is a promise or agreement made by the company prohibiting the
creation of affixed charge over property that is already under a floating charge
v. A floating charge is postponed to a latter fixed charge upon crystallization.
vi. If a floating charge is created over particular assets it shall have priority over a floating
charge created over general assets i.e. the floating charge over particular assets is
deemed to have already crystallized over these particular assets.
vii. Floating charges rank according to their order of creation, the1st to be created takes
priority.

Registration of charges

Sec 96 provides that the prescribed particulars of registration within 42 days after the date

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of creation of a charge co
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The specified of a charge are;
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i. A charge to secure the issue a debenture

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ii. A charge on uncalled share capital

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iii. A charge created by an instrument which is required to be registered under

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chattels movable property transfer act.

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iv. A charge on land

v. A charge on the back debts
vi. A charge on calls made but not paid
vii. A charge on goodwill, patent, copyright or trademark.

The prescribed particulars are as follows enumerated in form no214

1) The date and description of the instrument creating the charge or evidencing the charge
2) The amount secured by the mortgage or charge
3) Short particulars of the property charged
4) Names postal addresses and description of the persons entitled to the charge
5) Amount of commission ,allowance or discount if any in percentage

The purpose of registration is to enable a prospective creditor to know;

 1) The existing indebtness of a company
2) The assets available for setting the indebtness

The effect of non-registration under sec 96 is to make the charge void as against the liquidator
and any creditor .although a charge is void;

 The creditors is entitled to take immediate steps to recover his money

 Under sec 102 court is empowered to extended the to me for registration if it is satisfied
that omission to register was accidental or because of sufficient reason and if the interest
of the creditors will not be prejudiced by the extension.

Certificate of registration

Sec 99 provides that the registrar shall issue the certificate of registration if the specified charges
and their particulars have been delivered for registration within 42 days.

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The certificate is conclusive evidence of compliance thus in the case of Re C.LNye court said
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that the certificate is evidence that there was compliance even if it is incorrect and the charge
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shall not be rendered void in the grounds that one of the prescribed particulars e.g date is
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incorrect.
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Register of charges
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Sec 105 requires every limited company to keep a register of charges at its registered office.The
of a register are;

1) A short description of a property charged

2) The amount of a charge
3) Names and postal addresses of person entitled to the charge. (Refer to the prescribed
particulars under sec 96.

Non compliance with the requirements relating to the register will not invalidable the charge
but the office responsible shall be liable to a fine not exceeding sh1000.
 COMPANY MANAGEMENT/MEETING

There are 2 organs in the management of a company i.e. the general meeting and the board of
directors.

General Meeting

This is the assembly of general body of members. This organ may convene during any of the
following meeting;

i. Statutory meeting
ii. Annual general meeting
iii. Extra ordinary general meeting

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Statutory meeting co
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This is the 1st meeting of the meeting of a company. It is held after but not later than 3 months
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from the date obtaining of the certificate of trading. This meeting has its agenda being the
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statutory report .it gives members an early opportunity to learn about the promotion of their
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company. This meeting is held once in a lifetime of the company and will be compulsory for all
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public companies.

Annual General Meeting (A.G.M)

This s the annual meeting of the members of a company. This meeting is summoned by 21 days
notice though a shorter a one may be given if not less than 95% of all voting rights agreed. The
1st AGM must be held not later than 18 months from the date of issue of the certificate of
incorporation. Subsequent AGMs must be spaced by atmost 15 months between them.

The AGM discusses ordinary business of the company e.g.

i. Adoption of financial accounts

ii. The declaration of dividends
iii. Appointment of directors
iv. Appointment of auditors
 v. This meeting may be summoned by directors, registrar, directors under the directors
under the direction of the registrar and directors under the direction of the court.

Extra ordinary general meting

This is a meeting of the members of the company, that may be held anytime when need arises

This meeting discusses extra ordinary business such as removal of a director within their term of
office, approval of rights issue, removal of an auditor within their term of office, Ammendment
of memorandum and articles of association etc.

This meeting may b summoned by directors, registrar, requisitions or directors after the request
by members.

BOARD OF DIRECTORS

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The office of company’s director is established or created under sec 177 of the company act.
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Private companies may have a minimum of 1 director while public companies may have a
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minimum of 2 directors.
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Appointment of directors
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The 1st directors of the company are nominated by the subscribers to the memorandum failing in
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which all the subscribes becomes the 1st directors of the company. A company may adopt the
retirement by rotation formula contained in table A. Underthis formula all the 1st directors retire
at the conclusion of the 1st AGM subsequently a quarter of all the directors retire being the
longest serving directors. A retiring director is eligible for re-election. This formula does not
affect the director currently serving as managing directors (MD)

Qualification/disqualification of directors

1. AGE.

Any person below the age of 21 or above the age of 70 shall be ineligible for appointment as a
director.a director turning 70 is disqualified from continuing to hold office unless a special notice
has been given to reappoint them.
2. Share qualification

The articles may require person named as director take up a specified number of shares as their
share qualification. Any director not taking up such shares is disqualified from holding office as
a director.

3. Sound mind

Any person of unsound mind is disqualified from holding office as a director;

Bankruptcy

Any person who has been declared bankruptcy by a court of law is disqualified from holding
office as a director.

CONSENT

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Any person who has been named as a director/proposed as a director s disqualified from holding
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office if they have not presented to the registrar a written consent to act as director signed by
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them or by their agent authorized in writing.

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INDIVIDUAL VOTING

Every candidate for directorship must be considered individually. However 2 candidates may be
voted in together if there has been no objection to their joint vote. Persons elected in violation to
this provision are disqualified

Disqualified persons

A person convicted by a court for an offence in relation to company management may receive a
sentence in the form of disqualification from being engaged in company management either
directly ir indirectly for a specified period of time

Examples of such offences include; fraudulent trading, money laundry, insider crime dealing.

Removal of directors from office

A director may be removed from office within their term of appointment. When removing a
director from office the following procedures are followed.

1) Notice of intention to remove the director is given to the company

2) The notice is sent to the director who may make written representation as his
defence to the removal
3) The company sends notice to members convening a meeting to consider the
removal of the director The notice must inform the members whether the director
has made representations
4) The representation may be sent to members together with the notice unless they
are received too late or they are of unreasonable length
5) At the meeting if the representations were not sent to members the director is
entitled to have them read in the meeting.
6) The motion to remove them is considered and a vote is taken. If the required

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majority is achieved (simple majority) the director is removed from office.
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Loans and other payments to directors.

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It is generally unlawful for a company to give loans to their directors or provide any guarantee in
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connection to such loans. However I the following circumstances company may give loans to
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their directors.

1) Where the company for the time being private

2) Where the lending is a subsidiary and the directors is its holding company
3) Where the company is in the business of lending money and the same is done in the
ordinary course of business
4) Where the lending is done to enable the director to perform its duties to the company
more appropriately.

Payments to directors or compensation for loss of office

It is illegal for a company to compensate a director for retirement or loss of their office. If such
payment is to be made it must be approved by the general meeting including a declaration of the
amount being paid. Any payment made in violation of this provision is irregular and the director
paid holds the amount in trust for the company.

Division of powers between thegeneral meeting and the board of directors.

Both the general meeting and the board of directors perform various fines in the management
ofthe company e.g the general meeting traditionally discharges the following fines

 Declaration of dividends
 Approval/adoption of financial accounts
 Appointment of directors
 Appointment of auditors
 Removal of directors /auditors from office
 Alteration of memorandum and articles
 Board of directors traditionally perform the following fines

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 Recommending dividends
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Appointing MD
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
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 Appointing CO. Secretary

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 Payment of interim dividends etc

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Generally the question as to which organ person which duty is one of interpreting the articles. If
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a company adopts table A provides that all management fines of the company shall be exercised
by the board of directors except such functions that are as expressly provided to be exercised by
general meeting under these rules or act.

The principle of division of powers is that no organ should interfere with exercise of a power
vested I one organ unless;

-the function is being exercised in bad faith

-the power is being exceeded

The power is being exercised centrally to the articles

Articles 80 of table Ahas been interpreted by courts to the effect that all fines that are managerial
are to be exercised by B.OD unless specifically provided otherwise.In scott scott the articles of
the company gave the directors power topay such interim dividends as were justified bythe
profits of the company. The directors had not paid any interim dividend when the members in a
general meeting resolved that board pays interim dividend which they declined and were sued. It
was eld that the directors were not under obligation to pay the interim dividends. The general
meeting was exercising a power they did not have.

A similar decision was made in shaw v shaw where greer L.J held ‘’ they cannot themselves
usurp the powers vested which by the articles are vested on the directors any m0ore than the
directors can usurp the powers vested by the articles in the general body of shareholders. The
principle of division of powers extends to powers not vested in either of the organs where if one
organ pupports to exercises such fines the other may not interfere with the exercise.

Despite the sharing of powers and fines the general meeting appears to be a more powerful organ
due to the following.

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i. It appoints the members of the board
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ii. It may remove any member of the board

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iii. It may exercise some of the powers of the board in the following circumstances
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a. Commencement of proceedings or litigation (process of solving dispute through court) where

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the directors fail to sue or defend the company in court in court. This power becomes exercise by
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the general meeting.

b.Ratification of abuse of power by directors, where the general meeting adopts or approves
abuse of power by the board they are said to have exercised a fine of the board

Deadlock in management where the company’s board cannot fines due to a deadlock its fines
may be assumed by the general meeting as was the case in barron vs porter.

Duties of directors

Director’s duties may be classified as statutory and common law

Statutory duties

The company’s act imposes upon the directors the following duties
  Calling of general meeting
 Ensuring preparation of financial accounts
 Appointing a M.D
 Appoint a company secretary
 Duty to ensure accounts are audited and published
 Recommend payment of final dividends

Common law duties

Directors common law duties may be divided into 2 i.e. duty of care ,skill and diligence duty of
loyalty and good faith.

1.duty of care skill and diligence

As a director one must demonstrate skill and diligence in the performance of their duties courts

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of law have set the standards to which they duty of care and skill must be discharged.
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i.e. director need not demonstrate more care and skill than it is expected of a person of his
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knowledge and experience .In re;brazilian rubber plantation and estate ltd a company incurred
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heavy losses by reason of the director purchasing rubber plantations of a poor quality. The
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directors were one deaf and dumb while the other was old blind. It was held that directors were
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not liable since a person of their knowledge and experience would not have acted otherwise. This
standard suggests that a director is not expected to have any special skill.

ii.Director’s duties are not of a continuousnature. They are to be performed at such board
meeting or committee of the board that the director happens to be placed. The director should
only awail themselves to such meetings if circumstances allow. In re;marquis of butes m became
chairman of the board at 6 months and attended one board meeting at 38 yrs.the other directors
committed impropriaties.it was held that he was not liable since circumstance did not allow him
to attend and that his duties were not of a continuous nature.

Iii.Directors are entitled to trust their employees in the absence of circumstances that put them in
doubt. In dovey v cory the directors caused the company .it was held they were not liable since
directors are entitled to trust their employees in the absence of suspicious. This standard suggests
that directors are not required to carry out any due diligence.
Duty of loyalty and good faith

Theses include;

 Duty to act bona fide

 Unfettered discretion
 Proper purpose
 Conflict of interest

Duty to at bona fide

As a fiduciary a director must always act in the best interest. Failure to observe this duty may
lead to an action against the director damages any loss incurred

b.unfettered discretion

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Directors should approach decisions with open mind. Decision and board meeting must be
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arrived at after deliberation and there should be no prior arrangements on how to vote at board
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meetings
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cProper purpose
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Powers given to directors must be exercised for the purpose for which they were given. Directors
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must not abuse powers given where the company stands to benefit. Action taken by directors in
abuse of power may be reversed or stopped.

D.Avoiding conflict of interest

As a fidiciary a director must not place themselves in circumstances where their personal interest
conflict with their duties to the company a conflict may arise in the following circumstances

i. Interest in contracts entered into companies

ii. Secret profits
iii. Conflicting directorship

Interest in contract entered into companies

Where a director has an interest in a contract entered into by a company they must disclose their
interest to the company.diclosure must be made by notice to the board. The director must
disclosure the nature of their interest if the interest arises after the 1st meeting it must be
disclosed in the subsequent meeting. After disclosing interest the director is not part of a quorum
in the meeting and does not vote on the matter failure to disclose may attract criminal liability on
part of director and entitles the companies to a recession of a contract.

Secret profit

This is a benefit enjoyed by a fiduciary ever and above their remuneration .they include secret
commission gifts, bribes etc.

Where a fiduciary receives a secret profit they may enjoy it provided they disclose it

Failure to disclose a secret profit entitles the company to recover it through an action for account.

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Secret profits include information received by directors while in office that is subsequently used
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to set up a profitable enterprise.
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To determine whether info constitute a secret profit the courts in Canadian AERO SERVICES
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LTD VS omalley and others set out the circumstances or factors to be considered in determining
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whether info received constitute a secret profit. These are:

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i. The relationship between information and the office held

ii. The degree of accuracy or specifity of the information
iii. Amount of information received
iv. The use into which the information is put
v. Reasons for quiting employment

Conflicting directorship

This arises where a person is a director in two or more competing companies. There is however
no director statutory or common authority that discourages conflicting directorships.

Qtn:The directors duty of care, skill and diligence are exceptionally lax while those of good faith
and loyalty are very strict. Discuss.
Remedies against directors for breach of duties

The company or a 3rd party may take any of the following remedy against director’s damages if
the directors by their actions cause the company any loss they can be sued for damages.

Injunctionorder: if directors are abusing the power they can be stopped or an injunction can be
obtained

Recession: if directors enter into a contract without a disclosure the company is entitled to
recession

Account: if director earn a secret profit without a disclosure they may be sued for account

Summary dismissal: if they are in violation of their term of contract under the term of service.

Company officers.

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Managing director (M.D)
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The office of MD is created by the articles of association for the purposes of interm management
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of the company. The MD is appointed by the board of directors from among themselves
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The MD plays 2 roles namely

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1. As an employee

2. As a director

The power and functions of the MD largely depend on the size of the company and term of
service contract. The BOD reserves a right to vary, alter or reserve any powers of the MD.The
board may restrict or expand such powers as was the case.

Houlds worth company ltd vs cadddies where the appelent director had been instructed by the
board to concentrate his efforts in one of its subsidiaries as opposed to the entire group.

The director took this to be a breach of a contract.however,it was held that the court had the
power to limit the fines of MD as it deemed fit .An M.D does not retire by rotation but seizes to
hold office if for any reason he seizes to be a director.
Company secretary

The office of the company secretary is created by sec 178 (1) of the act. Under 178(2) where no
company secretary is appointed the office may be occupied by a deputy or a assistance secretary
or a delegate of the board. The company secretary is the appointee of board of directors.

Qualifications of a company secretary.

To be appointed as a company secretary one must have the following qualifications

i. Be a certified public secretary in good standing with institute of certified public secretary
of Kenya (ICPSK)

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ii. Be an advocate of the high court of Kenya co
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iii. Possess such other qualifications as the company may require
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The following persons will not be qualified for appointment as company secretary
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The sole director of a company

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A company that happens to be the sole director

The company secretary is an administrativeofficer of the company the capacity to contract on

the behalf of the company on administrative issues. The company secretary is treated as a
fiduciary for liability purposes and he owes to the company such fiduciary duties as directors.

Duties of the company secretary

As an administrative officer the company secretary has he following duties

 Filing the annual return

 Is the custodian of certain document of the company
 Is the custodian the company’s common seal
 To maintain various registers of the company and facilitate their inspection,eg register
of member ,charges debenture holder etc.
  Receiving notice on behalf of the company
 To send notices of meting to members
 Counter signing company instruments
 Certifying transfers.

Organic theory.

This doctrine attempts to action of the directors to the company, it is also known the
identification doctrine. The thought and deeds of the directorsof the company are assumed to be
those of the company i.e. the state of mind of the directors is that of the company.

In Asiatic petroleum company ltdVLemnard’s carrying company ltd the directors of the
defendant company authorized a ship as fit to sail while aware that it had faulty boiler.
Whilesailing the boilers’ exploided damaging the ship and it cargo. The question was whether the
company was liable. It was held that the company was liable for the loss since it was aware of

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the faulty boilers. The court implied on the company the state of mind of its directors was
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implied on the company.

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A similar decision was made in Bolton engineering company ltd V graham son’s ltd.The parties
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had a lease agreement under which a plain tiff as entitled to a renewal provided defendants were
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not intending to occupy the premises. The directors of the defendant company had thought of
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occupying the premises but there was no BOD meeting.

At the end of year the lease was not renewed and the plaintiff sued. It was held that this did not
amount to abreach of a contract since the company had though of occupying the premises. The
state of mind of the directors was implied on the company.

In the words of lord Deming the company can in many ways be linked to human body like
human the company has a brain which is its directing mind and will. These are the directors. It
also has hands with which it carries out its fines these, theses are its servants’’

Where the company‘s directors delegate their fxns the company thinks and acts through the
delegates. However, the actions of junior officers of the company are never tobe implied on the
company.
 THE LAW OF MEETING.

The term meeting has not been defined by statute.However; courts of law have suggested that a
meeting is the coming together of more than one person. In sharp v dawes notice was given over
company meeting where only one member (silver sides) was in attendance together with the
company secretary. Silver sides sides appointed himself chair person of the meeting and went on
to pass a resolution that a call be made. The defendant failed to pay up and was sued.

It was held that the defendant was not liable since the meeting was invalid and sowere its
pupported proceedings, this case is the authority for the preposition that a meeting is a coming
together of more than one person. It therefore follows that one person cannot constitute a
meeting.

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There are however, certain circumstances where one person shall constitute a meeting.
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These are exceptions to rule in sharp Vdawes.tey include:

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Board meetings for private companies

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Where a private company has only one director that constitute a board meeting for the purposes
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of exercising the powers of the board.

Class meetings

Where all the shares in a particular class are held by one person that person constitute a meeting
of that class of shares.

Creditors meetings

If during winding up only one creditor has proved their debt such creditors constitute a meeting
for the purposes of a creditor’s meeting

Adjourned meeting
Where a company convened by directors fails for lack of quorum it is adjourned to the following
week same time, day, same place. At the adjourned meeting one member present in person or by
proxy constitutes a meeting.

General meeting convened by the registrar or under the directions of the registrar

Where a the registrar convenes or directs the convening of a general meeting, one member
present in person or by proxy constitute a meeting.

Meeting convened by court or under the directions of the court.

Where a court of law directs the convening of a general a meeting such a meeting is duly
constituted with one member present in person or by proxy.

Essentials of a company general meeting

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1. Notice co
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A company’s generalmeeting notice must be issued within 21 days of the meeting .however a
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shorter notice may be given if not less than 95% of the total voting rights agree notice for
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companies meetings must be in writing and sent to all members including auditors. The notice
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for the meeting must inform members that they may appear by proxy and attach therein proxy
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forms.

The notice of the meeting must inform the members of its agenda soas to appreciate purpose.A
member may challenge the helding of a meeting on the grounds of insufficiency of itas
agenda.The notice must indicate all special resolutions to be passed in the manner in which they
intend to pass

Notice of a company meeting may be issued by any of the following persons

 Registrar
 Director
 Directors under directions of the registrar or court
 Directors following a request by members
 Requisitionist
The notice of a company’s general meeting must contain the following

 The date of the meeting

 Place of the meeting /venue
 Agenda
 Time
 Any resolution proposed to be passed as special
 Authority issuing the notice

Chairperson

Every general meeting must have a chair person within 15 min of appointed time. Ordinarily
the chair person of the board chairs company general meetings. If absent for unwilling any
other director may chair the meeting. If no director is present or is not willing the members
will elect one of their own to be the chair person of the meeting, the chairperson exercises the

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following functions and powers.
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FUNCTIONS OF THE CHAIRPERSON

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1. Maintain order of those present at the meeting

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2. To inform himself whether the meeting is properly constituted

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3. To confirm whether there is quorum in the meting

4. To conduct voting at the meeting
5. To declare the outcome of any vote
6. To endure that minutes are kept at the meeting

NB; Functions in their nature are routine.

The powers of the chair

1. call the meeting into order

2. determining who speaks at the meeting
3. determine the length time a person speaks
4. cast a vote in the event of a tie
5. conclude discussions on point of order
 6. adjourn the meeting with the consent of the members
7. proposes amendments to resolutions

NB.Power are discretionally and will only be exercised if circumstance is justified where
chairperson become obstructive and partial members may propose a motion for his removal and
replacement.

Quarum

This is the minimum no of persons who must be present at a company meeting for it to transact
the business. The minimum no is to be provided for by the articles failing which the provisions
of the act apply.sec134 where the articles are silent for the quorum two members present in
person shall constitute quorum for public company .this is referred to as effective quorum

Ameeting that does not have effective quorum is invalid so is the supported proceedings the

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articles provide that quorum shall be essential when the meeting proceeds into business.
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This suggests that quorum will not matter in any stage in ameeting other than it beginning.
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Question.
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Notice had been given of A ltd to hold annual general meeting. The following persons were in
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attendance.

a) A member of the company appointed as chair person

b) The company secretary
c) A proxy representing D
d) A proxy representing F

The meeting resolve that Y should not be re-appointed as the auditor of the company is aggrieved
by the resolution of the general, Advice Y on the validity or otherwise of his removal

Additional.

 A limited is private company

 The articles of association of A limited are silent on the quorum.
Solution

1. There is lack of effective quorum since the proxies are not counted as members and the
only member present is the chairperson
2. Where the articles is silent and being the private company there should be 2 persons for a
resolution to be passed hence the removal of Y as auditor was invalid
3. The secretary is not counted as a member the meeting can start /proceed without them
–the resolution was invalid
–lack of quorum

Voting

Every member in a company is entitled to vote. This is a propriety interest attached to their
membership. A member cannot be denied their right to vote even where they do not agree with
the majority.

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In pentter V lushingtone the defendant the chair person was ordered to count the votes of the
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plaintiff which he declared to include since they did not agree on the way to vote during
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company meetings voting may be by way of showing hand or poll method.

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1. Vote by show of hands

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This is the common law method of voting. Unless the articles otherwise require decisions are to
be taken first by way of show of hand. By the method of voting every member is entitled to one
vote regardless of the no of shares they have

The chairperson of the meeting is excepted to conduct the voting and announce the results.

This method is considered easy and readily available and it can be used to judge or assess the
mood of the meeting.

Voting by poll

This is a vote by no of shares that one has or represents voting by poll is always by demand. A
vote by poll may be requested by;

1. Chairperson of the meeting

 2. At least 2 members present in person or by proxy
3. At least 10%of the voting rights held by members or represented by proxies

In vote by poll every share is entitled to one vote. A member having more than one share is not
under obligation to use all his shares in the same way during voting.

Proxy (ies)

a member has right to be represented at company meetings by a proxy members effect this by
filling a proxy form attached in the notice of the meeting.

Members of public company may appoint 2 or more proxies to represent them.in private
companies a member can appoint only one proxy.proxies may be classified as either special or
general.

General proxy

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This is a representative appointed with authority to vote in any manner they wish having regard
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to business at meeting.
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Special proxy
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This is a representative appointed with instruction on how to vote during the meeting
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This classification may also be applied to forms filled in appointing a proxy where we have
general proxy form and special proxy form.

Special proxy form

This is a form appointing a representative to vote in a specific way at the meeting

General proxy form

This is a form appointing a representative to vote in any way at the meeting.

A resolution

This is the way by which company meetings make their decisions. A resolution is proposed
deliberated upon and voted on There are 3 types of resolution under Kenyan company law
These are;

i. Ordinary resolution
ii. Special resolution
iii. Resolution requiring special notice

Resolution requiring special notice

This is a resolution passed by meetings summoned by a 28 day notice. These resolutions require
a simple majority of those present and voting in person or by proxy to pass. These resolutions are
not registerable by registrar. Company business that is transacted with such resolutions include;

i. Removal of a director from office

ii. Removal of an auditor from office
iii. Reappointment of a director who has turned 70yrs.

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iv. Special resolution co
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This is a resolution passed by meeting summoned by a 21 day notice. This resolution requires a
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qualified majority of 75%of those present and voting in person or by proxy to pass. This
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resolution requires registration once it has been passed. This resolution is required to transact the
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following transactions.
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 Compulsory winding of a company

 Alteration of articles
 Reduction of capital
 Company’s change of name
 Conversion of a private company into public company

Ordinary resolution

This is a resolution passed by meetings summoned by a 21 day notice though a shorter notice
may be given. This resolution requires a simple majority of 50% plus 1 of votes of those present
in person or voting by proxy to pass. These resolutions are not registerable generally. This
resolution is required when transacting the following business.

i. Adoption of accounts
 ii. Appointing of directors
iii. Alteration of share capital
iv. Appointment of auditor
v. Declaration of dividends

Types of meetings

In a company the following types of meetings may be held

1. Annual general meeting

2. Extra ordinary general meeting
3. Statutory meeting
4. Creditors meeting
5. Class meeting

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Statutory meeting co
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This is the 1st meeting of the members of the company. This meeting will be compulsory for all
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public companies. This meeting is summoned by directors whose agenda is statutory report. This
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report must be sent to members signed by at least 2 directors 14 days to the date of the meeting
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Contents of the statutory report

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1. Number of shares issued distinguishing the fully paid the partly ppaid
2. Amount received in respect of the issued shares
3. An abstract of all receipts and payments made by the company
4. A list of the directors the secretary and their particulars
5. An auditor’s report on the shares subscribed and amount received
6. An auditors’ report on the abstract of the receipts and payments
7. Details of any contract to be presented before the meeting for modification.

Director’s meeting

This is a meeting of the board members to exercise the powers vested on the board. This meeting
may be held anytime when need arises. Notices for board meetings need not be written or sent
outside Kenya for director’s resident in foreign countries.
Quorum for board meeting shall be determined by the failing which 2 director’s form shall be
quorum.

Board meetings may b held under informal circumstances provided all directors are present and
agree to transact business. Board meetings may be summoned by any directors or the company
secretary under the directions of a director.

Class meeting

A class refers to a group of shareholders hose rights are so similar that it makes it possible to
consult. A class meeting may held to consider the variation of class rights. To vary the rights of a
class the motion must be supported by atleast 75%of the members of that class. Members not
interested in the variation may apply to court to have the resolution set aside if’s

i.They are at least 15%of all the members of the class

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Ii.They did not support or vote in favour of the motion to alter the rights
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JUNE 2012Qtn1C
no
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JUNE 2012 Qtn 7

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JUNE2011Q5B
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DEC 2010Q5A

JUNE 2010 Q7B

DEC2009 Q4

AUG2009 Q6a

JUNE2009Q3

COMPANY ACCOUNTS AND AUDIT

The company‘s act requires that companies keep book of accounts in respect to the following:
 i. All purchases made by the company
ii. All sales made by the company
iii. All receipts and payments
iv. All assets and liabilities of a company

It shall be deemed that no book have been kept if they do not reflect atrue and fair view of the
affairs of the company. The directors must prepare the following

a. Balance sheet
B.profit and loss account

These statements are to be prepared in accordance with the provisions of the act and all relevant
financial accounting and reporting standards e.g IFR,IAS.

Balance sheet

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The report reflects the financial position of the company in respect to its assets and liabilities asat
s.

the last day of the accounts.

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Income statement
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This report is preparared in respect of all revenues and expenditures of the company for the
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reporting year .the income statement show the following:

 Sales
 Purchases
 Opening stock
 Closing stock
 Incomes
 Expenses
 Net profit

Group accounts.
 Under sec 150(1)of the act the directors of the holding company must ensure that the
financial statements made before the A.G.M including those of its subsidiaries and other
related companies
 these accounts must reflect the financial position of the group
 The directors need not prepare/cause the preparation of group A/c if they are of the
opinion;
 if the consolidation may involve the delay
 where it is practically impossible to consolidate the account due to different reporting
formats
 where the results add no real values to the members due to the insignificant figures
involved
 where the results may be misleading
 Where the consolidation may be harmful to the business of either the holding company or

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the subsidiary. co
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The consolidated financial statements will include

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consolidated balance sheet

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
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 Consolidated profit and loss a/c

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Director report

Under the act financial report to be laid before the AGM must be accompanied by a director’s
report indicating

i. The amount of dividend they have recommended as payable (final dividend)

ii. The amount they have resolved to transfer to reserves.

Audit of account

Public company are required to audit their annual account before their presentation to the A.G.M

The audit function is carried out by an independent firm appointed by the company or the
registrar.

Appointment of the auditor

i.1st auditor

The 1st auditor of the company may be appointed by the directors at any time before the 1st
A.G.M

This auditor shall hold office until the conclusion of the 1st A.G.M.This auditor will be deemed
re-appointed for a 2nd term if there is no resolution passed appointing someone else as auditor.

Casual vacancy

Under the act, auditors may within the contractual period cease to hold office in which case the
directors may fill the casual vacancy arising.

Re-appointment of auditors

Under the act, a retiring auditor shall be deemed to be re-appointed without any resolution being

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passed unless. co
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i. He is not qualified for re-appointment

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ii. A resolution has been passed at the meeting appointing someone else as an auditor
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iii. A resolution has been passed at the meeting not appointing him as an auditor
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iv. Auditor has given notice in writing of his unwillingness tobe re-appointed.
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Remuneration of auditors

-Auditors remuneration is fixed by the appointing authority i.e. remuneration payable to an

auditor appointed by a director or the registrar is determined by directors or the registrar
respectively. In all other cases the auditors remuneration shall be fixed by the company in a
general meeting or in such other manner as the company may determine at a general meeting.

Qualification /disqualification of an auditor

The following persons are not qualified to be appointed as auditor of a company

1. Any person who does not hold a valid practicing certificate. This is requirement of
accountant act that auditors must have a valid practicing certificate.
2. An officer or servant of the company. He
 3. cannot be because he has an interest in the company of which his decision can be
compromised
4. A person who is a partner of or in the employment of an officer or a servant of the
company. The partner or servant may be influenced hence affecting their independence.
5. A body corporate. This is because a company enjoys a limited liability and is unable to
give an opinion.
6. A person disqualified as an auditor of the subsidiary or holding companies are
disqualified to act for each other. This is because the holding company of subsidiary
company is financial relative.

Duties of the auditors

An auditor must in his report give an opinion in respect to the following

i. Whether has obtained all the information and explanations that are necessary for the

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purpose of the audit
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ii. Whether in his opinion proper books of accounts have been kept by the company
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iii. Whether the balance sheet and P&L account are in agreement with the books of
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account
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iv. Whether to the best of his knowledge the accounts give all the information required
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by the act.
v. In case of a holding whether in his opinion group account have been properly
prepared and that they give a true and fair value of the affair of the company

Rights /powers of the auditors.

1. Right to access at all times the books and accounts of the company
2. Right to call on any officer of the company for any information and explanation that is
necessary for the performance of his duty.
3. To attend any general meeting of the company
4. To receive all notice and communication relating to the general meeting which any
member of the company is entitled to receive
5. He is entitled to attend and be heard at any general meetings which concern him as an
auditor.
6. Removal of auditors

Notice of intention to remove the auditor is sent to the company. The notice is then served to
the auditor himself who may make written representations as his defense to has removal.

The company must send a 28 day notice to the member of a meeting to consider the removal
of the auditor

The notice must indicate whether the auditor has made representation or not

The auditor representations may be attached to the notice if they are of a reasonable and they
have been received in good time.

At the general meeting convened the auditor is entitled to have their representation readout if
they were not sent to members. The meeting then proceeds to vote on the motion and if the
required majority is achieved the auditor is removed.

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co
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Dec 2011 Q7b
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June 2013 Q6c

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June 2011 Q 7c
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June 2010Qtn 7

Dec 2010 Q7

Aug 2009 Q6

Investigation of company’s affair

Company affairs may be investigated by the registrar or an investigation appointed by the

registrar or an investigator appointed by court of law.

INVESTIGATION BY THE REGISTRAR

The registrar may commence an investigation following any if the pursuant following
circumstances
1) Non-compliance with the provision of the act.

If the registrar has a reasonable cause to believe that certain provisions of the act are not
being complied with he may initiate an investigation by a written order.

2) Incomplete documents

If a document submitted to the registrar in compliance with the act does not disclose all
matters that it relates to the registrar may initiate an investigation

3) Ownership of shares or debentures

If the registrar has a good reason he may appoint one or more competent investigators to
investigate and report on ownership of shares/debentures or the registrar may demand
explanations from the persons who deal in relations to the shared debentures.

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Investigation by an investigator appointed by the registrar
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If the registrar has a good reason he may appoint one or more competent investigators to
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investigate and report on the membership of the company for the purpose of determining the
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following:
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 Persons who are financial in the success /failure of the company

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 Persons who control the company

 Persons who influence the policy of the company

Investigation by an investigator appointed bythe court

Company affairs may be investigated by the court in the following circumstances

I.Application by members

An application may be made by not less than 200 members or 10%of the issued shares to
have the company investigated y the court. This application must be supported by sufficient
evidence to justify the investigation

Special resolution
 The court may appoint one or more investigators if the company has passed a special
resolution to have affairs to have its affairs investigated.

Powers of the investigator

1. To investigate related companies

2. To call upon officers or agents of the company to provide materials necessary
for the investigation
3. To administer oath
4. To examine witness an oath
5. Apply to the court for witness to give evidence in a court of law.

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Causes of action
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If the court of the opinion that investigation discloses cause of action a copy of report will be
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handed to the DPP who may take the following actions

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Criminal prosecution
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If the DPP is certified that an offence has been committed and there is sufficient evidence he may
institute proceedings

Petition for winding up

If the DPP is certified that the company ought to be woundhe may present a winding up petition
in court

Civil proceedings

A civil case /sit may commence to recover any losses suffered by the company or the 3rd parties.

Expenses.
Expenses incurred during the investigation are in the first instance deprayed (accrued cost of a
legal proceedings) by the registrar who must be reimbursed by the any of the following persons
as appropriate

i. Any person who is convicted after prosecution by the DPP.

ii. Any person who is held liable following the civil suit
iii. The company in whose name the proceedings is instituted. If no person is convicted or
held liable the reimbursement must be made
-the company delt with the report
-Applicants for the investigation

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The annual return

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Every company must make a return every year to the registrar

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Annual returns for companies with a share capital

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These companies must make a return in respect to the following

i. The location and address of the registered office

ii. The register of members
iii. The register of charges
iv. The register of debenture holder
v. The register of directors and secretary
vi. A statement of the total indebtness of the company

Return for companies not having a share capital

These companies must make a return in respect to the following

1. Location and address off the registered office

 2. The location an address of the registers of member, director and secretary, charges and
debenture holders if not kept at the registered office.
3. A statement of the total indebtness of the company

Annual return for private company

Directors as well as the secretary of a private company must with the annual return attach a
certificate to the effect that the company has not in the previous invited the public to subscribe to
their shares or debenture. If the membership of the company exceeds 50 the directors must issue
a statement confirming that the extra members are or have been employees of the company.

The annual return is to be made within 42 days after the AGM. Third return must be
accompanied by following documents.

i. A copy of the balance sheet laid before the meeting

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ii. The directors report co
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iii. The auditor’s report
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NB:If any of the above documents is in foreign language a certified translation into English
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must be provided.
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Financial crimes
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This refers to prohibited conduct in relation to the management of companies. These crimes
includes

i. Insider dealing
ii. Money laundry
iii. Fraudulent trading
iv. Wrongful trading
v. Wrongful declaration of solvency
vi. Misfeasance
vii. Malfeasance

Insider dealing
Thisis the dealing in price affected securities while in possession of inside information as an
insider. Insider dealing also encourages another to deal, insider dealing constitute the following
elements

-dealing plus encouraging to deal

Price affected securities

Inside information

Insider

DEALING

This is he buying, selling or agreeing to buy or selling sensitive securities by one self of through
an agent.

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Price affected securities
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The subject matter of the dealing must be securities whose price is sensitive to information
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examples shares, debentures etc.

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Inside info
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This is info that has an effect on security prices that has not been made public through formal
channels

Insider

An insider can either be primary or secondary. A primary insider is one who obtains the info y
reason of their engagement with the company by employment or provision of services

Secondary insiders are insiders who receive info from primary insider or other secondary insider

Encouraging another to deal includes

i.passing on the inside info to another person

Counseling advising another person to deal in the securities without disclosing the info
Encouraging another to deal shall be criminal irrespective of the fact the recipient does not
understand info to be inside or does not deal in the security.

QUESTION.

William Rut is the director and CEO of PEV Ltd.the Company’s board has resolved to acquire
ICC ltd a competitor in six month time. William Rut disclosed this plan to his investment partner
freedom Kenyatta who promises to buy as many as his savings could allow. As a good friend
freedom Kenyatta emailed radio sang the details of their conversation with William Rut.
Comment on the possible liabilities of the following persons in relation to insider dealing

 William Rut
 Freedom Kenyatta
 Radio sang

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Additional info the names co
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MONEY LAUNDRYING
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This is the cleaning of money obtained from criminal activities such as

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i. Joining al-shabab
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ii. Robbery
iii. Smuggling
iv. Privacy

Money laundry involves the following steps

i. Placement-thisis the initial investment of the proceed of criminal activities into a

legitimate business.
ii. Layering-this involves moving money from one business to another in an attempt to
conceal it a source
iii. Integration-These are attempts to gain acceptance as a legitimately wealthy person
liability for money laundry has 3 aspects
a. Laundrying
b. Concealing laundrying
 c. Tipping off a money laundry suspect

Fraudulent trading

This is conducting of the affairs of the company in a manner that is intended to defeat the interest
of the creditors of the company some other person e.g. disposing of an asset is a subject matter of
a charge

Wrongful trading

This is increasing of the company’s indebtness in circumstances where the company officers
know or ought to know that the company cannot avoid windingup. This includes engaging in
activities such as hiring more staff, obtaining more loans, increasing of salaries while the
company facing liquidation.

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co
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Faulse declarations of solvency
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In a membervoluntary winding up the directors make a declaration to the effect that the company
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is able to pay all its creditors in a period not exceeding 12 months. These declarations mean
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creditors play a part in the winding up process. If their declarations turns out to be untrue the
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creditors are likely to have been unfairly prejudice for which the directors issuing the declaration
will be personally liable.

THE MAJORITY RULE AND MINORITY PROTECTION (THE RULE IN FODSSEV

HURBO TTLE)

- companies are treated by laws as democracies and therefore the majority are expected to
be the decision maker
- At the sometime the law guides against the rights of minority of group from violation,
resulting from the powerful decision power of the majorities. This is explained in the
decision in fosse v harbottle and its exceptions.
- In the case the director of the company were accused of purchasing a piece of land at an
expensive price at the company general meeting, the members were not keen in taking an
action against the director ,two majority shareholders fosse entitled took to court and sue
 harbottle and the other directors for embezzling company money. It was held that the two
has no focus standing to sue on the behalf of the company; wherever the companies’
rights are violated the company is primafacia the proper plaintiff for redress. This is the
majority rule

These rules are justified on the following grounds

1. To prevent a multiplicity of case-placing the right to sue of the company alone avoids
a situation where numerous cases would have filled against the same person over the
same subject
2. Futile actions cases filled by persons with no focus/standing ground are bound to fail
3. The upholding of the principle of corporate personality. Companies are separate from
their members and managing and as such they a right to sue and to enforce the rights
4. Companies are democracies in democrats the majority have their way therefore in

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companies as well the majority are the decision maker.
co
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5. This rule does not hold in the following circumstance. They are the exception to the
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rule in
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Foss v harbotte
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i.personal actions-where person rights have been violated the victim may take out a personal
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action against the wrong doer where such is the majority examplesof personal right include right
to vote ,right to participate in election or right to receive declared dividend .in

Pends Vs Lushington the defendant, the chairman was ordered to count the votes of he plaintiff
minority

ii.Qualified majority where the articles or the act require companies to pass certain decision by
specific majority any minority may go to court to oppose a violation of the special majority e,g a
decision to change company’s name require 75%majority .Any losser majority pupporting to
change the name may be successfully opposed by any minority.

iii.Ultra vives-where a company is about to or engaging in ultra vives transaction any member
may take out a derivative action to remedy/stop the company
Operation of minorities-if any decision taken by the company unfairly prejudices the interest of
the minority such minority may take out a derivative action against the company.

Derivative action

-this is a device that enables persons to take actions to remedy wrongs done to the company in
circumstances where the company is not in a position to enforce them. Derivative action has the
following characteristics

- They are representative in nature. They are taken on behalf of the company
- Wrong does must be in control, the circumstances should be that that the company is
unable to enforce its rights
- The company should be a nominal defendant this enable it to benefit from any order that
may be given by the court
Dominus litus-even though this action is taken on behalf of the company it remains the
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plaintiff case and he has the right to proceed negotiation out of court or withdraw the
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case.
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WINDING UP
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This is the legal process by which the company’s existence is brought to an end, its assets
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realized,its debts are settled and any surplus distributed to members ratebly.This also refer to
the process by which the management of the company is removed from the directors and
placed under the liquidator for purposes of collecting in assets all the liabilities and
distributing the reminder to its members

The act recognizes the 3 modes of winding up a company

- Compulsory winding up/winding up by the court

- Winding up subject to the supervision by the court
- Voluntary winding up

Winding up by the court (compulsory winding up)

The winding up process is commenced by a petition to the high court.Sec 219 of the act sets out
the circumstances under which a company may be wounded by court. These include:

i. If the company has b a special resolution resolved that it be wound up by the court
ii. If the company has failed to hold a statutory meeting in accordance with the act
iii. If the company has failed to deliver a copy of the statutory report to the registrar
iv. If the no of members has fallen below the statutory report to the registrar
v. If the company has failed to commence business within a gear of incorporation
vi. The company has suspended its business for whole year
vii. The company is unable to pay its debts
viii. If the winding up proceedings have been commenced outside Kenya for a company
incorporatal outside Kenya
ix. If the court is of the opinion that it is just equitable to wound up the company

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A winding up petition may be filed by any of the following
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a) The company
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b) Creditors
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c) Contributory(s)
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d) Member other than a contributory

e) DPP
f) Official receiver
g) The commissioner of insurance.

Petition by creditors

A creditor may petition for winding up if a company is unable to Pay its debts. a company is
considered unable to pay its debts if

i. If a debt of ksh 1000 or more remains unpaid 3 weeks after demand

ii. A judgment decree order within a judgment against the company is returned unsatisfied
or partly unsatisfied.
 iii. Having regard to prospective and contigent liabilities it is possible to conclude that the
company is unable to pay its debts.

Petition by a contributory

This is any person who is liable to contribute to the assets of the company in the event of
winding up. They are members with amounts outstanding on their shares. At common law every
contributory as a right to petition for a winding up. The right cannot be taken away by the court.

Petition by a member other than a contributory

This is a fully member .AT common law such a member has a no locus/reason standing to
petition for winding up.

However a petition by such a member may be sustained if it is proved that

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The member has sustaintive interest in the company co
s.

After the company’s affairs are wound up there would be a surplus available for distribution.
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Winding up under just inequitable ground.

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a company may be wound up by a court on other grounds other than those specifically set out in
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the act if the court is of the opinion that it is just an equitable to do so courts have considered the
following circumstances as just an equitable

1. Fraudulent/illegal

Courts of law have wound up companies on just an equitable ground if proved that they were
formed to pursue a fraudulent or illegal purpose

2.Failure of substratum

If the company’s main objective can no longer be achieved the company may be wound up on
just an equitable ground. In re German date coffee ltd the company had been formed with the
intention of acquiring patent from German to manufacture coffee from.
The company failed to acquire the patent and a shareholder petitioned for winding up it was held
that it was just an equitable ground to winding up the company.

3.Loss of confidence

A company may be wound on just an equitable ground if members have justifiably last
confidence in the manner in which its affairs are being managed in Loch Vjohn Black wood the
company was wound up despite being profitable since the trustees who van the company were
not accountable to beneficiaries

4. If the company is bubble

If it is evident that there was no bona fide intention to discharge the declared objects of the
company may be wound on just equitable grounds.

5. Oppression of minority

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If the affairs of the company are carried out in manner oppressive to any part of the member
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including the petitioners the company may be wound on just an equitable ground.
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6. Exclusion from management

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Courts have ordered the winding up of companies if it is established that the petitioner has been
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unfairly expelled from the company’s affairs in Re -Westbourne Galleries ltd a partnership of 3
partners was partners was converted into company where 2 partners became its directors they
increased their salaries and bonuses as directors. They increased their salaries and bonuses as
directors and never recommended any dividend. The excluded member petitioned for winding up
on just an equitable ground and the court allowed it.

7. Deadlock in management/membership

It is just an equitable to wind up a company if its board of general meeting cannot fix due to a
deadlock. In re yenidje tobacco company ltd 2 tobacco manufacturers Rothman and weiburg
merged their businesses and converted it to a company. There were the only shareholders and
directors. The 2 constantly quarreled and did not inmany times agree weiburg petitioned for
winding up on just an equitable grounds and the court granted it. While hearing the petition
thecourt has the following powers;

a) Adjourn the hearing

b) Make interim orders for preservation of assets
c) Any other order the company may dean fit.

Consequences of a winding up order

Once a winding up order has been made the following consequences flow.

1. The company ceases to carry on business except such that is necessary for winding up
2. Any disposition of the company property or transfer of shares is void
3. Any attachment or exclusion orders against the company assets is void
4. All legal actions by or against the company are staged i.e. stops

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5. Directors powers becomes funtus officio(no longer exercisable)
co
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6. The official receiver in office becomes the provision al liquidator if no other is appointed
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bythe court
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7. All employees of the company are ipso facto on that fact)dismissed .Those who continue
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to render service are in a new contract with the liquidator

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8. All floating charges of the company crystallize.

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The winding up process

A court’s winding up begins with a petition to the high court to winding up the company in
question. The petition is heard where the court may grant the winding up order.

The official receiver becomes the provisional liquidator

The provisional liquidator summons separate meeting of creditors and contributies to determine
whether an application will be made to the court to appoint a liquidator.

These meeting also nominate their representatives to the committee of inspection.

If the meetings resolve not to apply to the court for the appointment of the liquidator the
provision liquidator becomes the official liquidator becomes the official liquidator.
Liquidator

This is a person appointed to collect the company’s assets realize them make good all liabilities
and distribute any surplus to members.

Appointments of a liquidator

The law does not prescribe the qualifications a person must have to be appointed as a liquidator.
However the act disqualifies a body corporate from appointment.

In a winding by the court the official receiver is the liquidator or some other person appointed by
the court on application

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In a members voluntarily winding up the liquidators is appointed by the members
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In a creditors voluntary winding up he may be appointed by;

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i. Members
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ii. Creditors
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iii. Members and creditors

iv. The court on application

In a winding up subject to the supervision of a court he may be appointed by;

i. Members
ii. Creditors
iii. Members and creditors
iv. Court on application

Duties/obligations of the liquidator

i. He must act bona fide for the benefit of the company and all other interested parties
 ii. He is bound to exercise unfetted discretion
iii. He is bound not to abuse powers
iv. He must avoid any conflict of interest
v. He must exercise discretion personally unless jointly appointed
vi. He must take control of the company’s assets
vii. To realize the company’s assets
viii. To keep proper books of account
ix. He must ensure minutes are kept in creditors and contributories meeting
x. To exercise a reasonable degree of care and skill
xi. Pay money received into appropriate winding up account.

Powers of the liquidator

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The powers exercisable by the liquidator can be classified into 2 I.e. powers exercisable with the
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sanction of the court/committee of inspection and those exercised without sanction.

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Powers exercisable with the sanction

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i. To bring or defend legal actions n the name of the company and behalf of the company
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ii. To carry on the business of a company as far as may be necessary for beneficial winding
up.
iii. To engage an advocate to insist him in the performance of his duties
iv. To pay any class of creditors in full
v. To make compromise with creditors or persons claiming to be.
vi. Compromise al calls or liabilities on calls.

Powers exercisable without sanction

1. To sell movable or immovable assets of a company

2. To execute deeds in the name of and on behalf of the company
3. To make or endorse negotiable instruments in the name and on behalf of the company
4. To run, prove and claim in the bankruptcy of a contributory or debtor
5. To take out in his name letters of administration on a deceased contributory or debtors
 6. To raise money on the security of the company’s assets
7. To appoint agents to perform tasks that they cannot do.

Committee of inspection

This is a committee consisting of creditors and contributories. it characterizes a winding up by

the court and a creditor voluntary winding up.

In a winding up by the court this committee may be appointed by the court if the creditors and
contributories make an application

The creditors nominate not more than 5 of their own to become members of the committee while
the members nominated not more than 4 to become members of the committee

The responsibility of the committee is to assist the liquidator in the conduct of the winding up.
This committee has the following powers

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1. Sanction the exercise of powers bythe liquidator
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2. To fix the liquidator’s remuneration in a creditors voluntary winding up

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3. To sanction the continuation of directorship ,after the appointment of the liquidator

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4. The committee must meet as often as possible but at least once every month.
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Their meetings may be summoned by any member of the committee or the liquidator
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this committee acts by a majority in making a decision.This committee is empowered to

actnot withstanding a vacancy in the membership as long as 2 members are present .A
person mya cease to be a member of a committee in the following ways.

i. Registration b written notice to the liquidator

ii. If a member absents themselves from 5 consecutive meeting of the committee
without the leave or permission of the persons they represent
iii. If he is removed by an ordinary resolution of the group he represents
iv. if the member declared bankrupt by court of law
v. If the member dies
vi. If the member becomes insane as declared by the court of law
Once the company’s affairs are fully wound up the liquidator applies to the court for a
dissolution order as well as a release. This application must be accompanied by the winding up
accounts of the company. If no objections to his release is made the court may grant the
resolution order

A copy of the resolution order must be delivered to the registrar within 14days.

Question

1a Identify five grounds on which a company may be wound up by a court of law (10MKS)

b.outline the conditions that a contributory must meet in order to petion for the winding up of a
company (6mks)

C.Differentiate between liquidation and dissolution (4mks)

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2.Identify 3 circumstances under which a company would be considered as being unable to pay
co
s.
its debts (6mks)
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b.Outline the procedures that is followed in a compulsory winding up of a company (14mks)

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3.Identify 5 powers a liquidator exercise without the approval sanction of the court(5mks)
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Identify the roles of the following in a compulsory winding up

i. The court (5mks)

ii. The official receiver (5mks)
iii. The liquidator (5mks)

4.Courts of law may wind up a company in circumstances that are just and equitable highlight 5
circumstances under which courts of law have wound up companies on just and equitable ground
using case law where applicable (10mks)

b.identify 5 grounds on which a member may cease their membership to the committee of
inspection (5mks)

c.State 5 consequences of a winding up order against a company

Voluntary winding up.

This is the winding of a company at the instigation (start) of member. The winding up
commences on the date of the passing of the resolution for voluntary winding up

A voluntary winding up may be making by creditors or members.

Grounds for a voluntary winding up

1.Lapse of time

Where the articles suggest that business of the company should be run for a specified duration
members may pass a resolution to windup at the expiry of the such date

2. Occurence of an event

Where a particular is contemplated by the articles as capable of terminating the existence of the

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company members may pass a resolution to wind up
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s.
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Member’s voluntary winding up

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This is a voluntary winding up of a solvent company which is initiated by members by passing a

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resolution for voluntary winding up. It is conducted by members exclusively and the liquidator is
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answerable to them

Declaration of solvency

This is a statutory declaration made by directors or a majority of them at a board meeting and a
prescribed form to the effect that they have made a full inquiry into the affairs of the company
and are of the opinion that it is in a position to pay its debts full within a specified period not
exceeding 12 months from the commencement of winding up.

For this declaration to be valid I must meet the following conditions

It must contain a statement of the assets and liabilities of the company as at the last date of
accounts

It must be made within 30 days immediately proceeding the commencement of winding up.
A copy must be delivered to the registrar for registration before the date commencement process
A declaration of solvency is sworn evidence that the company in liquidation is solvent. A director
who makes this declaration without having reasonable ground for their opinion commits a
criminal offence.

Thewinding up process

1. A declaration of solvency must be made bythe directors within 30days immediately

proceeding the passing of the resolution voluntary winding up
2. Passing of a special resolution for a voluntary winding upthe meeting of members having
passed the resolution for voluntary winding up must appoint a liquidator
3. The liquidator must then enter upon his duties without unreasonable delay-should the
winding up process exceed 12 months the liquidator must within 3 months after the
expired year convene a meeting of member and lay before the meeting an account of his

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dealings within the last year. This procedure is to be repeated every other year the
co
s.
winding up continues
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4. Once the winding has been concluded the liquidator must summon the last meeting a of
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members and lay before it the winding up account. These accounts must be filed with the
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registrar within 14days of the last meeting.

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5. The company is deemed dissolved 3 months from the days of filing an account to the
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registrar. However the dissolution may be postponed by an application to the court by the
liquidator or other interested party.

Creditors voluntary winding up

This is the voluntary winding up of an insolvent company. Although it is initiated by

members it is conducted by both members and creditors who appoint the liquidator

There is no declaration of solvency

The winding up process

The board of directors summon separate meeting of members and creditor on the same or one
after the other. The members meeting has the following agent
 1. To pass a resolution for voluntary winding up
2. To nominate a liquidator
3. Nominate member to a committee of inspection

The meeting of creditors which is chaired by a director has following objectives

 Receive a full statement of the financial position of the company including a

list of all creditors and amounts owed to them
 Nominate a liquidator
 Appoint representative to the committee of inspection

If both meeting nominate the same person as the liquidator that person becomes the official
liquidator. Ifthe 2 meetings nominate different persons the creditor nominee has priority and shall
assume office as liquidator. The members apply to court for the appointment of other persons as
liquidator or the appointment of joint liquidator.

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co
s.
This right to apply is also extended to the director of the company
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no

Once the liquidator is appointed the directors powers become functus officio
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The liquidator must enter upon his obligation without a due delay and commence the winding up
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process
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If the winding up process continues for more than a year the liquidator must within 3 months
after expiry of the year convene meetings of creditors and members and lay before them a
account of his dealing during the past 1 year.

This procedure must be followed every other year the winding up continues.

Once the winding up affairs are fully wound up the liquidator must in gazette or some newspaper
circulating in Kenya summon the last meeting of members and creditor and lay before them the
final winding up accounts

The liquidator must then within 14 days of the final meeting before the registrar a copy of the
final account
The company would be deemed dissolved after 3 month of deposition of the final accounts
however, the dissolution may be postponed by an application to the court by the liquidator or
some other interest party.

Quiz.

5a.Outline 5 differences between a member voluntary winding up and a creditors voluntary

winding up.(10mks)

b.define a declaration of solvency and explain 3 condition that it must meet for it to be valid.
(6mks)

c.hightlight the powers of the committee of inspection in a creditors voluntary winding up

(4mks)

Winding up under supervision of the court

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co
s.
This is a hybrid winding up with the liberty of the parties to apply to the court. The act allows
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interested parties to make applications to court for the protection of their interest. This
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application may be made by

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i. Creditors
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ii. Members
iii. Directors

An interested party may apply to the court for the appointment of an additional liquidator. The so
appointed liquidator has the same powers and duties as the liquidator appointed by members and
creditors. This method of winding up has 2 advantages

Interested parties may make an application to the court for preservation of their interest

It introduces independence in the office of the liquidator by the appointment of an additional

liquidator.

Priority of debts

Priority of claims
1.All costs and expenses properly incurred winding up including the liquidator remuneration

2.Preferential claims

i. All taxes and local rats in arrears for not more than 1 year
ii. All government rent in arrears for not more than 1 year
iii. Wages and salaries of any servant of the company excluding directors for service
rendered during 4 months proceeding winding up.
iv. Any amount payable under the workman’s injuries and benefits act
v. Any amount payable under the NSSF and NHIF acts

3.Secured creditors

4.Ordinary creditors

5.Any balance is fairly distributed to members

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co
s.
Liability of past members
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no

In any winding up past and present are liable to contribute from the payment of the debts and
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other liabities of the company. This contribution is subject to the following qualifications
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/exceptions.
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i. Past member is not liable to contribute if he case to be a member for 1yr or more before
the commencement of winding up.
ii. Such a member is not liable to contribute for the debts and liabilities contracted after he
ceased to be a member
iii. A past member cannot be called upon t contribute unless it appears to the court that the
existing members are unable to contribute unless it appears to the court that the existing
members are unable to contribute
iv. In the case of a company ltd by shares a past member can only be called upon to
contribute up to to the amounts that are outstanding on the shares
v. In the case of a company limited by guarantee a past member can only be called upon to
contribute amount he undertook to contribute if the company was wound up during his
membership[p[ or within 1 year of cessation of membership.
CO-OPERATIVE SOCIETIES

A co-operative society is a form of a business association formed under the provisions of co-
operative society act.

This association comprise of person of similar economic or social interest who come together to
better their welfare

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co
s.
Principles and values of co-operative societies
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1. Voluntary and open membership

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The membership of a co-operative society should not be restricted to qualifying person

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2. Democraticmember control

Decisions of the co-operative society are to be made by members at the general meeting

3. Member economic participation

Members should make contributions to the co-operative by purchasing capital

4. Autonomy or independence

Co-operatives are independent association that are controlled by their members

5. Education and training

Co-operative are to advance knowledge and skill to their members

6. Co-operation among co-operative

To strengthen co-operatives movement there should be a relationship amongst co-operative
societies

Types of co-operative society

A Kenya has 3 ties co-operative structure.constisting of the following

 primary co-operative
 co-operative union(national corporation union)
 the apex society

Primary society

This is a co-operative whose membership is restricted to individual personsthis society must

consist of atleast 10 persons qualified for membership of the society .this qualifications may
include:

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co
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i. the person must be 18yrs and above
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ii. if their employment or occupation falls within the category for which the society is
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formed
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iii. The member must be a resident within the society area of operation.
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Co-operative union

This is a co-operative society whose membership is restricted to primary societies

A co-operative union must comprise of at least 2 registered primary societies

A majority of co-operative union are engaged in a provision f specialized service e.g.banking,

insurance

Apex society

This is a society formed at the national level by an association of at least 2 primary societies. It
represents the interest of the primary society at the national level.

Registration of co-operative societies

Co-operative societies are to be registered with the officer of the commissioner of co-operative
societies. To register a co-operative an application must be made to the commissioner in a
prescribed form. This application must be duly signed by

i. At least 10 persons who qualify for membership in respect of primary societies

ii. At least 2 persons duly authorized to act on behalf of 2 primary co-operative societies in
respect of co-operative union as well as apex society
iii. This application shall be accompanied by 4 copies of the proposed by laws of the society.
The by laws must be in the English language
iv. If the commissioner is satisfied that the provisions of the co-operative act and the
society’s ny laws have been complied with he may register the society and its by-laws
v. The commissioner is empowered to provisionally register a co-operative for not more
than a year if he is of the opinion that it has not fully complied with the act and its by-
laws

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co
s.
NB.The secretary must take all necessary steps to ensure compliance by the expiry of the one
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yr period.
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Once the co-operative society has been registered it becomes a body corporate by the name
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under he name which it is registered

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The following results from registration of a corporate

 Corporate legal entity

 Separate legal entity
 Can own property in its own name
 Can sue or be sued in their own name
 Has common seal
 Capacity to contract
 Perpetual succession
 Enjoy limited liability

Management of co-operative society

The management of co-operative societies is carried out by 2 organs

  General meeting of members
 Management committee

General meeting

This is the general body of members that comprises of the members of the society.

Co-operatives may have the following meetings

 General meetings
 Annual general meetings
 Special general meeting

a. General meeting

Every society should hold a general not later than 1 month after receiving a certificate of

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registration. This meeting transacts the following businessco
s.

i. Elect office bearers of the co-operative society

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no

ii. Determine the maximum borrowing powers of the society

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iii. Consider and approve estimates of income and expenditure for the coming year
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iv. Appoint the society bankers and auditors

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v. To make other decision that relate to matters from the registration of a society

b.Annual general meeting

After the 1st yr of existence a society should hold an A.G.M within the 4 months after the end of
the financial year at the A.G,.M the following business is transacted.

i. Consider and confirm previous minutes of the last A.G.M

ii. Consider any report of the committee or the commissioner
iii. Considering and adopting audited accounts
iv. To determine the manner in which any surplus would be distributed or invested
v. To elect the society officer bearers for the following year.
vi. Appoint an auditor for the following year.
vii. To transact any other business that the society is allowed by its by-laws.
SPECIAL GENERAL MEETING

This is a meeting of the members that may be held any time within the year to transact affair that
may not wait for AG.M such as

Change of name

Amendment of by-laws etc.

This meeting may be convened by the committee; committee upon receiving written notice from
members, members after the committee has failed to honour the notice and the notice.

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co
s.
THE COMMITTEE
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no

The committee is responsible for the day to day running of the co-operative society
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These committees consist of not less than 5 and not more than 9 members. This committee shall
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have its function.

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i. Contracting on behalf of the society

ii. Instituting legal proceedings on behalf of the society
iii. Run the operations of the society
iv. Doing any other thing towards achieving the society’s objectives

The following restrictions apply in becoming a member of the committee

1. One must not be a member of another co-operative society

2. One must not be less than 18 years of age
3. On e must not be unable to read and write
4. One must not be a member of a committee of another co-operative society
5. One must not be an undischarged bankrupt
 6. One must not have been adversely mentioned in an enquiry report conducted by the
commissioner
7. One must not have an uncleared debt owing to the society
8. One must not have been convicted for an offence under co-operatives act.

QUIZ..

1.Identify 5 differences between a co-operative society and a company.(10mks)

Rights of a member of a society

i. Rights to receive notice of society meeting

ii. Right to attend meeting of the society
iii. Right to vote at the society’s meeting
iv. Right to be elected into office or any office of the committee

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v. Right to enjoy the facilities of the society co
s.
vi. Right to accurate information concerning the society affairs etc.
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no

Settlement of disputes in a co-operative society

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kn

Disputes may at rise from;

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1. Present and past members

Present members and persons claiming through deceased members

The society and other society

Disputes may be referred to the co-operative tribunal. This tribunal is established by the co-
operative society’s act. Its membership comprises of the following.

i. A chair person and a deputy chair appointed by the minister on recommendation by the
judicial service commission
ii. An advocate of the high court of Kenya appointed by cabinet secretary on
recommendation by the L.S.K
iii. 3 other persons appointed bythe cabinet secretary being persons with more than 10years
experience in the management of co-operatives.
NB;A person will cease to be a member of co-operative society if

 He dies if a member dies

 Bankruptcy
 Insanity
 Resignation by a member
 If a member absents themselves from 3 consecutive settings without reasonable reasons
 If a member is removed by the cabinet secretary on account of inability to perform
 If a member to any position that would have made them ineligible for appointment
 If they were not member in the tribunal.

Dissolution of co-operatives

A co-operative society can be dissolved by an order of the commissioner after receiving an

application made by at least ¾ members of the co-operative. The order must be in writing and

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co
will subsequently lead to cancellation of the registration; once the registration is cancelled the
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society ceases to exists.

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no

Grounds for dissolution

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i. When the society has less than the prescribed number of minimum members
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ii. Where the society has failed to make returns to the commissioner for more than 3 yrs
iii. Where the society has failed to achieve its objectives
iv. On the basis of a recommendation made following enquiry. The commissioner will
appoint a liquidator who will be in charge of the winding up process.

Powers of the liquidator

1. To appoint a day on which the creditors are to prove the debts

2. To institute or defend any legal action by or on behalf of the society
3. To appoint an advocate to assist in the discharge of his duties
4. To refer disputes to co-operative tribunal
5. To determine contribution to be made by members and past members of the society
6. To investigate any claims against the society
7. To call meetings of members and creditors as may be necessary
 8. To carry on the business of the society as may be necessary for proper winding.

Powers of a commissioner during winding up

1. To rescind (reverse)or vary any order made by the liquidator

2. To remove the liquidator and appoint a new liquidator
3. To limit the powers of the liquidator
4. To ensure that the liquidation accounts are audited
5. To require the liquidator to present the liquidation account
6. To provide for remuneration of the liquidator
7. Discharge the liquidator after the completion of winding up.

Topics

 Company and registration of companies

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 Company’s constitution. co
s.

Memorandum of association
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no

Article of association
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Company promotion
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
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 Pre-incorporation
 Prospectus and commencement of business
 Capital
 Companysecurities
 Company membership
 Company management
 Winding up
 Co-operatives
 Alternatives to windingup
 Foreign companies

June 2013Qnt1

Dec 2012 Qtn1

June 2012Qtn1a&b

Dec 2011 Qtn1a&b

JUNE 2011Qtn7b

Dec 2010Qtn4

June 2010 Qtn5a, b, c

Dec 2009Qtn 1

Aug 2009 Qtn1

June 2013 Qtn 1a

a. Conditions contained in by-laws

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i. The maximum amounts a member can borrow
co
s.

ii. Repayment periods for amounts borrowed

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no

iii. Interest payable on the amount borrowed

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iv. Security to be provided against the borrowing

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v. Qualification for guarantors

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vi. Qualification of the borrower

vii. Consequences of defaulting

b.Appointment of the committee members of management committee are elected into office by a
vote of the members

Appointment of the banker

Appointment of the auditors

Determination of the distribution/investment of any surplus

Change of name of the society

Amendments of by laws including applications to the commission for dissolution.

Dec 2012

1b.-minute book for committee

-register of committee

Register of charges

Certificate of registration.

Duties of co-operative society

 Must hold statutory meeting audit financial statement

 Must make a return to the commission
 Must publish their name on all places of business and all official locations
 Must notify the commissioner of any special resolution passed

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 Must notify the commissioner of any change in the registered office
co
s.

June 2012
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no

1a) legal privilege of a co-operative society

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 To sue or be sued in their own names

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 To contract in their own names

 To own property
 To exist perpetuaty
 Limited liabilities for the members
 Common seal to authenticate their documents etc.

b.Rights of a member

 Right to receive notice

 Right to attend meeting
 Right tovote
 Right to be elected into the committee
 Right to us facilities of the society
 Right to receive accurate information regarding affairs of the society
Dec 2011

1. a )explain 3 types of co-operatives

Primary societies consist of on in

Secondary societies

National co-operative organization

Apex societies i.e national representation

B.Requirements for one to be a member

 be 18 yrs and above

 must be of sound mind
 must have common interest

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 must be literate
co
s.

 must not be bankrupt

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c.describe powers a liquidator of a co-operative

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 to refer disputes to co-operative tribunal

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 to select a day on which creditors are to prove debts

 to appoint an advocate to assist in discharge of duties

Describe the powers of a commissioner

 Discharge the liquidator

 Remunerate the liquidator
 To appoint the liquidator
 To remove the liquidator
 To ensure that winding up accounts are published.

4bi.Changarane must convene a special general meeting to consider the change of name

At the meeting the motion will be deliberated and voted on

Members must pass a special resolution in support of change of name

The resolution must be registered with the commissioner after its passing.

ii.A change of name does not affect the rights and obligations of the society. Any legal action by
or against the society under its old name may be carried on under its new name

Any debts or amount payable or receivable under the old name can still be claimed under the
society new name.

June 2010

Q5 Provision of a co-operative societies act and rules

 The maximum amounts that can be received by society from individual

 Interest payable on the amount received

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 Security to be provided by the society co
s.
 Repayment period
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 Insurance on such deposits

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Functions of supervisory committee

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w.

They performance oversight role over the fixed of management committee.

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Provide an independent opinion to decisions taken by management committee

They report to members on the functioning of management committee

c.

Committee

Commissioner

Members if the committee fails

Committee on request members

Notice of 28 days sent to members

Business transacted include

Change of name

Dec 2009

QTN RESTRICTIONS.

1a

 must not be a member of another co-operative

 Must not be defaulting debtor of a society
 You must not have been convicted for an offence prescribed under the co-operative act.
 You must not have been adversely mentioned on the enquiry reported adopted by DPP.

b.Composition of tribunal

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 Chairperson
co
s.

 Deputy chair
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 An advocate of the highcourt

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 3 persons
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If they are of unsound mind

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
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 If they are bankrupt

 Written a letter of resignation
 Appointed to any other office which disqualifies them
 Absents themselves for 4 consecutive meeting

Revision

Model paper one

Articles of association

1a.Are internal rules of management of a company. They regulate the relationship between the
company and its members

Contracted created is bonding on both members and company

Articles confer rights and impose obligation on both the company and members.

Provision which regulate alterations of articles

Statutory restrictions

i. An alteration of the articles must be supported by a special resolution of members

ii. An alteration must not exceed the condition contained in the memorandum
iii. An alteration must not alter the provisions of sec 30 if the company is to remain private

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iv. An alteration must not increase the liability of members without their consent
co
s.
v. An alteration must not contradict a court order must in the interest of the minority
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no

Common law
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If an amendment is for the best interests of the members.

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d.Highlights 5 advantages of a private company over public company

i. Private company do not require a certificate of trading

ii. Private companies can commence business earlier since they are not required to obtain
certificate of incorporation
iii. Private company can avoid the cost of auditing their financial statements since it is not a
statutory requirement like it is for public company.
iv. Private companies are not exposed adversely to their competitors like public companies
who are required to publish audited financial statement.
v. Private company suffer less compliance costs unlike public company who have more
compliance procedure to abide by e.g holding of a statutory meeting
vi. It is easy to retain control in private company unlike public since their membership is
generally restricted.
Case law

Side bottom V Kershaw lease the plaintiff was a member of the defendant company .he
formed another business that was indirect competition the defendant company members of
the defendant company commended the articles to give the directors power to require any
competing members to transfer their shares to a nominee of the directors. The plaintiff moved
to court to challenge the amendment.

It was held that the alteration was in order since it is in the best interest of a company to get
rid of competitors from among its membership

In brown vs British abrasive will the defendant company was in urgent need of more capital
or risk being wound.98% shareholders were ready and willing to provide additional capital
provide the 2% transferred their shares to which the minority opposed. They suggested
(majority)an amendment to the articles that any minority would transfer their shares if

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requested by an order of more than 90% and was thus not in good faith.
s.
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ec

QUESTION
kn
w.

The articles of association of print limited as originally framed mentioned kartasi limited as
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the sole suppliers of printing papers. Soon after being formed kartasi ltd received all lenders
relating to printing paper. Member have been complaining that these lenders need to be
awarded to the members of the company print ltd has since preferred companies owned by
members over kartasi ltd.kartasi ltd is aggrieved as approached you threatening to go to court
since print ltd is going against its own articles by not awarding him tenders .using a decided
advice kartasi ltd.

Solution

kartasi ltd has no course of action against print limited. The articles of association are a
contract between the company and its members and can only be enforced by a person in their
a capacity as s member.
 Karatasi ltd is not a member of the print ltd and therefore cannot enforce a provision of the
articles of print ltd.

It was so held in Elly V positively Government assurance that the plaintiff could not enforce
a provision of the articles since they were not members.

1. Outline rules that govern pre-incorporation contract

a) A company before incorporation has no capacity to contract since it does not exist
case law kelnex Vs Baxter
b) before incorporation a company cannot have agents kelner V baxter
c) Persons who contract on behalf of the company before incorporation are
personally liable Kelner v baxter
d) A contract entered into by nonexistent person is void new borne V sensold
e) The ratification of pre-incorporation creates no rights or obligations against the

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company co
s.
f) If a company enters into a similar contract after incorporation the pre-
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incorporation contract may be enforce.kayanje &others V mawagola farmers &

no

Growers Company limited.

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kn

Question
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Explain how promotes may protect themselves against liability pre-incorporation contract

Pre-incorporation contract may be executed

Novation –this is where contractual obligation may be substitute with another incase the earlier
or prior obligation cannot be achieved.

PROCEDURES FOLLOWIN BY A SHAREHOLDER WHO INTENDS TO TRANSFER

HIS SHARES TO ANOTHER

3a.Transfer and transferee must enter into a legally binding agreement

Parties must execute a proper instrument of transfer

Presentment of the instrument of transfer for assessment and payment of stamp duty

Stamped instrument of transfer is presented to the company for registration

If it is total transfer, the old certificate of a transfer shall be cancelled and the transferee issued
with a new certificate.

If it is a partial transfer, the old certificate of the transferor shall be cancelled and issued with two
certificates

Qtn.Highlight implied conditions in a transfer of shares

i. It is implied that transferee shall pay the price

ii. The transferor will do nothing to prevent the transfer from being registered
iii. To transferor gives no guarantee that the transfer will be registered
iv. The transfer shall hand over a genuine instrument of transfer

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v. The share certificate carries with all the rights that the transferor wis
s.

vi. hes to convey

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vii. The transferee shall indemnify the transferor of any liabilities that may arise after the
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transfer.
kn
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Qtn.Highlight the circumstances under which the company may decline to register a transfer
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 If the instrument of transfer is not properly executed

 If the instrument of transfer has not be assed and duty paid
 If the shares have a lien on them
 Where the transferee is a state corporation that has not obtained consent of the treasury

3b.Names considered by the registrar as desirable

 If the name has immoral intend

 If the name has connection to the setting head of state
 If the name is that of an existing company

Q4.Lifting of viel incorporation

 Agency
  Determination of character
 Determination of residence
 Prevention of fraudulent conduct
 Ratification of corporate acts
 Improper conduct

5a.General proxy

This is a representative of a member at a general meeting with authority to vote in any manner
they wish.

Special proxy

 This is a representative of a member at a general meeting which instruction to vote in

aparticular way.

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b.with reference to law governing dissolution of companies explains circumstances under
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which company will be deemed unable to pay its debts.

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If a debt of sh1000 or more remains unpaid 21 days after its deemed

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 If a court order /execution order against the company is returned unsatisfied or partly
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unsatisfied
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 If in regard to contingent and prospective liabilities of the company. It can be said that the
company will be unable to pay its debts.

Circumstances under which the commissioner of insurance may petition to wind up

If company is carrying out insurance business without license

If an insurance company has been unable to expectations of policy holders.

If a company has not been maintaining books of accounts in accordance with the act

If in the opinion of the commission it is just an equitable to wind up the company.

Differences between member’s voluntary winding up and creditor winding up

A member’s voluntary winding up is the winding up of process is the winding up of solvency

In members voluntary the liquidator is appointed by members while in the creditors winding up
the liquidator is appointed by both members and creditors

In a member voluntary winding the final meeting is a meeting of members only while the final of
creditors winding up consist of 2 meetings i.e. creditors and members meeting.

Circumstances when a company is required to issue a prospectus in respect to its

Shares and debentures

 Where the company is private for the time being

 Where the issue does not target the public
 Where the securities are similar to those already issued b the company
 Where it is in relation to bona fide invitation to under write the issue of share.

b.Civil and criminal liabilities relating to a prospectus

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civil liability
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Misrepresentation.
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i. If the statement is intended to be relied upon

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ii. The statement is material

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iii. The statement is in fact made by the defedent i.e. silence does not amount to
misrepresentation generally
iv. Misrepresentation can also can also be innocent, fraudulent or negligent.

Criminal liability

o Is a crime to issue a prospectus and apply for shares

o It is a crime to issue a prospectus which has not been foiled with the registrar
o It is a crime to issue a prospectus containing a statement purporting to have been
made by an expert without their written consent
o Issue a prospectus containing untrue statement

Types of co-operatives
  Primary societies
 Secondary societies
 National co-operative societies
 Apex societies

Conditions required for one to qualify to be a member

 Must be literate
 Must be within occupation, profession,employment or geographic area from whish co—
operatives are formed
 Must be 18 yrs and above

Principles that governing co-operatives

 Open and voluntary membership

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 Member training co
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 Democratic control
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Foreign companies
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A foreign company is a company that;

i. It is incorporated outside Kenya

ii. Has more than 50% of its shares owned by non citizens or non –Kenyan
iii. Any other company that may b classified bythe minister as foreign

-foreign companies have similar regulations to resident companies except in relation to the
following

Presentation of documents.

30 days of beginning operations in Kenya a foreign company must present the following
document to the registrar

i. Their certificate of incorporation or charter(chartered companies)

 ii. Copies of their memorandum and their articles
iii. A statement of the law under which they were incorporated
iv. A certificate of compliance to the laws of Kenya
v. List of their directors if any is nonresident, a working permit must be attached
vi. List of their members and their holding

Publication of name provisions

Foreign companies must meet the following conditions in respect to their name;

1. Their name must appear on all their places of business indicating the country of incorporation

NB: this provision only applies to foreign companies with a foreign incorporation

The company must indicate their country of incorporation on all official publications

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The name of the company including the country of incorporation must appear on all negotiable
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instrument made or endorsed by the company
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no

The name must appear in the prospectus indicating the country of incorporation.
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Prospectuses
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While issuing their prospectuses, foreign companies must adhere to the following

i. The prospectus must have the name of the company and country of incorporation
ii. It must indicate the company’s registered office in the country of incorporation
iii. It must indicate the address of the local operations office in Kenya
iv. They must indicate whether similar securities have been issued in any other country
v. They must indicate the countries participating in the issue

Winding up.

A foreign company incorporated in Kenya may be wound be wound up under the provision of
the company’s act and other relevant law in Kenya

If the winding up of a foreign company commences elsewhere similar proceedings should begin
in Kenya
Examples of foreign companies

COCACOLA CFC

GENERAL MOTOR BANK OF INDIA

AIRTEL BANK OF CHINA

UNILEVER

QTN7(A)JUNE 2013

Name of company including country of incorporation

 Address of the foreign company

 Address of local operation office
 Participation by non Kenyans in the issue whether they have been issued to any other

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company.
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DEC 2012
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QTN2a.
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Publication of their name without indicating country of incorporation

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Omission

Failure to present copies of their memorandum and articles to the registrar

Failure to present a copy of their certificate of incorporation or charter within 30 days.

Having non -resident directors without work permit.

June 2011 Qtn1 (b)

Certificate of incorporation /charter

Copies of their memorandum and articles

Certificate of compliance with Kenyan laws

List of their directors work permit for non residents

List of members including their share holding.

June 2010 Q5d

 Companies incorporated outside Kenya

 Companies incorporated in Kenya with a shareholding of more than 50%
 Companies classified by the minister as foreign.

Qtn 1.a.

a.Identify the differences between a resident company and a non resident company(10mks)

b.Outline the challenges that are faced by foreign companies doing business in Kenya (10MKS)

June 2012 Qtn4b

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An ultra vires transaction on e that is beyond the scope of the company thus it is illegal in the
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eyes of the law although shareholders approve.

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A ratification act should be viewed the same as an amendment by the majority of the members of
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the company. The decision is against the separation principles where the members interfere with
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actions by the directors .this is also against the majority act of ratification.

Alternatives to winding up

 Compromise
 Scheme of arrangement
 Reconstruction
 Takeover-bid
 Merger
 Amalgamation

Merger
This is the coming together of two or more companies without casing their independent existence

AMALGATION

This is the coming together of two or more companies to form one company where the
independent entity ceases to exist.

Objectives of merges and take over

2. To buy out competition/end completion/reduce competition

3. To create a monopoly
4. To reduce the tax burden
5. Pulling of capital

Exploitation of new market

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Enjoying economic of scale co
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Extending the distribution chain

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no

Compromise
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This is an agreement between a company in liquidation and their creditors. The agreement
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characterizes the creditors agreeing to be paid less than what they owner releasing any securities
in their custody

A compromise between a company and creditors will avoid a winding up order .in respect to
bankruptcy it is known as a compounding arrangement

NB. A compromise does not involve the courts

Reconstruction

This is the formation of a new company to acquire the assets of the company in liquidation as a
consideration for agreeing to have its liabilities transferred to the new company

The company in financial difficulties is thereafter dissolved

Any creditors of the cold company who do not wish to become creditors of the ne company may
enter into a compromise

NB; they do not involve the court

Scheme of arrangement.

This is an arrangement between.

End .

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