COMPANY LAW:

INTRODUCTION
The formation and winding up of a company in Kenya is governed by
t h e Companys Act Cap 486 of the Laws of Kenya. The company legislation in Kenya owes
its origin to the English company law. The companies Act of Kenya which came into
force on 1 st January 1962 is based on English companies Act of 1948.This Act is still
applicable together with later amendments. The Act provides a b a s i c l e g a l
framework for the regulation of companies in Kenya. It makes
provision for the legal incorporation of companies and lays down rules for
their constitution, management and winding up.
A part from the companies Act, there is also case law which has been developed by the courts
such doctrines of ultra vires. The case law and companies practice have developed so many rules
which are useful for filling in the gaps which have not been provided by the companies Act.
Definition of a Company
A c o mp a n y c a n b e d e f i n e d a s a g r o u p o f p e r s o n s a s s o c i a t e d t o g e t h e r f o r t h e
purpose of attaining a common objective, social or economic.
According to Lord Justice Lindley a company is associations of many personswho contribute
money or moneys worth to a common stock and employs it in s o m e t r a d e o r
b u s i n e s s a n d w h o s h a r e t h e p r o f i t a n d l o s s t h e r e f r o m . T h e common
s t o c k s o c o n t r i b u t e d i s d e n o t e d i n m o n e y a n d i s t h e c a p i t a l o f t h e company.
The persons who contribute it or to whom it belongs are members. The proportion of capital
to which each member is entitled is his share. The shares a r e a l w a y s
transferable although the right to transfer is often more or less
restricted.
Justice Marshall defines a company as an artificial being, invisible, intangible,
existing only in contemplation of the law. Being a mere creation of
l a w , i t possesses only the properties, which the charter of its creation confers upon
it, either expressly or as incidental to its very existence.
A c c o r d i n g t o H a n e y a c o mp a n y i s a n i n c o r p o r a t e d a s s o c i a t i o n w h i c h i s a n
artificial person created by law, having separate entity, with a perpetual succession and a
common seal.
Section 2 (1) of the company Act (cap 486) provides that a company means a
company formed and registered under this Act or an existing company. Existing c o m p a n y
o n l y m e a n s a c o m p a n y f o r m e d a n d r e g i s t e r e d u n d e r a n y o f t h e repealed
ordinances. For the purposes of companies Act of Kenya the companies includes: a) A registered company under this Act.
b) An existing company.
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c) An unregistered company covered under section 357-364.

d) A produce company covered under section 388.
e) A foreign company covered under section 365-381.
Characteristics of a company
1. Artificial legal person
A c o mp a n y i s a n a r t i f i c i a l l e g a l p e r s o n . I t a c t s t h r o u g h a b o a r d o f d i r e c t o r
s elected by the share holders. It was stated in Bates vs standard Land company that
The Board of Directors are the brains and the only brains of the company, which is
the body and the company can and does act only trough them.
A c o m p a n y h a s t h e r i g h t t o a c q u i r e a n d d i s p o s e o f t h e p r o p e r t y, t o e n t e r i n t o
contract with third parties in its own name and can sue or be sued in its own
name.
2. Separate legal Entity
A company is a separate entity quite distinct from its shareholders. A company or body corporate
is formed once a certificate of incorporation is given. Such a body corporate is capable of
having perpetual succession, power to hold land, has a common seal with liabilities
of its members limited as per the provisions of the Act.
In England legal personality of a company was recognized in 1867 in Oakes
vsTurquand. Importance of separate entity was firmly established by Salomon
vs.Salomon (1897) AC 22. In the case Solomon sold his boots business to a newly
f o r me d c o mp a n y f o r $ 3 0 0 0 0 . H i s w i f e , d a u g h t e r a n d f o u r s o n s t o o k u p
s h a r e s o f $1each. Salomon took 23000 shares of $1 and $10000 debentures. When
the company was wound up Salomon was able to rank any of secured (or preferred) creditors for
his debentures.
In the case Lord McNaughten observed the company is at law quite
d i f fe r e n t person altogether from the subscribers of the memorandum and though it
might be that after incorporation the business is precisely the same as it was before
and the same persons are managers, and the same hands receive the profits ,the
company is not in law the agent of the subscribers or trustee liable in any shape or
form except to the extent and in the manner provided by the Act.
Other case laws in support of separate legal personality are the Lee vs Lee
Air Farming Ltd and the Macaura vs Northern Assurance Company Limited 1952 AC
611.

3. Perpetual Succession
A company has a common seal, with which the name of the company is not affected by the
death, insanity or bankruptcy of shareholders. Change of membership also does not
affect continuity of the company.
4. Common Seal
A company has a common seal, with the name of the company engraved on it as a s u b s t i t u t e
f o r i t s s i g n a t u r e s . F o r a d o c u m e n t t o b e b i n d i n g i t m u s t b e a r t h e common seal
of the company and the seal witnessed by two or more directors.
5. Limited Liability
A shareholder is only liable to the debts of the company during its life or during
winding up only to the extent of share taken by him and only to the b a l a n c e t a k e n
b y h i m o r u p t o t h e g u a r a n t e e g i v e n b y h i m o r b o t h . Th e personal property of
a shareholder cant be attached for the debts of the company.
6. Transferability of shares

Members of a public company are free to transfer shares held by

t h e m t o anybody. However for private company transferability of shares may be restricted by
articles.
7. Capacity to sue or be sued
A company can sue or be sued all in its own name. Thus is the case of for suits for and against
the company is the proper plaintiff and proper defendant.
8. Separation of ownership and management
B o a r d o f d i r e c t o r s e l e c t e d b y me m b e r s i n t h e g e n e r a l me e t i n g g o v e r n i n g t h e
affairs of the company.
9. Separate property
A company is capable of owning, enjoying and disposing the property in its own
name. Thus a shareholder does not have an insurable interest in the property of the
company.
Lifting the Corporate Veil
Since a company is a legal person distinct from its members there is assumed to b e a c u r t a i n ,
a v e i l o r a s h i e l d b e t w e e n t h e c o mp a n y a n d i t s me m b e r s . T h e p r i n c i p l e o f
s e p a r a t e l e g a l e n t i t y w a s e s t a b l i s h e d i n t h e c a s e o f S a l o mo n v s S a l o m o n
and company Ltd. Thus once a company is formed there is a veil
between the company and its members. Based on this principle it is not easy to go
behind the curtain and see who are the real persons composing the company. There are
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however cases when

members who are in
lifting corporate veil
the corporate veil is
entitled to its property.

the corporate veil has to be lifted to look at the individual

fact the real beneficial owners of all corporate property. Thus
means identification of a company with its members and when
lifted the individual members may be held liable for its acts or

Some of the instances when the corporate veil may be lifted include where it is for
the benefit of revenue, where it is essential to secure justice and where it is in public interests.
The corporate veil may be lifted by: a) The courts
b) The statute
a) Lifting by the courts
1. Determination of the character of the company.
A company may be declared an enemy character when its directors
a r e residents of an enemy country. Therefore courts may lift the veil to ascertain the nationality
of persons controlling the company.
In Daimler Company Ltd vs. continental Tyres and rubber company Ltd 1916 AC307 Daimler
company was sued by continental tyre company for recovery of a d e b t o f T y r e s
s u p p l i e d . C o n t i n e n t a l t y r e s w a s i n c o r p o r a t e d i n E n g l a n d f o r purpose
o f s e l l i n g i n E n g l a n d t yr e s ma d e i n G e r m a n y. Th e s h a r e h o l d e r s o f continental
tyres were Germans except one and all directors were Germans
During the First World War continental tyres commenced an action to recover a d e b t f r o m
D a i m l e r. D a i m l e r c o n t e s t e d a rg u i n g t h a t c o n t i n e n t a l t yr e s w e r e a n enemy
company. It was held that continental tyres was an alien company and the payment of
debt would amount to trading with an enemy.
2. Prevention of fraud or improper conduct.
The veil may also be lifted if a company is formed for a fraudulent purpose or to
avoid legal obligations.
Professor Gower says that the veil of a corporate body will be lifted where the
corporate personality is being blatantly used as a clock for fraud or improper conduct.
Case law Jones vs. Lipman 1962
3. Where a company is a sham.
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This refers to a situation where a company is formed and used for some illegal or improper
purpose.
Case law Luniford motors Company Ltd vs Horne (1933)
4. Where the company is acting as the agent of the shareholders.
When a company is acting as an agent of its shareholders or of
a n o t h e r company, it will be liable for its acts. There may be express agreement to
the effect or an agreement (of agency) may be implied from the circumstances
of each particular case.
Case law relating to this is the F.G Film Ltd in Re (1953) I ALL E.R 615.
An American company financial the production of a film in India in the name of a B r i t i s h
c o m p a n y. Th e p r e s i d e n t o f t h e B r i t i s h c o mp a n y, t h e b o a r d o f t r a d e o f Great
Britain refused to register the film as a British film. The decision was held as a valid
in view of the fact that British company acted merely as the agent or nominee or the
American company.
5. Protection of Revenue.
This is especially the case when a company is formed to assist shareholders
evade taxes. In such case the shareholders may be held liable to pay income tax.
6. Protecting public policy.
Courts lift the corporate veil to protect the public policy and prevent transactions contrary to
public policy. Where there is a conflict between the separate entity p r i n c i p l e d a n d
p u b l i c p o l i c y t h e c o u r t s i g n o r e f o r m a n d t a k e i n t o a c c o u n t t h e substance
(Conners vs Connors Ltd (1940) for ALL ER 174).
Lifting by statute.
1. When members fall below statutory minimum. As per section 33 of the Act, a
business is not allowed to carry on business for more than six months if membership falls
below seven in case of a public company and below twoin case of a private company.
Anyone aware of the fall of membership and continues to carry on business will be held
liable for all debts of the company contracted after six months.
2. Misdescription of the company.
Sec 109 of the Act states that the name of the company must be fully
a n d properly mentioned on all documents issued by it. Where an officer of a company signs,
on behalf of the company, a bill of exchange, promissory note. Cheque, o r d e r f o r
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m o n e y o r g o o d s i n w h i c h t h e c o mp a n ys n a m e i s n o t me n t i o n e d t h e officer is
personally liable to the holder of the bill of exchange.
Case law in this case, Hendon vs. Alderman (1973) 117.
3. Holding and subsidiary companies.
Although both holding and subsidiary companies are separate entities there are
instances where a subsidiary may loose its separate identity to a certain extent.
a)W h e r e a t t h e e n d o f t h e f i n a n c i a l y e a r a c o m p a n y h a s
subsidiaries, it may lay before the members in a general meeting not only its own
account but also a set of group accounts showing t h e p r o f i t s a n d l o s s e a r n e d b y
t h e c o mp a n y a n d i t s s u b s i d i a r i e s and their collective state of affairs at the sixth
schedules.
b) Section 167 empowers the inspector appointed by the court to regard the
subsidiary and the holding company as one entity for the purpose of investigation.
4. Investigation of company membership.
Section 173 (s) empowers the registrar to appoint one or more
c o m p e t e n t inspectors to investigate and report on the membership of any company
for the p u r p o s e o f d e t e r m i n g t h e t r u e p e r s o n s w h o a r e o r h a v e b e e n
financially interested in the success or failure of the company or
a b l e t o c o n t r o l o r t o influence the policy of the company. To investigate the
corporate veil is lifted to ascertain the real persons controlling it.
5. Take over Bids.
S e c t i o n 2 1 0 p r o v i d e s t h a t w h e r e s c h e me o r c o n t r a c t i n v i t i n g t h e t r a n s f e r
of s h a r e s o r c l a s s o f s h a r e s i n t h e c o m p a n y t o a n o t h e r c o m p a n y
h a s b e e n approved by the holders of not less than nine tenths in the value of shares whose
transfer is involved the transferee company may at any time within two months
a f t e r t h e m a k i n g o f t h e o f f e r b y t h e t r a n s f e r o r c o m p a n y, g i v e n o t i c e
i n t h e prescribed manner to any dissenting shareholder that it deserves to acquire
his shares. This is illustrated in the case Re Bufle press Ltd.
6. Fraudulent conduct of Business.
Section 323 of companys Act in the course of winding up to a
c o m p a n y i t appears that any business of the company has been carried on with
intention to defraud creditors, the court may declare that any person who were
knowingly, parties to the carrying on such business are to be personally liable for the
debts and other liabilities of the company.
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7. Prosecution of delinquent officers and members of company.

Section 325 of Act if in the course of winding up of a company it appears that any p a s t o r
p r e s e n t o f fi c e r o r a n y m e m b e r o f t h e c o m p a n y h a s b e e n g u i l t y o f a n y
o ff e n c e i n r e l a t i o n t o t h e c o mp a n y t h e n t h e c o u r t ma y d e c l a r e s u c h a p e r s o n
liable for his offence.
Advantages of Incorporation.
1. Limited liability.
As observed in Jenkins vs pharmaceutical society of lirent Britain (1921) 1ch
392limited companies are off springs of preview necessity, that is, men should be
entitled to engage in a commercial pursuit without involving the whole of
their fortune in that particular pursuit in which they are engaged.
2. Transferability of shares.
Shares in a company can be transferred (subject to restrictions in the articles
of associations) from one person to another without the consent of other members.
3. Separate Legal entity.
A company is not affected by the death, insanity or bankruptcy of a member.
4. Control
Control can be gained by acquisition of majority shares which carry voting power.
5. Permanent existence.
A companys life is permanent.
6. Separation of ownership and management.
Shareholders are owners of the company. Shareholders elect their r e p r e s e n t a t i v e s
t o t h e b o a r d o f d i r e c t o r s , w h i c h m a n a g e s t h e a ff a i r s o f t h e company.
7. Expert management.
Companies run large-scale business and have adequate financial resources and a s s u c h c a n
a ff o r d t h e s e r v i c e s o f s p e c i a l i s t s . T h u s c o mp a n i e s a r e r u n professionally.
8. Public confidence.
Formation and running of a company is regulated by the provisions
o f t h e companies Act and various other acts. Provisions regarding the appointment and
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remuneration of directors, compulsory audit and publication of accounts protection of minority

shareholders have credited greater public confidence.
9. Social Advantages
A company helps to gather savings from the public and invests them in sound
industrial and commercial ventures. Companies provide employment opportunity t o m a n y a n d
s i n c e t h e y o p e r a t e i n l a rg e s c a l e t h e y e n s u r e e c o n o m i c u s e o f national
resources and provisions of goods and services to the public at lower prices.
Disadvantages of incorporation
1. F o r m a t i o n o f c o m p a n i e s i s a c o mp l i c a t e d p r o c e d u r e a n d i s c o s t l y.
Documents requited like the memorandum of Association, the articles, the prospectus or
statement in lieu of prospectus are usually drawn by legal experts who charge high fees
for their preparation.
2. There is no secrecy regarding the affairs of a company. Wide publicity of the
company affairs may lead to economic sabotage by its rivals.
3. It is very expensive to administer a company. This relates to requirements pertaining the
holding of general and statutory meetings and r e t u r n s o f a n n u a l a c c o u n t s . T h e
a c c o u n t s a n d a u d i t r e p o r t s r e q u i r e expenses.
4. D o c t r i n e o f u l t r a v i r e s . A c o m p a n y c a n o n l y t r a d e o n t h e b u s i n e s s specified
in its object clause of the memorandum of association.
5. Taxation.
A company must pay taxes as a legal person while this is not a requirement for partnerships.
6. There are many formalities before a business starts trading.
7. The winding up of a company is widely published thus exposing the property of the
company to an insecure position.
2. CLASSIFICATION OF COMPANIES CORPORATIONS.
Corporation is a person in law i.e. quite distinct from the individuals who are its m e m b e r s .
C o r p o r a t i o n s c a n o w n p r o p e r t y, h a v e r i g h t s a n d a r e s u b j e c t t o
liabilities.
Types of corporations:
a) Corporate sole.
Has only one member.
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Can continue even after death of those members.

b) Corporation aggregate.
Have more than one member.
Are classified according to the means the artificial corporate personality has been granted: - thus
(i) Chartered corporations
Are incorporated by the grant of a royal charter by the crown.
Nowadays charters are given to non-profit making bodies of public importance
(good).
(ii) Statutory corporations
Created by passing an act of parliament e.g. the national coal board.
(iii) Registered corporations.
Are those created by compliance with the terms of an act of parliament.
Companies act 1844 provided a third and easier method of incorporation by
registration following compliance with formalities. In 1855 limited liability concept was
introduced.
Types of registered companies
1. Public companies
Under section 1 (1) are formed by seven or more members, the purpose being to attract
investment from the general public.
2. Private companies.
Formed by two or more members. Defined by sec.28 (1) as a company which by its
articles: a)Restricts rights to transfer shares e.g. by clause that members must offer their
shares first to other members or to directors or a clause under which directors have a
right to refuse to register a transfer.
b) L i m i t s t h e n u m b e r o f i t s m e m b e r s t o 5 0 ( e x c l u d i n g p r e s e n t o r p a s t
employees). Joint holders of shares are treated as a single member.
c) P r o h i b i t s a n y i n v i t a t i o n t o t h e p u b l i c t o s u b s c r i b e f o r i t s s h a r e s
o r debentures.
Limited companies
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Liability of a company is unlimited in the sense that it must pay all debts due from it so long as
its assets are sufficient to meet them. Liability of members may be limited when the
company is formed by;
a) Shares.
Members are liable to the extent of the amount paid on their shares, including share
premium if any.
There is no liability regarding unissued capital.
In case of private companies a guarantee is usually required before credit is
given.
b) Guarantee
Normally these companies dont have share capital.
They are non-profit making organizations.
Where there is no share capital, there is no liability or the members unless and until
the company goes into liquidator in which case they were liable to the extent to which they
have agreed by the memorandum of association to contribute to the assets of the
company.
The guarantee is usually to contribute Sh1 though it may be more.
The guaranteed sum is payable by those who are members at the time
o f winding up and if they cant pay the liquidator may proceed against those who
were members previously but only in respect of debts incurred while they were
members.
An unlimited company may re-register as a limited company (by
s h a r e s o r guarantors) unless it has previously been converted from a limited to an unlimited
company.
Members must pass a special resolution agreeing to the change, and
the resolution must make the appropriate alterations so that it
c o n f i r m s t o t h e requirements.
The special resolution is then sent to the register of
c o m p a n y s a n d r e - registration is effected by a director or a company secretary
of the company by signing an application form sending it to the registrar together with a
printed copy of the companys memorandum and articles in their new form, the
register then issues a new certificate.
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Unlimited companies.
There is no limit to the liability of the members.
Mostly used by stockbrokers because stock exchange cant admit a company as a member unless
its members are personally liable for its debts.
An unlimited company can avoid giving publicity to its financial affairs.
An unlimited company can be formed by: a) By being formed as such;
Either with or without share capital and as a public or private company.
W h e r e t h e r e i s n o s h a r e c a p i t a l me m b e r s c o n t r i b u t e e q u a l l y t o t h e d e b t s a n d
liabilities of the company.
b) By being re-registered
Sec. 43 CA 1967 allows a company limited by shares or guaranteed
t o r e - register as an unlimited company.
All members must consent in writing and all the consents together
w i t h a statutory declaration by the directors that the consents have been obtained and ac o p y
of the memorandum and articles altered so as to confirm to those of an
unlimited company.
T h e r e g i s t r a r ma y t h e n i s s u e a c e r t i f i c a t e a n d p u b l i s h t h e f a c t o f i s s u e i n t h e
Gazette.
Special features of unlimited companies.
a) It need not deliver copies of its annual accounts, directors and auditors reports
to the registrar with its annual return
It enjoys privacy as regards its financial affairs.

T h i s p r i v i l e g e i s n o t e x t e n d e d t o a n u n l i m i t e d c o m p a n y, w h i c h
i s a subsidiary or holding of a limited company, or unlimited company,
which is potentially under control of two or more limited companies.

b) Provisions of CA 1948 governing the alteration of capital do not apply to unlimited

companies.

A company may alter its capital structure by a special resolution altering the
articles.
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Notice of any alteration must be given to the registrar within one month unless
alteration increases the companys nominal capital, when notice must be given within 15
days.

c ) A n u n l i m i t e d c o m p a n y ma y a c q u i r e a n y o f i t s o w n s h a r e s i f i t s
a r t i c l e s authorize it to do so, even though it uses its own assets to purchase
them. (Re Borough commercial and building society (1893)).
If at the time it acquires the shares the company knows that its existing assets and
amounts which it could expect to exact from its members on winding up will not be enough to
satisfy its liabilities the acquisition of the shares will be set a side as a fraud on its
creditors (Mitchell vs. city of Glasgow Bank (1879)).
d) An unlimited company need not give a more than seven days notice to its m e m b e r s o f
a n e x t r a o r d i n a r y g e n e r a l m e e t i n g c a l l e d t o p a s s a r e s o l u t i o n other than a
special one. The period for other companies is 14 days.
e) An unlimited company may issue shares of no par value.
f) An unlimited company has no statutory power to issue
r e d e e m a b l e preference shares, but since it can purchase its own shares if articles
provide.
I t c o u l d i n p r a c t i c e i s s u e r e d e e ma b l e p r e f e r e n c e s h a r e s a n d p r o v i s i o n
o f section 58 would not apply.
Other instances of unlimited liability.
(a) Section 31
Under this if a company carries on business for more than six months with less than
seven members (or two in a private company), every member who knows of the fact is
liable for the debts of the company which are incurred of the period of six months has expired.
The section does not apply as regards damages after awarded e.g. a breach of contract
by the company.
(b) Section 332
The section applies if the company is being wound up. The court
m u s t b e satisfied that the companys business has been carried on with intent to defraud
creditors.
Person carrying on business fraudulently must be made personally liable for the companys
debts.
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Example directors could be held liable if knowing that the company is unable to pay
its debts as they fall due, they ordered goods on credit or received money from
customers for goods, which the company might not be able to supply.
(c) Section 202
The memorandum of a company may provide or be altered to provide, that the
liability of its members shall be limited but the liability of its directors shall be
unlimited. This alternative is hardly ever adopted in practice.
Separate legal personality of a company
The case, which established the independent legal personality of a company, Salomon
vs. Salomon and company Ltd (1897) (1, 1).
Major consequences of the Salomon case.
a) It established the validity of registration as a means of
c r e a t i n g a corporation formerly these was done by charter for statute.
b) Registration was established as a method of creating a company with s eparate
legal personality.
c) A registered company has perpetual succession.
d) Separate personality is made to function by the board of directors which is t h e
agent. There is thus need for members to have some control over the
board. Some of the ways the member can achieve this control was:a. The ultra vires rule.
Shareholders can seek a court injunction wherever directors involve in transaction that are
beyond the company powers.
These days the courts construct objects clause widely so that this control is often more apparent
than real (Re New Finance and Mortgage Co. Ltd (1975)).
Also acts by directors which are defective whether because of lack of authority or q u o r u m o r
because of some defect I their appointment or because of
t h e i r motives were improper, can be validated by ordinary resolution of the
members after full disclosure of the facts to them in a general meeting, provided the acts in
question are not ultra vires the company (e.g. Branford vs. Branford (1969) Y4).
b) Accounts and audits
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The board is required to account for its financial stewardship by ensuring

t h e p r o d u c t i o n o f a n n u a l a c c o u n t s w h i c h mu s t b e a u d i t e d a n d p r e s e n t e d t o
t h e members at the
c) Sec. 184 removal of directors is made easy.
A company may by ordinary resolution remove a director before the expiration of h i s p e r i o d
of office regardless of the way in which he was appointed
n o t withstanding anything in its articles or any agreement in his favour section
184(1).
Special notice of 28 days to the company is required of the intention to move the resolution
(sec.184 (2)).
Following the acceptance of limited liability in Salomon, certain protections are
given to creditors and potential creditors.
a) Publicity as to financial standing - Companies must file the
a n n u a l returns.
b) Share capital (creditors fund) cannot be returned to shareholders.
(i)

C a p i t a l r e d u c t i o n s m u s t b e a p p r o v e d b y t h e c o u r t under section 66.

(ii)

A l i m i t e d c o m p a n y m a y n o t p u r c h a s e i t s o w n s h a r e s ( Tre v o r a n d
W h o r t w o r t h 1 8 8 7 ( 1 / 6 ) ) , n o r, s u b j e c t t o c e r t a i n e x c e p t i o n s , l e n d
m o n e y t o p e r s o n s s o t h a t t h e y m a y b u y t h e companys shares (s.54)

There is an exception when shares are issued as redeemable preference shares (section 58).
(iii)
Dividends must be paid out of profits and not out of capital.
There are provisions to prevent the capital of a company being watered down as i t c o me s i n t o
the company by the control of the issue of shares at a discount (section 57)
a n d o f u n d e r w r i t i n g c o m m i s s i o n p a i d o n s h a r e s o n t h e i s s u e o f shares.
Exceptions to the rule of separate legal personality.
1. Companies act 1948
If the membership fall below the statutory minimum for six months.
There is also liability where on winding up the court is satisfied that a companys business has
been carried on within intent to defraud its creditors.
2. Public interest
Personal qualities of shareholders may be investigated in public interest (Daimler Co. Ltd vs.
continental Tyre (1916) (1/7).
3. Evasion of legal obligations
14

When a company is formed to evade legal obligations (e.g. Gilford motor Co. Ltd vs. Horne
(1933)) shareholders may be personally liable.
4. Personal relationship company sec. 184 of 1948 Act,
Which allows removal of a director by an ordinary resolution after 28 days has also
given rise to abuse of the corporate entity theory in the private company. This is
because a director can be easily be removed without a mistake of in part, unless there is a special
clause in articles as in Bushell v. Feith.
However in Ebrahim vs. Westborne Leallaries (1972)(1/9) the House of Lords
decided that a removal under section 184 could be ground for winding up
under section 222 in private company. This rule applies not to all private companies but to
personal relationship companies.
Personal relationship companies are in essence partnerships where each
member assumes continuing involvement in management. In order to ascertain
whether the company is a personal relationship company, it is necessary to lift the
corporate veil and discover the hopes and aspirations of the members.
In Re. A&B, C chewing gum (1975)1/40 the court took a view that entitlement to
management participation was an obligation so basic that, if broken,
t h e association must be dissolved even though it was not a company arising out
of partnership.
2. FORMATION OF A COMPANY
Introduction
There are several formalities, which have to be followed before a company is
incorporated (formed). The process is grouped in the following stages: 1. Promotion
2. Incorporation or Registration
3. Capital subscription
4. Commencement of business
It should be noted that a private company need only to go through the first two stages
only. A public company must go through all the four stages.
1. Promotion

15

L.W Leertenberg defines promotion the discovery of business opportunities and t h e

s u b s e q u e n t o r ga n i z a t i o n o f f u n d s , p r o p e r t y a n d m a n a g e r i a l a b i l i t y i n t o a
business concern for the purpose of making profits there from.
Promotion therefore has to do with the discovery of a business idea which can be p r o f i t a b l y
u n d e r t a k e n b y a c o mp a n y a n d i n c l u d e s p r e l i m i n a r y a n d d e t a i l e d investigation
of the feasibility of the idea, assembling of business elements and making provisions
of the funds necessary to launch the enterprise as a going concern.
Thus stages can be summarized as under: i.
Pr e l i m i n a r y a n a l ys i s a n d e x a m i n i n g t h e p r o p o s e d i d e a t o s e e w h e t h e r
t h e business is profitable.
ii.
iii.
iv.

Estimating the cost of production, selling price of goods and services and the
amount of profits likely.
Arranging for the
m a n a g e r i a l ability.

acquisition

of

l a b o u r,

ma t e r i a l s ,

capital

and

Presentation to the public and underwrites the business proposition in order to m a k e

p e o p l e t o m a n a g e i n t h e v e n t u r e . Th i s i s d o n e t h r o u g h t h e i s s u e o f a
prospectus.

2. Registration or incorporation
This involves registering the company with the registrar of companies under the
companies Act. For a public company membership should be at least seven and at least two for a
private company. The people who are involved in registration of a company are called
promoters. The following activities or steps are taken by promoters in order to register
the company.
a) O b t a i n i n g a p p r o v a l o f t h e p r o p o s e d n a m e f r o m r e g i s t r a r o f t h e
companies.
P r o mo t e r s a r e f r e e t o c h o o s e a n y n a m e f o r t h e i r n e w c o m p a n y; s e c t i o n 1 9
o f companies Act however has put restrictions on the names to be chosen. Section1 9 ( 2 )
provides that no name shall be reserved and no company shall be
registered by a name which in the opinion of the registrar is undesirable.
Section 17 of the business names Act cap 499 lists instances when a name is deemed
undesirable: i.
ii.

Where the name chosen suggests a criminal or immoral intent.

W h e r e t h e n a me s u g g e s t s a s s o c i a t i o n w i t h t h e p r e s i d e n t o r h e a d
o f state or a government ministry or department or a local authority or suggests
connection with an international organization such as World Bank e.t.c.
16

iii.

If the name is misleading especially as to the nature of the business the c o mp a n y w i l l

u n d e r t a k e o r a s t o t h e n a t i o n a l i t y o r r e l i g i o n o f t h e p e o p l e behind the
company.

iv.

W h e r e t h e n a me i s s i m i l a r t o t h e n a m e o f a n e x i s t i n g c o m p a n y,
partnership or co-operative society.

S e c t i o n 1 0 9 o f t h e c o m p a n i e s n a m e r e q u i r e s p u b l i c a t i o n o f t h e n a me o f t h e
company by:
a) Painting or affixing and keeping painted or affixed name on the outside of
every office or place where its business is carried on, in a conspicuous
position; in easily legible roman letters.
b) Having its name engraved in legible roman letters on its seal which shall take the form of
an embossed metal die;
c ) H a v i n g i t s n a m e me n t i o n e d i n l e g i b l e r o ma n l e t t e r s i n a l l b u s i n e s s
letters of the company and in all notices and other official publications of the company
and in all its bills of exchange, promissory notes, endorsements, cheques and
orders for money or goods purporting to be signed by or on b e h a l f o f t h e
c o m p a n y; a n d i n a l l b i l l s o r p a r c e l s , i n v o i c e s , r e c e i p t s a n d letters of
credit of the company.
S e c t i o n 2 0 o f c o mp a n i e s Ac t p r o v i d e s t h a t a c o m p a n y c a n c h a n g e i t s n a m e s
subject to the following: i.

Its the company itself that can change its name i.e. members in a general
meeting.

ii.

The resolution changing the name must be a special resolution.

iii.

After changing the name the company must within fourteen days give notice of its
change of name to the register of companies. The registrar will make the
change and publish the fact in the official Kenya Gazette.

b) Presentation of documents
The following have to be prepared and presented to the registrar of companies
1. Memorandum of Association
Contains conditions upon which the company is allowed to be incorporated. It defines
and sets the limits of the powers of the company. The memorandum also sets the objects of the
company.
2. Articles of Association
17

Contains the rules, regulations, by laws for the internal management of the affairs of a company.
Articles enable the company operate in a way to achieve the aims and objectives set out in the
memorandum of association.
3. A statement of the companys nominal capital.
Nominal capital is the maximum amount of capital that a company aims to raise.
4. A declaration that all the requirements of the companies Act and other formalities
relating to registration have been complied with. The declaration has to be signed by
an advocate, a person named as director or company secretary.
5. A l i s t o f t h e c o mp a n y d i r e c t o r s a n d t h e i r w r i t t e n c o n s e n t t o b e c o m e
company directors. Immediately after registration, the following true documents are required: (i)Notice of the situation of the registered office.
(ii)Particulars of directors and the secretary.
The registered office cant be changed but if it changes notice of change must be given to the
registrar within 14 days. Particulars of the directors and the secretary need to be filed with the
registrar within fourteen days of their appointment.
d) Issuance of a certificate of incorporation
On receipt of necessary documents the registrar opens a file for the
particular company. If all requirements of the Act have been complied with, he will register the
company and place, its name in the register of companies. A certificate
of incorporation will be issued where upon the registrar shall certify under his hand
that the company is incorporated. The original copy is given to the promoters and a copy will be
left in the companys file (s. 12).
It should be noted that presentation of documents does not mean automatic
r e g i s t r a t i o n o f t h e c o m p a n y. T h e r e g i s t r a r o f c o m p a n ys p o w e r s t o
refuse registration are inherent. If the registrars reasons for refusal
t o r e g i s t e r a company are not valid the promoters can seek order of mandamus from the
high court to compel the registrar to issue the certificate.
In R vs. registrar of joint stock companies (1913) 2k B 197; the promoters of the
company sought mandamus to issue the registrar of the joint stock companies on grounds that he
had without reasonable cause refused to register their company.
It was held that where promoters are aggrieved by the decision of the registrar they
can apply for order of mandamus to issue against the registrar. However where the
18

registrar is justified in law and in fact not to issue the certificate the order of
mandamus shall not be issued.
I n t h e a b o v e c a s e t h e p r o mo t e r s f a i l e d i n t h e i r a t t e m p t b e c a u s e i s s u i n g t h e
certificate would mean allowing an English company commits an illegality.
Section 17(1) once the certificate is issued it acts as conclusive evidence that the company was
properly formed in accordance with all the requirements of either the companys Act or
the company practice. If it is later found that the granting of t h e c e r t i f i c a t e w a s m a d e
i n i g n o r a n c e o f s o m e i r r e g u l a r i t y o n t h e p a r t o f promoters; it cannot be
withdrawn. Incase in this point is Barnards Banking company Re Poels case (1867)
L.R.2ch. 674. It was held by Lord Cairns in this case that:
W h e n o n c e t h e m e m o r a n d u m i s r e g i s t e r e d a n d t h e c o mp a n y h o l d s o u t t o t h e
world as a company undertaking business willing to receive shareholders and ready
to contract engagements then it would be of most disastrous consequences if at all that
has been done, any person was allowed to go back
and enter into examination of the circumstances attending original registration and
the regularity of the execution of the documents.
The certificate cannot be disputed on any grounds and cannot be challenged
even: a) Where the memorandum is altered after signatories put their signatures on memorandum
but before it is registered with the registrar.
b) When memorandum is signed by only one person for all the seven.
c) Where all the signatories are minors.
d) Signatures to the memorandum are forged.
Other case law relation to incorporation is Jubilee cotton mills Ltd vs.
L e w i s (1924) AC 958.
Circumstances when incorporation can be withdrawn: (i)

W h e r e i t i s d i s c o v e r e d t h a t t h e c o mp a n y w a s f o r me d w i t h
b l a s p h e m o u s objectives. This is the case in Bowman and others vs. the secular
society limited ( 1 9 1 7 ) AC 4 0 6 w h e r e t h e c o mp a n y t h o u g h t a g a i n s t
C h r i s t i a n i t y a n d u rg e d i t s members to stop Salvation Army members from
attending their Sunday worship.

T h i s w a s f o u n d t h a t t h e a c t i v i t i e s o f t h i s c o mp a n y w e r e b l a s p h e mo u s t o t h e
doctrines of that religion and the certificate was withdrawn and
c a n c e l l e d . However on technical grounds the action failed.
19

(ii)

There the objects of the company are found to be immoral. In R vs. Registrar of joint
stock companies (Ex-parte the A.G) (1980) QBX a firm of Accountants
sought to register a company on behalf of their client. They intended to
register t h e c o mp a n y i n t h e n a m e p r o s t i t u t e s b u t t h e n a m e w a s
rejected and ther e s e r v e d a n o t h e r H o o k e r L t d , w h i c h w a s a l s o
r e f u s e d b y r e g i s t r a r . T h e accountants then submitted the name Lindi St.
Claire French Lessons Ltd. The registrar accepted the name and registered the
company issuing a certificate. Later it was discovered that the companys
sole purpose was to enable clients either alone or with others provide prostitution
service for gain.

Judge Ackner LS stated that though prostitution per se was not unlawful under the
English law it was contra Moros bonus. Hence the registrar was entitled to quash
registration and withdraw the certificate.
(iii)W h e r e t h e e n t i t y t h a t w a s r e g i s t e r e d a s a c o mp a n y i s n o t a c o mp a n y i n
nature. In Salomon vs. Salomon and company Ltd (1897) AG 22 Lord Parker in the
course of his judgment suggested that courts would be ready to go behind the
certificate and nullify the registration of a company on the grounds that the entity
which was not corporate body with the status and capacity conferred by the Act.
(iv)Where the company to which the certificate has been issued turns out to be an
enemy of the state. A company becomes an enemy if persons controlling it defacto
are resident in an enemy country or wherever resident are adherent of taking
instruction from or acting under the control of the enemy Lord Parker.
A company becomes an enemy if it draws its membership from an
e n e m y country. A case law relating the above is Daimler company Ltd vs.
continental Tyres company (1916) 2 AC 307.
d) Acquisition of legal personality
Where a company is registered it becomes a legal person by
t h e n a m e contained in its memorandum of association. S 16 (2) incorporation of a company
a s a l e g a l p e r s o n w a s e s t a b l i s h e d i n t h e c a s e o f S a l o m o n v s . S a l o mo n a n d
company Ltd (1897) AC 22. In this case it was held that upon incorporation and in
essence of any fraud on the part of the promoters the company becomes a legal
person separate and distinct from its members, however closely it may be controlled
by those members.
Another cases supporting the separate entity are tulstail vs. Stegmann (1962) 2QB
593. In Lee vs. Lee Air farming company Ltd (1960) WIR 758, Lee formed a
company and he secured a job in his company. He died while on duty and it was held that a
company being a legal person separate and distinct from its members is capable of employing
and dismissing workers. As an employer, the company is subject to amongst laws, the
workmans compensation law and must compensate an injured or deceased worker
(employee) accordingly. However the case failed on a procedural technically since the widow
20

sued on her own name. Another case in support of separate entity is the Mc Aura vs. Northern
Assurance C o m p a n y L t d 1 9 2 5 A C 6 1 9 . I n t h i s c a s e M C A u r a f o r m e d a
c o m p a n y a n d transferred his timber estate to it and he also owned the company.
He affected an insurance policy on the timber in his own name with several
companies. The t i m b e r w a s d e s t r o y e d b y f i r e b u t h e w a s n o t
c o m p e n s a t e d f o r h e h a d n o insurable interest in the timber.
3. CAPITAL SUBSCRIPTION
This involves steps taken to raise capital for the company. Promoters are the first directors of the
company. To raise capital directors will be called to deliberate on the following: a)A p p o i n t m e n t o f s e c r e t a r y a n d f i x i n g t h e t e r m s a n d c o n d i t i o n s o f
t h i s appointment.
b)Appointment of bankers, brokers, solicitors and Auditors.
c)A d o p t i o n o f p r e l i m i n a r y c o n t r a c t s e n t e r e d b y p r o m o t e r s o n b e h a l f o f t h e
company in the per-incorporation stage.
d) Securing underwriting contracts in order to secure minimum subscription.
e)Adoption of the draft prospectus or statement in lieu of prospectus.
f) Appointment of managing director or manger and other officers.
g) A p p r o v a l o f t h e d e s i g n o f t h e c o m m o n s e a l o f t h e c o m p a n y
a n d t h e authorizing the custody thereof.
h) Listing of shares on the stock exchange.
If the directors wish to invite the public to subscribe for its shares, they will file a
copy of the prospectus with the registrar of companies. On the advertised date, the
prospectus will be issued to the public investors can obtain the prospectus from the
registered office or from the bankers.
Investors then forward their applications for shares along with application money to the
companys bankers mentioned in the prospectus. The bankers will then f o r w a r d
all applications to the company and the directors will consider the
allotment of shares.
If the share applications meet a minimum subscription as disclosed
i n t h e prospectus, directors will allot shares to the applicants. Allotment letters are then sent to
those given shares and regret letters to those who are not. If applications

21

fall below the minimum subscription as in the prospectors within 120 days
after prospectus issue, no allotment is made and all money will be refunded.
W h e n a p u b l i c c o mp a n y d o e s n o t i n t e n d t o r a i s e m o n e y f r o m t h e p u b l i c t h e
company will file a statement in lien of prospectus with the registrar at least 3 days
before allotment of shares.
4. COMMENCEMENT OF BUSINESS.
S e c t i o n 3 o f t h e Ac t g i v e s c o n d i t i o n s a n d r e s t r i c t i o n s w h i c h a c o mp a n y mu s t
observe before it is allowed to start business. This includes issuance
o f prospectus, and whether the minimum subscription was raised.
Form 211 which must be given to the registrar confirms the following: a) The minimum subscription has been raised.
b) Every director of the company has paid the company or made the shares taken or
contracted to be taken by him.
Having given for 211 and 212 and the statement in lieu of
p r o s p e c t u s t h e registrar shall certify that the company is entitled to commence
business and issue it with a Trade certificate.
If the company defaults on the above, contracts entered by it will be provisional
only and not binding on it. Section 3 (b) provides a penalty for breaching
t h e conditions (i.e. $1000 each day as contravention continues).
Section 3 subsections 7 exempts private companies from the conditions and
restrictions thus a private company can start business without the
t r a d i n g certificate.
4. PROMOTERS.
A promoter is the person who conceives the idea of forming a company and who undertakes,
does and goes through all the formalities and incidental preliminaries of incorporating a
company. Promoter help to incorporate a company, provide it w i t h a s h a r e a n d
l o a n c a p i t a l a n d a c q u i r e b u s i n e s s o r p r o p e r l y w h i c h i t i s t o manage.
In Whaley Bridge Calico printing company vs. Green and Smith (1850) 5 Q BD109s
Bowen LS stated a promoter is not a term of law but of business, usually s u m m i n g
u p i n a s i n g l e w o r d n u mb e r o f b u s i n e s s o p e r a t i o n s f a m i l i a r t o t h e commercial
world by which a company is generally brought in existence. L o r d B l a c k b u r n s t a t e d t h a t
i t i s a s h o r t a n d c o n v e n i e n c e w a y o f d e s i g n a t i n g those who set in motion the
machinery by which the act enables them to create an incorporated company.
22

Justice Cockburn defines a promoter as one who undertakes to form a company w i t h

reference to a given project and to set it going and who undertakes the
necessary steps to accomplish that purpose.
Section 45 (5) of the companys act (cap 486) excludes persons
a c t i n g o n professional capacity from being called promoters.
Section 45 (5) (a) provides that promoter means a promoter who has party to the s e p a r a t i o n
of the prospectus; or the portion thereof containing the untrue
statement, but does not include any person acting in a professional capacity
for p e r s o n s e n g a g e d i n t h e f o r ma t i o n o f t h e c o mp a n y. I f a n y s u c h p e r s o n
a c t s beyond the scope of his professional duty and helps in any way in the formation
of a company or in preparations for the management of its affairs, he will become a promoter
(great wheal polgooth company Ltd; Re (1883) 53 LS Ch. 42).
N/B however a registered company may also act as a promoter.
Function of the promoters
The following are the functions of the promoters: 1. Decide on the company name and ascertain that it is accepted by the registrar.
2. Prepare memorandum and Articles of Association.
3. Nomination of directors, Bankers, auditors and secretary and the
registered office of the company.
4. Printing memorandum and articles of association.
5. Registration of the company.
6. Issue of prospectus.
Legal status of promoter
In Lindley and Wigpool Iron ore vs. Bird (1866) 33, Lindley described the position o f a
p r o mo t e r a s a l t h o u g h n o t a n a g e n t f o r t h e c o mp a n y, n o r a t r u s t e e f o r i t
before its formation, the old familiar principles of the law of agency and its
trusteeship have been extended and very popularly extended to meet such
cases.
A promoter is thus neither an agent nor a trustee of the company but certain fiduciary duties have
been imposed on him under the companys Act.
Fiduciary position of a promoter
23

In Erlanger vs new Sombrero Phosphate Company 1878 3A Ac 1218 Lord Cais

observed that promoters in equity cannot find the company by any contract with
themselves as promoters without fully disclosing to the company all material facts which the
company ought to know. Promoters are in a fiduciary position: a) Not to make profit at the expense of the company. Cape Breton company Re.
(1885) 29 Ch.D 795
b) To give benefit of negotiation to the company.
Thus where the promoter purchases an item he cant rightfully sell that item at a
higher price that he gave in for. (Erlanger vs. new Sombrero phosphate company (1878) AC
1218). The right of rescission is lost if the parties cannot be relegated to their original position
this happens: (i)

Where the character of the property has been altered.

(ii)

Where third parties have acquired valuable rights.

W h e r e a p r o mo t e r s e l l s o r w i s h e s t o s e l l h i s o w n p r o p e r t y t o t h e c o mp a n y h e
should: (i)

Se e t h a t t h e r e i s a B o a r d o f i n d e p e n d e n t p e r s o n s a p p o i n t e d
a s directors of the new company.

(ii)

Disclose his interest in the property to the intended members or to the public by
means of a prospectus. He must also disclose the profit he is making out of
the deal.

c) To make full disclosure of interest of profit. Promoters need to fully disclose his profit and
his personal interest in a transaction. A case in support of this is the Liluck vs.
Barress AC 240. In this case a syndicate bought property worth$140000 property at
$120000, which they later sold to a company which they formed at $180000. A
prospectus was issued disclosing a profit of $ 40000. it was held that the $ 20000 was a
secret profit and promoters are sound to refund the company. Lady well winning company Ltd B
Brookers (1887) 35 ch. D400 in the above case five persons bought a nine for $5000 on 1/2/1873
and sold it to a company on 4/4/1873 for $18000, making a profit of $13000.
It was held that the vendors were not promoters when they bought the mine and they were
therefore under no fiduciary duty to disclose their interest and account for the profit they had
made.
d) Not to make unfair use of position. He must avoid seeking. He must guard against
taking advantage of position or seek under influence or participate in fraud.
24

Duty of promoters as regards prospectus

Promoters must ensure that a prospectus is issued (public company) and the
prospectus.
(i) Contains necessary particulars
(ii) Does not contain an untrue or misleading statements or does not omit any material facts.
Section 39 of the act states that a prospectus shall be dated; and that date
unless the contrary is proved be taken as the date of
p u b l i c a t i o n o f t h e prospectus.
Section 40 provides that a prospectus issued shall state the matters specified in p a r t
1 of the third schedule. Chapter 7 specifies the form and contents of a
prospectus.
A prospectus must be truthful and promoters can be held responsible (liable) for any
misstatement in the prospectus. If a prospectus is found untruthful: -

a)Allotment of shares may be set a side in the case of fraudulent misrepresentation.

b) Promoters may be sued for damages.
c) They may be sued for compensation for misrepresentation.
d) Th e y ma y b e s u e d f o r d a m a g e s b y s h a r e h o l d e r s w h o h a v e s u ff e r e d b y
reason of their non-compliance with the statutory requirements as with the
contents of prospectus.
e) They may become liable for criminal proceedings.
T h e c o m p a n ys a c t p r o v i d e s b o t h c r i m i n a l a n d c i v i l l i a b i l i t y f o r b o t h c i v i l
a n d criminal liability for any untrue statement contained in the prospectus.
For civil liability 3. 45 (1) provide.
Section 45 (1) provides that the following persons shall be
l i a b l e t o p a y compensation to all persons who subscribe for any untrue
statement included therein.
a) Every person who is a director at the time of issue of the prospectus.
25

b) Every person who has agreed to be named as a director in the prospectus or anyone
who has agreed to be a director immediately or after an interval.
c) Every person being a promoter of the company.
d) E v e r y p e r s o n w h o h a s a u t h o r i z e d i s s u e o f t h e p r o s p e c t u s . H o w e v e r a n
e x p e r t c a n o n l y b e h e l d r e s p o n s i b l e f o r a n u n t r u e s t a t e m e n t ma d e b y h i m.
Section 45 (2) provides defences to liabilities under section 45 (1) such persons shall not be
liable if he proves.
a) He withdrew from being a director before issue of the prospectus and it was issued without
his authority or consent.
b) P r o s p e c t u s w a s i s s u e d w i t h o u t h i s k n o w l e d g e o r a c o n s e n t a n d o n
becoming aware he gave reasonable public notice that it was issued without his
knowledge.
c) That after the issue of the prospectus and before allotment there under, then on
becoming aware of any untrue statement there in withdrew his consent there to and gave
reasonable notice of the withdrawal and reason thereto that:(i)

Of every untrue statement not made by an expert he had reasonable ground to believe
and did up to the time of allotment believe that the statement was true.

(ii)

That he relieved on an expert and untrue statement is a fair representation of the expert
report and he had reasonable ground to believe that the person making the
statement was competent to make it.

(iii)

As regards every untrue statement purporting to be a statement made by an

official person or contained in what purports to be a copy of an extract from the
document.

Section 46 (1) of the Act a prospectus may attract criminal liability.

An untrue statement in prospectus may lead to imprisonment for a term not
exceeding two years or to a time not exceeding ten thousand shillings or both u n l e s s
h e p r o v e s e i t h e r t h a t t h e s t a t e m e n t w a s i m m a t e r i a l o r t h a t h e h a d reasonable
ground to believe and did up to the time of issue, believe that the statement was true.
Criminal proceedings are only made where there is willful untrue statement and not otherwise.

Remuneration of promoters
A promoter has not right for compensation unless there is a contract. In Clintons
claim (1908) 2 ch. 515 promoters were unable to recover fees and stamp duty
26

incidental to formation of the company as there was. A promoter takes remuneration

for his services in one of the following ways: a ) S e l l i n g h i s o w n p r o p e r t y t o t h e c o mp a n y a t a p r o f i t p r o v i d e d t h e r e i n
f u l l disclosure.
b) He may be given an option to buy shares at par.
c) He may take commission on the shares sold.
d) He may be paid a Lumpson by the company.
Article 80 table A provides that directors can pay all expenses
i n c u r r e d i n promoting and registering the company.
Pre-incorporation or preliminary contracts
These are contracts entered by promoters to acquire properly or some right for the
company. In Kelner vs. Baxter (1866) LR Z. Kelner agreed to sell a hotel to Baxter
who was acting agent for a company which was about to be formed. It was held that
Baxter was personally liable on the contract as the company was not in existence after
its incorporation.
The company is not liable for the Act of the promoters done before incorporation. In Newborne
vs.Sensolid Ltd 1954 1Q B45 Newborne a director, entered into acontract in the
name of a company before its incorporation. He signed his name in a contract on behalf
of the company. It was held that there was no contract.
Position of promoters as regards pre-incorporation contracts1.
Company is not bound by pre-incorporation contract even where it takes the benefit of the
contract entered into on its behalf.
A case law in this is in English and colonial produce company Ltd Re (1906) 2 ch435. A
solicitor prepared the memorandum and articles of a company and paid necessary
taxes and other expenses to obtain the registration of the company. He did this on the
instructions of promoters. It was held that the company was not liable to pay the
solicitors costs although it had taken benefit of his work.
2. The company cannot enforce pre-incorporation contract. A case law in this point is
Natal Land and colonization company Ltd vs. Pauline Colliery and development
syndicate Ltd Ac 120. a company cant enforce a contract made before its incorporation.
3. P r o mo t e r s a r e p e r s o n a l l y l i a b l e f o r c o n t r a c t s ma d e o n b e h a l f o f t h e
company before the companys incorporation.
Ratification of a pre-incorporation contract.
27

A company cannot ratify a contract entered into by promoters before incorporation.

Where contract is entered into by with both parties aware of the non-existence of the
company, the contract is a deserved to have been entered into personally and promoters
are liable.
To validate the pre-incorporation contracts a new contract has to be entered into with the other
party (in which case promoters cease to be liable)
F o r p r o m o t e r s a c t i n g o n b e h a l f o f t h e c o mp a n y a b o u t t o b e f o r m e d i t i s s a f e
(advisable) to provide in the contract that: a) If the company makes a fresh contract in terms of the incorporation contract, the liability
of the promoters shall come to an end.
b) If the company does not make a fresh contract within a limited time either of the parties
may rescind the contract.
5. MEMORANDUM OF ASSOCIATION
A memorandum of Association sets the fundamental conditions upon which the
company is allowed to be incorporated. It defines the relationship of the company a n d
creditors the outside public as well as the shareholders. It also enables
creditors and the outside public knows the range of permitted business of the
company.
In Ashbury Railway Carriage and company vs. Riche it was noted
t h a t t h e memorandum is as it were, the area beyond which the action of the
company cannot go inside that area the shareholders may make such regulations for their own
government as they think fit.
Importance of memorandum.
a) Provides basis of incorporation.
b) It determines the areas of operations of the company.
c) It defines the relationship of the company with the outsiders.
d ) I t i s a c h a r t e r o f t h e c o m p a n y, w h i c h c a n b e a l t e r e d o n l y u n d e r s p e c i a l
circumstances.
Purpose of memorandum
There are two purposes of memorandum: 28

a) To enable shareholders know where their funds are to be used and risks they
are undertaking in making such investments.
b) To enable outsiders of the company know the objectives of the company and
whether the contracts they intend to make with the company are within the objects of the
company.
Preparation of the memorandum
Schedule 1 of the act gives examples of various types of memoranda. Promoters c a n a d o p t
a n y o f t h e s e t a b l e s w i t h n e c e s s a r y m o d i f i c a t i o n s . T h e s e p r e s c r i b e forms of
memoranda are as under: Table B for a company limited by shares,
Table C for a company limited by guarantee and not having share capital,
Table D for a company limited by guarantee and having share capital,
Table E for unlimited company that has share capital.
Section 5 provides that memorandum of every company shall be in English and
printed.
S e c t i o n 6 s t a t e s t h a t me m o r a n d u m s h a l l b e s i g n e d b y e a c h s u b s c r i b e r ( w i t h
postal address and occupation) in the presence of at least one witness who shall affect the
signature and shall likewise add his address and occupation if any.
Contents of memorandum
Section 5 of the companies Act stipulated the memorandum should compose the following
clauses.
Clause 1 The name
Promoters must enquire from the register as to whether the proposed name of the
company is available for registration and is not considered undesirable; this should be
done before filling the memorandum or even before its preparation.
Section 19 provides that promoters may reserve a name pending registration of the
company for a period of thirty to sixty days.
Section 5 (1) requires accompany if limited to use the word limited as the word in
its name.
Section 21 provides that a company may drop the word limited if it obtains a
license to do so from the Attorney General. Such license is given if the Attorney
General is satisfied that: 29

(i)

T h e c o m p a n y t o b e f o r me d i s t o p r o mo t e c o m m e r c e , a r t s c i e n c e ,
r e l i g i o n , charity or any useful object.

(ii)

it intends to apply its profits or other income to promoting its objects.

(iii)

it prohibits the payment of any dividends to its members. Under section 20 a

company can charge its name by special resolution and with t h e a p p r o v a l
of the registrar signified in writing. A special resolution usually
requires twenty-one days not to the members and three fourths majority of
the votes at general meeting.

The above section provides that the company may change its name if it is almost like that of an
existing company, if the registrar so directs within six months of its registration.
The name does not affect any rights or obligations of the company or any legal
proceedings by or against it (section 20 (4)).
Clause 2 Registered office
Every company must have a registered office from the day on which it begins to
carry on business or within fourteen days after incorporation
w h i c h e v e r i s earliest; to which notices and all communications can be made (section 107)
Section 108 states that notice of the address of the registered office, and of any
change therein, must be given to the register within 14 days after incorporation or of the change.
The registered office is not necessarily the headquarters of the company.
Documents that must be kept at the registered office include: (i)

Register of members and index of members, unless made up elsewhere

or kept by an agent (section 112&113).

(ii)

Minute books of general meetings section 146.

(iii)

The register of directors interests in shares or debentures.

(iv)

A copy of every instrument creating any charge requiring registration.

(v)

The companys register of charges affecting properly of the company.

Clause 3 the objectives of the company

Objects clause defines the sphere of the companys activities, the aims that its
formation seeks to achieve and the kind of activities or business that it proposes to conduct.
30

Objects give protection to the shareholders and creditors as they are sure where t h e f u n d s w i l l
b e a p p l i e d . O b j e c t s a l s o h e l p o u t s i d e r s k n o w t h e p o w e r s o f t h e company.
Choice of the companys objects
Subscribers to the memorandum may choose any object for the
p r o p o s e d company. When drawing the object the subscribers should note the following: (i)

Objects should not include committing an illegality.

(ii)

The objects should not contradict the Act.

(iii)

Objects should not be against public policy.

Objects clause in the memorandum has to state.

(i)
The main objects of the company and objects incidental or auxiliary to the
attainment of the main objects
(ii)
Other objects of the company not included in (i) above.
A c company cannot continue to peruse subsidiary objects after the main object has
come to an end. In crown bank Re (1890) 44 ch D634. A company objects clause
enabled it to act as a bank and further invest in securities and land and to u n d e r w r i t e i s s u e
o f s e c u r i t i e s . I t s b a n k i n g b u s i n e s s w a s a b a n d o n e d a n d i t confined
i t s e l f t o f i n a n c i a l s p e c u l a t i o n . I t w a s h e l d t h a t t h e c o mp a n y w a s n o t entitled to
do so.
Incidental acts: A company may do anything which is fairly related to its core business. Anything i n c i d e n t a l
to the attainment or pursuit of any of the express objects of the
company will unless expressly prohibited to be within the implied powers of the
company.
1. Evans vs. Brunner, mond and company (1921) 1 ch 359.
A company engaged in manufacture of chemicals proposed to devote substantial sum of money
to the encouragement of scientific education. It was proved that this will in the end
benefit the company, but a shareholder objected that this was b e yo n d t h e p o w e r s o f t h e
c o m p a n y. I t w a s h e l d t h a t t h e p r o p o s a l w a s f a i r l y incidental to the companys
objects.
2. Foster vs. London, Chatham and Dover company (1895) 1 QB 711.
A company acquired a piece of land for the purpose of its railway. The railway was
erected on arches. The company left the arches as workshops e.t.c. The neighbours
31

objected of an account of noise and claimed that the act was ultra vires to the company
it was held that letting of the arches was valid.
3. Forrest vs. Manchester etc Rly company (1861) 4 Ltd 666.
A railway company had the authority to keep boats to be supplied for a ferry. It
employed the boats for excursion trips to the sea when they were not wanted for the ferry. It was
held that the use of the boats was incidental to the main purpose and was within the powers of
the company.
The following activities have also been held incidental to carrying of business: a) Appointing agents and hiring servants.
b) Borrowing money and giving security for loans.
c) Paying gratuities to employees.
d) Paying pensions to former officers and employees or their dependants.
In the following cases, companies were found to engage in activities beyond their powers.
1. London county council vs. Attorney General (1902) AC 165. The council had
the power to run tramways. It ran omnibuses to feed the tramways. It was held
that this was outside its powers as the omnibuses business was in no way incidental to the
business of working tramways.
2. Stephenes vs. Mysore reefs (Kangudry Mining Company Ltd (1902) 1 ch745.
the company object authorized to it acquire gold mines in Mysore and
elsewhere and it had other clauses. The company wanted to work in Ghana.
It was held that elsewhere could not be taken to mean any other
p l a c e outside India.
Ways a company can engage in a wide variety of business: -a)
Inflated object clause.
Promoters have given a list of several businesses that the company may engage itself.
b) Independent object clause
Courts usually take the first object in the memorandum as the core business and others
subsidiary. To avoid this interpretation experts drafting the objects may specify;

32

Each of the foregoing clause shall in no way unless otherwise provided as forming
part of or being dependent upon or shall in no way be severally formed and object
clause of an independent company.
c) Subjective objects clause
H e r e e x p e r t s c a n s i m p l y s a y t h a t t h e c o mp a n y c a n e n g a g e i n a n y b u s i n e s s ,
which in the opinion of the directors, the company can advantageously engage in.
Clause IV. Liability clause
Promoters must indicate
a) Whether the liability of the company is limited or unlimited.
b) If limited, is it by shares or guarantee.
c) If the company is public promoters have to indicate the liability of directors whether
limited or unlimited.
L i a b i l i t y c l a u s e i s e n t i r e l y o mi t t e d f r o m t h e m e m o r a n d u m i n a n u n l i m i t e d
company.
Clause V The capital clause
States the registered share capital divided into shares of a fixed
a m o u n t . Registered capital is also called nominal or authorized capital.

The clause is omitted in the companies with unlimited liability and the companies limited by
guarantee having not shown capital.
Clause VI. Association or subscription clause.
T h i s i s a d e c l a r a t i o n b y s u b s c r i b e r s t h a t t h e y d e s i r e t o f o r m a c o mp a n y a n d
agree to take shares stated against their names. The signature
o f e a c h s u b s c r i b e r m a y b e a n y o f t h e s u b s c r i b e r s . E a c h s u b s c r i b e r mu s t
i n d i c a t e h i s address, description and occupation.
General form of clause.
If the several persons whose names and address are subscribed are desirous of being formed
into a company in pursuance of the memorandum of association and we respectively
agree to take the members of shares in the company set opposite of our respective names.
33

After registration no subscriber to the memorandum can with withdraw his

description on any ground.
Alteration of the memorandum
Section 7 provides that a company cannot alter the conditions contained in the
memorandum except in the cases; in the mode and to the extent for which
express provision has been made in the companies Act.
Section 8 gives seven instances where a company may alter its objects after a special
resolution.
i)

To enable the company carry its business more economically and efficiently.

ii)

To attain its main purpose by new or more improved means.

iii)

To enlarge or change the local area of its operation.

iv)

To c a r r y o n s o m e b u s i n e s s w h i c h ma y b e c o n v e n i e n t l y c o m b i n e d
w i t h i t s own.

v)

To restrict or abandon any of its objects.

vi)

To sell or dispose part of or whole of its business.

vii)

To amalgamate with another company.

The proposed alteration become effective unless within thirty days

o f t h e resolution, objection is made to the courts in which case the alteration will
be effective if the court affirms it.
Section 8 (2) provides not such application may be made
a) By holders of that less than 15% of the companys members if the company is not limited
by shares.
b) By holders of not less that 15% of the companys debentures entitling the
holders to object to the alteration of its objects.
Section 8 (7) after a resolution altering the objects, a printed copy
o f t h e memorandum must be delivered to the registrar within fourteen days after
the expiry of the period allowed for objection. S e c t i o n 8 ( 2 ) t h e f a c t t h a t a n a l t e r a t i o n
does not come within one of the seven clauses specified in section 8 does
n o t r e n d e r t h e a l t e r a t i o n i n v a l i d u n l e s s objection is submitted within thirty days.
No alteration can be made requiring a member to take up further shares
o r increasing his liability unless he agrees in writing (section 24).
34

The courts cannot allow an alteration, which is incompatible with the original of t h e
o b j e c t s o f t h e c o m p a n y. A c a s e i n t h i s p o i n t i s i n R e c yc l i s t s Tou r i n g C l u b
( 1 9 7 0 ) . A c o mp a n y w a s r e g i s t e r e d t o p r o m o t e , a s s i s t a n d p r o t e c t t h e u s e
o f bicycles, tricycles and similar vehicles on public roads. The company proposed to alter its
powers by admitting all tourists and motorists, it was held by the court t h a t t h e
a l t e r a t i o n m u s t n o t b e a l l o w e d a s o n e o f t h e o b j e c t s w a s t o p r o t e c t cyclists
against motorists.
DOCTRINE OF ULTRA VIRES
Ultra vires is a term given to refer to a situation a company does anything beyond p o w e r s
g i v e n i n t h e me m o r a n d u m . A c o mp a n y m u s t n o t e n g a g e i n a c t i v i t i e s which
are not expressly or impliedly authorized by the memorandum, otherwise any act
which exceeds the powers of the company will be ultra vires and void and thus cannot
be ratified even by the assent of the whole body of directors.
An Act of Intra vires the company if it is within the companys powers, this is the case when;
(i)

T h e a c t i s w i t h i n t h e c o m p a n ys o b j e c t s
m e m o r a n d u m o f association of the company.

as

stated

in

the

(ii)

The act is reasonably incidental to the companys objects,

w h i c h a r e expressly stated in the memorandum of association and
i s d o n e i n o r d e r t o effectuate or achieve the stated objectives. The
doctrine was explained by the House of Lords in the case of Attorney General
VGE Rly. T h e d o c t r i n e o f u l t r a v i r e s i s i l l u s t r a t e d i n A s h b u r y
r a i l w a y c a r r i a g e a n d I r o n company vs. Riche in this case the
memorandum gives the company powers to make and sell railway
carriages. The directors entered in to a contract to lay a r a i l w a y i n
Belgium and the company in a general meeting subsequently
purported to ratify the act of the directors by passing a special resolution
to that effect. The company later dishonored (repudiated) the contract and
the other p a r t y s u e d f o r b r e a c h o f c o n t r a c t . H o u s e o f L o r d s h e l d t h a t
t h e r e c o u l d b e n o ratification of a contract made by a company ultra vires even
though every single member consented there to. The contract to make a
railway in a foreign country was a nature not included in the memorandum. The
company was therefore held not liable for the breach of contract.

The doctrine of ultra vires approved but qualified in Attorney General vs. Great
Eas tern Rly compan y (1880) 5 AC by adding that the doctrine ought
t o b e reasonably understood and applied and whatever may fairly be
regarded as incidental to or as consequential upon those things which the
l e g i s l a t u r e h a s authorized ought not to be held ultra vires to the company.
In Re Germany Date coffee company (1882) it was held that
w h e r e t h e substratum of the company fails, the heart of the company fails and the
body c a n n o t f u n c t i o n w i t h o u t t h e h e a r t . H o w e v e r i n t h e c a s e o f R e L i s t o n R .
35

c o . (1946) it was held that the company will not be wound up if the carrying on of the general
business is still possible.
The main issue in the doctrine of ultra vires is that a company not being a natural person
should not be held responsible for its own acts or agents acts that are beyond its
powers and privileges. But there is nothing to prevent a company from p r o t e c t i n g i t s
p r o p e r t y. A c a s e o n t h i s p o i n t i s n a t i o n a l Tel e p h o n e c o . v s . S t . Peter Port
constables (1900) AC 317. A telephone company put wires where it didnt have
powers to put the defendant cut them down. It was held the company could sue for
damages for the wires.
If transaction is beyond powers of directors but within powers of the company, the
shareholders can ratify it by a resolution in a general meeting provided they have all
facts relating to the transaction to be ratified.
Effects of ultra vires transactions
1. Any member may obtain an injunction of the court to restrain the company from
committing an ultra vires act.
2. Directors may be held personally liable for ultra vires payments. But the
d i r e c t o r s h a v i n g r e f u n d e d t h e mo n e y c o u l d g e t i n d e m n i t y a s a g a i n s t
t h e person who received the payment with the knowledge that the payment to
him was ultra vires.
3. Directors entering into ultra vires contracts may be liable to the third partyf o r b r e a c h
o f w a r r a n t y o f a u t h o r i t y. D i r e c t o r s w i l l b e l i a b l e t o t h e l o s s e s incurred
to third parties provided the third party does not know that they have no authority to enter
in a particular contract. In weeks vs. property. a company invited applications
for a loan on debentures but the company had already issued a maximum limit
of debentures. Directors were held personally liable to a plaintiff who offered
a loan of $500. In order to make directors personally liable it must be established that
their act amounts to an implied misrepresentation of facts and not of law.
4. If funds have been spent ultra vires in purchasing some property, its right over the
property will be protected.
5. Ultra vires contracts have no legal effect and are void. A company cannot s u e o r b e
s u e d o n t h o s e c o n t r a c t s b e c a u s e t h e y a r e v o i d . E v e r y p e r s o n dealing with
the company is expected to know its powers and if he enters into a contract that is
inconsistent with them he does so at his own risk.
Exceptions where a party can sue on an ultra vires contract.
i)

If the company takes an ultra loan and uses it to pay off the lawful debts of the
company then the second creditor (render) steps to the position of the paid
off c r e d i t o r a n d t o t h a t e x t e n t w i l l h a v e t h e r i g h t t o r e c o v e r
36

h i s l o a n f r o m t h e company. But he cannot claim any right to securities held by

the original creditor.
ii)

If t h e p r o p e r t y h a n d e d o v e r t o t h e c o m p a n y e x i s t s i n s p e c i e o r i f i t
c a n b e traced, the party handing it over can reclaim it.

iii)

If money is lent by a company that does not have the power to lend it, it
can be recovered because the debtor will be stopped from taking the plea
that the company had no power to lend.
6. A company will be liable for any tort of its employees if: a) The tort is committed in pursuance of its stated objects.
b) It is committed by employees within the course of their employment. A company will not
be liable for ultra vires torts.
6. ARTICLES OF ASSOCIATION
Articles of association are the rules and regulations of a company formed for the p u r p o s e o f
i n t e r n a l m a n a g e m e n t . Ac c o r d i n g t o t h e L o r d J u s t i c e B o w e n t h e memorandum
contains the fundamental conditions upon which alone the company is allowed to be
incorporated. They are conditions introduced for the benefits of creditors and the
outside public. The articles of association are the internal regulations of the company and
are for the benefit of shareholders.
Lord Cairns said the articles play a part subsidiary to the memorandum
o f association. They accept the memorandum as a charter of incorporation of the
company and so accepting the articles proceed to define duties, rights and
powers of the governing body as between themselves and the company at large and the mode and
form in which business of the company is to be carried on and the mode and form in which
changes in the internal regulations of the company may from time to time be made.
Section 2 (1) Articles include the regulations contained in table A schedule 1 to t h e
A c t i n s o f a r a s t h e y a p p l y t o t h e c o m p a n y. Ar t i c l e s w e r e t o b e
f r a m e d carefully so that they do not go beyond the powers of the company. They should not
violate any provision of the companies Act as these will make them null and v o i d .
I n P e r n e r i l G o l d m i n e s L t d ( 1 8 9 8 ) 1 c h . 1 2 2 t h e a r t i c l e s o f a c o mp a n y
provided that no petition for a winding up could be presented unless: a) Two directors consented in writing,
b) The petitioner held is of the issue of the share capital of these
conditions were fulfilled. It was held that the restrictions were invalid and petition could
be presented.

37

Functions of the Articles of Association

1. Define duties, rights and powers of the governing body.
2. Determine the mode and the form in which the business of the company may
from time to time be made. Section 9 stipulates that the articles must be
registered before incorporation. Section 11 states a company limited by shares ma y
adopt all or any part of the regulations of table A are not excluded
o r modified, these regulations shall be the regulations of the company so far
as they are applicable.
Table A in the first schedule to the act is provided as a specimen form of articles of association.
Part I may be adopted in whole/part by public companies and part II may be adopted in
whole part by private companies where a private company does not adopt part II of
task A are registers its own articles they must include the restrictions required by section
30.
Section 12 provides that if special articles are registered they must be: a)
b)
c)
d)

Printed in English
Divided into paragraphs
Dated
Signed by each subscriber and witnessed.

Contents of Articles of Association.

As an internal constitution promoters and later the members can indicate any rules
they may wish to have so long as such rules are permissible. The following are expected to be
included in the articles of association.
a) Share capital, rights of shareholders, and variation, of the rights
payments of commissions share certificates.
b) Lien on shares
c) Calls on shares.
d) Transfer of shares
e) Transmission of shares
f) Forfeiture of shares
g) Conversion of shares into stock
h) Share warrants
i) Alteration of capital
j) General meetings and proceedings there at
k) Voting rights of members voting and poll proxies.
l) Directors their appointments remuneration, qualifications, powers and
proceedings of board of directors.
38

m) Manager.
n) Secretary.
o) Dividends and reserves
p) Accounts, audit and borrowing powers
q) Capitalization of profits
r) Winding up.
Alteration of articles of association
Section 13of companies act cap 486 provides that a company can alter or add to i t s a r t i c l e s
b y p a s s i n g a s p e c i a l r e s o l u t i o n . An y a l t e r a t i o n s o me m a d e i n t h e a r t i c l e s
shall; subject to the provisions of the act; be as valid as if originally
contained therein.
Limitations to alterations.
The following limitations should be observed regarding alteration of articles: a) Such alteration should not be inconsistent to the act.
i) Restrict the members right to petition for winding up under section 221.
ii) Authorize the company to purchase its own shares.
iii) Authorize payment of dividends out of capital.
b) I t m u s t n o t c o n t r a d i c t t h e m e m o r a n d u m o f a s s o c i a t i o n . H o w e v e r articles
may be referred to where there is an ambiguity in the memorandum or where the
memorandum is silent on an issue.
c) Alteration should not sanction anything illegal.
d) Alteration must be made bona fide and for the benefit of the company as a whole. In Alten
vs. Gold Reefs of West Africa Ltd (1900) ch. 656. it was observed that the power of
alteration must be exercised subject to t h o s e o v e r a l l p r i n c i p l e s o f l a w a n d
e q u i t y w h i c h a r e a p p l i c a b l e t o a l l powers conferred on majorities and enabling them to
bind minorities.
In Shittleworth vs. Cox bros and company (Minden-lead Ltd (1927)) 2 k B g (CA)the articles
of a company provided that 5 and four others should be permanent directors to the
company. They could be disqualified by any six specific events. S failed to account for the
companys money on twenty-two occasions within twelve m o n t h s . Th e a r t i c l e s w e r e
a c c o r d i n g l y a l t e r e d a n d a 7 th event disqualified a director added. The event added was
that if a director was so requested in writing by all the other directors he should resign. S
was so requested to resign, it was held that the alteration was bona fide for the
benefit of the company as a whole and was valid.
39

O t h e r r u l i n g s i n s u p p o r t o f t h i s p o i n t w e r e m a d e i n G r e e n h a l g h v s . Ar d e n e
cinemas ltd (1951) ch. 286 and side Bottom vs. Kershaw Lees company
L t d (1920) 1 ch 154 (ca).
e) An alteration to increase the members liability will only bind those who
consent to it.
Section 24 provides that no member is bound by an alteration of the memorandum or
articles which requires him to increase his holding of shares or increase his liability to
pay money to the companies unless: i)
ii)

Alteration is made before he became a member.

He agrees in writing to be bound by such alteration.

An alteration of articles subject to restrictions in section 24 may be retrospective in effect, but

this will not enable the company to achieve a lien over shares after they have been
transferred for value by a debtor.
The relationship between the Articles and memorandum of Association.
1. The articles are subordinate to the memorandum. The memorandum states the
objectives of the company while the articles provide the manner in which the
internal management of the company is to be carried out.
2 . T h e m e m o r a n d u m mu s t b e r e a d i n c o n j u n c t i o n w i t h a r t i c l e s w h e r e i t i s
necessary to;
a) Explain any ambiguity in terms of the memorandum.
b ) S u p p l e m e n t t h e me m o r a n d u m o n m a t t e r s w h e r e i t i s s i l e n t b u t cannot
extend the scope of the memorandum.
3. The terms of the memorandum cannot be modified or controlled by the articles.
Legal effects of memorandum and articles:
1. Section 22 provides that after the articles and memorandum of association have been
signed by bind the members as if they have been signed by each individual
member of the company. The legal implications of the articles and
memorandum may be dissolved in four categories.
a) Members to the company.
Each member is bound to the company as if each member has actually signed t h e
memorandum and the articles. In Borland Trustee vs. Steel Brus and
40

company Ltd (1901) 1 ch. 279, the articles of a company were

a l t e r e d a n d provided that the shares of any member who became bankrupt should be sold to
certain persons at a fair price. B a shareholder became bankrupt and his trustee in bankruptcy
claimed that he was not bound by the altered articles. It was held
that the articles were personal contract between B and the rest of the members and B
and his trustee was bound.
Another case law is that of Hickman vs. Kent or Romney Marsh sheep breeders
Asociation (1915) 1 ch. 881.
b) Company to the member
A company is bound to the members and the company can exercise its rights as against any
member only in accordance with the provisions in the memorandum and articles. A
member can obtain an injunction restraining the company from doing ultra vires act.
In wood vs. Odesa water works company Ltd (1889) 42 ch. D630 the articles
of company provided that the directors may with the sanction of the company at
general meeting declare a dividend to be paid to the members.
A resolution was passed to give the shareholders debenture bonds instead of paying
the dividend in cash. It was held that the words to pay meant paid in cash; and a
shareholder could restrain the company from acting on the resolution on the ground that it
contravened the articles.
A member can also obtain an injunction restraining the company from committing a breach of
the memorandum and the articles, which would affect his rights as a member.
c) Members to members.
The memorandum and articles constitute a contract between the members and e a c h
member is bound to as against the other or others. Lord Herschell in
Wal t o n v s . S a ff e r y ( 1 8 9 7 ) AC 2 9 9 o b s e r v e d i t i s q u i t e t r u e t h a t t h e a r t i c l e s
constitute a contract between each member and the company and there is no
c o n t r a c t i n t e r ms o f b e t w e e n t h e i n d i v i d u a l me m b e r s o f t h e c o mp a n y b u t t h e
articles do not any the less, regulate their rights inter se. such rights can only been forced by or
against a member through the company or through the liquidators; r e p r e s e n t i n g t h e
c o m p a n y b u t n o m e m b e r h a s b e t w e e n h i m s e l f a n d o t h e r members any
right beyond that which the contract of the company gives.
In Ray field vs. Hands (1960) 1 is a leading case in this point.
d) Company to outsiders.
The articles do not constitute any binding contract as between a company and an outsider. In
general law a stranger to a contract cannot acquire any rights under such a contract.
41

Cases on these points are: i) Brown vs. La Trinidad (1887) 37 ch. D1.
The articles of a company contained a clause whereby B was to be a
director irremovable for a period of time. He was removed from office before the period; it was
held that it could not restrain the company from removing him as there was no
contract between him and the company.
ii) Elay vs. positive government security life Ass.Co. 1876 1 Ex D 88.
The articles of a company provided that it should be the solicitor of the company for life and
could be removed from office only for misconduct L took office and b e c a m e a
s h a r e h o l d e r, a f t e r s o m e t i m e t h e c o m p a n y d i s m i s s e d h i m w i t h o u t alleging
misconduct. E sued the company for damages for breach of contact. It was held that
the articles did not constitute any contract between the company and outsiders and as
such no action could lie.
The case in Eley has brought in some problems. The courts have therefore in some
cases acted on the footing that a clause in the articles not dealing with the rights of a member as
such but apparently intended to operate as a contract with him is to be regarded as the basis of a
contract.
In Swabey vs. ports Danwin Gold mining company (1889) 1 Meg 385, the articlesp r o v i d e d
that a director should receive a specified sum per annum by way
o f remuneration. In July, the company passed a special resolution reducing the sum a s f r o m
the end of the proceeding year. The plaintiff, who was a director,
resigned and sued for the services, it was held that he was entitled to sue
for remuneration up for the date of his resignation.
Constructive notice of memorandum and articles
Each person dealing with the company is assumed to know the contents of the
memorandum and articles of association. It is presumed the individuals dealing
with the company have read and understood the documents. This is called the doctrine
of constructive notice.
Memorandum and articles are open and accessible to all special resolution
become public documents once registered and an outsider is in notice of
their contents in the same way as he is of the articles and memorandum.
Lord Hartheley in Mahoney vs East Hollyford mining company (1875) LR7 HL 869
observed. But whether he actually reads them or not it will be presumed that he has read them.
Every joint stock company has its memorandum and articles of association open to all
who are minded to have any dealings whatever with the company and those who sue deal
with them must be affected with notice of all that is contained in these two documents.
42

Anyone dealing with a company is presumed not only to have

r e a d t h e memorandum and articles but have understood them properly (Oak Bank Oil
Co.vs. Crum (1882) 8 A. 65). The doctrine also prevents one from alleging that he
did not know that the memorandum and articles rendered a particular act ultravires
to the company (Freeman and Lookeyer vs. Buckhusst park properties ltd (1964) 1
ALL ER 630).
Doctrine of indoor management.
This doctrine imposes a limitation on the doctrine of constructive notice. Persons dealing with
the company once they are satisfied that the company has powers t o e n t e r t h e
p r o p o s e d t r a n s a c t i o n , t h e y a r e n o t r e q u i r e d e n q u i r e i n t o t h e regularity
of any internal proceedings they are entitled to assume that provisions of Articles have been
complied with by the company in its internal working.
If the proposed contract is within the powers of the company the company will be bound to the
outsider and claims of the outsider will not be affected in any way by the internal irregularity of
the company. This is the doctrine of indoor management or the rule in royal British Bank v.
Turquand.
I n R o ya l B r i t i s h B a n k v s . Tur q u a n d t h e a r t i c l e s e m p o w e r e d t h e d i r e c t o r s
t o borrow money provided they were authorized by a resolution passed at a general m e e t i n g o f
t h e c o m p a n y. T h e d i r e c t o r s b o r r o w e d m o n e y f r o m T a n d i s s u e d a bond to him
without the authority of resolution passed at the general meeting. It w a s h e l d t h a t
t h e c o m p a n y w a s l i a b l e f o r t h e mo n e y t o T b e c a u s e o n c e t h e a r t i c l e s
authorized directors to borrow subject to a resolution of the general
m e e t i n g o f t h e c o m p a n y T, w a s e n t i t l e d t o a s s u m e t h a t t h e d i r e c t o r s
w e r e borrowing on the authority of the resolution passed at a general meeting of the
c o m p a n y, T w a s n o t r e q u i r e d t o e n q u i r e i n t o t h e r e g u l a r i t y o f t h e c o mp a n ys
internal proceedings.
In Premier industrial Bank Ltd Vs. Calton Manufacturing company, it was stated that
if the directors have power and authority to bind the company, but certain
preliminaries are required to be gone through on the part of the company before that
power can be duly exercised, then the person contracting with the directors is not
bound to the section, that all these preliminaries have been observed he is entitled to presume
that the directors are acting lawfully in what they do.
The rule is also held in Fuontain vs. Carmarthen Rly co. (1868) LR5 ESQ 316. The
general rule here is that persons dealing with limited liability are not bound to inquire into the
regularity of the internal proceedings and will not be affected by irregularities of which
they had no notice.
Exceptions to the Doctrine of indoor management.
43

The doctrine of indoor management will not apply in the following instances: i)

Where the outsider has notice (actual or constructive) that the

p r e s c r i b e d procedure has not been complied with by the company. In Howard
Patent Ivory Company, the directors were empowered to borrow up to1 0 0 0 a n d
such further sums as the company in the general meeting
m i g h t authorize without such consent they issued to themselves debentures for
sums in excess of $1000. it was held they had knowledge of irregularity in
the internal proceedings of the company, the company would be liable for $1000
only. Sums borrowed in excess of this were held invalid.

ii)

A company cannot be held liable for forgeries committed by its officers. In

Ruben vs. Great Fingall Ltd, the company secretary issued a share certificate by
forging the signatures of the two directors under the seal of the company.
The
Plaintiff contended that it was not his duty to verify the signatures.
W h e t h e r signatures were genuine or not was part of internal management. It was held that the
certificate was not binding on the company as the rule in Turquands case does not
protect forgery. Lord Loreburn observed in the case it is quite true that persons dealing with
limited liability companies are not bound to inquire into their indoor management and will
not be affected by irregularities of which they have n o n o t i c e . B u t t h i s d o c t r i n e
a p p l i e s o n l y t o i r r e g u l a r i t i e s t h a t o t h e r w i s e m i g h t affect a genuine transaction, it
can apply to forgery.
iii) When the outsider is negligent: A n y p e r s o n e n t e r i n g i n t o a c o n t r a c t w i t h t h e c o mp a n y o u g h t t o m a k e
p r o p e r inquires, and in the absence of this he cannot claim benefit under the
Turquardcase.
In Wood vs. Bank of Liverpool the sole director paid cheques drawn in the name of
the company in his account. It was held that the bank was put upon inquiry before
crediting the cheques drawn in favour of the company in the account of the director.
The bank was not entitled to rely upon the ostensible authority of the director.
In Arand Bihari Lal vs. Dinshaw and company, the plaintiff accepted transfer on the
companys property from its accountant. The transfer was held to be void because
such a transaction is apparently beyond the scope of the accountants p o w e r s . I t
p u t s t h e p e r s o n d e a l i n g w i t h t h e c o m p a n y i n t o i n q u i r y, t h e p l a i n t i ff should
have insisted on seeing the power of Attorney executed in favour of the accountant
by the company. Even delegation clause is not enough to make the transaction valid
unless the accountant is in fact authorized.
iv) When an outsider does not have any knowledge of the articles. A person who did not
consult the companys memorandum and articles and consequently did not act in
reliance on those documents, cannot be protected under the rule in Turquands case.
44

v) Where an act is ordinarily beyond the apparent authority.

An outsider will not be protected by the rule in Turquards case if the act of the
a g e n t i s o n e w h i c h w o u l d n o t o r d i n a r i l y b e w i t h i n h i s p o w e r s s i mp l y
because u n d e r t h e a r t i c l e s t h e p o w e r o f m a k i n g s u c h a c o n t r a c t m i g h t
h a v e b e e n entrusted to him. The outsider can only hold the company liable if only the
power h a d i n f a c t b e e n d e l e g a t e d . T h e f a c t s o f A n a r d b i h a r i L a l v s .
D i n s h a w a n d company illustrate this point.
Statutory declaration of compliance.
This is a document required by section 17(2) and it contains a declaration made to
the registrar of companies telling him that the persons who have formed the
c o m p a n y h a v e c o m p l i e d w i t h a l l t h e r e q u i r e m e n t s o f t h e c o m p a n i e s Ac t a s
regards formation of a company.
The declaration should be prepared and signed by an advocate of the high court or by a person
who was named in the articles as a director or secretary of the company. The
declaration must be in the prescribed format usually on form 203 A.
The Act requires the promoters to prepare: a) Written consent of every director of public companies stating that each has
agreed to act as a director.
b) A return of the first directors i.e. particulars of the first directors.
c ) A s t a t e m e n t o n t h e a u t h o r i z e d s h a r e c a p i t a l o f t h e c o m p a n y. T h i s i s
required by the stamp duty act section 39.
d) A document indicating
o f f i c e (sec.108).

notice

of

the

companys

registered

7. PROSPECTUS
When a company wants to raise fund from the general public it
i s s u e s a prospectus. A prospectus is a document issued by the company to arouse public
interest in the proposed company and induce the general public to buy its shares and debentures.
A prospectus central theme is that it sets out the prospectus of the company and the purpose for
which the capital is required. A prospectus is an invitation to treat and the application for shares
on the basis of the prospectus is the officer.
Definition of a prospectus:
45

Sec.2 of companies act: A p r o s p e c t u s me a n s a n y p r o s p e c t u s , n o t i c e , c i r c u l a r a d v e r t i s e m e n t o r

o t h e r i n v i t a t i o n ; o ff e r i n g t o t h e p u b l i c o r f o r s u b s c r i p t i o n o r p u r c h a s e a n y
s h a r e s o r debentures of a company.
Any document inviting deposits from the public or inviting offers from the public for
subscription of shares or debentures of a company is a prospectus.
A prospectus must be in writing an oral invitation
a d v e r t i s e m e n t i n television or film is not treated as a prospectus.

or

an

Subscription:
The word when used in relation to a prospectus means to take shares for cash. In
government stock and other securities investment company Ltd vs.Christopher an offer was
made by company A to the members of company B and C to acquire all their shares in exchange
for allotment in the company. The offer c a n n o t b e h e l d t o b e a n o f fe r ma d e t o t h e
p u b l i c b e c a u s e i t d o e s n o t i n v i t e subscription for share since subscription means taking
shares for cash. Also this cannot be said to be an offer to the public.

Invitation to the public:

Section 57 defines public as including any section of the public,
w h e t h e r selected as members or debenture holders of the company concerned or as clients
of the person issuing the prospectus or in any other manner. The section also provides
that a public offer: a) M u s t b e c a l c u l a t e d t o r e s u l t i n t h e s h a r e s o r d e b e n t u r e s b e c o m i n g
available to persons other than those receiving the offer.
b) Should not be a domestic concern of those making and receiving the offer or
invitation.
In Nash vs. Lynde the managing director of a company prepared a document t h a t
w a s ma r k e d s t r i c t l y p r i v a t e a n d c o n f i d e n t i a l a n d i t d i d n o t c o n t a i n particulars
required to be disclosed in a prospectus, a copy of the document along with application
forms were sent to solicitor who in turn sent it to the plaintiff. The document was held to
be prospectus and as such the claim of the plaintiff for compensation was dismissed. In another
case distribution of 3000 copies of a prospectus among members of a certain company was held
to be a public offer because persons other than those r e c e i v i n g t h e o f f e r c o u l d a l s o
a c c e p t i t . T h e m a i n i s s u e i s t h a t a n o f f e r o r invitation to any section of the
public, whether selected as members or debenture holders of the company or as clients of
the person making the invitation, will be deemed to be an invitation to the public.
Form and contents of a prospectus
46

A prospectus gives a picture of the companys intended activities and position. It provides all
the necessary and material particulars about given company. The f o l l o w i n g
provisions of the act must be observed in the preparation of the
prospectus.
a) Section 43 a copy of the prospectus must be delivered to the register
of companies and must be signed by every person named therein as a director or
proposed director.
b) Section39 every prospectus must be dated; and the date unless the
contrary is proved, is taken to be the date of publication of the prospectus. Its advisable to
insert a date two or three days later than actual date.
c) Section 40 (1) every prospectus issued must include the
m a t t e r s specified in part 1 of the third schedule to the act and set out
t h e r e p o r t s specified in part 11 of that schedule.
As per third schedule to the act the prospectus must contain the following: -

1. The number of founders or management or deferred shares if any and the nature and
extent of the interest of the holders in the property and the profits of the
company.
2. The minimum shares a director can have and the remuneration
o f directors.
3. Names, occupation and postal addresses of the directors.
4. Where shares are offered to the public for subscription, particulars as to;
a) Minimum amount that must be raised by the issue of those shares to provide
funds for the following;
i)

T h e p u r c h a s e p r i c e o f p r o p e r t y p u r c h a s e d o r t o b e purchased,
which is to be defrayed in whole of the issue.

ii)

Preliminary expenses payable by the company and any c o m m i s s i o n s o

p a ya b l e t o a n y p e r s o n i n c o n s i d e r a t i o n o f h i s agreeing to procure
subscription for any shares in the company.

iii)

Repayment of any moneys borrowed by the company w i t h o u t u s e t h e

i s s u e p r o c e e d s a n d s o u r c e s o u t o f w h i c h amounts are to be provided.

5. The time of the opening of the subscription lists.

47

6. The amount payable on applications and allotment on each share. In the case
of second or subsequent offer, the amount offered for subscription on each
previous allotment made within the two preceding years, the amount paid for
the allotted shares.
7. The number, description and amount of any shares in or debentures of the c o m p a n y
which any person has, or is entitled to be given, an option to
subscribe for; together with the following particulars of the option: a) The period during which it is exercisable.
b) The prices to be paid for shares or debentures subscribed for under it.
c) Consideration (if any) given or to be given for it for the right to it.
The names and postal address of the persons to whom it or the right to it was given
8. The number and amount of shares and debentures issued or agreed tube issued
with the two preceding years as fully or partly paid otherwise than in cash and the
extent to which they are paid up.
9. (i) In respect of any property to which this paragraph applies;
a) The names and postal addresses of the renders.
b) The amounts payable in cash, shares or debentures to the vendor and where there are
many vendors amount payable to each vendor.
c) Short particulars of any transaction relating to the property completed within
the two preceding years in which any vendor of the property to the company
was at the time of the transaction, a promoter or a director or proposed director
of the company had any interest direct or indirect.
(ii) The property to which this paragraph applies is property purchased or by the company or
proposed so to be purchased, which is to be paid for wholly o r p a r t l y o u t o f t h e p r o c e e d s
o f t h e i s s u e o ff e r e d f o r s u b s c r i p t i o n b y t h e prospectus or the purchase of which
has not been completed at the date of the issue of the prospectus, other than property: a ) T h e c o n t r a c t f o r t h e p u r c h a s e w h e r e o f w a s e n t e r e d i n t o t h e ordinary
course of the companys business, the contract not being made in
contemplation of the issue nor the issue in consequence of the contract.
b ) A s r e s p e c t s w h i c h t h e a m o u n t o f t h e p u r c h a s e m o n e y i s n o t material.

48

10. T h e a m o u n t s , i f a n y, p a ya b l e a s p u r c h a s e m o n e y i n c a s h , s h a r e s
o r debentures for any property referred to in 9 above specifically the amount
of goodwill.
11. T h e a mo u n t i f a n y p a ya b l e o r p a i d w i t h i n t h e t w o p r e c e d i n g ye a r s a s
commission for subscribing or agreeing to subscribe on procuring or agreeing to procure
subscriptions for any shares in or debentures of the company or the rate of any such
commission.
12. T h e a m o u n t o r e s t i m a t e d a m o u n t o f p r e l i m i n a r y e x p e n s e s a n d t h e
persons by whom any of those expenses have been paid or are payable and t h e
a mo u n t o f t h e e x p e n s e s o f t h e i s s u e a n d t h e p e r s o n s b y w h o m a n y o f those
expenses have been paid or are payable.
13. Any amount or benefit paid within two preceding years or intended to be paid to any
promoter and the consideration for the payment or benefit.
14. General nature of any material contract not being a contract entered in the ordinary course of
the business carried on or intended to be carried on by the company or a contract entered into
more than two years before date of issue of prospectus. The dates of the contract and
parties to such contract should also be disclosed.
15. The names and postal address of the auditors if any by the company.
16. F u l l p a r t i c u l a r s o f t h e n a t u r e a n d e x t e n t a n d i n t e r e s t , i f a n y o f e v e r y
director in the promotion of or in the property proposed to be acquired by the
company or where the interest of such a director consists in being partner in affirm, the nature
and extent of the interest of the firm, with a statement of all s u m s p a i d o r a g r e e d
t o b e p a i d t o h i m o r t o t h e f i r m i n c a s h o r s h a r e s o r otherwise by any person either
to induce him to become or to qualify him as a d i r e c t o r , o r o t h e r w i s e f o r
s e r v i c e s r e n d e r e d b y h i m o r b y t h e f i r m i n connection with the promotion
or formation of the company.
17. If the prospectus invites the public to subscribe for shares in the company a n d t h e s h a r e
c a p i t a l o f t h e c o mp a n y i s d i v i d e d i n t o d i f fe r e n t c l a s s e s o f shares, the right of
voting at meetings of the company conferred thereby, and the rights in respect of capital and
dividends attached to the several classes of shares respectively.
18. I n t h e c a s e o f a c o m p a n y w h i c h h a s b e e n c a r r yi n g o n b u s i n e s s o r o f a
business which has been carried on for less than three years, the length of t i m e
during which the business of the company or the business to be
acquired, as the case may be, has been carried on.
Reports to be set out in prospectus.
49

Part II of the third schedule stipulates reports to be included in the prospectus. These
reports are prepared by the companys auditors and state: i.

T h e p r o f i t s o r l o s s e s o f t h e c o mp a n y i n e a c h o f t h e f i v e p r e c e d i n g
years.

ii.

The rate of dividends paid by the company in each in respect of each class of shares in
each of those years.
The assets and liabilities at the last date to which the accounts of the company were made
up.

iii.
i v.

If the proceeds or parts of the proceed are to be used directly

o r i n d i r e c t l y t o p u r c h a s e a b u s i n e s s t h e r e p o r t mu s t b e m a d e u p o f t h e
profits or losses of the business for the last five years.

Where the company has subsidiaries the performance of such subsidiaries has to be
reported or the consolidated accounts have to be prepared.
Reports of experts in prospectus
Section 42. A prospectus must not be issued purporting to contain a statement by an
expert unless: a) He has given and has not before delivery of a copy of the prospectus for r e g i s t r a t i o n ,
w i t h d r a w n b y w r i t t e n c o n s e n t t o t h e i s s u e t h e r e o f w i t h t h e statement
included in the form and context in which it is included.
b) A statement that he has given and not withdrawn his consent appears in the prospectus
Experts:
Refers to any person whose profession gives authority to a statement made by him.
Experts include engineers, valuers and accountants.
Exemption from requirements of third schedule matters and reports.
Requirements of the third schedule do not apply in the following: a) Where the prospectus is used to existing holders of shares
o r debentures (whether allotment letters are renounceable or nonrenounceable).
b) Where prospectus relates to
or debentures previously issued.

shares

or

debentures

similar

to

shares

A prospectus thus issued without the requirements of the third schedule is called a bridged
prospectus.
50

Issue of forms of application;

Forms of application must be accompanied with a prospectus. This requirement does
not apply where the form of application was issued either: In connection with a bonafide invitation to a person to enter into an underwriting
agreement with respect to shares or debentures.
In relation to shares or debentures which were not offered to the public section 40 (3)
(ii) (iii).
Issuing of shares to the public:
Issuing shares to the public is done by public companies wishing to raise capital
through;
a) Public issue by prospectus,
Done through a direct invitation,
To the public to subscribe for its shares or debentures invitation is made through a prospectus,
which specified the purpose for which the capital will be used.
b) Offer for sale
The provisions relating to the prospectus are cumbersome and companies in the past used
evaded the requirements by allotting the whole of an issue of shares and debentures
to an issuing house at a certain price. The issued house then published an advertisement
in the nature of an offer for sale inviting the public to b u y s h a r e s f r o m i t a t a h i g h e r
p r i c e . S e c t i o n 4 7 o f t h e a c t p r o v i d e s t h a t a document by which an offer
for sale is made to the public is within the definition of prospectus.
An allotment with a view to offer for sale is evidenced when;
a ) A n o ff e r o f s h a r e s o r d e b e n t u r e s w a s ma d e w i t h i n s i x m o n t h s
a f t e r allotment or agreement to allot.
b ) A t t h e d a t e w h e n t h e o f fe r w a s m a d e t h e w h o l e c o n s i d e r a t i o n t o b e
received by the company had not been received per section 47 (2).
In addition to complying with requirements of section 40 matters to be stated and reports to be
made out in prospectus an offer for sale must state: a) The net commission received or receivable in respect of shares
o r debentures to which the offer relates.
51

b) The place and time at which the contract of allotment or shares

o r debentures may be respected per section 47 (3).
An offer for sale must be signed by two directors of the company or not less than half of two
partners of the issuing form that a partner may sign through an agent. P e r s o n s ma k i n g t h e
o ff e r a r e p r i ma f a c i e l i a b l e t o p a y c o m p e n s a t i o n u n d e r section 45 caused by
misstatements in the offers as if they were directors.
Placings:
This case when a company issues its shares through one or more stockholders w h o
s e l l t h e m t o c l i e n t s . T h i s me t h o d i s i d e a l w h e n m a k i n g a s ma l l i s s u e
o f shares.
C o m p a n i e s r a i s i n g mo n e y t h r o u g h p l a c i n g a r e r e q u i r e d b y s t o c k e x c h a n g e t o
make a substantial proportion of their securities available to the general market.
Prospectus and duty of disclosure:
A part from requirements set out under section 40 any other information may be
volunteered. The intending purchaser of shares is entitled to all true disclosure in the prospectus.
In New Brunswick and Canada Rly and land Co. vs. Muggeridge (1860)
V C Kindersley said.
Those who issue prospectus holding out to the public the great advantages
which will accrue to persons who will take shares in a proposed undertaking and inviting them to
take shares on faith of the representations therein contained are b o u n d t o s t a t e e v e r yt h i n g
w i t h s t r i c t a n d s c r u p u l o u s a c c u r a c y a n d n o t o n l y t o abstain from stating as fact
that which is not so but to omit no one fact within their knowledge the existence of which might
in any degree affect the nature or extent a n d q u a l i t y o f t h e p r i v i l e g e s a n d a d v a n t a g e s
w h i c h t h e p r o s p e c t u s h o l d s a s inducement to take shares.
Effects of disclosure
Misstatement and non-disclosure are both fatal to the validity of the contract and a
subscriber for shares or debentures may rescind the contract within
r easonable time before the company goes into liquidation.
The contract can be rescinded if the following conditions are satisfied: a ) T h e s t a t e m e n t mu s t b e a m a t e r i a l m i s r e p r e s e n t a t i o n o f f a c t
. In Greenwood vs. Leather shod Wheel Company (1900) as company formed to manufacture
leather tyre wheels for trolleys issued a prospectus stating enlarge type orders have
already been received from the house of the house of commons to be followed by large
52

orders later. Infact all orders received were trial orders and no customers had yet expressed any
intention to buy in large-scale. It was held that the prospectus was misleading.
Statements of the fact can lead to the rescission of a contract but opinions in
prospectus cannot nullify a contract.
I n E d i n g t o n v s . F i z ma u r i c e ( 1 8 2 5 ) a c o m p a n y i s s u e d a p r o s p e c t u s i n v i t i n g
subscriptions for debentures. The object of the issue was stated to be that the money
would be used for effecting certain alterations in the companys building s a n d f o r
d e v e l o p i n g t h e b u s i n e s s o f t h e c o mp a n y. T h e mo n e y h o w e v e r w a s n e e d e d t o
p a y o ff p r e s s i n g l i a b i l i t i e s . Th e p l a i n t i ff a p p l i e d f o r d e b e n t u r e s i n reliance
on the statements in the prospectus. It was held that the plaintiff could rescind the
contract and directors were liable.
Other cases where subscribers were given the right to rescind the contract
for misleading prospectus are: 1. Kerbergs case Re Metropolitan coal consumers Association (1882).
2. Ross vs. Estates investment company (1868).
b) The statement must have induced the shareholder to take shares.
In Jennings vs. Brought, (1854) LJ ch. 999. A subscriber for shares in a mining
company offered by a prospectus which inaccurately described the capacity of the
companys mine. He inspected the mine himself. It was held that he was not e n t i t l e d t o
r e s c i n d t h e c o n t r a c t t o t a k e s h a r e s a s h e h a d i n s p e c t e d t h e m i n e himself. It
was held that he was not entitled to rescind the contract to take the shares as he had
inspected the mine himself and must have therefore, relied on his own observation and
not on the content of the prospectus.

c) The statement must be untrue.

A statement is untrue if it is misleading in the form and context in which it
i s included or where the omission from a prospectus of any matter is calculated to
mislead. A mere non-disclosure does not amount to misrepresentation unless the concealment has
prevented an adequate appreciation of what was stated.
A s t a t e m e n t c a n b e f a l s e b e c a u s e o f w h a t i t h a s s a i d , c o n c e a l e d , o mi t t e d
o r implied. In Rex vs. Lord Kylsant (1932) KB 442 a prospectus was issued by a
company stating that the company had paid a dividend every year between 1921 and
1927(years of depression) thus giving the impression that the company was stable.
However, the company had in fact incurred considerable trading losses and was a b l e
to pay dividends only out of realized capital profits. This fact was
n o t disclosed. It was held that the prospectus was false in material particular in that it conveyed
a false impression.
53

d) The deceived shareholder is an allotee and he must have relied on the statement in the
prospectus.
If a person purchases shares in the open market he has no right against the company.
In Peck vs. huirney (1873) LR 6HL, 377, a company issued a prospectus with a
misstatement. A relying on the misstatement applied and was allotted shares, which
he later sold to P. The company was wound up and P had to pay $100 and as a contributory. P
sought an indemnity for his loss from the directors; it was hed that the directors were not
liable to P.
L o r d C l a e mo s f o r d o b s e r v e d t h e o f fi c e o f a p r o s p e c t u s i s t o i n v i t e p e r s o n s
t o b e c o m e a l l o t e e s , a n d t h e a l l o t m e n t h a v i n g b e e n c o m p l e t e d , s u c h o f fi c e i s
exhausted and the liability to allotees does not follow the shares into the hands of the subsequent
transferees. Directors cannot be made liable ad infinitum for all the subsequent dealings, which
may take place with regard to those shares upon the stock exchange.
e) The omission of material fact must be misleading before recession is granted.
If a person relies as aground for the rescission of a contract on t h e o m i s s i o n o f
a s t a t e m e n t , h e m u s t s h o w t h a t t h e o m i s s i o n o f t h e statement
makes what is stated misleading. An omission must be of such a nature to make a
statement actually misleading.
I n C o l e s v s . Wh i t e G r e yh o u n d As s n L t d ( 1 9 2 9 ) 4 5 TL R 2 3 0 . a p r o s p e c t u s
d e s c r i b e d l a n d a s e m i n e n t l y s u i t a b l e f o r G r e yh o u n d r a c i n g , l o c a l a u t h o r i t y
refused approval, it was held that he description of land was misleading
a n d rescission was granted.
f ) T h e p r o c e e d i n g s o f r e s c i s s i o n mu s t b e s t a r t e d a s s o o n a s t h e a l l o t e e
c o m e s t o k n o w o f a mi s l e a d i n g s t a t e me n t a n d b e f o r e t h e company goes
into liquidation.
Where an allotee decides to rescind a contract on grounds of fraudulent
m i s p r e s e n t a t i o n , a me r e n o t i c e t o t h e company is not enough. He must make effective
steps for the rectification of register of members and removal of his name there from.
Loss of rights of rescission:
The right to rescind a contract based on fraudulent statement or withholding
material fact is lost in the following instances: 1. When after discovering the misstatement he treats the contract
a s subscribing or does any act adopting the contract by: a) Attempting to sell the shares.
b) Executing a transfer.
54

c) Paying calls or receiving dividends.

d ) A t t e n d i n g a n d v o t i n g a t a g e n e r a l m e e t i n g o f t h e c o mp a n y i n person or
by proxy.
2. When there is unreasonable delay upon discovering a misstatement. A delay of 15
days may be held to be too long and amounted to waiver of the right to rescind (Scottish
petroleum co. Re. Wallaces case (1883) 23 ch 413).
3. Where the winding up of the company has commenced and the rights of the
creditors of the company have intervened, the right of rescission is lost. Where the
shareholder has started active proceedings to be relieved of his s h a r e s , p a s s i n g o f
t h e w i n d i n g u p o r d e r d u r i n g t h e i r p e n d e n c y w o u l d n o t prejudice his right of
getting relief.
Damages for deceit
A n yo n e i n d u c e d b y f r a u d u l e n t s t a t e m e n t t o t a k e s h a r e i s e n t i t l e d t o s u e t h e
company for damages. He cannot both retain the shares and get damages
against the company.
Liability for false statement in prospectus
Section 46 where a prospectus has any untrue statement any person
w h o authorized its issue is liable for convictions, to a term of two years imprisonment or five to
ten thousand unless he proves.
a) That the statement was immaterial.
b) That he had reasonable ground for believing and did believe up to the time the
issue of prospectus that the statement was true.
In Derry vs. Peek (1889) the court held that the directors might not be liable on a statement
contained in a prospectus, which in their honest opinion was true and not made
carelessly.
Section 45 also provides that civil liability to pay damages may be incurred by: i)

Directors of the company

ii)

Persons who have agreed to become directors at a later date.

iii)
iv)

Promoters
O t h e r p e r s o n s w h o h a v e a u t h o r i z e d t h e i s s u e o f t h e prospectus.

Defences for directors or promoters:

Section 45 (2) provides the following defences, which the directors have to
establish to avoid liability: 55

a) That one had withdrawn his consented to become a director before the issue of prospectus
and it was issued without his consent.
b) That the issue was made without his knowledge or consent and that o n
b e c o mi n g a w a r e o f t h e i s s u e , h e f o r t h w i t h g a v e r e a s o n a b l e p u b l i c
notice of the fact.
c) That he withdrew his consent after the issue of the prospectus and gave
reasonable public notice before allotment.
d) He had reasonable ground to believe that the statements were true and believed
them to be true.
e) That the statement was correct and fair summary of an experts report or a
statement made by official or in an official documents.
Experts liability:
An expert who gives a report to be included in the prospectus is placed in a
similar position for untrue statement like the person who authorized the issue of the
prospectus; section 45 (3) provides the following defences to an expert: 1. That he withdrew his consent in writing before the registration of the
prospectus.
2. That offers registration sued before allotment, on becoming aware of t h e
untrue statement, he withdrew his statement in writing and gave
reasonable public notice of such withdrawals and the reason for it.
3. That he was competent to make the statement and up to the time of allotment he
believed on reasonable grounds that it was true.
STATEMENT IN LIEU OF PROSPECTUS
A statement in lieu of prospectus is to be filled with registrar on two occasions.
U n d e r s e c t i o n 5 0 a p u b l i c c o mp a n y h a v i n g p r i v a t e l y a r r a n g e d f o r i t s c a p i t a l
subscription need not issue a prospectus, but in that event a statement in lieu
of prospectus must be filled with the registrar three days before any allotment of any
shares or debentures can be made.
Under section 32 if a company alters its articles such that provisions of section 3 0
are excluded, the company will cease to be a private company and must
within fourteen days after the said date file with the registrar a statement in lieu of prospectus.

56

For a public company a statement in lieu of prospectus has to be in the form of the
fourth schedule while in the case of a private company it has to be in the form of the second
schedule.
Form of statement:
The statement must be signed by every person named therein as a director
or proposed director or his agent authorized in writing. The statement must contain same
information as a prospectus complying with the third schedule.
Section 50 provides that if a statement in lien of prospectus includes any untrue
statement, the directors and others who authorized its delivery for registration are liable to
imprisonment up to two years or a fine up to ten thousand shillings or both, unless it is
established by the person liable that: i)

The untrue statement was immaterial.

ii)

H e h a d r e a s o n a b l e g r o u n d t o b e l i e v e t h a t s u c h a statement
was

true.
Contents of statement in lieu of prospectus:
Contents of this statement depend on whether that statement is delivered
under section 32 (1) or section 11 (2). A statement delivered under section 32 (1) must contain
the following particulars.
The nominal share capital of the company and shares into which it is divided.
The amount (if any) of the capital constituted by redeemable preference shares.
The earliest date in which the company has power to redeem the redeemable
preference shares, if any.
a) Names, occupation and postal address of directors or proposed
directors.
b) Amount of issued shares and commission or discount allowed
therewith.
c) Amount of preliminary expenses and by whom they have to be paid or are payable.
d ) A mo u n t g i v e n o r a n y o t h e r b e n e f i t g i v e n t o a n y p r o mo t e r a n d t h e
consideration for the payment of the benefit.
e) Voting, capital and dividend attached to the different classes of shares.
57

f) Shares and debentures issued in the preceding two years as fully paid-up otherwise than for
cash and consideration for the issue.
g) Number description and amount of any shares which any person has o r i s e n t i t l e d
t o b e g i v e n a n o p t i o n t o s u b s c r i b e f o r a n d t h e p e r i o d t h e option is exercisable.
h) Name and postal address of vendors of the property of the company the amount
payable for any such property to each separate vendor.
i)Dates, parties to and general nature of material contracts, and the time and place at
which the contract or copies thereof may be.
j) Names and address of auditors.
k) Full particulars of the nature and extent of the interest of every director i n a n y o f t h e
i n t e r e s t s o f e v e r y d i r e c t o r i n a n y p r o p e r t y o f t h e c o m p a n y purchased or acquired
by the company within the preceding two years.
l) R a t e s o f d i v i d e n d ( i f a n y) p a i d b y t h e c o m p a n y i n r e s p e c t o f e a c h c l a s s
of shares in the company in each of the five financial years
immediately preceding the issue of the statement or financial years
immediately preceding the issue of the statement or since incorporation of the company,
whichever period is short and particulars.
m) The case in which no dividend have been paid in any class of shares in any of these
years.
STOCK EXCHANGE REQUIREMENTS:
T h e s t o c k e x c h a n g e i s a ma r k e t w h e r e s t o c k s o r s h a r e s a r e b o u g h t a n d s o l d
through stockbrokers. The stock exchange is governed by governed by a council elected by the
members from amongst themselves.
T h e f o l l o w i n g c o n d i t i o n s a r e f u l f i l l e d b e f o r e a c o mp a n y i s l i s t e d i n t h e
s t o c k exchange: a) A completion of an application form and signing an agreement.
b) A short history of the company.
c) A certificate from the auditors that the company is public within the terms of
the companies act.
d) Issued share capital must not be less than $ 25000.
e) Payment of a hearing fee of five hundred shillings.
58

f) Further five hundred shillings for all quotations granted.

g) Council has to be satisfied that a reasonable number of shares are offered in
order to start a market.
h) Submission of three copies of the articles of association, which may be referred
after perusal by the committee members.
ALLOTMENT OF SHARES ACT ON STOCK EXCHANGE
Section 53 where a prospectus states that application has been made
f o r permission for the shares or debentures offered thereby to be dealt in any stock
exchanges, allotment made will be void if: a) The permission has not been applied for before the third day after the first issue of the
prospectus.
b) Permission has been refused before the expiration of three weeks from the
date of the closing of the subscription list or such longer period not exceeding
six weeks.
Section 53 (2) states that where the permission has not been applied for or has - b e e n
r e f u s e d , t h e c o mp a n y m u s t i m m e d i a t e l y r e p a y a l l m o n e y r e c e i v e d f r o m
applicants. But if such money is not paid within eight days after the company
Became liable to repay the directors became liable to pay with interest at five
percent per annum from the expiration of the eight day, unless a director can prove
that the default was not due to any misconduct or negligence on his part.
Section 53 provides further that all money received from applicants must be kept in a separate
account so long as the company may become liable to repay it.
Underwriting commission
Underwriting refers to a situation where one agrees to take shares or debentures specified in an
agreement. If the public fails to subscribe for them, consideration for this undertaking is
commission. S e c t i o n 5 5 p r o v i d e s t h a t a c o m p a n y m a y p a y a c o m m i s s i o n t o a n y
person inconsideration of his subscribing or agreeing to subscribe or his
p r o c u r i n g o r agreeing to procure subscriptions for shares in or debentures of the company.
Before commission is paid the following conditions have to be fulfilled: i)

The payment of commission should be authorized by the articles.

ii)

Commission cannot exceed ten percent the price of shares.

3. T h e a m o u n t a n d r a t e o f t h e c o m m i s s i o n a n d n u mb e r o f s h a r e s w h i c h
underwriters have agreed to subscribe must be disclosed as: 59

a) In the case of shares offered to the public for subscription, the

disclosure must be in the prospectus.
b ) I n t h e c a s e o f s h a r e s n o t o ff e r e d t o t h e p u b l i c f o r s u b s c r i p t i o n , t h e
s a m e d i s c l o s u r e m u s t b e ma d e i n t h e s t a t e m e n t i n t h e p r e s c r i b e d f r o m
delivered to the registrar before payment of the commission.
S e c t i o n 5 5 ( 4 ) a v e n d o r o r p r o mo t e r o f a c o m p a n y o r a n y o t h e r p e r s o n w h o
receives payment in money or shares from the company, has power to apply any p a r t o f t h e
m o n e y o r s h a r e s s o r e c e i v e d i n p a ym e n t o f a n y c o m m i s s i o n , t h e p a y m e n t
which if made by the company would have been legal under this
sections.
A part from the above exceptions no company may apply its shares or capital to p a y
commission discount or allowance to any one in consideration of his
subscribing or agreeing to subscribe for any shares in the company.
Section 55 applies to private and public companies alike.
Brokerage
Section 55 permits companies to pay brokerage if its articles so provide. Brokers are
professional persons such as stockbrokers, bankers who exhibit prospectus and send
them to their customers and by whose mediation the customers are induced to
subscribe unlike underwriters brokers do not undertake to subscribe shares or
debentures, which are not subscribed by the public.
Brokerage must be payable to brokers only: I n An d r e a e v s . Z i n c mi n e s o f G r e a t B r i t a i n L t d ( 1 9 1 8 ) 2 K B 4 5 4 . A c o mp a n y
agreed to pay a lady ten percent commission on any capital the company as a result
of an introduction by her. The lady was not carrying on any business as a b r o k e r, i t
w a s h e l d t h a t s h e c o u l d n o t r e c o v e r t h e a g r e e d s u m a s s h e d i d n o t carry on
business as a broker and it was a mere accident that she came into the companys
office and was consulted on this matter.
8. MEMBERSHIP
A p e r s o n i s a m e m b e r o f a c o mp a n y i f t h e s u b s c r i b e s t o t h e me m o r a n d u m
o f association of a company and upon registration his name entered in the register of
members. Members are also called cooperators or shareholders.
A shareholder is a person who holds shares in a company while a member is one whose name
appears in the register of members.
60

The terms members and shareholders are used synonymously specifically in the case of a
company limited by guarantee and having a share capital and unlimited company whose capital
is held in definite shares. There are circumstances wherea s p e r s o n ma y b e c o m e a
m e m b e r o f a c o mp a n y w i t h o u t b e i n g i t s s h a r e h o l d e r without being a member.
The following are instances where a person becomes a member without being a shareholder of
the company.
1 ) I n t h e c a s e o f c o mp a n i e s l i m i t e d b y g u a r a n t e e o r u n l i mi t e d c o m p a n i e s
because such companies may not have share capital.
2) A deceased member continues to be a member as long as his name is on the
register of members, but he cannot be a shareholder of the company.
3) A transferor of shares continues to be a member until the
t r a n s f e r i s registered and the name replaced.
4 ) S u b s c r i b e r s t o t h e me m o r a n d u m a r e t r e a t e d a s m e m b e r s b y t h e f a c t
o f subscription on registration of the company they are entered in the
members register even before they are allotted any shares.
The following are instances where a person becomes a shareholder
o f a company without being its member.
a) A person who holds a share warrant.
b) A transferee or legal representative of deceased or insolvent member is n o t a
member until his name appears in the register although he is a
shareholder.
Modes of acquiring membership:
Section 28 of the companies act provides that a person may become a member of a
company by: a) Subscription to the memorandum:
Subscribers to the memorandum are deemed to have agreed to
b e c o m e members. The names are entered in the register of members upon registration of the
company.
In official liquidation vs. Suleman Bhai, S subscribed to a companys memorandum for
two hundred shares, but actually took 20 shares. It was held that he was liable in the
winding up of the company for all the 200 shares, as he became a member by the very
fact of subscription.
61

A subscriber to the memorandum cannot rescind the contract to take shares on the
ground of misrepresentation made by a promoter (metal constituents Ltd, ReLord Lurgens case
(1902) Ich 707 because: i)

By his name act he brought the company into existence.

ii)

The company could not appoint an agent before it came into existence and
it is therefore not liable for the promoters act.

iii) By signing the memorandum he became bond as between himself and the company
and also between himself and other persons who became members.
b) Agreement and registration:
Every person who agrees in writing to become a member and whose name is entered
in the register of members is a member of the company. Registration of a name as a
member of a company may be obtained through: 1. Application and allotment.
An application for shares is an offer to take shares; allotment is acceptance of t h a t
o f f e r b y t h e c o m p a n y, w h i c h c r e a t e s a b i n d i n g c o n t r a c t b e t w e e n t h e
a p p l i c a n t a n d t h e c o mp a n y. An a p p l i c a t i o n m a y b e a b s o l u t e o r c o n d i t i o n a l .
I f conditional the allotment must be in accordance to the terms of the application
(Aldborough Hotel Co. Re. Simpsons case (1986) 4 ch. 484).
2. Transfer.
One becomes a member when the transfer of shares is affected and his name is entered in the
register of members.
3. Succession.
The company has power to register any person as a shareholder to whom the right to
any shares (or debentures) in the company has been transmitted by the operation of
law, and in such a case an instrument of transfer is not necessary.
c) Qualification shares:
Before one is appointed a director of a public company, he must take or sign an
agreement to take and pay for qualification shares (if any) in which case he is in the
same position as a subscriber to the memorandum.
d) Estoppel:
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Anyone who allows his name to remain in the register of members or otherwise holds
himself out or allows himself to be held out as a member is estopped from denying being a
member of the company.
CESSATION OF MEMBERSHIP
A p e r s o n c e a s e s f r o m b e i n g a m e m b e r o n c e h i s n a m e i s r e mo v e d f r o m t h e
register. A shareholder may cease from being a member of a company by: 1. An act of the parties.
2. Operation of law.
1. Act of parties.
The following are instances where a person may cease to be a member through act of parties: a) If one transfers his shares to another.
b) If ones shares are forfeited.
c ) I f th e c omp an y s ells the p ers on s s ha re s un de r a p ro vision in
t h e articles.
d) If one rescinds the contract to take shares on grounds of misrepresentation.
e) If redeemable preference shares are redeemed.
f) If one surrenders his shares, if such is permitted by articles.
g) If share warrants are issued in exchange of fully paid shares.
2. Operation of law.
One may cease membership through operation of law in any one of the following ways:a) Insolvency
S h a r e s o f i n s o l v e n t v e s t i n t h e o f f i c i a l r e c e i v e r o r assignee.
b) Death
Shares of the deceased are vested in the legal representative, however the deceaseds estate
remain liable as long as the name of the deceased is in the register.
c) Sales of shares in execution of a court decree.
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d) Winding up of a company.
Rights and liabilities of members.
Rights of members.
The rights are conferred either by companys act, the memorandum and articles of
association or by the general law. Rights conferred by the companies act are called the
statutory rights. The following are statutory rights: (1) Right to obtain copies of the memorandum and articles on request and on
payment of the prescribed fee.
(2) Right in priority to have shares offered in case of increase of capital.
(3) Right to transfer shares.
(4) Right to vote on resolutions at meetings of the company.
(5) Right to apply to court to have any variation of his rights set aside by the court section 7
(4).
(6) Right to have a share certificate for shares held.
(7) Right to inspect register of members, register of debenture holders and copies
of annual return.
(8) Right to receive a copy of the statutory report.
(9) Right to apply to the BOD to call an annual general meeting when the company
fails to call such a meeting.
(10)

Right to receive notice of meetings, attend and vote at meeting.

(11)

Right to appoint a proxy and inspect proxy register.

(12)

Right to demand poll alone or with others.

(13)
Right of a body corporate to appoint a representative to attend and vote
at the general meetings.
(14)

Right to require the company to circulate resolution.

(15)
Right to have any request minutes of proceedings of a
g e n e r a l meeting.
64

(16)

Right to receive dividends when declared.

(17)
Right to receive copies of annual accounts of the company with the
auditors report.
(18)
Right to participate in the appointment of directors and auditors in the annual
general meetings.
(19)

Right to petition to the court for the winding up of the company.

(20)
Right to share surplus. T h e r i g h t s c o n f e r r e d o n me m b e r s b y
m e m o r a n d u m o f a s s o c i a t i o n a r e c a l l e d documentary rights, while rights
conferred on members by the general law are called legal rights.

Liability of members
Liability of members depends on the nature of the nature company. Liability maybe summarized
as follows: 1. For unlimited companies each member is liable in full for all the
d e b t s contracted by the company during the period he was a member.
2. In case of limited by shares each member is liable to pay the full nominal value of the
shares held by him.
3 . F o r a d e c e a s e d me m b e r, h i s e s t a t e i s l i a b l e i n r e s p e c t o f p a r t l y p a i d
shares and where the shares have been registered to the name of representatives
they become liable.
4. When one (a member) is adjudicated bankrupt, the official receiver may sell
the partly paid shares in which case the buyer becomes liable thereof or he
may disclaim them as onerous property.
5. When membership is reduced below seven and two for public and private companies,
every member aware of the fact becomes severally liable for the p a y m e n t o f
debts of the company after six months of trading from such
reduction in number.
6. For companies limited by guarantee each member is liable to contribute the
amount guaranteed by him to be paid in the event of winding up.
Register of members.

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S e c t i o n 112 r e q u i r e s e v e r y c o m p a n y t o ma i n t a i n a r e g i s t e r w i t h t h e
f o l l o w i n g particulars:a) The name and address of each member.
b) For a company with share capital, shares held by each
m e m b e r distinguished each share by its number and extent to which
t h e s h a r e s have been paid up.
c) The date each person was entered in the register as a member.
d) The date on which any person ceased to be a member.
Where the company has converted any of its shares into stock a notice of the
conversion has to be given to the registrar. If default is made in maintaining the
register, the company and every officer in default shall be liable to a default fine.
Section 114 provides that on issue of a share warrant, the company must strikeout of
the register, the name of the member because of the issue of the share warrant he
ceases to be a member in which case the following particulars should be entered in the register: a) The fact of the issue of the warrant.
b) Statement of the shares included in the warrant
c) Date of issue of the warrant
Index of members.
Section 113 states that every company with more than fifty members is required to
keep an index that may be in the form of a card index. The index should be kept
where the register is kept. Any alteration in the register should be noted in t h e
i n d e x w i t h i n f o u r t e e n d a ys . F a i l u r e t o c o m p l y w i t h a n y o f t h e a b o v e m a y
attract a fine.
Location of the register.
Section 112 (2) requires that the register must
c o m p a n y s registered office. It may be kept elsewhere provided.
a) The work of making it up is done at another office.
b) The register is prepared by another person.
Inspection of register of members.
66

be

kept

at

the

Inspection of the register of members and debenture holders is open to the public for at least two
hours a day.
Inspection is free for members and a fee of Ksh 2 is charged for every inspection. The right to
inspect includes the right to make extracts from the register. A fine of Ksh 40 is imposed for
refusal to inspect or refusal to supply extracts. The object o f i n s p e c t i n g t h e
r e g i s t e r i s i m m a t e r i a l . E x t r a c t s h a v e t o b e s u p p l i e d w i t h i n fourteen days upon
receipt of the demand.
The right to inspect ceases upon the commencement of winding up and an order of the court
must be obtained if inspection is required after that date.
Closure of register of members.
Under section 117 a company can close a register for 30 days
a f t e r a n a d v e r t i s e m e n t i n a l o c a l d a i l y. C l o s u r e i s u s u a l l y d o n e
p r i o r t o p a y m e n t o f dividends or issue of new shares.
Rectification of register of members
Section 118 provides that courts can order rectification of register of members in the following
cases: a) Where ones name is entered or omitted from the register of members without any
sufficient cause.
b) Where default is made or unnecessary delay takes place in entering on the register
the fact that any person having ceased to be a member. Courts may require companies to pay
damages to the aggrieved person.
No notice of trust on register.
Section 119 states that no notice of any trust express, implied or constructive, shall
be entered on the register of members or debenture holders.
The trustee can be entered in the register in his personal capacity and not as a
trustee, and he will exercise the rights of a shareholder, and is alone liable for shares
calls and to be put in the list of contributories.
Branch register.
S e c t i o n 1 2 1 a c o m p a n y c a r r yi n g b u s i n e s s o u t s i d e K e n ya i n a n y p a r t o f t h e
commonwealth countries may keep a branch register in that part.
Notice must be given to the registrar of the situation of the office where a branch register is
kept within one month of the opening of the office and any change in its situation or
discontinuation of such a register.
67

A branch register is deemed to be part of the companys register of members.

Annual return.
Section 125 provides that every company with share capital must file an annual
r e t u r n w i t h t h e r e g i s t e r o n c e i n e v e r y ye a r. T h e r e t u r n mu s t b e f i l e d w i t h t h e
registrar forty two days after the annual general meeting (sec. 127).
The following particulars must be included in the annual return in accordance to part
of the fifth schedule.
1. The address of the registered office.
2. The place where the register of members or debenture holders is kept is not kept at the
registered office.
3. Summary distinguishing between shares issued for cash and shares
issued as fully paid or otherwise than in cash specifying.
a) Amount of share capital and the number of shares.
b) The number of shares taken up to date of the return.
c) The amount called up, received and unpaid.
d) Commission and discount in respect of shares or debentures.
e) The total number of shares forfeited.
f) Total amount of shares for which share warrants are outstanding, the n u m b e r
o f s h a r e s c o m p a r e d i n e a c h w a r r a n t a n d t h e a mo u n t o f share warrants
issued and surrendered since the last return.
4. The total amount of indebtedness in respect of all registrable charges.
5. A listing containing: a ) T h e n a m e s a n d a d d r e s s e s o f t h o s e w h o a r e m e m b e r s o n t h e fourteenth
day after the annual general meeting and those who have ceased to be members
since the date of the last return.
b) The number of shares held by each member.
c) Particulars of the directors and the secretary.

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Section 125 (1) if the company has converted its shares into stock, the return should
give the same particulars with regard to the stock as required for shares.
Section 126 for a company with no share capital, the following facts should be
included: a) The situation and the postal address for the registered office.
b) The address of the place if the register of member is kept elsewhere.
c) The address and place if the register of debenture holders is kept
elsewhere.
d) Particulars relating to directors and the company secretary.
A statement containing the particulars of the total amount of in indebtness of the company in
respect of all charges which are or were required to be registered with the registrar
under the act.
Documents to be annexed to annual return.
Sec 128(1) the following documents must be annexed to the annual return.
a) A copy of the balance sheet with all notes thereto duly certified by a director or company
secretary.
b) A copy of auditors report and directors report certified by a
director and company secretary.
Section 156(1) the profit and loss account and group account should be annexed to the balance
sheet.
Section (129) requires that also a private company must also submit with annual return the
following certificates:a) The company has not invited the public to subscribe its shares or debentures.
b ) A n y e x c e s s o f f i f t y me m b e r s c o n s i s t s o f e n t i r e l y p r e s e n t a n d e x employees.
9. SHARES
Shares are indivisible units of the capital of the company. Fawell I in Barlandst r u s t e e v s .
S t e e l B r o s ( 1 9 0 1 ) 1 c h . 2 7 9 d e f i n e d a s h a r e a s t h e i n t e r e s t o f a shareholder in
the company measured by a sum of money for the purpose of liability in the first
place, and of interest in the second place, but also consists of a series of mutual
69

covenants entered into by the shareholders inter se in accordance with section 22 of

the companys act.
Shares represent the equal portions into which capital is divided each
shareholder is entitled to a portion of a companys profits in proportion to the number
of shares held by him.
A shareholders liability is usually measured against his indebtedness to the company
on the amount unpaid on shares held by him.
Section 76 requires that each class of shares be distinguished by its appropriate
number. The distinction is not necessary if all shares rank equally.
SHARE CAPITAL
Capital is a particular amount of money with which a business is started. For accompany is
usually called share capital.
Types of capital
1. Authorized or nominal capital
This is the nominal value of the shares which a company is authorized to issue by its
memorandum of Association. It is the maximum amount of capital which t h e
c o m p a n y w i l l h a v e . Th i s a mo u n t c a n b e i n c r e a s e d o r r e d u c e d o n l y i f t h e
company changes the memorandum. Nominal capital is also called
Registered capital.
2. Issued capital
This is the nominal value of the shares which are offered to the
p u b l i c f o r subscription. It represents the portion of the nominal capital that has
been given out to be subscribed by the public or by any persons concerned.
3. Subscribed capital
This is the part of issued capital which has been taken up by the public. When all the issued
capital has been subscribed then subscribed and issued capital are equal.
4. Called up capital
This is part of the issued capital which has been called up on the shares. This is the part of the
issued capital which shareholders are liable to pay as and when called.
5. Paid up capital

70

This is part of the issued capital which has been paid up by the shareholders. When
calls are made on the shares and shareholders fail to pay up the amount thus owing is
called calls in arrears or calls unpaid.
6. Reserved capital
This is any part of the companys share capital which a company may resolve by a special
resolution not to be called except in the event of a winding up. Section 62 of the
companies Act provides that a company by special resolution determine that any portion of its
uncalled capital be reserve capital.
Reserve capital can only be turned into uncalled capital by leave of the court.
R e s e r v e c a p i t a l i s d i f fe r e n t f r o m r e s e r v e s o r r e s e r v e f u n d . R e s e r v e f u n d
or r e s e r v e s r e f e r s t o u n d i s t r i b u t e d p r o f i t s k e p t b y t h e c o m p a n i e s t o
c a t e r f o r emergencies.
Application and allotment of shares:
A p p l i c a t i o n i s a n o ff e r b y a p r o s p e c t i v e s h a r e h o l d e r i n l i e u o f a p r o s p e c t u s
issued by the company. Allotment is the acceptance of an application and it results to
a contractual relationship between the company and the applicant,
Allotment of shares is an allocation (appropriation) by the board of directors of a
given number of shares in response to an application.
As the post is the medium of communication allotment is deemed completely on the
instant, the letter of allotment is posted even though the allotment letter is delayed in the post or
it never reaches the offeree (applicant) household fire insurance Co. vs. Grant (1879) 4 Ex. 216.
Provisions regarding allotment
1. Allotment must be by a resolution of the board of directors unless there is clause in the
articles providing otherwise.
2. Allotment must be made within a reasonable time, in Ramsgate Viction Hotel
vs. Monte fiore (1866) Lr1 Ex 109. Monte fiore was entitled to refuse an allotment as his
offer had lapsed due to undue delay in allotment.
3. Allotment must be communicated to the applicant where the post is used allotment is
completed as soon as the company posts the letter of acceptance, provided the
letter is sufficiently stamped and correctly addressed.
4. The allotment must be absolute and unconditional. The allotment must be made
in accordance to the conditions of the offer subject to provisions of the articles.
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In Ramabhai vs. Ghai Ram (1918) Born LR 595, R applied for 400 shares in a
company on condition that he was appointed a branch manager of the company. He was allotted
shares but was not appointed a branch manager. It was held that he was not bound by the
allotment.
5. An offer may be withdrawn any time before communication of
i t s acceptance. An applicant can withdraw his offer any time before his
offer has been accepted sec. 52 (5) an applicant cannot withdraw his
application until after the expiration of the third day after the opening of the
subscription list.
Requirements of allotment.
1. A public company must file a prospectus or a statement in lieu
o f prospectus must be subscribed before allotment.
2. The minimum subscription as provided in the prospectus must
b e subscribed before allotment. If the minimum subscription is not met within
s i x t y d a ys a l l m o n e y r e c e i v e d f r o m a p p l i c a n t s mu s t b e r e t u r n e d
f o r t h w i t h otherwise the money will attract default interest at 5% p.a from the
seventy-fifth day.
3. Section 52 provides that no allotment should be made of shares applied for until the third
day from the date of issue of the prospectus.
4. Under section 53; if prospectus states that application has been or will be made to the
stock exchange, then such permission must be applied before the third day of
the issue of prospectus, failure to which allotment would be void.
Irregular allotment
Under sec.51 an allotment made by the company to an applicant in contravention o f
provisions of sec. 49 (failure to meet minimum subscription) or section
5 0 (failure to issue a statement in lieu of prospectus) is voidable at the discretion of t h e
a p p l i c a n t w i t h i n o n e mo n t h a f t e r t h e h o l d i n g t h e s t a t u t o r y m e e t i n g o f t h e
company within one month after the date of allotment. The above
a p p l i e s regardless of the fact that the company is in the course of winding up.
If any director knowingly contravenes provisions of section 49 or 50 he
m u s t compensate the company and the allotee respectively for any loss or damages or costs
incurred.
Return of allotment (section 54)
A company is required to deliver within sixty days the following to the registrar of companies for
registration: 72

a)Return of allotment
The transferor to get a new certificate uses the ticket and the certificated
instrument is given to the transferee, which he uses to acquire a new certificate.
The company thus conceals the old certificate and prepares two certificates
a) One for share sold
b) For the unsold portion of the shares.
I f a c o m p a n y a f t e r c e r t i f yi n g r e t u r n s t h e o r i g i n a l c e r t i f i c a t e t o g e t h e r w i t h
the c e r t i f i c a t e t r a n s f e r t o t h e t r a n s f e r o r w h o u s e s i t t o c o m m i t f r a u d
o n t h e transferee, the third party has no right against the company.
The terms implied between seller and buyer
a) That the seller will give to the purchaser genuine of transfer and share
certificate required to enable the purchaser to be registered.
b) The seller will not prevent the buyer from registering the transfer.
c) The seller will compensate the buyer for any calls or liability which may arise
in respect of shares sold. The purchaser must also indemnify the seller against calls made
after date of contract.
Effect of transfer:
Position of the transferee before he is registered as a member
1 The transferor continues to be the legal owner of the shares set as a trustee of the transferee
2 The transferee has no rights as a shareholder of the company.
3 The transferee has equitable claim
4 If calls are made, the transferor must pay and recover the amount from the transferee
5 If dividends are paid the transferor is entitled to them.
6 Transferor must vote as the transferee directs [massel white vs v.Massel white $son limited]
(1962) ch. 964
Priority between transferees
When two or more persons lay their claim to the same shares, the priorities as
between the different claimants will be decided in accordance with the following
rules:
1 The first to secure registration will get priority irrespective of the date when his
claim arose.
2 As between claimants, the earlier in point of time will be preferred, irrespective of the date
when notice was given to the company.
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Notice of transfer
It is not mandatory, but it is advisable to give notice of the lodgment of transfer to the transferor.
Forged transfer
Consequences of forged transfer
1 Forged transfer does not pass any legal title to the transferee
2 In instances where the company has issued a share certificate to t h e t r a n s f e r e e o f
f o r ge d t r a n s f e r a n d h e s o l d t h e s e t o a n i n n o c e n t b u ye r, t h e b u ye r g e t s n o
r i g h t t o b e r e g i s t e r e d a s a s h a r e h o l d e r, i n such case he can claim damages from the
company.
3 If the company has been put to loss by reason of the forged
transfer, it may recover the loss from the person who procured
registration, even though he might have acted in good faith.
Blank transfer
This is a transfer of shares which is executed without the name of the transferee b e i n g f i l l e d
i n t h e t r a n s f e r f o r m o f d e e d w h i c h a t r a n s f e r o r h a n d s o v e r t o purchaser
or pledge.
The transferor also hands over to the purchaser the share certificate along with t h e b l a n k
transfer form or deed, the date the date of sale and name of the
transferor are left blank
The blank transfer is thus used as negotiable instrument. The advantage in giving a
blank transfer form is that the buyer or pledge will be at liberty to sell again without
his name and signature to subsequent buyer.
At the end of the transfer the first seller is treated as the transferor and the last buyer as a
shareholder and his name is registered in the company register.
10. DEBENTURES
Section 2 of the company act defines debentures as including debentures stock, bonds and any
other securities of a company, whether consisting a charge on the a s s e t s o f t h e c o m p a n y o r
n o t . T h e s e c t i o n d o e s n o t a c t u a l l y d e s c r i b e w h a t a debenture really is.
In Level vs. Abercorris state and slab Company (1897) 37 ch D 260. Debenture was
defined as a document, which either creates a debt or acknowledges it.
In Edmonds vs. Blaina Co. (1887) 36 ch. D 215 chitly S. debenture was defined.The term
itself imports a debt an acknowledgement of a debt an obligation or covenant to pay.
This obligation or covenant is in most cases accompanied by some charge or security.
74

A d e b e n t u r e i s t h u s a n a c k n o w l e d g e m e n t i n w r i t i n g a d e b t b y a c o mp a n y t o
s o m e p e r s o n s a n d i t i s i s s u e d t o t h e p u b l i c b y m e a n s o f a p r o s p e c t u s . Th e
prospectus has provisions for interest payment and repayment of loans lenders are
usually given a security against the non-repayment of their loan, by a charge against the assets of
the company.
Characteristic features of a debenture
In Lemon vs. Asustin Friars investment Trust Ltd (1926) ch. 1 debenture was defined
as follows a debenture is a document containing an acknowledgement of indebtedness
which need not be, although it usually is, under seal, which need not give, although it is
usually does give a charge on the assets of the company by way of security and which
may or may not be one of the services.
The following are characteristics of a debenture:
1. It is used by a company and is usually in the form of a certificate.
2.

It is issued under the companys seal.

3. It is one of a series issued to a number of lenders although there can be a

s i n g l e d e b e n t u r e , f o r e x a mp l e a mo r t g a g e o f a c o m p a n ys p r o p e r t y t o a
single individual.
4. It specifies the period and date of repayment.
5 . I t c r e a t e s a c h a r ge o n t h e u n d e r t a k i n g o f t h e c o m p a n y o r p a r t s o f t h e
company property, but this is not always necessary.
6. Debenture holders do not vote in company meetings.
Debenture stock
A debenture stock is borrowed capital consolidated into a unit with each leder having
a certificate entitling him to a certain sum being a portion at one large loan. The
debenture stock is usually secured by a trust deed and in case there is no charge, the stock is
called unsecured loan stock.
Debenture stock can be issued directly as such it is not necessary for an issue of debentures to be
fully paid and then turned into stock.
Classes of debentures
Debentures are classified according to the following characteristics: 1. Negotiability
75

2. Security
3. Convertibility
4. Priority
1. Classification according to negotiability
a) Bearer debentures
These are also known as unregistered debentures and are payable to
t h e bearer. These are negotiable instruments and are transferable by delivery and a
bonafide transferee for value is not affected by the defect in the title of the
prior holder.
In Bechuanaland Exploration company vs. London Trading Bank Ltd (1898) 2QB.
648 Co. held debentures of an English company, payable to bearer. It kept t h e m i n a
s a f e o f w h i c h t h e s e c r e t a r y h a d t h e k e y. Th e s e c r e t a r y p l e d g e d t h e
d e b e n t u r e s w i t h a b a n k s e c u r i t y f o r a l o a n t a k e n b y h i m. T h e b a n k t o o k t h e
debentures bonafide. It was held that the bank was entitled to the debentures as against the
company.
b) Registered debentures
T h e s e a r e d e b e n t u r e s p a ya b l e t o r e g i s t e r e d h o l d e r s . A h o l d e r i s o n e w h o s e
name is on the certificate and in the companys register of debentures.
A registered debenture is issued under the seal of the company and contains the following
clauses: (i)

A covenant to pay the principal sum.

(ii)

Covenant to pay interest.

(iii)

A description of the charge on the companys undertaking property.

(iv)

A s t a t e m e n t t h a t i s i s s u e d s u b j e c t t o t h e c o n d i t i o n s endorsed thereon.

2. Classification according to security

a) Secured debentures
These debentures create a charge on the property of the company. The charge may be
fixed or floating.
b) Unsecured or naked debentures
These do not create any charge on the assets of the company.
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3. Classification according to permanence

a) Redeemable debentures
These are issued on condition that they shall be redeemed after a given period.
b) Irredeemable or perpetual debentures
These are debentures with no fixed period for repayment of the principal amount or repayment
of it is made conditional on the happening of an event which may not happen or may
happen is specified events like winding up.
c) Debentures with Pari Passu clause
These are debentures payable ratably, though issued at different and varying t i m e s .
When assets are insufficient to pay all debts the debentures rank
p r o p o r t i o n a t e l y. I f t h e r e i s n o P a r i p a s s u c h a n g e i n t h e t e r ms
o f i s s u e , debentures are payable according to the date of issue.
A company cannot however issue a new batch of debentures to rank Pari Passu with an on batch.
Debentures trust Deed
Debenture holders may appoint persons as their trustees. When the trustees are appointed a trust
deed is executed conveying the property of the company to the t r u s t e e s . U n d e r t h e t e r m s
of the deed the company commits itself to pay the debenture holder their
p r i n c i p a l a n d i n t e r e s t a n d c h a r ge s i t s p r o p e r t y t o t h e trustees as security.
The trust deed contains the terms and conditions endorsed on the debentures and
defines the rights of debenture holder and the company. It empowers the trustees to
appoint a receiver to protect the interest of debenture holders.
Other contents of debentures are provisions concerning meetings of the d e b e n t u r e h o l d e r s ,
s u p e r v i s i o n s o f t h e a s s e t s c h a rg e d a n d t h e k e e p i n g o f a register of debenture
holders.
In case of default by the company the trustees take action on behalf
o f t h e debenture holders.
Advantages of the trust deed
1. It gives trustees a legal mortgage over the companys property.
2. Trustees Act are at better position of safeguarding the interests of the debenture
holders

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3.
4.
5.
6.
7.
8.

It specifies the events upon which principal and interest are payable and
trustees ensure that the money is paid.
The company is given power to deal with its own property advantageously for the
purpose of its business without prejudicing the interests of debenture holders.
The trustees act as watchdogs for the debenture holders.
The trustees have power to appoint a receiver to run the company.
In case of doubt or contingency the trustees can call a meeting
o f debenture holders to make a decision.
In c a s e o f d e f a u l t b y t h e c o m p a n y t h e c o m p a n y c a n a c t t o
p r o t e c t debenture holders.

Liability of trustees
A trustee is liable for any breach of trust where he fails to show the degree
o f care and deligence required of him as trustees.
Any clause in the trust deed releasing the trustee exempting him from liability for b r e a c h o f
t r u s t o r i n d e mn i f yi n g h i m a g a i n s t l i a b i l i t y f o r b r e a c h o f t r u s t i s v o i d except
in the following cases.
1. Where the trustee can show that he took such care and deligence as is required
of him as trustee.
2. Where the trustee acted honestly and reasonably, section 402.
3. Where a majority of not less than th in value of the debenture
holderspresent and voting in person or where proxies are permitted by proxy
at ameeting summoned for the purpose, agree and the voting relates to
specificActs or omissions or to a trustee who is dead or has ceased to act.
Rights to copy the trust deed
A registered debenture holder is entitled to require a copy of a printed trust deed section 89 (2).
Priority of charges
1. A fixed charge over the same assets has priority over the
f l o a t i n g charge.
2. Specific charge first in point of time takes priority.
3. A company is prohibited from creating mortgages ranking in priority after crystallization
of floating charge. On crystallization of floating charge becomes a specific mortgage.
4. A company is prohibited from creating a second floating charge having priority
over the first.
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5. A company can create a specific charge after a floating charge.

Floating charge is postponed to the rights of the following persons if they act before
the security crystallizes.
a) A landlord who distrains for rent
b) A judgement creditor, if the goods are sold by the sheriff.
c) A creditor who obtains a garnishee order absolute
d) A supplier of goods on hire purchase agreement has priority over such until goods
are paid for in full.
e) Preferential debts e.g. rates, taxes, wages and salaries.
11. DIRECTORS
I n F e rg u s o n v s . Wil s o n ( 1 8 6 6 ) L R 2 c h . 7 7 C a r r i s L J o b s e r v e d t h e c o mp a n y
itself cannot act in its own person for it has no person, it can only act through
directors, and the case is as regards those directors merely the ordinary case
of principal and agent.
In Aberdeen Rly company vs. Blaike Bros (1854) Lord Cranworth LC said, The
d i r e c t o r s a r e a b o d y t o w h o m i s d e l e g a t e d t h e d u t y o f ma n a g i n g t h e g e n e r a l
affairs of the company. A corporate body can act by agents and it is of course the
duty of those agents to act as best to promote the interests of the corporation whose affairs they
are conducting.
D i r e c t o r s a r e t h u s p e r s o n s i n c h a rg e o f t h e m a n a g e m e n t o f t h e a f fa i r s o f a
company and are collectively called board of directors.
There are several stages of appointment of the directors: a) The first directors of a company
are appointed by the promoter of the company, where promoters have not appointed the
directors subscribers to the memorandum will become and are regarded the first directors.
b) Subsequent appointment
are appointed when the company already exists. The company will make these
appointments in the following circumstances: a) To replace directors who have retired on rotation or otherwise.
b) To replace directors who have been removed from office.
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c) To replace retired directors.

d) To replace deceased directors.
Casual vacancies
These are vacancies occurring in the ranks of directors any time before the next
annual general meeting by death or registration of a director. Casual vacancies are
filled by appointment made by the existing directors.
Alternative directors
These are directors appointed temporarily to represent the director during his absence
or inability in the board of direct,
Managing director
Guidelines for appointment of the managing director are given in the articles
of association.
Qualification of directors
The Act does not require a director to hold shares, thus one can be a director u n l e s s
a r t i c l e s p r o v i d e o t h e r w i s e . Ar t i c l e 7 7 t a b l e A p r o v i d e s t h a t t h e s h a r e
qualification for directors may be fixed by the company in a general meeting and unless fixed no
qualification shares shall be required. If the articles of a company contain a provision that the
qualification of a director shall be holding a specified number of shares, section 183 provides
that;
(i)

Each director must acquire and retain such qualification shares within two
months after appointment.

(ii)

Share warrant to bearer may not count as qualification shares.

(iii)

If shares are not acquired within two months one ceases to be director.

(iv)

One cannot be re-appointed unless he has obtained his qualification shares.

(v)

A f i n e o f o n e h u n d r e d p e r d a y w i l l a c c r u e f o r t h e p e r i o d i n o ff i c e
w i t h o u t qualification shares.

Age of directors
Every director must retire on or shortly after the seventieth birthday, but he can
continue if allowed at a general meeting and after a special notice has been
given.
The minimum age for appointment is twenty-one years. The limits do not apply to private
companies unless they are subsidiaries of public companies
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Bankruptcy
Bankruptcy disqualifies one from holding the office of a director.
Effects of disqualification
The acts of a director or manager shall be valid not withstanding any defect that ma y
a f t e r w a r d s , b e d i s c o v e r e d i n h i s a p p o i n t m e n t o r q u a l i f i c a t i o n . Ac t s d o n e after
disclosure by the company will not be binding on the company.
Disqualification of directors
The following are grounds for disqualification of a director: 1. Failure to take up prescribed share within two months section 183.
2. When one becomes bankrupt or makes any arrangement or composition with his creditors
generally (sec.188).
3. If one is prohibited from being a director for any reason under section 189.
4. If one becomes of unsound mind.
5. Resigning by notice in writing to the company.
6. Absence without permission for more than six months from meetings
of directors.
Vacation or removal of a director
A director can leave office either by
(a) Vacation
This arises when a director voluntarily quits office by whatever reason. A director is liable for all
acts committed while in office but not thereafter.
(b) Removal from office
T h e s e a r e s i t u a t i o n s w h e n o n e i s f o r c e d t o q u i t t h e p o s i t i o n o f a d i r e c t o r.
A director can be forced to quite by:
a) Operation of law
Instances where a director is removed by operation of law.
(i)

Breach of statutory qualifications.

(ii)

Liquidation of the company.

b) The company
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T h e c o m p a n y ma y r e mo v e a d i r e c t o r b y a n o r d i n a r y r e s o l u t i o n a f t e r s p e c i a l
notice is given. A removed director may claim compensation for the loss of office.
Position of directors
Position of directors may be considered or described from different perspectives as follows:(i) Directors as agents
A company acts through directors who are representatives of directors, in the eyes of
law they are agents for the companies they act for. However directors are at times not just agents
as they have independent powers in certain matters.
Directors not personally liable as agents:
Directors are not personally liable for acts done on behalf of the
c o m p a n y provided they act within the scope of their authority and contracts are not in
their own names. Directors are however personally liable where: 1. They contract in their own names.
2. They use the name of the company incorrectly.
3. The contract is signed in such a way that it is not clear, whether it is the
principal or agent who signed.
4. They exceed powers given to them by the memorandum or articles.
Directors as trust employees
D i r e c t o r s a r e n o t e mp l o ye e s o r s e r v a n t s o f t h e c o m p a n y b u t t h e r e i s n o t h i n g
preventing a director from being an employee of the company under a special contract
of service, which he may enter into with the company.
Directors as trustees
Directors are treated as trustees: 1. Of the companys money and property.
2. Of the powers entrusted to them.
Directors are trustees of the companys money and property because they must
account for all the companys money and property and to refund to the company a n y o f i t s
mo n e y o r p r o p e r t y, w h i c h t h e y h a v e i mp r o p e r l y p a i d a w a y
o r transferred.
The director is a fiduciary position as regards to the protection of the company
properly. The duties of directors involve;

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(i)

F i d u c i a r y d u t y n o t t o p r o f i t h i ms e l f p e r s o n a l l y f r o m t h e p r o p e r t y o f
t h e company.

(ii)

As fiduciary to be honest to account for the profit of the company.

Directors however are not trustees in the real sense as they not vested with
ownership of the companys property. They are quasi trustees because: a) They are not vested with the ownership of the company property.
b) Their functions are not the same as those of trustees.

c) Their duties of care are not as onerous as those of trustees.

Directors remuneration
In Re George Newman and co (1895) 1 ch. 674 Lindley LS observed directors have
no right to be paid for their services and cannot pay themselves or each o t h e r o r
make presents to themselves out of the companys assets unless
authorized to do so by the instrument which regulates the company (articles) or by
the shareholders at properly convened meeting.
Directors can be paid expenses incurred while conducting the business of the
c o m p a n y. I n t h e a b s e n c e o f a p r o v i s i o n a s a l a r i e d d i r e c t o r i s n o t e n t i t l e d t o
expenses incurred as they are usually covered by his remuneration.
Compensation for loss of office
The powers of directors are spelt out in the articles. There is usually a clause
d e l e g a t i n g t o t h e d i r e c t o r s t h e p o w e r s t o m a n a g e t h e c o mp a n y. S o me o f t h e
functions directors included:(i)

Entering into contracts on behalf of the company.

(ii)

Engaging and dismissing employees.

The powers of directors may also be restricted by the articles.

Disclosure of interest
If a director has an interest in a contract which is being considered
b y t h e company he must declare his interest when the contract is being discussed.
A director who fails to declare his interest is liable to a fine of up to two thousand
shillings.
According to Lord Cairn one declares his interest not when he states that he has an interest but
when he states what his interests are.
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The disclosure should be made at the time the contract in question comes before the board of
directors for discussion, section 200(1).
Legal effect of non-disclosure of interest by directors.
There are two categories of consequences.
a) Statutory consequences
Section 200 (4) such directors shall be liable to a fine not exceeding
t w o thousand shillings.
b) Common law consequences
At common law the contract itself becomes voidable at the instance
o f t h e company. The director in question who also made secret profits on the
contract must refund the same to the company.
Duties of directors
The following are some of the duties of directors: 1 . To e x e r c i s e t h e i r p o w e r s h o n e s t l y f o r t h e b e n e f i t o f t h e c o m p a n y a s a
whole.
2. Not to place themselves in position in which there is a conflict between their
duties to the company and their personal interests.
3. To carry out their duties with reasonable care and exercise such degree of skill
and diligence as is reasonably expected of persons of their knowledge and status.
4. To attend board meetings.
5. Not to delegate his functions except to the extent authorized by the Act or constitution of
the company.
6. To disclose his interest.
SECRETARY
Introduction Every Company must have a secretary but a sole director cannot also be a secretary
Appointment it is usual for the secretary to be appointed by the directors on such
terms as they think fit. The directors may also remove the secretary.
Qualifications
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The directors must take all reasonable steps to ensure that the secretary is a person who appears
to them to have the requisite knowledge and experience. He must be one who: (i)

Already hold office as secretary, assistant secretary or deputy secretary of the

company or,

(ii)

For at least three out of five years immediately proceeding his appointment held
office as a secretary of a public company, or

(iii)

Is a barrister, advocate or solicitor, or

(iv)

Is a member of any of the following bodies; ICA, ACCA,ICSA, CIMA, CPA, or

CIPFA, CPS, e.t.c.

(v)

Is a person who by virtue of having held any position or being a member of

any other body, appears to the directors to be capable of discharging the
functions of secretary.

Powers
The secretary is the chief administrative officer of the company and on matters
of a d m i n i s t r a t i o n h e h a s o s t e n s i b l e a u t h o r i t y t o m a k e c o n t r a c t s o n b e h a l f o f
t h e company. Such contracts include: a) Hiring office staff
b) Contracts for the purchase of office equipment
c) Hiring cars for business purposes.
IN PANORAMA DEVELOPMENTS V.FIDELIS FURNISHING FABLICS 1971 the secretary
of the defendant company entered into a number of contracts for the hire of cars. The
cars were ostensibly to be used to collect important customers from Heathrow
Airport, but in fact the secretary used them for his own private purposes. The court
of appeal held that the defendant company was liable. Lord Denning M.R. Said;
a company with extensive duties and responsibilities. He is certainly entitled to
sign contracts connected with the administrative side of the companys affairs, such
as employing staff, ordering cars and so forth.
(vi) Although a secretary has extensive duties and responsibilities there are a
number of decisions where it has been held that he does not have authority
for particular acts. Thus he may not: Bind the company on a trading contract
Borrow money on behalf of the company
Issue a writ or lodge a defence in the companys name
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 Register a transfer of shares

Strike a name of the register of members.
Summon a general meeting on his own authority.
DUTIES
The secretary duties include: a ) E n s u r i n g t h a t t h e c o m p a n ys d o c u m e n t a t i o n i s i n o r d e r, t h a t t h e
r e q u i s i t e r e t u r n s a r e m a d e t o t h e c o m p a n i e s r e g i s t r y, a n d t h a t
t h e companys register are maintained,
b) Taking minutes of meetings,
c) Sending notices to members and,
d) Counter signing documents.
12. MEETINGS
A meeting is an assembly of people for lawful purpose or the coming together of a t l e a s t t w o
p e r s o n s f o r t h e s a me r e a s o n . A c o m p a n y m e e t i n g i s a c o m i n g together of at
least a quorum of members in order to transact either the ordinary or special business of
the company.
In Sharp vs. Dawes (1876) a meeting was defined as an assembly of people for a
lawful purpose or the coming together of at least two persons for any lawful purpose.
Meetings are divided into two types: a) Public meetings
These are meetings open to all members of the public and which
c o n s i d e r matters of public concern.
b) Private
These are meetings attended by people who have a specific right or special
capacity to attend.
Importance of company meetings
It is in meetings that important matters relating to the business of the company are
decided. Shareholders meetings are also important as they help them look after their
interests by exercising powers conferred on them by statute. There are also certain matters that
can only be decided only by shareholders.

86

Classification of company meeting

Company meetings are classified as below: 1. Meetings of shareholders.
(i)

Statutory meetings

(ii)

Annual general meetings

(iii)

Extra ordinary general meetings

(iv)

Class meetings

2. Meetings of directors
(i)
Meetings of the board of directors
(ii)

Meeting of committees of directors

3. Meetings of debenture holders

4. Meetings of creditors.
5. Meetings of creditors and contributories on winding up of the company.
Statutory meeting
This is the first meeting of a public company. Every company limited by shares and
every company limited by guarantee and having a share capital shall within a p e r i o d o f n o t
l e s s t h a n t h r e e mo n t h s f r o m t h e d a t e o n w h i c h t h e c o mp a n y i s e n t i t l e d t o
c o m m e n c e b u s i n e s s ; h o l d a g e n e r a l me e t i n g o f me m b e r s o f t h e company which
shall be called the statutory meeting.
The purpose is to accord members an opportunity to discuss matters relating to t h e
f o r ma t i o n o f t h e c o m p a n y o r m a t t e r s a r i s i n g o u t o f t h e s t a t u t o r y r e p o r t ,
whether previous notice has been given or not.
Statutory report
This is a report sent to all members at least fourteen days before the statutory
meeting. If all the members entitled to attend and vote agree the report can be
forwarded in less than fourteen days to the meeting.
Contents of the statutory report: a. Total shares allotted distinguishing shares allotted as fully or partly paid -up.
b. Cash received in respect of shares allotted.

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c. An abstract of receipts and payments of the company made up to date without

the seven days of the reports.
d. Names, address and occupation of the directors, auditors and managers and secretary
and changes, which have occurred in such names, address, and occupations.
e. The particulars of any contract the modification of which is to
b e submitted to the meeting for approval, together with the particulars of the
modification or proposed modification.
Section 130 (8) provides that the meeting may adjourn from time to time and at any
adjourned meeting a resolution can be passed after due notice in accordance with articles.
Default
If default is made as regards to holding of the statutory meeting and delivering t h e
statutory report a ground for petition for winding up order against
t h e company is created. In usual practice courts order such meetings to be held and reports
delivered at the cost of persons in default.
The person in default is also liable to a fine of up to one thousand shillings.
Annual general meetings
These are meetings held annually and the interval between one meeting and the next one shall be
not more than fifteen months. A company however may hold its first annual general meeting
within a period of eighteen months from the date of corporation.
The registrar may for any special reason, extend the time for holding any annual general
meeting by a given period of time. No extension of time is granted for holding the first
annual general meeting.
In case of default a member may apply to the registrar of companies to call or direct
the calling of such meeting.
If default is made in holding the annual general meeting in year one the annual
general meeting held in year two is treated as an annual general meeting for the year
one.
D e f a u l t t o h o l d i n g t h e a n n u a l g e n e r a l me e t i n g , r e n d e r s t h e c o mp a n y a n d i t s
officers in default to a fine up to two thousand shillings.

Requirement of notice
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S e c t i o n 1 3 3 p r o v i d e s t h e mi n i m u m n o t i c e r e q u i r e d f o r c o m p a n y me e t i n g s a s
follows: a) In the case of a meeting, twenty-one days notice in writing.
b) In the case of a meeting then an annual general meeting for passing a s p e c i a l
r e s o l u t i o n , f o u r t e e n d a ys i n w r i t i n g a n d s e v e n d a ys n o t i c e f o r a n
unlimited company.
Ordinary business of the annual general meeting.
The objects depend on the articles, but article 52 of table A provides that
t h e ordinary business of an annual general meeting shall be: a) Consideration of dividend
b) Consideration of accounts
c) Election of directors to replace the retiring
d) Appointment of and fixing the remuneration of auditors.
Although appointment of auditors must be made by the company in the general
meeting they are made by the company in the general meeting they
a r e automatically re-elected, provided they are qualified, without any resolution to
that effect, unless;
a) They have resigned.
b) They are unwilling
c) A resolution has been passed expressly providing that they shall not be reappointed.
Extra ordinary general meeting
These are called for transacting some special business, which may
n o t b e p o s t p o n e d t i l l t h e n e x t a n n u a l g e n e r a l m e e t i n g . Al l m e e t i n g s o t h e r
t h a n t h e annual general meeting and statutory meeting are called extra ordinary
general meeting.
The extra ordinary general meeting may be convened;
a) By the board of directors on its own or on the requisition of the members.
b) By the requisitions on failure of the board of directors.
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Extra ordinary meeting convened the board of directors.

(i) On its own
Board of directors may call an extraordinary general meeting to allow members
decide on matters that cannot be postponed to the next annual general meeting.
(ii) On requisition of the members
The required number of members of a company may also as for an extraordinary
general. The requisition for such a meeting by the members shall be signed.
a) In the case of a company having share capital holders if not less than one tenth
of the paid up capital of the company.
b) In the case of a company not having a share capital, by
m e m b e r s representing not less than one tenth of the total voting power in regard to the
matter in requisition.
T h e d i r e c t o r s a r e r e q u i r e d b y s e c t i o n 1 3 2 t o c o n v e n e s u c h a me e t i n g w i t h i n
t w e n t y- o n e d a ys f r o m t h e d a t e o f t h e r e q u i s i t i o n a n d i f t h e y f a i l t o d o s o ,
t h e r equisitionists may convene the meeting. The company must compensate the
requisitionists for any reasonable expenses incurred.
Class meetings
T h e s e a r e c a l l e d w h e n t h e c o mp a n ys s h a r e c a p i t a l i s d i v i d e d i n t o d i ff e r e n t
classes of shares. These meetings are required when it is proposed to alter, vary or affect the
rights of a particular class of shares.
A class meeting should be attended only by members of the class. A class
meeting can include strangers if there is no objection to their presence by a
member of the class.
T h e r i g h t s o f a p a r t i c u l a r c l a s s o f s h a r e s ma y b e v a r i e d w i t h t h e c o n s e n t i n
writing of the holders of three fourths of the issued shares of that class.
Rights of minority
Section 74 stipulates that the holders of not less than 15% of the issued shares of
that class being persons, who did not consent to the resolution, abstained or did not
vote all, may object within thirty days to the alteration approved by the majority of
the class. The court must disallow the variation if it is satisfied that it would unfairly
prejudice the shareholders of the class, but if not satisfied, it will confirm the variation.
2. (a) Meetings of the board of directors
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These are the most frequent meetings of the company. These meetings discuss matters of the
company and decide on policy issues concerning the company.
Meetings of committees of directors
Committees are common in large companies where it is convenient to delegate
certain matters. Delegation to committees can only be allowed if the articles so
provided. Committees may be standing or ad hoc committees.
Meetings of debenture holders

These meetings are held in accordance with the rules and regulations that are e i t h e r
e n t e r e d i n t h e t r u s t d e e d o r e n d o r s e d o n t h e d e b e n t u r e b o n d a n d a r e binding
on the company and the debenture holders.
These meetings are called wherever the interests of the debentures are involved as in
reconstruction, reorganizations, amalgamation and winding up.
The rules and regulations entered in the trust deed relate to notice of meeting,
appointment of a chairman and the writing and signing of minutes.

Meeting of creditors
These are called when the company proposes to make a scheme or arrangement with its
creditors.
Meeting of creditors and contributions on winding up.
These are held when the company has gone into liquidation. These are called to a s c e r t a i n t h e
i n d e b t n e s s o f t h e c o mp a n y t o i t s c r e d i t o r s a n d a l s o t o a p p o i n t either a liquidator
or a committee of inspection.
Requisites of a valid meeting
The following are requirements for a valid meeting: 1. The meeting must be duly commenced by a proper authority.
2. A proper notice must be served in the prescribed manner.
3. A quorum must be present.
4. A chairman must preside.
5. Minutes of proceedings must be kept.
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13. ACCOUNTS
There are certain prescribed books of account which must be kept by registered companies. The
accounts of the company have then to be presented to members at some interval.
Books of account
Section 147(1) requires all companies to keep proper books of account with respect to
(i)

All sums of money received and spent by the company.

(ii)
(iii)

All sales and purchases of goods made by the company.

The assets and liability of the company.

Section 147 (2) provides that proper books of account are only said to have seen kept with
respect to the matters aforesaid if such books give a true and fair view of the state of the
companies affairs and to explain its transactions.
Section 147(3)(a) provides that the books of account should be kept at the registered office of the
company or with consent of registrar and subject to conditions he may give at any other place as
the directors think fit.
Profit and loss account
Section 148 (1) stipulates that the directors of every company must, at some date not later than
eighteen months after incorporation of the company and subsequently once at least in every
calendar year, lay before the company in general meeting profit and loss account for the period.
A company which does not trade for profit is required to lay an income and expenditure account
instead of a profit and loss account. The period during which accounts are to be laid before the
general meeting will be extended by the registrar on special circumstances.
Balance sheet
Section 148 (2) provides that directors should prepare at the end of every year, and to lay before
the company in a general meeting, a balance sheet as at the date to which the profit and loss
accounts (or income and expenditure account) is made up.
Contents
Section 149 (1) provides that the balance sheet should give a true and fair view of the state of
affairs of the company as at the end of its financial year and the profit and loss account should
give a true and fair view of the profit or loss of the company for the financial year.
Group accounts
Section 150 (1) states that if at the end of the financial year, a company has subsidiaries then it
must include in its annual accounts group accounts which incorporates the affairs of the
subsidiaries.
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Section 150 (2) (b) provides that group accounts need not include a subsidiary of the company if
the companys directors are of the opinion that;
a) It is impracticable, or would be of no real value to the members of the company in view
of the insignificant amounts involved.
b) The result would be misleading.
c) The result would be harmful to the business of the company or any of its subsidiaries.
d) The business of the holding company and that of the subsidiary are so different that they
cannot reasonably be treated as a single undertaking.
Approval of the registrar will be required for not dealing in group accounts with a subsidiary on
grounds (c) or (d).
Section 150 (2) (a) exempts a company that is a wholly owned subsidiary of another company
from the obligation of preparing group accounts.
Form
Section 151 (1) provides that the group account laid before holding company shall be
consolidated accounts comprising: (a) Consolidated balance sheet
(b) Consolidated profit and loss account.
The directors can however decide to prepare the accounts in another form if they are of the view
that the form could be more appropriate.
Contents
Group accounts laid before the company should give a true and fair view of the state of affairs
and profit or loss of the company and the subsidiaries dealt with thereby as a whole, section 152
(1). The consolidated accounts shall comply with the requirements of the sixth schedule to the
Act; so far as applicable thereto.
Financial year
Section 153 (1) provides that a holding companys directors shall ensure that, except where in
their opinion there are good reasons against it, the financial year of each of its subsidiaries shall
coincide with the companys own financial year.
Under section 153 (2) the registrar is empowered to postpone the submission of a companys
accounts to a general meeting from one calendar year to the next for purposes of enabling the
companys financial year to end with that of the holding company.
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Balance sheet
Section 148 requires the directors to prepare and lay before the company in a general meeting a
balance sheet as at the date to which the profit and loss account or the income and expenditure
account is made up.
The accounts may be signed on behalf of the board by two directors or if there is only one
director by such director section 155 (1). If the balance sheet is not signed as required but a copy
issued, circulated or published, the company every officer who is default shall be liable to a fine
not exceeding one thousand shillings.
Accounts annexed
By section 156 (1) the profit and loss account and any group accounts laid before the company in
a general meeting shall be annexed to the balance sheet.
Section 156 (2) requires that the account so annexed be approved by the board of directors before
the balance sheet is signed on their behalf.
Section 156 (3) provides if any copy of the balance sheet is issued, circulated or published
without having annexed thereto a copy of the profit and loss account to be annexed, the company
and every officer of the company who is in default shall be liable to a fine not exceeding one
thousand shillings.
Directors report
Section 156 provides that the balance sheet must have attached to it a directors report on the
companys affairs, including the amount if any, which they recommend should be paid by way of
dividend and amount if any to be transferred to reserves.
14. AUDITORS AND INVESTIGATION
The subscribers of capital are not in direct control of the application of the
c a p i t a l , w h i c h i s l e f t , t o t h e c o n t r o l o f d i r e c t o r s a n d s u p e r i o r o ff i c e r s o f t h e
company. In these circumstances it becomes necessary to have someone to safeguard
their interests. The persons who safeguard the interests of shareholders are called auditors.
The auditor is a servant of the shareholders and his duty is to examine the
affairs of the company on their behalf at the end of the year and report to them what
he has found.
Appointment of auditors
A company is required at each annual general meeting to appoint an auditor(s) to hold
office until the conclusion of the next annual general meeting.
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Failure by a company to appoint auditor(s) entitles members to make

a n application to the registrar to appoint an auditor.
A retiring auditor is to be reappointed without any resolution being passed at the meeting unless:
a) He is not qualified for re-appointment
b) A resolution has been passed appointing someone else.
c) A resolution has been passed that he shall not be reappointed.
d) He has given the company a written notice of his unwillingness to be
reappointed. A n y c a s u a l v a c a n c y i n t h e o ffi c e o f a u d i t o r ma y b e f i l l e d b y
t h e d i r e c t o r s , b u t while such vacancy continues the serving auditors may act.
No person than a retiring auditor may be appointed at an annual general meeting unless a special
notice of the resolution has been given and a copy of it has been sent to the retiring auditor
forthwith.
The retiring auditor is entitled to make representations in writing and have them
circulated among the members, and speak at the meeting.
Disqualification for appointment as auditor
A part from private companies, a person is not qualified for appointment as
auditor unless:1. he is a member of one or more professional bodies specified in the first column
of the schedule to the accountants.
2. He is authorized by the registrar to be appointed as having
s i m i l a r qualifications obtained outside i.e. United Kingdom, South Africa, Zimbabwe
or India has adequate knowledge and experience acquired in the course of his
employment.
3. He has practiced in Kenya as an accountant before 26th may 1959.
4. He has been appointed and practiced before 26 th may 1959 as auditor of an
existing company.
The following persons are not qualified to be appointed as directors: a) An officer or servant of the company.
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b) A person who is a partner or in the employment of an officer or servant of the

company.
c) A body corporate.
d) A person disqualified for appointment as auditor of a subsidiary
o r holding company.
Appointment of an unqualified person as auditor renders such person and the
company and every officer in default liable to a fine up to four thousand shillings.
Remuneration of auditor
Remuneration of the auditors of a company may be fixed by the company in a
general meeting or in such a manners as the company in general meeting
maydetermine.I n c a s e o f a n a u d i t o r a p p o i n t e d b y d i r e c t o r s o r r e g i s t r a r h i s
r e m u n e r a t i o n i s determined by the directors or the registrar as the case may be (sec. 159(75).
Position of auditors
1. Auditors as agents of the members
An auditor is an agent of the company even when he is not appointed by them and
his duty is to examine the affairs of the company on their behalf and at the end of the
year report to them what he has found.
It was observed in Spackman vs. Evans (1868) that although an auditor is an agent of
the shareholders, the shareholders are not necessarily bound by notice of everything of
which notice is given to the auditor.
If the auditor is negligent in the course of his audit and this result in loss to the shareholders he is
liable to the shareholders, but his liability would not extend to third parties.
(2) Auditor as an officer of the company as an auditor is liable for default in the
performance of his duty to the company; he may to some extent be regarded as an officer of
the company.
(3) Auditor as an employee; The relationship between an auditor and a company is that of a
professional man and a client rather than that of an employee and employer.
Auditors report
As per the seventh schedule, an auditors report must contain the following; a) The accounts examined by him.
b) The balance sheet and profit and loss account.
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E v e r y d o c u m e n t a n n e x e d t o b e b a l a n c e s h e e t a n d p r o f i t a n d l o s s account (i.e.
notes to the accounts) laid before the company in a general meeting during his tenure of
officer.
A n a u d i t o r i s s a i d t o h a v e r e p o r t e d i f a f t e r h a v i n g a f fi x e d h i s s i g n a t u r e t o
t h e report annexed to the balance sheet; he forwards that report to the secretary
of the company or directors.
Matters to be expressly stated in the auditors report.
1. Whether auditors have received all information necessary for their audit.
2. Whether proper books of accounts of account have been kept by the
company and proper returns have been received from the branches not
visited by them.
3. (a) Whether the companys balance sheet and profit and loss account (or c o n s o l i d a t e d
a c c o u n t s ) d e a l t w i t h b y t h e r e p o r t a r e i n a g r e e me n t w i t h t h e books of
accounts and returns.
(b) Wh e t h e r , i n t h e i r o p i n i o n a n d t o t h e b e s t o f t h e i r i n f o r m a t i o n a n d
according to the explanations given to them, the said accounts give the
information required by the Act in the manner so required and give a true and fair view.
(i) In the case of the balance sheet, of the state of affairs as at the end of its financial
year.
(ii) I n t h e c a s e o f p r o f i t a n d l o s s a c c o u n t o f t h e p r o f i t o r loss in its financial year.
Rights and powers of auditors
1. Right to access books of account and vouchers. An auditor has a right to access at all
times to the books and vouchers of the company and is entitled to require from
the officers of the company such information and explanations as he thinks necessary for
the performance of his duties as auditor.
2. Right to attend any general meetings of the company and to receive any notices
which members are entitled to receive.

Duties of auditors
D u t i e s o f a u d i t o r s a r e s e t o u t i n s e c t i o n 1 5 9 t o 1 6 2 o f t h e a c t . Th e d u t i e s
o f auditors: -

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1. They must acquit themselves with their duties as laid down by articles and companies
Act.
2. They must report to members on the accounts laid before the company in general
meeting, during that tenure of office.
3. They must be honest and must exercise a reasonable skill and care or else they
may be sued for damages.
15. MAJORITY RULE AND MINORITY RIGHTS
MAJORITY RULE
A ma j o r i t y o f m e m b e r s o f a c o mp a n y i s e n t i t l e d t o e x e r c i s e t h e p o w e r s o f
t h e company and to control its affairs. Directors who enjoy a wide range of powers
are elected by the majority. It will therefore be seen that in all aspects the affairs of the company
are conducted by the majority.
Principle of majority rule
The principle was recognized in Foss vs. Harbottle and the principle was called the
majority rule or the proper plaintiff principle.
The rule is that the proper plaintiff in action to redress a wrong to a company on t h e
part of any one, is the company and where the alleged wrong
i s a n y irregularity which might be made binding on the company, by a simple majority
of members, no individual member can bring an action in respect of it.
I n F o s s v s . H a r b o t t l e t w o ma j o r i t y s h a r e h o l d e r s i n a c o mp a n y a l l e g e d t h a t
i t s directors were guilty of buying their own land for the companys use and paying
themselves a price greater than its value. This act of the directors resulted in a loss to
the company. The minority shareholders therefore decided to take action f o r d a m a g e s
a g a i n s t t h e d i r e c t o r s . Th e s h a r e h o l d e r s i n a g e n e r a l m e e t i n g b y majority
resolved not to take any action against the directors saying that they were not
responsible for the loss, which had been incurred. The court dismissed t h e s u i t o n
grounds that the act of directors were capable of confirmation by majority
o f m e m b e r s a n d h e l d t h a t t h e p r o p e r p l a i n t i ff f o r w r o n g s d o n e t o t h e company
is the company is the company itself not the minority and the company can only act through its
majority shareholders.
The principle of majority rule as laid down in Foss vs. Harbottle was also upheld in
Maldangall vs. Eardinor by Mellish L.J & in Burland vs. Earle by Lord Davery.
Advantages of the rule in Foss vs. Harbottle
.
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1. Recognition of the separate legal personality of a company.

2. It preserves the right of majority of members to make decisions.
3. Multiplicity of futile suits is avoided.
4. Litigation at the suit of a minority is futile if majority do not wish it.
Protection of minority shareholders or Exceptions to the rule in Foss vsHarbottle.
The wide powers of the majority if not used carefully may be used to exploit the minority
shareholders. Palmer pointed out that a proper balance of the rights of majority and minority
shareholders is essential for the smooth functioning of the company.
The following are exceptions to the Foss vs. Harbottle Rule.
(iv) When the acts of the majority are ultra vires or illegal.
(v) W h e n a c t s a r e s u p p o r t e d b y i n s u f fi c i e n t m a j o r i t y f o r certain acts the act or
articles require a special majority of three fourths of the shareholders.
(vi) Where the act of majority constitutes a fraud on minority. A r e s o l u t i o n w o u l d
c o n s t i t u t e a f r a u d o n m i n o r i t y i f i t i s n o t b o n a f i d e f o r t h e benefit of the company
as a whole.
The cases which illustrate the concept of fraud on minority are: Menier vs. Hoopers Telegraph Works Ltd; Cooks vs. Deeks and brown vs. British Abrasive
Wheel co.
(iv)Where the personal membership rights of the plaintiff shareholder have been infringed.
Individual membership rights include right to attend meetings, the right to receive dividends, the
right to insist on strict observance of legal rules e.t.c. if such rights are violated then a single
shareholder can defy the majority.
(v)Where there is a breach of duty where there is a breach of duty by the directors and majority
shareholders to the d e t r i m e n t o f a c o m p a n y t h e mi n o r i t y c a n b r i n g a c t i o n a g a i n s t
t h e c o mp a n y. A case illustrating this point is in Daniels vs. Daniels (1978).
(vi)Oppression and mismanagement
Where oppression of the minority and mismanagement of the company affairs is alleged the
rule in Foss vs. Harbottle does not apply. A member thus can bring an action against
the management of the company on grounds of oppression and mismanagement.
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16. AMALMAGATION
The term implies creation of a new company by complete
c o n s o l i d a t i o n o f combining units. Two or more companies may liquidate
themselves under the law and sell their assets and transfer their liabilities to a new
company which i s s u e s i t s o w n s h a r e s i n e x c h a n g e o f v a l u e r e c e i v e d f r o m t h e
a m a l g a m a t i n g companies.
After amalgamation none of the companies retains its entity or existence.
Amalgamation may take any of the following forms: 1. By a scheme of arrangement.
2. By sale of undertaking
3. By sale of shares
4. By amalgamation in case of a company in course of winding up.
1. Arrangement.
Arrangement includes a reorganization of the share capital of the company by the
consultation of shares of different classes or division of shares of different classes or
by division of shares of all modes of reorganizing the share capital even when
involving an interference with preferential or for special rights attached to the share by the
memorandum.
2. Sale of undertaking
This involves the sale of the whole of the undertaking of the transferor company as a
going concern. An amalgamation of two or more companies involves the transfer of
the whole part of the undertaking of the company; the court may make an order for the following
matter
(i)

The transfer to the transferee company of the whole part of the undertaking and the
property.

(ii)

The allotting or appropriation by the transferee of any share, debentures,

policies or other like interests in that by that company to or for any person.

(iii)

The continuation by or against the transferee company o f a n y l e g a l

p r o c e e d i n g s p e n d i n g o r a g a i n s t a n y t r a n s f e r o r company.

(iv)

T h e d i s s o l u t i o n w i t h o u t w i n d i n g u p o f a n y t r a n s f e r company
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(v)
(vi)

Provision to be made for any persons who, within such time and in such
manner as the court directs, dissent from the compromise or arrangement
Such incidental, consequential and supplemental matters as are necessary to
secure the reconstruction in amalgamation shall be fully and effectively carried out.

Sale of shares
S h a r e s a r e s o l d a n d r e g i s t e r e d i n t h e n a me o f t h e p u r c h a s i n g c o mp a n y. Th e
s e l l i n g s h a r e h o l d e r s r e c e i v e e i t h e r m o n e y o r s h a r e i n t o a c q u i r i n g c o m p a n y.
Approval the sale of shares must be approved by nineth .of the shareholder
whose is transfer is involved.
The number must exclude any shares already held by the transferee company or its nominees or
its subsidiary. When approval of nine-tenths majority is acquired, the transferee company can
acquire two months, after expiry of a four months the transferee company may give a
notice to dissenting shareholders that within one month, it desires to acquire their shares.
The dissenting shareholders may apply to court but if no application is made, the transferee
company gets the final right to acquire all the shares. The court will infer fairness from
the fact that the scheme has been approved by nine tenths of the members.
When an application is made to the court by a shareholder that the terms are not fair it is not
upon the applicant to establish his allegation. Where however the offer is being made
by the same majority shareholders who have accepted it, the burden of proof is reversed and it is
up to the offeror to show the scheme is fair.
Amalgamation in case of a company in course of winding up: Section 280 provides that a company may transfer or sell the whole or part of its
business or property to another company and a company may pass a special
resolution authorizing the liquidator to receive as a consideration cash or shares, p o l i c i e s o r
l i k e i n t e r e s t i n t r a n s f e r e e c o mp a n y f o r d i s t r i b u t i o n a m o n g t h e members of the
transferor company according to their rights and interests in that company. The sanction of the
court is unnecessary
Section 280 also provides that such an arrangement is binding on all
the members of the transferor company whether they agree to it or
n o t b u t t h e members who did not vote in favour of the resolution may leave his
dissent in writing addressed to the liquidator at the companys registered office within seven
days after the passing of the resolution. The liquidator must then either abstain from
carrying the resolution into effect or p u r c h a s e t h e m e m b e r s i n t e r e s t s a t a p r i c e
a g r e e d b y t h e m o r d e t e r m i n e d b y arbitration.
If there are many dissentients the liquidator may be forced by circumstance to
abandon the scheme.
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17. WINDING UP OR LIQUIDATION

Win d i n g u p r e p r e s e n t t h e p r o c e e d i n g b y w h i c h a c o mp a n y i s d i s s o l v e d . T h e
assets of the company are disposed of, the debts are paid from assets proceeds (or from
contributories) and the surplus is distributed to the shareholders.
Winding up or liquidation is the process by which the
m a n a g e m e n t o f a companys affairs is taken out of its directors hands, its
assets are realized by a liquidator and its debts are paid out of the proceed of realization.
P r o f e s s o r G o w e r g a v e t h e f o l l o w i n g d e f i n i t i o n w i n d i n g u p o f a c o mp a n y i s
a process whereby its life is ended and its property administered for the benefit of its
creditors and members. An administrator called a liquidator, is appointed and h e t a k e s
c o n t r o l o f t h e c o m p a n y c o l l e c t s i t s a s s e t s , p a ys i t s d e b t s a n d f i n a l l y
d i s t r i b u t e s a n y s u r p l u s a mo n g t h e m e m b e r s i n a c c o r d a n c e w i t h t h e i r
r i g h t s (modern company law, 4th edition page 789).
Pennington gives the following definition of winding up. Winding up is a process b y
w h i c h t h e m a n a g e m e n t o f a c o m p a n ys a ff a i r s i s t a k e n o u t o f i t s d i r e c t o r s
hands; its assets are realized by the liquidator and debts are paid out of the
proceeds of realization and any balance remaining is returned to its members. At the end of the
winding up, the company will have no assets or liabilities and will therefore be simply
a formal step for it to be dissolved, that is its legal personality as a corporation to be brought to
an end (company later 2nd edition).
Winding up and dissolution
A company is said to be dissolved when it ceases to exist as a corporate entity.
Winding up proceeds dissolution; it is the process by which the dissolution of a
company is brought about.
Winding up and insolvency
The following can be noted as regard to winding up and insolvency.
a) Winding up order can be made even when the company is solvent.
b) On winding up, the company continues to exist it only its administration that is carried on
through the medium of a liquidator.
c) Even where a company is wound up because it is
i n s o l v e n t circumstances, all the provisions of insolvency law do not apply to it.
Modes of winding up
There are three modes of winding up.
1. Winding up by court
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in

2. Voluntary winding up.

(a) Members voluntary winding up
(b) Creditors voluntary winding up
3. Winding up subject to the supervision of the court

Winding up by the court (sec.219)

Winding by court is also called compulsory winding up. This may occur in the
following circumstances: a) If the company has by special resolution resolved that it be wound up by court.
b) Default is made in delivering the statutory report to the registrar or in holding
the statutory meeting.
Only a shareholder may present a petition on this ground and where reason is failure
to hold the statutory meeting, fourteen days must have elapsed from the
Date meeting was due to be held. The courts may instead of making the winding up order direct
that the statutory report shall be delivered or the meeting be held and the costs to be paid by any
persons who are responsible for the default.
c) Where there is failure to commence business within a year or where the
business is suspended for a whole year by the company.
The court may order winding up if the company has no intention of carrying on its business or if
is not possible to carry on its business.
A n e x a mp l e o f a c o mp a n y t h a t w a s w o u n d u p b e c a u s e o f f a i l u r e t o c o n t i n u e
business is in Orissa Trunks and Enamel Works Ltd (1973) where the company
suspended business for ten years due to embezzlement.
If a company has not begun to carry on business within a year
f r o m i t s incorporation or suspends its business for a whole year the court will not
wind it up if: (i)
(ii)

There are reasonable prospects of a company starting business within a

reasonable time.
There are good reasons for the delay.
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An example where courts declined to wind a company on the above reasons is in

Middleborough Assembly Rooms Co. Re (1880) where the company suspended
business for three years due to depression in trade.
d) The number is reduced in case of private company below two or in the c a e o f
any other company below seven. If the company carries on
business for more than six months while the member is so reduced, every
member who is aware of the fact that the number is below the
statutory m i n i m u m w i l l b e s e v e r a l l y l i a b l e f o r t h e p a y m e n t o f
t h e d e b t s o f t h e company contracted after six months.
This is also one of the situations under the act where the veil of incorporation is
lifted.
e) Where the company is unable to pay its debts.
(i)

A creditor to whom the company owns more than one thousand shillings
has left at the companys registered office d emand under his hand for the
payment of the sum due and the
Company has for three weeks or thereafter neglected to pay the sum, to secure or compound for
it to the reasonable satisfaction of the creditor or;
(ii)

Execution or other process in favour of creditors of the company is returned

unsatisfied in whole or part or;

( i i i ) I t i s p r o v e d t o t h e s a t i s f a c t i o n o f t h e c o u r t t h a t t h e company
i s u n a b l e t o p a y i t s d e b t s ; t a k i n g i n t o a c c o u n t t h e contingent and
prospective liabilities of the company.
f) When it is just and equitable.
The petition should be allowed only as a last resort or for compelling reasons when
other remedies are not efficacious enough to protect the general interests of the
company.
In Westbourne Galleries Ltd Re. (1973) AC 360 it was observed that a petitioner w h o r e l i e s
o n t h e j u s t e q u i t a b l e c l a u s e mu s t c o m e t o t h e c o u r t w i t h a c l e a n hand, and if
the breakdown is confidence between him and other parties to the d i s p u t e a p p e a r s
t o h a v e b e e n d u e t o h i s m i s c o n d u c t , h e c a n n o t i n s i s t o n t h e company being
wound up if they wish to continue.
What is a just and equitable clause
T h e c o u r t s ma y o r d e r w i n d i n g u p u n d e r t h e j u s t a n d e q u i t a b l e c l a u s e i n t h e
following Case: -

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1. When the substratum is said to have disappeared. This occurs when the object
for which the company was formed has substantially failed or when it is i m p o s s i b l e t o
c a r r y b u s i n e s s e x c e p t a t l o s s o r t h e e x i s t i n g a n d p o s s i b l e assets are
insufficient to meet the existing liabilities. In making the winding up o r d e r t h e
courts should consider the interests of the shareholders and
creditors.
The substratum of a company disappears: (i)
(ii)

When the subject matter of the company is gone. This was the case in Perievs.
Stewart (1904)
When the main object of the company has substantially failed or become
impractical.

W h e n a c o mp a n ys ma i n o b j e c t f a i l s i t s s u b s t r a t u m i s g o n e a n d i t m a y b e
wound up even though it is carrying on its business in pursuit of a subsidiary object.
A company wound up on this ground was the German date coffee Co.
i n German date coffee company Re. (1882) 20 ch D 169.
(iii)

Wh e n t h e c o m p a n y i s c a r r yi n g o n i t s b u s i n e s s a t a l o s s a n d t h e r e i s
n o reasonable hope that the object of trading can be attained.

Where the majority shareholders are against winding up, the court will not order a company to be
wound up merely because it is making a loss.
(iv)

Where the existing and probable assets of the company are insufficient to
meet its existing liabilities.
2 . W h e n t h e ma n a g e m e n t i s c a r r i e d i n s u c h a w a y t h a t t h e m i n o r i t y a r e
disregarded or oppressed. The court will not make an order for winding up
unless it is proved that wrong has been done to the company by abuse
o f majority voting power, and it is impossible for the business of the company as a
whole, owing to the way in which voting is held and used.
In ReHarnets Mining co. Ltd WC (winding case no 12 of 1977) the petitioner Mrs.
Beth Wambui Mugo wanted the company to be wound up on the just and equitable
ground, the reasons were as follows: (i)

The affairs of the company were conducted in manner oppressive to her.

Though she had 50% of shareholding she did not participate in decision-making but
was expected to sign resolutions by other directors.

(ii)

The substratum of the company had gone and that the company had
n o alternative business to engage in.

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(iii)

The directors had loss confidence and probity in each other to the extent
that the company could no longer be managed at all. It was
h e l d t h a t t h e company could be wound up.

3. Where there is a deadlock in the management of a company.

This is usually real when the shareholding between the two competing sides is equal
and thus there is a complete deadlock in the company on account of lack of probity in the
management of the company and there is no possibility of efficient continuance of the
company as a commercial concern.
Cases of companies wound up on those grounds are in American
P i o n e e r Leather Core (1988) and in Yenidje Tobacco Co. Ltd (1916).
4. When the company was formed to carry out fraud or the illegal business or the
business of the company becomes illegal.
A case in which the company was wound up is
g r o u n d i s i n Brinsmead (Thomas Edward) & sons Re (1897) 1 ch. 45.

the

above

5. In the case of a company incorporated outside Kenya and carrying on business

in Kenya, winding up proceedings have been commenced in respect of it either: (i)

In the country of its incorporation.

(ii)

I n a n y c o u n t r y i n w h i c h i t h a s e s t a b l i s h e d a p l a c e o f business sec. 219.

Petitioners for compulsory winding up.

An application to the courts for winding up by petition may be presented.
a) By the company
A company in general meeting may resolve that the company be wound up by te court.
b) By a creditor or creditors
(Including any contingent or prospective creditors).
Persons included in the category of creditors
1. A contingent or prospective creditor
2. A secured creditor
3. A debenture holder
4.Any person who has a pecuniary claim against the company.
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5.The legal representations of a deceased creditor.

6. The government or local authority to which any tax or public charge is due.

Disputed debt
A creditor whose debt is disputed cannot get a winding up order.
c) By petition of any contributory
A contributory is any person liable to contribute to the assets of the company in the
event its being wound up. The definition does not include debtors. A holder of f u l l y p a i d
s h a r e s i s r e g a r d e d a s a c o n t r i b u t o r y a l t h o u g h n o f u r t h e r c a l l s c a n normally be
imposed upon him in liquidation of the company.
d) By official receiver.
e) By the attorney general after receiving a report of inspectors on the
companys affairs.
f) Section 221 (2) provides that when a company is already in the course of being wound
up voluntarily or subject to supervision, the courts if satisfied t h a t v o l u n t a r y
w i n d i n g u p o r w i n d i n g u p s u b j e c t t o s u p e r v i s i o n c a n n o t b e continued
with due regard to the interest of the creditors and contributories.
Right of assignee of a debt
The assignee of a debt has the same right which his assignor had to present a petition
for winding up order, unless the assignment was made after a petition had already been
presented.
Commencement of winding up
The commencement of winding up by the court is deemed to have started from the
date a petition is presented. When the order is made for winding up, it relates back to the date of
the presentation of petition.
Powers of court (section 218,221&222)
Courts have jurisdiction to receive winding up petition hear it and
m a k e determination. The interest of the applicant alone is not of predominant
Consideration. The interests of the shareholders of the company as a whole apart from those
other interests have to be kept in mind at the time of consideration as to whether the application
should be admitted on the allegations mentioned in the petition.
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The court may delay the order to enable the company to: a) Settle a list of contributories.
b) Order any person in possession of any property of the company to
surrender it to the liquidator immediately.
c) Make the last calls on the shares and debentures the members hold.
d) Where the companys business is running the company has power to appoint a
special manager to take care of the business until it determines.
e) Prevent any creditor from participating in the distribution of
t h e companys assets when the company is paying off its liabilities.
f) The courts have also power to prepare a priority list detailing the order in
which payment shall be made (sec.262).
g) If at the time of winding it appears that promoters might have committed fraud to the
company, the court may order that they be examined.

Procedure for winding up by the courts

A petition for winding up order against a company may be presented to the high court
of Kenya such a petition must be supported by an affidavit of the petitioner (sec.218).
When determining the case (petition) the court may (sec.222): a) Dismiss it with or without costs.
b) Adjourn the hearing conditionally or unconditionally.
c) Make an interim order.
d ) M a k e a n y o t h e r o r d e r ( f o r c o mp u l s o r y w i n d i n g u p o r w i n d i n g u p
u n d e r supervision of the court).
Consequences of winding up order
The consequences date back to the commencement of winding up. A winding up order operates
in favour of all creditors and contributories as if made on the joint petition of a creditor and a
contributory.
In the case of compulsory winding up by courts, the winding up dates from the
presentation of the petition unless before that date a resolution was passed to
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winding up
of resolution.

voluntarily, in which

case the

commencement is

the

time

Any subsequent disposition of the property and any transfer of

s h a r e s o r alteration in the status of members is void unless the court otherwise orders.
When winding up order has been granted or an interim liquidator has been
appointed, no action may be preceded with or commenced against the company except with
the leave of the courts and subject to such terms as the courts may impose.
T h e p o w e r s o f d i r e c t o r s a r e t e r mi n a t e d a n d t h e c o m p a n ys s e r v a n t s a r e I p s o
facto dismissed. The official receiver (of the court) becomes the
p r i n c i p a l liquidator to the company until he or another person becomes
l i q u i d a t o r (sec.236).

Special manager
Upon an application by the official receivers a special
m a n a g e r m a y b e appointed, acting as a liquidator, whether provisional or not by
the courts. Such an application may be made if the official receiver is satisfied that
the nature of the companys business or interests of the creditors or contributories
generally require the appointment of a special manager other than himself.
The remuneration of the special manager may be fixed by the courts.
Official receiver as liquidator.
The courts are empowered by section 235 to appoint a provisional liquidator at any
time after presentation of a petition and before winding up order is made. Once the
winding up order has been made the official receiver becomes Ispo facto, a provisional
liquidator until a liquidator is appointed.
Duties of an official receiver
An official receiver as a provisional liquidator can call on the directors to furnish
him with a statement of the companys affairs that has to be made
o u t i n accordance to a statutory form and verified by an affidavit. This statement
must show: a) Particulars of assets, debts, and liability of the company.
b) Names, residence and occupation of its creditors.
c) The security held by creditors and the dates when they were given and such
other information as may be required.
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The above statement must be submitted and verified by affidavit if: (i)

By one or more directors and secretary or,

(ii)

B y p e r s o n s w h o a r e o r h a v e b e e n o f fi c e r s o r w e r e e n g a g e d i n t h e
f o r ma t i o n o f t h e c o mp a n y w i t h i n t h e p a s t years in its employment during
such a time.

Report by official receiver

After receiving a statement of affairs the official receiver has to
s u b m i t a preliminary report to the courts as soon as practible. The report should
contain the following: a ) A mo u n t o f c a p i t a l i s s u e d , s u b s c r i b e d a n d p a i d a n d t h e e s t i ma t e d
amount of assets and liabilities.
b) The cause of failure of the company (if the company failed).
c) Whether in his opinion there is need for further inquiry to any matter relating
to the promotion formation or failure of the company or the conduct of its business.

First meeting of creditors and contributories

T h e o f fi c i a l r e c e i v e r i s u n d e r o b l i g a t i o n t o c o n v e n e s e p a r a t e m e e t i n g s o f t h e
creditors and contributories to find out whether they would like to appoint a
liquidator in place of the official receiver.
The above meeting should be held within sixty days from the date when the order was given
unless the courts provide otherwise.
A notice of seven days is required to hold both meetings. Rule 114 requires that the
official receiver must send to the creditors and contributories a summary of the
companys statement of affairs including causes of failure of the company and any
observation he may think fit to make.
W h e r e s u c h m e e t i n g s a r e c a l l e d t h e o f fi c i a l r e c e i v e r o r ( o r l i q u i d a t o r ) o r h i s
nominee is the chairman at the meeting.
The object of the meetings is to find out;
a) Whether creditors or contributories desire a liquidator of their choice.
b) Whether there shall be a committee of inspection and whom shall it
consist.
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Powers of the liquidator

After winding order is granted or after a provisional liquidator is appointed he will t a k e i n t o
h i s c u s t o d y o r u n d e r h i s c o n t r o l a l l t h e p r o p e r t y o f t h e c o mp a n y a n d other
right of the company.
The liquidator has power with leave of the court or committee.
a) To institute or defend suits and other legal proceedings, civil, criminal in the
name of the company.
b ) To c a r r y o n t h e b u s i n e s s o f t h e c o mp a n y s o f a r a s n e c e s s a r y f o r t h e
beneficial winding up of the company.
c) To appoint an advocate to assist him performs his duties.
d) Pay any class of creditors in full.
e) Make any compromise with creditors or persons claiming to be creditors.
f) Compromise calls debts and other claims between the company and any contributory or
debtor and,
A liquidator may, without sanction of the courts,
a) Sell companys movable and immovable property.
b) Do all acts and execute all documents in the companys seal.
c) Prove and receive dividends in the bankruptcy of any contributory.
d) Draw, accept and endorse bills and notes in the name of the company.
e) Borrow money on the security of the company assets.
f) T a k e o u t h i s o f f i c i a l n a m e l e t t e r s o f a d m i n i s t r a t i o n t o a d e c e a s e d
contributory.
g) Appoint an agent to do any business which the liquidator is unable to do himself.
h) W h e r e w i n d i n g u p p r o c e e d i n g h a v e b e e n c o m m e n c e d i n U g a n d a ,
Tan z a n i a o r i n K e n ya t o m a k e s u c h p a ym e n t s t o a l i q u i d a t o r t h e r e i n a s
n ecessary for the distribution of the companys assets.
Additional powers
These are powers of the courts delegated to the liquidator.
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a) To call and hold meeting of creditors and contributories.

b) Settling the list of contributories and rectifying the register of members.
c) Paying, delivery, conveyance, surrender or transfer of money, property and
documents to the liquidator.
d) Making calls on the contributories.
e) Fixing time within which debts and claims must be proved. The above powers
are exercised by the liquidator as an officer of the court.
Disclaimer by a liquidator
S e c t i o n 3 1 5 e mp o w e r s a l i q u i d a t o r w i t h l e a v e o f t h e c o u r t s t o d i s c l a i m a n y
o n e r o u s p r o p e r t y o f t h e c o m p a n y. T h e l i q u i d a t o r h a s t o d i s c l a i m t h e
p r o p e r t y within one year from the date of commencement winding up or from the date he
became aware of the onerous property.
The disclaimer extinguishes the rights, interests and liabilities of the company in the property
disclaimed. If any person suffers a loss (or damages by a disclaimer of the property, he may
prove for the amount as a creditor).
Termination of liquidators powers
A liquidator will cease to function if: a) He resigns
b) He is removed
c) He is released.
Committee of inspection
Creditors and contributories may apply to the courts to appoint a committee
of inspection. There is no given limit of members of the committee of inspection.
There is no given limit of members of the committee. The function
o f t h e committee is to assist and supervise the acts of the liquidator.
The committee must meet one in a month but the liquidator may call for meetings of inspection
as often as he thinks.
Power of the court to stay winding up
The courts at any time after an order of winding up have a discretion on the
application of the liquidator, official receiver or creditor or contributor, so stay
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p r o c e e d i n g s i n r e l a t i o n t o w i n d i n g u p . Th e c o u r t s m a y s t a y t h e p r o c e e d i n g s
altogether or for a limited time.
Dissolution of the company
When the affairs of the company have been wound up the court will,
i f t h e liquidator makes an application, make an order dissolving the company and
the company is dissolved from the date of such order.
The liquidator must within fourteen days deliver a copy of the order
t o t h e registrar for registration.
Voluntary winding up
This is winding up by members or creditors without interference by the court. The members,
creditors may however apply to the court for any direction, if and when necessary.
A company may be wound up voluntarily on the following
c i r c u m s t a n c e s (sec.271).
a) When the period for the duration of the company have come to an end or t h e
event which the company is to be wound up has happened and
t h e c o m p a n y h a s i n a g e n e r a l me e t i n g p a s s e d a r e s o l u t i o n w h i c h m a y
b e a n ordinary resolution unless articles provide otherwise.
b) If the company passes a resolution to wind up voluntarily.
Types of winding up
a) Members voluntary winding up
b) Creditors voluntary winding up.
a) Members voluntary winding up
This is allowed if a declaration of solvency of the company is made.
T h e declaration shall be made by a majority of the directors at a meeting to of the
board that they have made a full inquiry into the affairs of the company and that
having done so they are of the opinion that
a) That the company has no debts
b) That the debts can be paid in full within twelve months from
t h e commencement of the winding up. Such declaration is infective unless: (i)

It is made within thirty days immediately preceding t h e d a t e s o f p a s s i n g

o f t h e r e s o l u t i o n a n d d e l i v e r e d t o t h e registrar.
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(ii)

It embodies a statement of the companys assets and liabilities at the latest

practicable date before the making of the declaration.

DECLARATION OF SOLVENCY

This is declaration by a director that a company is able to pay all its debts within one year. If
late it is proved that a director has made the declaration of solvency without
reasonable grounds he may be liable to imprisonment up to a year or a fine or both.
Notice of declaration
The notice of the resolution to voluntarily wind up a company must be advertised in the Gazette
within fourteen days.
Summoning a general meeting
I f t h e w i n d i n g c o n t i n u e s f o r m o r e t h a n a ye a r t h e l i q u i d a t o r m u s t s u m m o n a
general meeting at the end of the first and subsequent years.
The liquidator must lay before the meeting an account of his acts and dealing of winding up
during the preceding year.
Final meeting
When the affairs of company are wound up the liquidator must make up a final
account and call a general meeting of the company, which must be advertised in the Gazette.
T h e l i q u i d a t o r mu s t s e n d a c o p y o f t h e a c c o u n t s t o t h e r e g i s t r a r a n d m a k e a
return of the holding of the meeting within fourteen days.
Creditors voluntary winding up
This arises when the company is insolvent in which case the company must call a
meeting of the creditors on the same day of the general meeting of member on a day after.
The meeting must be advertised in the gazette and directors must lay before the meeting .a
statement of the position of the company with a list of its creditors.
The directors can appoint one of their numbers to preside at the meeting
Appointment of liquidator
T h e c r e d i t o r s a n d t h e c o mp a n y i n t h e i r s e p a r a t e me e t i n g s ma y n o mi n a t e a
liquidator for the purpose of winding up the affairs of the company.
If the creditors and the company nominate different persons the nomination
of creditors will prevail.

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T h e l i q u i d a t o r mu s t w i t h i n f o u r t e e n d a ys o f h i s a p p o i n t m e n t , p u b l i s h i n t h e
Gazette and deliver to the registrar of companies notice of his appointment in the form
prescribed by the register (sec.299).
Committee of inspection
C r e d i t o r s a t t h e i r me e t i n g m a y a p p o i n t a c o m m i t t e e o f i n s p e c t i o n , a n d t h e
committee may appoint not more than five persons to the members of
the committee subject to the power of the creditors to disapprove
p e r s o n s s o appointed (sec 288).
A liquidator is to call a meeting of members and creditors after each year-end a n d
h a s t o l a y b e f o r e t h e me e t i n g a n a c c o u n t o f h i s a c t s a n d d e a l i n g s o f t h e
winding up of the preceding year.
Final meeting and dissolution
When the company is fully wound up, the liquidator has to hold a
general meeting of the company and a meeting of creditors and has
t o p r o d u c e a n account of the winding up showing how it has been conducted and
property of the company disposed of. These meetings are to be advertised in the
gazette, published thirty days before the meeting. Within fourteen days after the meeting the
liquidator must send to the registrar a copy of the accounts and a return of the meetings.

WINDING UP SUBJECT TO SUPERVISION OF COURT.

Section 304 provides that when a company has passed a resolution to wind up
voluntarily, the courts may order the continuation of voluntary winding up subject to their
supervision on any terms or conditions.
The liquidator will continue to exercise all powers subject to any restrictions laid b y
the courts. A petition for winding subject to court supervision may
b e presented by any person entitled to petition for the compulsory winding up.
Effects of supervision order.
Powers for the exercise of which such liquidation would require sanction may be exercised
only with the sanction of the courts or the committee of inspections o t h e r w i s e i n
a l l o t h e r i n s t a n c e s o r d i n a r y v o l u n t a r y l i q u i d a t i o n p r o c e d u r e s a r e followed.
Preferential payment
Section 302 provides that the companys assets must be used to pay all costs, charges
and expenses properly incurred in the winding up including liquidation. Thus winding
up charges and expenses rank in priority to all other claims.

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T h e f o l l o w i n g p r e f e r e n t i a l p a ym e n t s a r e r e q u i r e d t o b e ma d e i n p r i o r i t y t o
all other debts and such debts rank Pari Passu i.e. they rank equally
a mo n g s t themselves.
a) All government and local rates payable with 12 months before the date of winding up.
b) All government rents not more than one year in arrears.
c) Wages and salary of any clerk or servant for services rendered during f o u r
months preceding the relevant date not exceeding four thousand
shillings.
All amounts done in respect of any compensation under the workmens compensation act, which
have accrued before the relevant date.
Proceeds left may be given to the shareholders and if any portion
r e m a i n s unclaimed, if goes to the public trustee as Bona vacantia i.e. owners property.

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