Unit: Company Law: BCom/BBA

Unit Code: BMG 4303

Company law- Part 2

Topic:- Formation and Registration of companies

Introduction:

Any entity that is a person in the eyes if the law, unless prohibited, may form a company. A natural person
or a number of such persons may form a company. A corporate body, for example the government, may
establish a company by incorporating it according to the existing legal provisions. It is possible also for an
artificial person (corporate body) such as a private company to form and register a company in the same
way that a natural person may do. Formation of a company involves conceiving the idea, planning and
taking steps to bring it into reality. The process of forming it involves complying with legal requirements
and having it registered by the Registrar of Companies. Once it is registered, it acquires legal capacity to
act and transact business.

Promoters

A promoter is the person who conceives the idea of a company and takes steps to register it. He may not
have to do it personally but may instruct another person to do it for him. A promoter, therefore, can be a
natural person or can be an artificial person such as a corporation. A company may instruct another person
to carry out the plans for establishing a company. In this case, the person instructed is an agent and the
instructing company is the promoter. The promoter is responsible for the preparation of the documents
necessary for registration, for example, the memorandum of association, articles of association and the
filling of the application form, paying fees and levies. The promoter is also responsible for raising the capital
and getting the persons who are willing to be directors of the company. The promoter may also be
responsible for making preliminary contracts beneficial to the company (pre incorporation contracts are
contracts made in advance before the company is registered in anticipation of business needs of the
company.)

Definition:

The promoter can be defined in any one of the following ways:

a. Any person who is in control of issuing the shares of a company (not an agent)
b. Any person named in an offer document as the promoter.
c. Any person who undertakes to form a company with reference to a given project and to set it going
and who takes the necessary steps to accomplish that purpose.
*(c) is the best of the three definitions.
The relationship between the promoter and the company

Legal position of the promoter

The promoter is not an employee of the company neither is he an agent of or a trustee of the company.
This is because the company has not yet come into existence. No person may be an agent or trustee of a
person who is not existing. Therefore, the only legal responsibility that the promoter may owe the company
is the duty to be careful not to endanger the interests of the company before it is formed and to be honest
in dealing with the company affairs. This legal responsibility is called fiduciary duties. They two main
fiduciary duties:
❖ a duty of care and
❖ good faith
Thus, it is a fiduciary relationship which starts from the time the shares of the company are offered for
subscription up to the time when the directors of the company have been appointed. This is how the law
protects the company from impropriety by a promoter who may want to use his position for personal gain
at the expense of the company. It is also the way in which a company yet to be registered is protected from
careless actions of the promoter which may disadvantage the company or cause it losses when it is finally
incorporated. It is important to notice that the fiduciary duties are owed to the company that is to be
formed and not to the shareholders. Below are the contents of the fiduciary duties which bind the
promoter:-

The duty of good faith

The duty of good faith contains involves the following:
❖ The promoter must act in utmost good faith and avoid any conflicts of interests with the company
he is promoting. Conflict of interest may be a situation where the promoter is using the company
to further his own personal gain at the expense of the company that is yet to be formed.
❖ the promoter must not use his position to make a secret profit. He must observe a high standard
of honesty and openness.
❖ Therefore, he must later on disclose to the directors of the company any profits which he has made
while promoting the company. The BOD may allow it but is not under obligation to allow him to
keep the profit.
❖ The promoter may disclose by writing in the company’s articles of association or in the prospectus
for issuing the shares of the company. He may do so by writing about his personal interest and
profit in the offer document (i.e. a prospectus or any document informing potential shareholders
about the company shares for purposes of inviting them to subscribe for the shares.)
❖ This point can best be illustrated by the case of Erlanger v New Sombrero Phosphate Co.

FACTS OF THE CASE:

Erlanger bought an island (Sombrero Island) rich in phosphates mineral at a cost of 60,000
pounds and formed a company to mine the mineral. He appointed his friends to be the Board of
Directors when the company is finally registered. After the company was registered, Elenger sold
the island to the company (New Sombrero Phosphates Company.) He used a friend, J. Marsh
Evans, to pretend that he was the one selling the island to the Company thereby concealing the
true owner, Mr. Elanger. Rumors spread that Mr. Erlanger, the promoter of the company buying
the island had earlier bought it at 55,000 pounds. The company shareholders held a meeting
 and voted to remove the directors and replaced them. The new BOD then commenced an
investigation into the rumors and eventually sued Erlanger and his associates for a refund of the
110,000 pounds or the profit they made from buying the island at 55,000 pounds and selling it
at 110,000 pounds.
JUDGMENT:
The court rescinded the contract and was refunded the money.
REASON FOR THE JUDGEMENT:
The promoter, Erlanger abused his position and made a secret profit; failed to disclose to the
directors the facts regarding the sale of the island. He failed to observe the fiduciary duties
imposed on a promoter.

❖ Where the BOD has not been appointed, the promoter may seek the permission of the persons
who have contributed the initial capital of the company.
❖ The promoter must not disclose any confidential information in his possession.

Duty of care

The promoter is required to observe the duty of care and not put the company at risk by careless actions
during the period of promotion. The promoter must observe a high standard of care and skill to do whatever
he does in the interest of the company only. For example, must take good care of the property of the
company and not let it go to waste.
The company can claim the following remedies in case the promoter breaches his fiduciary duties:
i. Rescission - the court may allow a company to rescind any contract which the promoter made in
contravention of his fiduciary duties.
ii. Recovery of secret profits - the promoter may be given an order to surrender to the company the
secret profits.
iii. Damages - the company may be awarded damages by the court if fiduciary duties were breached.
iv. Retention of property - the company may retain the property acquired by the promoter in breach
of his duties.
The duties of the promoter explained above are derived from the common law, hence are referred to as
common law duties. They have been strengthened by their inclusion in company legislation. The same
duties are now found imposed by our company legislation.

Remuneration of the promoter

A promoter has no right of refund of his expenses while forming a company but he may be remunerated
in the following ways:
1. The promoter may sell his property to the company for cash or in exchange for shares.
2. He may be given an option to buy other shares.
3. He may take commission for the shares sold.
4. Take grant of company shares.
5. He may be paid a lump sum by the company.
6. The articles may provide that he be paid a fixed amount when the company is
incorporated. However, the company will not be bound by that.
Registration of companies

Section 11 of the Act provides that any one person or a number of persons acting together may lawfully
form a company in Kenya. This implies that, although companies tend to have several members, it is
possible to form a company as a single person. One man company is therefore permitted by law. However,
it is necessary for a company to be registered by the Registrar of Companies in order for it to operate
lawfully as a corporate body. Therefore, the persons wishing to register a company must apply to the
Registrar and submit a memorandum of association which complies with the requirements of the Act. The
company must be formed for carrying on lawful business otherwise, the Registrar may decline its
registration. The process of registering a company involves compliance with regulations provided for in the
Companies Act 17, particularly section 13 to 16 and the additional directions stipulated in the Regulations.
A number of documents are prescribed for submission to the Registrar of Companies.
1. Application form (Form CR1) - the applicant must submit a prescribed application form which states
the following details:
a. proposed name of the company.
b. its proposed location.
c. whether it is limited or not and if limited, whether by guarantee or shares.
d. whether private or public limited company.
e. if the application is being done on behalf of the promoter by an agent, then the agent's name and
particulars must be included.
f. must show a statement of shares capital and shareholding or a statement of guarantee.
g. names and particulars of proposed officers

2. Memorandum of association(Form CR2) - a memorandum drafted according to the prescribed

format given in the regulations. The MOA must show the names and particulars of the subscribers
to the company and where limitation is by shares it must show that the subscribers agree to take
at least one share. Further, it must have a declaration that:
a. the subscribers have agreed to be members of the company and that each member takes at least
a share.
b. Each member's name and other particulars are written and they sign.

The submission of this document is crucial. Section 12(2) states categorically that no company shall be
registered without a compliant MOA.

3. Articles of association - under section 13(5), application for registration must be accompanied by
this document. The AOA must comply with the requirements of this section, i.e.:
❖ Must be written in one document
❖ in English
❖ in printed form
❖ divided in numbered paragraphs
❖ dated and signed by each subscriber
❖ In addition, each subscriber's signature must be attested to by two witnesses.
4. Statement of nominal capital and initial shareholding - the statement must comply with
requirements of section 15, i.e. it must show the capital of the company and its division. It must
show the number of shares to be issued to subscribers; their nominal value and their aggregate
value.
 5. A statement of guarantee - this is needed where the company is limited by guarantee. This must
show the identity of the persons giving the guarantees and the amount they have agreed to
guarantee.
6. Statement of proposed officers - a statement identifying persons who have agreed to be the first
directors of the company; the person to be appointed the company secretary; the person to be
appointed authorized signatory of the company. The written consents of these officers must be
included and their particulars such as residential addresses, professions or trade.
7. Declaration of compliance - a statement attesting that the application complies with the
requirements must be signed by an advocate, director, or the Secretary.
8. Notice of the situation of the registered office - must be submitted not later than 14 days after the
date of incorporation.
9. ID or passports - copies of ID for Kenyan citizens and passports for foreign nationals.
10. Copy of pin number certificate - photocopy is required of persons intended to be appointed officers
of the company.
11. Passport size photo - of the persons who will be appointed to the BOD, secretary and signatory.

Section 17 of the Act provides that the Registrar will issue a certificate of registration if the application
complies with the law. The certificate must have the name of the company and a unique identification
number. It will have details of whether it is a public or private company and the date of its registration;
whether limited by shares or guarantee. The certificate must be signed by the Registrar. The certificate is
proof of the following:
1. That the company is lawfully registered.
2. The date of registration is the date when the company was incorporated.

Effect of registration

The registration of a company by the registrar has the following effects stated in sec. 19 of the Act.
1. First, the company receives a registration certificate and is allocated a unique number which
identifies it as an entity. From that time the company is a corporate body with its own identity.
2. The company is able to do anything in its powers or capacity, e.g. make contracts in its own name
or buy and own property.
3. It is proof that its registered office is the one stating its certificate of registration.
4. Registration also serves as proof that the company's name and status, whether limited by shares
or not is as stated in the registration certificate.
5. It is conclusive proof that the shareholders and the persons named as the officers of the company
are its officers.
6. That the persons who are it members are incorporated into one artificial entity separate from each
one of them.

Basic documents for registration of a company

The documents mentioned above are prerequisite for registration of a company. However, there are basic
documents which are very essential for the registration of a company and its future existence. The two
documents are the memorandum of association and the articles of association.
Memorandum of association

Memorandum of association is regarded as the most important document for the formation of a company,
the charter of the company. It is written in a format prescribed by the Act. Its contents are divided into
classes such as:
❖ Name clause which states the name of the company.
❖ Situation clause which states where the company offices are situated.
❖ The objects clause (the core business of the company).
❖ Clause stating its liability.
❖ Clause stating the share capital of the company.
❖ Association clause, detailing particulars of the subscribers.
❖ General form clause.

Memorandum of association is important for the following reasons:

a. It is the agreement between the members of a company and their company which provides the
basis of their relationship
b. It states the company's areas of operations thus serves as to inform the members of the public
what the business of the company is.
c. It defines the relationship between the company and outsiders.
d. It informs the members of the company where their funds are applied.

Articles of association

This document is the constitution of the company.

❖ It gives the structure of the company's management: the division of the company's management
into its various organs which exercise managerial authority.8
❖ The articles define the authority which may be exercised by each organ of the company and their
limits. For example, articles explain the functions of the Board of Directors of the company.

Articles are also drafted in a prescribed manner, that is, divided into clauses. 9 The clauses cover various
matters such as:-
a. authority of the Directors
b. general meetings
c. describes the shares, their divisions and transfer
d. communication by the company
e. and administrative arrangements.