INTRODUCTION TO COMPANY LAW NOTES

INTRODUCTION TO COMPANY LAW

The exact scope of company law is difficult to define, on account that the laws of Kenya do not define the term in testament to the words of Buckley J in Re: Stanley (1906) “The word company has no strict legal meaning”

However, section 3 (1) of the Companies Act it is provided that a company refers to “A company formed and registered under this Act or an existing company;”

A company may be defined as an association of persons formed for the purpose of some business or undertaking which has a legal personality separate from its members.

COMPANY LAW

This is a study of the rules and principles that governs and regulates the affairs of that which the law recognizes as a company.

Kenya’s company law is contained partly in the Companies Act and the substance of common law as modified the doctrines of equity. The basic principles and propositions of Company Law are judicial pronouncements.

The Foundation of Company Law

It is based on two fundamental principles.

  • Legal or corporate personality.
  • Theory of limited liability.

Legal or Corporate personality

This principle means, when a company is registered it becomes a legal person separate and distinct from its members and managers. It acquires an independent existence with certain capacities and subject to incapacities. This

 

principle was first formulated in the House of Lords in the matter of Salomon V Salomon Co Ltd., where Lord Mc Naughton was emphatic that the company is at law a different person altogether from the subscribers to the memorandum.

This principle is now contained in the Companies Act which provides inter alia”

“From the date of incorporation mentioned in the certificate of incorporation, the subscribers to the memorandum together with such other persons as may be members from time to time, shall be a body corporate the name contained in the memorandum capable of exercising all the functions of an incorporated company with perpetual succession and a common seal.”

In Salomon’s case, Salomon was a leather merchant who formed a company called Salomon &

Company Ltd, with a capital base of £ 40,000 divided into 40,000 shares of £1 each. Its members were Mr. and Mrs. Salomon, their 4 sons and 1 daughter. Each took one share. Subsequently, Salomon sold his business to the company for £39,000 which was paid £1,000 in cash, £20,000 in shares and £10,000 debentures secured assets of the company. The balance of £8,000 discharged the debts of the company incurred before the purchase. The company had unsecured creditors. Shortly afterwards, it was wound up. Its assets were only sufficient to pay the secured creditors. The liquidator sought to have Salomon held liable for other debts of the company and the Court of appeal agreed. However, the House of Lords reversed the decision regarding the liability, holding that since the company was properly incorporated, it was a legal person distinct from Salomon himself. As such he was not liable for its debts. In the words of Lord Mc Naghton:

“In order to form a company limited shares, the Act requires that a memorandum of association must be at least signed 7 persons who are each to take at least one share. If the mentioned conditions are complied with what can it matter whether the signatories are relatives or strangers? … The company attains maturity on its birth; there is neither a period of minority nor interval of incapacity… The company is at law a different person altogether from the subscribers to the memorandum and though it may be after incorporation, the business is precisely the same as it was before and the same persons are mangers and the same hands received the profits, the company is not in law the agent for the subscribers or trustee for them, nor are the

subscribers as members liable in any share or form except to the extent and manner provided the Act.

Theory of limited liability

Liability refers to the extent to which a person may be called upon to contribute to the assets of a company and in the event of its being wound up.

The liability of a company may be limited or unlimited. It may be limited shares or guarantee.

Types of Companies

Although company law is concerned with registered companies our Kenyan law recognizes other corporations which shares attributes similar to those of the registered company.

  • Corporations Sole.

This is a legally established office distinct from the holder and can only be occupied one person after which he is succeeded another. It is a legal person in its own right with limited liability, perpetual succession, capacity to contract, own property and sue or be sued. E.g. include the Office of the public trustee and the Office of the Permanent Secretary to the Treasury.

  • Corporations Aggregate

This is a legal entity formed two or more persons for a lawful purpose and whose membership consists of at least two persons. It has an independent legal existence with limited liability, capacity to contract, own property, sue or be sued and perpetual succession. E.g. public and private companies.

  • Registered Corporations

These are corporations created in accordance with the provisions of Companies Act. Such companies come into existence only when they are registered under the Companies Act. Certain documents must be delivered to the Registrar of companies to facilitate registration of the company. Such companies come into existence only when they are registered under the Act and a certificate of incorporation issued the Registrar of companies. E.g. memorandum of association, Articles of association, statement of nominal capital.

 

  • Registered companies may be classified as under:

Companies Limited Shares

These are companies having the liability of the members limited the memorandum to the amount, if any, unpaid on the shares held, beyond which the member is not liable. In Salomon’s case, Salomon was not liable to contribute the assets of the company as his shares were fully paid. If a member has paid the entire value of his shares, he does not owe any further liability to the company and if he has partly paid the value of his shares, the liability of such member is limited to the value of the unpaid amount of their shares held them. The liability of the shareholder to pay the unpaid amount can be enforced during the existence of the company or during its winding up.

If the company is registered as limited it must add the words “LTD” at the end of its name. If the company uses the word “limited” as part of its name when actually it is not registered, it commits an offence.

  • Companies Limited Guarantee
    • These are companies having liability of its members limited to the amount which they have undertaken to contribute to the assets of the company in the event of its being wound up while they are still members or within one year of cessation of membership.
    • It does not have a share capital
    • Its certificate of incorporate states that it is a company limited guarantee.

N.b: Subsection (1) does not prohibit a company limited guarantee from having a share capital if it was formed and registered before the commencement of this section.

  • Unlimited liability Companies

These are Companies not having the liability of their members limited the memorandum. Such members are liable to lose private assets in the event of the company’s insolvency.

 

  • Registered companies may also be classified as under iv. Private companies

Private companies are identified under section 9(1) of the Companies Act which provides that a private company is a company which, its Articles of association,

  • Public companies

A public company must have a minimum of 7 members.

  • Statutory Corporations

These are corporations created Acts of Parliament or an order of the President in accordance with the provisions of Section 3 (1) of the State Corporations Act (Cap 446).

A state corporation is a legal person with perpetual succession. In case of a corporation created an Act of Parliament, the Act gives it a name, management structure and prescribes the objects. E.g. Kenya Wildlife Services, Agricultural Finance Corporation, Public Universities, Central Bank etc.

  • Chartered Corporations

These are corporations created a charter granted the relevant authority.

The charter constitutes the association a corporation the name of the charter. E.g. Private Universities are chartered corporations under the Universities Act, Chapter 210 Laws of Kenya. To establish a private university, an application must be made to the Commission for Higher Education which forwards the same to the Minister for Education who in turn forwards the same to the President for the grant of a charter.

The Charter must set out the name, membership, powers and functions of the University. Under Section 14 of the Universities Act, a private University becomes a legal person when the charter is published in the Kenya Gazette the Minister in charge.

  • One Man Company

In these companies, the one man holds practically the entire share capital of the company.

Such a company is perfectly valid in the eyes of the law. It has its own entity which is separate from the entity of its member.

The new Companies Act 2015 introduces a one man company as provided in sec 11(1) which states; one or more persons who wish to form a company may subscribe their names to a memorandum of association.

Formation      of      Registered       companies

Preliminaries

These are the factors to be taken into consideration and to be ascertained before a company is formed.

  • The name of the company.

It is the duty of promoters to determine and set the company’s name. This is because a company can only be identified its name. Promoters have the liberty to give the company any name. However, there are certain statutory restrictions.

  • Public or private company.

Promoters must determine whether the company they intend to form is public of private.

Characteristics of a private company

Private companies are identified under section 30(1) of the Companies Act which provides that a private company is a company which, its Articles of association,

  • Limits the number of members to 50 excluding current and former employees who are members.
  • Restricts the rights to transfer its shares.
  • Prohibits any invitation to the public to subscribe for its shares or debentures.
  • It must have at least one director.
  • It must also have at least 1 member.
  • It is entitled to commence business from the date of incorporation.
  • It is not required to publish accounts or hold statutory meetings.
  • It is emto give loans to its directors.

Characteristics of a public company a public company:

  • Must have a minimum of 7 members.
  • Must have at least 2 directors.
  • Its shares must be freely transferable.
  • It must hold a statutory meeting (AGM)
  • It requires a certificate of trading to commence business or exercise borrowings powers (This is after getting the certificate of incorporation)
  • If quoted it must publish its annual accounts.
  • It may not give loans to its directors.

Advantages of a private company over a public company

  • Subscription. The formation of a private company requires only a minimum of two subscribers to the memorandum of association. This makes the choice of such companies most suitable for family or friendly concerns. Whereas a public company requires a minimum of seven subscribers to the memorandum of association.
  • Commencement of business. A private company may commence business immediately after incorporation, and allot shares whereas a public company with share capital cannot commence business as such till has been issued with a trading certificate.
  • Statutory meeting. A private company is not required to hold a statutory meeting or send statutory reports to its members.
  • Exemption from prospectus. Issuing of prospectus is prohibited. A private company is, therefore exempt from all requirements of the Act relating to the prospectus.
  • Directors. Where the articles appoint directors, they do not have to file with the registrar consent to act or undertaking to take qualification shares.
  • A private company shall have at least one director and a public company two directors. A private company does not need to keep an index of members.

viii. Annual accounts. A private company is exempted from publication of its annual accounts in the local dailies. This is the statutory obligation of a company.

  • Whether liability is limited shares or guarantee.

Companies formed for trading purposes have their liability limited shares while those formed for non-commercial purposes have their liability limited guarantee.

  • Whether or not the company has share capital.

Shares are the units into which the company’s capital is divided. They are the units of ownership.

Whether a company has share capital depends on:

  • The intention of promoters.
  • Limitation of liability. A company limited shares must have share capital. A company limited guarantee may or may not have share capital. On the other hand an unlimited company may or may not have share capital.

Section13-16 of the Act prescribes the minimum conditions in company formation.

Under it any 7 or more persons or if the company to be formed is public, any 1 or more persons if the company is private may, subscribing their names to a memorandum of association and complying with the provisions of the Companies Act relating to registration, form an incorporated company with or without limited liability.

 

THE FORMAL PROCEDURE OF COMPANY FORMATION

  • Application and reservation of name.

 

Under section 48 of the Act, the Registrar may, on written application, reserve a name pending registration of a company or change of name a company.

The reservation of a name remains in force for a period of thirty (30) days

  • Preparation of Registration Documents

 

In order to successfully complete registration, a company must register the following documents with the registrar of companies:

 

Application for registration (Form CR1)

  • Memorandum of association (Form CR2-Limited companies shares, Form CR3-limited companies guarantee, Form CR4-Unlimited companies)
  • Articles of association (this is the company’s constitution)
  • Notice of residential address of directors (Form CR8)
  • A statement of nominal capital
  • Presentation of documents

Under section 15 of the Act, the constitutive and other documents must be presented to the Registrar for registration of the company. The Registrar must satisfy himself that the documents have been prepared in accordance with the provision of Companies Act.

 

  • Registration and issue of certificate of incorporation

The Registrar registers the memorandum and issues a certificate of incorporation under his hand therecertifying that the company is duly incorporated. The company comes into existence on the date mentioned in the certificate of incorporation.

The company seal is formally prepared after the Certificate of incorporation has been issued

Differences between Limited companies and partnerships

Section 3 of the partnership Act defines a partnership as a relationship between two or more persons carrying on business together with the view of making profit. The partnership can be distinguished from a limited company as follows:

  • Formation: a company undergoes elaborate legal procedures to come into existence, for example, a company requires registration with the registrar of companies whereas for a partnership registration is not compulsory.
  • Legal personality. A company has legal personality and is distinct from its members whereas a partnership has no legal personality and is made up of the members who compose it.
  • Membership. The minimum number of members in a partnership is two and a maximum of twenty whereas the minimum number in a private company is two and maximum of fifty. In a public company minimum of seven and an unrestricted maximum.
  • Transferability of shares. Shares in a company are freely transferable whereas a partner cannot transfer his shares without consent of the other partners.
  • Scope of business. The scope of business of the company is limited to the object clause of the memorandum of association whereas scope of business of a partnership is not restricted.
  • Management. The business of the company is run the board of directors whereas every member of a partnership firm is involved in the business of the firm.
  • Agency. Partners are agents to each other in the carrying of business of the firm, whereas members of a limited company are not agents to each other.
  • Dissolution. An act of the parties. For example, agreement, notice etc, render the partnership dissolved whereas dissolution of the company requires elaborate legal procedures.

 

COMPANIES INCOPORTED OUTSIDE KENYA (FOREIGN COMPANIES)

 

It has been said that no man is an island and the company being a juridical person is no exception. There is need to incorporate foreign companies to encourage healthy completion. In the recent various foreign companies have been incorporated in Kenya for instance Oilibya from Libya.

Foreign companies are companies incorporated outside Kenya which, after the appointed day, establish a place of business within Kenya and companies incorporated outside Kenya which have, before the appointed day established a place of business within Kenya

Requirements for the Registration of a Foreign Company

The Registrar shall approve the application for registration and register the company entering its name and other particulars in the Foreign Companies Register if the application-

  • Contains the information prescribed the regulations for the purposes of this section;
  • Demonstrates that at least thirty percent of the company’s shareholding is held Kenyan citizens birth;
  • Is accompanied the prescribed fee, if any, and the required documents; and
  • Complies with the requirements of this Part with respect to the company’s name and the appointment of a local representative.

 

The documents required to accompany the application the foreign companies are

 

  • Certified copy of the foreign company’s current certificate of Formation or incorporation or registration in the company’s place of origin, or a document of similar effect;
  • A certified copy of the company’s constitution (memorandum and articles of association);
  • A list of the names of the company’s directors and shareholders, and their personal details;
  • A memorandum executed or on behalf of the company indicating the powers of directors, if any, who reside in Kenya and are members of a local board of directors;
  • In respect to any existing charge on property of the foreign company that would be a registrable charge if the foreign company were a company incorporated in Kenya, the documents that would be required to be lodged for registration with the Registrar of Companies;
  • Notice of the address of the company’s registered office in its Country of origin, if any; otherwise, the address of its principal place of business in its place of origin; and
  • Notice of the address of the company’s registered office in Kenya.

 

Registering a foreign company

On registering a foreign company, the Registrar shall — (a) Allocate a unique identifying number to the company.

Issue to the company a certificate of registration

Contents of a certificate of registration

A certificate of registration complies with this subsection if it states

  • The name of the company and its unique
  • Identifying number and the fact that the company is registered under this Act as a foreign company;
  • The date of its registration as a foreign company
  • The date of its incorporation in its place of origin

 

Requirements with respect to name, of foreign company’s foreign company shall include particulars of the name

Registered foreign company shall paint or affix and keep painted or affixed, in a conspicuous position and in letters easily legible, on the outside of every office and place (including its registered office) that is in Kenya, at which its business is carried on and that is open and accessible to the public.

State its name and other specified information in prescribed classes of documents and communications relating to its business in Kenya

  • its name and the name of its place of origin;
  • If the liability of its members is limited and the last word of its name is neither the word “Limited” nor the abbreviation “Ltd.”—notice of the fact that the liability of its members is limited; and
  • in the case of its registered office—the expression “Registered Office

The name of a foreign company must be contained in the following documents

  • In every prospectus inviting subscriptions for its shares or debentures in Kenya; and
  • On every place where it carries on business in Kenya;
  • In all bill-heads and letter paper, and in all notices and other official publications of the company; and;
  • If the liability of the members of the company is limited, cause notice of that fact to be stated in the places mentioned above.

 

Consequences of failure to comply with rules relating to the name of the company

 

If a registered foreign company fails to comply with subsection (1), the company and each officer of the company who is in default, commit an offence and on conviction are each liable to a fine not exceeding one hundred thousand shillings.

Prospectus of a foreign company

The prospectus of a foreign company is subject to almost the same rules as that of a company incorporated in Kenya. It is unlawful to issue in Kenya a prospectus offering for subscription shares or debentures of a company incorporated outside Kenya unless the prospectus is dated and contains the following particulars:

  • The instrument defining the companies constitution
  • The enactment under which the company is incorporated
  • The address in Kenya where this instrument can be inspected
  • The date and country of incorporation
  • The address of the principal place where it carries on its business in Kenya, if any. Note: An application for shares must be accompanied proper prospectus and a statement an expert, if that he has given and has not withdrawn his consent to the issue of the prospectus in Kenya. A copy of the prospectus must be filed with the registrar.

Local representatives of foreign companies

A foreign company must have at least one local representative in relation to whom the foreign company has complied with the prescribed requirements of the foreign companies regulations relating to local representatives of foreign companies.

Within one month after a registered foreign company has appointed a person as a local representative of the company in Kenya, the company shall lodge with the

Registrar for registration a notice of the appointment, specifying the person’s name and residential address and such other particulars (if any).

Death of a local representative

Within one month after a person who is a local representative of a registered foreign company has died, resigned or otherwise ceased to hold office as such, the company shall lodge with the Registrar for registration a notice to the effect that the person has ceased to be a local representative of the company in Kenya.

 

Liability of a local representative

A local representative of a registered foreign company-

  • is answerable for the doing of all acts, matters and things that the company is required or under the Act to do;
  • And is personally liable to a penalty imposed on the company for a contravention of, or failure to comply with, the Act if the Court hearing the matter is satisfied that the local representative should be so liable.

Liability of representatives appointed in the company

If a registered foreign company has two or more local representatives, those representatives are jointly and severally Answerable for the doing of all acts and things that the company is required or under this Act to do; and

Personally liable to a penalty imposed on the company for a contravention of, or failure to

 

Required office

A registered foreign company shall establish and maintain a registered office in Kenya to which all communications and notices may be addressed.

Rules on the registered office

The company shall ensure- o That its registered office is kept open on each business day from at least 10 a.m. to 12 noon and from at least 2 p.m. to 4 p.m.; and

  • That a local representative of the company is present at all times when the office is open.
  • The company shall lodge with the Registrar for registration a notice of the hours between 9 a.m. and 5 p.m. on each business day during which the body’s registered office in Kenya is kept open.
  • The company shall, within seven days after making a change in the location of its registered office in Kenya, lodge with the Registrar for registration a notice of the change and of the new address of that office. o The company shall, within seven days after making a change to the hours during which its registered office in Kenya is kept open, lodge with the Registrar for registration a notice of the change.

 

Consequences of failure to comply with rules relating to the registered office

 

If a registered foreign company fails to comply with a requirement of this section, the company and each officer of the company who is in default, commit an offence and on conviction are each liable to a fine not exceeding two hundred thousand shillings.

 

Notice of changes made the foreign company

A registered foreign company shall, within one month after a change occurs in the following submit the changes to the registrar of companies:

  • Its constitution or any other document lodged in relation to the company; b. Its directors;
  • The powers of any directors who reside in Kenya and members of a Kenyan board of directors of
  • The company; or
  • A local representative or local representatives;
  • The name or address of a local representative; or
  • The location of its registered office

 

Copies of registered foreign company’s financial statements and other documents to be lodged with Registrar.

 

A registered foreign company shall, at least once in every calendar year and at intervals of not more than fifteen months, lodge a copy of its financial statement made up to the end of its last financial year, in such form and containing such particulars, and including copies of such documents, as the being applicable to that company in its place of origin, together with a statement in writing, supported a statutory declaration, verifying that the copies are true copies of the documents so required.

 

Circumstances in which name of registered foreign company can be struck off or restored toRegister of Foreign Companies

 

  • Within one month after a registered foreign company has ceased to carry on business in

Kenya

  • Within one month after a registered foreign company has been dissolved or deregistered in its place of origin,
  • Where the registrar has reasonable cause to believe that a foreign company has ceased to have a place of business in Kenya
  • If he registrar receives a reply to the effect that the company has ceased to have a place of business in Kenya
  • It is conducting illegal trade
  • If it has attained an enemy character
  • is carrying on such a business without having a local representative

 

If a foreign company’s name is struck off the register under subsection (3), the company ceases to be registered

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