Lesson 1 The Medieval times or Middle Ages (5th to 15th century) has recognized

various forms of associations and the concept and incorporation of such

The meaning and historical development of companies
was widely accepted. This was in conjunction with the needs of the society
at that time.

First: Incorporation was commonly used only in connection with

The nature and legal status of companies has developed though history, ecclesiastical and public bodies, such as chapters, monasteries and
taking different forms and meaning to suit the dynamism and demands of boroughs, which had corporate personality conferred to them to by a
commerce and industry. Perhaps this explains why the meaning of the charter from the crown or were otherwise deemed prescription to have
word ‘company’ continues to elude precise definition over the years. received such a grant.

Thus, many writers offer a contextual meaning while answering the It was commonly understood that incorporation of an association depends
question ‘what is a company?’ upon:

Meaning of the word ‘company’  a state of grant (Royal charter)

 or by statute.
The Companies Act, 2015 offers no specific definition beyond identifying
the nature of undertakings recognized as companies under the Act. For This was the case until the latter part of the 18th Century when Acts of
practical purposes it may be argued that there is no particular need for a patent became the basis for incorporation. Until then, statutes were used to
precise lexical definition. As regards the meaning of the word ‘company’ it extend royal prerogative by authorizing the crown to confer a charter of
is enough to observe that companies have not always existed as such. incorporation with privileges beyond that the crown alone could confer.

Therefore, the word company has always meant different things to In relation to Companies chartered by the crown, such a charter normally
different people depending on the context in which it is used. The word conferred a corporate personality. Thus, the parties in the public body
may mean one thing to a layman and another to a jurist. could not claim ownership of the property of the public body. This is
because the company became a corporate personality on its own.
Historical Development of Companies
According to Gover & Davis ‘as it was a dubious policy for the crown to
Medieval to the Middle Ages
confer a full charter of incorporation on an ordinary trading concern, it was
The historical development of modern-day companies as the reform in the
empowered by the Trading Companies Act, 1834, and the Chartered
law governing the inception and regulation of various commercial
Companies Act, 1837 to confer by letters of patent all or any of the
undertakings and business associations explain the legal nature of what is
privileges of incorporation without actually granting a charter. (And so,
termed as a company.
without needing the crown to exercise their prerogatives) Under modern
law, incorporation is acquired by registration in accordance with defined

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procedure provided by statute. In Kenya, this defined procedure is Commandas and Societas
performed through the clauses incorporated within the Companies Act. In commanda, a trader lent money to another trader, got a share of the
Shift of incorporation from the crown to parliament through statutes. profit and in case of loss his liability was limited to the money lent. The
financier was to some extent a sleeping partner with limited liabilities.
Guilds: Similar to Limited Liability Corporations. This is because the liability was
Companies, as known today, have a long history. They evolved from limited to the amount of money lent to the other party. Thus, there was
association of merchants known as guilds established during the period limited liability in this instance. ‘Ordinary course’- subject to regulations
between the 11th and 13th C. What is the nature of a guild? These are of company under the Companies Act and Memorandum of Associations
members of a body that acted in a similar partisan manner in regard to a of the Company.
trade or commodity. In simple terms, an association of people with similar
interests or the pursuit of a common goal. In societas – All members took part in the management of the trade and
had unlimited liability. This meant that each partner was as agent of the
To be established, the guilds obtained charters in the nature of licenses others and was liable to the full extent of his assets to the partnership debts
from the crown mainly to secure for its members a monopoly in respect of incurred in the ordinary course (activities outlined under the Partnership
a particular branch of trade or commodity. The members who initially Deed) of the firm’s business. This remains the position with partnerships
traded on their own were subject to regulation of the guilds and to term of today. Similar to Partnerships. This is because each person was fully liable
the charter. Incorporation, which would ordinarily distinguish the rights for the debts incurred in the firm’s business and acted as an agent for the
and liabilities of the association from those of its members, was others. There was unlimited liability but only in respect to the losses and
unnecessary since each member traded on his own account, subject only to debts occurred in the ordinary cause of the firm’s business. Unlimited
the regulation of the guild. In effect each member traded with his own liability means that if the business suffers a debt, your personal assets will
stock and his own account, and his trading liability was entirely separate be claimed to pay those debts.
from that of the co. and other members. This led to separation of liability
between the members of the guild and the guild itself. Additionally, Also consider the existence of a limited liability partnership as per the
members who traded on their own thus, were subject to guild regulations. Limited Liability Partnerships Act of 2010 and another year.
Any person who would not be a member of the guild would be unable to
trade with those people. This combined interests of a particular group of Modern business association trace back to the 11th Century with the little
people. change in form and status, except, perhaps as regards the substance of
regulatory rules to which they were subject. The commanda has since
With time, the general body of traders began trading in joint account in developed into modern company while societas have evolved into the
what was known as commanda and societas that were business partnership firms as we know them today.
associations in the nature of partnerships regulated by the rules of the
guild.

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 Development from the 14th Century In the case of East India co. profits and membership subscription were
th
In the 14 Century, the word company was adopted by certain merchants divided among the members at the completion of every trading venture.
for trading overseas. They enjoyed certain privileges in trading, as given
In 1614, it was decided that the subscription be invested for several years
by royal charter (and subsequently by statute) which explain the origin of
leading to the introduction of a permanent subscription fund in 1653
today’s-chartered companies, an extension of the guild in foreign trade.
eventually creating a permanent joint stock of East India co. Private
By 16th Century, such charters became common granting monopoly of trading by the members in competition with the company and with one
trade to members of the company and governmental powers over the another was prohibited in 1692, a prohibition that applied to other
territory to the company commonly from at regulated companies. chartered companies. Private trading thereafter became prohibited and
members of the company could not compete with one another as well as
East India Company trading the company. This prohibition also applied to other chartered companies.
An example in the East India company established by grant of a Royal
charter in 1600 with monopoly of trade in the East Indies and Africa. The hitherto unfettered power of the crown to grant a charter of
incorporation to companies primarily engaged in foreign trade with
A member of East India company could: monopolistic privileges were curtailed following the revolution of 1688
(revolution which intended to limit the powers of the crown- known as the
 initially carry on trade individually- any loss incurred would not be borne
Glorious Revolution which established Parliament as the ruling power of
by the company and/or
England- movement from monarchy to constitutional monarchy) after
 had the option to subscribe to the joint fund or stock of the company in
which it become possible to confer monopolistic rights or special
much the same way today’s shareholder contributes to the capital to
privileges only by statute. This was and still in the position as regards
modern company.
statutory entities (public corporation also known as public entities), which
Datta traces the historical development of the modern company farther. By enjoy monopolistic privileges conferred by statute to ensure effective
the end of the 16th Century, individuals traded separately or with their service delivery. This greatly reduced the powers of the crown.
funds or stock or well as jointly with other members of the company.
The change in policy led to gradual decline of chartered foreign companies
Gradually, the members gave up separate trading and diverted their stock which resulted in growth of domestic companies that invited members of
to, and invested in, the joint ventures. Thus, became a joint fund or joint public to subscribe to their shares. This has been the trend in Kenya where
stock with which the members traded in a joint account. The regulated state or statutory corporations with monopolistic privileges have been on
companies became joint enterprises with joint stock instead of operating the decline following economic liberalization and government policy to
merely as trade protection association. Guild granted monopoly on privatize them by issuing shares to the public and thereby converting them
commodities, this changed this. into public limited liability companies.

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A new emergence of Acts their name under the Companies Act 2015. Liability would still be borne
by the partners in the partnership.
The Bubble Act, 1720
The first quarter of the 18th Century experienced an upward surge in Trading Companies Act of 1834, Chartered Companies Act of
speculative schemes of company floatation as expansion of trade and 1837, Joint Stock Companies Act of 1844 and the Limited
competition, often by unscrupulous means to the detriment or prejudice of
Liability Act of 1855
unsuspecting investors. This led to the enactment in England of the Bubble
The Bubble Act was repealed in 1825 after which the Trading Companies
Act of 1720, which prohibited generally the use of corporations unless they
Act of 1834 was passed to meet the needs of the business community. The
were authorized to act as such by an Act of parliament or Royal charter.
1834 Act empowered the crown to confer by letters of patent all or any of
However, the 1720 Act exempted all commercial undertakings established the privileges of incorporation (except limited liability) without granting a
before 24 June 1718. This meant that these corporations could carry on charter. Even then, companies could only sue in the names of their
business whether they were subject establishment by a royal charter or not. officials. Companies could still not sue or be sued in their name. This led
The primary intention was to enable joint stock associations to adopt a to incorporation by patent.
corporate form and, at the same time, safeguard the shareholders in such
Although the Act required public registration of members, their liability for
societies and the public against fraud and negligence in their promotion
the debts of associations remained unlimited until the enactment of the
and management.
Chartered Companies Act, 1837. The Act re-enacted the 1834 Act
However, the 1720 Act failed to obtain this objective. As a result, some providing that personal liability of members be expressly limited by the
companies were compelled to forfeit their charters (meaning dissolve their letters of patent to a specified amount per share. This aided in the
companies) leading to their collapse. This led to formation in the 19th movement of Limited Liability Partnerships.
Century of large partnerships by means of a deed of settlement whereby
Subsequently, the Joint Stock Companies Act was enacted in 1844:
parties were associated in a joint fund or stock divided into a number of
 making provision for registration of all new companies with more than 25
transferable shares. The management of such partnerships was vested in
members or with shares freely transferable without the consent of all
directors while the property was vested in a body or trustees, who had
members.
power to sue or to be sued on behalf of the co. since suits could not be filed
 the Act also provided for incorporation by registration, although such
in the co.’s name. Collapse of companies after 1720 Act which thereafter
registration was provisional in the sense that it authorized the company to
led to formation of Partnerships. Management- directors. Property vested
function for a limited purpose.
in trustees. Trustees could thereafter sue or be sued on behalf of the
company since companies at the time could not be sued in their name.
Company was deemed as finally incorporated upon the filing of a deed of
These Trustees held a fiduciary duty but did not operate with the trustee,
settlement containing the prescribed particulars and other documents, as
beneficiary relationship in equity. Companies now can sue or be sued in
prescribed by the Act. It did not grant limited liability at the outset.

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 Limited Liability Act of 1855 established the principle that members of ventures in respect of which their liability was unlimited. No limited
those corporations could enjoy limited liability for claims in contract and liability meant protection of property.
tort by simply registering as a limited liability co. subject to certain
conditions. What was the impact? Capital investments.

Amendment in Joint Stock Companies Act of 1856 repealed the 1855 Act The rarely found freedom from liability for the trading debts of one’s joint
– Limited Liability Act, 1855. venture gradually motivated growth in capital investments – this turn of
events spurred the growth of commerce industry.
It introduced memorandum and articles of associations in place of the
hitherto provisional registration of companies by deed of settlement. Companies Consolidation Acts
Memorandum and articles of association INSTEAD OF Deed of The law on companies was eventually codified in 1862. This was followed
Settlement. by numerous amendments lending to the enactment of the Companies
Consolidation Acts of 1908 and 1929.
It also provided for incorporation with limited liability for any 7 or more
persons who subscribed to the memorandum of association of the After further amendment, the Act was again consolidated leading to the
registered co. The Act has later been amended in 1857. enactment of the Companies Act of 1948 which consolidated the English
law on companies. Subsequent amendment led to the passing of the 1967
1856 Act sought to uphold two forms of legislative intervention in affairs and the 1985 Acts. The 1948, 1967 as the 1985 Acts govern Company law
of companies, namely: in England.
a) To institute sanctions that would deter or punish fraudulent directors; and
b) Give maximum publicity to the affairs of such companies through The law in Kenya on companies was essentially an adaptation of the 1948
mandatory returns and accounting disclosure. law in England before the recent reforms by the enactment of the
Why was this important? Companies Act, 2015 which is a reflection /mirror of the UK companies
 Meant that – Everyone dealing with them would be aware of their financial Act of 2006. Until 2015, we largely relied on Cap. 486, the 1948 law of
status and the basis on which they were transacting. England. But the 2015 law is an adaptation of the 2006 UK Act.
 Truthful and frequent publication of account is a safeguard for investors
Is this the ideal situation or should this be rectified to fit the Kenyan
and creditors alike.
situation? It is okay to use the Act as a benchmark; however, it should
 The prospect of incorporating joint stock ventures into limited liability
cater to Kenyan needs as opposed to being a duplicate of the Act.
companies under the 1856 Act enlarged the scope of investment
opportunities and appealed to large investors in search of profits. Modern day legal situation in the formation of companies
 Large inventors would enjoy the prospect of massive return on their
investment without risking their property, as was the case work joint By the end of the 19th Century, the forces of limited liability, coupled with
state and national deregulation, and substantial increase in capital markets,
had come together to support the creation and evolution of the corporation

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 into its modern-day form. As history has shown, the company has evolved companies since this was mandated in English colonies and they used to
through centuries of structural and legal reforms. exercise governmental powers. This no longer exists due to the
independence of most colonies.
During the 20th Century, there was proliferation of enabling legislative
reforms across the world, which facilitated rapid growth in the
establishment of business associations conducive to the growth of
commerce and industry.

We now witness a variety of business associations in the form of

partnerships firms and incorporated co. actively engaged in all kinds of
commerce and industry. The world of commerce and industry in any
entrepreneurial system in characterized by players who came together to
carry out their joint venture under defined legal framework by which they
are regulated.

Object of the Companies Act 2015 under Section 2… ‘to facilitate

commerce, industry and other socio-economic activities by enabling one or
more natural persons to incorporate an entities with perpetual succession,
with or without limited liability, and to provide for the regulation of those
entities in the public interaction, and in particular in the interests of their
members and creditors.’ Aims to thus facilitate and protect the needs of
society at this time.

 Incorporation
 Registration (Enabling one or more…)
 Operation management and
 Regulation (Provide for regulation…)
of companies in Kenya.

In every act, objectives are found under Section 2.

The objective does not involve the dissolution of companies. This is

because this is included in the Insolvency Act now. Of which this was
previously provided in Cap. 486.We no longer have foreign chartered

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 Lesson 2 majority and even so, the majority has the power to outvote all other
shareholders.
Corporate Personality  In this regard, A Company is a Separate Legal Entity from its owners or
shareholders even if its shares are predominantly held by members of
Principle 1: Company as a legal entity the same household. (Held by the Trial Court)
The concept of the company as a legal entity separate from the  The House of Lords unanimously reversed this decision. In the words
directors and shareholders: of Lord Halsbury:
The Law here treats a Company as legal person capable of having right “Either the limited company was a legal entity, or it was not. If it was,
and duties. Thus, it has the power to institute a suit on its behalf, has the the business belonged to it and not to Salomon. If it was not, there was
power to enter contracts, has the power to own property, has the power no person and no thing at all, and it is impossible to say at the same time
to defend itself in a suit. that there is the company and there is not”
Salomon v Salomon and Company Ltd [thus, recognising the two as separate entities]
Facts:  In the words of Lord Macnaghten:
 Salomon converts his sole proprietorship into a company limited by
shares. “the company is at a law a different person altogether from the
 The Share subscribers are himself, his wife, his daughter and four subscribers and though it may be that after incorporation the business is
sons. precisely the same as it was before, and the same persons are managers,
 He subscribes to the majority Shareholding 20,001 shares whereas the and the same hands receive the profits, the company is not in law the
total shareholding is 20,007 shares. agent of the subscribers or trustee for them nor are the subscribers as
 He issues debentures of several amounts to Mr. Edmund and another members liable in any shape or form except to the extent and manner
to Mr. Broderip prescribed by the Act. … in order to form a company limited by shares
 Bad times came and the court issues a Liquidation Order. the Act requires that a Memorandum of Association should be signed by
seven (7) persons who are each to take one share at least. If those
Was there a Company properly incorporated? conditions are satisfied, what can it matter, whether the signatories are
Was the entity in question an agent of Aron Salomon? relations or strangers. There is nothing in the Act requiring that the
subscribers to the Memorandum should be independent or unconnected
House of Lords decision: or that they or anyone of them should take a substantial interest in the
 A company formed following all the procedures of the Companies Act undertaking or that they should have a mind and will of their own.
1862 ought to be considered a Company at the very instance of When the Memorandum is duly signed and registered though there be
issuance with a certificate of incorporation. only seven (7) shares taken the subscribers are a body corporate
 Arguments about fraud by a majority shareholder ought not to arise capable forthwith of exercising all the functions of an incorporated
unless the owners of the company hadn’t ratified the decision of the company.

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 Lee v Lee’s Air Farming Ltd. (1961) A.C. 12
… The company attains maturity on its birth. There is no period of
minority and no interval of incapacity. A body corporate thus made Facts:
capable by statutes cannot lose its individuality by issuing the bulk of its  Lee’s company was formed with capital of £3000 divided into 3000 £1
capital to one person whether he be a subscriber to the Memorandum or shares.
not.”  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
 Locus classicus for the principle of the company having a separate shareholder, Lee voted himself as company director and Chief Pilot. In
personality. the course of his duty as a pilot he was involved in a crash in which he
died.
Macaura V. Northern Assurance Co. Ltd (Insurer) (1925) A.C. 619  His widow brought an action for compensation under the Workman’s
Compensation Act and in this Act, workman was defined as “A person
Facts: employed under a contract of service”.
 The Appellant owner of a timber estate assigned the whole of the
timber to a company known as Irish Canadian Sawmills Company Issue:
Limited for a consideration of £42,000. Payment was effected by the Whether Mr. Lee was a workman under the Act?
allotment to the Appellant of 42,000 shares fully paid up in £1 shares
in the company. No other shares were ever issued. House of Lords' Decision:
 The company proceeded with the cutting of the timber. In the course The House of Lords Held:
of these operations, the Appellant lent the company some £19,000.
Apart from this the company’s debts were minimal. “that it was the logical consequence of the decision in Salomon’s case
 The Appellant then insured the timber against fire by policies effected that Lee and the company were two separate entities capable of
in his own name. entering into contractual relations and the widow was therefore entitled
 The timber was destroyed by fire. The insurance company refused to to compensation.”
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. Recent Kenyan Cases:
 Joseph Kobia Nguthari v Kiegoi Tea Factory Company Limited & 2
Court Decision: others [2016] eKLR
 The courts held that it was clear that the Appellant had no insurable  Githunguri Dairy Farmers Co-operative Society v Ernie Campbell & Co.
interest in the timber and though he owned almost all the shares in the Ltd & another [2018] eKLR- case involving arbitral award
company and the company owed him a good deal of money, enforcement and which company should be sued to claim award
nevertheless, neither as creditor or shareholder could he insure the money.
company’s assets. So, he lost the Company.  Joel Ndemo Ong’au & another v Loyce Mukunya [2015] eKLR

[this shows how the company is a separate entity from its owners]

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 The incorporation of a company: Section 787:

Salomon v Salomon and Company: A company formed following all

the procedures of the Companies Act 1862 ought to be considered a
Company at the very instance of issuance with a certificate of
incorporation. However, Joe said that incorporation is done when the
Registrar actually registers the incorporation.

Advantages of Incorporation:

(What is a company able to do post incorporation?)

 Limited Liability
 Holding/Owning Property
 Suing and Being Sued
 Perpetual Succession
 Transferability of Shares
 Borrowing Facilities i.e. Issuance of Debentures. 1. Fraudulent Trading

This principle is captured in Section 787 of the Companies Act 2015;

Principle 2: Instances within which the corporate veil is This section empowers a court to investigate the Company Affairs on
lifted/pierced account of Fraud.
Therefore, such investigations can be done in the following
circumstances:
Joe's notes:  If the Companies business is being conducted-
o with intent to defraud its creditors or the creditors of any
 Once a Company is incorporated, it enjoys its own rights separately other person or otherwise for a fraudulent or unlawful
from the shareholders or directors. purpose
 Although Salomon’s case finally established that a company is a o in a manner oppressive to its members or to any part of them
separate and distinct entity from the members, there are  If the company was formed for a fraudulent/unlawful purpose.
circumstances in which this principle of corporate personality is itself  The persons responsible for the formation of the company or
disregarded. These situations must however be regarded as management of its affairs are/have been found guilty of fraud towards
exceptions because the Salomon decision still obtains as the general the company or its members.
principle.  If the company's members have not been given all information
required in respect to the company's affairs that they may have
reasonably expected to have been given.

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 If it would be in the public interest to do so. (Section 787(2)(e) of the These are the words of Justice Maugham J.
2015 Act)
“If a company continues to carry on business and to incur debts at a time
The concept of Fraud was defined comprehensively in Re William C when there is to the knowledge of the directors no reasonable prospects
Leitch Ltd (1932) 2 Ch. 7. 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
Facts: defraud.”
 The company was incorporated to acquire William’s business as a
furniture manufacturer. The directors of the company were William Additionally, in Re Patrick Lyon Limited, Maugham J. gave a more apt
and his wife, and they appointed William as the Managing Director at a definition:
Salary of £1000 per annum.
 Within the period of one month, the company was debited with an “the words fraud and fraudulent purpose where they appear in the
amount which was £500 more than what was actually due to William. Section in question are words which connote actual dishonesty involving
By that time the company had made a loss of £2500. according to the current notions of fair trading among commercial men
 Within 2 years of formation, and while the company was still in real moral blame. No judge has ever been willing to define fraud and I
financial problems, the directors paid to themselves the dividends of am attempting no definition.”
£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 ^ Main point to note in this case.
due.
 In spite of this William ordered goods worth £6000 which became Recent Kenyan Cases:
subject to a charge contained in a debenture held by them.  Ajay Shah v Deposit Protection Fund Board as Liquidator of Trust
 At the same time he continued to repay himself a loan of £600 which Bank Limited (In Liquidation) [2016] eKLR
he had lent to the company at the beginning of the 4th year the  Ajay I. Shah v Deposit Protection Fund Board as Liquidator of Trust
company with the knowledge of William owed £6500 for goods Bank Limited & Praful Shah [2014] eKLR.
supplied.
 In the winding up of the company the official receiver applied for a 2. Misdescription of Companies
declaration that in no circumstances William had carried on the
company’s business with intent to defraud and therefore should be Whenever a Company is doing business, its name should appear, its
held responsible for the repayment of the company’s debts. seal should also appear on all its documents. This serves to avoid
fraud.
Court Decision:
It was held that since that company continued to carry on business at a Hendon v Adelman brought this point out.
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.

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3. Holding and Subsidiary Companies

When is a company deemed a subsidiary of the other? [Section 3 of the

Companies Act]

When there is an agency relationship, the corporate veil may be

lifted for determination of such. When this happens, companies carry
(Section 4 of the Companies Act) When the Parent company is: on businesses as agents or parent companies or subsidiary companies.
 A member of the subsidiary and controls the composition of its board.
 When the parent company holds more than half of its nominal share Smith Stone & Knight v Birmingham Corporation (1939) 4 All E.R.
capital. 116

Facts:
 The Plaintiffs were paper manufacturers in Birmingham City.
 In the same city there was a partnership called Birmingham West
Company. This partnership did business as merchants and dealers in
wastepaper.
 The plaintiffs bought the partnership as a going concern and the
partnership business became part of the company’s property. The
plaintiffs then caused the partnership to be registered as a company in
the name of Birmingham West Company Limited.

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 Its subscribed capital was 502 pounds divided into 502 shares. “It is well settled that the mere fact that a man holds all the shares in a
 The Plaintiff holding 497 shares in their own name and the remaining company does not mean the business carried on by the company is his
shares being registered in the name of each of the Directors. business nor does it make the company his agent, for the carrying on of
Thereafter the Directors executed a declaration of trust stating that that business. However, it is also well settled that there maybe such an
their shares were held by them on trust for the Plaintiff company. arrangement between the shareholders and the company as will
 The new company had its name placed upon the premises and on the constitute the company. The shareholders agents for the purpose of
note paper invoices etc. as though it was still the old partnership carrying on the business and make the business that of the shareholders.
carrying on business. There was no agreement of any sort between the It seems to be a question of fact in each case and the question is whether
two companies and the business carried on by the new company was the subsidiary is carrying on the business as the parent’s business or as
never assigned to it. its own. In other words, who is really carrying on the business”
 The manager was appointed but there were no other staff. The books
and accounts of the new company were all kept by the plaintiff  His Lordship then stated that in order to answer whether the
company and the manager of this company did not know what was subsidiary company is an agent of the parent company, six points must
contained therein and had no access to those books. There was no be taken into account.
doubt that the Plaintiff Company had complete control over the waste i. Are the profits treated as the profits of the parent company?
company. There was no tenancy agreement between them, and the ii. are the persons conducting the business appointed by the
waste company never paid any rent. Apart from the name, it was as if parent company?
the manager was managing a department of the plaintiff company. iii. Is the parent company the head and brain of the trading
 The Birmingham Corporation compulsorily acquired the premises venture?
upon which the subsidiary company was carrying on business and the iv. Does the parent company govern the venture decide what
Plaintiff company claimed compensation for removal and disturbance. should be done and what capital should be embarked on in the
 Birmingham Corporation replied that the proper claimants were the venture?
subsidiary company and not the holding company since the subsidiary v. Does the company make the profits by its skill and direction?
company was a separate legal entity. vi. Is the company in effectual and constant control?
 If this contention was correct the Birmingham Corporation would
have escaped liability for paying compensation by virtue of a local Act If the answers are in the affirmative, then the subsidiary company is
which empowered them to give tenants notice to terminate the an agent of the parent company.
tenancy.
The parent company will only be held liable insofar as the shares it has
Court Holdings: invested in the subsidiary company unless there is unlimited liability.
 The court held that occupation of the premises by a separate legal
entity was not conclusive on a question of a right to claim and as a Additionally, in RE F G FILMS LTD [1953] 1 W.L.R.
subsidiary company it was not operating on its own behalf but on
behalf of the parent company. The subsidiary company was an agent.
 Lord Atkinson had the following to say…

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 Facts: them but he declined. Consequently, A and B formed a new company
 Here a British company was formed with a capital of 100 pounds of call it AB Limited, which made an offer to ABC Limited to buy their
which 90 pounds was contributed by the president of an American shares in the old company. A and B accepted the offer, but C refused.
Film Company. There were 3 directors, the American and 2 Britons. A and B sought to use provisions of Section 210 in order to acquire C’s
 By arrangement between the two companies, a film was shot in India shares compulsorily.
nominally by the British Company, but all the finances and other
facilities were provided by the American Company. Court Decision:
 The British Board of Trade refused to recognize the Film as having The court held that this was a bare faced attempt to evade the
been made by a British company and therefore refused to register it as fundamental principle of company law which forbids the majority
a British film. unless the articles provide to expropriate the minority shareholders.

Court Holding: Lord Justice Cohen said: “the company was nothing but a legal hut.
 The court held that insofar as the British company had acted at all it Built round the majority shareholders and the whole scheme was
had done so as an agent or nominee of the American company which nothing but a hollow shallow.”
was the true maker of the film.
5. Taking Advantages of Legal Provisions
The RE FG (Films) Case considers the instances when the corporate
veil will be lifted and when the rights and liabilities of the holding Gilford Motor Co. v. Horne (1933) Ch. 935
company will be equal to the rights and liabilities of the subsidiary
company. Facts:
 Here the Defendant was a former employee of the plaintiff company
4. Exploitation of minority shareholders and had covenanted not to solicit the plaintiff’s customers.
 He formed a company to run a competing distance. The company did
Where there is fraud or improper conduct, the courts will immediately the solicitation.
disregard the corporate entity of the company. Examples are found in  The defendant argued that he had not breached his agreement with
those situations in which a company is formed for a fraudulent the plaintiffs because the solicitation was undertaken by a company
purpose or to facilitate the evasion of legal obligations. which was a separate legal entity from him.

Re Bugle Press Ltd [1961] Ch. 270 Court Holding:

The court held that the defendant’s company was a mere cloak or
Facts: sham and that it was the defendant himself through this device who
 This was based on Section 210 of the Company’s Act where an offer was soliciting the plaintiff’s customers. An injunction was granted
was made to purchase out a company if 90% of shareholders agreed. against the both the defendant and the company not to solicit the
There were 3 shareholders in the company. A, B and C. plaintiff’s customers.
 A held 45% of the shares, B also held 45% of the shares and C held the
remaining 10% of the shares. A and B persuaded C to sell his shares to

13 | P a g e
 Jones v Lipman [1962] 1 WLR 832
Lesson 2 and 6: Lifting the Corporate Veil and
Facts: Duties of Directors :
 This case the Defendant entered into a contract for the sale of some
property to the plaintiff. October 2019, Question One:
 Subsequently he refused to convey the property to the plaintiff and
formed a company for the purpose of acquiring that property and
actually transferred the property to the company.
 In an action for specific performance the Defendant argued that he
could not convey the property to the Plaintiff as it was already vested
in a third party.

Court Holding:
Justice Russell J observed:
“the Defendant company was merely a device and a sham a mask which
he holds before his face in an attempt to avoid recognition by the eye of
equity”

6. Determination of a company's residence

De Beers Consolidated Mines Ltd (1906) K. C. 455

Lord Lorenburn said:

“in applying the conception of residence to a company, we ought to

Personal liability. How can this be established?
proceed as nearly as possible on the analogy of an individual. A
company cannot eat or sleep, but it can keep house or do business. A
 Through the lifting of the corporate veil (Section 787 and
company resides for purposes of Income Tax where its real business is
the common law established doctrines)
carried on. The real business is carried on where the central
 If a director or shareholders act negligently, fraudulently or
management and control actually abides.”
otherwise… (Directors Duties and Liabilities)
The courts also look behind the façade of the company and its place of
registration in order to determine its residence. Parties may also want
The corporate veil:
to life the corporate veil to determine revenue for income tax.

Past Paper Questions and Answers

14 | P a g e
 Salomon v Salomon- upon the incorporation of a company, Lipman.
there is a distinction between corporate entity v natural
entity. Distinction between the two. This is thus, the Personal liability established through Directors and
general rule. [Ensure you talk about this in detail in the Duties:
exam- mentioned by Joe. He says that he needs an in-detail
discussion of this to establish the question. Thus, you can Directors' duties- common law duties and equitable
even mention Macaura when talking about this.] fiduciary duties. If these duties are marred with fraud, they
are personally liable. This can be affirmed by the lack of
Exceptions to this rule and the lifting of the protection of directors if they act 'in breach of their duty or
corporate veil: breach of trust' as per S194(2).
1. Fraudulent Trading- 'actual dishonesty' and 'real moral
blame' under Re Patrick Lyon Limited. Section 787. We Charterbridge Corporations Ltd v Lloyd Bank Limited- test
could go further with these definitions and talk about the about exercising your directors’ duties and conducting
fiduciary duties and the aspect of 'actual dishonesty' as per transactions as an 'intelligent and honest man' would. So,
BCCI v Akindele and Royal Brunei Airlines v Tan. Joe said he we can relate this to the personal liability of Jeff Bezos and
is okay with this as long as there is no existing locus shareholders being in relation to this test of bona fide
classicus that could further the point better. This is also actions. [slightly far-fetched, however]
affirmed in S787 (2)(a) where it talks about a company's
business conducted in a manner 'oppressive to its Section 1002(1)- Offence of fraudulent trading. In this
members or to any part to them'. instance, Jeff Bezos and shareholders may also be held
2. Holding and Subsidiary Companies (Re FG Films and Smith, convictable of a criminal offence as per this Section. Re
Stone & Knight v Birmingham Corporation). Here, the Maidstone Buildings Provisions Ltd talks about this idea of
corporate veil may be lifted and thereafter, Jeff Bezos and 'knowingly participating ' in a business that acts
the Shareholders will be personally liable for the actions fraudulently. (Page 184 and 185 of Laibuta's case, also on
undertaken as per fraudulent trading. World Tour).
3. Public interest to lift the veil- Section 787(2)(e).
But Jeff Bezos and shareholders may escape
Exceptions that may not apply: personal liability on the basis of:
4. Misdescription of companies. Discuss this in relation to  Corporate veil being reaffirmed.
Hendon v Adelman and why it may not apply in this case.  Section 194 which protects directors from liability (does
5. Taking advantage of legal provisions- we could suggest not apply in instances of negligence, default, breach of
that this does apply since Amazon tries to evade liability duty or breach of trust).
with Amazon's subsidiarity in Sunnyvale- thus, taking
advantage of such legal provisions. This can be established
as per the cases of Gilford Motor Co v Horne and Jones v

15 | P a g e
 Lesson 2: Lifting the Corporate Veil: consideration of Re William Leitch. Section 787. Thus,
establishing instances in which liability may be lifted on the
October 2019, Question Two: basis of fraudulent trading due to the illicit harvesting of
data. This is also affirmed in S787 (2)(a) where it talks
about a company's business conducted in a manner
'oppressive to its members or to any part to them'.

2. In the public interest- Section 787 (2)(e)

Other exceptions that may not apply:

3. Misdescription of companies
4. Holding and Subsidiary Companies
5. Exploitation of minority shareholders
6. Taking advantage of legal provisions
7. Determination of company's residence

Personal liability established through Directors and

Duties:

Directors' duties- common law duties and equitable

fiduciary duties. If these duties are marred with fraud, they
are personally liable. This can be affirmed by the lack of
protection of directors if they act in breach of their duty or
breach of trust as per S194(2).

Section 1002(1)- Offence of fraudulent trading. In this

instance, Jeff Bezos and shareholders may also be held
The corporate veil:
convictable of a criminal offence as per this Section. Re
Salomon v Salomon, Macaura, when a company is
Maidstone Buildings Provisions Ltd talks about this idea of
incorporated, it becomes its own entity, allowing it to be
'knowingly participating ' in a business that acts
sued and sue in its own name (Foss v Harbottle). Really nail
fraudulently. (Page 184 and 185 of Laibuta's case; also, on
in this point.
World Tour)
Instances in which the Corporate Veil can be lifted:

1. Fraudulent Trading- 'actual dishonesty' and 'real moral Lifting the Corporate Veil, Corporate
blame' under Re Patrick Lyon Limited, additionally a Governance and Auditing:

16 | P a g e
May 2018, Question One(a) Issues:
 Who should Despacito recover her money from?
 Remedies Despacito may seek?

Rules and Analysis:

 NeverPay and NeverEverPay are parent and subsidiary
companies. The general rule is that the directors of a
company and the company itself are separate entities as
per Salomon v Salomon. Additionally, we can determine
such through Section 3 and its definition of a holding
company.

 Thus, there exists a corporate veil that does not disclose

the directors of a company. In this instance, the two
companies can have their own objects- which is cleaning
and hotelier services.

 There are two instances applicable in this case within which

the corporate veil may be lifted. One is when there is an
agency relationship and another, in the enforcement of
justice.

 To prove the control and agency relationship held by

NeverEverPay on NeverPay, the tests under Smith, Stone
Question a:

17 | P a g e
 and Knight may be used which are as per established in connotes 'actual dishonesty' and 'real moral blame'
your notes. contrary to the notion of fair trading. The fact that
These facts may be implied by the fact that the Managing Despacito has still not been paid her money for the
Director of NeverPay was said to be appointed upon stationary she gave may thus, be attributable to these
approval of NeverEverPay and the majority shareholding of terms. Note that this particular point is slightly
NeverEverPay in NeverPay. This is also emphasised by the farfetched, so be wary of using it.
holding of Smith, Stone and Knight that affirms an agency
relationship being based on: "the fact that the parent Thus, Despacito may be able to sue NeverEverPay and lift
company is a member of the subsidiary and controls the the corporate veil on three instances, through the
composition of its board and when it holds more than half determination of an agency relationship, promotion of
of its nominal share capital"- Section 3. This is ascertained justice and through enactment of the business of a
to be so in the facts of the question. If the two companies company through fraudulent means (slightly
are seen as the same entities, they are still able to farfetched).
maintain their objects as being unlimited in relation to
cleaning and hotelier services. * First, general principle of corporate veil. Then, establish
agency relationship and then use Githunguri to prove why
o In the second part, one can discern the point on the NeverEverPay should be sued. You can also affirm these
enforcement of justice as per the case of Githunguri Dairy points on the corporate veil thereafter by adding in the bit
Farmers Co-operative society v Ernie Campbell and on fraudulent means to affirm why the corporate veil
Githunguri Dairy Plant Company. In this case, it is stated should be lifted.
that the veil may be lifted to ensure that justice is done
or where it is patent that an incorporation is being Question b: Corporate Governance (do)
used for an illegal or improper cause. In this case,
Ernie Campbell sought to attach the assets of the parent
company- the Co-op Society in the enforcement of an
arbitral award. The judgement in this case was for the
lifting of the corporate veil for the fulfilment of their
obligations. The same facts may apply to this case. Question c: Auditing (do)

 These ideas may be further premeditated by Section 787(2)

(a)(ii) of the Companies Act which affirms the idea of an
investigation of a company and subsequently lifting its
corporate veil where the company's business is being
conducted with intent to defraud… any other person for a
fraudulent purpose. Fraudulent purpose may also be
affirmed through Re Patrick Lyon where fraudulent purpose

18 | P a g e
 Lifting the Corporate Veil Lesson 3
LBA Group CAT, Question One: *check slides Incorporation of Companies

b) Upon registration, a corporate veil is said to be drawn Pre-incorporation agreements

over the company as a separate person distinct from its
members and agents by whom it conducts business, and A contract or agreement undertaken prior to the incorporation of a
who are independent persons. company which has the effect of being a contract made on a company
before it is legally in existence. This therefore begs the questions of
Using relevant authorities discuss this statement and liability on an entity that cannot exist and personal liability on a
explain the circumstances under which the company's 'veil person engaging into a contract on behalf of the company.
of incorporation' may be lifted and the consequences
thereof. The actions of promoters (persons contracting on behalf of a
company) are therefore not binding on a company until ratification
Principle of the Corporate Veil: by that company post-incorporation or until the contract is made
Established in Salomon v Salomon. through the conduct of the company.

This principle has also been established in the case The lack of liability occurs since the company is not a legal entity yet
established in the slides. AND since the company is not a party to the contract made by the
promoter- this is conjunction with the doctrine of privity.
Circumstances in which the veil may be lifted:
Promoters:
1. Fraudulent trading- most important case: Re Patrick Lyon
Ltd, position altered in Re William Leitch Ltd. Definition of promoters
2. Misdescription of companies. Brought out in Hendon v
Adelman. One who undertakes to form a company and takes the necessary steps
3. Holding and Subsidiaries- where there is an agency to accomplish this.
relationship and the parent company can be significantly
seen as connected to the other company. Tests for this laid  Twycross v Grant:
out in the Smith Stone and Knight v Burmingham o Person who undertakes to form a company in a given project and
Corporation. takes necessary steps to achieve this.
4. Exploitation of minority shareholders- Re Bugle Press Ltd o The term also covers:
5. Taking Advantage of Legal Provisions- Jones v Lipman  an individual undertaking to be the director of a formed company OR
6. Determination of a company's residence- De Beers  anyone who negotiates preliminary agreements on the behalf of a
Consolidated Mines proposed company

19 | P a g e
o This is NOT INCLUSIVE of anyone who acts within their roles as a  This disclosure must be made to the company either through:
professional. Eg: Lawyer is NOT a promoter and professional advisers o An independent board of directors OR
are also not a promoter since they are engaged with regard to their o Existing and potential members of the company
personal interests and are not purely undertaken to provide
incorporation- they merely perform their professional duties.  If to the former the promoter’s duty to the company is duly
discharged, thereafter it is upon the directors to disclose to the
Roles of Promoters subscribers.
 If made to the members it must appear in a prospectus and the
 Instructing Advocates to prepare necessary documents constitution so that those who become members can have full
 Pay/provide registration fees information regarding it. Since a promoter owes his duty to a company
in the event of any non-disclosure the primary remedy is for the
Duties of Promoters company to bring proceedings for:
a. Either rescission of any contract with the promoter
 Fiduciary duties b. Recovery of any profits from the promoter.
 Duties of disclosure and proper accounting- a promoter must not
make any profit from the company without disclosing the nature and Preliminary Contracts by Promoters
extent of such a promotion to the company. Failure to do so many
constitute recovery of the profits of such an endeavour by the  Prior to the incorporation of companies, companies cannot enter
company. contracts as a legal entity. Thus, the company cannot be liable for any
 Erlanger v New Sombrero Phosphate: contract entered prior to incorporation.
Mainly covers the disclosure of profits of a company.  Ratification cannot be done by a non-existing principal. Meaning, a
o The promoters of a company sold a lease to a company at twice non-existing entity under the law (of which a company pre-
the price paid for it without disclosing this fact to the company. incorporation can be said to be one).
o It was held that the promoters breached their duties and that they  Such agreements are therefore not binding on a company.
should have disclosed this fact to the company’s board of
directors. Price v Kesall
Mainly covers whether a company can ratify a contract entered into on
o Erlanger WAS a promoter due to the six duties of a promoter its behalf prior to incorporation.
which are: o Acts by the company after incorporation can imply a new contract
 To act in good faith through conduct which would be based on the same terms as the old
 Disclose conflicting interests contract.
 Nominate impartial directors
 Not gain profit out of the promotion (OR disclose any profits
made)
 Be accountable to the company

20 | P a g e
 Mawagola Farmers & Growers Ltd v. Kanyanja
o On the fact that the initial contract cannot be ratified, this may be
enforced if another contract is implied through the conduct of the
parties which is the same as the terms of the previous agreement.
o Mustafa JA- mentioned the aspect of a new contract once again and
how this may be implied from past actions.

Kelner v Baxter
o Contract is binding against person who signed the contract personally
and not against the company due to a lack of formation of the company
at that time.

21 | P a g e
 Established under Section 5 of the Companies Act.

 Companies limited by shares- Section 6

 Companies limited by guarantee- Section 7

COMPANIES LIMITED BY SHARES (Shareholders)

As a promoter who enters into a contract, the terms are not binding Requires members of the company to subscribe to shares.
since the company is not in existence. This contract will only be
binding if the contract made after incorporation has the same terms as
the previous contract.

Note Section 44 of the Companies Act which places liability on the

promoter or person who gets into a contract before the company
having personal liability on the PERSON and not binding on the
COMPANY unless there is an agreement to the contrary.

Section 70- conversion of private companies to public, etc…

Section 6(2)- Even for existing companies, liability of members is still

limited to unpaid amounts on shares by the members of the company.
Liability of the members is limited to their unpaid shares.

As a promoter, you will then be personally liable UNLESS the company COMPANIES LIMITED BY GUARANTEE (Guarantors)
enters into an agreement to adopt those actions. (Though this would
be then ratified post-incorporation through conduct) Requires members of company to pay a certain amount as a guarantee.

Limited companies [main notes are in Lucid Liberty

and Aleph's presentations so check that]

22 | P a g e
 May be used where secrecy is needed, there is no risk of insolvency
and where unlimited liability may not be preferred in a certain field.

Cap 486 was very open with registration of private and public
unlimited liability companies and allowed for re-registration.

But, with the 2015 Act, only allows for private unlimited liability
companies. Additionally, there are more limitations on private
companies.

Private companies
The liability of members is limited to the amount of money that they
undertook to pay in case of liquidation by the company.

Generally, a company does not have share capital but can be allowed
to continue to do so if the company was formed and registered prior to
this section in the Companies Act of 2015.

Examples of these are sports clubs, foundations, etc… These members

of these clubs guarantee a certain amount to be paid. Joe found that Section 9 of the Companies Act. Three fundamental restrictions as per
20% of organisations are registered as companies limited by S8(1)(a).
guarantee when doing research.

Disadvantages of this company is that potential investors may be

unlikely to invest money since this money will not lead to profit and
instead will usually be invested for charitable purposes.

Unlimited liability companies

Private companies CANNOT be a company limited by guarantee and a

certification of incorporation is needed to show that it is a private
company.
Section 8 of the Companies Act.

23 | P a g e
An employee and a former employee will not be counted as members
and so, will not count as the fifty members in a private company. Even
if those employees or former employees have shares.

These private limited companies must have the abbreviation Ltd or be

followed by a limited after their name.

Public companies

Generally known as PLCs- Public limited companies). By law, such

companies must be followed by PLC in their name. Eg: Safaricom PLC.

A trading certificate is required for a public company to be able to run.

24 | P a g e
Private v Public How to register a company as required under the
Companies Act 2015

This is just the basics. Will be further elaborated in KSL.

Section 11: Registration of one's name to a memorandum of

Note the aspect of registration of the companies with the registrar that association and following procedure outlined from Sections 13 to S16.
is mentioned in the following topics but also that is further described An individual, unlike before can form a company.
in the Companies Act.

Two important documents with companies:

Memorandum of association- s12 of Companies Act. Relationship

between members of company and external world. Character of such
is made by regulations with the minister.

Must be authenticated and so, signed by those who want to form the
company.

25 | P a g e
Articles of Association- terms of engagement between the company
and its members.

Registration of Companies:

Section 13(1): Documents required for registration.

 Application for registration

 Memorandum of association
 Copy of proposed Articles of Association (can be made by you).
 If you adopt the standard articles under the Companies Act, you are not
required to provide a copy of these proposed Articles. These copies are in
the Schedules to the Companies General Regulations 2015- enacted
pursuant to the Companies Act 2015.

Third Schedule: Model articles for companies limited by shares.

Fourth Schedule:
Fifth Schedule:

26 | P a g e
 Section 13(2): Particulars of liabilities of the company and proposed
name and location of the company.

 Proposed name
 Proposed location
 Whether the company will have limited liability
 If limited liability, by shares or guarantee? Section 15- Statement of
guarantee.

Don't worry about Sections 14, 15 and 16- will learn in more detail
slightly later.

Section 17- If Registrar is satisfied with the following of Sections 11-

13, it will register the company and allocate a unique identifying Effect of registration of a company?
number to it.
After a company is incorporated, it becomes its own legal entity.
Company becomes its own juridical person and so, it can sue, be sued,
enter contracts in its own name, etc…

Section 18- The Registrar will thereafter issue a certificate of

incorporation.

Lesson 4

27 | P a g e
 Company Constitution and Memorandum of See Cotman-v. Brougham (1918) AC 514.
Association  Company can only perform actions within the scope of its objects and
powers as outlined within the Memorandum of Association or incidental to
The Positions of the Memorandum of Association and Articles under
Cap 486 its role as a company. If this is gone against, then the business can be said
to be acting ultra vires.
Memorandum of association
This is a charter to which members subscribe upon agreement to associate  Provides that the scope of business can be ascertained.
and be incorporated into a registered company. This is the same definition
The memorandum defines the boundary beyond which the company cannot
as Section 12 of the Companies Act.
go in pursuit of the business interests.

Consequences? The company had no powers (and could not purport to

exercise any powers) other than those:

a. expressly conferred upon it by the Companies Act or its memorandum of

association; or
b. incidental to the main object for which the co. was registered. (Ashbury
Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653)

Therefore, transactions carried out by the company outside the scope of its
Regarding companies registered before the commencement of the
objects or powers specified in the memorandum of association were
companies Act 2015, the memorandum of association defined the
considered ultra vires and unenforceable.
company’s objects and powers while the articles of association provide
the framework for internal regulation and management of the Articles of Association
company’s affairs. This set out the management structure of the Company and delineated the
What was the importance of setting out the objects and powers of the powers and duties of directors and secretary, as well as the rights and
company? powers of the various shareholders and the company in general meeting.
By setting out the objects and powers of the company, the memorandum The persons named in the statement of particulars of directors and
enabled the shareholders, creditors and those dealing with the company in secretary as such, were on the company’s incorporation, deemed to have
the ordinary cause of its business to ascertain the company’s scope of been respectively been appointed as its first directors and secretary.
business.

28 | P a g e
The articles of association among others, outlined the division of powers
between the Board of Directors and the company in the general meeting.

This practice and procedure relating to the form and content of

memorandum and articles of association has since changed with the
enactment of the 2015 Act.

Shift in legal position from Cap 486 to the 2015 Act

The Companies Act 2015 presents a radical shift (from Cap 486) from the
traditional/conventional approach where the memorandum of association
was required to specify the main objects and the powers within which the
It should be noted that the ultra vires doctrine has now been ‘dealt a blow’
company was restricted in the course of its business.
but it will still be applicable if it is noted in the articles of association that a
However, little has changed in regard to the articles of association. Apart company will be limited to a particular set of objects. Meaning, if the
from the fact that articles may presently play a significant role in company expressly says that they will not do goat farming, they can do
restricting the objects of the company, which are otherwise presumed to be dairy farming and poultry farming but would be acting ultra vires if they
unrestricted (see Section 28(1) of the Companies Act, 2015). do goat farming.

This may have been to allow companies to engage in any business due to Why would a company want to limit certain activities that may
the competitive nature of the market economy at this particular moment. be done by them?
Eg: A company that is doing poultry farming would previously be limited This may be done by the Board of Directors to stop directors of a company
from dairy farming. But a company who has not restricted itself under its from engaging within a certain business. This is because the directors
articles merely to poultry farming can now do dairy farming, goat farming, perform the day to day management of the company while the Board of
anything that they would like since their objects are unrestricted. This is as Directors (Shareholders) determine the initialisation of the company, so
long as this business is lawful. they therefore gain extra power over their directors. This could be to
prevent directors going into a field that they feel is risky. Eg: Doing
poultry farming and banning goat farming since it may be too risky and
may lead to the business making a loss. This restriction is not required by
law and may be done by a company if they want to.

Despite those changes, the memorandum and articles of association

constitute the basic or fundamental document for the incorporation and
registration of companies. They are the basic documents that guide the

29 | P a g e
 management of the company business and the company’s internal affairs. Thus, a company’s memorandum of association need not specify the
In short: they define the relationship between the company and the outside object of the company. Under Section 28 (1) of the companies Act 2015,
world and between its members inter se. they are presumed unrestricted.

The Memorandum of Association and Articles under the 2015 Act Section 28 introduces a paradigm shift from the position under the
Companies Act Cap 486, which required the objects of a company to be
Form and Content of a Memorandum of Association clearly defined in its memorandum. This was important because under Cap
[basically, a repetition of what I wrote about prior] 486, a company could only do what was within or incidental to the object
- Read Section 11 specified in its memorandum of association (see Cotman –v- Brougham
(1918) AC 514).
- Section 12
It was then necessary that the character and extent of its core business and
powers be easily ascertainable by those who wished to invest in the
company & engage in transaction with the Company.

Section 28 has taken a liberal approach and leaves it open for a company to
engage in any lawful business unless the object for which it was
incorporated are for a good cause restricted by its articles. It could also be
noted that the reason why this section was changed was because companies
had around 30 clauses on their objects and it started to become difficult for
registrars to manage this.

What about companies registered before companies Act 2015 came into
effect?
Section 26 of Companies Act 2015:

Section 28:

“Unless the Articles of a Company specifically restrict the object of the

Company, its objects are unrestricted.

30 | P a g e
Form and Content of the Articles of Association In Lock v Queensland Investment & Land Mortgage Co [1896] AC 461
Companies need a well-defined regulatory framework to delineate their the court addressing itself to the value or model articles, held that the
scope of business and powers and to facilitate the due administration of regulation in model articles have statutory authority. This is because they
their internal affairs in respect to, inter alia, management, powers of derive their character and form from the dictates of the Companies Act.
directors and of the company in general meeting, and right of shareholders.
Registration of the Articles of Association: Cap 486 v the 2015 Act
To achieve this objective, Section 13 of the Companies Act, 2015 obligates
Whereas the Companies Act 2015 leaves it for determination in regulation,
every person wishing to register a company to file a copy of the proposed
the Companies Act Cap 486 made express provision as to cases in which
articles of association with registrar. The articles of association, are the
articles had to be registered.
company’s main constitutional document and outline the company’s
relationship with its members, and the relationship between the Cap 486 required that articles be registered with the Memorandum of
members inter se. association in the case of a) companies limited by shares, or by guarantee,
and unlimited companies.
To meet the objective for this regulatory framework, the Companies Act
2015 prescribes the mandatory form of the proposed articles while Under Cap 486, the requirement to register articles was discretionary in
regulations in the third, fourth and fifth schedules make provision for the case of companies limited by shares but mandatory in cases of
model of public and private companies, and of companies limited by unlimited companies and companies limited by guarantee. Unlike Cap 486,
guarantee, respectively. This is as per my notes on the registration of Companies Act 2015 does not outline the types of companies in respect of
companies. which articles should be compulsorily registered or which have the
discretion not to register articles. According to Section 20(1) and (2) of the
The model articles of association may be adopted by companies with or
Companies Act 2015, all companies have the discretion to register their
without modification. Check the notes on registration of companies for
articles or to adopt the whole or any part of different version of model
further elaboration on this.
articles prescribed in the regulation for different types of companies. It
As to the form, Section 13(5) provides that, the articles of association of a should be noted that even though registration is discretionary, if articles are
company are required to: not registered, it will be assumed that the model articles have been
adopted.
a) Be contained in a single document.
The liberal approach under Companies Act 2015 widens the scope of a
b) Be printed
company’s discretion whether to comply with the formal requirements to
c) Be divided into paragraph numbered consecutively register articles of association. In any event, failure to register articles does
d) Be dated not of itself impede registration of accompany but calls for default
application of the relevant model articles.
e) Be signed by each subscriber to the articles.

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The default application of Section 21 of the whole or any part of model In particular the articles defined the duties, rights and powers of the
articles in appropriate cases ensuring that every registered company has a governing body as between themselves and the company at large, and the
regulatory framework for inter alia the effective management of its mode and form in which the business of the company into be carried on
internal affairs. This states that model articles are different for different and in which charger in its internal regulation may be made from time to
types of companies. time. See Ashbury –v- Watson (1885) 30 CHD P. 376 (CA).

If articles are not registered, a default application of model articles will be Articles of a company constitute a contract binding on all its members –
applied. These model articles are important since they allow those who see Scott v. Frank (Scott (London) US (1940) 3 all ER p. 508CA. Sec
have not registered to have model articles by which their company Hickman v. Kent (1950) CH. D 881 – Here the articles of a company
regulatory framework will be done. provided that any dispute between any member and the company shall be
referred to arbitration. A dispute arose between Hickman and the Co. and
instead of referring the dispute to arbitration, he filed an action against the
company. The company made an application for the action to be stayed
pending reference to arbitration in accordance with the company’s articles
of association.

Court held that the company was entitled to have the action stayed since
the articles amount to a contract between the company and the plaintiff,
and one of the terms of which was to refer such matters to arbitration.

Justice Asbury had the following to say; “that the law was clear and could
Whereas the memo of association functions as the Companies charter be reduced to 3 propositions. [Very important, remember this]
defining the proposed type of company and the terms on which its
members agree to be incorporated, the articles are the company’s i) That no article can constitute a contract between the company and a 3rd
constitution, which plays a critical role in regulating its affairs. party. Third parties are not privy to the contract between the company and
Memorandum of association determines the incorporation of a company,
but the Articles determine the regulation of the affairs of the company. third parties who are not part or do not subscribe to the Articles of
Association.
Where it is intended to restrict the scope of a company’s business, for
ii) No right merely purporting to be conferred by an article to any person in
examples the articles make provision specifying such restriction. Articles
are also designed to regulate the company’s internal affairs and outline the any capacity other than that of a member (for example a solicitor, promoter
manner in which its powers would be exercised for the attainment of the or director) can be enforced against the company.
objects for which the company was registered.

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iii) Articles regulating the rights and obligations of the members generally Company’s Constitution- aka Articles of Association.
create rights and obligations between members and the company.
Alteration of Articles of Association (Sections 22 and 23)
Section 31 of Companies Act: Articles of a company must be adaptable to the dynamic world of
commerce and industry and to the relational interests of the members of
the co. This is because companies are merely vehicles for its members. For
this reason, articles of association are amenable to alteration. The articles
are amenable to alteration from time to time in the manner prescribed
under the Companies Act and, in the procedure, set out in the regulations.

Eley v. Positive Government Security Life Association co. (1876) Ex 88 Section 22 of the Companies Act, 2015 empowers a co. to alter/to amend
its articles of association through a special resolution.
In this case the Company’s articles provided that Eley should become the
company solicitor and should transact all legal affairs of the company for Section 23 provides the effects of amendment of articles of association.
usual fees and charges. He bought shares in the company and thereupon Section 23 (1) to a member of a company is not bound by an amendment to
became a member and continued to act as the company’s solicitor for some the articles of a company after the date on which the person became a
time. Ultimately the company ceased to employ him. He filed an action member, and so far as the amendment.
against the company alleging breach of contract.
a) requires the person to take or subscribe to more shares than the number of
Court held: The articles constitute a contract between the co. and the
shares held by that person at the date on which the amendment is made, or
members in their capacity as members and as a solicitor, Eley was
therefore a third party to the contract and could not enforce it. The b) in any way increases the person’s liability as at that date to contribute to
contract relates to members in their capacity as members and the company the company’s share capital or otherwise pay money to the company.
so it’s only a contract between the co. and members of the company and c) 23(2). The position under section 23(1) is not applicable if the member
not in any other capacity such as solicitor. But note that there can be an
agrees in writing either before or after the amendment is made, to be bound
intra-member contract.
by the amendment.

This aims to stop the amendments of articles being done for the personal
means of members.

Section 24 – Amended Articles should be sent to register for registration

within 14 days of alteration or amendment.

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 Restriction of power to alter articles light of what motivates the alteration. The alteration is bona fides if it
Scott case- Courts do not have the power to alter articles of association. takes into account the general interest or benefit of the body of
shareholder and of the company as a distinct entity.
Allen v. Gold Reefs of West Africa (1900) CH 556- statutory power to
alter articles in far-reaching and must be exercised primarily for the benefit Shuttleworth v Cox Bros and Co (Maidenhead) [1927] 1 Ch 154 – The test
of the company. The power to alter articles is exercisable by a company as outlined by Banker LJ. is whether the alteration of the articles was in the
notwithstanding the fact that its articles are either silent on the matter or opinion of shareholders for the benefit of the company, provided, of course
otherwise contain a regulation designed to impose restrictions in that that the alteration is not oppressive to the minority. If it turns out that to be
regard. The power must also be exercised: oppressive to the minority, it is incapable of being considered as bona fides
or for the benefit of the company as a whole.
 Bona fide
This principle is thus interpreted with reference to the benefit of both the
 In a manner that does not hurt minority shareholders
company as a whole (corporation) and to the relative right of different
Walker v. London Tramways Co (1879) 12 CHD p. 405 - a company classes of shareholders.
cannot exempt any articles from liability of alteration through a clause in
its articles.

Russel –v- Northern Bank Development Corporation Ltd (1992) I WLR P.

588 - a contract made by a company that it will not exercise its statutory
power to alter its articles is unenforceable.

In short, a co. cannot contract out of the general powers and right to alter
articles as outlined by section 22 of the Act.

Lindley MR in Allen –v- Gold Reefs of West Africa Ltd held: The articles
of a company prescribe the regulation binding on its members. They have
the effect of a contract … the company in empowered by statute to alter
the regulations contained in its articles from time to time by special
resolution and any regulation or article purporting to deprive the company
of this power in invalid on the ground that it in contrary to the statute.

As a general rule, the alteration of articles must in every case be made

bona fides (in good faith) and in the interest of the company as a whole.
But what does bona fide mean in this context? Must be interpreted in the

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 Lesson 5 In case of a company whose objects are restricted, the statement of object
is required to specify the object or purpose that the company is authorized
The Ultra Vires doctrine
to pursue.

Definition This limits the scope, beyond which the company cannot lawfully act since

Every company is incorporated for a particular purpose or purposes which it is presumed to be incorporated only for the purpose of pursuing those

may or may not be specified in its constitution. As under Section 28 of the specified objects. Undertaking business outside those objects is said to be

Companies Act 2015, the nature and scope of the business for which a ultra vires or outside the powers of the company.

company is registered is presumed to be unrestricted unless otherwise

The ultra vires doctrine prescribes the limit as to the extent to which the
specified in the articles of association Section 28.
board may bind a company in contract.

As stated in Griffith v. Paget, (1877) Ch. D. 517:

Members of a company are deemed aware of the content of the statement

of the object and of the articles by which such objects are restricted. This
presumption is based on the principle that members contribute capital to
pursue lawful business activities or objects known and agreed among them
either as:

a. original subscribers to the memorandum and, articles of association of the

If restricted, the objects for which the company in incorporated must be company; or
specified in its constitution. To this end, the Companies Act requires the b. subsequent subscribers to share and other marketable shares.
articles of a company whose objects are restricted to state these objects for
which the company is incorporated, and in pursuit of which the corporators The term ultra vires denotes some act or transaction on the part of the
invest capital. company which, although not unlawful or contrary to public policy if done
by an individual, it would nonetheless beyond the company’s legitimate

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powers as defined by a) the Act under which it is incorporated b) the a) Where the company’s objects are restricted, the members are certain of the
statutes which are applicable to it; or c) by its articles of association. purpose for which they intend their money to be employed; and
b) the creditors are assured that the company’s assets to which they look up in
The doctrine essentially relates to acts done by the company or by any
the event of non-payment of their debts are not unauthorized activities.
person on its behalf a) outside the powers of the company; and b) outside
They are also able to establish what transactions they can legally enforce
the powers of the directors under the authority conferred as them by the
against the company, even though they are not bound to inquire on to
company or its constitution.
whether the transaction in question is permitted under the company’s

These may also include acts done in exercise of legitimate powers of constitution.

directors for purposes other than the promotion of the specified objects of
As stated in EIC Services v Phipps [2003] 3 All ER 804 this legal position
the company. In other works, the doctrine applies in circumstances where
is in favour of a person dealing with a company in good faith.
the object and powers of the company are specifically restricted by its
articles or expressly set out in its statement of objects. As a general rule, the power of the Board of Directors to bind the company
in contract with 3rd parties acting in good faith, or to authorize others to do
Any loss sustained by a company in consequence of an authorized
so, is deemed to be free of any limitation under the company’s
transaction must be redressed despite the principle that void contracts are
constitution.
unenforceable and that the loss remains where it falls. In its judgment in
Re Lands Allotment Co. [1894] 1 Ch. 616 the Court held that a director of Section 33: The validity of an act or omission of a company may not be
a company incurs personal liability for loss suffered by a company in an called into question on the ground of lack of capacity because of a
ultra vires transaction undertaken by them or under their direction, unless provision in the constitution of the company.
they are relieved from such liability by a special resolution.
Section 34 (1) In favour of a person dealing with a company in good faith,
Consequently, the ultra vires doctrine is not a purposeless invention of the the power of the directors to bind the company, or authorize others to do so
common law. It makes business sense in that it is designed to protect the is free of any limitation contained in the company’s constitution.
interaction of both the members and creditors of the company in two main
Section 34 (3) – For purposes of subsection (1) –
ways, namely:

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a. a person deals with a company if the person is a party to a transaction or The indoor management rule
other act to which the company in a party; and
The principle is known or the ‘indoor management rule’ and was
b. a person dealing with a company –
authoritatively laid down in Royal British Bank v Turquand (1856) 6
i) is not bound to enquire as to any limitation as the powers of the
E&B 327 ‘Turquand’ and eventually codified into statute law in Canada.
directors to bind the company or to authorize others to do so;
Royal British Bank v Turquand (was also codified under the Companies
ii) is presumed to have acted in good faith unless the contrary is proved;
Act, 1985 (UK). Read fact of Royal British Bank v Turquand (1856)
and;
case.
iii) is not to be regarded as having acted in bad faith only because the
person knew that a particular act is beyond the powers of the directors The rule is based on the principles of fairness and practicality.
under the constitution of the company.
Its effect is that a person dealing with a corporation has a legal obligation
This is as established to protect the third party and business efficacy. to ensure that a corporation has gone through any procedures required by
Similar to the right to sell wherein you don’t go asking a grocery seller if its articles, by-laws, resolutions, contract or policies, to authorize a
they have the right to sell bananas. This will unnecessarily elongate the transaction, or to give authority to a person purporting to act on behalf of
process of buying them. Thus, a third party dealing with the company will the company. Okay, now I’m confused. So, a third party is legally
not be expected to unnecessarily do their due diligence on the objects of obligated to do their due diligence? This means that previously, there was
that Company. the doctrine of constructive notice which required for the above to be done.
Now, as a result of the indoor management rule, this no longer applies.
Section 34 (5) This section does not affect a liability incurred by the
directors, or by any other person, because the directors have exceeded their Read the facts of Turquand case.
powers.
Turquand rule served to qualify the harsh implications of the doctrine of
In effect, a person dealing with a corporation need not inquire about the constructive notice “under which all persons dealing with a corporation
formality of the internal proceedings of the corporation. He is entitled to were presumed to have knowledge of any restriction on the authority of an
assume that there has been compliance with the articles of association and agent contained in the corporations’ articles and by-laws.’
by laws.

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The indoor management rule; was approved in Mahony v the unanimous decision of shareholders. So, it’s almost like no going back.
East Holyford Mining Co (1874-75), LR 7 HL 869 – Lord H a t h e r l y If contrary to the objects, you may avoid personal liability through a
“when there are persons conducting the affairs of the company in a manner special resolution, but you cannot try and authorise or ratify changes from
which appears to be perfectly consonant with the articles of association, these objects even if all the shareholders unanimously agree to do so.
then those dealing with them, externally, are not to be affected by any
Mitigation of the ultra vires doctrine
irregularities which may take place in the internal management of the
company. They are entitled to presume that of which only they have Ancillary Powers and Powers Incidental to Main Objects
The perceptible stringency of the ultra vires doctrine impacted adversely
knowledge, namely, the external acts, are rightly done, when those external
on business affairs of companies calling for moderation in subsequent
acts purport to be performed in the mode in which they ought to be
cases. Since the decision in Ashbury’s case, some in-rules have been made
performed.’
in subsequent cases to mitigate the apparent rigidity in the ultra vires
The indoor management rule was also applied in Morjaria v Kenya doctrine.
Batteries (1981) Ltd & 2 others [2002] eKLR: whether a company has or
In Attorney General v. Great Eastern Railway, (1880) 5 AC 473; the
has not complied with its internal procedures as to borrowing or execution
Court affirmed the long- established rule that a company had implied
of contract is an internal management issue and cannot constitute a defence
powers to do anything reasonably incidental to or consequential upon its
as against third party dealing with the company. The third party is entitled
specified objects. Unless such act was expressly prohibited by its
to assume that the company has complied with its internal rules and
constitution.
regulations, unless a) he has had actual knowledge of them; or b) there are
suspicion circumstances putting him on inquiry. Facts of the case? Read. [it’s our case!]

The general rule at common law is that any act that is ultra vires in the The implication of this is that a company has implied power to do all that
company’s constitution is beyond its capacity and void – case of Ashbury is necessary for attaining its objects, including power to borrow, give
Railway Carriage and Iron Co Ltd v Riche. security, sell or mortgage land, appoint or act by agents, for the purpose of
its business; provided that such powers are incidental or properly to be
Ashbury Railway Carriage and Iron Co Ltd v Riche case further
established that such an act could not be authorized or ratified even before

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inferred from the objects and powers (if any) specified in its statement of No such patent was granted to Mr. Henley, but the company nevertheless
objects – Oakbank Oil Co v Crum [1882] 8 App Cases 65 acquired a factory in Hamburg and made coffee there without patent
protection.
When a company’s substratum fails
Two shareholders petitioned for the company winding up of the company
In principle, companies subsist for a purpose for which they are formed.
on the ground that its substratum had failed. A winding up order was
Despite their unrestricted objects under and by nature of section 28 (1) of
granted and subsequently affirmed by the court of appeal.
the 2015 Act, a company where the main objects or purpose for which was
incorporated becomes unattainable or exhausted may be wound up to As per Jesse MR, the company’s business was not “to make a substitute for
protect the interests of its shareholders. coffee from dates, but to work a particular patent, and that particular patent
does not exist, and cannot exist, the petitioners are entitled to say that the
As illustrated in Re German Date Coffee Company (1882) 20 Ch.
company has to be wound up.”
D. 169 courts have recognized the equitable right of members to petition
for the wounding up of a company to protect their investment where its Despite the fact that the main objects of a company are unattainable, this
whole substratum (purpose for existing) has failed or disappeared. does not mean / necessarily make its future activities ultra vires; provided
Consequently, they have ordered liquidation of such companies under their that they are within the powers specified in its memorandum of
general powers to do so when it is just and equitable to do so. association.

The first paragraph of the Re German Date Coffee Company Company’s The only exception to this rule is the power to borrow, which cannot, as a
object clause stated that the co was established to ‘acquire and purchase, matter of public policy, be converted into an independent object clause.
and to use, exercise, and vend certain inventions for manufacturing from
dates and substitute for coffee, for which a patent has or will be granted by To hold otherwise would be to contemplate the formation of a company or
the empire of Germany to Thomas Frederick Henley.” operation of a company with the object and purpose only of borrowing
money. This is because borrowing is not an end in itself.
The second paragraph stated that the company was to ‘make and we the
said inventions’. Make and we the said?? As a general rule, the power to borrow can only be exercised with the aim
of attaining the main object of the company. Affirming this principle, the

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Court in Re introduction Ltd v National Provincial bank Ltd (1970) Ch financial year all donations (if any) made in excess of Kshs 100,000 by the
199 held an independent clause does not convert a power to an object, and company either on its own or by its subsidiary undertaking.
all powers must be exercised from an intra vires purpose. Harma J stated,
In principle, gratuitous payments made by a company are ultra vires unless
“borrowing is not an end in itself and must be for the purpose of the
made for purposes which are reasonably incidental to the carrying on of
company.”
the company’s business and for the purpose of the companies benefit –
Gratuitous Acts and Payments Hutton v West Cork Railway Co (1883) 23 Ch D 654 Where a company is
in liquidation and is not a going concern, gratuitous payments made to its
The ultra vires doctrine is primarily intended to protect investors by
directors or to its servants cannot be considered reasonably as incidental or
ensuring that the capital of their company is applied in line with its
beneficial to its business. Note: Reasonably incidental and for the benefit
constitution. It enables members of a company to control the activities of
of the company.
directors by preventing them from undertaking ultra vires business.

The appellant in the Hutton’s case was a debenture stockholder in the West
It also provides a remedy for the company against directors who act
Cork Railway Company, which had disposed of the whole of its
outside their powers thereby subjecting the company to needless financial
undertakings and was, therefore, not a going concern. The company no
loss. These transactions include gratuitous act, payments and donations
longer carried on business for the purpose of making profits but existed for
made out of corporate funds.
the purpose of winding-up. Nonetheless the company in general meeting
Companies frequently make gratuitous payments by way of donations or resolved to expend some of the purchase money on gratuitous payments to
gifts. Others act as guarantors or give security for the indebtedness of a its offices and directors. The payment was only a gratuity without a
person or other company. The general position at common law is that a prospect of it in anyway reasonably contributing to the benefit of the
company cannot make gratuitous payments or undertake gratuitous acts, company. Court of appeal granted an injunction restraining the proposed
unless it does so for the benefit, and so to promote the prosperity of the payment.
company.
Bowen LJ stated/ underscored the reason for which money belonging to
For accountability regulation 43 of the companies (General) Regulations, the company could be properly spend/employed: “The test for spending
2015 requires companies to disclose in the director’s report for the money must be what is reasonably incidental to the carrying on of the

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business of the company or within the reasonable scope of carrying on the a) Is the transaction reasonably incidental to the carrying on of the company’s
business of the company. business?
b) Is it a bona fides transaction?
It is in material that this resolution to spend the money in question had the
c) Is it done for the benefit, and to promote the prosperity, of the company?
support of the majority. According to Bowen LJ. unqualified gratuitous
payments lay beyond the powers of the company. He stated “The law does Rights and Remedies Under Ultra Vires Transactions
not say that there are to be no cakes and ale, but there are to be no cakes
Whether a contractual transaction is ultra vires or not depends upon the
and ale except such as required for the benefit of the company… charity
interpretation of the company’s statement of object and the extent to which
has no benefit to sit board of directors qua charity. There must be a limit,
certain powers may be implied and read into the express provision of its
and the limit in what is necessary in the reasonable management of the
constitution.
affairs of the company. The, ultimate test in not bone fides, but what in
necessary for carrying on business.’ In certain instances, though, enforceability of ultra vires transactions might
sometimes depend on the knowledge of the party dealing with the
Consider the question here on too much regulation of businesses. How
company and on the nature of the transaction.
does this particular regulation protect people as opposed to rigidifying the
powers of the directors and shareholders within the company? Or is it The general rule at common law is that a third party has no right under an
perhaps established to prevent companies being made for the sake of ultra vires transaction because it does not confer any rights to him or
transaction of fraudulent funds? impose any obligations on the company. A contract purported to be entered
into outside the scope of the company’s objects and powers in invalid and
Threefold test was stated in Re Lee Behrens Ltd 1932 2 Ch 46 which laid
of no legal effect.
down the general rule that gratuitous payments may be made only for
purposes reasonably incidental to the carrying on of the company’s Consequently, if property changes hands in such a transaction, the
business, and their validity may be tested by the following questions, purported contract cannot vest any right on the transferee or deprive the
which must be answered in the affirmative; transferor of his rights in the property. Accordingly, a company may
recover any property purported to be transferred under an ultra vires
transaction.

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Likewise, the third party is liable to restore anything received from the for breach of duty unless it is demonstrated to the satisfaction of the court
company under the transaction as long as it is traceable. The right to trace that they acted reasonably and bona fides in the interest of the co.
accrues in favour of a money lender or a transferor of property under an
In order to safeguard their capital and co.’s assets in the course of business
ultra vires transaction.
restricted to specified objects, members of a co. have the right to seek
The transferor or lender can trace and recover his property, including judicial intervention to prevent their co. from undertaking ultra vires
money lent for an ultra vires purpose: a) as long as the same is traceable at transactions. See Simpson v Westminster Palace Hotel Co (1860) 27.
law or in equity; and b) provided that it is physically identifiable. Whereas
However, a member has no right to bring an action to enforce company’s
funds are not physically identifiable (for instance, where it has been mixed
rights merely because the transaction is ultra vires since the company is the
up and become impossible to trace), the lender is entitled to an equitable
proper plaintiff in respect of its interests. Seek clarification on this
charge on the mixed up funds of the company proportionate to his claim as
statement.
against other claimants. Remember this particular remedy given to
beneficiaries on trustees in breach. Past Paper Questions and Answers

Lesson 3: Incorporation of Companies

In an event, directors, and other agents of the company who receive money
under ultra vires borrowing transaction stand in a fiduciary position May 2018, Question Five:
towards the lenders. Thus, the money so received is treated as trust money
recoverable from the money and from each of them jointly and severally.
In addition, a director or other agent of the company may also act in such a
way as would expose him to personal liability from breach of trust.

A third party may have a right to personal action against the directors with Firstly, discuss a private company limited by shares under Section 9 of
whom /he transacted. The action may be by way of restitution against such the CA. Note that in this, the registration of such a company would
require the Articles of a company to include the member's right to
directors or officers who act as agents of the company. Likewise, directors transfer, limitation of members to 50, prohibitions of allowing the
and others who enter into ultra vires transactions are liable to the company public to subscribe to shares/dividends, not allowing the registration
of a private company through guarantee and the statement of such in
its certificate of incorporation.

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 Section 13(2): Particulars of liabilities of the company and proposed
In this question, Waseeiya being British does not require a name and location of the company.
different registration process. Additionally, how the aspect
of the subsidiary company also changes things- if it does.  Proposed name
Look at the def of a subsidiary company under the  Proposed location
Companies Act and look at how much majority of the  Whether the company will have limited liability
shares should go to the parent company, on distributions of  If limited liability, by shares or guarantee? Section 15- Statement of
shares. Also, in line with private company limited by guarantee.
shares. Tested more on the difference between a subsidiary
company and company in registering a branch- not taught Section 17- If Registrar is satisfied with the following of Sections 11-
by Joe. Otherwise, subsidiary company is more or less 13, it will register the company and allocate a unique identifying
registered like a normal company, so my answering was number to it.
right. Previously, 30% of the company had to be owned by Section 18- The Registrar will thereafter issue a certificate of
Kenyan. This is not so important now as it was in 2018. incorporation- which will address that your company is a private
[The process of registration in the incorporation of a company limited by shares.
company is all applicable in this question, especially on the
documents to register and bring in]. Could be an extra thing to note later on in the question for
Waseeiya's reference: Effect of registration of a company?
Section 11: Registration of one's name to a memorandum of
association and following procedure outlined from Sections 13 to S16. After a company is incorporated, it becomes its own legal entity.
An individual, unlike before can form a company. Company becomes its own juridical person and so, it can sue, be sued,
enter contracts in its own name, etc…
Section 13(1): Documents required for registration.
Incorporation of Companies
 Application for registration
 Memorandum of association October 2016, Question One(b)
 Copy of proposed Articles of Association (can be made by you).
 If you adopt the standard articles under the Companies Act, you are not
required to provide a copy of these proposed Articles. These copies are in
the Schedules to the Companies General Regulations 2015- enacted
pursuant to the Companies Act 2015.

Third Schedule: Model articles for companies limited by shares.

Fourth Schedule:
Fifth Schedule:

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 In determining the pre-incorporation agreement, one must
first determine Mariam's role. If she is determined to be a
Issues: promoter, then this would be under the case of Twyford v
Grant as 'an individual undertaking to be a director of a
1. What the correct date of incorporation is? formed company or a person who negotiates preliminary
agreements on the behalf of a proposed company'. In this
Note the principle established in Salomon v Salomon and instance, Mariam can be deemed a promoter since she
the discussion on the effects of pre-incorporation wasn't acting in a professional activity, she was said to
agreements. 'wish to form a company' and thus, we can presume that
she is an individual undertaking to be a director of the
'A company formed following all the procedures of the Companies Act formed company.
1862 ought to be considered a Company at the very instance of
issuance with a certificate of incorporation.' Since the contract was made prior to the incorporation of
the company, we can consider the effect of a contract
The correct date is 7th March since the ‘actual registration’ made by a promoter on a company before it is legally in
is important. However, factors for consideration in relation existence- prior to incorporation. This therefore begs the
to the legal position of things are as per Salomon v questions of liability on an entity that cannot exist
Salomon, the date that the parties were issued with the and personal liability on a person engaging into a
certificate of incorporation. Another factor for consideration contract on behalf of the company. On the matter of
is whether the issuance of the company is in contemplation personal liability, we can also apply the case of Kelner v
with Section 18 of the Companies Act that affirms the Baxter which addresses how the contract is binding on the
issuance as being performed when the company complies person who made it and not the company. Section 44 of the
with the instructions issued under this section. If Mariam Companies Act highlights this fact too. Thus, in this case,
would like, she can thus change the legal position dates to Mariam may be personally liable for the contract with Picha
reflect the actual registration dates instead. Limited until it is ratified by the company post-
incorporation.
Joe says he would say 7th March. 'Actual
registration' is important. So, what you can do in The actions of promoters (persons contracting on behalf of
Salomon v Salomon and then saying how that is the a company) are therefore not binding on a company until
legal position, but the actual registration is done on ratification by that company post-incorporation or until
7th March. the contract is made through the conduct of the company.
Price v Kesall- a company can only ratify a contract made
2. Based on Mariam's role, what is the Liability on the contract prior to its incorporation through the formation of a new
with Motions Ltd between the company (Pre-incorporation contract with the same terms. This is encompassed in
agreement)?

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Mawagola Farmers and Growers v Kanyanja which Private limited company can only be limited by shares and
reiterates the same concept. not guarantee- Section 9(b).
Public limited company can be limited by both shares and
The lack of liability occurs since the company is not a legal guarantees.
entity yet AND since the company is not a party to the
contract made by the promoter- this is conjunction with the
doctrine of privity.

Thus, the incorporation of the Company, as per the

principles discussed was conducted on 1st March and
thereafter, for the contract with Picha Limited should be
ratified by the company as a new contract for it to be
applicable to the company as a result of the doctrine of
privity and the legal references provided.

Incorporation of Companies

October 2016, Question One(c)

Procedure for re-registration from a Private limited

company to public limited company:

For future reference- not applicable to this particular

section: Section 89- Public to unlimited private company.
Also, Section 429 which talks about the conversion of a
Difference between a private and public limited public company into a private company as a consequence
company: of the cancellation of shares. Generally, 427-435 which
addresses the whole public to private company and shares
Public Companies- Section 10 consequence.
Private Companies- Section 9
Limited Companies- Section 5; Companies limited by shares Section 69- how companies may alter their status.
(S6) and limited by guarantee (S7).

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 Section 74: The requirements for the registration of a
conversion from a private company to public company are
an application which contains their new name and a
statement of the current/proposed company secretary
(since Public companies are required to have company
Section 70- Conversion of private to public and the secretaries by law). This would also include a special
regulations under this Section. resolution on the conversion, unless already done with the
Registrar, a copy of the proposed amended articles, a copy
of the balance sheet and other documents as per S72(1)
and a copy of the valuation report.

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 Incorporation of Companies
 Liabilities of members under companies
LBA Group CAT, Question 1a *read Joy's slides
Unlimited companies- unlimited liability, derived from
a) Using appropriate case law, discuss the consequences of societas.
incorporation in respect to a Limited companies- limited liability depending on the
Company's a) legal status; and b) capacity? unpaid share capital and unpaid amount given during
guarantee. Derived from commandas.
Legal status: Private companies- number of members is limited to 50 and
liability is determinate on whether the company is
1. Company becomes a separate entity limited/unlimited.
2. The ability to incur its own liability Public companies- unlimited members, members can
transfer shares and again, their liability is determined by
Capacity: whether they are limited or unlimited.

1. Ability to hold/own property Lesson 4: Memorandum and Articles of

2. Contractual capacity- NNN v SNM Association
3. The ability to sue or be sued- this can be discussed within
the concept of derivative actions as per the case of Foss v LBA Group CAT, Question 5:
Harbottle.
A. Memorandum and articles of association of a company are
LBA Group CAT, Question 2a: *read Imperium's slides distinct documents with varied contents. Discuss their
respective contents.
a) In the course of your legal practice, a potential client
shares her plan to register a company. As a seasoned legal Main case: Cotman v Broughman
practitioner, advise her on the various types of companies
one can register under the Companies Act, 2015 and  Memorandum of Association- details outlined under
liabilities of members under each of the companies. Section 13(2); how the company deals with parties outside
of itself
 Types of companies
 Articles of Association- Company's constitution and how
Limited and Unlimited Companies. Companies limited by the internal regulations of the company are carried out.
shares and limited by guarantee. Public and private Section 22 of the CA. When signing this, there must be a
companies. Public companies can be unlimited or limited witness as to this result. Also, objects are unlimited.
both by shares and guarantees. Private companies can be
unlimited but only limited by shares and not guarantee.

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B. What are the restrictions of a company in respect to October 2019, Question Five (a):
alteration of its articles and what is the procedure of such
alteration?

Alteration of the Articles of Association:

 Special resolution through S22.

 Other thing in slides
 Other thing Ultra vires- when a business acts outside of its powers.
Comparison of such between the instance in Cap 486 when
Restrictions: the objects and powers of a corporation were outlined in
the Memorandum of Association and were limited to the
 Should not be oppressive to minority shareholders. objects that were mentioned within it. This is compared to
 Something else. the situation now, in the 2015 Companies Act within which
the objects and powers are unlimited (Section 28) and ultra
C. What is the legal effects of a company's constitution in vires is now determined when the company acts outside of
respect to i) its members ii) third parties. the objects specified in the Constitution or the Articles of
Association.
Members:
The Company is thus, incorporated for the objects in its
 Articles protect application of capital for members. Articles of Association now, known as its Constitution which
determine the existence of the company.
Third parties:
Another consideration is the indoor management rule which
 No binding contract between third party and company. overruled the doctrine of constructive notice in the
Established as per Eley v Positive Government Security interaction between the Constitution of a company and
Life Association Company (1876). third parties. The case for this is Royal British Bank v
 However, the constitution still can bind the third parties in Turquand.
subtle ways: through the indoor management rule, Royal
British Bank v Turquand where third parties are not LBA Group CAT, Question 6:
required to check on internal affairs of companies. Protects
parties acting in good faith (S34 of the CA). Note that this a) In respect of the objects of a company, what is meant by
rule did away with the doctrine of constructive notice. the term ultra vires, and what is the consequence of an
ultra vires transaction?
Lesson 5: Ultra Vires Doctrine
Ultra vires:

48 | P a g e
 When company acts beyond its objects. Note the LBA Group CAT, Question 9:
movement from Cap 486 from restricted objects to
unlimited objects in the 2015 Act. However, ultra vires a) What determines the scope of a company's business or
examples under the 2015 Act are: the objects that it may lawfully undertake? How does this
legal position differ under the Companies Act, 2015 and the
 Something* repealed Companies Act Cap 486?
 Something*
Scope and objects:
b) With proper cases, discuss the indoor management rule  The Articles of Association determine the scope- the
and its applicability on third parties dealing with a Company's Constitution
company.  Undertaking business outside the objects and scope as per
the Articles determines ultra vires.
Definition of the indoor management rule:  The Constitution would be declared ultra vires after it is
against the objects asserted through statute and the
 Royal British Bank v Turquad- establishes indoor objects that are signed by the members of an organisation.
management rule. This is for the protection of third parties o Lock v Queensland Investment and Land Mortgage Co.
in not having to know the internal affairs of a company that (1896)- the model articles have statutory authority
they are dealing with as long as they act in good faith. o Griffith v Paget (1877)- members of a company sign the
 Morjaria v Kenya Batteries- Justice Ringera. This deals with Constitution and therefore, would know what it entails
the indoor management rule in Kenya. (extremely paraphrased).

Codification of the Indoor Management Rule: Cap 486 v 2015 Act:

Section 34 in the 2015 Act, not previously mentioned in  Cap 486- restricted objects in Memorandum of Association
Cap 486.  2015 Act- unrestricted objects in the Articles of Association-
Section 28.
Exceptions to the Indoor management Rule: Can also mention the effect of such and the activities under
the objects of both. Re Introduction Ltd v Natural Provincial
The Indoor management rule applies as an exception to the Bank Ltd [1970]- addresses how the power to borrow is not
doctrine of constructive notice but there are also an end in itself and can still be incidental to the main
exceptions to this rule in itself. These are : objects of the company. Borrowing would thus be an
ancillary object to the company.
 Knowledge of irregularity
 Negligence b) What are the rights and remedies available to parties in
 Forgery- person seeking to rely on rule relies on forged an ultra vires transaction? And in your estimation are the
document (Ruben v Great Fingall) rights or remedies adequate?

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  Gratuitous payments by directors that are not seen as in
Rights and remedies to party in ultra vires the interest of the business may also form a basis for rights
transaction: and remedies in an ultra vires transaction- the members
may seek judicial intervention for such. As per the case of
First, a determination of how the transaction is ultra vires Hutton v West Cork Railways and the three part test in Re
must be done. This would be done as per the objects in the Lee Brethrens Ltd that talks about how these gratuitous
Constitution and the knowledge and nature of the third payments may be determined.
party dealing with the transaction itself. o Incidental to purpose of business
o Bona fides
Third parties: o For the benefit or prosperity of the company
 Generally, under common law, third party has no claim
since the Constitution does not confer any rights to them. Company:
Thus, an ultra vires transaction between a third party and  Those directors/shareholders may also be personally liable
company is thought of as invalid and with no legal effect- for such against the company unless they can prove that
the same applies for a contract involving transfer of they acted reasonably before the court.
property. But, if a contract goes through and there is some  Similarly, the company may also recover any property
transfer of property, a remedy that the third party can use transferred in a transaction between a third party.
is that they can retrieve anything from the company as
long as it is traceable either physically or in law or equity.
This third party may also have a personal claim against the
directors they transacted with.
 Directors who engage in ultra vires transactions with third
parties as to money shall end up holding fiduciary duties
and hold that money in trust for those third parties.

Members:
 Members of the company may also have the right to seek
judicial intervention to protect themselves. Simpson v
Westminister Palace Hotel- echoes the points made
in this paragraph. But, the member may not bring their
claim on behalf of company since the company is the
first person to sue on their own behalf (proper plaintiff-
Foss v Harbottle). [Determined as per Salomon v Salomon
when company can sue and be sued in its own name after
incorporation].

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 Lesson 6 Purpose of the establishment of companies: to protect
members of the company and investors from predators and
Corporate Governance: Directors the optimal enhancement of business in society. Thus,
most actions performed in the Companies Act are for the
protection of the above two principles.

Appointment of directors Section 130:

Section 128:

Private company, at least one director. Private company, at

least two directors.

Section 129:

Company is required to have at least one natural person

who is a director. Corporation sole- corporation with a
single entity.
Corporation aggregate- two or more persons. Opposite of
corporation sole.

Why is there emphasis on a natural person? Registrar may give direction to follow S129(2) if in breach
 Accountability- otherwise the actions could be attributable of Sections 128 and 129. Failure of this direction
to companies and not individual natural persons. Easier to (Subsection 6) will be liable to a fine.
hold a natural person accountable and defeat any
unscrupulous persons wishing to escape liability. Section 131:

51 | P a g e
Previously, minimum age was 21. Max as 74 under Cap
486. Now, it is 18 years old as min and no maximum age as
74.

But why?
How does this relate to the indoor management rule? This
Section 132: Appointment of director of public body came to mitigate the harshness of the doctrine of
constructive notice. This protects third parties since it
protects them from having to have constructive notice and
affirm the validity of these dealings. Helps third parties to
not have to look into the internal affairs/regulations of the
parties and whether they have been complied with.

Woolf v East Niger Gold Mining Co. Ltd (1995)

'duly constituted meeting'- compliant with Companies Act

and the Articles of Association of the company.

Section 133:

Section 134:

52 | P a g e
 To increase accountability, company is required to keep the
address of the directors so that they may be traced to their
residence. And there is an offence to fail to keep such a
register.

(5): Failure to comply constitutes an offence and conviction

liable to a fine.

(1): Register of directors shall be kept.

(2): Company will ensure register of directors complies with
Section 135- requirements met for natural persons
registration as a director and Section 136- requirements for
corporate director registration.
(3): Shall keep register open for inspection at registered
office or other authorised location prescribed/authorised by
regulations pursuant to the Companies Act 2015.
(7): Failure to comply shall constitute a fine and an offence.
Section 137:

53 | P a g e
Section 138: Directors' Duties

Gramophone and Typewriter v Stanley (1908): Directors

are neither the agents nor the servants of shareholders but
may act as agents of the company.

Directors are not the servants or agents of shareholders

and cannot be made to follow a particular action based on
the majority decision in a general meeting as per the
instructions of the shareholders if the powers vested upon
them to lead the company are given as per the Articles of
the company.

Section 140:

Directors' duties are to be interpreted and applied as per

common law or equitable principles. But this codification is
a new aspect of the Companies Act 2015.

Duty to inform registrar of changes in either the directors

or the addresses of directors. BUT the mode of informing
this registrar may change from time to time. Previously
done through statutory declaration but this may change.

Consequence of acting outside the scope of powers as a

director?

54 | P a g e
Personal liability but in case of a loss…
'intelligent and honest man'
Section 142:
Section 144:

Section 143:

Independent judgement. BUT (2)(a)- this duty is not

infringed by an agreement previously entered that does not
require independent judgement. If there is anything in the
articles that authorise the director into not acting
independently then the director may not have to act
independently in that case.

What makes this particular agreement so special that it

exempts independent judgement? Guaranteed by the Act
and so, this agreement supersedes all other agreements
and thus, exempts independent judgement in this manner.

Can directors be coerced to act as per the instructions of

the shareholder? The directors should exercise independent
judgement UNLESS contrary to the Companies Act or
Articles. So, does this action fall under the duties under
either the Const. or the Companies Act? If yes, then the
directors should act in this accord. But this is something
that would depend on a case to case basis.
Charterbridge Corporations Ltd v Lloyd's bank limited: Test
for whether a director acted bona fides and towards the Section 145:
promotion of the success of the company- whether an
honest man would have reasonably believed that the
transaction is for the benefit of the company.

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Two standards. One of a reasonable person performing that
duty and the individual general knowledge of the director.
These two tests are read conjunctively.

Tort only considers the general skill and knowledge, but

this Act also considers experience. Same standard as a
reasonably qualified person within that profession with a
clear amount of years of experience. So, could be the
general knowledge, skill and experience of a director who
has held that post for five years versus one year or This provision continues even as a former director as per
another. Section 140(2) as applicable to Sections 146 and 147.
Section 146:

Avoid conflicts of interests and declare those interests as

per Section 151.

Section 147:
Section 148:
No authorisation to accept any benefits as a director from a
third party if that benefit is due to the fact that you are a Consequences of breach.
director or if the benefit will be given after an act/omission
as a director of that company. Failure to adhere to Sections 146 and 147 guarantee
remedies of:

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 General rule: Directors do not enjoy immunity for acts done
Companies are able to demand a right to rescission or during the performance of their duties. Section 194 of the
compensation in breach of a fiduciary duty. CA. Applies to provisions in the Articles, Contract…
Remedy of account: Allows company to call upon/demand
that directors account for monies received when director
has not adhered their duties.

The right of rescission and account are independent of one

another. This thus means that the company does not
endorse the questionable transaction and so, they can call
for both account as well as rescission.

Another remedy: Shareholders can sue to seek remedies.

BUT this is dismissed on the basis of the proper plaintiff
principle and majority principle as per Foss v Harbottle.
Shareholders thus do not have actions to sue since it
should instead be brought by a company or through
derivative action.

Can a member go to court on the behalf of a company? BUT the company can enter into indemnity for the director
Whoever is best placed to seek relief on the basis of the in their actions as per an insurance company. This
company should go to court. This is the idea discussed in indemnification happens in regard to personal liability felt
understanding who can sue or seek remedies- established by the director.
under the proper plaintiff rule in Foss v Harbottle.

General rule on liability and immunity:

This section aims to link Sections 142 to 147 with 194 and Allowed to purchase and maintain insurance for any liability
195. This is on the exercise of powers for purposes for contracted in performance of powers.
which they are conferred and thereafter, the exemption of
these exercises of powers through the use of Derivative actions
indemnification.
8th Sept 2020 (Mummy's birthday!)

Foss v Harbottle:

57 | P a g e
 1. Where company is purported to act ultra vires. Since heads
Proper plaintiff principle of company refused to bring suit or majority may have
Majority principle endorsed action.
2. Where a special resolution that requires passing is not
An individual shareholder has no ability to bring a suit on done.
the behalf of a company since it is a legal entity. If a 3. Where alleged that personal rights of minority
shareholder wants to bring a case, they can do so through shareholders/shareholders are likely to be infringed.
the outlet of a derivative suit. 4. Where those in control of the company are perpetuating
fraud against the company.
David Lang'at v St. Luke's Orthopaedic and Trauma
Hospital Ltd & 2 others- End result in Foss v Harbottle is Section 238:
that it is the majority rule that prevails in company situations where derivative suits may be instituted.
management. However, situations may arise when the
appropriate entity may not be willing to bring a suit for the
interests of the company- may happen when the
wrongdoing may be done by the very persons heading the
company. Thus, there are certain exceptions to the Foss v
Harbottle rule that allows individual shareholders to bring
suits on the behalf of a company- derivative suits/actions.

Main principle: the company is the proper plaintiff that is

responsible for upholding the company's interest. Where
the majority endorse an action, minority members may not
be able to institute an action against this. (Foss v Harbottle)

Exception: Abuse to the main principle allows members of

the company as individuals to then institute suits on the
behalf of the company.

Exception: Edwards v Halliwell. Where action by company is

ultra vires, rule cannot apply since there is no question of
action being allowed by the majority. Thus, rule is relaxed,
and minority shareholders can bring an action on behalf of Proceedings by a member of a company: in respect to a
themselves. cause of action or when seeking relief on the behalf of a
company.
Laibuta: Exceptions to the main rule:

58 | P a g e
 Main things to note in this section: Part X of the Companies Act, 2015.
 Definition of derivative action
 Circumstances under which the derivative action may be This is distinct from the removal of directors.
sought Disqualification relates to the appointment of a director and
 Persons against whom a derivative action may be brought so, a person may be disqualified from appointment later on
based on their actions while removal may just lead to the
Court of law may grant you leave to institute a derivative removal itself.
claim.

Removal of directors
Section 139

 Ordinary resolution: Special notice required for this

ordinary resolution for the removal of a director and to
appoint a new person in their place.
 Resolution to move directors from office can be done
through ordinary resolution at a meeting but with a special
notice.

(2): Special notice required for resolution to remove

director.

What is a casual vacancy? R v Edwards

Occurs in the board of directors when the office of a
director is vacated prior to the expiry of their term. This is Whether or not the penalty of a ten years' disqualification
filled as per the Articles of Association of a company or the was appropriate? Judge said yes. Disqualification is a
provisions of the relevant Company's Act. preventive measure protecting public, shareholders,
creditors from individuals who may abuse their role and
Ordinary v special resolution? status. But the ten years was declared to not be warranted.
Will cover later on. Brackets of the severity of an action were declared and so,
the ten years was quashed and reduced to three years.
Disqualification of directors

59 | P a g e
Principle: Rationale of disqualification is for the protection
of people from those who may abuse their role as a director
of a limited company to the detriment of the public.

Re Altim Pty Ltd (1968)

Whether Mr. Logue, a minor director should be granted

leave under the Companies Act (British case- Act of 1961).

Undischarged bankrupt: Cannot borrow something. Court

said that Mr. Logue had already given problems to 3
creditors prior due to his business incompetence. Did not
grant leave, thus. Act does not allow for bankrupts in
general, not just dishonest bankrupts and so, is a ground
for disqualification against a director.

It is important to note the distinctions between the two

Sections. Disqualification of unfit directors in insolvent
companies and undischarged bankrupts as directors of a
company.

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  Disqualification for fraud or breach of duty committed while
company in liquidation or under administration (Section
216)
 Disqualification on conviction of offence involving failure to
lodge returns or other documents with Registrar (Section
217)

Section 219: Attorney General may perform a

disqualification is performed under public interest. AG may
accept a disqualification undertaking as per Section 220.

What is a disqualification undertaking?

R v Goodman

Court may disqualify a director on the basis of an indictable

offence. This case also establishes tests discussing the
definition of an indictable offence.

The Companies Act provides for several instances

wherein disqualification may be performed:

 Disqualification on the conviction of an offence (Section

215)

61 | P a g e
 Lesson 7
Funds raised by a company from selling or issuing its
Corporate Governance: Shareholders shares to investors.

What is Paid Up share capital and Unpaid up

Share Capital?

Limited liability would be held up to the amount of their

unpaid up share capital- meaning all they would have to do
is pay until this amount upon the insolvency of a company.
Your liability is limited to the shares you subscribed to but
that you have not paid for.

Liability= nominal value x number of shares

People will normally receive a specific amount of time to

pay for shares. This will be a 'call' issued by the directors. If
you do not pay, they will offer them out to someone who
can pay. 'Call-out share capital'. Thus, this principle will
What is a share? normally apply in instances where a person subscribes to
shares- owes a debt to the company and thereafter, the
company immediately falls into liquidity.
Board of Directors makes decisions on the behalf of a
company. Two types of shares:
Upon insolvency, does a shareholder need to pay back the
nominal value of those unpaid shares? No, usually- the
 Equity shares (Ordinary shares)- enables the holders of
shareholder can also pay back at the market value.
these shares to engage within the day to day running of the
company.
 Nominal
 Preference shares- first to be paid upon the insolvency of
 Market value
the business.
 Premium value of shares- though this can also be
 Deferred shares
established through the different values of shares.
Companies have the knowledge that there is an
Shareholders, being the people who join the company last
undertaking of shareholders to pay an amount. So, the fact
try to engage in value maximisation.
that the value of the shares fall does not take away from
the undertaking taken up by the shareholders. This is
What is a share capital?
because the shareholders now have a debt towards the

62 | P a g e
 company and this undertaking can also be enforced in However, this power is expected to be exercised in
court. consequence with the reasonable usage of this power.

Who are shareholders? Shareholder meetings

Shareholders and members may be used interchangeably. Diff. between Ordinary resolution and Special
A shareholder may be an: resolution?
Numbers required for the passing of each.
 Individual
 Firm Ordinary- passed by 50% of members present and voting.
 Other entity Preference shareholders have no voting rights.
that owns shares in a company. Special- Will require 75% of members present and voting to
cast approval and have this decision registered with the
Lucian Arye Bebchuk of Harvard Law School writes and registrar of companies.
says that shareholders should be more empowered to
ensure the success of the company as the shareholders How to determine what decision constitutes an
become the centre of corporate governance within the ordinary or special resolution?
company. This has now been recognised as the rights of
shareholders has been codified in the law. This can be indicated through information given within the
Company's Constitution, as per an understanding of which
What exactly does limited liability mean? decision will require more 'muscle'. Note that these can be
guided by the Model Articles of Association adopted. The
Shareholders have limited liability and so, limited Companies Act of 2015 also provides for circumstances in
opportunity to direct the affairs of a company. which an ordinary or special resolution may be made. This
is as per Sections 256 and 257.
How and what decisions do shareholders take
part in making?

Appointment of the Board for the central governance of the

company. As shareholders appoint the Board, they are
perceived as their 'bosses' and so, accountability may be
derived from this action.

The Companies Act gives shareholders the power to elect

directors of a company through an Ordinary resolution.

63 | P a g e
Remuneration report

This requires publishing and discussion in the next Annual

General Meeting. A vote must also be issued as to a
resolution that the report must be adopted. The chair must
give members a reasonable time and opportunity as
shareholders to pose questions or concerns as to all that is
going to be transacted. By posing them with this, it creates
accountability with directors and allowing them to know
that they do not have life tenure.

Derivative actions

Foss v Harbottle- company is declared to be the proper

plaintiff. Otherwise, shareholders may sue. For example, in
a special resolution, minority shareholders who disagree
with the passing of the resolution who believe the action
may be to the detriment of the company are thus, allowed
to bring a suit to enforce this ideal. Gives shareholders the
power to enforce the rules of the company if ignored by the
director.

Again, the case of David Lang'at v St. Luke's Orthopaedic

and Trauma Hospital Ltd & 2 others is mentioned. BUT this
case shows that majority shareholders may also institute
derivative action suits and not just minority shareholders.
In this case, a shareholder holding 50% was allowed to
bring a claim against their fellow shareholder who also held
50% of the shares.

Note that the shareholders may bring these suits to court,

but the court has to grant leave for these suits to be
brought. This is to prevent shareholders who just want to
oppose for the sake of it. Helps to prevent vexatious claims.

64 | P a g e
 NOTE that the directors are not the agents of shareholders
but merely agents of the company.

Shareholder Proposals

If directors refuse to share these proposals, the

shareholders may circulate their proposals at their own
cost. But if this proposal is enforced, shareholders may be
reimbursed for this. If not, the expenditure is undertaken
by the shareholders. Normally these proposals do not pass,
and they are not easily circulated as they may usually be to
the detriment of these shareholders.
How does the law aid in the protection of
minority shareholders?

1. All shareholders receive notices of meetings, resolutions

and everything. Information is power- these shareholders
may then make more informed decisions. These events
may be halted until all classes of shareholders are
accommodated. However, some meetings may be made for
certain shareholder classes- if this is the case, you cannot
ask for a notice on that basis.
2. Rights of ALL members apply to all without discrimination
under Section 114 of the Companies Act.
3. Derivative actions and other parameters put in place to
prevent abuse of power.
4. Section 611 of the Companies Act- 'Squeeze in and sell
out'; right of offeror to buy out minority shareholders.
[more information on this will be shared by Alfayo Ongeri]
5. The protections accorded under Section 782 of the
Companies Act- allows the court to intervene against
actions of members that accord oppressive conduct and
unfair prejudice.

Section 114:

65 | P a g e
Section 782 of the Companies Act:

66 | P a g e
 Lesson 8 the statutory registers, preparing the agenda and minutes
of board/general meetings, and ensuring that general
Corporate Governance: Company Secretaries meetings are conducted in accordance with the procedures
established in the Companies Act.

Topics for this part:  A company secretary is an officer appointed by directors

and board of directors who ensures that the legal and
Company Secretaries regulatory compliance of the company are followed.
(Employee of the board of directors)
Sections 243 – 254.
Panorama Development (Guilford) ltd v Fidelis
Furnishing Fabrics Ltd (1971) – Duties and
Responsibilities of a Company Secretary:

Roles of CS have changed over time, no longer mere clerks

but can sign contracts of companies’ behalf and can make
contracts on behalf of the company. Now, they are officers
in a company with extensive duties that are managerial,
administrative and advisory.

In the case of Panorama Developments (Guildford) Ltd v

Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 (CA), where
Lord Denning MR stated that:
Company secretary:
“[T]imes have changed. A company secretary is a much
more important person nowadays than he was in 1887. He
 Previously determined as a mere servant of the CEO of the
is an officer of the company with extensive duties and
Company. Lord Asher even referred to such in very
responsibilities. This appears not only in the modern
derogatory words.
Companies Acts, but also by the role which he plays in the
day-to-day business of companies. He is no longer a mere
Historically, the role of the secretary was limited. In the
clerk. He regularly makes representations on behalf of the
1887 case of Barnett, Hoares & Co v South London
company and enters into contracts on its behalf which
Tramways Co (1887) 18 QBD 815, Lord Esher MR described
come within the day-to-day running of the company’s
the secretary as “a mere servant” who must “do what he is
business…. He is certainly entitled to sign contracts
told.” This led to the secretary being primarily viewed as an
connected with the administrative side of a company’s
administrator, who would engage in tasks such as ensuring
the filing of documents at Companies House, maintaining

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affairs, such as employing staff, and ordering cars, and so
forth.”

Statutory provisions:

Public limited company MUST have a company secretary.

Private limited company requires company secretary only if
it has a paid-up share capital of more than 5 million under
Section 243. Note that if a private company decides to
become a public limited company, they will now be
required to have a company secretary.

Arthur asked why the Act is only specific on public

companies requiring a register but Alfayo said that it is also
required by private companies too, only that the law does
not recognise it.

Section 249:
If there is any change to the company secretary, this must
be communicated to the Registrar since any company
communications will now be sent to a different location- as
What happens to private companies with no company their location should no longer be the receipt point for the
secretary? S243(b) of the Act- allocate duties to a director communication of company letters.
or person authorised generally.

Section 248:
Requirement of keeping a register of the company
secretaries of a business. Why? Since they deal with some
of the very serious aspects of a business.

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 regulations and Companies Act. And thus, a CS does not
really have the power to determine company resolutions
but just advises on this basis.
 CS can be a corporate person- does not merely have to be
a natural person; implied by Section 251 which talks about
registration particulars for a corporate personality.

Cap 486 and now:

Now, private companies with above 5 million share capital

must have a company secretary. This distinction of 5
million was previously not made. Why is this emphasised?
Because such private companies will be able to distribute
their share capital and so, should have company
secretaries as accountability measures.

What are some of the duties required for

performance by a Company Secretary?

 Derived from Part XII of the Companies Act

 Derived from common law through the outlet of a few
cases

If the company acts ultra vires, does the liability fall on the
Company Secretary? The liability accrues to the company
or the director since the director is seen as the brains of the
company and the CS as merely the actor under their
instructions.
Important things to note:

 Secretary advises board of directors of procedures and

responsibilities as per Articles of Company, Company

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 Lesson 8 Corporate Finance: Equity Financing

Can be given to all employees (Section 9 refers to

A share and its import: employee types) and this determination of which employee
gets these shares is determined purely by the Constitution
 A share is not money, it merely shows value. of the company.
 What does a share determine?
 A measure of liability: By mere fact of the subscription of These shares determine the scope of authority certain
shares, the person subscribing to those shares shall now rights are accorded in the receipt of dividends, return on
owe a measure of liability. investment, voting rights etc…
 It accords rights- such as rights to vote on the basis of
ordinary shares in the AGM. How would a company draft its Constitution for the division
 Ownership measure- determines the proportion of of these shares?
ownership rights within the company that are accorded  Through promoters, as the first basis. Also, determined
through the use of shares. through price of shares- how much each share is accorded
 An asset transferrable: shares can be sold and to a person at what value. Ordinary shareholders buy
distributed/transferred and so, are assets that may be shares at nominal value and Preference shareholders at a
placed as a security, can be transferred through a will. premium value to enable the different roles and positions
accorded to each.
Classes of shares:  Refer to Section 13(4) of the Companies Act; application to
registrar for application of company- company with share
These are as provided under the Company Constitution. capital- Section 14, statement of share capital
These are: shareholding; one of the things required to be provided is a
classing of shares and allocation of rights of each shares.
 Ordinary Shares
 Preference Shares: are they higher than creditors or not in
payment of debts upon insolvency? They are paid above
creditors since at times, the company may pay back their
creditors and have no money to give back- this gives
incentive to people to put money into a company.
 Deferred Shares
Variation of class rights:
 Employee Shares: given as a reward to certain employees,
also increases incentive for employee to work harder since
the success of the company determines dividend given.

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 Issuing of shares: The provision of a prospectus by
directors. This prospectus is an outline of shares given by
the director- this is an offer. When a person asks for shares,
that is an acceptance. Thereafter, a debt is owed to a
company.

After offer and acceptance, allotment of shares is

performed after registration of shareholders and the
making of a member out of the individual.

Statutory allotment of shares:

Not sure what this point was, ask.

This means variations accorded to the rights given within Transfer and Transmission of Shares
each particular class of shares.
Note the distinction transfer in public and private
Company can create their classes of their own rights. If a companies. Private companies allow for the exercise of pre-
company decides to vary the rights accorded through emptive rights. Determined through the Company
particular shares (to maximise revenue by increasing Constitution/Articles.
rights), this may be done through a special resolution.
Section 23:
Such rights cover:
 Voting rights
 Rights to dividend
 Right to return on capital when company is in vicinity of
insolvency

Ordinary shares cannot be converted to other classes.

Charging Shares
Share issue and allotment:
Taking a loan on the basis of shares. Have to seek
Note the difference between issue and allotment. consultation for this with the company.

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  Invaluable expert opinion
Equity financing- Shares  Something

The three Fs of Equity financing: Disadvantages

 Family
 Friends  Other stuff from slides
 Fools; meant to be funny Cont. of Equity financing [Jade will share brief
notes on this, if you have any questions, reach
Other ways to engage in Equity financing: out to her on email]

 Dividends and distributions

 Mergers and Takeovers
 Financial assistance in general

Dividends and distributions:

What are dividends?

Payments made by the company after the end of a period
to shareholders.
Business Angels may also give skill, know-how, said to give Are companies mandated to declare dividends during the
mentoring to businesses due to years of experience. time of COVID just because they are making a profit? Not
Convertible debt: Given as loan, if within 6 months, the always, since when the companies declare a dividend, it is
company does well, the individual can convert the debt into something declared to the shareholders. Additionally, it
shares into the business. means that the dividend is an undertaking of debt by the
board of directors.

 This debt is mostly accorded to a final dividend-payable

once in a year when financial statements are published.
Advantages and disadvantages of Equity  An interim may be suspended or cancelled but the minute a
financing final dividend is recommended, and the shareholders make
a resolution to pay, it becomes owe-able.
Advantages
The board of directors recommend dividends as per Bond v
 No need to refund Barrow Haematite Steel Co.
 Availability of further funds for investment

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 Process for the declaration of dividends: Competition Act comes in to regulate these mergers to
Dividend is recommended by Board of Directors- tabled by ensure that some mergers do not make industries that
Shareholders- then determined whether declaration will be create industry monopolies. What determines whether
given but Shareholders cannot declare a dividend higher some mergers are legal or illegal? Usually the amount
than recommended by the Board of Directors. This is also in determined by the capital created- analysed by the
regard to the Constitution of the Company itself. In this Competition Authorities- determined by the guidelines of
process, the Shareholders are the second opinion in the Section 3 of the Competition Act and the Competition
determination of dividends. Authorities (can be found on their website).

Types of mergers:
 Amalgamation: Mergers may be made through an
amalgamation- MIC and CBA with MCBA; initial company
then ceases to exist.
During COVID, regulations were made as to banks with  Absorption/Acquisition: Mergers may be made through
dividends, how would companies determine dividends absorption- one company ends up acquiring another
during this time? Through common law or the rules in the company. This is an acquisition. When Gyro Commercial
Companies Act since there would be no industry standards Bank merged with I&M bank and became I&M bank. An
(as set out by CBK for banks). Acquisition is therefore a type of merger.

Amount suggested by Board of Directors -> Shareholders Other types of mergers:

give the rubber stamp of approval on this, voting rights on  Vertical mergers: Same product value chain but not same
this meeting are the same as all others, ordinary level- one company makes shoes, and another makes
shareholders hold more voting rights on this, same as a laces; makes different products and so, merges for that.
special resolution. (Value chain- process of making product, the making of the
Mergers sole, laces, selling in wholesale, retail etc for the creation of
a product).
Company directly/indirectly acquires/takes control over the  Horizontal mergers: Same product, same value chain. Both
whole/part of a company. Read with Companies Act and companies make cell phones and merge to make cell
Competition Act. Mergers are done as a result of: phones together.
 Regulation
 other means Take-overs:
Eg: CBK released order that Banks have to have a specific
limit of capital (?), banks thus had to merge or restructure Guided by the Capital Markets Authority/Competitions
themselves or be rendered obsolete. Authority (unique to Mergers and Acquisitions).

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Threshold returned to 90% by the Statute Laws considered prior to an increase being taken. (Stamp Duties
Amendment Act after being changed from 90% (2018), to Act provision, not provided for in the Companies Act)
50% (2019) and back to 90% (2020). This threshold
requires compliance with a take-over once the 90% When companies increase share capital, there is a process
threshold is gone over. So, mergers can be made until 90% that is followed, but it is easier to increase than reduce.
of the Company's value but after that, takeovers have to be Decrease requires a court order and a statement declaring
done and the procedure for such, complied with through: that the share capital is being reduced. It is hard to
decrease since it reduces liability on the part of the
Takeover offer with an application letter -> Shareholders shareholders, and it hurts them in case the company
authorise takeover- normal takeover; shareholders do not cannot pay their debts.
agree with takeover and threshold met, hostile takeover to
take up all existing shares. Subdividing: 1 share having value of 100 kshs now
becoming 1 share being worth 1000 kshs. Could be for the
Dimension data took over with Access Kenya: purposes of weighting shares differently. Same thing with 1
The greatest example of take-over will be discussed in the share worth 1000 being made into 1 share worth 100-
next class. company would have to reissue share capitals in such an
instance.
If you have more questions, go through the process of this.
Increase: Ordinary resolution
Decrease: Special resolution
Subdividing share capital: Ordinary resolution

Financial assistance:
22.08.2020 Chapter 486: No financial assistance at all
S440 of the 2015 Act: Now provides financial assistance
Re-organisation of share capital:

Note the difference in share capital between private and

public companies. Could be the increasing, decreasing or
weighting of a particular share.

Issued share capital: nominal value of shares and NOT the

actual value of the shares. Increasing share capital may
also attract stamp duty at 1% (tax), thus this is usually

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 Moving from private to public company, company would
But what is financial assistance exactly? buy out shares from public, if they do not have funds, they
would pledge those shares as security and thereafter buy
When is financial assistance allowed? those out.
When company wants to buy its own shares.

Management buy-out:

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 Lesson 9 A public company is entitled to carry on business and exercise its
borrowing powers only if it has been issued with a trading certificate on
Corporate Finance: Debt Financing
application to the registrar in line with section 517 of the Companies Acts,
2015.
Borrowing powers:
Every company requires capital to finance its ordinary business operations. In the event a public company carries out business or exercises any
borrowing powers without a trading certificate in contravention of
Capital can be raised by either:
Section 516(1), the company and each of its officers in default commit on
a) Issuing shares or other securities; or (Equity financing) offence and are liable on conviction to the fine prescribed to under Section
b) Borrowing 519 (1).

If share capital is not sufficient, loan capital is raised by way of debentures Notably, contravention of Section 516 does not in itself affect the validity
or other corporate securities against which money lenders advance money of a transaction entered into by the company. However, the directors
to the company within the scope of the company’s borrowing powers as of the company are jointly and severally liable to indemnify any other
outlined in the articles of association. party to the transaction in respect of any loss or damage suffered by
that party because of the company’s failure to adhere to statutory
Generally, to raise capital for a company, directors may exercise all the
obligation specified in section 516 – 519 (Remember Ultra Vires
powers of the company, including power to:
Doctrine: director acting outside scope of objects of company and in case
a) Borrow money, of any laws, director must indemnify company against the suffering of any
b) Mortgage or charge its property and uncalled capital; and loss).
c) Issue debentures (external party gives the company a type of loan),
With reference to a company’s borrowing powers to obtain a loan capital,
denture stock (a type of stock or share in which the owner receives
the word term “security” means any mortgage, charge, lien, or other
regular payments interests /payments of interest at intervals instead
security given to secure or guarantee repayment of any amount advanced
of dividends) and other securities (including floating changes) to
to the company by way of a loan or other financial accommodation.
secure repayment of the Co’s debt.

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  “Charge” - Refers to any form of legal or equitable ‘interest’ over c) Enforcement of guarantee (this is when a guarantee has given a
property securing payment of money. ‘promise’ of payment of sorts and so, this guarantee needs to be
 ‘Mortgage’ – Includes any charge or lien on any property for enforced in the defaulting of payment)
securing money or money’s worth. A charge gives the creditor
The chargor has the right to repay the mortgage and redeem the
(chargee) in whose favour a charge is created the right to
security at any time before it is realized by the chargee unless and
repayment from the income or proceeds of sale of the property
until: a) the secured obligation in fully discharged b) the right to
charged in priority to claim against the debtor (chargor) by
redeem is foreclosed by a court order. c) Chargee duly exercises his
unsecured creditors.
statutory power of sale, d) Mortgaged property is sold pursuant to an
On the other hand, charges rank in priority with reference to the dates order of the court.
on which the instruments of charge were registered (what this means is
Indoor management rule:
that a particular asset can be charged multiple times). Securities confer
on the money lender the right to a recourse against the company’s Lender is not required to verify /ascertain whether a company is acting
assets if the sums thereby are not repaid together with the interest within the scope of its powers to borrow. This is established as per Royal
thereon in accordance with the contract. This means that the money British Bank v Turquand (1856) 6 E&B 327. Section 33?
lender (usually bank) is able to exercise their rights to gain security if
there is a default on the loan. Corporate securities
The term “securities” entails various forms of investments one may hold in
Security may be realized (meaning, money retrieved by the person a company and which he may buy or sell at the stock exchange.
holding the item in security) by:
A company may issue two primary forms of securities, namely: shares
a) Sale of the asset charged in exercise of statutory power of sale- (covered in previous classes) and debentures. A share constitutes the
basically meaning selling the charged asset. holder a member of a company. A debenture holder is merely a creditor,
b) Receipt of rental income earned from mortgaged property. who may not necessarily be a member of a company, but who receives
interest on the amount of the stock.

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A debenture is a document that either creates a debt or acknowledges it, it Important sections of the companies act in regard to this topic:
can be held by a shareholder or non-shareholder. It may consist of any of
the following, namely:
Section 496:
a) a simple acknowledgement of the debt under a seal;
b) a document acknowledging the debt and charging the assets of the
company generally; or
c) a document acknowledging the debt and charging the company’s
property for repayment and, further, restricting the company from
creating any other charge over them.

Although money raised through debentures forms part of a company’s

capital structure, it does not become share capital.

Essentially, a debenture need not to be secured by a charge on the

company’s property. It may instead take the form of a loan or debenture Section 496(1) – A company shall within 2 months after the allotment of
stock, that like shares, are a transferrable investment in the company. This its shares, debentures or debenture stock, complete and have ready for
means that debentures may be transferrable from party to party. delivery – a) certificate of shares allotted; b) the certificate of debentures
allotted; or certificates of the debenture stock allotted.
Debentures in private companies cannot be subscribed to by members of
public – (Section 9 Companies Acts, 2015.) These loan securities are said 496(1) is not applicable if the conditions of issue of shares, debentures or
to be marketable in the sense that they can be allotted and registered in debenture stock provide otherwise.
accordance with Section 572 (1) of the Companies Act.
496(3) An offence to fail to comply with section 496(1) – Each officer
convicted – liable for a fine not exceeding 500K.

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Section 572: Section 573:

Section 572(1) – company to register allotment of debentures. Non-

compliance by an officer of the company – offence – fire not exceeding
1M.

Section 573: Company to establish and maintain register of debentures.

573(2): Company should keep its register of debenture holders (if any)
open for inspection at the registered office of the company.

573(3) Default –offence-fine not exceeding 1M.

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Section 574: Section 574 (1) – Right of debenture holders and others to inspect and
obtain companies of register of debenture holders. Copy after payment of
fee required. Copy of fee is shouldered by person who wants to retrieve the
copy in itself.

Section 575:

Section 575 (1) – Offence to refuse inspection of register of debenture

holders or fail to provide a copy.

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Section 578:

Types of charges
Right of debenture holder to obtain copy of trust deed securing debentures Property charges in the character of loan securities differ in nature, terms
and effect. They may be created over intangible assets (e.g.), movable or
Section 580:
immovable property in which a company has equitable or proprietary
interest.

Charges may be classified into 2 main classes:

a. fixed (or specific charges)- applicable to particular property

b. floating charges- not applicable to any particular property but can
materialise over a certain property when need be

Illingworth v Houldsworth- really good case that helps distinguish the

difference between a fixed charge and a floating charge.

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Section 878(4) of the Companies Act outlines the various types of charges Section 891 requires every limited company in addition to the statutory
that a company may create over its diverse range of assets, namely: (read duty to register charges and debentures, to keep a register of charges
the section). containing among others:

a) charges specifically affecting the company’s property; and

b); all floating changes on the whole or part of the property or undertaking
of the company in each case the record shall disclose
i) a description of the property charged;
ii) the amount secured by the charges; and
iii) the names of person entitled to it.

Instruments of charge and register of charges shall be open to inspection at

the company’s registered office by a) any creditor or member of the
company without charges; and b) any other person on payment of a fee.

Key advantages of debt financing

a) Reduces the possibility of dilution of company’s ownership. Debenture
holders do not have a controlling interest in the company.
b) Finance is available for a fixed duration which allows a company to adjust
its investment plans in a suitable manner taking into account availability of
Section 884 (1) Require the registrar to keep, a register of all charges of funds.
company that are required to be registered under the Act. c) Often provide long-term finance to a company on favourable terms as
opposed to cost of equity or preference shares.
Section 878(1) – Requires a company by which any of the changes
Key Disadvantages
prescribed under section 878(4) is created to lodge with the registrar the
a) Funds should be repaid within the agreed period
prescribed particulars of the change with the document (if any) by which b) The interest rates might be high; may not be able to negotiate agreeable
the charge is created or evidenced. terms. Additionally, banks may have the discretion to increase/lower
interest rates.

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 Past Paper Questions and Answers and general skill expected of director as per that certain
amount of years of experience.
5. S146 and S151- to avoid conflict of interest by declaring
Corp Gov: Directors' Duties their interests to the company.
6. S148- to not accept benefits from third party if the benefit
October 2016, Question Two is a consequence of being a director (this section aims to
avoid bribery, corruption and fraud).

Lesson 6: Corporate Governance: Directors

October 2019, Question Five (b):

'Introduction'

Gramophone and Typewriter v Stanley: Directors are

neither agents nor servants of shareholders but may be
agents of the company.
Section 140(3) and (4)- Directors' Duties are to be
established and interpreted as per common law and
equitable principles. 'Introduction'

Cases- duties under common law: Gramophone and Typewriter v Stanley: Directors are
1. Charterbridge v Lloyd's Bank Limited- determining whether neither agents nor servants of shareholders but may be
director acted towards success of company and acted 'as agents of the company.
an honest and intelligent person would'. (duty to promote Section 140(3) and (4)- Directors' Duties are to be
success of company) established and interpreted as per common law and
equitable principles.
Sections under the Companies Act that determine
duties as per legislation: Cases- duties under common law:
1. S142- duty of director to act within powers. Acting within 1. Charterbridge v Lloyd's Bank Limited- determining whether
constitution and within conferred duties. director acted towards success of company and acted 'as
2. S143- duty to promote success of company. an honest and intelligent person would'. (duty to promote
3. S144- duty of director to exercise independent judgement success of company)
unless acting according to previous company agreement or
as per Constitution. Sections under the Companies Act that determine
4. S145- duty of director to exercise independent skill, care duties as per legislation:
and diligence as per the general skill expected of person

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a. S142- duty of director to act within powers. Acting within  Requires at least two directors with one being a natural
constitution and within conferred duties. person- Section 128(2) and Section 129.
b. S143- duty to promote success of company.  Appointment is as per S132- which entails general meeting
c. S144- duty of director to exercise independent judgement of company for appointment of directors. This meeting shall
unless acting according to previous company agreement or be moved in the first resolution if a unanimous vote is cast
as per Constitution. for such.
d. S145- duty of director to exercise independent skill, care
and diligence as per the general skill expected of person General conditions for appointment:
and general skill expected of director as per that certain  Minimum age being 18 as per S131.
amount of years of experience.  After appointment, company should keep a register of
e. S146 and S151- to avoid conflict of interest by declaring directors (S134) which should comply with requirements for
their interests to the company. natural person as director (S135) and legal person as
f. S148- to not accept benefits from third party if the benefit director (S136).
is a consequence of being a director (this section aims to  Directors' residential addresses should also be kept (S137)
avoid bribery, corruption and fraud). and changes in directors should be notified to registrar as
per S138.
LBA Group CAT, Question 3a:

The requirement of the Companies Act 2015 to appoint

directors binds both private and public companies. In order
to comply with the Act, who may be appointed to the board
of directors a) of a private company b) of a public company
and how are the appointments undertaken?

Appointment to board of directors in a private

company and how the appointments are undertaken:

 Private company requires at least one director- Section

128(1) with one being a natural person (S129).
 Appointment is done as per S130 on direction for
appointment. No particular provision dictates the exact
appointment process.

Appointment to board of directors in a public

company and how the appointments are undertaken:

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 Corp Gov: Company Secretaries and Directors'
Duties and Shareholders' Duties

October 2016, Question Four

Issues:
 Are the shareholders of a company entitled to sue the
directors if they do not call an AGM?
 What is the normal duration of AGM meetings?
 What are the roles of the Company Secretary in relation to
such events?

Potentially, seek clarification on this OR do more

research on it.

Rules and Analysis:

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Corp Gov: Directors: Derivative Action

October 2016, Question Five (i)

You can bring a derivate suit. Legal citations:

 Foss v Harbottle
 Exceptions
o David Lang'at
o Edwards v Halliwell
 Section 238

Lesson 8: Equity Financing and Shareholders

The case of Foss v Harbottle is on the fact that an individual
shareholder does not have the power to bring an individual
May 2018, Question Three:
suit if the company is the proper plaintiff as per the proper
plaintiff principle and the majority principle.

This is supported by the case of David Langa'at v St Luke's

Orthopaedic and Trauma Hospital Ltd and 2 others- accepts
that there are certain exceptions where you can bring a First of all, to gain ownership of one's shares once again-
derivative, individual shareholder suit. this can be done through financial assistance which is
allowed for as per S440 of the Companies Act. Section 441
Another exception to the general rule of Foss v Harbottle is provides for instances wherein a person seeking to acquire
Edwards v Halliwell where individual shareholders can bring shares cannot gain financial assistance either from the
a suit where an action by a company is ultra vires and so, company or a subsidiary company for such.
the question of action is allowed by the majority.
[there is lots of information on how to buy back one's
This is affirmed by Section 238 where derivative suits may shares but limited information on why].
be instituted. Court of law can grant leave to bring
derivative claim. Lesson 8: Equity Financing and Shareholders
Corp Gov: Shareholders- Protection of Minority May 2018, Question Four:
Shareholders/ Derivative Actions

October 2016, Question Five (ii)

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 Advantages of raising capital through debentures
LBA Group CAT, Question 2b: Here, we can talk about financing through debentures>
equity financing.
In the course of your legal practice, a potential client
shares her plan to register a company. As a seasoned legal Define financing:
practitioner, advise her on: i. through debentures- where a company acquires financing
through the use of debentures. This is encompassed under
 Types of shares Sections 570-582, Part 23 of the Companies Act. Note that
 Ordinary shares a:
 Preference shares + Debenture- document that recognises/acknowledges the
 Employee shares loan
 Deferred shares + Debenture stock- transferrable investment
ii. Equity financing, on the other hand refers to shares.
 Rights as per the shares
 Benefits accorded by shares Advantages of Debt Financing:
a. Reduces the possibility of dilution of company’s ownership.
Lesson 9: Debt Financing Debenture holders do not have a controlling interest in the
company.
October 2019, Question Four: b. Finance is available for a fixed duration which allows a
company to adjust its investment plans in a suitable
manner taking into account availability of funds.

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c. Often provide long-term finance to a company on 1. Issuing shares (Equity financing)
favourable terms as opposed to cost of equity or a. Statutory provisions on shares as per the Companies Act.
preference shares. b. Procedure of raising capital through angel investors and
venture capitalists. Public companies can do so through an
Equity financing disadvantages: IPO.
a. May lead to a possible buyout c. Alteration of Share Capital (Steps 1-4)
b. Leads to dilution of the ownership of the company
(especially in companies such as family businesses). 2. Issuing of corporate securities such as debentures
a. Debenture- doc containing acknowledgement of a debt
The legal requirements that must be met in the b. Section 572 of the CA- registration and Penalty under
allotment of debentures S572(2).
 Public company- trading certificate, Section 517 of the c. Requirement to give copy of debenture holders- Section
Companies Act 573 and 574.
 Company requirements in the issuing of debentures- d. Offences on inspection of register and provision of copy
Section 496(1) upon request- S575.
 Section 572, 573- maintaining register of debenture holders e. Types of debentures:
and 574 o Redeemable debentures
 S574 on inspection of debentures and consequent o And other?
sanctions
 S580- Power of company to re-issue redeemed debentures 3. Through borrowing
a. Ancillary powers and powers incidental to main objects
Rights of the debenture holders (need to be considered as per the ultra vires doctrine and
 Section 578- right to obtain copy of trust deed securing how borrowing does not need to be specified as an object)
debentures b. Statutes on borrowing- Section 517, Section 519(1) and
 S574- right of debenture holders to copy and obtain records Sections 516-519.
of debentures c. Types of charges
LBA Group CAT, Question Four:

The directors of one of the leading companies in Kenya

approach your law firm for legal advice on the best means
to raise capital for the company. Advise them on the
various ways they may raise capital as provided under the
Companies Act 2015.

Raising capital:

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 Debt Financing and Equity Financing: 3. Through borrowing
a. Ancillary powers and powers incidental to main objects
October 2016, Question One(a) (need to be considered as per the ultra vires doctrine and
how borrowing does not need to be specified as an object)
b. Statutes on borrowing- Section 517, Section 519(1) and
Sections 516-519.
c. Types of charges

Which one is most preferred?

 Equity financing is advantageous because you don't have to
refund any money, you are able to gain a mass amount of funds
for investments and there is invaluable expert opinion that you
can receive from investors. However, it is disadvantageous due to
dilution of ownership in the company and the requirement of
constant payment of dividend which may also lead to the dilution
of profits.
General description of Equity Financing and Debt Financing.  Debt financing is advantageous because you are able to receive
money without dilution of company ownership, you are able to
1. Issuing shares (Equity financing) access finance for a fixed duration and long-term finance is
available. However, it is disadvantageous because funds need to
a. Statutory provisions on shares as per the Companies Act.
be repaid within an agreed period and interest rates may be high.
b. Procedure of raising capital through angel investors and  Borrowing is advantageous because it gives you access to the
venture capitalists. Public companies can do so through an amount of money that you would like, however, you require a
IPO. good credit score and paying back through interest may be hefty.
c. Alteration of Share Capital (Steps 1-4)

2. Issuing of corporate securities such as debentures

a. Debenture- doc containing acknowledgement of a debt
b. Section 572 of the CA- registration and Penalty under
S572(2).
c. Requirement to give copy of debenture holders- Section
573 and 574.
d. Offences on inspection of register and provision of copy
upon request- S575.
e. Types of debentures:
o Redeemable debentures
o And other?

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 Lesson 9 directors reasonably resolve otherwise on the ground that audited financial
statements are unlikely to be required.
Appointment of statutory auditors
Under Section 722(2) if a company fails to appoint its auditors in line with
Section 721, on notice given under Section 722(1) the CS may appoint an
auditor/auditors unless he or she is satisfied that there are no good reasons
Every company is required at each general meeting to appoint an auditor or not to do so.
auditors by a resolution of its members. Auditors hold office from the
conclusion of that meeting until the conclusion of the next annual general Section 722 of Companies act, a natural person or firm shall not be
meeting at which the company’s accounts and reports are laid. qualified for appointment as a statutory auditor of a company unless he or
she in, or in the case of a firm, every partner in the firm is the holder of a
Section 717 of the Companies Act, requires private companies to appoint practicing certificate issued pursuant to Section 21 of the Accountants
auditor or auditors act for each of its financial year (other than its first Act. Note that the Companies Act acts in collaboration with other Acts.
year) unless the directors reasonably resolve otherwise on the ground that
auditors financial statements are unlikely to be required. Section 724 specifies the basis of disqualification for appointment to the
office of a statutory auditor for want of independence. This means that an
Sections 717(4) and 717(5) require that the appointment of auditors be auditor MUST be independent.
made either:
(These are the basis of disqualification). Accordingly, none of the
a. by the Directors or following persons shall in any case be qualified for appointment as
b. by an ordinary resolution of members, within the period specified auditors of a company, namely,
in 777(3) of the Companies Act a. an officer or servant of the audited company;
b. a person who is a partner of or in the employment of an officer or
If a private company fails to appoint auditor or auditors within the
specified period under Section 717(3), it is required to notify the Cabinet servant of the audited company;
Secretary (Section 718(1)) of that failure within 7 days from the due date. c. partner who is an employee of the audited company or partnership
Upon receipt of the notice, the cabinet secretary may exercise his default
of which such person is a partner;
powers under Section 718(2) to appoint one or more auditors to fill the
vacancy unless satisfied that there are good reasons not to do so. d. an officer or employee of an associated undertaking of the audited
company; or
Equally, every public company is required under Section 721(1) to have an
auditor or auditors for each financial year of the company unless the

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 e. any person not qualified for appointment as an auditor of any other iii. in the case of group financial statements, of the state of affairs
corporate body which is that company’s subsidiary or holding at the end of financial year and of the profit or loss for the
company or other associated undertaking of the company. financial year of the undertakings to which the statements
relate, taken as a whole, so far as concerns to members of the
Duties and responsibilities of Auditors
company.
Word ‘auditor’ is synonymous with assessor, examiner or inspector, and is b) Have been properly prepared in line with the relevant financial
suggestive of his general duties. In addition to the statutory duties outlined
in the Companies Act, 2015, the duties of an auditor may be generally set reporting framework; and
out in the articles of the company which they are appointed to audit or in c) Have been prepared in line with requirements of the Companies Act,
the contract under which they are appointed. 2015
Section 740 of Companies Act, 2015 specifies the primary duty of auditors
which is to make a report to the members on the accounts and financial Statements of matters in the auditor’s report
statements examined by them, and on every balance sheet, every profit and For this reason, the auditor’s report ordinarily entails statement on the
loss account and all group accounts (if any) laid before the company in following matters among others:
general meeting during the tenure of office. a. whether they have obtained all the information and explanations
In discharge of their statutory responsibilities under Sections 727 and 730 necessary for the purposes of the auditor
of the Companies Act, auditors are required to disclose in their report b. whether in their opinions, proper books of accounts have been kept
whether, in their opinion, the annual financial statements fulfil the
by the company
requirements for disclosure as stated below.
c. whether the company’s balance sheet and profit and loss accounts
Requirements for disclosure
are in agreement with the books of accounts and returns and state
The auditors are required to disclose in their report, as per their own
opinion, whether the annual financial statements: whether, in their opinion, the accounts give a true and fair view of
state of the company’s affairs at the end of its financial year.
a) Give a true and fair view:
i. in the case of an individual balance sheet, of the state of affairs The auditors have no obligation to circulate the report to members of
of the company at the end of financial year; the company or to requisition for a meeting at which their report in
consideration. Their statutory duty to make a report to the members is
ii. in the case of an individual profit and loss account, of the
confined to forwarding the report to the secretary of the company.
profit or loss of the company for the financial year; Meaning, the auditors need only to prepare the report and forward it to the

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secretary of the company/directors of company, they do not need to This common law duty of care was restated in Re Thomas Gerald and
circulate it to everyone else too. Son Ltd (1968) where Pennyquick J is held:

This leaves the secretary or director: (Duty to circulate the report is thus, “The auditors of a company owe a statutory duty to make to the members a report
on the director/secretary) containing certain statements. If the Directors do not allow auditors time to
conduct such investigations as are necessary in order to make these statements,
a. to circulate it to the shareholders and debenture holders, the auditors must, it seems to me, refuse either to make a report at all or make an
appropriately qualified report. They cannot be justified in making a report
b. to convene a general meeting to consider the report.
containing statements the truth of which they have not had an opportunity of
ascertaining.”
After the meeting, the directors are bound to take such measures as maybe
necessary to act upon the resolution passed to address the matters raised in What this means is that an auditor may refuse to make a report if not given
the report. time to do so by the directors. Auditors may only make statements based
on the truth that they are able to ascertain.
To facilitate effective discharge of auditor’s duties and responsibilities
under the Companies Act, 2015, under Section 731(1), auditors at all times The auditors’ common law duty of care finds meaning under Section
have the right to access the company’s accounts and financial statements 727(7)(a) of the Companies Act, 2015 which gives them the discretion to
despite the form in which they are kept or maintained. state whether their report is qualified or unqualified. The Common Law
duty of an auditor in the performance of his work was also emphasized by
Important cases determining the duties and responsibilities of Lope J in Re Kingston Cotton Mill Company (No. 2) (1896) where he
auditors stated:
In Caparo Industries PLC v. Dickman (1990) 2 AC, Lord Oliver of
Aylmen observed that the general duties of auditors are as follows: “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 cautious
“It is the auditor’s function to ensure so far as possible, that the financial auditor would use. What is reasonable skill, care and caution must depend on the
information as to the company’s affairs prepared by the directors accurately particular circumstances of each case. An auditor is not bound to be a detective,
reflect the company’s position in order, to first, to protect the company itself from or as was said, to appreciate his work with suspicion or a foregone conclusion
the consequences of undetected errors, or, possibly wrong doing (by, for instance, that there is something wrong. He is a watchdog, not a bloodhound. He is
declaring dividends out of capital), and, secondly, to provide shareholders with justified in believing trite servants of the company in whom confidence is placed
reliable intelligence for the purpose of enabling them to scrutinize the conduct of by the Company. He is entitled to assume that they are honest, and to rely upon
the companies affairs and to exercise their collective powers to reward or control their representations; provided that he takes reasonable care. If there is anything
or remove those to whom that conduct has been confided.” calculated to excite suspicion he should probe it to the bottom; but in the absence
of anything of that kind he is only bound to be reasonably cautious and careful…
Moreover, auditors are obligated to be honest and to exercise reasonable an auditor does not guarantee discovery of all fraud… auditors must not be made
care and skill in the discharge of their responsibilities. liable for not tracking ingenious and carefully laid schemes of fraud when there is

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nothing to arouse their suspicion, and when these frauds are perpetrated by trite The auditor proposed to be removed has a right to receive a notice of the
servants of the company and are undetected for years by the directors.” resolution and to make written representations for consideration by
members at the meeting convened for that purpose. Moreover, the
Required to take:
outgoing auditor has a right to be heard at the meeting at which the
 Reasonable care, skill and caution- dependent on circumstances. proposed resolution is to be passed.
 Does not need to go above and beyond their duties to try and If passed, Section 741(1) requires that the resolution be lodged with the
detect fraud. registrar within 14 days from the day on which it is passed. In any event,
an auditor of a company may resign from office in line with Section
Liability of Auditors 745(1).

Auditors have a fiduciary duty and a duty of Care, skill and diligence in Summary:
relation to the company by whom they are engaged. Therefore, an auditor
is personally liable for any negligence, default, breach of duty of care or  Must be served with resolution of removal
breach of trust in relation to the company occurring when auditing the  Has a right to sit at meeting of proposed resolution
company’s financial statements. Especially note the ‘personal liability’  If passed, resolution must be lodged with registrar within 14 days
accorded when there is breach of the fiduciary duty of the auditor.
 Auditor may resign as per S745(1)
Auditors do not as a personal rule owe a duty of care to third parties
dealing with the company on the basis of their report.

Removal of Auditors
Section 739 of the companies Act, 2015 empowers members of a company
to remove an auditor from office at any time before the end of his term of
appointment

a. by ordinary resolution passed at a meeting convened for that

purpose, and
b. on giving the special notice of the proposed resolution as required
under Section 740 of the Companies Act, 2015; and
ii) of the proposed resolution to appoint another person to
replace the outgoing auditor in line with the Act.

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 Lesson 10 Insolvency: refers to the inability and not merely the refusal of a
company to meet or discharge their financial obligation on the become
Insolvency: Company Administration and Voluntary due.

Agreements A business becomes insolvent when its liabilities exceed its assets. This
notwithstanding insolvency comes about when a business cannot raise
General Introduction to the Insolvency Act enough funds to meet its obligations as they fall due.

Long title of the Insolvency Act, (No. 18 of 2015): Section 384

An Act of Parliament used to amend and consolidate the law relating to the
insolvency of natural persons and incorporated and incorporated bodies…
to provide for the liquidation of incorporated and incorporated bodies
(including ones that may be solvent); to provide as an alternative to
liquidation procedures that will enable the affairs of those bodies as
became insolvent to the administered for the benefit of that creditors;
and to provide for related and incidental matters.
Points for consideration:
Under the Insolvency Act, 2015 companies that are under financial distress
may use the Insolvency Act to navigate through restructuring process, and 1. The mention of S384(1)(a) and 100,000 kshs being expressly
in the process of restructuring protect the interests of creditors, and other mentioned. Why this figure? Due to market value and those
stakeholders in the company such as shareholders.
circumstances. But this may be varied according to the

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 circumstances of the time as per sub-section 3. To remedy this situation, Insolvency Act, 2015 was enacted. Among
others, the Act aims at redeeming insolvent companies through
administration as opposed to liquidation. The Act seeks to assist insolvent
2. Also mentions company assets being less than amount of liabilities corporate bodies whose financial position is redeemable, to continue
being a fact for consideration. operating as going concerns so that they may be able to meet their financial
obligations to the satisfaction of their creditors.
Mere insolvency does not afford enough ground for lenders to petition for
involuntary bankruptcy of the borrower or force liquidation of business. All the mechanisms available under the Insolvency Act, 2015
This basically means that now, other considerations are made prior to include:
liquidation. (In this instance, note the difference between insolvency and i) Administration of insolvent companies
liquidation). ii) Company voluntary arrangements, and
iii) Liquidation
Alternatives to liquidation under the Insolvency Act
Before the enactment of the Insolvency Act, 2015, liquidation was often Administration
the creditors only recovery option. The Insolvency Act 2015 improved the
options by providing additional alternatives such as: Administration, which is a fairly new development in Kenya’s law entails
as administrator taking control of the whole or substantially the whole of
i) Administration, and the company’s business and assets to manage the company’s business and
ii) Company voluntary arrangements. (if need be) realize (sell) its assets for the purpose of applying the proceeds
thereof in paying one or more of its creditors.
The philosophy behind the provisions made to provide At this point, the directors are no longer in charge of the running of the
alternatives to liquidation: company. The daily management of the company business and assets are
Cap 486 v 2015 Act: Before the enactment of the Insolvency Act 2015, under the administrator. A director may only sue on the behalf of the
insolvency proceedings of both corporate entities and individuals was company. This change in responsibility is because it is assumed that the
undertaken pursuant to the winding-up provisions of the Companies Act director themselves are the one who engaged in mismanagement and so,
and the Bankruptcy Act. In the case of corporations, the resolution of the change in responsibility is warranted. This is repeated in the last bit of
insolvency proceedings often involved the commencement of winding up this topic.
proceedings, which entailed the liquidation of the Company under financial
distress and paying the firms creditors. Essentially this meant that Company administration was introduced to enable a court to give insolvent
creditors and other stakeholders in companies risked failing to recover companies a moratorium (delay/suspension of debts occasioned by law)
total amounts of interests, especially in the event the company’s assets on the enforcement of debts and securities while the possibility of some
failed to cover the total amounts due. form of rescue or arrangements with creditors are explored (see Centre

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Reinsurance International Company and Other v. Freakley and Others Primary objectives of the administration of a company are:
(2006) 4 All ER). a) To maintain the company as a going concern,

This process is essentially a way of saving the business or realizing it to a b) To achieve a better outcome for the company’s creditors than
position of better advantage than in a liquidation. liquidation; and

Lord Hoffman in Centre Reinsurance International Co and other v c) To realize the property of the company in order to make distribution to
Freakely and others stated: secured or preferential creditors.

“In essence, the administration order did two things. First, it placed a Appointment and Removal of an administrator
procedural bar on the enforcement of security over the company’s An administrator may be appointed in any of the following 3 ways:
property or the commencement or continuance of any legal proceedings or
a) By an administration order of the court
execution against the company secondly, it substituted for the existing
b) By the holder of a floating charge pursuant to section 534 of the
management, a court appointed administrator with power, under the
Insolvency Act, 2015; or
control of the court, to manage the company’s business and property…”
c) By resolution of the company in a general meeting; or by the

An administrator may be described as a receiver or a manager of the directors in line with section 541 of the Insolvency Act, 2015.
whole (or substantially the whole) of a company’s business and property
appointed by or on behalf of the holders of any debentures of the company
secured by a (floating) charge or by such charge and one or more other
securities.

An administrator may also be appointed by a court to collect and protect

the property of an insolvent company until its fate is determined by the
court or by a chargee to utilize the property or managing the company’s
affairs in discharging the contractual obligations secured by the charge.

An administrator has the sole authority to deal with the charged property
and the authority of directors in that respect terminates on appointment of
an administrator regardless whether such directors remain in office.
However, the appointment of a receiver /administrator does not divest the
directors of the power to institute proceedings in the company’s name.

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Section 534: Section 526:

Once an administrator is appointed, they are entitled to all records of the

company and are required to present a proposal to the creditors on their
plan to salvage the company. The administrator assumes control of all
property of the company and is entitled to manage the affairs and property
of the company.

The appointment of administrator does not subsist for an indefinite term.

Hence the statutory duty /obligation to discharge his duties expeditiously
with the primacy to restore the company into its original status as a going
concern should be undertaken. Once you fulfil your statutory duties, you
should discharge your role.

In line with section 593 of the Insolvency Act, the appointment of a

Section 541: receiver automatically ends at the end of 12 months from and including the
date on which it took effect, unless extended for a specified period in line
with sectors 594 of the Insolvency Act, 2015.

Sections 593 and 594:

To qualify for appointment as an administrator, a person is required by

Section 526 of the Insolvency Act, 2015 to be an authorized insolvency
practitioner. Regardless of the manner of his /her appointment, an
administrator has the status of an officer of court and in by no means
deemed an agent of the debenture holder or the company by whom
he/she is appointed. This means that the administrator is not an agent of
either the debenture holder or company but instead, an officer of the court.

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 a) The purpose of administration has sufficiently been achieved.
b) The objective of administration cannot be achieved
c) The company should not have been placed under administration in
the first place
d) If a creditor, meeting directs the administrator to make such an
application.

Section 595:

Methods of termination of the appointment of an administrator

I. Also, the appointment of the administrator may be terminated by an II. The appointment of an administrator may be terminated at any time by a
order of court on the administrators’ application under section 595 where court order i) on the application of a creditor or a group of creditors
he reasonably believes that: pursuant to section 597 of the insolvency Act, 2015; or ii) on an

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application made under section 425 for a liquidation order in respect of a to creditors to pay back all/part of debts at any specified time. Scheme:
company under administration. Creditors ask for money to be paid in one specific payment at a go, this
may be partial, but it shall be declared fully paid and performed to the full
III. The appointment of an administrator may come to an end where he/she satisfaction of your debt.
resigns in line with Section 603 of the Insolvency Act, 2015.
The supervisor is responsible for implementing the arrangement in the
Company Voluntary arrangement mutual interests of the company and its creditors, and for monitoring
Section 625(1): compliance by the company with the terms of the arrangement.

The intention of a voluntary arrangement or composition (also known as

scheme of arrangement) is to facilitate orderly discharge by the company
of all its financial obligations and in the end, enable it to carry on business
as a going concern.

Three main things to remember:

 Primary concerns- Re T
 Unique nature of scheme of arrangement- Re Cap PLC
 Who may make a proposal for voluntary arrangement?

Thus, the primary concern of a scheme of arrangement is to encourage the

As an alternative to administration under a security, the directors of a adoption of an agreed scheme with creditors which avoids liquidation and
company may make a proposal pursuant to Section 625(1) of the facilitates the financial rehabilitation of the co (see Re T and N Ltd and
Insolvency Act to the company and its creditors for their approval of a others (2006) 3 All ER)
voluntary arrangement (CVA- Company Voluntary Arrangement) under The unique nature and form of a scheme of arrangements should be well
which the company enters into either: understood. The court in Re Cap PLC and others explained that the
a) a composition in satisfaction of the debts on such terms as may be arrangement is not a contractual relationship per se but:
agreed with its creditors; or b) a scheme for arranging its affairs, under the a. a statutory procedure involving the proposed of a scheme,
supervision of an authorized practitioner.
b. its approval by the statutory majorities of creditors,
Note the difference between a composition and scheme. They are both c. its sanction by the court.
company voluntary arrangements. Composition: company makes proposal

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A proposal for voluntary arrangement may also be made by: 2015 Act, administration and company voluntary
arrangements.
a. the administrator of a company under administration,
b. the liquidator of a company in liquidation Insolvency: inability of party to discharge financial
responsibility and not refusal to do so.
c. the director of a company not subject to liquidation (not very sure
about this one) Based on these points, the Insolvency Act is said to be a
good creature of the Eleventh Parliament.
The time in which a voluntary arrangement proposal may take effect: A Voluntary Arrangements:
proposal takes effect as a voluntary arrangement by the company on the
day after the date on which it is approved by the court by order made under
the Insolvency Act, or on such a later date as specified in the court order.

There should be a requirement that the voluntary agreement is subject to

approval by a court of law to prevent any potential injustice fared by the
parties.

Additional Material

N/B: Read the Article on the link provided below

Cytonn, The Insolvency Act - A Second Chance for Struggling but Viable
Businesses 30 December, 2018 https://cytonn.com/topicals/the-
insolvency-act-a-second-chance-for-struggling-but-viable-
businesses accessed 28 September 2020. Company Administration:

Important things to note:

Everything on Insolvency is now in the Insolvency Act.

Previously, we had the Companies Act, Cap 486 and
Bankruptcy Act but now, this has changed. Important act for determination of company
administration over liquidation: In Re Nakumatt
Another very important thing to note is the two alternatives Holdings [2017] eKLR
provided to liquidation- which did not exist prior to the
Lesson 11

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 Insolvency: Liquidation

Liquidation:

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 Secured and unsecured debts and other liabilities.
 Any surplus if left over, is then distributed among
contributories (the list of contributories is determined)

Two types of liquidation:

1. Compulsory liquidation- this is done by the court
2. Voluntary liquidation
a. instituted by members- Section 398 of Insolvency Act,
2015
b. Instituted by creditors- if S398 is not made, creditors
voluntary liquidation takes effect

Contributory- Section 386 of IA(?) Present/past members of

company. Includes person who has contributed to
company. Past member may not apply if they ceased to be
members for more than one year before the
commencement of the winding up proceedings.

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Liquidation notes from the article:
Voluntary liquidation

Section 384- circumstances under which a company may

be considered insolvent. Company may be liquidated when
still solvent or when insolvent.

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 Note: Section 394:
4. Section 398- Company's directors have to make a statutory
declaration of the: inquiry made, and the opinion formed on
the payment of debts in full or the payment of any other
official rates. This payment must be made in 12 months.
Joe said this is very important and we do not forget
about it.

5. Section 399(3)- To be appointed as a liquidator, you must

be an authorised insolvency practitioner.

5. Section 401- If liquidation happens for twelve months or

more, the liquidator shall convene a general meeting of the
company. In this meeting, the liquidator shall lay out their
acts and dealings and conduct of the liquidation. Failing to
comply leads to the liability of a fine not exceeding 500,000
kshs.

6. Section 402- liquidator should call final meeting prior to

Why notice? To protect interests of members, shareholders dissolution, for members' voluntary liquidation. This section
and contributories of a company. outlines the whole process that you undergo when
performing the process of liquidation.
Members Voluntary Liquidation:
Process of the voluntary liquidation period of
What other Sections should be kept in consideration? members:
Liquidation published
1. Section 395- When does liquidation take effect? When a Director should make declaration
resolution to do so is passed by the members. Members can appoint liquidator
Liquidator manages assets of company and does the
2. Section 396- Consequences of resolution to liquidate. necessary allocations

Conversion to creditors voluntary liquidation from

members voluntary liquidation:

3. Section 397- Share transfers or attempts to alter a

member's status after liquidation is void.

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 Application for compulsory liquidation:

1. Section 425- Compulsory liquidation by the court is only

done if the court is moved. The court can be moved
through an application done by:

IMPORTANT:
Creditors voluntary liquidation only happens when the
company realises that it cannot pay off its debts.
2. Section 426- AG can also apply for compulsory liquidation
Creditors voluntary liquidation, important sections: of company on grounds of public interest.

1. Section 405- how a creditors voluntary liquidation will 3. Section 427- Power of high court has jurisdiction in allowing
apply. for liquidation for all companies in Kenya.
2. Section 406- Meeting of creditors procedure
3. Section 407- Director lays out statement of company Dissolution of a company after liquidation:
4. Section 408- Creditors may appoint liquidator but if they
don't, one may be nominated by the company. Section 494- Dissolution under voluntary liquidation.
5. Section 409- Creditors may appoint liquidation of more Applies after liquidator sends final account to Registrar of
than 3 members Companies. Registrar does dissolution as soon as
6. Section 411- Powers of the director cease after practicable. After three months of the registration of that
appointment of the liquidator account, the company is dissolved.
7. Section 413- meeting of company and company creditors
held after every twelve months Section 495- Provides for the early dissolution of a
8. Section 414- calls liquidator to be accountable for actions company through the outlet of a court order, allow for this
performed during liquidation. This account thereafter needs earlier than the three months that dissolution would
to be registered with the Registrar of companies. normally take place.

Note that there are sections in the liquidation act referring Past Paper Questions and Answers
to preferential payments, who is paid first? The surplus of
that amount is thereafter distributed to members. Lesson 9: Auditing

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  Section 722- Cabinet Secretary shall appoint auditor unless
October 2016, Question Three convinced of reasons to not do so.

Lesson 9: Auditing and Lesson 8: Debt Financing

LBA Group CAT, Question 7:

After accessing various reports prepared by the auditors of

Kura co. ltd, Mr and Mrs Odube decided to subscribe to the
debentures of Kura co. ltd. This was informed by the fact
that the auditors reports indicated that the company's
finances were properly managed.

Several months, Kura co. ltd became insolvent. Mr & Mrs

Odube have decided to sue the auditors. The auditors have
sought legal advice from their firms. Advise them on their
duties and responsibilities as outlined in the Companies Act
and whether or not they are not liable.
Audit Obligations:
1. What are the auditor's rights and responsibilities?
Main requirements are entailed under Section 709 of the a. Duty to report on the annual financial statements of a
Companies Act. company- Section 727.
An exemption from audit can be done for small companies b. Duty to exercise reasonable care and skill- Re Thomas
with no more than fifty million shillings turnover- Section Gerald and Son Ltd
711(2). c. Responsibility to carry out investigations- Caparo v
Dickman
Statutory Procedure required for appointment and d. Duty to formalise the reports- Sections 735, 736 and 737.
termination of Auditor:
2. Whether the auditors owe a duty of care to the third
Appointment of auditors- Sections 717 to 726. party?
 Section 717- Appointment of auditor by private companies. a. Caparo v Dickman- no duty of care to third party.
This may be done through an ordinary resolution. Determines when duty of care exists. These are:
 Section 718- Appointment of auditor for private companies i. When the loss suffered is a reasonably foreseeable
by the Cabinet Secretary if the period for appointment is consequence of the defendant's conduct.
not met. ii. There is sufficient proximity between the defendant and
 Section 721(1)- Every public company requires an auditor. pursuer.

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iii. It is 'fair, just and reasonable' to impose liability on the
defendant.
b. Bannerman case establishes a case in which the duty of
care was established.

3. Whether the auditors are liable?

a. They bear personal liability for negligence, breach of duty
of care and trust when undertaking personal activities.
b. But, under s763(2)(a) allows court to grant relief when
acting honestly.

Conclusion: In contemplation of insolvency, a company can enter:

Auditors can say that it is impossible for auditor to discover
all fraud in reference to Kingston case. Can say nothing Liquidation
roused their suspicion under S730 of the CA. Administration
Voluntary agreements

In order to meet its 'death' and the consequences of its

'demise'.

Lesson 11: Insolvency

May 2018, Question Two:

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 Lesson 11: Insolvency  In liquidation, the unsecured creditors may not have much
hope of getting their money back.
October 2019, Question Three:  In administration, there is greater hope of the creditors
getting their dues and a possibility of the company not
falling into liquidation. Thus, the creditors should pursue
administration due to the benefits under S522.
o 521, 522, 523, 296 and the Centre Reinsurance v Freakley-
2006 case.

Why would creditors want to engage in voluntary

liquidation? And in what instances would voluntary
liquidation by creditors be wanted as opposed to
administration?
Basically, none since perhaps only shareholders with
unpaid share capital would want liquidation since
they would no longer have to pay the money. The
creditor would like to get their money back and so,
would not want liquidation.

LBA Group CAT, Question 8:

Firstly, define: 8. The Insolvency Act 2015 has cushioned companies under
 Liquidation (how is this carried out and its effects, why it is financial distress while at the same time protected the
not the ideal) interests of creditors and company stakeholders. Discuss
o Compulsory (Sections 425 and 426, who can apply for this the various mechanisms under to insolvent companies
order to be given by the court, AG in 426 can also give this under the Insolvency Act 2015 which cushion them against
order if in the public interest) forced
o Voluntary liquidation.
 By members
 By creditors (not in their best interest in this question to do What is insolvency?
this, however. Inability to pay debts as they are due. (Section 138? Of the
 Administration (Section 521 defines admin, 522 talks about IA).
benefits of admin)
Objectives of the Insolvency Act, 2015:
And their effects  Mentioned in slides.

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 Mechanisms of cushioning companies under the IA,
2015:

NOTE:
that this question does not ask for liquidation to be
covered as a mechanism, only company
administration and voluntary agreements.

 Company Administration
 Voluntary Agreements
o Re Cape PLC and others, not contractual relationship but
statutory procedure.

Additional info that shouldn't be in this question:

 Liquidation: does not always lead to the dissolution of a
company
o Voluntary Liquidation (By members/creditors)
o Compulsory Liquidation

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