COMPANY LAW

INTRODUCTION

Companies in Kenya are regulated and registered under the Companies Act 1962 (Cap 486) of
the Laws of Kenya. Kenya’s Companies Act is based upon the English Companies Act of 1948,
and hence there is a lot of similarity between Kenyan law and English law in relation to
companies.

INCORPORATION

CREATION OF LEGAL PERSONS

Legal persons are created by a process known as incorporation which according to Osborne’s
Concise Law Dictionary defines incorporation as “merging together to form a single whole,
conferring legal personality upon an association of individuals, or the holder of a certain office,
pursuant to Royal Charter or the Act of Parliament”.

For a company to be formed there must be some people who bring out the idea of forming one
and setting it in operation. Such founder members are known as PROMOTERS. To form a
private company, it requires two and public company seven. The business so formed is legally
regarded as a legal entity that is altogether separate from the members of the group, individually
and collectively.

THE NATURE OF THE COMPANY

The word company is a by-product of mercantile rather than legal ingenuity and was in use in
England long before what is now called company law came into existence.

Although the word was initially used by English merchants to denote associations which they
had formed for trading overseas, such as the British East India Company and the Hudson Bay
Company, it was gradually extended with surprising latitude to diverse associations until it
ceased to have a specific meaning.
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One major consequence of this extension is that the English Company Law which has been
adopted in Kenya defines or classifies companies according to the mode of their formation rather
than according to their intrinsic attributes.

CLASSIFICATION OF COMPANIES

Section 389 of the Companies Act provides that ‘no company, association or partnership
consisting of more than twenty persons shall be formed unless it is registered as a company
under this Act, or is formed in pursuance of some other Act, Act of the United Kingdom or
letters patent.

Three types of company are provided for under this section. They are:-

 Chartered companies
 Statutory companies
 Registered companies

Chartered Companies

Formed when the Queen or King of England issues a charter or letters of patent to a group of
people who intend to carry on a business as a chartered company.

However, no such company can be formed in Kenya after independence and the words ‘letters of
patent’ in Section 389 of the Companies Act only serve as a reminder of the English origin of our
Companies Act which is the replica of the English Companies Act 1948 with a few minor
modifications.

Statutory Companies

Formed by a specific Act of Parliament primarily as a means of conferring on it some powers

which would not be available to it if it were formed by Royal Charter or registration under the
Companies Act.

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A statutory company has no shareholders and its initial capital is provided by the Treasury. It is
expected to operate according to commercial principles and to make profits. If it makes losses
and becomes unable to pay its debts, its property can be attached by its creditors but it cannot be
wound up on the application of any creditor.

However the government will usually come to its aid if it has no cash or other assets to pay its
creditors.

Registered Companies

Formed by registration under the Companies Act.

It is this type of company that people usually have in mind when they talk of ‘a company.’ It
should be noted that section 2 of the Companies Act defines a company as “a company formed
and registered under this Act.”

CLASSIFICATION OF REGISTERED COMPANIES

Registered companies are classified by section 4(1) of the Companies Act into:
a) A company formed by “any seven or more persons”. Such a company is known in
common parlance as a public company.
b) A company formed by “any two or persons.” Such a company is referred to in the act as
“a private company.”
A private company or a public company may be limited by shares if the liability of a member to
contribute to the company’s assets is limited to the amount, if any, unpaid on his shares.
Such companies must have a share capital. These types of companies are the most common and
prevalent in Kenya. Companies limited by shares are commonly registered as ‘for profit’
organizations and are of two types-

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 (i) Limited by guarantee if the liability of its members is limited by its
memorandum to an amount which the members have undertaken to contribute to
the assets of the company in the event of its being wound up.
(ii) Unlimited if it does not have any limit on the liability of its members.

REGISTRATION PROCEDURES

The procedures to be followed by persons who intend to form a registered company will depend
on whether the proposed company is to be a public company or a private company.

Public Company

The initial step that must be taken by promoters who are desirous of forming a public company is
the preparation of a document called the memorandum of association to which at least seven of
them will subscribe their names as prescribed by section 4 of the Act.

The memorandum must contain a declaration by the promoters that they are desirous of being
formed into a company pursuant thereto and must state:

a) The name of the company, with ‘limited’ as the last word of the name of the
company in the case of a company limited by shares or by guarantee; and
b) That the registered office of the company is to be situate in Kenya; and
c) The objects of the company; and
d) In the case of a company having a share capital, the amount of capital with which
the company is to be registered and the division of the capital into shares of a
fixed amount (unless the company is an unlimited company).

The memorandum of a company limited by shares or by guarantee must also state that the
liability of the company’s members is limited. The memorandum of a company limited by
guarantee shall also state the amount ‘guaranteed’ by each member of the company.

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The memorandum must also contain a clause declaring that the promoters desire to form a
company pursuant thereto. This clause is known as ‘the association clause.’

The next step is the delivery of the memorandum to the registrar of companies together with
some or all of the following documents:

(i) Articles of association

This document contains the regulations for management of a company. If the
proposed company is to be limited by shares, the promoters need not deliver it for
registration
(ii) Consent to act as director (Form No 209)
If any person is appointed director of the company by the articles which are to be
delivered for registration, Form No 209 must be delivered for registration after being
duly completed and signed by him or by his agent authorized in writing to do so. The
form is the statutory signification of the person’s consent to act as director.

(iii) List of persons who have consented to be directors (Form No 210)

This form, when duly completed and signed, constitutes the statutory list of persons
who have given their individual consents in Form No 209.

(iv) Statement of the nominal share capital

This statement is delivered for taxation purposes pursuant to Section 39 of the Stamp
Duty Act.

(v) Declaration of compliance (Form No 208)

Form No 208, when duly completed and signed, constitutes the statutory declaration
by the advocate engaged in the formation of the proposed company, or by the person
named in the articles as a director or secretary of the company, that all the
requirements of the companies act in respect of matters precedent to the registration
of the company and incidental thereto have been complied with.

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REGISTRATION

If the aforesaid documents are correctly prepared in accordance with the provisions of the
Companies Act they are registered, the registrar grants a certificate of incorporation and the
company is formed from the date of incorporation written in the certificate.

Private Company

In order to secure the registration of a private company the procedure described above is
followed except that:

a) The memorandum of association will be signed by at least two of the company’s

promoters.
b) Form No. 209 and 210 are not delivered for registration because section 182(5) of
the Act exempts promoters of a private company from the obligation to deliver
them for registration.
c) If articles of association are not delivered for registration, the provisions of Part I
of Table A will become the company’s articles, as modified by Part II thereof.

Significance of registration

Section 389 provides that “no company, association or partnership consisting of more than
twenty persons shall be formed… unless it is registered as a company under this Act.” The
provision has been interpreted by the English and Kenyan courts to the effect that registration is
the condition precedent to the formation of a registered company and failure to register a
proposed company will mean that it does not legally exist.

Effect of registration

Section 16(2) of the Act provides that “from the date of incorporation mentioned in the
certificate of incorporation the subscribers to the memorandum of association….. shall be a body
corporate by the name contained in the memorandum.”

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This section has been judicially explained as follows:

a) The date mentioned (i.e. written) in the certificate of incorporation is the date
from which the company’s legal existence commences.
Consequently, if an incorrect date is written in the certificate, that date would be
regarded as the actual date on which the company was registered. This legal
position was explained by the House of Lords, under the English Companies act
whose provisions in this regard are identical to s.16(2) of the Kenya Companies
Act.
b) The company’s registration constitutes it ‘a body corporate.’
It becomes ‘a legal person,’ or ‘corpora corporata,’ whose name is the name
chosen for it by its promoters and written in its memorandum of association. The
certificate of incorporation may therefore be regarded as the company’s birth
certificate and the date written therein as the company’s birthday.

Practical consequences of registration

Once the company is incorporated, it must be treated like any other independent person with
rights and liabilities appropriate to itself.

This means that the company, as an independent person, has rights and obligations which are not
the same as the rights and obligations of the subscribers to its memorandum and the other
persons who will join it later as its members. This is the fundamental attribute of corporate
personality which is given practical effect in the following ways:

Limited liability

The fact that a registered company is a different person altogether from the subscribers to its
memorandum and its other members means that the company’s debts are not the debts of its
members.

If the company has borrowed money, it and it alone is under an obligation to repay the loan.

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The members are under no such obligation and cannot be asked to repay the loan.

In case a company is unable to pay its debts the creditors, or a creditor, may petition the High
Court for an order to wind it up. During the winding up the members will be called upon to pay
the amount, if any, which is unpaid on the shares they hold, in the case of a company limited by
shares, or the amount prescribed by the memorandum, in the case of a company limited by
guarantee, as provided in section 4(2) of the Act.

It should be noted that, in the case of a company limited by shares, what the members are paying
are the amounts they owe to the company as its debtors in respect of shares that were sold to
them on credit and have not been paid for in full. The company’s liquidator will in turn use the
money so paid to pay off, or reduce, the company’s debts.

The other point to be noted is that a company’s creditor cannot institute legal proceedings against
a company’s member in order to recover from him what he owes the company. This is because
the member does not, legally, become his debtor merely because the company is his debtor.

Perpetual succession

According to the concise Oxford Dictionary, ‘perpetual’ means, interalia, “applicable, valid, for
ever or for indefinite time” while ‘succession’ means “a following in order.”

When used in relation to registered companies the phrase ‘perpetual succession’ denotes a
process whereby a company’s membership changes in a definite order prescribed by the
company’s articles and goes on changing for an indefinite period of time until the company’s
liquidation.

The ‘perpetual succession’ occurs because a company and its members are separate persons and
so the company’s legal life is not terminated by a member’s death.

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Owning of property

Under section 16(2) of the Act, a registered company, as a person, has power to own movable
and immovable property. It can actually do so if it can afford to buy them, or receives them as a
gift.

But it is important to note that, legally, the company’s property does not belong to its members,
either individually or as a group. It belongs to the company alone.

Any member who uses the company’s money to purchase personal items or discharge personal
obligations will be liable to the company for conversion.

This rule applies irrespective of whether the company is of a class popularly referred o as a
‘one-man company.’

Suing and being sued

Because a company is at law a different person altogether from its members it follows that a
wrong to, or by, the company does not legally constitute a wrong to, or by, the company’s
members. Consequently:

A member or members cannot institute legal proceedings to redress a wrong to the company. The
company as the injured party is generally speaking, the proper plaintiff.

A member cannot be sued to redress a wrong by the company.

Lifting the veil of incorporation

The legal rule that a registered company is at law a different person altogether from the
subscribers to the memorandum of association and other persons who join the company later on
as its members has been modified in instances which have come to be known in company law as
‘lifting the veil of incorporation’. Such instances may arise under statutory provisions or case
law.

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 THE COMPANY’S CONSTITUTION

Introduction

The persons wishing to form a limited company also called promoters

would be expected to fulfil a number of conditions that will make a
company become a legal entity.

The procedure of incorporating a limited company involves:

 Preparing a Memorandum of association -Section 4 (1)

 Preparing Articles of Association
 Draw a list of Board of Directors (Public Company)
 Making statutory declaration or declaration of compliance
 Giving notice of location of the office of business
 Delivery of the Memorandum of Association together with other
accompanying documents to the Registrar of Companies
 The Registrar of Companies scrutinises the documents to
establish whether they comply with the provisions of the Company
Act
 If the documents are in order, the Registrar of Companies registers
the documents, then issues the Certificate of Incorporation and a
Company formed from the date indicated on the certificate

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THE MEMORANDUM OF ASSOCIATION

This is a six clause document drawn and signed by the promoters of the
company detailing and defining the basic information on powers, duties
and limitations concerning the company.

These clauses are:

1. Name clause

2. Registered Office clause

3. Objects Clause

4. Limitation of liability clause

5. Capital clause

6. Association clause

1. The Name Clause

Choice of name

The promoters of a proposed company have freedom to choose its name

but the freedom is limited by Section 19(2) of the Act which provides
that “no name shall be reserved, and no company shall be registered by a
name which consists of abbreviations, initials or which, in the opinion of
the registrar, is undesirable.

According to the English Companies Acts 1948, Practice Note No C 186 a

proposed name would be normally regarded undesirable if:-

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i) It is too like the name of an existing company.
ii) It is misleading, for example, if the name of a company likely to
have small resources suggests that it is going to trade on a great
scale over a wide field.
iii) It suggests some connection with the crown or members of the
Royal Family or royal patronage, including names containing such
words as “Royal Queen’ ‘prince’ and ‘Crown’
iv) It suggests connection with a government department or any
Municipality or other local authority or anybody incorporate by
Royal Charter or by statute or with the government of any part of
the Commonwealth or any foreign country.
v) It contains the words ‘British’ unless the undertaking is British-
controlled and entirely British-owned and is also of substantial size
and importance in its particular field of business.
vi) It include ‘Imperial’, ‘commonwealth’, ‘ National’, ‘International’,
‘Corporation’, ‘Co-operative’, ‘Building Society’, ‘Bank’, ‘Bankers’,
‘Banking’, ‘Investment Trust’, or ‘Trust’, unless the circumstances
justify the inclusion.
vii) It includes a surname which is not that of a proposed director,
unless the circumstances justify the inclusion.
viii) It includes words which might be trademarks, unless mark
clearance has been obtained.

Reservation of name

To avoid the risk of choosing a name that ultimately turns out to be

undesirable, the promoters should enquire from the Registrar whether
the name they intend to give the company is ‘too like’ that of a company
already in the register of companies.
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After obtaining confirmation that the name is a registerable one they
should immediately make a written application for its reservation under
S.19 (1) (a) of the Act. Any such reservation shall remain in force for a
period of thirty days or such longer period not exceeding sixty days, as
the registrar may, for special reasons, allow. No other company shall be
entitled to be registered with the reserved name.

Name to end with the word ‘Limited’

S. 5 (1) (a) provides that the word ‘limited must be the last word of the
name of company which is to be limited by shares or by guarantee.

Change of name

A company’s name may be changed voluntarily or compulsorily.

a) Voluntary change

A company’s name may be changed voluntarily:

i) Under s.20 (1) if a special resolution is passed by the company

for purpose after obtaining the written approval of the Registrar.
ii) Under section 20(2) if the company was inadvertently registered
by a name which, in the opinion of the Registrar, is too like the
name by which a company in existence is previously registered.
No particular type of resolution is prescribed by the section and
change may therefore be made by ordinary solution.

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 iii) Under section 21(20) if the Minister, by licence, authorises a
company by a special resolution to make a change.
b) Compulsory change

Section 20(2) of the Act provides that within six months of registrar may direct
a change in name in his opinion the name is ‘too like’ that of a pre-existing
company. In the event of such direction the change shall be made within the
period of six weeks from the date of the direction or such longer period as he
may be made by ordinary resolution.

After a company change its name under any of the above provision it shall give
to the registrar notice thereof within fourteen days. Upon receipt of the notice,
the Registrar shall-

i) Enter the new name on the registrar in place of the former name;
ii) Issue to the company a certificate of change of name ; and
iii) Publish the change of name in the Kenya Gazette.

Where a company changes its name either voluntarily or compulsorily the

change will not affect any of rights or obligations or render defective any legal
proceedings by or against it, and any such proceedings may continued or
commenced against it by its new name

2. The Registered Office Clause

Section 5(1) (b) provides that the memorandum of association shall state that
‘the registered office of the company is to be situate in Kenya’ the
situation of the registered office in Kenya fixes the company’s nationality as
Kenyan and its domicile as Kenya, though not its residence. Residence is
decided by ascertaining where the company’s centre of management and

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control is. Thus a company may be resident in a number of countries where it
has several centres of control in different countries. The residence of a
company is important in connection with its liability to pay Kenya taxation.

3. The objects clause

This would state the objectives of the company so that the shareholders know
what business they are engaging their funds in. Secion 5(1) (c) requires the
memorandum of association to state the objects of the company. In Cotman v
Brougham Lord Parker stated that the statement of a company’s objects in its
memorandum of association is intended to serve the following purpose:-

a) To protect subscribers who learn from it the purpose to which their

money can be applied.
b) To protect persons who deal with the company and who can infer
from it the extent of the company’s powers.

The doctrine of ‘ultra vires’

The doctrine of ultra vires is a legal rule that was articulated by the House of
Lord in the case of Ashbury Rail’, Carriage and Iron Co Ltd v Riche to the
effect that, where a contract made by accompany (usually by the directors on
its behalf) is beyond the objects of the company as written in the company’s
memorandum of association, it is beyond the power of the company to make
the contract. The contract is void, illegal and unenforceable. For example a
company whose object has stated to be ‘gold mining’ cannot engage in ‘fried
fish’ business.

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Alteration of objects

S. (7) of the Act provides that a company shall not alter the ‘conditions’ (i.e.
contents) of its memorandum except in the case, in the mode and to the extent
for which express provision is made in the Act. This provision confers a special
status on the memorandum as the basic document of the company whose
contents are statutorily prescribed and protected.

Regarding alteration of objects, S. (8) provides that a company may by special a

resolution; alter the provision of its memorandum with respect to its objects if
the alteration would enable the company:

a) To carry its business more economically or more efficiently.

b) To obtain its main purpose by new or improved means.
c) To enlarge or change the local area of its operations
d) To carry on some business which under existing circumstances may
conveniently or advantageously be combined with the business of the
company
e) To restrict or abandon any of the objects specified in the memorandum:
This is illustrated by Re: Hampstead Garden Suburb Trust Ltd (29).
f) To sell or disposal of the whole or any part of the undertaking of the
company
g) To amalgamate with any other company or body persons.

4. Limited Liability Clause

Section 5(2) provides that memorandum of a company limited by shares or by

guarantee shall also state that “the liability of its members is limited”

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Companies limited by shares

Most registered companies both public and private, are limited by shares. Such
a company is defined by S. 4(2) (a) as “a company having the liability of its
members limited by the memorandum to the amount, if any unpaid on the
shares respectively held by them”. It should be noted that it is the liability of
the company’s members which is limited, and not the company’s own liability.

Companies limited by guarantee

S. 4(2) (b) defines a company limited by limited by guarantee as “a company

having the liability of its members limited, by the memorandum, to such
amount as the member may respectively thereby undertake to contribute to the
assets of the company in the event of its being wound up”. The member’s
liability is contingent and he can only be called upon to pay amount ‘guarantee’
if the company is in liquidation.

Unlimited companies

S. 4 (2) (c) defines an “unlimited company” as a company not having any limit
on the liability of its members”. In such a case, although the company is a
separate legal entity, the members’ liability resembles that of partners.

5. Capital Clause

Section 5 (4) (a) provides that in the case of a company having a share capital;
the memorandum shall also (unless the company is an unlimited company)

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state ‘the amount of share capital with which the company proposes to be
registered and the division thereof into shares of a fixed amount”.

6. The association Clause

‘The association clause’ is not provided for in S. 5 of the Company Act which
prescribes the contents of the memorandum of association. It is however the
popular or academic designation of the last paragraph of Table B which
contains a declaration that the subscribers to the memorandum of association
“are desirous of being formed into a company, in pursuance of this
memorandum of association and agree to take the number of shares in the
company” set opposite their respective names.

The declarants then sign the memorandum and their signatures are then
witnessed by least one person who is not a subscriber.

ARTICLES OF ASSOCIATION

After drawing the memorandum of Association the promoters would then set
out to draw up the Articles of Association. This is legal document that sets out
the rules and regulations that would govern the internal organisation and
management of the company. It is the charter that guides the company’s
internal operations once it has been registered. It has the following clauses:-

(i) Table A clause. This provides a model set of articles for the
administration and management of accompany which is limited by shares.
Promoters have a choice to adopt in full, in part or to reject the contents of

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 Table A. in most cases, private companies may not adopt any of them, while
it is normal practice for public limited companies to adopt them in full.

(ii) the rights and powers of shareholders clause:- Such rights and powers as
stipulated in the clause would be in accordance with the types of shares held
by the members. It would also include the following:-

 The power and duties of the Board of Directors together with their
appointments, terms of office and remuneration i.e. salaries and
allowances.
 The procedures of convening and conducting Board of Directors meetings
 The procedures to be followed when issuing or transferring shares among
the shareholders.
 The method of dealing with any alterations of capital that may be deemed
necessary by the owners.
 The procedures to be used in writing keeping and auditing of books of
account of the company.
 Election of members of the Board of Directors through voting, proxies
and quorum requirements during such elections.
 The amount of issued share capital, stating the types of shares and
transfer procedures.

STATUTORY DECLARATION AND NOTICE OF SITUATION OF REGISTERED

OFFICE OF THE COMPANY.

At this stage the promoters would simply declare that they have complied with
all the necessary requirements and that they would be situated in the
registered office in a stated locality.

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CERTIFICATE OF INCORPORATION

This is document issued to the promoters when the registrar of Companies has
received all the legal documents discussed above. Certificate of Incorporation
show that the company is born and is now a separate legal entity from its
owners. The company is therefore, ready to operate as legal person capable of
doing legal things that a person can do.

MANAGEMENT OF COMPANIES

By incorporation, there is formed a corporate person which is separate from the

servants who work for it or the members who own it.

The general affairs of the company are managed by the Board of directors

A public company shall have a minimum of two directors while a private

company shall have at least one director

The actual number of directors would initially be decided upon by the

shareholders or a majority of them, and until so determined by ordinary
resolution all of them shall be the first directors.

Functions of the Board of Directors

 Appointing senior managers like the General managers to oversee

various functions
 Deciding on how profits shall be distributed and table the same to the
shareholders annual general meeting
 Deciding on how to raise and spend capital
 Establishing major policies of a company

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  Ensure that all legal requirements are adhered to
 Ensuring effective management of the company so as to make it
successful in achieving it’s goals

Appointment of Directors

Directors are appointed in accordance with the provision of Table A, once

appointed must publicise their names of the companies’ registry, its registered
office and its letter heads.

First directors

Their manes shall be decide in writing by the subscribes of the memorandum

of association or a majority of them

Subsequent director

They are appointed by the members in a general meeting being from the first
annual general meeting at which all the first directors refine from office and
members given the first appointment to elect directors of their own choice.

Casual appointment

Article as permits the board of directors to fill a vacancy in the board or get
additional directors to join the board for practical reasons provided such an
appointment does not cause the number of directors to exceed the limit
imposed by the articles.

A director appointed in thus way shall hold office until next general meeting.
He shall be eligible for re-election.

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Restrictions on Appointment

1. Appointment by the articles

See. 182 (1) provides that- A person shall not be appointed a director by the
articles unless before the legistration of the articles he has by himself or by his
agent authorised in writing, signed and delivered to the registrar for
registration a consent in writing to act as such and either

 Signed memorandum for a number of shares not less than his

qualification shares if any, or
 Taken from the company and paid or agreed to pay his qualification
shares if any, or
 Signed and delivered to the registrar for registration an undertaking in
writing to take the company and pay for his qualification shares if any

The provision do not apply with

 A company not having share capital

 A private company
 A company which was a private company before becoming a public
company
2. Qualification shares

Section 183 (1) provides that a director should hold a specified share
qualification and whoever not already qualified to obtain his qualification
within two months after his appointment or within a shorter time (if any)
specified in the articles.

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

3. Age limit

Section 186 provide that no person shall be capable of being appointed a

director of a public company, or a private company which is a subsidiary of a
public company if at the time of his appointment:-

 He has not attained the age of twenty one years.

 He has attained the age of seventy years.

However thus may not apply if a special notice of the resolution to appointment
the director was given to the company or if the company’s articles provide
otherwise.

4. Un discharged bankrupts

Section 188 provides if a person has been declared bankrupt or insolvent by a

court in Kenya.

5. Fraudulent persons.

Section 189 (1) empowers the court to make an order restraining a person from
being appointed as a company’s director for a period not exceeding five years

 The person is convicted of any offence in connection with promotion or

management of a company or
 In the course of a winding up it appears that the person has been guilty
of fraudulent trading or has been guilty while an officer or the company
of any or breach of duty to the company.

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 6. Individual voting

Section 184 (1) provides that the appointment of directors to be voted on

individually, unless a motion for the appointment of two or more person as
director by a single resolution was agreed upon by meeting without any vote
given against it.

A resolution moved in contravention of this provision is void under section

184 (2) even if no objection had been taken to its being moved.

Disqualification of directors

Table A, Article 88 provides, under the headings “disqualification of

directors”, that the office of director shall be vacate if the director-

 Ceases to be a director by virtue of s.138 or s.186 (i.e. failure to

obtain a share qualification or attaining the age limit, respectively)
 Becomes bankrupt or makes any arrangement or composition with
his creditors generally; or
 Becomes prohibited from being a director by reason of any order made
by the court under s.189 of the Act; or
 Becomes of unsound mind; or
 Resigns his office by notice in writing to the company; or shall for
more than six months have been absent without permission that
period.

A person may also cease to be a director for other reasons such as:

 Death; or
 Retirement by rotation under the articles(e.g. Table A, Article 89); or

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  Dissolution of the company.

Removal of directors

By S. 185(1), a company may by ordinary resolution remove a director before

the expiration of his period of office, notwithstanding anything in the articles or
in any agreement between him and the company. Special notice must be given
of any resolution to remove the director, or to appoint another director in his
place.

The removal will be effective if it is decided on by an ordinary resolution.

Harman, L J in the case of Bushell v Faith and Another defined "an ordinary
resolution” as “a resolution depending for its passing on a simple majority of
votes validly cast in conformity with the articles”

Directors’ remuneration

Directors are regarded as servants or employees of the company of which they

are directors. They therefore have no right to be paid for their services unless
there is a provision for payment in the articles.

In the case of companies which have adopted Table A, Articles 76 it provides

that the remuneration of the directors shall from time to time be determined by
the company in a general meeting where shareholders pass a resolution
authorizing payment.

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

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Compensation for loss of office

Section 192(1) makes it unlawful for a company to make a payment to director

as consideration for or in connection with his retirement unless particulars of
the proposed payment, including the amount, are disclosed by the company
and the proposal is approved by the company in general meeting.

The primary object of this section is to give the company’s members who are
present at a general meeting the opportunity to consider the facts surrounding
the proposed payment and, if they are of the view that the payment should be
made, to fix the amount payable.

A payment made in breach of this provision is illegal and the amount received
by the director shall be deemed to have been received by him in trust for the
company.

Duties of directors

The duties of director are usually considered under two broad headings,
namely-

1) Duties of care and skill at common law, and

2) Fiduciary duties as expressed by courts of equity.

Duties of care and skill

The directors’ duties of care and skill have been formulated in a series of cases
which were brought against directors in order to make them liable in
negligence for the matter in which they conducted the company’s affairs.

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These duties were summarised by Romer, J in Re: City Equitable Fire
Insurance Co. Ltd (1925) in the following three rules:

a) A director need not exhibit in the performance of his duties a greater

degree of skill than may reasonably be expected from a person of his
knowledge and experience.

This rule prescribes a duty which is partly objective (the standard of the
reasonable man) and partly subjective (the reasonable man is deemed to have
the knowledge and experience of the particular director). It may also be
expressed by saying that, if a foolish director makes foolish decisions resulting
in loss to the company, he cannot be liable for negligence. It would be
unreasonable to expect a foolish director to make wise decisions. However, if
the director made very foolish decisions resulting in loss to the company, he
will be liable in negligence since it is not the reasonable to expect a foolish
director to make very foolish decisions. On the other hand, a wise director will
be liable if he makes unwise decisions, since it is unreasonable to expect him,
a wise man, to make unwise or foolish decisions.

A directorship is not a professional job with a legally prescribed qualification.

In the circumstances, anybody, even a six-month-old baby, can become, and
indeed become, a director. All that the law can expect him to do is serve the
company honestly and to the best of his ability. In Re: Marquis of Bute’s Case
the director at the age of six months by inheriting the office from his father who
had died. What can one reasonably expect such a director to do in the course
of “managing” the company’s affairs?

b) A director is not bound to give continuous attention to the affairs of his

company.

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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 so.

c) in respect of all duties that, having regard to the constraints of

business, and the articles of association, may properly be left to some
other official, a director is, in the absence of grounds for suspicion,
justified in trusting that official to perform such duties honestly.

A director is liable only on his personal negligence but not those he has
delegated responsibilities or employees.

2. Fiduciary duties

The first proposition is that director is not allowed to put himself in a position
where his interest and duty conflict. The second proposition is that a director is
not, unless otherwise expressly provide, entitled to make a profit.

Section 200 requires a director who is in any way interested in a contract with
the company to declare the nature of his interest at a board meeting.

Article 84 of Table A which provides that - The director shall not vote in
respect of the contract and if he does vote, his vote shall not be counted; and
the director shall not be counted in the quorum present at the meeting.

a) Industrial Development Consultants Ltd v Cooley in which the

director become personally interested in a contract he had been assigned to
negotiate for the company.

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The court made the order despite the defendant’s argument that plaintiffs had
suffered no loss since they would not have obtained the work for themselves.
The fact is that, having become personally interested in the contract, he totally
forgot or disregarded the fact that it was his duty to do everything possible so
that his employers got the contract. That included refusing completely to
accept the offer which had been made to him as a person.

b) Cook v Deeks in which some of the company’s directors diverted to

themselves a contract that was intended to be for the company. It was held
that they had to surrender the benefit of the contract to the company. In law
the benefit of the contract belonged to the company which the director had
formed for the purpose of obtaining the contract but in equity the contract
belonged to the company for which it was intended.

Director Powers

Equity regards director as holding their powers in trust for the company. They
can only exercise those powers for the benefits of the company; otherwise the
purported exercise will be regarded as’ ultra vires’ and invalid. In such cases
the court would regard the transaction as having been entered into for an
‘extraneous purpose’.

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 RECONSTRUCTIONS AND MERGERS.
RECONSTRUCTION.

The term “reconstruction” is not defined by the companies Act. However it is

generally used in company law to denote some of the instances in which a
company is “built again”. The building again of a company may also be
described as a reorganization or a scheme of arrangement.

Scheme of arrangement takes place when the rights of the creditors are varied,
modified or changed. Section 207(5) defines arrangement to include:-

 A reorganization of the share capital of the company by consolidation of

shares of different classes; or
 The division of shares into different classes or
 Both the two methods above.

NB: only one company is involved.

METHODS OF RECONSTRUCTION.

(I) Reduction of capital

(II) Variation of class rights
(III) Scheme of arrangement (sections 207-209)
Through an application made to court by the company or any creditor
or member of the company. The application is for an order that a
meeting be held by:- either
- The creditors
- A class of creditors
- Members of the company
- A class of members.

Section 207(2) provides that if the scheme is agreed to by a majority in

number representing 75% in value of the creditors or members, or class of
members, as the case may be who are present at the meeting and vote either in
person or by proxy, and is sanctioned by the court, it shall be binding on all
the creditors or the class of creditors, or the members or class of members and
also on the company. It comes into effect only after a certified copy of the court
order has been delivered to the registrar for registration.

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ROLE OF COURT

The court will give its sanction only if it is satisfied that :-

(I) The arrangement offer` s a better prospect for the parties concerned
than winding up the company.
(II) There is a genuine compromise or arrangement .

It should be noted that an arrangement implies some element of

accommodation on all sides and that a scheme involving the total surrender of
the rights of some members will not be approved by the court.

ADVANTAGES OF SCHEME OF ARRANGEMENT.

Scheme of arrangement is a compromise of some sort made by the company

with members or creditors and has three main advantages.

(I) Can save a company from being wound up

(II) The procedure is simple and requires approval by fewer votes to pass.
(III) Saves substantial expenses.

MERGERS.

Merger or amalgamation denotes instances in which the property or business

of a company is transferred to another company which is already in existence.

Alternatively a new company can be incorporated to acquire the business of

two (or more) existing companies. In either case, the procedure followed is as in
reconstruction.

TAKE OVER BIDS.

This is compulsory acquisition under section 210.

Section 210 provides that if company A (the transferee company) offers to

acquire shares in company B (the transferor) and the scheme or contract to
which the offer relates is accepted by holders of 90% of the shares for which

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the offer is made, then company A may compulsorily acquire the remaining
shares so as to achieve a complete 100% acquisition of the shares.

The non-accepting minority may (individually or collectively) apply to the court

to prevent company A from acquiring their shares

NOTE: The offer must be made by a company to acquire shares of another

company but not an individual.

PROCEDURE FOR TAKE OVER BIDS

If company A, directly or through subsidiaries, owns more than 10% of the

shares in company B then company A must:-

(I) Offer the same terms for all the shares which it does not already own.
(II) Obtain acceptance from 75% of the shareholders as well as holders of
90% of the shares.

It is a statutory requirement that the transferee company (company A) give

notice of the fact that it has reached 90% ownership of shares (or 90% of a
class of shares) in the transferee company,( company B) to the holders of the
outstanding shares within a month of such an occurrence. Those shareholders
may then require company A, within the ensuing three months, to acquire
their shares on the same terms as have been accepted by the approving
shareholders.

The minority whose shares are acquired compulsorily under section 210 are
entitled to all the benefits included in the original offer and accepted by the
share holders of 90% or more of the shares.

NB: A non- accepting shareholder may, in some cases, apply to the court to set
aside the proposed acquisition of his shares as in Re VS Bugle press.

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WINDING UP.

“Winding up” is the legal process by which a company’s legal existence is

brought to an end. It is carried through by a person known as a liquidator
who liquidates the company (i.e kills it and then makes the necessary
arrangements for its burial).

The burial arrangements entail among other things.

(a) Settling the list of contributories (members)

(b) Collecting the company’s assets.
(c) Paying the company’s debts and other liabilities
(d) Distributing the surplus assets (if any) among the contributories.

WAYS OF WINDING UP (SECTION 212(1)

(a) Compulsory –by court

(b) Voluntary –by either member or creditors.
(c) Voluntary subject to the supervision of the high court .

WINDING UP BY THE COURT (COMPULSORY)

Winding up by the court commences when a petition is presented to the high

court under section 218 of the companies Act. The petition for compulsory
winding up is usually presented either by a creditor or contributory (member)
of the company.

GROUNDS FOR WINDING UP BY THE COURT

(I) The Company resolves by a special resolution that it should be wound up

by the court.
(II) The company does not deliver the statutory report to the registrar of
registration.
(III) The company defaults in holding a statutory meeting.
(IV) The company has not commenced its business within a year from
incorporation.
(V) The company has suspended its business for a whole year.
(VI) The company is unable to pay its debts as defined in section 220.
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 (VII) The number of members has reduced below the statutory levels
Eg. A private company – below two
A public company –below seven
(VIII) The court considers that it is just and equitable to wind up the
company.
(IX) For a company incorporated outside Kenya but carrying on business
in Kenya liquidation proceedings for it have been commenced in the
Country of incorporation.

NB: IV and V above relate in the case of Defunct companies where the
registrar, having reasonable cause to believe that a company is not carrying on
business or in operation may, subject to certain procedures, strike off the
register the name of a company thereby dissolving it.

INABILITY TO PAY DEBTS.

A company shall be deemed to be unable to pay its debts if:-

(I) A creditor (or creditors) who is owed Kshs. 1,000/= serves on the
company, at its registered offices, a written demand for payment and
the company neglects within the ensuing three weeks, either to pay or
to offer satisfactory security for it, or
(II) Execution or other process issued on a judgment, decree or order of any
court is returned unsatisfied in whole or in part, or
(III) It is proved to the satisfaction of the court that, taking account of the
contingent and prospective liabilities of the company, it is unable to
pay its debts.

NOTE: No minimum amount is specified for (ii) or (iii) above but it is assumed
that the Kshs. 1,000/= minimum applies.

WINDING UP ON THE JUST AND EQUITABLE GROUND

This is only done if the court is of the opinion that the company should be so
wound up.

The just equitable ground is usually relied upon by a member who is

dissatisfied with, or is at loggerheads with the directors or controlling
shareholders over the management of the company .

Winding up orders on the just and equitable ground have been made in
situations where:
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 (a) The substratum of the company has gone as Occurred in Re vs
German Date Coffee Co. (1882). The objects clause specified that the sole object
of the company was to manufacture coffee from dates under a German patent.

The German Government refused to grant a patent. The company however,

manufactured coffee under a Swedish patent for sale in Germany. A
contributory petitioned for compulsory winding up. The petition was opposed
by the other members. It was ruled that the company should be wound up
since it had been formed only to work a particular patent.

But if there is an alternative object which the company can carry on, then it
will not be wound up on the just and equitable ground [(case Re vs Kitson & Co
(1946)].

(b) There is a complete deadlock in the management of the company’s

affairs typified in the case of Re vs Yenidje Tobacco co. (1946) where the
prospects of a friendly co-operation had been destroyed by the animosity
of the directors towards each other. The court can also allow winding up
on just equitable if some directors act in an unjust or inequitable
manner as in the case of Ebrahim Vs Westbourne Galleries (1973).

VOLUNTARY WINDING UP (SECTION 271(1)

A company may be wound up voluntarily :-

(a) (i) When the period, if any, fixed for the duration of the company by the
articles expires or
(ii) The event, if any, on the occurrence of which the articles provide that
the company be dissolved and
(iii) The company in general meeting has passed a resolution requiring
the company to be wound up voluntarily.
(b) If the company resolves by special resolution that the company be wound
up voluntarily.

NOTE: the winding up commences at the time of the passing of the resolution
for winding up .

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MEMBERS’ VOLUNTARY WINDING UP.

A voluntary winding up is a members’ voluntary winding up only if the

directors make and deliver to the registrar a declaration of solvency.

The declaration of solvency is a statutory declaration that the directors have

made full inquiry into the affairs of the company and are of the opinion that it
will be able to pay its debts in full within a specified period, not exceeding
one year.

NOTE: 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.

In a members’ voluntary winding up, the creditors play no part in the winding
up since they have been assured that their debts will be paid in full.

CREDITORS’ VOLUNTARY WINDING UP.

This is voluntary winding up in the case where no declaration of solvency is

made and delivered to the registrar regardless of whether the company pays all
its debts in full in the end.

Differences between a members’ and a creditors’

CREDITORS WINDING UP MEMBERS WINDING UP

(a) Liquidator selected by the creditors Liquidator appointed by
the members

Liquidator obtains
(b) Liquidator must obtain the approval of the approval from the
committee of inspection for the exercise of members in general
certain statutory powers meeting

There is a committee of inspection No committee of

inspection
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WINDING UP SUBJECT TO SUPERVISION.

This is where the court makes an order that voluntary winding up shall
continue but subject to supervision of the court. Where the court makes an
order for winding up subject to supervision, it may appoint an additional
liquidator who shall be subject to the same obligations and stands in the same
position as if he had been appointed under an order for a voluntary winding
up.

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