Course Code: FIN 2325 Title: Company Law.

Course Lecturer: Okwiri Minado Saad-PhD

Lecture 8: Alteration of Share Capital

A Company Limited by shares, in a General Meeting, if so authorised by its Articles of
Association, alter the Capital Clause of its Memorandum of Association in any of the
following ways:
 It may increase its share capital by issuing new shares.
 It may consolidate and divide all or part of its share capital into shares of a large amount.
 It may convert all or any of its fully paid-up shares into stock or reconvert that stock into
fully paid-up shares of any denomination.
 It may sub-divide its shares into shares of lower denomination.
 It may cancel those shares which have not been taken by any person and reduce the
amount of its share capital.

(i) Authorised by article.

 The right to alter the share capital must be given in the Articles of Association of the
company.
(ii) To pass a resolution.
 Alteration can be effected in the capital by passing an ordinary resolution in the general
meeting of the company.
(iii) Confirmation of court is not required.
 For such an alteration of capital, the confirmation of court is not required.
(iv). Notice to the Registrar.
 The company shall give notice of the alterations to the Registrar within 30 days of doing
so.
(v) Change by Registrar.
The Registrar will record the above notice and make necessary alterations in the memorandum
and articles of the company.
(vi). Economic penalty.
If any default is made in complying with the above provisions, the company and every officer of
the company who is in default is punishable with a fine which may extend to Kshs. 200/- for
every day the default continues.
(vii) Effect of conversion of shares into stock.
 If a company has converted any of its shares into stock, such provisions of the Act as are
applicable only to shares shall cease to apply to such shares which have been converted
into stock.
(viii) Information of increase in share capital.
 The information must be given to the Registrar within 30 days if the company has
increased its authorised capital or, in the case of a company not limited by shares.

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  Notice of the increase must be given to the Registrar even when the new shares may not
have been issued to any shareholder, if default is made in complying with the provisions,
the company and every officer who is in default is punishable with a fine, which may
extend to Kshs.200/- for every day the default continues.

Reduction in Share Capital.

A company limited by shares or a guarantee company with a share capital is permitted to reduce
its share capital in any of the following ways:
(i) Extinguish or Reduce.
 By extinguishing or reducing the liability on any of its shares in respect of share capital
not paid up.
(ii) Cancel.
 By cancelling any paid-up capital which is lost or unrepresented by available assets.
(iii) Payoff.
 By paying off any paid-up capital which is in excess of the needs of the company.
(iv). By Court.
 By any other method approved by the court.

Procedure:
(i) Company Limited by Shares.
 A company limited by shares or a guarantee company with a share capital is permitted to
reduce its share capital.
(ii) Authorised by articles.
 Reduction in share capital can be effected when it is authorised by Articles of Association
of the company.
 If the articles do not give this power to the company, they may be altered by special
resolution to enable the company to reduce its share capital.
 It is of no avail, where this authority is contained in the memorandum only.
(iii) To pass a special resolution.
 The company must pass a special resolution effecting the reduction in share capital.
(iv). An application to the court.
 After having passed the special resolution for reducing the share capital, the company
must apply to the court for an order confirming the reduction in share capital.
 The court must look after the interest of shareholders and creditors.

Interest of Creditors.
 The special resolution of the company reducing the share capital must in all cases be
confirmed by the court and the court is empowered to enquire into the objection that may

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 be raised by the creditors in that behalf, unless the court directs not to make such an
equity.
Reasons for Reduction in Share Capital.
 The share capital of the company may be more than enough for its present and future
needs, and so, it may return the surplus capital to the shareholders.
 The paid-up capital of the company is sufficient and it may refrain from calling up the
unpaid portion of share money.
 Some of the capital may in fact have been lost or diminished e.g., share of Kshs. 100/-
may represent assets worth Kshs. 50/-. The company may wish to write off the lost
capital.

Reserve Capital or Reserve Liability.

 This the amount which is not callable by the company except in the event of the company
being wound up.
 The company cannot demand the payment of money on the shares to that extent during
its life time.
 Reserve Capital may be created by means of a special resolution passed by the company
in its General Meeting by 3/4th majority of these voting on it.
 When once the Reserve Capital has been so created the company cannot alter its Articles
of Association so as to make the reserve liability available at any time.
 The Reserve Capital cannot be charged as security for loans by the creditors.
 It cannot be turned into ordinary capital without the order of the court.
 It cannot be cancelled at the time of reduction of capital.
Reorganisation of Capital.
The term arrangement includes a reorganisation of the share capital of the company by
consolidation of shares at different classes, or by division of shares into different classes, or
by both these methods.
When a reorganisation of share capital of a company is proposed.
 Between a company and its creditors or any class of them, or
 Between a company and its members or any class of them, the court may order a meeting
of creditors or members of the company on an application by the company or by any
creditor or members or by a liquidator in case the company is being wound up.
 The reorganisation of share capital of a company shall be binding if the scheme is
approved by a majority in number representing three fourths in value of the creditors or
members, as the case may be present and voting in person or by proxy, where proxies are
allowed, and the scheme is sanctioned by court.
Issue of Shares at a Discount.
Issue of shares at a discount means the issue price of shares is less than their nominal face value.

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A company can issue at a discount (i.e., for a consideration less than the nominal value of
the shares) subject to the following conditions.
 Shares to be issued at a discount shall be of a class already issued.
 The issue of shares at a discount is authorised by a resolution passed by the company in
its general meeting.
 The issue of shares at a discount must be sanctioned by the Board of Directors.
 One year must have passed since the date at which the company was entitled to
commence business.
 Shares are issued within two months after the date on which the issue is sanctioned by the
Board of Directors unless the time is further extended.
 Every prospectus relating to the issue of shares shall disclose particulars of the discount
allowed on the issue of shares or that amount which has not been written off at the date of
the issue of prospectus.
The secretary of the company has also to do all general acts regarding issue of shares at
discount in addition to the acts relating to the issue of share as discussed above.

Issue of Share at a Premium.

 This is when the issue price of shares is higher than their nominal or face values.
 The difference between issue price and face value is called premium.
 The power to issue shares at a premium need not be given in the articles of the company.
The total premium amount shall be transferred to Share Premium Account which may be
applied only for the following purpose and not for others:
 To issue fully paid bonus shares to the members of the Company.
 To write off preliminary expenses of the company.
 To write off the expenses or the commission paid or discount allowed, on any issue of
shares or debentures of the company.
 To provide any premium on redemption of redeemable preference shares or debentures
of the company.
In addition to the above acts regarding the issue of shares at a premium, the secretary of the
company has also to do all general acts regarding the issue of shares at discount.

Further Issue of Capital Right Issue:

When the shares are issued further by the directors, such further shares are offered to the existing
equity shareholders of the company.

The conditions regarding further issue of share capital are as follows:

To pass a resolution:
 To increase the share capital a resolution must be passed by the board of directors.
 The further issue of share capital can take place after two years from the date of
formation of the company and one year after allotment whichever is earlier.

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 Increase in share capital-The increase in the share capital must be of subscribed capital and not
of authorised.
Further shares are offered to existing shareholders.
 The further shares must be offered to the equity shareholders in proportion of capital paid
by them on their shares.
 A notice is being served by the company on the shareholders defining therein the number
of shares offered and time which should not be less than fifteen days, must be given to
give the acceptance.
 If the acceptance does not reach within the prescribed time then it is assumed that they do
not accept the shares offered.
Right of renunciation in favour of others-Unless the articles of the company otherwise provide
the shareholders the right to renounce all or any of them in favour of any person he likes.
Power of board to dispose of shares:
 When the time expires as given in the notice to shareholders, the board of directors may
dispose of the shares in such a manner as they think appropriate
 They may offer these shares to outsiders if a special resolution has been passed, then
consent of Registrar of Companies is to be obtained.
The above provisions do not apply to a private company or in case of public company when
increase of share capital takes place due to conversion of debentures or loans into shares.

Right Shares
 This is when unissued portion of the authorised capital was not issued earlier but is issued
now, then the existing shareholders of the company have a first right to get them.
 This right is known as right of pre-emption, and the shares which are meant for existing
shareholders are known as Right Shares.
 The issue of right shares can be made at any time after the expiry of two years from the
formation of the company or after the expiry of one year from the first allotment of shares
after its formation (Whichever is earlier).
 A meeting of board of directors should consider the proposal for right share and the terms
of issue.
 A resolution should be passed in the general meeting of the shareholders for increase in
share capital and a copy of resolution should be filed with the registrar within thirty days.

Bonus Shares:
 The issue of bonus shares implies the payment of dividend in the form of shares instead
of cash.
 A bonus issue occurs where the company does not distribute the profits and reserve by
way of dividend, but retains them and uses them to make the payment for the issue of
new fully paid shares.
 The shares so issued are called bonus shares.
 In case of bonus shares, shareholders have not to make any payment to the company.

5
The provisions, regarding the issue of bonus shares, are as follows:
 The Company is authorised to issue bonus share or not.
 The permission of ‘Controller of Capital Issues’ regardless of the amount involved should
be obtained.
 A meeting of directors should be held to consider the proposal for bonus issue and the
proportion in which the same should be issued.
 Notices should be issued to the members relating to the meeting.
 A resolution in the general meeting should be passed. If it is a special resolution, a copy
of it should be filed with the Registrar within 30 days.
 The list of members showing their present shareholding and the number of bonus shares
to which they are entitled should be prepared.
 A public notice regarding the closure of Register of Members and Transfer Books for the
purpose of issue of bonus share should be given. .
 Allotment letters to the members along with a circular explaining how the allotment has
been made should be issued.
 Necessary entries in the Register of Members should be made.
 New share certificates should be prepared and issued.
 Within 30 days of the allotment a ‘Return of Allotment’ should be filed with the
Registrar.

Alterations of Share Capital - Highlights

(i) Authorised by article.

 The right to alter the share capital must be given in the Articles of Association of the
company.
(ii) To pass a resolution.
 Alteration can be effected in the capital by passing an ordinary resolution in the general
meeting of the company.
(iii) Confirmation of court is not required.
 For such an alteration of capital, the confirmation of court is not required.
(iv). Notice to the Registrar.
 The company shall give notice of the alterations to the Registrar within 30 days of doing
so.
(v) Change by Registrar.
The Registrar will record the above notice and make necessary alterations in the memorandum
and articles of the company.
(vi). Economic penalty.
If any default is made in complying with the above provisions, the company and every officer of
the company who is in default is punishable with a fine which may extend to Kshs. 200/- for
every day the default continues.
(vii) Effect of conversion of shares into stock.

6
  If a company has converted any of its shares into stock, such provisions of the Act as are
applicable only to shares shall cease to apply to such shares which have been converted
into stock.
(viii) Information of increase in share capital.
 The information must be given to the Registrar within 30 days if the company has
increased its authorised capital or, in the case of a company not limited by shares.
 Notice of the increase must be given to the Registrar even when the new shares may not
have been issued to any shareholder, if default is made in complying with the provisions,
the company and every officer who is in default is punishable with a fine, which may
extend to Kshs.200/- for every day the default continues.

Reduction in Share Capital.

A company limited by shares or a guarantee company with a share capital is permitted to reduce
its share capital in any of the following ways:
(i) Extinguish or Reduce.
 By extinguishing or reducing the liability on any of its shares in respect of share capital
not paid up.
(ii) Cancel.
 By cancelling any paid-up capital which is lost or unrepresented by available assets.
(iii) Payoff.
 By paying off any paid-up capital which is in excess of the needs of the company.
(iv). By Court.
 By any other method approved by the court.

Procedure:
(i) Company Limited by Shares.
 A company limited by shares or a guarantee company with a share capital is permitted to
reduce its share capital.
(ii) Authorised by articles.
 Reduction in share capital can be effected when it is authorised by Articles of Association
of the company.
 If the articles do not give this power to the company, they may be altered by special
resolution to enable the company to reduce its share capital.
 It is of no avail, where this authority is contained in the memorandum only.
(iii) To pass a special resolution.
 The company must pass a special resolution effecting the reduction in share capital.
(iv). An application to the court.

7
  After having passed the special resolution for reducing the share capital, the company
must apply to the court for an order confirming the reduction in share capital.
 The court must look after the interest of shareholders and creditors.

Interest of Creditors.
 The special resolution of the company reducing the share capital must in all cases be
confirmed by the court and the court is empowered to enquire into the objection that may
be raised by the creditors in that behalf, unless the court directs not to make such an
equity.
Reasons for Reduction in Share Capital.
 The share capital of the company may be more than enough for its present and future
needs, and so, it may return the surplus capital to the shareholders.
 The paid-up capital of the company is sufficient and it may refrain from calling up the
unpaid portion of share money.
 Some of the capital may in fact have been lost or diminished e.g., share of Kshs. 100/-
may represent assets worth Kshs. 50/-. The company may wish to write off the lost
capital.
.
Reserve Capital or Reserve Liability.
 This the amount which is not callable by the company except in the event of the company
being wound up.
 The company cannot demand the payment of money on the shares to that extent during
its life time.
 Reserve Capital may be created by means of a special resolution passed by the company
in its General Meeting by 3/4th majority of these voting on it.
 When once the Reserve Capital has been so created the company cannot alter its Articles
of Association so as to make the reserve liability available at any time.
 The Reserve Capital cannot be charged as security for loans by the creditors.
 It cannot be turned into ordinary capital without the order of the court.
 It cannot be cancelled at the time of reduction of capital.
Reorganisation of Capital.
The term arrangement includes a reorganisation of the share capital of the company by
consolidation of shares at different classes, or by division of shares into different classes, or
by both these methods.
When a reorganisation of share capital of a company is proposed.
 Between a company and its creditors or any class of them, or
 Between a company and its members or any class of them, the court may order a meeting
of creditors or members of the company on an application by the company or by any
creditor or members or by a liquidator in case the company is being wound up.

8
  The reorganisation of share capital of a company shall be binding if the scheme is
approved by a majority in number representing three fourths in value of the creditors or
members, as the case may be present and voting in person or by proxy, where proxies are
allowed, and the scheme is sanctioned by court.
Issue of Shares at a Discount.
Issue of shares at a discount means the issue price of shares is less than their nominal face value.
A company can issue at a discount (i.e., for a consideration less than the nominal value of
the shares) subject to the following conditions.
 Shares to be issued at a discount shall be of a class already issued.
 The issue of shares at a discount is authorised by a resolution passed by the company in
its general meeting.
 The issue of shares at a discount must be sanctioned by the Board of Directors.
 One year must have passed since the date at which the company was entitled to
commence business.
 Shares are issued within two months after the date on which the issue is sanctioned by the
Board of Directors unless the time is further extended.
 Every prospectus relating to the issue of shares shall disclose particulars of the discount
allowed on the issue of shares or that amount which has not been written off at the date of
the issue of prospectus.
The secretary of the company has also to do all general acts regarding issue of shares at
discount in addition to the acts relating to the issue of share as discussed above.

Issue of Share at a Premium.

 This is when the issue price of shares is higher than their nominal or face values.
 The difference between issue price and face value is called premium.
 The power to issue shares at a premium need not be given in the articles of the company.
The total premium amount shall be transferred to Share Premium Account which may be
applied only for the following purpose and not for others:
 To issue fully paid bonus shares to the members of the Company.
 To write off preliminary expenses of the company.
 To write off the expenses or the commission paid or discount allowed, on any issue of
shares or debentures of the company.
 To provide any premium on redemption of redeemable preference shares or debentures
of the company.
In addition to the above acts regarding the issue of shares at a premium, the secretary of the
company has also to do all general acts regarding the issue of shares at discount.

Further Issue of Capital Right Issue:

9
  When the shares are issued further by the directors, such further shares are offered to the
existing equity shareholders of the company.
The conditions regarding further issue of share capital are as follows:
To pass a resolution:
 To increase the share capital a resolution must be passed by the board of directors.
 The further issue of share capital can take place after two years from the date of
formation of the company and one year after allotment whichever is earlier.
Increase in share capital.
 The increase in the share capital must be of subscribed capital and not of authorised.
Further shares are offered to existing shareholders.
 The further shares must be offered to the equity shareholders in proportion of capital paid
by them on their shares.
 A notice is being served by the company on the shareholders defining therein the number
of shares offered and time which should not be less than fifteen days, must be given to
give the acceptance.
 If the acceptance does not reach within the prescribed time then it is assumed that they do
not accept the shares offered.
Right of renunciation in favour of others.
 Unless the articles of the company otherwise provide the shareholders the right to
renounce all or any of them in favour of any person he likes.
Power of board to dispose of shares:
 When the time expires as given in the notice to shareholders, the board of directors may
dispose of the shares in such a manner as they think appropriate
 They may offer these shares to outsiders if a special resolution has been passed, then
consent of Registrar of Companies is to be obtained.
The above provisions do not apply to a private company or in case of public company when
increase of share capital takes place due to conversion of debentures or loans into shares.

Right Shares
 This is when unissued portion of the authorised capital was not issued earlier but is issued
now, then the existing shareholders of the company have a first right to get them.
 This right is known as right of pre-emption, and the shares which are meant for existing
shareholders are known as Right Shares.
 The issue of right shares can be made at any time after the expiry of two years from the
formation of the company or after the expiry of one year from the first allotment of shares
after its formation (Whichever is earlier).
 A meeting of board of directors should consider the proposal for right share and the terms
of issue.
 A resolution should be passed in the general meeting of the shareholders for increase in
share capital and a copy of resolution should be filed with the registrar within thirty days.

Bonus Shares:

10
  The issue of bonus shares implies the payment of dividend in the form of shares instead
of cash.
 A bonus issue occurs where the company does not distribute the profits and reserve by
way of dividend, but retains them and uses them to make the payment for the issue of
new fully paid shares.
 The shares so issued are called bonus shares.
 In case of bonus shares, shareholders have not to make any payment to the company.
The provisions, regarding the issue of bonus shares, are as follows:
 The Company is authorised to issue bonus share or not.
 The permission of ‘Controller of Capital Issues’ regardless of the amount involved should
be obtained.
 A meeting of directors should be held to consider the proposal for bonus issue and the
proportion in which the same should be issued.
 Notices should be issued to the members relating to the meeting.
 A resolution in the general meeting should be passed. If it is a special resolution, a copy
of it should be filed with the Registrar within 30 days.
 The list of members showing their present shareholding and the number of bonus shares
to which they are entitled should be prepared.
 A public notice regarding the closure of Register of Members and Transfer Books for the
purpose of issue of bonus share should be given. .
 Allotment letters to the members along with a circular explaining how the allotment has
been made should be issued.
 Necessary entries in the Register of Members should be made.
 New share certificates should be prepared and issued.
 Within 30 days of the allotment a ‘Return of Allotment’ should be filed with the
Registrar.

ZZZZZZZZZZZZZZZZZZZZZZZZ END ZZZZZZZZZZZZZZZZZZZZZZZZZZ

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 Course Code: FIN 2325 Title: Company Law.
Course Lecturer: Okwiri Minado Saad-PhD

Lecture 9: Termination / Removal of a Company Director

Introduction
There are various circumstances in which a company may wish to terminate the appointment of a
director, and the relevant procedural requirements. A director’s appointment may be terminated:
(i) Resignation-A director may resign his or her office at any time by proper notice to the
company and unless the articles provide otherwise, no period of notice is required. A resignation
will be effective even where it is in breach of the director’s service agreement (although the
director may then be liable to the company for damages).
(ii) Vacation of office under the Articles-Where the articles of a company provide that a
director vacates office on the happening of some event or the doing of some act, the director
automatically vacates his or her office on the happening of the event or on the act being done; no
resolution is required and the board cannot waive the event or condone the act.
 A board will have no power to remove a director from office unless such a power is set
out in the company’s articles i.e., the office will be vacated on the termination of the
director’s service agreement, or the office will be vacated if the director is convicted of
certain offences.
 If a director loses office under an article because he or she have a protected characteristic
covered by the Equality Act 2010 e.g., age or disability, including mental impairment, he
or she might have a claim against the company under that Act. Hence, it is important to
draft and amend articles to make sure they are in compliance with this Act.

(iii) Vacation of office by Law- The Company Act provides that a person may not be appointed
as a director unless they are at least 18 years old when the appointment takes effect. There is
maximum age for directors which may be captured by AA or prescribed by the law.
(iv) Removal under ordinary resolution- a company may by ordinary resolution at a meeting
remove a director before the expiration of his or her period of office.
 The right applies notwithstanding anything in any service agreement between the director
and the company (although the director’s right to compensation or damages payable is
expressly preserved).
(v) Vacation of office under a Court Order
In theory the court could order the removal of directors, via an application for unfair prejudice,
the court has wide discretion to make such order as it thinks fit to remedy any unfair prejudice
that the petitioner is able to establish.
Highlights in a nutshell: Vacation / Removal of Director can occur as a result of the following;

12
 A director voluntarily Resigns.
 A director is Removed by Ordinary Resolution of Members.
 A Removal by the Court Authority.
 A director becomes of Unsound Mind.
 A director is absent without permission for more than 6 months from meetings of
Directors held during that period.
 A director Dies.
 A director retires by Rotation under Articles.
 The Company is Dissolved.

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 Course Code FIN 2325 Title: Company Law.
Course Lecturer: Okwiri Minado Saad-PhD

Lecture 10: Winding up of a Company.

Introduction.
 Liquidation or winding up refers to the process whereby the company gives up its
business, sells off its assets, pays its debts and distributes whatever surplus remains
amongst its members or otherwise as its constitution may provide.
 Both solvent and insolvent companies may be wound up, but an insolvent company
pays the debts to the extent that its funds allow.
 The process of liquidating a company is conducted by a Liquidator and the powers of the
directors to manage the business of the company ceases upon the appointment of the
Liquidator.
 There is still a corporate personality and all corporate acts in the course of
liquidation i.e., throughout the process of liquidation or winding up, the company
continues to exist e.g., the transfer of property and institution of legal proceedings,
are done in its name rather than by the liquidator in his or her own name.
 The company ceases to exist only after the winding up procedure has been completed, in
other words, after formal dissolution of the company.
 The process of liquidation must be gazetted.
Note: Liquidation of a Company formed under Cap 486 laws of Kenya with emphasis on
the Provisions of the Insolvency Act 2015 and the Company’s Act 2015.

Modes of Liquidation.
Three modes in which a company may be wound up.
 Compulsory winding up by the court.
 Voluntary winding up-Members’ and Creditors’ voluntary winding up.
 Winding up under the supervision of the court.

(a) Compulsory winding up by the Court.

Only the High Court has jurisdiction to supervise the liquidation of companies registered in
Kenya.
(a) Circumstances under which a company may be wound up by the court.
The Insolvency Act provides that a company may be liquidated by the Court if:
(i) By special resolution resolved that the company be liquidated by the Court.
(ii) Being a public company that was registered as such on its original incorporation.
 The company has not been issued with a trading certificate under the Companies Act,
2015 and,
 More than twelve months has elapsed since was so registered

14
(iii) The company does not commence its business within twelve months from its incorporation
or suspends its business for a whole year.
(iv). Except in the case of a private company limited by shares or by guarantee, the number of
members is reduced below two.
(v) The company is unable to pay its debts.
(vi). At the time at which a moratorium for the company ends, a voluntary arrangement made
does not have effect in relation to the company.
(vii) The Court is of the opinion that it is just and equitable that the company should be
liquidated.
(viii) A company may also be liquidated by the Court on an application made by the Attorney
General on either of the grounds i-viii above or according to section 426 of Insolvency Act.
If in relation to a company, it appears to the Attorney General:
 From a report made or information obtained from investigations carried out or inspection
of documents produced under the Companies Act, 2015.
 From a report made, or information obtained, by the Capital Markets Authority under the
Capital Markets Act.
 From information provided by the Registrar.
 As a result of the company or its directors having been convicted of an offence involving
fraudulent conduct that it would be in the public interest for the company to be liquidated.
Note:
 The Attorney General may also make an application for the liquidation of a company if,
after receiving from an inspector appointed to conduct an investigation into the
affairs of a company under the Companies Act, 2015 a copy of a report of the
investigation.
 In effect, the Attorney General considers that, the company should be liquidated.
 Then the Attorney General may make an application to the Court to make a liquidation
order in respect of the company for its liquidation on the ground that it would be just and
equitable for it to be so.
(b) Persons Eligible to make an application for liquidation.
Under section 425 of the Insolvency Act, An application to the Court for the liquidation of a
company may be made any or all of the following:
 The Company or its Directors.
 A creditor or creditors (including any contingent or prospective creditor or creditors).
 A contributory or contributories of the company.
 A provisional liquidator or an administrator of the company.
 If the company is in voluntary liquidation-the liquidator.
 An Official Receiver or by any other person authorised under the provisions of this
section may make a liquidation application to the Court in respect of a company that is in
voluntary liquidation.

(c). Role of the Court in Liquidation.

15
The Insolvency Act provides that the Court may make a liquidation order on such an application
only if it is satisfied that the voluntary liquidation cannot be continued with due regard to the
interests of the creditors or contributories.
Section 427 of the insolvency act provides that on the hearing the case, the Court may make
decisions it considers appropriate.
 An order dismissing the application.
 An order adjourning the hearing, conditionally or unconditionally.
 An interim liquidation order.
 Any other order that, in its opinion, the circumstances of the case require.
Note: The Court may not refuse to make a liquidation order on the ground only that the
company’s assets have been mortgaged to an amount equal to or in excess of those assets, or that
the company has no assets.
If the application is made by members of the company as contributories on the ground that
it is just and equitable that the company should be liquidated, the Court shall make a
liquidation order, but only if of the opinion that:
 That the applicants are entitled to relief either by liquidating the company or by some
other means.
 That, in the absence of any other remedy, it would-be just and equitable that the company
should be liquidated.
The Court will not make an order for liquidation if it is of the opinion that:
 Some other remedy is available to the applicants.
 They are acting unreasonably in seeking to have the company liquidated instead of
pursuing that other remedy.
Section 429 of the Insolvency Act provides that in a liquidation ordered by the Court:
 Any disposition of the company’s property.
 Any transfer of shares, or alteration in the status of the company’s members, made after
the commencement of the liquidation is void, unless the Court otherwise orders.
Note: If a company is being liquidated by the Court, any attachment, sequestration, distress or
execution instigated against the assets of the company after the commencement of the liquidation
is void.
(d) Dissolution where Liquidation Order has been made by the Court.
The Insolvency Act under Section provides that:
 Within seven days after a liquidation order is made in respect of a company, the company
shall lodge a copy of the order with the Registrar for registration and also lodge a copy of
it with the Official Receiver.
 When a liquidation order has been made or a provisional liquidator has been appointed,
legal proceedings against the company may be begin or continue only with the approval
of the Court and subject to such conditions as the Court considers appropriate.
 An order for liquidating a company operates in favour of all the creditors and of all
contributories of the company as if made on the joint application of all of them.

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Under Section 433 of the Insolvency Act- the Prescribed Persons who are required to make out
a statement of affairs relating to the company are required to do so without delay and shall
include in it:
 Such particulars of the company’s assets, debts and liabilities as are prescribed by the
insolvency regulations for the purposes of this section.
 The names and addresses of the company’s Creditors.
 The securities (if any) held by them respectively.
 The dates when the securities were respectively given and other information as the
official receiver may reasonably require.
The Prescribed Persons are:
 Those who are or have been officers of the company.
 Those who have taken part in the formation of the company at any time during the
twelve months before the relevant date.
Those who are:
 In the company’s employment, or have been in its employment during that period.
 In the official receiver’s opinion capable of giving the information required.
Including those who are or have been within that period officers of or in the employment of a
company that is or within that period was an officer of the company.
Prescribed Persons have to submit a statement of affairs to the official receiver within twenty-
one days from the date on which notice of the requirement was given by the official receiver and
verify the statement by statutory declaration.
(e) Role of Liquidators in the Liquidation Process- Under section 460 of the insolvency Act
2015.
 In the event of a voluntary liquidation, the liquidator may exercise the court powers of
settling a list of contributories, make calls on unpaid shares, convene general
meetings and pay companies debts.
 In the event of a creditor’s voluntary liquidation, the liquidator is to assume all control of
the company’s assets, dispose of perishable goods that may diminish in value and take
any action necessary to protect the company’s assets.
 The liquidator is entitled to distribute assets to the payment of creditors.
 They also have the power to dispose of onerous property this is property that has no net
value for example it includes an unprofitable contract and unsalable property. Further
they may transfer company assets to employees.
 The liquidator must lodge from time to time reports to the registrar of companies with
regards to the state of liquidation.
The liquidator has power to defend and bring a suit in the company’s name and carry out
company’s business so long as is necessary for a beneficial liquidation.
 The liquidator can without seeking approval, sell any of the company’s property and
lastly the liquidator has the power to appoint an agent to carry out business which he /
she is unable to do.
Winding up under Supervision of the Court.

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 A resolution has been passed by the company for liquidating the company voluntarily.
In such a situation:
 The liquidation commences at the time of the passing of the resolution.
 Unless the Court, on proof of fraud or mistake, directs otherwise, all proceedings taken in
the voluntary liquidation are to be regarded as having have been validly taken.
(b) Voluntary winding up of a Company.
 Voluntary liquidation means liquidation by the members or creditors of a company
without the interference of the court.
 The purpose is that, members and creditors are free to settle their debt obligations without
going to court.
Circumstances under which a Company may be Voluntarily Liquidated.
 When a period fixed for the term of a company has come to an end or for whatever
reasons members pass a special resolution.

Two forms of Voluntary liquidation.

 Members’ Liquidation.
 Creditors’ Liquidation.
Procedure for voluntary Liquidation.
Notice of Resolution.
 Before passing a resolution for voluntary liquidation, the company shall give notice of
the resolution to the holder of any qualifying floating charge in respect of the company’s
property.
Passing a Resolution.
The basis of a resolution for the voluntary liquidation of a company.
 After the expiry of seven days from and including the date on which the notice was
given.
 If the person to whom the notice was given has consented in writing to the passing of the
resolution.
Directors’ Meeting.
The Directors may at a Directors’ Meeting make a Statutory Declaration to the effect that:
 They have made a full inquiry into the company’s affairs.
 That, having done so, they have formed the opinion that the company will be able to pay
its debts in full, together with interest at the official rate, within such period (not
exceeding twelve months from the commencement of the liquidation) as may be
specified in the declaration.
 Such a declaration must be made within the five weeks immediately preceding the date
of the passing of the resolution for liquidation, or on that date but before the passing of
the resolution; and should include a statement of the company’s assets and liabilities as
at the latest practicable date before the making of the declaration.
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  Within fourteen days after the date on which the resolution for liquidation is passed, the
company must lodge a copy of the declaration with the Registrar for registration.

Members Liquidation.
 Basically, is usually on the basis of insolvency.
 On the appointment of a liquidator all the powers of the directors cease unless the general
meeting or liquidator sanctions their continuance.

Declaration of Insolvency by the Liquidator.

 The liquidator will confirm making a full inquiry into the company affairs and the
company has no debts and the existing debts will be payable within 12 months from the
date of commencement of liquidation.
 A declaration of insolvency is a solemn declaration order by a director declaring a
company is solvent and is able to pay its debts in full within 12 months.
 The shareholders will appoint a liquidator who shall proceed with liquidation process of
the company.

Preparation of Liquidation Accounts.

As soon practicable after the liquidation of the company’s affairs is complete, the liquidator:
 Must prepare an account of the liquidation showing how it has been conducted and how
the company’s property has been disposed of.
 The liquidator then convenes a general meeting of the company for the purpose of laying
before it the account and giving an explanation of it.
The meeting shall be convened by publishing, at least 30 days before the meeting, an
advertisement:
 Once in the Gazette.
 Once in at least 2 Daily Newspapers.
 On the company’s website.
Lodging a copy of Accounts and Minutes to the Register.
 Within 7 days after the meeting, the liquidator lodges with the Registrar a copy of the
accounts, together with a return giving details of the meeting and of its date.
 If the copy and return are not lodged in accordance with subsection (3), the liquidator
commits an offence and on conviction is liable to a fine not exceeding five hundred
thousand shillings.

Dissolution of the Company.

 As soon as practicable after striking the name of the company off the Register, the
Registrar shall publish in the Gazette a notice that the company’s name has been struck
off the Register and the date of the striking off.
Creditors Liquidation.

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  The company must call a meeting of creditors to which voluntary liquidation of the
company is proposed.
Notice of Meeting to Creditors.
The notice of the creditors’ meeting states either:
 The Name and Address of a Person Authorised to act as an Insolvency Practitioner in
relation to the company and will provide creditors freely such information concerning
the company’s affairs as the creditors may reasonably require.
 The company’s principal place of business in Kenya and a list of names and addresses of
the company’s creditors which will be available for inspection freely.
 A meeting of the company’s creditors should be convened not later than the fourteenth
day after the day on which there is to be held the company meeting at which the
resolution for voluntary liquidation is to be proposed.
The notice of the creditors’ meeting should be send to the creditors not less than 7 days
before the day on which that meeting is to be held and the same should be published:
 Once in the Gazette.
 Once in at least 2 Daily Newspapers.
 On the company’s website.
Preparation of the statements by the Directors.
The Directors of the company must:
 Prepare a statement setting out the financial position of the company in strict compliance
with the requirements and present it to the creditors’ meeting, then appoint one of them to
preside over the meeting.
 It is the duty of the appointed director to attend the meeting and preside over it.
The statement must specify:
 The details of the company’s assets, debts and liabilities.
 The names and addresses of the company’s creditors.
 The securities held by each of them respectively.
 The dates when the securities were respectively given’
 Any other related information as may be so prescribed.

Compulsory winding up by the Court (Section 219) - Insolvency Act 2015 Kenya.
This may occur in the following circumstances:
(a) Special resolution of the company.
 If the company has by special resolution resolved that it may be wound up by the court,
the court may pass a winding up order.
 The power of the court in such a case is discretionary- it may refuse to order winding up
where it is opposed to public or company’s interest.
(b) Default in holding statutory meeting or in delivering the statutory report to the
registrar.

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  If a company defaults in delivering a statutory report to the registrar or in holding the
statutory meeting, the court may order winding up of the company either on the petition
of the registrar or on the petition of a contributory.
 The petition must not be filed before expiry of 14 days after the last day in which the
statutory meeting ought to have been held.
 However, the court may instead of making a winding up order, direct the statutory report
to be delivered or that a meeting shall be held.
(c) Failure to commence or suspension of business.
 Where a company does not commence its business within one year from its
incorporation, or suspends its business for a whole year, the court may order for is
winding up.
 The court exercises power in this case only if the company has no intention of carrying
on its business or if it is not possible for it to carry on its business.
 Where the suspension of business is temporary or can be satisfactorily accounted for, the
court will refuse to make an order.
If a company has not begun to carry on its business within a year from its incorporation, or
suspends its business for a whole year, the court will not wind up if:
 There are reasonable prospects of the company starting business within a reasonable
time.
 There are good reasons for the delay, that is, the suspension of business is satisfactorily
accounted for and appears to be due to temporary causes.
(d) Reduction of members below Minimum.
 In the case of a Public company below seven members.
 If the company carries on business for more than six months while the number is reduced,
every member who is cognizant of the fact that it is carrying out business with members
fewer than the statutory minimum, will be severally liable for the payment of the whole
of the debts of the company contracted after six months.
 This is an area in the company where corporation veil is lifted.
(e) Inability to pay debts.
 A creditor to whom the company owes more than Kshs. 1,000/- has left at the registered
office, demand under his hand for the payment of the sum due, and the company has for
3 weeks thereafter reflected to honour the sum.
 Execution or other process in favour of the creditors of a company is returned unsatisfied
in whole or in part.
 If it is proved to the satisfaction of the court that the company is unable to pay its debts.
 The court will not prove whether assets exceed liabilities, rather whether the company is
unable to meet its current demands.
(f) Just and Equitable.
 This is when the court is of the opinion that it is just and equitable that the company
should be wound up.

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  This clause gives the court very wide powers to order winding whenever the court
considers it just and equitable to do.
The Instances where the court can issue a winding up order under the clause, ‘just and
equitable’.
 Where there is a deadlock in management.
 Where it is impossible to carry on the business of the company except at a loss.
 Where the company has engaged in illegal business.
 Where the object for which the company is formed is impossible of further pursuit.
 Where the minority is being disregarded or oppressed.
 Where there is lack of confidence in directors.
 Where the company has been conceived and brought forth in fraud.

Just and Equitable clause.

 The court must be over-cautious before admitting a petition for winding up on the just
and equitable clause. It should be allowed as a last resort.
 Just and equitable clause depends upon the facts of each case.
The court may order winding up under this clause when:-
(a) The substratum of the company is gone.
 Substratum of a company is said to have disappeared only when the object for which it was
incorporated has substantially failed or when it is impossible to carry on business except at a loss,
or the existing assets are insufficient to meet the existing liabilities.
 Before the court makes a winding up order under this, the court should consider the interest of
shareholders as well as creditors.

The substratum of a company disappears when:-

(i) The subject matter is gone.
Illustration.
A shipping company lost its only ship, the remaining assets being a paltry sum of
Kshs. 36, 900/- . Majority shareholders filed a petition for winding up but minority shareholders
opposed this and desired to carry on business.
It was held that it was just and equitable that the company be would up.

(ii) When the main object of the company has substantially failed or become impracticable.
Illustration.
The Object Clause of the Kenya Coffee Dates Company stated that it was formed for a Kenyan
Patent which would be granted for making a partial substitute for Coffee from Dates and for
acquisition of incidental there and also other inventions for similar purposes. The Kenyan Patent
was never granted but the company did acquire and work on a Tanzanian Patent and carried on

22
business at Nairobi where substitute for coffee was made from the dates, but not under the
protection of a patent.
A petition was filed by two shareholders that the main object could not be achieved, and
therefore it was just and equitable that the company should be wound up.
(iii) The company carries on business at a loss and there is no reasonable hope that the
object of trading can be attained.
 Majority shareholders are against it, the court cannot 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.
 Where the company is totally unable to pay off creditors and there is increasing burden of
interest and deteriorating state of management and control of business owing to sharp
differences between shareholders, the court will order winding up.
(b) When the management is carried on in such a way that the minority is disregarded or
oppressed.
This is prejudicing the interests of minority shareholders by majority shareholders.
Illustration.
The petitioner was Hon. Beth Wambui Mugo. She wanted the company to be wound up on the
‘just and equitable’ ground. Her reasons were as follows.
(i) That the affairs of the company were being conducted in a manner which was
oppressive to her.
 Despite her 50% shareholding, she was treated at most times as decorating figure because
she was excluded from both the company and board meetings, but nevertheless expected
to sign or approve most of the resolutions. When she suggested transferring her
shareholding, she was out voted.
(ii) The substratum of the company had gone and that the company had no alternative
business to engage in.
 A company had been incorporated to ‘Mining Waste’. This business collapsed because
Mugo influenced the government to withdraw the mining license as a way of revenging
against the Greek Directors.
(iii) Because of the differences between her and the rest of the Greek Members.
 The management of the company had broken down completely and consequently there was loss
of confidence and proximity in each other to the extent that the company could no longer be
managed at all. It was held that though Mugo (Petitioner) was partly to blame for sabotaging the
business, she was entitled to this order under Section 215.

(c) Where there is Deadlock in Management of the Company.

When shareholding is equal and there is a case of complete deadlock and there is no hope or
possibility of smooth and efficient continuance of the company as commercial concern.
Illustration.

23
There were only three directors and shareholders in a private company. One of them left the country and
the remaining two quarrelled among themselves and as a result there was a complete deadlock.
It was held that it was just and equitable that the company be wound up.

(d) When the company was formed to carry out fraudulent or illegal business, or when the
business of a company becomes illegal.
Thom Hassan and two of his sons were employed by Zam -Zam & Sons Ltd in the business of Bakery.
They left Zam -Zam & Sons Ltd and started a company called Thom Hassan Zam - Zam & Sons Ltd
for carrying on similar business. They were restrained by a court injunction from using the name Zam -
Zam on the ground of fraud. A petition for compulsory winding up of the company was presented.
Held that the company was formed to carry out fraud and, therefore, it was just and equitable to be
wound up.

(e) In the case of a company incorporated outside Kenya and carrying on business in
Kenya, winding up proceedings have been commenced in respect of it either:
 In the country of incorporation.
 In any country in which it has established place of business (Section 219).

Petition for Compulsory Winding Up.

The following persons can file a petition.

(a) The Company.
 A company may itself file a petition for winding up after it has passed a special
resolution.
 The directors have no powers to present a petition for winding up.
(b) Creditors.
 This is every person having a pecuniary claim against the company, whether actual or
contingent, and such a person is competent to file a petition for the winding up of the
company.
Disputed Debt.
 A creditor whose debt is disputed cannot get a winding up order.
 The court may either order the petition or stand over until the validity of the debt can be
determined, or may dismiss a petition.
(c) Petition by Any Contributory.
 Section 214 defines a contributory as any person liable to contribute to the assets of the
company in the event of its being wound up.
It however includes all persons who at the date.
 Members of the company
 Have been members within a year immediately preceding that date.

(d) By official receiver.

(e) By Attorney General in consequence of a report of inspectors upon the company’s

affairs.

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Consequence of Winding up Order.
 Official liquidators are appointed.
 The powers of directors are terminated.
 The company’s servants are ipso facto dismissed.
Note: A receiver is not under any obligation to discharge debts even though incurred after the
date of his appointment, unless he exceeded his authority or expressly accepted or agreed a
personal liability.

Voluntary Winding Up.

 This means winding up by members, or creditors without interference by the court. They
are left to settle their affairs without going to the court.
 They may apply to the court for any directions, if and when necessary.
A company may be wound up voluntarily when.
 The period fixed by articles for the duration of the company has expired or an event upon
which the company is to be wound up has happened and the company in a general
meeting has passed an ordinary resolution.
 If the company for whatever reason, has passed a special resolution to wind up
voluntarily.
Types of Voluntary Winding Up.
 Members’ voluntary winding up.
 Creditors’ voluntary winding up.

(a) Members voluntary winding up.

 If a declaration of solvency is made, it is a members’ voluntary winding up.
 The declaration shall be made by majority of directors at a meeting of the Board and in
their opinion any existing debts of the company will be payable in full within 12 months
from the date of commencement of the winding up.

Declaration of Solvency.
 This should be done before the general meeting passing the resolution for winding up and
not after the general meeting.
 It is a solemn declaration of solvency made by a director that the company is solvent and
able to pay all its debts in full within a period of 12 months.
(b) Creditors’ voluntary winding up.
 Where the declaration of solvency is not made, the winding up is referred to as creditors’
winding up. It is presumed that the company is insolvent.
 In such a case, a company must call a meeting of creditors on the same day or the
following day after the meeting, at which resolution for winding up is to be made or
proposed. The directors must lay before the creditors the position of the company.
(iii) Winding up subject to the Supervision of the Court.
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  When a company has passed a resolution to wind up voluntarily, the court may order the
continuation of voluntarily winding up subject to their supervision on any terms.
 The liquidator will continue to exercise all powers subject to the restrictions laid down by the
courts.
 A petition for the winding up of the company subject to the supervision of the courts may be
presented by any person entitled for the compulsory winding up, but before the court refuses or
makes a supervision order, they must call a meeting for ascertaining the wishes of creditors and
contributories.
 The court will usually be called to supervise a voluntary winding up if there is a substantial
dispute between the company and creditors, especially where they disagree over the
appointment of a liquidator.

Voluntary winding up vs Compulsory Winding up.

 Declaration of solvency is a must in members whereas it is not necessary in creditors winding
up.

(iv). Mode of discharging liabilities in case of winding up.

 The company must pay all costs, charges and expenses property incurred in the winding
up including liquidation costs.
 These expenses rank in priority to other claims.
 If assets are insufficient to satisfy all the liabilities, the courts may make any order as to
the payment of those costs and charges as they deem fit.
(v) Then, preferential creditors must be paid under Section 311.
The following preferential creditors must be paid in priority:
 All government and local rates payable within 12 months before the date of winding up.
 All government rent not more than one year.
 Wages and salaries of any servant for services rendered during four months preceding relevant
period not exceeding Kshs. 4,000/-
 All amounts due in respect of any compensation under workmen’s compensation, which has
occurred before the relevant date.

(vi). Finally, proceeds left may be given to shareholders and if any portion remains unclaimed, it goes to
the public trustee as Bona vacantia, that is, ownerless property.

Dissolution of a Company.
Introduction
The registration of a company also known as ‘incorporation’ brings the company into
existence. At the end of its doing business, a company may also be deregistered or dissolved. A
deregistered / dissolved company ceases to exist. Theoretically, while both deregistration and
dissolution have the effect of terminating the legal existence of a company, their consequences
are different. Where a company is dissolved, the liability of the directors, members and officers
ceases. With deregistration however, such liability does not cease to exist. Notwithstanding
deregistration / dissolution, a deregistered / dissolved company may also be reinstated. The act
of reinstating a deregistered company is also referred to as restoration.

26
Instances when a company may be dissolved from the Register of Companies.
The Companies Act 2015 provides for instances when a company may be dissolved. Those
instances include:
(i) Where a company is not carrying on business or is not in operation.
 Where the Registrar believes that, a company is not carrying on business or is not in
operation, he or she may send a letter to the company inquiring whether the company is
carrying on business or is operational.
 If the response indicates that a company is not in operation, the registrar may strike off
the company from the register and the company will be dissolved.
(ii) A company that is in liquidation.
 In the case of a company that is in liquidation and where the Registrar reasonably
believes that the affairs of the company are fully wound up or that no liquidator is acting,
the registrar may strike the company’s name off the Register.
(iii) Where a company applies to the Registrar that it be struck off the register.
 The registrar may also strike the company’s name off the Register on application by a
company.
 Such an application is effective only if it is made on behalf of the company by its
directors or by a majority of them.
 Such an application as stated above may not be made where an application to the Court
has been made on behalf of the company for the sanctioning of a compromise or
arrangement and the matter has not been finally concluded.
The effects of dissolution of a company.
 The effect of dissolution of a company is that the property that had not been distributed
immediately prior to the dissolution of a company vests in the state with effect from
dissolution of the company.
 However, the Attorney General may discharge such property vested in the state by
issuing a notice of disclaimer of ownership of that property.
 After the dissolution of company business affairs cannot be carried forward and the
name of the company is struck off the Register of companies by the Registrar and this
fact is published in Official Gazette.

Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Course Code: FIN 2325 Title: Company Law.

Course Lecturer: Okwiri Minado Saad-PhD

Lecture 12: Annual Report and Auditors’ Report.

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Introduction.

(a) Annual Report.

 It contains financial statements, BoD Report and almost all the information relating to the
entity.
 It is a comprehensive report on the entity’s activities throughout the preceding year. The
report is intended to give shareholders and other interested people information about the
company’s activities and financial performance.
At its most basic, it includes:
 General description of the industry or industries in which the company is involved.
 Audited statements of income, financial position, cash flow and notes to the statements
providing details for various line items e.g., market price of the company’s stock and
dividends paid.
The financial statements are the most important part of the annual report that allows current and
future investors, shareholders , employees and other business stakeholders to determine how well
the company has performed in past , its ability to pay off its debts and its plans for growth.

Typical Annual Reports will include:

 General Corporate Information.
 Operating and Financial Review.
 Director’s Report.
 Corporate Governance Information.
 Chairperson’s statement.
 Auditor’s Report.
 Contents on non-audited information.
 Financial Statements including Balance Sheet aka Statement of Financial Position.

(b) Auditors’ Report.

 It is a financial summary of a company’s activities during the year along with

management’s analysis of the company’s current financial position and future plans.
 These reports are prepared at the end of the fiscal year for external users to gain financial
information about the inner workings of the company and what management plans to do
in the future.
 In other words it is a publication issued to a company's shareholders, creditors, and
regulatory organizations following the end of its fiscal year.
 The report typically contains at least an income statement, balance sheet, statement of
cash flows, and accompanying footnotes.
 It may also contain a letter to shareholders, management comments, an audit report, and
various supporting schedules that may be required by regulatory organizations.
 The report is directed at external users and also used as an advertising and marketing tool
to show the public that the company is doing well.

28
  Management can showcase new products and innovations as well as discuss new
markets that they expect to enter in future periods.
 It is typically issued with graphics, photos, illustrations, graphs, and diagrams. It’s for
more attractive than a simple set of financial statements.
 In a sense, this is the report where management can brag about its accomplishments
and entice new investors to join the company.
 Even though there are marketing-type elements in the report, the actual purpose of it is to
convey financial information to the outside users.
Audited Financial Statements.
 The purpose of the independent audit is to provide assurance that the management has
presented financial statements that are free from material error.
 Hiring an Independent and Qualified CPA provides reassurance to banks, suppliers, and
potential investors that the business is financially sound and creditworthy.
 Audited financial statements are needed to provide information to decision makers.
 During a Financial Audit, a CPA confirms that the financial statements do not contain
material errors.
 In case there are substantial errors, the CPA recommends corrective measures that
comply with the Generally Accepted Accounting Principles (GAAP) and International
Financial Reporting Standards (IFRS).

The Main Types of Audited Financial Statements.

(i) Income Statement.
 This statement shows the performance of the company during a fiscal year.
 The statement reports the revenue earned and expenses incurred during the period.
 On the last line, the report reveals the net profit or loss for the period. (
 The Earnings per Share (EPS) figure may be included when the financial statements are
issued by a publicly-traded company.
 The auditor verifies the accuracy of transactions by crosschecking the cash book and
individual books of accounts.

(ii) Balance Sheet.

 This reports the financial position of the company at the end of the fiscal year or at any
other time a balance sheet is done e.g., companies are usually required to submit a
balance sheet when applying for a loan.
 It reveals the value of assets, liabilities, and equity of a company.
 The items in the assets and liabilities columns are presented in order of liquidity, with the
most liquid items reported first.
 The auditor may verify the existence of assets and liabilities, and the accuracy of the
figures presented.

(iii) Cash Flow Statement.

29
  The cash flow statement reveals the cash inflows and outflows during the fiscal year.
 It provides an insight into the company’s ability to meet its short-term obligations and
continue operating in the foreseeable future.
 The Auditor may verify the entries in the cash flow statement against the bank statement
and also check the accuracy of the footnotes.

Audit Opinion Letter.

 An Auditor issues an audit opinion letter after completing the audit process, and this is
included in the audited financial statements.
 In this letter, the auditor reveals the financial statements reviewed and the audit method
used.
 If there were no material errors in the financial statements, then the auditor will give an
audit opinion that the financial statements represent a true and fair view of the company’s
performance and position.
The Components of an Auditor's Report.
The Auditor's Letter follows a Standard Format, as established by Generally Accepted Auditing
Standards (GAAS).

A report usually consists of three paragraphs.

 The 1st paragraph states the Responsibilities of the Auditor and Directors.
 The 2nd paragraph contains the scope, stating that a set of standard accounting practices
was the guide.
 The 3rd paragraph contains the Auditor's Opinion.

Note: The type of report issued will be dependent on the findings by the Auditor.
The Most Common Types of Reports Issued for Companies.

(i) Clean or Unqualified Report.

 A clean report means that the company's financial records are correct and conform to the
guidelines set out by GAAP.
 A Majority of Audits end in Unqualified, or Clean Opinions.
(ii) Qualified Opinion.
 A Qualified Opinion means that although a company didn't follow the proper accounting
standards, the company didn't do anything wrong.
 For instance, a mistake might have been made in calculating operating expenses or
profit.
 Auditors typically state the specific reasons and areas where the issues are present so that
the company can fix them.
(iii) Adverse Opinion.

30
  An adverse opinion means that the auditor found that not only did the company not
follow accounting guidelines, but there were discrepancies in the financials.
 It indicates that the Auditor might have suspicions of Material Misstatements or
Misrepresentations in the financial statements, but does not have enough evidence
to clearly express that opinion.
 It is the worst possible outcome for a company and can have a lasting impact and legal
ramifications if not corrected.
Disclaimer of Opinion.
 This means that for some reason, the Auditor couldn't complete the audit or chooses not
to provide an opinion on the company e.g., when an Auditor can't be impartial or
wasn't allowed access to certain financial information.
 Regulators and investors will reject a company's financial statements following an
adverse opinion from an auditor and if illegal activity exists, corporate officers might face
criminal charges.
Example of Audit Opinion Letter.
Dear Board of Directors,
Xylco Company Limited,
Nakuru.
Reference: Audit Opinion Letter.
We, the Auditors, have audited the Income Statement, Balance Sheet, and Cash flow Statement
of Xylco Company Limited as of December 31st, 2019.
We completed our audit according to the auditing standards set out by Generally Accepted
Accounting Principles (GAAP) in Kenya. . Based on this audit, we have obtained reasonable
assurance that the above noted financial statements are free of material misstatement.
As part of our audit, we examined and tested evidence supporting the figures contained in the
financial statements. We also assessed the accounting principles and estimates used by the
company in preparing their financial statements. This audit formed the basis of our opinion,
stated below.
In our opinion, the financial statements of Xylco Company Limited are represented in
accordance with Generally Accepted Accounting Principles (GAAP) in Kenya.
Signature.
Hawa Ahmad, CPA.
Auditor
In a nutshell:
The auditor's report is a document containing the auditor's opinion of whether a company's
financial statements comply with GAAP.
The audit report is important because banks, creditors, and regulators require an audit of a
company's financial statements.

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A clean audit report means a company followed accounting standards while an unqualified report
means there might be errors.
An adverse report means that the financial statements might have had discrepancies,
misrepresentations, and didn't adhere to GAAP.

Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Course Code: FIN 2325 Title: Company Law.

Course Lecturer: Okwiri Minado Saad -PhD

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Lecture 13: Investigations of Company Affairs. Functions of Nairobi Stock Exchange.

(a) Investigations of Company Affairs.

Investigation by the Registrar

(i) Where the registrar has reasonable cause to believe that the provisions of this Act are not
being complied with, or where, on perusal of any document which a company is required to
submit to him under the provisions of this Act, he is of opinion that the document does not
disclose a full and fair statement of the matters to which it purports to relate, he may, by a
written order, call on the company concerned to produce all or any of the books of the company
or to furnish in writing such information or explanation as he may specify in his order.

(ii) Such books shall be produced and such information or explanation shall be furnished within
such time as may be specified in the order.

On receipt of an order under subsection (1)

 It shall be the duty of all persons who are or have been officers of the company to
produce such books or to furnish such information or explanation so far as lies within
their power.

 If any such person refuses or neglects to produce such books or to furnish any such
information or explanation he shall be liable to a fine not exceeding two hundred shillings
in respect of each offence.

 If after examination of such books or consideration of such information or explanation

the registrar is of the opinion that an unsatisfactory state of affairs is disclosed or that a
full and fair statement has not been disclosed the registrar shall report the circumstances
of the case in writing to the court.

Inspection
Investigation of company’s affairs on application of members
The court may appoint one or more competent inspectors to investigate the affairs of a company
and to report thereon in such manner as the court directs:

 In the case of a company having a share capital, on the application either of not less than
two hundred members or of members holding not less than one-tenth of the shares issued,

33
  In the case of a company not having a share capital on the application of not less than
one-fifth in number of the persons on the company’s register of members.

The application shall be supported by such evidence as the court may require for the purpose of
showing that the applicants have good reason for requiring the investigation, and the court may,
before appointing an inspector, require the applicants to give security, to an amount not
exceeding ten thousand shillings for payment of the costs of the investigation.

Investigation of company’s affairs in other cases.

Without prejudice to its powers under section 165 the court-
 Shall appoint one or more competent inspectors to investigate the affairs of a company
and to report thereon in such manner as the court directs, if the company by special
resolution declares that its affairs ought to be investigated by an inspector appointed by
the court; and
May do so, if it appears to the court upon a report from the registrar that there are
circumstances suggesting-
 That the company’s business is being conducted with intent to defraud its creditors or the
creditors of any other person or otherwise for a fraudulent or unlawful purpose or in a
manner oppressive of any part of its members or that it was formed for any fraudulent or
unlawful purpose; or
 That persons concerned with its formation or the management of its affairs have in
connection therewith been guilty of fraud, misfeasance or other misconduct towards it or
towards its members; or
 That its members have not been given all the information with respect to its affairs which
they might reasonably expect; or
 That it is desirable so to do.
Power of inspectors to carry investigation into affairs of related companies.
 If an inspector appointed to investigate the affairs of a company thinks it necessary for
the purposes of his investigation to investigate also the affairs of any other body
corporate which is or has at any relevant time been the company’s subsidiary or holding
company or a subsidiary of its holding company or a holding company of its subsidiary,
he shall have power so to do, and shall report on the affairs of the other body corporate so

34
 far as he thinks the results of his investigation thereof are relevant to the investigation of
the affairs of the first-mentioned company.

Production of Documents, and Evidence on Investigation.

 It shall be the duty of all officers and agents of the company and of all officers and agents
of any other body corporate whose affairs are investigated by virtue of section 167 to
produce to any inspector all books and documents of or relating to the company or, as the
case may be, the other body corporate which are in their custody or power and otherwise
to give to the inspectors all assistance in connection with the investigation which they are
reasonably able to give.

 An inspector may examine on oath the officers and agents of the company or other body
corporate in relation to its business, and may administer an oath accordingly.

 If any officer or agent of the company or other body corporate refuses to produce to any
inspector any book or document which it is his duty under this section so to produce, or
refuses to answer any question which is put to him by an inspector with respect to the
affairs of the company or other body corporate, as the case may be, the inspector may
certify the refusal under his hand to the court, and the court may thereupon inquire into
the case, and after hearing any witnesses who may be produced against or on behalf of
the alleged offender and after hearing any statement which may be offered in defence,
punish the offender in like manner as if he had been guilty of contempt of the court.

If an inspector thinks it necessary for the purpose of his investigation that a person whom he
has no power to examine on oath should be so examined, he may apply to the court and the
court may if it sees fit order that person to attend and be examined on oath before it on any
matter relevant to the investigation, and on any such examination-
 The inspector may take part therein either personally or by advocate.
 The court may put such questions to the person examined as the court thinks fit.
 The person examined shall answer all such questions as the court may put or allow to
be put to him, but may at his own cost employ an advocate, who shall be at liberty to
put to him such questions as the court may deem just for the purpose of enabling him
to explain or qualify any answers given by him, and notes of the examination shall be

35
 taken down in writing and shall be read over to or by, and signed by, the person
examined, and may thereafter be used in evidence against him:

 Provided that, notwithstanding anything the court may allow the person examined
such costs as in its discretion it may think fit, and any costs so allowed shall be paid
as part of the expenses of the investigation.

 Any reference to officers or to agents includes past, as well as present, officers or

agents, as the case may be, and for the purposes of this section agents, in relation to a
company or other body corporate includes the bankers and advocates of the company
or other body corporate, and any persons employed by the company or other body
corporate as auditors, whether those persons are or are not officers of the company or
other body corporate.

Inspector’s Report.
 An inspector may, and, if so directed by the court, shall, make interim reports to the
court, and on the conclusion of the investigation shall make a final report to the court.
 Any such report shall be written or, if the court so directs, printed.
The court shall-
 Forward a copy of any report made by an inspector to the company and to the registrar.
 If the court thinks fit, forward a copy thereof on request and on payment of the
prescribed fee to any other person who is a member of the company or of any other body
corporate dealt with in the report by virtue of section 167, or whose interests as a creditor
of the company or any such other body corporate as aforesaid appear to the court to be
affected.
 Where any inspector is appointed under section 165, furnish, at the request of the
applicants for the investigation a copy to them, and may also cause the report to be
printed and published.
Proceedings on Inspector’s Reports.
 If from any report made under section 169, it appears to the court that any person has, in
relation to the company or to any other body corporate whose affairs have been
investigated by virtue of section 167 been guilty of any offence for which he is criminally
liable, the court shall forward a copy of the report to the Attorney-General, and, if the

36
 Attorney-General considers that the case is one in which a prosecution ought to be
instituted, he shall institute proceedings accordingly, and it shall be the duty of all
officers and agents of the company, past and present (other than the defendant in the
proceedings), to give to him all assistance in connection with the prosecution which they
are reasonably able to give.
Subsection (5) of section 168 shall apply for the purposes of this subsection as it applies for the
purposes of that section.
 If, in the case of anybody corporate liable to be wound up under this Act, it appears to the
Attorney-General, from any such report as aforesaid that it is expedient so to do by
reason of any such circumstances as are referred to in subparagraph (i)
 or subparagraph (ii) of paragraph (b) of section 166, the Attorney General may, unless
the body corporate is already being wound up by the court, present a petition for it to be
so wound up if the court thinks it just and equitable that it should be wound up or a
petition for an order under section 211 or both.
 If from any such report as aforesaid it appear to the Attorney-General that proceedings
ought in the public interest to be brought by anybody corporate dealt with by the report
for the recovery of damages in respect of any fraud, misfeasance or other misconduct in
connection with the promotion or formation of that body corporate or the management of
its affairs, or for the recovery of any property of the body corporate which has been
misapplied or wrongfully retained, he may himself bring proceedings for that purpose in
the name of the body corporate.
 The registrar shall indemnify the body corporate against any costs or expenses incurred
by it in or in connection with any proceedings brought by virtue of subsection (3).

Expenses of Investigation of Company’s Affairs.

The expenses of and incidental to an investigation by an inspector appointed by the court under
the foregoing provisions of this Act shall be defrayed in the first instance by the registrar, but the
following persons shall, to the extent mentioned, be liable to repay the registrar-

 Any person who is convicted on a prosecution instituted by the Attorney-General as a

result of the investigation, or who is ordered to pay damages or restore any property in
proceedings brought by virtue of subsection (3) of section 170, may in the same

37
 proceedings be ordered to pay the said expenses to such extent as may be specified in the
order;

 Anybody corporate in whose name proceedings are brought as aforesaid shall be liable to
the amount or value of any sums or property recovered by it as a result of those
proceedings.

Unless as a result of the investigation a prosecution is instituted by the Attorney-General.

 Anybody corporate dealt with by the report, where the inspector was appointed otherwise
than under paragraph (b) of section 166, shall be liable, except so far as the court
otherwise directs; and

 The applicants for the investigation, where the inspector was appointed under section
165, shall be liable to such extent (if any) as the court directs, and any amount for which
a body corporate is liable by virtue of paragraph (b) of this subsection shall be a first
charge on the sums or property mentioned in that paragraph.

 The report of an inspector appointed otherwise than under paragraph (b) of section 166
may, if he thinks fit, and shall, if the court so directs, include a recommendation as to the
directions (if any) which he thinks appropriate, in the light of his investigation, to be
given under paragraph (c) of subsection (1) of this section.

 For the purposes of this section, any costs or expenses incurred by the registrar in or in
connection with proceedings brought by virtue of subsection (3) of section 170 (including
expenses incurred by virtue of subsection (4) of that section) shall be treated as expenses
of the investigation giving rise to the proceedings.

 Any liability to repay the registrar imposed by paragraphs (a) and (b) of subsection (1)
shall, subject to satisfaction of the registrar’s right to repayment, be a liability also to
indemnify all persons against liability under paragraph (c) thereof, and any such liability
imposed by paragraph (a) shall, subject as aforesaid, be a liability also to indemnify all
persons against liability under paragraph (b); and any person liable under paragraph (a) or
(b) or either subparagraph of paragraph (c) shall be entitled to contribution from any
other person liable under the same paragraph or subparagraph, as the case may be,
according to the amount of their respective liabilities thereunder

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Inspector’s Report to be Evidence.
A copy of any report of any inspector appointed under the foregoing provisions of this Act,
authenticated by the seal of the company whose affairs have been investigated, shall be
admissible in any legal proceedings as evidence of the opinion of the inspector in relation to any
matter contained in the report. 173. Appointment and powers of inspectors to investigate
ownership of company.
 Where it appears to the registrar that there is good reason so to do, he may appoint one or
more competent inspectors to investigate and report on the membership of any company
and otherwise with respect to the company for the purpose of determining the true
persons who are or have been financially interested in the success or failure (real or
apparent) of the company or able to control or materially to influence the policy of the
company.

 The appointment of an inspector under this section may define the scope of his
investigation, whether as respects the matter or the period to which it is to extend or
otherwise and in particular may limit the investigation to matters connected with
particular shares or debentures.

 Where an application for an investigation under this section with respect to particular
shares or debentures of a company is made to the registrar by members of the company,
and the number of applicants or the amount of shares held by them is not less than that
required for an application for the appointment of an inspector under section 165, the
registrar shall appoint an inspector to conduct the investigation unless he is satisfied that
the application is vexatious, and the inspector’s appointment shall not exclude from the
scope of his investigation any matter which the application seeks to have included
therein, except in so far as the registrar is satisfied that it is unreasonable for that matter
to be investigated: Provided that the registrar may refuse to appoint an inspector under
this subsection unless, in any case in which he considers it reasonable so to require, the
applicants give sufficient security for the payment of the costs of the investigation.
 Subject to the terms of an inspector’s appointment, his powers shall extend to the
investigation of any circumstances suggesting the existence of an arrangement or

39
 understanding which, though not legally binding, is or was observed or likely to be
observed in practice and which is relevant to the purposes of his investigation.

 For the purposes of any investigation under this section, sections 167 to 169 shall apply
with the necessary modifications of references to the affairs of the company or to those of
any other body corporate.

 The said sections shall apply in relation to all persons who are or have been, or whom
the inspector has reasonable cause to believe to be or have been, financially interested in
the success or failure, or the apparent success or failure, of the company or any other
body corporate whose membership is investigated with that of the company, or able to
control or materially to influence the policy thereof, including persons concerned only on
behalf of others, as they apply in relation to officers and agents of the company or of the
other body corporate, as the case may be;

 The registrar shall not be bound to furnish the company or any other person with a copy
of any report by an inspector appointed under this section or with a complete copy
thereof if he is of opinion that there is good reason for not divulging the contents of the
report or of parts thereof, but shall keep a copy of any such report or, as the case may be,
the parts of any such report, as respects which he is not of that opinion.
 The expenses of any investigation under subsection (1) shall be defrayed by the registrar.
 The expenses of any investigation under subsection (3) shall be defrayed by the
applicants unless the registrar certifies that it is a case in which he might properly have
acted under subsection (1).

Negligent Directors.
 A Director found guilty of fraud or negligence must be served with a notice of the meeting
in which he shall be removed as director. He may choose to make his representations in
writing.
Some Directors run down the company, embezzle funds, or simply put – act like demi-gods.
 The Companies Act provides a number of remedies against Directors suspected or found
to conduct the company affairs fraudulently.
 Little applied provisions of the Companies Act provide adequate remedies against
directors found to mismanage the company affairs.
 Section 185 of the Companies Act allows company shareholders to remove directors by
passing ordinary resolutions against any such Director.

40
  The only requirement to effect such a resolution is that the affected Director must be
served with a notice of the meeting in which he shall be removed as director.
 He may choose to make his representations in writing.
 The said section does not require any proof on the shareholders part of any
mismanagement. This means that the tenure of directors may not be so secure after all.

When Shareholders are dissatisfied with the conduct of any director of a company, the
right to remove such a director is available under Section 185 of the Companies Act.
 Once the resolutions are filed then the said director ceases to be a director of the
company.
 Another remedy available to shareholders is common law remedies for breach of
fiduciary duty by the negligent director.
 If it is found that the director did not exercise due diligence in any of his duties then other
than the remedy under Section 185 of the Companies Act, the shareholders may file a
claim for damages against any such director.
Note:
 If a company sustains huge losses due to the negligent steps taken by any servant of the
company, then an action for damages lies against such servant.
 This would perhaps be of interest to the shareholders of investment companies where it is
common for shareholders to suffer losses due to the negligence of directors.

In addition to all these remedies, lie criminal sanctions against directors suspected of
defrauding the company. It is so happening that some directors run the outfit as if it were
their own outfit.
Section 323 of the Penal Code specifically criminalises fraud by directors.
 This may include banking fraud and misappropriation of company property.
 The Companies Act allows an aggrieved member to apply to the court to investigate the
affairs of a company if the same is being run in a fraudulent or oppressive manner.
 Under Section 164 of the Companies Act the Registrar of Companies is authorised to
investigate a company’s accounts.
 Under Section 165 of the Act the court can appoint investigators to look into the affairs of
a company upon the application of the shareholders of a company.
 However, there is a pre-condition that the applicant must own not less than 10 per cent of
the total issued share capital. This locks out small shareholders who own less than 10 per
cent of the share capital.
 Such shareholders can only claim under Section 211 of the Act which allows such
shareholders to apply for suitable court orders where the affairs of the company are being
run in an oppressive manner.
 The remedy under Section 165 can also be sought by members who number not less than
200. This means that in the case of a public company the pre-condition is that either one
has 10 per cent or more of the shareholding, or that the applicants number over 200.

41
  The rule in Section 165 is found in most commonwealth countries whereby members
may petition the court to investigate the company’s affairs if the same is being run
oppressively or fraudulently.

Under Section 166 of the Act the company can by special resolution resolve to have the
court inspect its affairs.
 This means that the minimum number of shareholders needed to pass a resolution as the
Articles of the Company prescribe, may petition the court to inspect the company e.g.,
two directors, may petition the court to investigate the company on the fraud of a third
director.
 The investigator looks into claims that the affairs of a company are being run with intent
to defraud creditors, the company is being run in an oppressive manner, the management
has been fraudulent and that the other members have not been given all the information
pertaining to the company.

Criminal Activity.
 If the investigator finds that there has been any criminal activity by the directors then he
forwards his report to the Attorney General’s office for investigation and prosecution of
the directors.
 The court may also wind up the company if it finds that the company is being run in a
manner oppressive to the minority shareholders.
Therefore, my parting shot to frustrated shareholders would be to apply these remedies
where there has been any mismanagement of the company.

(b) Nairobi Securities Exchange (NSE)

Introduction.
 Stock Exchange is an organized market where stock and shares are issued, bought and
sold through the services of stockbrokers or dealers, hence a part of the capital market.
 The Stock Exchange which deals with new issues and second-hand shares and Stock
Market consists of institutions dealing in long-term funds.
 The second-hand market is always extraordinarily large than the new issue market.
 The shares are much more liquid, and as such they are much more attractive to invest in.
This is especially so if they can correctly be predicted that they can be readily resold for
cash at a later date.
 The Stock Exchange provides the market for such a resale where second-hand shares may
be bought or sold. The company issuing the shares has to make prior arrangements for
their shares to be traded.
 NSE is situated in Kenya -one of the fastest-growing economies in Sub-Saharan Africa.
 It plays a vital role in the growth of Kenya’s economy by encouraging savings and
investment, as well as helping local and international companies’ access cost-effective
capital and operates under the jurisdiction of the Capital Markets Authority of Kenya.

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Functions of NSE.
 Allows the owners of capital to divorce from managing their capital, a very important
step because owners of capital may not necessarily have the expertise to manage capital
investment efficiently.
 Check against flight of capital which takes place because of local inflation and currency
depreciation.
 Encourages of higher standards of accounting, resource management and public
disclosure which in turn affords greater efficiency in the process of capital growth.
 Encourages public floatation of private companies which in turn allows greater growth
and increase of the supply of assets available for long term investment.
 Facilitates equity financing as opposed to debt financing. Debt financing has been the
undoing of many entities especially during recession.
 Growth of related financial services sector e.g. insurance, pension and provident fund
schemes which nurture the spirit of savings.
 Mobilization of savings for investment in productive enterprises as an alternative to
putting savings in bank deposits, purchase of real estate and outright consumption.
 It enhances improved access to finance both to new and small companies, which might otherwise
find it hard to access finance.
 It enables futuristic funding in most of the developing countries, where venture capital is mostly
unavailable.

The Impact of Nairobi Securities Exchange in the Kenyan Economy.

Introduction.
A Stock Exchange or Stock Market is an organized market for the trading of stocks, bonds and
other securities.
 It provides a mechanism through which companies can raise capital for expansion
purposes by selling and issuing securities (stocks and bonds).
 NSE self-listed itself to raise funds in order to upgrade and expand its functions.
 The roles of Stock Exchanges are varied and highly important in a National Economic
Development.
Apart from being a hub of primary and secondary market, NSE’s impact on the economy cannot
be gainsaid.
(i) Raising Capital for Business Enterprises.
 The exchange helps companies to capitalize by selling shares to the investing public, the
companies raise capital which is used in expansion of various sectors of the companies.
 This leads to a direct effect to the economy as many people are employed when the
companies expand hence reducing the unemployment problem.
Mobilizing Savings for Investments.
 When people draw their savings and invest in shares, it leads to a more rational allocation
of resources because funds, which could have been consumed or kept in unused deposits
with banks, are mobilized and redirected to promote commerce and industry.

43
  This also helps public to mobilize their savings to invest in high yielding Economic
Sectors, which results in higher yield, both to the Individual and to the National
Economy.

(iii). Control of Company Management.

 The role of the stock exchange is also to monitor the market to ensure that it is working
efficiently, fairly and transparently.
 Over the decades, the stock exchange has been raising requirements for new corporations
seeking listing of all financial information regarding companies whose securities are sold
on the stock exchange.
 Such requirements exercise a control on a company management and keep its malpractice
in check and prevents companies from running bankrupt or being mismanaged hence
leading to their failure.

(iv). Creating Investment Opportunities for Small Investors.

 As opposed to other businesses that require a huge capital outlay, investing in shares is
open to both large and small investors because a person buys the number of shares that he
or she can afford.
 Therefore, the stock exchange provides an extra source of income to small savers.

(v) Raising Government Capital for Development Projects.

 The Government and even County Authorities may decide to borrow money in order to
finance huge infrastructure projects by selling bonds.
 These bonds can be raised through the stock exchange whereby members of the public
buy them. When the Government or the County Authority gets this alternative source of
funds, it no longer has the need to overtax the people in order to finance development.
For instance, the Government of Kenya has issued a Euro Bond in order to fund its
budget deficit.

(vi) Barometer of the Economy.

 The stock exchange maintains the stock indexes which are the indicators of the general
trend in the economy.
 It also regulates the stock price fluctuations.
 At the stock exchange, shares rise and fall depending, largely, on market forces.
 Share prices tend to rise or remain stable when companies and the economy in general
show sign of stability.
 Therefore, the movement of share prices can be an indicator of the general trend in the
economy.

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 School of Business and Technology
Department of Business

Course Outline: September -December 2024

Course Code: FIN 2325. Course Title: Company Law

Course Lecturer: Okwiri Minado Saad-PhD Finance.

Cell Phones: +254 721 572970 / +254 733 9060 26

Email: minadosaad@gmail.com

Lecture Time: Day: Wednesday. Time: 8 – 11 a.m. Venue: VCDL 3

Course Objective
To equip the learners with knowledge, skills, and attitudes that will help him /her to apply and
comply with the provisions of company law in relevant circumstances and environments.

Learning Outcomes- Knowledge and Understanding

On successful completion of the course, the learner will be able to demonstrate Knowledge and
Understanding of:
(i) Apply legal principles relating to formation of companies.
(ii) Evaluate the rights and obligations of members and shareholders.
(iii) Comply with legal principles governing liquidation of corporates and restructuring
(iv) Comply with legal principles relating to companies incorporated outside Kenya
(v) Ensure books of accounts are prepared in compliance with the law.

Pre-requisite-None
Learning Outcomes- Knowledge and Understanding
On successful completion of the course, the learner will be able to demonstrate Knowledge and
Understanding of:
(i) Apply legal principles relating to formation of companies.
(ii) Evaluate the rights and obligations of members and shareholders.
(iii) Comply with legal principles governing liquidation of corporates and restructuring

45
(iv) Comply with legal principles relating to companies incorporated outside Kenya
(v) Ensure books of accounts are prepared in compliance with the law.

Course Content
Introduction: Forms of Business Organizations, Incorporation of a Company, Articles of
Association, Memorandum of Association. Promotion & Pre-Incorporation Activities.
Registration & Classification of a company. Appointment of Directors, their respective powers,
Termination & Removal. Alteration of Capital. Functions of Capital Market Authority. Annual
& Audit Reports. Majority Rights & Minority Protection. Investigation of Company Affairs.
Functions of Nairobi Security Exchange.

COURSE OUTLINE
Week Topic Sub-topics Method
1 Introduction Forms of Business Organization Lecture, Class
discussion &
Notes
2 Incorporation of a Merits and Consequences Lecture, Class
Company discussion &
Notes
3 Incorporation (i) Articles of Association, Lecture, Class
Documents Memorandum of Association discussion &
(ii) Promotion & Pre-incorporation Notes
Activities
4 Registration& (i) Prospectus Lecture, Class
Classification of a (ii) Floatation of a company discussion &
company (iii) Constructive Notice Notes
(iv) Organic Theory
5 Appointment of (i) Restrictions & Loans to Directors Lecture, Class
Directors discussion &
Notes
6 Continuous Assessment Test 1 (CAT,
Assignment
7 Division of Powers, Law of Meetings- Convention & Lecture, Class
and Board of Directors. Conduct-Voting & Resolutions discussion &
Notes
8 Alterations of capital. Role and Functions of Capital Lecture, Class
Market Authority discussion &
Notes
9 Termination / Removal Winding up of a company. Lecture, Class
of a Company discussion &
Director Notes

10 Continuous Assessment Test II (CAT,

Assignment
11 Annual Reports and Annual Reports and Auditors Lecture, Class

46
 Auditors Reports. Reports. discussion &
Notes
12 Majority Rights and Majority Rights and Minority Lecture, Class
Minority Protection. Protection. discussion &
Notes
13 Investigation of Investigation of Company Affairs Lecture, Class
Company Affairs and and Functions of the Nairobi discussion &
Functions of the Securities Exchange (NSE Notes
Nairobi Securities
Exchange (NSE
14-15 Revision &
Examination

Teaching Methodology.
Lectures, Group Activities and Presentations including Class Discussions

Instructional Materials & Equipment

White Board, Felt Pens, Notes

Course Assessment -Mode of evaluation-Course Work

Continuous Assessments- (Attendance, Exercises/ Tests, Group Work) ...…...………30 %
End of the Trimester Examination………………………………….…………………70 %

Total Marks ……………………………………………………………………100 %

Course Text Books

(i)John Joseph Ogolla & Robert Gitau Company Law-3rd Edition. Focus Publishers Ltd.
(ii) Company’s Act Cap 486, Laws of Kenya.

Lecturer In-Charge:

Name: Okwiri Minado Saad -PhD Finance. Sign: ……….…………… Date: ……………

Approved for Circulation

Head of Department Business

47
Name………………....................................Sign……………........................Date…………...

Mobile……………………………………. Email…………………………………………….

Dean, School of Business & Technology

Name ……………………………………. Sign……………………………. Date……………

Mobile……………………………………. Email…………………………………………….

Class Representative

Name ……………………………………. Sign……………………………. Date……………

Mobile……………………………………. Email…………………………………………….

Course Code: FIN 2325 Title: Company Law.

Course Lecturer: Okwiri Minado Saad-PhD -Finance

Lecture 1: Introduction of Company Law and Forms of Business Organizations.

Company Law-Kenya (Pursuant to the 2015 Act)

48
(a) Introduction.
A Company is an Artificial Legal Person created by complying with the Provisions of the
Companies Act, 2015 of the Laws of Kenya.
There are 2 Fundamental Concepts emanating from the above definition:
(i) Legal Personality, and (ii) Limited Liability

(i) Legal Personality.

 A Company must be treated as a person in its own right. This separates and creates a
distinction between the personalities which constitute the created entity.
 This concept also incorporates other aspects such as life and death.
 A Legal Person is any person human or otherwise which has rights and duties. The Non-
Human Persons are called Corporations.
 The word corporation derives from the Latin word corpus meaning body. These are legal
persons brought into being by artificial processes of the law.

(ii) Limited liability.

 Means the extent to which a person can be called upon to account for something. A
person can be called upon to pay the amount of a debt or to account for a debt up to a
certain amount.
 In the context of company law, liability can be limited by shares or by guarantee. A share
is an interest which an investor has in a particular company.
 Under Sec 6 of the Companies Act, Cap. 2015 a limited liability company is one in which
the liability of its members is limited by the memorandum to the amount, if any, unpaid
on the shares respectively held by them. This is a company limited by shares.
 A share is the interest which someone has in a company measured in monetary terms.
 The members in a company may sometimes enter into an agreement where they may
contribute towards the company’s assets while they are still members to enable
the company to discharge its debts. They cannot be called upon to pay more than they
undertook to pay. Such a company is limited by guarantee.

49
  Under sec. 7 of the Companies Act, Cap. 2015, a Company Limited by Guarantee is a
Company having the liability of its members limited by the memorandum to such amount
as the members may respectively thereby undertake to contribute to the assets of the
company in the event of its being wound up.
 In the event that a company does not have this guarantee or liability then it is an
unlimited company. Thus section 8 of the companies Act, 2015 defines an unlimited
company as ‘a company not having any limit on the liability of its members.’

(iii) Limited Liability Partnerships-LLP

In a partnership, the Limited Partners (LPs) have Limited Liability while the General Partner has
Unlimited Liability.
 The Limited Liability feature protects the partner's personal assets from the risk of being
seized to satisfy creditor claims in the event of the company's or partnership's insolvency
while the general partner’s personal property would remain at risk.
 An LLP has the ability to bring partners in and let partners out i.e. Partners can be added
or retired as outlined by the agreement. Usually, the decision to add requires approval
from all the existing partners.

Limited Liability in an Incorporated Business

 A Limited Liability Company (LLC) is a corporate structure in Kenya whereby the
owners are not personally liable for the company's debts or liabilities.
 Limited Liability Companies are hybrid entities that combine the characteristics of a
corporation with those of a Partnership or Sole Proprietorship.

Basic Principles of Company Law are designed to:

 Protect Creditors.
 Protect Investors.
Note: The Act protects the two groups of people. Nonetheless, a company’s activities may affect
the Public or Employees as well. Whether or not companies should have the interest of the
community put into account is still a matter for debate.
In Summary
 A Limited Liability is a type of Legal Structure for an Organization where a Corporate
Loss will not exceed the amount invested in a Limited Liability Company. In other
words, investors and owners’ private assets are not at risk if the company fails.

50
  The Limited Liability Feature is the basic advantage of investing in publicly listed
companies. While a shareholder can participate wholly in the growth of a company, his or
her liability is restricted to the amount of the investment in the company, even if it
subsequently goes bankrupt and has remaining debt obligations.
Limited Liability Works as follows:
 When either an individual or a company function with limited liability this means that,
assets attributed to the associated individuals cannot be seized in an effort to repay debt
obligations attributed to the company. Funds that were directly invested with the
company, such as with the purchase of company stock, are considered assets of the
company in question and can be seized in the event of insolvency.
 Any other assets deemed to be in the company’s possession, such as real estate,
equipment, and machinery, investments made in the name of the institution and any
goods that have been produced but have not been sold, are also subject to seizure and
liquidation.
In a nutshell: Without limited liability as a legal precedent, many investors would be reluctant
to acquire equity ownership in firms, and entrepreneurs would be wary of undertaking a new
venture. This is because without limited liability if the company loses more money than it has,
creditors and other stakeholders could claim the investors’ and owners’ assets. Limited liability
prevents that from occurring, and so the most that can be lost is the amount invested, with any
personal assets held as off-limits.
The Bottom Line:
 Limited liability is a legal structure of organizations such as firms that limit the extent of
an economic loss to assets invested in the organization and which keeps personal assets
of investors and owners off-limits.
 Without limited liability as a legal precedent, many investors would be reluctant to
acquire equity ownership in firms and entrepreneurs would be wary of undertaking a new
venture.
 Several limited liability structures exist such as limited liability partnerships (LPs and
LLPs), limited liability companies (LLCs), and corporations.

(ii) Forms of Business Organizations.

There are various legal forms that a business may take namely;

51
(a) Sole Trader (b) Partnerships with 2 or more people (c) Limited liability Company.

(a) Sole Trader.

Sole Proprietorship
 A sole proprietorship also referred to as a sole trader or a proprietorship, is an
unincorporated business that has just one owner who pays personal income tax on
profits earned from the business.
 He or She procures the necessary capital alone. He gets the profits alone and equally shoulders
any losses. Since a sole trader has no association in law, he is not in any way regulated by any
special rules of law.
 A sole proprietorship is the easiest type of business to establish or take apart, due to a
lack of government regulation. As such, sole proprietorships are very popular among
individual self-contractors, consultants or small business owners. Many sole proprietors
do business under their own names because creating a separate business or trade name
isn't necessary.

Highlights.
 A sole proprietorship is an unincorporated business with only one owner who pays
personal income tax on profits earned.
 Sole proprietorships are easy to establish and dismantle, due to a lack of government
involvement, making them popular with small business owners and contractors.
 Many sole proprietorships end up getting restructured into a Limited Liability Company
(LLC), in sync with the company's expansion.
 No Separate Legal Entity is created in a Sole Proprietorship. The Business Owner is not
exempt from liabilities incurred by the entity.
 The basic operational hitch of Sole Proprietorship is to access Capital Funding,
specifically through established channels, such as Issuance of Equity and obtaining bank
loans facilities.

(b) Partnership.
A Partnership is a relation that subsists between two and twenty members in a trading
partnership, two or more professional Persons with a view to sharing profits.
 Firms or Professional Persons like Lawyers, Accountants and Surveyors have no
limitation of membership.
 The Partnerships Act cap 29 defines a partnership as a relation that subsists between 2 or
more persons carrying on business in common with a view to profit.
 Under Section 389 of the Companies Act, Cap. 486, ‘No company, association or
partnership consisting of more than twenty persons shall be formed for the purpose of
carrying on any business that has for its object the acquisition of gain by the company,
association or partnership, or by the individual members thereof, unless it is registered as
a company under the Act. The effect of this section is to prohibit the formation of a
partnership of more than 20 people.

52
Reasons for limited Number of Partnership.
The number should be limited for public policy reasons.
 The Act was intended to prevent the mischief arising from large trading undertakings
being carried on by large fluctuating bodies so that persons dealing with them did not
know with whom they were contracting and may be put to great difficulty and expense.
 The Rights of the Partners are regulated by an agreement and if this agreement is in
writing it is referred to as the Articles of Partnership or the Partnership Deed. The
provisions of the Partnerships Act govern whatever the partners may have left out in the
partnership Deed.
 Under Section 11 of the Partnership Act, every partner in a firm is liable jointly with
other partners for all the obligations and debts of the firm incurred while he is a partner.
This is in contrast to companies. Companies are better organs for doing business because
of limited liability aspect.

Note: Where an action is brought against a partnership, it is one against all the partners. For this
reason, where a sole trader carries a business in a name other than his own name, he cannot
commence action in that name e.g., Wa-Bidii General Suppliers.
It was held that an individual had no right to institute legal proceedings in his business name.

(iii) Limited Liability Company:

Note: If promoters wish to carry on a business through the medium of a limited liability
company, they may choose which one of the various types of company they wish to form. The
first choice is for the promoters to consider between limited and unlimited companies.
If a company is limited it could be by shares or guarantee, if not limited it would be an unlimited
company.

Section 8 of the Companies Act provides that for purposes of the Act, a company is an
unlimited company if:
 There is no limit on the liability of its members.
 Its Certificate of Incorporation states that the liability of its members is unlimited.
 Its Certificate of Incorporation states that it is a Private Company.
‘Any seven or more persons or where the company to be formed will be a private company, any
two or more persons associated for any lawful purpose may by subscribing their names to a
memorandum of Association and otherwise complying with the requirements of this Act in
respect of registration from an incorporated company with or without limited liability.’

Note: If a Company is a profit making concern, then it is suitable to have a Company Limited by
Shares or Company Limited by Guarantee.

The Promoters may also decide whether the company is to be Private or Public.
Section 9 of the Companies Act, defines a private company to mean a company which by its
Articles of Association

53
  Restricts the right to transfer its shares.
 Prevent the Public at large from subscribing to it
These are the basic criteria that differentiate private companies from public companies

Other Aspects:
 Membership- Minimum 2 and maximum 200
 Private Limited- All private companies must include the words Private Limited or Pvt.
Ltd in their names

Merits & Demerits of Private Limited Company

A Private Limited Company is a company which is privately held for small businesses. The
liability of the members of a Private Limited Company is limited to the number of shares
respectively held by them. Shares of Private Limited Company cannot be publicly traded.
Merits
(i) No Minimum Capital requirements nor restrictions on allotment of shares.
(ii) Separate Legal Entity it is a separate legal identity in the court of the law, meaning
assets and liabilities of the business are not the same as the assets and liabilities of the Directors.
Both are counted as different. It separates Management and Ownership and thus, managers are
responsible for the company’s success and are also answerable for the company’s loss.
(iii) Limited Liability-If the company undergoes financial distress because of whatsoever
reasons, the personal assets of members will not be used to pay the debts of the Company as the
liability of the person is limited.
(iv) Fund Raising and FDI Allowed-In Private Limited Company, Foreign Direct Investment
is allowed that means any foreign entity or foreign person can directly invest in a Private Limited
Company.
(v) Uninterrupted existence and Builds Credibility- A company, being a separate legal
person, is unaffected by the death or other departure of any member but continues to be in
existence irrespective of the changes in membership. ‘Perpetual Succession’ is one of the most
important characteristics of a company.
(vi) The particulars of the company are available on a public database. This improves the
credibility of the company as it makes it easy to authenticate the details

Demerits
(i) Compulsory Registration- prior to commencing business, it is compulsory to register a
private limited company in India under the provisions of Companies Act, of 2015.
(ii) Periodic Regular Compliance-A private limited company is required to complete several
regulatory compliances, such as, appointing a statutory auditor within 30 days of its

54
incorporation, conducting a minimum of 4 (four) board meetings in a year, conducting an annual
general meeting every year and maintaining several statutory registers such as register of
members, directors, etc.
(iii) Division of Ownership
A major disadvantage of private limited company is that it requires a minimum of one Director
to a maximum of 15 Directors.
(iv) Winding up- the process to wind up a private limited company in Kenya is more complex,
time consuming and costly as several regulatory requirements need to be fulfilled.
(v) Personal Liability-The company itself is fully liable for its debt and has unlimited
liability. Only the members of a company enjoy limited liability protection

Private Company vs Public Company

There exist various types of companies in Kenya as provided for by the Companies Act, 2015,
and amongst them are Public and Private Companies, being the most preferred types of
companies used to undertake business in Kenya.
Essentially, a private company refers to a company that restrict a shareholder’s right to transfer
shares; limits the number of members to fifty; prohibits invitations to the public to subscribe for
shares or debentures of the company and requires the consent of all shareholders to add a new
member.
Whereas, a public company is that which allow its members the right to transfer their shares in
the company and allows invitations to the public to subscribe for shares or debentures of the
company
Additional differences between a private and public company.
(i) Public companies are created with the intention of conducting business and are suitable for
public investment attracting many persons. However, private investment is suitable for family,
friends and relatives while the company is intended for business, trading and other commercial
purposes.
(ii)The two companies differ in their naming where public companies that enjoy limited liability
end with “Public Limited Company” or “plc” while private companies that enjoy limited liability
must have their names end with “limited’ or “ltd”.
(iii) The two types of companies differ in their membership. Public companies can be formed by
one or more persons with no maximum membership. However, private companies may be
formed by one or more persons but have a maximum number of members.
(iv) Public companies differ with private ones when it comes to directorship. Public Companies
are required to have at least 2 directors where one has to be a natural person whereas private
companies are required to have at least one director.
55
(v) Private companies have no minimum capital requirements nor restrictions on allotment of
shares. However, public companies are required to have an Authorized minimum capital and
they have restrictions as to how they can allot their shares.
(vi) Public companies are required to have a company secretary while private companies are not
mandated to have accompany secretary unless it has a paid-up capital of at least Ksh 5 million
and above.
(vii) Public companies may transfer their shares to the public freely while private companies
have their shares not freely transferable.
(viii) Private companies are not required to organize statutory meetings but public companies
must organize a statutory meeting and deliver the report of such meetings to the shareholders and
file the same with Registrar.
(ix) In public companies, 2/3rd of the total number of directors must retire by rotation. However,
the directors of a private companies are not required to retire by rotation, they can be permanent.
(x) Private companies can start their business immediately after receiving the certificate of
incorporation, whereas a public company need a certificate of commencement of business after it
has received a certificate of incorporation, to commence business.
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Course Code: FIN 2325 Title: Company Law.

Course Lecturer: Okwiri Minado Saad-PhD

Lecture 2: Incorporation of a Company, Merits and Consequences

56
(a) Incorporation of a Company.
The Promoters must prepare and register certain documents.
(i) Memorandum of Association-in which they express inter alia their desire and intention to
be formed in a company with a specific name and objects.
(ii) Articles of Association- in which they set out rules for the internal management of the
company.
These documents are signed by at least seven or two persons where it is a public or a private
company as the case may be. The signatures must be attested by a witness. The person so signing
the MA is referred to as a subscriber. If the company has a share capital each subscriber must
sign opposite his name the number of shares he takes and must not take less than one share.
(iii) Statement of Nominal Capital- this is required only in the case of a company with shared
capital. It is used for the purposes of computing the stamp duty payable.
(iv) Declaration of compliance- is a statutory declaration made either by the advocate engaged
in the formation of the company or by a person named in the Articles as Director or Secretary to
the effect that all the Requirements of the Companies Act have been complied with.
For Public Companies, a list of persons who have agreed to become Directors and their written
consent to act as such is a requirement.
Additional Documents:
(i) Notice of the situation of the registered office of the company.
(ii) The Particulars of the Directors and the Secretary.
These documents are lodged with the Registrar of Companies who scrutinizes them and on
finding them in order he or she registers them and issues a Certificate of Incorporation and the
company is thereby formed.
Note: From the date of incorporation mentioned in the certificate the subscribers to the
memorandum together with such other persons as may from time to time become members of the
company shall be a body corporate by the name contained in the memorandum capable of
exercising all the functions of an incorporated company with power to own land and having
perpetual succession and a common seal.
(iii) Certificate of Incorporation given by the Registrar shall be conclusive evidence that all the
requirements of this act in respect of the registration and of matters have been complied with and
that the association is a company authorized to be registered and duly registered under the Act.
Note: Since a Company is an Artificial Person, it cannot act on its own, it is the Directors who
are given the Powers of Control and Management of the Company. In theory and according
to law, the ultimate control of the affairs of the company lies with the shareholders.

57
(b) Merits and Consequences of Incorporation.

(i) Legal Personality-A Company is regarded in law as having its own Legal Personality distinct
and separate from its members. It is a legal entity in its own right. It is therefore capable of
enjoying rights and being subject to duties. The assets of the company belong to it and not to the
members. Shareholders do not have an insurable interest in assets nor do creditors unless they
have a security.

(ii) Limited Liability-Since a company is a corporation it has a separate legal personality and
the members are not liable for the company's debts. In the case of a company limited by shares a
member will be liable only for the amount payable on his shares if the company is limited by
guarantee, then the liability is limited to the amount guaranteed to be paid.

(iii) Holding Property-Corporation personality enables the company to hold property in its own
name distinct from that of its members.

(iv) Sue and be sued-The Company being a separate legal personality may sue to enforce its
rights and it may also be sued for breaching its own legal duties. Unincorporated associations can
sue under a representative capacity, where one party represents the rest in a representative
capacity.

(v) Perpetual Succession-Since a company is a corporation and an artificial person it has no

body, mind or soul but it rests only on the intendment and consideration of the law. It cannot die
like a human person since it is born by a process of law it can only be destroyed by the same
process. Unless and until that process is brought into play, it cannot be ended. Hence a company
has perpetual succession and lives indefinitely.

(vi) Transfer of Shares-Subject to section 30 of the Companies Act, shares in a company are
freely transferable and the transferee steps into the shoes of the transferor as a member.

Note:
Section 30 of the Companies Act provides that, Private Companies should restrict the right to the
transfer of shares. Hence, the Articles of Association of Private Companies guides the process. In
a partnership one partner cannot assign his interest except with the consent of all the other
parties. Even then, the outgoing partner continues to be liable for all the debts and obligations of
the firm incurred while he was a partner. The only way he can escape liability for such debts is
by entering a tripartite agreement between himself, the remaining partners and the creditors
whereby he will be released from liability for the debts of the firm.

(vii) Borrowing Facilities-A company can borrow money much more easily than sole traders
and partnerships. This is facilitated by the device of a floating charge.

Concept of Floating Charge.

58
This is a charge which floats like a cloud over all the assets of the company from time to time
falling within a generic description but without preventing company from disposing of those
assets in the ordinary course of business until something causes it to crystallise and fasten on the
assets. It is an equitable security. It does not attach on any property at all as opposed to the legal
charge which is attached to a particular property of the company.
The company is not limited from disposing such a charge. Sole traders and partnerships are not
allowed to do so.

(c) Demerits of Incorporation.

(i) Formality-In order to form a company, the promoters must prepare and register certain
documents. Even in liquidation, a company must follow a particular procedure this is a legal
formality under the Act

(ii) Expense-Throughout its life a company is required to file certain documents like annual
returns balance sheets and profit and loss Accounts. These are Public Documents and may be
examined by any member of the public on paying of an examination fee. Their preparation
requires the payment of money.

(iii) Publicity-The company's affairs are publicised and there is no privacy, as there is a lot of
interference in the company's affairs.

Concept of Lifting the Veil - Ignoring the Corporate Entity.

A company is a separate and distinct legal person, there are situations in which this fundamental
principle of corporate personality is ignored. In such situations, the law ignores the corporate
entity of the company and instead pays attention to the surrounding economic realities.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Course Code: FIN 2325 Title: Company Law.

Course Lecturer: Okwiri Minado Saad-PhD

Lecture 3: Articles of Association (AA), & Memorandum of Association (MA). Promotion

& Pre-Incorporation Activities

Introduction
59
A Company is incorporated when Promoters come together with a view to exploit some Business
Opportunity. The 1st step that must be taken by Promoters who are desirous of forming a
company is the preparation of the Memorandum of Association (MA) to which at least seven of
them will subscribe their names in case of a Public Company and two in case of Private
Company, as prescribed by Section 4 of the Act. Thereafter, to deliver the MA to the Registrar of
Companies together with the following documents:

(a) Articles of Association- AA.

The Articles of Association is an important document relating to the Company’s Constitution.
 The document specifies the regulations for a company’s operations and defines the
company’s purpose.
 It lays out how tasks are to be accomplished within the organization including the process
of appointing Directors and the handling of financial records.
 In other words, the Articles of Association regulate how the internal affairs shall be
managed this is to say, it lays down all rules , provisions , regulations, powers, duties,
rights, and responsibilities related with the overall governance and management of the
company.

The Document contains the Regulations for Management of a Company.

(i). Consent to Act as a Director-A Person appointed Director of the Company by the AA, the
AA must be delivered for registration after being duly completed and signed by him or by his
agent authorized to do so. The signed form is the statutory signification of the person’s consent
to act as a director.
(ii) List of Persons who have consented to be Directors.
(iii) Statement of the Nominal Share Capital- This statement is delivered for taxation purposes
pursuant to Section 39 of the Stamp Duty Act.
(iv). Declaration of Compliance- constitutes the statutory declaration by an advocate engaged
in the formation of the company that all the requirements of the Companies Act in respect of
matters precedent to the registration of the company and incidental thereto have been complied
with.
If the aforesaid documents are correctly prepared in accordance with the provisions of the
Companies Act, the Registrar Grants a Certificate of Incorporation and the Company is formed
from the Date of Incorporation written in the certificate.
Significance of Registration- Registration is the condition precedent to the formation of a
registered company and failure to register a proposed company will mean that it does not legally
exist.
Effect of Registration.

60
(a) The date mentioned in the certificate of incorporation is the date from which the company’s
legal existence commences. Consequently, if an incorrect date is written in the certificate, that
date would be regarded as the actual date on which the company was registered.
(b) The company’s registration constitutes it “a body corporate”. It becomes a legal person or
“corpora corporata” whose name is that appearing in the memorandum of association. The
certificate of incorporation is regarded as the company’s birth certificate and the date written on
it is the company’s birthday.
(c) Once the company is registered it must be treated like any other independent person with
rights and liabilities appropriate to itself.

Articles of Association covers:

 Liability of Members. Directors Powers and Responsibilities.
 Directors’ meetings, Voting, Delegation to others and Conflict of Interest
 Retaining records of Directors’ decisions. Appointment and removal of Directors
 Issue of shares. Alteration of share capital. Transfer of shares. General meetings.
 Payment of dividends. Accounts. Winding up and other miscellaneous matters.

The Articles of Association also provide the dividing line between the powers of shareholders
and those of directors.

The Juridical Effects of the Articles.

 Under section 22 of the Companies Act, subject to the provisions of the Act when the
Memorandum and Articles are registered they bind the company and the members as if
they had been signed and sealed by each member and contain covenants on the part of
each member to observe all the provisions.
 This section has been interpreted to mean that once the Articles have been registered
they constitute a contract between the company and each individual member.

Alteration of the Articles of Association.

 Section 13 of the Companies Act, empowers a company by special resolution to alter or
add to its articles. Any such alteration or addition is as valid as if it was originally
contained in the Articles.
 Special resolution is defined in section 141 as a resolution supported by ¾ of the
members voting, either in person or by proxy, at a general meeting of which twenty one
days’ notice of the intention to propose the resolution as a special resolution has been
given.
 The power to alter the Articles of Association is a statutory power and the company
cannot deprive itself of the right to exercise that power.

Although Companies have power to alter their Articles, there are limitations to this power.
A resolution to alter the Articles of a company must not:
 Be inconsistent with any statute.
 Exceed conditions contained in the memorandum.

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  Increase liability of a member or require him to take more shares, unless he agrees to do
so in writing.
 Remove the restrictions contained in section 30, if the company is to remain a private
company.
 The variation of the Articles must not conflict with section 74 of the companies Act, as to
the rights of shareholders affected by a variation of class rights to apply to the court for
cancellation of the variation.
 The resolution must not be with an order of the court made under section 211 dealing
with cases of oppression by the majority of the minority in a company. Anybody
claiming that there is oppression can petition the court to bring to an end. Once the court
makes such an order, the company cannot alter its articles to contravene that order.
 The alteration of the Articles of Association must be in good faith and for the benefit of
the company as a whole.

Memorandum of Association – MA- (The Company’s Constitution).

It is a document which sets out the constitution of the company and is really the foundation on
which the structure of the company is based. It contains the fundamental conditions upon which
the company is allowed to be incorporated.

A company pursues only such objects and exercises only such powers as are conferred expressly
in the MA. A company cannot depart from the provisions contained in its MA, however great
the necessity may be. If it does, it would be ultra vires to the company and therefore wholly
void.
The Purpose of the MA is to enable the shareholders, creditors and those who deal with the
company to know what the permitted range of the enterprise is. It defines as well as
confines the powers of the company.

Main Clauses of the Memorandum of Association.

(i) The Name Clause.
The promoters of a proposed company have freedom to choose its name, but the freedom is
limited by section 19(2) of the Act which provides that “no name shall be reserved and no
company shall be registered by a name which consists of abbreviations, initials or which, in the
opinion of the registrar is “undesirable” e.g. Malaya.
 No company shall be registered by a name which is identical or which resembles the
name of an existing company. Where a company is registered by a name so similar to
that of another company that the public are likely to be deceived, the court will grant an
injunction restraining it from using that name.
 Every public company must write the word ‘limited’ after its name and every private
limited must write the word ‘private limited’ after its name.

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  Companies whose liabilities are not limited are prohibited from using the word
‘limited’.

(ii) The Registered office clause.

Section 5(1) (b) provides that the memorandum of association shall state that, “The registered
office for the company is to be situated in Kenya” The registered office clause is important for
two reasons:
 It ascertains the domicile and nationality of a company.
 It is the place where various registers relating to the company must be kept and to which
all communications and notices must be sent. A company need not carry on its business
at its registered office.
Note: The primary function of the registered office is to act as the company’s official address. It
provides a convenient place where legal documents, notices, and other communications can be
signed.

Registers and Documents Kept at the Company’s Registered Office.

(i)The Register of Members. (ii) The Register of Directors and Secretaries.
(iii)The company’s Register of Charges. (iv). The Register of Debenture Holders.
(v).The Register of Directors Interests in Shares. (vi). The Minute Books of General Meeting.
The Registers and Documents (Above) are Subject to Inspection by the following:
 The Company’s Members can access and inspect them free of charge during business
hours for at least two hours each day.
 Debenture Holders of the company can inspect free of charge during business hours.
 Any Member of the Public can inspect on payment of prescribed fee not exceeding
Kshs. 2/- for each inspection.

(iii) The Object Clause:

Section 5(1) (c) requires the MA to state the Objects of the Company.

The Object Clause defines the Sphere of the Company’s Activities, the Aims that it’s
Formation Seeks to Achieve and the Kind of Activities.

If anything is undertaken outside the objects stated in the MA then such shall be considered
ultra vires and hence not binding the company. This is to say, a Company is not allowed to do
any activity beyond its objects or else any such activity will be deemed to be null and void.
In this Context, the Doctrine of Ultra Vires is two told:

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  It is intended to protect the investors by ensuring that they know the objects to which
their money is to be applied.
 It is for the protection of creditors by ensuring that the company’s assets to which they
look for the repayment of their debts are not wasted in unpaying ventures.

Purposes of the Objects Clause:

 To Protect Subscribers who learn from it the purpose to which their money can be
applied.
 To Protect Persons who deal with the company and who can infer from it the extent of
the company’s powers.

Guidelines for Choosing the Company’s Objects.

 The Objects should not be Illegal or Against the General Law of the Country, e.g.,
gambling is prohibited and therefore the objects should exclude such.
 The object should not include anything in Contravention of the Act.
 They should not include anything against Public Policy e.g. trading with alien enemies.
Highlights on the Concept of Ultra Vires.
 The statement that, a contract beyond the objects of the company in the MA, is beyond
the powers of the company give the impression that a company has no legal power to do
anything which is not written in the MA. That would be a starting proposition.

 In practice, companies have to do so many things in the course of their business that if all
those things were to be written down in the MA, then the MA would be such a gigantic
document that nobody would read it.

 The Judges will not regard a transaction undertaken by a company as ‘ultra vires’ merely
because it is not written in the company’s MA as one of the company’s objects.

Judges would in fact regard the transaction as ultra vires by implication if:
 It was reasonably incidental to any of the objects which have been written in the
company’s MA.
 It was undertaken for the sole purpose of effectuating, or achieving the written objects.

Doctrine of Constructive Notice / Rule.

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This rule regards that a person transacting business with a company is taken to be aware of the
contents of the company’s public documents such as memorandum, articles, annual return and
special resolutions.
 Because the company’s registry is a “public office” the documents kept therein are
generally referred to as ‘Public Documents’ since members of the public are free to
inspect them on payment of a prescribed fee.
 A person transacting business with a company will be taken to have read the objects
clause in the company’s MA.
 Consequently, if he concludes a contract with the company and it turns out that the
contract was for a purpose which is neither expressly nor impliedly within the company’s
objects and hence ultra vires, he is regarded as having entered into an ultra vires contract
knowingly even though he was not actually aware of its being ultra vires. He cannot
successfully sue the company for breach of the contract.

Justification.
 The Legal Justification for this rule is that, since the company’s public documents in
its file at the company’s Registry are available there for inspection by any interested
member of the public he should have gone to the registry asked for the company’s file,
inspected the contents and having found the MA read the objects clause in order to
ascertain whether the proposed contract is consistent with the company’s objects. If
he fails to do so, he will be regarded as having been aware that the contract was ultra
vires. He cannot therefore be allowed to enforce it.

Criticism against the Constructive Notice / Rule.

 The criticism that could be made against the Constructive Rule is its assumption that a
potential contracting party who read a company’s objects will be able to make the correct
legal conclusion regarding the vires of the proposed transaction.
 The fact that a perusal of the company’s object clause does not guarantee its correct
interpretation is amply demonstrated when senior judges differ over the vires of a
particular transaction.
 Why should an ordinary businessman be expected to decide the matter
correctly? Reading the objects does not guarantee correct interpretation.

Remedies of the Ultra Vires Lender.

No action or suit lies at law to recover money lent to a company which was borrowed for an ultra
vires purpose. This means that, the ultra vires lender cannot sue, as lender, to recover the money
he lent to the company. However, he might avail himself of one or any of the following
remedies:

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  If the result of the transaction is that the indebtedness of the company is not increased
because the new loan was applied in discharging an old debt, the invalid lender can be
treated as standing in place of those whose debts have been paid off. This is to say, the
Ultra Vires Lender would be entitled to rank as creditor only to the extent to which his
money was applied in discharging the intra vires debt.

 If the Lender can identify his money or the investment of his money in the hands of the
borrowing company, he can call for its return.

 If the Lender cannot bring himself within any of the above prepositions he would have no
remedy except to participate in the division of the company’s surplus assets if any which
would be divisible among ultra vires creditors during company’s liquidation after all
members have received back their capital in full.

(iv)The Liability Clause

This clause states that the Liability of the Members of the Company is Limited.
Section 5(2) provides that MA of a Company Limited by Shares or Guarantee shall state that the
Liability of Members is limited.
Companies may be: Limited by Shares, Limited by Guarantee and Unlimited.
 Companies Limited by Shares-Section 4 (2) (a) defines such a company as a company
having the liability of its members limited by MA to the amount, if any, unpaid on the
shares held by them.
 Companies limited by Guarantee-Section 4 (2) (b) defines such a company as a
company having the liability of its members limited by the MA to such an amount as the
members may undertake to contribute to the assets of the company in the event of its
being wound up. Members can only be called upon to pay the amount guaranteed if the
company is in liquidation.
 Unlimited Companies Section 4 (2) (c) defines it as a company not having any limit on
the liability of its members. Although the company is a separate legal entity, the
members’ liability resembles that of partners.
(v) The Capital Clause-Section 5 (4) (a) provides that a company having a share capital, the
memorandum shall state “the amount of share capital with which the company proposes to be
registered and the division thereof into shares of a fixed amount”.

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(vii)The Association Clause-This clause provides that those who have agreed to subscribe to the
memorandum must signify their willingness to associate and form a company. Seven persons are
required to sign the memorandum in case of public company whereas two for private companies.

Alteration of the Memorandum.

The MA of a company being its charter, the right of the company to alter its contents is rigidly
limited by the provisions of the Act. Section 7 of the Act provides that a company shall not alter
the conditions contained in its MA except in cases, in the mode and to the extent for which
express provisions is made in this Act.

(a) Change of Name-A Company’s Name may be changed voluntarily or compulsorily.

(i) Voluntary Change of Name.
A Company’s Name may be changed voluntarily if:
 A Special resolution is passed by the company for that purpose after obtaining a Written
Approval of the Registrar (Section 20(1).
 The Company was inadvertently registered by a name which, in the opinion of the
Registrar, is too like the name by which a company in existence is previously registered.
Note: Although the section does not make it mandatory for the company to change its name it is
advisable for the company to take immediate steps to effect the change as soon as it becomes
aware of the situation. Any delay entails the risk of passing-off action being instituted against it.

 The minister, by license, authorizes a company to make a change in its name.

(ii) Compulsory change.

Section 20 (2) of the Act provides that within 6 months of registration with a particular name, the
registrar may direct a change in name if in his opinion the name is ‘too like’ that of pre-existing
company. A change of name under this section may be made by ordinary resolution.

Failure to comply with the registrar’s directive is an offence punishable by a fine not
exceeding Kshs. 100/- for every day during which the default continues.

After a company changes its name, it shall give to the Registrar Notice thereof within fourteen
days. Upon receipt of the notice, the registrar shall:
 Enter the name on the register in place of the former.

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  Issue to the company a certificate of change of name.
 Publish the change of name in the Kenya Gazette

(b) Change of Registered Office.

 A company may change the address of its registered office on giving proper notice to the
registrar. The new address takes effect on the entry of the address on the register but the
company has 14 days after giving due notice in which to use the new address and to
transfer the registers etc., required to be kept there before it commits any offences for
using the wrong address. The registrar must publish in the Gazette notice of the receipt by
him of notice of change in the company’s registered office.
(c) Change of the Object Clause.
Section 8 of the Act provides that a company may, by special resolution, alter the provisions of
its MA with respect to its objects if the alteration would enable the company:
 To carry on its business more economically or more effectively.
 To attain its main purpose by new or improved means.
 To enlarge or change the local area of its operations.
 To carry on some business which under existing circumstances may conveniently or
advantageously be combined with the business of the company.
 To restrict or abandon any of the objects specified in the memorandum.
 To sell or dispose of the undertaking of the company.
 To amalgamate with any other company or body of persons.
In order to effect the proposed alterations, the company’s directors would have to convene an
extraordinary general meeting of the company in order to consider and if approved, pass a
resolution that the company’s objects be altered as proposed.
The resolution would be effective immediately it is passed if it was voted for by the holders of at
least 86% in nominal value of the company’s issued share capital or any class thereof.
When the objects are altered, a printed copy of the Special Resolution must be delivered to the
Registrar within 14 days.
(d) Change of Capital Clause.
Section 63 (1) provides that a company limited by shares or a company limited by guarantee and
having a share capital, if so authorized by its AA, may alter the conditions of its MA as follows:
 It may increase its share capital by new shares of such amount as it thinks expedient.
 It may consolidate and divide its capital into shares of larger amount than the existing
shares.
 It may convert all or any of its paid up shares into stock and reconvert stock into paid up
shares.
 It may subdivide its shares into shares of smaller amount.
 It may cancel shares, which at the date of passing of the resolution have not been taken or
agreed to be taken by any person and diminish the amount of its share capital by the

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 amount of shares so cancelled. Section 63 (2) provides that this shall be exercised by the
company in a General Meeting.
Promotion and Pre-Incorporation Activities.
(a) Promotion.
Promoters are persons who have an intention to form a company and take the necessary steps to
carry that intention into operation. This is to say, a Promoter is one who undertakes to form a
company with reference to a given project and to set it going, and who takes the necessary steps
to accomplish that purpose. Simply put, is one who generally brings a company into existence.
(i) Promotional Acts.
 Preparation of the MA of the proposed company.
 The appointments of First Directors.
 Preparation of the Prospectus.
 Negotiating Preliminary Contracts.
 Paying the Preliminary Expenses.

(i) Duties of a Promoter.

A Promoter is in a Judiciary Relationship with the company. Hence, he has the legal duty to
disclose to the company any profits which he makes from the promotion. He can make a profit
but the profit must not be a secret profit.

If he makes a profit but does not disclose it, he must account to the company for it as
follows:

(a) Where the Promoter purchased the property before he began to act as Promoter, his
non-disclosure of the fact that the property was his own would entitle the company to repudiate
the contract of sale and restore the original position, that is, return the property to the promoter
and recover the purchase price.

Illustration.
If Annasy acquired some piece of land in the year 2015 for Kshs. 200,000/- with the intention of
using it for farming but changed his mind in the year 2016 and promoted a company to which he
sold the land for Kshs. 220,000/- without disclosing his interest, the company may:
 Rescind the Contract.
 Keep the land. It cannot recover Kshs. 20,000/- profit which Annasy made.

(b)Where he purchased the property after he began to act as a promoter the company may:
 Rescind the Contract.
 Keep the property and recover the secret profit made by the promoter.

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In the above case, it is deemed that the promoter had an intention of reselling it to the company
and Annasy’s position would be regarded as ‘an agent’ and the company’s rights at common
law would be the same as those of the principal.

The Remedy of Rescission is subject to the general restrictions on its availability. If the
company has resold the property to a third party the remedy would not be available against the
Promoter since restitution integrum is not possible and the only remedy would be limited to
recovery of the profit made, or damages at common law if it can be proved that the promoters’
conduct had been fraudulent.

The Concept of Restitutio Integrum.

Restitutio in integrum simply means, returning everything to the state as it was before. This
principle is commonly followed by courts while awarding damages in common law negligence
cases. The amount of damages awarded should be sufficient bring the plaintiff back to the
position as if no tort has been committed.
Common Law Negligence Claims.
Restitutio Integrum is one of the primary guiding principles behind the awarding
of damages in common law negligence claims.
 The amount of compensation awarded should put the successful plaintiff in the position
he or she would have been had the tortious action not been committed.
 The plaintiff should clearly be awarded damages for direct expenses such as medical
bills and property repairs and the loss of future earnings attributable to the injury (which
often involves difficult speculation about the future career and promotion prospects).
 Although Monetary Compensation cannot be directly equated with physical deprivation it
is generally accepted that, compensation should also be awarded for loss of amenities,
reflecting the decrease in expected standard of living due to any injury suffered and pain
and suffering.
 Damages awards in these categories are justified by the Restitutio Principle as
monetary compensation provides the most practicable way of redressing the deprivation
caused by physical injury.
(iii) Payment for Promotion.
A Promoter has No Legal Rights against the company he promotes.
Reasons:

(a) The Company did not ask him to promote.

There is no contract between him and the company which would entitle him to sue for his
expenses or professional fees.

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(b) The Company could not after its incorporation enter into a contract to pay him for his
services because no consideration to support such a contract would be furnished by
him. This would be ‘Past Consideration’.
Note: Nonetheless, Directors are legally empowered to pay Promoters their promotion
expenses. This power given to Directors, confers no Legal Rights on the Promoter. This
situation makes a Promoter the ‘illegitimate child of the law, actively known, and formally
ignored’.
A Promoter who wishes to sell his / her Own Property to the Company must make a Full
Disclosure of his/ her Interest in the Transaction.
The disclosure may be made:
 To an Independent Board of Directors.
 In the Articles of Association.
 In the Prospectus.
 To the Shareholders.
The wisdom is guided by the following statement- an owner of property may not promote and
form a joint stock company and then sell his property to it but if he does, he is bond to take care
that he sells it to the company through the Medium of Board of Directors who can exercise an
Independent and Intelligent Judgment on the Transaction.
(b) Pre-Incorporation Contracts.
Pre-incorporation contract is an agreement which is entered into, usually by a promoter on behalf
of a company at a time when the company’s formation has not been completed by its
registration. Such contracts may relate to property which the promoters wish to purchase for the
company or they may be made with persons whose know-how is vital to the success of the
company. The promoters may perhaps have arranged for the company to take over an existing
business, and therefore need to make a contract with the vendor for its sale or purchase.
Before its incorporation, a company has no capacity to contract. A contract entered into by
promoters on behalf of a proposed company is void in so far as the company is concerned. The
promoters cannot be agents for a principal which has not yet come into existence. In such cases
the company cannot sue or be sued on it. The company has no legal existence until it is
incorporated.
It therefore follows:
(i) That when the company is registered, it is not bound by pre-incorporation contracts.
 In a Case Law, it was stated that a solicitor prepared the memorandum and articles of
association and paid all the necessary registration fees on the instructions of persons who
later became directors. He claimed his fees and expenses on the liquidation of the
company. The court of appeal held that the company was not liable to pay the solicitor
cost, though it had taken the benefit of its work.
(ii) That the company when registered cannot ratify the agreement.
 The company was not a principal with contractual capacity at the time when the contract
was made.

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  A contract can be ratified only when it is made by an agent for a principal who is in
existence and who is competent to contract at the time when the contract is made.
Note: If the company were allowed to ratify the contract it would mean that it contracted on the
date the contract was formed. This in effect would mean that the company contracted before it
was formed. If the company wishes to revive the abortive contract it must make a fresh offer and
if the offer is accepted by the other party, a contract will come into existence from the moment of
acceptance.
(iii) That if the agent undertook any liability under the agreement he would be personally liable
notwithstanding that he is described in the agreement as an agent and that the company may have
attempted to ratify the agreement.
The Concept of Corporate Veil
This a legal concept that separates the personality of a corporation from the personalities of its
shareholders, and protects them from being personally liable for the company’s debts and other
obligations. This protection is not ironclad or impenetrable. i.e. where a court determines that a
company’s business was not conducted in accordance with the provisions of corporate legislation
(or that it was just a facade for illegal activities), it may hold the shareholders personally liable
for the company’s obligations under the legal concept of lifting the corporate veil. So essentially,
the corporate veil is the liability protection that owners, corporate officers, and corporate
shareholders receive when they form a limited liability company or corporation.
"Piercing the corporate veil" is a situation in which courts put aside limited liability and hold
a corporation’s shareholders or directors personally liable for the corporation’s actions
or debts. Veil piercing is most common in close corporations.
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