Week 1: Thursday 21st July 2022
We went through the Course Outline
Week 2: Thursday 28th July 2022
TOPIC: The Meaning & Historical Development of Companies
→ Throughout this discussion, it is important to keep in the mind these two key points:
✓ Companies are not an end unto themselves, they exist in order to facilitate commerce
and industry in any society. Therefore, their nature and character has been informed
by the demand of commerce & industry in that society.
✓ Law develops in tandem with the growth & development of any society.
Consequently, the law concerning regulation of societies has been determined by the
need to meet certain ends and address certain challenges in the society. The law will
always evolve to meet the demands/needs of commerce & industry in the society.
THESE POINTS ARE VERY IMPORTANT. THEY GIVE US THE BIGGER PICTURE
OF THE COURSE WE ARE GOING TO LEARN ***
→ 2015 – New Companies Act was enacted in order to ensure that existing laws that
regulate companies create the kind of companies that would serve the needs of Kenya
at that time/meet the existing demands in the market. This has been the case since
early periods when there were different formations that became companies.
→ Over the years, the meaning and the legal status of companies has evolved to meet the
demands & needs of commerce & industry. (The meaning on “company” varies
depending on the context)
→ Meaning of “company” is dependent on the existing laws that created the entity
→ For example, Limited Liability companies have certain characteristics that are
different from a corporation.
→ The definition & nature of companies is determined by the context in which it is
used.
Section 3 Companies Act 2015
“company” means a company formed and registered under this Act or an existing company –
not a proper definition of the entity in terms of characteristics
Section 3 Companies Act CAP 486
“company” means a company formed and registered under this Act or an existing company;
→ Prior to the enactment of the Companies Act 2015, the entity that was known as a
company was an entity that was registered and managed according to the provisions
of the Companies Act CAP 486.
→ Definition of Company – An entity registered/incorporated and managed in line with
the requirements of the Companies Act 2015 or an already existing company. ***
→ This definition is a reflection of the definition of the word company under the
Companies Act CAP 486 which is now repealed.
→ STATEMENT HERE
→ The concept of incorporation and the various associations as seen today can be traced
back to the Medieval Period or the Middle Ages (5th to the 15th Century)
→ Existence of entities that are separate from the members has been there since the
Medieval Period. The term “incorporation” was used in relation to ecclesiastical and
public bodies such as Chapters and Monasteries; these entities had a corporate
personality granted to them by the Crown. Initially, incorporation was dependent on a
state of grant (Royal Charter from the Crown) or statute.
→ TWO STATEMENTS HERE
YOU MISSED THE ENTIRE VIRTUAL CLASS – 2
HOURS YOU NEED TO CATCH UP ***
Week 3: Thursday 4th August 2022
TOPIC: The Concept of Legal or Corporate Personality
Foundational Ideas for this class
1. If companies exist as a separate legal entity, they have the veil of incorporation:
(a) Have rights and duties distinct from those of their shareholders or members
(b) The companies also shoulder liabilities that arise out of activities undertaken during
the ordinary course of business
2. The veil of incorporation/Corporate veil can be lifted or pierced under certain
circumstances – the Directors of the company or the officers of the company may be
held liable or put under investigation
A. Companies as Separate Legal Entities
→ A company is a separate legal entity from its owners/shareholders
→ The Law treats a company as a legal person capable of having rights & duties. It,
therefore, has the power to:
 Own property
 Enter into contracts under its own name
 Institute a suit on its behalf & defend itself in a suit [Ability to sue and be sued]
♦ Salomon v Aron Salomon & Company Ltd
✓ Locus Classicus: VERY IMPORTANT *****
→ Laid down the principle of Corporate Personality otherwise known as the Salomon
Principle: that a company is a separate legal person from its directors, shareholders,
employees and agents.
Facts + Decision Summary:
→ Salomon converted his sole proprietorship into a company limited by shares. The
subscribers to the shares were himself, his wife, his daughter & four sons. [He had
20,0001 shares while the rest had 1 share each – requirement by Companies Act to
have 7 subscribers with at least one share each]
→ Salomon issued debentures to 2 people – unsecured loan certificate issued the by the
company – usually used by large companies to borrow money & the evidence a
company’s liability to pay a specified amount with interest.
→ Later company went into liquidation, the 2 creditors claiming the company was a
sham, an agent of Salomon & that since Salomon was the majority shareholder, he
should shoulder the liabilities of the company.
House of Lords: If a company is in existence, it is a separate egal entity from its
owners/shareholders.
➢ Shareholders cannot be personally liable for the insolvency of the company ****
♦ Macaura v Northen Assurance Co. Ltd (Insurer) [1925]
Facts + Decision Summary:
→ Appellant – owner of a timber estate. Sold all the timber to a company which in turn
allotted him shares equivalent to the worth of the timber. [42,000 pounds – No other
shares were ever issued by the company making the appellant the majority
shareholder.]
→ Different occasion: the appellant loaned the company 19,000 pounds.
→ Appellant insured the timber against fire by policies effected in his own name. Fire
destroyed the timber. Insurance Company refused to indemnify because appellant had
no insurable interest in the timer at the time of effecting the insurance policy.
Appellant sued.
Court Held: Appellant had no insurable interest because timber belonged to the company.
Even though he was the majority shareholder & a creditor of the company, the company was
a separate legal entity, therefore, he could not insure the company’s assets.
EFFECT: Upholding the Coporate Personality of the company
♦ Lee v Lee’s Air Farming Ltd [1961]
Facts + Decision Summary:
→ Lee was a pilot who incorporated an Air Farming Company with 3000 shares divided
into 1-pound shares. Of these, he owned 2,999 and the remaining one share was held
by a third party as his nominee.
→ In his capacity as majority/controlling shareholder he voted himself Managing
director and in the capacity of his post, appointed himself Chief Pilot of the company.
He lost his life while working as a pilot for the company and his widow sought
compensation under Workmen’s compensation Act.
Court upheld the widow’s appeal. (Used Salomon v Salomon as precedent)
Rationale? Corporate Personality enabled Lee to be master and servant at the same time.
Therefore, since Lee was a worker of the Air Company, his widow was entitled to
compensation for her husband who died while serving the company as a pilot.
NB: Kenyan cases that demonstrate this principle: (Read them)
(a) Joseph Kobia Nguthari v Kiegoi Tea Factory Company Limited & 2 others [2016]
(b) Githunguri Dairy Farmers Co-operative Society v Ernie Campbell & Co. Ltd &
another [2018] eKLR
❑
Joel Ndemo Ong’au & another v Loyce Mukunya [2015]
– The veil of incorporation is not to be lifted merely because a company has no assets or it is
unable to pay its debts. ***
❑ Advantages of Incorporation
→ These are the benefits of having a Company as a Separate Legal Entity from its
Owners:
✓ Transferability of shares
✓ Can own property under its own name
✓ Can sue or be sued in its own name
✓ Borrowing facilities – for example, Issuance of Debentures
✓ Perpetual Succession –
✓ Limited Liability – the shareholders will not be called upon to bear or shoulder
liabilities incurred by the company
B. Corporate Veil
→ Once a company is incorporated, it enjoys its own rights separately from those of the
shareholders or directors.
→ Salomon v Salomon – established that a company is a separate & distinct entity from
the members, HOWEVER, there are circumstances in which the principle of
corporate personality is disregarded.
Mugenyi & Company Advocates v The Attorney General (1999)
Locus Classicus: lists 10 instances where corporate veil can be lifted:
(i) Where companies are in the relationship of holding and subsidiary companies’
(ii) Where a shareholder has lost the privilege of limited liability and has become directly
liable to certain creditors on the ground that business continued after the membership had
dropped below the legal minimum, to the knowledge of the shareholder;
(iii)
In certain matters relating to taxation;
(iv)
In the law relating to exchange control;
(v)
In the law relating to trading with the enemy;
(vi)
In the law of merger control in the United Kingdom;
(vii) In competition of the European Economic Community;
(viii) In abuse of law in certain circumstances;
(ix) Where the device of incorporation is used for some illegal or improper purpose; and
(x) Where the private company is founded on personal relationship between the members.
Piercing the Corporate Veil/Lifting the Veil of Incorporation
1. FRAUDULENT TRANSACTIONS
→ Section 787 Companies Act 2015 – empowers a court to investigate company affairs
on account of Fraud.
→ Such investigations can be done in the following circumstances:
(a) That the company's business is being conducted—
(i) With intent to defraud its creditors or the creditors of any other person or otherwise for a
fraudulent or unlawful purpose; or
(ii) In a manner oppressive to its members or to any part of them;
(b) That the company was formed for a fraudulent or unlawful purpose;
(c) That persons responsible for the company's formation or the management of its affairs
are or have been guilty of fraud, misfeasance or other misconduct towards it or towards its
members;
(d) That the company's members have not been given all the information with respect to
its affairs that they might reasonably expect to have been given; or
(e), that it would be in the public interest to do so.
♦ Re William C. Leitich Ltd (1932)
Facts + Decision Summary:
→ The company was insolvent but continued to carry on its business and purchased
further goods on credit. As a result, the liquidator requested that the company director
be held personally liable for carrying on the business of the company with the intent
to defraud its creditors.
In holding the director liable, Maugham J:
✓ If a company continues to carry on business and to incur debts at a time when there is,
to the knowledge of the directors, no reasonable prospect of the creditors ever
receiving payment of those debts, it is, in general, a proper inference that the company
is carrying on business with intent to defraud. ****
Insolvency – Director’s Personal Liability – Fraud – Intent to defraud creditors
♦ Re Patrick Lyon Ltd
Maugham J: “the words fraud and fraudulent purpose where they appear in the Section in
question are words which connote actual dishonesty involving according to the current
notions of fair trading among commercial men real moral blame. No judge has ever been
willing to define fraud and I am attempting no definition.”
2. HOLDINGS & SUBSIDIARIES
→ Section 2 Companies Act: meaning – “subsidiary” means a company of which another
company is its holding company
→ Subsidiary Company – An independent company...
→ Holding Company – partially or wholly owns a subsidiary company
✓ The veil of incorporation can be lifted where the parent company dominates the
subsidiary company to the extent that the latter does not demonstrate a separate legal
existence
How to ensure that a Subsidiary Company maintains its separate legal existence
Have its own pool of funding
Having its own assets & documentation
Ensuring independent management or leadership distinct from that of the holding company
3. MISDESCRIPTION OF COMPANIES
Where a company is transacting business, its name should appear in all the documents – to
protect members of the public from being defrauded.
4. AGENCY RELATIONSHIP
Companies carry business as agents of parent companies or subsidiary companies
Between one company and another or between the company its shareholders (Smith Stone &
Knight v Birmingham Corporation)
5. EXPLOITATION OF MINORITY SHAREHOLDERS
Where there is fraud or improper conduct, the courts will immediately disregard the corporate
entity of the company – where a company is formed for a fraudulent purpose or to facilitate
the evasion of legal obligations
Case: Re Bugle Press Ltd (1961)
→ 3 directors – 45% + 45% + 10%
→ The majority formed a different company and offered to buy off the minority’s shares
in the original company
→ Where such an offer is made, it is only viable where the parties making the offer are
unconnected to the initial company. Burden of proof is usually on the minority to
show that those trying to buy him out are connected to the company
6. TAKING ADVANTAGE OF LEGAL PROVISIONS
Case: Gilford Motor Co. V Horne (1933)
→ Agreement not to solicit the customers of the company. However, after leaving the
company, Mr. Horne incorporated a company in which is wife and friend were the
directors. He used to company to approach customers.
→ Held: the company that has been registered by the defendant was a mere cloak or
sham used by the defendant to take advantage of the fact that a company has a
separate legal existence from its shareholders.
Case: Jones v Lipman
→ Corporate veil can be lifted where a company is formed as a means or device to avoid
an obligation.
7. DETERMINATION OF A COMPANY’S RESIDENCE FOR
THE PURPOSE OF TAXATION
→ A company is taxed in the place where its real business is carried on – where the
central management actually resides
De Beers Consolidated Mines Ltd (1906)
The appellant company was registered in South Africa. Its general meetings were always held
there. Some of the directors lived in South Africa. Its meetings were held in Kimberly and in
London. However, a majority of the directors lived in London and most of the directors’
meetings were held there. Most of the chief operations of the company were controlled from
London. It was held that the company was resident in the UK for purposes of taxation. Lord
Lorban stated, “a company cannot eat or sleep but it can keep house and do business. We
ought therefore to see where it kept house and did business. A companies’ real business is
carried on where the central management and control actually reside. A company is taxed in
the place where its real business is carried on – where the central management actually
resides
Week 4: Thursday 25th August 2022
Morning Virtual Class
Physical Class
A. LIMITED COMPANIES
Firm 6: Companies Limited by Shares
→ Limited Company – Owners are responsible for the company's debt only to the extent
of their unpaid shares
→ Section 5 Companies Act –
→ Separate Legal entity from its owners
→ They are essentially profit-making vehicles.
Companies Limited by Guarantee
→ The Company Act 2015 does not allow the registration of companies
→ Companies limited by Guarantee – members of the company undertake to pay a
certain amount in the event that the company goes into liquidation. The figure should
be stated
→ They are essentially non-profit making; they may be registered for charity or to
promote public good. For example, sports clubs.
A. UNLIMITED COMPANIES
→ They are associations formed to conduct business in the name of the said
→ Members’ liability means
→ The members are liable to contribute the assets of the company during the event of
liquidation.
Advantages of Unlimited Companies
(i) Promoting Management Quality – Since owners have a lot to lose
(ii) Promotes Creditor Confidence –
(iii) Confidentiality – exemption in the Act
(iv) Splitting of Debt – all shareholders split
Disadvantages of Unlimited Companies
(i) Shareholders have to contribute – creditors can lay claim on the shareholders
WEEK 5: Thursday 1st September
13., Registration documents
(1), A person who wishes to register a company shall lodge with the Registrar—
(a), an application for registration of the company that complies with subsections (2) and (4);
(b), a memorandum of association of the company; and
(c), except as provided by section 21, a copy of the proposed articles of association.
(2), An application for registration complies with this subsection if it states—
(a), the proposed name of the company;
(b), the proposed location of the registered office of the company;
(c), whether the liability of the members of the company is to be limited, and if so whether it
is to be limited by shares or by guarantee; and
(d), whether the company is to be a private or a public company.
(3), If the application for registration of a company is submitted by an agent for the
subscribers to the memorandum of association, the agent shall include in the application the
name and address of the agent.
(4), An application for registration complies with this subsection if it contains or is
accompanied by—
(a), in the case of a company that is to have a share capital, a statement of capital and initial
shareholding in accordance with section 14;
(b), in the case of a company that is to be limited by guarantee, a statement of guarantee in
accordance with section 15; and
(c), a statement of the company's proposed officers in accordance with section 16.
(5), In order to be registered, the articles of association of a company are required to—
(a), be contained in a single document;
(b), be printed;
(c), be divided into paragraphs numbered consecutively;
(d), be dated; and
(e), be signed by each subscriber to the articles.
(6), A subscriber's signature is required to be attested by a witness, whose name, occupation
and postal address are required to be written or printed below the subscriber's signature.
14., Statement of capital and initial shareholdings
(1), If the company is to have a share capital, the applicants for registration shall ensure that
the requisite statement of capital and initial shareholding comply with subsections (2) & (3).
(2), The statement of capital and initial shareholding complies with this subsection if it
states—
(a), the total number of shares of the company to be taken on formation by the subscribers to
the memorandum of association;
(b), the aggregate nominal value of those shares;
(c), for each class of shares—
(i), the particulars of the rights attached to the shares prescribed by the regulations for the
purposes of this subsection;
(ii), the total number of shares of that class; and
(iii), the aggregate nominal value of shares of that class; and
(d), the amount to be paid up and the amount (if any) to be unpaid on each share, whether on
account of the nominal value of the share or in the form of a premium.
GO THROUGH SECTION 11 TO 19
Memorandum of Association
→ Section 12 Companies Act (2015) Memorandum of association
(1) A memorandum of association is a memorandum stating that the subscribers—
(a) wish to form a company under this Act; and
(b) agree to become members of the company and, in the case of a company that is to have a
share capital, to take at least one share each. ***
Definition: A charter based on which the subscribers agree to form a company and be
members of the company upon incorporation
→ CAP 486 required a Memorandum of Association to outline the objects and powers of
the company. [The purpose for which the company was being registered] = Objects
Clause
→ Once the company was registered, it could only carry out business within the limits of
the objects indicated in the Memorandum of Association (Pre-2015)
→ The objects concern the external business transactions of the company
Case: Cotman v Broughham
✓ By outlining the purpose for which the company was registered, the members of the
company, creditors + anyone else would be able to tell the kind of
business/undertakings that the company carries out.
✓ The Objects Clause = ascertain the boundaries/scope within which the company was
to operate.
✓ A company has to remain within the objects outlined or businesses incidental to the
objects in its Memorandum of Association – Position in CAP 486
New Position, Companies Act 2015: Companies have the freedom not to outline their objects
in the memorandum of association meaning that it remains unrestricted unless its objects are
restricted by the Articles of Association ***
 The Doctrine of Ultra Vires will be applicable where a company carries out
transactions outside the scope of its objects – Effect: Such a transaction is not
enforceable against the company itself. (Directors bear liability)
Articles of Association
→ Provide for the internal management of the company/internal running of the company.
→ Section 28 Companies Act (2015) Statement of company’s objects
(1), Unless the articles of a company specifically restrict the objects of the company, its
objects are unrestricted.
(2), If a company amends its articles so as to add, remove or alter a statement of the
company's objects—
(a), it shall lodge with the Registrar for registration a notice giving particulars of the
amendment;
(b), on receipt of the notice, the Registrar shall register it; and
(c), the amendment is not effective until the notice is recorded on the Register.
(3), An amendment to the company's objects does not affect rights or obligations of the
company or render defective legal proceedings by or against it.
→ Effect of Section 28 (1) – Unless a company expressly indicates that it will only
conduct this type of business OR that it cannot undertake certain activities, it may
conduct whatever business it so pleases so long as the activities are legal. ****
(IMPORTANT SHIFT: POINT OF DIFFERENCE FROM PRE-ENACTMENT OF THE
2015 ACT)
Note that this provision does not do away with the application of the doctrine of Ultra Vires
Rationale for this shift:
(a) Allow for evolution and growth of companies without altering their articles of
association
(b) Enabling the government to collect more revenue through taxpayer’s monies since
companies are able to venture into a wider range of businesses without being limited
by its objects.
→ A company has the option of using the default model articles of association and
modify or improve them in order to tailor them to the needs of your company.
→ Articles of Association constitute a contract between the company and its members
which is binding on the members. *** (IMPORTANT)
Section 13 (5) Form & Content of the Articles of Association
(5) In order to be registered, the articles of association of a company are required to—
(a) be contained in a single document;
(b) be printed;
(c) be divided into paragraphs numbered consecutively;
(d) be dated; and
(e) be signed by each subscriber to the articles. [Authentication]
Lock v Queensland Investment & Land Mortgage Co
✓ The value of the model articles of association – the regulation in model articles have
statutory authority because they derive their character and form from the dictates of
the Companies Act 2015
✓ Section 20 + 21 – default application of model articles of association)
→ CAP 486 require companies ( Unlimited Companies & Companies limited by
Guarantee) Companies' Act 2015 – does not indicate which type of company MUST
register its articles of association.
Why did these companies have to register
− Companies limited by guarantee – meant to benefit the public – need to have proper
management
−
Scott v Frank
→ Defendant company was a private company in the line of vouchering
→ Court has no jurisdiction to ratify the articles of association even though they do not
conform with the intention of the signatories to the articles. Because AoA are
contracts
Rationale for the
(a) The Court is not a party to the contract and contracts can only be altered by the parties
to them
Hickman v. Kent
→ Hickman proceeded to court to have his dispute resolved when the articles of
association provided that any dispute between any member and the company shall be
referred to arbitration
→ The company went to court and sought a Stay of Proceedings pending determination
of the issue of the AoA& whether the dispute could be subjected to Arbitration.
✓ Principle: Articles of Association constitute a contract between the company and the
members of the company and the company’s business must be conducted in
consonance with the Articles of Association.
→ Justice Asbury had the following to say; “that the law was clear and could be reduced
to 3 propositions.
(i) That no article can constitute a contract between the company and a 3rd party.
(ii) No right merely purporting to be conferred by an article to any person in a capacity other
than that of a member for example a solicitor, promoter or director can be enforced against
the company. [Rights accrue to people as members not in any other capacity]
(iii) Articles regulating the rights and obligations of the members generally are such as to
create rights and obligations between members and the company.
Eley v. Positive Government Security Life Association co.
✓ In this case the Company’s articles provided that Eley should become the company
solicitor and should transact all legal affairs of the company for usual fees and
charges. He bought shares in the company and thereupon became a member and
continued to act as the company’s solicitor for some time. Ultimately the company
ceased to employ him. He filed an action against the company alleging breach of
contract.
✓ Court held: The articles constitute a contract between the co. and the members in their
capacity as members and as a solicitor, Eley was therefore a third party to the contract
and could not enforce it. The contract relates to members in their capacity as members
and the company so it’s only a contract between the co. and members of the company
and not in any other capacity such as solicitor. But note that there can be an intramember contract
✓ No right merely purporting to be conferred by an article to any person in a capacity
other than that of a member for example a solicitor, promoter or director can be
enforced against the company. [Rights accrue to people as members not in any other
capacity]
Only contract that existed was between Eley as a member and the company, NOT Eley as a
solicitor and the company
Week 6: Thursday 8th September 2022
Morning Virtual Class
Physical Class
The Ultra Vires Doctrine
→ In Kenya, the nature and scope of the business for which a company is registered is
unlimited – Section 28 Companies Act.
→ It can be limited to only conducting certain activities if the company restricts its
objects in the articles of association.
→ It is assumed that the members of a company are aware of the objects of the company
and the articles by which such objects are limited. [Griffith v Paget]
Important to NOTE: Ultra Vires Activities are NOT unlawful activities neither are they
activities against public policy. ***
→ Activities not consistent with the company's object or not in line with the Companies
Act or any other statute applicable to companies.
→ They are also activities undertaken by the directors of a company outside the scope of
their powers: a director involved in an activity outside of the company’s objects
(a) The company being involved in activities outside the scope of their objects and
powers
(b) The directors acting outside the scope of their powers or within powers but
conducting an activity beyond the scope of the companies’ objects.
Consequence: The director will bear personal liability unless the company elects to relieve
the director of the liability by means of special resolution.
→
♦ Re Lands Allotment Co. (1984)
✓ Whether directors were liable for loss as a result of an investment decision made
→ Directors – trustees of the companies supposed to act in the best interest of the
company. These two directors were not present at the meeting that decided the ultra
vires investment but were present at a different meeting for the planning.
Court:
→ Directors are not trustees by virtue of holding office but because of money which
comes through their hands, or which is under their control.
→ A director of a company incurs personal liability for loss suffered by a company in an
ultra vires transaction undertaken by them or under their direction, unless relived from
such liability by a special resolution
→ A special resolution – 75%
→ Ordinary Resolution – simple majority
Need for the Ultra Vires Doctrine: Protecting the interest of shareholders and members of a
company as well as creditors
(i) Creditors are assured that the money they lent to the company is used to fund lawful
activities and
♦ EIC Services v Phipps
→ EIC Services – incorporated in April 1989 with unauthorized capital
→ 2 people made directors – acquired the business with the intention of investing in
internet related businesses
→ 3rd director appointed later - + 11 others were allotted shares
→ Gansi Company bought all the shares from EIC Services – whether Gansi was acting
outside the company’s constitution
→ Third party acting in good faith but directors were not
Where there is a third party acting in good faith, but the directors were not in line with the
company’s objects or acting beyond their power, the court will rule in favour of the 3rd party
that was acting in good faith.
In case a company incurs any loss because of a director acting ultra vires, the director bears
personal liability.
❑ Section 33 Companies Act
✓ The validity of an act or omission of a company may not be called into question on
the ground of lack of capacity because of a provision in the constitution of the
company.
A company is NOT allowed to say that the directors did not have capacity to act in the case
that one of their directors
❑ Section 34 Companies Act
✓ In favour of a person dealing with a company in good faith, the power of the directors
to bind the company, or authorise others to do so, is free of any is limitation contained
in the company's constitution.
Because the directors knew the objects of the company and were aware of their powers and
went ahead to act contrary to this ***
Implication of Section 33 & 34
→ A person (third party) dealing with a company need not to inquire about the internal
regulations of the company. [Company’s Constitution & By laws] He is entitled to
presume that there has been compliance with the law and the directors are acting
within their powers.
→ This is the INDOOR MANAGEMENT RULE or the Tarquand Rule
♦ Royal British Bank v Tarquand
VERY IMPORTANT CASE: Established the Indoor Management Rule
→ Tarquand given a bond by the Royal British Bank – no resolution passed that he could
get the bond.
→ However, he was allowed to sue the bank for the bond even though the internal
regulations of the bank
→ Principle: a person dealing with a corporation has no legal obligation to ensure that a
corporation has gone through any
CODIFIED IN SECTION 34 (2) (b) (i) Companies Act
Prior to the indoor management rule, there existed the Doctrine of Constructive Notice – that
any person engaging with a company is presumed to be aware of the company’s internal
regulations and. Such that the court cannot rule in the outsider’s favour, if they engaged in
activities not allowed by the company's internal regulations.
♦ Mahony v East Holyford Mining
→ Company’s bank made payments based on a copy of something itself signed by the
secretary. Later it came out that directors and secretary had never been properly
→ The constitution provided that cheques should be signed by 2 or 3
→ Reaffirms the position in the Tarquand case as far as the Indoor Management Policy –
where a party is transacting business with a company
**** Exceptions to the Indoor Management Policy:
♦ Morjaria v Kenya Batteries
→ The third party is entitled to assume that the company has complied with its internal
rules & regulations UNLESS:
(a) He has actual knowledge of them
(b) There are suspicious circumstances putting him on inquiry
**** Locus Classicus that establishes the Ultra Vires Doctrine [EMPHASIZED]
♦ Ashbury Railways Carriage & Iron Co. Ltd v Richie
→ Incorporated, its memorandum – objects – make and sell or lend & hire railway
→ Activities beyond this needed special resolution but the company later gave Richie
and his brother a loan to build a railway.
→ Company is only allowed to do what the objects
An act that is ultra vires CANNOT be ratified or authorized by a company even with a
unanimous decision of the shareholders.
Company should have initially amended its articles of association in order to undertake other
activities.
Week 7: Thursday 15th September 2022
Ancillary Powers – necessary for supporting the objectives of the company
Powers incidental to the main object = part of or accompanying the objects
Great Eastern Railway Case – Limits or mitigates the rigidity in the application of the Ultra
Vires Doctrine
A LOT YOU HAVE MISSED HERE
When a company’s substratum fails; meaning: the company cannot attain the objective or
achieve the purpose for which it was incorporated – It is equitable to wind up the company to
protect the interests of the shareholder
Winding up vs Liquidation
Liquidation – selling of the company’s assets to pay off creditors
Winding up – ending all business affairs and incudes the closure of the company
Week 8: Thursday 22nd September 2022
Rights & Remedies Under Ultra Vires Transactions
II. MANAGEMENT OF COMPANIES
Corporate Governance: Directors
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The Board
Qualification of Directors
Directors’ Duties
Remedies for breach of directors’ duties
Derivative Actions
Global Corporate Governance Principles and Guidelines
Directors are appointed for 2 reasons:
1. The company itself cannot act in its own person – it is a juridical/artificial person;
therefore, there is need to appoint natural persons as Directors to act on behalf of the
company
2. Public Companies – fluctuation in the body of shareholders – there cannot be
effective management of the company if the shareholders are left to run the day-today activities of the company [Public Companies can invite the public to buy shares]
→ Shareholders do not automatically enjoy management powers; these are bestowed on
the Board of Directors. However, individual shareholders can be appointed to the
management of the company
→ Generally, directors have mandate over the day-to-day management of the company
to the exclusion of shareholders.
→ However, individual shareholders can be appointed to the management of the
company. In this instance, they can enjoy management powers.
Who Appoints the Directors of a Company?
→ The Directors of a company can be appointed by the shareholders or members of a
company.
→ This power MUST be exercised in good faith and for the benefit of the company as
whole and NOT to secure any ulterior advantage. This appointment or removal is
meant to aim at realizing the objects of the company
→ You cannot appoint or remove a director in order to oppress the minority
shareholders.
Question: Can this right to appoint a director be limited then?
♦ Woolf v East Niger Gold Mining Co. Ltd
Holding: In the absence of any express provision in the articles either appointing the first
directors named in the statement or prescribing the procedure for appointment of directors
generally, members of the company have an immutable right by ordinary resolution passed at
a duly constituted general meeting of the company to appoint (or remove) its directors.
✓ Immutable right = right that CANNOT be limited ****
• Ordinary Resolution – Requires simple majority to be passed
• Special Resolution – At least ¾ of the members need to pass the resolution
For appointment & removal of directors, ordinary resolution is required – less stringent ***
Section 13 Companies Act 2015 – Upon registration, it is a requirement for companies to
appoint a director or directors
Question: Are Directors agents of shareholders?
Answer: DIRECTORS ARE NOT AGENTS OF SHAREHOLDERS. They do not carry out
their functions as agents of the shareholders
→ Directors owe their duty to the company and not the shareholders
♦ Gramophone and Typewriter v Stanley (1908)
Holding: Directors of a company do not, when acting as such, act as agents of the members
of the company. It is immaterial that the director is an employee of a shareholder and is
nominated to his directorship by that shareholder.
Rationale:
(a) Independence & Impartiality of directors is important to prevent the shareholders
from influencing the running of the company for selfish personal benefit
(b) To protect the long-term interest of the company
(c) Because the company is a separate entity in itself and director owe their duty to the
company not the shareholders
 Joe: If directors function as agents of the members of the company, then the
shareholders would be vicariously liable as principals for the wrongs committed by
the directors of the company
→ Thus, the need to separate the management of the company from the shareholders.
✓ The company is a separate legal entity from its shareholders
✓ As a result, the wrongs committed by the directors [within the scope of their powers
and intra vires] are shouldered by the company because the directors act as agents of
the company.
Physical Class
❑ Section 128 Companies Act
→ A private company is required to have at least one director.
→ A public company is required to have at least two directors
❑ Section 129 – A company is required to have at least one director who is a natural
person. This section is complied with if the office of the director is held by a natural
person
Companies are allowed to have artificial persons as directors. A company can be a director in
another company [Artificial persons can be appointed as directors but Section 129 requires
that at least one director should be a natural person]
Easier to have an individual run the day-to-day activities of the company as opposed to
artificial persons
❑ Section 130 Direction requiring company to make appointment
→ Breach of Sections 128 or 129 the Registrar may give the company a direction for
compliance that must include the following:
✓ The statutory requirement in breach
✓ The action that the company should take in order to comply
✓ The period within which the company is require [Not less than 1 month, not more
than 3 months]
✓ The consequences of the company failing to comply with the direction
❑ Section 131 – Minimum age of a director: 18 years. Appointment made in
contravention of this is void
→ Repealed Act (CAP 486) minimum age was 21 + past the age of 70 one could no
longer be appointed as a director.
(a) Allowing youth to engage in commerce and industry – entrepreneurship among the
youth
(b) 18 is the age of majority and a person is considered to possess the mental capacity to
make decisions
→ Current Act does not provide for a maximum limit
(a) To remedy injustice/discrimination against people over the age of 70 years
Skill & experience of people over 70 years?
❑ Section 134 – Company shall keep a register of its directors and such register shall
comply with Sections 135 & 136
→ The Register of Directors should be kept in
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(a)
Section 135 – Particulars of Directors to be registered: Natural persons
Forename & surname any former name
Service address
Nationality
Business or occupation
Date of birth
The person’s other company directorships
Usual residence
Section 136 – Particulars of Directors to be registered: Corporate Directors
The body corporate’s name
The registered or principal office of the body
Particulars of:
The legal form of the body [company, limited liability partnership] + the law by
which it is governed &
(b) If applicable, the register in which it is entered + its registration number
❑ Section 137 – Company is also required to keep a register of the director’s residential
addresses
Rationale:
In the event that the corporate veil is lifted, it is necessary to have
❑ Section 138 – Duty of the company to notify the Registrar of changes of directors and
directors’ addresses
DUTIES OF DIRECTORS
❑ Section 140 – The duties specified in the Companies Act are owed by a director to the
company [and NOT to the shareholders] **** IMPORTANT
→ There are certain duties that remain to bind a former director – Duty to avoid conflict
of interest + Duty to NOT receive any benefits in their capacity as director/former
director (The duties – 146 & 147 respectfully)
→ The general duties of a director are based on Common Law rules and the principles of
Equity
*** One of the key features of the Companies Act 2015 is the codification of the duties of
Directors – The Repealed Act did not have provisions as regards They are not new duties,
they were previously known
→ Interpretation and application of these duties should be in the same way as common
law rules or equitable principles, and those interpreting and applying those rules and
principles are required to have regard to the corresponding common law rules and
equitable principles
❑ Section 142 – Duty of Director to act within Powers
→ A director of a company shall act in accordance with the constitution of the company;
and only exercise powers for the purposes for which they are conferred
CONJUCTIVE TEST
❑ Section 143 – Duty of a Director to promote in good faith the success of the company
as a whole
→ The success of the company is only demonstrated by the realization of the objects of
the company. The director
✓ Long term consequences of the decisions
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 There are circumstances in which the director is required by law to consider or act in
the interests of the creditors of the company
❑ Section 144 – Duty of a Director to exercise independent judgement
❑ Section 145 – Duty to exercise Reasonable Care, skill and diligence
→ A director should NOT act negligently
→ The standard of this duty is based on the general knowledge, skill and experience that
may reasonably be expected of a person carrying out the functions performed by the
director in relation to the company and the general knowledge, skill and experience
that the director has.
❑ Section 146 – Duty of a Director to Avoid Conflict of Interest
→ The director shall avoid a situation in which the he/she has, or can have, a direct or
indirect interest that conflicts, or may conflict, with the interests of the company.
→ This applies in particular to the exploitation of
✓ Any property;
✓ Confidential information of the company;
✓ The director's position in the company
✓ Opportunities in or for the company:
→ If the transaction is authorized by other directors, the duty of a director to avoid
conflict of interest is not infringed
❑ Section 147 – Duty not to accept benefits from third parties
→ A person who is a director of a company shall not accept a benefit from a third party
if the benefit attributable—
(a) to the fact that the person is a director of the company
(b) to any act or omission of the person as a director
❑ Section 151 – Duty to declare interest in proposed or existing transaction or
arrangement
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What happens when there is a breach of Duty?
If a director benefits from a transaction and there exists conflict of interest between the
company and the director, the transaction is voidable at the instance of the company
→ Benefits from third party – voidable
✓ In addition to the right recession, the company can demand an account for money
received by the director in breach of his fiduciary duty [does not mean it has endorsed
the transaction]
✓ These remedies are independent – the company can still rescind the transaction even
after demanding for an account
Section 194 Companies Act – A company cannot exempt its director from liability – cannot
enjoy immunity negligence, default or breach of duty of trust
Section 195 – a company can provide indemnity/insurance in case of liability that would arise
out of the performance of their duties – Director is still liable; they just have insurance. If
director is in breach and is required to pay a certain amount, the Insurance Company will
cover the amount
Recission
Accounting for money
Directors cannot be exempted from liability but the company can insure?
Week 9: Thursday 29th September 2022
Morning Virtual Class
Locus Classicus: Foss v Harbottle
Two minority shareholders in Victoria
Buy land in order to transform (1835)
Plaintiff commenced an action against the promoters/defendants of the company –
(i) Whether members of the company could file a case o behalf of the company -
Act of incorporation was passed in
Directors should have acted as trustees of the company
Judgements: Dismissed the shareholders claim. Shareholders cannot bring an action on behalf
of the company because the company
1. Proper plaintiff principle – any loss only the company can sue
2. Majority principle rule – if the alleged wrong has been ratified by the majority
shareholders
Derivative Action – a minority shareholder
Edwards v Halliwell - Jenkins LJ.
Foss v Harbottle
David Langat v St Lukes Orthopaedic and Trauma Hospital Ltd and Others
Justice Munyau Sila – trying to elaborate the rule in Foss v Harbottle
→ The end result of the rule in Foss v Harbottle is that – the majority rule prevails in
company management. However, situations may arise
(i) When the wrong complained of against the company has been done by the very
people in charge of the
Justice Kasango
The thing complained of is a thing which the minority.........The
Designed in equity to cure injustice
EXCEPTIONS IN EDWARD V HALLIWELL
Also read: Goa – Principles of Modern Company Law
1. Where it is complained that the company is acting ultra vires – minority shareholder
can bring an action on behalf of the company where the direct
2. Where the act complained of, while though not ultra vires, should be passed by a
special resolution or an extra ordinary resolution but that has not been done or is not
validly passed
3. Where the personal rights of the plaintiff shareholder have been or are about to be
violated
4. Those who control the company are perpetuating fraud against the minority
5. Where it constitutes a valid reason in the interest of justice to disregard the position in
Foss v Harbottle –
There should be a wrong committed against the company but those who are supposed to be
Relief that is sought is for the benefit of the company
Section 238 Companies Act 2015 – Derivative Claim
Proceedings by a member of a company in respect of a cause of action vested in the company
and seeking relief on behalf of the company
238 (3) A derivative claim under this Part may be brought only in respect of a cause of action
arising from an actual or proposed act or omission involving negligence, default, breach of
duty or breach of trust by a director of the company
REMOVAL OF DIRECTORS
→ Section 139 Companies Act
✓ A company may, by ordinary resolution at a general meeting, remove a director
before the end of the director’s period of office, despite anything to the contrary in
any agreement between the company and the director
(Ordinary resolution – passed by simple majority)
✓ a special notice is required for a resolution to remove a director under this section or
to appoint a person to replace the director so removed at the meeting at which the
director is removed – may be contained in the same resolution
Duty to avoid conflict of interest + Duty to NOT accept benefits
Disqualifications of Directors [Section 213 - 218]
1. Section 215 – Upon conviction for an offence related to the promotion, formation,
management or liquidation or administration of a company of –
2. Section 216 – fraud or breach of duty when company is under liquidation or
administration
3. On conviction of an offence on failure to lodge returns or other documents with
Registrar
4. Section 218 – unfit directors and secretaries of insolvent companies
COMPANY SECRETARIES
Section 243 – 246
→ Private companies are not required to have secretaries
→ They may be required to have company secretaries ONLY if it has a paid-up capital
of five million shillings or more
→ The Director may act as the company secretary, or any other person authorized by
directors
Section 244
→ Every public company is required t have at least 1 company secretary
Qualifications for Company Secretaires in Public Companies (Section 246)
Duty to ensure
Preparing and lodging
Advising board of directors
Company – administers, attends and prepares minutes -
Does not vote unless he or she is a member of the board of companies
Involved in administrative matters
Afternoon Class
Company issues a prospectus (invitation to treat)
Buyer makes an offer to purchase
Gives you an unconditional right to be entered into the register of members + you are given a
certificate of shares
Section 2 – shares: meaning –
An interest measured by a sum of money made up of various rights
Why are Shares Important
1. To determine liability
How is liability determined for a company limited by shares – liability is equal to the money
invested initially
2. To determine ownership rights & interests of a shareholder: such as voting rights –
dividends – distributable profit
STATEMENT OF CAPITAL & INITIAL SHAREHOLDING
Should contain:
(a) Total number of shares to be issued
(b) Aggregate Nominal Value – initial cost of a share [Distinct from market value]
(c) Rights attached to each class of shares, total number of shares in that class, aggregate
nominal value of shares in that class – a company determines its own class of shares
(d) Amount to be paid up [if any]
(e) Identify subscribers to the Memorandum of Association as well as the shares to be
taken by each subscriber on formation
Impact of NOT being put in the Register of Members yet you have bought shares?
The rights of a shareholder will not be available
Remedy – Section 323: make an application to court for rectification
Rights Attached to Shareholding – Section 114 (3)
(a), the right to be sent a proposed written resolution;
(b), the right to require circulation of a written resolution;
(c), the right to require directors to call a general meeting;
(d), the right to receive notices of general meetings;
(e), the right to require circulation of a statement;
(f), the right to appoint a proxy to act at a meeting;
(g), the right to be sent a copy of the company's annual financial statement and reports; and
(h), if the company is a public company, the right to require the circulation of a resolution for
the annual general meeting of the company.
Shareholders can participate in decision making through resolutions
(i) Ordinary resolution
(ii) Special resolution – decisions that are core to the structure of the company or business
of the company [Example: Changing the company’s articles of association – section
22 Companies Act]
Before presenting a special resolution matter, a notice must be given before the special
resolution is issued and members can vote
PART XIII
Private Company – written resolutions or meeting of the members
Public company – MUST meet, resolution is tabled there then it is circulated or members
vote there and then [Can be virtual meetings]
Section 256 – Ordinary Resolutions
Proxy – needs to be in writing – you can send someone as a representative to vote for you
50% +1 of those who are entitled to vote [Perhaps those entitled to vote are only Ordinary
shareholders to the exclusion of Preference shareholders]
Section 257 – Special Resolution
75% majority
Preceded by a notice
Winding up the company
VOTING
Limited by Shares – One vote per share
Limited by Guarantee – One vote per member
Shareholders can hold shares jointly – only one of them will vote – the one who is senior –
the one who appears first in the Register of Members
Section 139 + Section – you cannot remove Company Director and Auditor
Share holder have a right to require company directors to circulate a resolution for the
purposes of voting – Proviso: quorum: 5% of shareholders eligible to vote for that resolution
[Circulation may be via website, personal delivery – the Act provides many methods of
circulation and requires that directors circulate without undue delay]
Time limit to pass a resolution
Section 271 Deadline for agreeing to written resolution
(1), A proposed written resolution lapses if it is not passed before—
(a) the deadline specified for this purpose in the company’s articles; or
(b) if no deadline is specified the expiry of twenty-eight (28) days from and including the
circulation date.
REMEDY FOR TIME LAPSE: FORMULATE ANOTHER RESOLUTION
Appointed by a shareholder to represent them at a meeting for the purposes of voting –
member should notify the rest of the members of such appointment and it is advisable that
such notice should be in writing
Proxy – should be notified of the appointment as well
Standard for shareholders to require the Directors to convene a meeting – 10%
In addition to request to have a special resolution the shareholders should have a
Types of Shares
1. Ordinary shares
2. Preference shares – have priority rights during payment of dividends, usually have a
fixed annual rate of getting dividends
Dividend – distributable profit
Rights attached to each class of shares is determined by the company in its Articles of
Association
PREFERENCE SHARES
→ Have priority rights during payment of dividends, usually have a fixed annual rate of
getting dividends
✓ Cumulative preference shares– your fixed rate is carried forward to the next year if
the company does not make profit that year
✓ Non-cumulative preference shares – OPPOSITE
 Participating preference shares– holders get to participate in distribution of shares
after ordinary shareholders have been paid and there are additional shares
 Non-participating – OPPOSITE: You only get the right to share in dividends before
ordinary shareholders and not after
❑ Redeemable preference shares – can be redeemed or repaid after the expiry of a fixed
period or after giving the prescribed notice to the party
❑ Non-redeemable preference shares – you can never get your money back
NB: Shares are transferrable
→ Do not carry voting rights unless there is a variation of rights – meaning the company
changes the rights attached to a specific
MANAGEMENT SHARES
A company can create a class of shares to allow members of the company to retain control of
the company. For example, they may allocate 10nvotes per shares for this class of shares
EMPLOYEE SHARES
Added advantage that the public does not have
Share options key – gives employee an option to buy shares in future at nominal value and
not
Share Gifting scheme – shares given as a gift or articles of association may create this type
Share Purchase Scheme at a benefit – company allows employees to purchase shares at a
benefit
The Share Certificate
Third party will rely on this good title when buying shares
If mistake was – Bonafide purchaser for value is entitled to damages from seller & owner of
that share certificate
Due Execution – by a director of the company in the presence of a witness or 2 authorized
persons
VARIATION OF A CLASS OF SHARES
→ Changing the rights attached to a certain class of shares
→ Is only valid subject to the consent of the members of that class of shares (75%) ***
Intention: – to protect minority shareholders
→ Shares belong to one class if rights attached to those shares are the same. Dissimilar
rights to acquire dividends does NOT make shares dissimilar
→ Members of a class of shares can object to variation of the rights – threshold: 15% of
the members of that class and such objection must be within 21 days
See Sections 396 & 397
→ Test used by the Court to determine validity of a Variation: whether the variation
unfairly prejudices the shareholders of the class represented by the applicant
→ A representative instead
→ The court may either disallow or confirm the variation
Week 10: Thursday 6th October 2022
TOPIC: CORPORATE FINANCING
DIFFERENT WAYS COMPANIES RAISE CAPITAL
1. Issuance of shares
2. Raising money through borrowing
A. Borrowing/Debt Financing
→ Ordinarily companies will resort to borrowing if they cannot raise enough share
capital [selling of shares]
→ Loan facility or loan to raise money to facilitate the realization of their objectives
→ Directors should act within their powers
Different ways in which Directors may borrow money
(a) Mortgage and charge the company’s property and uncalled capital in order to secure
the payment of a loan that the company acquires
[Uncalled capital is the amount of money that has not been paid on shares that have already
been allocated]
(b) Issuance of debentures or debenture stock
✓ Section 516 Companies Act – Trading Certificate
→ A public company must be issued with a trading certificate before it exercises the
power to borrow
✓ Section 517 Companies Act – Procedure for Obtaining a
trading certificate
→
→
(a)
(b)
(c)
The public company should make an application to the Registrar in writing
The Registrar may refuse to grant such an application if it DOES NOT:
State the nominal value of the company allotted share capital
Specify the amount, or estimated amount, of the preliminary expenses of the company
Specify any amount or benefit paid or given, or intended to be paid or given, to any
promoter of the company, and the consideration for the payment benefit
✓ Section 518 – Authorized Minimum
→ The authorized minimum in relation to the nominal value of a public company’s
allotted shares is Kshs.6,750,000. (6M 750K)
NB: Companies with a share capital of 5M are required to have a Company Secretary
✓ Section 519 – Consequences of doing business, borrowing etc
without a trading certificate
→ If a company carries on its business or exercises the power to borrow without a
trading certificate, the company, and each officer of the company who is in default,
commit an offence and on conviction are each liable to fine not exceeding one million
shillings.
→ Contravention of 516 does not affect the validity of a transaction entered into by the
company, BUT if the company fails to comply with its obligations under such a
transaction within 21 days from being called to do so, the directors of the company
are jointly and severally liable to indemnify any other party to the transaction in
respect of any loss or damage suffered by that party because of the company's failure
to comply with those obligations [Causation]
While the transactions remain valid, in case of any loss incurred, the directors of the company
will be jointly and severally liable
Definition of Terms
1. Security – Within the context of borrowing, a security is any mortgage, charge or
lien or other security given to guarantee the repayment of any amount advanced to
company by way of a loan or other financial accommodation
2. Charge – A legal or equitable interest created over property in order to secure
payment of a debt
 Charge gives the creditor [chargee] a priority right to be paid over unsecured creditors
when the property is sold in order to repay debt
 Charges rank in priority depending on the date on which the charge instrument was
registered [Ensures that a creditor has priority over other secured creditors]
Charge which is registered first takes precedence over charges registered subsequently in
terms of payment
3. Mortgage – A transfer of title of property from the borrower to the lender in order to
secure repayment of a loan
Difference: charge does not entail transfer of title from the borrower to lender whereas a
mortgage does
4. Lien – The right to keep possession of property belonging to someone else until a
debt owed by that person is discharged
Afternoon Physical Class
Realization of Security – if a company is not in a position to repay a loan, then the property
which secures the loan can be sold in order for the creditor to get their money back
Ways in which Security can be Realized
1. The sale of the charged asset in exercise of the statutory power of sale –
Section 90 (1) – Land Act – Statutory power of sale for financial institutions that lend money
and have a charge over the lender’s land
2. Getting rent from the mortgaged property [rental income]
3. Enforcement of guarantee –
* Guarantee is an undertaking by a person to settle the debt of a lender in the event that the
lender defaults in payment or simply fails to honour the obligation completely
→ Before the realization of security, the chargor can redeem the security. This can only
happen under the following circumstances: ***
(a) If right to redeem is not foreclosed by a court
(b) If the chargee has not duly exercised their statutory power of sale
(c) If the mortgage property has not been sold pursuant to a court order
(d) If the secured obligation is not fully discharged
Indoor Management Rule – lenders are not required to inquire or ascertain whether the
company is acting in compliance with its powers to borrow [Section 519]
CORPORATE SECURITIES
→ Securities that relate to Debt Financing. Companies may issue 2 types of securities:
1. Shares
2. Debentures
Nairobi Securities Exchange, previously Nairobi Stock Exchange
→ If you hold a share in a company, you become a shareholder/member of the company
→ If you hold a debenture, you are a creditor of the company and a debenture holder –
you are not a member of the company. You are only entitled to be paid an interest on
the money the company owes you not the profits they make
→ You can be a both a member/shareholder and a debenture holder ***
→ A debenture can take the form of either one of the following:
(a) A document that acknowledges a debt
(b) A document that acknowledges a debt and creates a charge over the assets of the
company
(c) A document that acknowledges a debt, creates a charge over the assets of the
company and further restricts the creation of another charge over those assets
Important to NOTE:
 While money raised through debentures forms part of the company’s capital, it does
NOT form part of the company’s share capital because share capital is money
obtained from paid shares.
→ In private companies, debentures are NOT open for subscription by members of the
public
Section 9 – Characteristics of a Private Company
(i) A member’s rights to transfer shares are limited
(ii) Members are limited to 50
(iii) Members of the public cannot be invited to subscribe to the debentures of the
company
(iv) Consent of all members is required to add a new member
Section 10 – Characteristics of a Public Company
(i) The articles of association allow members to transfer their shares in the company
(ii) Members of the public can be invited to subscribe to the debentures of the company
✓ Section 496 (1) – if you allot debentures as a company, you are required to issue a
certificate of debentures. Failure to comply with this requirement, invites a penalty of
an amount not exceeding Kshs500,000
✓ Section 572 – Companies are required to register an allotment of debentures as soon
as practicable
✓ Section 573 – Companies are required to keep a register of debenture holders and
non-compliance by an officer of the company in default, upon conviction, attracts a
fine not exceeding Kshs. 1,000,000. This register should be kept open for inspection
at the registered offices of the company and non-compliance by an officer of the
company in default, upon conviction, attracts a fine not exceeding Kshs. 1,000,000
✓ Section 574 – right of debenture holders and others to inspect the Register of
Debenture holders. They also have the right to obtain a copy of the register but may
be required to pay a certain fee
✓ Section 575 – creates the offence of refusing others to inspect the register
✓ Section 578 – right of a debenture holder to obtain a of copy of a trust deed securing
debentures in case there is a trust deed created to secure the debentures
Question: What are some of the registers that the Act requires a company to keep?
(a) Register of Directors
(b) Register of Residences
(c)
Types of Charges
1. Fixed or Specific charges
2. Floating charges
A company may create two types of charges in order to secure a loan
→ Specific/fixed charges are attached to a particular asset owned by the company, for
example, LR NO: 20 –
→ A floating charge is not based on any particular assets of the company – it will only
crystalize upon default or the occurrence of a certain agreed event
Case: Illingworth v Houldsworth
Established: Distinction between Fixed Charges and Floating Charges
✓ A fixed charge – one that fastens on ascertained and definite property or on property
of being capable of being ascertained/defined - the borrower not allowed as a
borrower to sell that particular asset [property/land] until he or she has fully steeled
the loan
✓ A floating charge – an equitable charge over corporate assets attaching to no specific
assets but hovering over, and so to speak – falling within a generic description but
without preventing a company from disposing of its assets
The borrower is at liberty to sell his or assets. In case of default, the financial institution can
sell any of their assets in order to realize repayment of the loan
✓ Section 878 – Charges created by a Companies
→ Requires a company to REGISTER or lodge with the Registrar of companies the
particulars of the charge together with the documents (if any) by which the charge is
created/evidenced
Rationale:
(a) To protect a bonafide purchaser for value from buying an asset from a company that
has a charge on it/protecting members of the public from a company’s fraudulent
actions
→ Registrar of Companies is required to keep a register of the charges of a company as
required under the Act – Section 884(1)
(4) Outlines the various types of charges a company may create on its assets
(a) a charge on land or any interest in land (other than a charge for any rent or other
periodical sum issuing out of land) owned by the company or in which it has a proprietorial
interest
(b) a charge created or evidenced by a document that, if executed by a natural person, would
require to be registered as a bill of sale
(c) a charge for the purposes of securing an issue of debentures by the company; (d) a charge
on the company's uncalled share capital (if any)
(e) a charge on calls made by the company but not yet paid
(f) a charge on the company's book debts
(g) a floating charge on the company's property or undertaking
(h) a charge on a ship or aircraft, or a share in a ship or aircraft, owned by the company or in
which it has a proprietorial interest
(i) a charge on the company's goodwill or intellectual property.
Section 891 – Company’s Register of Charges
(i) Charges that specifically affect the company’s assets
(ii) All floating charges
→ Details or descriptions of the property charged; amount secured by the charge ans the
names of persons entitled to the charges
→ Should be open for inspection by any creditor or member of the company without
charge and any other person on payment of a fee prescribed by the company
Advantages of Debt Financing
1. Reduces the possibility of dilution of the company’s ownership because creditors do
not have controlling interest in the company since they do not enjoy ownership rights
2. Money/finance is available for a fixed duration which allows the company to adjust
its investment plans in a suitable manner taking into consideration the availability of
funds [Fixed term of 5 years to repay the loan is an incentive to achieve great heights
within 5 years]
3. Provides long term financing to a company on favourable terms as opposed to the cost
of equity or preference shares
Disadvantages of Debt Financing
1. Funds should be repaid within the agreed period failure to which lender can realize the
agreed security
2. Interest rates may be high
CAT REVISION
Comparing CAP 486 & Companies Act 2015
CAP 486
Companies Act 2015
One person can form a company
Required the M.o.A to outline the objects &
powers of the company
M.o.A need not specify the objects of the
company. Objects are unrestricted unless
restricted by the company itself in its A.o.A
(Section 28 [1] C.A 2015)
Express provisions as to cases in which the
Articles had to be registered with the M.o.A
- unlimited companies + companies limited
by guarantee
Does not outline the types of companies in
respect of which the articles should
compulsorily be registered
No codification of duties but they existed
and were drawn from Common Law
Codification of the duties of Directors
Private Company – Section 9
Public Company – Section 10
Its articles –
~ Restricts its members’ right to transfer
shares
~ Maximum number of members is 50
~ Prohibits invitations to the public
subscribe for shares/debentures
~ Requires consent of all members to add a
new member
Its articles –
~ No restriction on transferability of shares
~ Members of the public can subscribe to
the shares and/or debentures
NOT limited by guarantee
Certificate of incorporation states that it is a
private company
Certificate of incorporation states that it is a
public company
At least 1 director – Section 128 (1)
At least 2 directors one of whom is a natural
person Section 128 (2)
Registered with a name ending in
"Limited”or Ltd”– Section 54
Registered with a name ending in 'Public
Limited Company’ or PLC’ – Section 53
Week 13: Tuesday 25th October 2022
CORPORATE LIQUIDATION & ADMINISTRATION
Corporate Insolvency
→ Insolvency refers to the inability to pay one’s debts as a result of lack of
solvency/liquidity/ready cash in hand.
Reasons why a company would run out of cash:
(i) Trading losses through general bad/unwise/incompetent trading or not adapting to
changes in your market
(ii) Poor management of working capital, perhaps because there are several unpaid bills,
or perhaps one big customer (debtor) has not paid up
(iii) Directors have taken money out of the company which the company couldn’t afford
(iv) Company has money tied up in machinery or buildings – money that cannot now be
accessed to meet current bills
→ Section 384 of the Insolvency Act defines inability to pay debts, a company is unable
to pay its debts:
(a) If a creditor (by assignment or otherwise) to whom the company is indebted for a
hundred thousand shillings or more has served on the company, by leaving it at the
company’s registered office, a written demand requiring the company to pay the debt
& the company has 21 days afterwards failed to pay the debt or to secure or
compound for it to the reasonable satisfaction of the creditor
(b) If execution on or to the process issued on a judgement, decree or order of any court
in favour of a creditor of the company is returned unsatisfied in whole or in part
(c) If it is proved to the satisfaction of the court that the company is unable to pay its
debts as they fall due [Cash flow Test]
(d) If it is proved to the satisfaction of the court that the value of the company’s assets is
less than the amount of its liabilities (including its contingent & prospective
liabilities) [Balance Sheet Test]
→ To help answer the question of when a company is insolvent one can break down the
question into three further questions:
✓ Does the company pass the insolvency tests?
✓ When does the company go into formal insolvency?
✓ When does that formal insolvency start?
❖ DOES THE COMPANY PASS THE INSOLVENCY TESTS?
• Insolvency is defined by 2 tests:
(a) Cash Flow Test – the inability to pay debts as they fall due
(b) Balance Sheet Test – the moment at which liabilities exceed the value of assets
Cash Flow Test
→ According to this test, a company is insolvent when it is unable to pay its debts as
they fall due, the fact that the company’s assets exceed its liabilities is irrelevant.
→ Only debts are taken into account. An unliquidated claim such as damages for breach
of contract or tort cannot be considered.
→ Only due debts are taken into account. Note that the court will consider whether the
company will be able to pay future debts when they become due.
→ Insufficiency of liquid assets does not necessarily indicate inability to pay. It suffices
that the company can raise the funds needed within the required time e.g., by
borrowing or by disposing of liquid assets.
→ Where a company defaults in payment of an undisputed debt after demands have been
made, this is sufficient evidence that it is unable to pay its debts.
Balance Sheet Test
→ This test considers whether the company’s assets are insufficient to discharge its
liabilities ‘taking into account its contingent and prospective liabilities.’
→ Liability includes more than just debts; it refers to all forms of liability whether;
liquidated or unliquidated; whether arising in contract or in tort or by way of
restitution for damages for breach of statutory duty
→ The Balance Sheet test is one of the tests prescribed for the purpose of grounds for
winding up, administration or the avoidance of certain transactions.
→ It is also a test relevant in considering the disqualification of directors and is the one
test used in identifying insolvent liquidation for the purpose of assessing directorial
liabilities for wrongful trading.
❖ WHEN DOES THE COMPANY GO INTO FORMAL
INSOLVENCY?
→ A company goes into a formal insolvency by going into:
(i) Liquidation
(ii) Administration
(iii) Receivership
(iv) A Company Voluntary Arrangement (CVA)
❖ WHEN DOES THAT FORMAL INSOLVENCY SATRT?
→ All insolvencies start on the day the company goes into formal insolvency – except
when a company goes into compulsory liquidation.
→ For Compulsory liquidation, where a creditor, a director or shareholder petitions the
court for the company to be wound up, resulting in a court hearing and a winding up
order insolvency starts on the day the petition was presented by the creditor to the
court
A. LIQUIDATION
→ Liquidation means the end, the death, cremation and scattering of the ashes of a
company, once liquidation is complete, the company is automatically dissolved, and it
no longer exists.
→ The purpose of liquidation is to liquidate the assets: turn them into cash and distribute
the cash (or what is left after meeting the costs of the liquidation) among the creditors
and shareholders in the prescribed order.
→ Liquidation is used to liquidate solvent companies as well as insolvent companies.
Solvent liquidations include members’ voluntary liquidations while Insolvent
liquidations include creditor’s voluntary liquidation and compulsory liquidation.
♦ Solvent Liquidation – Members Voluntary Liquidation
→ Section 393 of the Insolvency Act provides that a company may be liquidated
voluntarily:
(a) When the period (if any) fixed for the duration of the company by the articles
expires, or the event (if any) occur, on the occurrence of which the articles provide
that the company is to be dissolved and the company in general meeting has passed
a resolution providing for its voluntary liquidation; or
(b) If the company resolves by special resolution that it be liquidated voluntarily
→ Therefore, voluntary liquidation of a company commences when the resolution for the
voluntary liquidation is passed (section 395).
→ Section 395 goes on and states that on and after the commencement of voluntary
liquidation of a company, the company shall cease to carry on its business, except in
so far as may be necessary for its beneficial liquidation.
→ The implication of this is captured in Section 397 which provides that any transfer of
company shares without the liquidator’s sanction or any alteration in or attempt to
alter the status of the company made after the commencement of a voluntary
liquidation is VOID.
→ To put a company into members’ voluntary liquidation, the directors need to prepare a
declaration of solvency ***
This is a statement of assets and liabilities showing that the company will be able to meet all
its debts, including statutory interest, within a period not exceeding 12 months from the
commencement of liquidation – Section 398. The declaration:
(i) Is made by all the directors or if there are more than two directors by a majority of
them
(ii) Includes a statement of the company’s assets and liabilities as at the latest practicable
date before the declaration is made,
(iii) Must be made not more than 5 weeks before the resolution to wind up is passed and
(iv) Must be delivered to the Registrar within 14 days after the meeting.
− If the liquidator later concludes that the company will be unable to pay its debts, the
directors must call a meeting of creditors and lay before them a statement of assets
and liabilities.
− In a member’s voluntary winding up the CREDITORS PLAY NO PART since the
assumption is that their debts will be paid in full. ***
− Section 401 provides that the liquidator shall call special and annual general meetings
of contributories (members) to whom they report:
(a) Within three months after each anniversary of the commencement of the winding up the
liquidator must call a meeting and lay before it an account of his transactions during the year.
(b) When the liquidation is complete the liquidator calls a meeting to lay before it his final
accounts.
•
After holding the final meeting as provided for under Section 402, the liquidator
sends a copy of his accounts to the Registrar who dissolves the company 3 months
later by removing its name from the register.
Summary of Process
1. Director’s Meeting
2. Declaration of Solvency – not more than 5 weeks before members meeting & is sent
to the Registrar
3. Members’ Meeting – special resolution is passed to voluntarily liquidate
4. Notice to the Registrar – 14 days of the special resolution
5. Meeting (Shareholders)
6. Report to Registrar
7. Dissolution 3 months later
**** READ THIS SUMMARY AGAIN – FILL IN THE LOGICAL GAPS ****
♦ Insolvent Liquidation – Creditors’ Voluntary Liquidation
→ Section 406 provides that in order to commence a creditors’ voluntary winding up the
directors convene a general meeting of members:
(a) First to pass a resolution to wind up
(b) To appoint a liquidator(s) and
(c) To nominate up to five representatives to be members of the liquidation committee.
→ They must also convene a meeting of creditors, giving at least seven days’ notice of
the meeting.
→ The creditors’ meeting should preferably be convened on the same day but at a later
time than the members’ meeting, or on the next day, but in any event within 14 days
of it.
→ Notice of the creditors’ meeting should be published once in the Gazette; once in
at least two newspapers circulating in the area in which the company has its
principal place of business in Kenya; and on the company’s website (if any).
→ The directors of the company shall prepare a statement setting out the financial
position of the company and lay that statement before the creditor’ meeting. The
statement should contain the following information:
i. Details of the company’s assets, debts and liabilities
ii. The names and addresses of the company’s creditors
iii. The securities held by them respectively
iv. The dates when the securities were respectively given
|| COMPULSORY LIQUIDATION ||
→ Section 423 provides that only the High Court has jurisdiction to supervise the
liquidation of companies registered in Kenya. ***
→ Section 424 provides the following grounds of compulsory liquidation:
(a) The company has by special resolution resolved that the company be liquidated by the
Court
(b) Being a public company that was registered as such on its original incorporation;
i.
ii.
The Company has not been issued with a trading certificate under the Companies Act,
2015; and
More than twelve months has elapsed since it was so registered.
(c) The company does not commence its business within twelve months from its
incorporation or suspends its business for a whole year
(d) Except in the case of a private company limited by shares or by guarantee, the number of
members is reduced below two
(e) The company is unable to pay its debts
(f) The Court is of the opinion that it is just and equitable
→ A company may also be liquidated by the Court on an application made by the
Attorney General under Section 425(6). If in relation to a company, it appears to the
Attorney General:
(i) From a report made or information obtained from investigations carried out on
inspection of documents produced under the Companies Act,
(ii) From a report made, or information obtained, by the Capital Markets Authority under
the Capital Markets Act
(iii) From information provided by the Registrar; or
(iv) As a result of the company or its directors having been convicted of an offence
involving fraudulent conduct
THAT: It would be in the PUBLIC INTEREST for the company to be liquidated. The
Attorney General may make an application to the Court to make a liquidation order in
respect of the company for its liquidation on the ground that it would be just and equitable
for it to be so. (NB: These grounds are in Section 426 :)
→ Section 425 provides that an application to the Court for the liquidation of a company
may be made by all of the following:
(a) The company or its directors
(b) A creditor or creditors [including any contingent or prospective creditor or creditors)
(c) A contributory or contributories of the company – members of the company
(d) A provisional liquidator or an administrator of the company
(e) If the company is in voluntary liquidation – the liquidator
→ Where the court issues a liquidation order, they may appoint the official receiver to
oversee the liquidation process. Section 434 identifies the obligations of the official
receiver as follows: ***
1. If the company has failed, to discover why the company failed; and
2. Generally, to investigate the promotion, formation, business, dealings, and affairs of
the company, and to make such report (if any) to the Court as the Official Receiver
considers appropriate.
→ The official receiver is authorized by Section 435 to carry out a public examination
of any officers of the company involved in promotion, formation and management of
the company.
# Power of the Court After Hearing the Petition #
→ Section 427 provides that upon hearing the winding up petition the Court may:
i. Dismiss the application
ii. Adjourn the hearing conditionally or unconditionally
iii. Make an interim liquidation order
iv. Make such order or further order as the circumstances of the case require
→ If the petition is based on the company’s failure to hold the statutory meeting or
deliver a copy of the statutory report to the Registrar, the court may in lieu of winding
up, order that the meeting be held or the report be delivered to the Registrar. [In lieu
means instead]
→ Note that as provided for under Section 427(4), the court will only liquidate the
company as a last option. *** If there is an alternative remedy or if the petitioners are
acting unreasonably by requesting the winding up, the petition will fail.
# Consequences of the Liquidation Order #
Once the winding up order is made, the following consequences follow:
✓ The company ceases to carry on business except such as may be required for its
beneficial winding up
✓ Any disposition of property of the company including things in action, any transfer of
shares or alteration in the status of members is VOID.
✓ Any attachment, distress or execution put in force against the estate or effects of the
company is VOID.
✓ Legal proceedings commenced by or against the company are stayed as provided for
under Section 432. *** [DOUBLE CHECK] ***
✓ Director’s powers become functus officio (un-exercisable)
✓ By virtue of his office, the Official Receiver becomes the Provisional Liquidator and
if not, other person is appointed liquidator by the Court, becomes the liquidator.
✓ Servants of the company are ipso facto dismissed (by that very fact of winding up
order being issued). However, those who continue to render services and receive
wages are presumed to have entered into a new contract of service with the liquidator.
✓ Floating charges of the company crystalize and become fixed.
Summary of the Process
1.
2.
3.
4.
5.
General Meeting of members convened by directors
Directors prepare a Statement setting out the Financial Position of the Company
Creditors Meeting – are shown the statement
Application for liquidation to the High Court
Liquidation Order may be made & the consequences of such order follow
B. ADMINISTRATION
→ Administration can be considered as a method of saving a company in financial
difficulty.
→ The aim of administration is to rescue companies, where a business is potentially
viable, or it is likely to be beneficial for the company to continue trading then
administration probably is the most appropriate ‘gateway’ insolvency procedure to
bring a difficult situation under control and create breathing space to achieve one of
the objectives detailed below – Section 522:
* Maintain the company as a going concern
* If this is not possible, then achieving a better outcome for creditors as a whole
than would be likely if the company were liquidated
* Only if neither of these objectives is possible can the administrator realise the
property of the company to make a distribution to secured or preferential
creditors.
→ While administration may not always rescue a company it may facilitate the sale of
the company as a going concern, or a more advantageous realization of its assets and a
better return for the creditors than winding up.
→ Section 528: Administration and liquidation are MUTUALLY EXCLUSIVE ***
A company that is under liquidation cannot be put under administration. Once an order for
winding up has been made, an administration order cannot be granted and, alternatively, once
an administration order has been passed by the court, it is no longer possible to petition the
court for a winding up order.
→ Section 522(4) provides that the administrator cannot perform any function where he
believes that it is not reasonably practicable to achieve either of the objectives
specified in the statutes [going concern + better outcome for creditors]
The implication of this section is that before an order of administration can be given, there
has to be a reasonable basis for believing that the company can actually be rescued. ***
 An Administrator may be appointed:
A. With a Court Order
The Court may make an administration order in relation to a company only if satisfied: (a)
that the company is or is likely to become unable to pay its debts; and (b) that the
administration order is reasonably likely to achieve an objective of administration
→ An application to the Court for an administration order in respect of a company may
be made only by the following persons:
(a) The company
(b) The directors of the company;
(c) One or more creditors of the company
(d) A combination of persons specified in paragraphs (a) to (c)
(e) Any other person of a class prescribed by the insolvency regulations for the purposes
of this section.
B. Without a Court Order
Section 523 emphasizes that a person may be appointed as administrator:
a) By the holder of a floating charge; or
b) By the company or its director
|| APPOINTMENT BY FLOATING CHARGE HOLDERS ||
→ In order to qualify for this right, the floating charge must entitle the holder to appoint
an administrator. ***
→ However, as provided for under Section 535 the floating charge holder may only
appoint an administrator if:
(i) the person has given at least three days’ notice to the holder of any prior floating
charge who also has the right to appoint an administrator
(ii) Their floating charge is enforceable
→ The floating charge holder will file the following documents provided for under
Section 537 at court:
✓ A statutory declaration that he qualifies to make the appointment.
✓ A notice of appointment
✓ A statement by the administrator that he consents to the appointment
✓ A statement by the administrator that, in his opinion, the purpose of administration is
likely to be achieved.
One these documents have been filed, the appointment is valid and the appointer must notify
the administrator.
|| APPOINTMENT BY THE COMPANY OR DIRECTORS ||
→ A company or its directors may appoint an administrator if:
 The company has not done so in the last 12 months or been subject to a moratorium as
a result of a voluntary arrangement with its creditors in the last 12 months.
 The company is, or is likely to be, unable to pay its debts
 No petition for winding up nor any administration order in respect of the company has
been presented to the court and is outstanding
 The company is not in liquidation
 No administrator is already in office
 No administrative receiver is already in office
NB: The company or its directors must give notice to any floating charge holders entitled to
appoint an administrator. This means that the floating charge holders may appoint their own
administrator within this time period, and so BLOCK the company’s choice of administrator.
****
|| EFFECTS OF APPOINTING AN ADMINISTRATOR ||
1. Administration order in respect of company PREVENTS making of application for
liquidation order and SUSPENDS pending applications for liquidation order. ***
Section 528 + 559
2. A Moratorium over the company’s debts commences (that is, no creditor can enforce
their debt during the administration period without the court’s permission) as
provided for under Section 559
3. Administrators consent MUST be sought when:
(a) Enforcing a security over the company’s property
(b) Repossessing goods in the company’s possession under a credit purchase transaction
(c) A landlord seeks to exercise a right of forfeiture by peaceable re-entry in relation to
premises let to the company; and
(d) Beginning or continuing legal proceedings (including execution and distress) against the
company or the company’s property
❑ Centre Reinsurance International Co and other v Freakely
Principles Derived: Effects of Administration
1. Places a procedural bar on: a) Enforcement of securities by creditors against a
company’s property; and b) The commencement or continuance of any legal
proceedings
2. Substitutes for the company’s existing management with an administrator who
manages the company’s business & property
Advantages of Administration
TO THE COMPANY
1. The company does not necessarily cease to exist at the end of the process, whereas
liquidation will always result in the company being wound up – Administration offers
the possibility for a company to survive and continue trading as opposed to the
finality of being wound up.
2. It offers the advantage of buying time which allows a company to restructure
unimpeded by the imminent threat of winding up.
3. It provides a ringfence against legal action by effect of a mortarium which prevents
any creditors applying for compulsory liquidation or enforcing their securities against
the company’s properties
4. It allows past transactions to be challenged. Administration may put the company in
the hands of a licensed Insolvency Practitioner acting as the administrator who ensure
that all actions taken during Administration are carried out with the interest of the
company and its creditors in mind. This may involve accountability for allnpast
transactions.
TO THE MEMBERS
1. They will continue to have shares in the company which has not been wound up.
2. If the administration is successful, regenerating the business should enhance share
value and will restore any income from the business.
TO THE CREDITORS
1. Creditors should obtain a return in relation to their past debts from an administrator.
The total funds realised in an Administration will generally be higher than in
liquidation possibly because of the continuity of the trade. Third parties are generally
willing to bid higher in an administration as this is viewed as a rescue procedure
rather than a terminal insolvency procedure like liquidation.
2. Unsecured creditors will benefit from asset realizations. In liquidation, the priority in
payment – secured creditors over unsecured – so the latter as well as the shareholders
may end up getting nothing
3. Any creditor may apply to the court for an administration order, while only certain
creditors may apply for other forms of relief from debt. For example, the use of
receivers or an application for winding up.
4. Floating charge holders may appoint an administrator without reference to the court.
5. It may also be in the best interests of the creditors to have a continued business
relationship with the company once the business has turned around.
|| PROCESS OF ADMINISTRATION ||
* Section 563 provides that as soon as possible after the administrator’s appointment he must
give notice to the specificied persons.
* Section 564 requires officers of the company and any persons involved in the formation of
the company to provide the administrator with a statement of affairs. [usually for the last one
year – how the company has been doing – Balance Sheet] This statement must be submitted
within 12 days from the day when the administrator asks for it.
* Section 566 provides that the administrator will be required to set out proposals on how to
achieve the objectives of the administration.
•
These proposals must be sent to creditors, the company and the registrar within 60
days from the date on which the company entered into administration.
* Section 568 requires the administrator to convene a creditor meeting within 70 days from
the date on which the company went into administration.
•
However, note that the requirement to call for a creditors meeting can be dispensed
with where the company has sufficient property to enable each creditor of the
company to be paid in full or the company has insufficient property to enable a
distribution to be made.
* Section 570 identifies the object of the creditors meeting as approval of the administrator’s
proposals with or without modification. The administrator is expected to report the outcome
of the meeting to the court.
* Section 572 provides that if the creditors fail to approve the proposals the court may
terminate administration. ***
•
During administration, a creditors committee may be established pursuant to Section
517 in order to provide some oversight over the administration.
|| DUTIES OF AN ADMINISTRATOR ||
✓ Section 584 provides that as soon as he is appointed the administrator should take
control of the company’s property.
✓ Section 585 requires that administrator to manage the affairs of the company in light
of the proposals agreed upon and any revisions thereto
✓ Section 586 provides that the administrator is an agent of the company and as such
should work within the limits of its authority
|| POWERS OF THE ADMINISTRATOR ||
The Fourth Schedule of the Insolvency Act lists the following powers:
− Take possession of company property and sell it
− Borrow money and give security for the borrowing if the creditors give their consent.
− Appoint qualified persons such as solicitors and accountants to assist him iv. Bring or
defend proceedings against the company
− Effect insurance policies on behalf of the company
− Use the company seal and execute documents on behalf of the company
− Make arrangements and compromises with creditors
− Make or defend an application for the liquidation of the company
− Change the location of the company’s registered office
• Section 577 provides that administrators have the power to remove and appoint directors of
the company
|| ENDING ADMINISTRATION ||
* Section 591 provides that a member or a creditor of a company that is under administration
may make an application to the court for the removal of the administrator on the ground that
that he has either acted or proposes to act in a way that will be detrimental to the interests of
the applicant.
•
Additionally, an application may also be made if the administrator is not performing
his functions as quickly or efficiently as reasonably expected.
* Section 593 provides that the appointment of an administrator automatically ends at the
end of twelve months (12 months) from and includes the date on which it took effect. Consent
may however be given by the court or by the creditors to extend the duration of
administration.
* Section 595 provides that an administrator can make an application to the court for an order
terminating his appointment if:
a)
b)
c)
d)
The objective of the administration cannot be achieved
The company should not have entered administration
If a creditor’s meeting requires the administrator to make such an application
The purpose of administration has been sufficiently achieved in relation to the
company
* Section 596 additionally provides that if the administrator believes that the purpose of
administration has been sufficiently achieved, he may lodge with the Court and with the
Registrar, a notice containing prescribed information where upon his appointment will end.
→ They court may terminate the appointment of an administrator on the application
of a creditor who alleges an improper motive pursuant to Section 597. ***
→ Finally, as provided for under Section 598, the court may terminate the
administration if they chose to liquidate the company in the public interest instead.
C. RECEIVORSHIP
YOU HAVE VOLUNTARILY SKIPPED THIS SECTION
D. COMPANY VOLUNTARY ARRANGEMENTS
→ Section 625 (1) of the Insolvency Act provides for voluntary arrangement whose aim
is to prevent the winding-up of a company. This arrangement is a contract between the
company and its creditors that sets out the terms of payments of the debts between the
parties.
→ Directors initiate formal proposals for voluntary arrangements also referred to as
scheme of arrangement regarding settlement of payments to creditors.
→ The directors will appoint a licensed Insolvency Practitioner who is a natural person
and not a body corporate (however, the natural person may be an employee of a body
corporate)
→ This arrangement can be done even where the company is not insolvent, however in
most cases the company is usually close to insolvency.
Case: The primary concern of a scheme of arrangement ***
❑ Re T and N Ltd and others (2006)
✓ To encourage the adoption of an agreed scheme with creditors which avoids
liquidation and facilitates the financial rehabilitation of the company
❑ Re Cap PLC and other
→ The court explained that the arrangement is not a contractual relationship per se but:
(a) A statutory procedure involving the proposed of a scheme
(b) Its approval by the statutory majorities of creditors
(c) Its sanction by the court.
|| APPROVAL OF SCHEME ||
•
•
•
The scheme requires approval of the members in the form of a simple majority in
value during a members’ vote.
The approval by creditors is by special resolution 75% – three-quarter majority in
value of the creditors voting
Dissenting members and/or creditors may apply to court to set aside the scheme on
grounds of it being unfair, prejudicial or presence of material irregularity. ***
|| SCHEME OF ARRANGEMENT WITH A MORATORIUM OPTION ||
→ Section 638 provides option of a short moratorium usually 28 days to small
companies where its directors intend to put forward a proposal to the company’s
creditors for a voluntary arrangement.
→ A moratorium is the temporary suspension of the legal obligation to settle debt
payments.
→ Section 643 Obtaining a moratorium
• Document setting out the proposal for voluntary arrangement
• Statement of the Company’s financial position
• Appointment of Insolvency Practitioner
→ S643 (5) Approval of the moratorium requires indication of the following:
✓ Proposal for scheme of arrangement has reasonable prospect of approval
✓ The company has sufficient funds available to continue carrying on business.
✓ Meeting of creditors should be convened to consider approval of the scheme
→ Section 644: The scheme is then submitted to the court
→ The moratorium takes effect when the documents are lodged in court and ends on the
first day in which creditors’ meetings are first held.
Effects of Moratorium
1. Meeting with company creditors may be convened
2. Application for liquidation cannot be made
3. During this period, if there is a resolution that has been passed to liquidate the
company, that resolution has no effect
4. Enforcement of security by creditors is only if reasonable grounds are given and is
proved to be in the best interest of the company
5. The company may obtain credit exceeding 25,000 shillings from a person who is not
aware of the moratorium
6. Company property can be disposed where it is proven that it is in the best interest of
the company
YOU HAVE BOOKMARKED SOME REALLY NICE WEBSITES ON
ADMINISTRATORS AND RECEIVERSHIP - NICK'S LAPTOP
Week 13: Thursday 27th October 2022
STATUTORY AUDITORS
→ An auditor checks the books of a company with the goal of ensuring the annual
financial statements align with the actual financial position
Appointment of Auditors
APPOINTMENT OF AUDITORS: PRIVATE COMPANIES
→ Companies are required to have an annual general meeting – for directors to present
the company’s annual financial statement as well as the Auditor’s Report verifying
the + Director’s Report] Members then appoint the auditor for the next financial year
through an ordinary resolution (Simple majority = 50% +1)
→ Failure to appoint an auditor necessitates the company informing the Cabinet
secretary of reasons why – but no requirement to have an auditor for the 1 st financial
year since the company just started
→ Sometimes the Articles of Association may provide that the same auditor is reappointed
→ Shareholders blocking should meet 5% of the shareholders of the company – meeting
is held – ordinary resolution to block resolution
→ Resign – directors have a duty appoint a new one [Sometimes for private companies,
A.o.A provide that the new auditor be appointed at a general meeting by simple
majority]
READ Section 717 (4)
If directors fail to appoint, the shareholders will take on this responsibility
APPOINTMENT OF AUDITORS: PUBLIC COMPANIES
AGM – Ordinary Resolution – Default power of CS to appoint where company fails to
appoint
If a company does not = offence & penalty associated with non-appointment & failure to give
reasons
→ Practising Certificate & a valid annual License under the Accountants Act
→ Auditors should also disclose any conflict of interest = illegibility
→ CS also recognizes foreign qualifications – Section 778
TERM OF OFFCICE
→ Dictated by the contract of appointment between the auditor and the company
→ The terms MUST be disclosed to the members of the company
✓ Section 723 – Term of office of auditor(s) in a public company
− They do not take office until the
−
* Once audit report has been present in the AGM – the term of the auditor ends
✓ Section 725 – Company to disclose the terms of audit appointment in writing to the
members of the company
READ THE SECTION TO UNDERSTAND
DUTIES/RESPONSIBILITIES OF AUDITORS
Sources of the duties of an auditor:
– Companies Act – Section 727 to Section 730
– Articles of Association
– Contract of appointment
* The main business: Does the annual financial statement give a true and fair view of the
financial state of the company
NB: A contract cannot purport to give an auditor duties that are NOT prescribed by the
Companies Act
* An investor CANNOT rely on an Auditor's Report to gauge on the success of the
Case Law on Duties of Auditors
❑ Stone and Rolls Ltd (In Liquidation) v Moore Stephens (a firm) [2009]
•
→
→
→
Decided in the House of Lords
Charted a company to perform an audit
Moore Stevens could not be sued by the company's creditors because once
Defense of illegality is only available to 3rd parties that innocently relied – creditors
suing on behalf of the company could not
Take Away: An auditor CANNOT be held liable for the illegal acts of a company *** Auditor
can, however, be sued for the failure to perform their duties [IMPORTANT]
❑ Fomento (Sterling Area) Ltd v Selsdon Fountain Pen Co. Ltd [1958]
→ Defendant wanted permission
→ Had auditor find out whether the defendant pen A paid, B & C – not paid
Take Away:
Contents of Auditor’s Report on Annual Financial Statements:
1. Whether the Balance Sheet,
2. Profit & Loss Account
3. Whether the financial statements prepared by the company are according to the
Companies ' Act and with the relevant
4. Whether the financial statements prepared by the company are according to the
Companies ' Act
5. Whether the financial statements prepared by the company are in line with the
relevant IFRS & IAS
Qualified Report & Unqualified Reports
→ Qualified Report: meaning – Auditor is unable to certify or verify that the annual
financial statements reflect the true financial position of the company
Because of material discrepancies – these reasons MUST be listed by the auditors
NB: Not the auditor’s job to do an investigation – just say that this is not the true position,
there is a discrepancy
→ Unqualified report: meaning – the auditors conclude that the financial statements of
the company present fairly its affairs in all material aspects. It assumes that the
company observed compliance with generally accepted accounting principles and
statutory requirements
Actual Duties
✓ Duty to be Honest and Exercise Reasonable Care & Skill
• Re Thomas Gerrald & Sons Ltd
→ Statutory duty owed to members to make a report containing certain statements – if
auditor is supposed to make a report: he should either resign from office or make a
report clearly indicating that he was unable to complete his work because he did not
have access to necessary financial statements
→ If you require any reports, any meeting, access to books = ASK & DO IT
✓ Duty to be Independent – Section 774 & 775 Companies
→ Auditor should disclose any conflict of interest, otherwise, the Audit Report prepared
by such auditor may not reflect a true and objective
NO DUTY TO CIRCULATE A REPORT TO MEMBERS ***
− An Audit Report MUST be executed – Section 735: An auditor must sign & date the
report + ensure that the auditor's name is prominently displayed in the report
− Date refers to the financial year for whose financial statements the audit is carried
against
Joint & Several liability – sue the firm and the specific auditor
RIGHTS OF AN AUDITOR – SECTION 731 – 734
1. Right to access all necessary information [Failure = offence]
2. Right to receive notice and communication regarding resolutions and meetings – the
auditor must be present at all meetings conducted in that financial year
Case:
❑ Caparo Industries plc v Dickman [1990]
→ Ensure that the financial information prepared by the directors accurately reflect the
true financial position of the company:
(i) Protect company itself – correct mistakes made genuinely
(ii) Enable shareholders – to decide whether they would like to retain shares in that
company & investors to make a decision whether they would like to buy shares in that
company
ALSO READ THIS CASE FOR LIABILITY TO 3RD PARTIES
LIABILITY
If there is a breach of an auditor’s duty, whether in statute or Common Law, an auditor will
be held liable
 Reasonable care, skill and diligence

Instances where an Auditor is Relieved of Liability
1. If the court finds that any other reasonable auditor would have made the same
mistake, the auditor will be absolved of liability by the court (Section 763 Companies
Act)
2. Liability Limitation Agreement between auditor & company – Section 764
Companies Act
For example, in the event of fraudulent transactions – ordinary administrative and
management of the company
NB: Does NOT exempt an auditor from statutory and Common Law duties ***
❑ Andrew Muma and Charles Kanjama Trading as Muma & Kanjama
Advocates & Others v Deeloitte & Touche East Africa & 5 Others
(2020)
→ Third parties: directors & shareholders – reasonable rely on the auditor's report and
are affected by the auditor's negligence
→ Remedies that a company may get:
REMOVAL OF AUDITORS
1. Resign – in accordance with the contract: giving notice + reasons [Section 745]
2. Removal – members can remove by ordinary resolution
3.
STUDY TOPICS
•
•
•
•
•
•
Coporate Veil + Instances where corporate veil can be lifted + Liability
Directors + Duties of Directors + Difference between Directors & Shareholders +
Ultra Vires
Substratum failing +Derivative Action
Insolvency: Rescue mechanisms as opposed to liquidation + why they are better
option
Debt Financing + Equity Financing
Statutory Auditors