BBM Company Law Notes
BBM Company Law Notes
INTRODUCTION
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 company can be defined as a group of persons associated together for the
purpose of attaining a common objective, social or economic.
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o n l y m e a n s a c o m p a n y f o r m e d a n d r e g i s t e r e d u n d e r a n y o f t h e repealed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: -
b) An existing company.
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c) An unregistered company covered under section 357-364.
Characteristics of a company
1. Artificial legal person
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.
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.
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.
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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 . T h e personal property of
a shareholder can’t 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.
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.
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
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 Ty 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 y r e s m a d e i n G e r m a n y. T h 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 y r 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.
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.
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This refers to a situation where a company is formed and used for some illegal or improper
purpose.
Case law relating to this is the F.G Film Ltd in Re (1953) I ALL E.R 615.
5. Protection of Revenue.
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.
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 m p a n y ’s n a m e i s n o t m e n t i o n e d t h e officer is
personally liable to the holder of the bill of exchange.
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 m p 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.
Section 210 provides that where scheme or contract inviting the transfer
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.
S e c t i o n 3 2 3 o f c o m p a n y ’s A c t i n t h e c o u r s e o f w i n d i n g u p t o 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 ff i 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 m p a n y t h e n t h e c o u r t m a 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.
2. Transferability of shares.
4. Control
Control can be gained by acquisition of majority shares which carry voting power.
5. Permanent existence.
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 m p a n i e s a r e r u n professionally.
8. Public confidence.
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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 m p 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.
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.
7. The winding up of a company is widely published thus exposing the property of the
company to an insecure position.
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.
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Can continue even after death of those members.
b) Corporation aggregate.
Are classified according to the means the artificial corporate personality has been granted: - thus
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.
b) Guarantee
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 guaranteed sum is payable by those who are members at the time
o f winding up and if they can’t pay the liquidator may proceed against those who
were members previously but only in respect of debts incurred while they were
members.
Mostly used by stockbrokers because stock exchange can’t admit a company as a member unless
its members are personally liable for its debts.
Where there is no share capital members contribute equally to the debts and
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.
The registrar may then issue a certificate and publish the fact of issue in the
Gazette.
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.
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 company’s nominal capital, when notice must be given within 15
days.
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.
(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.
The section applies if the company is being wound up. The court
m u s t b e satisfied that the company’s business has been carried on with intent to defraud
creditors.
Person carrying on business fraudulently must be made personally liable for the company’s
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.
The case, which established the independent legal personality of a company, Salomon
vs. Salomon and company Ltd (1897) (1, 1).
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).
Special notice of 28 days to the company is required of the intention to move the resolution
(sec.184 (2)).
(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 ( Tr e 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 company’s 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 m e 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.
There is also liability where on winding up the court is satisfied that a company’s 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).
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
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
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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 rg a 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 m p 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.
ii. Estimating the cost of production, selling price of goods and services and the
amount of profits likely.
iv. Presentation to the public and underwrites the business proposition in order to m a k e
people to manage in the venture. This is done through the issue of 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) Obtaining approval of the proposed name from registrar of the
companies.
Promoters are free to choose any name for their new company; section 19
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: -
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iii. If the name is misleading especially as to the nature of the business the c o m p 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.
i v. W h e r e t h e n a m e 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.
Section 109 of the companies name requires publication of the name of the
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;
Section 20 of companies Act provides that a company can change its names
subject to the following: -
i. It’s the company itself that can change its name i.e. members in a general
meeting.
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
2. Articles of Association
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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.
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 m p 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: -
The registered office can’t 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.
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
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registrar is justified in law and in fact not to issue the certificate the order of
mandamus shall not be issued.
In the above case the promoters failed in their attempt because issuing the
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 company’s 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 Barnard’s Banking company Re Poel’s case (1867)
L.R.2ch. 674. It was held by Lord Cairns in this case that:
When once the memorandum is registered and the company holds out to the
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.
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.
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: -
This was found that the activities of this company were blasphemous to the
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.
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(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 m p 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 company’s
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 m p a n y i s n o t a c o m p 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.
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
workman’s compensation law and must compensate an injured or deceased worker
(employee) accordingly. However the case failed on a procedural technically since the widow
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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.
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.
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.
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
company’s 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.
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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.
When a public company does not intend to raise money from the public the
company will file a statement in lien of prospectus with the registrar at least 3 days
before allotment of shares.
4. COMMENCEMENT OF BUSINESS.
Section 3 of the Act gives conditions and restrictions which a company must
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: -
b) Every director of the company has paid the company or made the shares taken or
contracted to be taken by him.
H av in g g iv en fo r 211 a nd 2 12 a nd th e s ta te me nt in li eu o f
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.
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 BD109’s
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 m b 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”.
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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”.
S e c t i o n 4 5 ( 5 ) o f t h e c o m p a n y ’s a c t ( c a p 4 8 6 ) e x c l u d e s p e r s o n s
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 m a t i o n o f t h e c o m p 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).
1. Decide on the company name and ascertain that it is accepted by the registrar.
6. Issue of prospectus.
In Lindley and Wigpool Iron ore vs. Bird (1866) 33, Lindley described the position o f a
p r o m o 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 m p 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 company’s Act.
a) Not to make profit at the expense of the company. Cape Breton company Re.
(1885) 29 Ch.D 795
Thus where the promoter purchases an item he can’t 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: -
Where a promoter sells or wishes to sell his own property to the company he
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.
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Duty of promoters as regards prospectus
Promoters must ensure that a prospectus is issued (public company) and the
prospectus.
(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: -
d) T h e y m a 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.
T h e c o m p a n y ’s 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.
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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.
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
expert can only be held responsible for an untrue statement made by him.
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.
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: -
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.
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 can’t enforce a contract made before its incorporation.
3. P r o m o 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 m a d e o n b e h a l f o f t h e
company before the company’s incorporation.
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)
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
Importance of memorandum.
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: -
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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.
Table C for a company limited by guarantee and not having share capital,
Contents of memorandum
Section 5 of the companies Act stipulated the memorandum should compose the following
clauses.
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: -
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(i) The company to be formed is to promote commerce, art science,
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)).
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.
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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.
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 m p 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.
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
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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.
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: -
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.
Promoters have given a list of several businesses that the company may engage itself.
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;
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‘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.’
Here experts can simply say that the company can engage in any business,
which in the opinion of the directors, the company can advantageously engage in.
c) If the company is public promoters have to indicate the liability of directors whether
limited or unlimited.
The clause is omitted in the companies with unlimited liability and the companies limited by
guarantee having not shown capital.
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.
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.
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 m a 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.
b) By holders of not less that 15% of the company’s debentures entitling the
holders to object to the alteration of its objects.
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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 y c l i s t s To u r i n g C l u b
(1970). A company was registered to promote, assist and protect the use
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.
An Act of “Intra vires” the company if it is within the company’s powers, this is the case when;
(ii) T h e a c t i s r e a s o n a b l y i n c i d e n t a l t o t h e c o m p a n y ’s o b j e c t s ,
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
Eastern Rly company (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.
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 Te l 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 didn’t 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.
2. Directors may be held personally liable for ultra vires payments. But the
directors having refunded the money could get indemnity as against
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.
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: -
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 . A c 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”.
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Functions of the Articles of Association
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 m a 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) Printed in English
b) Divided into paragraphs
c) Dated
d) Signed by each subscriber and witnessed.
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.
Limitations to alterations.
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.
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
company’s money on twenty-two occasions within twelve m o n t h s . T h 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
Other rulings in support of this point were made in Greenhalgh vs. Ardene
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.
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.
b ) S u p p l e m e n t t h e m e 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.
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.
Each member is bound to the company as if each member has actually signed t h e
m em or an du m an d th e ar ti cl es . In Bo rl an d Tru st ee v s. St ee l B rus an d
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.
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
Wa l t o n v s . S a ff e r y ( 1 8 9 7 ) A C 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
contract in terms of between the individual members of the company but the
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”.
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: -
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
t h e e n d o f t h e p r o c e e d i n g y e a r. T h e p l a i n t i ff , w h o w a s a d i r e c t o r,
resigned and sued for the services, it was held that he was entitled to sue
for remuneration up for the date of his resignation.
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.
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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).
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 y a l B r i t i s h B a n k v s . Tu r 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
the company was liable for the money to T because once the articles
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 m p a n y ’s
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.
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The doctrine of indoor management will not apply in the following instances: -
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
P l a i n t i ff c o n t e n d e d t h a t i t w a s n o t h i s d u t y t o v e r i f y t h e s i g n a t u r e s .
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 Turquand’s 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”.
Any person entering into a contract with the company ought to make
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
company’s property from its accountant. The transfer was held to be void because
such a transaction is apparently beyond the scope of the accountant’s 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 company’s memorandum and articles and consequently did not act in
reliance on those documents, cannot be protected under the rule in Turquand’s case.
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v) Where an act is ordinarily beyond the apparent authority.
An outsider will not be protected by the rule in Turquard’s case if the act of the
agent is one which would not ordinarily be within his powers simply
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.
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.
a) Written consent of every director of public companies stating that each has
agreed to act as a director.
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.
7. PROSPECTUS
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:
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Sec.2 of companies act: -
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.
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 ff e r m a 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.
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.
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.
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.
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.
b) The amounts payable in cash, shares or debentures to the vendor and where there are
many vendors amount payable to each vendor.
(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 company’s 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.
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10. T h e a m o u n t s , i f a n y, p a y a 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 m o u n t i f a n y p a y a 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 y e 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 m o 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 m p a n y i s d i v i d e d i n t o d i ff e 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 y i 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.
49
Part II of the third schedule stipulates reports to be included in the prospectus. These
reports are prepared by the company’s auditors and state: -
ii. The rate of dividends paid by the company in each in respect of each class of shares in
each of those years.
iii. The assets and liabilities at the last date to which the accounts of the company were made
up.
Where the company has subsidiaries the performance of such subsidiaries has to be
reported or the consolidated accounts have to be prepared.
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.
A prospectus thus issued without the requirements of the third schedule is called a bridged
prospectus.
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Issue of forms of application;
In relation to shares or debentures which were not offered to the public section 40 (3)
(ii) (iii).
Issuing shares to the public is done by public companies wishing to raise capital
through;
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.
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.
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 m a 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 ff e 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).
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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 m a k i n g t h e
o ff e r a r e p r i m a 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
sell them to clients. This method is ideal when making a small issue
o f shares.
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 y t 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.
Statements of the fact can lead to the rescission of a contract but opinions in
prospectus cannot nullify a contract.
Other cases where subscribers were given the right to rescind the contract
for misleading prospectus are: -
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 m o s f o r d o b s e r v e d “ t h e o ff i 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 ff i 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.
In Coles vs. White Greyhound Assn Ltd (1929) 45 TLR 230. a prospectus
described land as eminently suitable for Greyhound racing, local authority
refused approval, it was held that he description of land was misleading
a n d rescission was granted.
f) The proceedings of rescission must be started as soon as the allotee
c o m e s t o k n o w o f a m i s l e a d i n g s t a t e m e 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 m e 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.
b) Executing a transfer.
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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 m p a n y i n person or
by proxy.
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: -
iii) Promoters
iv) 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.
Section 45 (2) provides the following defences, which the directors have to
establish to avoid liability: -
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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
becoming aware of the issue, he forth with gave reasonable public
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.
Expert’s liability:
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.
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.
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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:
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.
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.
c) Amount of preliminary expenses and by whom they have to be paid or are payable.
d) Amount given or any other benefit given to any promoter and the
consideration for the payment of the benefit.
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.
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.
The stock exchange is a market where stocks or shares are bought and sold
through stockbrokers. The stock exchange is governed by governed by a council elected by the
members from amongst themselves.
c) A certificate from the auditors that the company is public within the terms of
the companies act.
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f) Further five hundred shillings for all quotations granted.
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
refused, the company must immediately repay all money received from
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.
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 m b e r o f s h a r e s w h i c h
underwriters have agreed to subscribe must be disclosed as: -
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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
same disclosure must be made in the statement in the prescribed from
delivered to the registrar before payment of the commission.
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.
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.
In Andreae vs. Zinc mines of Great Britain Ltd (1918) 2 KB 454. A company
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 company’s
office and was consulted on this matter.
8. MEMBERSHIP
A shareholder is a person who holds shares in a company while a member is one whose name
appears in the register of members.
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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 m a y b e c o m e a
m e m b e r o f a c o m p 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.
Section 28 of the companies act provides that a person may become a member of a
company by: -
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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 Lurgen’s case
(1902) Ich 707 because: -
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.
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:
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 person ceases from being a member once his name is removed from the
register. A shareholder may cease from being a member of a company by: -
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: -
c ) I f t h e c o m p a n y s e l l s t h e p e r s o n ’s s h a r e s u n d e r a p r o v i s i o n i n
t h e articles.
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 deceased’s estate
remain liable as long as the name of the deceased is in the register.
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d) Winding up of a company.
Rights of members.
The rights are conferred either by company’s 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.
(5) Right to apply to court to have any variation of his rights set aside by the court section 7
(4).
(7) Right to inspect register of members, register of debenture holders and copies
of annual return.
(9) Right to apply to the BOD to call an annual general meeting when the company
fails to call such a meeting.
(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.
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 m e 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.
Register of members.
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S e c t i o n 11 2 r e q u i r e s e v e r y c o m p a n y t o m a 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:-
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: -
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
index within fourteen days. Failure to comply with any of the above may
attract a fine.
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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.
a) Where one’s 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.
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.
Section 121 a company carrying business outside Kenya in any part of the
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.
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A branch register is deemed to be part of the company’s 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 y e a r. T h e r e t u r n m u 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.
2. The place where the register of members or debenture holders is kept is not kept at the
registered office.
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 m o u n t o f share warrants
issued and surrendered since the last return.
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.
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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.
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.
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 c o p y o f a u d i t o r ’s r e p o r t a n d d i r e c t o r ’s r e p o r t c e r t i f i e d b y 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.
9. SHARES
Shares are indivisible units of the capital of the company. Fawell I in Barland’st 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
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covenants entered into by the shareholders “inter se” in accordance with section 22 of
the company’s act.
Shares represent the equal portions into which capital is divided each
shareholder is entitled to a portion of a company’s profits in proportion to the number
of shares held by him.
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
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
company will have. This amount can be increased or reduced only if the
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
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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 company’s 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 ff e 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.
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,
1. Allotment must be by a resolution of the board of directors unless there is clause in the
articles providing otherwise.
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.
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
applicant within one month after the holding the statutory meeting of the
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.
A company is required to deliver within sixty days the following to the registrar of companies for
registration: -
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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.
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:
6 Transferor must vote as the transferee directs [massel white vs v.Massel white $son limited]
(1962) ch. 964
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
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”.
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A debenture is thus an acknowledgement in writing a debt by a company to
some persons and it is issued to the public by means of a prospectus. The
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.
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”.
5 . I t c r e a t e s a c h a rg e 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.
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
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2. Security
3. Convertibility
4. Priority
a) Bearer debentures
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. T h e s e c r e t a r y p l e d g e d t h e
debentures with a bank security for a loan taken by him. The bank took the
debenture’s bonafide. It was held that the bank was entitled to the debentures as against the
company.
b) Registered debentures
A registered debenture is issued under the seal of the company and contains the following
clauses: -
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
a) Redeemable debentures
These are issued on condition that they shall be redeemed after a given period.
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.
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 m s
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 rg e 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.
2. Trustees Act are at better position of safeguarding the interests of the debenture
holders
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3. It specifies the events upon which principal and interest are payable and
trustees ensure that the money is paid.
4. 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.
5. The trustees act as watchdogs for the debenture holders.
6. The trustees have power to appoint a receiver to run the company.
7. In case of doubt or contingency the trustees can call a meeting
o f debenture holders to make a decision.
8. 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 m n i f y i 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.
Priority of charges
1. A fixed charge over the same assets has priority over the
f l o a t i n g charge.
Floating charge is postponed to the rights of the following persons if they act before
the security crystallizes.
11. DIRECTORS
I n F e rg u s o n v s . Wi l 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 m p 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
directors are a body to whom is delegated the duty of managing the general
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 ff a i r s o f a
company and are collectively called board of directors.
b) Subsequent appointment –
are appointed when the company already exists. The company will make these
appointments in the following circumstances: -
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c) To replace retired 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
articles provide otherwise. Article 77 table A provides that the share
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.
(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
Disqualification of directors
The following are grounds for disqualification of a director: -
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.
6. Absence without permission for more than six months from meetings
of directors.
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.
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
b) The company
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The company may remove a director by an ordinary resolution after special
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:-
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.
3. The contract is signed in such a way that it is not clear, whether it is the
principal or agent who signed.
Directors are trustees of the company’s money and property because they must
account for all the company’s money and property and to refund to the company a n y o f i t s
m o 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 m p r o p e r l y p a i d a w a y
o r transferred.
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(i) Fiduciary duty not to profit himself personally from the property of
t h e company.
Directors however are not trustees in the real sense as they not vested with
ownership of the company’s property. They are quasi trustees because: -
a) They are not vested with the ownership of the company property.
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
m a k e p r e s e n t s t o t h e m s e l v e s o u t o f t h e c o m p a n y ’s a s s e t s u n l e s s
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.
Disclosure of interest
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).
a) Statutory consequences
Section 200 (4) such directors shall be liable to a fine not exceeding
t w o thousand shillings.
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.
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.
5. Not to delegate his functions except to the extent authorized by the Act or constitution of
the company.
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
(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: -
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• Register a transfer of shares
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 y ’s 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 company’s register are maintained,
12. MEETINGS
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.
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Classification of company meeting
Company meetings are classified as below: -
1. Meetings of shareholders.
2. Meetings of directors
(i) Meetings of the board of directors
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
less than three months from the date on which the company is entitled to
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 m e e t i n g o f m e m b e r s o f t h e company which
shall be called the statutory meeting.
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.
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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.
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
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.
Default to holding the annual general meeting, renders the company and its
officers in default to a fine up to two thousand shillings.
Requirement of notice
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Section 133 provides the minimum notice required for company meetings as
follows: -
a) Consideration of dividend
b) Consideration of accounts
c) A resolution has been passed expressly providing that they shall not be re-
appointed.
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Extra ordinary meeting convened the board of directors.
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.
The directors are required by section 132 to convene such a meeting within
twenty-one days from the date of the requisition and if they fail to do so,
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 m p a n y ’s 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.
The rights of a particular class of shares may be varied with the consent in
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.
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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.
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.
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 m p 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.
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
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.
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 company’s directors are of the opinion that;
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: -
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 company’s 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 company’s own financial year.
Under section 153 (2) the registrar is empowered to postpone the submission of a company’s
accounts to a general meeting from one calendar year to the next for purposes of enabling the
company’s 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.
Director’s report
Section 156 provides that the balance sheet must have attached to it a director’s report on the
company’s 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.
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 retiring auditor is to be reappointed without any resolution being passed at the meeting unless:
-
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.
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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.
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 auditor’s report must contain the following; -
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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 ff i 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.
1. Whether auditors have received all information necessary for their audit.
3. (a) Whether the company’s 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 m e 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.
2. Right to attend any general meetings of the company and to receive any notices
which members are entitled to receive.
Duties of auditors
Duties of auditors are set out in section 159 to 162 of the act. The duties
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.
MAJORITY RULE
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.
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.
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”.
(iv) When the acts of the majority are ultra vires or illegal.
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 m i 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 m p a n y. A case illustrating this point is in Daniels vs. Daniels (1978).
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
1. By a scheme of arrangement.
2. By sale of undertaking
3. By sale of shares
1. Arrangement.
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.
(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) 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
(vi) 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 m e o f t h e p u r c h a s i n g c o m p a n y. T h 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.
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17. WINDING UP OR LIQUIDATION
Wi n 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 m p 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.
b) On winding up, the company continues to exist it only its administration that is carried on
through the medium of a liquidator.
Modes of winding up
There are three modes of winding up.
1. Winding up by court
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2. Voluntary winding up.
Winding by court is also called compulsory winding up. This may occur in the
following circumstances: -
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.
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.
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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.
This is also one of the situations under the act where the veil of incorporation is
lifted.
(i) A creditor to whom the company owns more than one thousand shillings
has left at the company’s 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;
( 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.
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 m u 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.
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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.
(i) When the subject matter of the company is gone. This was the case in Perievs.
Stewart (1904)
(ii) When the main object of the company has substantially failed or become
impractical.
W h e n a c o m p a n y ’s m a 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) When the company is carrying on its business at a loss and there is
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. When the management is carried in such a way that the minority are
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.
4. When the company was formed to carry out fraud or the illegal business or the
business of the company becomes illegal.
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).
3. A debenture holder
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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 contributory is any person liable to contribute to the assets of the company in the
event it’s 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.
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.
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.
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: -
c) Make the last calls on the shares and debentures the members hold.
d) Where the company’s business is running the company has power to appoint a
special manager to take care of the business until it determines.
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.
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 voluntarily, in which case the commencement is the time
of resolution.
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 m i n a t e d a n d t h e c o m p a n y ’s 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 company‘s business or interests of the creditors or contributories
generally require the appointment of a special manager other than himself.
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.
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: -
(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 ff i 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 m a t i o n o f t h e c o m p a n y w i t h i n t h e p a s t years in its employment during
such a time.
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.
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
company’s 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 ff i 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.
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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 m p a n y a n d other
right of the company.
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 m p 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.
f) Compromise calls debts and other claims between the company and any contributory or
debtor and,
A liquidator may, without sanction of the courts,
d) Draw, accept and endorse bills and notes in the name of the company.
f) Ta 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.
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 ,
Ta n z a n i a o r i n K e n y a t o m a k e s u c h p a y m 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 company’s assets.
Additional powers
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
Section 315 empowers a liquidator with leave of the courts to disclaim any
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).
a) He resigns
b) He is removed
c) He is released.
Committee of inspection
The committee must meet one in a month but the liquidator may call for meetings of inspection
as often as he thinks.
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proceedings in relation to winding up. The courts may stay the proceedings
altogether or for a limited time.
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 company has in a general meeting passed a resolution which may
b e a n ordinary resolution unless articles provide otherwise.
Types of winding up
a) Members voluntary winding up
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: -
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(ii) It embodies a statement of the company’s 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.
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.
The liquidator must send a copy of the accounts to the registrar and make a
return of the holding of the meeting within fourteen days.
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
The creditors and the company in their separate meetings may nominate 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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The liquidator must within fourteen days of his appointment, publish in the
Gazette and deliver to the registrar of companies notice of his appointment in the form
prescribed by the register (sec.299).
Committee of inspection
Creditors at their meeting may appoint a committee of inspection, and the
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).
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.
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 company’s 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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The following preferential payments are required to be made in priority to
all other debts and such debts rank “Pari Passu” i.e. they rank equally
a m o n g s t themselves.
a) All government and local rates payable with 12 months before the date of winding up.
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 workmen’s compensation act, which
have accrued before the relevant date.
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