Bbm4101 Company Law

P.O.
Box 342-01000 Thika

Email: info@mku.ac.ke
Web: www.mku.ac.ke
DEPARTMENT OF BUSINESS STUDIES
COURSE CODE: BBM411

COURSE TITLE: COMPANY LAW
Patrick Kibati-0722-577701
C OURSE
OUTLINE
Purpose of the course

To prepare students for such aspects of law as will touch their business operations so that
they can play a practical role in the field of commercial enterprise in the community and
nation as a whole.
Course outcomes
By the end of the course unit, the learner should be able to:
Explain features of a company as a legal person
Describe the procedure of forming a company
Describe the procedure of holding a statutory meeting
Explain the general running of a company
Course Content
Lesson one: the company as a form of business organization
Meaning of company
Classification of companies
Registration procedures
Effect of registration
Meaning of incorporation
Practical consequences of registration
Disadvantages of incorporation
Lifting the corporate veil
Lesson 2: memorandum of association
Meaning and importance
The purposes of memorandum
The contents of memorandum
The alteration of the memorandum
Doctrine of ultra vires
Lesson 3: articles of association
Meaning of articles of association
The contents of articles of association
Alteration of articles of association
The constructive notice of memorandum and articles
2
The doctrine of indoor management

The rule royal brutish bank v turquand
The exceptions to the doctrine of indoor management
Lesson 4: The promoters
Meaning of promoters
The functions of promoters.
Legal status of a promoter
Fiduciary position of a promoter
Duty of promoter as regards prospectus
Remuneration of promoters
Pre incorporation or preliminary contracts
Position of promoters as regards pre incorporation contracts
Ratification of a pre-incorporation contract
Lesson 5: prospectus
Meaning of prospectus
Purpose of a prospectus
The form and contents of a prospectus
The report to be set out in prospectus
Lesson 6: Flotations
Meaning of floatation
The methods of public issue
Lesson 7: distribution of companys powers
The directors powers
How the board meetings are conducted
The role of the chairman in a company
The delegation of directors powers
Powers, remuneration and removal of the managing director
The qualifications ,legal status and liabilities of the company secretary
The directors vis members in general meetings
CAT
Lesson 8: the law of meeting
The meaning of meeting
Importance of company meetings
Classification of company meetings
The requisites of a valid meeting
Lesson 9: share capital
Meaning of share capital
3
Types of types of share capital

Classes of shares
Meaning of stocks
Alteration of capital
Variation of shareholders rights
Lesson 10: majority rights and minority protection
Meaning of majority power

Meaning of the principle of majority rule
Protection of minority shareholders or exception to the rules in Foss-v- Harbottle
Lesson 11: accounts and auditors

Requirements of what should be captured by the books of account
The various financial statements that should be presented to the shareholders
The manner of presentation of group accounts to the shareholders
In the manner of appointment ,remuneration and disqualification of the auditors
Lesson 12: investigation of a companys affairs
Explain the process of investigation into a companys affairs
Explain the process of investigation of companys membership
Explain the alternative power of registrar in matters of company investigation
Lesson 13: winding-up
The meaning of winding up
The process of winding up by the court
The process of voluntary winding up
The process of creditors voluntary winding up
The process of winding up subject to supervision
Lesson 14: companies and the stock exchange
The reasons for listing in the stock exchange
The major benefits of listing at the stock exchange
The Nairobi stock exchange market segments
Listing requirements at the Nairobi stock exchange general eligibility
requirements for public offering of shares and listing
The responsibilities of a listed institution
The role of the capital markets authority
Teaching learning methodologies:
Lectures and tutorials; group discussion; demonstration; individual assignment; Case
studies.
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Course assessment
Cats
20 %
Assignments
10%
Final exam
70%
Total
100%
Instructional materials and equipment:

Projector, text books, design catalogues, computer laboratory, design software, simulators.
Recommended text books:
Gordon & Barrie, Commercial Law
C.R Newton, General Principles Of Law
Textbooks for further reading
C. Hamblin And F. Wright, Introduction To Commercial Law
Other support materials:

Various applicable manuals and journals, variety of electronic information resources as
prescribed by the lecturer.
Other support materials:
Various applicable manuals and journals, variety of electronic information resources as
prescribed by the lecturer.
TABLE OF CONTENTS
LESSON ONE: THE COMPANY AS A FORM OF BUSINESS ORGANIZATION
Page
5
1.1 The Nature Of The Company.10

1.2 Classification Of Companies. 11
1.3 Registration Procedures......13
1.4 Effect Of Registration.15
1.5 Incorporation ......17
1.6 Advantages Of Incorporation ..........20
1.7 Disadvantages Of Incorporation......22
1.8 Lifting The Corporate Veil..23
LESSON 2: MEMORANDUM OF ASSOCIATION
2.1 Meaning And Importance.....................................................................................31

2.2 Purposes Of Memorandum...................................................................................32
2.3 Preparation Of Memorandum Of Association......................................................32
2.4 Contents Of Memorandum...................................................................................32
2.5 Alteration Of The Memorandum..........................................................................40
2.6 Doctrine Of Ultra Vires........................................................................................40
LESSON 3: ARTICLES OF ASSOCIATION
3.1 Meaning Of Articles Of Association....................................................................44

3.2 Contents Of Articles Of Association ...................................................................46
3.3 Alteration Of Articles Of Association..................................................................47
3.4 Constructive Notice Of Memorandum And Articles............................................49
3.5 Doctrine Of Indoor Management..........................................................................50
3.6 The Rule Royal British Bank V Turquand........................................................... 51
3.7 Exceptions To The Doctrine Of Indoor Management......................................... .53
LESSON 4: PROMOTERS
4.1 Definition Of Promoters................................................................................... ...56

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4.2 Functions Of Promoters.......................................................................................58

4.3 Legal Status Of A Promoter.................................................................................58
4.4 Fiduciary Position Of A Promoter........................................................................58
4.5 Duty Of Promoter As Regards Prospectus............................................................61
4.6 Remuneration Of Promoters.................................................................................64
4.7 Pre Incorporation Or Preliminary Contracts......................................................65
4.8 Position Of Promoters As Regards Pre Incorporation Contracts ......................66
4.9 Ratification Of A Pre-Incorporation Contract .....................................................66
LESSON 5: PROSPECTUS
5.1 Definition Of Prospectus.......................................................................................69

5.2 Purpose Of A Prospectus......................................................................................69
5.3 Form And Contents Of A Prospectus....................................................................72
5.4 Report To Be Set Out In Prospectus.......................................................................74
LESSON 6: FLOTATIONS
6.1 Definition Of Floatation..........................................................................................77

6.2 Methods Of Public Issue..........................................................................................77
LESSON 7: DISTRIBUTION OF COMPANYS POWERS
7.1 Introduction..............................................................................................................82
7.2 Exercise Of Directors Powers................................................................................82
7.3 Board Meetings........................................................................................................82
7.4 Notice Of Board Meeting ........................................................................................83
7.5 Quorum At Board Meeting......................................................................................85
7.6 Disinterested Quorum............................................................................................85
7.7 The Chairman.................................................................................................85
7.8 Voting At Board Meetings .............................................................................85
7.9 Powers Of The Chairman................................................................................86
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7.9 Delegation........................................................................................................87
7.11 Managing Director.........................................................................................87
7.12 Powers Of Managing Director.......................................................................87
7.13 Remuneration ................................................................................................88
7.14 Removal.........................................................................................................88
7.15 The Company Secretary.................................................................................88
7.16 Powers And Duties Of The Company Secretary............................................90
7.17 Legal Status Of The Secretary........................................................................90
7.18 Liability Of The Secretary..............................................................................91
7.19 Directors Vis Members In General Meetings ................................................91
LESSON 8: THE LAW OF MEETING
8.1 Meaning Of Meeting..........................................................................................96

8.2 Importance Of Company Meetings ...................................................................97
8.3 Classification Of Company Meetings................................................................98
8.3.1 Meetings Of Shareholders...............................................................................98
8.3.2) Meeting Of The Board Of Directors............................................................108
8.3.3) Meeting Of Debentures Holders...................................................................109
8.3.4) Meeting Of Creditors....................................................................................109
8.3.5) Meeting Of Creditors And Contribution On Winding Up............................109
8.4) Requisites Of A Valid Meeting........................................................................110
LESSON 9:
SHARE CAPITAL
9.1 Meaning Of Share Capital.................................................................................127

9.2 Types Of Share Capital .....................................................................................127
9.3 Classes Of Shares...............................................................................................129
9.4 Stocks..................................................................................................................135
9.5 Alteration Of Capital...................................................................................137
9.6 Variation Of Shareholders Rights...............................................................141
9.7 Prohibition Of Financial Assistance............................................................142
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LESSON 10: MAJORITY RIGHTS AND MINORITY PROTECTION
10.1 Majority Power...........................................................................................144

10.2 The Principle Of Majority Rule..................................................................144
LESSON 11: ACCOUNTS AND AUDITORS
11.1 Introduction..................................................................................................151
11.2 Books Of Account........................................................................................151
11.3 Audit Of Accounts........................................................................................154
LESSON 12: INVESTIGATION OF A COMPANYS AFFAIRS
12.1 Investigation Into A Companys Affairs.......................................................160
12.2 Investigation Of Companys Membership....................................................164
12.3 Alternative Power Of Registrar.....................................................................165
LESSON 13: WINDING-UP
13.1 Meaning Of Winding Up................................................................................165

13.2 Modes Of Winding Up...................................................................................168
13.2.1 Winding Up By The Court..........................................................................168
13.2.2 Voluntary Winding Up................................................................................177
13.3.3 Creditors Voluntary Winding Up...............................................................179
13.3.4 Winding Up Subject To Supervision............................................................180
LESSON 14: COMPANIES AND THE STOCK EXCHANGE
14.1 Reasons For Listing In The Stock Exchange.........................................................184

14.2 Major Benefits Of Listing......................................................................................184
14.3 The Nairobi Stock Exchange Market Segments ...................................................185
14.4 Listing Requirements At The Nairobi Stock Exchange ........................................185
14.4.1 Main Investment Market Segment (MIMS)........................................................185
12.4.2 Alternative Investment Market Segment (AIMS)...............................................186
14.4.3 Fixed Income Securities Market Segment (FISMS)...........................................188
14.4.4 General Eligibility Requirements For Public Offering Of Shares And Listing..189
14.5 Disclosure Of Periodic Financial Information ......................................................190
14.6 Communications With Shareholders .....................................................................191
14.7 Responsibilities Of A Listed Institution.................................................................191
14.8 Role Of The Capital Markets Authority.................................................................192
LESSON ONE: THE COMPANY AS A FORM OF BUSINESS ORGANIZATION

Expected Learning outcomes
10
By the end of this lesson you should be able to:

a) Explain the meaning of company
b) Explain the classification of companies
c) Explain the registration procedures
d) Explain the effect of registration

e) Explain the meaning of incorporation
f) Describe the practical consequences of registration
g) Explain the disadvantages of incorporation
h) Explain the concept lifting the corporate veil
1.1 The Nature of the Company

There is no precise legal definition of a company .The word company is a by- product
of mercantile rather than legal ingenuity and was in use in England long before what is
now called company law came into existence
Although the word was initially used by English merchants to denote associations which
they had formed for trading overseas, such as the British East India Company and the
Hudson Bay Company, it was gradually extended with surprising latitude to diverse
association until it ceased to have a specific meaning. One major consequences of this
extension is that the English Company Law which has been adopted in Kenya defines or
classifies companies according to the mode of their formation rather than according to
their intrinsic attributes.
1.2 Classification of Companies
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Section 389 of the Companies Act provides that no company, association or partnership
consisting of more than twenty persons shall; be formed .. unless it is registered as a
company under this Act, or is formed in pursuance of some other Act, Act of the United
Kingdom or of letters patent.
Three types of companies are provided for under this section. They are:
a) Chartered companies
b) Statutory companies
c) Registered companies
a) Chartered companies
A chartered company is formed when the queen or King of England issue a charter, or
letters patent, to a group of people who intend to carry on a business as a chartered
company. No such company can be formed in Kenya after political independence and the
words letters patent in s. 389 only serve as a reminder of the England origin of our
Companies Act which is the replica of the English Companies Act, 1948, with a few
minor modifications.
b) Statutory companies
Statutory companies are set up by specific Act of Parliament or under authority of an Act
of parliament by the state. The Act confers upon the statutory company corporate
personality to enable it to exist separate from the government.
In the past, the government established such companies under specific Act of parliament
e.g. Kenya Railways (set up under the Kenya Railways Corporations Act), the former
Kenya Post and Telecommunications (set up under the Kenya posts and
telecommunications Act which has since been repealed) and the Kenya ports Authority (
set up under the Kenya ports Authority Act). However, since the passing of the state
Corporation Act (Cap 446) law of Kenya, the government has moved towards formation
of state corporations under the Act.
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Section3 (1) of the Act provides that, the president may, by order, establish a state
corporation as a body corporate to perform the functions specified in the order. In this
regard many state corporations have been established through the authority of this Act as
fewer are being formed through specific Acts. Such state corporations are endowed with
perpetual succession; the ability to institute suits and being sued in their corporate name;
and capacity to hold and alienate movable and immovable property in accordance with
the Act.
The object of statutory corporations is set out in the Act which creates them or
the creating instrument which is usually an order from the president under the State
Corporations Act issued as a subsidiary legislation to the Act. Therefore a statutory
corporation can only carry out those functions for which it was created. Moreover the
capital of a statutory corporation is raised through borrowing, guaranteed by the
Treasury, or by Treasury. Its profits and gains are injected back into the corporation or
paid to the Treasury as dividend. When it makes loss and is unable to pay its debt it can
be sued and its property attached to settle a judgment of the court but it cannot be wound
up on the grounds that it is unable to pay its debts as happens in registered companies.
Such statutory corporations are would up on the repeal or revocation of the parent statute.
c) Registered companies
A registered company is formed by registration under the companies Act. It is this type of
company that people usually have in mind when they talk of a company. The note that
follow are concerned exclusively with registered companies. It should be noted that s.2
of the Companies Act defines a company as a company formed and registered under
this Act.
Classification of registered companies
Registered companies are classified by s.4 (1) of the companies Act into:
a) A company formed by any seven or more persons. Such a company is known as
a public company.
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b) A company formed by any two or more person. Such a company is referred to in

the Act as a private company.
A private company or a public company may be:
(i) Limited by shares if the liability of its members is limited by its
memorandum to the amount, if any, unpaid on the shares, respectively
held by the
(ii) Limited by guarantee if the liability of its members is limited by its
memorandum to an amount which the members have undertaken to
contribute to the assets of the company in the event of its being would
up.
(iii)Unlimited if it does not have any limit on the liability of its members.
1.3 Registration procedures
The procedures to be followed by persons who intend to form a registered company will
depend on whether the proposed company is to a public company or a private company.
a) Public company
The initial step that must be taken by promoters who are desirous of forming a public
company is the preparation of a document called the memorandum of association to
which at least seven of them will subscribe their names as prescribed by s. 4 of the Act.
The memorandum must contain a declaration by the promoters that they are desirous of
being formed into a company pursued thereto and must state:
a) The name of the company, with limited as the last word of the name of the company
in the case of a company limited by shares or by guarantee; and
b) That the registered office of the company is to be situated in Kenya; and
c) The object of the company; and
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d) In the case of a company having a share capital, the amount of capital with which the
company is to be registered and the division of the capital into shares of a fixed amount
(unless the company is unlimited company).
The memorandum of a company limited by shares or by guarantee must also state that the
liability of the companys members is limited. The memorandum of a company limited
by guarantee shall also state the amount guaranteed by each member of the company.
The memorandum must also contain a clause declaring that the promoters desire to form
a company pursuant thereto this clause is known as the association clause.
The next step is the delivery of the memorandum to the Registrar of Companies
together with some or all of the following documents.
i) Articles of association
This document contains the regulations for management of a company.
(ii) Consent to act as director
If any person is appointed director of the company, the person must indicate his consent
to act as director.
(iii) List of persons who have consented to be directors (form No 210)
This form, when duly completed and signed, constitutes the statutory list of the persons
who have given their individual consents in form no 209.
(iv) Statement of the nominal share capital
This statement is delivered for taxation purposes
(v)Declaration of compliance with the registration requirements
(vi) Notice of the situation of registered office
A promoter should fill a form issued by the registrar that sets out the details relating to
the physical and postal address of the registered office of the proposed company.
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Registration
If the aforesaid documents are correctly prepared in accordance with the provisions of the
Companies Act, the Registrar grants a certificate of incorporation and the company is
formed from the date of incorporation written in the certificate.
b) Private company
In order to secure the registration of a private company the procedure described above is
followed except that:
(a) The memorandum of association will be signed by at least two of the companys
promoters.
Significance of registration
S. 16(2) provides that no company, association or partnership consisting of more than
twenty persons shall be formed . Unless it is registered as a company under this Act .
The provision has been interpreted by the English and Kenyan courts to the effect that
registration is the condition precedent to the formation of a registered company and
failure to register a proposed company will mean that it does not legally exist.
1.4 Effect of registration
Companies incorporated in Kenya
S. 16(2) of the Act provides that from the date of incorporation mentioned in the
certificate of incorporation the subscribers to the memorandum of association. Shall
be a body corporate by the name contained in the memorandum. This section has been
judicially explained as follows:
(a) The date mentioned (i.e. written) in the certificate of incorporation is the date from
which the companys legal existence commences. Consequently, if an incorrect date is
written in the certificate, that date would be regarded as the actual date on which the
company was registered.
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(b) The companys registration constitutes it a body corporate. It becomes a legal

person , or corpora corporate, whose name is the name chosen for it by its promoters
and written in its memorandum of association. The certificate of incorporation may
therefore be regarded as the companys birth certificate and the date written therein as
the companys birthday.
Companies incorporated outside Kenya
Section 366 provides that if a foreign company after the appointed date of the Act
establishes a place of business within Kenya shall, within thirty days of the establishment
of the place of business deliver to the registrar for registration:
(a) A certified copy of the charter , statutes or memorandum and articles of the
company or other instrument constituting or defining the constitution of the
company, and ,if the instrument is not written in the English language , a certified
translation thereof;
(b) A list of the directors and secretary of the company containing the following
particulars;
(i)
In the case of the individual, his present Christian name and surname and
any former Christian name or surname , his usual postal address, his
nationality and his business occupation, if any; and.
(ii)
In the case of a corporation, its corporate name and registered or principal

office, and its postal address.
(iii)
Where all the partners in a firm are joint secretaries of the company, the
name and principal office of the firm may be stated instead of their
particulars.
(c) the names and postal addresses of someone or more persons resident in Kenya
authorized to accept on behalf of the company service of process and any notices
required to be served on the company; and
(d) The full address of the registered or principal office of the company.
Once the foreign company has delivered to the registrar the documents mentioned
in s. 366, the registrar shall, if such documents and particulars are so delivered
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after the appointed day, certify under his hand that the company has complied
with the provisions of s. 366; and shall be conclusive evidence that the company
is registered as a foreign company for the purpose of the Act.
Section 3336(2) provides that once a foreign company has delivered to the
registrar the documents and particulars mentioned in s.366, it shall have the same
power to hold land in Kenya as if it were a company incorporated under this Act.
The concept of a registered company as a person was consummated in the
celebrated case of Solomon v $ Co Ltd (3) and its practical consequences are
enumerated below
1.5 Incorporation
This is the process by which legal persons are created .Osbornes Concise Law
Dictionary defines incorporation as a merging together to form a single whole ;
conferring legal personality upon an association of individual, or the holder of a certain
office, pursuant to Royal Charter or Act of Parliament.
For purpose of company law it denotes the legal process by which a group of
people are constituted and then enabled to carry on a business in such a way that the
business is legally regarded as a legal entity that is altogether separated from the
members of the group, individually and collectively. This mode of carrying on a business
is resorted to because it has certain legal advantages, some of which are explained under
partnership, below. The business so incorporated is usually called a company.

In the cause of delivering his judgment in Solomons case Lord Halsbury stated
that once the company is incorporated, it must be treated like any other
independent person with rights and liability appropriate to itself. This means that
the company, as an independent person, has right and obligations which are not
the same as the rights and obligations of the subscribers to it memorandum and
the other persons who will join it later as its member. This is the fundamental
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attribute of corporate personality which is given practical effect in the following

ways.
a) Limited liability
The fact that a registered company is a different person altogether from the
subscriber to its memorandum and its other members means that the companys
debts are not the debts of its members. If the company has borrowed money, it
and it alone is under an obligation to repay the loan. The members are under no
such obligation and cannot be asked to repay be the loan. This is illustrated by the
case of Salomon v Salomon $ Co Ltd (1897) below:
In this case, Salomon sold his boots business to a newly formed company for
30,000. His wife, one daughter and four sons took up one share of 1 each
.Solomon took 23,000 shares of 1 and 10,000 debentures in the company.
The debentures gave Salomon a charge over the assets of the company as the
consideration of the transfer of the business. Subsequently, when the company
was wound up, its assets were found to be worth 6,000 and its liabilities
amounted to 17,000 of which 10,000 were due to Salomon (secured by
debentures) and 7,000 of which due to unsecured creditors. The unsecured
creditors claimed that Salomon and the company was one and the same person
and that the company was a mere agent for Salomon and hence they should be
paid in priority to Salomon. It was held that the company was, in the eyes of the
law, a separate person independent from and was not his agent, though initially
the holder of all the shares of the company was also a secured creditor, and was
entitled to repayment in priority to the unsecured creditors.
In his celebrated passage, Lord Machaghten observed in this case.
The company is a in law a different person altogether from the subscribers of the
memorandum and, though it may be that after incorporation the business is
precisely the same as it was before and the same persons are managers, and the
same hands receive the profits; the company is not in law the agent of the
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subscribers or trustee for them. Nor are the subscribers liable in any shape or
form except to the extent and in the manner provided by the Act.
In case a company is unable to pay its debts the creditors, or a creditor, may
petition the High Court for an order to wind it up. During the winding up the
members will be called upon to pay the amount , if any , which is unpaid on the
shares they held , in the case of a company limited by shares, or the amount
prescribed by the memorandum , in the case of a company limited by guarantee ,
as provided in s 4(2) of the Act.
It should be noted that, in the case for company limited by shares, what the
members are paying are the amounts they owe to the company as its debtors in
respect of shares that were sold to them on credit and have not been paid for in
full. The companys liquidator will in turn use the money so paid to pay off, or
reduce, the companys debts.
The other point to be noted is that a companys creditor cannot institute legal
proceedings against a companys member in order to recover from him what he is
owed by the company. This is because the members do not, legally, become his
debtor merely because the company is his debtor.
b) Perpetual succession
According to the Concise Oxford Dictionary, perpetual means , inter alia,
applicable , valid, for ever or for indefinite time while succession means a
following in order . When used in relation to registered companies the phrase
perpetual succession denotes a process whereby a companys membership
changes in definite order prescribed by the companys articles and goes on
changing for an indefinite period of time until the companys liquidation. The
perpetual succession occurs because a company and its members are separate
persons and so the companys legal life is not terminated by a members death.
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c) Owning of property
Under s. (2) of the Act a registered company, as person, has power to own
movable and immovable property. It can actually do so if it can afford to buy
them, or receive them as a gift. But it is important to not that, legally, the
companys property does not belong to the members, either individually or as
group. It belongs to the company alone. Any member who uses the companys
money to purchase personal items or discharge personal obligations will be liable
to the company for conversion (theft). This rule applies irrespective of whether
the company is of a class popularly refers to as a one man company.
d) Suing and being sued

Because a company is at law a different person altogether from its members it
follows that a wrong to, or by, the company does not legally constitute a wrong to,
or, the companys members. Consequently:
(a) A member or members cannot institute legal proceeding to redress a wrong to
the company. The company as the injured party is, generally speaking, the
proper plaintiff.
(b) A member cannot be used to redress a wrong by the company.
1.6 Advantages of incorporation

1. Limited Liability
The liability of all the members of a limited company is limited to the nominal
amount of their shares therein. In Jenkin vs. Pharmaceutical Society of Great
Britain (1921) Ich. 392 it was observed that limited companies are
offsprings of a proven necessity, that is that men should be entitled to engage
in a commercial pursuit without involving the whole of their fortune in that
particular pursuit in which they are engaged. This is the crux of limited
liability. This enables even not too enterprising people to invest part of their
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money in industrial ventures carried on by limited companies because they

know beforehand than their liability is limited.
2. Transferability of Shares
Shares in a company can be transferred (subject to any restrictions in the
Articles of Association) from one person to another without the consent of the
other members.
3. Separate Legal Entity
A company as is already illustrated both by the Act and case law, has separate
legal entity from its members and its existence is not affected by the death,
insanity or bankruptcy of a member i.e. a company has perpetual; succession.
Members will always come and go but the company will continue to exist.
4. Control
The control of a company can be secured by the acquisition of the majority of
the companys shares which carry the voting power.
5. Permanent Existence
The life of the company is permanent. The Company Act creates the company
and can dissolve it. The death, insolvency or the transfer of shares of members
does not affect the existence of the company. It may be stated that, members
may come, members may go; but the company goes on for ever.
6. Separation of Ownership and Management
The shareholders, who are the owners of the company, cannot participate in
the management of companys business. They can elect their representatives
to the Board of Directors, which manages the affairs of the company. This has
led to the recognition of the fact that ownership and management of business
functions.
7. Experts Management
Since a company carries a business on a large scale and has huge financial
resources, it can afford the services of the experts. This will lead towards
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professionalisation of management which is necessary for the efficient

management of any business.
8. Public Confidence
The formation and running of a company is regulated by the provisions of
Companies Act and various other acts. The provisions regarding appointment
and remuneration of directors, compulsory audit and publication of accounts,
protection of minority shareholders and so have created greater public
confidence in companies.
9. Social Advantages
A company is also beneficial from the societys point of view. It mobilizes the
scattered savings of public and invests them in sound industrial and
commercial ventures. It provides employment to a large number of people.
Economics of large scale operations leads to economical use of national
resources and provisions of goods and services, to the public at cheaper prices.
1.7 Disadvantages of incorporation
1. Complicated Procedure and Cost
Formation of a registered company must comply with the requirements of the
Companies Act. The documents required for its formation e.g the Memorandum
of Association, the Article of Association, the prospectus of statement in lieu of
Prospectus etc, are usually drawn by legal experts who charge high fees for their
preparation. Thus, the task of incorporation is complicated and expensive unlike
other business forms like partnerships which may be formed easily and can even
be inferred from the conduct of the parties.
2. Publicity
There is no secrecy regarding the affairs of a company. Once the Memorandum
and Articles of Association and the prospectus have been filed with the Registrar
of Companies, they become public documents open to the inspection of the
public. This wide publicity may open the company economic sabotage by its
rivals.
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3. Administration
The administration of a company must comply with the requirements of the
Companies Act. Requirements pertain to the holding of general and statutory
meetings and returns of annual accounts. The accounts report and audit report also
require expenses thus administration of a company is more expensive than that of
partnership.
4. The Doctrine of Ultra Vires
The company can only carry on the business specified in its objects clause of the
Memorandum of Association. The operation of the doctrine ultra vires hinders the
company from investing in other forms business which might be more profitable.
5. Taxation
A company must pay corporate tax which is not required in the case partnership.
Taxation reduces the profits of the company.
6. Winding Up
The winding up of a company is widely published thus exposing the property of
the company to an insecure position.
1.8 Lifting the Corporate Veil
A company is a legal person and is distinct from its members. This principle is regarded
as a curtain, a veil or shield between the company and its members. This principle of
separate legal entity was established in the famous case of Salomon Vs Salomon & Co
Ltd. This precedent has been followed in a number of cases and it has come to be
regarded as a fundamental principle of company laws. This shows that once the company
is registered under the Act, there is a veil between the company and its members.
Following this principle, the courts in most cases have refused to go behind the curtain
and see who are the real persons composing the company.
But sometimes the necessity of the situation may compel the authorities to disregard the
corporate legal entity and look to individual members who are in fact the real beneficial
24
owners of all corporate property, and this in fact is what is known as, Lifting or Piercing
the Corporate Veil. Thus the doctrine of lifting the corporate veil may be understood as
the identification of a company with its members and when the corporate veil is lifted the
individual members may be held liable for its acts or entitled to its property.
The courts will lift the corporate veil where it is essential to secure justice, where it is in
the public interest to do so or where it is for the benefit of revenue. But it must be kept in
mind that a separate legal entity is still the general rule. The corporate entity will be
disregarded only in exceptional cases. These cases are exceptions to the principle in
Salomon and Co Ltd. The various cases in which corporate veil has been lifted can
divided be divided into two:a. Lifting by the courts
b. Lifting by the Statute
These are explained as under:a) Lifting By the Courts
1. Determination of the Character of the company
A company may assume an enemy character when persons in de facto control of its
affairs are residents in an enemy country. In such a case, the court may examine the
character of persons in real control of the company and declare the company to be
an enemy company.
Daimler Co. Ltd vs. Continental Tyre & Rubber Co. Ltd (1916) A. C. 307.
A company was incorporated in England for the purpose of selling in England tyres
made in Germany by a German company which held the bulk of shares in the
English company. The holders of the remaining shares except one and all the
directors were German residents in Germany.
During the First World War, the English company commenced an action for
recovery of a trade debt. It was held that the company was an alien company and
25
the payment of debt to it would amount to trading with the enemy and, therefore,
the company was not allowed to proceed with the action.
2. Prevention of Fraud or Improper Conduct

The court will refuse to uphold the separate existence of the company where it is
formed for a fraudulent purpose or to avoid legal obligations.
Professor Gower observed in this regard that the veil of a corporate body will be
lifted where the corporate personality is being blatantly used as a cloak for fraud or
improper conduct. Thus in the following case where a company was incorporated
as a device to conceal the identity of the perpetrators of the fraud the court
disregarded the corporate personality.
Jones vs Limpman (1962)
L agreed to sell a certain land to J. He subsequently changed his mind and to avoid
the specific performance of the contract he sold it to a company which was formed
specifically for the purpose. The company had L and the clerk of his solicitors as
the only members. J brought an action for the specific performance against L and
the company. The court looked to the reality of the situation ignored the transfer
and ordered that the company should convey the land to J.
3. Where the Company is a Sham
The court will lift the veil where the company is a mere cloak or sham i.e. where
the device of incorporation is used for some illegal or improper purpose. The
following case illustrates this point.
Guilford Motors Co. Ltd Vs Horne (1933):Horne was appointed as a managing director of the plaintiff company on the
condition that he shall not at any time solicit or entice away the customers of the
company. He, however, formed a new company to carry on the same business. The
new company solicited the plaintiffs customers. An injunction was granted against
26
both Horne and the Company. The court held the company was a mere cloak for
the purpose of enabling the defendant to commit a breach of his agreement against
solicitation
4. Where the company is acting as the agent of the shareholders
When a company is acting as an agent of its shareholders or of another company, it
will be liable for its acts. However, it is a question of fact in each case whether the
company is acting as agent for its shareholders. There may be express agreement to
this effect or an agreement may be implied from the circumstances of each
particular case. Note the following case.
F.G. Film Ltd In Re (1953) I ALL E. R 615.
An American company financed the production of a film in India in the name of a
British company. The president of the American company held 90 per cent of the
capital of the British company. The Board of Trade of Great Britain refused to
register the film as a British film. It was held that the decision was valid in view of
the fact that British company acted merely as the agent or nominee of the American
company.
5. Protection of Revenue
The court may also lift the corporate veil in the interests of revenue. The court will
not hesitate to look behind the corporate veil where it is found that the company has
been formed for evasion of taxes. In such cases, the individual shareholders may be
held liable to pay income tax. The following case illustrates this point:Sir Dinshaw Maneckjee Petit, Re A. I. R. (1927) Bom. 371. D,
An assessee, who was receiving huge dividend and interest income, transferred his
investments to four private companies formed for the purpose of reducing his tax
liability. These companies transferred the income to D as a pretended loan. Held;
the companies were formed by D purely and simply as a means of avoiding tax
obligation and the companies were nothing more than the assessee himself. They
27
did no business but were created simply as legal entities to ostensibly receive the
dividends and interest and to hand them over to D as pretended loans.
6. Protecting Public Policy
The Courts invariably lift the corporate veil to protect the public policy and prevent
transactions contrary to public policy. Thus where there is a conflict with the public
policy, the courts ignore the form and take into account the substance
b) Lifting by statute
1. Number of Members Below Statutory Minimum:
As per section 33 of the Act, when the company carries on business for more than
six months after its number of members is reduced below seven in the case of a
public company and below two in the case of a private company, person who is
cognizant of the fact and is a member during the time the company so carries on
business after these six months, is severally liable for all the debts of the company
contracted during that time. However, the members or members will enjoy the
privilege of limited liability for the six months. This section enables creditors to
look beyond the company to its members for satisfaction of their amounts.
2. Misdescription of the Company
Section 109 of the Act states that the name of the company must be fully and
properly mentioned on all documents issued by it. Where an officer of a company
signs, on behalf of the company, a bill of exchange, promissory note, cheque or
order for money or goods in which the companys name is not mentioned, the
officer is personally liable to the holder of the bill of exchange, etc for the amount
thereof unless it is paid by the company. The liability under this section is
illustrated by Hendon vs. Alderman 91973) 117 S. J. 631. The directors of L & R
Agencies Ltd signed a cheque in the name of the company stating the companys
name as L. R Agencies Ltd (omitting the word & from the name).It was held that
they were personally liable.
3. Holding and Subsidiary Companies
28
In the eye of the law, the holding company and its subsidiary are separated legal
entities. Even a 100% subsidiary is a separate legal entity and its creator and
controller (ie the holding company) is not liable for its breaches of contracts and
torts. Nor can the holding company sue to enforce rights which belong to the
subsidiary
But in the following two cases, a subsidiary company may loose its separate
identity to a certain extent:
a. Where at the end of its financial year a company has subsidiaries, it must
lay before its members in general meeting not only its own account but
also a set of group accounts shoeing the profit or loss earned or suffered
by the holding company and its subsidiaries collectively and their
collective state of affairs at the end of the year
b. Section 167 empowers the inspector appointed by the court to regard the
subsidiary and the holding company as one entity for the purpose of
investigation.
4. Investigation of Company Membership
Section 173 (5) empowers the registrar to appoint one or more competent
inspectors to investigate and report on the membership of any company for the
purpose of determining the persons who are or have been financially interested in
the success or failure of the company or able to control or to influence the policy
of the company. This will be done by lifting the corporate veil so as to ascertain
the real persons controlling it.
5. Take Over Bids
Section 210 provides that where a scheme or contract inviting the transfer of
shares or class of shares or class of shares in the company to another company has
been approved by the holders of not less than nine tenths in the value of shares
whose transfer is involved, the transferee company may, at any time within two
months after the making of the offer by the transferor company, give notice in the
prescribed manner to any dissenting share holder that it deserves to acquire his
shares.
29
This is well illustrated in the case of Re. Bufle Press Ltd in which an offer made
by the company was regarded as having been made, in substance, by the company
members. The court thereby lifted the veil of incorporation by treating the
company and its members as one entity for he purpose of acceptances of the offer.
6. Fraudulent Conduct of Business
Section 323 of the Act states that if in the course of the winding up of a company
it appears that any business of the company has been carried on with intent to
defraud creditors, the court may declare that any person who were knowingly,
parties to the carrying on of such business are to be personally liable for the debts
and other liabilities of the company.
7
Prosecution of Delinquent Officers and Members of Company

Section 325 of the Act states that if in the course of a winding up of company it
appears that any past or present officer or any member of the company has been
guilty of any offence in relation to the company then the court may declare such a
person liable for his offence. In this case also, the corporate veil will be lifted.
Summary for the topic
Meaning of company
Classification of companies
Registration procedures
Effect of registration
Meaning of incorporation
Disadvantages of incorporation
Lifting the corporate veil
30
Revision Questions
a) Explain the meaning of company
b) Explain the classification of companies
c) Explain the registration procedures
d) Explain the effect of registration

e) Explain the meaning of incorporation
f) Describe the practical consequences of registration
g) Explain the disadvantages of incorporation
h) Explain the concept lifting the corporate veil
Text Books For Further Reading

Ogolla J.J, Gitau. R (2010) Company Law, Focus Publishers, Nairobi, Kenya. Pages 9-27
Saleemi.N.A (1997)Company Law Simplified, N.A Saleemi Publishers Limited ,Nairobi,
Kenya.
Pages 1-17
Oliver.m,Marshal E.A,Company Law pitman publishing London UK Pages 1-26
Abbot.K, Penddle.N,Wardman.K (2002)Business Law. Continuum London UK

Pages 361-368
Cheeseman.H,R (1998) Business Law, Prentice Hall International, London U.K
Pages 603-607
Marsh,Soulsby (1998)Business Law Stanley Thorns(Publishers)Limited, Cheltanham UK
Pages 101-102
Walmsley,K(2000) Company Law,Reed Elsevier(Uk) Ltd London UK Pages 1-3,10-20
Miller.R,Gaylord.J (1991) Business Law Today, West Educational Publishing
Company,USA. Pages 632-655
31
LESSON 2: MEMORANDUM OF ASSOCIATION

a) Explain the meaning and importance
b) Explain the purposes of memorandum
c) Explain the contents of memorandum
d) Explain the alteration of the memorandum
e) Describe doctrine of ultra vires
2.1 Meaning and Importance
A companys memorandum of association is of supreme importance. The first step in the
formation of a company is to prepare a memorandum of association because no company
can be formed or registered under the Companies Act without it. It is the charter of the
company. It contains fundamental conditions upon which alone the company is allowed
to be incorporated. They are conditions introduced for the benefit of the creditors and the
outside public as well of the shareholders. It sets out the constitution of the company and
provides the foundation on which the company is built. It lays down the objects and
scope of activities of the company and also defines the relationship of the company with
the outside world. Its importance can be gauged by the liability of its members and its
scope of activities. Its purpose is to enable share holders, creditors and those who deal
with the company to know what is its permitted range of enterprise.
It may be noted here that a memorandum not only defines the powers of the company but
also confines them. Nothing beyond the power as defined by the memorandum shall be
attempted by the company. If this is done, it shall be considered ultra vires. it was rightly
pointed out in Ashbury Railway Carriage Co. v. Riche that, the memorandum is, as it
were, the area beyond which the action of the company cannot go, inside that area the
shareholders may make such regulations for their own government as they think fit.
32
The following facts indicate importance of the Memorandum: a) It provides the basic of incorporation.
b) It determines the areas of operations of the company.
c) It defines the relationship of company with the outsiders.
d) It is an unalterable charter of the company. Although, it can be altered under
some special circumstances.
2.2 Purposes of Memorandum
The purposes of the Memorandum of Association are two fold. These are: a) The prospective shareholders shall know the field in which or the purpose for
which their money is going to be used by the company and what risks they are
undertaking in making investment.
b) The outsiders dealing with the company shall know with certainity as to what the
objects of the company are and as to whether the contractual relation into which
they contemplate to enter with the company is within the objects or the company.
2.3 Preparation of Memorandum of Association
The promoters must prepare the memorandum of association in accordance with the
requirements of the Act which relates to the formation and contents of the memorandum
of association
Section 5 of the Act states that the Memorandum of every company shall be English
language and printed. Section 6 of Acts states that the Memorandum shall be signed by
each subscriber (who shall add his postal address occupation, if any), in the presence of at
least one witness who shall attest signature and shall likewise add his address and
occupation if any. The memorandum shall be divided into paragraphs numbered
consecutively.
2.4 Contents of memorandum
Section 5 of the Companies Act states that the memorandum of association of every
company shall contain the following clauses:-
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Clause 1: The Name

The Memorandum must, together with the other documents, be filed prior to registration
of the company, but before it is filed or even prepared, the promoters must make
enquiries from the Registrar as to whether the proposed name of company is available for
registration and is not considered undesirable. According to Section 19, the promoters
may request the Registrar to reserve name pending registration of a company, and such
reservation remains in for a period of thirty to sixty days. During this period, no other
company will entitled to be registered under hat name.
Section 5(1) (a) of the Act requires a company, if limited, to use the Limited as the last
word in its name.
License to drop the word Limited:- As per section 21, a company may dispense with
the word Limited if it obtains a licence to do so from Attorney General. eg change of
Kenya Power And Lighting Company Limited to Kenya Power .Such a license will be
granted only if the Attorney General satisfied:a) That the company to be formed is to promote commerce, art science religion,
charity, or any useful object.
b) That it intends to apply its profits, or other income to promoting objects, and
c) That it prohibits the payment of any dividend to its members.
A company may, under Section 20, change its name by special resolution and with the
approval of the Registrar signified in writing. A special resolution usually requires at
least twenty one days notice to the members and three-fourths majority of the votes at a
general meeting.
The above section further provides that if, inadvertently or otherwise, the name is too
much like that of an existing company, it can be changed with the sanction of the
Registrar and must be changed, if the Registrar so directs, within six months of its
registration.
A change of name, however, does not affect any rights or obligations of the company, or
any legal proceeding by or against it as per section 20(4).
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Clause II: Registered Office

Every company shall have a registered office from the day on which it begins to carry on
business or within fourteen days after incorporation whichever is the earliest, to which
notices and all other communications can be made (S. 107). The provisions of this section
in effect therefore means that it is possible for promoters to actually register the
company and later on, within the stipulated period of fourteen days acquire and notify the
location of its registered office so that the world will know where it can be found for
communications and location of documents.
Section 108 states that notice of the address of the registered office, and of any change
therein must be given to the Registrar within 4 days after incorporation or of the change.
It is not sufficient simply to record the change of address in the Annual Return.
It is important to remember that the registered office gives the company physical
residence and Nationality as an entity in Law. The registered office of a company is not
necessarily its head-quarters. A company may choose to locate its headquarters at the
registered office, and change therein, if any, must be filed with the register within the
fourteen days from the incorporation of the company change of address. The postal
address of the registered office must also be included in the annual return of the company
as required by section 108 of the Act.
Most of the important documents relating to the affairs of the company are by law
required to be kept at the registered office of the company, for example:a) The register of members, and index of members, unless made up elsewhere or
kept by an agent.
b) A copy of every instrument creating any charge requiring registration.
c) The companys register of charges affecting property of the company.
d) The minute books of directors and secretaries
e) The register of directors interests in shares or debentures.
35
Clause III: The Objects Of The Company

This defines the sphere of the companys activities, the aims that its formation seeks to
achieve and the kind of activities or business that it proposes to conduct. A company
cannot conduct any business foreign to its objective clause. If anything unauthorized by
the objects clause is undertaken it is considered ultra vires and hence not binding to the
company.
The objects clause of the memorandum gives protection to shareholders who learn from it
the purposes for which their money can be applied. It assures them that their money will
not be risked in any business other than that for which they have been asked to invest.
Similarly, it also protects individuals who deal with the company and who can infer from
it the extent of the companys powers. The creditors of the company who are to receive
repayment of their money from the assets of the company feel secure if they know that
the funds of the company will not be utilized for any object not mentioned in the objects
clause.
Choice of companys objects.
Subscribers to the memorandum may choose any object or objects for the proposed
company. However, they must keep in mind certain points while drafting the objects
clause of the memorandum.
1. The objects should not include anything illegal or against the general law of the
county.
2. They should not include anything in contravention of the Act itself. For example,
a clause in the memorandum providing that the company can buy its own shares
is invalid, as the Act prohibits purchase of its own shares by the company.
3. They should not include anything which is against public policy, for instance,
trading with alien enemies.
The objects clause in the memorandum of every company has to state:
36
i.
The main objects of the company to be pursued by the company on its

incorporation and objects or ancillary to the attainment of the main
objects; and
ii.
Other objects of the company not included in the above clause.
A company which has a main object together with a number of subsidiary objects cannot
continue to peruse the subsidiary objects, after the main object has come to an end.
Crown Bank Re (1890) ch. D 634.
A companys objects clause enabled it to act as a bank and further to invest in securities
and land and to underwrite issue of securities. The company abandoned its banking
business and confined itself to financial speculation. It was held that the company was
not entitled to do so.
Incidental acts:
The powers specified in the memorandum must not be construed strictly. The company
may do anything which is fairly incidental to these powers. Anything reasonably
incidental to the attainment of pursuit of any of the express objects of the company will,
unless expressly prohibited, to be within the implied powers of the company. Note the
following cases in this regards:
1. Evans vs. Brunner, Mond Co. (1921) 1 ch. 359
A company, engaged in manufacture of chemicals, proposed to devote a substantial
sum of money to the encouragement of the scientific education. It was proved that
this act would ultimately benefit the company, but a shareholder objected on the
ground that it was beyond the powers of the company. It was held that the proposal
was fairly incidental to the companys objects.
2. Forest vs. Manchester etc. Rly Co. (1861) 4 LT 666.

A railway company had the authority to keep boats to be supplied for a ferry. It
employed the boats for excursion trips to the sea when these were not wanted for the
37
ferry. It was held that the use of the boats was incidental to the main purpose and was
within the powers of the company.
The court has been generally liberal in implying powers appropriate or incidental to the
carrying of a business as such as:
a) Appointing agents and hiring servants.
b) Borrowing money and giving security for loans,
c) Paying gratuities to employees,
d) Paying pension to former officers and employees, of their dependants on
the footing that such payment encourages persons to enter into
employment of the company.
Note the following cases in which acts have been held not to incidental to the main
object:
a) London Country Council vs. Attorney General (1902) A.C. 165. The council had
the power to run tramways. It ran omnibuses to feed the tramways. It was held
that this was outside its powers as the omnibus business was in no way incidental
to the business of working tramways.
b) Stephens vs. Mysore Reefs (Kangundy) Mining Co. Ltd (1902) 1 ch. 745. The
Memorandum of a company authorized it to acquire gold mines in Mysore and
elsewhere and contained wide general clauses. The company wanted to work in
Ghana. It was held that it could not do so as elsewhere could not be taken to mean
any other place outside India.
The promoters must exercise care when drafting the object clause since it is not easy to
foresee from the onset all possible business such a company may find advantageous in
the future.
In order to circumvent the obstacles imposed by the Ultra Vires doctrine, experts have
come up with three types of objects clauses commonly adopted by promoters.
a) The inflated object clause:
38
Under this type of clauses, the promoters are free to state any imaginable
business. In one case, North J. said: - under this type of clause the company is free
to engage in the business of banking and also to engage in the business of establishing
a line of balloons between the earth and the moon
b) The independent object clause:When the experts came up with the first type of clause, the courts which applied
the ultra vires doctrine said that first object was the most important and the rest
were subsidiary. They said that if a company engaged in the other objects other
than the first ones, the subsequent objects must be generically related to the first
and if not then it is ultra vires. The courts regarded first objects as the most
important because it is what the promoters chose first among others. To avoid the
cumbersome and restrictive interpretation of the inflated object clause the experts
came up with the independent objects clause as an alternative. In this case, many
businesses can be listed and at the end of this list, the experts may say: Each of
the foregoing clause shall in no way, unless otherwise provided, be construed as
forming part of or being dependant upon or shall in no way be construed together
with any other clause herein contained, but that each shall stand as if it severally
formed an object clause of an independent company.
c) The subjective objects clause:
When the experts invented the second alternative, the courts still interpreted this
alternative clause strictly thereby declaring certain businesses of a company ultra
vires despite the fact that such were listed in objects clause. The experts can
simply say that the company is free to engage in any business which in the
opinion of the directors, the company can advantageously engage in. The
promoters can list a number of objects and at the end of it they simply say that the
company can engage in any other business in addition to the ones listed.
Clause IV: Liability Clause
In this clause, the promoters must indicate:
a) Whether the liability of the company is limited or unlimited.
39
b) If limited, is it by shares or by guarantee ?. In practice, it is enough to merely say

that the liability is limited.
c) If the company is a public company, the promoters must also indicate in this
clause the liability of directors whether limited or unlimited.
Even if a company has obtained the licence of the Registrar to dispense with the word
limited Under section 21 as part of its name, the memorandum must nevertheless state
that the liability of members is limited.
The liability clause is entirely omitted form the memorandum in an unlimited company.
Clause V: Capital Clause
The capital clause of a company states the amount of capital with which it is registered,
divided into shares of a fixed amount. There is no legal limit to the amount of capital or
each share. This capital is called the registered, nominal or authorized capital. The
amount of such capital is determined by the cost of starting the business and there is no
statutory limitation regarding minimum of maximum. It is always prudent for promoters
to consult experts such as accountants to assist them in estimating the amount or
registered capital. A miscalculation of this capital might lead to overcapitalization or
under-capitalization both of which are undesirable to the company.
This clause is to be omitted in the case of companies with unlimited liability and the
companies limited by guarantee having no share capital.
Clause VI: Association or subscription clause
In this clause the subscribers declare that they desire to be formed into a company and
agree to take shares stated against their names. No subscriber will take less than one
share. The memorandum has to be subscribed to by at least seven persons in the case of a
public company and by at least two persons in the case of a private company. After
registration, no subscriber to the memorandum can withdraw his subscription on any
grounds.
40
Also the subscribers of the memorandum appoint the first directors of the company. If
they do not appoint any, the subscribers themselves become the directors by the very fact
of incorporation
2.5 Alteration of the memorandum
Section 7 provides that a company cannot alter the conditions set in the memorandum
except in the cases, in the mode and to the extent for which express provision has been
made in the companies act.
The objects of a company can be altered by a special resolution but only to the extent
allowed by section 8 of the Act. Section 8 provides that these alterations of the objects
must be of the following seven kinds.
a) To enable it carry on the business more economically or more efficiently
b) To attain its main purpose by new or more improved means
c) To enlarge or change its local area of operation
d) To carry on some business which may be conveniently combined with its own
e) To restrict or abandon any of its objects
f) To sell or disposes of the whole or any part of its undertaking
g) To amalgamate with another company
The proposed alteration will become effective unless within thirty days of the resolution,
objection is made by petition to the courts in which case the alteration will only apply if
the court affirms it.
2.6 Doctrine of ultra vires
A company that has been incorporated either by a special act of parliament or under
companies act cannot do anything beyond the powers given in the memorandum and
41
anything so done is ultra vires. The objects clause governs and limits the powers of the
company to transact its business. Its purpose is two fold;
a) To inform the shareholders in what kind of business their capital may be used and
b) To inform person dealing with the company what its powers are
A company may carry out any business which is reasonably incidental or conducive to
the attained of its stated objects. But a company must not engage in activates which are
not expressly or impliedly unauthorized by the memorandum, otherwise any act which
exceeds the power of the company will be ultra vires and void, and thus cannot be ratified
even by the assent of the whole body of shareholders.
An act is said to be intra vires the company if it is within the companys powers this
will be so if.
a) The act is within the companys objects as stated in the memorandum of
association of the company, or
b) The act is reasonably incidental to the companys objects which are expressly
stated in the memorandum of association and is done in order to effectuate, or
achieve the stated objects. In this case, the act is intravires the company by
implication even though it is not within the expressly stated objects. The doctrine
was explained by the House of Lords in the case of Attorney General V. G.E.
Rly.
The doctrine of ultra vires is best illustrated in Ashbury Railway Carriage and Iron Co.
Ltd V. Riche
In Ashbury Railway Carriage Co. Vs Riche, the memorandum gave the company power
to make and sell railway carriages. The directors entered into contract to lay a railway in
Belgium, and the company in a general meeting subsequently purported to ratify the act
of the directors by passing a special resolution to that effect. The company later
repudiated the contract and the other party sued for breach. of contact. The House of
42
Lords held that there can be no ratification of a contract made by a company ultra vires
even though every single member of the company consented thereto. The contract to
make a railway in a foreign country was of a nature not included in the memorandum and
was therefore void. The company was therefore held not liable for the breach of contract.
Meaning and importance

The purposes of memorandum
The contents of memorandum
The alteration of the memorandum
Doctrine of ultra vires
43
Revision Questions
a) Explain the meaning and importance
b) Explain the purposes of memorandum
c) Explain the Preparation of memorandum of association
d) Explain the contents of memorandum
e) Explain the alteration of the memorandum
f) Describe doctrine of ultra vires
Ogolla J.J, Gitau. R (2010) Company Law, Focus Publishers, Nairobi, Kenya. Pages 4669
Saleemi.N.A (1997)Company Law Simplified, N.A Saleemi Publishers Limited ,Nairobi,
Kenya.
Pages 57-70
Oliver.M, Marshal E.A,Company Law Pitman Publishing London UK Pages 27-62

Pages374-382
Walmsley,K(2000) Company Law, Reed Elsevier(UK) Ltd London UK Pages 3-6
44
LESSON 3: ARTICLES OF ASSOCIATION

a) Explain the meaning of articles
b) Describe the contents of articles of association
c) Explain the alteration of articles of association
d) Describe the constructive notice of memorandum and articles
e) Describe the doctrine of indoor management
f) Explain the rule royal brutish bank v Turquand
g) Explain the exceptions to the doctrine of indoor management
3.1 Meaning Of Articles Of Association

The articles of association are the rules and regulations of a company formed for the
purpose of internal management. The articles regulate the manner in which the
companys affairs will be managed. While the memorandum lays down the
objects and purposes for which the company is formed, the article lay down rules
and regulations for the attainment of those objects.
Lord Cairns defined Articles of Association by saying, The Articles play a part
subsidiary to the memorandum of association. They accept the memorandum as
the charter of incorporation of the company, and so accepting it, the articles
proceed to define the duties, the rights and the powers of the governing body as
between themselves and the company at large, and the mode and form in which
business of the company is to be carried on, and the made and form in which
changes in the internal regulations of the company may from time to time be
made
45
According to section 2 (1), Articles means the Articles of association of a company as

originally framed or as altered from time to time in pursuance of the Companies Act. The
Articles are next in importance to the memorandum which contains the incorporated.
They are as such subordinate to and controlled by the Memorandum of Association.
In framing the Articles of a company, care must be taken to see that regulations framed
do not go beyond the power of the company itself as contemplated by the Memorandum
of Association. They should not violate any of the provisions of the Companies Act. If
they do, they would be an ultra vires the Memorandum or the Act, and will be null and
void. For example according to the Companies Act, dividends can only be paid out of
profits. Any provisions into the articles contrary to this provision of the Companies Act
are void. The following case illustrates this point.
In perveril Gold Mines Ltd (1898) 1 ch. 122 the Article of a company provided that no
petition for a winding up could be presented unless
i.
Two directors consented in writing.
ii.
The petitioner held 1/5 th of the issued shared capital.
None of these conditions were fulfilled. It was held that the restrictions were invalid and
a petition could be presented. However, anything contained in companys article which is
identical to any part of table A cannot be questioned since table A is statutory.
The general, functions of articles were clearly stated in Ashbury. Carriage Company vs.
Riche where Lord Cairn said that the Article play a part subsidiary to the memorandum
of association. They accept the memorandum as the charter of incorporation of the
company and so accepting it, the article proceed to define the duties, the rights and the
powers of the governing body as between themselves and the company at large and the
mode and the form in which the business of the company may from time to time be
made.
Section 9 ties the articles to the memorandum in that they must be registered with
registrar of companies before incorporation. Section 11 states that company limited by
shares may adopt all or any part of the regulations contains in Table A and that where
46
articles are not registered or where they are registered and regulations of Table A are not
excluded or modified, those regulations shall be the regulations of the company so far as
they are applicable.
Table A in the first schedule to the Act is provide as a specimen form of article of
association. Part one of which may be adopted in whole or in part by public companies,
and part II of which may be adapted in whole or in part by private companies. Where a
private company does not adopt part 11 of Table A and registers its own they must
include the restrictions required by section 30
Section 12 provides that if special articles are registered they must be.
a) Printed in the English language
b) Divided into paragraphs numbered consecutively
c) Dated ; and
d) Signed by each subscriber of the memorandum in the presence of least one
witness who must attest the signature and add his occupation and postal
address.
3.2 Contents Of Articles Of Association
The Companies Act does not prescribe everything that must be included in the
Articles of Association. The articles are an internal constitution of a company
regulating internal matters of the company hence the promoters and later the members
can indicate any rules they may wish to have so long as such rules are permissible in
law
Though the promoters are free to write anything in their article of association, a well
drafted article should contain the following regulations in the following subjects:
a) Share capital ,rights on lien, variation of these rights, payment of
commissions, share certificates
b) Lien on shares
c) Calls on shares
47
d) Transfer of shares
e) Transmission of shares
f) Forfeiture of shares
g) Conversion of shares into stock
h) Share warrants
i) Alteration of capital
j) General meetings and proceeding thereat
k) Voting right of members, voting and poll, proxies
l) Directors their appointment, remuneration qualifications, powers and
proceedings of the board
m) Manager
n) Secretary
o) Dividends and reserves
p) Accounts, audit, and borrowing powers
q) Capitalization of profits and
r) Winding up
3.3 Alteration of articles of association

Companies have been given wide powers to alter their articles. The right to alter the
articles is so important that a company cannot in any manner either by express provision
in the articles or by an independent contract deprive itself of the power to alter its articles.
Any clause in the articles that restricts or prohibits alteration of articles is invalid. The
companies act states that a company can alter or add to, its articles by passing a special
48
resolution .Any alteration so made in the articles shall, subject to the provisions of the
Act , be as valid as if originally contained therein
Note:
a) Alteration can only be done by the company i.e. members themselves nobody
else.
b) This must only be effected by special resolution.
Limitations to Alteration
Even though the company may freely alter its articles, it must however, observe the
following limitation.
a) Such alterations must not be inconsistent with the act such as to:
i.
Restrict a members right to petition for winding up under section 221; or
ii.
authorize a company to purchase its own shares; or
iii.
authorize the payment of dividends out of capital.
b) It must not produce conflict between the articles and the memorandum. The
alteration of the articles must not exceed the power given by the memorandum of
conflict with the provisions therein. If it does it will be ultra vires a wholly void
and inoperative. In case of conflict between the articles and the memorandum the
memorandum shall prevail. Reference may, however, be made to the articles to
explain any ambiguity in the memorandum on a certain point.
c)
Such alterations must not sanction anything illegal. The alteration must not
purport to sanction anything which is illegal but it is legal and it is not clearly
prohibited by the memorandum it may be held to be valid even where it alters the
whole structures off the company.
49
In Andrews Vs Gas Meter Co. Ltd. (1897) 1 ch. 361, the memorandum of a company
provided that the nominal capital of the company was 1000sh each. The
memorandum and the articles did not contain any express provisions as to issue of
preference shares. The company by a special resolution altered its articles so as to
give itself power to issue preference shares and then issue them. It was held that
the issue was valid.
d) The alteration must be made bona fide and for the benefit of the company as a
whole. In Allen versus Gold Reefs of West Africa Ltd. (1900) 1 ch. 656, it was
observed that the power of alteration must be exercised subject to those general
principles of law and equity which are applicable to all powers conferred to
majorities and enabling them to blind minorities.
The phrase the company as a whole means the company as a general body. It
should not discriminate between the majority shareholders and the minority
shareholders so as to give the farmers an advantage of which the latter are
deprived.
3.4 Constructive Notice Of Memorandum And Articles
A companys memorandum and articles of association become public documents on
registration with the Registrar or Companies. These documents are available for public
inspection in the Registrars office on payment of such fees as may be prescribed.
Every person who deals with the company is deemed to know the contents of these two
documents. This is known as Doctrine of Constructive Notice or Constructive Notice
of Memorandum and Articles It is presumed the individuals dealing with the company
have only read these documents but that they have also understood their proper meaning.
The memorandum and the articles are open and accessible to all. It is the duty of every
person to inspect these documents and see that it is within the powers of the company to
enter into the proposed contract. Likewise, special resolutions when registered with the
registrar because public documents so that an outsider is in the notice of their contents in
the same way as he is of the articles and the memorandum.
50
Presumption that outsiders have read memorandum and articles. Lord Hartherley
observed in this regard in Mahoney vs. East Holyford Mining Co. (1875) L.R. 7 H. L.
869 as follows:But whether he actually reads them or not is will be presumed that he has read them.
Every joint stock company has its memorandum and article of association open to all who
are minded to have any dealings whatever with the company and those who so deal with
them must be affected with notice of all that is contained in these two documents.
Thus, anyone dealing with a company is presumed not only to have read the
memorandum and the article but to have understood them, properly (Oak Bank Oil Co. vs
Crum (1882) 8 A. C. 65) The doctrine of constructive notice of the memorandum and
article however, is not a positive doctrine but a negative one. It is like doctrine of
eastoppel. It does not operate against the company. It operates only against an outsider
dealing with the company. It prevents him from alleging that he did not know that the
memorandum and article rendered a particular act ultra vines the company. (Freeman and
Lookeyer vs Buckhurst Park Properties Ltd. (1964) 1 ALL ER 630).
3.5 Doctrine Of Indoor Management
The doctrine of indoor management imposes as important limitation on the doctrine of
constructive notice Persons dealing with the company are presumed to have read these
documents. Once they are satisfied that the company has powers to enter into proposed
transactions they are required to do no more. They are not to enquire into the regularity of
an internal proceeding. They are entitled to assume that provisions of articles have been
complied with by the company in its internal working. If the proposed contract is within
the scope of the company as indicated by these two documents, the company will be bond
to the outsider and the claims of the outsider will not be affected in any way by the
internal irregularity of the company. This is known as the Doctrine of Indoor
Management or rule in Royal British Bank v Turquand.
51
3.6 The rule Royal British Bank v Turquand

In the Royal British Bank v Turquand (80) a company was ordered to repay a loan
which its directors had borrowed on its behalf without the authority of an ordinary
resolution prescribed by the articles of association. In the course of delivering his
judgment Jarvis, C. j stated:
The dealing with these companies is not like dealings with other partnerships, and the
parties dealing with them are bound to read the statute and the deed of settlement. But
they are not bound to do more. And the party here, on reading the deed of settlement,
would find not a prohibition from borrowing, but a permission to do so on certain
conditions. Finding that the authority might make complete by a solution, he would have
a right to infer the fact of a resolution authorized that which on the face of the document
appeared to the legitimately done
This statement can be reduced to two propositions which constitute what is compositely
known as the rule in Turquands case.
(a) A person dealing with a company is bound to read the relevant restrictive
provisions of the companies Act, the companys memorandum of association and
the companys articles of association. If he does not do so, he will deamed to have
read them and, as a consequence, to have been aware of their provision.
(b) In so far as the articles provide that a transaction may be affected by some internal
procedure, the person dealing within the company (called outsider) may assume
that the procedure has been duly complied with.
The combined effect of these propositions is that the company will be bound by the
transaction even if the prescribed procedure was not followed or complied with. An
internal procedure for this purpose would usually be a decision of the company which is
made by an ordinary resolution passed by the company in general meetings, or a
resolution of the directors passed at a board meeting. Such a resolution is not registerable
at the Companies Registry pursuant to s. 143 or any other section of the Companies Act
and the outsider who goes to the Registry would not be in a position to ascertain whether
it had in fact been passed. Rather than compel him to go to the relevant officer of the
52
company to make enquiries, the courts decided to, as it were, give him the benefit of
the doubt by holding that the resolution will be deemed to have been passed even if it
had not actually been passed.
Examples
The following cases are some of the leading examples of the application of the rule in
Turquands case:
(a) Mahoney v East Holyford Mining Co
The company secretary sent the companys bank what purported to be a final copy of a
resolution of the board authorizing the payment of cheques signed by two of three named
directors and by the named secretary .The bank, relying on the resolution ,honored
claques signed in accordance with its provisions. The company later went into liquidation
and it was then realized that neither the director nor the secretary had been properly
appointed and no general or board meetings had ever been held. The liquidators
contention that the cheques which had been signed by the directors and the secretary
had been wrongly paid and the bank must refund the money was rejected. The bank
neither was nor bound to enquire whether the directors and the secretary had been
properly appointed and could rely on the rule in Turquands case. The resolutions
appointing them are not registered under s.
(b) Freeman $ Lockyer v Buckhurst Park Properties Ltd
The articles of a company formed to purchase and resell an estate empowered the
directors to appoint one of their bodies a managing director. Kapoor, a director, was
never appointed managing director but, to the knowledge of the board, he acted as such.
On behalf of the company he instructed the plaintiffs, a firm of architects and surveyors,
to apply for planning permission with a view to developing the estate. The company later
refused to pay the plaintiffs fees on the ground that Kapoor had no authority to engage
them.
Held, the company was bound by the contract and liable for the plaintiffs fees. The act
of engaging architects was within the apparent authority of a managing director of a
53
property company and the plaintiffs were not obliged to enquire whether the person they
were dealing with ( Kapoor) was properly appointed. It was sufficient that under the
articles there was a power to appoint a managing director, and that the board of directors
had allowed one of them (Kapoor) to act as such. In any case, a resolution of the board
appointing managing directors is not registerable under s. 143 and so its passing cannot
be ascertained by a visit to the companies registry
3.7 Exceptions to the doctrine of indoor management
The rule in Turquands case will not apply if:
(a) The person suing the company is in fact an insider, such as a director of the
company. Such a person has access to the companys documents from which he
may discover the lack of authority. Exceptionally, he may succeed against the
company if he proves that he was a recently appointed director and had not fully
acquainted himself with the internal procedures of the company.
(b) The companys article prescribed a special resolution which had not been passed.
A special resolution is registerable under s. 143 of the Companies Act and if it
had been passed a copy thereof would have been delivered for registration and
would have been found among the companys documents at the companies
registry. Its absence should have warned the outsider that it had not been passed.
(c) There were special circumstances which should have put the outsider on inquiry:
The transaction is Ultra virus the company. This is so because a companys agent
cannot have authority to transact a business which the company itself lacks
capacity to transact.
(d) The transaction relates to the issue of a forged document, such as a forged share
certificate issue by the secretary without the authority of the board, as illustrated
by Ruben v Great Fingall Consolidated Ltd in which Lord Loreburm, L.c.
stated:
it is quite true that persons dealing with limited liability companies are not
bound to inquire into their indoor management, and will not be affected by
irregularities of which they have no notice. But this doctrine, which is well
54
established, applies only to irregularies that otherwise might affect a genuine

transaction. It cannot apply to a forgery.
The company was therefore not stopped by a share certificate to which its seal had
been affixed without the authority of the board of directors after the signatures of
two directors had been forged and added thereto.
Meaning of articles of association

The contents of articles of association
Alteration of articles of association
The constructive notice of memorandum and articles
The doctrine of indoor management
The rule royal brutish bank v turquand
The exceptions to the doctrine of indoor management
55
Revision Questions
a) Explain the meaning of articles of association
b) Describe the contents of articles of association
c) Explain the alteration of articles of association
d) Describe the constructive notice of memorandum and articles
e) Describe the doctrine of indoor management
f) Explain the rule royal brutish bank v Turquand
g) Explain the exceptions to the doctrine of indoor management

Saleemi.N.A (1997) Company Law Simplified, N.A Saleemi Publishers Limited, Nairobi,
Kenya.
Pages 71-86
Oliver.M,Marshal E.A,Company Law Pitman Publishing London UK Pages 63-75

Pages 382-387
Walmsley,K(2000) Company Law, Reed Elsevier(UK) Ltd London UK Pages 7-9
56
LESSON 4: PROMOTERS

a) Define of promoters
b) Describe the functions of promoters.
c) Describe legal status of a promoter
d) Describe fiduciary position of a promoter
e) Describe duty of promoter as regards prospectus
f) Explain remuneration of promoters
g) Describe pre incorporation or preliminary contracts
h) Explain position of promoters as regards pre incorporation contracts
i) Explain ratification of a pre-incorporation contract
4.1 Definition of promoters

A promoter is a person who does the necessary preliminary work incidental to the
formation of a company. It is a term used for a person who undertakes, does and goes
through all the necessary incidental preliminaries, keeping in view the object, to bring
into existence an incorporated company.
Chronologically, the first persons who control a companys affairs are its promoters. It is
they who conceive the idea of forming the company, with reference to a given object and
then to set it going. It is they, who take the necessary steps to incorporate the company,
provide it with share and loan capital and acquire the business or property which it is to
manage. When these things have been done, they hand over the control of the company to
its directors who are often the promoters themselves, under a different name.
57
Lord Blackburn has beautifully stated that it is a short and convenient way of
designating those who set in motion the machinery by which the Act enables them to
create and incorporate company.
Justice Cockburn defines a promoter as, one 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
So long as the work of formation continues, those who carry on that work retain the
character of promoters. However, if the board of directors is formed and it undertakes the
remaining work of company formation, the promoters function comes to an end.
Not everybody connected with the formation of a company can be called a promoter.
Thus the professional adviser, legal as well as others, are not promoters. Similarly, when
those engaged in starting a new enterprise, consult an expert to advise them of the full
facts with regard to the proposed enterprise and its future prospectus (e.g values,
surveyors, engineers e.t.c) they cannot be called promoters.
S. 45 (5) of the Companies Act [Cap 486] Law of Kenya does not include a person acting
in a professional capacity within the meaning of a promoter e.g a lawyer. Whether a
person is or is not a promoter is a question of fact depending upon the role performed by
him in the formation of the company. A person who does not play a prominent role may
also be a promoter if he has so acted. But if the person is merely employed in
professional or technical capacity such as a lawyer (for preparing the Memorandum and
Articles of Association of the proposed company) accountants, valuers or business
consultant he will not be a promoter.
Section 45(5) (a) provides that a promoter means a person who has a party to the
preparation of the prospectus, but does not include any person acting in a professional
capacity for persons engaged in the formation of the company. But if any such person
acts beyond the scope of his professional duty and helps in any way in the formation of a
company or in preparations for the management of its affairs, he will become a promoter
A registered company may also act as a promoter.
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4.2 Functions of Promoters.

The promoters of a company decide its name and ascertain that it will be accepted by the
Registrar of Companies. They settle the details of the companys Memorandum and
Articles the nomination of the directors of the company, bankers, the secretary and the
registered office of the company. 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. They are in fact responsible for bringing the company into existence for the
object which they have in view.
4.3 Legal Status of a Promoter
As to the exact legal status of a promoter, the statutory provisions are silent. His legal
status is incapable of precise statement, but Lindley L. J described his position in Lydney
& Wigpool Iron Ore Co. s. Bird [1866] 33 ch.d as follows.
Although not an agent for the company, nor a trustee for it before its
formation the old familiar principle of the law of agency and of trusteeship have been
extended and very popularly extended to meet such cases
Thus it appears that a promoter is neither an agent nor a trustee of the company under
incorporation but certain fiduciary duties have been imposed on him under the
Companies Act. He is not an agent because there is no principal born by that time and he
is not a trustee because there is no cestui que trust i.e beneficiary in existence. Hence
he occupies the peculiar position of a quasi trustee.
4.4 Fiduciary position of a promoter
A promoter stands in a fiduciary relation (requiring confidence or trust) to the company
which he promotes. In E langer Vs New Sombero Phosphate Co (1878) 3 A. C. 1218,
Lord Cairns observed in this regard:
In equity the promoters of a company stand in a fiduciary relation to it and those
persons whom they induce to become shareholders in it, and cannot in equity bind the
59
company by any contract with themselves as promoters without fully disclosing to the
company all material facts which the company ought to know
The fiduciary position of a promoter may be summed up as follows.
a. Not to make any profit at the expense of the company:
The promoter must not make, either directly or indirectly any profit at the
expense of the company which he is promoting. If any secret profit is made in
notation of this rule, the company may on discovering it compel him to account
for and surrender it, such profit . If he sells to the company, stock or shares of
his own at prices in excess of their market value, he may be liable in damages
for the excess of the price received by him over the market value.
b. To give benefit of negotiation to the company:
The promoter must, when once he has begun to act in the promotion of the
company, give to the company the benefit of any negotiations or contracts into
which he enters in respect of the company. Thus, where he purchases some
property for the company, he cannot rightfully sell that property to the company
at a price higher than he gave for it. If he does so, the company may on
discovering it, rescind the contract and recover the purchase price.
In Erlanger Vs New Sombrero Phosphate Co. (1878) 3 A. C. 1218, a syndicate,
of which E was the head, purchased an island said to contain valuable minerals.
E, as promoter, sold the island to 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 purchase at double the price actually paid by E. It was held
that as there had been no disclosure 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.
When a promoter sells or wishes to sell his own property to the company, he
should either.
60
i.
See that there is a Board of independent persons appointed as directors

of the new company or
ii.
Disclose his interest in the property to the intended members or to the

public by means of a prospectus. He must also make a full disclosure of
profits he is making in that deal.
c. To make a full disclosure of interest or profit:

If the promoter fails to make a full disclosure of all the relevant facts, including
any profit and his personal interest in a transaction with the company, the
company may sue him for damages for breach of his fiduciary duty and recover
from him any secret profit.
It is important to note that it is not the profit by the promoter which the law
forbids, but the nondisclosure of it and if disclosure is made, the profit is
permissible
The disclosure must be made to an independent Board of Directors. Where there
is no independent Board, disclosure must be made to the intended shareholders
as a whole.
The measure of damages is the actual loss suffered by the company as a result
of the transaction in question.
On 1st February 1873, five persons bought a mine for 5,000 for cash with a
view to selling to a company to be formed. On 4th April, 1878 they entered into
a provision contract with the trustees of the intended company for the sale of the
mine for 18,000. Subsequently when the company was registered it adopted
the contract of 4th April, and four of the vendors were appointed the directors of
the company. On coming to know of contract of 1st February which was not
disclosed to the company, the company sued the vendors to recover that profit
of 13,000. It was held that the vendors were not promoters when they bought
the mine and they were therefore under no fiduciary duty to disclose their
interest and account for the profit they had made.
61
Thus, a person who is not the agent nor the trustee of a company, nor in a
fiduciary relationship to the company can, when he buys he buys property sell
the same to the company at a profit without disclosing the same.
d. Not to make unfair use of position:
The promoter must not make an unfair or unreasonable use of his position and
must take care to avoid anything which has the appearance of undue influence
or fraud.
4.5 Duty of promoter as regards prospectus
The promoter must see, in connection with the prospectus if any is issued or a statement
in lieu of prospectus, that the prospectus:
1. Contains the necessary particulars
2. Does not contain any untrue or misleading statements or does not omit any
material facts.
Section 39 of the Act states that a prospectus issued by or on behalf of a company or in
relation to an intended company shall be dated; and that date unless the contrary is
proved, is taken as the date of publication of the prospectus.
Section 40 provides that every prospectus issued by or on behalf of a company or on
behalf of any person who is or has been engaged or is interested in the formation of the
company shall state the matters specified in part one of the third schedule.
It is important to note when a company issues a prospect, this does not constitute an offer
made by the company to members of the public for the companys shares. It is a mere
invitation to treat. However, is must be truthful in its content since the promoters can be
held liable for any misstatement in the prospectus. If the promoters fail to do this then
following consequences may ensue:
a) Allotment of shares may be set aside in the case of a fraudulent or innocent
misrepresentation.
b) They may be sued for damages.
c) They may be sued for compensation for misrepresentation.
62
d) They may be sued for damages by shareholders who have suffered by reason of
their non compliance with the statutory requirements as to the contents of the
prospectus, and
e) They may become liable to criminal proceedings.
The Companies Act itself provides for both civil and criminal liability for any untrue
statement contained in the prospectus.
For civil liability, S 45 (1) provides as follows:
S. 45(1) Subject to the provision of this section, where a prospectus invites persons to
subscribe for shares or debentures of a company, the following persons shall be liable to
pay compensation to all person who subscribe for any shares or debentures on the faith of
the prospectus for the loss or damage they may have sustained by reason of any untrue
statement included therein, that is to say:
a) Every person who is a director of the company at the time of the issue of the
prospectus.
b) Every person who has authorized himself to be named and is named in the
prospectus as a director or as having agreed to become a director either
immediately or after an interval of time.
c) Every person being a promoter of the company and
d) Every person who has authorized issue of a prospectus
However, if the consent of a person is required for the issue of a prospectus which
consent he has given, he shall not by reason of his having given consent be liable
under this subsection as a person who has authorized the issue of the prospectus
except in respect of an untrue statement purporting to be made by him as an expert.
S 45 (2) of the Act provides possible defense to persons who would otherwise be
liable under subsection (1) of section 45.
Such person shall not be liable if he proves:
63
a) That, having consented to become a director of the company, he withdrew his

consent before the issue of the prospectus, and that it was issued without his
authority or consent or
b) That the prospectus was issued without his knowledge or consent, and that on
becoming aware of its issue, he forthwith gave reasonable pubic notice that it was
issued without his knowledge or consent or,
c) That, after the issue of the prospectus and before allotment there under he, on
becoming aware of any untrue statement therein withdrew his consent thereto and
gave reasonable public notice of the withdrawal and of the reason thereof or
d) That:
i.
As regards every untrue statement not purporting to be made on

the authority of an expert or of a public official document or
statement, he had reasonable ground to believe, and did up to the
time of the allotment of the shares or debentures, as the case may
be, believe, that the statement was true, and
ii.
As regards every untrue statement purporting to be a statement by

an expert or contained in what purports to be a copy of or extract
from a report or valuation of an expert, it fairly represented the
statement, or was a correct and fair copy of or extract from the
report or valuation, and he had reasonable ground to believe and
did up to the time of issue of the prospectus believe that the person
making the statement was competent to make it and that person
had given the consent required by section 42 to the issue of the
prospectus and has not withdrawn that consent before delivery of a
copy of the prospectus for registration or to the defendants
knowledge before allotment thereundrer and
iii.
As regards every untrue statement purporting to be a statement

made by an official person or contained in what purports to be a
copy of an extract from a public official document or copy of or
extract from the document.
64
Untrue statement in the prospectus may also attract criminal liability under S. 46 (1) of
the Act .The said section provides as follows:
Where a prospectus is issued after the commencement of this Act, includes any untrue
statement, any person who authorized the issue of the prospectus shall be guilty of an
offence and liable to imprisonment for a term not exceeding two years, or to a fine not
exceeding ten thousand shillings or to both such fine and imprisonment, unless he proves
either that the statement was immaterial or that he had reasonable ground to believe and
did up to the time of the issue of the prospectus, believe that the statement was true
It is important to note that S. 46 (1) prescribes the criminal sanctions only in respect of
willful untrue statement made in the prospectus and not otherwise.
4.6 Remuneration of promoters
A promoter has no right to get compensation from the company for his services in
promoting the company unless there is a contract to that effect. If there is no such
contract, he is not entitled to get any compensation in respect of any payment made by
him in connection with the formation of the company.
In Clintons Claim (1908) 2ch. 515, a syndicate which promoted a company incurred
certain expenses in respect of fees and stamp duty incidental to the formation of the
company. The company was later wound up. It was held that the syndicate was not
entitled to recover the expenses incurred by it. In practice a promoter takes remuneration
for his services in one of the following ways:
a) He may sell his own property at a profit to the company for cash or fully paid
shares provided he makes a disclosure to this effect.
b) He may be given an option to buy a certain number of shares in the company at
par.
c) He may take a commission on the shares sold.
d) He may be paid a lumpsum by the company
65
Article 80 of table A usually gives the directors power to pay all expenses incurred in
promoting and registering the company but this gives the promoter no right to sue for
payment as it only confers discretion upon the directors. However it is common practice
that promoters are usually the first directors and no difficulty is likely to arise for
receiving their expenses.
4.7 Pre incorporation or preliminary contracts
The promoters of a company usually enter into contracts to acquire some property or
right for the company which is yet to be incorporated. Such contracts are called pre
incorporation or preliminary contracts. The promoters generally enter into such contracts
as agents for the company about to be formed. The legal position is that two consenting
parties are necessary to a contract whereas the company before incorporation is a non
entity. In Kelner Vs Baxter (1866) LR 2, Kelner agreed to sell a hotel to Baxter who was
acting agent for a company which was about to be formed. It was held that Baxter was
personally liable on the contract as the company was not in existence at the time of
contracting and therefore, could not ratify the contract after its incorporation. The
promoter cannot, therefore act as agent for a company which has not yet come into
existence. As such the company is not liable for the act of the promoters done before its
incorporation.
A pre-incorporation contract permitted to be made by a company which does not exist is
an annullity. As such the company, when it comes into existence can neither sue nor be
sued on that contract.
In Newborne vs. Sensolid (Great Braitain) Ltd (1954) I Q B 45, New borne a director,
entered into a contract in the name of a company before its incorporation. He signed his
name underneath the name of the yet be formed company. It was not contract.
66
4.8 Position of promoters as regards pre incorporation contracts

1. Company not bound by pre-incorporation contract. A company, when it comes
into existence is not bound by a pre-incorporation contract even where it takes
the benefit of the contract entered into on its behalf.
English Colonial Produce Co. Ltd Re (1906) 2 ch. 435: A solicitor prepared the
Memorandum and Articles of Association of a company and paid the necessary fees and
other incidental expenses to obtain the registration of the company. He did this on the
instructions of certain persons who later become directors of the company. It was held
that the company was not liable to pay the solicitors costs although it had taken the
benefit of his work.
2.
The company cannot enforce pre-incorporation contract. A company cannot,

after incorporation enforce the contract made before its incorporation. The
leading case on this point is Natal Land Colonisation Co. Ltd vs. Pauline Colliery
Development Syndicate Ltd AC 120. In this case the N company agreed with an
agent of the P Syndicate. The syndicate was registered and discovered a seam of
coal. The company refused to grant the lease. It was held that there was no
binding contract between the company and the syndicate.
3.
Promoter personally liable. The promoters remain personally liable on a contract

made on behalf of a company not yet in existence.Such a contract is deemed to
have been entered into personally by the promoters and they are liable to pay
damages for failure to perform the promises made in the companys name even
though the contract expressly provides that only companys shall be answerable
for performance.
4.9 Ratification of a Pre-Incorporation Contract

A company cannot ratify a contract entered into by the promoters on its behalf before its
incorporation. Therefore, it cannot by adoption or ratification obtain the benefit of the
contract purported to have been made on its behalf before it came into existence as
ratification by the company when formed is legally impossible. The doctrine of
ratification only applies if an agent contracts for a principal who is in contract at the time
of the contract by the agent.
67
Where a contract is made on behalf of a company known to both the parties to be non
existent, the contract is deemed to have been entered into personally by the promoters.
The company can, if it desires, enter into a new contract, after its incorporation with the
other party. The contract may be on the pre incorporation contract made by the
promoters. But the adoption of the pre incorporation contract made by the company will
not create a contract between the company and the other parties even though the adoption
of the contract is made as one of the objects of the company in its Memorandum or
Articles.
In such a case, it is safer for the promoters acting on behalf of the company about to be
formed to provide in the contract that:
1. If the company makes a fresh contract in terms of the pre-incorporation contract,
the liability of the promoters shall come to an end, and
2. If the company does not make a fresh contract within a limited time, either of
other parties may rescind the contract.
Meaning of promoters
The functions of promoters.
Legal status of a promoter
Fiduciary position of a promoter
Duty of promoter as regards prospectus
Remuneration of promoters
Pre incorporation or preliminary contracts
Position of promoters as regards pre incorporation contracts
Ratification of a pre-incorporation contract
68
Revision Questions
a) Define of promoters
b) Describe the functions of promoters.
c) Describe legal status of a promoter
d) Describe fiduciary position of a promoter
e) Describe duty of promoter as regards prospectus
f) Explain remuneration of promoters
g) Describe pre incorporation or preliminary contracts
h) Explain position of promoters as regards pre incorporation contracts
i) Explain ratification of a pre-incorporation contract

Kenya.
Pages 47-56
Abbot.K, Penddle.N,Wardman.K (2002)Business Law. Continuum London UK 371-374

Pages

Pages 55-88
69
LESSON 5: PROSPECTUS
a) Definite a prospectus
b) Explain the purpose of a prospectus
c) Describe the form and contents of a prospectus
d) Explain the report to be set out in prospectus
5.1 Definition of Prospectus

Section 2 of the Companies Act defines a prospectus thus: A prospectus means any
prospectus, notice, circular, advertisement or other invitation; offering to the public for
subscription or purchase any shares of debentures of a company.
In simple words, any document inviting deposits from the public or inviting offers from
the public for subscription of shares of debentures of a company is a prospectus.
5.2 purpose of a prospectus
After obtaining the certificate of incorporation the promoters will take steps to raise the
necessary capital for the company. A public company may invite the general public to
subscribe to the capital of the company and for this purpose a prospectus has to be issued.
The basic objective of issuing a prospectus is to arouse public interest in the proposed
company and induce the general public to buy its shares and debentures. However, it is
not essential for a public company to issue a prospectus. If the promoters are confident of
raising the required capital; privately from their relatives and friends, they need not issue
a prospectus. In such a case, a statement in lieu of prospectus must be filed with the
Registrar of companies.
70
A private company, by its articles, prohibits any invitation to the public to subscribe for
any shares in, of debentures of the company. It is also not required to file a statement in
lieu pr prospectus.
The central theme of a prospectus, from money raising point of view, is that it sets out the
prospects of the company and the purpose for which the capital is required. The
prospectus is the basis on which the prospective investors form their opinion and take
decision as to the worth and prospects of the company. A prospectus, from a legal point
of view is not an offer but a mere invitation to treat. When a person makes an application
for shares on the basis of the prospectus, that application is the offer.
Prospectus to be in Writing:
A prospectus must be in writing. An oral invitation to subscribe shares in or debentures
of, a company, or deposit is not a prospectus. Likewise, an advertisement in television or
a film is not treated to be a prospectus.
Subscription:
The word subscription in the definition of a prospectus means taking or agreeing to
take shares for cash. It means that the person agreeing to take the shares puts himself
under a liability to pay the nominal amount thereof in cash. In Government Stock and
Other Securities Investment Co. Ltd Christopher, an offer was made by company A to the
members of companies B and C to acquire all their shares in these companies in
exchange of allotment of shares in the company. The offer cannot be held to be an offer
to the public because it does not invite subscription for shares since subscription means
taking shares for cash. Moreover, the offer cannot be said to have been made to the public
as it can be accepted only by members to who it is made. The shares were not open for
subscription by the public.
Invitation to Public:
It may be noted here that a document will be treated as a prospectus only when it invites
offers from the public. Section 57 defines the term public as follows: It includes any
section of the public, whether selected as members or debenture holders of the company
71
concerned or as clients of the person issuing the prospectus or in any other manner. It
further provides that no offer of invitation shall be treated as made to the public if:
a) The same is not calculated to result in the shares or debentures becoming
available other than those receiving the offer or invitation.
b) It appears to be a domestic concern of the person making and receiving the offer
or invitation.
The public is of course a general word. No particular members are prescribed. Anything
from two to infinity, perhaps even one, may serve to indicate public. The point is that the
offer makes the shares and debentures available for subscription to any one who brings
his money and applies in due form, whether the prospectus was addressed to him on
behalf of the company or not. A private communication does not satisfy the above point.
Where directors make an offer to a few of their friends, relatives or customers by sending
them a copy of the prospectus marked not for publication, it is not considered an offer
to the public. In another case, it was held that the offering of share to the kith and kin of a
director is not an invitation of the public.
It was held that the provisions of the Act relating to prospectus are not attracted unless
the prospectus is issued to the public. The term issued is not satisfied by a single private
communication. The leading case on this point is Nash v. Lynde. In this case the
managing director of a company prepared a document that was marked strictly private
and confidential and it did not obtain the particulars required to be disclosed in a
prospectus. A copy of the document along with application forms was sent to a solicitor
who in turn sent it to the plaintiff. The document was held not to be a prospectus and as
such the claim for compensation was dismissed.
On the other hand, the distribution of 3,000 copies of a prospectus among the members of
certain gas companies was held to be an offer to the public because persons other than
those receiving the offer could also accept it. One may note here that an offer or
invitation to any section of the company or as clients of the person making the invitation
will be deemed to be an invitation to the public.
72
Similarly, where in an advertisement it was stated, some shares are still available for sale
according to terms of the prospectus of the company which may be obtained on
application, it was held to be a prospectus as it amounted to an invitation to the public to
subscribe to the shares of the company.
Meaning of the word issued
Issued means issued to the public. It is not necessary that a prospectus should be issued
by a company. It may be issued on behalf of the company by an agent.
5.3 Form and contents of a prospectus
Prospectus is the window through which an investor can look into the soundness of a
companys venture. The investor must, therefore, be given a complete picture of the
companys intended activities and its position. This is done through prospectus which
must secure the fullest disclosure of all material and essential particulars and lay the same
in full view of all intending purchasers of shares. The contents and preparation of a
prospectus must be in accordance with the provision of the Act, and the following rules
must be observed in all cases:
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 a director or
proposed director.
Section 39 provides that every prospectus issued by or on behalf of a company or
intended company or intended must be dated, and the date, unless the contrary is proved,
is taken to be the date of the publication of the prospectus. Thus it is advisable to insert a
date two or three days later than the actual date on which the prospectus is printed. On or
before the date of publication, a copy must be delivered to the Registrar for registration.
(d) Section 40 (1) provides that every prospectus issued must include the matter specified in part 1 of the
third schedule to the Act and set out the reports specified in part II of the schedule. Sub
section 2 renders void any attempted condition requiring an applicant for shares or
debentures to waive compliance with the section or purporting to effect him with notice of
any contract, document or matter not specifically referred to in the prospectus.
73
As per Third schedule to the Act scheduled, the prospectus must contain the following matters:1.
The number of the founders or management or deferred shares, if any ,and the nature and extent
of the interest of the holders in the property and profit of the company.
2.
The number of shares, if any fixed by the articles as the qualification of a director and any
provision in the article as to the remuneration of the directors.
3.
The names, occupation and postal addresses of the directors or proposed directors.
4.
Where shares are offered to the public for the subscription particulars as to
(a)
The minimum are offered of any property purchased or to be purchased which is to be defrayed
in whole or in part out of the proceed of the issue.
(b)
Any preliminary expenses payable by the company and any commission so payable to any
person in consideration of his agreeing to procure subscription for any shares in the
company.
(c)
The repayment of any moneys borrowed by the company in respect of the matters aforesaid
otherwise than out of the proceeds of the issue and the source out of which those amounts
are provided.
5.
The time of the opening of the subscription lists
6.
The amount on application and allotment on each share, and in the case of a second or
subsequent offer of shares, the amount offered for subscription on each previous allotment
made within the two proceeding years, the amount actually allotted and the amount, if any
paid on the shares so allotted.
7.
The number, description and amount of any shares in a debentures of the company which any
person has, or is entitled to be given, an option to subscribe for, together with the following
particulars of the option, that is to say:
a.
The period during which it is exercisable
b.
The prices to be paid for shares or debentures subscribed for under it.
c.
The consideration (if any) given or to be give for the right to it.
d.
The names and postal addresses of the person to whom it or the right to it was given, or if given
the existing shareholders or debenture holders as such, the relevant shares or debentures.
8.
The amount ,if any, paid within the two preceding years, or payable, as commission (but not
including commission to sub under-writers)for subscribing or agreeing to subscribe, or
74
procuring or agreeing to procure subscriptions for any share in or debenture of the

company, or the rate of any such commission.
9.
The amount or estimated amount or preliminary expenses and the person by whom any those
expenses have been paid or are payable, and the amount or estimated amount of the
expenses of the issue and the person by whom any of those expenses have been paid or are
payable.
10.
Any amount or benefit paid or given within the two preceding years or intended to be paid or
given to any promoter, and the consideration for the payment or the giving of the benefit.
11.
The dates of parties and general nature of any material contract, not being a contract entered into
the ordinally course of the business carried on by the company or a contract entered into
more than two years before the date of issue of the prospectus.
12.
The names and postal address of the auditor, if any, by the company.
13.
Fill particulars of the nature and extent of the interest, if any, of every director in the promotion
of or in the property proposed to be acquired by the company, or, where the interest of such
a director consists in being a partner in firm, the nature and extent of such director consists
in being a partner in firm, the nature and extent of the interest of the firm with a statement
of all paid or agreed to be paid to him or to the firm in cash or shares or otherwise
14.
If the prospectus invites the public to subscribe for shares in the company and the share capital of
the company is divided into different classes of shares, the right of voting at meeting of the
company conferred by and the rights in respect of capital and dividends attached to several
classes of shares respectively.
15.
In case of accompany which have been carrying on business, or of a business which has been
carried on for less than three years, the length of time during which the business of the
company or the business to be acquired ,as the case may be ,has been carried.
5.4 Report To Be Set Out In Prospectus

Part 11 of the third Scheduled makes provisions with regard to the inclusion of report to be set out in
prospectus .Briefly, these are reports by the companys auditor starting;
(a)
The profit or losses of the company in each of the five financial years preceding the issue of the
prospectus.
75
(b)
The rate of dividends, if any, paid by the company in respect of each class of shares in each of
those years.
(c)
The assets and liability at the last date due to which the amount of the company were made up.
(d)
If the proceed, or any part of the proceeds, of the issue of shares or debentures are to be applied
directly or indirectly in the purchase of any business during the five financial years
immediately preceding the issue of the prospectus, and also on the assets and liability of the
business at the last date to which the amount were made up.
Where the company has subsidiaries, the report must also deal either with the combined profit and losses
of each of the subsidiaries. Alternatively, the combined profits or losses of the company
and subsidiaries may be dealt with. Assets and liability of subsidiaries must also be dealt
with.
Meaning of prospectus
Purpose of a prospectus
The form and contents of a prospectus
The report to be set out in prospectus
76
Revision Questions
a) Definite a prospectus
b) Explain the purpose of a prospectus
c) Describe the form and contents of a prospectus
d) Explain the report to be set out in prospectus

Kenya.
Pages 87-110
Walmsley,K(2000) Company Law, Reed Elsevier(UK) Limited, London UK Pages 5888
77
LESSON 6: FLOTATIONS
a) Define floatation
b) Explain the methods of public issue
6.1 Definition of floatation

A flotation occurs if a company invites the public to apply for its shares or debentures.
This is only done by public companies since private companies are prohibited by their
articles from doing so. However, a private company which intends to have its capital
floated off to the public must:
(a) Alter its articles in such manner that they no longer:
(i)
restrict the right to transfer shares;
(ii)
restrict the maximum number of members, and
(iii)
prohibit an invitation to the public to subscribe for any shares or debentures of the
company.
(b) Within fourteen days after altering the articles, deliver to the registrar for registration a
prospectus relating to the company which complies with the Third Schedule.
If the flotation is to take place at some future date, the company must, within fourteen days
after the alteration of the articles, deliver to the registrar for registration a statement in lieu
of prospectus which complies with the Second Schedule.
If a private company floated off its shares to the public without altering its articles, the
company would cease to be entitled to privileges and exemptions which the Act confers on
a private company and would henceforth be governed by the provisions of the Act as if it
were not a private company (unless the court, on being satisfied that the failure to comply
with the articles was accidental or due to inadvertence or some other sufficient case, order
otherwise) (s. 31).
78
If the company altered the articles but failed to deliver the statement in lieu of
prospectus the company and every officer of the company who is in default shall be liable
to a default fine of one thousand shillings (s. 32(3)
6.2 Methods of public issue

The methods by which public companies raise their capital from the public are explained in
varying detail by English text books on company law. The methods are those which
English companies have evolved over a very long period of time though trial and error.
Although they were not evolved by Kenya companies some of them have been adopted by
those companies. The methods which are explained herein are those which have already
been adopted and those which are likely to be adopted in Kenya as the Kenyan economy
grows largely along the English model as a result of the economic programmes which are
currently being put in place in Kenya. These methods are:
a Prospectus issue
Under a prospectus issue the company sells the shares directly to the public rather than
selling them through intermediaries.
Company
sells shares to
public
(Issues a document generally

Called prospectus)
As a precaution against the issue being unsuccessful the company may underwrite the
issue (i.e. entering in to contract with a financial institution which agrees to take up the
shares which are not applied for the public). This method is the one which is the generally
used by Kenyan companies
b) Placing
A placing occurs if the company, instead of selling its shares directly to the public,
arranges with a broker or issuing house to sell them on its behalf.
79
Company
Broker
Sells the shares to
Public
(Acts as the
Companys agent)
A placing may be a private placing if the issuing house purchases the shares and place
them with its clients (usually institutional investors) rather than making them available to
the general public
c) Offer for sale

An offer for sale is an arrangement whereby a company sells the whole of its shares to an
Issuing House and the issuing house then re-sells the shares to the general public ,usually
at a profit.
Company
sells shares to
public
Issuing House
resells the shares
to
(Issues a document
Called offer for sale)
The company usually issues renounceable allotment letters to the issuing house. The
letters enable the allottees to assign their rights to the shares specified in them by signing
forms of the renunciation in favour of third parties who buy the shares. The forms of
renunciation are printed as part of the allotment letters.
d) Offers by tender
An offer by tender occurs if a company invites tenders for its shares, and sells them to the
highest bidder. This is done with a view to obtaining the best price possible for the shares.
Under this method, the company fixes a minimum price for the share and accepts the
highest tendered price above the minimum price, in much the same way as an auctioneer
who sells goods subject to a reserve price.
e) Rights issue
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A rights issue occurs if a company which has been trading for some time makes an offer
to the existing members to buy shares of a new issue in proportion to the number of
shares they hold . The existing members, rather than the public, are thereby given a
right to buy new shares. A member who does not want to keep the shares will have a right
to sell them straight away if he accepts the companys offer.
The advantages of this method are that as far as the company is concerned, it obviates
the substantial expenditure that is incidental to an offer to the public and as a far as the
member is concerned, it enables him to buy shares at a price that is usually below their
market price.
f) Bonus issue
A bonus issue is a method by which a company, instead of paying a cash dividend to its
members, retains the cash but issues new shares to the members. The total nominal value of
the shares issued equals the retained cash.
The company thereby increases its nominal capital and acquires the cash it needs for
business expansion without having to borrow money from a bank or other financial
institutions.
This method can only be used if the articles make a provision for it because the general
rule at common law is that dividends are payable in cash:
g) Conversion issue
A conversion issue occurs either during a re-organization of a companys capital structure
or when two or more companies amalgamates. What usually happens is that holders of one
type of shares (e.g. preference shares) are offered the right to convert them into shares of
another type in the same company (e.g. ordinary shares), or, in the case of an
amalgamation, the shares of another company.
This method has business advantages both for the company and the members. It is not,
strictly speaking, a method of raising capital.
81
Meaning of floatation
The methods of public issue
Revision Questions
a) Define floatation
b) Explain the methods of public issue
Kenya. Pages 177-200
Pages 618-620
Marsh,Soulsby (1998)Business Law Stanley Thorns(Publishers)Limited, Cheltenham UK
Pages 102-106
Walmsley,K(2000) Company Law, Reed Elsevier(UK) Limited, London UK Pages462466
82
LESSON 7: DISTRIBUTION OF COMPANYS POWERS

a) Explain the directors powers
b) Explain how the board meetings are conducted
c) Explain the role of the chairman in a company
d) Explain the delegation of directors powers
e) Describe the powers, remuneration and removal of the managing director
f) Describe the qualifications ,legal status and liabilities of the company secretary
g) Explain the directors vis members in general meetings
7.1 Introduction
The articles of a registered company usually provide that the business of the company
shall be managed by the directors. This lesson examines how the directors exercise
their powers and the role played by members in general meeting in the management
process of a company.
7.2 Exercise of Directors Powers
The manner in which the directors are to exercise their powers to manage their company
is not governed by the companies Act. The English cases which have a bearing on this
point have been devoted to construction of particular articles rather than formulation of
principles of general application. What is stated hereinafter is therefore the provisions
generally applicable to Kenya companies.
7.3 Board meetings
Table A, Article 80 provides, inter alia, that the business of the company shall be
managed by the directors. The reference to the directors ,when read in conjunction
with articles 98 and 99 which provide for board meetings and quorum, respectively,
83
implies that the power of directors are conferred on them collectively (i.e. as a board )
and not individually . To exercise those powers, therefore, the directors must hold a
board meeting.
7.4 Notice of board meeting
Notice of board meeting must be given to all directors whose whereabouts are known.
However, Table, A, Articles 98 provides that it shall not be necessary to give notice of a
meeting of directors to any director for the time being absent from Kenya. It would
appear that no notice need be given if the directors had resolved to meet, and
subsequently met, at fixed times.
Failure to give notice of a board meeting to a director renders the meeting a nullity. The
absence of a provision corresponding to Table A, Articles 51, in relation to board
meetings would be another ground for holding the view that failure to give notice of a
board meeting renders the meeting a nullity, Only such an article would have excluded
the operation of the common rule that failure to give notice of a meeting to a person
entitled to attend the meeting renders it a nullity.
Failure to give proper notice to a director only entitled him to require, within a
reasonable time, that a second meeting be held but did not invalidate the meeting.
Assuming that notice of some sort has been given, the question remains as to whether the
notice was valid one.
There are no provisions in the Act or in Table A and the question must therefore be
considered on the basis of decided cases. In Browne v La Trinidad it was held that five
minutes notice to a director was sufficient since the director did not have other
engagements and the distance did not prevent him from attending. In Re: Homer
District Consolidated Gold Mines Ltd three hours notice was held to be insufficient
since the director had other business to attend to. On the bases of these cases it may be
stated that, to be valid, the notice must be reasonable having regard to the
circumstances of the director given the notice.
84
In Barron v Potter the plaintiff and the defendant were the only directors of a
company. The defendant (potter), as chairman of the board with a casting vote, was
anxious that a board meeting should be held. None could however be held since the
plaintiff had refused to attend. The defendant therefore decided to wait for the plaintiff at
a railway station where, as soon as the plaintiff had alighted from a train, told him that he
was convening a board meeting to be held there and then for the purpose of appointing
additional directors to the board. The defendant disregarded the plaintiffs protest and, as
they continued to walk along, declared that as chairman of the meeting, he had used his
casting vote and appointed the said directors. It was held that proper notice of the meeting
had not been given to the plaintiff and the meeting at the railway station was null and
void.
In Compagnie de Mayville v Whitley (1896) it was held that it is not legally necessary
to state in the notice of the meeting the nature of the business to be transacted. This
rule acknowledges the fact that the board from time to time considers matters of a
sensitive nature which may be very imprudent to state in advance because of the dangers
of leakage. But it is legally permissible for the notice to state the nature of the business
to be transacted if there is no risk of leakage of confidential matters.
7.5 Quorum at board meeting
The quorum at board meeting is usually fixed by the articles. Table A, Article 99
provides that the quorum necessary for the transaction of the business of the
directors may be fixed by the directors, and unless so fixed shall be two. Because of the
words the transaction of business, the quorum must be present throughout the
meeting.
Table A, Article 100 provides that the continuing directors may act
notwithstanding a vacancy in their body. However, if their number is reduced below
the number fixed or pursuant to the articles as the necessary quorum of directors,
the continuing directors or director may act for the purpose of increasing the number of
directors to the number, or of summoning a general meeting of the company.
85
7.6 Disinterested quorum

The quorum must consist of directors who are entitled to vote. This, generally
speaking, means directors who have no personal interest in the matter to be considered
by the board.
The consequences of a breach of this rule will depend on the provisions of the
articles. Table A, Article 84 (2) provides that a director shall not vote in respect of any
contract or agreement in which he is interested. If he votes, his vote shall not be
counted. He shall also not be counted in the quorum present at the meeting
Since the disinterested quorum rule does not apply to general meetings it is legally
permissible for a director debarred by the rule from voting at a board meeting to vote on
the same matter if the opportunity to do so arises at a general meeting of the companys
members.
Articles 84(1) permits an interested director to attend the meeting of the
board
but does not require him to withdraw during the discussion of the particular item
of the business in which he is interested. This means that he cannot legally be compelled
to withdraw. It is however advisable for him to so do, particularly if he is the chairman of
the board of directors, since his presence may not be conducive to the frank and free
debate that should take place before a decision is made one way or the other.
7.7 The chairman
Table A, Article 101 provides that the directors may elect a chairman of their meetings
and determine the period for which he is to hold office.
If no chairman is elected, or if the elected chairman is not present within five minutes
after the time appointed for holding a meeting, the directors present may choose one of
their number to be a chairman of the meeting. These provisions also apply when the
appointment of the chairman of a committee (of the board) is to be made.
7.8 Voting at board meetings
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The voting at board meetings is governed by the articles of the company and, in the
absence of any provision in the articles, the common law rule will apply and each director
will have one vote only. Table A, Article 98 provides that questions arising from any
meeting shall be decided by a majority of votes and, in the case of an equality of votes,
the chairman shall have a second or casting vote.
If the chairman has no casting vote and there is an equality of votes the resolution would
be lost.
7.9 Powers of the chairman
The powers of the chairman of the board of directors is not governed by any statutory
provisions or case law. It is therefore tempting to regard his role as being more of a
public relations exercise, such as presenting a good image of the company to potential
customers. He may also facilitate harmonious interaction between individual directors of
the company as well as between directors and the employees His success in this area
depends very much on whether he has a pleasant disposition and good social connections,
usually political.
When he actually presides at a meeting of the board he would be expected to ensure that:
(a) the function of the board is carried out as was agreed at the last meeting;
(b) The meeting is carried out in a business like manner, and
(c) Every director is given a fair opportunity to participate in the discussion.
The chairman of the board usually presides at general meeting of the company as well.
Minutes
For the purposes of the law of meeting , the word minutes denotes a record of the
business transacted at a meeting of the company which is prepared and kept by the
company, usually pursuant to statutory provision
Section 145(1) provides that every company shall cause minutes of all
proceedings at meeting of its directors to be entered in books kept for that purpose.
Section 145 (2) further provides that any such minute, if purporting to be signed by the
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chairman of the meeting at which the proceedings were held, or by the chairman of the
next succeeding meeting of directors, shall be evidence of the proceedings.
In R v Merchant Tailor Co (1831) it was held that the members have no right to inspect
the minutes of the directors meetings.
7.10 Delegation of directors powers
In Ellis v Bailey $ Co (East Africa) Ltd (77) Sir Trevor Gould, S g V-p stated that,
without specific authority in the article, directors may not appoint one of their number
to the position of a managing directors or other salaried office. This is because of the
rule delegatus non potest delegare.
It is however not unusual to find articles of association empowering directors to appoint
a managing director and other officers of the company and to confer on such officers
such powers as they think may fit.
7.11 Managing Director
In the case of companies which have adopted Table A, Article 107 empowers directors to
appoint a managing director for such period and on such terms as they think fit. In
Craven- Ellis v Cannons Ltd it was explained that the words the directors at the
beginning of the Article 107 means the de jure directors. Consequently, a purported
appointment by de facto directors would be null and void. A managing director occupies
a crucial position in the management of a company and as such it would be improper to
allow people who are in fact illegally in office (the de facto directors) to appoint him..
7.12 Powers of managing director
Article 109 provides that the directors may entrust to and confer upon a managing
director any of the powers exercisable by them upon such terms and conditions and with
such restriction as they may think fit, and either collaterally with or to the exclusion of
their own powers, and may from time to time revoke, withdraw, alter or vary all or any of
such powers.
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7.13 Remuneration
Article 108 provides that a managing director shall receive such remuneration (whether
by way of salary, commission or participation in profits, or partly in one way and partly
in another) as the directors may determine. It was explained in Craven- Ellis v Cannons
Ltd that, unless the article provides otherwise, a managing director would be entitled to
remuneration payable on a quantum meruit basis in respect of services rendered to the
company, in those cases where the directors had not fixed his remuneration at the time of
his appointment. No such payment would however be made if the articles, like Article
108, contain specific provisions pertaining to the payment of remuneration.
7.14 Removal
Article 107 provides that the managing directors appointment shall be automatically
determined if he ceases from any cause to be a director. It was explained in Southern
Foundries Ltd v Ltd v Shirlaw (78) that if the appointment constituted a service
agreement with the company the managing director would be entitled to sue the
company for damages if the removal from directorship derogated from the terms of the
agreement and constituted a breach of it , such as being removed before the period fixed
in the services agreement expired . If on the other hand the appointment does not
constitute a service contract the managing director would have no remedy for premature
removal
7.15 The company secretary
By section 178, every company must have a secretary but a sole director cannot be a
secretary as well. Table A, Article 110, provides that the secretary shall be appointed by
the directors on such terms and conditions as they think fit and may be dismissed by
them.
Section 178A(1) provides that every secretary to the company shall hold a
qualification prescribed by section 20 of the Certified Public Secretaries Act, 1988 which
states that a person is qualified to be registered( as a secretary) if:
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a) he has been awarded by the Kenya Accountants and Secretaries National

Examinations Board a certificate designated the final Certificate of the
Certified Public Secretaries Examination;
b) he hold a qualification approved by the Registration of Certified Public
Secretaries Board , established by Section 11 of the Certified Public
Secretaries Act;
c) he is ,at the commencement of the Act, both a citizen of Kenya and a
member of the professional body known as the Institute of Chartered
Secretaries and Administrator;
d) he is, at the commencement of the Act , both ordinarily resident in Kenya and
a member of the professional body known as the institute of Chartered
Secretaries and Administrators;
e) he is, at the commencement of the Act , registered as an Accountant under
section 24(1) of the Accountant Act; or
f) he is qualified as an advocate of the High Court of Kenya.
However , the Registration Board may, from time to time , by notice in the Gazette,
approve qualifications which is considered sufficient to allow a person to be registered ,
and may, in like manner, withdraw any such approval. A person is disqualified from
being registereda) If he is convicted by a court of competent jurisdiction in Kenya or elsewhere
of an offence involving fraud or dishonesty;
b) If he is undischarged bankrupt;
c) If he is unsound mind and has been certified to be so by a medical
practitioner; or
d) During any period when the registration board has determined ,after
consideration of a report of alleged misconduct, that he shall not be registered
or during any such period as varied by the High Court after an appeal against
the determination.
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7.16 Powers and duties of the company secretary

It is surprising to note that neither the Act nor Table A specifies the powers or duties of
the company secretary. Table A, Article 110 merely provides that the secretary shall be
appointed by the directors upon such conditions as they may think fit Table A,
Article 113 however provides that every instrument to which the companys seal is
affixed shall be countersigned by the secretary (unless countersigned by a second
directors for the purpose) . Since they are not defined by the Act or Table A, the powers
and duties of the secretary will depend primarily on his job description (i.e. his contract
of employment and its schedule of duties and powers). The schedule of duties would
normally include the following
a) Issuing notices of general meetings to the members of the company after
being instructed by the board to do so.
b) Taking minutes of the board meetings and general meetings.
c) Issuing notices of board meetings to the members of the board on the
requisition of director.
d) Countersigning documents to which the company seal has been affixed.
e) Keeping the companys statutory books and registers.
7.17 Legal status of the secretary
In 1882 Lord Esher in Barnett, Hoares, $ Co South London Tramsways Co stated:
A secretary is a mere servant; his position is that he is to do what he is told, and no
person can assume that statements made by him are necessarily to be accepted as
trustworthy without further inquiry.
Although this statement was true in 1888 it does not correctly state the current status of
the secretary. For example, in Panorama Developments Ltd v Fidelis Furnishing Fabrics
Ltd(108) in 1971 Lord Denning stated:
times have changed. A company secretary is a much more important person
nowadays than he was in 1887. He is in officer of the company with executive duties
and responsibility He is no longer a mere clerk. He regularly makes
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representations on behalf of the company and enters into contracts on its behalf which
some within the day- to-day running of the company business. So much so that he may be
regarded as held out as having authority to do such things on behalf of the company. He
is certainly entitled to sign contracts connected with the administrative side of the
companys affairs, such as employing staff , and ordering cars, and so forth.
This statement correctly defines the position in Kenya as well although we have no
statute dealing with the qualifications and duties of the company secretary.
7.18 Liability of the secretary
As an officer of the company, the secretary owes fiduciary duties to the company
which is similar to those of a director. He is also liable, in the capacity, under the sections
of the Act which impose criminal liability on officers of the company who fail to
comply with the requirements of any of those sections.
7.19 Directors vis members in general meetings
To what extent are a companys powers distributed between the directors and the
company members assembled in a general meeting of the company?
In the case of companies which have adopted Table A, Article 80 provides.
The business of the company shall be managed by the directors, who may.. Exercise
all such powers of the company as are not , by the Act or by these regulations , required
to exercised by the company in general meeting, subject, nevertheless , to any of these
regulations , to the provisions of the Act and to such regulations , being not inconsistent
with the aforesaid regulations or provisions, as may be prescribed by the company in
general meeting; but no regulation made by the company in general meeting shall
invalidate any prior act of the directors which would have been valid if that regulation
had not been made.
The exact meaning of this article is uncertain. Prof. Gower has stated, in relation to it ,
that under an article in the terms of a Table A the members in general meeting cannot
give directions on how the companys affairs are to be managed , nor can they overrule
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any decision come to by the directors in the conduct of its business. And this applies even
as regard matters not specifically delegated to the directors provided they are not
expressly reserved to a general meeting by the Act or the articles.
Barron v Potter (86), and Foster v Foster (87),in particular , established the rule that, if
the board is unable to function because it is paralysed by personal feuds between the
directors, the powers normally reserved to it by the articles will revert to the company
and become exercised by the members in general meetings so that the companys
operations may continue rather than grind to a halt. There is no academic controversy
over this proposition.
Exceptionally, the court may exercise the powers of the board if that becomes necessary,
as in Re: Copal Varnish Co. Ltd where the court approved a transfer of shares. It may
also appoint a receiver of the companys business to manage it until a competent board
can be constituted.
Regarding lack of quorum, the articles (e.g., Table A, Article100) usually empower the
continuing directors or director to act for the purpose of increasing the number of
directors to the quorum number or summoning a general meeting of the company to
appoint additional directors.
The directors powers

How the board meetings are conducted
The role of the chairman in a company
The delegation of directors powers
Powers, remuneration and removal of the managing director
The qualifications ,legal status and liabilities of the company secretary
The directors vis members in general meetings
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Revision Questions
a) Explain the directors powers
b) Explain how the board meetings are conducted
c) Explain the role of the chairman in a company
d) Explain the delegation of directors powers
e) Describe the powers, remuneration and removal of the managing director
f) Describe the qualifications ,legal status and liabilities of the company
secretary
g) Explain the directors vis members in general meetings

Ogolla J.J, Gitau. R (2010) Company Law, Focus Publishers, Nairobi, Kenya.
Pages 186-196
Pages 425-444
Pages624-626,633-640
Pages122-129
Walmsley,K(2000) Company Law, Reed Elsevier(UK) Limited, London UK Pages282322
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SAMPLE CAT
MOUNT KENYA UNIVERSITY

UNIT NAME:
COMPANY LAW
UNIT CODE:
BBM 411
TIME: ONE HOUR

Instructions
Choose any three questions
QUESTION ONE
i) Explain the meaning of incorporation
2mks
j) Describe the practical consequences of registration
4mks
k) Explain the disadvantages of incorporation
5mks
l) Explain the concept lifting the corporate veil
3mks
m) Explain the contents of memorandum
6mks
QUESTION TWO
h) Explain the alteration of articles of association
2mks
i) Describe the constructive notice of memorandum and articles
6mks
j) Describe the doctrine of indoor management
6mks
k) Explain the exceptions to the doctrine of indoor management
6mks
95
QUESTION THREE
a) Describe the functions of promoters.
2mks
b) Describe duty of promoter as regards prospectus
6mks
c) Describe pre incorporation or preliminary contracts
6mks
d) Explain ratification of a pre-incorporation contract
6mks
QUESTION FOUR
a) Explain the purpose of a prospectus
2mks
b) Describe the form and contents of a prospectus
6mks
c) Explain the methods of public issue
6mks
d) Explain the role of the chairman in a company
6mks
96
LESSON 8: THE LAW OF MEETING

a) Explain the meaning of meeting
b) Explain importance of company meetings
c) Explain classification of company meetings
d) Describe the requisites of a valid meeting
8.1 Meaning of meeting

Ordinarily, a meeting may be defined as assembly of people for a lawful purpose or the
coming together of at least two persons for the same reason. A company meeting may be
defined as a concurrence or coming together of at least a quorum of members in order to
transact either the ordinary or special business of the company. Thus on the basis of the
above two definitions, it can be said that a meeting can no more be constituted by one
person than it could if no shareholders at all had attended.
Although the word meeting is not defined in the Companies Act; In Sharp vs Dawes
[1876] a meeting was defined as an assembly of people for a lawful purpose of the
coming together of at least two persons for any lawful purpose.
It follows, therefore; that the word meeting covers a wide range of assemblers, from the
formal meeting of a board of directors of a registered company to the social meeting of
friends. The behavior of people at any kind of meeting is governed by the law of the land
as it affects each individual. For many types of assembly this is quite sufficient and there
is no need for special rules and regulations for such assemblies as theatre and cinema
audiences or friends who go out for a meal together. The law relating to meetings is,
therefore, confined to the regulations of assemblies which consider matters of general
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public concern or the consideration of affairs which are of common concern to members
of the assembly.
These meeting are divided into two types:
a) Public meetings which consider matters of public concern and to which all
members of the public have access, subject to the physical limitations of the place
where the meeting is held or conditions imposed by any law, but irrespective of
whether persons attending the meetings are required to pay; and
b) Private meeting which are attended by people who have a specific right or special
capacity to attend, such as the committee of a golf club or the members of a
registered company. It means the company meeting fall under the category of
private meetings.
8.2 Importance of company meetings
Companies meeting are of considerable importance. Since a company is an artificial
person, it cannot act on its own. It is the directors, the elected representatives of
shareholders, who are vested with the power of control and management of the company.
The directors are to act as a team and for this purpose directors meetings are held
frequently. It is at these meetings that important matters relating to the business of the
company are decided. Similarly shareholders meetings are also important as it is here
that shareholders can look after their interest by exercising the powers conferred on them
by statute. These meetings provide an opportunity to shareholders to come together and
take decisions for their welfare by controlling the board of directors and their activities.
Besides, there are certain matters which can be decided only by the shareholders and the
shareholders meetings are therefore held from time to time.
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8.3 Classification of company meetings

The meetings of a company can be classified as below:
1 .Meetings of shareholders:
a) Statutory meetings
b) Annual general meetings
c) Extra ordinary general meetings
d) Class meetings
2. Meeting of directors:
a) Meetings of the board of directors; and
b) Meeting of committees of directors.
3. Meetings of debenture holders.

4. Meetings of creditors.
5. Meetings of creditors and contributories on the winding up of the company.
These are explained as under:8.3.1 Meetings of shareholders

a) Statutory meeting (sec: 130)
The first meeting of the shareholders of a public company is known as a statutory
meeting. Every company limited by shares and every company limited by guarantee and
having a share capital shall, within a period of not less than one month and not more than
three months from the date on which the company is entitled to commence business, hold
a general meeting of members of the company, which shall be called the statutory
meeting. This meeting is held only once in the life-time of a company. A private limited
company, an unlimited company or a public guarantee company having no share capital
are not to hold statutory meetings.
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The object of this meeting is to afford the shareholders an early opportunity of obtaining
material information as to the circumstances of the companies promotion and also its
immediate prospects. The members have a statutory right to discuss any matters relating
to the formation of the company or arising out of the statutory report, whether previous
notice has been given or not.
Statutory Report
The section accordingly requires that the directors to send a report known as the statutory
report to every member of the company at least fourteen days before the date of the
meeting. However, if all the members entitled to attend and vote at the meeting agree, the
report can be forwarded less than fourteen days before the meeting.
The report must be certified by the least two directors of the company. The auditors also
must certify as correct certain particulars of the report in accordance with section 130 (4)
which states:
The statutory report shall, so far as it relates to the shares allotted by the company, and
to the cash received in respect of such shares, and to the receipts and payments of the
company on capital account, be certified as correct by the auditors, if any, of the
company
A copy of the report must be delivered to the Registrar of Companies forthwith after it
has been sent to the members i.e section 130 (5).
Contents of Statutory Report
The statutory report of a company contains all the necessary information relating to the
formational aspect of the company. It sets out the following information:
a) Total shares allotted the total number of shares allotted, distinguishing shares
allotted as fully or partly paid- up otherwise than in cash and stating in the case of
shares partly paid -up, the extent to which they are so paid - up, and in either case,
the consideration for which they have been allotted.
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b) Cash received the total amount of cash received by the company in respect of all
shares allotted
c) An abstract of the receipts of the company and of payments made up to a date
within the seven days of the date of the report. This abstract must distinguish the
source of the receipts and must also show an estimate of the preliminary expenses
of the company.
d) Directors and auditors the names, addresses and occupations of the directors,
auditors and managers and secretary, and changes which have occurred in such
names, addresses and occupations since the date of the incorporation of the
company.
e) The particulars of any contract the modification of which is to be submitted to the
meeting for its approval, together with the particulars of the modification or
proposed modification.
At the meting a list of the names, addresses and descriptions of the members, and
the number of shares held by them respectively is required to be produced and to
remain open for inspection during the meeting. At the meeting the whole situation
with regard to the company is received in the light of the report. Section 130 (7)
provides that the members present at the meeting are free to discuss any matters
relating to the formation of the company, or arising out of the report whether
previous notice has given or not, but no resolution of which notice has not been
given in accordance with the articles may be passed.
Section 130(8) provides that the meeting may adjourn from time to time and at
any adjourned meeting a resolution can be passed after due notice in accordance
with the articles has been given so that if the company at the original meeting
wishes to pass a resolution and sufficient notice has not been given, it can resolve
to adjourn for the necessary period in order to allow notice to be given
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Default of holding the statutory meeting

If default is made in complying wit the provisions of section 130, every director of the
company who is knowingly and willfully guilty of the default, or in the case of default by
the company every officer f the company who is in fault is liable to a fine up to one
thousand shilling .In addition to the default fine, default in delivering the statutory report
or in holding the statutory meeting is one of the grounds for petition for a winding up
order against the company. The court ordinarily does not take such a serious view of the
default. So, instead of making a winding up order, section 222(3) provides that the courts
may direct the report to be delivered or the meeting to be held and order the costs to be
paid by the persons in default.
Objects of statutory meeting and statutory report are follows:
1. To put the members of the company in possession of all the important facts
relating to the company, what shares have been taken up, what money received,
what contracts entered into, and what sums spent on preliminary expenses etc.
2. To provide the members an opportunity of meeting and discussing the
management, methods and prospectus of the company. To approve the
modification of the terms of any contract named in the prospectus
b) Annual general meetings (sec. 131)
Every company shall in each year hold, in addition to any other meeting a general
meeting as its annual general meeting and shall specify the meetings as such in the notice
calling it. There shall not be an interval of more than 15 months between one annual
general meeting of the company and the next. A company may hold its first annual
general meting within a period of 18 months from the date of its incorporation. In that
event it is not necessary for the company to hold any annual general meeting in the year
of its incorporation or in the next year. Year means calendar year.
Example: A company incorporated on October 1, 1994 may hold its first annual general
meeting by April 1; 1996 and then no other meeting will be necessary either for 1995 or
1996. Similarly, a company incorporated on January 1, 1995 may hold its first annual
general meeting within 18 months, i.e upto July, 1996. If the meeting is held, say in June
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1996, the company need not hold any other meeting in the year 1995 to 1996. This
enables such a company to draw up its first set of accounts to be presented to the
shareholders at the meeting.
The Registrar may, for any special reason, may extend the time for holding any annual
general meeting by a given period. But no extension of time is granted for holding the
first annual general meeting.
There should be at least one annual general meeting per year and as many meetings as
there are years. This point was very well brought in the following case.
Sree Meenakshi Mills co. Ltd vs. Assistant Registrar of Company A.I.R [1938] Mad 640.
The annual general meeting of a company called in December 1934 was adjourned and
held in March 1935. The next meeting was held in January 1936, no other meeting being
held in 1935. The company was prosecuted for failure to call the annual general meeting
in 1935. The company argued that it did hold a meeting in the year 1935, but it was held
by the court that the meeting of March 1935 was the adjourned meeting of 1934.
If default is made in holding annual general meeting a member may apply to the
Registrar of Companies to call or direct the calling of such meeting. On such application
the Registrar has power to call the meeting and to give such directions as appears to him
expedient.
If such a meeting is not held in the year in which the default in holding the companys
annual general meeting occurred, it is held unless the company resolves at that meeting
that it must be so treated. If such a resolution is passed a copy of it must be sent to the
Registrar of Companies within fourteen days.
Default in accordance with the prevision of section 131, or in complying with any
directions of the Registrar, renders the company and its officers who are in default liable
to a fine up to two thousand shillings.
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Requirements of Notice
Proper length of notice must be given as provided by statute. Section 133 of the Act
provides that the minimum notice required for company meetings (other than an
adjourned meetings) ia as follows:-
a) In the case of an annual general meeting, twenty-one days notice in writing; and
b) In the case of a meeting other than an annual general meeting, or a meeting for the
passing of a special resolution, fourteen days notice in writing, and seven days
notice in the case of an unlimited company.
Any provision contained in a companys articles shall be void in so far as it provides for
the calling of a meeting by a shorter notice than is provided by this section. There is,
however, nothing to prevent a companys articles providing for longer notice than that
laid down by the Act, in which case the company must comply with its articles.
Ordinary Business Annual General Meeting:
The normal business transacted at an annual general meeting depends upon the articles.
Articles 52 of table A provides that the ordinary business of such a meeting shall be:
a) the declaration of dividend;
b) the consideration of accounts;
c) the election of directors in place of those retiring; and
d) the appointment of, and the fixing of the remuneration of auditors,
Any business which is not defined as ordinary business of an annual general meeting is
known as special business.
Section 148 provides that at the annual general meeting the directors of a company must
lay before the company a profit and loss account. This account will be in the case of the
first account from the incorporation of the company, and in any other case, from the
preceding year.
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The proceedings at the meeting are commenced by the chairman, who usually makes a
speech on the companys affairs and any other circumstances of interest to the company
and also answers questions if any, from the members. After his speech he proposes the
motion relating to the adoption of the account and payment of dividends if any .
The next item of business deals with proposals for election or re-election of directors. In
this connection, the requirement, of section 184 must be complied with. This section
stipulates that if a single resolution is passed for election or re-election of more that one
director of a public company, such a resolution is invalid unless resolution was
previously passed that all the directors concerned can be elected by a single composite
resolution.
After dealing with the election and re-election of directors, a motion regarding the
remuneration of a companys auditors is proposed. The resolution for this is obligatory.
Although the appointment of auditors must be made by the company in the general
meeting, they are automatically re-elected, provided they are qualified, without any
resolution to that effect, unless.
a) they have resigned; or
b) they are unwilling to act; or
c) a resolution has been passed expressly providing that they shall not be
reappointed; or
d) other auditors in their place have been appointed
Importance of annual general meeting:

It is only at the annual general meeting of a company that the shareholders can exercise
any control over the affairs of the company. They can confront the directors, their elected
representatives, at least a year. They also get an opportunity to discuss the affairs and
review the working of the company.
They can also take the necessary steps for the protection of their interests. They may, for
example, refuse to re-elect a director whose actions and policy they disapprove . They
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can also take up any other business relating to the affairs of the general meeting. Annual
accounts are presented for the consideration of the shareholders and dividends are
declared in the annual general meeting.
c) Extraordinary general meeting (sec:312)
A statutory meeting and an annual general meeting of a company are called ordinary
meetings. Any meeting other than these meetings is called extraordinary general meeting.
It is called for transacting some urgent or special business which may not be postponed
untill the next annual general meeting.
Such a meeting may be held subject to the terms of articles of association at any time the
directors think it is necessary to transact business of a special character.
Article 48 and 49 of table A make previsions for the convention of general meetings
other that annual general meeting.
Article 48: All other meeting other than general meetings shall be called extraordinarily
general meetings.
Article 49: The directors may, whenever they think fit, convene an extraordinary general
meeting, and it may also be convened by the requisitionists as provided by section 132 of
the Act.
Article 52 of Table A states that all business that is transacted at an extraordinary meeting
shall be deemed as special.
The extraordinary general meeting may be convened:
a) by the Board of directors on its own or on the requisition of the members; or
b) by the requsitionists themselves on the failure of the Board of Directors to call the
meeting.
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Convening of extraordinary meeting

a) On its own, The Board of Directors may call an extraordinary general meeting
whenever some special business is to be transacted which in the opinion of the
Board of Directors cannot be postponed till the next annual general meeting.
b) On requisition of the members. The requisite number of members of a company

may also ask for an extraordinary general meeting to be held in such a case the
Board of Directors shall proceed duly to call such a meeting of the company. The
requisition for such a meeting by the members shall be signed.
In the case of a company having a share capital, holders of not less than one-tenth of
the paid-up capital of the company, having the right of voting in regard to the
matter of requisition; or
In the case of a company not having a share capital, by members representing not less
than one-tenth of the total voting power in regard to the matter or requisition.
A requisition signed by one of the joint owners of the shares has the same force and
effect as if it had been signed by all of them.
The requisition shall set out the matters for the consideration of which the meeting is to
be called. It shall be deposited at the registered office of the company.
The directors are required by section 132 to convene such a meeting within twenty - one
days from the date of the deposit of the requisition, but if they fail to do so, requisitionists
themselves may convene the meetings, as nearly as possible in the manner required by
the companys articles for the convening of meetings.
The company must compensate the requisitions for any reasonable expenses incurred and
may repay itself out of sums payable by the company to such directors as were in fault.
Notice
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Unless the meeting is called to pass a special resolution, the requisite notice for an
extraordinary general meeting is fourteen clear days (i.e. Saturday, Sunday of other
public holidays are not included in computing the period) in the case of all companies
other than unlimited company when seven days, notice is required. Where a special
resolution is to be passed, the notice required is twenty one days.
d) Class meeting
Meeting of classes of shareholders are necessary if the share capital of the company is
divided into different classes of shares. These meeting are usually required when it is
proposed to alter, vary or affect the rights of a particular class of shares. In such case, the
articles of association usually provide for the holding of meetings of the particular class
of shareholders and for the consent of that class to be given by a stated majority of the
members of that class. Where upon the variation is deemed to be binding on all the
members of the class.
Prime facie, a class meeting should be attended by the members of the class in order that
the discussion of the matter which the meeting has to consider may be carried on
unhampered. The presence of a number of persons with conflicting interests would render
it impossible for members of the class to adequately discuss the matter form their point of
view. And if the presence of the outsiders is retained in spite of the ascertained wish of
the constituents of the meeting for their exclusion, it cannot be said that a separate
meeting of the class had been fully held. But where the constitutions of the meting meet
together and no one infact raises any objection to the presence of strangers or outsiders
within the same four walls, there is no reason why their meeting should not be a perfectly
good meeting
Articles 4 of Table A provides that the rights of a particular class of shares may (whether
or not the company is being wound up), be varied with the consent in writing of the
holders of three fourths of the issued shares of that class, or with the sanction of a special
resolution passed at a separate general meeting of the holders of the shares of the class.
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Rights of Minority
Although the articles usually allow the variation of class rights with the consent of a
specified proportion of a class of shareholders, the minority of that particular class of
shares has a valuable right to object.
Section 74 stipulates that the holders of not less than 15% of the issued shares of that
class being persons who did not consent to the resolution or abstained of did not vote at
all may object within thirty days to the alteration approved by the majority of the class.
The court must disallow the variation if it is satisfied that it would unfairly prejudice the
shareholders of the class, but if not satisfied, then it will confirm the variation. A copy of
the order of the court made on such application must be forwarded within thirty days to
the Registrar. If the memorandum or articles of the company do not provide for the
variation of class rights and it is desired that a variation be effected, then this must be
done under section 207 which gives power to a company to compromise with its
creditors, or any class or them, or its members or any class of them.
8.3.2) Meeting of the board of directors
Wide powers have been vested in the board in regard to management of companies. The
company is entitled to the combined wisdom of the directors and the directors are
required to meet together as a board. Under the circumstances, directors must hold their
meetings as frequently as possible. These meetings of the directors are known as Board
meetings.
The Board meetings are the most important as well as the frequently held meetings of the
company. It is at these meetings that all important matters relating to the company and its
policy are discussed and decided upon.
Meeting of committees of directors
In case of large companies, the board of directors usually find it convenient, and often
necessary, to delegate certain matters to a committee of their number, but may only
delegate their powers in this manner if the articles of association so provide. By doing so,
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the full board will probably not need to meet more frequently. The committee so formed
shall, in the exercise of the powers so delegated, conform to any regulation that may be
imposed on it by the board.
The committees may be either standing or ad hoc committees. Standing committees such
as share transfer or finance committees are usually formed to conduct routine business. A
committee formed to consider the inauguration of a pension scheme for the companys
employees is an example of ad hoc committee.
8.3.3) Meeting of debentures holders
These meetings are held in accordance with the rules and regulations that are either
entered in the trust deed or endorsed on the debenture bond so that they are binding upon
both, the holders or debentures and the company. These meetings are called from time to
time where the interests of debenture holders are involved at time of the reconstruction,
reorganization, amalgamation or winding-up of the company. The rules and regulations
entered in the trust deed relate to notice of the meeting, appointment of a chairman or the
meeting passing the resolution, quorum of the meeting and the writing and signing of
minutes.
8.3.4) Meeting of creditors
These meetings are called when the company proposes to make scheme or arrangement
with its creditors. Companies, like individuals, may sometimes find it necessary to
compromise or make some arrangement with their creditors. Section 207 to 209 of the
Companies Act not only give powers to the company to compromise with the creditors
but also lay down the procedure for doing so.
8.3.5) Meeting of creditors and contribution on winding up
The meetings are held when the company has gone into liquidation. These meetings are
held to ascertain the total amount due by the company to its creditors and also to appoint
either liquidators to wind up the affairs of the company or a committee of inspection.
They term contributory covers every person who is liable to contribute to the assets of a
company in the event of this being wound up.
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8.4) Requisites of a valid meeting

A meeting can validly transact any business if the following requirements are satisfied:a) The meeting must be duly commenced by a proper authority.
b) a proper notice must be served in the prescribed manner
c) a quorum must be present;
d) a chairman must preside;
e) minutes of the proceedings must be kept
a) Proper Authority
The proper authority to convene a general meeting (whether statutory, annual general or
extraordinary) of a company is the Board of Directors. The Board of directors should
pass a resolution to call meeting at a duly convened meeting of the Board. If the directors
do not call the meeting the members of the company may call the meeting.
If some defect in the appointment or qualifications of the directors present at the Board
meeting comes to light after the Board has acted bona fide, such a defect is not
necessarily fatal to the validity of their resolution to call the meeting. Even if the meeting
of the Board at which it is resolved to call a general meeting is not properly concerned or
constituted, the general meeting called by the Board can act
b)Notice of General Meeting
A proper notice of the meeting should be given to the members and all others who are
entitled to attend the meeting. The length of notice required by section 133 for calling a
general meeting is twenty one days for the annual general meeting. Section 133, since
statutory, overrides any provision in the articles for a shorter notice. But the articles can
validly provide for longer notice than that laid down by statute, in which case the
company must comply with its articles.
Notwithstanding the argument above, there are exceptions to the requirements as to
notice i.e
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i.
An annual general meeting may, however, be called by a shorter notice and is

to be deemed duly convened, if it is consented to by all the members entitled
to vote at the meeting, and
ii.
Any other meeting if the holder of 95 percent of the nominal value of shares
or of the total power consent to the shorter notice i.e. section 133 (3).
iii.
If the members agree to accept a shorter notice, a resolution to that effect must
be recorded in the minutes of the meeting with sufficient details of voting
Bailey, Hay Co. Re [1971] 1 W.E.R 1357. The notice of a meeting for the voluntary
winding up of a company was short by one day. All the five members of the company
attended the meeting. The necessary resolution was passed by the votes of two members.
The other three members abstained from voting. It was held that the resolution was
validly passed with the unanimous assent of all the members and those who abstained
were treated as having acquiesced in the winding up.
Persons on whom notice is to be served and contents of notice.
The notice of every meeting of a company shall be given to:1. every member of the company entitled to vote;
2. the persons on whom the shares of any deceased or insolvent member may have
devolved, and
3. the auditor(s) of the company.
If notice of a meeting is not given to every person entitled to receive notice, any
resolution passed at the meeting will be of no effect.
Young vs. Ladies Imperial Club, [1920] 2 K.B. 523. A Committee of a club met and
passed a resolution expelling Y from the club. The notice convening the meeting sated
that it was summoned, to report and discuss of the matter concerning Y .X, a member
of the committee was not summoned to the meeting, as she had previously informed the
chairman that she would be unable to attend the meeting. It was held that the omission to
give notice to all those entitled to notice invalidated the proceedings of the committee and
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in any event the notice did not give sufficient indication of the purpose (i.e. expulsion of
Y) of the meeting.
Omission to give notice:
Deliberate omission to give notice even to a single member may invalidate the meeting
(Smyth vs Darley; [1849] 2 H.L. 789) An accidental omission to give notice to, or the
non-receipt of notice by, any member or the person to whom it should be given, does not
invalidate the proceedings at the meeting. Accidental omission means that it is not
deliberate.
Contents of Notice
Every notice of a company calling a meeting shall specify the place and the day and hour
of the meeting. It shall also contain a statement of the business to be transacted at the
meeting.
The notice of a general meeting must fairly and intelligently convey the purpose for
which the meeting is called to enable a person having the right to attend reasonably to
make up his mind to attend or not. It should not be misleading or Baillie vs Oriental
Telephone & Electronic Co. [1915], ch 503. Between 1907 and 1914 the directors of a
subsidiary company had been receiving remuneration as directors of a subsidiary
company without the shareholders of the holding company knowing this. A special
resolution was passed at an extraordinary meeting authorizing the directors to keep
money. The notice did not specify that the sum involved was nearly 45,000. Held the
notice was bad because it did not give sufficient details.
Kaye V Croydon Tramways Co. [1898] 1 ch 358. A notice convening a meeting stated
that the object of the meeting was to adopt an agreement for the sale of the companys
undertaking to another company. The notice did not disclose that the directors were
interested in the agreement as a substantial part of the sale proceeds was to be paid to the
directors as compensation for loss of office. It was held that the notice was bad as it did
not fairly disclose the purpose for which the meeting was called.
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Special Notice
Certain powers which are exercisable by members by ordinary or special resolution may
require special notice to the company. Section 142 provides that where, by any
provision in the Act a special notice is required of a resolution, the resolution shall not be
effective unless the notice of the intention to move it has been given to the company (not
by the company) not less than twenty eight days before the meeting at which it is
moved. The company must then give its members notice of the resolution at the same
time and in the same manner as it gives notice of the meeting.
If that is not practicable, it shall give them notice of the resolution either by
advertisement in a newspaper having an appropriate circulation or in any other mode
allowed by the articles, not less than twenty one days before the meeting.
A special notice is required for the following resolutions.
i.
removing a director
ii.
authorizing the appointment of a director over seven years
iii.
appointing as an auditor at an annual general meeting a person other than a

retiring auditor or
iv.
providing expressly that a retiring auditor shall not be appointed
c) Quorum of general meeting

Quorum means the minimum number of members who must be present in order to
constitute a valid meeting. The quorum is generally fixed by the articles.
Article 53 of Table A provides that no business shall be translated at any general meeting
unless a quorum is presented at the time when the meeting proceeds to business, save as
herein otherwise provided, three members present in person shall be quorum. Thus, those
members who intended to vote by proxy are not taken into account when determining
whether or not a quorum is present. Where no provision is made as to quorum in the
articles, Section 134 ( c ) prescribes two members, in the case of a private company, and
in other cases three members, personally present as the quorum for a general meeting of
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the company. If, however, articles provide for a quorum present in person or proxy,
proxies can be counted.
As a general rule if no quorum is present, then there is no meeting, and any business of
conducted is invalid. Thus, unless the article otherwise provide, if within half an hour
from the time appointed for holding a meeting of the company, a quorum is not present,
the meeting;
i.
if called upon the requisition of members stand be dissolved
ii.
but in other cases it shall stand adjourned to the same day in the next week
at the same time and place as the directors may determine.
Note:
If the quorum is not similarly present at the adjourned meeting, then the members present
shall be quorum.
When should quorum be present?
The quorum should be present at the time when the meeting proceeds to business. It need
not be present throughout or at the time of taking vote on any resolution.
Illustration
Hartley Baird Ltd, Re [1955] ch 143.
A meeting was summoned for the purpose of altering the class rights of certain
shareholders. A quorum was present when the meeting began but it fell below the
required number when a member, who opposed the resolution left meeting before the
vote was taken. It was held that the alteration was valid.
One person, except in the exceptional cases cannot constitute a quorum. The word
meeting prime facie means a coming together of more than one person. Strictly
speaking therefore, one shareholder cannot constitute a meeting. This is known as Rule in
Sharp vs Dawes.
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Sharp vs Dawes [1876] 2 Q.B.D. 26.

A general meeting of a company was called for the purpose of making a call. Only one
shareholder attended the meeting. The business of the company was carried through
including a call on the shareholders Dawes was sued for the call he had failed to pay. In
his defense, Dawes argued that the call had not been validly made at a general meeting. It
was held that one person could constitute a meeting. Mellish said:
it is clear that, according to the ordinary use of the English language, a meeting could
not more be constituted by one person than a meeting could have been constituted if no
shareholder at all had attended. No business could be done at such a meeting
Re Sanitary Carbon Co. [1877] appeared to lend support to the above decision, as it was
held that a meeting of a company attended by one shareholder only was not validly
constituted even though that shareholders held the proxies of all the other members.
Therefore, as a general rule one individual alone does not constitute a meeting even if she
or he represents two or more members, for example by being both a member and a proxy
for another member or by being a member both in his or her own right and as a trustee for
another
In Re London Flats [1969] the articles of a company required a quorum of two. It was
held that a decision made by one shareholder after the other had left the room was a
nullity. Plowman J. described the powers of the court to order a company meeting of one
as exceptional and held that they did not displace the general rule that a single
shareholder cannot constitute a meeting
Modern technology and meetings:
With the development of modern technology, the possibilities for holding meetings and
conferences simultaneously in different venues connected by audiovisual or similar
linked has become possible. Teleconferencing, for example, is a modern day reality
where groups of delegates gathered in different parts of the world can take part in the
same conference proceedings aided by satellite communications and audio-visual links.
The question then arises whether as a matter of law such events can amount to a meeting
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given that a meeting is the coming together of at least two persons for any lawful purpose
and that meeting means to come face to face with or into the company of another person.
The issue arose in Byng vs Lodasn Life Assurance Ltd [1989] where too large a number
of shareholders for the venue turned up at an extraordinary general meeting and had to be
accommodated in overflow rooms connected to the main venue by audio visual links.
One of the issues in the case was whether there was a meeting. The following extract
form the judgment of Browne Wilkonson V-C in the court of Appeal appears to reflect
that attitude of the courts;
The rationale behind the requirements for meeting in the Companies Act is that the
members shall be able to attend in person so as to debate and vote on matters affecting
the company. Until recently this could only be achieved by everyone being physically
present in the same room face to face. Given modern technologies advances, the same
result can now be achieved without all the members coming face to face. Without being
physical in the same room they can be electronically in each others presence so as to
hear and be heard and to see and be seen. The fact that such a meeting could not have
been foreseen at the time the first statutory requirement for meetings were laid down,
does not require us to hold that such a meeting is not within the meaning of the word
meeting in the Companies Act.
Thus, communication by telephone had been held to be a telegraph within the meaning
of the Telegraph Acts 1863 and 1869, not withstanding that the telephone had not been
invented or contemplated when those Acts were passed. Attorney General vs. Edison
Telephone Co. pf London Ltd [1880].
I have no doubt therefore, that, in cases where the original venue proves inadequate to
accommodate all those wishing to attend, valid general meetings of a company can be
properly held using overflow rooms provided, first, that all due steps are taken to direct to
the overflow rooms those unable to get into the main meeting, and secondly, that there
are adequate audio-visual links to enable those in all the rooms to see and hear what is
going on in the other rooms. Were the law otherwise, with the present tendency towards
companies with very large members of shareholders and corresponding uncertainty as to
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how many shareholders will attend meetings, the organization of such meeting might
prove to be impossible.
d) Chairman of general meeting
Presiding officer of the meeting:
A chairman is necessary to conduct a meeting. He is the presiding officer of the meeting.
Unless the Article of a company provides otherwise, the members personally present at
the meeting shall elect one of them to be the chairman of the meeting on a show of hands.
In such a case, the chairman elected on a show of hands shall exercise all the powers of
the chairman. If a poll is demanded on the election of the chairman, it shall be taken
forthwith. If some other person is elected chairman as a result of the poll, he shall be the
chairman for the rest of the meeting. The articles generally provide for the directors
electing a chairman of their meetings, and the chairman so elected is entitled to preside at
a general meeting or in his absence some other director.
But if there is no such chairman or he is not present within fifteen minutes of the time of
holding the meeting or he is unwilling to act:
i.
the directors present at the meeting may elect one of their member to be
the chairman of the meeting ; and
ii.
if no director is willing to act as chairman or no director is present, the

members present may, as already been said above, choose one of their
number to be the chairman of the meeting.
Importance of Chairman
a) He must act at all times bona fide and in the interests of the company as a
whole.
b) He must ensure that the meeting is properly convened and constituted i.e.
c) He must ensure that the proceedings at the meeting are properly and regularly
conducted
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d) He must ensure that the provisions of the Act and the Articles are observed,
and the business is taken in the order set out in the agenda.
e) He must see that all the business transacted at the meeting is within the scope
of the meeting.
f) He must preserve and maintain order in the meeting and decide any points of
order submitted to him.
g) He must ascertain the sense of the meeting properly with regard to any
question before it. He must do so by putting those motions in their proper
form, and declare the result of the voting.
h) He must decide incidental questions arising for decision during the meeting.
i) He must exercise his casting vote bona fide in the interest of the company i.e.
if articles allow, the chairman may, in the case of an equality of votes
(whether on a show of hands or on a poll) be entitled to a second or casing
vote.
j) He must exercise correctly his power of adjournment and of taking a poll, he
must see that any disorderly persons are removed, and where it is impossible
to maintain order, he should adjourn the meeting. Even if the relevant rules do
not give him the power to adjourn the meeting he may do so on the event of
disorder. The adjournment must be no longer than he considers necessary and
must so far as possible communicate his decision to those present.
k) He must give the members who are present a reasonable and sufficient
opportunity to express their views on the motion or resolution before the
meeting. He must not allow discussion except upon a motion on resolution.
But at the expiration of a reasonable time he is entitled, if he thinks fit, to put
a resolution to the meeting that the discussion be terminated
l) He must also care that the rights of the minority are not ignored.
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Conduct of the Meeting:

The way in which a meeting is to be conducted is a matter for the chairman, with the
assent of the persons properly present, to be determined in the light of the general law
and the companys Articles of Association
Proxies:
The term proxy has a double meaning. A member entitled to attend and vote at a meeting
may vote either in person or by proxy. A proxy is an authority to represent and vote for
another person at a meeting. It is also an instrument appointing a person as a proxy. The
person so appointed is also called a proxy. A proxy is not entitled to act contrary to the
instructions of the appointer, the proxy may or may not be a member of the company but
he shall not have any right to speak at the meeting, if the company in question is a public
company except to demand or joining in demanding a poll, and he can only vote on poll.
However, in the case of a private company the person appointed as a proxy has the right
to attend and speak at the meeting. Notice calling a meeting must contain a statement that
a member can appoint a proxy. The right to appoint proxy is provided for under section
13 and any clause in the articles purporting to take away this right is void.
Under section 136 (4) when, for the purpose of any meeting of a company invitation to
appoint particular persons as proxies are sent out by the directors at the companys
expense, such proxy instruments must be sent out to all persons entitled to attend the
meeting and vote there at by proxy and not to a selected few.
Voting and poll:
Primarily the voting on a resolution is by show of hands, in which case each person
entitled to vote has one vote only irrespective of the number of shares he may hold. A
proxy, however, cannot vote by a show of hands.
Since voting by show of hands does not always reflect the true interest of a member upon
a value basis, provision has been made in section 137 by virtue of which, except on the
question of the election of a chairman or an adjournment of meeting, the members have a
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statutory right to demand that a poll to be taken. Any provision in the articles which
purports to take away this right is void. The demand for a poll may be made effective:
a) by the chairman;
b) by not less than five members having the right to vote at the meeting;
c) By a member(s) representing not less than one-tenth of the total voting rights of all the
members having the right to vote at the meeting,
d) By a member (s) holding shares in the company conferring a right to vote at the meeting,
being shares on which an aggregate sum has been paid up equal to not less than one
tenth of the total sum paid up on all the shares conferring that right.
Revocation of Proxies
A proxy is an agent of the person appointing him, i.e. principal. The principal may, unless the
proxy is made irrevocable for valuable consideration, revoke the authority given to his agent
before the authority has been exercised. In cousins vs. International Brink Co. Ltd [1931] 2
ch 90. Lord Hanworth observed in this regard:
It would be strange if the person in the position of an agent could say to his principal, you
have entrusted to me a power which I will not allow to pass back to you, although you
demand the right to exercise it
The right of proxy to vote terminates:
(a) If the shareholder votes before his proxy has voted for him.
(b) If the shareholder who has appointed a proxy dies or become insane.
But usually the article provides against the termination of proxy as a result of either the death or
insanity of the person appointing a proxy. For example, Article73 of Table A provides:
A vote given in accordance with the terms of an instrument of proxy shall be valid
notwithstanding the previous death or insanity of the principal or revocation of the proxy or of the
authority under which the proxy was executed
Resolutions:
The questions which generally come for consideration at the general meeting of a company are
presented in the form of proposals called motion A motion may be proposed by the chairman of
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the meeting or by any other member of the company. Before it is placed before the meeting by
the chairman for discussion, it must be seconded by someone. The motion, after the close of
discussion, is formally put to vote by a show of hands. It may either be carried or rejected .If a
sufficient number of members demand, the motion may be put to poll. The final result is declared
after the poll is taken. If a motion is carried, it becomes a resolution.
The wishes of a company can be expressed only by resolution of a majority of the members
present and voting at the general meeting which has been properly convened in accordance with
the provisions of the Articles and the Act.
Kinds of Resolution
A part from resolutions of any kind which may be provided for by the articles, the Companies Act
recognizes two types of resolutions:
(a) Ordinary resolution.
(b) Special resolution.
To the two above, a third type has been added i.e.
(c) Resolution requiring special notice.
The category of extraordinary resolution (in U. k. Act) has been abolished, and as per section
405(8) any company carrying on business in Kenya requiring any matter or thing to be done by
passing of an extraordinary resolution, is deemed to have been lawfully and sufficiently done by
passing a special resolution.
In some instances, the Act may design the particular form of resolution required with respect to
specific matters, where the Act does not define the kinds of resolution necessary, the articles may
provide its form. But if neither the Act nor the articles demand a different type of resolution, an
ordinary one suffices.
Ordinary Resolution
An ordinary resolution is a resolution passed at a general meeting of a company by a simple
majority of votes (i.e. votes cast in favour of the resolution exceeds votes cast against it)
including the casting vote of the chairman, if any. The votes may be cast by members in person or
by proxy, where proxies are allowed. The required notice should have been duly given i.e. notice
of 21 days is requires by Article 50 of table A.
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Example: In a general meeting of a company, out of 1,000 members entitled to vote, only 700 are
present. Of the 700, 251 members vote in favour of a resolution, 250 against it, and 199 abstain
from voting. The resolution is passed by a simple majority.
Where the Companies Act, 1948 requires certain things to be done by special resolutions or
resolutions requiring special notice, the memorandum or the Article cannot validly provide that
they may be done in any other manner. The reason being that the two documents are essentially
subordinate to the Act. Ordinary resolution, in the absence of contrary provision in the Articles, is
necessary for the following among other purposes:
(a) To authorize an issue of shares at a discount as per section 59.
(b) To increase the share capital, if authorized by the articles, or otherwise to alter the share
capital apart from a reduction of the subscribed capital i.e. section 63, Article 45 Table A;
(c) To appoint an auditor;
(d) To appoint director;
(e) To declare dividend;
(f) To approve the accounts;
(g) To wind up voluntarily where provision to that effect is made by the articles i.e.
section271
For certain matters the Act requires that special notice of any ordinary resolution must be
given- Section142 state that where special notice is required of a resolution, the resolution is
not effective unless notice of the intention to move it has been given to the company not less
than 28 days before the meeting at which it is moved and the company must give its members
notice of any such resolution at the same time and in the manner as it gives notice of the
meeting ,or, if that is not practicable, must give them notice thereof, either by advertisement
in a newspaper having an appropriate circulation, by the articles, not less than 21 days before
the meeting.
Extraordinary Resolution
Under the U.k. Companies Act, 1948 which was introduced in Kenya the same year, an
extraordinary resolution is one which has been passed by a majority of not less than three
fourths of such members as being entitled so to do, vote in person, or( where proxies are
allowed) by proxy at a general meeting of which notice specifying the intention to propose
the resolution as extraordinary has been duly given (Section 141)U.k. Act. This category of
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resolution however does not find a place in the Kenya Companies Act and under section 405
(8) any reference to extraordinary resolution in the articles of a company or elsewhere shall
be construed as referring to a special resolution.
Special Resolution
A resolution is a special resolution, says the Act at section141, where it has been passed by a
majority of not less than three fourths of such members as, being entitled go to do, vote in
person or where proxies are allowed: by proxy, at a general meeting of which notice
specifying the intention to propose the resolution as a special resolution has been duly given.
A notice of intention to move the special resolution should be given to the company no less
than 21 days before the meeting at which it is to be moved, and the company should give its
members notice of such resolution along with the notice of the meeting i.e. 21 days notice.
The Act requires the sanction of members by special resolution in respect of the following
matters among others
a) To alter the objects of a company i.e. section 8.
b) To alter the articles. Section 13.
c) To charge the name of the company section 20.
d) to create a reserve liability under section 62
e) to authorize the payment of interest to shares out of capital where such authority is
not given by the articles
f) T o reduce the share capital of a company limited i.e. section 69

g) To appoint inspector to investigate the affairs of a company. i.e. section 166.
h) To make unlimited the liability of directors or managers of a limited company
i.e section204.
i) To authorize an assignment of office by a directories section 205
j) To resolve that a company be would up by order of the court. Section 271
k) To institute a members voluntary winding up. Section 280
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l) To authorize the liquidator to accept shares in consideration for the sale of

companys property
The object of requiring a majority of three-fourths of the vote for a special resolution is to
protect the minority in important matters above mentioned relating to the companys
affairs. Thus where the Act or the Articles require a special resolution for any purpose, a
three-fourth majority is necessary and a simple majority is not enough (Edward vs.
Hallivell [2 All ER 1064
Resolution Requiring Special Notice
A resolution requiring special notice may be passed by the members at a general meeting
by a simple or three-fourth majority according to the provisions of the Act, in respect of
different matters, provided the following procedures is followed.
A special resolution for which special notice will be invalid unless 28 days notice before
the meeting at which the resolution is to be moved is given to the company by a member.
Special notice is required by the Act in the following matters
a) For a resolution at an annual general meeting appointing as an auditor a
person other than a retiring one i.e. section 160
b) For a resolution at an annual general meeting to provide that a retiring auditor
shall not be appointed
c) For a special resolution to appoint a director who is over any applicable age
limit i.e. Section186(2)
d) For a resolution to remove a director before the expiry of his period of office,
or to appoint another director in place of the removed director i.e. section
185(2)
Registration of Resolution
Section 143 makes it compulsory for a company to file with the Registrar of Companies
printed copies of the following resolutions and agreements within thirty days after the
passing or making thereof.
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a) Special resolutions
b) Resolution which have been agreed to by all the members or class of
members.
c) Resolution requiring a company to be voluntarily wound up passed under
paragraphs (a) of sub-section(1) of section276
d) All resolution or agreements which effectively bind all members of any class
of shareholders though not agreed to by all those members
A copy of every such resolution or agreement must be embodied or annexed to every
copy of registered articles issued after the passing of the resolution or the making of
the agreement.
If default is made in filing any of the above, the company and each officer in default
is liable to a fine up to twenty shillings for every day of default.
Amendment
Any relevant amendment may be proposed where an ordinary resolution of which
proper notice has been given, provided it is within the business covered by the notice
of the meeting
e) Minutes of meetings
Section 145 of the Act provides that every company must keep minutes containing a
fair and correct summary of all proceedings of general meetings and directors
meetings in the books kept for that purpose.
Any minute purporting to be signed by the chairman of a meeting is evidence of the
proceedings of the meeting to which it relates.
The meaning of meeting

Importance of company meetings
Classification of company meetings
The requisites of a valid meeting
126
Revision Questions
a) Explain the meaning of meeting
b) Explain importance of company meetings
c) Explain classification of company meetings
d) Describe the requisites of a valid meeting
Oliver.M,Marshal E.A,Company Law Pitman Publishing London UK Pages
242-270
Pages 462-477
Pages 626-629
Pages 118-122
Walmsley,K(2000) Company Law, Reed Elsevier(UK) Limited, London UK
Pages 366-383
127
LESSON 9:
SHARE CAPITAL

a) Explain the meaning of share capital
b) Describe various types of types of share capital
c) Explain the classes of shares
d) Explain the meaning of stocks
e) Explain the alteration of capital
f) Describe the variation of shareholders rights
9.1 Meaning of share capital

Capital denotes a particular amount of money with which a business is started. In the case
of a company, the word capital means the share capital i.e. the money raised by the issue
of shares: the word capital in connection with a company is used in several senses. It
may mean authorized issued and subscribed or paid up or reserved capital of the
company.
9.2 Types of share capital
1. Authorized or Nominal Capital:
Every company limited by shares or limited by guarantee and having share capital is
required to have a nominal or authorized capital with which it proposes to be
registered. This is the nominal value of the shares which a company is authorized to
issue by its Memorandum of Association. This 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. This is also known as registered capital.
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2. Issued Capital:
Issued capital is the nominal value of the shares which are offered to the public
for subscription. A company does not normally issue capital at once, so that
issued capital in such a case is less than the authorized capital. The issued capital
can never exceed the authorized capital; it can at the most be equal to the
authorized capital which is the case when all the shares have been issued to the
public.
3. Subscribed Capital:
This refers to that part of the companys issued capital which has been taken up or
subscribed by the public. In the case of reputed companies with a lot of goodwill,
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 is that part of the issued capital which has been called up on the shares. It is
total amount called upon the shares issued and which the shares holders
continue to be liable to pay as and when called.
5. Paid-up Capital:
This is that part of the issued capital which has been paid up by the shareholders
or which is credited as paid up on the shares .Often some shareholders fail to pay
the calls made on them and the amount thus owing is known as calls in arrears
or calls unpaid
6. Reserved Capital:
This is any part of the companys share capital; which a company may resolve by
a special resolution not to be called except in the event of a winding up. Section
62 of the Act states thus in this regard.
A limited company may by special resolution determine that any portion of its
share capital which has not been already called up shall not be capable of being
called up except in the event and for the purpose aforesaid.
129
Reserve capital cannot be turned into uncalled capital without the leave of the
court. It is available only for the creditors on the winding up of the company. The
company can neither charge reserve capital nor cancel it in reduction of capital
(Midland Rly Carriage Co. Re (1904) W.N 175).
Reserve capital must be distinguished from reserve or reserve fund. The
expressions reserve and reserve fund are applied to undistributed profit which the
company keeps in cash to provide for emergencies.
9.3 Classes of shares
The capital of a company is divided into certain indivisible units of a fixed amount called
shares. J. Farwel in the case of Boorlands Trustee vs. Steel Bros (1901) 1 ch 279 defines
a share as the interest of a shareholders in the company measured by a sum of money for
the purpose of liability in the first place and or interest in the second place but also
consist of a series of mutual covenants entered into by all the shareholders.
A company is not legally obligated to issue all its shares ranking Pari Passu i.e with
shareholders sharing the benefits equally, and can offer different classes of shares with
different rights attached to them. However, a company may divide its shares into
different classes only if so authorized by its Articles or Memorandum. Often the different
rights and privileges are issued to attract different types of investors.
Shares of a company may be classified as under:a) preference shares
b) ordinary or equity shares
c) corporate shares
d) deferred of founders shares
e) unclassified shares
Various classes are explained as under:-
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a) Preference shares
This is the highest class of shares a company can create because as the name suggests it
gives preference to the holders thereof over the holders of the other classes of shares. The
preference here is in respect of the following matters.
i.When a divided is declared, the holders of preference shares are the first to receive
payment.
ii.When receiving dividends, preference shareholders are paid at a fixed rate agreed
upon e.g. they will receive the divided at a rate of 5%. For this reason, the
company must pay them the dividend at the rate of 5%. Where the dividend at
the rate of 5% accrues it is considered as debt owing from the company and
must be paid during winding up if not yet settled. In the case of the holder of the
other classes of shares, they are not paid divided at any fixed rate but it depends
upon the amount of dividend declared by the company and available for
distribution. If the dividend declared is large they may end up earning more than
the preference shareholders. As far as dividends are concerned, preference
shareholders can boast of a steady rate of income form their investment in this
class of shares.
Preference shares are also preferential as to capital i.e when a company goes into
liquidation and all its creditors are paid, the balance of assets constitute capital which
must be returned to members of the company. It must pay the holders of preference
shares first then if there is any surplus it can distribute the same to other classes.
Preference shareholders have no priority as to the surplus assets in the winding up, unless
it is expressly given by the articles .If no such priority is given, all the shareholders are
paid equally on the winding up of the company after.
a) the discharge of all liabilities;
b) the payment of winding up expenses; and
c) the repayment of capital
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If, however, the preference shares are made preferential as to capital any surplus assets of
the company after payment of companys debts will be applied first in paying off
preference shares. But it should be noted that a right to priority of payment of capital is
not itself a right to participate in surplus capital.
In Re Isle of Thanet Electricity Co. Ltd (1950, the companys article conferred on the
preference shareholders the right in priority to the ordinary shareholders to a six per cent
divided and to repayment of capital in a winding up with any arrears of dividends. It was
held that preference shareholders were not entitled to share in surplus assets on winding
up.
Voting Right of Preference Shares
Preference shares, like debentures, entitle the holders to receive dividends and interest at
fixed rates, and so long as the fixed preferential dividend is regularly paid, the holders
have no justification to interfere with the companys management. Thus, in the case of
preference shares, the right to vote at meetings is usually restricted by providing that they
shall have no right to attend such meetings or to vote there unless:
a) their special rights are being varied; of
b) the meeting is called to wind up the company;
c) their dividend is in arrears for more than six months.
Similarly, debenture holders being creditors of the company have no voting rights
whereas ordinary shares carry full voting rights. Whenever preference shareholders are,
however, authorized to vote by the poll, their shares are weighted more than other
classes. Weighting here means so many votes will be allocated to each share a member
holds so that when such a member votes, his votes are calculated by multiplying each
share by the number of votes attached to each share. Usually, the Articles weighs
preference shares more that the other classes of shares.
Classes of Preference Shares
Preference shares are further sub classified into the following sub classes:a) Cumulative or non cumulative preference shares
132
When preference shares are designated as being cumulative it means that any
arrears of divided declared in previous years are not lost but will keep on
accumulating and the company must pay those arrears in subsequent years when
dividends are declared or before liquidation which ever is earliest. However,
when preference shares are non-cumulative, the holders of those shares are
entitled to receive a fixed percentage as dividend out of the profits of each year,
but in case no profits are available in a particular year, they will not be entitled to
the missed divided in any subsequent year. However, the preference shares are
legally deemed to be cumulative, unless the companys article specifically makes
them non-cumulative.
b) Participating or non participating preference shares.
Participating preference shares are those 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 the equity shareholders (up to a limit say 15 %) have been met. The surplus
profits are distributed in a certain agreed ratio between the holders of the
participating preference shares and the holders of equity shares. Non
participating preference shares are those that earn dividends at fixed rates only
once whether or not there is a surplus still available for distribution to the
members.
c) Redeemable preference shares (S.60)
The registered companies are not as a rule to repay any of their share capital
without deciding on this by a special resolution of the shareholders, which would
have to be approved by the law courts. Preference shares constitute an exception
to this rule in that a company may, subject to its articles, issue Redeemable
Preference Shares. Section 60 permits a company, if so authorized by its articles
to issue redeemable preference shares. The redemption is only possible if it is
effected in accordance with the following statutory conditions:a. The shares must be fully paid up.
b. They must be redeemed,
133
i.
out of the profits of the company which would otherwise be available for
dividends; or
ii.
out of the proceeds of a new issue of shares made for the purpose of redemption
c. That any premium payable on redemption must come out of the

companys 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 companys profits to
special reserve fund known as the Capital Redemption Reserve Fund.
Note: - To redeem means to buy back i.e. a company is buying back the shares it has
issued to this class of shareholders.
b) Ordinary shares
Ordinary shares are also referred to as the equity capital. Members holding them are said
to have the equity in the company and equity here means ownership of the company. This
is because just as much as they take the lions share of the companys profits when
dividends are declared handsomely; they also take the great part of the companys
financial losses, because they invest their money without having any sort of assurance
that they will be paid any interest on their investment. The holders of such shares receive
dividends out of the profits as determined by the directors and declared by the members
in the annual general meeting. If there are preference shares, the divided on ordinary
shares is paid after the payment of divided on preference shares as per right given by the
articles.
As the ordinary shares carry the main financial risks, they are entitled to the following
rights which are not available in respect of other shares:a. After providing for any divided which is payable on preference
shares, the whole of the profits can be made available to them.
b. They are entitled by use of their voting power at the general
meeting to control the company.
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c. In winding up, the holders of the ordinary shares are entitled to the
entire residue after payment of the companys liabilities.
c) Corporate shares
These are shares created by a company for issue to its employees. They are therefore,
shares that serve special purpose. They are usually given to employees as a means of
winning their co-operation with the companys management and owners. Normally, the
company pays for them to the employees as fully paid up shares. Since the employees
will one day leave the company employment, the companys trustees will look after these
shares in the event of an employee leaving the company.
These shares are normally issued without voting rights but have the right to earn
dividends. They are also issued at the par value usually lower than that of ordinary
shares.
d) Deferred of founders shares
Apart from the classes listed above, the company can issue shares known as founders or
deferred shares in priority to the ordinary shares. Deferred shares are usually given the
right to a portion of the profits if the dividends on ordinary shares exceed a certain fixed
amount.
Frequently, this type of share is issued to the founders of the company (i.e.the promoters)
as a reward for their services. They are usually very few in number and carry a right to
the residual profit when other shareholders have been paid. The Companies Act
recognizes such types of shares. The number of founders or management or deferred
shares and the interest of the holders in property and profits of the company must be set
out in the prospectus.
Note: As a matter of practice, founders of companies have become very sophisticated.
They do not like being given those shares because they are onerous for nothing.
Founders, therefore, prefer to be given preference shares which are of course cumulative
and participating nature.
135
e) Unclassified shares
Professor Gower in the 3rd edition of his book on Company Law has indicated that a
company may also have a further category of shares. These are shares not falling in any
of the above classes. They can remain unclassified until the company designates a class
for them.
9.4 Stocks
Instead of creating or maintaining its capital in shares, a company can decide to convert
its shares into stocks and issue the same to the members. A stock, by definition, is one
unit of a company capital comprising several number of shares put together e.g. a
company may decide that every ten shares shall be converted to constitute one stock so
that instead of members buying shares they buy stocks each one of which represents ten
shares. A stock is, therefore, a large unit of the companys capital as compared to share.
When a company decides to consolidate its shares into stocks consolidation does not alter
the par value, indeed the total value of shares comprised in one stock becomes the value
of the stock they constitute. This means the interest of the members and their obligations
in respect of shares converted into stock remains not withstanding the fact that those
shares have been converted into stock.
The conditions under which shares may be converted into stocks or vice versa are
governed by sections 63 and 64 of the Act, read together with articles 40-43 of Table A
or the First Schedule to the Act. These conditions may be summarized as under:
i.
It must be the type of company that is allowed to convert its shares. According
to section 63 (1) (c), companies which are permitted to convert shares into
stocks are companies which are registered as Limited By the necessary
implications, they must be companies hav9ing share capital.
ii.
Conversion can only be undertaken if only the Articles of Association of the

company in question contain express provisions to that effect. Where the
article is silent, the company cannot undertake such conversion. However, if
the company wishes to do so, it must first necessarily alter the articles to make
a provision for conversion i.e section 63 (1).
136
iii.
Only the company itself can take a decision to convert shares into stocks. For
this reason, directors f a company do not have the authority in law to make
this decision. By virtue of articles 40 of table A, the members by an ordinary
resolution can take a decision to convert shares into stocks.
iv.
the shares to be converted must only be shares which are full paid for by the
members, i.e Article 40 read together with section 63 (2).
v.
Where a company has taken a decision to convert shares into stocks, that
company must give notice of conversion t the registrar of companies within
thirty days for the date the resolution was taken i.e. section 64 (1). If default is
made every officer responsible shall suffer default fine as per section 64 (1)
In Pilkington vs United Railway of Havana (1930) 2 ch 108, it was said that after the
shares have been converted into stocks and have been issued to stockholders, any
share certificate they had should be substituted with stock certificate. The
company should not issue the stock holders with the stock warrants
SHARES
A share is a distinct individual unit of
STOCKS
Stock is not divided into equal parts
capital in a company and shares
or denominations and subject to
can be bought and sold in whole
articles may be bought or sold in
units.
any convenient multiples or

subdivisions.
Under the Companies Act, shares are

required to be distinguished.
Stocks, even if divided into units for

convenience, bear no
A company can issue shares directly.
distinguishing numbers.
But a company cannot issue stock

directly; it can only convert its
fully paid shares into stock.
137
Note: stocks cannot be issued in the first instance, but can only emerge from the
conversion of fully paid shares.
9.5 Alteration of capital

Power to alter capital (section 63):
A company limited by shares or guarantee having a share capital may if, so authorized by
its Articles, alter its shares capital as follows:
a) Increase its nominal share capital by issuing new share capital of any amount.
b) Consolidate and divide all or any part of its share capital into shares of larger
amount.
c) Convert all or any of its paid-up shares into stock and reconvert such stocks
into paid-up shares of any denomination.
d) Sub-divide its shares into shares of smaller amount but the proportion between
the amount paid and the amount (if any) unpaid on each reduced share must
remain the same.
e) Cancel shares which have not been taken. Such cancellations will not be
deemed to be resection of share capital
The provisions of the above section establish some firm rules as to all modes of alteration
of capital. According to section 63 no alteration of capital can be valid unless:It is authorized by the articles; and
It is approved by the company in a general meeting.
Increase in Share Capital

The nominal share capital of a company may be increased, even though it has not yet
issued all its authorized capital, by ordinary resolution of the company in a general
meeting. The companys articles usually contain the authority to allow the company to
increase it capital but in case the articles do not allow it must be altered by special
resolution to this effect.
138
The company may from time to time by ordinary resolution increase the share capital by
such sum to be divided into shares of such amount as resolution shall prescribe.
Section 65 provides that where a company has increased its share capital beyond the
registered capital, notice must be given to the Registrar within thirty days from the date
of a passing the resolution by which the increase is effected. Such a notice must be
accompanied with particulars of the conditions on which the new shares are issued. In
case of default, the company and every director or other officers of the company
knowingly permitting the default will be liable to a fine of one hundred shillings.
Further issue of capital right issues
Further issue of capital of a company may take place:-
a) By allotment of new shares

b) By conversion of debentures or loans into shares.
A public company limited by share may at any time increase its subscribed share capital
(within the limit of authorized capital) by issuing new shares. It is for the directors to
decide whether an increase in the subscribed capital of the company is necessary or not.
The obligation cast upon them is that if new shares (known as rights shares) are issued
these shall be offered to the members in proportion to the existing shares held by each of
them. They cannot offer these shares to any persons at their discretion. The object of this
requirement is to prevent:-
i. Discrimination amongst shareholders by ensuring equitable

distribution of shares among them; and
ii. Directors from offering shares to outsiders before they are offered
to the shareholders.
The right of shareholders to be offered new shares to them before they are offered to the
public is known as shareholders right of pre - emption.
139
Reduction of share capital

The law regards the capital of a company as something sacred. The general principle of
law founded on principles of public policy and rightly enforced by courts is that no action
resulting in a reduction of capital of a company should be permitted unless the reduction
is effected:-
i.
Under statutory authority or by forfeiture; and
ii.
In strict accordance with procedure if any laid down in the articles of association.
Any reduction of capital contrary to this principle is illegal and ultra vires.
A reduction of capital may be effected in different ways. Section 63 (e) provides that if
the articles permit un issued shares may be cancelled which will diminish the amount of
the nominal capital of the company. The diminution of capital does not constitute a
reduction within the meaning of the aforesaid section and can be effected without
obtaining the consent of the court, by an ordinary resolution if this procedure is
authorized by the article.
However, a reduction of capital in any other form must be carried out in conformity with
the provisions of section 68. According to this section, a company limited by shares or
guarantee can reduce its capital if:-
a) Authorized by the articles;

b) A special resolution has been passed to this effect; and
c) It has been confirmed by the courts.
Section 68 gives the company the power to reduce its share capital in any way but
specifically mentions the following ways in which the reduction of capital may be
effected. It may:-
a) Extinguish or reduce the liability on shares not fully paid up, e.g. if the shares are
one hundred shillings each with fifty shillings paid up reducing them to fifty
140
shilling [paid up shares and thus relieving the shareholders from paying the
balance on the shares.
b) Cancel paid up capital which is lost or unrepresented by the available assets
either with or without extinguishing of reducing the liability on any shares.
c) pay off any paid up capita; in excess of the wants of he company either with or
without extinguishing or reducing the liability on any shares and may so far as
necessary alter its memorandum by reducing the amount of share capital; and
shares accordingly.
Under section 69, where a company has passed a resolution for reduction of capital it
must apply to the courts for an order confirming the reduction. Where the reduction of
share capital involves diminution of liability for unpaid capital or return to any
shareholder of any paid up share capital, the courts may allow all creditors to object to
reduction
For this purpose, the courts will settle a list of companys creditors and hear their
objection, if any. The courts may confirm such a reduction on any terms they think fit on
being satisfied that:a) The creditors consent to the reduction has been obtained
b) Their debts have been discharged
c) Their debts have been secured by the company
Where the courts confirm such reduction they may direct the company to add the words
And reduced to its name for a fixed period and to publish the reasons for reduction for
the information of the public.
Members liability on reduced shares
Section 72 provides that in the case of a reduction of share capital, a past present or
member of the company will not be liable for calls or other contributions as regards the
141
amount by which the nominal amount of the shares has been reduced. but if the company
becomes unable to pay in debts, within one year after the reduction, the creditors who by
reason of their ignorance of the reduction were not entered on the register of creditors can
claim the reduced amount against:-
a) Every person who was a member of the company at the date of the registration of
the order reduction. The liability of such a person to contribute is limited to such
an amount which he would have been liable to contribute before such date of
registration.
b) If the company is wound up, the courts, on application of such creditor and upon
proof of his ignorance of the reduction, may accordingly settle a new list of
contributories in a winding up.
9.6 Variation of shareholders rights

The shares in a company may be equity shares (ordinary) and or preference shares.
Usually, the rights attaching to different classes of shares are different. These rights may
be set out either in the articles of association or the memorandum of association.
Where the share capital of a company is so divided into such different classes of shares
with specific rights attached to each class such rights may be varied with the cost in
writing of not less than three fourths of the issued shares of that class. This can be done
by circulating the resolution among all the shareholders of that class and obtaining the
consent of the shareholders of at least three fourths of the issued shares. The consent may
also be obtained at a separate meeting of the holders of those shares by three fourths
majority.
The variation by either procedure is possible only if provision for such variation is
contained in the memorandum or articles of the company or even without such provisions
as long as the variation is not prohibited by the terms of issue of the shares of that class.
142
Section 74 empowers dissident members to apply to the courts for the cancellation of the
variation. Thus if the holders of 15 % of the issued shares of that class who had not
assented to the variation apply to the courts within thirty days of the date of the consent
or the passing of the resolution, the courts after hearing the interested parties may either:
a) Confirm the variation; or

b) Cancel it.
The courts decision in this respect is final and the company must within thirty days of
the service of the court order forward a copy of the order to the registrar.
9.7 Prohibition of financial assistance

A company as a general rule may not by means of a loan, guarantee, or the provision of
security or otherwise directly provide financial assistance for purchase by any person of
shares in the company or where the company is a subsidiary, in its holding company.
However, this prohibition does not apply where:
a) The lending of money is part of the ordinary business of the company.

b) Money is provided under a scheme for the purchase by trustee of fully paid
shares in the company or its holding company to be held for the benefit of
employees.
c) The company gives loan to its employees (other than directors) to enable them
to purchase fully paid shares in the company to be held by them.
Meaning of share capital

Types of types of share capital
Classes of shares
Meaning of stocks
Alteration of capital
Variation of shareholders rights
143
Revision Questions
a) Explain the meaning of share capital
b) Describe various types of types of share capital
c) Explain the classes of shares
d) Explain the meaning of stocks
e) Explain the alteration of capital
f) Describe the variation of shareholders rights
Pages 388-398
Pages 615-623

Pages 106-116
144
LESSON 10: MAJORITY RIGHTS AND MINORITY PROTECTION

a) Explain the meaning of majority power
b) Explain the meaning of the principle of majority rule
c) Explain the meaning of protection of minority shareholders or exception to the
rules in foss-v- harbottle
10.1 Majority power

Supremacy of the majority is the fundamental principle of company law. Generally, a
majority of members of a company is entitled to exercise the powers of the company and
generally to control its affair. There is no doubt that directors enjoys wide powers in
respect of controlling, directing and managing the affairs of a company but one must not
forget the fact that directors are elected by majority shareholders. The act lays down
certain matters which can be decided by the shareholders at general meetings by simple
majority, whereas certain more important matter can be decided by special majority of
three forth of the company, it is the wish of the majority share holders that prevails. The
majority shareholders determine the fate of the company.
10.2 The principle of majority rule
The principle of majority rule was recognized in Foss-v- Harbottle.The rule in Foss-vHarbottle is known as the Majority Rule or proper plaintiff principle
The rule is that the proper plaintiff in an action to redress an alleged wrong to a company
on the part of any one, whether director, member or outsider , or to recover money or
damages alleged to be done to it, is prima faciethe company and where the alleged
145
wrong is any irregularity which might be made binding on the company by a simple
majority of members, no individuals member can bring an action in respect of it.
In Foss-v- Harbottle two minority shareholders in a company alleged that its directors
were guilty of buying their own land for the companys use paying themselves a price
greater than its value. This act of the directors resulted in a loss to a company. The
minority shareholders therefore decided to take an action for damages against the
directors. The shareholders in a general meeting, by majority resolved not to take any
action against the directors alleging that they were not responsible for the loss which had
incurred. The court dismissed the suit on the ground that the acts of directors were
capable of confirmation by the majority of members and held that the proper plaintiff for
wrongs done to the company is the company itself and not the minority shareholder, and
the company can act only through its majority shareholders.
The rational of the above rules is that a company is a separate legal entity from the
members who compose it. As such, if any right of the company is violated, it is the
company which can bring an action.
The principle laid down in Foss v-Harbottle was stated by Mellish L.J in Macdougall
v- ; Gardianer in these words. If the thing complained is a thing which, in substance ,the
majority of the company are entitled to do legally, there can be no use in having litigation
about it, the ultimate end of which is only that a meeting has to be called, and then
ultimately the majority gets its wishes.
Similarly Lord Davey in Burland v.Ealre observed as follows. It is an elementary
principle of Law relating to joint stock companies that the court will not interfere with the
internal management of companies acting within their powers and has in fact no
jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the
company or to recover monies or damages due to the company, the action should prima
facie be brought by the company itself.
In Macdougall vs. Gardiner (1875) ch D13, the articles of the company empowered the
chairman, with the consent of the members in a meeting to adjourn a meeting, and also
provided for taking a poll if demanded by the shareholders. The adjournment was moved
146
and declared by the chairperson. A shareholder brought an action for declaration that the
chairpersons conduct was illegal. It was held that the shareholder could not bring the
action, if the chairman was wrong the company could sue.
Advantage of rule in Foss vs. Harbottle
1. Recognition of the separate legal personality of a company i.e if a company has
suffered some injuries, and not the individuals members, it is the company itself
which can seek redress,
2. Need to preserve the right of the majority to decide i.e. the principle in Foss Vs
Harbottle preserves the right of the majority to decide how the affairs of the
company shall be conducted. It is but fair that the wish of the majority should
prevail.
3. Multiplicity of futile suits avoided i.e clearly, if every individual member were
permitted to sue anyone who has injured the company through a breach of duty
there could be enormous waste of time and money
4. Litigation suit of a minority is futile if majority do not wish it. If the irregularity
complained of is one which can be subsequently ratified by the majority. It is
futile to have litigation about it except with the consent of the majority in a
general meeting
10.3 Protection of minority shareholders or exception to the rules in foss-vharbottle

It has become clear from the Rule in Foss v- Harbotle that it is the majority rule
that prevail in company management. Such wide powers concentrated in their
hands may be misused to exploit the minority shareholders and to serve their
personal ends. The possibility of such domination will be even more in case of
private companies where a few individuals may hold a majority of shares. It is,
therefore, rightly pointed that a proper balance of the rights of the majority and
minority shareholders is essential for the smooth functioning of the company.
147
In order to prevent the majority from misusing this privilege and at the same time
to ensure justice to minority shareholders, certain exceptions to Foss v Harbottle
have been admitted, which are as follow.
a) Acts which are ultra vires or illegal

It may be noted that the rule in Foss v, Harbottle will apply only when the act done by the
majority is one, which the company is authorized by its memorandum to do. Any act
done by the majority beyond the object clause is ultra vires and it cannot be ratified even
if every shareholder is willing to do so. In the case of the ultra vires acts even a single
shareholders can restrain the company from committing those acts by filing a suit of
injunction .Similarly, the majority rule will not apply where the act in question is illegal.
b) Act support by insufficient majority

For certain acts, the Act or the articles of the company require a special majority of threefourths of the shareholders. The rule in Foss-v-Harbottle cannot be invoked to override,
these requirement by a resolution passed by a simple majority. If the requirement of a
special majority is not fulfilled, any shareholder can return the company from acting on
the resolution
c) Where the act of majority constitute a fraud on minority

The rule in Foss v.Harbottle will not apply to such acts of majority which constitute a
fraud on minority. Majority powers must be exercised bona fide for the benefit of the
company as whole. A resolution would constitute a fraud on minority if its not bona fide
for the benefit of the company as a whole. In such cases, the decision of the majority can
bee challenged by the minority. Similarly, an action of the majority which discriminate
between majority shareholders and minority shareholders would constitute a fraud of
minority, A special resolution would be liable to be impeached if the effect of it were to
discriminate between the majority shareholders and minority shareholder, so as to give
the former an advantage of which the latter were deprived, The following cases would
illustrate the concept of fraud on minority.
148
Cokes v.Deeks.in this case the director of a railway construction company obtained a
contract in their own names to construct a railway line. The contract was obtained under
circumstances which amounted to breach of trust by the director who then used their
voting powers to pass a resolution of the company declaring that the company had no
interest in the contract. It was held that the benefit of the contract belongs in equity to the
company and that the director could not benefit themselves at the expense of the
minority. If it were not checked, this would be tantamount to allowing a majority to
oppress the minority.
Brown v. British Abrasive Wheel co, The majority shareholders holding ninety-eight per
cent of the shares were willing to subscribe further capital which the company badly
needed, but only if they were able to acquire the shareholding of the minority. They
passed a special resolution to alter the articles to enable them purchase the minority share
compulsory on certain terms. The plaintiff refused to sell its shares and challenged the
validity of the majority resolution. It was decided that the alteration was not for the
benefit of the company but for the benefit of the majority and accordingly an injuction
was granted against the company prohibiting it from carrying out the resolution.
d) Where it is alleged that the personal membership rights of the plaintiff

shareholder have been infringed.
Every shareholder has individuals membership rights against the company, conferred
either by the companies Act or the articles of the company .Such individual membership
rights include the right to attend meetings, the right to receive dividends, the right to
insist on strict observance of the legal rules, statutory provisions in the memorandum and
articles,etc.If such a right is in question, a single shareholder can, on principle, defy a
majority consisting of all other shareholders. The rule in Foss v. Harbotle has no
application so far as these individual membership rights are concerned. If any
individuals membership right is infringed, he can sue in his own name, and this right of
action is unaffected by any decision of the majority. Thus, where the chairman of a
meeting at the time of taking a poll ruled out certain votes, which should have been
included, a suit by the shareholder concerned was held to the validly filed. Again where
149
the chairman rejects the candidature of a shareholder for directorship, it is an individual

wrong in respect of which suit is maintainable.
e) Where there is a breach of duty
The minority shareholders may bring an action against the company where there is a
breach of duty by the director and majority shareholders to the detriment of the company.
In this case, the action will be allowed even where there is no fraud.
In Daniel vs Daniels (1978) ch .406 a company, on the instruction of the two directors
(who were husband and wife) having majority shareholder sold the companys lands to
one of then (the wife) at gross undervalue. The minority shareholder brought an action
against the directors and the company, it was held that the company and minority
shareholder had valid cause of action as the director knew or ought to have known that
the sale was at a gross undervalue.
Meaning of majority power

Meaning of the principle of majority rule
Protection of minority shareholders or exception to the rules in Foss-v- Harbottle
150
Revision Questions
a) Explain the principle of majority rule Are there any exceptions? Discuss them
b) Explain the rule of supremacy of the majority of shareholder with all its
exception
c) Describe the concept of minority shareholder
d) State the rule in Foss V,Harbottle?
e) What constitute the exceptions to this rule?
f) Muiruri shareholder of kamukunji Land Buying Co.Ltd.The article of
Association of the company state that the voting will be done by show of hands.
At a meeting to resolves, a long-standing disagreement between members over a
land buying issue, Muiruri votes against the expectations of the Chairman of
the Board of Director who loudly declines to record his votes.Muiruri considers
this as directly against the interest of the company and contemplates suing the
chairman. Advise Muiruri.

Pages 417-424
Pages 129-132
151
LESSON 11: ACCOUNTS AND AUDITORS

a) To explain requirements of what should be captured by the Books of Account
b) To explain the various financial statements that should be presented to the
shareholders
c) To explain the manner of presentation of group accounts to the shareholders
d) To explain the manner of appointment ,remuneration and disqualification of
the auditors
11.1 Introduction
The Companies Act makes it mandatory for registered companies to keep prescribed books of
account and to prepare certain accounts which are to be presented from time to time to the
companys members for consideration.
11.2 Books of Account

By s. 147 (1) every company shall cause to be kept in the English language proper books of
account with respect to:
(a) All sums of money received and expended by the company and the matters in respect of
which the receipt and expenditure takes place;
(b) All sales and purchases of goods by the company;
(c) The assets and liabilities of the company.
S. 147 (2) provides that proper books of account shall be deemed not to have been kept with
respect to the matters aforesaid if there are not kept such books as are necessary to give a true and
fair view of the state of the companys affairs and to explain its transactions.
By s. 147 (3) (a) the books of account are to be kept at the registered office of the company or
with the consent of the Registrar and subject to such conditions as he may impose, at such other
place as the directors think fit, and shall at all times be open to inspection by the directors.
152
a) Profit and loss account

S. 148 (1) provides that the directors of every company shall, at some date not later than eighteen
months after the incorporation of the company and subsequently once at least in every calendar
year, lay before the company in general meeting a profit and loss account for the period, in the
case of the first account, since the incorporation of the company, and, in any other case, since the
preceding account. The account shall be made up to a date not earlier than the date of the meeting
by more than nine months or, in the case of a company carrying on business or having interests
abroad, by more than twelve months.
A company which does not trade for profit is required to lay an income and expenditure account
instead of a profit and loss account. The period during which the accounts have to be laid before
the general meeting may be expended by the Registrar for any special reasons.
b) Balance Sheet
Section 148 (2) provides that the directors cause to be made out in every calendar year, and to be
laid before the company in general meeting, a balance sheet as at the date to which the profit and
loss account or the income and expenditure account (as the case may be) is made up.
Contents
By s. (149 (1), every balance sheet shall give a true and fair view of the state of affairs of the
company as at the end of its financial year and every profit and loss account shall give a true and
fair view of the profit and loss of the company for the financial year.
By s. 149 (2), a companys balance sheet and profit and loss account shall comply with the
requirements of the Sixth Schedule to the Act so far as applicable (subject to such modifications
as the Registrar may, on the application or with the consent of the companys directors, allow).
The detailed contents of the Sixth Schedule are dealt with during the accounting lectures which
accountancy students issued. They are supplemented by the various Kenyan Accounting
Standards issued by the Institute of Certified Public Accountants of Kenya and are beyond the
scope of this book.
c) Group Accounts
S. 150 (1) provides that it, at the end of its financial year, a company has subsidiaries, then it must
include in its annual accounts group accounts dealing with the affairs of the subsidiaries as well.
153
By s. 150 (2) (b) group accounts need not deal with a subsidiary of the company if the companys
directors are of the opinion that:
(a) It is impracticable, or would be of no real value to the members of the company, in view of
the insignificant amounts involved, or would involve expense or delay out of proportion to
the value to members of the company; or,
(b) The result would be misleading; or
(c) The result would be harmful to the business of the company or any of its subsidiaries; or
(d) The business of the holding company and that of the subsidiary are so different that they
cannot reasonably be treated as a single undertaking.
The approval of the Registrar shall be required for not dealing n group accounts with a subsidiary
on grounds (c) or (d).
By s. 150 (2) (a), a company is exempt from the obligation to prepare group accounts if it is a
wholly owned subsidiary of another body corporate incorporated in Kenya.
Form
S. 151 (1) provides that the group accounts laid before a holding company shall be consolidated
accounts comprising:
(a) A consolidated balance sheet dealing with the state of affairs of the company and all the
subsidiaries to be dealt with in the group;
A consolidated profit and loss account dealing with the profit or loss of the company and those
subsidiaries.
However, the group accounts need not be prepared in this form if the directors are of the view
that they could be prepared in another form.
Contents
By s. 152 (1), the group accounts laid before a company shall give a true and fair view of the state
of affairs and profit or loss of the company and the subsidiaries dealt with thereby as a whole, so
far as concerns members of the company.
S. 153 (1) further provides that the group accounts, if prepared as consolidated accounts, shall
comply with the requirements of the Sixth Schedule to the Act, so far as applicable thereto, and if
not so prepared, shall give the same or equivalent information.
154
Financial year
S. 153 (1) provides that a holding companys directors shall ensure that, except where in their
opinion there are good reasons against it, the financial year of each of its subsidiaries shall
coincide with the companys own financial year.
By S. 153 (2) the Registrar is empowered to postpone the submission of a companys accounts to
a general meeting from one calendar year to the next for purposes of enabling the companys
financial year to end with that of the holding company.
Directors; report
By s. 157 (1) the balance sheet must have attached to its directors report on the companys
affairs, including the amount if any, which they propose to carry to reserves within the meaning
of the Sixth Schedule to the Act.
11.3 Audit of Accounts

A companys annual accounts are required to be audited y auditors appointed for the purpose. S.
159 (1) provides that every company shall at each annual general meeting appoint an auditor or
auditors to hold office from the conclusion of that, until the conclusion of the next, annual general
meeting .
a) Reappointment
By s. 159 (2) a retiring auditor shall be deemed to be reappointed without any resolution being
passed unless:
(a) He is not qualified for reappointment; or
(b) A resolution has been passed at that meeting (i.e. annual general meeting) appointing
somebody instead of him or providing expressly that he shall not be appointed;
(c) He has given the company notice in writing of his unwillingness to be reappointed.
b)Appointment by the registrar

Section 159 (3) provides that :where at an annual general meeting no auditors are appointed or are
deemed to be reappointed, the Registrar may appoint a person to fill the vacancy. Section 159 (4)
requires the company, within seven days of the Registrars power to appoint an auditor under s.
159 (3) becoming exercisable, to give him notice of that fact. If the company fails to do so, it and
every officer who is in default shall be liable to a default fine.
155
c) First auditors
Section 159 (5) provides that the first auditors of a company may be appointed by the directors at
any time before the first annual general meeting and that the auditors so appointed shall hold
office until the conclusion of that meeting.
In default of appointment of the first auditors by directors the company may do so. Where the
directors have appointed the first auditors, the company may at a general meeting remove such
auditors and appoint in their place any other persons who have been nominated for appointment
by any member of the company. Notice of the nomination to be given to the members at least
fourteen days before the date of the meeting.
d) Remuneration
Section 159 (7) provides that the remuneration payable to an auditor appointed by the directors or
by the Registrar may be fixed by the directors or by the Registrar, as the case may be. In all other
cases the auditors remuneration shall be fixed by the company in general meeting or in such
manner as the company in general meeting may determine. Any sums paid in respect of the
auditors expenses shall be deemed to be included in the expression remuneration.
e) Qualifications
Section 161 (1), as amended by s. 46 (2) of the Accountants Act 1977, provides that a person or
firm shall not be qualified for appointment as auditor of a company unless he, or in the case of a
firm, every partner in the firm, is the holder of a practicing certificated issued pursuant to
section 21 of the Accountants Act 1977.
f) Disqualification
Section 161 (2) provides that one of the following persons shall be qualified for appointment as
auditor of a company:
(a) An officer or servant of the company;
(b) A person who is a partner of or in the employment of an officer or servant of the company
(unless the company is a private company);
(c) A body corporate; and
(d) Persons who are disqualified for appointment as auditor of the companys subsidiary or
holding company or subsidiary of the companys holding company.
156
g) Improper appointment
S. 161 provides that if any unqualified person is appointed as auditor, the person appointed, the
company and every officer in default, shall be liable to a fine not exceeding four thousand
shillings.
h) Removal
Although the marginal note section 160 (1) bears the word provisions as to resolutions relating
to appointment and removal of auditors there is no provision in the section for removal of
auditors. It only provides that special notice shall be required for a resolution at the companys
annual general meeting appointing as auditor a person other than a retiring auditor or providing
expressly that a retiring auditor shall not be reappointed.
A special notice is defined by section 142 generally for all provisions of the Act as not less than
twenty-eight days notice. On receipt of the proposed resolution the company shall forthwith send
a copy thereof to the retiring auditor (id any). If the auditor makes written representations which
do not exceed a reasonable length and requests their notification to members of the company, the
company shall:
(a) In any notice of the resolution given to members of the company state the fact of the
representations having been made, and
(b) Send a copy of the representations to every member of the company to whom notice of the
meeting is sent (whether before of after receipt of the representations by the company).
If a copy of the representations is not sent as provided because the representations were received
too late or because of the companys default the auditor may (without prejudice to his right to be
heard orally) require that the representations shall be read out at the meeting. None of these
provisions applies if, on application of either of the company or any other person who claims to
be aggrieved, the High Court holds the representations to be defamatory.
The duty of the auditors is spelt out in section 162 (1) which provides:
The auditors shall make a report to the members on the accounts examined by
them, and on every balance sheet, every profit and loss account and on the group
accounts laid before the company in general meeting during their tenure of office.
157
The auditors report shall be read before the company in general meeting and shall open to
inspection by any member
i)Contents of the auditors report

By section 162 (1) the auditors report must contain statements as to the matters mentioned in the
seventh schedule of the Act.
The matters are:

1. Whether they have obtained all the information and explanations which to the best of their
knowledge and belief were necessary for the purposes of their audit.
2. Whether, in their opinion, proper books of account have been kept by the company, so far as
appears from their examination of those books, and proper returns adequate for the purposes
of their audit have been received from branches not visited by them
3. (a) Whether the companys balance sheet and (unless it is framed as a consolidated profit
and loss account) profit and loss account dealt with by the report are in agreement with
the books of account and returns.
(b) Whether, in their opinion and to the best of their information and according to the
explanations given them, the said accounts give the information required by the Act in
the manner so required and give a true and fair view(i)
In the case of the balance sheet, of the state of the companys affairs as at the end
of its financial year; and
(ii)
In the case of the profit and loss account, of the profit or loss for its financial year
or, as the case may be give a true and fair view thereof subject to the nondisclosure of any matters (to be indicated in the report) which by virtue of Part III
of the Sixth Schedule to the Act are not required to be disclosed.
4. In the case of a holding company submitting group accounts whether in their opinion, the
group accounts have been properly prepared in accordance with the provisions of the Act so
as to give a true and fair view of the state of affairs and profit or loss of the company and its
subsidiaries dealt with thereby, so far as concerns members of the company, or as the case
may be, so as to give a true and fair view thereof subject to the non-disclosure of any matters
(to be indicated in their report) which by virtue of Part III of the Sixth Schedule to the Act are
not required to be disclosed.
158
j) Power of auditors
Under s. 162 (3) every auditor of a company has a right of access at all times to the books and
accounts and vouchers of the company. He has also a right under the section to call n officers of
the company for any information and explanation as he thinks necessary for the performance of
his duties.
Under section 162 (4) he is entitled to attend any general meeting of the company. He is also
entitled to receive all notices and communications relating to any general meeting which any
member of the company is entitled to be heard at any general meeting which he attends on any
part of the business of the meeting which concerns him as auditor.
Requirements of what should be captured by the books of account

The various financial statements that should be presented to the shareholders
The manner of presentation of group accounts to the shareholders
In the manner of appointment ,remuneration and disqualification of the auditors
159
Revision Questions
a)
Explain requirements of what should be captured by the Books of Account
b)
Explain the various financial statements that should be presented to the shareholders
c)
Explain the manner of presentation of group accounts to the shareholders
d)
Explain the manner of appointment ,remuneration and disqualification of the auditors
Pages446-458
Walmsley,K(2000) Company Law, Reed Elsevier(UK) Limited, London UK Pages 221286,382-394
160
LESSON 12: INVESTIGATION OF A COMPANYS AFFAIRS

a) Explain the process of Investigation Into a Companys Affairs
b) Explain the process of Investigation of Companys membership

c) Explain the Alternative power of Registrar in matters of company investigation
12.1 Investigation Into a Companys Affairs
An investigation by the Registrar of Companies into a companys affairs may arise in the
following ways under section 164 of the Act:
(a) Where the Registrar has reasonable cause to believe that the provisions of the Act are not
being complies with by the company, or
(b) Where, on perusal of any document which the company is required to submit to him under
the provisions of the Act, he is of the opinion that the document does not disclose a full and
fair statement of the matters to which it purports to relate.
The Registrar initiates his investigation by calling on the company, by written order, to produce
all or any of the books of the company, or to furnish in writing any specified information or
explanation. The books must be produced, and the information or explanation furnished, within
the time specified in the order.
Subsection 4 provides that, if after examination of the books produced and the explanation
furnished y the company, the Registrar is of the opinion that an unsatisfactory state of affairs is
disclosed or that, a full and fair statement has not been disclosed, he shall report the
circumstances of the case in writing to the High Court.
a) Appointment of inspectors
Section 166 empowers the High Court to appoint one or more competent inspectors to investigate
the affairs of the company if it appears to the court upon the report from the Registrar that there
are circumstances suggesting:
(a) That the companys business is being conducted with intent to defraud its creditors or the
creditors of any other person or otherwise for a fraudulent or unlawful purpose or in a manner
161
oppressive of any part of its members or that it was formed for any fraudulent or unlawful
purpose; or
(b) That persons concerned with its formation or the management of its affairs have in connexion
therewith been guilty of fraud, misfeasance or other misconduct towards its members; or
(c) That its members have not been given all the information with respect to its affairs which
they might reasonably expect; or
(d) That it is desirable so to do.
b) Appointment of inspectors on application of members

Section 165 gives additional powers to the High Court to appoint inspectors
(a) In the case of a company having a share capital, on the application either of not less than two
hundred members or of members holding not less than one-tenth of the shares issued; and
(b) In the case of a company not having a share capital, on the application of not less than onefifth in number of the persons on the companys register of members.
Subsection (2) requires the application to be supported by such evidence as the court may require
for the purpose of showing that the applicants have good reason for requiring the investigation. In
addition, the court may, before appointing an Inspector, require the applicants to give security, to
an amount not exceeding ten thousand shillings, for payment of the costs of the investigation.
c) Scope of investigation
The inspector appointed by the court is to investigate the affairs of the company. This phrase
has no specific meaning and has not been defined by the Ac. In the English case of R v Board of
Trade, ex parte St. Martins Preserving Co. Ltd (1965) it was explained, in relation to the
equivalent provisions of the English Companies Act 1948, that the words affairs of the company
include matters which relate to a companys shareholding in its subsidiary and control of its
subsidiary as well as the conduct of a companys affairs by a receiver and manager appointed
by the debenture-holder. This explains the reason why section 167 empowers the inspector to
investigate also the affairs of any other body corporate which is or has at any relevant time
been the companys subsidiary or holding company, or a subsidiary or its holding company,
or a holding company of its subsidiary.
d) Powers of inspector
Section 168 gives to the inspector the following powers:
162
(a) To require any officer or agent of the company to produce all books and documents of, or
relating to, the company or any other body corporate whose affairs are also being investigated
by the inspector which are in his custody or power.
(b) To acquire any officer or agent of the company being investigated to give all assistance in
connection with the investigation which he is reasonably able to give.
(c) To examine on oath any officer or agent of the company being investigated and to administer
the oath accordingly.
(d) To ask the High Court to examine on oath any person whom he cannot so examine.
Any officer or agent who refuses to produce the books or documents required by the inspector or
refuses to answer any question which is put to him by the inspector is liable to be punished by the
High Court as if he had been guilty of contempt of the court.
Subsection 5 of Section 168 provides than any reference to officers or to agents of a company
includes past, as well as present officers, agents and the bankers, advocates and auditors of the
company.
e) The inspectors reports
Section 169(1) provides that an inspector may, and, if so directed by the High Court,
shall, makes interim reports to the court, and on the conclusion of the investigation shall
make a final report to the court. The report shall be written and, if the court so directs,
printed.
The court shalla) Forward a copy of any report made by an inspector to the company and to the
Registrar;
b) If the courts thinks fit, forward a copy thereof on request and on payment of the
prescribed fee, to any person who is a member of the company or of any other
body corporate dealt with in the report, or whose interests as a creditor of the
company or any such other body corporate appear to the court to be affected; and
c) Where the inspector is appointed under section 165, furnished, at the request of the
applicants for the investigation, a copy to them.
163
The Court may also cause the report to be printed and published
Under Section four 172, a copy of the inspectors report which is authenticated by the
seal of the company whose affairs have been investigated shall be admissible in any
legal proceedings as evidence of the opinion of the inspector in relation to any matter
contained in the report.
f) Proceeding on inspectors reports
Section 170 provides that if, from the Inspectors report:
It appears to the court that any person has, in relation to the company or to any other
body corporate whose affairs have been investigated, been guilty of any offence for which
he is criminally liable, the court shall forward a copy of the report to the attorney
General who shall institute proceeding if he considered that the case is one in which a
prosecution ought to be instituted (in which event all officers and agents of the company,
past the present, except the defendant in the proceeding , shall give to him all assistance in
connection with the prosecution which they are reasonably able to give);
It appears to the attorney general, in the case of any body corporate liable to be would up
under the Act, that it is expedient to wind it up because:
the companys business is being conducted with intent to defraud creditors or for a
fraudulent or unlawful purpose or in a manner oppressive of any part of its members, or
the person concerned with its formation or the management of its affairs have in
connection therewith been guilty of fraud, misfeasance or other misconduct towards it or
towards its members, the attorney general shall , unless the body corporate is already
being wound up by the court, present a petition for it to be wound up if the court thinks
it is just and equitable that it should be wound up or a petition for an order under section
211 of the Act, or both;
it appears to the attorney general that civil proceeding ought in the public interest to be
brought by any body corporate dealt with by the report for the recovery of damages in
respect of any fraud, misfeasance or other misconduct in connection with the promotion or
formation of the body corporate or the management of its affairs , or for the recovery of
any property of the body corporate which has been misapplied or wrongfully retained , the
attorney -general may himself bring proceedings for the purpose in the name of the body
164
corporate(in which event the Registrar shall indemnify the body corporate against any cost
or expenses incurred by it in or in connection with the proceedings)
g) Expenses of investigation
Sectiion171 (1) provides that the expenses of and incidental to an investigation by an
inspector appointed by the court are to be defrayed in the first instance by the registrar, but
the following persons shall, to the extent mentioned, be liable to repay the Registrar
any person who is convicted on a prosecution instituted by the attorney general as a
result of investigation, or who is ordered to pay damages or restore any property in
proceedings brought by the Attorney General as a result of the inspectors report, may in
the same proceedings be ordered to pay such expenses to such extent as may be specified in
the order;
any body corporate in whose name proceeding are brought as a result of inspectors
report is liable to repay to the amount or value of any sums of property recovered by it as a
result of those proceedings (in which case the amount payable shall be a first charge on
the sums or property recovered
any body corporate dealt with by the inspector s report, where the inspectors was not
appointed by the court on its own motion, is liable, except so far as the court otherwise
directs( unless as a result of the investigation a prosecution is instituted by the Attorney
General); and
the applicants for the investigation( where the inspector was appointed as a result of an
application made by the companys members) are liable to such extent (if any) as the court
direct.
12.2 Investigation of Companys membership
a) Appointment of inspectors
Section 173(1) provides that where it appears to the Registrar that there are good
reasons so to do, he may appoint one or more competent inspectors to investigate and
report on the membership of any company, or otherwise, for the purpose of determining
the true persons who are or have been financially interested in the success or failure
165
(real or apparent) of the company or able to control or materially to influence the policy
of the company
Section 173(2) provides that the appointment may define the scope of the inspectors
investigation, whether as respects the matter or the period to which it is extended or
otherwise, and, in particular, may limit the investigation to matters connected with
particular shares or debentures.
b) Inspectors powers
Section 173(4) provides that, subject to the terms of an inspectors appointment, his
powers shall extend to the investigation of any circumstances suggesting the existence
of an arrangement or understanding which, though not legally binding, is or was
observed or likely to be observed in practice and which is relevant for purposes of his
investigation Section173(5) further confers on the inspector the same powers as those
conferred on an inspector appointed to investigate a companys affairs.
Section 173(6) provides that the expenses of investigation shall be defrayed by the
Registrar.
12.3 Alternative power of Registrar

Section174(1) provides that, where it appears to the Registrar that there is good reason to
investigate the ownership of any shares in or debentures of a company and that it is
unnecessary to appoint an inspector for the purpose, he may require any person whom
he has reasonable cause to believea) to be or to have been interested in those shares or debentures; or
b) to act or to have acted in relation to those shares or debentures as the advocate or
agent of someone interested therein,
to give him any information which he has or reasonably be expected to obtain as to the
present and past interests in those shares or debentures. The names and addresses of the
said persons and of any persons who act or have acted on their behalf in relation to the
shares or debentures must also be given.
Section 174(2) provides that, for the purpose of Section 174, a person shall be
deemed to have an interest in a share or debenture if he has any right to acquire or dispose
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of the share or debenture, or any interest therein, or to vote in respect thereof, or if his
consent is necessary for the exercise of any of the rights of other persons interested therein,
or if other persons interested therein can be required or accustomed to exercise their rights
in accordance with his instructions.
Explain the process of investigation into a companys affairs

Explain the process of investigation of companys membership
Explain the alternative power of registrar in matters of company investigation
167
Revision Questions
a) Explain the process of Investigation Into a Companys Affairs
b) Explain the process of Investigation of Companys membership

c) Explain the Alternative power of Registrar in matters of company investigation

Saleemi.N.A (1997) Company Law Simplified, N.A Saleemi Publishers Limited, Nairobi, Kenya.
Pages 283-287

Pages 458-462
168
LESSON 13: WINDING-UP

a) Explain the meaning of winding up
b) Explain the process of winding up by the court
c) Explain the process of voluntary winding up
d) Explain the process of creditors voluntary winding up
e) Explain the process of winding up subject to supervision
13.1 meaning of winding up

Winding up is the legal process by which a companys legal existence is brought to an
end. It is carried though by a person known as liquidator who liquidates the company
(i.e. kills it and then makes the necessary arrangements for its burial).The burial
arrangements entail, inter alia
a) Setting the list of contributories;
b) Collecting the companys assets
c) Paying the companys debts and other liabilities, and
d) Distributing the surplus assets (if any) among the contributories
Section 212 provides that the winding up may be either
a) a compulsory winding up by the court; or
b) a voluntary winding up, which may be either a members voluntary
winding up, or a creditors voluntary winding up; or
c) a winding up subject to the supervision of the high court.
13.2 Modes of winding up
13.2.1 Winding up by the court
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A winding up by the court commences when a petition is presented to the High court
under s.218 of the Companies Act. The petition will specify one of the seven grounds
for compulsory winding up and be presented (usually) either by a creditor or by a
member (now called a contributory) of the company.
The seven grounds for winding up by the court are listed in s. 219 as followsa) the company has by special resolution resolved that it should be wound up by
the court;
b) the company does not deliver the statutory report to the Registrar or defaults in
holding the statutory meetings;
c) the company has not commenced its business within a year from its incorporation
or has suspended its business for a whole year;
d) the company is unable to pay its debts( as defined in section 220;
e) the number of members of the company has reduced, in the case of a private
company, below, two , or, in the case of a public company, below seven;
f) the court considers that it is just and equitable to wind up the company, and
g) in the case of a company incorporated outside Kenya and carrying on business in
Kenya, liquidation proceedings have been commenced in respect of it in the
country of its incorporation or in which it has established a place of business.
Inability to pay debts

By section 220, a company shall be deemed to be unable to pay its debts:
a) if a creditor (or creditors) to whom the company owes more than one thousand
shillings serves on the company at its registered office a written demand for
payment and the company neglects , within the ensuing three weeks, either to pay
the debt or to offer satisfactory security for it;
b) if execution or other process issued on a judgment, decree or order of any court
in favor of a creditor of the company is returned unsatisfied in whole or in part; or
c) If it is proved to the satisfaction of the court that, taking account of the contingent
and prospective liabilities of the company, it is unable to pay its debt.
Although no minimum amount is specified for (b) or(c) it is assumed that the
one thousand shillings minimum applies.
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Regarding winding up on the just and equitable ground, it should be noted that
this will be done only if the court is of the opinion that the company should be so
wound up. This gives the court a discretionary power which is extremely wide and
those exercises cannot be challenged. However, the just and equitable ground is
usually relied on by a member (contributory) who is dissatisfied with, or is at
loggerheads with, the directors or controlling shareholders over the management
of the company. Winding up orders on the just and equitable ground have been made
in situations where:
(a)
The substratum of the company has gone .What is generally called lose of
substrum occurred in Re: German Date Coffee Co. (1882) in which the object clause
specified with much particularity that the sole object of the company was to
manufacture coffee from dates under a German patent. The German government
refused to grant a patent. The company however manufactured coffee under a Swedish
patent for a sale in German. A contributory petitioned for compulsory winding up but
the petition was opposed by the other members of the company. It was held that the
company had been formed only to work a particular patent and, as it could not do so, it
should be would up. However, the case of Re: Kitson $ (1946) established the
principle that, if there is an alternative object which the company can carry on, it will
not be wound up on the just and equitable ground.
(b)
There is a complete deadlock in the management of the companys affairs
The kind of deadlock that is required for this purpose is typified by the case of Re:
Yenidje Tobacco Co. (1946) in which two sole traders had converted their business
into a company of which they were the only directors and shareholders. The quarreled
bitterly and one sued the other for fraud. Meanwhile they refused to speak to each other
and conducted board meetings by passing notes though the hands of the secretary. The
defendant in the fraud action petitioned for compulsory winding up, which was opposed
by the other member. It was held that, in substance, the two members were really
partners and, by analogy with the law of partnership, it was just and equitable to order
liquidation since any prospect of friendly co-operation that sustains a partnership had
been destroyed by their animosity towards each other.
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In Ebrahimi v Westbourne Galleries(1973) , E and N had carried on business together

for twenty five years , originally as a partners , and for the last ten years through a
company, in which each originally had five hundred shares. E and N were the first
directors and shared the profit as directors remuneration and no dividends were
paid to them . When Ns son joined the business, he became a third director and E and
N each transferred one hundred shares to him eventually there were disputes and N and
his son used their voting control in general meeting to remove E from his directorship
under the power of removal given by Companies Act 1948 s. 184 (in Kenya, s. 185). E
sued to have company wound up on the ground that it was just and equitable to do so.
It was held that the company should be wound up. Although N and his son had acted
within their legal rights when they voted for the removal of E, they had acted in an
unjust or inequitable manner.
Petitions
A petition for the winding up of a company by the High Court may be presented by:
(a)
The company itself after the members have passed a special resolution that the
company be wound up by the court;

(b)
A creditor or creditors ; or
(c)
A contributory or contributories; or
(d)
The Official Receiver (who, under s.221(2), can present a petition even after the
commencement of a voluntary winding up); or

(e)
The Attorney-General (following an investigation into the companys affairs).
For the purpose of (b) above, a creditor includes:

(i)Any person to whom a sum of money is due and payable by the company, including
assignees of a debt, or part of a debt;
(ii)
The personal representative of a deceased creditor; or
A contingent or prospective creditor

For the purpose of (c) above, a contributory is defined by s.214 as every person liable to
contribute to the assets of a company in the event of its being wound up, including
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any person alleged to be a contributory. Such a person is usually a member of the

company (irrespective of whether his shares are fully paid up).
Section 221(1) provides that a contributory shall not be entitled to present a winding up
petition unless.
(a)
the number of members is reduced below the prescribed limit; or
(b)
the shares in respect of which he is contributory, or some of them, were originally
allotted to him; or
(c)
he has held the shares in respect of which he is contributory, for at least six
months out of the last eighteen months;

(d)
the shares have devolved on him though the death of a former holder.
Procedure on winding up by the High Court

The procedure on winding up a company by the High Court is governed by the
Companies (Winding-up) Rules and, briefly, is as follows:
1.
Presentation of petition
Rule 21 provides that every petition shall be in Form No3, 4, or 5(in the schedule to the
Rules), but with such variation as circumstances may require.
The following information is to be entered in the form:
(a)
the months of the companys incorporation;
(b)
the situation of the registered office of the company;
(c)
the registered postal address of the company;
(d)
the nominal capital of the company, the shares into which it is divided and the
amount paid or credited as paid up;

(e)
the objects for which the company was established, and
(f)
the facts on which the petitioner relied on for making the application.
Under Rule 22, the petition must be presented at the office of the Registrar of Companies
who shall appoint the time and place at which the petition is to be heard. The time and
place so fixed are to be written on the petition and all sealed copies of it.
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Rule 23 provides that every petition shall be advertised for at least seven days before
the hearing, once in Kenya Gazette, and once at least in one newspaper circulating in the
area of the companys registered office or principal or last known principal place of business.
The advertisement must state the date on which the petition was presented and the name and
address of the petitioner and of his advocate and must contain a note at the foot thereof stating
that any person who intends to appear at the hearing of the petition must send notice of his
intention to the petitioner, or to his advocate, vide Form No. 13 in the schedule to the
companies (Winding up) Rules. Rule29 (2) provides that any person who fails to give notice
of his intention as prescribed shall not without special leave of the court, be allowed to appear
on the hearing of the petition.
By Rule 25, every petition must be verified by an affidavit in Form No. 10 sworn by the
petitioner or, if there is more than one petitioner, by one of the petitioners. Where the petition is
presented by a corporation, the affidavit shall be in Form No. 11 and shall be sworn by a
director, secretary or other principal officer of the corporation, and filed within four days after
the presentation thereof.
By Rule 24, every petition shall, unless presented by the company, be served upon the company
at its registered office, if any, and, if there is no registered office, at the principal or last known
principal place of business. Where the company is being wound up voluntarily a copy of the
petition must also be served upon the liquidator.
In Charles Forte Investments Ltd v Amanda (1964) it was explained that the court had
inherent power to restrain the presentation of a petition if it is of the opinion that the
presentation is vexatious or an abuse of the court. The court would also refuse to make an order
for winding up if the petitioner fails to show strong grounds as to why the company should be
wound up : Re: Davis Investment(East Ham) Ltd .
Section226 (2) of the Act provides that the winding up of a company by the court shall be deemed
to commence at the time of presentation of the petition for the winding up by the court.
This would not however be the case where, before the presentation, a resolution had been
passed by the company for voluntary winding up. In such a case the winding up shall be
deemed to have commenced at the time of the passing of the resolution.
2. Appointment of provisional liquidator
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Section 235 empowers the High Court to appoint the official Receiver to be the liquidator
provisionally at any time after the presentation of a winding up petition and before the
making of a winding up order. By section 230, the official receiver means the official
receiver attached to the High Court for bankruptcy purposes. The court is however empowered
by s. 231 to appoint some other officer to be the official Receiver, and hence the interim
liquidator, if by doing so a more convenient and economical conduct of winding up wound be
secured. The powers of the interim liquidator under the Act may be limited and restricted to any
extent by the court order appointing him.
3. Liquidator
Section 236(b) provides that, on a winding up order being made, the Official Receiver summon
separate meetings of the directors and contributories of the company for the purpose of
determining whether or not an application is to be made to the High Court for appointing a
liquidator in the place of the Official Receiver. It shall however not be necessary to summon a
meeting of contributories where the court has dispensed with the settlement of a list of
contributories. If there is a disagreement between the creditors and contributories as to who
should be appointed liquidator, the court shall decide the difference and make such order
thereon as it may think fit. If the court does not appoint a liquidator, the Official receiver shall
be a liquidator of the company. He shall also, by virtue of his office, be the liquidator during
any vacancy in the office of the liquidator. While discharging the duties of the office of
liquidator the official receiver shall be known as the official receiver and liquidator. Any
other person appointed liquidator shall be known as the liquidator.
4. Special Manager
Section 258(1) empowers the Official Receiver to apply to the court for the appointment of a
special manager where he is satisfied that the nature of the estate or business of the company,
or the interests of the creditors or contributories generally require the appointment of the special
manager. The court may then appoint the manager to act during such time as the court may
direct. By s.258 (2), the special manager shall give such security and account in such manner
as the Official Receiver shall direct.
Rule 40 of the Companies (Winding up) Rules provides that every special manager shall account
to the Official Receiver and the special managers accounts shall be verified by affidavit and
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when approved by the Official Receiver, to totals of the receipts and payment shall be added by
the Official Receiver to his accounts.
Section 258(3) provides that the special manager shall receive such remuneration as may be fixed
by the court. Under Rule 39(2), the remuneration shall, unless the court in any case otherwise
directs, be stated in the order appointing him. The court is empowered at any subsequent time,
for good cause, to make an order for payment of further remuneration.
5. Hearing of petition
Section 222(1) provides that on hearing of a winding-up petition the High Court may
(a)
Dismiss the petition; or
(b)
Adjourn the hearing conditionally or unconditionally; or
(c)
Make an interim order, or
(d)
Make any other order it thinks fit.
However, the court cannot refuse to make a winding up order on the ground only that the assets
of the company have been mortgaged to an amount equal or in excess of their value, or that the
company has no assets.
By section 222(2), where the petition is presented by members of the company as contributories
on the ground that it is just and equitable that the company should be wound up, the court shall
make a winding up order if it is of the opinion:
(i)
That the petitioners are entitled to relief either by winding-up the company or by some
other means, and

(ii)
That in the absence of any other remedy it would be just and equitable that the company
should be wound up.

However, the court needs not make an order if it is also of the opinion that some other remedy is
available to the petitioners and that they are acting unreasonably in seeking to have the
company wound up instead of pursuing the alternative remedy.
Where the petition is presented on the ground of default in delivering the statutory report to the
registrar or in holding the statutory meeting the court may:
(a) Instead of making a winding-up order, direct that the statutory report shall be delivered or that
shall be held, and
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(b) Order the costs to be paid by any persons who in the opinion of the court are responsible for
the default.
6. Winding-up order
Rule 37 provides that when an order that a company be wound up has been made:
(a)
Three sealed copies of the order shall forthwith be sent by the Registrar of the High
Court to the Official Receiver.

(b)
The Official Receiver shall serve upon the company by post one sealed copy of the order
and shall forthwith cause the order to be inserted in the Kenya Gazette. The fact of the order
having been made shall also be advertised in a newspaper circulating in Kenya
7. Effect of a winding-up order
The effect of the order is as follows
(a)
The Official Receiver becomes provisional liquidator and takes possession and control of
the assets of the company;

(b)
The liquidation is deemed to have begun at the time when the petition was first presented;
(c)
All the power of the directors cease;
(d)
any disposition of the companys property and transfer of its shares subsequent to the
commencement of liquidation is void unless the court orders otherwise:s.224;

(e)
any legal proceedings in progress against the company are halted ( and non may
thereafter begin) unless the court gives leave;

(f)
any attachment of the companys assets after commencement of liquidation is void;
(g)
all employees of the company are automatically dismissed.
8. Statement of affairs
By s. 232, within fourteen days of the making of the order for winding up, a statement of affairs
must be delivered to the Official Receiver verified by one or more directors and by the
secretary. The statement shall be in form no.21, verified by an affidavit and must show
particulars of the companys assets and liabilities and a list of all creditors with particulars of
any security which creditors may hold.
The Official Receiver may require any of the following persons to join in submitting the
statement of affairs:
(a)
present or past officers of the company;

177
(b)
employees who are or who have been in the service of the company within the previous
year if the official receiver is of the opinion that they can provide the formation required;
(c)
persons who have taken part in the formation of the company within the previous year,
(d)
the receivers or managers of the whole or substantially the whole of the companys
property.
The Official Receiver then makes a preliminary report to the court on the causes of the
companys failure and states whether in his opinion he should make further investigation and
report on suspected fraud. If he does so, this may lead on to the public examination in open
court of those believed to be implicated.
The Official Receiver is also empowered to call separate meetings of creditors and of
contributories within one month of the order for liquidation. Each meeting may nominate a
liquidator to replace the Official Receiver and also representatives to serve as members of a
committee of inspection (to work with the liquidator). The Official Receiver reports to the court
which may appoint a liquidator and a committee of inspection. If no other liquidator is
appointed (or if the post falls vacant) the Official Receiver continues to act as liquidator. A
liquidator must be an individual and may not be an undischarged bankrupt.
Notice of the order for compulsory liquidation and of the appointment of a liquidator is given to
the Registrar and in the Kenya Gazette. When the liquidator completes his task he reports to the
court, which examines his accounts, and makes an order for dissolution of the company. The
order is sent to the Registrar who gives notice of it in the Kenya Gazette and dissolves the
company.
If while the liquidation is in progress the liquidator decides to call meeting of contributories
or creditors, he may arrange to do so under the powers vested in the court
13.2.2 Voluntary Winding up

Section 271 (1) provides that a company may be wound up voluntarily:
a) When period, if any, fixed for the duration of the company by the articles expires,
or the events, if any, occurs, on the occurrence of which the article provides that
the company is to be dissolved, and company in general meeting has passed a
resolution requiring the company to be wound up voluntarily; or
b) If the company resolves by special resolution that the company be wound up
voluntarily. Section272(1) provides that when a company has passed a resolution
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for voluntary winding up, it shall within fourteen days after the passing of the
resolution, give notice of the resolution by advertisement in the Kenya Gazette,
and also some newspaper circulating in Kenya.
The Under Section 273, the winding up commences at the time of the passing of
resolution for winding up.
a) Declaration of Solvency
A voluntary winding up is a members voluntary winding up only if the directors make
and deliver to the registrar a declaration of solvency. The declaration is a statutory
declaration that the directors have made a full inquiry in to the affairs of the company and
are of the opinion that it will be able to pay its debts in full within a specified period, not
exceeding twelve months.
The declaration is made by all the directors or, if there are more than two directors, by a
majority of them. It must be in the form No. 27 and must include a statement of the
companys assets and liabilities as at the latest practicable date before the declaration is
made.
Under Section 27(2) the declaration shall have no effect unless it is made within the thirty
days immediately preceding the date of the passing of the resolution for winding up the
company and is delivered to the Register for registration before that date.
It is a criminal offence punishable by fine or imprisonment for a director to make a
declaration of solvency without having reasonable grounds for it.
In a members voluntary winding up the creditors play no part in the winding up
since they have been assured that their debts will be paid in full.
There is no committee of inspection on which creditors would be represented. The liquidator shall
also within three months from the end of the year following the commencement of the winding
up, call a general meeting of the company and lay before it an account of his acts and dealings
and of the conduct of the winding up during the preceding year.
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When the liquidation is complete the liquidator calls a meeting to lay before it his final accounts.
After holding the final meeting the liquidator sends a copy of his accounts to the Registrar who
dissolves the company three months later by removing its name from the register.
13.3.3 Creditors Voluntary Winding Up

Section 276 (4) provides that winding-up in the case of which no declaration of solvency is made
and delivered to the Registrar is to be known as creditors voluntary winding up. This would be
so even if in the end the company pays all its debts in full.
In order to commence as creditors voluntary winding up, the directors must convene a general
meeting of members to pass a special resolution for voluntary winding up. They also convene a
meeting of creditors by sending notices by post to creditors individually and advertising the
meeting once in the Kenya Gazette and once at least in a newspaper circulating in Kenya.
The meeting of members is held first and its primary duty is;
(a) To pass the resolution for winding up the company:
(b) To appoint a liquidator; and
(c) To nominate representatives to the committee of inspection .
The creditors meeting is convened for the same day as a later time than the members meeting or
it is held the following day. Section 286 (3) provides that the directors of the company shall:
(a) Cause a full statement of the position of the companys affairs together with a list of the
creditors of the company and the estimated amount of their claims to be laid before the
meeting of the creditors; and
(b) Appoint one of their numbers to preside at the said meeting.
The creditors meeting nominates a liquidator and up to five representatives of creditors to be
members of the committee of inspection. If the creditors nominate a different person to be
liquidator their choice prevails over the nomination by the members (subject to a right of appeal
to the court).
The main differences between a members and creditors voluntary winding up are that:
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(a) In a creditors voluntary winding up the liquidator, although responsible to members as well
as creditors, is selected by the creditors whereas in a members voluntary winding up he is
appointed by the members;
(b) In a creditors voluntary winding up the liquidator must obtain the approval (usually) of the
committee of inspection for the exercise of certain statutory powers whereas in a members
voluntary winding up he obtains approval from the members in a general meeting
(c) There is a committee of inspection in a creditors voluntary winding up with up to five
members, a majority of whom are appointed by the creditors whereas there is no committee
in a members voluntary winding up.
12.3.4 Winding Up Subject to Supervision

Section 304 provides that when a company has passed a resolution for voluntary winding up, the
court may make an order that voluntary winding up shall continue but subject to such supervision
of the court, and with such liberty for creditors, contributors, or others to apply to the court and
generally on such terms and conditions, as the court thinks just.
By section 305, a petition for the continuation of a voluntary winding up subject too the
supervision of the court shall, for the purpose of giving jurisdiction to the court over actions, be
deemed to be a petition for winding up by the court. Where the court makes an order it may
appoint an additional liquidator who shall be subject to the same obligations and stand in the
same position as if he had been appointed under an order for voluntary winding up.
Effect of supervision
Section 308 (1) provides that where an order is made for winding up subject to supervision the
liquidator may, subject to any restrictions imposed by the court, exercise all his powers, without
the sanction or intervention of the court, in the same manner as if the company were being wound
up voluntarily.
Defunct companies
Section 339 (i) provides that where the Registrar has reasonable cause to believe that a company
is not carrying on business or in operation, he may send to the company by post a letter inquiring
whether the company is carrying on business or in operation.
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Section 339 (2) further provides that if the Registrar does not within thirty days of the sending of
the letter receive an answer thereto, he shall within fourteen days after the expiration of the said
period of thirty days send to the company by registered post a letter referring to the first letter,
and stating that no answer thereto has been received, and that if an answer is not received to the
second letter within thirty days from the date thereof, a notice will be published in the Kenya
Gazette with a view to striking the name of the company off the register.
By s. 339 (3), if the Registrar either receives an answer to the effect that the company is not
carrying on business in operation, or does not within thirty days after sending the second letter
receice any answer, he may publish in the Kenya Gazette, and send to the company by post a
notice that at the expiration of three months from the date of the notice the name of the company
mentioned therein will, unless cause is shown to the contrary, be struck off the register and the
company will be dissolved. No letter need however be sent to the company where the company
itself or any director or the secretary of the company has requested the Registrar to strike the
company off the register or has notified him that the company is not carrying on business.
The powers conferred on the Registrar by Section 339 (3) in relation to defunct companies is also
extended to companies which are in the process of being wound up. The power becomes
exercisable if the Registrar has reasonable cause to believe either that no liquidator is acting, or
that the affairs of the company are fully wound up, and that the return required to be made by the
liquidator have not been made for a period of six consecutive months. He then publishes it in the
Kenya Gazette and sends to the company or the liquidator, if any, a notice that at the expiration of
three months from the date of the notice the name of the company will, unless cause is shown to
the contrary, be struck off the register and the company be dissolved.
By section 339 (5), at the expiration of the time mentioned in the notice the Registrar may, unless
cause to the contrary is previously shown by the company, or the liquidator, strike the name of
the company off the register and then publish notice thereof in the Kenya Gazette. The company
shall be dissolved on the publication of the notice in the Gazette. However, the liability, if any, of
every director, officer and member of the company shall continue and may be enforced as if the
company had not been dissolved. The power of the High Court to wind up a company whose
name has been struck off the register shall not be affected by the companys dissolution.
182
By s. 339 (6) if the company or any member or creditor of the company feels aggrieved by the
company having been struck off the register, the High Court may, on application made before the
expiration of ten years from the publication of the notice of dissolution in the Gazette, order the
name of the company to be restored to the Register of Companies. This could be done only if the
court if satisfied that:
(a) The company, at the time or sticking off, was carrying on business or in operation, or
(b) It is just that the company be restored to the register.
Section 340 provides that where a company is dissolved, all property and rights whatsoever
vested in or held in trust for the company immediately before its dissolution (but not-including
property held by the company in trust for any other person) shall be deemed to be bona vacantia
and shall belong to the government unless the court orders otherwise.
The meaning of winding up

The process of winding up by the court
The process of voluntary winding up
The process of creditors voluntary winding up
The process of winding up subject to supervision
183
Revision Questions
a) Explain the meaning of winding up
b) Explain the process of winding up by the court
c) Explain the process of voluntary winding up
d) Explain the process of creditors voluntary winding up
e) Explain the process of winding up subject to supervision
Pages 488-498

Pages 652--658

Pages 135-136
184
LESSON 14: COMPANIES AND THE STOCK EXCHANGE

a) List the reasons for listing in the stock exchange
b) Explain the major benefits of listing at the stock exchange
c) Describe the Nairobi stock exchange market segments
d) List down listing requirements at the Nairobi stock exchange general
eligibility requirements for public offering of shares and listing
e) Explain the responsibilities of a listed institution
f) Describe the role of the capital markets authority
14.1 Reasons for listing in the Stock exchange

Institutions list Securities primarily:
a) To unlock value . Sponsors, Promoters and Venture Capitalists use the
capital markets to exit their investments or share risk.
b) To raise funds for expansion and growth without the interest burden of
funds borrowed from lending institutions.
c) To improve the liquidity of their securities.
d) To increase public awareness about the institution and its products.
14.2 Major benefits of listing
a. Funds for expansion and growth without the interest burden.
b. Provides a market for securities .
c. Greater liquidity of securities.
185
d. Improves perception of an institutions financial stability and

transparency.
e. Objective valuation of securities by market forces.
f. Greater efficiency due to more rigorous disclosure requirements.
g. Greater public profile and awareness of the institution and its products.
14.3 The Nairobi Stock Exchange market segments
a. The Main Board
b. The Main Investment Market Segment (MIMS);
c. The Alternative Investment Market Segment (AIMS);
d. The Fixed Income Securities Market Segment (FISMS);
e. Futures and Options (FOMS)- to be implemented
f. Soon to be introduced (Distinct from the Main Board):Over the Counter
(OTC) Market Segment
14.4 Listing requirements at the Nairobi Stock Exchange
The Capital Markets (Securities) (Public Offers, Listing and Disclosures) Regulations,
2002, prescribes the eligibility requirements for companies listed under the different
market segments at the NSE. It also provides the continuous reporting and disclosure
requirements of listed companies. The following is a summary of the listing requirements
61
under the different market segments.

14.4.1 Main Investment Market Segment (MIMS)
1. Registration of the company under the Companies Act as a public limited company
limited by shares.
2. Minimum authorized, issued and fully paid up share capital of Kshs. 50 million and net
assets of Kshs.100 million before public offering of the shares.
3. Shares to be listed must be freely transferable and not subject to any restrictions on
marketability or pre-emptive rights.
4. The company must have published audited and financial statements in line with
international accounting standards for an accounting period ending not more than
186
three months prior to the proposed date of the offer. If more than three months have
lapsed, the company must prepare a set of interim un-audited financial statements for
the period following the end of the financial period as long as the period does not
exceed six months. If the period exceeds six months, the company must carry out an
interim audit for the period, or plan a date of offer immediately following the
completion of the next annual audit. The auditors report unqualified
5. The company should be solvent.
6. The company must not be in breach of any of its loan covenants particularly the
maximum debt capacity at the date of application for listing.
7. For a period of at least two years prior to the date of application, the directors of the
issuer must not have:
a. any proceedings in which he/she was convicted of fraud or any criminal offence, or
be the subject of pending criminal proceedings (for individuals) or any action or
offence within or outside Kenya (for corporate bodies).
b. Been the subject of any ruling of a court or governmental body that permanently or
temporarily prohibits him/her from engaging in any type of business practice or
activity, or acting as an investment adviser or as a director, employee, broker,
dealer of any financial institution.
8. The company must have declared positive profits after tax in at least three of the last
five completed accounting periods to the date of the offer.
9. At least 20% of the shares must be held by not less than 300 shareholders excluding
employees of the company following the public shares offering.
10. If the company is a banking or insurance company, it must obtain a clean certificate
from the relevant regulatory authority.
11. The Capital Markets Authority must approve the companys information
memorandum or prospectus.
14.4.2 Alternative investment market segment (AIMS)
1. Registration of the company under the Companies Act as a public limited company
limited by shares.
2. Minimum authorized, issued and fully paid up share capital of Kshs. 10 million and net
assets of Kshs.20 million before the public offering of shares.
187
3. Shares to be listed must be freely transferable and not subject to any restrictions on
marketability or pre-emptive rights.
4. The company must not be in breach of any of its loan covenants particularly maximum
debt capacity at the date of application for listing.
5. The company must have at least two non-executive and independent directors.
6. For a period of at least two years prior to the date of application, the directors of the
issuer must not have:
a. any proceedings in which he/she was convicted of fraud or any criminal offence, or be
the subject of pending criminal proceedings (for individuals) or any action or offence
within or outside Kenya (for corporate bodies).
b. Been the subject of any ruling of a court or governmental body that permanently or
temporarily prohibits him/her from acting as an investment adviser or as a director,
employee, broker, dealer of any financial institution or engaging in any type of
business practice or activity.
7. For at least one year prior to the application for listing the company must have suitably
qualified senior management with relevant experience. The management should not
have committed any offence considered inappropriate for the management of a listed
company.
The company should have a minimum of twenty-five investors. After listing, at least 20%
of the paid up capital should be held by not less than twenty-five investors excluding
any holding by employees or family members in a family owned enterprise. No
investor should hold more than 3% of the 20% of paid up capital.
9. The company must ensure that the existing shareholders, related persons or such other
group of controlling shareholders who have influence over the management,
undertake not to sell their shareholding before the expiry of twenty-four months
following the listing.
10. The company must have potential for growth and should have been in existence in the
same line of business for a minimum of two years.
11. A subsidiary whose parent company has a five-year track record may list provided
that the subsidiary has an operating track record of at least one year.
188
12. The accounts of the company must be audited and should not be older than four
months prior to the date of offer. The auditors report should be unqualified.
13. The company should be solvent.
14. The company should not use the proceeds of a public issue to redeem any loans
obtained prior to the listing by the directors or shareholders.
15. The company must disclose a clear policy on dividends.
16. A company listed on AIMS may only change to MIMS after satisfying the relevant
listing requirements and after a minimum of one year of listing on the AIMS.
17. The Capital Markets Authority must approve the companys information
memorandum or prospectus.
14.4.3 Fixed income securities market segment (FISMS)

Companies intending to list commercial papers or corporate bonds in the FIMS must
satisfy all the requirements under MIMS including the following:
1. The total indebtedness of the issuer, including the new issue of the commercial paper
or the corporate bond shall not exceed 400% of the companys net worth as at the
date of the latest balance sheet and as long as the commercial paper or corporate bond
remains outstanding.
2. The ration of funds generated from operations to total debt for the three trading periods
preceding the issue shall be maintained at a weighted average of 40% or more.
3. The directors and senior management of an applicant must have appropriate expertise
and experience for the management of the groups business. Details of their expertise
must be disclosed in the applications memorandum of information.
4. The directors must be free from any conflict of interest between the duties owed to the
company and their private interest.
5. The consent of the CBK or Commissioner of Insurance is required where there is a
guarantor who is either a bank or insurance company, except where the guarantor is
an offshore bank or insurance company not subject to the regulation of the CBK or
Commissioner of Insurance.
6. The guarantor is required to provide the CMA with a financial capability statement
duly certified by its auditors.
189
14.4.4 General eligibility requirements for public offering of shares and listing
a) Transferability of Securities : Securities must be freely transferable and not
subject to any restriction on marketability or pre-emption rights.
b) Undertaking: The Company must undertake to comply with the rules of the
market
c) Voting Shares: Only one class of voting shares which are the shares listed on the
Exchange.
d) Approval: All Companies seeking listing shall have their information memoranda
or prospectuses approved by the Capital Markets Authority.
e) Shares: Only fully paid shares are listed at the Exchange.
f) Dividend Policy: Clear future dividend policy.
g) Solvency and adequacy of working capital: Should not be insolvent.
h) Certificate of Comfort: If the issuer is listed in a securities exchange outside
Kenya or is licensed to operate as a bank or an insurance company the issuer must
obtain a letter of no objection from the relevant regulator.
i) Competence and suitability of directors and management: The issuer must not be
in breach of any of its loan covenants the maximum debt capacity.
As at the date of application and for a period of 2 years prior, no director shall
have:i.
Any petition under bankruptcy laws (individuals), winding up

petition (corporates);
ii.
Any criminal proceedings, nor be subject to any pending

criminal proceedings, or any offence or such action within or
outside Kenya;
iii.
Subject to any ruling of a competent court/Government body

that prohibits temporarily or otherwise from engaging in any
type of business practice or activity
190
14.5 Disclosure of periodic financial information

a) Dividends and interest
b) Such payments on issued securities should be notified to the securities exchange,
the Authority and the securities holders immediately upon declaration by means
of a press announcement.
c) The declaration shall be at least 14 days prior to the closing date of the register
and shall contain the following minimum information:
d) The closing date for determination of entitlements;
e) The date on which the dividend or interest will be paid; and
f) The cash amount that will be paid for the dividend or interest.
g) Interim and Preliminary Reports
h) An Issuer shall publish an interim report within 2 months of the end of the interim
period in the financial year and shall notify the Securities Exchange and the
Authority. Where an Issuer has subsidiaries, the said report shall be based on the
group accounts.
i) Annual Financial Statements
j) Every Issuer of securities to the public shall prepare an annual report containing
audited annual financial statements within 4 months of the close of its financial
year. A complete set of financial statements includes:
k) Balance sheet;
l) Income statement;
m) A statement showing either all changes in equity; or changes in equity other than
those arising from capital transactions with owners and distributions to owners;
n) Cash flow statements; and
o) Accounting policies and explanatory notes.
191
14.6 Communications with shareholders

a) Convening Meetings
b) Shareholder meetings shall be convened at least 21 clear days before such
meeting is held. Notices shall specify the place , date , hour and agenda of the
meeting.
c) The issuer will ensure that all the necessary facilities and information are
available to enable holders of its securities to exercise their rights. In
particular it shall:
d) Inform securities holders, meetings which they are entitled to attend;
e) Where applicable, enable them to exercise their voting rights; and
f) Publish notices or distribute circulars giving information on:
g) The allocation and payment of dividends and interest;
h) The issue of new securities, including arrangements for the allotment,
subscription, renunciation, conversion or exchange of the securities; and
i) Redemption or repayment of the securities.
j) Convening Meetings
k) If a circular is issued to the holders of any particular class of security, the
issuer shall issue a copy or summary of the same to the holders of all other
listed securities.
l) The issuer shall forward to the Securities Exchange and the Authority copies
of:
m) all circulars, notices, reports, announcements or other documents at the same
time as they are issued; and
n) All resolutions passed by the Issuer other than resolutions concerning ordinary
business at an AGM without delay after the relevant general meeting.
14.7 Responsibilities of a listed institution
a) Once on the Official List, the institution has a number of
responsibilities which can broadly be classified into:
b) Disclosure;
192
c) Corporate governance;
d) Investor relations.
e) Competence and suitability of directors and management :
f) Suitable senior management with relevant experience for at least 1
year prior to listing.
g) No change of management for a period of 12 months following the
listing other than for reason of a serious offence that may be
considered to affect the integrity or be inappropriate for management
of a listed company.
h) At least a third of the Board as non executive directors.
i) Every issuer shall establish an Audit Committee and comply with
guidelines on corporate governance issued by the Authority.
j) There should also be public disclosure in respect of any management
or business agreements entered into between the Issuer and its local or
foreign associated and related companies, which may result in a
conflict-of-interest situation
14.8 Role of the Capital Markets Authority
Pursuant to its mission, the CMA is guided by the following objectives:
a) Facilitate the creation of incentives for and the removal of impediments to longterm investments in productive activities.
b) Facilitate the existence of a market in which securities can be traded in an orderly,
fair and efficient manner, and ensure participation of the general public.
c) Protect investors from financial loss arising from failure of a broker or dealer to
meet his contractual obligations through a guarantee embodied in the
compensation fund.
d) Develop a framework through which electronic commerce may be used for the
development of capital markets in Kenya.
e) Develop new financial products to diversify the market and attract investors.
f) Facilitating the training and education of investors and other market participants.
g) Participate in the integration of the East African capital market.
193
h) Develop a legal and regulatory framework for the market. In this regard, the CMA
has formulated the following rules and regulations:
i.
Capital Markets (Licensing Requirements) (General) Regulations, 2002
ii.
Capital Markets (Securities) (Public Offers, Listing and Disclosure)

Regulations, 2002
iii.
Capital Markets (Takeovers and Mergers) Regulations
iv.
Capital Markets Authority, Foreign Investor Regulations, 2002
v.
Capital Markets Authority Fees Structure
vi.
Collective Investment Schemes Regulations, 2001
vii.
Corporate Governance Guidelines, 2002
viii.
Rating Agency Guidelines, 2001
The reasons for listing in the stock exchange

The major benefits of listing at the stock exchange
The Nairobi stock exchange market segments
Listing requirements at the Nairobi stock exchange general eligibility
requirements for public offering of shares and listing
The responsibilities of a listed institution
The role of the capital markets authority
194
Revision Questions
a) List the reasons for listing in the stock exchange
b) Explain the major benefits of listing at the stock exchange
c) Describe the Nairobi stock exchange market segments
d) List down listing requirements at the Nairobi stock exchange general
eligibility requirements for public offering of shares and listing
e) Explain the responsibilities of a listed institution
f) Describe the role of the capital markets authority

Kenya. Pages 94-109
195
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Box 342-01000 Thika

DEPARTMENT OF BUSINESS STUDIES

COURSE CODE: BBM411

Purpose of the course

Explain features of a company as a legal person

Describe the procedure of forming a company

Describe the procedure of holding a statutory meeting

Explain the general running of a company

The doctrine of indoor management

Lesson 4: The promoters

Types of types of share capital

Lesson 10: majority rights and minority protection

Meaning of majority power

Lesson 11: accounts and auditors

Instructional materials and equipment:

Gordon & Barrie, Commercial Law

C.R Newton, General Principles Of Law

Textbooks for further reading

C. Hamblin And F. Wright, Introduction To Commercial Law

Other support materials:

1.1 The Nature Of The Company.10

LESSON 2: MEMORANDUM OF ASSOCIATION

2.1 Meaning And Importance.....................................................................................31

LESSON 3: ARTICLES OF ASSOCIATION

3.1 Meaning Of Articles Of Association....................................................................44

4.1 Definition Of Promoters................................................................................... ...56

4.2 Functions Of Promoters.......................................................................................58

5.1 Definition Of Prospectus.......................................................................................69

6.1 Definition Of Floatation..........................................................................................77

LESSON 8: THE LAW OF MEETING

8.1 Meaning Of Meeting..........................................................................................96

9.1 Meaning Of Share Capital.................................................................................127

LESSON 10: MAJORITY RIGHTS AND MINORITY PROTECTION

10.1 Majority Power...........................................................................................144

LESSON 11: ACCOUNTS AND AUDITORS

LESSON 13: WINDING-UP

13.1 Meaning Of Winding Up................................................................................165

LESSON 14: COMPANIES AND THE STOCK EXCHANGE

14.1 Reasons For Listing In The Stock Exchange.........................................................184

LESSON ONE: THE COMPANY AS A FORM OF BUSINESS ORGANIZATION

By the end of this lesson you should be able to:

d) Explain the effect of registration

1.1 The Nature of the Company

1.2 Classification of Companies

b) A company formed by any two or more person. Such a company is referred to in

(b) The companys registration constitutes it a body corporate. It becomes a legal

In the case of a corporation, its corporate name and registered or principal

Practical consequences of registration

attribute of corporate personality which is given practical effect in the following

d) Suing and being sued

1.6 Advantages of incorporation

money in industrial ventures carried on by limited companies because they

professionalisation of management which is necessary for the efficient

2. Prevention of Fraud or Improper Conduct

Prosecution of Delinquent Officers and Members of Company

Summary for the topic

d) Explain the effect of registration

Text Books For Further Reading

Oliver.m,Marshal E.A,Company Law pitman publishing London UK Pages 1-26

Abbot.K, Penddle.N,Wardman.K (2002)Business Law. Continuum London UK

LESSON 2: MEMORANDUM OF ASSOCIATION

Clause 1: The Name

Clause II: Registered Office