INTRODUCTION TO COMPANIES AND COMPANY LAW

The exact scope of company law is difficult to define, on account that the laws of Kenya do not define
the term in testament to the words of Buckley J in Re: Stanley (1906)

“The word company has no strict legal meaning...”

However, section 3 (1) of the Companies Act, No. 17 of 2015 (The Companies Act) it is provided that a
company refers to:

“A company formed and registered under this Act [the 2015 Companies Act of Kenya] or an
existing company [one incorporated under a pre-existing or other statute e.g. CAP 486]”

This definition fails to identify the attributes of the company as it only describes a registered company
i.e. a company incorporated by registration.

A company may also be defined as an association of many persons who contribute money or money’s
worth to a common stock and who employ it to a common purpose. Regrettably, this explanation fails to
distinguish a company from a partnership.

In common law, a company is a ‘legal person’ or ‘legal entity’ separate from, and capable of surviving
beyond the lives of its members. Like any juristic person a company is legally an entity apart from its
members, capable of rights and duties of its own, and endowed with the potential of perpetual
succession.

However, ‘a company’ is not merely a legal institution; it is also a legal device for the attainment of any
social or economic end, and to a large extent has public and social responsibility.

The Historical Evolution of Companies

This is traceable to early forms of business associations created by the Romans in the early 13th Century.

However the company as a form of business organization emerged during the mercantile era due to 2
reasons:

i. The need for large scale investments and large scale production to satisfy the market demand,
as a result of which, traders were in dire need of a commercial device that could facilitate the
raising of capital on a large scale basis.

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 ii. The need to limit the liability of investors for debts and other liabilities from the association. This
was realized by the Limited Liability Act of 1855.

Members contribute money or money’s worth to a common stock. The money is put together by the
members and is employed to a common purpose.

Under the Kenyan law, companies are only one of the various forms of recognized business associations.

TYPES OF COMPANIES

Although company law is concerned with registered companies our Kenyan law recognizes other
corporations which shares attributes similar to those of the registered company.

1. Corporations Sole.
This is a legally established office distinct from the holder and can only be occupied by one
person after which he is succeeded by another. It is a legal person in its own right with limited
liability, perpetual succession, capacity to contract, own property and sue or be sued. E.g.
include the Office of the Public Trustee and the Office of the Principal Secretary to the National
Treasury.

2. Corporations Aggregate
This is a legal entity formed by two or more persons for a lawful purpose and whose
membership consists of at least two persons. It has an independent legal existence with limited
liability, capacity to contract, own property, sue or be sued and perpetual succession. E.g. public
and private companies.

3. Registered Corporations
These are corporations created in accordance with the provisions of Companies Act. Certain
documents must be delivered to the Registrar of companies to facilitate registration of the
company. E.g. memorandum of association, Articles of association, statement of nominal
capital. Examples of registered corporations are; public and private companies

4. Statutory Corporations
These are corporations created by Acts of Parliament or an order of the President in accordance
with the provisions of Section 3 (1) of the State Corporations Act (Cap 446).
A state corporation is a legal person with perpetual succession. In case of a corporation created
by an Act of Parliament, the Act gives it a name, management structure and prescribes the
objects. E.g. Kenya Wildlife Services, Agricultural Finance Corporation, Public Universities,
Central Bank etc.

Statutory corporations have the following characteristics:

a) No shareholders
b) Initial capital provided by the National Treasury
c) It is expected to operate according to commercial principles and make profit
d) If it makes profits and becomes unable to pay debts, its property can be attached by its
creditors but it cannot be wound up on the application of any creditor. The Central
Government come to its aid.

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 e) It can only be wound up on the repeal or revocation of the enabling Act which created
it.

5. Chartered Corporations
These are corporations created by a charter granted by the relevant authority. The charter
constitutes the association a corporation by the name of the charter. E.g. Private Universities
are chartered corporations under the Universities Act, Chapter 210 Laws of Kenya. To establish a
private university, an application must be made to the Commission for Higher Education which
forwards the same to the Cabinet Secretary for Education who in turn forwards the same to the
President for the grant of a charter. The Charter must set out the name, membership, powers
and functions of the University. Under Section 14 of the Universities Act, a private University
becomes a legal person when the charter is published in the Kenya Gazette by the Cabinet
Secretary in charge.

COMPANY LAW

This is the study of the rules and principles that governs and regulates the affairs of that which the law
recognizes as a company.

Sources of Company law:

1. Companies Act 2015

It is an Act of Kenyan legislature and it came into operation in September 2015. The New Act has drawn
heavily on the Companies Act, 2006 of the United Kingdom. At 1,026 sections running to over 1,600
pages (without schedules) the New Act is by far the most extensive piece of legislation on the statute
books in Kenya. By comparison, the old Companies Act (Cap 486) had 406 sections covering 270 pages
(which included a regime for corporate insolvency).

2. Common Law and Doctrines of Equity

Common law is a term that may refer to the English system of law as a whole when being contrasted
with alternative systems of law. It can also be used to refer to the rules of law which evolved over the
years within the English jurisdiction through decisions by judges in court cases (judicial precedent)

Doctrines of equity are principles of justice and fairness which also evolved over the years within the
English jurisdiction. They apply to company law in the same way as they apply to any other legal matter
in the country.

Common law and doctrines of equity apply to Kenya by virtue of the section 3 of the Judicature Act Cap
8 Laws of Kenya

3. Precedents
These are judicial decisions made by the superior courts in Kenya and are binding on subordinate courts
and the High court as well as the Court of Appeal when they originate from the Supreme Court.

To the extent that the decisions of superior courts relate to interpretation of company law, they guide
the subordinate courts.

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THE FOUNDATION OF COMPANY LAW

It is based on two fundamental principles:

i. Legal or corporate personality.
ii. Theory of limited liability.

1. Legal or Corporate personality

This principle is set to the effect that when a company is registered it becomes a legal person separate
and distinct from its members and managers. It acquires an independent existence with certain
capacities and subject to incapacities. This principle was first formulated in the House of Lords in the
matter of Salomon v. Salomon [1897] A C 22., where Lord Macnaghten was emphatic that the company
is at law a different person altogether from the subscribers to the memorandum. In this case, Salomon
was a prosperous leather merchant. He sold his business to Salomon and Co. Limited which he formed
for that purpose at the price of £39,000 satisfied by £1,000 in cash, £10,000 in debentures conferring a
floating charge on the company’s assets and £20,000 in fully paid up £1 shares. Salomon was both a
creditor because he held a debenture and also a shareholder because he held shares in the company.
Seven shares were then subscribed for in cash by Salomon, his wife and daughter and each of his 4 sons.
Salomon therefore had 20,001 of the 20,007 shares in the company and each member of the family had
1 share as Salomon‘s nominees. Within one year of incorporation the company ran into financial
problems and consequently it was wound up. Its assets were not enough to satisfy the debenture
holder (Salomon) and having done so there was nothing left for the unsecured creditors. The court of
first instance and the Court of Appeal held that the company was a mere sham an alias, agents or
nominees of Salomon and that Mr. Salomon should therefore indemnify the company against its trade
loss.

The House of Lords unanimously reversed this decision.

In the words of Lord Halsbury:

“Either the limited company was a legal entity or it was not. If it was, the business belonged to
it and not to Salomon. If it was not, there was no person and nothing at all and it is impossible
to say at the same time that there is the company and there is not.”

In the words of Lord Macnaghten:

“the company is at a law a different person altogether from the subscribers and though it may
be that after incorporation the business is precisely the same as it was before, and the same
persons are managers, and the same hands receive the profits, the company is not in law the
agent of the subscribers or trustee for them nor are the subscribers as members liable in any
shape or form except to the extent and manner prescribed by the Act. … In order to form a
company limited by shares the Act requires that a Memorandum of Association should be
signed by at least two persons who are each to take one share at least. If those conditions are
satisfied, what can it matter, whether the signatories are relations or strangers. There is nothing
in the Act requiring that the subscribers to the Memorandum should be independent or
unconnected or that they or anyone of them should take a substantial interest in the
undertaking or that they should have a mind and will of their own. When the Memorandum is

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 duly signed and registered the subscribers are a body corporate capable forthwith of exercising
all the functions of an incorporated company…
… The company attains maturity on its birth. There is no period of minority and no interval of
incapacity. A body corporate thus made capable by statutes cannot lose its individuality by
issuing the bulk of its capital to one person whether he be a subscriber to the Memorandum or
not.”

This principle is now contained in Section 19 of the 2015 Companies Act which provides inter alia:

“From the date of incorporation of a company the subscribers to the memorandum, together
with such other persons as may from time to time become members of the company, become a
body corporate by the name stated in the certificate of incorporation…”

The significance of the Salomon decision is threefold.

1. The decision established the legality of the so called one man company;

2. It showed that incorporation was as readily available to the small private partnership and
sole traders as to the large private company; and

3. It also revealed that it is possible for a trader not merely to limit his liability to the money
invested in his enterprise but even to avoid any serious risk to that capital by subscribing for
debentures rather than shares (in addition to shareholding, it is possible for member of a
company to subscribe for its debentures and thus become a creditor.

Since the decision in Salomon’s case the complete separation of the company and its members has
never been doubted.

The above legal principle as formulated in Salomon’s case was applied in several cases subsequently
such as:

a) Macaura V. Northern Assurance Co. Ltd (1925) A.C. 619

The Appellant owner of a timber estate assigned the whole of the timber to a company known as Irish
Canadian Sawmills Company Limited for a consideration of £42,000. Payment was effected by the
allotment to the Appellant of 42,000 shares fully paid up in £1 shares in the company. No other shares
were ever issued. The company proceeded with the cutting of the timber. In the course of these
operations, the Appellant lent the company some £19,000. Apart from this the company’s debts were
minimal. The Appellant then insured the timber against fire by policies effected in his own name. Then
the timber was destroyed by fire. The insurance company refused to pay any indemnity to the appellant
on the ground that he had no insurable interest in the timber at the time of effecting the policy.

The courts held that it was clear that the Appellant had no insurable interest in the timber and though
he owned almost all the shares in the company and the company owed him a good deal of money,
nevertheless, neither as creditor or shareholder could he insure the company’s assets. So he lost the
Company.

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 b) Lee v Lee’s Air Farming Ltd. (1961) A.C. 12

Lee’s company was formed with capital of £3000 divided into 3000 £1 shares. Of these shares Mr. Lee
held 2,999 and the remaining one share was held by a third party as his nominee. In his capacity as
controlling shareholder, Lee voted himself as company director and Chief Pilot. In the course of his duty
as a pilot he was involved in a crash in which he died. His widow brought an action for compensation
under the Workman’s Compensation Act and in this Act workman was defined as “A person employed
under a contract of service” so the issue was whether Mr. Lee was a workman under the Act. The House
of Lords held that:

“… it was the logical consequence of the decision in Salomon’s case that Lee and the company
were two separate entities capable of entering into contractual relations and the widow was
therefore entitled to compensation.”

c) Katate v Nyakatukura (1956) 7 U.L.R 47A

The Respondent sued the Petitioner for the recovery of certain sums of money allegedly due to the
Ankore African Commercial Society Ltd in which the petitioner was a Director and also the deputy
chairman. The Respondent conceded that in filing the action he was acting entirely on behalf of the
society which was therefore the proper Plaintiff. The action was filed in the Central Native Court. Under
the Relevant Native Court Ordinance the Central Native Court had jurisdiction in civil cases in which all
parties were natives. The issue was whether the Ankore African Commercial Society Ltd of whom all the
shareholders were natives was also a native.
The court held that a limited liability company is a corporation and as such it has existence which is
distinct from that of the shareholders who own it. Being a distinct legal entity and abstract in nature, it
was not capable of having racial attributes.

2. The Theory of Limited Liability

Liability refers to the extent to which a person may be called upon to contribute to the assets of a
company and in the event of its being wound up.

The liability of a company may be limited or unlimited. Under Section 5, a Company is deemed a
Limited Company if it is a company limited by shares or by guarantee.

Companies Limited by Shares

Under Section 6 of the Act, these are companies having the liability of the members limited by the
Company’s Articles to the amount, if any, unpaid on the shares held, beyond which the member is not
liable. In Salomon’s case, Salomon was not liable to contribute the assets of the company as his shares
were fully paid.

Companies Limited by Guarantee

Section 7 provides that a company is a company limited by guarantee if:

a) it does not have a share capital;

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 b) the liability of its members is limited by the Company's Articles to the amount that the members
undertake, by those Articles, to contribute to the assets of the company in the event of its
liquidation; and
c) its Certificate of Incorporate states that it is a company limited by guarantee.

Unlimited Companies
Section 8 provides that a company is an unlimited company if:
a) there is no limit on the liability of its members; and
b) its Certificate of Incorporation states that the liability of its members is unlimited.

CLASSIFICATION OF COMPANIES

Companies Classification Details

Act
1. Section 5 Limited A company limited by shares or by guarantee
2. Section 6 Limited by The liability of its members is limited by the company's
shares articles to any amount unpaid on the shares held by the
members.
3. Section 7 Limited by a) It does not have a share capital;
guarantee
b) The liability of its members is limited by the company's
articles to the amount that the members undertake, by
those articles, to contribute to the assets of the company
in the event of its liquidation; and

c) Its certificate of incorporate states that it is a company

limited by guarantee.

4. Section 8 Unlimited a) There is no limit on the liability of its members; and

Company
b) Its certificate of incorporation states that the liability of
its members is unlimited.
5. Section 9 Private a) Its Articles:
Company (i) restrict a member's right to transfer shares;
(ii) limit the number of members to fifty; and
(iii) prohibit invitations to the public to subscribe for
shares or debentures of the company;

b) it is not a company limited by guarantee; and

c) its certificate of incorporation states that it is a private

company.
6. Section 10 Public a) its articles allow its members the right to transfer their
Company shares in the company;

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b) its articles do not prohibit invitations to the public to
subscribe for shares or debentures of the company ; and

c) its Certificate of Incorporation states that it is a public

company.

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THE FORMAL PROCEDURE OF COMPANY FORMATION

In Kenya the process involves the registration of a company under the Companies Act.

If a company is not registered it does not exist as legal person. It has no rights and cannot bear any
obligations; for example, it cannot bring an action to court and it cannot enter into contract

Courts have illustrated the disabilities of unregistered companies in the following cases:

i. Fort Hall Bakery Supply Co vs Wangoe

In this case a plaint was drawn by Fort Hall Bakery Supply Company purporting to be the plaintiff in a
claim for recovery of a debt. The defendant argued at the trial that the plaintiff ‘company’ was not
registered as a company under the Companies Act and therefore lacked the legal standing to institute a
case in its own name. The court agreed with this argument and held that the plaintiff could not be
recognized as having any legal existence and was incapable of maintaining an action i.e. it lacked locus
standi. In terminating the proceedings, the court did not make any order as to costs because a plaintiff
that does not exist can neither pay nor receive costs.

ii. Kelner v. Baxter

In this case, promoters of a hotel company contracted for the purchase of wine before the company was
incorporated. Upon incorporation, the company purported to ratify the contract. Before payment, the
company went into liquidation. The promoters were held personally liable since the company did not
exist and so could not contract. This supplanted the rule in Salomon’s case that a company comes into
existence only after registration as evidenced by the Certificate of Incorporation.

REGISTRATION OF A COMPANY UNDER THE COMPANIES ACT

Method of Company Formation

Under Section 11, one or more persons who wish to form a company must:

a) Subscribe their names to a memorandum of association

b) Comply with the requirements of the Companies Act (sections 13 to 16) with respect to
registration; and
c) Ensure their company is not formed for an unlawful purpose otherwise it will not me registered

S.12 also provides that a company may not be registered unless its memorandum of association is:
a. in the form prescribed by the regulations; and

b. Authenticated by each subscriber.

THE REGISTRATION PROCESS

The process of registering a company follows the following steps:

1. Preliminaries – Type of Company, Company Name (Choice, Reservation etc.)
2. Preparation of constitutive documents - MEMARTS
3. Presentation of documents for scrutiny and stamping
4. Payment of stamp duty
5. Issuance of Certificate of Incorporation

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The Company Name

All companies must have a name. This is because, as a juristic person, the Company needs a name for
identification.

Registered names are however different from trading names.

1. Name Search

The Promoters of the conduct a ‘Search’ at the Registrar of Companies to ensure that the name they
want to incorporate into a company has not been utilized by another company.

This involves giving three choices of names, which are approved or disapproved by the Officers in the
Registry.

Section 57 provides that The Registrar shall not register a company under the Act by a name that is the
same as another name appearing in the Index of Company Names.

Registrar’s Restrictions on the Company Name

Under Section 49, the Registrar may not register a company by a particular name if:
a) the use of the name would constitute an offence;

b) the name consists of abbreviations or initials not authorized by or under the Act;

c) the Registrar is, after taking into account the relevant criteria, of the opinion that the name is
offensive or undesirable;

d) the name is restricted by Statute e.g. Banking Act and Co-operative Societies Act

NB: Section 50 provides that the approval of the Registrar will be required for a name that would
connote a connection with a State organ; a County Government; or any public authority.

2. Reservation of Company Name – S.58

The Registrar may, on written application, reserve a name pending registration of a company or a
change of name by a company for a period of 30 – 60 days.

During this reserve period, no other company is entitled to be registered by that name.

3. Indications of type of company

Under S.53, a company that is both a public limited company may only be registered with a name that
ends with the words "public limited company" or the abbreviation "plc".

Under S.54, a company that is both a private limited company may be registered only with a name that
ends with the word "limited" or the abbreviation "ltd."

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The Cabinet Secretary may, by notice given to the company, exempt a private company from using the
word "limited" or "ltd" as required by section 54.

Lodging Application Documents with the Registrar

Section 13 thereafter provides that a person who wishes to register a company shall lodge with the
Registrar:

a) An application for registration of the company,

b) A Memorandum of association of the company; and
c) A copy of the proposed Articles of association unless exempted by S.21

Additionally:

d) The Statement of Capital and Initial Shareholdings

e) Statement of Guarantee
f) The Statement of Proposed Officers

1. The Application for Registration – S.13(2)

An application for registration must state:

a) The proposed name of the company;

b) The proposed location of the registered office of the company;
c) Whether the liability of the members of the company is to be limited, and if so whether it is to
be limited by shares or by guarantee; and
d) Whether the company is to be a private or a public company.

Further, the application must contain, or be accompanied by:

a) a statement of capital and initial shareholding (S.14) - in the case of a company that is to have a
share capital;
b) a statement of guarantee (S.15) - in the case of a company that is to be limited by guarantee;
and
c) a statement of the company's proposed officers (S.16).

If this application is made by an agent, his name and address must be included in the application.

2. The Memorandum of Association – S.12

This is a memorandum stating that the subscribers:

a. wish to form a company under this Act;
b. agree to become members of the company; and
c. agree to take at least one share each, if the company is to have share capital

The memorandum of association MUST be:

a. in the form prescribed by the regulations; and
b. authenticated by each subscriber.

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 3. The Articles of Association – S.13

These are the rules of internal management of a company and for they to be registered, they must:
a) be contained in a single document;
b) be printed
c) be divided into paragraphs numbered consecutively;
d) be dated;
e) be signed by each subscriber to the articles; and
f) contain an attestation of each subscriber’s signature.

4. The Statement of Capital and Initial Shareholdings – S.14

The statement of capital and initial shareholding must state:

a) the total number of shares of the company to be taken on formation by the subscribers to the
memorandum;

b) the aggregate nominal value of those shares;

c) for each class of shares-

(i) the particulars of the rights attached to the shares;
(ii) the total number of shares of that class; and
(iii) the aggregate nominal value of shares of that class; and

d) the amount to be paid up and the amount (if any) to be unpaid on each share, whether on
account of the nominal value of the share or in the form of a premium.

The statement of capital and initial shareholding must:

a) contain information for identifying the subscribers; and

b) state the nominal value of each share held by a subscriber.

5. Statement of Guarantee – S.15

This must accompany an application to register a company to be limited by guarantee.

The statement is to the effect that each member undertakes, if the company is liquidated while the
person is a member or within 12 months after the person ceases to be a member, to contribute to the
assets of the company such amount as may be required for:

a) paying the debts and liabilities of the company contracted before the person ceases to be a
member;

b) paying the costs, charges and expenses of liquidation; and

c) adjusting the rights of the contributories among themselves.

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It must contain the prescribed information to enable the identification of subscribers to the
memorandum.

6. The Statement of Proposed Officers – S.16

This statement must contain required particulars of the following officers:

a) the person(s) who is (are) to be the first director(s)of the company;

b) the company secretary of the company – if the company is to be a public company; and
c) any person appointed to be an authorized signatory of the company.

The required particulars are the particulars that will be required to be stated:

a) in the company's register of directors and register of directors' residential addresses ;

b) in the company's register of secretaries; and
c) in the company's register of authorized signatories.

The statement of the company's proposed officers must contain a consent by each of the named
persons to act in the respective capacities.

Registration of Company by Registrar – S.17

After all these documents have been prepared the promoters of the company are required to take them
to the Registrar of Companies. The documents are then scrutinized by the officers of the Registrar of
companies who ensure that they have been prepared in accordance with the provisions of the
Companies Act.

Section 17 of the Companies Act provides that if satisfied that an application for registration complies
with the requirements of the Act relating to registration, the Registrar shall register the company and
allocate to it a unique identifying number

Section 18 thereafter provides that on the registration of a company in accordance with section 17, the
Registrar shall issue to the company a Certificate of Incorporation.

THE CERTIFICATE OF INCORPORATION – S.18

Issued as evidence of registration of a company.

It is signed by the Registrar, who authenticates it with the Registrar's official seal.

The certificate is conclusive evidence that the requirements of the Act relating to registration have been
complied with and that the company is duly registered under the Companies Act.

Contents of the Certificate of Incorporation – S.18(2)

1. The name of the company and its unique identifying number;

2. The date of the company's incorporation;

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 3. Whether the company's liability is limited or unlimited, and if it is limited, whether it is limited
by shares or by guarantee; and
4. Whether the company a private or a public one

Effects of Registration – S.19

From the date of incorporation of the Company:

1. The subscribers to the memorandum (founding members), together with such other persons as
may from time to time become members of the company (other members), become a body
corporate by the name stated in the certificate of incorporation;
2. The company can do all of the things that an incorporated company can do;
3. The registered office of the company is as stated in the application for registration;
4. The status of the company is as stated in its certificate of incorporation;
5. In the case of a company having a share capital, the subscribers to the memorandum of
association become holders of the shares specified in the statement of capital and initial
shareholdings; and
6. The persons named in the statement of proposed officers (directors, CS and authorized
signatories) become holders of those offices.

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

EFFECTS/CONSEQUENCES OF INCORPORATION

Under section 19 of the Act, from the date of incorporation of the company as stated in the Certificate
of Incorporation, the subscribers to the Memorandum shall be a body corporate by the name contained
in the Certificate of Incorporation. This is the rule in Salomon’s case i.e. the company becomes a legal
person separate and distinct from its members and managers.

The most fundamental attribute of incorporation from which all other consequences flow is that the
company acquires an independent legal existence. In the words of Lord Macnaghten:

“The company is at law a different person altogether from the subscribers to the memorandum”

The judge meant that the juristic person created on incorporation is very different from its members
and its managers. This difference is exemplified by the characteristics of the company as explained
below.

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1. Limited liability
Under section 5, the liability of a registered company is limited by shares or guarantee. A member can
only be called upon to contribute to the assets of a company either:
• The amount, if any, outstanding on the shares held.
• The amount he undertook to contribute if the company was wound up during his membership
or within 1 year of cessation of membership

The members are not generally liable for the debts and other obligations of the company.

2. Perpetual succession
Company Law is emphatic that an incorporated company has perpetual succession. Being a creation of
the law, its life lies in the intendment of law.
It has the capacity to exist to perpetuity as it is not susceptible to natural shock. The death of its
members and/or directors has no effect on its existence.

However its existence can be brought to an end only through the legal process of winding up.

3. Owning of property
As a legal person a registered company has the right to own property. Company Law provides that it has
power to own land meaning that the property of a registered company is vested in it as opposed to its
members and the company alone has an insurable interest in such property.

This was so held in Macaura V. Northern Assurance Co. Ltd (1925) A.C. 619. The plaintiff owned a
forest. He then formed a company to which he transferred the forest in return for 42,000 fully paid
shares. He was the principal shareholder of the company. He lent the company £19,000 (unsecured
loan). The company subsequently converted the tress to timber. The plaintiff insured the timber held by
the defendant but in his own name. It was destroyed by fire 2 weeks later and his claim for
compensation was rejected. He sued.

It was held that he was not entitled to indemnity as he had no insurable interest in the timber as it
belonged to the company. As such a company could own property.

4. Capacity to contract
A registered company has capacity to enter into contractual relationships such as borrowing in
furtherance of its objectives.

It has the capacity to hire and fire as held in the case of Lee v Lee’s Air Farming Ltd. (1961) A.C. 12 Mr.
Lee formed a company to carry on the business or aerial top dressing with a capital of £3,000 divided
into 3,000 shares of £1 each. He had 2999 of the shares; the other share (1) was held by a solicitor on his
behalf. He was the governing director of the company as well as its chief pilot. He died in an air crash
while working for the company. Mrs. Lee sued for compensation under the Workmen’s Compensation
Act (1922). The legal question was whether Mr. Lee was an employee of the company.
It was held that since Lee’s air farming Co Ltd was properly incorporated. It was a legal person distinct
from Mr. Lee and the two were capable of establishing a contractual relationship, thus Mr. Lee was a
worker and Mrs. Lee was entitled to compensation.

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5. Capacity to sue and be sued
As a legal person a registered company has rights and is subject to obligations. It has the capacity to
enforce the rights by action and may be sued on its obligations. At common law, when a wrong is done
to a company, the company is prima facie the proper plaintiff for redress.

It was so held in Foss V. Harbottle (1843) 2 Hare 461 where the directors had defrauded their company
but its members in a general meeting resolved not to sue them. Two minority shareholders Foss and
Turton sued the directors to compel them to make good the loss of the company. Their action was
dismissed on the ground that they had no locus standi as the wrong in question had been committed to
the company (therefore the company was prima facie the proper plaintiff)

6. Common seal
In law, an incorporated company has a common seal to authenticate its transactions. This is the
company’s signature.
A seal is an embossed symbol used as attestation or evidence of authenticity.
Affixing the seal signifies that the document is the act and deed of the company. If the document is only
signed by the director, it is deemed to be the work of the company’s agent and therefore agency law
applies.

ADVANTAGES OF INCORPORATION
The registered company is the most advanced form of business association and it dominates the
commercial sector. This may be explained by the advantages that accrue from incorporation which tilts
the balance in favour of the company.

Carrying on a business by way of a company has certain legal advantages:

1. Limited liability
Members of a company are not liable for debts and other liabilities of the company. Their liability is
limited by shares or guarantee and there is no risk of loss of private assets in the event of the company’s
insolvency.

2. Perpetual succession
The fact that a registered company has capacity to exist in perpetuity is an advantage where the
company’s is business is prosperous as it encourages business investment on a long term basis.

3. Capacity to contract
A registered company has the legal ability to enter into various contractual relationships in furtherance
of its objects, thereby enabling it to enhance profitability. The wider the objects clause the wider the
company’s contractual capacity.

4. Owning of property
The fact that a registered company has ability to own various towns of property such as land,
marketable securities, plant and machinery means that is has capacity to invest for the benefit of its
members.

5. Sue or be sued
Members of a registered company are not obliged to sue on behalf of the company and cannot be
generally sued for its wrong doings.

16
6. Wide capital base
Compared to other forms of business associations the registered company has the widest capital base
by reason of its wide spectrum of membership

7. Transferability of shares
Under the Act, the shares or other interests of any member of a company shall be moveable property,
transferable in the manner provided by the Articles of the company.

Shares in a public or private company are transferable, however transfer in private companies is
restricted (Section 9).

Transferability of the shares means that the company’s member’s outlook keeps changing from time to
time and the company could take advantage of the entrepreneurial skills of new members by appointing
them as directors.

8. Qualified / Specialized management

Under section 128 of the Act, whereas a company public must have at least 2 directors, a private
company must have at least 1.

Companies are run by directors appointed in an AGM. Shareholders can appoint qualified persons as
directors.

9. Borrowing by floating charge

Registered companies are free to utilize the facility of floating charge to borrow.

This is an equitable charge. It is a charge securing a debenture on the assets of a going concern, but
which remain dormant until crystallization.

It is a charge secured on the assets that keep on changing from time to time (non-current assets) in the
ordinary course of business.

This charge has several advantages:

• It enables companies with no fixed assets to borrow.
• It enhances the borrowing capacity of companies with fixed assets.
• It enables to use the future assets as collateral.
• It does not interfere with the ordinary business of a company.
• On crystallization the charge fastens on the assets within its reach, it then becomes fixed on the
asset.

DISADVANTAGES OF INCORPORATION
1. Formalities
The registered company is characterized by legal formalities from incorporation to winding up e.g. an
application must be made to the Registrar to reserve the proposed name.

Company formation is subject to the provision of the Companies Act.

17
During its life a company must hold general meetings register resolution and documents, file the annual
returns and elect directors.

The winding up of a company is also an elaborate legal process.

2. Publicity
Companies are subject to undue publicity e.g. under the Act, the public documents of a company
(Constitutive documents, Registers, Minutes etc.) are open to public scrutiny on payment of the
prescribed fee.

A registered company must have a physical and postal address. Its name must be displayed on the
outside of the place of business.

The company’s AGMs are held in public and the winding up of a company is also conducted in the public
eye.

3. Corporation tax
It is argued that the tax payable by a registered company is comparatively higher than other business
forms thereby reducing the amount of profit available to shareholders as dividends.

5. Non-participation in management
Shareholders other than directors are not involved in the day to day affairs of the company and rarely
influence its policy.

6. Expenses
The registered company is the most expensive form of business association to form, maintain and wind
up. Formation expenses include fee, registration fee, stamp duty and legal fee. During its life, a company
must hold general meetings, contract directors and auditors register documents and file the annual
returns. The winding up of a company is also an expensive undertaking. In the words of L.C .B Gower in
his book ‘Principles of Modern Company Law’ 4th Ed. pg 471: “At the worst liquidation is like the
extraction of an aching tooth, it puts an end to the victim’s agony and may even enable him to bite back,
but it cannot guarantee him a square mean and it may be painful at the time particularly if the operation
is delayed too long.”

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THE VEIL OF INCORPORATION

The veil of incorporation is commonly referred to as the corporate shell. It vests on a company after
incorporation, legally separating membership and management from the company itself. It is brought
about by the separate and distinct legal personality acquired by the company upon incorporation.

In Salomon’s case, it was established that a company is a legal person separate and distinct from its
members and managers. It has an independent legal existence (what is referred to as the veil of
incorporation)

As a general rule, company law does not go behind the veil of incorporation to the individual members
as illustrated in Macaura Vs Northern Assurance Co Ltd.

However in certain situations the rule in Salomon’s case is modified by lifting of the veil whereby, the
law disregards the legal personality of a company in favor of the individual members or disregards the
distinct legal personality of a company and its subsidiaries in favor of the economic realities constituted
by the group. Such instances will result in personal liability of the company officers or agents.

These circumstances where the rule in Salomon’s case is ignored modified or qualified are collectively
referred to as lifting the veil of incorporation (piercing the corporate shell). They are exceptions to the
rule in Salomon’s case as recognized by statue and case law.

Lifting or piercing the veil is company law’s most widely used doctrine to decide when a shareholder or
shareholders will be held liable for obligations of the corporation. Lifting the veil doctrine exists as a
check on the principle that, in general, shareholders should not be held liable for the debts of their
corporation beyond the value of their investment. The corporate veil is said to be lifted when the court
ignores the company and concerns itself directly with the members or the managers.

It can be said “that adherence to the Solomon principle will not be doggedly followed where this would
cause an unjust result”.

One of the grounds for lifting of the corporate veil is fraud. The courts have pierced the corporate veil
when they feel that fraud is or could be perpetrated behind the veil. The courts will not allow the
Salomon principal to be used as an engine of fraud. The two classic cases of the fraud exception are
Gilford Motor Company Ltd v. Horne in which Mr. Horne was an ex-employee of The Gilford motor
company and his employment contract provided that he could not solicit the customers of the company.
In order to defeat this he incorporated a limited company in his wife’s name and solicited the customers
of the company. The company brought an action against him. The Court of appeal was of the view that:

“… the company was formed as a device, a stratagem, in order to mask the effective carrying on
of business of Mr. Horne. In this case it was clear that the main purpose of incorporating the
new company was to perpetrate fraud…”

Thus the court of appeal regarded it as a mere sham to cloak his wrongdoings.

The veil of incorporation can be lifted either by Statute or by Common law.

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LIFTING THE VEIL BY STATUTE

This refers to the Parliamentary/Statutory exceptions to the rule in Salomon’s case. These are
exceptions recognized by the Companies Act. In the words of Devin J in Bank VoorHendel V Stalford:

“The Legislature can forge a sledge hammer capable of cracking open the corporate shell’”

a) Non-publication of a Company’s Name – S.67

Section 67 of the Companies Act requires a company, through its principal officers, to disclose its name
on its seal, letters, business documents and negotiable instruments. This is done for the benefit of 3rd
parties who might contract with a company without realizing the extent of its liability (limited, unlimited
etc.).

Any officer or agent of the company who does not comply with S.67 shall be personally liable to a fine
not exceeding KES 500,000.

This imposition of personal liability on the company’s agent is what is regarded as “lifting the veil of
incorporation”.

In Duram Fancy Goods Ltd V Michael Jackson (Fancy Goods) where M was used to abbreviate Michael
in a bill of exchange, it was held that this amounted to a mis-description of the company’s name as M is
not an accepted abbreviation of Michael.

b) Investigation the Company’s affairs – S.788

Section 788 gives an Inspector appointed by the Court (High Court) to investigate company’s affairs the
power to investigate the affairs of a company’s Subsidiary or Holding company, if the inspector thinks it
necessary to do so for the purpose of his investigation.

In such cases, the veil is lifted because the order to investigate a company under S.787 allows the
Inspector to investigate the company’s members and link them to their related entities as if they were
one corporate entity.

NB: It would be near impossible to establish the connection between entities without reviewing their
membership i.e. lifting the veil of incorporation.

c) Investigation of Company’s membership – S.801

Section 800 empowers the Attorney General to appoint an inspector to investigate and report on the
membership of a company for the purpose of determining the persons who are or have been:

 financially interested in the success or failure of the company; or

 are able to control or materially influence the company’s policy.

For this to happen, the distinction between the company, its members and managers is done away with
i.e. the veil of incorporation is lifted.

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Further, S.801 the Inspector appointed by dint of S.800 has the power to investigate the affairs of the
Company’s holding or subsidiary entities.

d) Group Accounts – S.642

If a Group financial statement is required to be prepared, the directors of the parent company shall
prepare the statement in accordance with the Act.

Under section 643 the Group accounts laid before the General Meeting must comprise:

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

b. A consolidated profit and loss account dealing with the profit or loss of the parent company and
its subsidiary undertakings

S.642 (2) however places personal liability on the directors of the parent company which does not
comply. The directors are deemed to have committed an offence and on conviction is liable to a fine not
exceeding KES 500,000.

Personal liability means the veil of incorporation is lifted, in this case by Statute.

e) Fraudulent Trading – S.1002

If a business of a company is carried on with intent to defraud creditors of the company or creditors of
any other person, or for any fraudulent purpose, each person who knowingly participates in carrying on
the business in that manner commits the offence of fraudulent trading – and is personally liable.

‘Each person’ here includes directors and principal officers of the company.

S.1002 is clear that the offence crystallizes whether or not the company has been liquidated or is in
liquidation.

A person found guilty of an offence under this section is liable on conviction to imprisonment for a term
not exceeding 10 years or a fine not exceeding KES 10 Million, or to both. This effectively means that the
corporate shield is dispensed with.

In Re William C. Leitch Ltd (1932) 2 Ch. 71 the company was incorporated to acquire William’s business
as a furniture manufacturer. The directors of the company were William and his wife and they
appointed William as the Managing Director at a Salary of £1000 per annum. Within the period of one
month, the company was debited with an amount which was £500 more than what was actually due to
William. By that time the company had made a loss of £2500. Within 2 years of formation, and while
the company was still in financial problems, the directors paid to themselves the dividends of £250. By
the end of the 3rd year since incorporation the company was in such serious difficulties such that it
could not pay debts as they fell due. In spite of this William ordered goods worth £6000 which became
subject to a charge contained in a debenture held by them. At the same time he continued to repay
himself a loan of £600 which he had lent to the company at the beginning of the 4th year the company
with the knowledge of William owed £6500 for goods supplied. In the winding up of the company the

21
official receiver applied for a declaration that in no circumstances William had carried on the company’s
business with intent to defraud and therefore should be held responsible for the repayment of the
company’s debts. It was held that since that company continued to carry on business at a time when
William knew that the company could not comfortably pay its debts, then this was fraudulent trading
within the meaning of Section 323 and William should be responsible for repaying the debts. These are
the words of Justice Maugham J:

“if a company continues to carry on business and to incur debts at a time when there is to the
knowledge of the directors no reasonable prospects of the creditors ever receiving payments of
those debts, it is in general a proper inference that the company is carrying on business with
intent to defraud.”

The test is both subjective and objective.

In the Case of Re Patrick Lyon Ltd (1933) Ch. 786 on facts which were similar to the Williams case, the
same Judge Maugham J. said as follows:

“the words fraud and fraudulent purpose where they appear in the Section in question are
words which connote actual dishonesty involving according to the current notions of fair trading
among commercial men real moral blame. No judge has ever been willing to define fraud and I
am attempting no definition.”

The statutes are not clear as to the meaning of fraud the question arises that once the money has been
recovered from the fraudulent director, is it to be laid as part of the company’s general assets available
to all creditors or should it go back to those creditors who are actually defrauded.

In the case of Re William C. Leitch Ltd (1932) 2 Ch. 71 Justice Eve J. stated that such money should form
part of the company’s general assets and should not be refunded to the defrauded creditors.

In the case of Re Cyona Distributors Ltd (1967) Ch. 889 the Court of Appeal ruled that if the application
under Section 323 is made by the debtor then the money recovered should form part of the company’s
general assets but where the application is made by a creditor himself, then that creditor is entitled to
retain the money in the discharge of the debts due to him.

Although Section 1002 uses the word creditors, the Court will impose personal liability where only one
creditor has been defrauded. This was so held in Re Gerald Cooper Chemicals Ltd.

22
LIFTING THE VEIL BY COMMON LAW

The courts have time and time again identified circumstances in which the veil of incorporation can be
lifted. These circumstances are as follows:

a) Agency

If one company is to be fixed with liability as a principal for the acts of another company the relationship
of agency should be substantively established.

In Smith, Stone & Knight Ltd v. Birmingham Corporation where a relationship of this kind was revealed,
Lord Atkinson laid down a test as to whether such a relationship would exist.

In this case a company acquired a partnership concern, registered it as a company, and then continued
to carry it on as a subsidiary company. The parent company held all the shares except a few; treated the
subsidiary profits as its own, appointed managers and exercised effectual and constant control. When
the business of the subsidiary was acquired by the defendant corporation the court allowed the parent
company, brushing aside the legal distinction between the two companies, to claim compensation in
respect of removal and disturbance.

In that judgment, Lord Atkinson laid down the necessary questions one need to ask to know if the
company will constitute the shareholders’ as agents for purpose of carrying on the business:

i. Were the profits treated as the profits of the parent company?

ii. Were the persons conducting the business appointed by the parent company?
iii. Was the parent company the head and the brain of the trading company?
iv. Did the parent company govern the adventure; decide what should be done and what capital
should be embarked on the venture?
v. Did the trading company make the profit by its skill and direction?
vi. Was the parent company in constant and effectual control?

b) Ratification of Corporate Acts

In the past a company would be bound in a matter which would otherwise be ultra vires after a
unanimous agreement of its members in ratification. It is now clear that there is no need for unanimity.
All the members of a company need not agree on a certain matter for it to be ratified. All is required
now is agreement of all members entitled to vote on the matter.

Once such a decision has been reached in this manner the members are said to have ratified an action
despite the fact that the action was beyond the power of the company’s official who took it. When a
court of law looks at the circumstances of a case and concludes that during a meeting of members,
members ratified an act done on behalf of the company; in regarding the decision of the members as
the decision of the company itself, then the court would have to lift the veil of incorporation.

This was the case in Bamford V Bamford where directors of a company exercised their power to issue
shares for an improper purpose but the members in the general meeting voted in favour of the ultra-

23
vires action of the directors and therefore ratified it. It was held that the ratification validated the issue
of the shares.

c) Fraud/Improper Conduct

The common law has constantly and consistently declared that the veil of incorporated will be lifted in
order to prevent a fraudulent or improper design by members of a company. This is normally in order to
prevent individuals from using the advantage of the incorporation of a company to willfully and
knowingly perpetuate fraud, illegal acts or improper conduct.

In Re Bugle Press Ltd Horman L. J, to indicate that he would lift the veil of incorporation for the purpose
of disallowing the takeover bid since Jackson & Shaw (Holdings Co. Ltd) had been formed to enable the
majority shareholders acquire the shares of the minority, stated that,

‘this is a bare faced attempt to evade that fundamental rule of company law which forbids the
majority of shareholders, unless the articles so provide to expropriate a minority. The
transferee company was nothing but a small hut built round two company shareholders and the
so called sham was made by themselves as directors of that company. The whole thing is seen
to be a hollow sham.’

In Jones & Another v. Lipman & Another James bought a house from Lipman for £5,250. Before the
transaction was concluded, Lipman changed his mind and opted out of the contract. He formed a
company to which he transferred the house. James sued Lipman and his company for specific
performance of the contract. The court lifted the veil of incorporation with regard to the second
defendant and decreed specific performance since the defendant had formed the company to enable
him evade an existing legal obligation. Lawrence L.J stated:

‘The defendant company is the creature of the 1st defendant, a device and a sham, a mask which he
holds before his face in an attempt to avoid recognition by the eye of equity. The proper order to
make is an order on both the defendants specifically to perform the agreement between the
plaintiff and the 1st defendant.’

d) Determination of Residence

In order to ascertain a company’s residence it is necessary to lift the veil of incorporation. This is
because a company resides in the country in which its affairs are controlled and managed from. This is
not necessarily where the company is but where its members are. The veil has to be lifted so that the
location of the members can be ascertained. In Debeers Consolidated Mines Co. v. House (1906) The
company was registered in S. Africa where its general meetings were held. Some of its directors lived in
South Africa and some board meetings were held there as well. However, majority of the directors were
Britons resident in Britain. The company’s affairs were controlled and managed from London. The
question was whether the company was a resident of the UK for purposes of tax. The court held that it
was resident in London. Lord Loveburn stated:

“A company cannot act or sleep but it can keep house and do business. A company resides for
purposes of income tax where its real business is carried on. The real business is carried on where
the central management and control actually abides.’

24
 e) Group Enterprises

Many cases have been decided where the court has held that a parent company is the same entity as its
subsidiary and vice versa. There is no basic principle governing when this decision will be reached. The
decisions are based on the circumstances of each case.

In Harold Holdsworth & Co. Ltd v. Caddies the respondent (caddies) was the appellant’s Managing
Director and an agreement between himself and the company stated:

‘…. he shall perform the duties and exercise the powers in relation to the business of the
company and the business of its existing subsidiary companies, which may from time to time
assigned to or vested to him by, the board of directors of the company.’

After some time the board resolved that he should confine his attention to one of their subsidiaries
only. He refused to do so and brought an action for damages for breach of contract.

The court held that there was no breach due to the fact that in the circumstances of the case, the
director of the parent company could make decisions of the management of any of its subsidiary
companies as if the parent company and subsidiary company were one entity.

f) Determination of character/enemy character

As an artificial person a company has no actual character. It is neither friend nor foe. It can be neither
loyal nor disloyal. In order to ascertain a company’s ‘character’ courts have lifted the veil of
incorporation and taken a look at the character of its members and managers. These are the persons
who lend a company its character. A company is regarded as having an ‘enemy character’ if its members
or managers are enemies of the state or ‘alien enemies’. If this is the case, the company is said to be an
enemy of the country it is operating in.

In Daimler Co. Ltd V Continental Tyre and Rubber Co. (Great Britain) Ltd the continental tyre co was
formed in Britain to sell German made tyres. The bulk of the co shares were held by the German co.
which manufactured the tyres. The remaining shares except one, were held by a German resident in
Germany. All directors were Germans resident in Germany. After the outbreak of the 1st world war, the
Continental tyre co. instituted proceedings against the appellant (Daimler) to enforce a trade debt. The
defendant denied liability and argued that the debt was unenforceable as enforcing it amounted to
trade with an alien enemy. This defense was rejected. However on appeal the House of Lords lifted the
veil of incorporation and disallowed the action as the company was an alien enemy by reason of its
members and managers of the co. In the words of Lord Parker:

"A company incorporated in the UK is a legal entity, a creation of law with the status and
capacity which the law requires. It is not a natural person with mind or conscience. It can be
neither loyal nor disloyal. It can neither be friend nor enemy. Such a co. may however assume
an enemy character. This would be the case if its agents or the person in de facto control of its
affairs whether authorized or not are resident in an enemy country or wherever resident are
adhering to the enemy or taking instructions from or acting under the control of enemies. A
person knowingly dealing with the company in such a case is trading with the enemy.”

25
1.1. Distinction between companies and other forms of business associations

Distinction Sole trader Partnership Company Co-operative

Formation Register as self– Deed of partnership Register with Registrar of Register with Registrar of
employed drawn up Companies. cooperatives
Number of one Two or more One or more Ten or more
shareholders/partner
s/members
Member’s control sole Depends on deed Decision making at Decision making at
shareholder level is based on members
number of shares held and level is usually based on
voting powers attached to one member-one-vote
each share. principle.
Liability of Unlimited (personal Unlimited (personal property Limited to investment placed Limited to investment
shareholder, property of shareholder may be at into business. (corporate veil placed
partners or of shareholder may be risk) rule-of-law applies) into business. (corporate
members at risk) veil
rule-of-law applies)
Governance By owner (appointed Shared responsibility (agreed Board of directors Committee of
by by partners) (elected at management
owner) an AGM by the shareholders) and management team
(elected at an AGM by the
members)
Investment Mainly personal funds Partners’ finance Shareholders’ finance, Mainly from owners’
issuing of shares. finance, government
assistance and
pooling of limited
personal
resources.
Accounts and No strict accounting or No strict accounting or audit Accounting and audit Accounting and audit
audit audit required. required. requirements (depending on requirements (depending
Records not available Records not available for legislative thresholds). on
for public inspection. public inspection. Accounts open for public legislative thresholds).

26
 inspection (also in abridged Accounts open for public
format). inspection (also in
abridged
format).
Profit Withdrawn by owner Distributed to partners Distributed by way of Distributed by way of
distribution according to profit sharing dividends to shareholders in patronage to members in
proportion to their number proportion to the volume
of of
shares. business or other
transactions
done by them with the
society.
Usually limited dividends
paid to shareholders in
proportion to their
number of
shares.
Continuity If owner dies or retires Partnership dissolved on Perpetual existence. Perpetual existence.
business may go out of death, retirement or Shareholders and their Members and their
existence unless sold bankruptcy. company are legal and cooperative
by distinct entities. are legal and
heirs. distinct entities.
Winding-up Usually business is Usually business is closed and Usually company is Usually a co-operative is
closed and net assets net assets (if any) are liquidated and net assets (if liquidated and the net
(if any) are distributed to owners any) are distributed to assets
distributed to owners shareholders according to % (if any) are distributed on
shareholding. winding-up according to
the
principle of disinterested
distribution, that is to say
to
another co-operative
pursuing similar aims or
general interest purposes.

27
LIMITED COMPANIES AND PARTNERSHIPS COMPARED

Section 3 of the Partnership Act defines a partnership as a relationship between two or more persons
carrying on business together with the view of making profit. The partnership can be distinguished from
a limited company as follows:

1. Formation: a company undergoes elaborate legal procedures to come into existence, for
example, a company requires registration with the registrar of companies whereas for a
partnership registration is not compulsory.
2. Legal personality. A company has legal personality and is distinct from its members whereas a
partnership has no legal personality and is made up of the members who compose it.
3. Membership. The minimum number of members in a partnership is two and a maximum of
twenty whereas the minimum number in a private company is two and maximum of fifty. In a
public company minimum of seven and an unrestricted maximum.
4. Transferability of shares. Shares in a company are freely transferable whereas a partner cannot
transfer his shares without consent of the other partners.
5. Scope of business. The scope of business of the company is limited to the object clause of the
memorandum of association whereas scope of business of a partnership is not restricted.
6. Management. The business of the company is run by the board of directors whereas every
member of a partnership firm is involved in the business of the firm.
7. Agency. Partners are agents to each other in the carrying of business of the firm, whereas
members of a limited company are not agents to each other.
8. Dissolution. An act of the parties. For example, agreement, notice etc, render the partnership
dissolved whereas dissolution of the company requires elaborate legal procedures.

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PROMOTERS, COMPANY PROMOTION AND PRE-INCORPORATION CONTRACTS

Promotion is conducted by persons who come up with the idea to form a company. They are legally referred to
as promoters.

A promoter is a person who was a party to the preparation of the Company Prospectus or on the particulars thereof but
doesn’t include any person so engaged in his professional capacity e.g. Advocate, CPS, unless they are named as
directors of the company being formed.

In the words of Cockburn C.J in Twycross v Grant (1877) 2C.P.D. 469:

“A promoter, I apprehend, is one who undertakes to form a company with reference to a particular project and
set it going and who takes the necessary steps to accomplish that purpose. ”

This explanation fails to capture the role that a person must play to qualify as a promoter. In the words of Lindley J in
Emma Silver Mining Co. V Lewis 4 C. P. D. 396 (I879):

“As used in connection with companies, the term promoter involves the idea of exertion for the purpose of getting
up and starting a company (floating it).”

This explanation also fails to fully identify the role of a promoter.

Promotional acts usually include:

a) Preparation of the Memorandum and Articles of the proposed company
b) The appointment of the first directors
c) Preparation of the prospectus
d) Negotiating the preliminary contracts
e) Paying the preliminary expenses etc.

A PROMOTER DEMYSTIFIED

It has been observed that a promoter is a person who comes up with the idea of enterprise and participates in transforming
the idea into a company. He is said to be the person who prepares the documents, registers the company and meets its
preliminary expenses.

A promoter is any person who has taken some part in bringing a company into existence or in procuring persons to join it
as soon as it is technically formed.

The role of a promoter may be active or passive e.g. the advocate engaged to form a company becomes a promoter
thereof if he agrees to become a director or provides a director. The question as to who a promoter is one of fact and
varies from case to case. In the words of Bowen L.J. In Whaleybridge Calico printing Co Ltd V Green,

“The term promoter is a term not of law but of business it usefully sums up in a single word a number of business
operations familiar to the commercial world by which a company is generally brought into existence. Although
1
 company law recognizes the role played by a promoter the term still remains ill-defined and so is the promoter’s
relationships with the company in formation. He is therefore described as an illegitimate child of the law; actively
known but formally ignored.”

THE LEGAL POSITION OF A PROMOTER

A promoter is not an agent of the company in formation as it does not legally exist. This is because at common law, a
person cannot be an agent for a non-existing principal as it was held in Kelner V Baxter.

A promoter is also not a trustee of the company in formation as the beneficiary does not exist. This was so held in Omnium
Electric Palaces Ltd V Baines.

Promoters thus stand in a fiduciary position with regard to the company in formation. In the words of Lord Cairns in
Erlanger v New Sombrero Phosphates Co. (1878) 3 A.C. 1218 (The Sombrero case) are instructive,

“They stand in my opinion, undoubtedly in a fiduciary position [as] they have in their hands the creation and
molding of the company. This is an equitable relationship based on trust confidence and good faith; it imposes
upon the promoters certain equitable or fiduciary obligations”

In this case, the promoters of a company sold a lease to the company at twice the price paid for it without disclosing this
fact to the company. It was held that the promoters breached their duties and that they should have disclosed this fact to
the company’s board of directors.

DUTIES AND OBLIGATIONS OF PROMOTERS

Promoter’s duties fall into two broad categories; fiduciary and common law

Fiduciary Duties

a) Duty to act bonafide: Promoters are bound to act in good faith in what they consider to be the best interest of
the company and all actions must be guided by the principles of utmost good faith and fairness.

b) Proper accounting: Promoters are bound to explain the application of monies or assets which come into their
hands from the date they become promoters. The account must be complete and honest.

c) Disclosure: As fiduciaries, promoters are bound to disclose personal interest in transactions to avoid conflict of
interest. Any secret profit made must be disclosed failing which the promoter is liable to account for the same
and the contract may be rescinded by the company. Such disclosure may be made to an independent board of
directors or to all members in the prospectus.

In the Sombrero Case, persons who were in the process of forming a company bought a lease in the West Indies
for £55,000 so as to mine phosphate deposits. They sold the lease to the company for £110,000 a fact that they
did not disclose. The facts came to light 8 months later and all the directors were removed from office. The
company sought to rescind the contract for the non-disclosure and it was held that it was entitled to do so.
Whereas disclosure to the general body of shareholders is sufficient, disclosure to a few persons who constitute
the initial membership of the company is insufficient.

It was so held in Gluckstein V Baines (1900) where the plaintiff and four others bought certain premises for
£140,000 and sold it to a company they were forming for £180,000. The company had no independent board of
directors. Although the prospectus disclosed the £40,000 profit, it did not disclose a further £20,000 the
promoters had made on the premises. In liquidation, the liquidator sought to recover £6,341 from Gluckstein as

2
 his share of the secret profit. It was held that he was liable to account for the non-disclosure. In the words of Lord
Macnaghten:

“Disclosure is not the most appropriate word to use when a person who plays many parts announces to
himself in one character what he has done or is doing in another... to the intended shareholders there
was no disclosure at all an elaborate system of deception was practiced on them.”

Common law or General Duties

a) Determine and settle the company name.

b) To request or cause the registration of a company.

c) To prepare or cause the preparation of the constitutive documents.

d) To meet the preliminary expenses.

e) To secure the services of directors.

f) To prepare the prospectus if necessary.

g) To ensure that the company has an independent board of directors

h) To acquire assets for use by the company.

i) To enter into business contracts on behalf of the company.

REMUNERATION OF PROMOTERS

A promoter is neither entitled to remuneration for incorporating the company nor is he entitled to recover the expenses
incurred. This is because there is no contractual relationship between the promoter and the company. Such a contract
cannot exist as the company has no legal existence or capacity to contract – Kelner v Baxter

The company could not after its incorporation enter into a contract to pay him for his services because no consideration
to support the contract would be furnished by him. The services rendered would be past consideration.

However in practice promoters recover their expenses in accordance with the Articles. For example, a clause providing
that Company Directors may pay all the expenses incurred in promoting and registering it.

Promoters may be rewarded in other ways as follows:

a) Upon disclosure, a promoter is free to sell overvalued assets to the company in formation in return for a profit.
b) By disclosing, a promoter is free to sell overvalued assets to the company in return for fully paid shares.
c) A promoter may act as an agent to enable the company acquire an undertaking from a third party in return for a
commission which ought to be disclosed.
d) Promoters may be afforded the opportunity to take up extra shares at par value after the market value has risen.
e) Traditionally, promoters have been rewarded by being offered either deferred, founders or management shares.
f) Promoters may also be appointed as the initial directors of the company

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PRE-INCORPORATION CONTRACTS/PRELIMINARY CONTRACTS

These are contracts entered into by persons purporting to do so on behalf of the company before its incorporation. They
are also referred to as Preliminary Contracts.

Under Section 18 (4) of the Companies Act, a company comes into existence on the date of incorporation. Before then it
is not a legal person and has no capacity to contact or have agents.
At common law, a pre incorporation contract is generally unenforceable by or against the company.

Section 44 of the Companies Act provides that a contract that purports to be made by or on behalf of a company at a time
when the company has not been formed has effect, subject to any agreement to the contrary, as a contract made with
the person purporting to act for the company or as agent for it, and the person is personally liable on the contract
accordingly.

RULES GOVERNING PRE-INCORPORATION CONTRACTS

1. Before incorporation, a company has no legal existence it can neither contract nor have agents as held in Kelner v.
Baxter (1886)

2. At common law, a person who purports to contract as an agent where he has no principal existing at that particular
time is personally liable on the contract. This was so held in Kelner v. Baxter (1886) where 3 persons who were forming
a company ordered a large quantity of wine from plaintiff and signed the contract as follows:

“On behalf of Gravesend Royal Alexander Hotel Ltd”

The wine was supplied and consumed by the hotel business which subsequently collapsed. The plaintiff sued the
promoters in question and the issue was who the contracting parties were. It was held that even though the
defendants had contracted as agents, they had no principal and were thus personally liable on the contract. The Court
was of the considered view that it was necessary to hold the defendants liable to give effect of the contract by stating:

“Where a contract is signed by one who professes to be signing as an agent, but who has no principal existing at
the time and the contract would be altogether inoperative unless binding upon the one who signed it, he is bound
thereby and a stranger cannot, by a subsequent notification, relieve him from such responsibility”

3. At common law a contract purportedly entered into by a nonexistent person is void. This is because for a contract to
come into existence there must be at least two parties. In Newborn v. Sensolid (G.B Ltd) (1954) a contract was
entered into between Leopold Newborn London Ltd and the Defendant for purchase of goods by the latter. The
defendant subsequently refused to take delivery of the goods and an action was commenced by Leopold Newborn
Ltd. It was discovered that at the time the contract was entered into, the company had not been incorporated. Leopold
Newborn thereupon sought personally to enforce the contract. It was held that the signature on the document was
the company’s signature and as the company was not in existence when the contract was signed, there never was a
contract and Mr. Newborn could not come forward and say that it was his contract. The fact was that he made a
contract for a company which did not exist. In the words of Lord Goddard:

“This purports to be contract by the company; it doesn’t purport to be a contract by Mr. Newborn. He does not
purport to be selling his goods. The only person who had any contract here was the company and Mr.
Newborne’s signature merely confirmed the company’s signature.”

4. At common law, a pre-incorporation contract cannot be ratified by the company after incorporation as the company
did not exist when the contract was entered into. It was so held in Price V Kelsal (1959). In Natal Land Co. Ltd V
Pauline Colliery Syndicate where the respondent company applied for specific performance of a contract entered into

4
 before its incorporation, it was held that the contract was unenforceable as it was incapable of being ratified by the
company.

5. At common law, the mere adoption or confirmation by directors of a contract entered into before incorporation
creates no relationship whatsoever between the company and the party. It was so held in North Sydney Investments
and Another V Higgins and Another.

6. At common law, a pre-incorporation contract is enforceable by or against the company if after incorporation the
company has entered into a new contract similar to the previous agreement. It was so held in Howard V Patent Ivory
Manufacturing Co Ltd. The new contract by the company may be express or implied by the conduct of the company
after incorporation. In Mawagola Farmers & Growers Ltd. V Kanyanja and Others (1971) the appellant company had
500 shares of 20 UGShs each. Before incorporation, its promoters held many meetings in many parts of Uganda
soliciting subscribers for the shares. Some of the respondents bought shares from the promoters while others bought
them from the company after incorporation. No shares were allotted to them. The returns of the company showed
that all the shares had been allotted, the company shares had been consolidated and the company’s capital had been
increased. The respondents applied to the High Court for rectification of the register of members to include their
names as members and the High Court ordered the rectification on the ground that the company had entered into
new contract after incorporation. The company appealed. The Court of Appeal upheld the decision on the ground that
there was evidence a new contract by the company.

REMEDIES AGAINST PROMOTERS FOR BREACH OF DUTY

The company or a third party may pursue any of the following remedies against the promoters where appropriate for
breach

a) Rescission.
The company or third party who has dealt with a promoter in breach of his fiduciary obligations may rescind the contract
in question. The essence of the remedy is to restore the parties to the position they were before the contract. Its grant or
refusal is dictated by the principles of equity.

The remedy is unavailable where:

 The party entitled to it has slept on its rights for too long.
 The party entitled to it has expressly or impliedly affirmed or accepted the contract.
 Third party rights have arisen on the contract.
 Restitutio in integrum is not possible.

In the Sombrero case, it was held that the company was entitled to rescind the contract for non-disclosure by the
promoters.

b) Account / recovery of profit.

The company is entitled to recover any secret profit made by a promoter in his promotional activities without disclosure.
The same is recoverable under an action for money had and received as held in Gluckstein V Barnes (1900) where
Gluckstein was ordered to account for £6,341 which was a secret profit he had made as a promoter.

c) Damages.
The company has an action in damages against a promoter for breach of duty which is sustainable notwithstanding the
absence of fraud. This action is an alternative to an account. In Re Leeds and Hanley Theater of Varieties Ltd, where a
promoter had made a secret profit of £12,000 and the company sued, the Court of appeal awarded the same as damages.

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 d) Compensation.
Under section 44 (1) of the Act, persons who purport to enter into contracts on behalf of the company before the company
is formed are personally liable on the same.

Additionally, a third party who has suffered loss or damage by reason of subscribing for shares or debentures of a company
on the faith of a prospectus containing any untrue statement is entitled to compensation for loss or damage by among
others, every person who was a promoter of the company.

e) Investigations
Under Part XXX of the Act an investigation may be made into the affairs or the membership of the company.
Section 788(2)(c) is clear that investigations shall be conducted where the persons responsible for the company's
formation (promoters) or the management of its affairs are or have been guilty of fraud, misfeasance or other misconduct
towards it or towards its members. This means that the promoters will be personally liable for breach of their duty.

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THE COMPANY’S CONSTITUTION

Part III of the Companies Act 2015 deals with the Company’s Constitution i.e. the Memorandum and Articles of Association.

THE MEMORANDUM OF ASSOCIATION

Under the 2015 Act the Memorandum serves a limited but nonetheless important purpose.

It evidences the intention of the subscribers to the Memorandum to form a company and become members of that
company on formation. In the case of a company limited by shares the Memorandum will also provide evidence of the
members’ agreement to take at least one share each in the company.

Section 12 (1) of the Act provides that a Memorandum of association is a Memorandum stating that the subscribers:

 Wish to form a company under this Act; and

 Agree to become members of the company and,
 In the case of a company that is to have a share capital, to take at least one share each.

A company may not be registered unless its Memorandum of association is:

 In the form prescribed by the regulations,

 Authenticated by each subscriber, and
 Lodged with the Registrar for registration during company formation

The Memorandum is therefore very different from that created under the previous Companies Act which had clauses such
as Name Clause, Capital Clause, Liability Clause, Situation Clause, Objects Clause etc. In addition, it will not be possible to
amend or update the Memorandum of a company formed under the 2015 Act.

In terms of transition, Section 26 of the 2015 Act provides that provisions contained in previous versions of Memorandum
of Association but are not provisions of the kind referred to in Section 12, (the MOA clauses) become provisions of the
company's Articles on that commencement.

It’s important to also note that key information regarding the internal allocation of powers between the directors and
members of the company will be set out in the Articles of Association.

THE DOCTRINE OF ULTRA VIRES AND THE COMPANY’S CAPACITY

Ultra vires literally means beyond the powers. It is the rule of capacity formulated in Common Law and adopted in varying
degree by statute. Its effect was to limit the contractual capacity of a company so as to restrict the risk to the shareholder’s
capital.

This is a legal rule articulated by the House of Lords in the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche to
the effect that where a contract made by a company is beyond the objects of the company as written in the object’s clause
of the Company’s Memorandum of Association it is beyond the powers of the company to make the contract. Lord Cairns
states in obiter dictum that such a contract cannot be ratified even by the unanimous consent of all the shareholders of
the company. If deemed ultra vires, then the directors would be found personally liable.

This common law rule has however been done away with by S.28 and S.33 of the 2015 Act.

Section 28 provides that unless the Articles of a company specifically restrict the objects of the company, its objects are
unrestricted.
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Section 33 states that the validity of an act or omission of a company may not be called into question on the ground of
lack of capacity because of a provision in the Constitution of the company.

This effectively means that the Company has the capacity to undertake any transaction, which must be legal, without any
limitation instigated by the Constitution.

Section 34 further provides that the power of the directors to bind the company, or authorize others to do so, is free of
any limitation contained in the company's Constitution. Additionally:

(a) The 3rd party must be dealing with the company in good faith
(b) Is assumed to have been dealing in good faith unless proven otherwise
(c) The 3rd party need not enquire as to any limitation on the powers of the directors to bind the company or to
authorize others to do so

NB:
1. Where the directors have however exceeded their powers, they will be personally liable.

2. S.34 does not prevent legal action being instituted under any other laws challenging the validity of the contract
entered into by the Company. Such contracts are voidable at the option of the company

3. The director in question or a connected party in such a contract will be liable to:

 Account for any gains made directly or indirectly under the contract
 Indemnify the company for any loss or damage resulting from the transaction

4. The contract ceases being voidable if:

 Restitution ad integrum is not possible.

 The company is fully indemnified
 A bona fide 3rd party’s rights would be affected
 The transaction is affirmed by the company

THE ARTICLES OF ASSOCIATION

Under the 2015 Act, the Articles of Association are the key constitution of the company. They are registered with the
Registrar upon incorporation of the company.

Under Section 21, where Articles of Association are not registered, the Model Articles of Association (previously Table A)
will apply by default. The Regulations to the 2015 Companies Act will provide for Model AOA for public and private
companies.

Section 26 of the Act provides that provisions which previously would be found in the Memorandum of association but
which should now be considered as part of the Articles of Association will be duly considered as such.

Section 28 provides that unless the Articles of a company specifically restrict the objects of the company, its objects are
unrestricted. This is an important section because it greatly diminishes the application of the doctrine of ultra vires in
company law.

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Legal Effect of Registering the Articles

Section 30 provides that a company's constitution binds the company and its members to the same extent as if the
company and its members had covenanted or agreed with each other to observe the constitution. As a result, money
payable by a member to the company under its Constitution is recoverable in a court of competent jurisdiction as a debt
due from the member to the company

The existence of this contract was first acknowledged by Lord Herschell in Welton v. Seffery (1891) where he observed:

“It is quite true that the Articles constitute a contract between each member and the company.”

It is contended that the contract created by the Articles has certain special characteristics. These characteristics were
highlighted by Ashbury J in Hickman v. Kent (1915). Article 49, of the affected Company’s Articles, provided that any
dispute between a member and the company should be referred to arbitration. A dispute arose between Hickman and
the company, in which he was a member, and its secretary. Hickman sued the company. The company applied for a stay
of the proceedings for the dispute to be referred to arbitration in accordance with article 49. The court granted a stay on
the ground that Articles constituted a contract between the company and its members and therefore both were bound
to observe its provisions. In making this decision Ashbury J laid down the following features of the contract: -

i. No Article can constitute a contract between a company and a third person. The contract created by the Articles
is between the company and its members only.
ii. No right merely purporting to be given by an Article to a person e.g. director or promoter can be enforced against
a company unless that person is a member and brings the action in his own capacity as a member. The rights
conferred by this contract can and only be enforced by members in their capacity as members.
iii. The contract created by the Articles must be consistent with the Memorandum and the provisions of the
Companies Act.
iv. The terms of the contract keep on changing from time to time whenever the company alters its Articles in exercise
of the power conferred upon it in Sec. 22.
v. The contract confers rights and imposes obligations on the company and its members.

In Eley v. Positive Government Life Assurance Co., Article 118, of the defendant company’s Articles, provided that Eley be
appointed the company solicitor for life to transact all the companies’ legal business at a fee. After incorporation, Eley
was appointed the company’s solicitor and transacted its legal business for some time. He then bought shares and became
a member. Shortly thereafter the company ceased to employ him preferring other solicitors to transact its legal business.
Eley sued to enforce the Contract in Article 118. It was held that the Articles were unenforceable since Eley was an
outsider. Though he was a member, he was suing to enforce a right accruing to him in a capacity other than that of a
member.

In Rayfield v. Hands, Article 11 of the affected company’s Articles, provided that any member intending to transfer shares
had to inform the directors who were to take up the shares equally between them at a fair value. Rayfield who held 725
shares informed the directors of his intention to transfer his shares but the directors declined to take up the shares. The
directors were also members of the company. Rayfield sued the directors to enforce Article 11. It was held that the Article
was enforceable as it referred to directors in their capacity as members.

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Amendment of the Articles of Association

Section 22 provides that a company may amend its Articles only by special resolution – qualified majority of 75%

In Andrews v. Gas Meter Co. Ltd (1906), the original Articles of the company stated that the company had no power to
issue preference shares. The company had by a special resolution altered the Articles to give itself the power to issue
preference shares to increase its capital. The plaintiff sued on the question whether a company could alter its Articles to
give itself a power it did not have under the original Articles. It was held that a company could alter its Articles to confer
upon itself such a power since the power to alter Articles was statutory.

A. Statutory Restrictions On The Alteration Of The Articles

Generally, a member is bound by the AOA as well as any subsequent amendments thereafter.

However, Section 23 provides that a member of a company is not bound by an amendment to the Articles of a company
after the date on which he became a member, if the amendment:

a) requires the person to take or subscribe for more shares than the number held by the person at the date on which
the amendment is made: or

b) in any way increases the person’s liability as at that date to contribute to the company's share capital or otherwise
to pay money to the company.

Section 23 does not apply if the member agrees in writing to be bound by the amendment.

The amended Articles must be lodged with the Registrar for registration within 14 days after the special resolution
containing the amendment is passed, failing which the company, and company officers, commit an offence and on
conviction are each liable to a fine not exceeding KES 200,000.

Other Restrictions include:

1. The alteration must be authorized by a special resolution of members in a general meeting.

2. The alteration must not be inconsistent with the provisions of the Companies Act or any other written law.
3. It must not increase the liability of members or require them to take up more shares without written consent.
4. It must not be inconsistent with the rights of dissenting members affected by a variation of class rights to apply to
the Court for the variation to be cancelled.
5. It must not be contrary to a Court order (if any) made pursuant to the Act for the purposes of minority protection.

Resolutions Requiring Registration

The following resolutions and agreements will be deemed to affect the company’s Constitution and should be registered
with the registrar within 14 days of being passed:

a) A special resolution;
b) A resolution or agreement agreed to by all the members of a company that if not so agreed to would not have
been effective for its purpose unless passed as a special resolution
c) A resolution or agreement agreed to by all the members of a class of shareholders that if not so agreed to would
not have been effective for its purpose unless passed by a particular majority or otherwise in a particular manner;
d) A resolution or agreement that effectively binds all members of a class of shareholders though not agreed to by
all those members

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 e) A resolution to give, vary, revoke or renew authority for the purposes of section 451 – authorization for off-market
purchase of shares;
f) A resolution conferring, varying, revoking or renewing authority following market purchase of a company's own
shares;
g) A resolution for voluntary liquidation;
h) A resolution passed regarding transfer of securities.

B. Common Law/Judicial Restriction on the alteration of the Articles

The alteration must be made in good faith and for the benefit of the company as a whole. It was held in Allen v. Gold
Reefs of West Africa (1900) 1 Ch. 626. In the words of Lindley J:

“[This power] must be exercised subject to the general principles of law and equity which are applicable
to all powers conferred on majorities and enabling them to bind minorities. It must be exercised not only in the
manner required by law but also bona fide for the benefit of the company as a whole.”

Further reference may be made to the case of Shuttleworth v. Cox Brothers Ltd (1927) 2 KB 29 where the Articles of the
Company provided that the Plaintiff and 4 others should be the first directors of the company. Further each one of them
should hold office for life unless he should be disqualified on any one of some six specified grounds, bankruptcy, insanity
etc. The Plaintiff failed to account to the company for certain money he had received on its behalf. Under a general
meeting of the company a special resolution was passed that the articles be altered by adding a seventh ground for
disqualification of a director which was a request in writing by his co-directors that he should resign. Such request was
duly given to the Plaintiff and there was no evidence of bad faith on the part of shareholders in altering the articles. The
Plaintiff sued the company for breach of an alleged contract contained in their original articles that he should be a
permanent director and for a declaration that he was still a director. The court held that the contract if any between the
Plaintiff and the company contained in the original articles in their original form was subject to the statutory power of
alteration and if the alteration was bona fide for the benefit of the company, it was valid and there was no breach of
contract. Lord Justice Bankes observed as follows:

“In this case, the contract derives its force and effect from the Articles themselves which may be altered. It is not
an absolute contract but only a conditional contract.”

The question here is who determines what is for the benefit of the company? Is it the shareholders or the Courts? Scrutton
L.J. had the following to say:

“… to adopt such a view that a court should decide will be to make the court the manager of the affairs of
innumerable companies instead of shareholders themselves. It is not the business of the court to manage the
affairs of the company. That is for the shareholders and the directors.”

The Courts are however clear than when determining the validity of an alteration, regard must also be had or given to
existing and future members of the company.

In Sidebottom v. Kershaw Leese & Co. Ltd the Plaintiff was a minority shareholder in a small farming company. He was
interested in a business which was in direct competition with that of the company. Members in the general meeting
resolved to add to the Articles that a shareholder had to transfer his shares to nominees of directors if a written request
was served upon him by the board. A request was served upon the Plaintiff who instituted proceedings challenging the
validity of the said Article. It was held that the alteration was valid as it was beneficial to the company to get rid of
competition from its membership.

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However in Brown v. British Abrasive Wheel Co. Ltd a public company required further capital urgently or risked being
wound up. The majority holding 98% of the shares were willing to provide the capital provided that they were allowed to
buy the shares of the minority. The minority refused to sell the shares. The majority in general meeting resolved to add
to the Articles a provision to the effect that a member was bound to transfer his shares if a written request was served
upon him by holders of not less than 90% of the shares. The Plaintiff challenged the validity of the proposed alteration.
The Courts granted an injunction restraining alteration as it was not made in good faith and for the sake of the company
as a whole but exclusively for the benefit of the majority.

Alteration of Articles and the Effect on Directorships

The legal consequence of an alteration of the Articles on a contract of directorship depends on how the director was
appointed to office. A director may be appointed to office:

 In accordance to the Articles;

 Under a contract of service independent of the Articles; and
 Under a contract of service dependent on the Articles.

1. Directorship under the Articles

A director appointed to office in accordance with the Articles remains in office so long as the Articles remain unchanged.

If they are altered by the company in such a way that he loses office, the director has no actionable claim against the
company as was the case in Shuttleworth v. Cox Brothers Ltd (1927) 2 KB 29 where the Articles provided that the plaintiff
and other persons be appointed directors and hold office for life unless removed on any of certain six grounds as
enumerated by the Articles. The plaintiff had on many occasions failed to account of monies received on behalf of the
company. The members resolved to add to the Articles a seventh ground for disqualification of directorships i.e. a director
had to resign if a written request was served upon him by the other directors. A request was served upon the plaintiff who
sued for a declaration that he was still a director. It was held that he had ceased to be a director of the company since his
directorship was based on the Articles.

2. Directorship under contract of service independent of the Articles

A director appointed to office under such a contract remains in office as long as the terms of the contract dictate and can
only be removed in accordance with the terms of the contract.

Any purported removal on the basis of the Articles amounts to a breach of contract which the director has a remedy in
damages as was the case in Southern Foundries v. Shirlaw (1940) A.C. 701 where the plaintiff was appointed MD of a
company in 1833 under a 10 year written contract service. After a reorganization of the company, a new set of Articles
was adopted. One of the Articles empowered the company to remove any director from office by notice. The plaintiff was
removed from the office of director whereupon he ceased being the MD. The sued in damages for wrongful dismissal and
was awarded £12,000.

A similar holding was held in Shindler V Northern Raincoat Co Ltd where the plaintiff has been appointed MD under a
contract of service for 10 years but the company purported to remove him from office under the Articles. He was awarded
£7500 in damages for breach of contract.

3. Directorship under a contract of service dependent on the Articles

This is a contract of service which embodies the relevant provision of the Articles.

A director appointed to office under such a contract may be removed under the Articles as constituted or as altered from
time to time.

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This was the case in Read v. Astoria Garage (1952) 1 All.E.R 922 where the plaintiff was appointed and served as MD for
17 years. The Articles provided that an MD ceased to hold office if the general meeting so resolved or if he ceased to be a
director for any reason among others. The board of directors terminated his term of office by notice to that effect that
decision which the general meeting had passed had been ratified. It was held that he was not entitled to damages as the
company had reserved to itself the power to remove the MD from office.

Can a company be restrained from altering the Articles?

This question arises where the proposed alteration leads to breach of contract or interferes with the rights of members.

In Punt V Symons it was held that an injunction will not be generally issued to restrain a company from altering its Articles.

In the words of Lord Porter in Southern Foundries Ltd V Shirlow:

“A company cannot be precluded from altering its Articles thereby giving itself the power to act upon the altered
Articles, but so to act may nevertheless be a breach of contract if it is contrary to a stipulation in a contract validity
concluded before the alteration”

However, an injunction may be granted to restrain a company from altering its Articles if it is the most appropriate remedy
in the circumstances as held in British Mural Syndicate V Alpperton Rubber Co Ltd 1950 2 Ch. 186 where, by an agreement
binding on the Defendant company it was provided that so long as the operative syndicate should hold over 5000 shares
in the Defendant’s company, the Plaintiff’s syndicate should have the right of nominating two directors on the Board of
the Defendant Company. A clause to the same effect was contained in Article 88 of the Defendant Company’s Articles of
Association. Another Article provided that the number of directors should not be less than 3 nor more than 7. The Plaintiff
syndicate had recently nominated 2 persons as directors. The Defendant Company objected to these two persons as
directors and refused to accept the nomination and a meeting of shareholders was called for the purpose of passing a
special resolution under Section 13 of the Companies Act cancelling the article. The court held that the defendant company
had no power to alter its Articles of Association for the purpose of committing a breach of contract and that an injunction
ought to be granted to restrain the holding of the meeting for that purpose.

THE DOCTRINE OF CONSTRUCTIVE NOTICE

This doctrine is to the effect that persons who deal with the company are deemed to know the contents of its public
documents i.e. the Memorandum, the Articles, Special Resolutions among others. It was so held in Ernest V Nicholls.

This is because such documents are registerable with the Registrar and are open to public scrutiny by those who care to
inspect them.

Persons who deal with companies are presumed to know the extent of their contractual capacity i.e. whether a transaction
is intra or ultra vires the company.

For purposes of the ultra vires doctrine a person transacting business with a company will be taken to be aware of the
company’s objects, if restricted. Consequently, if he concludes a contract with the company and it turns out that the
contract was for a purpose which is neither expressly nor impliedly within the company’s objects and hence ultra vires, he
is regarded as having entered into an ultra vires contract knowingly even though he was not actually aware of its being
ultra vires. He cannot successfully sue the company for breach of contract as was illustrated in Ashbury Railway Carriage
v. Riche where the company’s objects authorized it to make and sell railway carriages and wagons and all kinds of rail
fittings but the company purported to enter into a contract for the construction of a railway in Belgium.

Third parties are therefore required to inquire into the affairs of the company by reading its public documents.

13
However the doctrine of constructive notice operates negatively, meaning that a party can only rely on a provision of the
Articles if it has actual knowledge of its existence. It was so held in Rama Corporation V Proved Tins and General
Investments Ltd where a director of the plaintiff company contracted with a single director of the defendant company
who had no authority of the board to contract on behalf of the company. However, the Company’s Articles empowered
the Board to delegate powers to committees of one or more directors. The director of the plaintiff company was unaware
of this Article. The defendant company repudiated the contract and was sued. It was held that the company was not liable
as the director had no authority to contract on its behalf. The plaintiff could not rely on the Article permitting delegations
as it was unaware of its existence. In the words of Justice Slade:

“There is no positive doctrine of constructive notice. It is a purely negative one”

The doctrine of Constructive Notice protects the company from third parties who do not make adequate or appropriate
inquiry.

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SHARES

1.1. Classes of shares

1.1.1. introduction

Section 323 of the Act provides that the shares or other interest of a member in a personal property and are
not in the nature of real estate.

Section 32 thereafter provides that The shares and any other interests of a member in a company are
transferable in accordance with the company's articles.

The definition of a share which is generally quoted in English text-books on Company Law is that of
Farwell, J. in Borland’s Trustee v Steel Brothers to the effect that,

“a share is the interest of a shareholder in the company measured by a sum of money, for the purpose
of liability in the first place, and of interest in the second, but also consisting of a series of mutual
covenants entered into by all the shareholders inter se in accordance with (Section 30 of the Companies
Act ). The contract contained in the Articles of Association is one of the original incidents of the share.
A share is not a sum of money, but is an interest measured by a sum of money and made up of various
rights contained in the contract, including the right to a sum of money of a more or less amount”.

From the above definition it should be noted that a share:

i. Is a yardstick of the holder’s liability to the company (if the company is limited by shares);
ii. Is the yardstick of the holder’s right in the company, particularly the dividends payable by the
company to the shareholders, voting rights and return of capital on a winding up;
iii. Is the foundation of the bundle of rights and liabilities arising from the statutory contract contained
in the Articles of Association.
iv. Is a form of property which, being transferable, can be bought, sold, given as security for a loan or
disposed of under a will. A person who owns one or more shares in a company is ipso facto, a
member of the company (unless the company did not enter his name in its register of members as
a consequence of which he is technically not regarded as a member of the company as was held in
Nicoll’s case).

Note that companies limited by guarantee and not having a share capital have members who do not own
shares in the company.

1.1.2. The classes of shares

The classes or types of shares, which can be created and issued by a company, are not prescribed by the
Companies Act. They depend on the provisions of the company’s constitution, usually the Articles of
Association, or the contract pursuant to which they are issued. Legally, therefore, a company can create any

1
type or class of shares it pleases but in practice the following are the classes of shares generally issued by
registered companies:

1. Ordinary shares

2. Preference shares
i. Participating preference shares and non-participating preference shares
ii. Redeemable preference shares and non-redeemable preference shares
iii. Cumulative preference shares and non-cumulative preference shares

3. Deferred or founders or management shares

4. Employee shares

Ordinary shares

Most companies have just ordinary/equity shares. They carry one vote per share, are entitled to participate
equally in dividends and, if the company is wound up, share in the proceeds of the company's assets after
all the debts have been paid. Some companies create different classes of ordinary shares. This is done to
create some small difference between the different classes, e.g. to allow the directors to pay different
dividends to the holders of the different share classes, or to distinguish between the shares so that different
rules apply for share transfers, etc. There can also be ordinary shares in the same company that are of
different nominal values, e.g. Ksh. 100 ordinary shares and Ksh. 10 ordinary shares.

Preference shares

The nature of “preference” shares and the rights attached to them have been explained by the English courts
in various cases. The decisions may be summarized as follows:

i. The essential characteristic of a preference share is that it carries a prior right to receive an annual
dividend of a fixed amount, e.g. 6% dividends. This is the only preferential right that it would have
over the other shares, particularly the ordinary shares. If the share is to have any other preferential
right, such a right must be expressly conferred by the contract under which it was issued or,
exceptionally, the company’s articles of association.

ii. As regards the priority dividend entitlement, four points should be noted:
 The right is merely to receive a dividend at the specified rate before any dividend may be
paid on ordinary or other classes of shares. It is a priority right to whatever dividend may
be declared. It is not a right to compel the company to pay the dividend if it declines to do
so. This issue is likely to arise if the company decides to transfer profits to reserve or makes
a provision in its accounts for a liability or loss instead of using the profits to pay the
preference dividend. In Bond V Barrow Haematite Steel Co (1902), The company did
not pay its preference dividend. Bond and other preference shareholders contended that the
company had available reserves of 240,000 pounds from which it could have declared the
dividend on their shares. The company replied that it had suffered realized losses of
200,000 pounds on the disposal or demolition of current assets and, in addition, its retained

2
 fixed assets had diminished in value generally by 50,000 pounds. It, therefore, decided to
retain the funds in question to make good the losses. It was held that the court could not
overrule the directors in their decision that the “state of the accounts did not admit of any
such payment” (of preference dividend). It was also held in Re Buenos Aires Great
Southern Railway Co. Ltd that if the company’s articles entitle the preference
shareholders to receive a fixed dividend for each year “out of the profits of the company”,
the words “profits of the company” means the profits available for dividend after setting
aside such reserves as the directors think fit. If the whole of the profits are transferred to
reserve the preference shareholders are NOT entitled to any dividends.

iii. Cumulative and non-cumulative preference shares: The right to receive a preference dividend
is deemed to be cumulative unless the contrary is stated. If, therefore, a 7% dividend is not paid
in year 1, the priority entitlement is normally carried forward to year 2, increasing the priority right
for that year to 14%and so on. When arrears of cumulative dividend are paid, the holders of the
shares at the time when the dividend is declared are entitled to the whole of it even though they did
not hold the shares in the year to which the arrears relate. An intention that preference shares could
not carry forward an entitlement to arrears is usually expressed by the word “non-cumulative”. If
nothing is expressed (though cumulative preference shares are usually described as “cumulative”
to remove all possible doubt) they are deemed to be cumulative, it was so held in Webb v Earle
(1875).

iv. If the company which has arrears of unpaid cumulative preference dividends goes into liquidation,
the preference shareholders cease to be entitled to the arrears unless:

 A dividend has been declared though not yet paid when liquidation commences;
 The articles (or other terms of issue) expressly provide that in liquidation arrears are to be
paid in priority to return of capital to members.

v. Participating and non-participating preference shares: Holders of preference shares have no

entitlement to participate in any additional dividend over and above their specified rate. If,
for example, a 7% dividend is paid on 7% preference shares, the entire balance of available profit
may then be distributed to the holders of ordinary shares. But this rule also may be expressly
overridden by the terms of issue. For example, the articles may provide that the preference shares
are to receive a priority 7% dividend and are also to participate equally in any dividends payable
after the ordinary shares have received a 7% dividend. The company might then distribute, say, 9%
to its ordinary shareholders and an extra 2% (making 9% in all) to its preference shareholders.
These preference shares are called participative preference shares. Since there is no limit on the
amount of dividend, which may be paid on them, they are a form of “equity share capital” even if
their entitlement to capital is restricted.

vi. Redeemable and non-redeemable preference shares: Those preference shares, which can be
redeemed or repaid after the expiry of a fixed period or after giving the prescribed notice as desired
by the company, are known as redeemable preference shares. Terms of redemption are announced
at the time of issue of such shares. On the other hand, preference shares, which cannot be redeemed

3
 during the life time of the company, are known as non-redeemable preference shares. The amount
of such shares is paid at the time of liquidation of the company.

vii. In all other respects, preference shares carry the same rights as ordinary shares unless otherwise
stated. If they do rank equally, they carry the same rights, no more and no less, to return of capital
and distribution of surplus assets and to vote. In practice, it is usual to issue preference shares on
this basis. It is more usually expressly provided that:

 The preference shares are to carry a priority right to return of capital; and
 They are not to carry a right to vote except in specified circumstances, such as failure to
pay the preference dividend, variation of their rights or on a resolution to wind up.

viii. When preference shares carry a prior right to a return of capital the result is that:
 The amount paid up on the preference shares, e.g. 1 pound on each 1 pound share, is to be
paid in liquidation or reduction of capital before anything is repaid to ordinary
shareholders; but
 Unless otherwise stated, the holders of the preference shares are not entitled to share in
surplus assets when the ordinary share capital has been repaid.

ix. If preference shares carry no right to attend and vote at general meetings, the preference
shareholders are still entitled to receive a copy of the annual accounts since these must be sent to
“every member” and they are members.

x. The advantages obtained by holders of preference shares are greater security of income and (if they
carry priority in repayment of capital) greater security of capital. But in a period of persistent
inflation, the entitlement to a fixed income and to capital fixed in money terms is an illusion. A
number of drawbacks and pitfalls, e.g. loss of arrears in winding up and enforced repayment, have
been indicated above. The type of investor to whom preference shares were attractive is better
protected by investing in debentures since he then has a contractual right to his interest (whether or
not the company makes profits) and as a creditor he is entitled to repayment of his capital before
any class of shares is repaid. It is also advantageous to a company for tax reasons to issue debentures
rather than preference shares.

Management shares

A class of shares carrying extra voting rights so as to retain control of the company in particular hands. This
may be done by conferring multiple votes to each share (e.g. ten votes each) or by having a smaller nominal
value for such shares so that there are more shares (and so more votes) per Ksh. invested. Such shares are
often used to allow the original owners of a company to retain control after additional shares have been
issued to outside investors.

Employee shares

Employee share schemes allow employees to acquire shares in their company, often with some tax benefits
and other advantages.

4
An employee share scheme will generally speaking be a share option scheme, a share-gifting scheme, a
share purchase scheme or a mixture of these:

 a share option scheme is where employees have the option to buy shares at some point in the
future at a price set on day one – referred to as the date of grant. The aim is that if the share price
increases in that time, employees can buy shares for below what they would be worth.
 a share-gifting scheme or a free shares scheme is where the company gives shares to the
employees free of charge. These shares normally have to be held in a trust structure for a period of
time.
 share purchase scheme where an employee can buy shares in the company, normally at a
discounted rate

1.2. Variation of class rights

As per section 392 of the Act shares are of one class if the rights attached to them are in all respects uniform.

There is a different procedure for variation of class rights depending on whether the company has share
capital or it doesn’t.

According to section 393 rights attached to a class of a company's shares may be varied only in accordance
with the provisions of the company's articles providing for the variation of those rights; or according to
section 393(2)

a) if there is written consent from the holders of at least three-quarters in nominal value of the issued
shares of that class (excluding any shares held as treasury shares);
b) or a special resolution passed at a separate general meeting of the holders of that class sanctioning
the variation.

Section 394 provides that where the company lacks share capital rights may only be varied as permitted by
the articles or as provided for above.

This is to protect the minority members in a company against the majority members in the company by
ensuring that they do not hold a joint meeting at which the majority class could pass a resolution for
variation of the minority’s rights despite their opposition. Such a resolution would not be fair as it would
effectively enable the majority to forcibly modify or appropriate to themselves some rights of the minority.
However, the fundamental flaw in the article is its failure to make provision for the protection of the
minority members in the minority class.

However, this omission has been remedied by section 396 which empowers the holders of not less in the
aggregate than fifteen percent of the issued shares of the class being varied may apply to the court to have
the variation cancelled provided that they did not consent to or vote in favour of the resolution for the
variation. Where any such application is made the variation shall not have effect unless and until it is
confirmed by the court.

5
An application to the Court can be made only within twenty-one days after the date on which the consent
was given or the resolution was passed, or within such extended period as the Court may in special
circumstances allow. The application to the Court may be made by all of the shareholders entitled to make
the application or on their behalf by such one or more of their number as they may appoint in writing for
the purpose.

At the hearing of the application, the Court shall, if satisfied that the variation would unfairly prejudice the
shareholders of the class represented by the applicant, disallow the variation, but, if it is not so satisfied, it
shall confirm it.

The applicant and any other persons who apply to the Court to be heard and appear to the Court to be
interested in the application are entitled to be heard at the hearing of the application and to have their
representations taken into consideration at the hearing. The decision of the Court on any such application
is final.

Within fourteen days after the making of an order by the Court on an application under section 396 or 397,
the company concerned shall lodge a copy of the order with the Registrar for registration. If the company
fails to comply with subsection the company, and each officer of the company who is in default, commit
an offence and on conviction are each liable to a fine not exceeding two hundred thousand shillings.

Section 400 provides that If the rights attached to shares of a company are varied, the company shall, within
fourteen days after the date on which the variation is made, lodge with the Registrar for registration a notice
giving particulars of the variation.

In Re Holders Investment Trust Ltd (1979) the company proposed to reduce its share capital by
repayment of the 5% £1 cumulative preference shares which were entitled to repayment of capital in priority
to ordinary shares and to effect repayment by the allotment to the holders an equivalent amount of 6% loan
stock. The trustees of trusts which held 90% of the issued preference shares voted at a class meeting in
favour of the scheme because they had been advised that as holders of 52% of the company’s ordinary stock
and non-voting ordinary shares they would derive overall benefit from the change. It was held that the
resolution passed at the class meeting was invalid since the trusteed who provided the majority of votes
cast were not concerned with benefit to the holders of the preference shares as a class. They had instead
considered what was best in their own interest based on their large holding of stock and ordinary shares.

In Re Carruth v, I.C.I. Ltd. (1973) a series of general and class meetings of the defendant company were
held to approve the successive stages of a capital reorganization. Out of 1600 members present only 565
were holders of deferred shares. Only the holders of each class were invited to vote at their class meeting.
The others present took no part. It was held that there was no irregularity of procedure in conducting a class
meeting in the presence of non-members of the class. A class meeting is one at which only members of a
particular class vote. It does not matter that others who are not members of the class are present.

1.2.1. Variation procedure

6
It is only necessary to follow the variation of class rights procedure (and a dissenting minority can only
apply to the court for cancellation) if what is proposed amounts to a variation of the class rights of itself.
The English cases show that it is not a variation of class rights:

i. To issue shares of the same class to allotees who are not already members of the class

In White v. Bristol Aeroplane co. the company made a bonus issue of new ordinary and
preference shares to the existing ordinary shareholders who alone were entitled under the article to
participate in bonus issues. The existing preference shareholders objected that by reducing their
proportion of preference shares the bonus issue was a variation of class rights to which they had
not consented. It was held that this was not a variation of class rights since the existing preference
shareholders still had the same number of shares and votes at a class meeting as before.

ii. To subdivide shares of one class thereby increasing the voting strength of that class

In Greenhalgh v. Ardene Cinemas in which the company which had two classes of ordinary
shares i.e. 50p shares and 10p shares (each carrying one vote) passed a resolution to subdivide each
50p share into five 10p shares thus multiplying the votes of that class by five. This was challenged
by the holders of the original 10p shares but the court held that the rights of the original 10p shares
had not been varied since they still had one vote per share as before.

iii. To return capital to the holders of preference shares which carry no right on a winding up to share
in surplus assets but merely a right to prior repayment.

In Re Saltdean Estate Co. Ltd in which the company which had ordinary shares and preference
shares, the latter being entitled to a prior return of capital on winding up but nothing more, the
company proposed to reduce its capital by returning the amount paid by the preference
shareholders. It was held that this was not a variation of class rights of the preference shares.

iv. To create and issue a new class of preference shares with priority over an existing class of
preference shares as was the case in Underwood v. London Music Hall.

1.3. Share warrants and certificates

1.3.1. Share certificates

Section 495 provides that a certificate under the common seal of the company specifying any shares held
by a member is, in the absence of proof to the contrary, evidence of the member's title to the shares.

Section 496 provides that a company shall within two months after the allotment of any of its shares,
debentures or debenture stock, complete and have ready for delivery the certificates of the shares allotted.

7
Note the following:

a) One certificate is to be issued to the member for all shares without payment. However, if more than
one certificate is issued the member shall pay the prescribed fee for every certificate after the first.
b) Every certificate shall be under the seal of the company and shall specify the shares to which it
relates and the amount paid up thereon.
c) The company is not bound to issue more than one certificate in respect of shares or shares held
jointly by several persons.
d) If once certificate is issued in respect of a share or shares held jointly by several persons the delivery
of a certificate to one of the joint holders shall be sufficient delivery to all the holders.

1.3.1.1. Form of the certificate

The form and layout of share certificates vary as between different companies since it is not governed by
any statutory provisions. All joint holders are named on the certificate but usually only the address of the
holder who is named first is stated. The standard printed wording on a share certificate reads:

“This is to certify that (name of shareholder) is the registered holder of (number and any description)
shares fully paid of (nominal value) each numbered ... to ... inclusive in the above named company
subject to the memorandum and articles of association thereof.

Given under the seal of the said company this…day of…”

1.3.1.2. Effect of the certificate

As provided for under section 495 the share certificate is prima facie evidence of title of the member to the
shares.

In Re Bahia & San Francisco Railway co. Cockburn J described the certificate as:

“a declaration by the company to all the world that the person in whose name the certificate is made out
and to whom it is given is a shareholder in the company, and it is given by the company with the intention
that it shall be so used by the person to whom it is given and acted upon in the sale and transfer of
shares.”

1.3.1.3. Estoppel by share certificate

A company must take care when issuing a share certificate so as to avoid stating thereon what is incorrect.
If the company negligently issues a certificate that is incorrect in some material particulars it may be
estopped from denying the correctness of the stated facts if a third party changes his position in reliance on
them. This is illustrated by:

a) Re Bahia & San Francisco Railway Co. T was the registered holder of five shares. S and G
forged a transfer of the shares to themselves and presented it for registration with T’s share
certificate, which they held as her brokers. The transfer was registered and a new share certificate
was issued to S and G as shareholders. S and G sold the shares to B and another person who were
duly registered as holders. T had the shares re-registered in her name since the forged transfer was
a nullity. B and the other purchaser claimed the value of the shares from the company as damages.

8
 Held: The claim was valid since the share certificate in the name of S and G was “a declaration by
the company to all the world that the person in whose name the certificate is made out and to whom
the certificate is given, is a shareholder of the company ... with the intention that it shall be acted
upon in the sale and transfer of shares”. (NB In this case, the share certificate issued to S and G
was genuine (although obtained by a forged transfer) and the claimants had not themselves
presented a forged transfer since the transfer to them by S and G was genuine (although it related
to shares to which S and G had no title). The company was estopped from denying that the named
member was at the date of the issue of the certificate the holder of the specified shares and ordered
to compensate the purchasers
b) Burkinshaw v. Nicolls in which the company was estopped by the certificate from denying that
the shares were fully paid up.
c) In Bloomenthal V Ford (1897) The company borrowed money from B and as security gave him
share certificates for 10,000 shares of 1 pound each in his name in which the shares were described
as fully paid. B believed that the amount due on shares had been paid by a previous holder. But this
was not true. The company went into liquidation and the liquidator claimed from B the amount due
on his shares. Held: The company was estopped by its own statement on the certificate that the
shares were fully paid. The claim must fail.

If the company becomes aware of an incorrect statement in a share certificate before the shareholder sells
the shares it would be entitled to recall the certification for cancellation so as to issue another one.

1.3.1.4. Forged certificate

The principle of estoppel does not apply when the certificate relied upon was issued fraudulently and
without the authority of the board of directors. This may be so if the secretary wrongly affixed the
Company’s seal and forged the signature attesting it, or where although the signatures are genuine they
were made as part of the fraudulent design of the signers.

In Ruben v. Great Fingall Consolidated the plaintiffs, stockbrokers, procured a loan for the secretary of
the defendant company on the security of a share certificate for five thousand shares in the company to
which, unknown to them, the secretary had affixed his own signature and the company seal after forging
the signatures of two directors. The plaintiffs paid off the loan and then sued the company for damages for
failure to register then as owners of the shares. The House of Lords held that the company was not bound
by the certificates.

In Sheffield Corporation V Barclay Stock was registered in the joint names of T and H. T forged H’s
signature on a transfer and added his own. T delivered the transfer to B (who was unaware of the forgery)
and B obtained registration of the transfer to himself. B later transferred the shares to C to whom B delivered
a transfer and the certificate issued to him. When the forgery was discovered, H claimed to be restored to
the register as holder of the shares (T had died meanwhile) and the corporation, being estopped against C,
purchased shares in the market for registration as replacement in the name of H. The corporation claimed
compensation from B. iIt was held that B was liable to compensate the corporation since he had caused it
to issue a false share certificate by delivering a forged transfer to himself for registration.

1.3.2. Share warrants

9
A share warrant is a warranty that the bearer is the holder of the shares therein specified. The company
cannot therefore deny that the bearer is the holder of the relevant shares. It is a negotiable instrument which
is transferable by simple delivery and a bona fide transferee for value of the warrant is not affected by any
defect in the title of the transferor.

Section 85 of the previous Companies Act provided that a company limited by shares could with respect to
any fully paid up shares issue under its common seal a warrant stating that the bearer of the warrant was
entitled to the shares therein. On the issue of the share warrant the company had to strike out of its register
of members the name of the member then entered therein as holding the shares specified in the warrant as
if he had ceased to be a member. Instead the company would then enter the fact of the issue of the warrant,
a description of the shares included in the warrant and the date of issue. The bearer of the warrant was
entitled, on surrendering it for cancellation, to have his name entered as a member in the register of
members.

Section 504 of the current act provides that irrespective of whether a company limited by shares purports
to be authorized by its articles to issue with respect to any fully paid shares a share warrant stating that the
bearer of the share warrant is entitled to the shares specified in it, the company may no longer issue such
share warrants after the commencement of the section. A share warrant issued in contravention of the
section is void.

1.4. Issue and allotment

Section 327 of the act provides that the directors of the company may exercise the powers of allotment of
shares subject to section 328 and 329.

The terms allotment and issue have different meanings:

a) A share is allotted when the person to whom it is allotted acquires an unconditional right to be
entered into the register of members as the holder of that share. This stage is reached when the
board of directors considers the application and formally resolve to allot the shares
b) The issue of shares is not a defined term but is usually taken to be a later stage at which the allotee
receives a letter of allotment or share certificate issued by the company.

In Nicol’s case Chitty J stated,

“What is termed allotment is generally neither more nor less than the acceptance by the company of the
offer to take shares. To take the common case, the offer is to take a certain number of shares or such
less number of shares as may be allotted. That offer is accepted by the allotment either of the total number
mentioned in the offer or a less number, to be taken by the person who made the offer. This constitutes
a binding contract to take the number according to the offer and the acceptance. To my mind there is no
magic whatsoever in the term allotment as used in these circumstances…”

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

10
 a) Where the company issues a prospectus the issue is an invitation to treat but not an offer. When
applications are made they will constitute offers.
b) The company’s acceptance must be unconditional. If therefore the application was for 10 shares
and only 5 shares were allotted the allotment would be a counter-offer which the allotee could
reject. In order to overcome this legal problem companies prepare forms which contain a clause to
the effect that the applicant agrees to accept such number of shares as the company in its absolute
discretion may allot to him.
c) The acceptance must be communicated to the applicant.
d) The allotment must be made within a reasonable time as was the case in Ramsgate Victoria Hotel
v. Montefiore

1.4.1. Statutory restrictions on allotment

Under section 329 of the act directors can only allot shares if they have the requisite authorization. The
authorization in question should state the maximum number of shares that directors are allowed to allot,
and will only be valid for a period of five years subject to renewal.

As per section 332 a company shall register an allotment of shares as soon as practicable and in any event
within two months after the date of the allotment.

Section 333 provides that within one month after making an allotment of shares, a limited company shall
lodge with the Registrar for registration a return of the allotment. The company shall ensure that the return:

a) contains the information prescribed by the regulations; and

b) is accompanied by a statement of capital.

The company shall specify in the statement of capital as at the date to which the return is made up:

a) the total number of shares of the company;

b) the aggregate nominal value of those shares;
c) for each class of shares-
i. the particulars prescribed by the regulations of the rights attached to the shares;
ii. the total number of shares of that class: and
iii. the aggregate nominal value of shares of that class: and

d) the amount paid up and the amount (if any) unpaid on each share (whether on account of the
nominal value of the share or in the form of a premium).

Section 354 provides that a public company shall not allot shares of the company offered for public
subscription unless the issue is subscribed for in full or the offer is made on terms that the shares subscribed
for may be allotted in any event; or if specified conditions are made and those conditions are satisfied. If
shares are prohibited from being allotted by subsection (l ) and forty days have elapsed since the offer was
first made, the company shall, without delay but without interest, repay all money received from applicants
for shares.

11
Section 356 provides that a company cannot allot its shares at a discount. If shares are allotted in
contravention of subsection (1), the allottee is liable to pay the company an amount equal to the amount of
the discount, with interest at the appropriate rate.

According to article 362 A public company shall not allot a share except as paid up at least as to one-quarter
of its nominal value and the whole of any premium on it.

A public company shall not allot shares as fully or partly paid up as to their nominal value or any premium
on them otherwise than in cash if the consideration for the allotment is or includes an undertaking that is to
be, or could be, performed more than five years after the date of the allotment.

1.5. Transfer and transmission

1.5.1. Transfer of shares

Section 326 provides that the shares of any member in a company shall be movable property transferable
in the manner provided by the articles of the company.

Restrictions on transferability

In Re Smith & Fawcett Ltd Lord Greene M.R. held that,

“One of the normal rights of a shareholder is the right to deal freely with his property and to transfer it
to whomsoever he pleases. When it is said that regard must be had to this last consideration, it means, I
apprehend, nothing more than that the shareholder has such a prima facie right…to any extent which
the articles on their true construction permits.”

1.5.1.1. Transfer procedure

The procedure to be followed by a shareholder who intends to transfer his shares depends on the provisions
of the company’s articles. However the following sequence of events is likely to be followed:

i. The transferor completes the transfer form which usually states:

 The name of the company
 The number of shares and description of shares to be transferred
 The transferor’s name and address unless the transfer is a blank transfer
 The consideration paid for the shares
 The tranferee’s name and address
ii. The transferor signs the transfer form or document. It is usual for this to be done in the presence of
a witness (attestation).
iii. The transferor gives the transfer form and the relevant share certificate to the transferee
iv. The transferee signs the transfer form in the presence of a witness who also signs it
v. The transferee affixes the appropriate stamp duty to the transfer form and lodges it and the share
certificate with the company for registration.
vi. The transfer is considered and approved by the board of directors

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vii. The company secretary makes out a new share certificate in the name of the transferee and affixes
the company’s seal thereon after it is signed by one of the directors and countersigned by the
secretary or another director.
viii. The transferee’s name is entered into the company’s register of members in place of the transferor’s
name
ix. The new certificate is delivered to the transferee.

The company must complete the certificate and have it ready for delivery within the prescribed period. If
there is default in complying the company and every officer of the company who is in default shall be liable
to a default fine.

1.5.1.2. Certification of transfer

A certification is necessary:

a) Where the transferor is transferring only a part of his holding

b) Where the transferor is transferring all of his shares to two or more transferees
c) Where the transferor has not yet received a certificate from the company but has been issued with
a document of title to the shares e.g. an allotment letter
d) Where the transferee is not satisfied with the transferor’s title to the shares e.g. because the name
on the certificate does not correspond with the transferor’s name

In any of these circumstances the transferor or his broker will forward the transfer form or document
together with the certificate to the company for certification. On receipt of the certificate the company
secretary or other authorized signatory will compare the share certificate and the transfer form with the
register of members and if they correspond in their material particulars will write in the margin of the
transfer form “transfer lodged” or words to that effect and then sign it on behalf of the company.

The certified transfer form is then returned to the person who deposited it while the share certificate is
retained by the company. The transferor will thereafter deliver the certified transfer to the transferee who
will then lodge it with the company for registration. The company will then issue a new certificate to the
transferee for the shares transferred and if applicable a balance certificate to the transferor for the shares
which have not yet been transferred.

1.5.1.3. Effect of transfer

Unless shares are being transferred as a gift, a transfer is a contract of sale which is effected through the
agency of a stockbroker who is a member of the Nairobi Stock Exchange and will be evidenced by a
purchase contract note and a sale contract note issued by the stockbroker.

The property in the shares is however not vested in the transferee unless and until his name is entered into
the company’s register of members.

In Musselwhite v. CH Mussel white & Son Ltd it was held that in the interim period the effect of the
transfer is as follows:

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 i. If the shares are partly paid and a call is made the transferor is legally liable and must pay the
amount required and then seek an indemnity from the transferee
ii. If dividends are declared and paid the transferor is the person who according to the company’s
records is entitled to them. He would however hold the dividends in trust for the transferee unless
the shares were bought ex div.
iii. If a meeting of the company is convened and the transferor decides to attend the meeting, his right
to vote or otherwise will depend on whether he has been fully paid for the shares:
 If he has been fully paid he must vote as the transferee directs
 If he has not been fully paid he would have prima facie right to vote in respect of those
shares

1.5.1.4. Forged transfers

A transfer is usually forged after a person steals another’s share certificate with the intention of having the
relevant shares registered in his name so that he may thereafter transfer them to a third party. Because the
transferor’s forged signature on the transfer form is wholly inoperative the position of the parties is affected
as follows:

a) Where the true owner of the shares has been removed from the register, on discovery of the forgery
the company must restore his name to the register and pay him any dividends which have been
declared during the time his name did not appear in the register
b) The person who lodged the forged transfer for registration must indemnify the company against
any loss it suffers as a consequence of the registration.
c) If the company issues a share certificate to the transferee under the forged transfer and the transferee
sells or mortgages the shares to another person who relying on the certificate takes them bona fide
for value, the company is estopped from denying the transferee’s title to the shares. Consequently
the company would be liable in damages to the purchaser or mortgagee in respect of loss arising
out of the fact that he does not obtain registration. However, the company would not be estopped
from denying the transferee’s title if the forgery was discovered before he sold or mortgaged the
shares.

1.6. Mortgaging and charging of shares

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

1.6.1. Legal mortgage

In order to effect a legal mortgage of shares the legal ownership of the shares must be transferred to the
lender by the registration of a form of transfer with the company concerned. The terms of the loan are
usually incorporated in a loan agreement which will also contain a clause in which the lender undertakes to
transfer the shares when the loan is repaid in full.

14
Dividends paid to the lender during the currency of the loan as the registered holder of the shares are payable
by him to the borrower unless the loan agreement provided that they will be applied towards the reduction
of the loan. The voting rights in respect of the shares will depend on the provisions of the loan agreement.

1.6.2. Equitable mortgage

There are no legal formalities prescribed for an equitable mortgage which can therefore be created quite
informally. The common options are:

i. To deposit the share certificate with the lender without executing a transfer – if the borrower
fails to repay the loan as agreed between him and the lender, the lender must apply to the court for
an order for sale of the shares. If the sale realizes an amount of money that is in excess of the
amount due and the cost of the sale the lender must account to the borrower for the difference. The
alternative course of action available to the lender is to apply for an order of foreclosure which
would vest the ownership of the shares in him absolutely.
ii. To deposit the share certificates plus a blank transfer with the lender – a blank transfer is one
which is signed by a named transferor but does not specify the transferee. On default by the
borrower the lender has an implied authority to sell the shares and to enter the name of the
purchaser in the transfer as the transferee. In Deverges v. Sandeman Clark & co. it was explained
that no court order is required in order to effect the sale.
1.6.3. Order of priority

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

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CHAPTER FOUR: SHARES

EMERGING ISSUES

1.1. Dematerialization/immobilization of share certificates

Dematerialized securities are securities that are not on paper and a certificate to that effect
does not exist. They exist in the form of entries in the book of depositories. Essentially, unlike
the traditional method of possessing a share certificate to the effect of ownership of shares, in
the dematerialized system, the shares are held in a dematerialized form. This system works
through the CDS.
CDS stands for the Central Depository System. This is a computer system operated by The
Central Depository and Settlement Corporation (CDSC) that facilitates holdings of shares in
electronic accounts, opened by shareholders and manages the process of transferring shares
traded at the Stock Exchange.
Advantages of Dematerialization
The advantages of dematerialization of securities can be summarized as follows:
i. Share certificates, on dematerialization, are cancelled and the same will not be sent
back to the investor. The depository system and dematerialized securities offer
paperless trading and transfer of shares through the use of technology.
ii. It enables processing of share trading and transfers electronically without involving
share certificates and transfer deeds, thus eliminating the paper work involved in scrip-
based trading and share transfer system.
iii. Transfer of dematerialized securities is immediate and unlike in the case of physical
transfer where the change of ownership has to be informed to the company in order to
be registered as such, in case of transfer in dematerialized form, beneficial ownership
will be transferred as soon as the shares are transferred from one account to another.
iv. The investor is also relieved of problems like bad delivery, fake certificates, shares under
litigation, signature difference of transferor etc.
v. There is no need to fill a transfer form for transfer of shares and affix share transfer
stamps.
vi. There is saving in time and cost on account of elimination of posting of certificates.

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vii. The threat of loss of certificates or fraudulent interception of certificates in transit that
causes anxiety to the investors, are eliminated.
viii. Both equity and debt instruments can be held in the CDS account

Disadvantages of Dematerialization

The disadvantages of dematerialization of securities can be summarized as follows:

i. Trading in securities may become uncontrolled in case of dematerialized securities.
ii. It is incumbent upon the capital market regulator to keep a close watch on the trading in
dematerialized securities and see to it that trading does not act as a detriment to
investors.
iii. The role of key market players in case of dematerialized securities, such as stock-
brokers, needs to be supervised as they have the capability of manipulating the market.

1.2. Operation of CDS accounts

A depository is like a bank, which holds securities (like shares, bonds, Government Securities
among others) for investors in electronic form. Besides holding securities, a depository also
provides services related to transactions in securities.
CDS assures investors of safer, faster and easier trading in securities. Investors do not have to
wait for the issue of certificates before they can trade again as shares are credited to the CDS
account 5 days after the date of trade.

Benefits of holding a CDS account include:

i. Immediate transfer of securities
ii. Elimination of risks associated with physical certificates such as bad delivery, fake
securities among others
iii. Reduction in paperwork involved in transfer of securities;
iv. Reduction of transaction cost
v. Change in address recorded when CDA gets registered electronically with all companies
in which investor holds securities eliminating the need to correspond with each of them
separately
vi. Transmission of securities is done by CDA eliminating correspondence with the
companies in which investor holds securities
vii. Convenient method of consolidation of CDA accounts
viii. Holding investments in equity, debt instruments and Government securities in a single
account

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 ix. Automatic credit into securities account, of shares, arising out of split or a consolidation
or a merger among others

Investors can open a CDS account by completing and signing a securities account
opening/maintenance form with a central depository agent (CDA). All licensed Members of the
Nairobi Stock Exchange and Custodian banks are CDAs. The form is called CDS 1. There are no
restrictions on the number of CDAs an investor can open accounts with. The depository has not
prescribed any minimum balance. Investors can therefore have zero balance in their accounts.
Shareholders who already have share certificates must open a CDS account and have the shares
deposited into the account, otherwise they will not be able to trade in those shares. The
process is called immobilization of shares. Having completed the dematerialization process
(where all shares were converted from physical into electronic form) investors can no longer be
issued with a share certificate but they can instead get a CDSC account statement as proof of
holdings.
An investor who wants to use shares as collateral for a loan will complete a Pledge Form (CDS 5)
together with the lender and deliver it to the CDA. The lender will forward the forms to CDSC
through the CDA. CDSC thus marks the shares as pledged to the lender and confirms this to the
lender and the shareholder. When shares are pledged the shareholder cannot sell them.
When the shareholder pays the loan, the lender completes the necessary Form (CDS6)
instructing CDSC to remove the pledge.
The pledgor will continue to receive dividend on the pledged securities..

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COMPANY MEETINGS

Neither the Companies Act defines the term meeting nor have Courts provided a legal definition of a meeting. They
appear to have adopted the ordinary meaning of the term. In the words of Lord Coleridge in Sharp V Dawes (1876)

“The word meeting prima facie means a coming together of more than one person”

The ordinary meaning of the term meeting is an assembly of persons. It therefore follows that one person cannot
constitute a meeting. This is the rule in Sharp V Dawes where a single shareholder purported to hold a meeting to pass a
resolution to make calls. The meeting was scheduled for 30th Dec 1874 and only 2 people attended; these two people
were Sharp who was the Company’s Secretary and Silversides, a member. The latter acted as Chairman while the former
took minutes. The meeting resolved that calls be made but the defendant member declined and was sued. It was held
that no meeting had been properly constituted and the purported proceedings were null and void. The case is authority
for the proposition that one person cannot constitute a meeting or a corporate assembly.

However in law, one person can constitute a meeting as well as quorum for the meeting, these are exceptions to the
rule in Sharp V Dawes.

Exceptions to the rule in Sharp V Dawes:

1. Directors meeting.
Where a private company has only one director, that director constitutes a directors meeting for purposes of
exercise of the powers conferred on the board by the Articles.

2. Class meeting.
Where the company’s capital has been divided into different classes of shares e.g. ordinary, preference or
deferred, if all the shares of a particular class are held by one member such member constitutes a meeting of
the holders of that class of shares, it was so held in East V Bunnett Bros.

3. Creditors meeting.
If in the course of winding up, only one creditor has proved his claim in accordance with section 309, that
creditor constitutes a meeting of creditors for purposes of winding up.

4. Adjourned meetings.
This is the continuation of an earlier meeting. If a meeting summoned by directors has no quorum present
within 30 minutes of the appointed time it stands adjourned to the following week on the same day, time and
place unless the directors otherwise resolve. The adjourned meeting is duly constituted by one member, present
in person or by proxy.

5. AGM’s summoned by or in accordance with the Registrar’s directions.

If a company fails to hold an AGM, any member may petition the Registrar to call or direct the calling of an AGM.
Such meeting is duly constituted by one member present in person or in proxy.

6. General meeting summoned pursuant to a Court order.

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 If by any reason it is impracticable for a company to call or conduct a meeting in accordance with the Act and the
Articles, the Court may on its own motion or application by a director or member or any member entitled to vote,
order the calling and holding the general meeting in accordance with the Act and Articles. Such a meeting is duly
constituted by one member present in person or by proxy.

Need for Company Meetings

Company general meetings are held from time to time in order:
a) To comply with statutory provisions which require certain general meetings to be held in order to transact
specified business. Such meetings include the statutory meeting, the annual general meeting and class meetings.
b) To transact business that may only be transacted at a general meeting of the members or shareholders, such as
alteration or reduction of the company’s capital.
c) To enable the directors and members to exchange views regarding the running of the company’s affairs or resolve
some existing disputes.
d) To transact some business which may only be transacted at a meeting of a class of the company’s members, such
as variation of a right attached to a class of shares.

Types of meetings
There are four kinds of meetings of members which may be held by a company:
a) The Annual General Meeting
b) General meetings at other times (Extra ordinary general meetings)
c) Class meetings
d) Director’s Meetings
e) The Statutory Meeting (under the previous Companies Act)

1. The Annual General Meeting (AGM)

Section 310 provides that every public company shall hold a general meeting as its annual general meeting within six
months from and including the day following its accounting reference date in each year, whether or not it holds other
meetings during that period. This is a meeting held by companies each year to consider ordinary business.

Notice of the AGM

A public company shall state in the notice convening an annual general meeting of the company that the meeting is an
annual general meeting.

Private companies are not required to have an AGM each year and therefore their business is usually conducted through
written resolutions. However, members holding sufficient shares or votes can request a general meeting or written
resolution

An annual general meeting may be convened by shorter notice than that required by section 281(2) or by the company's
articles, if all the members entitled to attend and vote at the meeting agree to the shorter notice. Section 281(2) provides
that in convening a general meeting, a public company, shall give in the case of its annual general meeting at least 21 days’
notice to members; or in the case of any other general meeting at least 14 days’ notice to members.

The members of a public company may require the company to give to members of the company who are entitled to
receive notice of the next annual general meeting a notice of a resolution that is proposed to be moved at that meeting.

A public company is not required to give notice of a resolution if:

 it would, if passed, be void (whether because of inconsistency with this Act or any other written law or the
company's constitution or otherwise);
 it defames a person; or
 it is frivolous or vexatious.

2
A company is required to give notice of a resolution once it has received requests that it do so from:
 members representing at least 5% of the total voting rights of all the members who have a right to vote on the
resolution at the annual general meeting to which the requests relate; or
 at least 100 members who have a right to vote on the resolution at the annual general meeting to which the requests
relate and hold shares in the company on which there has been paid up an average sum, per member, of at least KES
10,000.

A request is effective for the purpose of this section only if:

 it is in hard copy form or in electronic form;
 identifies the resolution of which notice is to be given;
 is authenticated by the person or persons making it; and
 is received by the company not later than 6 weeks before the annual general meeting to which the
request relates; or if later, the time at which notice is given of that meeting.
The Act does not provide for the business which may be transacted at the annual general meeting. However the ordinary
business of an AGM includes:
i. Declaring a dividend
ii. The consideration of the accounts, balance sheets and the reports of the directors and auditors
iii. The election of directors in the place of those retiring
iv. The appointment of and the fixing of the remuneration of auditors

2. Extra-ordinary General Meetings (EOGM)

This is a General Meeting which a company may hold at any time when need arises. It generally considers special
business and may be summoned by directors, requisitionists, or pursuant to a Court order.

Section 276 provides that the directors of a company may convene a general meeting of the company.

Section 277(1) provides that the members of a company may require the directors to convene a general meeting of the
company.

Convening an EOGM by Directors:

The directors are required to convene a general meeting as soon as practicable after the company has received requests
to do so from:

 In the case of a public company, 10% of the paid-up capital of the company as carries the right of voting at general
or of total voting rights of all the members having a right to vote at general meetings.
 In the case of a private company, 5% of the paid-up capital of the company as carries the right of voting at general
or of total voting rights of all the members having a right to vote at general meetings

A request for the directors to convene a general meeting is only effective if it states the general nature of the business to
be dealt with at the meeting. However, such a request may include the text of a resolution that is proposed to be put to
the meeting. A resolution may not be moved at a general meeting if:

 it would, if passed, be void because of inconsistency with any written law or the constitution of the company or
otherwise;
 it defames a person; or
 It is frivolous or vexatious.

A request for the directors to convene a general meeting is not effective unless it is in hard copy form or in electronic
form; and authenticated by the person or persons making it.

3
If requested to convene a general meeting of the company, the directors shall:

 do so within 21 days from the date on which request was made; and
 hold the meeting on a date not more than 28 days after the date of the notice convening the meeting.

If such a request includes a resolution intended to be moved at the meeting, the directors shall include in the notice of
the meeting a copy of the proposed resolution.

Convening an EOGM by Members:

If after having been required to convene a general meeting under section 277, the directors fail to do as required by
section 278, the members who requested the meeting or any of them representing more than one 50% of the total voting
rights of all of them may convene a general meeting.

If the requests received by the company included the text of a resolution intended to be moved at the meeting, the
members concerned shall include in the notice convening the meeting the text of the intended resolution.

The members concerned shall ensure that the meeting is convened for a date not more than 3 months after the date on
which the directors were requested to convene a meeting.

The members concerned shall convene the meeting, as nearly as practicable in the manner in which meetings are required
to be convened by directors of the company.

The company shall reimburse the members concerned for all reasonable expenses incurred by them because the directors
failed to convene a meeting as required by section 278.

The company shall deduct from the remuneration payable to the directors who were in default the amount of expenses
reimbursed to members.

Convening an EOGM by Court Order:

The Court may, either on its own initiative, or on the application:

 of a director of the company; or

 of a member of the company who would be entitled to vote at the meeting,

Make an order requiring a meeting to be convened, held and conducted in any manner the Court considers appropriate.

If an order is made the Court may give such ancillary or consequential directions as it considers appropriate. Directions
given by the Court under subsection may include a direction that one member of the company present at the meeting be
regarded as constituting a quorum.

A meeting convened, held and conducted in accordance with an order by the court is taken for all purposes to be a meeting
of the company properly convened, held and conducted.

In Re El Sombrero Ltd (1958) the applicant held 900 of the 1000 shares in the company while the remaining shares were
held as to 50 each by the two respondents who were its only directors. The applicant had twice requisitioned a meeting
of the company for the purpose of exercising the power given by section 184 of the 1948 Companies Act to remove the
directors by ordinary resolution but on each occasion the respondents had absented themselves in order to ensure that
the quorum of two members as fixed by the articles was not present. He sought an order and a direction from the court
that one person should be deemed to constitute a quorum at such meeting. The court overruling the decision of the
registrar made an order accordingly.
4
 3. Class Meetings

This is a meeting of holders of a particular class of shares of the company and can only be held if the company’s capital is
divided into different classes of shares for examples ordinary, preference deferred.
In the words of Bowen L.J in Sovereign Life Assurance V Dodds

“The term class is vague and must be restricted to persons whose rights are not so dissimilar as to make it
impossible for them to consult”

The rules or principles which govern the calling, quorum and conduct of class meetings are prescribed by the Articles.

Section 321 of the 2015 Companies Act provides that the provisions of the Act apply with necessary records of resolutions
and modifications, in relation to resolutions and meetings of:

 holders of a class of shares; and

 in the case of a company without a share capital, a class of members, as it applies in relation to resolutions of
members generally and to general meetings

4. The Director’s Meeting

This is a meeting of members of the board and may be held at any time when need arises.

The meeting may be summoned by a director or the company or the Company Secretary if instructed by a director.
Notice need not be written or sent to a director outside Kenya. Quorum for such a meeting is fixed by the directors
failing which it is two.

The meeting must have a Chairman within 5 minutes of the appointed time.

Directors meeting may be held in very informal circumstances provided all directors are present and they agree to
transact the company’s business. It was so held in Barron V Porter where the directors had a casual meeting on the
streets.

Directors meetings enable the board to exercise the powers conferred upon it by the Articles such as:
 Borrowing
 Recommending dividend
 Payment of interim dividend
 Appointment of the Managing Director
 Appointment of Company Secretary.

The Articles generally gives directors the power to delegate their powers to committees of one or more directors.

5. Statutory General Meeting

Section 41 of the 6th schedule to the Companies Act 2015 provides that an existing company that was required by section
130, 131 or 132 of the repealed Act to convene and hold a general meeting and has not convened and held that meeting
before the repeal of the relevant section, that section continues to have effect in respect of the company and the meeting
as if that repeal had not taken effect.

5
The implication here is that any existing company which had not yet held a statutory general meeting under the Companies
Act 1948 has to meet the requirements of the repealed Act in the stated sections. However, for companies registered
under the 2015 Act there is no requirement that this meeting be held.

A Statutory Meeting is considered a special meeting held by public companies once in their life time whose agenda is
the statutory report. In the course of the meeting the directors must display a list of all members and the number of
shares held. Such list must be accessible to all members.

Members are free to discuss matters relating to the formation and promotion of the company or arising out of the
statutory report. The meeting may be adjourned from time to time.

Failure to hold the meeting under CAP 486 rendered every director or officer in default liable to a fine not exceeding KES
1000.

According to Section 130 of the repealed Act every public company limited by shares and every public company limited
by guarantee and having a share capital was required within a period of not less than one month nor more than three
months from the date when the company is entitled to commence business, hold a general meeting of the members of
the company, which shall be called the statutory meeting.

The statutory meeting was held for the specific purpose of enabling the members of the company to consider the statutory
report. Section 130(3) of the repealed Act provided that the statutory meeting shall be characterized by the Statutory
Report. This is a report prepared by director for submission to members at the statutory meeting. It is the agenda of the
meeting and must be certified by at least 2 directors of the meeting. The Statutory Report shall state:

a) The total number of shares allotted, distinguishing shares allotted as fully or partially paid up otherwise than in
cash, the consideration for which the shares have been allotted and, in the case of shares partly paid up, the
extent to which they are so paid up;
b) The total amount of cash received by the company in respect of all the shares allotted, distinguished as aforesaid;
c) An abstract of the receipts of the company and of the payments made therein, up to a date within seven days of
the report, exhibiting under distinctive headings the receipts of the company from shares and debentures and
other sources, the payments made and particulars concerning the balance remaining in hand and an account or
estimate of the preliminary expenses of the company;
d) The names, postal addresses and descriptions of the directors, auditors, if any, managers if any, and the secretary
of the company; and
e) The particulars of any contract the modification of which is to be submitted to the meeting for its approval,
together with particulars of the modification or proposed modification.
f) An Auditor’s Certificate on the shares allotted, cash received and the abstract of receipts and payments.

By Section 130 (2) a copy of the statutory report was to be forwarded by the directors to every member of the company
at least 14 days before the day on which the statutory meeting was to be held. The directors were required to cause a
certified copy of the statutory report to be delivered to the registrar for registration forthwith after the sending thereof
to the members of the company.

ESSENTIALS OF MEETINGS

1. Convening of Meetings & Notices

General meetings are normally convened by the Board of Directors as provided for under Section 276 and 277 of the Act.
The company secretary or any other officer of the company has no power to call a general meeting. It was so held in Re
State of Wyoming Syndicate where the secretary of the company without the authority of the directors summoned the
meeting.
6
The directors must act in good faith when calling a meeting, thus, in Cannon v Tasks, the directors called the annual
general meeting at an earlier date than was usual for the company to hold it. Their intention in doing so was to ensure
that transfers of shares to certain persons who were likely to oppose some of their proposals would not be registered in
time so that they would be unable to vote. An injunction stopping the meeting from being held was granted.

However, once the directors have called the meeting they cannot postpone or cancel it. For example, in Smith v Paringa
Mines Ltd, a notice was issued purporting to postpone the holding of a general meeting of shareholders which had
previously been duly convened. One of the directors of the company who was in disagreement with the remainder of the
board attended the meeting together with several shareholders. It was held that resolutions passed at the meeting were
valid and effective. The purported postponement of the meeting was inoperative since the articles pursuant to which the
meeting had been convened did not give specific power to postpone a convened meeting. The proper course is for the
meeting to be held and, with the consent of the majority of those present and voting, adjourned.

Section 281 provides that in convening a general meeting (other than an adjourned meeting), a private company shall give
at least 21 days’ notice.

In convening a general meeting, a public company, shall give

 in the case of its AGM at least 21 days' notice -to members; or
 in the case of any other general meeting at least 14 days’ notice to members.

The company's Articles may require a longer period of notice than that specified above.

A general meeting may be convened by shorter notice than that otherwise required if it is agreed to by the members. The
shorter notice refer is valid only if it is agreed to by the required majority of members. The majority in question is in the
case of a private company 90% or such higher percentage, not exceeding 95%, as may be specified in the company's
articles; or in the case of a public company ninety-five percent of nominal value of the shares giving a right to attend and
vote at the meeting or in the case of a company that does not have a share capital the percentage of total voting rights at
that meeting of all the members.

It was explained in Re: Pearce Duff & Co. Ltd that the mere fact all the members are present at the meeting and pass a
particular resolution, either unanimously or by a majority holding 95% of the voting rights, does not imply consent to short
notice. Anyone who voted for the resolution can, therefore, change his mind afterwards and challenge it.

If a provision of the Act requires a special notice of a resolution to be given, the resolution is not effective unless notice
of the intention to move it has been given to the company at least 28 days before the meeting at which it is moved.

The company shall, if practicable, give its members notice of any such resolution in the same manner and at the same
time as it gives notice of the meeting. If it is not practicable to give that notice, the company shall give its members notice
of the resolution at least 14 days before the meeting:
i. by advertisement in a newspaper having a wide circulation in the area in which the company carries on business;
or
ii. in any other manner allowed by the company's articles.

Section 282 provides that a company shall give Notice of a general meeting:
 in hard copy form;
 in electronic form;
 by means of a website; or
 partly by one such means and partly by one or more of the other such means.

7
In notifying its members of the presence on a website of a notice convening a general meeting, a company shall state that
it concerns a notice of a company meeting; specify the place, date and time of the meeting; and in the case of a public
company, state whether the meeting will be an annual general meeting.

The company shall ensure that the notice of the general meeting is available on the website throughout the period from
and including the date of that notification and ending with the conclusion of the meeting.

A company shall send a notice of a general meeting of the company to each member of the company; and each director.

The reference to a member includes any person who is entitled to a share in consequence of the death or bankruptcy of
a member, if the company has been notified of their entitlement. In Re West Canadian Collieries Ltd Plowman, J. stated:
“It is well settled that as regards a general meeting, failure to give notice to a single person entitled to receive notice
renders the meeting a nullity”. The primary purpose of the common law rule appears to be to imposed on the company’s
officers who are entrusted with the power of convening its meetings the obligation of acting fairly towards every member
of company. They must invite all the members to the meeting and not just those whom they believe are likely to support
their views.

The common law rule applies irrespective of whether the failure to give notice of the meeting was deliberate or
unintentional. However, it is competent for the company’s members to reflect on the matter and, if they deem it
appropriate, amend the company’s articles by incorporation, therein of a suitable provision. For example, a provision that
“the accidental omission to give notice of a meeting to.... any person entitled to receive notice shall not invalidate the
proceedings at that meeting”. In such a case, notice of the meeting would be deemed to have been given despite an
“accidental omission” to give the notice.

In Musselwhite v C. H. Musselwhite & Son Ltd it was explained that a deliberate failure to give notice of a meeting to a
member on the mistaken grounds that the member was not entitled to the notice would not be regarded as an “accidental
omission” within the relevant article, since it was a mistake of the law. The meeting, was therefore, declared null and void.

Note however that section 288 provides that if a company gives notice of a general meeting; or a resolution intended to
be moved at a general meeting, an accidental failure to give notice to one or more persons is to be disregarded for the
purpose of determining whether notice of the meeting or resolution has been duly given.

Contents of the Notice

Section 285 provides that in giving notice of a general meeting, a company shall specify:

a) the time and date of the meeting;

b) the type of the meeting;

c) the place of the meeting; and

d) the general nature of the business to be dealt with at the meeting (proposed resolutions, whether ordinary or
special)

In Tiessen v, Henderson it was held that the notice convening a meeting must be clear and explicit so that the person
receiving it may be in a position to decide whether or not he ought in his own interest to attend the meeting. In this case
the violet consolidated mining company ltd was in difficulty and meetings were summoned to put before the shareholders
alternative schemes for reconstruction. The alternative scheme which was approved was one in which certain of the
directors had a strong financial interest but his fact was not disclosed in the notice convening the meeting. It was held
that the resolution was invalid.

8
If the meeting is the annual general meeting the notice must specify the meeting as such. If the meeting is convened to
pass a special resolution the notice must specify the intention to propose the resolution as a special resolution. In Kaye v.
Croydon Tramways Co the court invalidated a resolution because the notice convening the meeting contained the text of
the resolution to approve the sale of the company’s business but did not mention that the directors were to be paid a
substantial sum as compensation for loss of office. The notice by reason of the omission did not fairly disclose the purpose
for which the meeting was convened.

2. Proceedings At Meetings

 Quorum
A Quorum is the minimum number of persons who must be present at a meeting in order that the meeting may
commence, or having commenced, continue so as to validly transact the business for which it was convened.

Section 292(1) provides that in the case of a company limited by shares or guarantee and having only one member, one
qualifying person present at a meeting constitutes a quorum.

Section 292(2) provides that in any other case, (subject to the articles of the company) two qualifying persons present at
a meeting are a quorum, unless:

i. each is a qualifying person only because the person is authorised under section 297 to act as the representative
of a body corporate in relation to the meeting, and they are representatives of the same body corporate; or

ii. each is a qualifying person only because the person is appointed as proxy of a member in relation to the meeting,
and they are proxies of the same member.

It is the duty of the Chairman of the meeting to determine whether a quorum of member is present by the time the
meeting proceeds to business.

The quorum must be effective i.e. only persons who are entitled to participate are counted.

In Re Hartley Baird Ltd it was held that the quorum is required only at the time when the meeting commences. There
need therefore be no quorum after the meeting has begun and it may be legally continued provided there are at least two
persons present who would constitute a valid meeting at common law.

Where the articles prescribe a quorum of at least two members, and there is no quorum, there would also be no valid
meeting. This is so because as was explained in Sharp v Dawes, “the word `meeting’ prima facie means a coming together
of more than one person”. Please note the exceptions to the rule in Sharp v Dawes also apply.

A meeting with no quorum is a legal nullity (it is null and void) and so are its purported proceedings.

 Adjournment

If within half an hour from the time appointed for the meeting a quorum is not present, the meeting, if convened upon
the requisition of members, shall be dissolved, in any other case it shall stand adjourned to the same day in the next week,
at the same time and place or to such other day and at such other time and place as the directors may determine.

An adjourned meeting is a continuation of an earlier meeting.

A meeting may be adjourned for various reasons including disorder or inadequacy of space. In these two cases, the
Chairman has power to adjourn the meeting without the concurrence of members but he must exercise the power in
good faith. In other circumstances, consent of the meeting is necessary.
9
A meeting adjourned for lack of quorum is duly constituted by one member present in person or in proxy.

A meeting adjourned for more than 30 days requires a new Notice. An adjourned meeting has the same powers as the
original meeting in that it can only transact the unfinished business of the other meeting.

Resolutions passed by an adjourned meeting are deemed to have been passed on the date of the adjourned meeting as
opposed to the date of the earlier meeting.

 Proxies

Proxy refers to the form by which the shareholders appoint another person to attend a meeting on his behalf as well as
the person so appointed to attend the meeting.

Any member entitled to attend and vote at a general meeting may appoint another person who need not be a member
to attend and vote on his behalf. The appointment of a proxy is effected by the completion and submission of a proxy
form to the company.

There are two types of proxies:

 The general proxy - This is a proxy empowered to vote as he wishes having regard to the discussion at the
meeting.
 Special proxy - This is a proxy appointed to vote either for or against a particular resolution before the meeting.

Once appointed, a proxy enjoys certain rights:

 The right to attend the meeting.
 Right to join other proxies or member to demand voting by poll.
 Right to vote by poll.
 Right to speak in the case of a private company meeting.

Section 298 provides that a member of a company is entitled to appoint another person as the member's proxy to exercise
all or any of the member's rights to attend and to speak and vote at a meeting of the company.

A member of a company that has a share capital may appoint more than one proxy for a meeting provided each proxy is
appointed to exercise the rights attached to a different share or different shares held by the member.

In every notice convening a meeting of a company, the company shall include a prominently displayed statement
informing the member of the member's rights under section 298; and any more extensive rights conferred by the
company's articles to appoint more than one proxy.

Failure to comply with this requirement does not affect the validity of the meeting or of anything done at the meeting.

A provision of the company's articles is void to the extent that it would have the effect of requiring the appointment of a
proxy or document necessary to show the validity of, or otherwise relating to, the appointment of a proxy to be received
by the company or another person earlier than whichever of the following periods is applicable:

a) in the case of a meeting or adjourned meeting, 48 hours before the time for holding the meeting or adjourned
meeting;
b) in the case of a poll taken more than 48 hours after it was demanded, 24 hours before the time appointed for the
taking of the poll;
c) in the case of a poll taken not more than 48 hours after it was demanded, the time at which it was demanded.

10
Section 302 provides that a proxy may be elected to preside at a general meeting by a resolution of the company passed
at the meeting. The appointment of a proxy to vote on a matter at a meeting of a company authorizes the proxy to
demand, or join in demanding, a poll on that matter.

Section 304 provides that a member of a company who has appointed a person to act as a proxy of the member may
terminate the appointment by notice. The termination of the authority of a person to act as proxy does not affect the
validity of a vote given by that person unless the company receives notice of the termination:
a) before the start of the meeting or adjourned meeting at which the vote is cast; or
b) in the case of a poll taken more than forty-eight hours after it is demanded, before the time fixed for taking the
poll.

 The Chairman

Section 293 provides the members present at a general meeting may by ordinary resolution, elect one of the members to
preside at the meeting. Subsection (1) is subject to any provision of the company's articles that states who may or may
not be chairperson or preside at a general meeting of the company.

In the case of National Dwelling Society v. Sykes Chitty J stated,

“It is the duty of the chairman, and his function, to preserve order and to take care that the proceedings are
conducted in a proper manner and that the sense of the meeting is properly ascertained with regard to any
question which is properly before the meeting.”

The powers and duties of the chairman which can be deduced from this statement include:
a) Determining that the meeting is properly constituted and that a quorum is present.
b) Informing himself as to the business and objects of the meeting
c) Preserving order in the conduct of those present
d) Confining discussion within the scope of the meeting and reasonable limits of time
e) Deciding whether proposed motions and amendments are in order
f) Formulating for discussion and decision questions which have been moved for the consideration of the meeting
g) Deciding points of order and other incidental matters which require decision at the time
h) Ascertaining the sense of the meeting by:
 Putting relevant questions to the meeting and taking a vote on them
 Declaring the result
 Causing a poll to be taken if duly demanded
i) Declaring the meeting closed when business has been completed. Note that the chairman has no power to adjourn
a meeting merely because the proceedings have taken a turn which he himself does not like as was the case in
National Dwelling Society v. Sykes. However, he may adjourn the meeting if it becomes disorderly or if the
members agree.

 Conduct of business

The conduct of business at meetings is not governed by the act. However, each item of business contained in the notice
of meetings should be taken separately, discussed and put to the vote.

Members may propose amendments to the resolutions. The chairman should reject any amendment, which is outside the
limits set by the notice convening the meeting. With ordinary business, this rule may present no difficulty but with special
business, which has necessarily been described in details in the notice; there are only limited possibilities of amendment.
If the special business is an ordinary resolution it may be possible to amend it so as to reduce its effect to something less
(provided that the change does not entirely alter its character) e.g. an ordinary resolution authorizing the directors to
borrow 100,000 pounds might be amended to substitute a limit of 50,000 pounds (but not to increase it to 150,000 pounds
11
as 100,000 pounds would have been stated in the notice). It is not possible to pass a special resolution, which differs in
substance from the text set out in the notice. In Re Moorgate Mercantile Holdings (1980) A special resolution set out in
the notice provided for the total cancellation of a share premium account balance of 1,356,900.48 pounds since the assets
which it represented had been lost (form of reduction of share capital). At the meeting, the resolution was amended, for
technical reasons, to reduce the balance to 321.17 pounds and it was passed in that form. It was held that the resolution
as passed was invalid since it was not the special resolution of which notice had been given.

 VOTING
There are two types of votes:
i. By show of hands
ii. By poll

The common law rule is that a member is entitled to one vote only irrespective of the number of shares he holds as was
held in Re Horbury Bridge Coal Co. (1879). The vote is to be cast by a show of hands. However, as soon as the result of
voting has been declared by the chairman, any member can demand a poll. The demand cancels the result of the previous
voting.

The rights of members to vote and the number of votes to which they are entitled to in respect of their shares are fixed
by the articles. One vote per share is normal but some shares, e.g. preference shares, may carry no voting rights in normal
circumstances.

Section 258 provides when a vote on a written resolution put to the members of a company is taken, then

a) if the company has a share capital each member has one vote for each share, or each one hundred shillings of
stock, held by the member; and
b) if the company does not have a share capital each member has one vote.

When a vote on a resolution is to be taken by the members of a company at a meeting on a show of hands each member
present in person has one vote; and each proxy present who has been duly appointed by a member entitled to vote on
the resolution has one vote.

When a vote on a resolution is to be taken by the members of a company by a poll:

a) if the company has a share capital each member present in person, or each proxy present who has been duly
appointed by a member, has one vote for each share, or each one hundred shillings of stock, held by the member;
and
b) if the company does not have a share capital each member present in person, or each proxy present who has been
duly appointed by a member, has one vote.

Section 294 provides that on a vote on a resolution at a meeting with a show of hands, the person presiding at the meeting
may declare the result of voting on a show hands:
i. has or has not been passed; or
ii. has passed with a particular majority.

Such a declaration is conclusive evidence of the result of the voting without proof of the number or proportion of the
votes recorded in favor of or against the resolution. An entry in respect of such a declaration in the minutes of the meeting
recorded in accordance with section 292 is also conclusive evidence of that fact without further proof.

This section does not have effect if a poll is demanded for passing the resolution and the demand is not subsequently
withdrawn.

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Section 295 provides that a provision of a company's articles is void to the extent that it would have the effect of excluding
right to demand a poll at a general meeting on a resolution other than one for:
i. electing the member who is to preside at the meeting; or
ii. adjourning the meeting.

A provision of a company's articles is void to the extent that it would have the effect of making ineffective a demand for
a poll on a resolution made-
a) by no fewer than five members having the right to vote on the resolution;
b) by a member or members representing no less than ten percent of the total voting rights of all the members
having the right to vote on the resolution; or
c) by a member or members holding shares in the company conferring a right to vote on the resolution, being shares
on which an aggregate amount has been paid up equal to not less than ten percent of the total amount paid up
on all the shares conferring that right.

Section 296 provides that a member who is entitled to cast two or more votes at a poll taken at a general meeting of a
company is not obliged to use all of those votes or to cast them all in the same way.

Section 297 provides that if a body corporate is a member of a company, it may, by resolution of its directors or other
governing body, authorize a person or persons to act as its representative or representatives at a meeting of the company.

To shorten the proceedings at meetings the procedure is:

i. On putting a resolution to the vote the chairman calls for a show of hands, i.e. one vote may be given by each
member present in person: proxies do not vote. The chairman declares the result. Unless a poll is then demanded,
the chairman’s declaration (duly recorded in the minutes) is conclusive. No one can re-count hands after the
meeting.

ii. If a real test of voting strength is required, a poll may be demanded. The result of the previous show of hands is
then disregarded. On a poll, every member and also proxies representing absent members may cast the full
number of votes to which they are entitled. A poll need not be held forthwith but may be postponed so that
arrangements to hold it can be made. When a poll is held, it is usual to appoint “scrutinisers” and to ask members
and proxies to sign voting cards or lists. The votes cast are checked against the register of members and the
chairman declares the result.

In voting, either by show of hands or on a poll, it is the number of votes cast which determines the result. Votes which are
not cast, whether the member who does not use them is present or absent are simply disregarded. Hence the majority
vote may be much less than half or three quarters) of the total votes which could be cast.

In the case of joint holders the vote of the senior joint holder who tenders a vote whether in person or by proxy shall be
accepted to the exclusion of the votes of the other joint holders, the seniority being determined by the order in which the
names stand in the register of members. However in Burns v. Siemens Bros Dynamo Works Ltd it was held that joint
holders are entitled to require that their holding be split with a different holder being registered as the senior in respect
of the various split holdings. Section 260 provides that if two or more persons hold a share jointly, only the vote of the
senior holder who votes and any proxies duly authorized by that holder are eligible for counting by the company. For the
purposes of the section, the senior holder of a share is determined by the order in which the names of the joint holders
appear in the register of members.

Note that it is common for members in arrears with calls or other sums not to be allowed to vote.

13
  Resolutions

Company meetings make decisions by passing resolutions. A resolution is proposed, deliberated upon and voted on. A
proposed resolution may be amended as long as the amendments do not negate its main purpose.

The following types of resolutions provided for under the Companies Act:
i. Written resolutions
ii. Ordinary resolutions
iii. Special resolutions
iv. Resolution requiring special notice under section 287 of the Act

Section 255 provides that a resolution of the members, or of a class of members of a private company may be passed
either as a written resolution; or at a meeting of the members.

Section 262 provides that the following may not be passed as a written resolution:
a) a resolution under section 139 removing a director from office before the end of the director's period of office;
or
b) a resolution under section 739 removing an auditor before the end of the auditor's term of office.

Either the directors or members of the private company may propose a resolution as a written resolution.

A written resolution has effect as if passed by the company in a general meeting; or by a meeting of a class of members
of the company.

A resolution of the members or of a class of members of a public company may be passed only at a meeting of the
members.

Section 256 provides that a resolution is an ordinary resolution of the members (or of a class of members) of a company
if it is passed by a simple majority.

Section 257 provides that a resolution is a special resolution of the members (or of a class of members) of a company if it
is passed by a majority of not less than seventy-five percent.

Note that a written resolution may be passed with a simple majority (ordinary resolution) or a majority of not less than
seventy-five percent (special resolution). However, note that if a resolution of a private company is passed as a written
resolution the resolution is not a special resolution unless it stated that it was proposed as a special resolution; and if the
resolution so stated it may only be passed as a special resolution.

If a resolution is passed at a meeting, the resolution is a special resolution only if the notice of the meeting:
a) included the text of the resolution; and
b) specified an intention to propose the resolution as a special resolution, but if the notice of the meeting specified
such an intention, the resolution may be passed only as a special resolution.

Section 275 provides that a resolution of the members of a company is validly passed at a general meeting if:
a) notice of the meeting and of the resolution is given; and
b) the meeting is held and conducted, in accordance with the Act and the company's articles.

 Minutes

14
Separate minutes or proceedings of directors and general meetings must be kept; the latter are open to inspection by
members. The minutes when signed by the chairman of the meeting or next succeeding meeting, are prima facie evidence
of the proceedings.

Section 317 of the Act provides that every company shall keep comprising:

a) copies of all resolutions of members passed otherwise than at general meetings;

b) minutes of all proceedings of general meetings; and
c) details provided to the company in accordance with section 319 where decisions are taken in a company that has
a sole member.

The company shall keep the records for at least ten years from the date of the relevant resolution, meeting or decision. If
a company fails to comply with this requirement the company, and each officer of the company who is in default, commit
an offence and on conviction are each liable to a fine not exceeding KES 500,000.

Section 318 provides that the minutes of proceedings of a general meeting, if purporting to be signed by the person
presiding at that meeting or by the person presiding at the next general meeting, are evidence of the proceedings at the
meeting.

If a record of proceedings of a general meeting of a company exists, then, until the contrary is proved:
a) the meeting is presumed to have been duly held and convened;
b) all proceedings at the meeting are presumed to have duly taken place; and
c) all appointments at the meeting are presumed to be valid.

Section 320 requires companies to keep its records available for inspection at its registered office. The company shall, on
being requested to do so by a member of the company, make the records available for inspection by the member without
charge. If a member of the company requests the company to provide the member with a specified record, the company
shall comply with the request within seven days after receiving the request, subject to payment of the prescribed fee (if
any).

15
COMPANY DIRECTORS

Both the Companies Act and case law recognize the General Meeting and the Board of Directors (the BOD) as the
principal managerial organs of the company and the Constitution vest power in both.

Whereas the General Meeting makes major decisions the Board of Directors is responsible for managing the day to day
affairs of the company.

The 2015 Companies Act extensively deals with Directors under Part IX, outlining statutory provisions from Sections 122
to 237 on these company managers.

Section 3 of the Act states that "director", in relation to a body corporate, includes:

a) any person occupying the position of a director of the body( by whatever name the person is called); and

b) any person in accordance with whose directions or instructions (not being advice given in a professional
capacity) the directors of the body are accustomed to act;

Any person who occupies the position of director is treated as such. The test is one function. The directors’ function is to
take part in making decisions by attending the meetings of board of directors. Anyone who does that is a director
whatever they may be called.

A person who is given the title of director, such as ‘Sales Director’ or ‘Director of Research’, to give them status in the
company structure is a not a director in company law. This is unless by virtue of their appointment they are member of
the board of director, or they carry out functions that would be properly discharged only by a director. Anyone who is
held out by a company as a director, and who acts as a director although not validly appointed as one, is known as de
facto director as opposed to a de jure director, a formally appointed one.

Shadow Directors

A person might seek to avoid the legal responsibilities of being a director by avoiding appointment as such but using his
power, say as a major shareholder, to manipulate the acknowledged board of directors. Company law seeks to prevent
this abuse by extending several statutory rules to shadow directors. Shadow directors are directors for legal purpose if
the board of directors is accustomed to act in accordance with their directions and instructions. This rule does not apply
to professional advisers merely acting in that capacity.

Alternate Directors

A director may, if the articles permit, appoint an alternate director to attend and vote for them at board meetings which
they are unable to attend. Such an alternate be another director, in which case they have the vote of the absentee as
well as their own. More usually they are an outsider. Company articles could make specific provisions for this situation.

Executive Directors

1
An executive director is a director who performs a specific role in a company under a service contract which requires a
regular, possibly daily, involvement in management. This director is usually employed for his experience and therefore
the standard of care expected of him is much higher than ordinary directors. It is an implied term of his service contract
that he will use reasonable skill in the performance of his duties of his office i.e. the degree of skill which may be
expected of a person in such a position.

Executive Directors perform specific roles in a company under service contract requiring regular involvement in
management.

Since the company is also his employer there is a potential conflict of interest which in principle a director is required to
avoid. To allow an individual to be both a director and an employee the articles usually make express provision for it, but
prohibit the director from voting at board meeting on the terms of their own employment.

Directors who have additional management duties as employees may be distinguished by special tittles, such as ‘Finance
Director’.

Executive directors are headed by the MD/CEO

Non-Executive Directors

A non-executive director does not have a function to perform in a company’s management but is involved in its
governance. In listed companies, corporate governance codes state that boards of director are more likely to be fully
effective if they comprise both of executive directors and strong, independent non-executive directors.

The main tasks of the NEDs are as follows:

 Contribute an independent view to the board ‘s deliberations

 Help the board provide the company with effective leadership

 Ensure the continuing effectiveness of the executive directors and management.

 Ensure high standards of financial probity on the part of the company.

 Non-executive and shadow directors are subject to the same duties as executive directors.

Non-Executive directors are headed by the Chairman of the Board

The Managing Director (MD)

A managing director is one the directors of the company appointed to carry out overall day-to-day management
functions. If the articles provides for it the board may appoint one or more directors to be managing directors. A
managing director does have a special position and has wider apparent powers than any director who is not appointed
an MD. He heads the executive arm of the Board of Directors.

The office of the MD is created by the company’s constitution. The directors may from time to time appoint one or more
of their body to the office of the MD for such term and other conditions as the board may deem fit. The board is
empowered to remove the MD from office subject to the terms of the contract between him and his company.

2
In case of wrongful removal, the MD can sue in damages for breach of contract. It was so held in Southern Foundries Ltd
V Shirlaw. In this case, the MD was appointed for 10 years. Upon the reorganization of the company, the new
Constitution adopted by the company empowered the removal of the MD from office. The company then removed him
from office as a director thus automatically terminating his contract as MD. It was held that the removal was in breach
of his 10 year agreement and the company was liable for the breach of contract.

The serving MD does not retire by rotation but he ceases to hold office if for any reason he ceases to be a director. The
MD receives such remuneration by way of salary, commission or participation in profit as the board deems fit.

If the Board fails to fix the MD’s remuneration, the General Meeting may do so.

The MD serves the company in 2 capacities i.e. as a director and employee. His powers and functions largely depend on
the terms of employment.

The directors may entrust and confer upon the MD any of the powers exercisable by them on such terms and conditions
and with such restrictions as they may deem fit. Such powers are exercisable by the MD collaterally (together) with or to
the exclusion of the board. However, the board is entitled to withdraw, revoke, alter or vary all or any of the powers
conferred upon the MD as was the case in Holdsworth and Co. V Caddies, where after one year of service the Board of
Directors resolved that the MD’s powers be confined to one of the subsidiaries of the company.

THE BOARD OF DIRECTORS

It is the body responsible for the day to day affairs of the company. The board of directors is responsible for the
management of the company’s business. It is the group of persons elected by the shareholders of a corporation to
govern and manage the affairs of the company.

Under Section 128 of the Act, whereas a private company must have at least 1 director, a public company must have at
least 2 directors.

Section 129 also provides that a company must have at least one director who is a natural person, including a
corporation sole’.

Section 130 provides that a company in contravention of S. 128 and 129 must comply within a period of not more than 3
months from the date a compliance order is issued, by appointing a natural person as Director and notifying the
Registrar of such an appointment. Failure to comply attracts a fine of KES 500,000 to the defaulting company and its
officers.

Section 131 is clear that the minimum age of a director in Kenya is 18 years

The number and the names of the first directors is determined by the subscribers to the memorandum in writing failing
which all the subscribers become the first directors.

A company may by its Constitution require directors to take up a specified number of shares. In the absence of such an
Article, the Companies Act does not require directors to hold any number of shares.

Directors are generally elected by member by ordinary resolution in the General Meeting.

The appointment of directors and their remaining in office is subject to various restrictions:

3
Restriction Details
Minimum number of Private company = 1
directors – S.128 Public company = 2
Age – S.131 At least 18 years
Individual voting – S.132 Directors are voted to office individually. However, 2 or more may be voted in by a single
resolution provided that a motion to that effect has previously been agreed to by the
meeting any vote against it.
Consent All proposed directors must deliver to the Registrar their written consent to act as Director
Share Qualification Must be taken up within 2 months of appointment by either:
 Signing the memorandum for a number of shares not less than his qualification.
 Taking up and paying or agreeing to pay for his share qualification.
 Signing and delivering to the Registrar for registration, an undertaking to take and pay
for his qualification shares.
 Delivering to the Registrar for registration, a statutory declaration to the effect that
shares not less than his qualification are already registered in his name.
Sound mind To qualify for appointment as director a person must be of sound mind.
The office of director shall be vacated if the director becomes of unsound mind.

Bankruptcy An insolvent person or a person declared bankrupt by a Court of law must not be directly or
indirectly involved in company management without leave of the Court.

Disqualification by the The High Court has jurisdiction to disqualify a person from being directly or indirectly
Court involved in company management for a duration not exceeding 15 years if the person:
 Has been guilty of an offence relating to the formation, promotion and management of
the company.
 Has been guilty of fraudulent trading.
 Has been guilty of fraud or breach of duty to the company.
 Has been guilty of failing to lodge returns with the Registrar.
 Has been involved in the management of an insolvent company.
 Has been deemed unfit to manage a company in the interest of the public after
investigations by the AG.
 Has acted as a director while an undischarged bankrupt

THE REGISTER OF DIRECTORS

S.134 requires every company to maintain a Register of Directors at its registered office and open to inspection by:
 Any member of the company without charge
 A 3rd party on payment of an inspection fee (if any)

Companies which fail to maintain a register subject to inspection are liable to a default fine of KES 1,000,000.

The Register must have the following details:

4
 Particulars of a Register of Directors

Natural Director – S.135 Corporate Directors – S.136

 Name and any former name  The body's corporate name

 Service address (which may be the company’s  The registered or principal office of the body
registered office)  He legal form of the body and the law by which it
 Residential address is governed
 Country and place of residence  The corporate body’s registration number
 The person’s nationality
 The person's business or occupation
 The person's date of birth

S.137 – every company shall maintain a Register of director’s residential address failing which a default fine of KES
500,000 applies. Any changes thereto must be notified to the Registrar within 14 days thereof failing which a fine of KES
200,000 applies.

DISQUALIFICATION OF DIRECTORS

The office of director shall be vacated (declared vacant) if the director:

 Fails to acquire his share qualification within the prescribed duration.
 If the director is disqualified from holding office by a Court of law.
 If he absents himself from directors meetings held in over 6 months.
 If he becomes of unsound mind.
 If declared bankrupt or enters into an arrangement with his creditors to compromise his debts.
 If he attains the age of 70 whereby he retires after the next AGM
 If he resigns from office by written notice to the company.
 If removed from office by an ordinary resolution of members in a General Meeting.

A company may by its Constitution adopt retirement by rotation in which case all directors retire at the conclusion of the
first AGM and at subsequent AGM’s a third of the longest serving directors retire.

However a serving managing director (MD) does not retire by rotation but if he ceases to hold office for any reason, he
ceases to be a director.

Removal of directors from office

Under Section 139, a company is empowered to remove a director from office by an ordinary resolution to that effect
provided that the following procedure is followed:

1) A special notice (28 days) of the intended resolution to remove a director from office must be given to the
company.
2) Upon receipt of the notice, the company must send a copy thereof to the director concerned who is entitled to
make written representations not exceeding a reasonable length as his defense – S.141
3) The director may request the company to notify the members that he has made representations.
4) The directors must summon an extra ordinary General Meeting to discuss the matter
5) Notice of the meeting must indicate that the director has made representations and copies thereof must be sent
to the members unless received late by the company.
6) If the copies are not enclosed by reason of lateness or default by the company, the director is entitled to have
them read out at the meeting however the directors representations need not be sent out to members or read

5
 out at the meeting if an application by the company or any other aggrieved person, the Court is satisfied that the
director is abusing his right to be heard, to secure needles publicity for a defamatory matter.
7) The Court may hold the director liable for the cost of the applications.
8) The removal of a director from office takes effect when the meeting by ordinary resolution so resolves.

THE LEGAL POSITION OF DIRECTORS

Section 3 of the Companies Act provides that a director includes any person occupying the position of director by
whatever name called. This definition fails to identify the director and his relationship with the company.

The legal position of directors has been articulated by Courts. In the words of Sir George Jessel MR:

“Directors have been called trustees and managing trustees. It does not matter what you call them so long as
you understand what their true position is.”

For certain purposes directors are regarded as agents, for others they are considered as trustees but their true legal
position is that of fiduciaries.

 Directors as agents
They are deemed to be agents when they contract on behalf of the company. On contracts of employment borrowing or
in furtherance of the objects of the company, they contract as agents and the company is generally liable as the
principal. However in those circumstances in which the agent is personally liable, the directors are liable. It was so held
in Ferguson V Wilson.

 Directors as trustees
It is argued that directors are trustees for certain purposes though not ordinarily trustees.

Unlike ordinary trustees who have legal title in trust property, directors do not have it as it is vested in the company.
Unlike ordinary trustees whose obligation is to preserve trust property for the beneficiary, directors are bound to invest
for the benefit of the company. Money in a company’s bank account which directors are authorized to operate is held in
trust for the company assets that come into the hands of directors or under their control are held in trust for the
company. It was so held in Re: Forest of Dean Coal Mining Co.

 Directors as fiduciaries
In the words of Lord Porter in Regal (Hastings) Ltd V Gulliver:

“Directors no doubt are not trustees but they occupy a fiduciary position towards the company who’s Board
they form. This is the true legal position of directors. There is a fiduciary relationship between the directors and
the company, a relationship based on trust, confidence and good faith which imposes upon the directors various
fiduciary or equitable duties often referred to as duties of loyalty and good faith”

6
DIRECTOR’S DUTIES

Directors will only bind the company when acting collectively as a board. However the board is empowered to delegate
powers to committees of one or more directors.

Directors owe their duties to the company as a legal person as opposed to individual shareholders. It was so held in
Percival V Wright.

However if shareholders appoint directors to negotiate on their behalf, they become their agents and must report the
outcome. Unless otherwise provided by the Act, the director’s duties are not restricted to ‘directors’ properly so called.
They are equally owed by other officers particularly those serving the company in similar managerial positions by
whatever name called.

STATUTORY DUTIES

S.140 of the 2015 Companies Act provides that the general duties identified in the Act are owed by a director of a
company to the company (as opposed to third parties).

These general duties of directors are based on common law rules and equitable principles that apply in relation to
directors and have effect in place of those rules and principles with respect to the duties owed to a company by a
director.

S.140 further clarifies that the general duties of directors are to be interpreted and applied in the same way as common
law rules or equitable principles, and those interpreting and applying those rules and principles are required to have
regard to the corresponding common law rules and equitable principles.

Statutory Duty Details

provision
S.142 Duty to act within powers A director of a company shall:

(a) act in accordance with the constitution of the company; and

(b) only exercise powers for the purposes for which they are conferred

S.143 Duty to promote the success In so doing the director shall have regard to:
of the Company
(a) the long term consequences of any decision of the directors;

(b) the interests of the employees of the company;

(c) the need to foster the company's business relationships with suppliers,
customers and others;

(d) the impact of the operations of the company on the community and
the environment;

(e) the desirability of the company to maintain a reputation for high

standards of business conduct; and

(f) the need to act fairly as between the directors and the members of
the company
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S.144 Duty to exercise This duty is not infringed by a director acting:
independent judgment (a) in accordance with an agreement duly entered into by the company
that restricts the future exercise of discretion by its directors; or

(b) in a way authorized by the constitution of the company.

S.145 Duty to exercise reasonable In performing the functions of a director, a director of a company shall
care, skill and diligence exercise the same care, skill and diligence that would be exercisable by a
reasonably diligent person with:

(a) the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the functions performed by the
director in relation to the company; and

(b) the general knowledge, skill and experience that the director has.

S.146 Duty to avoid conflict of A director of a company shall avoid a situation in which the director has, or
interest can have, a direct or indirect interest that conflicts, or may conflict, with
the interests of the company.

This is unless the action is sanctioned by the Board of Directors.

A director with a potential conflict of interest in a proposed or existing

transaction must disclose the same under S.151 to either:
 A General Meeting; or
 The Members via notice

Disclosure need not be made:

 Where the director is not aware of the interest
 The situation cannot reasonably be regarded as likely to give rise
to a conflict of interest
Lack of compliance attracts a fine of KES 1,000,000

S.147 Duty not to accept benefits A person who is a director of a company shall not accept a benefit from a
from 3rd parties third party if the benefit is attributable:

(a) to the fact that the person is a director of the company; or

(b) to any act or omission of the person as a director.

Any person who contravenes S.147 is liable to a fine not exceeding KES
1,000,000 and forfeiture of the benefit or its monetary equivalent

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COMMON LAW DUTIES

 DUTY OF CARE, SKILL AND DILIGENCE

In Re: City Equitable Fire Insurance Co LtdRomer J observed that in discharging their mandate, directors are required to
demonstrate some degree of care, skill and diligence. The judge formulated the following principles, rules or standards
expected of a Director:

1. A director need not exhibit in the performance of his duties a greater degree of skill than may be reasonably
expected from a person of his knowledge and experience.
In Re: Brazilian Rubber Plantations and Estates Ltd where a company with five directors suffered huge losses by
reasons of purchasing certain rubber plantations in Brazil on the basis of a prospectus containing untrue statements on
their quality which directors ought to have discovered by exercising reasonable care, it was held that they were not
liable in negligence as directors of their knowledge and expertise could not have acted otherwise.
The Court was emphatic that a director was not bound to bring any special qualification to this office.

2. A director is not bound to give continuous attention to the affairs of the company.
His duties are of an intermittent nature to be performed at periodical board meetings and at meetings of any committee
of the board upon which he happens to be placed.
He is not however bound to attend all such meetings though he ought to attend whenever in the circumstances he is
reasonably able to do.
In the Marquis of Butes Case, where M become the president of a company at the age of 6 months, inheriting the office
from the father, and attended one board meeting in 38 years, it was held that he was not liable for the wrongs
committed by other directors at board meetings as he was not bound to attend them.
A similar holding was made in Re: Denham and Company where the only director who had assets capable of being
attached by a third party had attended only one board meeting for a long time and was thus not liable for the wrongs
committed at the board meetings.

3. In the absence of suspicion, a director is entitled to assume that officers of the company performed their duties
honestly.
This means that the director is entitled to rely on information provided by trusted servants of the company.
In Dovey V Covey, where a director of a bank facilitated certain irregularities by relying on information provided by a
manager and chairman of the bank, it was held that he was not liable in negligence as it was reasonable for him to rely
on the information provided by his officers.

 DUTY OF LOYALTY AND GOOD FAITH

This duty falls in the following 4 categories:

1. Duty to act bonafide

Directors are bound to act in good faith in what they consider to be the best interest of the company. The powers
conferred upon them must be exercised in good faith. Regard must be given to existing and future members of the
company. It was so held in Tech Corp V Miller.

2. Duty to exercise unfettered discretion

Directors are required to approach company matters with an open mind. Decisions must be made after deliberations
and they cannot agree in advance on how to vote at future board meetings.

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 3. Duty to exercise powers for the proper purpose
Directors are bound to exercise the powers conferred upon them for the particular purposes for which they were
conferred. Their powers must not be exercised for extraneous or improper purposes even if the company benefits. This
was so held in Re: Smith V Fawcett.

In Punt V Symmons Co Ltd, the directors issued shares so as to acquire a majority to pass a special resolution to deny
shareholders certain rights given by the Constitution. It was held that this was an improper exercise of the power to
issue shares and an injunction was granted.

InPiercy V Mills and Co Ltd, where directors had issued shares to ensure that they were re-elected and retained a
majority on the board, the allotments were deemed void for being an improper exercise of the power to issue shares.

However, if the company in a General Meeting ratified and improper exercise of power by the directors the transaction
is validated as was the case in Bamford V Bamford,where the directors had misused their power to issue shares but the
General Meeting ratified the same.

4. Duty to avoid conflict of interest

As fiduciaries, directors are bound to avoid conflict of interest. A director must not, without the company’s consent,
place himself in circumstances in which his personal interests and those of the company conflict.

There are 3 potential situations of conflict of interest namely:

a) Interest in contracts made by the company

If a director has a personal interest in a contract made by the company, equity demands that he discloses the interest to
the company, failing which, the contract is voidable at the option of the company.

Section 151 of the Companies Act prescribes the rules and principles relating to disclosure by interested directors:

i. A director who is directly or indirectly interested in a contract or proposed contract must declare the nature
of his interest at the meeting of the board.
ii. If the contract is a proposal, disclosure must be made at the meeting of the board at which the question of
the contract is first considered.
iii. If the director’s interest develops after the first meeting, disclosure must be made at the next meeting of the
board.
iv. If the director’s interest develops after the contract is concluded, disclosure must be made at the next
meeting of the board.
v. The director must give a general notice of the nature of his interest e.g. he is a partner in the firm dealing
with the company.
vi. It is the duty of the director to disclose at the meeting or take reasonable steps to ensure that the notice of
disclosure is brought up and read at the meeting.
vii. Upon disclosure, the director is not counted in the constitution of quorum for the meeting deliberating the
same, and does not vote on the issue.

Effects of non-disclosure
Non-disclosure of personal interest by a director is a criminal offence for which he is liable to a fine not exceeding KES
1,000,000. The contract also becomes voidable at the option of the company as the case in Aberden Railway Company
V Blaike Brotherswhere the appellant company contracted to buy certain goods from the respondent partnership. The
chairman of the board of the company was also the managing partner of the firm, a fact he did not disclose when the
contract was conducted. The company repudiated the contract and was sued. It was held liable. However on appeal, the
company argued that the contract was voidable at its option for the non-disclosure. It was held that the company was
not liable as it was entitled to avoid the contract.
10
 b) Making secret profit
This phrase denotes any financial advantage enjoyed by a fiduciary over and above his remuneration.

In equity, a fiduciary must not benefit by virtue of his position. Any secret profit made by way of bribe, secret
commission, or from the use of information without disclosure must be accounted to the company, failing which the
company is entitled to the same under an action for money had and received.

In Regal Hasting Ltd V Gulliver, where directors took up all the shares not taken up by the public and subsequently sold
them at a profit, it was held that they were liable to account to the company.

A similar holding was made in Industrial Development Consultant’s Ltd V Cooley. The defendant was a former MD of
the plaintiff company which had unsuccessfully submitted a tender to the Gas Board, for a particular project. At a private
meeting between the chairman of the Gas Board and the defendant, the former offered the latter the contract
personally. The defendant then resigned from the company on the grounds of ill health and took up the project as its
manager. The company subsequently sued for the profit he had made on that project. It was held that he had breached
his fiduciary obligations and was liable to account.

A director who takes advantage of a maturing business opportunity which the company has an interest in is liable to
account for any profit made. It was so held in Canadian Aero Services Ltd V Omaliey where the Court formulated the
factors or circumstances to be considered in determining whether a director is liable to account for the secret profit
made. These factors are:
i. Office or position held.
ii. Nature of the corporate opportunity.
iii. The extent to which it is specific.
iv. The relationship between the office and the information.
v. The amount of information possessed.
vi. The circumstances in which the information was obtained.
vii. The use to which the information was put.
viii. Reasons for leaving the company if he left.

However a director is free to make a personal investment if the company has considered a particular proposal and has
rejected it in good faith. It was so held in Peso Silver Mining Co V Cropper.

c) Conflicting or interlocking directorships

Such conflict of interest arises if a director is actually involved in the affairs of two or more competing companies.
However there is no direct judicial authority for the proposition that a person cannot be a director of 2 or more
companies competing. In Mashonaland V Mashonaland, where the plaintiff company applied for an injunction to
restrain a director from acting as a director of the competing defendant company, the Court declined to issue an
injunction.

NB:
Under Section 207, a decision of a company to ratify the conduct of a director amounting to negligence, default, breach
of duty or breach of trust in relation to the company can be taken only by the members. However, unless the company's
constitution require unanimity or a higher majority, such a decision can be approved by an ordinary resolution of the
members.

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GENERAL MEETING APPROVAL OF SUBSTANTIAL PROPERTY TRANSACTIONS – S.158

Under S.158, a company may not enter into substantial property transactions where a director may acquire a substantial
non-cash asset unless the arrangement has been approved by a resolution of the members of the company.

An asset is a substantial non-cash asset if its value:

a) exceeds 10% of the company’s asset value and is more than KES 5,000,000; or
b) exceeds KES 10,000,000.

Exceptions:
1. Transactions with members of other group companies – S.159
2. Companies in liquidation other than member’s voluntary liquidation – S.160
3. Companies under Administration – S.160
4. Transactions on an approved securities exchange - S.161

S.162 provides that transactions entered into in contravention of S.158 are voidable at the option of the company
unless:

a) Restitution of any money or other asset that was the subject matter of the arrangement or transaction is no
longer possible;
b) The company has been indemnified in accordance with this section by other persons for the loss or damage
suffered by it; or
c) Rights acquired in good faith, for value and without actual notice of the contravention by a person who is not a
party to the arrangement or transaction would be affected by the avoidance

S.163 provides that subsequent affirmation, within a reasonable period, cures the transaction otherwise avoided under
S.162. This affirmation is by ordinary resolution of the general meeting of the company.

LOANS AND OTHER PAYMENTS TO DIRECTORS

Under Section 164 of the Companies Act, it is unlawful for a company to make a loan to any person who is its director or
director of its holding company or extend a guarantee or provide security in connection with a loan made to such a
person unless:

1. The company is for the time being private.

2. The lending company is the subsidiary and the holdings company its director.
3. The lending money or giving guarantee is part of the ordinary business of the company and the same is given in
the ordinary course of that business.
4. The funds are necessary to meet expenditure incurred or to be incurred by the director for purposes of the
company or enabling him to properly perform his duties as an officer of the company.
5. The payment must be approved at the General Meeting during which particulars of the payments including the
amount are to be disclosed.

A payment made without approval of the General Meeting renders the directors who authorized the same jointly and
severally liable to indemnify the company from any loss arising.

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PAYMENTS TO DIRECTORS FOR LOSS OF OFFICE

Under Section 182, it is unlawful for the company to make any payment to a director by way of compensation for loss of
office or as consideration for this retirement unless:

 Particulars of the proposed payment including the amount are disclosed to members in the General Meeting.
 The General Meeting has by resolution approved the payment.

Similarly, a company may not make a payment for loss of office to a director of its holding company unless the payment
has been approved by a resolution of the members of the company and each of the companies that are associated with
it.

A resolution approving a payment to which this section applies can be passed only if a Memorandum setting out
particulars of the proposed payment (including the amount) is made available to the members of the company whose
approval is sought.

The above prohibition (S.182) does not apply for a payment made in good faith:

a) in discharge of an existing legal obligation;

b) as damages for breach of such an obligation;
c) in settling or compromising any claim arising in connection with the termination of a person's office or
employment;
d) as a pension for past services;

Under Section 187 a payment made to a director without requisite approval is illegal and the director receives the same
in trust for the company (entitled to return the money after holding it). Any director who authorized the payment is
jointly and severally liable to indemnify the company that made the payment for any loss resulting from it.

Further, it is unlawful for a company to transfer the whole or any part of its undertaking in property to a director for
purposes of payment unless the payment has been approved by members in a General Meeting at which the particulars
of the payment including the amount were disclosed to members.

It is unlawful for a company to pay directors remuneration fee from tax.

MINUTES OF DIRECTOR’S MEETINGS – S.210

A company shall ensure that minutes of all proceedings at meetings of its directors are recorded.

A company shall keep the minutes of of its directors' for at least 10 years from the date of the meeting.

In case of non-compliance, the company, and each director of the company who is in default, commits an offence and
on conviction are each liable to a fine not exceeding KES 500,000.

Under S.211 if minutes of a meeting are recorded in accordance with section 210:

(a) the meeting is presumed to have been duly held and convened;
(b) all proceedings at the meeting are presumed to have duly taken place; and
(c) all appointments at the meeting are presumed to have been validly made.

13
DIVISION OF POWERS BETWEEN THE GENERAL MEETING AND THE BOARD

During the 19th century, it was generally believed that the General Meeting was the company. The directors were
regarded as agents whose responsibilities were to implement resolutions of the General Meeting. However, this
conception changed towards the beginning of the 20th century and by 1948, the law had recognized the General
Meeting and the BOD as the principal organs of the company with specific powers to exercise. Whereas some powers
are only exercisable by the Board, others can only be exercised by the General Meeting.

In this regard, the General Meeting is empowered to:

1) Alter the Memorandum of Association.
2) Alter the Constitution of Association.
3) Declare dividends.
4) Remove directors from office.
5) Authorize bonus issue
6) Approve appointment of auditors

On the other hand the Board of Directors is empowered to:

1) Appoint the managing director.
2) Appoint the company Secretary.
3) Recommend the payment of dividends.
4) Recommend a bonus issue.
5) Exercise borrowing powers.
6) Pay interim dividends.

The law governing the division of powers between these organs is that if a power is vested in one, the other must not
interfere with its exercise unless it’s being abused, exercised in bad faith or contrary to the constitution.

The question as to which powers are exercised by which organ is one of interpretation of the constitution. It was so held
in Automatic Self Cleansing Filter Syndicate V Cunningham.

Most companies adopt the formula contained in the Model Articles which provides inter alia:

“The business of the company shall be managed by the director… and may exercise all such powers of the
company as are not by the Act or by this regulation required to be exercised by the company in the General
Meeting….”

This Article has been interpreted to mean that director and no one else are responsible for managing the company
except in the matters specifically allotted to the company in the General Meeting.

Courts of law have given judicial effect to the division of powers between the two organs.

In Scott V Scottthe Constitution gave the directors the power to pay to members, from time to time, such interim
dividends as was justified by the profits of a company. The General Meeting resolved that the directors pay interim
dividends but they declined and were sued, it was held that they were not bound to implement the resolution as the
General Meeting was interfering with the exercise of a power vested by the Constitution on the Board.

In Shaw v Shaw, the directors were empowered to manage the company’s affairs and had instituted an action in the
company’s name to recover monies due to the company. The General Meeting resolved that the action be discontinued.
It was held that the resolution of the General Meeting had no legal effect. In the words of Lord Green:

14
 “They cannot themselves usurp the powers which by the Constitution are vested on the directors any more than
the directors can usurp the powers vested by the Constitution in the general body of shareholders”

The division of powers extends to powers vested in neither organ, if either of them purports to exercise such powers,
the other must not interfere.

However the General Meeting appears dominant in the following two respects:

It is empowered to:
 Remove directors from office; and
 Alter the MOA and AOA

Before such a step is taken the directors are fee to ignore instructions of the General Meeting on how to exercise a
power vested in them.

However in certain exceptional circumstances, the General Meeting exercises powers vested by the Constitution on the
Board of Directors. These powers are:

1. Litigation or commencement of proceedings

If the Board of Directors fails, neglects or refuses to sue or defend an action on behalf of the company, the
power becomes exercisable by the General Meeting as was the case in Marshalls Valve Gear Co V Manning
Wardle where it was held that an action commenced by the General Meeting where the directors had neglected
to do so was sustainable.

2. Ratification of abuse of power by directors

Whenever the General Meeting ratifies or adopts an abuse of power the directors, the transaction is validated
and it exercises a power vested on the Board. In Bamford V Bamford, the General Meeting ratified an improper
issue of shares by directors.
An abuse of power by directors can only be ratified if it is intra vires the company.

3. Deadlock in management
If the company’s Board of Directors cannot function in any material respect by reason of a deadlock, its powers
become exercisable by the General Meeting as it was held in Barron V Porter where the Constitution created
ten directorships but two years after incorporation, the company had two directors, Barren and Porter, who
were not in talking terms. Neither could attend a meeting summoned by the other and they could only
communicate through the Secretary. The quorum for Board meetings was two and the power to appoint
additional directors was vested on the Board. It was held that the power to appoint additional directors could be
exercisable by the General Meeting.

In summation it is arguable that the old idea that the General Meeting was the company and the directors were mere
agents thereof always serving the General Meeting is no longer the law as it is certainly not the fact.

PERSONAL LIABILITY OF DIRECTORS

In Ferguson V Wilson, it was observed that directors are agents when they contract on behalf of the company thereby
making the company liable as the principal.

However under certain circumstances, the liability is that of the agent thereby making the directors personally liable.
These circumstances include:

15
 a. Breach of warranty of authority: These are the circumstances in which a director has acted in excess of his
authority as a director. Such a director is personally liable.

b. Fraud: A director will be held personally liable if he has acted fraudulently in relation to a third party dealing
with the company.

c. Consent: An agent (the director) is personally liable if he had willfully bound himself to personal responsibility.

d. Negligence: If a director assumes direct duty of care to a third party, he renders himself liable for any liability
arising there from

e. Non-publication or mis-description of company name: A director who signs or authorizes the signing of a
negotiable instrument on behalf of the company where in the company’s name is not published or is mis-
described, is personally liable for any loss arising there from unless it has been made good by the company.

f. Illusory/deceptive company: A director who purports to act on behalf of an illusory company is personally liable
for any liability arising there from.

g. Unlawful purpose: A director who is party to the formation of a company whose object is to pursue an unlawful
purpose would be held personally liable on contracts made by the company.

Remedies against Directors for Breach of Duty

 Injunction.
 Damages or monetary compensation.
 Account or recovery of profit.
 Rescission of contract entered into.
 Restoration of company property (From a director holding them unlawfully)
 Summary dismissal.

16
THE DOCTRINE OF CONTRUCTIVE NOTICE

This doctrine is to the effect that persons who deal with the company are deemed to know the contents of its
documents i.e. the Memorandum, the Constitution, Special Resolutions among others. It was so held in Ernest V
Nicholls.

This is because such documents are registerable with the Registrar and are open to public scrutiny by those who care to
inspect them.

Persons who deal with companies are presumed to know the extent of their contractual capacity i.e. whether a
transaction is intra or ultra vires the company.

Third parties are therefore required to inquire into the affairs of the company by reading its public documents.

However the doctrine of constructive notice operates negatively, meaning that a party can only rely on a provision of
the Constitution if it has actual knowledge of its existence. It was so held in Rama Corporation V Proved Tins and
General Investments Ltd where a director of the plaintiff company contracted with a single director of the defendant
company who had no authority of the board to contract on behalf of the company. However, the Company’s
Constitution empowered the Board to delegate powers to committees of one or more directors. The director of the
plaintiff company was unaware of this Article. The defendant company repudiated the contract and was sued. It was
held that the company was not liable as the director had no authority to contract on its behalf. The plaintiff could not
rely on the Article permitting delegations as it was unaware of its existence. In the words of Justice Slade:

“There is no positive doctrine of constructive notice. It is a purely negative one”

The doctrine of Constructive Notice protects the company from third parties who do not make adequate or appropriate
inquiry.

THE INDOOR MANAGEMENT RULE (The Rule in Turquand’s case)

This rule is concerned with the liability of the company for the wrongs committed by its organs (the General Meeting
and the Board of Directors.)

It answers the following questions:

 Can a company escape liability by pleading on internal irregularity of its own?
 Are third parties bound to satisfy themselves that the rules of internal management have been compiled with
while dealing with the company?

These questions were answered in the negative in the case of Royal British Bank V Turquand (1856) where the
Constitution provided that the company could only borrow a bound such sums as had been approved by ordinary
resolution of the General Meeting. The company borrowed £2000 without any resolution and subsequently went into
liquidation. The liquidator denied liability on the ground that the borrowing was irregular. The company was however
held liable. The Court formulated the rule as follows.

“Persons who contract and deal with a company in good faith are entitled to assume that it is acting within its
constitutional powers and are not bound to satisfy themselves that rules of internal management have been
compiled with.”

They are entitled to assume that what appears regular in so far as can be ascertained from the company’s public
documents is indeed regular.

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The indoor management rule is intended to protect third parties in cases of internal irregularities and may be justified
on 2 grounds:

 It is fair and just to third parties.

 It facilitates commercial transactions and gives business efficacy.

In certain circumstances the rule cannot be relied upon by third parties and the company is thus not liable.

These are the exceptions to the rule in Turquand’s case.

1. Public documents
If the irregularity would have been apparent by an inspection of the company’s public documents but the third party
fails to do so, it cannot rely on the rule. It was so held in Irwine V Union Bank of Australia. For example if the
transaction requires a special resolution and the same has not been passed, the third party is unprotected as the
resolution is registerable.

2. Knowledge of irregularity
If the third party is aware of the internal irregularity, it is not deemed to be acting in good faith and cannot therefore
rely on the rule.

3. Suspicion
If the circumstances are such that they put the third party under inquiry but he fails to inquire so as to ascertain the
facts, he cannot thereafter rely on the rule in the event of an irregularity.

4. Abuse of power
If the officer dealt with purports to exercise powers not exercised by that earlier of officer and the third party does
inquire, the company cannot be liable for any irregularities.

5. Forged documents
The indoor management rule has not application where the document relied upon by the third party is a forgery as such
a document is a legal nullify. It was so held in Reuben V Great Fingall Consolidated Ltd.

6. Insiders
An insider is a person who by virtue of his position in the company is deemed to know whether the rules of internal
management have been complied with. In Howard V Patent Ivory Manufacturing Co. Ltd, it was held that the director
of the company could not rely on the indoor management as they were aware of the irregularities.

Directors are not always insiders for purposes of indoor management rule. It all depends on the transaction. It if is so
clearly intertwined with the position of director as a director of the company, he is deemed aware of the circumstances
affecting it and is therefore an insider. If it is not so closely intertwined with his position he is not deemed to be aware
and may rely on the rule.

THE DOCTRINE OF HOLDING OUT

This doctrine is to the effect that anyone who is held out by a company as a director, and who acts as a director although
not validly appointed as one, will be considered a de facto director who will bind the company in transactions entered
into on its behalf. The company will be estopped from denying the ‘apparent’ directorship brought about by estoppel.
Such a director will exercise apparent/ostensible authority.

In Mahoney V East Hollywood Mining, it was held that a person who deals with the company through an officer who is
held out by the company as a particular sort of officer is entitled to assume that is the officer concerned.
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In Freeman and Lockyer V Backhurst Park Properties, the business of the defendant company was property
development. The Constitution authorized the board to appoint a Managing Director but none had been appointed. One
director with the others knowledge, purported to act as MD. He engaged the plaintiff, a firm of architects, to render
certain services which they but were not paid and they sued. The company denied liability on the grounds that the
director was not its MD and thus had no authority to contract. It was held that the company was liable as it had held out
his director as its MD and was estopped from denying that fact.

THE ORGANIC THEORY OF COMPANIES

This is a principle of company law which attempts to connect the living to the non-living in that it attributes to the
company the thoughts and deeds of the responsible officers of the company.
Their state of mind is imputed to the company. The doctrine postulates that the responsible thinks and acts through
them. This theory is also referred to as the alter ego doctrine or identification theory.
Under the theory, the MD’s knowledge is deemed to be the company’s knowledge.

In Lennard’s Carrying Company V Asiatic Petroleum Company Ltd, under the Merchant’s Shipping Act of 1894, a ship
owner could only be held liable for lost cargo if there was negligence or if he was party to the loss. In this case, the MD
of the company had knowledge that the boilers of the ship were faulty and as a consequence the ship and its cargo were
lost. It was held that the company was liable for the loss as it was aware of the faulty boilers.

The doctrine imputes the thoughts of the directors to the company.

In Bolton Engineering Co. V Graham and Sons a company owned rental premises and the tenant was entitled to an
extension of the lease unless the company intended to occupy the premises. In this case, the directors had thought of
the company doing so but had neither passed the resolution nor formally discussed the matter at the Board. The
company refused to renew the lease and was sued. It was held that it was not bound to renew it as it had manifested its
intention to occupy the premises through the thoughts of the directors. In the words of Lord Denning:

“A company may in many ways be likened to the human body. It has a brain and a nerve centre which controls
what it does. It also has hands which hold the tools. Some of the people in company are mere servants and
agents. Others are directors and managers who represent the directing will and mind of the company and control
what it does. The state of mind of these managers is the state of mind of the company and is treated by law as
such.”

If the responsible officers delegate powers to junior officers, the company thinks and acts through the delegates.

However the thoughts deals of junior officers are not attributable to the company. It was so held in Tesco Supermarkets
V Natress Ltd. where it was held that the manager of the supermarket was not a responsible officer for purposes of the
organic theory.

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COMPANY ACCOUNTS, THE COMPANY AUDITOR AND AUDIT

COMPANY ACCOUNTS
Under the provisions of the Companies Act, companies are obliged to keep certain books of accounts known as the
Annual Financial Statements in the English language.

Every company must keep proper books of accounts with respect to:
 All sums of money received and expected by the company and the matters in respect of which the receipt and
expenditure takes place.
 All sales and purchases of goods by the company.
 The assets and liabilities of the company

Section 620 defines “annual financial statement", in relation to a company to mean the company's individual financial
statement for a financial year, and includes any group financial statement prepared by the company for that year.
Specifically the annual financial statements and reports for a financial year consist of the following:

Unquoted Companies Quoted Companies

a) The Annual Financial Statements a) The Annual Financial Statements
b) The Director’s report b) The Director’s remuneration report
c) The Auditor’s report on both (a) and (b) above c) The Director’s report
d) The Auditor’s report on (a), (b) and (c) above

The Small Company Regime

Under the 2015 Act, regulations on companies and small companies as concerns Company Accounts vary. Under Section
623, a company is deemed a “small company” if any two of the following conditions apply:

a) it has a turnover of not more than KES 50Million;

b) the value of its net assets as shown in its balance sheet as at the end of the year is not more than KES 20M; and
c) it does not have more than 50 employees on average per year.

However, S.626 excludes the following companies from the small companies regime identified above:

a) a public company
b) a member of an ineligible group
c) a person who carries on insurance market or banking activity

Companies Required to Keep Proper Accounting Records – S.628

S.628 is clear that every company shall keep proper accounting records i.e. records which:

a) show and explain the transactions of the company;

b) disclose with reasonable accuracy, the financial position of the company at that time; and

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 c) enable the directors lo ensure that every financial statement required to be prepared complies with the
requirements of the 2015 Companies Act.

These records should contain:

 Entries from day to day of all amounts of money received and, spent by the ,company and the matters in,
respect of which the receipt and expenditure takes place; and
 A record of the assets and liabilities of the company;
 statements of stock held by the company at the end of each financial year of the company
 all statements of stock-taking
 statements of all goods purchased and sold identifying the buyers and sellers in detail

Default fine: Company = KES 2M fine; Natural person = KES 1M fine and/or 2yrs imprisonment

Location of Accounting Records

S.630 dictates that these are to be maintained in the company’s registered office. The records must be open to
inspection by the officers of the company.

These accounting records are to be preserved for a period of 7years.

Default fine: Company = KES 2M; Natural person = KES 1M fine and/or 2yrs imprisonment

Annual Financial Statements: Composition and Preparation

Under S.635 these are to be prepared by the company directors failing which a default penalty of KES 1M applies.

S.636 dictates that the AFS so prepared must give a true and fair view of the assets, liabilities, profit or loss of the
company, failing which a default fine of KES 500,000 applies.

S.638 provides that the financial statements prepared comprise:

 a balance sheet as at the last day of the financial year;

 a profit and loss account;
 a statement of cash flow; and
 a statement of change in equity

Purposes of the profit and loss account:

1. It shows the profit and loss of the company that is the difference between the revenue for the period covered
by the account and the expenditure chargeable in the period.
2. To explain the company’s transactions, for example, all money received and spent and what matters, all sales
and purchases of goods
3. To present the true and fair view of the profit and loss of the company for the financial year
4. To safeguard the interest of creditors, investors and shareholders
5. The profit and loss statement shows:
 The amount charged to revenue by way of provisions for depreciation renewals or diminution in value of
fixed assets
 The amount of interest on the company’s debentures and fixed loans
 The amount charged against income tax and other taxation on profits

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Group Accounts

Parent companies not exempted by the small companies’ regime are also required, under S.639, to prepare group
financial statements for the year. Subsidiary companies are however not required to prepare group accounts.

The group accounts laid before the meeting must comprise consolidated accounts consisting:
 A consolidated balance sheet dealing with the state of the affairs of the company and all the subsidiaries dealt
with in the group accounts.
 A consolidated profit and loss account dealing with the profit or loss of the company and those subsidiaries.

Under S.645, the directors of a parent company shall ensure that the individual financial statements of the parent
company and the subsidiaries are all prepared using the same financial reporting framework.

Further, a holding company's directors shall ensure that except where in their opinion there are good reasons against it,
the financial year of each of its subsidiaries shall coincide with the company's own financial year.

The group accounts of a company need not deal with the subsidiary if the directors are of the opinion that:

1. It is impracticable.
2. It will be of no real value to members of the company in view of the insignificant amounts involved.
3. It would involve expense or delay out of proportion to the value the member of the company.
4. The result will be misleading.
5. The result would be harmful to the business of the company or any of the subsidiaries.
6. The business of the holding company and that the subsidiaries are so different that they cannot reasonably be
treated as a single understanding.

Disclosure of Director’s Benefits

Under S.650 directors shall include, as notes to the company’s individual financial statements, details of benefits
received during the relevant financial year of the company including:

 gains made by directors on the exercise of share options;

 benefits received or receivable by directors under long-term incentive schemes;
 payments for loss of office;
 benefits receivable, and contributions for the purpose of providing benefits, in respect of past services of a
person as director or in any other capacity while director;
 consideration paid to, or receivable by, third parties for making available the services of a person as director or
in any other capacity while a director.

Approval and Signing the Financial Statements

This is to be done by the Directors as soon as practicable after the AFS have been prepared, bearing in mind the
timelines to file Annual and Tax returns.

At least 2 directors must sign the books of accounts of a company.

Under Section 683, the signed financial statements must be filed with the Registrar:
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 a) For private companies - within 9 months after end of financial year
b) For public companies - within 6 months after end of financial year

The Director’s Report

This report must be prepared by the directors and accompany the AFS whenever published. The contents of this report
include but are not limited to:

1. The names of director’s during the year

2. Principal activities of the company
3. The amount, if any, which the Director’s recommended to be paid out as dividend
4. A business review, relevant to the company, identifying:
a. Principal risks and uncertainties facing the company
b. The company’s development and performance
c. The company’s position vis-à-vis its size and complexity
d. Factors and trends likely to affect future development and performance of the company
e. The company’s environmental impact
f. Information on the company’s employees
g. Social and community issues
h. Information on key stakeholders
i. Analyses using identifiable KPI’s
j. References to and additional information on amounts declared in the AFS

Default fine on directors: KES 1M fine and/or 5yrs imprisonment.

The Director’s Remuneration Report

S.659 – this must be prepared by the directors of quoted companies in each financial year outlining the remuneration
earned by the directors of the quoted company.

A default fine of KES 500,000 applies.

As soon as it is prepared, the Directors will approve the report and arrange for its sign-off by one of them ofr the
company secretary.

Under S.681, the director’s remuneration report must be approved, by ordinary resolution, at a general meeting of
members of the company.

Circulation of Annual Financial Statements

S.662 – every company shall send a copy of its annual financial statement and reports for each financial year to:

a) every member of the company;

b) every holder of the company’s debentures
c) every person who is -entitled to receive notice of general meetings;

Under S.665, the Directors have an option to circulate a summarized version of the financial statements.

4
Public companies must comply with S.662 at least 21 days before the date of the general meeting at which the financial
statements are to be laid.

A default fine of KES 1M applies.

Under S.673, a member or debenture holder of an unquoted company is entitled to be provided, on demand and
without charge, a copy of:

a) the last annual financial statement of the company;

b) the last directors' report; and
c) the auditor's report on that statement and that report

Under S.674, a member or debenture holder of a quoted company is entitled to be provided, on demand and without
charge, a copy of:

a) the company’s most recent annual financial statement;

b) the most recent director’s remuneration report
c) the most recent director’s report
d) the auditor’s report on the financial statements

Director’s Liability on Financial Statement

S.703 provides that a company director is liable to compensate the company for any loss suffered as a result of

a) any untrue or misleading statement in the director’s report, director’s remuneration report or a summary
financial statement; or
b) the omission of anything required to be in the abovementioned documents.

The Company’s Annual Return

Under S.705, these must be filed with the Registrar on the company’s return date i.e.:

a) The anniversary of the company's incorporation; or

b) If the company's last return lodged was made up to a different date, the anniversary of that date.

The Annual Return must contain the following details:

1. The address of the company's registered office

2. The physical address of that office;
3. the type of company and its principal business activities;
4. The financial statements or exemption statement, where applicable.
5. A statement of capital comprising:
a. The total number of shares of the company
b. The aggregate nominal value of those shares
c. For each class of shares
i. The particulars of rights attached therein
ii. The total number of shares of that class
iii. The aggregate nominal value of shares that class
d. The amount paid up on each share and the amount (if any) unpaid

5
 6. Particulars or every member, past or present
7. The number of shares held by each member
8. The number of shares of each class transferred and the dates of transfer

A default fine of KES 200,000 applies for not filing an annual return.

INTRODUCTION TO AUDIT

Section 709 of the Companies Act states that the directors of a company shall ensure that the company’s annual
financial statements are audited, unless it is a small company which is exempted.

An audit is the independent examination of and expression of an opinion on the financial statements of an
economic entity (in this case a company) by an appointed auditor in pursuance of that appointment and in compliance
with any relevant statutory obligation.

The objective of an audit is to enable the auditor express an opinion whether financial statements show a true and fair
view of the company state of affairs in accordance with an identified financial reporting framework.

The purpose of an audit is not to provide additional information but rather it is intended to provide the users of the
accounts with assurance that the information provided to then by directors is reliable. However, the users should not
assume the auditor’s opinion is on the efficiency with which management has conducted the affairs of the entity.

Auditing is a check carried out by an independent auditor to make sure that what a company is saying about its financial
statement is true. Auditing therefore adds credibility to the financial statements by ensuring the availability of accurate
and reliable financial information.

ISA200 (objectives and General principles Governing an audit of Financial accounting) states that the objective of an
audit of financial statement is to enable auditors give an opinion on financial statements taken as a whole thereby
provide reasonable assurance that the statements give a true and fair view and have been prepared in accordance with
relevant accounting and other requirements.

The auditor’s opinion is not a guarantee that the financial statements actually show true and a fair view but that in his or
her opinion, they show a true and fair view as to the state of affairs of the company.

The True and Fair View

The true and fair view is a concept of S.636 of the Companies Act. However, the Companies act does not define or even
describe what is true and fair view.

The Companies Act requires all limited liability companies to appoint an auditor whose task is to express an independent
opinion as to whether financial statement show true and fair view of the financial performance and position of the
company. True and fair view implies that the financial statements are not prejudicial to any user of the financial
statements. Financial statements will present a true and fair view if:

 They contain in all material respects with the disclosure requirement of the Companies Act and other relevant
regulations.
 They contain material matter and not full of needless details.
 They are complete in every respect within the constraints of materiality and the inevitable estimation of some
items.
 The values attributed to the items in the financial statements are reasonable amounts within a range in which if
a major decision was taken on their basis the user would not make a material error.

6
  The information contained therein is presented and disclosed without bias and all relevant information for
evaluation and decision making is available.

THE COMPANY AUDITOR

Every company must have an external auditor whose responsibility is to examine the company’s books, accounts,
vouchers and other information and make a report for submission to members at the general meeting. The report must
contain the auditor’s opinion on the accounts.

The auditor’s task is deemed complete when his report is handled over to the Company Secretary.

Appointment Of Auditors

Under sections 717 and 721 of the Act, auditors for private or public companies respectively may be appointed either by
the directors, the AGM or the Cabinet Secretary.

 Appointment by Directors
The first auditors of the company may be appointed by directors before the first AGM. Such auditors hold office until the
conclusion of the meeting. However their appointment may be confirmed if the notice of a resolution to do so has been
given to members within 14 days before the meeting.
Under the above sections, directors may fill a casual vacancy in the office of auditor.

 Appointment by the AGM

Every company must at each AGM appoint an auditor to hold office from the conclusion of that meeting to the
conclusion of the next AGM. The appointment is by ordinary resolution.

However, at every AGM a retiring auditor is to be reappointed without resolution being passed unless:
i. He is not qualified for reappointment.
ii. He has given the company a written notice of his unwillingness to be reappointed.
iii. The meeting has by resolution resolved to appoint some other person auditor.
iv. The meeting has expressly resolved not to reappoint him.

However if an AGM appoints some other person auditor who subsequently dies or is incapacitated or disqualified, the
retiring auditor is not deemed to be automatically reappointed.
If at an AGM no auditor is appointed or deemed to be reappointed, a vacancy arises in the office of auditor and the
Cabinet Secretary must be notified within 7 days failing which the company and every officer in default are liable to a
default fine.

 Appointment by the Cabinet Secretary

If the AGM fails to appoint an auditor and no auditor is deemed to be reappointed, the Cabinet Secretary may upon
notification appoint a person to fill the vacancy within 7 days.

Qualifications of the Auditor

To qualify for appointment a person must be registered accountant practicing accountancy individually or as a partner in
a firm. For one to be appointed as an auditor he must meet the following requirements under S.772 of the Companies
Act:

1. Must be a holder of a practicing certificate issued under S.21 of the Accountants Act

7
 2. Must have a valid annual license issued under S.22 of the Accountants Act

Disqualified Auditors

Under section 774 of the Act the following persons are not qualified for appointment as auditors:

1. A body corporate.
2. An officer or servant of the company.
3. A partner or employee of an officer or servant of the company
4. A person disqualified for appointment as auditor for the holding company is likewise disqualified for
appointment as auditor for the subsidiary.
5. Undischarged bankrupts and persons of unsound mind are disqualified for appointment by the company law.

If a disqualified person is appointed auditor the person, the company and every officer of the company in default are
liable to a fine not exceeding KES 1M

Remuneration of Auditors

Under section 724 the term “remuneration” refers to any sums paid by the company in respect of his expenses. The
auditor’s remuneration may be fixed by:

 Directors, if appointed by them.

 The Cabinet Secretary, if appointed by him.
 By the company (members) in a General meeting.
 In the manner determined by the company in General meeting.

Under Section 725, a company is required to disclose the terms on which the company’s auditor is appointed,
remunerated or is required to exercise their function.

Rights of Auditors

1. Under section 731 every auditor has the right to access to the company’s accounting records and financial
statements, in whatever form they are held.
2. The right to demand information and explanations from officers of the company if necessary.
3. The right to a notice of intended resolution to appoint some other person auditor.
4. The rights to all notices and other communication sent to members.
5. Right to seek professional advice whenever necessary.
6. Right to attend all General Meetings of the company.
7. The right to rely on information provided by trusted officers of the company.
8. The right to remuneration for services rendered.
9. The right to make representations as a defense to a notice for his removal.
10. The right to be heard at a General Meeting on any matter concerning him as auditor.
11. The right to be compensated/indemnified for any loss or liability arising in the course of discharging his obligations.
12. A right of lien over the company’s assets in his possession to enforce the right of remuneration

S.733 is clear that any person who makes a false, misleading or reckless statement to the auditor commits an offence
and is liable to a fine not exceeding KES 1M and/or 3 years imprisonment.

8
Statutory Functions of Auditors

Under S.727, an auditor shall make a report to the members of the company on all annual financial statements of the
company.

He shall include in the auditor’s report:

a) an introduction identifying the annual financial statement that is the subject of the audit and the financial
reporting framework that has been applied in its preparation; and
b) a description of the scope of the audit identifying the auditing standards in accordance with which the audit was
conducted.

The auditor shall also clearly state in the report whether, in the auditor’s opinion, the annual financial statements:

a) Give a true and fair view of the company’s financial position and profit or loss at the end of the financial year.
b) Has been properly prepared in accordance with the relevant financial reporting framework
c) Has been prepared in accordance with the requirements of the 2015 Companies Act.

Further, under S.728, The auditor shall state in the auditor's report on the company's annual financial statement
whether in the auditor's opinion the information given in the directors' report for the financial year for which the
financial statement is prepared is consistent with that statement.

Under S.729, in reporting on the annual financial statement of a quoted company, the auditor shall:

a) report to the company's members on the auditable part of the directors' remuneration report; and
b) state whether in the auditor's opinion that part of the directors' remuneration report has been properly
prepared in accordance with the 2015 Companies Act.

Responsibilities of the Auditor

Under S.730, the company's auditor shall carry out such investigations as will enable the auditor to form an opinion:

a) whether adequate accounting records have been kept by the company and returns adequate for their audit
have been received from the company's branches not visited by the auditor;
b) whether the company's individual financial statement is in agreement with the company's accounting records
and returns-, and
c) in the case of a quoted company—whether the auditable part of the company's directors' remuneration report
is in agreement with those accounting records and returns

If the auditor fails to obtain all the information and explanations that, to the best of the auditor's knowledge and belief,
are necessary for the purposes of the audit, the auditor shall qualify his report by stating that fact in the report.

Common Law Duties/Obligations of Auditors

It is the duty of the auditor to examine the accounts of the company, its balance sheet, profit and loss account, any
group accounts, vouchers and other material information and make a report for submission to members at general
meeting during his tenure of office.

The auditor’s report must be read out before the company in general meeting and must be accessible to members.

9
He is bound to acquaint himself with his duties under Companies Act and the Articles of the company. In the words of
Asbury J in Re: Republic of Bolivia Exploration Syndicate:

“Auditors of a limited company are bound to know or make themselves acquainted with their duties under the
Articles of the company whose accounts they are appointed to audit under the Companies Act for the time being
in force.”

It is the duty of the auditor to execute his task with an inquiring mind and not with a pre-gone conclusion of dishonesty.
In the words of Lopes L.J Re Kingston Cotton Mills (No. 2 1896):

“An auditor is not bound to be a detective… to approach his work with suspicion or with a foregone conclusion
that there is something wrong. He is watchdog but not a bloodhound.”

An auditor is obliged to satisfy himself that the company’s securities exist and are in safe custody. However whether he
must inspect the documents or accept the assurance of the officer of the company in possession depends on the
circumstances of the case in the words of Romer J in Re: City Equitable Fire Insurance Co. (1925):

“It is the duty of a company’s auditor in general to satisfy himself that the securities of the company in fact exist
and are in safe custody and whenever an auditor discovers that the securities of a company are not in proper
custody it is his duty to require that the matter be put right at once.”

An auditor is bound to exercise reasonable care, skill and caution. The standard of care and skill expected of an auditor is
that of a reasonably competent careful and cautious auditor. In the words of Lopes L.J in Re: Kingston Cotton Mills (No 2
1896):

“… it is the duty of an auditor to bring to bear on the work he has to perform, that skill, care and caution which a
reasonably competent, careful and cautions auditor would use. What is reasonable care, skill and caution must
depend on the particular circumstances of each case.”

An auditor is bound to act honestly. He must not certify as true what he does not believe to be true and must take
reasonable care and skill before certifying something as true. In the words of Lindsey J in Re: London and General bank
(1895):

“An auditor however is not bound to do more than exercise reasonable care and skill in making inquiries and
investigations… he must be honest, he must not certify what he does not believe to be true and he must take
reasonable care and skill before he believes that what he certifies is true.”

It is the duty of the auditor to provide professional advice whenever called upon to do so. It was so held in Tomenta v.
Selsdon (Foundation) Pen Co Ltd.

It is not the duty of the auditor to take stock. In Re Kingston Cotton Mills Lopes L.J observed,
“… It is not the duty the duty of the auditor to take stock. He is not a stock expert. There are many matters in
respect of which he must on the honesty and accuracy of others. He does not guarantee the discovery of all
fraud.”

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Is an auditor an investigator? No

Questions have arisen as to whether the auditor is an investigator. As appointed at general meeting or by directors or
the registrar he is not an investigator.

His primary duty is to examine the company’s books, accounts, vouchers other documents and considers any other
necessary information for the purpose of making a report for submission to members at a General Meeting.
The auditor must approach his task with an enquiring mind.

It has been observed that he is a watchdog but not a bloodhound.

His standards of care and skill are that of a reasonably competent careful and cautious auditor. He is not bound to do
more.

He does not guarantee the discovery of all fraud, nor does he guarantee that the company’s business has been
prudently or imprudently carried on.

However he must satisfy himself the company’s securities exist and are in safe custody.

However an auditor may be deemed to be an investigator in certain circumstances.

 If appointed to investigate the affairs of a company.
 If there is anything calculated to excite his suspicion he must probe it to the bottom.

The duties of an auditor are owned to the company as a legal person. There is a contractual relationship between the
auditor and the company. However in certain circumstances the auditor owes a legal duty of care to existing and
potential shareholders whom he knows or reasonably ought to foresee will rely on his audit and report.

Removal of the Auditor from Office

The provisions of the 2015 Companies Act confer upon a company the power to remove an auditor from office by
ordinary resolution with special notice at general meeting. Under section 740:

 A special notice of the intended resolution to remove an auditor from office must be given to the company.
 Upon receipt of the notice the company must send a copy thereof to the auditor concerned.
 The auditor is entitled to make written representations not exceeding reasonable length as his defense
 The auditor may then request the company to notify its members the fact that he has made representations.
 The company must convene an extraordinary general meeting to determine the issue. A special notice of the
intended resolution must be sent to every member and members must be notified that the auditor has made
representations if any.
 Copies of the representations must be enclosed with the notice of the meeting and sent to the members. If this
is not possible by reason of lateness or default by the company, the auditor is entitled to have them read out at
the meeting. However, copies of the auditor’s representations need not be sent to members or be read out at
the meeting if upon application by the company or any other aggrieved party, the Court is satisfied that the
auditor is abusing the right to be heard to secure needless publicity for defamatory purposes. The Court may
order the company’s cost of the application be paid wholly or in part by the auditor.
 An ordinary resolution is then passed at the General Meeting and the auditor is considered removed from office.

Directors are however empowered to fill any casual vacancies arising in the office of an auditor.

Under S.741, the resolution passed to remove an auditor from office must be filed with the Registrar within 14 days of
its passing.
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Resignation of the auditor under S.747 takes a similar approach.

If an auditor ceases to hold office before the end of his term, the auditor (under S.751) and the company (under S.752)
shall notify the appropriate audit authority (ICPAK) of that fact.

Liability of Auditors

Liability to the company

i. Damages for professional negligence

The company has an action in damages against an auditor who has failed to exhibit the care and skill of a reasonably
competent, careful and cautious auditor.
The company must prove that some other auditor would have acted otherwise.

ii. Damages for misfeasance

A misfeasance is a transgression, especially the wrongful/improper exercise of lawful authority.
Although an auditor is not an officer of the company properly so called, case law demonstrates that he may be held
liable in damages for misfeasances committed or omitted in the course of discharging his obligations.
This was the case in Re: London General Bank where an auditor had failed to detect that certain items had been over
valued resulting in dividends being paid out of capital and it was held that the auditor was liable in damages for the
misfeasance.

Liability to third parties

As a general rule, auditors are not liable to third parties. However a third party who suffers loss or damage by reason of
relying on the audit, and its report may hold the auditor liable if it is proved that:

1. There was a special relationship between the auditor and the party and therefore the auditor owed the party a
legal duty of care.
2. The auditor knows or reasonably ought to have known that his audit and report was to be relied upon by the
third parties
3. The auditor broke his duty of care.
4. The third party suffered loss of a financial nature.

Liability Limitation Agreements

Under S.764, these are agreements which purport to limit the extent of a liability owed to a company by its auditor in
respect of any negligence, default, breach of duty or breach of trust, occurring in the course of auditing financial
statements, of which the auditor may be guilty in relation to the company.

Section 767 however is clear that a liability limitation agreement is not effective to reduce the auditor’s liability to less
than what is fair and reasonable having regard to:

a) the auditor's responsibilities under the Companies Act;

b) the nature and purpose of the auditor's contractual obligations to the company; and
c) the professional standards expected of the auditor

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Audit Committees

Section 769 provides that the directors of a quoted company shall ensure that the company has an audit committee
appointed by the shareholders of a size and capability appropriate for the business conducted by the company.

Under S.770, the audit committee shall:

a) set out the corporate governance principles that are appropriate for the nature and scope of the company's
business;
b) establish policies and strategies for achieving them; and
c) annually assess the extent to which the company has observed those policies and strategies.

The audit committee is also responsible for:

a) Organizing the company to promote the effective and prudent management of the company and the directors
oversight of that management; and
b) Establishing standards of business conduct and ethical behaviour for directors, managers and other personnel,
including policies on private transactions, self-dealing, and other transactions or practices of a non-arm's length
nature.
c) overseeing the operations of the company and providing direction to it on a day-to-day basis, subject to the
objectives and policies set out by the audit committee and any other written law;
d) Providing the directors with recommendations, for their review and approval, on the objectives, strategy,
business plans and major policies that are to govern the operation of the company; and
e) Providing the directors with comprehensive, relevant and timely information that will enable the directors to
review the company's business objectives, business strategy and policies, and to hold senior management
accountable for the company's performance.

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INSIDER TRADING

This is the sale or purchase of company securities by or on behalf of a person whose relationship with the company is such
that he is likely to have access to material information on the company not generally available to the public.

It takes place when a person buys or sells securities while knowingly in possession of price sensitive information not available
to the public which if made available will affect the price or value of those securities. It is the taking advantage of
confidential information on the company for personal gain.

Insider trading occurs where an individual or organization buys or sells securities while knowingly in possession of some
piece of confidential information which is not generally available and which is not likely, if made available to the general
public, to materially affect the price of the securities.

For example, where a company director who is aware that the company is in a bad financial state and will consequently cut
its dividend pay-out sells his shares before a public announcement to this effect is made. This is also the case when the
director buys shares in the company with knowledge that the company is declaring super profits or is acquiring a competitor.

Regulation of Insider Trading in Kenya

In Kenya, Insider Trading is prohibited and criminalised by Section 32B of the Capital Markets Act Cap 485A.

Under Section 32B, a person who deals in listed securities or their derivatives that are price-affected in relation to the
information in his possession commits an offence of insider trading if that person:

a) Encourages another person, whether or not that other person knows it, to deal in securities or their derivatives
which are price-affected securities in relation to the information in the possession of the insider, knowing or
having reasonable cause to believe that the trading would take place; or

b) Discloses the information, otherwise than in the proper performance of the functions of his employment, office
or profession, to another person.

A person deals in securities or their derivatives if, whether as principal or agent, he sells, purchases, exchanges or
subscribes for any listed securities or their derivatives.

The provisions of Section 32B provide that “insider” means a person in possession of inside information.

Section 2 of Cap 485A defines an “insider” to mean any person who, is or was connected with a company or is deemed to
have been connected with a company, and who is reasonably expected to have access, by virtue of such connection to
unpublished information which if made generally available would be likely to materially affect the price or value of the
securities of the company, or who has received or has had access to such unpublished information.

Such a person is prohibited from trading in the company securities.

Section 2 of the Act further explains “trading in securities” to mean making or offering to make with any person, or inducing
or attempting to induce any person to enter into or to offer to enter into:

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 a) any agreement for or with a view to acquiring, disposing of, subscribing for or underwriting securities; or

b) any agreement the purpose or intended purpose of which is to secure a profit to any of the parties from the yield of
securities or by reference to fluctuations in the price of securities.

Under Section 32A of the Capital Markets Act securities are “price-affected securities” in relation to inside information if
the information is likely to, if made public, materially affect the price of the securities;

Information shall also be treated as relating to an issuer of securities where it may affect the business prospects of the
company.

Under Section 32C "inside information" means information which:

a) relates to particular securities or to a particular issuer of securities;

b) has not been made public; and

c) if it were made public is likely to have a material effect on the price of the securities;

For the purposes of section 32C, information is made public if:

a) it is published in accordance with the rules of a securities exchange for the purpose of informing investors and
their professional advisers;

b) it is contained in records which by virtue of any law are open to inspection by the public;

c) it can readily be acquired by those likely to deal in any securities to which the information relates; or of an
issuer to which the information relates; or

d) it is derived from information which has been made public.

Information may be treated as having been made public even though the information:

a) Can be acquired by persons exercising diligence or expertise;

b) Is communicated to a section of the public;

c) Can be acquired by observation;

d) Is communicated on the payment of a fee; or

e) Is published outside Kenya

Section 32E of the Capital Markets Act imposes stiff penalties for persons convicted of insider trading e.g. on the first
conviction a convicted company may be fined up to KES 5,000,000 and payment of the amount of gain made or loss
avoided while a convicted individual may be fined up to KES 2,500,000 or be imprisoned for a duration of not more than 2
years and payment of the amount of gain made or loss avoided.

2
On a subsequent conviction a company may be fined up to KES 10,000,000 and twice the amount of gain made or loss
avoided while an individual may be imprisoned for up to 7 years or fined up to KES 5,000,000 and payment of twice the
amount of gain made or loss avoided.

Who suffers in Insider Trading?

In order to understand insider trading, it is essential to distinguish between the nominal value of shares and the market
value of the share, what the share is actually worth. Whilst the former is fixed in the company’s memorandum of
association, the latter is free to fluctuate with demand. It is, of course, the fact that share prices fluctuate in this way
that provides the possibility of individuals making large profits, or losses, in speculating in shares.

At a basic level, the value of shares may be seen as a reflection of the underlying profitability of the company; the more
profitable the company, the greater it’s potential to pay dividends and the higher the value of its shares. Once the actual
performance of a company is revealed in its accounts and statements, the market value of its share capital will be
adjusted in the market to reflect its true worth, either upwards if it has done better than expected, or downwards if it
has done worse than was expected.

Share valuation depends upon accurate information as to a company’s performance or its prospects. To that extent
knowledge is money, but such price sensitive/affected information is usually only available to the individual share
purchaser after the company has issued its information to the public. If, however, the share buyer could gain prior
access to such information, then they would be in the position to predict the way in which share prices would be likely
to move and consequently to make substantial profits. Such trading in shares, on the basis of access to unpublished
price sensitive information, provides the basis for the offence of insider trading.

Whilst some would argue that insider trading is a victimless crime, in that no one is forced, or tricked, into buying or
selling shares: the shares in question are, after all, bought ‘at arm’s length’ on the stock exchange. Nonetheless such
activity is treated as criminal. The underlying justification for this would appear to be that those who engage in the
activity gain an unjustified return based in their access to price sensitive information that is not available to the general
public. In addition it is recognized that the existence of insider trading tends to undermine the integrity of the share
market generally as the public may exhibit reluctance to participate in a market that is being, at least in part, run to the
benefit of a few individuals with privileged access to such information.

The Case for Regulation

It is generally accepted that insider trading is wrong and unethical and ought to be regulated.

It is argued that insider trading should be regulated for the following reasons:

 It gives companies a negative reputation which may affect trading in their securities.
 It interferes with the principle of equality of information in the market as some investors rely on confidential
information.
 It amounts to a breach of trust in the case of fiduciaries such as directors.
 It has a negative effect on market confidence and the entire securities sector.

This is on understanding the basis within which companies’ stock trade in the stock market and how price-sensitive
information affects the value of a listed company.

In the realm of company law, it may be necessary to regulate insider trading or trading since the insider with access to
confidential information is in potential conflict of interest situation, in particular where his position in the company enables
him to dictate or influence when the public disclosure of price-sensitive information is to be made.
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In such a case, the officer’s decision and his own desire to trade advantageously in the company’s shares may conflict and
such conduct is likely to bring the company into disrepute.

It is therefore recognised that it is wrong for a director or any other insider to deal in a company’s securities knowing of
some development which is likely to affect the price of the securities which other members of the public are generally not
yet privy to.

Liability for Insider Trading/Trading

At common law, officers of the company are free to hold and deal in the shares of the company. However, use of
confidential information is actionable.

This legal position is traceable to the decision in Percival v Wright where joint holders of some shares of an unlisted colliery
company offered them for sale to the chairman of the company and two other directors at a price determined by an
independent value at £12.10 but after conclusion of the sale, it was discovered that while negotiating the purchase, the
chairman was involved in discussions of the possible sale of the whole colliery at a price that would have made each share in
the company worth more than £12.10. However, the colliery was never sold. In an action by Percival and his co-
shareholders to have the sale set aside on the ground of non-disclosure by the chairman, it was held that since the directors
owed their duties to the company, there was no duty to disclose. In the words of Swinfen Eady J:
“The contrary view would place directors in a most invidious position, as they could not buy or sell shares without
disclosing negotiations, a premature disclosure of which might well be against the best interest of the company. I am
of the opinion that directors are not in that position.”

The decision in Percival v Wright was upheld in Tent v Phoenix Property & Invest Co. Ltd. (1984.)

In Multinational gas & Petrochemical Co. v Multinational Gas and Petrochemical Services Ltd. (1983), Dillon L. J. observed:

“The directors stand in a fiduciary relationship to the company and they owe fiduciary duties to the company though
not to individual shareholders”.

However, in Allen v Hyatt (1914) where shareholders had engaged directors to invest on their behalf and the directors
benefited, it was held that since the directors were agents of the shareholders, they were liable to account to the
shareholders.

The challenge of using criminal law to regulate insider trading is that detection of insider trading and procuring its conviction
is difficult as evidence is hard to come by.

However a conviction may be secured in obvious circumstances as was the case in R.V Goodman where the accused who
was the chairman of the BOD of a company sold his entire shareholding in the company and resigned from office before the
company announced that it had made a loss of £ 900,000 in circumstances in which many investor expected it to declare
profit. The accused was convicted of insider trading and disqualified from acting as a company director for 10 years.

Both the Kenyan Companies Act and the Capital Markets Act adopt the disclosure principle to regulate insider trading. It is
argued that the best weapon to fight insider trading is to ensure that price sensitive information reaches the market
promptly.

Although the Companies Act does not recognize the offence of insider trading it provides for disclosure by directors.
However these provisions do not go far enough neither do they cover relatives of directors.

4
The Capital Markets (Securities Public Offers Listing and Disclosure Regulations) of 2002 provide the framework for
disclosure by companies in relation to IPOs and continual obligations. They prescribe the contents of the company’s
prospects.

Courts of law have enforced the disclosure philosophy embodied in the company’s act. In Diamond V Oreamuno (1969)
where directors of the company being aware that due to an increase in expenses, the company’s profit and dropped, sold
their share in the company at £28 each before the company’s accounts were released and thereafter the prices fell to £11, it
was held that the directors were guilty of insider trading and had to account the profit to the company.

The only justification for insider trading is that it is not wrong to use private information for personal gain as this is the primal
basis for the capitalistic markets.

Defences to a charge of Insider Trading

1. The trader did not honestly anticipate to make a profit or avoid making a significant loss

2. The trade would have been undertaken at the same time with or without the inside information (scheduled trades)

3. The trader honestly believed that the information had been made public or the trader utilized public information

4. The information was already made public.

5
THE COMPANY SECRETARY

This is the officer appointed by the directors of a company as responsible for ensuring that firm's legal obligations under
the corporate legislation are complied with. The office of the Company Secretary, Corporate Secretary or Board
Secretary is in charge of legal and regulatory compliance at Board level. A company secretary is not automatically an
employee of the company but remains a principal officer under the Act.

The office of the Company Secretary is created by the Section 198(1) of the 2015 Companies Act which states that every
company must have a Company Secretary. Specifically however, Company Secretaries are provided in Part XII of the
2015 Companies Act of Kenya.

Section 243 provides that a private company is required to have a company secretary only if it has a paid up capital of
KES 5,000,000 or more.

Under Section 243, if a private company does not have a company secretary:

1. Anything required to be done by the CS may be done by a director or any other authorized person
2. Anything required to be served on the CS may be served on the company itself or on any authorized person

Under Section 178 (2) if the office of the Company Secretary is vacant, its function and duties may be discharged by a
deputy or assistant Secretary or delegate of the Board of Directors.

Section 244 is clear that every public companies are required to have a company secretary or joint secretaries. Where
the AG is satisfied that a company is not complying with the rule in section 244, he may give direction, under Section 245
as to:
 what the company is required to do in order to comply with the direction;
 the period within which it is to comply (between 1 and 3 months); and
 the consequence of failing to comply with the direction.

Under Section 245 (4) the company shall then comply with the AG’s direction by:
 making the necessary appointment; and
 giving notice of the appointment under Section 249, before the end of the period specified in the direction.

Failure to comply attracts an default fine of KES 500,000 to the company and its officers and a subsequent daily fine of
KES 50,000.

Appointment of the Company Secretary

Under the Companies Act the Company Secretary is appointed by the Board of directors for such term and such other
conditions as the board may deem fit. The board is empowered to remove the Secretary subject to the terms of the
appointment.

Under Section 246, the directors of a public company shall take all reasonable steps to ensure that the secretary or each
joint secretary of the company:

1
 a) is a person who appears to them to have the requisite knowledge and experience to discharge the functions of a
secretary of the company; and

b) is the holder of a practising certificate issued under the Certified Public Secretaries of Kenya Act1.

A director of a public company who fails to comply with S.246 commits an offence and on conviction is liable to a fine
not exceeding KES 200,000.

The following persons are disqualified from being appointed company secretaries:

 The sole director of the company.

 A corporation which is a sole director of the company.

Vacancy in the Office of the Secretary – Section 247

If, in the case of a public company, the office of secretary is vacant, or for any other reason there is no secretary capable
of acting, anything required or authorized to be done by or to the secretary can be done by or to:

c) an assistant or deputy secretary (if any);

d) any person capable of acting; or
e) any person authorized generally or specifically for the purpose by the directors.

The Register of Company Secretaries

Under Section 248, a public company shall keep a register of its secretaries containing the required particulars of the
person who is, or persons who are, the secretary or joint secretaries of the company.

For natural Secretaries, Section 250 requires the following details:

f) the name and any former name of the secretary; and

g) the address of the secretary

For corporate Secretaries, Section 251 requires the following details:

a) the name of the company or the firm;

b) the registered or principal office of the company or the firm;
c) the legal form of the company or firm and the law by which it is governed; and
d) in the case of a company or a firm that is incorporated, register in which it is recorded (including the place
where the register is kept) and its registration number in the register.

Under Section 252, a person who knowingly or recklessly authorizes or permits the inclusion of misleading, false or
deceptive particulars in register of secretaries commits an offence and is liable on conviction to imprisonment for a term
not exceeding 2 years or a fine not exceeding KES 1,000,000 or to both

The register of Secretaries is open for inspection at the company’s registered office – subject to the company’s
regulations, by:

1
CAP 534 Laws of Kenya
2
 a) any member of the company without charge; and
b) any other person on payment of the prescribed fee (if any)

Section 248(4) prescribes a fine of KES 500,000 to the company and its officers for default in maintenance of the
register.

Duty to notify the Registrar of changes in the Secretary’s Office

Under Section 249, the company shall, within 14 days thereof, lodge with the Registrar for registration a notice of any
change in the office of the CS including:

a) the appointment of CS or joint CS,

b) cessation of appointment or
c) change in the particulars contained in the register of Secretaries

A default fine of KES 200,000 applies under Section 249(3) and a further daily default fine of KES 20,000 under S.249 (4).

NB: Section 254 states that a provision requiring or authorizing a thing to be done by or to a director and the Secretary
of a public company is not satisfied by its being done by or to the same person acting both as director and as, or in place
of, the Secretary.

The Legal position of the Company Secretary

He stands in a fiduciary position in relation to the company and owes it the basic fiduciary duties i.e. must act bonafide
and avoid conflict of interest. He is in a position of trust, confidence and good faith.

Status of the Secretary

During the 19th century the Company Secretary was regarded as mere servant of the company with no powers to bind it.
In the word of Lord Esher in Barnett Hoarses and Co. V South London Tramways Co Ltd (1887):

“A Secretary is a mere servant his position is that he is to do what he is told to and no person can assume that he has
any authority to represent anything at all”

However his status has since changed and he is today regarded as the Chief Administrative Officer of the company with
extensive duties and responsibilities.

In the Panorama case (Panorama Developments (Guilford) Ltd V Fidelis Furnishing Fabrics), a Company Secretary hired
motor vehicles for personal use but on the pretext that he wanted to use them for the company’s business and the
company was sued for the hiring charges. It was held that the company was liable as the Secretary had apparent/
ostensible authority to enter into the transaction. In the words of Lord Denning:

“… but the times have changed. A Company Secretary is a much more important person than he was in 1887. He
is an important office of the company with extensive duties and responsibilities. He is no longer a mere clerk. He
is certainly entitled to sign contracts connected with the administrative side of the company’s affairs.”

Duties and Obligations of the Company Secretary

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Although the Companies Act does not identify the duties of a Secretary, it perceives them as administrative. His duties
depend on the size of the company and the terms of engagement. His overall responsibility is to ensure that the affairs
of the company are conducted in accordance with the company’s Constitution.

Some of his specific duties include:

 Taking minutes at General and Board meetings.

 Issuing notices to members.
 Accepting or receiving notices on behalf of the company.
 Certifying transfers.
 Issuing share and debenture certificates.
 Registering charges created by the company.
 Registering special resolution.
 Filing the annual returns.
 Maintaining custody of certain books of the company.
 Maintaining custody of the company’s common seal.
 Publishing the company’s name as required.
 Countersigning documents on which the company seal is placed or used.

Under corporate governance rules, the Company Secretary is tasked with ensuring legal and regulatory compliance by
the Board of directors. His role here includes:

 Ensuring good information flows within the Board and its committees
 Facilitating the induction of newly appointed Board members
 Assist with the professional development of Board members
 Advising the Chairman and the Board in general on all governance issues

Liability of the Company Secretary

As a fiduciary, he is liable in damages for breach of any fiduciary duties. He must act in good faith and must not make a
secret profit. He may be held liable to account for any secret profit made in breach of these duties.

He is criminally liable for:

 Failing to publish the company’s name as required.

 Failing to register charges.
 Failing to make the annual returns.
 Failing to make returns on allotment.
 Destroying or falsifying the company’s books with intent to defraud.

4
CORPORATE INSOLVENCY UNDER THE 2015 INSOLVENCY ACT

Corporate Insolvency in Kenya was previously governed under the Companies Act, CAP 486 Laws of Kenya. However in
September 2015, the Insolvency Act regulates this feature of company law.

Unlike the previous legislation, the Insolvency Act seeks to redeem insolvent companies through administration as
opposed to liquidation. The Act focuses more on assisting insolvent natural persons, unincorporated entities and insolvent
corporate bodies whose financial position is redeemable to continue operating as going concerns so that they may be able
to meet their financial obligations to the satisfaction of their creditors.

The consolidation of the laws with respect to insolvency is aimed at not only providing for and regulating the liquidation
of incorporated and unincorporated bodies but also to enable their affairs to be managed for the benefit of their creditors
by providing alternatives to bankruptcy and liquidation.

Meaning of Insolvency

Insolvency means that a company is unable to pay its debts. Section 384 of the Insolvency Act 2015 provides that a
company is unable to pay its debts:

a) if a creditor (by assignment or otherwise) to whom the company is indebted for KES 100,000 or more has served
on the company, by leaving it at the company’s registered office, a written demand requiring the company to pay
the debt and the company has for 21 days afterwards failed to pay the debt or to secure or compound for it to
the reasonable satisfaction of the creditor;
b) if execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the
company is returned unsatisfied in whole or in part; or
c) if it is proved to the satisfaction of the Court that the company is unable to pay its debts as they fall due.

Section 384(2) provides that a company is also unable to pay its debts if it is proved to the satisfaction of the Court that
the value of the company’s assets is less than the amount of its liabilities (including its contingent and prospective
liabilities).

Liquidation is the dissolution or winding up of a company. It is the legal process by which a company’s management is
removed from directors and placed under a liquidator for purposes of collecting the assets, realizing them, ascertaining
and making good liabilities and distributing the remainder, if any, to members.

TYPES OF WINDING UP

There are three different types of liquidation:

1
 a) Compulsory liquidation
b) Member’s voluntary liquidation
c) Creditor’s voluntary liquidation

The parties most likely to be involved in the decision to liquidate are:

a) The directors
b) The creditors
c) The members

The directors are best placed to know the financial position and difficulty that the company is in.

The creditors may become aware that the company is in financial difficulty when their invoices don’t get paid.

The members are likely to be the last people to know that the company is in financial difficulty as they rely on the directors
to tell them.

If a creditor has sufficient grounds they may apply to the court for the compulsory winding up of the company. Creditors
may also be closely involved in a voluntary winding up if the company is insolvent when the members decide to wind the
company up.

The members may decide to wind the company voluntarily in two cases:

i. Member’s voluntary winding up (if the company is solvent)

ii. Creditor’s voluntary winding up (if the company is insolvent)

VOLUNTARY LIQUIDATION

Section 393 provides that a company may be liquidated voluntarily:

a) when the period (if any) fixed for the duration of the company by the articles expires, or the event (if any) occurs,
on the occurrence of which the articles provide that the company is to be dissolved, and the company in general
meeting has passed a resolution providing for its voluntary liquidation; or
b) if the company resolves by special resolution that it be liquidated voluntarily.

Section 394 provides that within 14 days after a company has passed a resolution for its voluntary liquidation, it shall
publish a notice setting out the resolution:

a) once in the Gazette;

b) once in at least 2 newspapers circulating in the area in which the company has its principal place of business in
Kenya; and
c) on the company’s website (if any).

Section 395 provides that the voluntary liquidation of a company commences when the special resolution for voluntary
liquidation is passed. On and after the commencement of voluntary liquidation of a company, the company shall cease to
carry on its business, except in so far as may be necessary for its beneficial liquidation.

Section 397 provides that the following are void if made after the commencement of a voluntary liquidation of a company:

a) any transfer of the company’s shares (other than a transfer made to or with the sanction of the liquidator);

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 b) an alteration in, or an attempt to alter, the status of the company’s members.

Member’s voluntary liquidation

This is the winding up of a solvent company.

A voluntary winding up is a members' voluntary winding up only if the directors make and deliver to the Registrar a
declaration of solvency as provided for under section 398. This is a statutory declaration that the directors have made full
enquiry into the affairs of the company and are of the opinion that it will be able to pay its debts, within a specified period
not exceeding 12 months.

a) The declaration is made by all the directors or, if there are more than two directors, by a majority of them.
b) The declaration includes a statement of the company's assets and liabilities as at the latest practicable date before
the declaration is made.
c) The declaration must be:
i. Made not more than 5 weeks before the resolution to wind up is passed, and
ii. Delivered to the Registrar within 14 days after the meeting.

If the liquidator later concludes that the company will be unable to pay its debts they must call a meeting of creditors and
lay before them a statement of assets and liabilities.

It is a criminal offence punishable by fine or imprisonment for a director to make a declaration of solvency without having
reasonable grounds for it. If the company proves to be insolvent they will have to justify their previous declaration or be
punished.

In a members' voluntary winding up the creditors play no part since the assumption is that their debts will be paid in full.
Section 401 provides that the liquidator shall call special and annual general meetings of contributories (members) to
whom they report:

a) Within 3 months after each anniversary of the commencement of the winding up the liquidator must call a
meeting and lay before it an interim account of his transactions during the year.
b) When the liquidation is complete the liquidator calls a meeting to lay before it his final accounts.

After holding the final meeting as provided for under section 402 the liquidator sends a copy of his accounts to the
Registrar who dissolves the company 3 months later by removing its name from the register of companies.

Creditor’s voluntary liquidation

If no declaration of solvency is made and delivered to the Registrar the liquidation proceeds as a creditors' voluntary
winding up even if in the end the company pays its debts in full.

It is when a company being wound up voluntarily is insolvent.

Section 403 provides that on forming the view that the company is or will be unable to pay its debts, the liquidator shall:

1. Convene a meeting of creditors on a date not later than 30 days after the day on which the contributory formed
that opinion;
2. Send notices of the creditors’ meeting to the creditors by post at least 7 days before the day on which that meeting
is to be held;

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 3. Publish notice of the creditors’ meeting once in the Gazette AND once in at least two newspapers circulating in
the area in which the company has its principal place of business in Kenya; and on the company’s website (if any);
and
4. Advertise the meeting in such other manner and place as the liquidator considers desirable in the interests of the
creditors;
5. During the period before the day on which the creditors’ meeting is to be held, provide creditors, free of charge,
with such information concerning the affairs of the company as they may reasonably require; and
6. Specify in the notice of the creditors’ meeting the duty imposed by paragraph (e).

The liquidator shall also prepare a statement setting out the financial position of the company, lay that statement before
the creditors’ meeting; and attend and preside at that meeting. The statement should specify:

i. the prescribed details of the company’s assets, debts and liabilities;

ii. the names and addresses of the company’s creditors;
iii. the securities (if any) respectively held by them and the dates on which they were respectively given; and
iv. such other information (if any) as may be prescribed by the insolvency regulations;

To commence a creditors' voluntary winding up the directors convene a general meeting of members to pass a special
resolution to wind-up the insolvent company (private companies may pass a written resolution with a 75% majority). They
must also convene a meeting of creditors, giving at least 7 days’ notice of this meeting.

The meeting of members is held first and its business is as follows:

 To resolve to wind up
 To appoint a liquidator, and
 To nominate up to 5 representatives to be members of the Liquidation Committee.

The creditors' meeting should preferably be convened on the same day but at a later time than the members' meeting,
or on the next day, but in any event within 14 days of it.

One of the directors presides at the creditors' meeting and lays before it a full statement of the company's affairs and a
list of creditors with the amounts owing to them. The meeting may nominate a liquidator and up to 5 representatives to
be members of the liquidation committee. This is provided for under section 409.

Section 408 provides that if the creditors nominate a different person to be liquidator, their choice prevails over the
nomination by the members.

Of course, the creditors may decide not to appoint a liquidator at all. They cannot be compelled to appoint a liquidator,
and if they do fail to appoint one it will be the members' nominee who will take office.

Section 411 provides that on the appointment of a liquidator, all the powers of the directors cease, except so far as the
liquidation committee, or if there is no such committee, the creditors, sanction their continuance. i.e. directors become
functus officio.

However even if creditors do appoint a liquidator there is a period of up to two weeks before the creditors' meeting takes
place at which they will actually make the appointment. In the interim it will be the members' nominee who takes office
as liquidator.

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In either case the presence of the members' nominee as liquidator has been exploited in the past for the purpose known
as 'centrebinding'.

In Re Centrebind Ltd (1966) the directors convened a general meeting, without making a statutory declaration of solvency,
but failed to call a creditors' meeting for the same or the next day. The penalty for this was merely a small default fine.
The liquidator chosen by the members had disposed of the assets before the creditors could appoint a liquidator. The
creditors' liquidator challenged the sale of the assets (at a low price) as invalid. It was held that the first liquidator had
been in office when he made the sale and so it was a valid exercise of the normal power of sale.

In a 'centrebinding' transaction the assets are sold by an obliging liquidator to a new company formed by the members of
the insolvent company. The purpose is to defeat the claims of the creditors at minimum cost and enable the same people
to continue in business until the next insolvency supervenes. The Government has sought to limit the abuses during the
period between the members' and creditors' meetings. The powers of the members' nominee as liquidator are now
restricted to:

1. Taking control of the company's property

2. Disposing of perishable or other goods which might diminish in value if not disposed of immediately, and
3. Doing all other things necessary for the protection of the company's assets.

If the members' liquidator wishes to perform any act other than those listed above, he will have to apply to the court for
leave.

Provisions applying to both kinds of Voluntary Liquidation

Section 415 provides that on the liquidation, the company’s property:

a) are to be applied in satisfaction of the company’s liabilities equally and without preference; and
b) subject to that application, are, unless the company’s articles otherwise provide, to be distributed among the
members according to their rights and interests in the company.

Section 416 provides that the Court may appoint a liquidator if for any reason there is no liquidator or the liquidator is
unable to act.

The Court may, on cause shown, remove a liquidator and appoint another one.

Only an authorized insolvency practitioner is eligible for appointment.

The acts of a person appointed by the Court as a liquidator of a company are valid despite any defect in the person’s
appointment or qualifications.

Within 7 days after being appointed as liquidator of a company, the liquidator shall publish a notice of the liquidator’s
appointment

COMPULSORY LIQUIDATION BY THE COURT

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Section 423 of the Insolvency Act provides that only the High Court has jurisdiction to supervise the liquidation of
companies registered in Kenya.

Section 424 provides that a company may be liquidated by the Court if:

a) the company has by special resolution resolved that the company be liquidated by the Court;
b) being a public company that was registered as such on its original incorporation:
i. the company has not been issued with a trading certificate under the Companies Act, 2015; and
ii. more than 12 months has elapsed since it was so registered;
c) the company does not commence its business within 12 months from its incorporation or suspends its business
for a whole year;
d) except in the case of a private company limited by shares or by guarantee, the number of members is reduced
below 2;
e) the company is unable to pay its debts;
f) the Court is of the opinion that it is just and equitable that the company should be liquidated.

A company may also be liquidated by the Court on an application made by the Attorney General under section 425(6). If,
in relation to a company, it appears to the Attorney General that it would be in the public interest or just and equitable
for the company to be liquidated:

a) from a report made or information obtained from investigations carried out or inspection of documents produced
under the Companies Act, 2015;
b) from a report made, or information obtained, by the Capital Markets Authority under the Capital Markets Act;
c) from information provided by the Registrar; or
d) as a result of the company or its directors having been convicted of an offence involving fraudulent conduct, that
it would be in the public interest for the company to be liquidated,

Section 425 provides that an application/petition to the Court for the liquidation of a company may be made any or all of
the following:

a) the company or its directors;

b) a creditor or creditors (including any contingent or prospective creditor or creditors);
c) a contributory or contributories of the company;
d) a provisional liquidator or an administrator of the company;
e) if the company is in voluntary liquidation—the liquidator.

If the court issues a liquidation order they may appoint the official receiver to oversee the liquidation process. Section 434
identifies the obligations of the official receiver as follows:

a) if the company has failed—to discover why the company failed; and
b) generally, to investigate the promotion, formation, business, dealings and affairs of the company, and to make
such report (if any) to the Court as the Official Receiver considers appropriate.

The official receiver is authorized by section 435 to carry out a public examination of any officers of the company involved
in promotion, formation and management of the company. A person who, without reasonable excuse, fails at any time to
attend the person’s public examination under section 435 is guilty of a contempt of Court and is liable to be punished
accordingly.

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Winding up on the Just and Equitable Ground

There is no exhaustive list of the circumstances in which a company may be wound up on this ground, however judicial
authority shows that a company may be wound up on the just and equitable ground in the following instances:

1. Fraudulent / illegal purpose

In Re: Thomas Edwards Brinsmead and Sons Ltd, it was held that a company would be wound up on this ground. If it is
established that it was formed to pursue a fraudulent or illegal purpose the petitioner must prove the fraud or illegality.

2. Failure of substratum

If the principal or paramount purpose for which the company is incorporated (i.e. its substratum) fails or is no longer
attainable it becomes just and equitable to wind up the company. This was the case in Re: German Date Coffee Company
Ltd where the company’s principal object was to acquire a German patent to manufacture coffee from dates as a
substitute which it failed to acquire and a shareholder petitioned for its winding up. It was held that it was just and
equitable to wind up the company. A similar holding was made in Re: Bakin Consolidated Oil Fields Ltd where a company
had been formed to take over 2 existing oil companies in Russia but the oil industry was nationalized before the takeover.

3. ‘Bubble companies’

In Re: London and Country Coal Company Ltd, it was held that it is just and equitable to wind up a company if it was
established that there was no bonafide intention on the directors to pursue the declared objects or pursue them in the
proper manner.

4. Oppression of minority

A company would be wound up on the just and equitable ground if it was proved that its affairs were being conducted in
a manner oppressive/prejudicial to the minority. The petitioner must prove the oppression or oppressive conduct in the
affairs of the company and that the same was continuous and it affected members in their capacity as members (members
qua members).

5. Loss of confidence in management

Case law demonstrates that it is just and equitable to wind up a company if member have justifiably lost confidence in its
management. The petitioner must prove a consistent course of conduct on the part of the management which justifies
the loss of confidence as was the case in Loch V John Blackwood Company Ltd. where after Blackwood’s death his
engineering business was converted to a company managed by one of his trustees for the benefit of the 3 beneficiaries of
the estate. The business was very profitable but the trustee did not avail to the beneficiaries any information about the
company which they were entitled to nor called general meetings. The beneficiaries petitioned for winding up on the
grounds of loss of confidence in the management. The Court agreed and granted the winding up order.

6. Wrongful Exclusion or expulsion from management.

A company would be wound up on the just and equitable ground if it is shown that the petitioner has been unfairly
excluded from its management. This was the case in Re: Westbourne Galleries Company Ltd where a partnership was
incorporated to a company but one member was unfairly left out of the board. The directors refused to declare dividend
as all the profits of the company were payable to them as directorship allowances. The petitioner argued that the unfair
treatment he was subjected to made it just and equitable for the company to be wound up. The Court granted the order.

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In addition a winding up order may be made if a director is unfairly expelled from the board or excluded from participating
in board meetings as was the case in Re: Lundie Bros Co. Ltd where the petitioner who was the chairman of the board
held 10,000 of the 20,000 shares of the company. The balance was held by 2 brothers equally. All members were directors
earned £20 a week. The 2 brothers used their voting power on the board to remove the petitioner from his position and
reduce his earnings to £2 per week. It was held that it was just and equitable to wind up the company.

7. Deadlock in management and membership.

It is just and equitable to wind up a company if its membership and management cannot function in any respect due to a
deadlock. This may arise where the company’s shares and voting rights are equally divided between 2 persons or groups
or persons with irreconcilable differences. This was the case in Re: Yenidje Tobacco Company Ltd, where Rathman and
Weinberg who were tobacco dealers merged their businesses to a company and were the only members and directors
with equal number of shares and voting rights. The 2 quarreled consistently and could only communicate through the
Company Secretary. Rathman sued Weinberg alleging fraud and the 2 made the company lose over £1,000 in a case
involving the dismissal of a factory manager. Although the company was making enormous profits, Weinberg petitioned
for winding up and the Court was satisfied that it was just and equitable to wind up the company the Court was of the
opinion that circumstances which could lead to the winding up of a partnership were applicable in this case.

The Power of the Court after Hearing a Winding up Petition

Upon hearing the winding up petition the Court may:

 Dismiss it.
 Adjourn the hearing conditionally or unconditionally.
 Make any interim orders.
 Make such order or further order as it may deem fit.

If the petition is based on the company’s failure to hold the statutory meeting or deliver a copy of the statutory report to
the Registrar, the Court may in lieu of winding up, order that the meeting be held or the report be delivered to the
Registrar.

Effects or consequences of a winding up order

Its effects date backwards to an earlier date than that of the order itself. This is the date of commencement of winding up
which is the earlier of:

 The date of presentation of the winding up petition to the Court; or

 The date of passage of the resolution for voluntary winding up.

Once the winding up order is made, the following consequences flow:

a) The company ceases to carry on business except such as may be required for its beneficial winding up.
b) Any disposition of property of the company including things in action, any transfer of shares or alteration in the
status of members is void
c) Any attachment, distress or execution put in force against the estate or effects of the company is void
d) Legal proceedings commenced by or against the company are stayed.
e) Director’s powers become functus officio (unexcercisable)

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 f) By virtue of his office the Official Receiver becomes the Provisional Liquidator and if not other person is appointed
liquidator by the Court, he becomes the liquidator.
g) Servants of the company are ipso facto dismissed (by that very fact of winding up order being issued). However
those who continue to render services and receive wages are presumed to have entered into a new contract of
service with the liquidator
h) Floating charges of the company crystallize and become fixed.

A winding up order operates in favour of all creditors and contributories as if it was issued on a joint petition of both
creditors and contributories. A copy of the winding up order must be delivered to the Registrar for registration.

THE LIQUIDATOR

This term was first incorporated into the Companies Act in 1856. This is the person appointed to realize the company’s
assets, ascertain and pay its liabilities and distributes the remainder, if any, to the members. This is a person appointed to
wind up the affairs of the company.

Qualifications to act as a Liquidator

The Act does not expressly prescribe the qualification of the holder of the office of liquidator, but expressly disqualifies
undischarged bankrupts and body corporate. Additionally, a liquidator has to be a qualified bankruptcy practioner.

Appointment of a Liquidator

His appointment depends on the type of winding up:

a) In a winding up by the Court, the official receiver is the liquidator or any other person appointed by the Court on
application.
b) In a member’s voluntary winding up, he is appointed by members in the General Meeting.
c) In a creditor’s voluntary winding up, he may be appointed by:
 Members
 Creditors
 Both creditors and members
 The Court on application.

Once appointed, a liquidator other than the official receiver must notify his appointment in the Kenya Gazette and is
obliged to deliver to the official receiver, such books or information as he may require.

The Legal Position of the Liquidator

The exact position of the liquidator is difficult to define as neither the Companies Act nor case law is clear on this point.

1. Liquidator as an officer of the Court

If he is appointed by the Court, he is an officer of the Court and must act honestly and impartially. He is answerable to the
Court.

2. Liquidator as trustee

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He is said to be a trustee for the general body of creditors and not for individual creditors. In the words of Rower J in
Knowles V Scott:

“In my judgment the liquidator is not a trustee in the strict sense. No doubt in a sense and for certain purposes a
liquidator may fairly enough be regarded as a trustee”

3. The liquidator as an agent

Case law demonstrates that a liquidator is an agent in a voluntary winding up as long as he is acting within the scope of
his authority. In the words of Lawrence J in Stead Hazel V Cooper, a liquidator is an agent of the company.

4. Liquidator as a fiduciary

Although there is no direct judicial authority for the proportion that a liquidator is a fiduciary, his obligations suggest that
he is one e.g. he must act in good faith and avoid conflict of interest.

Duties and Obligations of the Liquidator

1. He must act bonafide for the benefit of interested parties.

2. He must exercise unfettered discretion.
3. He must exercise powers for the particular purpose for which they were given.
4. He is bound to avoid conflict of interest.
5. He must exercise discretion personally unless appointed jointly.
6. He must act honestly and impartially
7. He must exhibit the degree of care and skill appropriate to the circumstances.
8. He is bound to secure control of the company’s assets.
9. He is bound to realize the assets
10. He must ascertain and pay the company’s debts
11. He is bound to ensure that minutes of the respective meetings are held.
12. He is bound to keep proper books of accounts.
13. He is bound to pay monies received into a separate account for purposes of the winding up.
14. At least twice a year, he is bound to deliver to the official receiver an account of his receipts and payments.

Powers of the Liquidator Exercisable with Sanction of the Court

1. To bring or defend any action or other legal proceedings in the name of and on behalf of the company.
2. To carry on any business of the company as may be necessary for the beneficial winding up.
3. To appoint an advocate to assist him in the performance of his duties.
4. To pay any classes of creditors in full.
5. To make any compromise or arrangement with creditors or persons claiming to be creditors.
6. To compromise all calls liabilities to calls, debts and other liabilities.

Powers of the Liquidator exercisable without sanction of the Court

1. To sell moveable and immoveable assets of the company.

2. To do all such acts and execute deeds in the name of and on behalf of the company.
3. To draw accept or endorse negotiable instruments in the name of and on behalf of the company.
4. To prove rank and claim in the bankruptcy and insolvency of a contributory

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 5. To take out letters of administration in his official name on a deceased contributory.
6. To raise money on the security of the company’s assets.
7. To employ agents to perform tasks he cannot.
8. To do so other acts as are necessary for the winding up and distributing of the assets of the company.

Release of the Liquidator

When the liquidator has collected all the property of the company or as much as he can without protracting the winding
up and has:

a) Distributed a final dividend if any to creditors;

b) Adjusted the rights of contributories amongst themselves; and
c) Made a final return to contributories; he must apply to the Court for his release or discharge.

The Court then orders him to prepare a report on his account and on the basis of the report and any objection as may be
made by any creditor, contributory or interested party; the Court determines whether or not to release the liquidator.

If the liquidator’s release is withheld the Court may hold him liable on application for acts or commissions committed or
omitted in the course of winding up.

If the Court releases the liquidator; the order discharges him from all liabilities arising in the course of winding up.

However the discharge may be revoked if it is proved that it was procured by fraud, misrepresentation and concealment
of material facts. Otherwise a discharge order operates as the removal of liquidator from office.

Rights of Parties in relation to winding up

Liquidation rights can take two forms: an initial liquidation preference and participation rights.

An initial liquidation preference provides that, in the event of a sale, the holders of preferred stock receive a specified
amount per share prior to any payments to the holders of common stock.

Participation rights allow a preferred shareholder to share the proceeds of a sale on a pro rata basis with the common
shareholders as though the preferred shares are common shares

DISTRIBUTION OF ASSETS

In a compulsory liquidation (and often in a voluntary one) the liquidator follows a prescribed order for distributing the
company's assets:

Order
1 Liquidation Costs
2 Preferential debts
Explanation
These include the costs of selling the assets, the liquidator's
remuneration and all costs incidental to the liquidation procedure
 All taxes and local rates due from the company for not more
than one year.
 All government rent in arrears for not more than one year.
 Employees' wages (subject to a statutory maximum)
 Accrued holiday pay
 Contributions to an occupational pension fund

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 3 Debts secured by Subject to the ‘prescribed part' (see below)
floating charges
4 Debts owed to A proportion of assets (known as the ‘prescribed part') is 'ring-fenced'
unsecured ordinary for unsecured creditors.
creditors
5 Deferred debts These include dividends declared but not paid and interest accrued on
debts since liquidation
6 Members Any surplus (unlikely in compulsory and creditors' voluntary
liquidations) is distributed to members according to their rights under
the articles or the terms of issue of their shares

It is important to remember that creditors with fixed and floating charges may appoint a receiver to sell the charged asset
- any surplus is passed onto to the liquidator. In the event of a shortfall they become unsecured creditors for the balance.

Offenses Related to Liquidation

1.Statutory Offenses

Section 498 provides that an officer or former officer of the company commits an offence if, within the 12 months
immediately preceding the commencement of the liquidation of the company, the officer or former officer:

a) concealed any part of the company’s property to the value of KES 50,000 or more; or concealed any debt due to
or from the company;
b) fraudulently removed any part of the company’s property to the value of KES 50,000 or more;
c) concealed, destroyed, mutilated or falsified any document affecting or relating to the company’s affairs or
property;
d) made any false entry in any document affecting or relating to the company’s affairs or property;
e) fraudulently parted with, altered or made any omission in any document affecting or relating to the company’s
affairs or property; or
f) pawned, pledged or disposed of any property of the company that has been obtained on credit and has not been
paid for.

Section 499 provides that an officer or former officer of the company commits an offence if the officer or former officer:

a) has made or caused to be made a gift or transfer of, or charge on, or has caused or connived at the levying of
execution against, the company’s property; or
b) has concealed or removed any part of the company’s property since, or within the 2 months preceding, the date
of any unsatisfied judgment or order for the payment of money obtained against the company.

Section 501 makes it an offense to falsify documents in relation to company in liquidation.

Section 502 makes it an offense to make a material omission from statements relating to financial position of company in
liquidation

Section 503 provides that it is an offence to make false representations to creditors of a company in liquidation.

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2.Fraudulent Preference

This is a charge, mortgage, conveyance delivery of goods act relating to company property made by or on behalf of the
company within 6 months of commencement of the winding up. Such a transaction is deemed void, however it must be
evident that it was entered into voluntarily, when the company was insolvent, to prefer a particular creditor over another.

3.Misfeasance

This is a wrongful act of omission committed or omitted by a person charged with a specific responsibility. In the words of
Lord Esher in Re: B Johnson (Builder) Company Ltd,

“There is no such distinct wrongful act known to the law as misfeasance”

According to the judge, a misfeasance is an act of omission committed or omitted in violation of the principles of common
law or equity. It is neither a crime nor a tort and does not include acts or omissions of negligence.

Misfeasance proceedings may be instituted against promoters, directors, liquidators, auditor etc. and the principal remedy
to the company is damages. For example, the Court has the jurisdiction in winding up to assess the damages payable by
officers of the company including the liquidator for any misfeasance committed. Examples of misfeasance include:

1. Payment of dividends out of capital.

2. Making of improper payment to promoters by directors.
3. Making of secret profit by directors or promoters.
4. Making fraudulent preferences.
5. Selling a company property at undervalue.
6. Applying the company’s assets in ultra vires or illegal transactions.

In Reliance Wholesale Company Ltd V Mills the company owed its directors £7,500 and the amount was repayable as and
when it becomes available. On one occasion, the director found signed cheques at the company’s office he filled £5,500
in one of them but in a subsequent conversation with the other director he was instructed not to cash it, but he did. The
company thereafter went into liquidation and the liquidator applied to have the amount returned on the ground that the
director was guilty of or misfeasance. The Court agreed and ordered the director to account for the same.

LIABILITY OF PAST MEMBERS

Members of the company, both past and present, are liable to contribute to the assets of the company, such amounts as
necessary to meet its debts and other liabilities as well as the expenses of winding up. However the liability of past
members is subject to the following qualifications:

 A past member cannot be called upon to contribute the assets of the company if he has ceased to be a member
for one year or more before the commencement of winding up.
 A past member is not liable to contribute in respect of debts contracted after he ceased to be a member of the
company.
 A past member can only be called upon to contribute if existing members are unable to satisfy the contributions
necessary.
 In the case of a company limited by shares, a past member can only be called upon to contribute the amount
unpaid on his shares.

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  In case of a company limited by guarantee a past member can only be called upon to contribute the amount he
undertook to contribute if the company was wound up during his membership or within one year of cessation of
membership

DISSOLUTION OF COMPANIES AFTER LIQUIDATION

Section 494 provides that as soon as practicable after receiving the final account and return prepared by the liquidator,
the Registrar shall register them.

At the end of 3 months from the registration of the account and return, the company is dissolved and its name officially
withdrawn from the register of companies.

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