COMPANY LAW

Company as a form of business association

A company refers to a group of persons associated together for the purpose of attaining a
common objective i.e. social or economic. Normally a company is formed to carry on a
business with a view to earn profits. However, a company may also be formed for the
promotion of commerce, art, science, religion or charity or any other useful object under the
companies Act.
Lord Justice Lindley defined a company as follows:
An association of many persons who contribute money or money’s worth to a common stock
and employ it in some trade or business and who share profit or loss there from.
For the purposes of companies Act of Kenya, the company includes the following:
a. An existing company
b. A registered company under this Act
c. An unregistered company covered under section 357-364
d. A foreign company covered under section 365-381
A foreign company means an incorporated company outside Kenya but which has an
establishment or agency or branch through which it operates in Kenya.
Characteristics of a company
1. An artificial person since it is a creation of law (it exists in the eye of the law and cannot
act on its own). Although a company is an artificial legal person but it enjoys all the rights
of a natural person.
2. It has separate legal entity
Companies Act provides for a separate legal existence from its shareholders. From the date of
incorporation as mentioned in the certificate of incorporation, a body of corporate by the
name contained in the memorandum is formed. Such a body corporate is capable of having
power to hold land, has a common seal with liabilities of its members limited as per the
provisions of the Act.
3. Perpetual succession
The company has a continuous existence, the death, bankruptcy or insanity of a shareholder
does not affect the existence of the company.
4. Common seal
A company being an artificial person cannot sign documents. The law therefore has provided
for the use of a common seal with the name of the company engraved on it as a substitute for
its signatures.
5. Limited liability
A shareholder shall be liable to contribute towards the debts of the company during its life or
during winding up only to the extent of shares taken by him and only to the balance of the
shares taken by him or up to the guarantee given by him or both. Members cannot be asked to
pay more than what is unpaid on the shares of the company held.
6. Ability to employ
A company has the contractual ability to enter into all forms of contracts including relating to
the employment. In this regard the terms of the contract are to determine the rights and
obligation of the company. In Lee vs. Lee air farming company limited, it was held by the
House of Lords that the company, was under obligation to provide all the compensation due
to Lee in his capacity as an employee upon his death.
7. Capability to own property
A company upon being registered has the capability to own property and do what pertains to
the ownership of the property independent from that of its members. The property of the
company belongs to the company while that of the members are to remain for the members.
In macaura vs. Northern Assurance Company, it was held that the company has the ability to
own the timber.

SOURCES AND FOUNDATION OF COMPANY LAW

Legislation
Statutes take the lead in the sources of company law. The main statute containing company
law is currently the companies Act 2006. The most important statute containing provisions
regarded as part of company law involves
Insolvency Act 1986, Company Directors, disliquidation Act, Financial services and Market
Act 2000, Criminal justice Act 1993 (Insider dealings) and even company Act (Audit,
investigations, and community enterprise.

Formation of a Company
This follows 4 stages namely:

The formation of a company is a lengthy process. For convenience the

whole process of company formation may be divided into the following
four stages:
1. Promotion Stage 2. Incorporation or Registration Stage 3. Capital
Subscription Stage 4. Commencement of Business Stage
Promotion
Promotion is the first stage in the formation of a company. The term
‘Promotion’ refers to the aggregate of activities designed to bring into being
an enterprise to operate a business. It presupposes the technical processing
of a commercial proposition with reference to its potential profitability. The
meaning of promotion and the steps to be taken in promoting a business.
Promotion of a company refers to the sum total of the activities of all those
who participate in the building of the enterprise up to the organisation of
the company and completion of the plan to exploit the idea.
Promotion is the process of creating a specific business enterprise. Its
scope is very broad, and numerous individuals are frequently asked to
make their contributions to the programme. Promotion begins when
someone gives serious consideration to the formulation of the ideas upon
which the business in question is to be based. When the corporation is
organised and ready for operation, the major function of promotion comes
to an end.”
2. Incorporation or Registration Stage

Incorporation or registration is the second stage in the formation of a company. It is the

registration that brings a company into existence. A company is properly constituted only
when it is duly registered under the Act and a Certificate of Incorporation has been obtained
from the registrar of companies.

In order to get a company registered or incorporated, the following procedure is to be

adopted:

1. Decide the name of the company

2. Filing of Document with the Registrar:

a. Memorandum of Association

b. Articles of Association

3. List of directors
4. Written concent of the directors
5. Statutory declaration

Effects of Incorporation

The certificate of incorporation is conclusive evidence of the fact that:

(i) The company is properly incorporated and duly registered.

(ii) The terms of the Memorandum and Articles are within the law.

(iii) All requirements of the Act in respect of registration have been complied with.
(iv) A private company can start its business after getting the certificate of incorporation.

(v) With the issue of certificate, the company takes birth with a separate legal entity.

3. Capital Subscription Stage

A private company or a public company not having share capital can commence business
immediately on its incorporation. As such ‘capital subscription stage’ and ‘commencement of
business stage’ are relevant only in the case of a public company having a share capital. Such
a company has to pass through these additional two stages before it can commence business.
Under the capital subscription stage comes the task of obtaining the necessary capital for the
company.

For this purpose, soon after the incorporation, a meeting of the Board of Directors is
convened to deal with the following business:

1. Appointment of the Secretary. In most cases the appointment of pre-term secretary (who is
appointed at the promotion stage) is confirmed.

2. Appointment of bankers, auditors, solicitors and brokers etc.

3. Adoption of draft ‘prospectus’ or ‘statement in lieu of prospectus’.

4. Adoption of underwriting contract, if any.

Besides the above-mentioned business, the Board also decides as to whether:

(i) A public offer for capital subscription is to be made, and

(ii) Listing of shares at a stock exchange is to be secured.

The company will now proceed to obtain the permission of the Controller of Capital Issue, ,
under the Capital Issue Control Act.

4. Commencement of Business Stage:

After getting the certificate of incorporation, a private company can start its business. A
public company can start its business only after getting a’ certificate of commencement of
business.
After getting the certificate of incorporation

(i) A public company issues a prospectus of inviting the public to subscribe to its share
capital.

(ii) A minimum subscription is fixed

(iii) The company is required to sell a minimum number of shares mentioned in the
prospectus.

After making the sale of the required number of shares a certificate is sent to the Registrar
stating this fact, along-with a letter from the banks, that it has received application money for
such shares. The Registrar scrutinizes the documents. If he is satisfied, then issues a
certificate known as Certificate of Commencement of Business. This is the conclusive
evidence of the commencement of the business.

TYPES OF COMPANY
Joint stock companies under the English law are broadly classified into the following two
major categories;
 Incorporated companies
 Unincorporated associations

Incorporated companies
These companies are classified into the following three categories on the basis of formation
a) Chartered companies
b) Statutory companies
c) Registered companies

Chartered companies
These companies are formed by the crown in exercise of the royal prerogative power by grant
of a charter to persons who intends to form a business. The powers, scope of operations and
nature of the business of the company are defined under the act. Examples of this company
can be the bank of England (1694). No such companies are currently formed in Kenya and
section 12 of the universities Act which empowers the head of state to grant charter to any
private university if in his opinion the grant will facilitate the advancement of higher
education in Kenya should not be confused with these companies.

Statutory companies
These are companies which are formed through the act of parliament or the companies Act.
They are mostly formed to carry out specific business activities which are commonly public
undertakings e.g. railway, waterworks etc. They do not have shareholders and hence their
initial capital normally comes from the consolidated fund through the act forming it. Their
powers, scope of operations and nature of activities are found within the Act forming it.

The provisions of the companies Act regarding operations and management applies to the
company just like the other companies i.e. registered companies.
 Registered companies
It is the type of company defined under section 2 of the Act as company formed and
registered under the companies Act.

The companies come into existence immediately upon registration and the issue of certificate
of incorporation. These companies are further classified on the basis of ownership into either
private or public company under section 4(1).

1. Private company
These are companies according to section 4(1) as formed by two or more persons but not
exceeding fifty. Section 30 states that this company must have an article prepared showing
the following provisions;
i. Restrict the right of transfer of shares, if any;
ii. Prohibit the invitation of the public to subscribe for any of its shares or debentures,
iii. Limit the number of members to fifty, not including the present or past employee
shareholders.

2. Public company
This is a company which according to section 4(1) is formed by any seven or more person. It
is a company with a share capital which has a memorandum stating that it is a public
company and which has been registered or re-registered as such. It is a company which is not
a private company and has the following features;
i. Does not have any restrictions on transfer of its shares
ii. Does not limit the maximum number of members
iii. Can invite the public for the subscription of its shares or debentures.

Requirements for registration

i. It must state that it is a public company both in the memorandum of association and in its
name.
ii. The memorandum must be in form specified under section 14(a).
iii. The company must be able to raise the minimum capital before it can commence trading.

A private company is defined under section 30 as accompany which;

i. Restrict the right of transfer of shares, if any;
ii. Prohibit the invitation of the public to subscribe for any of its shares or debentures,
iii. Limit the number of members to fifty, not including the present or past employee
shareholder.

Distinctions between a private company and a public company.

a) Membership-A private requires a minimum of two and a maximum of fifty while a
public company requires a minimum of 7 and upper limit.
b) Directorship-A private requires a minimum of one director and no upper limited while a
public company requires a minimum of two and no upper limit.
c) Use of word ‘limited’-Private company are required to use the word ‘private limited’ if
their liabilities is limited while public company may use the word ‘limited’ or ‘public
limited company’.
d) Commencement of business-Private company are required to commence their business
immediately upon receiving the certificate of incorporation while a public must ensure
that it raised the minimum capital required and that it has received the certificate of
trading before it commences business.
e) Issue of prospectus and statement in lieu of prospectus to the public-Private
companies are not required to issue to the registrar for registration prospectus or even a
statement in lieu of the prospectus unless it has breached the provisions of section 30
while public companies must issue the documents to the registrar whether they are raising
the capital from the public or not.
f) Transferability of shares-Private companies under section 30 restrict (though do not
prevent!) the transferability of shares to its members while no restriction exists in case of
a public company.
g) Requirement for holding a statutory meeting- Private company are not required to hold
the statutory meeting while this is a mandatory requirement for all the public company.
h) Qualification shares-Directors of private company are not required to take the
qualifications shares as a condition for them becoming the directors while such a
requirement is normal available in the public companies if the articles provides for the
same.
i) Issue of share certificate and share warrant-A private company can only issue a share
certificate if it has a share capital while public company limited by shares can issue a
share certificate and if authorised by the members at the general meeting, issue a share
warrant.

j) Invitation of the public for the company’s shares or debentures-Private companies is

Prohibited from inviting the public for subscription of its shares and debentures while
public companies are not.
k) Publication of accounts-Private companies is not required to publish their accounts
while it is a mandatory requirement for public companies.
l) Registration Requirements-The registration procedures of private company are not as
complex as that of public companies. In addition, the private companies are exempted
from submitting form 209 and from 210 to the registrar.
m) Quorum-Quorum for the private companies is a minimum of two while a public
company requires a minimum of three.

Privileges and exemptions

i. Only two members are required in order to form the private company.
ii. It not is required under section130 to hold statutory meetings and remit the statutory
report to the registrar.
iii. It needs a minimum of only one director for its incorporation.
iv. All the directors can be appointed by a single resolution unlike the public companies
where each director has to be appointed through a separate resolution.
v. Directors shall not be required to retire on rotation basis at the general meeting.
 vi. Directors are not under any obligation to hold qualification shares in the company.
vii. Only two members are required to constitute a quorum for purpose of all meetings at
the general meetings.
viii. The members in a private company are exempted from holding general meetings if
they have a resolution in writing signed by all the members required to receive the
notice to attend and vote at such a meeting.
ix. Its directors are not bound by the provisions of section 191(1) which renders it
unlawful for the directors of public companies from obtaining a loan or any financial
assistance from the company.
x. It can commence the allotment of the shares before the shares are fully subscribed.
xi. It can commence business immediately after receiving the certificate of incorporation
and need ensure that it has raised the minimum capital. The minimum capital is said
to have been raised if enough capital has been issued to be able to cater for the
following;
a) Minimum working capital of the company
b) Issue cost of floating the shares and debentures.
c) The preliminary expenses of the business
d) The amount borrowed in order to finance the above
xii. A prospectus and statement in lieu of a prospectus is not required to be filed to the
registrar unless the company has breached the provisions of section 30.
xiii. Form 209 and 210 (Consent to act as directors and list of persons who have consented
to act as directors) are not delivered by the promoters of private companies when
seeking registration.
xiv. Private companies are exempted from publishing the books of the accounts.
Both Private and public companies can further be classified according to the liability as
follows;
a. Companies limited by shares
b. Companies limited by guarantee
c. Companies limited by both shares and guarantee
d. Unlimited companies.

Companies limited by shares

These are companies whose members’ liability is limited to the value of shares taken by
them. In case a member has an outstanding amount due to the company, he will only be liable
to contribute to the extent of obligation in the event of winding up. The promoters of this
company can draft their own memorandum association or adopt the form of memorandum of
association found.

Companies limited by guarantee

This is a company formed without a share capital but members undertaking against their
names in the memorandum of association to contribute a certain amount of capital in the
event of winding up of the company. This company are mostly formed for non-profit or non-
trading purposes such as promotion of art, science, culture, sports etc. The article of
association must contain a provision regarding the number of members. The capital
guaranteed cannot be recalled during the continuity of the company’s operation and hence
similar to reserve capital (see type of share capital under chapter 6). The promoters of the
company can adopt the memorandum specimen found under table C of the first schedule.
 Companies limited by both shares and guarantee
These are companies which have the features of both the companies limited by shares and
those limited by guarantee. The company has a portion of its capital inform of shares and
another in form of guarantee which has to be reserved until the company is in winding up for
it to be called.

Unlimited companies.
This companies are similar to partnerships and the liability of the members in this type of
company is unlimited and therefore extents to the personal property of the members.
The liability of the member in this case can only be exercised by the company when it goes
into liquidation, and in case of a past member within one year after a person has ceased from
being a member of the company and also on condition that the present members (then called
contributories) are unable to contribute towards the company’s debts.

Holding and subsidiary companies

A company which controls another company is known as the ‘holding company’ and the
company so controlled is referred as ‘subsidiary company’.
A holding company is the one which;
i. Controls the board of directors of another company.
ii. Holds more than half of the shares of the nominal value of the equity shares capital of
another.
iii. Is a subsidiary of any company which is in turn a subsidiary of another?
iv. Keeps the statutory books of the other company.

A subsidiary company is one which;

i. Its board of director is controlled by another company referred as a holding company.
ii. More than half of its nominal value of the equity shares capital is held by another company
referred as a holding company.
iii. Is a subsidiary of another company which in turn is a subsidiary of the other company
referred as a holding company?
iv. Its statutory books are maintained by the company referred as a holding company above.

Government Company
The company Act is silent about this company but under the English law, this is a company
where not less than fifty one per cent (51%) of the paid up capital is held by the central
government, by any state government, partly by the central government and partly by one or
more state governments or is a subsidiary of the an existing government company.
Shares held by the municipal and local authorities are not to be included in the determination

One Man Company

No company can be formed by one person under the companies Act. But if almost all the
shares of the company are predominantly held by one person and the other remaining shares
held by few individuals, this can be construed as held by the holders in their capacity as a
nominee or agent of the holder.
Such a person under normal circumstances is the largest holder, the managing director of the
company or controls the board of directors and enjoys complete control over the company.
Examples under judicial case laws include;
 Salmon the man in Salmon and salmon and company limited.
 Lee in Lee vs. Lee and air faming company limited.
 Macaura in Macaura Vs. Northern Assurance Company limited.

Incorporated and Unincorporated association

Incorporation is a legal process by which several people are constituted together under the
law in order to form an entity which is normally considered as separate with rights and
obligations independent from the persons who formed it. Significantly, it is a process of
forming companies. Section 16(2) states that from the date of incorporation mentioned in the
certificate of incorporation, the subscribers to the memorandum of association shall be a body
corporate by the name contained in the memorandum.

PROMOTERS AND PRE-INCORPORATION CONTRACTS

A promoter is a person who does the necessary preliminary work incidental to the formation
of a company.
N/B Not everybody connected with the formation of a company can be called promoters, thus
professional advisers, legal as well as others are not promoters.
A person who does not play a prominent role may also be a promoter if he has so acted, but
does not include any person acting in a professional capacity in the formation of the company
Promoters are the first persons who control company’s affairs. They are the people who
conceive ideas about the formation of a company with reference to a given object and to set it
going.
They take the necessary step to incorporate the company, provide it with shares and loan
capital and acquire the business capital which it is to manage. Upon completion of everything
then they hand over the control to directors who are often the promoters themselves under a
different name.
Functions of promoters
1. They decide the name of the company and ascertain that it will be accepted by registrar of
companies.
2. They settle the details of the company’s Memorandum and article of association, the
nomination of Directors, bankers, Auditors and secretary and the registered office of the
company.
3. They arrange for the printing of the memorandum and Articles, the registration of the
company, the issue of prospectus where a public issue is necessary.
4. They are responsible for bringing the company into existence for the object which they
have in view.
Legal status of a promoter
The exact legal status of a promoter, the statutory provisions are silent. He is neither an agent
nor a trustee of the company under incorporation but a certain fiduciary duty has been
imposed on him under the company Act.
FIDUCIARY POSITION OF A PROMOTER
A promoter stands in a fiduciary relation (acquiring confidence or trust) to the company
which he promotes.
Fiduciary position of a promoter may be summed as follows
1. Not to make any profit at the expense of the company which he is promoting.
2. To give benefits of negotiation to the company, thus where he purchases some property
for the company, he cannot rightfully sell that property to the company at the price higher
than he gave for it.
Example
In Erlanger Vs New Sombrero Phosphate Co (1878), a syndicate of which E was the head,
purchased an Island said to contain valuable minerals. E, as a promoter, sold a company
newly formed for the purpose of buying it. A contract was entered into between X, a nominee
of the syndicate, and the company for the purchase at double the price actually paid by E. It
was held that as there had been no discloser by the promoters, of the profit they were making,
the company was entitled to rescind the contract and to recover the purchase money from E
and the other members of the syndicate.
The right of rescission is lost if the parties cannot be relegated to their original position. This
happen, for example:
i. Where the character of the property has been altered, or
ii. Where third parties have been acquired valuable rights.
When a promoter sells or wishes to sell his own property to the company, he should either:
a. See that there is a board of independent persons appointed as Directors of the new
company or
b. Disclose his interest in the property to the intended member or to the public by means of
prospectus
3. To make a full disclosure of the interest or profit
This disclosure to be made to an independent Board of Directors if they are not there then it
should be made to the intended shareholder as a whole.
4. Not to make unfair or unreasonable use of his position and must take care to avoid
anything which has the appearance of undue influence or fraud.
The promoter has a duty with regard to prospectors to ensure that
a. The prospectus contains the necessary particulars
b. The prospectus does not contain any untrue or misleading statements or does not omit any
material facts.
“Pre-incorporation contract”

A pre-incorporation contract is a contract entered into by the promoters and purporting to be

acting on behalf of the company before it is registered. Section 16 of the company Act states
that the company is deemed to have been incorporated upon its registration and hence cannot
have agents before its registration since by then it has no legal existence under the law.

Such contracts may relate to property which the promoters wish to purchase for the company
or they may be made with persons whose know-how is vital to the success of the company.
The promoters may perhaps have arranged for the company to take over an existing business,
and therefore need to make a contract with the vendor for its sale or purchase. Before its
incorporation, a company has no capacity to contract.
A contract entered into by promoters on behalf of a proposed company is void in so far as the
company is concerned. The promoters cannot be agents for a principal which has not yet
come into existence. In such cases the company cannot sue or be sued on it.
Legal effect of a pre-incorporation contract on the company being incorporated
Several judicial presence have been set in respect of pre-incorporations contract and this
provides the basis of the pre incorporation contracts rules as they relate to companies. This
includes;
(i) That the company when registered cannot ratify the agreement since a ratified
contract has retrospective effect.
The company was not a principal with contractual capacity at the time when the contract was
made. A contract can be ratified only when it is made by an agent for a principal who is in
existence and who is competent to contract at the time when the contract is made. In Natal
Land Colonisation company. Ltd vs. Pauline Colliery Syndicate Ltd (1904), N company
agreed with Mrs Carrey an agent of a syndicate before its incorporation that N company
would grant a mining lease to the syndicate. The syndicate was incorporated as Pauline
Colliery. Pauline Company discovered coal whereupon Natal Land Co. Ltd refused to grant
the lease.

It was held that there was no binding contract between Natal Land Co. Ltd and Pauline
Company as the latter was not in existence when the contract was signed.
If the company were allowed to ratify the contract it would mean that it contracted on the
date the contract was formed. This in effect would mean that the company contracted before
it was formed.

(ii) If the contract is in writing and it appears the company proposed was contracting as
a party, the promoters will not be allowed to enforce it in case of breach.

(iii). If the contract was written and it appears that the promoters were acting as in their
personal capacity, the company will not be liable nor will it be able to sue to enforce any
rights associated with it in Case Law: Kelner vs. Baxter (1866). It was held that B was
personally liable and no ratification could release him from his liability.
An agreement was made between K& B. B was acting on behalf of the proposed hotel
company. Wine supplied under the contract was used by the company which had “ratified”
the agreement after incorporation. The company went into liquidation before paying the
debt.

MANAGEMENT OF A COMPANY
A company in the eyes of the law is an artificial person and cannot act in its existence and
can only act through human agency i.e. directors, who are delegated the duty of managing the
general affairs of the company. They are collectively known as the Board of Directors.
The Board of Directors are given the powers to manage the company and has powers to bring
an action against the members to restrain them. They have great powers and the court
generally refuses to interfere with their management of company affairs if they keep within
those powers.
Circumstances when members have a right to intervene and take away management
from Board of Directors.
1. Where the directors are improperly using the name of the company in litigation.
In Danish Mercantile Co Vs Beamont (1951), the company in question appointed X and Y to
be its directors. X and Y were also members of the company. Their appointment as Directors
was contained in a separate agreement with them which conferred upon them powers to
manage the conduct of the affairs of the company as they thought fit. After a year, a dispute
arose between this company and another one. Y in particular, using the name of their
company, brought an action against the other company. In bringing this action, he never
informed colleagues nor the company in a general meeting, before the action actually
commenced. The company went into liquidation and the liquidator brought an action to strike
out the name of this company as a plaintiff in this action. It was held by the court of appeal
that the action by Y had been improperly instituted and in an event like that the members or
their representatives i.e. the liquidator could rightly bring an action to terminate that action
because by secretly instituting the proceedings, the directors were abusing the name of the
company.
(2). If the board of Directors itself cannot function due to one reason or another the members
can intervene.
(3). Where the Directors have acted ultra vires, the powers granted to them or the company
itself.
PROSPECTUS
Refers to circular, notice, advertisement, or other invitation, offering to the public for
subscription or purchase any shares or debentures of a company. In simple words it refers to
any document inviting offers from the public for subscription of shares or debentures of a
company. A prospectus must be in writing. An oral invitation to subscribe shares in, or
debentures of a company or deposit is not a prospectus.
Subscription
It means taking or agreeing to take’ shares for cash. It means that the person agreeing to take
shares puts himself under a liability to pay the nominal amount thereof in cash.
Invitation to public
Public includes any section of the public, whether selected as members or debenture holders
of the company concerned or as clients of the person issuing the prospectus or in any other
manner.
Meaning of the word issued
It means issued to the public, this may be done by agent of the company and not necessarily
the company itself.
FORM AND CONTENTS OF A PROSPECTUS
A prospectus is the window through which an investor can look into the soundness of a
company’s venture.
The contents and preparations of all prospectus must be in accordance with the provision of
the Act and the following rules must be observed in all cases.
a. Section 43 provides that a copy of the prospectus must be delivered to the registrar of
companies and must be signed by every person who is named therein as Director or
proposed director.
b. Section 39 provides that every prospectus issued by or on behalf of a company must be
dated and the date unless the contrary is approved.
Characteristics of Prospectuses
The essential characteristics and the features of the prospectus are the following:
i. It is a document described or issued as a prospectus.
ii. It includes any notice, circular, advertisement, inviting deposits from the public or other
document.
iii. It is an invitation to the members of the public.
iv. The public is invited to subscribe the shares or debenture of the company

N/B

The term public does not mean an invitation of very large number of people. It is enough if
the invitation is to a section of the public. In South of England Natural Gas Co Ltd case, P
“strictly private circulation” = stated to have been distributed by the promoters only to the
shareholders in certain gas companies in which they were interested. 3,000 copies were sent
out. The court held that the prospectus was an offer of shares to the public. It is a domestic
concern of the persons making and receiving the offer or invitation. Thus an offer to one’s
kith and kin cannot be considered to be an invitation to public. But an invitation to a few
friends and relatives or to the customers of the promoter does not institute a prospectus. In
Sherwell vs. Combined Incandescent Mantles -“strictly private and confidential, not for
publication.” The directors distributed, without the authority and company, 200 of them
amongst their and promoters’ friends and relatives. The court held that it was not an
invitation to the public.

From these cases it follows that there must be some degree of publicity, even though it is on a
low key.

v. Prospectus is the document through which the Company secures the capital needed for
Carrying on its business. Any document having this object, comes within the definition of
prospectus.

FORM AND CONTENTS OF THE PROSPECTUS

The Companies Act in its schedules specifies a list of particulars which must be included in
the prospectus. The principal items are the following :
1) Particulars of signatories of the memorandum of the Company and shares subscribed
by them;
2) Number and classes of shares and extent of interest of holders and particulars
regarding debentures and redeemable preference shares;
3) The rights in respect of capital and dividends attached to different classes of shares;
4) Particulars regarding the directors, managing agents, secretaries and treasurers, etc.
and of the Contract fixing the remuneration of managing agents, etc
5) The minimum amount of subscription and amount payable on application;
6) Time of opening of subscription list;
7) Preliminary expenses incurred;
8) Particulars regarding purchase of property;
9) Details of any premium or under-writing commissions paid;
10) Particulars of reserves including reserves capitalised;
11) Nature and extent of interest of every director and promoter;
12) Names and addresses of the auditors of the company;
13) In case of existing companies, a report by the auditors showing the profit and loss and
assets and liabilities of the company, rates of dividend paid for five years preceding
issue of prospectus and particulars regarding subsidiaries;
14) Whether the prospectus is issued at the time of the formation of the company or
subsequently;
15) The nature and extent of restrictions upon members at company meetings;
16) Restrictions upon the powers of the directors;
17) Voting rights, capitalization of reserves and surplus of revaluation;
18) Inspection of balance sheet and profits and loss account;
19) The following reports are to be annexed to the prospectus
i) report by auditors and\
ii) report by the accountant
THE LEGAL REQUIREMENTS OF PROSPECTUS
1) Time
A prospectus is to be issued after the incorporation of the company.
2) Particulars
The prospectus must contain all the particulars listed in Schedule to the Companies Act.
3) Date
The prospectus must be dated and this date will be considered to be the date of publication
unless otherwise proved
4) Signature.
The prospectus must be signed by every person mentioned there in as director or proposed
director or his agent.
5) Copy of prospectus
Every application form for shares, issued by the company, must be accompanied by a copy
of the prospectus except
i) Application forms issued in connection with a bonafide invitation to a person to enter
into an under-writing agreement, and
ii) Application forms issued to existing members and debenture-holders.
CAPITAL OF A COMPANY
The word capital in connection with a company means share capital i.e. Money raised by the
issue of shares.
Types of capital
1. Authorized or nominal capital
Refers to the nominal value of the shares which a company is authorised to issue by its
memorandum of association. It is the maximum capital which the company will have during
its lifetime unless it is increased or reduced depending on the financial requirement of the
company. It is also known as registered capital.
2. Issued capital
This refers to the nominal value of the shares which are offered to the public for subscription.
The issued capital can never exceed the authorized capital since company cannot issue capital
at once.
3. Subscribed shares
This refers to that part of company’s issued capital which has been taken up or subscribed by
the public. In the case of reputed companies with a lot of good will, the entire issued capital
may be subscribed by the public, but in unsound companies the subscribed capital may be
less than the issued capital.
4. Called- up capital
This refers to that part of the issued capital which has been called up on the shares. It is the
total amount called upon the shares issued and which the shareholders continue to be liable to
pay as and when called.
5. Paid up capital
Refers to that part of the capital which has been paid up by the shareholders or which is
credited as paid up on shares.
6. Reserved capital
Refers to any part of the company’s share capital which a company may resolve by a special
resolution not to be called except in the event of winding up.
Classes of shares
The capital of a company is divided into certain indivisible units of a fixed amount called
shares.
Shares of a company may be classified into the following.
a. Preference shares
b. Ordinary or equity shares
c. Corporate shares
d. Deferred or founders’ shares
e. Unclassified shares
Preference shares
These are share whose holders are given priority or preference when dividend is being paid.
Preference shares in this case is in respect to the following matters:
1. When a dividend is declared, the holders of preference shares are first to receive payment.
2. When receiving dividends, preference shareholders are paid at a fixed rate so that the
company cannot pay them more or less than the rate agreed upon e.g. they will receive the
dividend at a rate of 5%.
N/B
Preference shareholders have no priority as to the surplus assets in the winding up, unless
it is expressly given in the article.
Classes of preference shares
1. Cumulative or non- cumulative preference shares
Refers to those shares whose dividends not declared in the previous years are kept
accumulating to be paid in subsequent years when dividends are declared or before
liquidation whichever comes first.
Non- cumulative preference shares
A type of shares whose holders are entitled to receive a fixed percentage as dividend out of
the profits of each year.
2. Participating or non -participating preference shares
Participating preference share
Refers to those shares that are not only entitled to a fixed rate of divided but also to a share in
the surplus profits which remain after the claims of equity shareholders (up to a limit say
15%).
Non-participating preference shares
These are preference shares that earn dividends at a fixed rate only once whether or not there
is a surplus still available for distribution to the members.
3. Redeemable preference shares
These are shares that can be bought back by the company once they are issued to the
shareholders. Redemption is only possible when it is effected in accordance to the
following statutory conditions.
a. The shares must be fully paid up.
b. They must be redeemed
1. Out of the proceeds of a new issue of shares made for the purpose of redemption.
2. Out of the profits of the company which would otherwise be available for dividends.
c. That any premium payable on redemption must come out of the company profits.
d. Where the shares are redeemed out of profits a sum equal to the value of the redeemed
share shall be transferred from the company’s profits to special reserve fund known as
the capital redemption reserve fund.
ORDINARY SHARES/ EQUITY CAPITAL
These are share whose shareholders receive dividends after payment of the dividend to
preference shareholders.
They carry main financial risks; they are entitled to the following rights unavailable in respect
to other shares.
1. They are entitled by use of their voting powers at the general meeting to control the
company.
2. After providing for any dividend which is payable on preference shares, the whole of the
profits can be made available to them.
3. In winding up, the holders of ordinary shares are entitled to the entire residue after
payment of the company’s liabilities.

Corporate shares
These are shares created by a company for issue to its employees. They are shares that serve
special purpose, i.e. given to employees as a means to win their co-operation with the
company’s management and owners. They are issued without voting rights but have the right
to earn dividend.
Deferred or founders’ shares
These are shares issued to the founders of the company. They are also given right to
apportion of the profits if the dividend on ordinary shares exceed a certain fixed amount.
WINDING UP OR LIQUIDATION
According to Professor Gower, he defined it as a process whereby a company’s life is ended
and its property administered for the benefit of its creditors and members.
During this process management of a company’s affairs is taken out of the director’s hand, its
assets are realised by a liquidator and its debts are paid out of the proceeds of realization.
Winding up and dissolution
Winding and dissolution of a company are not one and the same thing. Winding up precedes
dissolution i.e. it is the process by which the dissolution of a company is brought a bout. At
the end of winding up, the company will not have assets or liabilities and it will therefore be
simply be a formal step for it to be dissolved that is for legal personality as a corporation to
be destroyed. In between winding up and dissolution the legal entity of the company remains
and it can be sued in a court of law.
Winding up and insolvency
The above two are not one and the same thing.
1. Winding up in order can be made, even when the company is insolvent. In other words,
winding up is not confined to cases where a company insolvent, but it may be adopted as
a means of enabling the company or members to reincorporate with more extended
objects or further powers or more efficient means of management.
2. On winding up, the company as such does not cease to exist, only its administration is
carried through the medium of a liquidator. The property of the still belong to the
company which can carry on business and file suits in its own name. It is otherwise in the
case of insolvency.
3. Even where a company is wound up because it is insolvent circumstances, all the
provisions of the insolvency law do not apply to it.
Modes of winding up
There are three modes of winding up.
a. Winding up by court
b. Voluntary winding up. This may be
i. Members’ voluntary winding up
ii. Creditor’s voluntary winding up
Winding up subject to the supervision of the court.

Winding up by court
This occur under court order and it is called compulsory winding. This occur under the
following circumstances
i. If the company has, by special resolution, resolved that it be wound up by the court.
ii. Default is made in delivering the statutory report to the registrar or in holding the
statutory meeting.
iii. Where there is a failure to commence business within a year or where the business is
suspended for a whole year by the whole year by a company.
The court cannot only wind it up if
a. There is a reasonable prospect of the company starting business within a reasonable time.
b. There are good reasons for delay i.e. the suspension of the business is satisfactorily
accounted for and appears to be due to temporary causes.
iv. The number of the members reduced in the case of private company below two or in
the case of any other company below seven.
v. Where the company is unable to pay its debts i.e.
a. A creditor to whom the company owes more than one thousand shillings has left at the
company’s registered office demands to be paid of the sum due and the company has for
three weeks thereafter neglected to pay the sum or to secure or compound for it to the
reasonable satisfaction of the creditor.
b. Execution or other processes in favour of creditors of the company is returned unsatisfied
in whole or part.
c. It is proved to the satisfaction of the court that the company is unable to pay its debts,
taking into account the contingent and prospective liabilities of the company.
vi. Just and equitable
It means that the jurisdiction of the court is not limited to any particular case. The principle
of just and equitable clause baffles a precise definition i.e. it must rest upon the judicial
discretion of the court depending upon the facts and circumstances of each case.
What is ‘just and equitable’ clause.
The court may order winding up under the just and equitable clause in the following cases.
1. When management is carried out in such a way that the minority shareholders is
disregarded or oppressed, this must be proved. This can be proved if abuse of majority
voting power is realized.
2. Where there is a deadlock in the management of the company. Where shareholding is
more or less equal and there is a case of complete deadlock in the company.
3. When the company was formed to carry out fraudulent or illegal business or when the
business of the company becomes illegal.
4. In the case of a company incorporated outside Kenya and carrying on business in Kenya.
Winding up proceedings have been commenced in respect of it either:
i. In the country of its incorporation or
ii. In any country in which it has been established a place of business, Section 219.
5. When substratum of the company is gone. The substratum of the company can be said to
have disappeared only when the object for impossible to carry on the business except at
loss, or existing liabilities. The stratum of a company disappears
i. When the subject matter of the company is gone.
ii. When the main object of the company has substantially failed or become
impractible. Its substratum is gone and it might be wound up even though it is
carrying on its business in pursuit of a subsidiary object.
iii. When the company is carrying on its business at loss and there is no reasonable hope
that the object of trading can be attained.
iv. Where the existing and probable assets of the company are insufficient to meet its
existing liabilities. Where a company is totally unable to pay off creditors and there
is ever increasing burden of interest and deteriorating state of management and
control of business owing to sharp differences between shareholders, the court will
order winding up.
Who may petition for company winding up?
According to section 221, an application to the courts for winding up is by petition which
may be presented:
a. By the company itself to the court for winding up after it has passed a special
resolution. This should be supported by resolution in a general meeting.
b. By any creditor or creditors (Including any contingent or prospective creditor or
creditors). Creditor here implies every person having a pecuniary claim against the
 company whether actual or contingent, such a person is competent to file a petition
for the winding up of the company.
Persons included in the category of a creditor are:
 A contingent or prospective creditor – Holder of bills of exchange not yet due or
holders of debentures not yet payable
 A debenture holder
 A legal representative of deceased creditor
 The government or a local authority to whom any tax or other public charge is due.
 Any person who has pecuniary claim against the company whether actual or
contingent.

Commencement of winding up
Where, before the presentation of a petition for winding up of a company by the court, a
resolution has been passed by the company for voluntary winding up, the winding up shall be
deemed to have commenced from the date of the resolution for voluntary winding up. The
winding up of the company by the court shall be deemed to commence at the time of
presentation of the petition for the winding up.
When an order is made for winding up, it relates back to the date of the presentation of the
petition.
Procedure of winding up by the court
In section 218, a petition for winding up order against a company may be presented to the
High court of Kenya, such a petition must be supported by an affidavit of the petitioner.
When determining the petition under section 222, the court may either,
a. Dismiss it with or without costs
b. Adjourn the hearing, conditionally or unconditionally or
c. Make an interim order or
d. Make any other order (for compulsory winding up or winding up under the supervision of
the courts) that thinks necessary.
However, the courts must not refuse to grant a winding up order on the ground only that the
company’s assets have been mortgaged to an amount equal to or in excess of their value or
that the company has no assets.
As per section 222 (3), where a petition is presented on the ground that the statutory meeting
has not been held or the statutory report has not been delivered, the court may:
i. Require the meeting to be held or the report to be filed instead of making a winding
up order
ii. Order the costs to be paid by any persons responsible for the default.

Consequences of winding up by the court

Once the court makes an order for winding up of a company, its consequences date back to
the commencement of winding up. By virtue of section 229, an order of winding up a
company operates in favour of all creditors and contributories as if made on the joint petition
of a creditor and contributory.
1. In the case of compulsory winding up by the courts, the winding up dates from the
presentation of the petition, unless before that date a resolution was passed to winding up
voluntarily in which case commencement is the time of the resolution.
2. In the case of voluntary winding up, the winding up is deemed to commence at the time
of the passing of the resolution to wind up voluntarily.
3. In case winding up has been granted or an interim liquidator has been appointed, no
action may be proceeded with or commenced against the company except by the leave
(Permission of the court) and subject to such terms as the courts may impose.
Powers of the liquidator
Taking into his custody or under his control all the property of the company and things in
action.
The liquidator with the leave or permission of the court or committee
1. Institute or defend suits and other legal proceedings, civil or criminal, in the name of the
company.
2. To carry on the business of the company so far as may be necessary for the beneficial
winding up the company.
Without the sanctions of the courts he may:
a. Sell the company’s movable and immovable property by public auction or privately.
b. Do all acts and execute all documents in the company’s name and use the company seal.
c. Draw, accept and endorse bills and notes in the name of the company.
d. Borrow money on the security of company’s assets
e. Appoint an agent to do any business which the liquidator is unable to do himself.
f. Take out in the official name letters of administration to a deceased contributor.
Additional powers
Section 268 and the winding up rules further provide for the delegation of certain powers of
courts to the liquidator in respect to the following matters.
1. Holding meetings of creditors and contributors for ascertaining their wishes.
2. Settling the list of contributories and rectifying the register of members
3. Making calls on the contributors
4. Fixing time within which debts and claims must be proved.
5. Paying, delivery, conveyance, surrender or transfer of money, property and documents
of the liquidator.
Termination of the liquidator powers
The liquidator ceases to function if
1. He resigns
2. He is removed by courts if sufficient cause is shown under section 238.
3. He is released by an order of the court; this indemnifies him from all liabilities in the
administration of the affairs of the company.
Dissolution of the company
This is done by the liquidator who makes an application for an order to dissolve the
company and the company is dissolved from the application of such order.
The liquidator within 14 days deliver a copy of the order to the registrar for registration.
VOLUNTARY WINDING UP
It means winding up by the members or creditors of a company without interference by the
court.
Circumstances in which a company may be wound up voluntarily
a. When the period fixed for the duration of the company have come to an end or an event
upon which the company is to be wound up has happened and the company in a general
meeting has passed resolution.
b. If a company (for any reason whatever) passes a special resolution to winding up
voluntarily.
Types of voluntary winding up
1. Members voluntary winding up
2. Creditors voluntary winding up
1. Members voluntary winding up
This is done through declaration by members in a member’s voluntary winding up. The
declaration shall be made by majority of Directors at the meeting of the Board that they have
made a full inquiry into affairs of the company and having done so they have the opinion that
the company.
a. Has no debt
b. It will be able to pay debts in full within 12 months from the commencement of winding
up.
2. Creditors voluntary winding up
This is done where the declaration of solvency is not made and filled with the registrar in
such a case the company must call a meeting of the creditors on the same day or on the next
day after meeting at which the resolution for voluntary winding up is to be proposed.
3. Winding up under the supervision of the court.
This a form of winding up where courts are usually invited to supervise a voluntary winding
up if there is a substantial dispute between the company and the creditors especially when
they disagree over the appointment of the liquidator.

Companies and Capital Markets

Capital markets

Are venues where savings and investments are channelled between the suppliers who have
capital and those who are in need of capital. The entities that have capital include retail
and institutional investors while those who seek capital are businesses, governments, and
people. Capital markets are composed of primary and secondary markets. The most common
capital markets are the stock market and the bond market.

Capital markets seek to improve transactional efficiencies. These markets bring those who
hold capital and those seeking capital together and provide a place where entities can
exchange securities. Capital markets are used to sell financial products such as equities and
debt securities. Equities are stocks, which are ownership shares in a company. Debt
securities, such as bonds, are interest-bearing IOUs.

Primary versus Secondary Capital Markets

Capital markets are composed of primary and secondary markets. The majority of modern
primary and secondary markets are computer-based electronic platforms. Primary markets are
open to specific investors who buy securities directly from the issuing company. These
securities are considered primary offerings or initial public offerings (IPOs). When a
company goes public, it sells its stocks and bonds to large-scale and institutional investors
such as hedge funds and mutual funds.

The secondary market, on the other hand, includes venues overseen by a regulatory body like
the Securities and Exchange Commission (SEC) where existing or already-issued securities
are traded between investors. Issuing companies do not have a part in the secondary market.
The New York Stock Exchange (NYSE) and Nasdaq are examples of the secondary market.

DIVISION OF POWERS BETWEEN THE BOARD OF DIRECTORS AND

GENERAL MEETING.

Balance of power in the company raises the question of the relationship between the company
in general meeting and the Board of Directors. All these bodies have distinct powers and
controls of the company provided for in the Companies Act, and or the memorandum and
articles of Association of the Company. The general meeting is principally responsible for
election of the directors while directors are principally concerned with the management of the
company. The question is which of the two bodies;

Board and shareholders in general meeting have more powers in the control of the company
and what should happen if one body misuses its powers to the detriment of the other. In this
paper, I examine the arguments that have been raised by other authors in favour of
shareholders in general meeting as having the control over the company on the one hand and
the Board of directors on the other hand. I argue that the powers of the shareholders is
restricted and only exercised as permitted by the Articles and Memorandum of Association.

The Board is vested with a lot of powers in the management of the company and that its
improper exercise leaves the shareholders in most jurisdictions at the mercy of the Board. I
further lend an argument that corporate governance has developed principles which are
intended to tame the powers of the Board of directors outside the law. I analyse how the
principles of good corporate governance once implemented can ensure that the Board acts
within acceptable means, and I end by recommending that principles of good corporate
governance be made into law by States that have not done so as the same will ensure
compliance by the Board.