CERTIFIED SECRETARIES (CS)

PART II
SECTION 4

CORPORATE SECRETARIAL PRACTICE

STUDY NOTES

1
 Business names and Company names
The promoters of a proposed company have freedom to choose a name by which the
company is to be called. The registrar of companies may on written application reserve the
name pending registration of the company.
According to the Companies Act, no name shall be reserved if it consists of abbreviations or
initials which in the registrar‟s opinion is undesirable.
The registrar has not specified the criteria he uses when deciding whether a proposed name is
undesirable. The registrar of companies will deem a name undesirable if:

i) It is too much like the name of an existing company

ii) It suggests criminal or immoral intent or purpose
iii) It is misleading e.g. if the name of a company likely to have small resources suggests that it is
going to trade on a greater scale over a wide area.
iv) It suggests some connection with the crown or members of the royal family including certain
words such as President, King, Queen Prince, crown
v) It suggests connection with a government department or any municipality or other local
authority or any body incorporated by a Royal charter or by the statute or by the government.
vi) Contains a person‟s trademark without his consent.
vii) Does not have the word limited as the last word.
viii) If it consists of the proper name of a person who is not a director.
Reservation of a name
To avoid the risk of choosing a name that ultimately turns out to be undesirable, promoters
should enquire from the registrar whether the name the promoters intent to give a company is
too much like the name of a company already in the register.
After obtaining confirmation that the name is not a registered one, they should lodge an
application for its reservation. Any such reservation remains in force for within 30 days or
such longer period not exceeding 60 days or as the registrar may allow. No other company
will be entitled to register with the reservation name. Reservation is done by a paying
reservation fee of 100 shillings. The reservation exist pending incorporation of the company.

Name to end with the word “limited”

The Act, provides that the word “limited” must be last word of the name of the company
which is to be limited by shares or guarantee.
Generally, it is included in company name by way of description and not identification.

Power to dispense with the word “limited”

Although the Act provides that the last word of the name of a limited company must be
“limited”, the Attorney General has power to allow a company to dispense with it by licence
if he is satisfied that an association about to be formed as a limited company was to be
formed for promoting comment, art science, religion, charity or any other useful object and it
intends to apply profits if any or other income promoting its object and prohibits the payment
of any dividend to the company members was prohibited.
An existing registered company may obtain a licence to make by special resolution a change
in its name so as to omit the word “limited” as its last word.

2
 Change of name
The company name may be changed voluntarily or compulsory

(a) Voluntarily
(i) The company can by special resolution change its name with the sanction of the
registrar
(ii) If a company was mistakenly registered by a name which in opinion of the Registrar
is too much like the name of a company already in existence.
(b) Compulsorily
The Act provides that within 6 months of registration with a particular name. Registrar may
direct a change of name if in his opinion the name is too much like that of an existing
company. The change shall be made within a period of 6 weeks from the date of direction or
such longer period as he may allow.

Publication of name
The Act requires every company:
(i) To paint or affix its name in a conspicuous position on the outside of every office or place in
which its business is carried.
(ii) To mention its name on all letters, notices, bills of exchange ordinary cheques, invoices,
receipts and letters of the company.
(iii) To engrave its name on its seal which shall be in the form of a embossed metal dye.
If a company does not paint or affix its name as prescribed, the company and every officer in
default are liable to a fine not exceeding ksh.100 and the officer may be made personally
liable to any creditor who has relied on the document if the company failed to pay.

BUSINESS NAMES
If a company has a place of business in Kenya and carries on business, under a business name
which does not consist of its corporate name without any addition, the company must within
28 days after commencing business under the business name submit to the registrar of
business names submit a statement of particulars which contains:
(a) The business name
(b) The full address of the principal place of business and postal address of the company
(c) The general nature of the business
(d) Full address of every other place of business
However, the Registration of Business Names Act provides that a company using a business
name distinct from its corporate name must disclose its corporate name in all trade circulars
and business letters or other publications issued by the company.
MEMORANDUM OF ASSOCIATION (MOA)
Section 2 of the Act defines the MOA “Memorandum of Association of the Company as originally
registered or altered from time to time”. The Memorandum of Association is a fundamental document

3
of the Company because it contains basic condition upon which the Company is authorized to be
formed. It is the charter / constitution of Company and defines the scope of business of the Company.

Form of Memorandum of Association

Section 14 provides the form in which the Memorandum of Association of a Company should be
framed. It is usually in the forms set out in Tables B, C, D& E of the 1 st schedule to the Act.
Table B-gives a specimen Memorandum of Association of a Company limited by shares
Table C-gives specimen memorandum of Association of a Company limited by guarantee without a
share capital
Table D-gives a specimen Memorandum of Association of a Company limited guarantee and having
a share capital.
Table E-gives a specimen Memorandum of Association unlimited Companies having a share capital

CONTENTS OF MEMORANDUM OF ASSOCIATION

The Name Clause

 The clause states that name of the Company shall end with the word limited as the last word
of the name in case of a Company limited by shares or guarantee.
 The name of a Company symbolizes the identity of a Company and its existence.
 The name should be painted or affixed outside every office or place in which the business of
the Company is carried on in a conspicuous and easily legible roman character.
 Every Company shall also have its name engraved on its seal and shall have the name
mentioned in all business letters of the Company and official publications.
 Incase of default in affixing the name as aforesaid, the Company and every officer cognizant
of the fact shall be liable to a fine not exceeding sh100 every day during existence of the
default.

Dispensing With the Use of the Word Limited

Where it is proved by the Attorney General that an association to be formed has a limited Company is
to be formed for promoting commerce, art, science, religion or charity and it intends to apply its profit
if any to the promotion of the objects for which it was formed and prohibits payment of dividends, he
may allow it to dispense with use of the word “limited”.

Restriction on the Choice of Name

Although there is freedom of choice of name of the company, the registrar shall not register a
company by a name which in his opinion is deemed undesirable

The name shall be deemed undesirable in following circumstances

4
a) When name is too much the name of an existing Company. Every Company must have its
own name. This is meant to protect the Company from other people taking advantage of its
goodwill. It also protects the public from confusing the Company with another Company.
b) Misleading name-A Company will not be allowed to be registered with a name which in the
opinion of the registrar is misleading to the public e.g. a bakery operating under the name
“Wananchi Auto Spares”
c) A name cannot be ordinarily allowed if it suggests some connection with the government or
royal patronage e.g. including such names as queen president etc
d) No name will be registered if it suggests criminal tendencies or propensity towards immoral
activities e.g. Magaidi Limited or Malaya Limited
e) No name will be allowed if it includes the proper name of a person who is not a director of
Company unless for proper reasons
f) The name will not be registered if it includes such words as co-operative, building society etc
unless the circumstances justify
g) No name will ordinarily be allowed if it suggests some connection with National flag or
National names or names prohibited under the National flag and emblems Act.

Change of Name
A Company may change its name under the following circumstance
1) Voluntary- a Company may be special resolution voluntarily alter its name with sanction of
registrar.
2) If through in adverting (by mistakes)- the name of Company on its first registration is found
to be similar to name of another Company already in existence registrar may order the newly
registered Company to change its name within 6 months.
3) Through a passing off action:-passing off involves imitating the use of another Company‟s
name thereby confusing the public. Where another Company succeeds in bringing a passing
off action against a newly formed Company, the new Company brought may be compelled by
the court to change its name.
4) Under section 70 where the court permits a reduction of capital of Company it may direct
Company to add to its name as the last word the words “and reduced” for a specific period of
time to serve as a warning to creditors. (Any change in the Company name shall be notified to
the registrar within 14 days and the registrar shall enter the new name on the register in place
of the former name and shall issue the Company with a certificate of change of name and
shall notify the change in Kenya Gazette. Any change in Company name shall not have any
effect on right /obligations of Company or invalidate any legal proceedings by or against the
Company which may have commenced during use of the former name.

5
2. THE REGISTERED OFFICE CLAUSE

Section 5 of Act provides that every Company Memorandum of Association shall state that the
registered office is situated in Kenya. The office fixes the nationality of the Company and its physical
address. Under Section 107, a Company from day on which it commences business or the 14 th day
after the date of incorporation whichever is the earlier shall have a registered office and a postal
address to which all communication and notice to the company will be addressed.

Documents usually kept of registered office include:

 Register of members
 Register of debenture holders
 Register of directors and secretaries
 Register of directors interests in the shares and debentures of Company
 Register of charges and instruments creating them
 Minute books of annual general meetings and directors meetings
 Accounting records of the Company
 Copies of directors service contracts setting out the terms of their contracts
 Certificate of incorporation

Changes of Registered Office

Under Section 25, a Company may change its registered office within Kenya. Such change requires a
special resolution by the members in a general meeting. Notice of such change must be given to the
registrar within 14 days of the change.

3.THE OBJECTIVES CLAUSE

Section 5 of the Act provides that every Company shall state its objects. A Company is not legally
entitled to do any business which is outside the objects for which it was formed otherwise the
transaction shall be declared ultra vires and void.
Ultra vires is used to refer to the principle that a Company shall not enter into any transaction that
exceeds its powers.

Alteration of the Objects

A Company may by special resolution alter the provisions of its memorandum of association with
respect to its objects so far as it may be required to enable it:
 To obtain its main purpose by new and improved means
 To carry out its business more economically /more efficiently
 To enlarge / change its local area of operation
 To carry on some business which may be conveniently combined with the business of the
Company
 To restrict / abandon any of the objects specified in the Memorandum of Association
 To sell the whole / any part of the undertaking of the Company
 To amalgamate with any other Company

6
PROCEDURE FOR ALTERATION
If any of the above objects can be achieved only by alteration of Memorandum of Association the
Company must adopt the following procedure
i. Convening an extraordinary general meeting- if the change is urgent and cannot wait for the
next annual general meetings the Company must convene an EGM for the purpose of placing
the agenda before the meeting.
 This requires at least 21 days notice
ii. Special resolution –at the meeting the Company must pass a special resolution supported by
¾ of members entitled to attend and vote at the meeting
iii. Court sanction –a petition must be brought to the court for confirmation of alteration but
before confirmation the court must be satisfied that:
 Sufficient notice has been given to every debenture holder, creditor and any other person
whose interests would be affected by the alteration
 Every objecting creditor has been paid in full or his consent has been obtained
 That the alteration is fair and equitable considering the interests of members and creditors
iv. The Company shall then proceed to alter the objects as required
v. The Company must file copy of resolution and court order with the registrar within 14 days.

Objection to the Alteration of Objects

An application may be made by any member/ creditor of the Company for the order altering the
objects to be cancelled. If such application is made the order to alter shall not have effect unless
confirmed by the court. An application for cancellation of the order may be made by:
a) Holders of not less than 15% of the nominal value of the issued capital of the Company
b) If Company is not limited by shares then by not less than 15% of members of the Company.
c) Holders of not less than 15% of Company debentures entitling such holders to object

 Such an application shall not be made by any person who consented or voted in favour of
application.
 This is known as nominal/registered capital
 If the capital into different classes it must also state denomination into which the capital is
divided
 It must also state that members or subscribers shall not take less than one share.
 The application must be made within 30 days after date on which the resolution was passed

Failure of the Objects

The main and distinct purpose of the Company is called its substratum. Where the substratum
(objects) fails, the heart of the Company fails and the body cannot function without the heart.
Thus if the main object of Company fails, the Company may be wound up. However if the
Company can still carry on incidental objects then it would not be wound up

THE LIABILITY CLAUSE

 Section 5 of the Act provides that the Memorandum of Association of every Company limited
by shares or guarantee shall state that liability of its members is limited. The Memorandum of
Association of a Company limited by guarantee shall further state that each member
undertakes to contribute to the assets of Company, a certain amount during winding up while
he is a member or within one year after he ceases to be a member.

7
 The liability clause serves as a general notice to members of the public intending to deal with
the Company that liability of member is limited to such an extent as is stipulated in the
Memorandum of Association. Any provision in memorandum of association compelling a
member to take more liability than agreed by him is void

However, in the following exceptional case, a member may be liable in excess of his initial
liability:
a) If a member agrees in writing either before or after alteration is made in the memorandum of
association increasing his liability. In this case he is bound by alteration
b) If every member agrees in writing to conversion of a limited Company to an unlimited
Company pursuant to section 18 of the Act
c) If to the knowledge of members number of members has fallen below statutory minimum and
the Company has carried on business for more than 6 months when the number is so reduced.
In such case, the remaining members are liable to an unlimited extent for debt of the
Company contracted during that period.
d) If subscribers to the memorandum of association include a nominee who fails to pay up his
liability within 21days from being requested to do so, the other subscribers are liable to
contribute towards that liability.
e) Where the Company has made an unlawful distribution of profit (dividend) out of capital, any
member who at the time of distribution knew or had reasonable grounds of believing that
distribution was unlawful will be liable to pay back what he received.
f) If a member undertakes to subscribe or acquire more shares in the Company beyond his initial
liability he is bound to pay this liability in addition to the initial liability

Alteration of Liability Clause

Section 24 provides “notwithstanding any thing in the Memorandum of Association or Articles of

Association of the Company no member of the Company shall be bound by any alteration made to the
Memorandum of Association or Article of Association after the date on which he became a member,
so far as the alteration requires him to take or subscribe for more shares than the number held by him
at date on which the alteration was made.

Shareholders of an unlimited Company can make their liability limited by passing a special resolution
and obtaining the sanction of registrar

Similarly a limited Company can be converted into an unlimited but this requires the support of all
members of the Company

In spite of the conversion, the liability of the Company and the members in respect of any debt or
obligations incurred before the conversion remains unaffected.

CAPITAL CLAUSE
Incase of a Company limited by guarantee and having a share capital it must state the capital with
which the Company is proposed to be registered.
 This is known as nominal/registered capital
 If the capital into different classes it must also state denomination into which capital is
divided
 It must also state that members or subscribers shall not take less than 1 share

8
Alteration of Capital Clause

Under section 63, a Company may if authorized by its articles alter its share capital in the following
ways:

a) Increase share capital: under44 of Table A this may be done by an ordinary resolution in a
general meeting of the Company. Notice of the increase and a copy of the resolution must be
filed with the registrar. Where the articles do not give power to increase the capital, then a
special resolution must be passed to alter the articles in order to empower the Company to
increase its capital
b) Consolidations of shares: a Company may by ordinary resolution and if authorized by its
articles consolidate its Capital by amalgamating shares of small amounts to share of large
amounts e.g. a consolidation of 100 shares of shs 18 each to 50 shares of shs36 each.
c) Subdivision of shares: a Company may by ordinary resolution subdivide its shares into
shares of smaller amounts but the proportion of the amounts paid and unpaid must remain the
same.
d) Conversion of shares into stock:a Company may if authorized by its articles convert its
shares into or vice versa
e) Cancellation of unissued capital: a Company can reduce the amount of share capital
available for issue but this does not amount to a reduction of capital because shares have not
been issued.

Association Clause

Under this clause subscribers to memorandum of association agree to be associated and formed into a
Company and to take the shares placed opposite their names

ARTICLES OF ASSCIATION

„Articles „means articles of association of a Company as originally formed or as altered from time to
time pursuant to the provisions of the Act

They include regulations contained in Table A in the first schedule of the Act so far as they apply to
the Company. It contains regulations meant for the internal management of the Company affair.

They prescribe the rules and by-laws meant to govern the Company and for achieving the objectives
specified in the Memorandum of Association.

Under section 9, a Company limited by shares may register its Articles of Association while a
Company limited by guarantee or unlimited Companies shall register the Article of Association
together with the Memorandum of Association at the time of registration.

A Company limited by shares which does not register its own articles shall adopt Table A specimen
Articles as its Articles

Form of Articles

The Act provides that a Company shall provide its articles in any of forms laid down for different
types of Companies in the respective schedules.

9
Table A in the 1st schedule provides specimen form of Articles part I of which may be adopted in
whole or in part by a public limited and part II by a private limited company under section 12 if
special Article are registered they must be:
 Printed in English language
 Divided into paragraphs and numbered consecutively
 Dated
 Signed by each subscriber to the memorandum of association in the presence at least one
witness

CONTENTS OF THE ARTICLES

 It is common for the articles to contain the following regulations or provisions:
 Extent to which Table A of the first schedule is applicable
 Different classes of shares and rights attached to them
 Procedure of making calls and forfeiture of shares
 Transfer and transmission of shares
 Methods of issuing shares
 Conversion of shares into stock and vice versa
 calling and conduct of general meetings
 Voting rights of members
 Qualification and qualification shares of directors
 Appointment and removal of directors
 Appointment and removal of auditors
 Borrowing powers of the Company
 Declaration of dividends
 Capitalization of profits
 Winding up procedures

Alteration of Articles

 The articles of a Company may be altered freely by passing a special resolution.

 The power of the Company to alter its articles is provided under section 13 of the Act and this
right cannot be taken away from the Company
 Any alteration or addition so made shall subject to the provisions of the Act be as valid as if
originally contained there in.
 The altered articles must be filed with the registrar for registration within 30 days after
passing of the resolution to alter them.

Restrictions to Alteration of Articles

1. Alteration must not be inconsistent with the express provisions of the Act such as to:
 Restrict a member‟s right to petition for winding up
 Authorize a Company to purchase its own shares
 Authorize payment of dividends out of capital
2. The alteration must not produce conflict between articles and the memorandum and incase of
conflict the memorandum of association will prevail
3. The alteration must not sanction anything illegal
4. Alteration must not be inconsistent with the order of the court. Thus where court has made an
order to prevent oppression of minority, Company may not alter articles in a manner that will
be inconsistent with the court order

10
 5. Alteration must be made in good faith and in best interest of Company as a whole and if this
is the case it does not matter if it inflicts hardship on the minority.

6. An alteration to increase members‟ liability will only bind those who consent to it. Thus
under section 24, no member is bound by an alteration to alter the Memorandum of
Association or Article of Association, which requires him to increase his shareholding or
increase his liability to pay money to the Company unless:
 the alteration was made before he became a member
 he agrees in writing to be bound by such alteration

7. The alteration must not constitute fraud on the minority. The alteration to the articles would
be declared invalid if it amounts to fraud on minority of members.

8. Where the alteration effect class right of member. Then class venation procedure must be
followed in which 15% or more of the dissentients (opposes) must be given right to petition to
the court against the alteration
9. An alteration may not be made to have a retrospective (backdating effect) so as to take away
right of a member acquired when forming the contract
10. A private Company which intends to continue enjoying the privileges of a private Company
shall not alter the provisions of its articles to conflict with section 30 of the Act which defines
a private Company

Conversion or re-conversion (re-registration)

This is the process of converting a private company into a public company and vice versa.
The process of conversion of a company has to be done through the board of director‟s
solution and must be approved by the shareholders at a general meeting. For the company to
be converted either from private to public or vice versa consent of the registrar of company
must be obtained.

Procedure of conversion
- A director„s meeting has to be called by giving the necessary notice after which the directors
will recommend to convert the company either into private or public.
- For the name of the company to be converted the shareholders must at Annual General
Meeting approve or reject the conversion of the name as recommended by the directors.
- The Memorandum of Association & Articles of Association have to be amended to reflect the
position of the new company.
- Kenya Revenue Authority has to e informed of the changes affecting the company.

Types of Corporations
a) Chartered Companies
Are companies registered by a charter granted by the King or Queen in exercise of an ancient
prerogative or power vested on the crown? Most companies in the United Kingdom were
crowned using such powers and were granted charters for the purpose of operation. In Kenya
11
 formation of a company by charter is restricted to educational institutions of higher learning
e.g Universities.

b) Statutory Corporations
It is a corporation formed by a specific Act of parliament which carefully deprives its powers
from Parent Act. A statutory company has no shareholders and its initial capital is provided
by the Treasury, corporations such as AFC, Kenya Wheat Board Kenya Sugar Board are
company‟s statutory corporations.

c) Registered companies
These are formed under the companies Act Cap 486. These are registered by submitting
certain documents to the Registrar of companies such documents can be summarized as
MOA, & AOA, statement of nominal capital, forms 201, 203 and 208. Such companies name
come into existence once the Registrar issue a certificate of incorporation. A registered
company may either be a private or public company.

(i) Private company

Section 30 of the Companies Act Cap 486 defines a private company as one which by its
articles:

- Restricts the right to transfer its shares.

- Limits the number of members to 50 excluding present and past employees who acquired the
shares while working for the company and have since retained them.
- Prohibits any invitation to the public to subscribe its shares or debentures.

(a) Public company

It is one that is not private. The public company has a minimum membership of 7 members
and no maximum, there is no statutory restriction on members‟ right to transfer its shares and
it can invite the public to subscribe in its shares or debentures.
A public company listed at Nairobi Securities Exchange must prepare a prospectus which has
to be filed with the Registrar.
A public company not listed or quoted has to prepare a statement showing that all the
requirements of the Act have been compiled with. A public company must hold a statutory
meeting.

Advantages of a private company

(i) Only 2 signatories to the Memorandum of Association are sufficient to form a private
company and only 1 director is required – section 177 cap 486
(ii) Can commences business immediately after incorporation and allot shares as the provisions
relating to minimum subscription don‟t apply to it.
(iii) A private company need not hold a statutory meeting or send a statutory report to its
members.
(iv) Since it cannot issue a prospectus inviting the public to buy shares, it needs not to prepare a
prospectus.
(v) While the Articles of Association appoint directors, they do not have to file with the Registrar
a consent to act or an undertaking to take qualifications shares.

12
(vi) Directors can be appointed by a single resolution and they can obtain loans from the
company.

Partnerships
They are governed by the Partnership Act Cap 29. This Act defines a partnership as a
relationship which subsists between persons carrying on a business in common with a view of
profit. It may be formed orally or by written agreement. It is governed by the Partnership
deed which can be signed by all the partners.

Partnership deed
It is a document that details the terms and conditions under which the partnership is operated
The contents of the partnership deed include:
(i) Name of the firm and names of the partners and their addresses
(ii) Nature of the business and place the where business will be carried on
(iii) Date of commencement and duration of partnership
(iv) Amount of capital to be contributed by each partner
(v) The ratios of sharing profits and losses
(vi) Interest on capital, partners loan and interest on drawings
(vii) Salaries, commissions payable to each partner
(viii) Procedure to be followed in case of retirement, death and admission of new partners
(ix) Duties, powers and obligations of each partner
(x) Arbitration clause in case of disputes among the partners.

Characteristics of a Partnership
(i) It has no legal existence separate from its members
(ii) It cannot generally sue or be sued in its own name
(iii) It cannot consist of more than 20 persons unless authorized by written law
(iv) Easy to form by written agreement or orally
(v) May engage in a variety of businesses subject to the mutual consent of the partners
(vi) Easy to alter its capital
(vii) Every partner is an agent of the firm and of other partners
(viii) It is sometimes difficult to distinguish between a partner‟s property from that of the
partnership
(ix) Shares (capital) can only be transferred with the consent of other partner.

Limited Partnership
It is formed by limitation of the limited provisions of limited Partnerships Act Cap 30. They
are not common in Kenya. Cap 30 allows for the intent the liability of some partners to the
capital contributed by them whereas other partners are liable for all the debts of the
firm(General Partners).
A limited partner cannot take part in the management of the firm cannot bind the firm, is not
entitled to dissolve the partnership by notice and his death does not affect the continuity of
the partners unless specifically provided in the partnership agreement.
Sole proprietorship

13
 This is where a business is run by one person. The process of registering a sole proprietorship
is the same as that of a partnership.

Conversion of a partnership & sole proprietorship into Limited Liability Company

The process of converting a partnership into Limited Liability Company will follow the
following procedure:

- Written request to the registrar of the companies to reserve the name intended for registration
- Completion of Form BN4 and submission to the Registrar of company attach original
certificate of registration
- Once the firm has been approved, follow the same procedure as registration of a company.
Registration of foreign companies carrying on business in Kenya: section 366 (1) cap 486
allows foreign company outside Kenya to establish business within Kenya. On submission of
the necessary documentation, the registrar will issue certificates of compliance bearing the
company number starting with “F” e.g. f23/2000.
For foreign company to be registered in Kenya, the Registrar will require the following
documents:

(i) Certificate copy of incorporation issued by the country of origin.

(ii) Certified copy of Memorandum of Association & Articles of Association or a charter written
in English and duly translated if written in a different language.
(iii) A list of and the full names of directors and secretary of the parent company.
(iv) Full names and postal addresses of persons resident in Kenya authorized to accept on behalf
of the company service of process and any other notices required to be served on the
company.
(v) Details of outstanding charges registered by the company excluding charges solely on
property outside Kenya
(vi) Full addresses of the registered principal office of the company.
Returns of a foreign company to be submitted to the Registrar
(i) The annual financial statements of the parent company duly written in English
(ii) Returns on any alterations made on the following:
- The charter, statutes or Memorandum of Association or Articles of Association of the
company
- The directors or secretary of the foreign company or parent company
- Names and postal addresses of persons authorized to accept service on behalf of the company
- Addresses of the registered or principal office of the foreign company.
Procedure of striking off company from the Register of companies
If a company is not trading and has no assets or liabilities, the directors of such a dormant
company may request the Registrar to strike the company off the Register. Under section 339
(3) cap 486, a company may also be wound up by the receiver manager giving notification to
the Registrar of companies that the assets of the company have been realized, all creditors
paid and nothing remains to be done.

14
 1. The directors and shareholders have to make a declaration in accordance with the section 339
(3) that the company has no assets, is dormant, has no liabilities and it is desirable to strike
off the company.
2. The shareholders at an Annual General Meeting will pass a resolution, striking off the
company.
3. All outstanding annual returns for the year must be filed with the Registrar.
4. The Registrar will then publish in the Kenya Gazette the intention for dissolution giving 3
months within which any objection can be raised.
5. If no objection is raised within 3 months period given in the Gazette the final notice striking
off the company will be issued by the Registrar and the company shall stand dissolved.

Striking off a foreign company from the Registrar’s record

The procedure to be followed is:
1. Completion of Form 249 and submitting to the Registrar of companies for the company to be
struck off. Form 249 is called cessation form.
2. The Registrar will publish in the Gazette the dissolution of the company.
3. However, if the company has not filed financial statements of the parent company the
Registrar will insist on updating the records.

Listing of shares
Refers to the process whereby the company‟s shares are admitted on the list of stocks or
shares that are being traded on the securities exchange for the purposes of trading at the
securities exchange floor.
Normally, the issuing company is the one that applies for listing through Nairobi Securities
Exchange and CMA. CMA and NSE after verification of the documentation presented by the
issuing company may reject or approve the listing of shares of the issuing company.

There are 3 investment market segments at the Nairobi Securities Exchange namely:

 Main investment market segment (MIMS)

 Alternative investment market segment (AIMS)
 Fixed income securities market segment(FISMS)

To list securities on any of these market segments the following eligibility criteria must be
satisfied:
(i) Incorporation status – the issuer must be a public company limited by shares and registered
under cap 486.
(ii) Share capital – the minimum authorized, issued and fully paid up capital may be ksh.50
million i.e. MIMS, FISMS, and ksh.20 million for AIMS.
(iii) Net assets should not be less than ksh.100 million immediately before the public offer i.e for
MIMS, FISMS and ksh.20 million for AIMS.
(iv) Transferability of shares – shares to be listed must be freely transferable.
(v) Financial records – the audited financial statements of the issuer for 5 previous years must be
availed (MIMS), 3 years for AIMS and FIMS.
(vi) Directors and management – the directors and the senior management of the issuer must be
competent persons without any legal encumbrances.
(vii) Dividend policy – have a clear future dividend policy.
(viii) Solvency – issuer should be solvent and have adequate working capital.

15
(ix) If the issuer should be is licensed to operate as a bank or insurance company, the issuer must
obtain a certificate of no objection from the relevant regulator.

Procedure for admission to listing

An issuer shall submit an information memorandum or prospectus to the – CMA for
approval and a copy to the exchange for comments through the sponsoring broker.
An issuer shall submit its information memorandum approved by the authority to the
exchange.

The admission procedure

The issuer submits its application and prospectus for approval by the authority through the
sponsoring broker.
The exchange submits its comment if any to the authority working within 10 days of the
receipt of the copy of the information.

The authority shall consider as appropriate the comments of the exchange while granting
approval to listing.
On receipt of the letter of approval, for listing from the authority in compliance with the Act,
the exchange shall approve the listing without any other condition save for the attainment of
the prescribed minimum shareholders; following public offering or the attainment of
minimum subscription.
The sponsoring stock broker shall ensure the issuer complies with documentation required by
these rules.

In case of introductions and additional listings approved by the authority the exchange shall
admit securities for listing on payment of additional fees by the issuer without any further
condition.

De-listing of shares
This means removal of a security of a company from the list of the securities exchange.

Reasons for de-listing

 Voluntary suspension – the issuer requests in writing the authority to suspend the company in
the event of significant restructuring involving a list of securities from the trading floor.
 Failure to comply with NSE & CMA rules and regulations.
 When the number of shares held by local shareholders goes below 80%.
 The the issuer fails to honour its financial obligations to the stakeholders.
 The issuer engages in fraudulent activities i.e. money laundering or colluding authorities to
have the market price per share increased in the market.
 If a company converts into a private company.

CAPITAL MARKET AUTHORITY

16
 The Capital Market Authority (CMA) was established under the CMA Act Cap 485 A. It has
established to take up the role played by the stock exchange commission which then was
under the Ministry of Finance & Planning.
The Act came into force on 15th December 1989 through a legal notice by the Minister of
Finance.
The authority was established for the purpose of promoting and facilitating the development
of an orderly, fair and efficient market in Kenya.

Principal objectives of the authority

(a) The development of all aspects of the capital markets with particular function on removal of
impediments to and the provision of incentives for longer investment in productive
enterprises.
(b) To facilitate the existence of a nationwide securities exchange and broker services to enable
wider participation of the general public in the securities.
(c) Protection of investors.
(d) The operation of a compensation fund to protect investors from financial loss arising from the
failure of a licensed broker or dealer to his contractual obligations.
(e) The establishment maintenance and regulation of a market in which securities can be issued
or traded in an orderly, fair and efficient manner through the implementation of a market in
which the participants are self regulated.
(f) The development of a framework to facilitate the use of electronic commerce for the
development of capital markets in Kenya.

Shortfalls of Capital Market Authority

The Capital Market Authority and Nairobi Stock Exchange have made several efforts to have
many companies listed on the securities stock exchange. However, this has not been
successful. The authority suggests the following limitations:

 Ignorance among Kenyans about the securities available and necessary education may not
help as a number of Kenyans may not be conversant with the financial years.
 Most multinationals opting in Kenya are foreign owned and have being listed in their
countries.
 Majority of Kenyans are falling in the low income brackets and not therefore have sufficient
income which they can save or credit investments.
 Capital Market Authority has put in place stringent rules for companies seeking listing or
quotation therefore most of them shy away.
 The cost of having a company listed is time consuming and expensive in preparation of
prospectus, application forms, marketing of shares to be floating etc.
 Kenya has a limited market for goods and services therefore expansion of financing services
will call for expansion of consumer market which is not easy.
 A number of companies are family owned therefore they do not wish public to know more
about their secrets.

NAIROBI STOCK EXCHANGE

Stock exchange is where debentures, shares, stocks are sold.

17
 It can be defined as an organized market where securities such as share debentures and stock
are bought and sold through brokers who act as middlemen between the buyers and sellers. In
Kenya securities are translated through the Nairobi Stock Exchange based at Nation Centre
1st floor. Nairobi Stock Exchange comprises of 2 subsidiary markets, primary market (for
new shares to new shareholders) and secondary market (a market for shares already listed or
quoted and changing hands at the Nairobi Stock Exchange.

NSE was initiated in 1953 by the former colonial administrator who was meant to serve
colonial interest and only colonial owned companies were allowed to trade in shares.
Africans were not allowed to participate in the NSE and even to bear shareholders in such
companies.
In 1954, the stock exchange went through a major reorganization and the first time Africans
were allowed to own shares and transact business at Nairobi stock Exchange. The company
owned by Africans were also allowed to have their shares traded at Nairobi Stock Exchange.
Members of Nairobi Stock Exchange are stakeholders are licenced financial institutions or
banks. The following are members of Nairobi stock exchange:

 Dyer and Blair

 Francis Thuo & Partners (put ***statutory management)
 Kingdom securities limited – Cooperative Bank
 Equity stock brokers
 Apex stock brokers
 Ngenye Kariuki stock brokers
 Suntra stock brokers
 CFC Financial Services etc.

Functions of Nairobi Stock Exchange

The Nairobi Stock Exchange performs the following functions:

 It serves as a market for securities. It facilitates the transfer of securities between buyers and
sellers with help of stockbrokers.
 Provides ready market in which buyers and sellers of securities ***their deals and this
provides a medium through which securities are liquidated.
 Acts as a channel through which savings are turned into investments form of shares and other
securities.
 Enables other investors into the country as most foreigners prefer investing through the stock
exchange.
 Provides medium through which government can absorb excess liquidity in economy by
issuing its securities at favorable interest rates in curbing inflationary tendencies. The
government usually maps excess by issuing treasury bonds to the public.
 Stock exchange index acts as a good measure of economic activities a country as such it will
indicate whether the economy is growing stagnant or declining.
 Collects information from quoted company regarding their financial performance a publishers
such information in the medial thus enabling potential investors ****makes decisions on
which company to invest in.
 Enacts rules and regulations which are meant to protect the interest of investors in shares and
debentures.

18
 Limitations of Nairobi Stock Exchange
1. The stock exchange has not been able to convince more companies more to be listed at the
NSE to enable a wider participation by the public in securities.
2. It has not been able to turn rogue stockbrokers who at the end have disappeared with millions
of people‟s investors e.g. Nyaga Stock Brokers, Francis Thuo which was put ****statutory
management.
3. Rules and regulations imposed by stock exchange for potential company seeking listings are
very elaborate and expensive i.e preparation of prospectus, application forms and number of
issued shares which a company must have before the author to list can be given.
4. It has failed to conduct mass education with regard to benefits occurring for company being
listed.
5. It has not endeavored to give education to the directors of most companies therefore the
management of such company end up mismanaging them at the expense of shareholders.

The Central Deposit system

The central deposit system was created in 2000 under the CDS Act. It is meant to provide the
legal framework for the establishment and operation of a central depository and settlement
corporation limited (CDSC).
The object of the Act is to provide the establishment, operation and regulation of central
deposit to provide for immobilization and eventual dematerialization of ***and dealing in
securities deposited thereon.

Objectives of CDS
The purpose of CDS is to facilitate dealing in securities electronically through the book entry
system without the use of physical share certificates or transfers.
Any person willing to trade in shares will be required to open a CDS through any of the
stockbrokers. The buying and selling of securities is conducted by the CDSC which is
subsidiary of the Nairobi Stock exchange.
CDS rules and any amendment to the rules must be approved by the Capital Market
Authority. It operates under the regulatory oversight of the Capital Market Authority.

Duties of Central Deposit System

A central depository shall provide or cause to be provided all such facilities as may be
necessary for the effective transaction in securities.
Central depository system performs the following duties:
(a) Facilitate the immobilization of securities.
(b) Facilitate the deposit and withdrawal of certificates in respect of immobilized securities.
(c) Facilitate the dematerialization of securities. Dematerialization means an entry of securities
whereby the underlying physical certificates is no ***recognized as prima facie evidence of
ownership under the company Act after the dematerialization date.
(d) To open, maintain close securities accounts.
(e) To ensure the efficient transfer of book entry of securities.
(f) Facilitate the efficient process of cash payment in exchange of securities.

19
 (g) Ensure the safe custody of certificates and other documents representing immobilization
securities.
(h) Guard against falsification of any records or accounts required to be kept maintained under
the Act.
(i) *****securities accounts for the handling of book entry securities and if any.
(j) Establish a proper and efficient system for verification, inspection, identification and
recording all book entry securities with the central depository.
(k) To facilitate religion of dealings in book entry of securities.

Benefits of Central Depository System

1. It facilitates mobilization of domestic savings
2. Use of physical share certificates and transfer is eliminated
3. It reduces the settlement of period i.e. transaction in securities is instant
4. The cost of buying and selling securities is reduced
5. Risk is fraud is minimized
6. The system enhances competition and innovation
7. It improves liquidity
8. It attracts foreign investors.
IMMOBILIZATION
This is the process by which the share certificates of a listed security currently in the hands of
investors are deposited in electronic investors‟ accounts under the central depository system.
The investor opens an account with the central depository system which ***like a bank
account.
Additional deposits into clients central depository system account like a credit and sales of
deposited shares in a clients central depository system account treated like a debt. The client
is then issued with a statement of account showing the debits and credits.

Disadvantages
(i) Fraud – a number of investors have in the past lost their investment through fraudulent
dealing by the stock brokers.
(ii) Lack of the physical share certificate which an investor can use as a collateral for the
purposes of securing a loan.
(iii) The process of achieving corporate actions e.g. payment of dividend, issue bonus is very time
consuming since the 2 registers have to be uploaded (combined)
(iv) The process is complicated particularly for those in the rural areas because of lack of
education.
(v) It can be subject to abuse.
(vi) There may be delay in transacting securities in the event computer failure.
MEMBERSHIP

A person is a member of a Company if he subscribes to the Memorandum of Association of the

Company and upon registration of the Company, his name shall be entered in the register of members.
Otherwise a person becomes a member of the Company if he agrees to become a member and his
name is entered in the register of members.

The term shareholder refers to a person who holds shares in a Company while a member is a person
whose name appears in the register of members. Although the terms shareholder and member are used

20
interchangeably, there are exceptional cases where a person may become a member without being a
shareholder and vice versa.

a) Companies limited by guarantee and having no share capital will only have members but not
shareholders

b) A holder of a share warrant is a shareholder and not a member as his name is removed from
the register of members immediately on the issue of a share warrant.

c) A transferee or legal representative of a deceased member may be a shareholder but he may

not be a member until his name is entered in the register of members

d) A deceased person is a member as long as his name remains in the register of members

e) A person who has forfeited his shares ceases to be a shareholder but may remain to be a
member until his name is removed from register.

MODES OF BECOMING A MEMBER

1) By Allotment Normally a person becomes a member of a Company by applying for shares

and being allotted shares directly by the Company.
2) By Subscription to the Memorandum. The Act provides that the subscribers to
memorandum of association shall be deemed to have agreed to become members of the
Company and on its registration shall be entered as members in the register of members.
In the case of subscribers to the memorandum of association neither allotment nor entry in the
register of members is necessary to constitute membership.
3) Agreement to Become a Member and Entry on the Register In case of membership other
than subscription to the memorandum of association two conditions must be satisfied.
 agreement to become a member
 entry on the register

Unless the two conditions are both satisfied the person in question does not acquire the status
of membership. A person who is improperly registered without his consent is not bound there
by and may have his name removed from the register.

4) Agreement to Take Qualification Shares Under section 183 of the Act, persons who have
signed an undertaking to take and pay for any qualification shares for acting as directors of
the Company are in same position as subscribers to memorandum and are deemed to become
members immediately the Company is registered.
5) By Transfer (Purchase of Shares) a person gets registered as a member and shareholder if
he buys shares from another person in the open market or if shares are transferred to him as a
gift.
6) Transmission A person will become a member by transmission through the death, lunacy or
insolvency of a member. It takes place by operation of law to a person entitled under the law
to succeed to the shares of the deceased automatically and does not require an instrument of
transfer. In this case the Company can only place the name of such a person in the register
with his consent.
7) By Estoppel If a person‟s name is wrongly placed on the register and he knows and assents to
it, attends Company meetings or accepts a dividend, he shall be deemed to be a member. In

21
 this case a person holds himself out as if he is a member in which case he will be stopped
from denying the fact that he is a member.

Capacity to Become Members

All persons who are competent to contract may in general become members of a Company.
There are however some special considerations to the following:-

i. A Company as a Member of Another Company- A Company may become a member of

another Company if authorized by its memorandum or Articles. However a Company cannot
become a member of its own holding Company
ii. A firm- A partnership firm cannot become a member of the Company as it is not a legal
person with a separate legal entity from that of the partners. Partners may only be registered
as joint holders in which case each of them becomes a member. A Company however may be
a partner of a firm.
iii. Minor / Infant – A minor may become a member of a Company unless prohibited by the
Articles. A minor has a right to repudiate any liability on partly paid shares either when he
attains the majority age or within a reasonable time thereafter. However, if after attaining the
majority age he receives a dividend and raises no objection to his name being included in the
register he cannot deny that he is a member on the ground of estoppel.
iv. Bankrupt-A bankrupt may be a member of a Company as long as his name is in the register
of members.
v. Foreigner- He can still be a member but in time of war where he becomes an enemy, his
powers of voting and to receive notice will be suspended.

Cessation of Membership

A person ceases to be a member of a Company when his name is removed from the register of
members for any sufficient cause or reason. A person whose name is removed from the register
without any justification remains being a member and retains all rights and liabilities in respect of the
shares.

Such a person may apply for the rectification of the register. Generally a person ceases to be a
member by:

 Act of parties
 Operation of law

ACT OF PARTIES

a) If a member voluntarily transfers- his shares to another and this is approved by the board of
directors.
b) By forfeiture-for non- payment of a call. If the articles provide that a member who does not
pay the call money shall forfeit his shares then upon default such shares shall be forfeited and
membership shall cease.

22
 c) If the Company sells a members shares in execution of a court order-or in exercise of the
power of lien over the shares such person ceases to be a member once his name is removed
from the register.
d) Rescission of the contract-a person ceases to be a member if he rescinds (avoids) the
contract to take the shares on the ground of misrepresentation in the prospectus or on the
ground of irregular allotment. This does not apply to shares subscribed in the memorandum.
e) By a valid surrender of shares – subject to the provisions of the articles
f) By redemption- of preference shares
g) By conversion- of share certificate into a share warrant

BY OPERATION OF LAW

a) Insolvency- the shares of an insolvent vest in the official receiver/trustee. When such person
transfers his shares to another person the insolvent ceases to be a member upon the
registration of the transferee as a member. The insolvent remains a member as long as his
name is not removed from the register of members.
b) Death- a deceased member ceases to be a member when his shares are registered in the name
of his legal representatives
c) By Mortgage of Shares- sometimes the condition of a mortgage loan may be that shares,
may be transferred to a creditor (lender) and in such a case the lender shall be deemed to be a
member of the Company and the borrower ceases to be a member
d) Upon winding up of the Company all existing members cease to be members and become
contributories.

REGISTER OF MEMBERS

Every Company is required under section 112 to keep a register of its members. The register may be
in one or more bound books or it may be kept in any other manner provided adequate precautions are
taken against falsification and effects of forgery.

CONTENTS OF THE REGISTER

a) Name and address of each member

b) Date on which each person was entered in the register as a member
c) Date on which each person ceased to be a member
d) In case of a Company having share capital, shares held by each member distinguishing each
share by its number and the extent to which the shares have been paid up

23
 e) Where the Company has converted some of its shares into stock, the register shall show the
amount of stock held by each member concerned.

LOCATION OF THE REGISTER

The register must be kept at the registered office of the Company. It may however be kept at any other
place if the work of making it is done at another office of the Company or by another person e.g.
advocate or a Company secretarial firm.

The Company must send a notice within 14 days to the registrar informing him of the place where
register of members is kept and any change in that place.

Index of Members

Section 113 requires that every Company having more than 50 members must keep an index of
members alongside the register unless the register is kept in the form of an index. It may be kept in the
form of a card in which case it must have sufficient indication to enable entries relating to that
member in the register to be readily found. Any alteration in the register must be noted in the index
within 14 days of such alteration.

Inspection of the Register

The register and index of members must be open for inspection except when closed under the
provisions of the Act. It shall be open for inspection to members for at least 2 hrs a day without
charge and in case of any other person upon payment of a fee. The Company is also bound to supply a
copy of the register to members upon payment of a nominal fee.

Closure of the Register

Under section 117 a Company may after giving not less than 7 days notice by advertisement in a local
daily close the register for a period not exceeding 30 days per year

Closure is necessary:

 In order to hold an Annual General Meeting

 To declare a dividend
 To make a call
 To pay a dividend

During the said period of closure no transfer of shares shall take place through the register

Rectification of the Register

Register of members may be rectified if:

 The name of any person is without sufficient cause entered in or omitted from the register.

 A default in or unnecessary delay takes place in entering or removing from the register the
fact of any person having ceased to be a member.

Branch Register

24
A Company having a share capital may if authorized keep a branch register in any part of the
commonwealth.

The Company shall give notice to the registrar concerning location of the branch register and register
shall be deemed to be part of the Company register of members.

The register shall be kept in the same manner as the principal register and in the event of closure of
the branch register notice shall be placed in that area.

Register and Notice of Trust

Section 119 states that no notice of any trust express or implied shall be entered on the register of
members e.g. if „A‟ is acting as a trustee on behalf of „B‟, the Company must not take any notice of
the fact that „A‟ is a trustee. In the register only the name of „A‟ is to be entered and no mention that
he is a trustee on behalf of „B‟ and only „A‟ will be put on the list of contributories during winding up.

Annual Return

Section 125 states that every Company having a share capital must file an annual return with the
register once every year “it consists of the information required to be given to the registrar at the end
of the year. The return must be prepared and filed with the registrar within 42 days after the Annual
General Meeting.

Contents of the Annual Return

Particulars to be included in the return include

i. Address of the registered office

ii. The place where the register of members or debentures holders are kept if not at the registered
office
iii. Total amount of indebtedness in respect of all registrable charges
iv. A summary distinguishing between shares issued for cash and shares issued for a
consideration other than cash specifying:
 Amount of share capital and the number of shares
 Number of shares taken as at the date of the return
 Total number of shares forfeited
 Commission and discount in respect of shares and debentures
 Shares represented by share warrants

v) A List Containing the;

 Names and addresses of those who were members 14 days after the annual general meeting
and those who ceased to be members since the date of the last return
 Number of shares held by each member stating the shares transferred since the date of the last
return
 Particulars of directors and secretaries

For Companies not having a share capital the return will include

a) Address of the registered office

25
 b) the place where the register of members and debenture holders are kept if not at the registered
office
c) Particulars of the total amount of indebtedness of the Company in respect of all registrable
charges
d) Particulars relating to directors and secretaries of the Companies

Documents to be annexed to the Annual Return

 A copy of the balance sheet including a copy of the profit and loss account and every
document required by law to be annexed to the balance sheet duly certified by directors and
secretary of the Company.
 A copy of the auditors‟ report duly certified

SHARES

Section 2 (1) of the Act, defines a share as “a share in the share capital of the company and includes
stock except where there is a distinction between shares and stock.”

A share in a Company is one of the units into which the capital of the Company is divided. It is the
interest of the shareholder in the Company measured by a sum of money for purpose of liability or to
earn interest in the Company.

Stock is a bundle of fully paid shares put together for convenience and it may be divided into any
amount or transferred in any fraction or denomination.

Distinction between Shares and Stock

1) A Company can issue shares directly but it cannot issue stock directly as stock results from
the conversion of shares.

2) Shares may be fully or partly paid but stock must be fully paid up

3) Shares are always of a fixed denomination whereas stock can be sold in any fraction or
denomination.

4) A share has a distinct number with which it is distinguished from other shares whereas stock
does not have a number and it is not required by law to have numbers.

5) A share can be issued by both PVC and PLC whereas stock can only be issued by Public
limited Company.

6) A share entitles a share holder to a number of rights e.g. participation in meetings of the
Company whereas stockholders do not have such rights.

Classes of Shares

a) Preference Shares- They carry preferential rights in relation to other classes of shares. The
rights relate to dividend and right to receive proportionate parts of capital during winding up.

The rights on preference shares may be stated in the Articles of association. As regards their
priority entitlement, the following features must be observed:

26
 i. The right to receive a dividend at a specified rate usually fixed by the terms of issue or the
articles.

ii. The right to receive dividends before any other class but not a right to compel the Company to
pay dividends if it fails to do so.

iii. The right to receive dividends is assumed to be cumulative unless otherwise stated.

iv. If a Company which has arrears of unpaid dividends goes into liquidation, a preference
shareholder ceases to be entitled to the arrears of the dividends unless the dividend had been
declared and not paid or the articles provide for payment for such arrears.

v. Holders of preference shares are not entitled to participate in any surplus dividend over and
above the specified rates.

b) Redeemable Preference Shares

Section 60 provides that a Company may issue preference shares which are liable to be redeemed.
This is only possible under the following conditions:

i. The Company must have shares which are not redeemable e.g. Ordinary shares
ii. Issue of redeemable preference shares must be authorized by the articles
iii. The shares must be fully paid at the time of redemption
iv. Money required for redemption must be from either the proceeds from a fresh issue of shares
made for that purpose or out of accumulated profit
v. Any premium on redemption must be provided out of profits available for distribution or out
of the share premium account.
vi. Redemption of preference shares should not be taken as a reduction of the Company‟s
authorized share capital.
vii. Within one month of redemption notice of the number of shares redeemed must be given to
the registrar.

c) Ordinary Shares

They are also referred to as equity capital. The holders of ordinary shares usually carry the main risk
of business as they invest their money without assurance that they will be paid interest on their
investment. Holders receive dividends out of profit as determined by directors and declared by
members in the Annual General Meeting.
Ordinary shareholders are entitled to the following rights which are not available in respect of other
shares:
i. After providing for any other dividend which is payable on preference shares, the whole of
the remaining profits can be available to them by way of dividend if they so wish.
ii. They are entitled to control the company by use of voting rights at the Annual General
Meeting.

27
 iii. During winding up ordinary shareholders are entitled to the entire residue after payment of
the company's liability.
iv. They receive dividend at variable rates based on the discretion of directors and availability of
profits.

D) Deferred (Founders) Shares.

They are usually issued to the founders or promoters as a reward for their services. They are entitled
to dividends only after other classes of shares
Although their rights depend on the articles, these shares normally take a larger share of surplus assets
during winding up than ordinary shares and they also carry greater voting rights.

E) Bonus (Scrip) Shares

These result from payment of dividends in terms of shares instead of cash. It results in capitalizations
of profits which then proportionately increases the shares held by each shareholder.
F) Employee Shares
A company may have shares issued to employees to encourage them to have a direct interest in the
company. This is done through an employee shares scheme managed and administered by a trustee for
the benefit of deserving employees and those that have rendered exemplary service to the company.
Usually employees make no payment for these shares and the shares have no voting rights at
company's Annual General Meeting. They serve as a retirement benefit for employees as they will be
able to enjoy dividends and other benefits.
Factors to be taken in account in establishing ESS
The first step in choosing an ESS is to decide objective for introducing such a scheme. It is
important to choose a scheme that will help an organization to achieve its objectives.
Employees can be given shares that are to be held in attractive receive share options or
purchase shares on attractive terms
The following need to be taken into account:
(i) How much to spend on the plan i.e. the cost of establishing a ***
(ii) Details of the plan i.e. employee eligibility. ESS in most cases is meant for employees who
are at a lower grade.
(iii) What is to happen if the scheme needs to be wound up
(iv) Regulatory requirements i.e. rules and regulations governing the trust
(v) Explain to the employees share ownership scheme needs and benefits to the staff and also
they need to be aware of the risks associated with scheme
(vi) Distribution of shares must abide by certain rules, company constitution (account and
relevant legislation e.g. Companies Act and Capital Market Authority rules and regulations.
Disadvantages of ESS

28
(i) The effect on morale and retention reduces if the share price falls.
(ii) Administration costs – short term cost of drawing up and getting scheme apparent and long
term cost managing scheme and keeping records shares are to be issued.
- Not less than 1 year as at the date of issue elapsed since the date on which the company is
entitled to commence business.
- Shares must be issued within one month of the sanction by the company or within such
extended time as the courts may allow.

Dilution of share ownership – as more shares are issued, each share an employee owns
become smaller in percentage with regard to payment of dividend and the market value.
Risk of arousing unrealistic expectations among employees of the financial rewards.
If employees eventually wish to sell their shares in unlisted capital company may need to run
an internal market for the shares perhaps setting up an employee benefit trust.

SHARE CERTIFICATE
Every person whose name is entered in the register of members has a right to receive a share
certificate in respect of those shares he owns in the Company. Thus every Company must issue a
share certificate within 60 days of allotment or lodgment of transfer. In case of default then every
director, secretary or any officer who is party to the default is liable to a fine of Kshs100 every day the
default continues
Contents of Share Certificate
 Name and address of shareholder
 Name and address of the Company
 Number of shares held and extent to which they have been paid up
 Common seal of the Company affixed to it
 Signature of one or more directors
Legal Effects of a Share Certificate
A share certificate under seal of Company is prima facie evidence of the title of the member to the
shares specified there in.
The issue of a share certificate makes the Company liable in two ways:
a) Estoppel as to Title
If a Company authorizes the issue of a share certificate stating that the person named there in is the
registered holder of certain shares it cannot afterwards allege that the person is not entitled to those
shares
N
/B A Company is not liable / bound by a certificate issued without the authority of the Board of
Directors or where the certificate was a forgery
b) Estoppel as to Payment

29
If the share certificate states that the shares are fully paid, the Company is estopped as against a bona
fide purchaser from alleging that the amount stated in the share certificate as having been paid has not
been paid
Transfer of Shares
 The shares or other interests of a member in the Company are movable assets and are
transferable in the manner prescribed under the Act and the Articles
 The articles of a public limited Company may and those of a PVC must restrict the right of
transfer. Thus a member cannot be prohibited from transferring his shares as this is a statutory
right which cannot be taken away by the articles
 The directors may however decline to register the transfer of shares to a person of whom they
shall not approve or shares on which the Company has a lien.
Contract of Transfer
This is a contract by which a shareholder undertakes to transfer his shares or a contract in which the
transferor agrees to sell while the transferee agrees to buy the shares. The following terms are implied
in a contract of transfer:
a) The transferee will pay the price and that the transferor will hand over to him genuine
instruments of transfer and the share certificate
b) The transferor will do nothing to prevent or delay the transferee from having the transfer
registered
c) That the transferee will indemnify the transferor from any loss or liability which may arise in
respect of the shares
d) That the share certificate carries the rights and interests which it purports to convey.
Once the contract has been entered into the transferee has an equitable title to the shares and
the transferee holds them until registration as a trustee for the transferee
Procedure of Transfer of Shares
1. When a share warrant to bearer is issued in respect of fully paid shares the ownership is
transferred by mere delivery without any instrument of transfer
2. Where a person wishes to transfer all his shares (other than a share warrant) this is effected by
a written instrument of transfer executed by the transferor and transferee duly stamped
specifying the name address and occupation of the transferee
 The instrument must then be delivered to the Company for registration together with the share
certificate, in which case the directors have to register the transferee as the owner of the
shares and enter the name of the transferee in the register in place of that the transferor
3. When a shareholder sells only part of the shares named in the share certificate he does not
deliver the share certificate to the buyer but the selling broker produces it along with the
transfer instrument to an officer of the Company who certificates the transfer by writing in its
margin the words “certificate lodged” and mentions the number of shares for which the

30
 certificate has been lodged
 He then hands back the certificated instrument to the broker with a balance ticket for any
shares that have not been transferred. The ticket entitles the transferor to apply for a new
certificate for the shares which have not been transferred
 The certificated instrument is then forwarded to the transferee who can make a good title for
the shares bought. The Company will then register the transferee as a shareholder of the
shares sold to him and then cancel the old certificate and then prepare two certificates:
 One for the shares sold and which shall be given to the transferee
 The other for the unsold shares which will be handed over to the transferee
N/B the Company‟s liability for false certification is subject to the qualification that the person
certificating is authorized by the Company to do so and in the absence of such authority; the Company
is not liable to the transferee for any loss suffered by him
Contents of a Transfer Form
1. Name and address of transferor
2. Name and address of transferee
3. Name of the Company
4. Number of shares being transferred
5. Date of transfer
6. Consideration paid
7. Signatures of transferor and transferee

Effects of Transfer
A transferee does not acquire the legal title to the shares transferred or the full status of a member
until his name is entered in the register. Until this happens;
a) The transferor continues to be the legal owner of the shares but holds them in trust for the
transferee.
b) The transferee cannot exercise the rights of a share holder
c) The transferee only has an equitable claim on the shares
d) If calls are made the transferor must pay them but he can recover the amount so paid by him
from the transferee
e) If dividends are paid, the transferor is the person entitled to them
f) The transferor must vote as the transferee directs him since the voting rights attaching to the
shares have been transferred to the transferee
Notice of Transfer
It is advisable for the Company to give notice of lodgment of transfer to the transferor in the form of a
letter informing him that a share certificate and a transfer form purporting to be signed by him have
been lodged by the transferee for registration and that the transfer will be presumed in order if notice

31
to the contrary is not received by return post.
Forged Transfer
An instrument of transfer of shares on which the signature of the transferor is forged is called a
forged instrument. Any transfer of shares effected by such instrument is called a forged transfer.
Consequences of a Forged Transfer
1. A forged transfer is a nullity and does not pass any legal title to the transferee. The true owner
can have his name restored on the register of members
2. If the Company has issued a share certificate to a transferee of a forged transfer and he has
sold those shares to an innocent buyer, the innocent buyer gets no right to be registered as a
shareholder. He can however claim damages against the Company on the ground that he acted
on the strength of the share certificate issued by the Company.
3. If the Company has been put to loss following a forged transfer, it may recover the loss from
the person who procured registration even though he might have acted in good faith
Transmission of Shares
Transmission means the transfer of property or title in the shares by operation of law. It takes place by
the death, bankruptcy or insanity of a member or if the member is a limited liability Company, on its
going into liquidation.
Section 84 provides that the Company must accept as evidence of representation, any document which
by law is sufficient evidence of letters of administration. A person entitled to any shares by
transmission still has the same rights as to dividends and other privileges carried by the shares as if he
was the original owner of the shares except that he cannot exercise any right as a member at a general
meeting of the Company
The following steps are necessary in respect of the transmission of shares:
a) The Company secretary should obtain the correct documentation and check it thoroughly the
relevant share certificate should also be submitted.
b) The Company secretary should endorse the fact of the documentation upon appropriate
Company records
c) If a representative wishes the shares to be transferred into his own name a letter requesting
this should be sent to the Company
The representative may alternatively transfer the shares to a specific beneficiary in line with a written
will. However if he wishes to sell them he has to follow the share transfer procedure which includes
execution of a transfer form.
Mortgage of Shares
Shares can be used as security to secure loans. In this case a shareholder may allow his shares to be
charged or mortgaged for his loan. This may be arranged by
i. Legal mortgage
ii. Equitable mortgage

32
 Legal Mortgage
This is effected by a transfer of shares to the lender as security for repayment of a debt. The mortgage
deed sets out the terms of the loans and includes a clause that allows the mortgagor to have shares
reconveyed to him after the loan obligation has been discharged.
As long as the mortgagee remains the registered shareholder he is entitled to all dividends and voting
rights. In case the mortgagee (lender) accepts partly paid shares as security, he renders himself
personally liable for calls on the shares
A legal mortgagee is thus a member of the Company
Equitable Mortgage
This is effected by the deposit of the share certificate by the borrower (mortgagor) with the mortgagee
as security for a loan with or without delivering a blank transfer form to the mortgagee. Where the
mortgagee is in possession of a blank transfer form and the loan is not repaid as previously agreed he
may fill in his name as transferee and get his name registered on the register of members or he may
sell the shares after giving due notice
Liability of the Company
Since the Company cannot be effectively bound to have regard to the interests of 3 rd parties, the owner
of the shares has the power to dispose the shares without regard to the mortgagee. Thus an equitable
mortgage does not provide absolute safe security to the lender as the borrower remains on the register
and may sell the same shares to someone else without the knowledge of the lender especially where
he uses a duplicate share certificate.
Calls on shares
 A call is a demand by the Company on its shareholders to pay the whole or part of the balance
remaining unpaid on each share.
A call is made pursuant to a resolution of the board and the terms of the articles. It may be made
anytime during the lifetime of the Company during windin

Procedure of making a call

1. Board meeting is convened to pass a resolution that a call letter be issued accordingly on a
specified date.
2. The company secretary is instructed to prepare and post the call letters to the shareholders
concerned.
3. Reminder letter is then sent (just in case there is no response ) to shareholders who have
responded to 1st call letter warning them that interest will be charged if payment is not
received immediately.
4. If payment is still not received within 7 days, a further notice is sent to the shareholders
concerned warning them that unless the company is promptly paid the directors will consider
possibility of forfeiture of the shares.
5. The amount received from calls should be credited in an account credited for that particular
purpose.
Provisions Relating to Calls

33
 1. A call on shares must not exceed 25% of nominal value of shares
2. No call shall be made payable within less than one month from the date for payment of the
last call
3. Resolution of the board. A call must be made by a resolution passed at a duly convened and
constituted meeting of the directors. The power to make calls cannot be delegated the general
meeting by directors even to a subcommittee of the directors or the Managing Director.
4. A call resolution must specify the amount of call, date and place of payment.
5. A call cannot be made until the minimum subscription has been received
6. Calls shall be made on uniform basis on all shares under the same class
7. The call must conform to the provisions of the articles. However where the articles are silent
Table A provides the following rules
i. The maximum amount per call shall be 25% of nominal value per share
ii. There must be at least one month interval between two successive calls.
iii. Each member must be given at least fourteen days notice specifying the amount due on call,
time and place of payment.
iv. Directors have the discretion to postpone a call
N/B Where a call is made contrary to the provisions of the articles it shall be invalid and the
shareholder is not bound to pay such a call.
Calls in Arrears
 If the sum called in respect of a share is not paid on or before the date appointed for payment
the call is said to be in arrears. The shareholder will be liable to pay interest at 6% per annum
or such rate as the directors may determine.
 The directors may also wave the interest.
Consequences of non-payment of calls
1. Non- payment of calls by a director within six months from the date of call is a
disqualification leading to vacation of his office.
2. No member shall be entitled to vote at any meeting unless all calls payable by him have been
paid.
3. The Company may subject to provisions of articles forfeit the shares
4. The Company may refuse to transfer such shares to another shareholder incase holder sells
them.

Forfeiture of Shares
 It means the cancellation of shares of a shareholder by way of penalty for nonpayment of any
call made in respect of them.
 If a shareholder falls to pay the call the Company has two remedies
a) It may sue for the amount

34
 b) It may forfeit his shares
 Normally a Company should take legal action against defaulting members, however it avoids
going to court and instead prefers to acquire the power under its articles to forfeit the shares
of such members.
Rules relating to a valid forfeiture
1. Authority of articles; a forfeiture must be authorized by articles of the Company and it will
only be valid if such provisions are strictly compelled with.
2. Notice; a proper notice of the intention to forfeit must be served on the defaulting member
requiring him to pay the outstanding amount of call which remains unpaid with interests if
any. The notice must further state that in event of nonpayment of the call at or before
appointed time the shares shall be liable to be forfeited.
3. Resolution of the board; if the member does not comply with the notice the board will pass a
formal resolution of forfeiture.

N/B Shares can only be forfeited for nonpayment of calls but not for any other debt.
4. Good faith;the power to forfeit shares must be exercised by directors in good faith and for
benefit of the Company. The power cannot be used at the request of a shareholder to relieve
him from liability on his shares.
5. Statutory declaration; the secretary or director of Company shall make a statutory
declaration in writing that certain shares in Company have been forfeited on the date specified
in the declaration.
Effect of Forfeiture
a) The defaulting shareholder ceases to be a member of Company
b) He loses his claim on the paid up amount on the shares
c) He remains a contributory as a past member
A forfeited share may be sold on such terms and in such manner as the directors think fit and at any
time before such seal, the forfeiture may be cancelled by the directors.
Surrender of Shares
This means the return of shares by a shareholder to the Company for cancelation voluntarily .It is a
shortcut to the long procedure of forfeiture otherwise effect is the same. A surrender of shares is only
done where the articles contain provisions empowering directors to accept a surrender of shares in
cases where forfeiture is justified.
Surrender of shares can be effected in circumstances where shares are exchanged with a new class of
shares of the same nominal value being issued in place of those surrendered
Share warrant (section 85)
A Public Company limited by shares and if authorized by its articles may issue share warrants in
respect of fully paid shares. The warrant represents that the bearer is entitled to the number of shares

35
specified there in.
On the issue of a share warrant the Company must strike out of its register of members the name of
the member and enter following particulars:
 The fact of the issue of the share warrant
 A statement of shares included in the warrant
 Date of issue of the warrant
Under section 114(2) if the articles allow, the holder of a share warrant may surrender it for in
exchange a share certificate upon which this name will be entered in the register and a share
certificate will be issued in his name
N/B A holder of a share warrant cannot qualify as a director of the Company.
Distinction between Share Certificate and Share Warrant
1. A share warrant can only be issued by a Public Company whereas a share certificate may be
issued by both public and private Companies
2. A share warrant can only be issued in respect of fully paid shares while a share certificate can
be issued for partly or fully paid shares
3. The holder of a share certificate is a member of Company but a holder of a share warrant is
not a member
4. A share warrant is by trade custom a negotiable instrument while share certificate is not
5. No stamp duty is payable on transfer of shares contained in a share warrant whereas stamp
duty is payable on transfer of shares specified in a share certificate
6. Dividend due on a share warrant is advertised in the newspaper and is payable to the holder
upon presentation of the relevant coupon attached to the warrant .Dividend is paid to a holder
of a share certificate by issue of a dividend voucher in his favor

Shares must be issued within such extended time as the courts may allow.

Issue and redemption of shares

A company limited by shares or by guarantee and having a share capital may if authorized by
the Articles of Association issue shares which are redeemable or which are reliable to be
redeemed at the option of the company or shareholders.
Section 60 cap 486 permits a company if so authorized by its articles to issue redeemable
preference shares.
Redeemable preference shares are usually issued for a certain period for 5 years, 10 years or
20 years after which the shares are redeemed and the share certificate surrender for
cancellation.

NB redemption of shares does not affect authorized share capital since reducing the
authorized share capital will amount to a reduction of share capital.

36
 Conditions of Redemption
A company may issue redeemable preference shares only if the following conditions are
satisfied:
(i) At the time of redeemable preference shares there must be other issued shares of the company
which are not subject to redemption
(ii) Shares to be redeemed must be fully paid
(iii) The Articles of association of the company must have a provision for redemption
(iv) Any shares redeemed must be treated as cancelled on redemption
(v) The terms of redemption must provide for payment on redemption
(vi) Where a premium is payable on redemption, it must be provided out of profits of the
company or out of the share premium account
(vii) Redeemable shares may be only out of the distributable profits or out of the proceeds of fresh
issue of shares made for this purpose.
(viii) If the shares are redeemed out of the profits, a sum equal to the nominal value of shares
redeemed must be transferred out of profits otherwise available for dividend to a capital
redemption reserve fund.

Procedure on Redemption
(i) Boards of directors meeting have to be held to recommend to the shareholders on Annual
General Meeting to pass a special resolution redeeming the shares.
(ii) Annual General Meeting is called where the shareholders formerly pass a special resolution
redeeming the shares.
(iii) The company secretary will notify the Registrar of company with regard to the redeemed
shares. Section 64 cap 486 by completing and submitting Form 29.
(iv) Amend the relevant clauses of the Memorandum of Association and Articles of Association
with regard to the redeemable shares.
(v) The company has a similar remedy against the directors for the loss, damages and cost.

Calls on shares
A call is a demand upon the holder of partly paid up shares in account for payment of the
balance or an installment of it by the company itself or by the liquidator if the company is in
liquidation.

Calls on shares arise when under the terms of issue of shares only part of the nominal amount
of each share is payable at the time of allotment and no date is fixed for the payment of the
balance.

Shares with different voting rights

Class rights are rights to a class of shares by the Articles of Association, Memorandum of
Association, terms of issues or a special resolution.

Shares in a company may be divided into different classes, the respective rights of the classes
being defined in Memorandum of Association, Articles of Association or in the case of shares
credited by increase of capital, thereby the resolution creating the increase.

37
 Class rights are usually concerned with dividend, voting or the distribution of assets of the
company in case of the company of a winding up.

Variation of rights attached to shares

This is where the rights attached to shares with regard to dividend voting, management or
distribution of assets is varied or removed.
This can be effected through either memorandum of association and articles of association,
terms of issue or the resolution which created such rights.
- If the rights conferred by the memorandum of association and articles of association adopted
at the time of incorporation of the company, contained provisions of variation of each class
rights, then the class rights can only be varied according to provision of these documents.
Where the class rights are conferred by the memorandum of association it does not contain
provisions for the variation of the class rights, they may be varied with the consent of all the
members of the company not only the holders of the class of shares concerned.
- If the memorandum of association contains modification of rights clause, the class rights may
be varied with the consent of the specified proportion of the holders of the shares of the class
by altering the articles of association through a special resolution.
- The class rights may also be varied with the consent in writing of not less than ¾ of the
shares of that class.
SHARE CAPITAL
Share capital is the amount that purchasers of shares have agreed to contribute to the Company in
return of its shares
This is the amount of capital raised or to be raised by issue of shares by the Company
Types of Shares Capital
1. Authorized Share Capital It is also known as nominal / registered capital
Every Company limited by shares or guarantee and having a share capital is required to have a
nominal capital with which it is to be registered
This is the maximum amount of share capital which is stated in the memorandum of association and
which the Company is authorized to issue in its lifetime unless it alters provisions of the capital
clause.
2. Issued capital
It is the nominal value of the shares which have been taken up or offered to public for subscription. It
can either be equal to or less than the authorized capital but cannot exceed it
3. Subscribed capital
It is that part of issued capital which has been taken up by the public. The entire issued capital may be
subscribed by the public or it may be less where not all of the issued capital is taken up
4. Called up capital
It is that part of the subscribed capital which has been called on the unpaid shares
5. Uncalled capital
It is that part of the subscribed capital which has not been called up by the Company. It includes part

38
of the capital which Company through a board resolution decides not to call until during winding up
of the Company
6. Reserve capital
It is that part of uncalled capital which the Company decides by a resolution not to call except when
the Company is being wound up. Such a step is usually taken by the Company as security to creditors
RAISING OF CAPITAL
The capital needed to finance activities of a Company may be provided by promoters or by the public
by way of subscription. For this purpose a prospectus is issued to the public inviting members of the
public to invest in the Company
Prospectus
Section 2 (1) of the Act defines of prospectus as “any prospectus, notice, circular, advertisement or
other invitation to the public for subscription or purchase of any shares or debentures of the
Company” Thus any document containing an offer of shares or debentures for sale to the public shall
be deemed to be a prospectus and all provisions relating to a prospectus shall also apply to it.
Offer to the Public
Under section 27 public includes any section of the public however selected whether as members or
debenture holders or clients of the person issuing the prospectus
No offer shall be treated as made to the public if:
 It is not calculated to result in the shares or debentures becoming available to persons other
than those receiving the invitation
 It appears to be a domestic concern between persons making and receiving the invitation
Form of Prospectus
Before a prospectus is issued a copy must be delivered to the registrar and it must be signed by every
person named there in as a director or proposed director. It must be dated and the date unless
otherwise stated is taken to be the date of publication of the prospectus.
Contents of the Prospectus
The Act provides that every prospectus issued by or on behalf of the Company must state matters set
out and reports specified under different schedule of the Act
The following matters (contents) must be stated
1. Name of the Company and address of registered office
2. Objects of the Company
3. Address and occupation of directors or proposed directors
4. Number and classes of shares held by members
5. Details about redeemable preference shares, if any.
6. Date and time of opening the subscription list
7. The amount payable on application and allotment

39
 8. Amount of premium payable on each share if issued at a premium
9. Names and address of the Company‟s auditors
10. Qualification shares of directors where articles require
Reports to Be Set Out in the Prospectus
In appropriate form, the following are required to be set out in the prospectus
1) A report by the auditors of the Company relating to profits and losses and assets and liabilities
of the Company for the last 5 years
2) A report by directors of the Company in respect of rate of dividends paid by the Company in
respect of each class of shares for the last 5 years
3) If the Company proposes to acquire any business, a report by a qualified accountant whose
name should be disclosed in the prospectus
Statement in lieu of prospectus (abridged prospectus) xxxx
A public Limited Company having a share capital may sometimes decide not to approach the public
in order to secure the necessary capital if it is confident of obtaining the required capital privately.
In such a case it will file a statement in lieu of prospectus instead of a prospectus. It will contain
information similar to the prospectus and must be signed by all directors and auditors. It must be filed
with register at least 3 days before allotment of shares.
The statement can also be issued by a Private Company at the time of its conversation into a Public
Limited Company for purpose of enabling it to raise capital from the public
Misleading Prospectus
A prospectus constitutes the basis of the contract between the Company and the share holder and
therefore it must disclose all materials facts accurately. It must not conceal or misrepresent facts,
thereby improperly influencing and misleading a prospective investor into becoming an allotee of
shares or debentures in consequence of which he suffers loss.
A prospectus containing a false or misleading statement is called a misleading prospectus. In this case
the misled investor (original allotee of shares) who had relied on the prospectus and not a buyer in
open market, is entitled to proceed against those who misled him

Remedies for Misstatements in the Prospectus

They are grouped into two categories
 Remedies against Company
 Remedies against directors promoters and experts
Remedies against the Company
1) Rescission- the subscriber is entitled to rescind (avoid) the contract of allotment and return
the shares to the Company and recover his money. In order to rescind the contract subscriber
must prove the following:
 The prospectus was issued by the Company or on its behalf by the directors or if issued by the

40
 promoters, the board ratified and adopted the issue
 The prospectus contained a misrepresentation of material facts and not statement of a law or
opinion
 The misrepresentation related to such facts as are likely to influence the judgment of a
reasonable man whether or not to take the shares.
 He actually relied on the statement in question when applying for the shares
Loss of the Right of Rescission
The right to rescind a contract of allotment based on a misrepresentation in the prospectus is lost in
following circumstances:
i. If the allotee does not commence the proceedings within a reasonable time after learning of
the misrepresentation
ii. If he expressly or impliedly affirms the contract after becoming aware of the falsity of the
statement e.g. attending and voting at meetings or accepting dividends
iii. If the Company goes into liquidation before he has commenced rescission proceedings
iv. If he is a person of such experience that he is not likely to have been mislead by the
statement
v. Where restitutio integrum is not possible i.e. where party cannot be restored to the original
position e.g. when shares have already been sold before discovering the misrepresentations.
2) Damages for fraud
Subscriber is allowed to claim damages from the Company for fraud by proving that the
statement was fraudulently made and he was actually deceived
3) Damages for negligence at common law
A person may claim damages for the tort of negligence if he can show that
 The defendant owed him a duty of care when issuing the prospectus
 There was a breach of the duty of care
 He suffered financial loss
Remedies against Director’s Promoters and Experts
These remedies are available to a misled investor whether he rescinds contract or not. The following
persons are liable to investors for any misrepresentation in the prospectus
 Directors at time of issue of the prospectus
 Every person who authorized himself to be named and was actually named in the
prospectus as present / future director
 Every promoter
 Every person who authorized issue of prospectus
The liability of such persons include damages for misrepresentation and criminal liability
Damages for Fraud

41
An action for deceit to recover damages may be brought by a subscriber if he proves that he was
actually deceived
The action can be maintained even after the Company goes into liquidation
Damages for Misrepresentation
The remedy is available for any loss sustained by a subscriber by reason of untrue statement in the
prospectus
The subscriber must however prove that the prospectus contained an untrue statement of material
facts and that he actually sustained a loss. The action can be maintained even after winding up of
Company
Defense for Directors and Promoters
A person who has been sued for the misrepresentation contained in a prospectus may avail himself
any of following defenses;
 He withdraws his consent to act as director before the prospectus was issued and that it was
issued without his consent
 He was not aware of the untrue statement and on becoming aware of the same after issue of
prospectus but before allotment, he withdraws his consent and gave public notice of it
 That statement was in fact made on the authority of a competent expert and the expert had
given his consent and had not withdrawn it.
 That the statement was from a correct and fair copy of the initial document and was based on
the authority of an official person

Criminal Liability
This involves a fine or a term of imprisonment on the guilty party. Thus where a prospectus contains
an untrue statement every person who authorized its issue shall be punished by a fine not exceeding
10,000 or imprisonment for a term up to two years unless he proves that:
 Statement was immaterial
 He believed on reasonable ground that it was true
N/B Experts are exempt from criminal liability:
The following actions and omissions constitute criminal behavior in relation to preparation and issue
of a prospectus;
 Failure to include matters and reports that are supposed to accompany the prospectus
 A prospectus containing an expert statement and the expert has not endorsed such statement
 Omitting to include material contracts
 Including false statements in the prospectus
 Issuing a prospectus without delivering a signed copy of it to the registrar for registration
UNDERWRITING COMMISSION
A public which invites the public to subscribe for its shares or debentures must ensure that the issue is

42
fully subscribed by the public.
To ensure that this happens it may pay an underwriting commission on all shares / debentures offered
to any one who guarantees that if any of the shares are not taken up he will take them up
Before paying underwriting commission the following conditions must be fulfilled
1) Payment of the commission must be authorized by the articles
2) Commission paid or agreed to be paid does not exceed 10% of the price at which the shares or
debentures are issued or such lower rate as may be fixed by the articles
3) The amount and rate of commission and the number of shares to be underwritten must be
disclosed in the prospectus if shares are issued to the public and if not to public disclosure
must be made in the statement in lieu of prospectus

Brokerage
It is the commission paid to persons who deal in shares and debentures and whose business includes
procuring the subscription for the shares and debentures.
Unlike underwriters brokers do not undertake to take up shares or debentures which are not
subscribed for by the public. Brokerage must be paid to a broker for services as a broker and not to a
person who induced the other to subscribe for the shares and debentures
Rules Governing Application and Allotment of Shares
In response to an issue of a prospectus there shall come application for shares from the prospective
investors. Allotment is the acceptance of the offer. Once an offer is accepted it results in a contract
binding the Company to the member and the applicant becomes a shareholder
The provisions regarding allotment are either general or statutory
General Provisions
A valid allotment must be made in accordance with general rules of the law of contract relating to
offer and acceptance. The rules include
1) Allotment must be made by proper authority- the board of directors is the body authorized to
allot shares and this duty cannot be delegated
2) Allotment must be made within a reasonable time otherwise the applicant is not bound to
accept it
3) Allotment must be communicated to the applicant so that it is legally complete. Acceptance is
completed immediately the letter of allotment is posted even if such letter gets lost or delays.
4) Allotment must be absolute and unconditional otherwise the applicant is not bound to take the
shares
5) Revocation of an application may be done any time before allotment is done and
communication made by post

Statutory Provisions

43
There is no restriction on allotment of shares in case of PVC. The Act however lays down certain
restrictions in case of Public Limited Companies.

a) Where no public offer is made the Company cannot proceed to allot shares unless at least 3
days before allotment, the Company has filed with the registrar a statement in lieu of
prospectus otherwise the allotment shall be irregular and therefore voidable at option of the
applicants and directors shall be liable to a default fine of Shs2,000.
b) Where offer is made to the Public
 A copy of the prospectus must be duly filed with the registrar
 The Company must have received at least 5% of nominal value of shares in cash as
application money before it can proceed to allot the shares.
 The minimum subscription stated in the prospectus must have been raised
 No allotment must be made until the beginning of the 3 rd day after that on which the
prospectus was issued or such later date as may be prescribed
Return of Allotment
Section 54 (1) provides that when a Company limited by shares or by guarantee and having a share
capital makes any allotment of its shares, the Company shall within 60 days thereof deliver to the
registrar for registration:
a) A return of allotment stating
i. The numbers and nominal value of the shares allotted
ii. The names address and description of the allotees
iii. The amount if any paid or due and payable on each share
b) In case of shares allotted for a non-cash consideration, a contract in writing constituting the
title of the allotee indicating the services or other consideration for which the shares are
allotted
Methods of Public Issue
Direct Offer to Public
This is done by publishing a prospectus inviting the public to subscribe for the shares. If this is done,
the Company may have to arrange for the issue to be underwritten by negotiating with an issuing
house to take up shares that will not have been taken up by the public.
Offer for Sale
Under this method the Company may sell the whole of the shares to an issuing house which in turn
publishes a prospectus inviting the public to purchase the shares at a higher price to cover for issue
expenses and earn a profit. If the Company adopts this method, then it has no responsibility for the
success of the issue as it will already have a binding contract whereby the issuing house has
subscribed or agreed to subscribe for securities thereby in effect underwriting the whole issue.

44
Offer by Tender
This is where tenders are invited and the shares are sold to the highest bidder. It is meant to ensure
that the highest possible price is obtained and to discourage stags who apply for speculative purposes
Placings
In this case, the Company arranges for the issuing house to purchase the securities and places them
with its clients usually in fairly substantial blocks.
This method usually favours large institutional investors e.g. NSSF small investors are however
protected in a way by the securities exchange which requires such Companies to make a substantial
proportion of the securities available to the general public.
Rights Issue
This is an issue of shares by the Company to existing members who are given right to acquire shares
in proportion to the existing shareholding. This minimizes floatation expenses and also the assistance
of issuing houses is dispensed with. Shareholders who do not exercise their rights in this regard will
have their rights sold to the open market.

Issue of Shares at a Premium

When shares are issued at a premium shareholders pay a price higher than their par value. Section 58
provides that the premium amount must be transferred to share premium account only which can be
used for the following purposes:
1) For share reduction purposes
2) Pay up unissued shares of the Company to be issued to members as fully paid shares
3) Write off preliminary expenses of Company
4) Write off any discount allowed on any issues of shares or debentures of the Company
5) Provide for the premium payable on redemption of redeemable preference shares or
debentures where they are to be redeemed at a premium
N/B The premium is strictly controlled by the Act and must be disclosed in the balance sheet and only
used for specified purposes.
Issue of Shares at a Discount
This means the issue of shares at a price below the par value. Generally it is not open to the Company
to issue shares at a discount. If the Company has to issue shares at a discount it has to satisfy the
following conditions:
a) The articles must have authorized the issue and if not the article must first be altered in order
to allow the Company to issue shares at a discount
b) It must be an issue of shares of a class already issued thus a Company cannot create a new
class of shares and then issue them at a discount.
c) At least one year must have elapsed since the Company became entitled to commence
business.

45
 d) The issue must be sanctioned by the court.
e) Shares to be issued at a discount must be issued within one month from the date on which the
issue is sanctioned by the court or within such time as the court may allow.
f) The Company must pass a resolution authorizing the issue
g) The resolution must specify the maximum rate of discount at which the shares are to be
issued.
Reduction of capital
The general principle enforced by courts is that no action resulting in a reduction of the capital of a
Company shall be permitted unless the reduction is effected
 Under statutory authority
 In strict accordance with procedure laid down in the articles.
The main ways of capital reduction include
a) To extinguish / reduce liability on shares not fully paid up
b) To cancel paid up capital which is lost or unrepresented by available assets.
c) To pay off any paid up capital in excess of the needs of the Company
Procedure for Reduction of Shares Capital
1) Convening an extraordinary general meeting and placing the matter on the agenda before the
members
2) The Company must pass a special resolution which is supported by ¾ of members entitled to
attend and vote at meeting of Company authorizing the reduction of capital
3) Application for court sanction. Once the Company passes the resolution it must apply to court
by petition for an order confirming the reduction. where the proposed reduction involves
extinguishing / reducing liability in respect of unpaid share capital then;
a) Every creditor of the Company is entitled to object to the reduction
b) The court shall make a list of creditors entitled to object to such a reduction and the amounts
respectively owed to them and then publish it. It will then fix a date on which any creditor
who had been excluded from the list can demand to be included so as to have the right to
object
c) Where a creditor entered on the list does not consent to the reduction, the court may if it
deems fit dispense with the consent of such creditor if the Company secures payment of the
debt.
4) Registration of the order the court order the confirming the reduction shall be filed with the
registrar. The registrar shall then certify the order then issue a certificate in his name and the
certificate shall be conclusive evidence that all requirements of the Act with regard to
reduction of capital have been complied with

5) Company shall then proceed. to reduce its capital and method of reduction to be adopted is at

46
 the discretion of the Company
RAISING AND MAINTENANCE OF CAPITAL
The capital of the Company whether paid up or not is regarded by the court as constituting at least in
principle a permanent fund available to the creditors of the Company. This capital is required for
protection of creditors since the liability of shareholders is in general limited to the nominal amount of
shares taken up by them and thus the only fund of last resort available to creditors is the issued capital
It has therefore been necessary for the court and legislature to provide that the full value of that capital
be raised and maintained as a fund so far as ordinary risk of business will allow. The following rules
relate to raising of capital:
a) The issue of shares at a discount is in principle prohibited as this would mislead persons
dealing with Company into believing that the full value of the issued capital has been received
by Company
b) When shares are issued at a premium, the premium is transferred to a share premium account
and this can only be applied for purpose provided by the Act
c) Payment for shares shall be in money or money‟s worth and in case of Public Limited
Companies it must not consist of an undertaking to work or perform services
d) A public limited company may not allot shares until it has received at least a quarter of its
nominal value and the whole of the premium
e) A public limited company may not allot any shares for a consideration other than cash
without an evaluation report in respect of the consideration
Rules Governing Maintenance of Capital
1) Reduction of issued capital must comply with the strict legal requirements including
confirmation by the court
2) A Company will only purchase or redeem its shares out of distributable profits or out of a
fresh issue shares to raise cash for that purpose.
3) A Company may not issue shares to a nominee of its own
4) A public limited company must sell or cancel any of its shares acquired by itself by forfeiture
or surrender
5) A public limited company may not in principle finance the acquisition of its own shares
6) Dividends can only be paid out of profits and not out of capital

Methods of Alteration
(i) Increase in capital
If the articles of association permit, the authorized capital of a company may be increased by
the creation of additional ordinary shares to rank in priority (have the same right) with the
existing shares of the company.

47
(ii) Consolidation of shares
This is where the capital of the company is consolidated and divided into shares of larger
nominal value than those into which the capital is presently divided.
The consolidation of shares usually increases the par value of shares. The par value which has
initially sh.5 changes to sh.10.

(iii) Subdivision of shares

The shares of the company may be subdivided by splitting shares into shares of smaller
nominal value i.e. the nominal value which was initially sh5 may be subdivided into sh.2/50.
Subdivision of shares or share split may be effected in the case of listed company to make
shares easily marketable and more affordable by the public.

(iv) Conversion of shares into stock

If the articles of association allows, the fully paid shares of a company can be converted into
stock by an ordinary resolution unless the articles stating the contrary.

Procedure of converting shares into stock

1. Ensure that the articles of association give the necessary power to effect the conversion.
2. Ensure that the shares are fully paid.
3. Convene a board meeting to recommend to the shareholders at Annual General Meeting that
it is desirable to convert the shares into stock.
4. Convene a general meeting of the company giving appropriate notice.
5. Pass the necessary ordinary or special resolution as required.
6. Within one month of the passing of the resolution, file with the Registrar of company the
notice of conversion.
7. Amend all copies of the memorandum into stock so as to effect the conversion.

Procedure of increasing share capital

1. The Board meeting to recommend to the shareholders that it is desirable to increase the
authorized share capital of the company.
2. Convene an Annual General Meeting giving appropriate notice 21 days clear notice or
company to short notice which has to be signed by shareholders – private company
especially.
3. Pass the necessary ordinary resolution to affect increased and ordinary share capital.
4. Complete the necessary statement of increase of nominal capital have it stamped with the
appropriate stamp duty i.e. 1% of the increased authorized share capital.
5. Complete form 204 which has to be signed by the company secretary or company director.
6. Complete the necessary form 213 which has to be signed by either the company secretary of
company director. Form 213 will only be necessary if the shares are to be allotted.

 Within one month, file the Registrar of a company, statement of increase of nominal capital
together with other forms.
 Update the memorandum of association and articles of association with the increase
authorized capital.

48
 Prepare the necessary share certificates in case shares are allotted.
7. Reconversion stock of shares

The stock of a company may be reconverted into paid up shares of or denomination by

ordinary resolution.

8. Cancellation of unissued shares

This is where the unissued shares comprised in the authorized capital is cancelled by an
ordinary resolution

ACCOUNTS AND AUDITORS

Accounts

As a safeguard to creditors, investors and shareholders, there is a statutory obligation placed upon
every company to keep proper books of accounts and to make an annual return to the registrar
giving certain information regarding the financial position. The books must give a true and fair view
of the state of the company’s affairs and to explain its transaction.

Books of Accounts

Section 147 imposes a strict obligation upon the company to keep proper books of accounts of
respect to:-

 All sums of money received and spent by the company and the matters in respect with
which the receipts and expenditure take place (cash book).
 All sales and purchases of the goods by the company
 The assets and liabilities of the company
The books of accounts must be kept in English language at the registered office of the company or at
such other place as may be determined by the directors. If kept at a place outside Kenya, returns
regarding the business recorded in such books are to be made to the registrar at interval not
exceeding six months. Such accounts and returns must disclose with reasonable accuracy the
financial position of the business recorded and be sufficient to enable the company’s balance sheet
to disclose to profit and loss account or income and expenditure account. The books and returns are
to be open for inspection by the directors. The articles also make provisions for the inspection of the
books by members of the company but no members shall have the right except as conferred by
statutes or authorized by directors or by the company’s general meeting. The responsibility of

49
preparing the books of accounts rests on the directors and default in this renders the directors liable
to imprisonment up to 12 months or a fine of up to kshs.10, 000 or to both.

Annual Accounts and the Balance Sheet

Section 148 requires that the directors must lay before the company at least once a year a balance
sheet and a profit and loss account or an income and expenditure account in case of a non-trading
company. The accounts must cover the period in the case of the first accounts since incorporation of
the company and in other cases, since the previous accounts .The accounts are required to be
accompanied by a balance sheet as at the date to which the profit and loss accounts or income and
expenditure accounts are made.

Signing of the Balance Sheet

Except for a banking company, the balance sheet must be signed by two directors or incase of only
one director by him. For banking companies the balance sheet must be signed by at least three
directors or all of them if they do not exceed three. It must also be signed by the secretary. The
balance sheet laid before the company in a general meeting is required to have attached to it the
following documents.

1. The profit and loss accounts approved by the directors before the balance sheet is signed
2. Any group accounts which are not incorporated in the balance sheet or profit and loss
accounts
3. The auditors report
4. The director’s report
Rights to Receive Copies

Every share holder is entitled to a copy of every balance sheet which is to be laid before the
company in a general meeting together with those documents to be annexed to the balance sheet. A
copy must be sent to every member not less than 21 days before the meeting.

Exception

1. A member of a company without share capital

2. Where the shareholder’s address is not known
Other requirements as to accounts

There must be shown either in the balance sheet or profit and loss account laid before the general
meeting.

50
  The amount of directors’ emoluments
 Particulars of directors’ emoluments which have been waved
 Any loans made to any officer of the company or by its subsidiaries during the financial year
 Particulars of employees’ salaries
Group Accounts

Section 150 imposes an obligation on a holding company to present to its members alongside its
own annual accounts group, accounts relating to the state of affairs of the company and its
subsidiaries. This is one of the occasions when the veil of incorporation is lifted by statute so that the
holding and subsidiary companies are treated, though separate, as one entity.

Exceptions to preparation of Group Accounts

1. Group accounts need not to be prepared in the case of a wholly owned subsidiary company of
the holding company.
2. Group accounts need not to deal with a subsidiary company if the company’s directors are of the
opinion that:-
 It is impracticable or it will be of no value to the members in view of the insignificant amount
involved or it would involve delay.
 The results would be misleading or harmful to the business of the company or the
subsidiaries.
 If the business of the holding company differs from that of the subsidiary to such an extent
that they can’t be reasonably be treated as a single undertaking.
Form and Content of Group Account
The group accounts presented before a holding company must be in the form of consolidated
accounts comprising of:-

a) A consolidated balance sheet dealing with the state of affairs of the company and all its
subsidiaries
b) A consolidated profit and loss account dealing with the profit and loss account of the holding
company and its subsidiaries.
When the financial years of a group of companies do not coincide, the registrar may relieve a
holding company or a subsidiary company from holding an Annual General Meeting in a calendar
year where it is desirable to extend financial year to coincide with that of its subsidiary or holding
company. However, the directors are required to explain the reasons why the financial years don’t

51
coincide. Under section 157, there must also be attached to the holding company’s books laid before
the General Meeting a report by the directors. The report must show:-

 The state of the company’s affairs

 The amount, if any, they recommended to be paid as dividends
 The amount, if any, they propose to carry to reserves
 A fair review of the business during the year and at the end of the year. The names of
directors who have held office at any time during the year.
 Details of any acquisition by a company of its own shares.
 Directors’ interests in the shares or debentures of the company at the beginning and end of
the year if not shown elsewhere in the accounts.

AUDITORS

To safeguard the interests of subscribers, the Act provides for the employment of an auditor. The
auditor is a servant of the shareholders and his duty is to examine the affairs of the company on
their behalf and to report to them at the end of the year. The articles normally include a provision
dealing with the appointment of auditors and the auditing of the company’s accounts.

Appointment of Auditors

The first auditors of a newly formed company are appointed by the board of directors. Subsequent
appointments are made at the Annual General Meeting. Thus under Section 159, every company is
required at each Annual General Meeting to appoint an auditor to hold office from the conclusion of
that meeting until the next Annual General Meeting.

Failure by the company to appoint an auditor entitles members to make an application to the
registrar to appoint one. Generally, a retiring auditor is to be re-appointed without any resolution
being passed at the meeting unless;

a) He is not qualified for re-appointment

b) A resolution has been passed appointing someone else instead of him
c) A resolution has been passed that he shall not be re-appointed
d) He has given the company a written notice of his unwillingness to be re-appointed
Any casual vacancy in the office of the auditor may be filled by the directors. No person other than a
retiring auditor may be appointed at an Annual General Meeting unless special notice of the
resolution has been given and a copy of it has been sent to the retiring auditor. The retiring auditor

52
is usually entitled to make representations in writing and to have them circulated among members
and he shall be entitled to speak at the meeting at which he is to be removed.

Qualifications to be appointed as an Auditor

Except for private companies a person is not qualified to be appointed as auditor unless:-

a) He is a member of the Institute of Certified Public Accountant of Kenya.

b) He is a member of any other professional body specified in the Accountants Act.
Persons not qualified as Auditors

1. An officer or servant of the company

2. A person who is a partner or in the employment of an officer or servant of the company
3. A body corporate
4. A person disqualified for appointment as auditor of a subsidiary or holding company
N/B: Appointment of any person not qualified to act as auditor renders such person and the
company liable to a default fine.

Remuneration of Auditors

This may be fixed by the company in the Annual General Meeting or in such a manner as the
company may determine. Incase of an auditor appointed by the directors to fill a casual vacancy or
by the registrar in the event of the company failing to appoint one, his remuneration is governed by
the provisions of Section 159 which empowers the directors or the registrar to fix such
remuneration.

Powers and Duties of Auditors

The duties of auditors are laid down by the companies Act and by the articles of the company. They
include:-

1. Auditors must acquaint themselves with their duties as laid down by the articles and by the
Act
2. They must report to the members on the accounts laid before the company in a General
Meeting during their tenure of office. In Re- London General Bank Company, it was observed
that in preparing the report, they must ascertain and state the true financial position of the
company through examination of the books.

53
 3. They must be honest and exercise reasonable care and skill in their duties. They have been
described as watchdogs but not blood hounds. They are not bound to be detectives and
should not approach their work with suspicion or a foregone conclusion that there is
something wrong.
Thus, the auditor is justified in trusting the responsible officers of the company and in assuming
that such officers are honest provided the auditor takes reasonable care. If this happens he shall
not be liable if the information turns out to be misleading. In Kingston Cotton Mills Company, the
auditors accepted the certificate of the manager as to the value of stock in trade. The stock was
grossly overstated for several years in the balance sheet as a result of which dividends were paid
out of capital. The auditors did not examine the goods yet had they done so, they would have
discovered that the valuation required explanation. It was held that the auditors were not liable.

4. Statutory Report
After the statutory report has been certified by the directors, the auditor must certify the report has
correct so far has it relates to:

 The shares allotted by the company

 Cash received in respect of shares
 Receipts and payments of a company
5. Prospectus
It requires a report by the auditors in respect of profits and losses, assets, liabilities and the rates of
dividends if any paid by the company and which is required to be included in the prospectus. The
auditor has to certify this as correct.

Contents of Auditors Report

1) Whether the auditors obtained all the information and explanations which to the best of
their knowledge were necessary for the audit
2) Whether in their opinion proper books of accounts have been kept by the company or
proper returns adequate for the purposes of audit have been received from subsidiaries not
visited by them.
3) Whether the company’s balance sheet and profit and loss accounts dealt with in the report
are in agreement with the books of accounts and returns and whether in their opinion the
accounts give the information required by the Act and in manner so required.

54
 4) In the case of a holding company submitting group accounts whether in their opinion the
group accounts have been properly prepared in accordance with the provisions of the Act

N/B

i. If the directors refuse to allow the auditor to access any information for them to
make their report; the auditors should refuse to make the report or make an
appropriate by qualified report.
ii. The auditors report must be read to the company in a General Meeting and be open
to inspection by any member.

Rights of Auditors

a) Every auditor of a company has a right of access at all times to the books and vouchers of
the company and is entitled to require from the officers of the company such information
and explanations he deems necessary for the performance of his duties as auditor.
b) He is entitled to attend any General Meeting of the company and to receive any notice
which members are entitled to receive.
c) He is entitled to be heard on any business of the meeting which concerns him as auditor.
d) Right to receive remuneration for auditing the accounts of the company
e) Right to make representations at a meeting where it is proposed that he be removed as
auditor
f) Action for damages where the termination of his service is unlawful and unprocedural
g) Right to visit branches where the accounts of any branch are audited by a person other than
the company’s auditors

Liability of the Auditors

1) Default to comply with the requirements of section 162 regarding his report renders him
liable to a fine and may also be sued by the company for damages
2) Where it is proved that the auditor s are negligent in the performance of their duties, any
member’s suffering loss as a result of the negligence will be entitled to sue the auditors for
compensation
Removal of Auditors

55
A company may remove an auditor by an ordinary resolution for which special notice has been given
to the members. Upon receipt of the special notice intended to remove an auditor, a copy of the
notice must be sent to the retiring auditor immediately. He must also be advised by the company
that he is entitled;

a) To make written representations and have them circulated to all members before the
meeting.
b) To attend the meeting and to speak on any matter relating to his own position as an auditor.
Members shall then pass an ordinary resolution to remove the auditor and within 14 days of the
resolution, the company must give the registrar notice of the removal of the auditor.

Investigation into the affairs of a Company

Investigation into the affairs a Company means an investigation of all its business affairs its profit and
losses, assets, investments and management of the affairs of its subsidiaries.

The most important reason for investigation is for the protection of investors and creditors. This is
because in most cases persons who are in real control of the affairs of a Company manage its affairs in
such a way that shareholders are rendered almost ineffective.

Application for investigation may be made by:

i. The Registrar

ii. The Members

iii. The Company

i. Investigation by the Registrar

Under section 164 it is provided that where the registrar has reasonable grounds to believe that
provisions of the Act have not been complied with or where on examining any document filed with
him he is of the opinion that the document does not disclose a fair statement that it purports, he may
ask the Company in writing to furnish him such information or explanations within a specified time
failure to which the registrar must report the circumstances in writing to the court which can appoint
an inspector.

ii. Application by members

Members have a statutory mandate to apply to the court to appoint one or more inspectors to
carry out investigations and report their findings. Such an application may be made by:

a) In case of Company having a share capital by not less than 200 members or by members
holding not less than 1/10 of the issued shares

b) In case of a Company not having share capital by not less than 1/10 of the members. The court
before acting may require members to file convincing evidence of matters requiring
investigation.

56
 iii. Application by the company

A company may by a special resolution of members in a general meeting declare that its affairs
ought to be investigated and in such a case the court is bound to appoint an inspector to make an
investigation and report to it

The court may also appoint inspectors where it seems that-:

a) The business of the Company is being conducted with an intent to defraud creditors or for
some other fraudulent/ unlawful purpose

b) Where persons concerned with formation of the Company have been guilty of fraud or other
misconduct towards a company or its members

c) Where the members of the Company have not been given all the information with respect to
its affairs

Powers of inspectors

An inspector appointed pursuant to an application for investigation by members or the Company has
discretionary powers to investigate the subsidiary of Company and Co-subsidiaries

Section 168 empowers an inspector to apply to the court for attendance and examination on oath of
any person he would not otherwise be entitled to examine.

On conclusion of his investigation, the inspector is required to make a written report to the court and
the court must then supply a copy of the report

 To the Company and the registrar

 To any member of the Company upon payment of a prescribed fee
 To the applicants if they so request
Under section 172 it is provided that a copy of the report authenticated by the common seal of the
Company is admissible evidence in any legal proceedings in relation to matters contained there in.

If the report discloses any offence in relation to the Company for which any person should be
criminally prosecuted, the court is required to refer the matter to the director of public prosecutions
(DPP).

Once proceedings have commenced officers and agents of the Company are required to give any
necessary assistance as they are reasonably able to give towards the proceedings

BORROWING POWERS AND DEBENTURES

Every trading company is deemed to have borrowing powers even if these are expressly specified in
the object clause of its MOA.

There is no such implied power for a non-trading company and its MOA must lay down such powers
to enable it to borrow.

57
A company having power to borrow may do so any extent within the limitations laid down by the
MOA and AOA.

Sect 111, provides that a public company having a share capital cannot exercise borrowing powers
until it‟s entitled to commence business.

If the company exercises such powers in contravention of this provision every person responsible will
be liable to a fine up to sh.1,000 every day the contravention continues.

The provision does not apply to a private company.

Ultra vires borrowing

If a company borrows beyond the powers specified in the MOA, the borrowing is ultra vires and
therefore void.

In such a case, no debt is created and any security which may have been given in respect of the
borrowing is inoperative.

A company has no power to ratify a void contract even if every member purports to do so.

In this case the lender cannot sue the company for the repayment of the loan.

The following remedies are however available to the lender

If the money has not been spent by the company, the lender can obtain the money an injunction to
prevent the company from parting with it.

If he can identify the property purchased with the money, it is entitled to a tracing order and can
recover it.

If the money ha been used to pay off legitimate debts of the company, the lender may sue the
company has he steps into the show of creditors who have been paid off by virtue of the principle of
subrogation.

In Neat Building Society v Lucey, a building society borrowed money to pay off the principle and
interest due in a mortgage.

The borrowing was ultra vires.

It was held that the lenders were subrogated to the rights of the creditors who were paid off and could
recover the amount from the company. Similarly, the lender can retain the securities given to him for
such part of the money lent that is equivalent to the legitimate debts paid.

If the borrowing is ultra vires in regard to directors only the company can ratify the contract and to be
binding on it.

If the contract is not ratified, the lender may recover damages from directors for breach of authority.

Debentures and debenture stock

According to sec 2, debenture includes stock, bonds and any other securities of a company whether
constituting a charge on the assets of the company or not.

Generally, a debenture refers to a document containing an acknowledgement of indebtedness issued

by the company under its common seal giving an undertaking to repay the debt at a specified date or

58
at the option of the company and in the meantime to pay interest thereon (on it) at a fixed rate and at
intervals stated in the debentures.

All companies public or private can issue debentures.

They may be issued at par, premium or discount either privately or through a prospectus.

The legal requirement of, issuing and allotting debentures are the same as those of shares except that
the following conditions do not apply to debentures.

 No 5% cash requirement as nominal value on application

 No minimum subscription for allotment
 No legal restrictions are imposed e.g. issuing at a discount.

Types of debentures

Secured debenture

These are secured by some charge on the property of the company.

This charge may be fixed or floating hence there may be fixed or floating charge debentures.

Unsecured debenture (naked)

They are not secured by any charge on the assets of the company

The holders of such debentures are like ordinary unsecured creditors of the company.

Registered debentures

These are debentures that are payable to the registered holders.

A registered holder is one whose name appears both on the debenture certificate and in the company‟s
register of debenture holders.

The holders of such debentures can transfer them like shares but such transfer must be registered.

A transfer debenture contains the following clauses:-

 A covenant to pay the principle sum

 A covenant to pay interest
 A description of the charge on the company‟s undertaking or assets.
 A statement that it is issued subject to the conditions endorsed on it

Redeemable debentures

This provides for the repayment of the principle sum on a specified date or on demand.

Irredeemable (perpetual) debenture

In this case, the issuing company does fix a date by which they should be redeemed and the holder of
such debentures cannot demand payment from the company so long as it is a going concern.

59
They are normally payable on winding up or some serious default by the company.

Bearer (unregistered) debenture

These are debentures which are payable to bearer.

They are registered as negotiable instruments and are transferable by delivery and therefore a bona
fide transferee for value is not affected by the defects of title of the previous orders.

Convertible debentures

They contain an option entitling the holder to convert his debt at times stated in the debenture to
ordinary or preference shares of the company at a stated rate of change.

If the holder exercises these rights he ceases to be a lender of the company and become a member.

Characteristics (features) of a debenture

1) It is issued by company and is usually in the form of a certificate which is an acknowledgement of

indebtedness.
2) It usually specifies a particular period as the date of payment unless it is irredeemable.
3) It generally creates a charge on the undertaking of the company or some part of the property
although some are without charge.
4) A debenture holder does not have a right to vote in the general meetings of a company.
5) It attracts a fixed rate of interest.

Distinguish between debentures & shares

A shareholder is partly the owner of the company but a debenture holder is only a creditor.

Income on debentures is fixed & certain whether or not a company makes profits whereas income on
shares is uncertain depending on availability of profits & the description of directors.

A shareholder has normal rights of a member e.g. right to receive notices of general meeting, to vote
etc. whereas a debenture holder is not a member & not entitled to some of these rights.

A company may purchase its own debentures but it is not open to purchase its shares.

In case of winding up, debenture holders rank first for repayments whereas shareholders can only
obtain anything after all the outside creditors have been paid.

Debentures may be issued at a discount but shares may not be issued at a discount.

Interest is paid on debenture while dividends are paid on shares.

Debenture Stock

It refers to the borrowed capital consolidated into one mass

The difference between debenture & debenture stock is that a debenture is usually for a fixed sum &
is transferable in its entirety (complete units) whereas debenture stock can be transferred in fractions.

60
Similarly, a debenture may be issued with or without a security whereas debenture stock is generally
created by a trust deed.

Debenture Trust Deed

Debenture holder with a floating charge may not have time to look after their interests in the property
charged.

They may for the purposes of protecting their interest appoint some persons among themselves as
trustees.

For this term of the deed the company undertakes to pay the debenture holders the principle sum &
interest normally charges its property to the trustees as security.

The trustees must act diligently in the discharge of their duties and any clause in the trust deed which
exempts them from liability for breach of their duty is void.

Contents of Debenture Trust Deed

The facts of the appointment of a trustee for debenture stock holder.

The nominal amount of the debenture stock

The date or period of the payment of the principal amount.

The rate of interest or interest payment date.

If the debenture stock is secured, the deed creates a charge over the assets of the company.

The authority of a trustee to enforce the security in case of default e.g. to appoint a receiver with
suitable powers of management.

Covenants between the company and trustee e.g. to keep the assets fully issued or to limit total
borrowing.

A prohibition of issuing another charge ranking ahead or equal to a floating charge.

Details of the issue & conversion rights if any.

Other provisions relating to:-

 A register of debenture holder

 Transfer of stock.
 Issue of stock certificate
 Meeting of debenture stock holders

Advantages of a Trust Deed

1. A trustee with appropriate powers can intervene & appoint a receiver or take possession of the
property of the company and carry on the business in case of need.
2. Security for the debenture stock can be given a single trustee unlike ordinary debentures on
which the security can be given to numerous charging bodies of debenture holders.
3. A company can construct the representative of the debenture holders (trustee) with whom it
can negotiate e.g. on the consent to sell an obsolete security & replace it with another.

61
4. By calling a meeting of debenture holder the trustee can consult them and obtain a decision
binding on all of them.
5. The trustees have a legal mortgage over the company property. Thus persons who
subsequently lend money to the company cannot gain priority over the debenture holders.
6. The trustee act as watchdogs in ensuring & instituting the company‟s obligations under the
trust deed are carried out properly e.g. property been kept insured & well maintained.

Liability of trustees (sec 90)

A trustee is liable for any breach of trust where he fails to show the degree of diligence & care
required of him as a trustee having regard to the provisions of the trust deed conferring on him
any powers, authority or discretion.

Any clause in the trust deed exempting the trustee from liability for breach of trust is void.

Exemptions

Where the trustee can show that he took such care & diligence as is required of him as a trustee.

Where a majority of not less than ¾ in value of the debenture holders agree to ratify the act of a
trustee who is dead or ceases to act.

Under sec 402, in the case of directors or other officer in the company the courts are empowered
to receive him from liability if of the opinion of such person acted honestly and reasonably.

Register of Debenture Holder & Index of Debenture Holders

The register of debenture holders must be kept at the company registered office and must contain
the following particulars.

Name, address & occupation of each debenture holder

Debenture held by each holder distinguished by their numbers and the amount paid or considered
as paid.

The date each person was entered in the register as a debenture holder.

The date when each holder ceased to be a debenture holder.

NB// if the number exceeds 50 debenture holders, an index must also be prepared unless the
register is maintained in the form of an index.

Charges

A charge is a claim by a creditor on the property & assets of the company as security for
repayment of a loan.

The charge on the assets may either be fixed or floating.

Fixed (Specific)) Charge

A fixed charge is one which is created on some definite or specific property of a permanent nature
e.g. a building, land or heavy machinery.

62
It prevents the company from selling the property so charged free the burden of the debt.

In the event of winding up a debenture holder secured by a specific charge is in the highest
ranking class of creditors (secured creditor).

Where the property of the company is specifically charged, the cannot sell it without the consent
of the holder of the charge.

The charge can either be equitable or legal.

In a legal charge, the full ownership of the property is transferred to the creditors (lenders)
without delivery possession of the mortgaged property & the mortgager reserves the right to
regain the full ownership upon payment of the loan & interest.

In an equitable mortgage, only the title deed or documents of the ownership of the property are
deposited with the creditor as security without transferring the legal ownership.

Floating Charge

Floating charge is defined as one in ambulatory (shifting) in its nature hovering over the property
which is intended to affect until some event occurs or some act is done which causes it to settle on
the subject matter of the charge within its reach.

It is an equitable charge & remains dominant until the undertaking charge ceases to be a going
concern or until the person in whose favor the charge is created intervenes.

The property under a floating charge can be dealt with by the company without consulting the
holder of the charge & may be sold, exchanged or dealt with in any way that the directors may
deem fit.

Rules Relating to Floating Charges

It operates as an immediate or continuing charge on the property charged subject only to the
company‟s powers to deal with the property in the ordinary cause of business.

A floating charge unless otherwise agreed leaves the company at liberty to create fixed charges
ranking in priority to the floating charges.

Notice of the floating charge does not stop subsequent fixed charges.

The floating charge unless otherwise agreed retains its floating characteristics unless a receiver is
appointed either by the court or by the debenture holder in which case it crystallize.

A landlord can destrain for rent before the appointment of a receiver but where a receiver has
already been appointed by the court; the landlord must apply for permission from the court before
destraining for rent.

Where chattels are in the company‟s possessions under a hire purchase agreement, the rights of
the owner prevails over a floating charge created by the company.

Crystallization of a Floating Charge

63
When a floating charge becomes fixed or fastens to some particular property for any reason, it is
said to crystallize and such charge becomes a fixed charge.

A floating charge crystallizes in the occurrence of the following event:-

When a company goes into liquidation-in this case, the charge automatically crystallises whether
or not the company is in default.

Appointment of a receiver-where the company is in default, the lender may take some steps for
redress by appointing a receiver in which case the charge crystallises.

When the company ceases to carry on business or ceases to be a going concern.

Where a creditor takes possession of the assets subject to the charge under the power of seizure.

Where the charge is converted into a fixed charge in which case it will concern specific property.

Disadvantages of floating charges

Reduction in the value of asset- a floating charge is always worthless when a lender seeks to rely
on it because the company which creates the charge is free to deal with its assets in the ordinary
cause of business and may even sell them so that when the lender appoints a receiver, the value of
the remaining assets may be very small.

Priority of preferential creditors-certain class of creditors e.g. taxes due to the government are
treated as preferential by law either in the event of the company being wound up or in the event of
a receiver being appointed.

Priority of other creditors-if a lender is relying on a floating charge, there is risk that certain
creditors may obtain priority over the lender e.g. a landlord levying distress for rent before a
receiver is appointed.

The act provides that a floating charge created 6 months before commencement of winding up is
void unless the charge was created when the company was solvent.

Possible priority of subsequent fixed charge-a company which has created a floating charge may
at a later date execute a subsequent fixed charge on some of the assets comprised under the
floating charge unless proper precautions are taken by the holders of the floating charge.

Debentures with a pari passsu clause

When debenture are issued creating a charge it should be maintained on the back of debenture or
in the trust deed that each debenture of the sales issued is to pari passu i.e. equal as reguards
charge and repayment with the others of the same series.

In the absence of the clause the legal position will be that the debentures will be payable
according to the days of issue and if all of them were issued in the same date, then according to
consecutive numbers.

The objective of the clause is to place all the debentures on he same level as to security so that if
the security is to be enforced, whatever is realised from it shall be divided among the debenture
holders on pro rata basis.

64
Negative pledge clause

A creditor to whom a floating charge is given may seek to protect himself against losing his
priority by including a prohibition against the company creating a fixed charge over the same
property which would otherwise take priority.

If the company breaks the prohibition the creditor to whom the charge is given still obtains
priority unless at the time when this charge was created, he had actual knowledge of prohibition
imposed by the floating charge.

Registration of a floating charge is deemed to give notice of the existence of the floating charge
but it does not give notice of negative pledge clause even though the registered particulars on the
file at the registry refer explicitly to the provision.

Registration of charges (sec 96)

Under sec 96 every company is required to keep at its registered officer a register of all its fixed
charges specifically affecting the property of the company and all floating charges on the
undertaking on any property of the company and to enter in it a short description on the property
charged, the amount of the charge and the names of the persons entitled to it.

The act provides for the registration of the following charges (Registrable charges) of the
company together with the instrument creating them:-

a) A charge for the purpose of securing any issue of debentures

b) A charge on uncalled share capital of the company

c) A charge on any immovable property whatever situated or any interest there in

d) A charge on any book debt of the company a book debt is any debt occurring in the
ordinary course of business and is usually entered in the trade books.

e) A floating charge on the undertaking or any property of the company including stock in
trade.

f) A charge on calls made but not paid. Unless otherwise provided in the MOA, or AOA a
charge on unpaid capital cannot be created

g) A charge on a ship or any share on the ship

h) A charge on a goodwill, patent or license under a patent, trademark or on a copyright.

Particulars to be registered

 The total amount secured by the series of debentures

 The date of the resolution authority the issue

 The date of the trust deed if any which creates or defines the security.

 A general description of the property charged

 The amount or rate of commission paid or discount allowed in the case of subscription of
debentures.

65
Effects of non registration of charges

 If a charge is not registered with the registrar within 42 days, it is void against the
subsequent creditors.

 Money secured becomes immediately repayable.

 The charge is void against the remunerator in the event of winding up but the debt in
respect in which the charge was given remains valid but as unsecured debt.

 Every person in default is liable to a penalty each day the default continues.

Conclusiveness of certificate of registration of a charge

Once the registrar issues the certificate of the registration of a charge this gives conclusive
evidence that all the requirements of the companies Act in relation to registration of charges have
been duly complied with.

Thus, if after the certificate is issued some irregularities are discovered, these will not nullify or
invalidate the charge.

In Reclnye Ltd 1969, a company created a charge in favor of a lender in February. The necessary
documents were executed but left undated and the lawyer acting for the company did not register
them.

In June, he realized his mistake, wrote a June date on the document certificate of registration was
issued. The company went into liquidation and the liquidation challenged the validity of the
charge.

Held: it was held that the charge was valid and enforceable as the registration certificate was
conclusive evidence that the charge had been registered with the time stipulated by the statute.

Rights and remedies of debenture holders

This depends on whether the debenture holder was secured or unsecured.

In case of unsecured debenture;

 The debenture holder can bring an action to enforce the debenture and obtain judgment to
levy execution on the property of the company.

 He may present a petition for a compulsory winding up of the company.

 If winding up is in progress he can prove during winding up for the amount due to him for
which no security was given.

 He may rank with the ordinary creditors although he will be treated as a special creditor.

In case of secured debenture

 Action for recovery of the debt-However, this may not be necessary for a secured
creditor as he can use the threat of solvency proceeding against the company.

 Sale of property-in case of a fixed charge over property, a debenture holder has implied
power of sale under the law of property.

66
  Taking the possession of the property- the mortgagee‟s right to the possession of the
property is not statutory but results from the fact that a legal mortgager gives the
mortgagee right to take passion of the property.

 Winding up- a secured creditor can petition for the winding up of the company where the
debenture gives him express power. The petition may be made on the following ground:-

a) Where the principal amount of the loan has become payable

b) The payment of interest or instalment are in arrears

c) The company is insolvent or has ceased to carry on business.

d) The assets of the company are being sold to an extend which exceed any limit set by the
company MAO or by the terms of the debenture

e) If it appears probable that the company may be wound up due to pressure form a creditor.

Appointment of a Receiver

The court usually appoints a receiver and manager if necessary where duty shall be to collect and
protect the property over which he is appointed.

He may also carry on the business of the company to satisfy the claim of debenture holders after
they result the company back to the directors.

He may also sell the assets and use the proceeds to repay the debenture holders.

ALTERNATIVES TO WINDING UP (CORPORATE RESTRUCTURING)

Compromise or Scheme of Arrangement (Sec 207)

The provision of the companies Act regarding compromises, schemes or arrangements are mainly
applicable to those companies liable to be wound up under the Act.

The provision can apply to a company which is in the process of winding up.

By making this provision the law provides a kind of substitute for winding up which will thereby save
the company from going into liquidation.

A compromise includes any settlement of a matter or disputes between a company and its creditors or
members by mutual concession.

An arrangement includes a re-organization of share capital of the company by the consolation of

shares of different classes or by division of the shares into shares of different classes or both.

It also includes a variation of the special preferential rights on preference shares.

A scheme binds all parties including dissentients.

Whatever a company makes a scheme of compromise or arrangement, and then all contracts are
modified and new contract come into force to replace the old ones on terms that are aimed at
stipulating the company‟s financial structure.

67
This may involve the following change.

Debenture holders and creditor may be agree to accept a reduction in the rate of interest or to
surrender the rights to accumulated outstanding interest or to accept shares.

Preference shares may be converted after consolation with preferential shareholder into equity shares
or of dividend may be lowered.

Statutory Provision

Where a compromise or an arrangement is proposed between a company and its creditors or its
member, the court may on application by the creditors or members or liquidator order a meeting of the
creditors or member as the case may be.

Such meetings may be called and conducted in such manner as the court directs.

The compromise or arrangement will then be binding on all creditors, members and the company
provides that:-

The scheme is approved by a majority in number representing not less than ¾ in value of creditors or
members.

The scheme is sanctioned by the court in which case the court will have to determine whether the
schemes:-

Complies with the law

Is fair and equitable

Is workable

Whether the majority acted in good faith

NB//: the court is empowered to sanction a scheme of arrangement or compromise providing for a
variation of the rights attached to a class of shares despite of any provision to contrally in the terms of
issue of the MOA or AOA.

Where a scheme of arrangement involves a reduction of capital the court must not sanction it unless a
special restriction for the reduction of capital is passed in accordance with the provision of the act.

The court order is not effective unless a certified copy of it has been filed with the registrar.

A copy of every such order shall be annexed to every copy of the MOA subsequently issued.

After an application of the sanction has been made, the court may at any time stay (stop) the
commencement or continuation of any legal proceeding against the company on terms as it may deem
fit until the application is finally disposed off.

Any order of the court is open to appeal to a higher court.

Powers of court to enforce a compromise or arrangement

To supervise the carrying out of the scheme of arrangement or compromise

68
Power to give direction or make such modification as may be appropriate for the proper working of
the arrangement or compromise.

Where it is satisfied that the sanction of a compromise or arrangement cannot be worked

satisfactorily, it may on its on application make the order of compulsory winding up.

Information relating to compromise to creditors or members

Where a meeting of creditors or members has been summoned, there should be sent alongside the
notice a statement explaining the effect of the compromise or arrangement.

A notice of the place at which and the manner in which creditors or members are entitled to attend the
meeting must be indicated.

When the compromise or arrangement affects the right of debenturable of the company the statement
shall give the necessary explanation as regards trustee of any deed securing the issued debentures.

Every creditor or member shall be vanished with a copy of the statement by the company free of
charge.

It is the duty of each company directors and any trustee of debenture holders of the company to give
notice of such matters relating to himself for purposes of the scheme.

Reconstructing and Amalgamation (Sec 209)

Reconstruction implies information of a new company to take over the assets of an existing company
with the idea that the persons interested and the nature of the business remains the same.

Amalgamation is taken to mean the union of two or more companies so as to form a third entity or
one company may by absorbed into another.

Where on application under sec 207 it is shown to the court that the scheme of arrangement or
compromise has been proposed and the whole or part of the undertaking property or liability of one
company are to be transferred of another company the court may provide for all or any of the
following matters:-

Order the transfer of the undertaking property or liabilities of one company to another.

Allotment or appropriation by the transferee company of its shares or debenture in that company.

Continuation by or against the transferee company of any legal proceedings without winding up of the
transferor company.

Provisions to be made for any person who dissents from the scheme.

Any other incidental or consequential matters as may be necessary to ensure that reconstruction or
amalgamation is effectively carried out.

Where an order is made under this section, every company shall cause a certified copy of the order to
be delivered to the registrar for registration within 14 days after the making of the order otherwise the
company and every other officer of the company in default shall be liable to a default fine.

TAKE-OVER BIDS (section 210)

69
A takeover bid means an offer to acquire the shares of another company with a view to obtaining legal
control the shares of the company

The offer to purchase shares may either be for cash or an exchange for shares

The company taken over remains in existence unless an amalgamation is carried out

For acquisition of the shares of one company (transferee company) by another company (transferee
company), the transferee company may make an offer to the transferor company so that the officer
may be placed before the shareholders of the transferee company

If the offer is accepted by all shareholders of the transferor company there is no problem. However if
only a specified % of the shareholders of the transferor company accepts the offer, the transferee
company will purchase the shares of such shareholders and then seek to acquire the shares of the
dissentient shareholders in the manner provided under section 210 which provides for the compulsory
acquisition of the minority by the transferee company. On the same terms as those of the approving
shareholders.

The specified majority for a takeover is at least 90%

PROVISIONS OF SECTION 210 RELATING TO TAKE OVER BIDS

1. The offer of the transferee company to acquire the share on any class of shares must be placed
before the shareholders of the transferors company
2. The shareholders have the option to approve the offers in a general meeting within 4months.
The approval must be given by holders of at least 90% in value of the shares whose transfer is
involved
3. If thee bid is approved, the transferee company may at any time within 2 months after the
expiration of the above 4 months, give notice to the dissentient shareholders if any that it
desires to acquire their share
4. The dissenting shareholders can within one month of receipt of that notice apply to the court
for annulment of the bid on the ground that there had some misrepresentation which
influenced the assets of the company.
5. If the court confirms the bid, the transferee company shall be entitled and bound to acquire
the shares of the dissenting shareholders on the same terms of the approving shareholders.
However where the bid is in reality a mere device to enable majority shareholders to commit
fraud on the minority, the court may set aside the offer (in re bugle press ltd)
6. The transfer of shares pursuant to the notice given shall be the shareholders of an instrument
of transfer executed on behalf of the shareholders of the transferor company. By the person
appointed by the Transferee company.
The money for the shares shall be paid to the transferor company. Which shall then register the
transferee company as the holder of those shares.

The sums so received by the transferor company must be paid into for the separate bank account and
the amount will be held in trust for the shareholders.

REVIEW QUESTIONS

1. What is the procedure prescribed by the company‟s act for resolving disputes between?
i. The company and its members
ii. The company and its creditors without recourse to liquidation?

70
 iii. Where are the powers of dissentient members on such schemes?
2. What is reconstruction? Explain the statutory provision regarding construction
3. Explain the term compromise and state the procedure to be adopted to affect a compromise
4. What is a takeover bid?
a) Explain the procedure to be followed in takeover bid
b) Can a takeover bid be challenged by any one and if so, on what ground

WINDING UP

A company being an artificial person cannot die a natural death

In order to put any end to the life of the company any of the following legal processes may be
followed

Through a scheme of reconstruction and amalgamation- in which the undertaking of one company
may be transferred to another company and the court orders for the dissolution of the transfer without
the winding up process.

Through the removal of the name from the register of company’s by the registrar

Through winding up-Winding up is the process where life of the company is ended and its property
administered for the benefit of the liabilities and distribution of the surplus if any among the members
of the company.

Winding Up and Dissolution

Winding up precedes dissolution

Prior to dissolution and after winding up, the legal entity of the remains and it can be issued in a court
of law

On dissolution, the company ceases to exist and its name is struck off the register of companies by the
registrar and the fact is published

Although in most cases winding up is resulted to buy company‟s having financial difficulties, in some
cases solvent company‟s would be up by shareholders e.g. where the object for which the company
was formed has been accomplished

MODES OF WINDING UP

The act provider for winding up a company in any of the following three ways

a) Winding up by the courts (compulsory winding up)

b) Voluntary winding up
c) Winding up subject to court supervision (supervisory winding up)

Winding up by the court (section 219)

In this case it is the court which makes the first order that the company be would up and there after its
effect passes on to the liquidator.

Grounds for compulsory winding up

71
 1. Passing of a special resolution

In this cash, the company resolves that it would be winded up b the court

The power of the courts in this regard is discretionary and may not be exercised if the court is of the
opinion that winding up will be approved to public interests and company interests.

The reasons underlying the passing of a special resolution may include:

a. Deteriorating financial and trading position of the company which may imply future liability
of the company to pay its debts
b. Lack of working capital
c. Change of business conditions which renders the continued operation of the company difficult
d. Where the object for which the company was created has been achieved
e. General paralysis arising from labour industrial unrest and strikes

2. Default in holding a statutory meeting or delivering of a statutory report to the registrar

Winding up on this ground can be represented either by the registrar or by a member on or after 14
days after the due date of the meeting

3. Where the company fails to commence business within one year of in cooperation or
suspending business for one year
4. Reduction in membership below the statutory minimum and the company carries on business
for more than 6months
5. Where the company is unable to pay its debts or honour its monetary commitment

This is determined when:

A creditor owed section 1000 or more has served on the company. At its registered office a demand
for payment and the company has for 3 weeks there neglected paying

An execution or other order issued by the court in favour of a creditor is returned unsatisfied in whole
or in part

The court is fully satisfied that the company is completely unable to pay its debts

Where it is just and equitable for the court to wind up the company

On the basis of judicial decision, the following circumstances may be deemed to be just and equitable

a. Failure of the objects (substratum

b. The substratum of the company is deemed to be gone when the main object for which the
company was formed has become impossible or impracticable to achieve
c. Where there is a complete deadlock in the meeting of the company and therefore meeting
cannot function (Re Yanidje Tobacco Company)
d. Unfair prejudice
e. Where the affairs of the company are being conducted in a manner which is unfair or
prejudicial to the minority, such members may partition for winding up under section 211
f. Where the business of the company is making loses, even though the company is not
technically insolvent
g. For this ground to hold, it must be impossible for the company to make profits
h. Where the conduct of a director or shareholders of a small private company is such that if the
company where a partnership it would lead to the dissolution of the partnership, e.g. where
there is a constant break of trust
i. Where the company was conceived to carry an illegal or fraud lent business or when the
business of the company has become illegal

72
 j. Exclusion from meeting

Where there is a meeting participation agreement and one group excludes the other from
meeting, the excluded group may partition for the winding up of the company

Who may petition?

The following persons may make petition to the court to get an order for winding up the company

a. The company itself

A petition to the court by the company for its winding up may be made by its directors

When it has passed a special resolution to this effect

When the directors are of the opinion that the circumstance leading to the insolvency state of the
company ought to be investigated

b. By a contributory (a member)

A contributory is any person liable to contribute the assets of the company in the court of its wound
up

A contributory can petition only if:

1. He is an original allottee of the shares

2. He has held the shares in his name for at least 18 months
3. The shares have devolved to him due to the death of a former shareholder

c. Creditor

A creditor whether secured or unsecured can petition so long as the debt owed to him is at least
shs1000

He will not be able to petition if his claim is for a liquidated damages against the company

He will need to obtain judgments for a definite sum (liquidated sum)

1. The following are regarded as creditors:

2. A secured or unsecured creditor
3. A holder of any debentures
4. The trustee of debenture holders
5. The government for any outstanding revenue from the company

N/B: The creditor‟s petition may not be maintained if the debt is statute barred

d. Registrar

He may petition for winding up on the public interests where the company‟s books and documents
have been investigated and the inspectors have made a report

e. By the Attorney General

This follows a report of inspectors upon the company‟s affairs where it appears that the business of
the company is being conducted with intent to defraud creditors

73
FORM OF PETITION

It must be in the form prescribed by the act and lodged at the high court and verified by affidavits
(shown statement)

The petition is required to state: (contents)

I. The name, description, occupation and address of the petitioner

II. The name of the company and its date of incorporation
III. The location of the registered office company
IV. It‟s nominal and paid up capital
V. The objects for which it was formed
VI. The grounds on which winding up is sought

If the petition is presented by the company itself, the particulars of the resolution passed by the
company must be given

The petition must be advertised in the Kenya gazette at least 7 days before the hearing

Once a court makes a winding up order, it appoints the official receiver to be provisional liquidator so
as to present the assets of the company

The company must then submit to the official receiver a statement of affairs of the company‟s assets
and liabilities together with cases of failure within 14 days of the making of the winding up order

Within one month after the winding up order, the official receiver must sent a summary of the
company‟s statement of affairs to every creditor and contributory and convince the first meeting of
creditors for the purpose of appointing a committee of inspection

Committee of inspection

It consist of an equal number of creditors and contributories and the number is determined by the
court

They meet at least once amounts under the chairmanship of the liquidator

Members of the committee are in a fiduciary position towards the company

Functions of the committee

1. To appoint a registrar to replace the official receiver

2. To determine the remuneration of the liquidator
3. To consider the progress of liquidation
4. To supervise the conduct of the liquidator
5. To sanction certain powers to be exercised by the liquidator

Consequences of winding up order

1. The winding up order shall be deemed to be notice of discharge of the officers and employees
of the company except when the business of the company is to be continued for the purpose
of beneficial realization of assets
2. The powers of the board of directors are terminated and the same will now be exercised by
the official liquidator
3. The winding up order shall operate in favour of all the creditors and contributories of the
company
4. The official receiver by virtue of his office becomes the liquidator
5. Any debts payable at a future date became immediately payable on the winding up order

74
 6. No legal proceedings can be commenced against the company without the leave (permission)
of the court directs
7. The court which is conducting winding up shall full powers to entertain or dispose of any new
or pending suit by or against the company

Any suits pending in any other court shall also be transferred to the court in which the winding up of
the company is proceeding

Powers of the liquidator

He can exercise certain powers with the sanction of the court unless expressing exempted

There are some powers which can also exercise on it‟s own without court sanction

Powers with court sanction

1. To institute or defend any suit in the name of and on behalf of the company
2. To carry on the business of the company so far as may be necessary for the beneficial winding
up of the company
3. To sell the movable and immovable property and actionable claims of the company e.g. debts
either by private contract or by auction
4. To raise any money as may be required and charge the company‟s assets
5. To appoint an advocate to appear before the court or assist him in the performance of his
duties
6. To pay any class of creditors in full or to make a compromise or arrangement with creditors
7. To compromise calls, debts and other peculiarly liabilities with contributions or debtors
8. To do all such other things as may be necessary far winding up up of the affairs of the
company and distributing its assets e.g. settings a list of contributions and creditors

Powers without court sanction

1. To do all acts in the name and on behalf of the company and to execute deeds in the name of
the company and to use the common seal of the company.
2. To inspect the records and returns of the company and the files of the registrar without
payment of any fees
3. To draw, accept and endorse any negotiable instrument in the name of the company
4. To make out in his official name letters of administration to the estate of deceased
contributory and to do necessary things to obtain payment
5. To appoint an agent to do any business which he is unable to do himself?
6. To prove, rank and claim in the insolvency of any contributory for any balance against his
estate
7. To set aside fraudulent preferences effected within 6 months before the commencement of
winding up.

NB :Any person aggrieved by any decision or action of the liquidator may apply to the court for the
court to confirm reverse or modify the act or decision as it may deem fit

Duties of liquidator

1. To conduct the proceedings of winding up and perform s7uuch duties as the court may
impose
2. To submit a preliminary report to the court after the receipt of the statement of affairs
3. To take in to custody all the books document and assets of the company
4. To give regard to the resolution of creditors or contributors or to any direction given by a
committee of inspection

75
 5. To summon meetings of creditors and contributors for the purpose of ascertaining their work
6. To maintain proper book in the prescribed manner to record entries minute of proceedings at
meetings and such other matters as may be prescribed

Any member or creditor may be allowed to inspect such records.

7. To present an account of receipts and payment to the court which then gets the accounts
audited keeps one copy of the audited accounts and delivers the other copy to the registrar
8. To submit information concerning any pending liquidation where winding is not concluded
within one year

The liquidation is required to file in the court and with the registrar a statement in the prescribed form
dully audited with respect to the proceedings and the position of liquidation within 2 months after the
expiry of the 1st year and there after once every year until winding up is concluded.

Power of the court after the winding up order

1. Power to stay (stop) winding up proceedings

The court on application of either a liquidator or any creditor or contributory, they make an order
staying the proceeding completely or for a limited time on such terms and conditions as it deems fit

2. To settle a list of contributories and order for the realization of the company assets in order to
discharge to liabilities
3. To order for the delivery of property, books or cash of the company to he liquidator
4. Power to make calls if there is a deficiency in the company‟s asset to meet the company‟s
liability and winding up expenses.
5. Power to exclude creditors who do not prove their debts on time
6. Power to order public examination of promoters or directors if on the report of the liquidator
he is of the opinion that fraud has been committed by any person in promotion of the
company or an officer of the company in the conduct of his business
7. Power to arrest a contributory intending to obscure from the country and to have his books,
papers and property seized and safely kept until such time the court will order
8. Power to order for dissolution of the company after the affairs of the company have been
completely wound up, and the liquidator has made any application to the court in that regard

The liquidator will then within 15 days file a copy of the order with registrar who shall strike the
name of the company from the registrar of the company

9. Power to declare dissolution void. The court may at any time within 2 years of dissolution
make an order declaring dissolution to be void on application of the liquidator or other
interested persons

The company shall then be re- interested in the registrar

Voluntary winding up

This means winding up of the company. By the members or creditors without interference by the
court

Grounds for voluntary winding up

76
Section 271 sets out the following as the grounds under which a company may be wound up
voluntarily

1. Passing of a special resolution

A company may at time pass a special resolution that it may be wound up voluntarily due to

a. Less of business prospect

b. Adverse business circumstance
c. Where members simply wish to distribute surplus assets among themselves and to terminate
the company activity
2. By passing an ordinary resolution on the following grounds
a. Where the company was formed to last for only a fixed period and that period has come to an
end
b. If the company was created to last until the occurrence of a specified event e.g. on the debts
of the last founding company director

TYPES OF VOLUNTARY WINDING UP

Voluntary winding up may either be

a. Member‟s voluntary winding up

b. Creditor‟s voluntary winding up

Member’s voluntary winding up

This is where members of the company on their own order the liquidation process through their
appointed liquidator

This is only possible when the company is solvent and able to pay its debts in full

This require the filling of a statutory declaration of solvency by the directors

This is a declaration that the company is solvent and that it has no debt or that it will pay its debts full
within 12 months from the commencement of winding up

The declaration must be made by directors at the meeting of the board

In order to be effective, it must be made within 30 days of the passing of the winding up resolution
and the resolution shall be delivered to the registrar for filling accompanied by a copy of the auditor‟s
report, a profit and loss account since the date of the last account and the balance sheet as at that date
showing a statement of the company‟s assets and liabilities

Directors making a false declaration of solvency are liable to imprisonment for a term not exceeding
12 months or to a fine not exceeding shs20,000 or both

Procedure for winding up by members

1. Passing of a winding up resolution: by the members in a general meeting

2. Appointment of a liquidator: the company‟s general meeting shall appoint one or more
liquidator and fix his remuneration
3. Cessation of the powers of directors: on the appointment of a liquidator, the powers of the
directors shall cease except as may be required by the company‟s in a general meeting or by
the liquidator

77
Power of a liquidator to accept shares: where the company is proposed to be wound up, or if in the
process of winding up the whole or part of the asset of the company are proposed to be transferred to
another company‟s, the liquidator of the transfer company with the sanction of the company‟s special
resolution may receive in compensation shares or other interests in the transferee company for
distribution among the members

4. Calling creditors meeting

If liquidation goes on for more than one year, the liquidator shall summon a meeting of the creditors
and lay before it a statement of assets and liabilities of the company

This is necessary if in the opinion of the liquidator the company is not able to pay its debts in full
without the period stated in the declaration of solvency

78
 5. General meeting of members at the end of the year

The liquidator shall convene such a meeting where winding up goes beyond one year

He shall lay before the meeting an account of his activities and report the progress of winding up during
that year

6. Final meeting and resolution

After the affairs of the company are completely wound up, the liquidator will call the final meeting of the
company for the purpose of laying a detailed account of the winding up process and giving necessary
explanation

The meeting shall be called by an advertisement in a local daily having sufficient circulation and by
notice with the Kenya gazette

If everything is satisfactory, the company shall be dissolved

Creditor’s voluntary winding up

If in a voluntary winding up, a declaration of solvency is not made the creditors take it out

The creditors take over the winding up procedure in order to protect their own interests in the company

Winding up will then proceed as follows:

The creditors and members at their respective: meeting may nominate a liquidator for the purpose of
winding up the affairs of the distribute its assets

If they appoint different persons as liquidator, then the liquidator by the creditors shall be the liquidator

Tabling of the statement of affairs: the board must lay before the meeting of creditors a statement of the
position of the company‟s affairs e.g. with a list of creditors of the company and the amount of their
claims

Appointment of a committee of inspection: the creditors appoint this committee comprising of not more
than 5 persons and the committee shall fix the remuneration of the liquidator apart from overseen the
winding up proceedings

Cessations of director’s powers: on appoint on the liquidator, in all of the board shall cease and the
same shall vest in the liquidator. If a vacancy occurs by death resignation of the liquidator the creditors
may appoint another person to the vacancy

The calling of a general meeting: at the end of the year to review the progress of liquidation where
winding up proceeds for more than one year

Final meeting and dissolution: once the affairs of the company have been wound up, the liquidator shall
call a final meeting at which a resolution shall be passed that the company‟s affairs shall be wound up.
The liquidator shall then notify the court concerning the resolution and the court shall order for
dissolution of the company

79
DISTINGUISHING BETWEEN MEMBERS & CREDITORS VOLUNTARY WINDING UP

Members

1. It is to by solvent companies and require filling of a statutory declaration of solvency by directors

2. It requires the calling of a general meeting of members only
3. The liquidator is appointed by inspection in a general meeting
4. Appointment of a committee of inspection does not arise
5. Control of the proceedings is by members

Creditors
1. Resorted to by insolvent company‟s there cannot be a declaration of solvency
2. Require the holding of both members and creditors meetings
3. Liquidator appointed by either members or creditors
4. Creditors usually appoint a committee of inspection
5. Creditors control the proceedings

WINDING UP SUBJECT TO COURT SUPERVISION

This form of winding up starts as voluntary winding up but when it is in progress the liquidator, creditor
or contributory may apply to the court that the winding up be proceeded under the supervision of the court

The reasons whey voluntary winding up be may refer to the courts include:

a) Where a dispute arise as to how best the process should be proceeded

b) That the liquidator is negligent or biased in collecting the assets
c) The rules of relating to winding up are not being observed
d) Where the majority are playing fraud on the minority

PROCEDURE

After winding up subject to court supervision commence it shall proceed as if it was compulsory winding
up
Once it has started any disposition of the property of the company including things in action and transfer
of any shares and any change of the status of the company shall be void

GENERAL PROVISIONS RELATING TO WINDING UP

1. Winding up is deemed to commence from the date of passing the winding up resolution
2. There must be a notice of commencement of winding up in the Kenya nation and in a local daily
having a wide circulation
3. Appointment of liquidator for the purpose of collecting the company‟s assets and a final
distribution to the creditors

80
 4. Once liquidation has commenced certain activities of the company seize e.g. legal action by or
against the company
5. Creditors prove their debts and there after the liquidator distributes the remaining assets to the
members at the end of the liquidation process the liquidator shall convene a final meeting and
give his final report after which he hands over a copy to the registrar so that the registrar can
strike the company‟s name from the registrar
6. Dissolution of the company can be challenged on appeal and the company can be re-instated in
the register

COMPANIES INCORPORATED OUTSIDE KENYA(Foreign Companies)

 A foreign company is one which is incorporated outside Kenya but has an established place of
business in Kenya. Such Companies are required within 30 days of establishment of a place of
business in Kenya to deliver to the registrar of Companies for registration;
 A certified copy of the charter (Memorandum of Association, Article of Association) or other
documents defining the constitution of the Company together with a certified translation of the
instrument if the instrument is not written in English language.
 A list of directors and secretary of the Company.
 The names and postal address of one or more persons resident in Kenya who is authorized to
accept any correspondence and notice on behalf of Company.
 The full address of the registered office in Kenya.
 Details concerning any charge on its property wherever situated.
 If any alterations are made in respect of the above documents, particulars of such alteration must
be delivered for registration to the registrar within 60 days.

Accounts of Foreign Companies

 All foreign Companies with an established place of business in Kenya are required to make out in
every calendar year, a balance sheet, profit and loss account and if the company is a holding
company, group accounts just as Companies incorporated in Kenya
 These documents must be filed together with all other documents which are required to be laid
out before a general meeting by Companies incorporated in Kenya.

Other Requirements of a Foreign Company

A foreign company is required -:

81
 i. To state the country in which it is incorporated in every prospectus inviting the public for
subscription of its shares or debentures in Kenya
ii. To exhibit conspicuously in every place it carries on business in Kenya its name and country of
incorporation
iii. To indicate its name and country of incorporation in legible roman letters in every prospectus and
all documents and official publications of company e.g. receipts, invoices etc.
iv. If the liability of its members is limited, this fact must be legibly indicated in every prospectus
and all business documents and official publications of the Company.

If a foreign Company ceases to have a place of business in Kenya it must give a written notice to the
registrar for de-registration of the Company and the name would be struck off from the register.

Winding Up of Foreign Companies

A foreign company carrying on business in Kenya would be deemed to have been wound up if-:

 It ceases to carry on business in Kenya

 It‟s unable to pay its debts
 It engages in illegal business activities
 Winding up has already commenced in the country of incorporation
 It suspends its business for more than one year
 If the court is of the opinion that it is just and equitable for the Company to be wound up.

CO-OPERATIVE SOCIETIES

Co-operative societies are formed and operated in accordance with the co-operative societies act
For a co-operative to be formed and registered under the act it must have among its objects the promotion
of the welfare and economic interests of its members
The act further requires that it needs to incorporate in its by-laws the international co-operative principals
which the act has enacted as part of Kenyan law
Co-operatives operate according to the following core principles and values

1. Voluntary and open membership: co-operative are voluntary organizations open to all people
to use service and those willing to accept the membership responsibilities

2. Democratic member control: they are controlled by the members who actively participate in
setting out polices and making decisions by majority

82
 3. Member’s economic participation: this is in terms of the contributions each member is required
to make towards the capital of the co-operative. This benefits members in proportion to the
business they conduct with the member‟s money that has been invested

4. Autonomy and independence: co-operative are autonomous self-help organizations controlled

by their members

5. Education and training: co-operative provide education and training for members elected
representatives managers and employees so that can contribute effectively to the development of
their co-operative

6. Cooperation among co-operative: they serve their members most effectively and strengthen the
co-operative movement by working e.g. through local, national, regional and international levels

7. Concern for the community: apart from for casing on their members needs co-operatives work
for sustainable development through policies and programmers‟ that assist the community e.g.
school and banks

TYPES OF CO-OPERATIVE SOCIETIES

There are three types of co-operative societies that can be formed over assist the act:
Primary society
Co-operative union (secondary)
Apex society

Primary society

Section 2 of the act defines a primary society as a corporative society whose membership is restricted to
individual person

Section 5 further provides that to register a primary society it must consist of at least 10 qualified persons
for membership of co-operative societies

A person is qualified to be a member of a co-operative society if

 He has attained age of 18years

 His employment occupation or profession falls within the category or decision of those for which
the co-operative society is formed
 He is resident within or occupies land within the societies area of operation as described in the
relevant by-laws

Co-operative union

It is a co-operative society where membership is restricted to primary societies. To register a co-operative

union, at least two registered primary societies must comprise its membership

Apex society

83
This is a society formed at the national level by the co-operative movement in Kenya and registered under
the act to promote co-operative development and to represent the interests of the co-operative societies
locally and internationally

Registration of co-operative societies

Co-operative societies are formed through registration with the commission of co-operative development

Section 3 of the act establishes the office of the commissions of co-operative development who is tasked
with the responsibility of overseeing growth and development of co-operative societies, their organization
registration and dissolutions.

The act provides that an application to register a society shall be made to the commissioner in the
prescribed form and be signed by

A least 10 persons qualified for membership of the society where such members wish to form a primary
society

At least 2 duly authorized persons acting on behalf of co-operative societies in case of formation of a co-
operative union

At least 2 duly authorized persons acting on behalf of co-operative unions in case of formation of an apex
society

The application shall be accompanied by 4 copies of the proposed by-laws of the society and the persons
on whose behalf such application is made shall furnish such information with regard to the commissioner
may require

If the commissioner is satisfied that the provision of the act and by-law of the society have been complied
with, he may register the society and its by-laws under the act

Once a co-operative society has been registered, it becomes a body corporate by the name under which it
is registered with perpetual immovable property, to enter in to contracts to sue and be sued and to do all
things necessary in accordance with its by-law

The by-law when registered bind the co-operative society and the members of the co-operative society to
the same extent as if they were signed by each member and contained covenants on the part of each
member for himself and his personal representatives to observe all the provisions of the by-law

The act gives the commission‟s discretion to provisionally registered co-operative society for a period not
exceeding one year if:

He is not satisfied that a society has complied with the act and any rules made under it

He is not satisfied that its by-law confirms the act and any rules made under it

He is of the opinion that steps can be taken by the persons making the application to comply with the
act and the rule made under it.

84
MANAGEMNENT OF CO-OPERATIVE SOCIETIES

Section 27 provides that the supreme authority of a co-operative society shall be vested in the general
meeting at which members shall have the right to attend, participate and vote on all matters

However, since the general meeting cannot be responsible for the day to day running of the co-operative
society, section 28 provides that every co-operative society shall have a committee consisting of not less
than 5 and not more than 9 members who shall be the governing body and shall subject to any direction
from the legal meeting or the by-law of the contracts

a) Enter in to contracts
b) Institute or defend legal proceedings brought in the name of or against the co-operative society
c) Do any other things necessary to achieve the objectives of the society in line with its by-law
Co-operative societies are subject to external regulations by the commissioner who is authorized to hold
inquiring and inspection on the society
This regulation is an important part of the meeting of a co-operative society and for the protection of
members and creditors

INQUIRY

Section 58 authorizes the commission to hold an inquiry or direct any person authorized by him in writing
to hold an inquiry in to the by-law working and financial position of any co-operative society. An inquiry
may be made by

a) Members making an application to the commissioner through a resolution passed by not less than
1/3 of the members present and voting at a meeting of the society which has been duly advertised
b) The minister directing the commissioner to hold an inquiry
c) By the commissioner whenever he deems fix to hold an inquiry

After the inquiry to a general meeting of the society and give directions for the implementations of the
recommendation of the inquiry report
The inquiry may lead to the dissolution of a co-operative society or other proposals by the commissioner
e.g.

 Dissolve the committee

 Cause to be appointed an interim committee consisting of not more than 5 members from among
the members of the society for a period not exceeding 90 days

INSPECTIONS

Section 59 provides that the commissioner may if he deems fit on application of a creditor of a co-
operative society inspect or direct some persons authorized by him to inspect the books of the society if

a) The creditor satisfies the commissioner that the debt is a sum due and that he has demanded
payment but has not received satisfaction within a reasonable time

b) The applicant that the commissioner may if he deems fix on to meet the expenses of inspection as
the commissioner may require

The commissioner may then be obligated to inform the commissioner of the results of inspection and
make such other order as may be necessary for the purpose of protecting the creditor‟s name

85
MEETINGS

Co-operative society members may hold the following meetings

 General meetings
 Annual general meetings
 Special general meetings

GENERAL MEETINGS

Section 27 provides that a co-operative society should hold a general meeting not later than one month
after receipt of certificate of registration to transact the following business

a) Elect the co-operative societies office bearers for the ensuring year
b) Determine the maximum borrowing powers of the society
c) Consider and approve estimates of income and expenditure for the ensuring financial year or part
of it
d) To appoint the co-operative societies bankers and auditors
e) To receive reports and decide upon such other matters as may be necessary for the conduct of the
co-operative societies business

ANNUAL GENERAL MEETING

After the first year of existence, a co-operative society should hold an annual general meeting within 4
months after the end of every financial year. At the annual general meeting, the members shall:

a) Consider and confirm the minutes of the last general meeting

b) Consider any report of the committee or the commissioner
c) Consider and adopt audited accounts
d) Determine the manner in which any available surplus is to be distributed or invested
e) Elect the co-operative societies office barriers for the pursuing year
f) Determine the maximum borrowing power of the society where necessary
g) Appointment of an auditor for the financial year
h) Transact any other general business of the co-operative society for which notice has been given to
members in the manner prescribed in the by-laws of the co-operative society

SPECIAL GENERAL MEETING

A co-operative society may hold a special general meeting which may be convened:
a) By the committee: for the purpose of approving annual estimates or discussing any urgent matter
which in the committees opinion is in the interests of the co-operative society
b) By the committee on receipt of the written notice: for such meeting signed by such no. of
members of the co-operative society as may be prescribed in the rules and stating the objects and
reasons for calling the meeting
c) By the members who: having demanded the meeting and the committee having failed to
convene such a meeting within 15 days of receiving the notice may themselves convene the
meeting by giving notice to other members stating the objects and reasons for the meeting and the
fact that the committee has failed to convene the meeting
d) By the commissioner:

86
N/B section 27 provides that a general meeting of a co-operative society shall be convened by giving at
least 15 days written notice to the members
The chairman or in his absence the vice chairman or such other person has may be prescribed by the by-
laws of the society shall preside at a general meeting of the co-operative society. Where the meeting is
convened by the commissioner he might preside on that meeting
A co-operative society should in its first general meeting and in the subsequent annual general meeting
elect office bearers of the society

MANAGEMENT COMMITTEE
The act define it‟s as the governing body of a co-operative society to whom the meeting its affairs is
entrusted

The section 91 provides that the rules of the society may provide for appointment suspension and removal
of the members of the committee and other offices and for the procedure at meetings of the committee
and the powers to be exercised and duties to be performed by the committee and other offices

DUTIES OF COMMITTEE MEMBERS

i. Committee members are entrusted with intense powers which must be regulated not only for
public good but also for the protection of those where investments are involved

ii. Just like directorship in company‟s, committee membership may be prone to abuse because some
members will always be faithless to their trust and capitalize on their strategize positions to serve
their own interests

iii. The law therefore imposes upon them certain duties which when properly enforced may reduce
chances of abuse

LIABILITY FOR BRAECH OF TRUST

Members of the committee are in certain respects in the position of trusts for the society since the act
imposes a duty them to exercise prudence and diligence expected of them and holds the members jointly
and severally liable for any losses sustained through any of their acts that may be centrally to the act, by-
laws or directions of a general meeting of the co-operative society

The committee members are deemed to be trustees:

a) In relation to money which comes in to their hands or which is actually under their control since
they will be liable to make good any misapplied money on the same footing as if they were
trustees

b) As regards the exercise of powers which they are authorized to exercise on behalf of the co-
operative society

c) With regard to prohibition of their personal interests in conflicting with that of the co-operative
society

RESTRICTIONS ON COMMITTEE MEMBERSHIP

Section 28 provides that a person shall not be a member of a committee if he:

87
 a) Is not a member of the co-operative society?
b) Is not less than 18 years of age?
c) Is unable to read and write
d) Receive any remuneration, salary or other payments from the co-operative society in accordance
with the co-operative societies
e) Is a committee member of co-operative societies?
f) Being a member of a co-operative society that lent‟s money to its members lent‟s money on his
own account
g) Being a member of a co-operative society which trades in goods or produce trades either on his
own account or some other persons accounts in the same type of goods
h) Has not within 30 days of being appointed declared his wealth to the commissioner in the
prescribed manner?
i) He is an undercharged bankrupt
j) Has been adversely named by the commissioner in the inquiry report adopted by a general
meeting for mismanagement or corrupt practices while a member of the committee
k) Has been convicted of any offence involving dishonesty or is sentenced to imprisonment for a
term exceeding 3 months
l) Has been convicted of any offence under the co-operative societies
m) Has any un cleared debt owing to a co-operative society at the end of its financial year other than
inspect of a loan under the provisions of any rules made under the act

DISSOLUTION

A co-operative society can be dissolved by an order of the commissioner after receiving an application
made by at least ¾ of the members of the co-operative society who are of the opinion that the society
ought to be dissolved. The orders must be made in writing and this will subsequently lead to cancellation
of registration. Once the registration of a c0-operative society is cancelled, it ceases to be a body co-
operative

GROUNDS FOR DISSOLUTION

a) When the society has less than the prescribed no. of members
b) It has failed to be returns with the commissioner for a period of 3 years
c) Has failed to achieve its objects
d) Based on the recommendation of an inquiry on inspection

Once the order to dissolve is made, the commissioner may appoint a liquidator who take shall control of
all the property of such society

POWERS OF THE LIQUIDATOR

a) To appoint a day on which the creditors are entitles to prove their debts and to have their names
included on the list of creditors
b) To institute and defend any legal proceedings by and on behalf of the society his own name
c) To appoint an advocate assist him in the performance of duties
d) To refer disputes to the tribunal in the prescribed manner
e) To determine from time to time the contributions to be made by the members and past members
to the funds of the society
f) To investigate all claims against the society and to decide on question of priority arising between
g) To call such meetings of members and creditors as may be necessary for the proper conduct of
liquidation
h) To sell the movable and immovable property of the society by public auction or private contract

88
 i) Take procession of the books and assets of the society
j) Carry on the business of the society as may be necessary to the proper liquidation of the affairs of
the society

POWERS OF THE COMMISSIONER DURING DISSLOUTION

Rescind and vary any order made by the liquidator and make any new order he deems appropriate

To remove the liquidator from office and appoint a new liquidator

To limit the powers of the liquidator as confirmed by the act in any particular place

To require accounts to be rendered to him by the liquidation

To ensure the auditing of the liquidation accounts and authorize the distribution of the assets of the
society

Make an order for the remuneration of the liquidator

Grant a discharge to the liquidator after completion of the liquidation proceedings

DISTIGUISHEN BETWEEN CO-OPERATIVE AND LIMITED COMPANY’S

Co-operative

1. Formed and registered under the co-operative societies act

2. Registered by the commissioner of co-operatives
3. They serve members of the society
4. Democratic as members have equal voting rights
5. There is homogenous form of capital
6. Shares are not traded at the stock exchange
7. The top organ is the meeting committee
8. It can be formed by at least 10 people

Limited companies
1. Formed and registered under the company‟s act
2. Registered by the registrar of companies
3. They sell goods and services to the public to make profits
4. The voting power may depend on the number of shares one has
5. They have heterogeneous share capital which includes ordinary and preference shares
6. Shares of quoted company‟s are traded at the stock exchange
7. Top organ is the B.O.D
8. Can be formed by at least 2 people for private companies and 7 for public companies

89
 --

BONDS
A bond is a debt securely in which the authorized issuer owes the holder a debt. Depending on
the terms of bond, the issuer is obliged to pay interest (coupon) and to repay the principle at a
later date termed as maturity. A bond is a formal contract to ****borrowed money with interest
at fixed interval.
A bond is like a loan the issuer is the borrower (debtor), the holder the lender (creditor), and the
coupon is the interest rate being paid.Bonds provide borrowers with external funds to finance
long term investments or in the case of government bonds, to finance current expenses. Bonds
must be paid at fixed intervals over a a period of time.
Bonds and stocks are both securities but the major difference between the two is that stockholder
have an equity stake in the company i.e. owners whereas bondholders have a credit stake in the
company i.e. lenders.
Bonds usually have a defined term or maturity after which they are redeemed whereas stakes
may be perpetual (unredeemable).

Issue of bonds
Bonds are issued by public authority, credit institutions or company in the principle market. The
common process of issuing bonds is through underwriting in a bank or financial institution.

In underwriting, one or more security firms or banks buy entire issued bonds from an issuer and
resell them to the investors.

Features of a bond
1. Nominal, principal or face value -This is the amount on which issuer pays interest and which
commonly has to be repaid at the maturity period.
2. Issue price - Is the price at which the investor buys the bonds when they are 1 st issued which
typically is equal to the nominal account.
3. Maturity date – the date on which the issuer has to repay the normal.
As long as all the repayments have been made, the issuer has no obligation to the bond holders
after maturity date.
4. Coupon – interest rate the issuer pays to the bond holders. Usually the rate is fixed throughout
the life of the bond.
5. Coupon dates – the date on which the issuer pays the interest to the bond holders. It may be
quarterly or semi-annually.

Types of bonds
1. Government/ Treasury bonds – these are treasury securities which are perceived to the safest
debt securities as they are backed by the full creditors of the government. Maturity period ranges
between 1 – 30 years.

90
 Due to their safety, their yields are usually low.
2. Corporate bonds – issued by corporations and are guaranteed by the borrowing company and the
risk depends on the company‟s ability to repay the loan at maturity.
3. Municipal bonds – bonds issued by the state and local government agencies and are subject to
certain preferences and exempted from state and local taxes.
4. Bearer bond – this is on official certificate issued without a named holder. The person who has
the paper certificate can claim the value of the bonds.
5. Subordinate bonds – these are bonds which have a borrower priority than other bonds of the
issuer incase of liquidation. The first bond holders to be paid are those holding senior bonds.

Other instruments of raising capital

Besides debentures and bonds, other instruments of raising capital include:
1. Commercial paper – short term unsecured securities issued by highly credit worthy company.
They are issued with maturity period of 3 months to one year. They are marketable securities
therefore liquidity is not a problem.
2. Treasury bills – are short term government securities issued to the public and institutional
investors. Issued for a period of 91 days or 182 days. The usual practice is to sell total bills at
discount and redeem them at par maturity. They can also be bought and sold at any time they
have liquidity. They do not have default risks.
3. Certificates of deposit – are papers issued by banks acknowledging fixed deposit for a specified
period of time.
4. Public issue (LPO). This is where the public is invited to subscribe for the shares of a public
company. This can be either through an initial public offer or can be issued by company already
listed at the stock exchange.
5. Rights issue – this is where an already company issues the shares to the existing shareholders and
the public when all the shares are not taken by the existing shareholders. The right issue is
offered below the market price.
6. Bank deposit – a firm can deposit its temporary cash in a bank for fixed period of time. This is
usually the cash which the company documents not into the use immediately. The interest rate
depends on the maturity period.
DIRECTORS
A director is defined by section 2 of cap486 as any person occupying the position of a director
by whatever name called.
A director is also termed as an agent of the company and contracts made by him will bind the
company so long as he acts within the scope of his authority.

A director may also be defined as manager of the company. The first directors of the company
are appointed by the subscribers to the memorandum of association and articles of association.
Once the subscribers to the memorandum have appointed the first directors of the company, the
subsequent appointments will be dictated by the provisions of the articles of association and the
companies Act, cap 486.

91
 Re-appointment of directors

A director retiring at an Annual General Meeting is eligible for re-appointment. Act 89 of table
A provides that at the first Annual General Meeting of the company, all directors shall retire
from office, and at the annual general meeting in every subsequent year of the director for the
time being or if their number is not or a multiple of 3, then the number nearest 1/3 shall retire
from office.
If a company adopts article 89 of table A, then directors of such a company shall be subject to
retirement by rotation and shall be eligible for re-election.
The articles also usually contain clauses providing that the retiree director shall be eligible for re-
election and that the company in a general meeting may increase or reduce the number of
directors and that casual vacancies i.e vacancies occurring between annual general meeting may
be filled by the directors.
The appointment of directors at a general meeting except in the case of a private company must
be voted individually unless a resolution to the contrary has been agreed upon without any vote
being given against it.
If a single resolution is passed to appoint 2 or more directors of a listed or public company then
such a resolution is void.

Table A, Article 92, provides that the retiring director if offering him for re-election is deemed to
have been re-elected unless:

 Another person is elected to his place.

 A resolution not to fill the vacancy is passed.
 A resolution for his re-election is lost.

REMOVAL OF A DIRECTOR
Under section 185 of cap 486, a director may be removed from office before his expiration of his
period of office by an ordinary resolution passed at an annual general meeting notwithstanding
anything in the articles or in any ****in the absence of rounds for suspicion justified in trusting
that such officials to performed their duties honestly.

POWERS OF THE DIRECTORS

These depend of the articles of the company which they manage. Usually directors derive their
powers on the articles of the company and the common law. If the directors act within the
powers given to the ***by the articles, they are not bound to obey any resolution passed to the
shareholders or control at a general meeting.
Such resolution by the shareholders cannot override the decision of directors or control them in
the future.
For such control to be effective, the articles of association shall have to be altered.

92
 The following are the powers of directors:
 To delegate some of their authority if the articles permit to ***** of one or more persons – Art
202 of Table A.
 To attend meeting of the Board of Directors.
 To requisition a general meeting.
 To fill a casual vacancy created by registration or removal of a director in compliance with
articles of the company.
 All directors are entitled to the notice of the annual general meeting hence have the power to
attend an annual general meeting.
 To inspect the statutory books of the company and the books of account.
Alternate Directors cap 486 contains no provisions authorizing a substantive director to appoint
an alternate director act on his behalf for the purpose of attending a Board meeting.
Alternate director may be appointed only if article of association contains such a provision. It is
where a director delegates his adho to any other person to act in his behalf.

Al alternate director may be an existing director or any other peson approved by the board of
directors.
A substantive director may also be appointed an alternate.
An alternate director is regarded as being a director of the company a legally responsible for his
act as a director and is subject to all statutory obligations imposed on directors.
The particulars of an alternate must be entered in the registration of directors and secretaries ad
filed with the Registrar of company by filing Form 203A.

Circumstances under which an alternate director may vacate the office

An alternate director may vacate office under the following circumstances:
(i) By revocation – where the appointing director revokes his appointments.
(ii) By death of either an appointing director or an alternate director himself.
(iii) By the resignation of the appointing director or alternate director.
(iv) On the expiration of the tem fixed for his appointment if any.
(v) By disqualification of the appointing director or by his or own.
(vi) By his own acts e.g. if he retires or resigns in writing by delivering his registration letter to the
company secretary or chairman.

Remuneration of directors
Directors have no implied rights to remunerate. It must either be expressly provided for in the
company articles of association or fixed by the company in general meeting.
Remuneration of directors is an annual general meeting agenda and must be approved to the
shareholders at an annual general meeting. The amount payable to directors as remuneration is
usally provided for in the financial strut of the *****

93
 It is an annual payment to the directors and must be paid whether the company makes a profit or
not.

If remuneration of directors is approved by shareholders, it constituted debt due from the

company is consequently payable not only out of the ****between him and the company.
Removal of a director, shall require a special notice given either by director or a shareholder. The
notice may be sent together with the notice calling the meeting which is usually 21 days.

Procedure of removal of a director

(i) Special notice must be given under section 42 of cap 486 to remove a director.
(ii) On receipt of such a notice the company secretary or director must send copy to the director
concerned.
(iii) The director to be removed is entitled to have his representative in writing sent to the members
of the company and to be heard on resolution at the meeting.

Disqualification of directors
In certain circumstances, directors may be disqualified from holding office. The companies Act
and the Articles provide for disqualification from directorship on the following grounds:
1. He has ceased to be a director of the company by virtue of section 18 of cap 486, i.e. he has
failed to take up any prescribed shares within 2 months of his appointment.
2. Under section 186 of cap 486 lays down the minimum and maximum age of appointment of
directors. (Minimum 21 years, maximum 70 years).
3. He is undischarged bankrupt or makes any arrangement or composition with his creditors
generally section 188 cap 486.
4. He becomes prohibited from being a director by reason of any order made under section 189 of
cap 486 i.e. restraining a fraudulent person from managing a company.
5. He becomes of unsound mind.
6. He resigns his office by notice in writing to the company.
7. He is absent without permission for more than 6 months for meetings of directors held that
period.
Duties and powers of directors
The directors owe their duties to the company, shareholders and stakeholders.
The stakeholders refer to those who may directly or indirectly benefit from such a company.
The duties of directors may be classified as fiduciary (of trust and duties of care and skill)

Fiduciary duties
They must exercise their powers honestly and for the best interest of the company. They must
not put themselves in a position where their duties and interests are likely to conflict their powers
and duties are conferred to them by the articles, they must act in good faith for the general
advantage of the company.

94
 Because directors owe fiduciary duties, they must not make a secret profit out of their position.
A director cannot directly or indirectly contract with the company which he manages unless the
articles provide otherwise.

Duties of care and skill

Can be summarized as follows:
- They must act honestly for the good of the company.
- They must exercise the degree of skill which may be reasonably experience from a person of
their knowledge and experience.
- They are not bound to give continuous attention to the company‟s affairs.
- They are not liable for errors of judgment i.e. if directors make wrong decisions such decisions
may be ratified by the shareholders or by altering the articles of association of the company.
- Incase of duties properly left to some officials of the company they are being issued.
It is important to note that obtaining an overdraft from the bank is also a borrowing.
Any borrowing on which a charge has been created must be filed with the Registrar of company.

Ultra vires borrowing

If the borrowing is beyond the powers of the company as stipulated in its memorandum of
association, the borrowing and any security given is void and no ratification by the company in
general meeting can render it *****. Such borrowing does not give rise to any indebtedness at
law or equity or on the part of the company.
The lender cannot sue the company for repayment of loan in account but has the following:

1. If the money borrowed has been applied in paying off debt incurred by the company intra vires,
the lender ranks as a creditor to the extent to which money has been applied and can recover.
2. If he can identify his money or any property purchased***it he is entitles to a tracing order and
he can recover***
3. He may recover damages from the directors for breach of warranty and authority unless the fact
that the borrowing was ultra vires would have been discovered from the company registered.
4. If the money borrowed has not been spent by the company lender can obtain an injection to
prevent the company from parting with it.
The first meeting of the Board of Directors
This is the first board meeting of the company held after the appointment of the first directors
and following the receipt of the certificate of incorporation. The date of the first meeting of the
directors is usually the date shown on the certificate of incorporation.

The notice and agenda of the first board meeting should contain the following agenda items:
1. Certificate of incorporation – is tabled by the company secretary and date the company number
on the certificate is noted accordingly.

95
2. First directors of the company – having been appointed at the time of **** will be produced
(names) by the company secretary as evidence of their appointment and noted accordingly.
3. Chairman of the board at this meeting, the chairman who will preside over future board meetings
is usually appointed at the meeting where he takes the chair. He is the chairman who will preside
over both annual general meetings.
4. Appointment of company secretary – the company secretary who signed the incorporation of
another person is noted.
5. The common seal – it is also tabled at this meeting and its impression affixed in the minutes for
voting purposes.
6. Appointment of the company lawyers – the appointment of the lawyers will be incorporated the
company may be ratified at this meeting or another lawyer appointed in their place.
7. Appointment of the company bankers – is the meeting where the first bank to the company are
appointed and the necessary forms completed. The company secretary will also be required to
send an extract duly certified for purposes of opening an account.
8. Auditors to the company – the auditors are usually appointed by the directors and their
appointment ratified at the annual general meeting by the shareholders.
9. Statutory books – these include minute book, register of members, register of directors and the
seal register. At this meeting, the company secretary is usually given for author to purchase these
books and enter the details of the directors, secretaries and subscriber.
10. Registered office – at this meeting, the registered office which had already been filed with the
Registrar of company on form 201, may be ratifies or distinguishing members. The directors may
decide to pass a resolution that the share certificates shall not bear distinguishing members.

CHAIRMAN
Appointment
The member of the chairman‟s appointment depends upon the kind of meetings he presides. The
chairman of a limited company is appointed in accordance with that company' articles of
association.
The articles of association will also state the manner in which annual general meeting or
executive general meeting.
The chairman of any meeting for which no specific rules are provided may be appointed for that
meeting by the majority vote of those before dealing with any of the business for which the
meeting is being held.
The duration of which his appointment also depends upon the regulations which govern the
meeting e.g. appointed for one part and meeting for a fixed period or even for life.

A deputy chairman will preside in the absence of an elected chairman or any person may be
elected in the place of the deputy chair.

Duties of the chairman

May be set out in the regulations governing the meetings but more are implicit in his
appointment or arise out of the common law.

96
The duties of the chairman whether express or implied may be summarized as follows:
(a) Notice – before the meeting commences he ought to certify the meeting has been
properly convened. He will ascertain whether the notice was sent to those entitled within
the required person i.e. 21 days for an annual general meeting seven days for a board
meeting.
(b) Constitution – he must ensure that the meeting is properly constituted i.e that his
appointment is in order and that the quorum is present.
(c) Quorum – before the chairman proceeds with the meeting, he ****consult with the
company secretary for consultation that the necessary quorum is present to enable the
meeting to proceed with the consent that members he may adjorn the meeting due to lack
of quorum.
(d) Conduct of meeting – during the whole course of the meeting, the chairman must ensure
that proceedings are conducted strictly in accordance with the rules which govern the
meeting.
(e) Presentation of order – the chairman has a duly to preserve order or for this purpose he
may have power to order the withdrawal of any unruly person but this power will depend
on the nature of the meeting and where it is held.
(f) Order of business – he must ensure that the business is dealt with ***the order set out in
the agenda paper, unless the meeting consents variation of the order.
(g) Discussions – the chairman has a duly to allow reasonable time discussion of the agenda
under review. He must also restrain irrelevant discussion which is not before the meeting.
(h) Sense of the meeting – the chairman must ensure that the sense of the meeting is
properly ascertained with regard to any question which is the meeting.
He must read the mood of the meeting and take any approval action including adjourning
the meeting when necessary. However, the chairman has no authority to adjourn the
meeting without the consent of the members and if he does so the members may appoint
one among themselves to continue with the meeting.

Issues of the chairman

The chairman derives his principally from the rules which govern the meeting over which he
presides, but also to some extent from the common law.

*************************************
(a) To maintain order – use his discretion in dealing with emergencies **they arise. He has
to ensure the meeting is orderly and any person causing breach of the peace is removed
from the meeting using reasonable force.
(b) He decide on points of order – he has power to decide on these as they arise and to give
and maintain his rulings on any points of order.
(c) Use a casting vote – where there is unequality of votes and if the rules confer this power,
the chairman has power to cast his vote. The power of a chairman to cast a vote must be
provided by the rules that govern the meeting i.e for a limited liability company success
provision must be contained in the company articles of association.
(d) To order the removal of disorderly persons – where necessary, the chairman may order
the removal of any disorderly person. How reasonable force may be used to effect

97
 removal, if the person concerned has failed to withdrawal after being requested to do so
under the chairman.
(e) Adjourn the meeting – unless the rules give him express power to adjourn in specified
cases, the chairman derives this power from meeting. If he were to adjourn without the
consent of the meeting another chairman may be appointed by the meeting to continue
with the agenda of the day. National dwelling society vs. Sykes 188.

Circumstances under where the chairman is allowed to adjourn

- Where a poll is to be taken, the chairman has authority to adjourn the meeting which shall
continue after the poll has been taken.
- The chairman has authority to adjourn because of lack of quorum.
- When the meeting becomes ungovernable.
- To enable the chairman to carry out his duties successfully

Qualifications of a chairman
(a) To enable the chairman to carry out his duties successfully.
(b) He holds a qualification approved by the Registration Board.
(c) He is qualified as an advocate of the High Court of Kenya (Miscellaneous Amendment
Act 2002).
(d) He is at the commencement of the Act, registered as an account under section 24(1) of
the Accountants Act cap 531.
(e) He is at the commencement of the Act, both a citizen of Kenya a member of the
professional body known as the Institute of Chartered Secretaries and Administrators.

Disqualifications from registration as company secretary

Section 21(1) provides the circumstances under which one may be disqualified as a company
secretary. The section gives the following provisions for disqualifications:

(a) If convicted by a court of competent jurisdiction in Kenya or elsewhere of an offence

including fraud and dishonesty.
(b) If undischarged bankrupt.
(c) If during the period when the registration board has determined under section 28 (1)
(d) that he shall not be registered or during any such period as varied by the High
Court under section 29.
(d) Section 28 gives the Registering Board power to cancel the registration of a member
amongst other penalties if found guilty of professional misconduct.
(e) If the membership of a member expires, the registration board may gazette his
deregistration.
Circumstances under which a member of the Institute of Certified Public Secretaries may be
disqualified for professional misconduct
A member of the Institute is guilty of professional misconduct under the following
circumstances:

98
 (a) If he allows any person to practice in his name as certified public secretaries unless such
a person is the holder of the practicing certificate and is in partnership with him or
employed by him.
(b) He discloses information acquired in the course of professional engagement to any person
other than the client and without the consent of the client.
(c) He fails to report a material misstatement known to him to approve in a statutory return
with which he is concerned in a professional capacity.
(d) He is guilty of gross negligence in the conduct of his professional duties.
(e) He fails to disclose in a statutory return or otherwise a ****fact not known and disclose
of which was necessary to ensure that the statutory return is not misleading i.e. failure to
disclose particulars of indebtness in the annual return.
(f) He includes in any statement return or form to be submitted to the council any particular
known to him to be false.
(g) If he expresses an opinion on any matter with which he is concerned in a professional
capacity without obtaining sufficient information on which base the
opion*************
(h) If he fails to keep the funds of a client in a separate bank account or if he uses the client‟s
money for the purposes for which it was not intended.
(i) If he does or fails to do any other act which may be subscribed by the registration board.
(j) If he enters of or in the course of practicing certified public secretaries and yet he does
not hold a practicing certificate.

Appointment
Status of a company secretary
- He is a servant of the company with powers to bind the company in his professional
capacity.
- An officer of the company and therefore liable to penalties in that capacity.
- If acting with the scope of his duties as secretary and if expressly authorized by the
directors, he is an agent of the company with powers to bind the company.
- If the office of the secretary is vacant or if for any other reason there is no other secretary
of acting, his functions and responsibilities may be undertaken by an assistant company
secretary who should also be qualified.

Powers and duties of the company secretary

The powers and duties of the company secretary depend on the size and nature of the company
and the personal contractual arrangement he makes with the company. The activities of the
company secretary will also be determined as to whether the company is active or dormant.
In dormant company, the secretary may only prepare compliance. In active company, the role
may vary i.e. preparing resolutions with changes to bank mandatory board resolutions with
respect to banking facilities, payment if dividends e.t.c.
However, a company secretary usually has the following powers and duties:

(a) To be present at all meeting including board meetings and to take minutes of such
proceedings.

99
 (b) On the instruction of the Board, issue notice of meetings too members and others entitled
to.
(c) To counter sign and record transfer of shares and conduct correspondence with
shareholders as regards calls, transfers and forfeiture.
(d) To keep the books of the company particularly those relating to the internal
administration of the company e.g. share registers and register of changes.
(e) To make all the returns of the company e.g. return fileable with the Registrar of
********.
(f) For quoted company, he has to ensure compliance with the Nairobi Stock Exchange and
CMA Rules and Regulations.
(g) To counter sign instruments to which the company seal has been affixed unless the
document has been signed by 2 directors.
(h) To ensure compliance with changes in respect of authorized signatories in a bank.
(i) For financial institutions and banks, the company secretary must ensure compliance with
the Central Bank of Kenya and Banking Act.
Role of the company secretary with regard to board of directors, company shareholders

Role to the board

- Ensure that the procedure for the appointment of directors is properly carried out and he
should assist in their proper ****
- Access the specific training needs of directors and executive management.
- Advise the board on changes which may affect the running of the ****i.e. changes with
respect to the Companies Act Insurance Act Banking Act e.t.c.
- Assist in compiling board papers and should be able to filter to ensure compliance with
the best practice in corporate governor.
- Advise the board in relation to matters affecting the Articles of Association i.e. with
regard to number of directors.
- Use his initiative in raising matters which may warrant the attention of the board. i.e.
when the annual general meeting of the company is due any changes in the legislation
which may affect the company.
Role of the company
- The secretary should ensure compliance with relevant statutory regulatory requirements.
- Assist in the implementation of corporate strategies by ensuring that the board‟s decisions
and instructions are properly carried out and communicated.
- Ensure that the company is in compliance with the company‟s Act under which all
limited liability company ********
- Be available to provide central source of guidance and advise within the company on
matters of business ethics and good governance.

Role of shareholders
- To communicate with the shareholders appropriately to ensure that ***regard is paid to
their interests.
- Ensure that all shareholders are treated in a fair and equal manner.

100
 - Ensure that all notices of the Annual General Meetings are dispatched to the shareholders
on due date and any other enclosure required for an Annual General Meeting.
- Act as a primary form of contact for shareholders and institutional investors with regard
to matters of corporate governance.
- Ensure that shareholders who may *****into his office without notice are properly
attended to.
- Ensure that all dividend due to the shareholders are promptly dispatched to them.
The other company duties of the company secretary which assist in good corporate governance
1. Ensuring that the annual general meeting is held in accordance with the requirements
***cap 486 and articles of association.
2. Facilitating the smooth running of board meetings.
3. Monitoring and ensuring compliance with CMA requirements incase of a listed
company.
4. Maintaining statutory records.
5. Communicating with shareholders on matters which affect them.
6. Maintaining shareholders register.
7. Filing statutory returns with the relevant regulatory bodies.
Practical ********us requiring action by company secretary

(a) Facilitating proper induction of directors into their role.

(b) Continually reviewing development in corporate governance and advicing interested
parties accordingly.
(c) Assisting directors with respect to their duties and responsibilities, in particular
compliance with the company law and if applicable stock exchange requirement.
(d) Monitoring and laying in place procedures which allow for compliance relevant
regulatory and legal requirement.

Challenges of the company secretary

1. Limited powers – the company secretary has limited powers in the running of it as his
role is only to advice the board on legal matters or issues relating to the Company Act.
2. Interest groups – as a company secretary, one has to serve various interest groups of
which may be conflicting. Some of the dormant of the interest may cause conflict with
the board of directors.
3. Level of independence – as a company secretary, one should not reveal the matters
concerning the company to the 3rd parties without the authority of directors.
4. Terms of engagement – most cases, the terms and conditions under the company
secretary is dictated by the letter or engagement which states the terms with respect to
fees chargeable and the work to be performed.

Role of the company secretary before the meeting

(a) To prepare notice and agenda in consultation with the chairman of the Board.
(b) To dispatch the notice and agenda to those entitled to attend the meeting.
(c) Prepare a schedule of proxies received from the shareholders for the purposes of tabling
the same at the annual general meeting.

101
 (d) Ensure proper accommodation arrangements for directors who reside outside the country.
(e) Arrange the revive where meeting is to take place.
(f) Prepare attendance sheet to be signed by those to attend the meeting.
(g) To ensure that the clerks are stationed *********************** members who are
attending the meeting.

During the meeting

1. Ensure you have copies if the previous meeting‟s minutes for signal *by chairman after
they have been approved.
2. Ensure the register of directors and secretaries is in place incase director may wish to
know the date of his appointment.
3. Have a copy of register of shareholders.
4. Have spare copies of the notice and agenda.
5. Have polling votes incase a poll is expected.
6. Have a copy of the Memorandum of Association and Articles of Association required for
the purposes of confirming the presence of a quorum.
7. Have a copy of the Companies Act.
After the meeting
1. Prepare draft minutes and send them to the chairman for approval or communication.
2. File proxy forms and the attendance list for record purposes.
3. Paste the minutes of the meeting which were signed by the chairman if they are in loose
form.
4. Update the register of directors in case there were changes in the directorship.
5. Process dividend and to dispatch to the shareholders incase a dividend was approved at
the meeting.

AUDITORS
The primary function of the auditor is to report on the company statutory accounts prepared by
them. They have a duly to the shareholders their report is to be read to the shareholders at an
Annual General Meeting.
The position of an auditor has become important and every company excess dormant company,
is required to appoint an auditor to audit the balance of accounts of the company.
The first auditors of the company may be appointed by the directors at any time before the first
general meeting and they will hold office until the conclusion of that meeting.
If the directors do not appoint the first auditors, the company in general meeting may appoint the
auditors under section 159 of cap 486.

The auditors appointed whether by the directors or the members entitled to re-appointment at the
next annual general meeting unless a special notice has been given to appoint any other auditor
rather than the retiring auditor.

102
The general rule regarding the re-appointment of the auditor is the retiring auditor is re-appointed
without any resolution being passed.

However, the retiring auditor may not be re-appointed under the following:

 A resolution has been passed appointing another auditor in his place.

 A resolution has been providing expressly that he shall not be reappointed.
 He has given the company a written notice of his willingness to being reappointed.
 If he is not qualified for re-appointment.

Removal
For an auditor to be removed from office, a special notice must be given 28 days to the company
either by a director or a member expressing his intention to move the resolution replacing the
retiring auditor.
On receipt of such a notice, must forthwith send a copy of the notice to the retiring auditor. The
retiring auditor may make representations in writing have them circulated to the members
together with the special notice.
He may speak on the resolution at the Annual General Meeting to let the members know reasons
for his removal as auditor of the company section 160 cap 486.

Duties of the Auditors

These are laid down by cap 486 and the articles of association of the company. Article 130 of
table A provides the the appointment and duties of audit shall be regulated by section 159 -162
of cap 486.
The following are the duties of the auditors:

(a) To examine the company books and accounts.

(b) To make a report to the members at the annual general meeting on the accounts examined
by them and on every balance sheet and every profit and loss account and all the group
accounts laid before the meeting.
(c) To report on the part‟s of assets and liabilities, profits and dividends.
(d) To ascertain and state the true financial position of the company by examining the books
and accounts.
(e) Report to the members whether they were able to obtain all the account they required for
the purposes of their audit.
(f) To read their report to the members at the annual general meeting.

Rights of the auditors

In order to carry out their duties properly and professionally, the auditors have the following
**** section 162 (4) of cap 486:
1. Right to access to the company‟s books, accounts and vouchers

103
 2. To receive notice of the annual general meeting
3. To attend and read the officers of company any information and explanations they think
necessary in the performance of their duties
4. To make any representation to the members concerning his removal from office
5. To receive special notice with regard to his intended removal.

Remuneration of the auditor

This may fixed by the directors if the auditors are appointed by the directors before the first
general meeting or if appointment is ****casual vacancy.
In other cases, it will be fixed by the company in general meeting remuneration of the auditors
must be shown as a separate ***** the accounts whether fixed by the directors or general
meeting.

Eligibility for appointment as an auditor

No person can be appointed as an auditor unless he has the qualifications:
(a) He has a member of a body of accountant established by Kenya known as ICPAK.
(b) He has obtained adequate knowledge and experience in the course his employment by a
member of a body if accountants.
(c) He is authorized to be appointed by the Registration Board subject to qualifications
required by the Board.
(d) He is a member of a body by accountants established and recognized in the United
Kingdom.
(e) He is a holder of practicing certificate issued by the Registering Board.

Disqualifications
Section 161(1) of cap 486 disqualifies the following persons from being appointed as auditor of a
company:
1. An officer or servant of the company
2. A body corporate i.e. a limited company
3. A partner or employer of an officer or servant of the company
4. A serving auditor who becomes disqualified under section 28 of the Accountants Act Cap
531.

Auditing a ***********
The auditor must report to the members on the accounts examined by them. The auditors‟ report
must be read ************************** general meeting and must be open for inspection
by any member. An auditor is entitled to attend the general meeting and report the members on
the books of accounts examined by them.
The contents of the auditor‟s report include the following struts:
(a) That they have obtained all the information and explanation which is to the best of their
knowledge and belief were necessary for the purpose of their audit.

104
 (b) In their opinion, proper books and accounts have been kept by the ****so far as appears
from their examination of those books.
(c) Proper returns adequate for the purposes of their audit have been received from the
branches not visited by them.
(d) The auditor‟s have to report that the company balance sheet and its profits and loss
account dealt with by the report are in agreement with the books of account and returns
(e) Whether in their opinion, and to the best of their belief, the financial struts give a true and
fair view of the state of financial affairs of the company at the financial period under
review.
(f) Whether in their opinion, in the case of holding company books of accounts have been
properly prepared.

Director’s Report
This is required by section 157(1) of cap 486 to be attached to every balance sheet laid before a
company in general meeting with respect to the company‟s state of affairs.
The director‟s report should be read to the members by the financial director or it may be taken
as read with the consent of the meeting.

The contents of the director‟s report should include the following duties:
(a) Principal activities of the company and its subsidiaries during the period under review
and any significant changes therein.
(b) Results of the company‟s trading during the period stating profit ********taxation and
the tax deducted.
(c) Dividend recommended for payment to shareholders for the period of review and the
dividend paid for the previous year.
(d) Proposed earnings transferred to the reserves.
(e) Any significant changes in the fixed assets of the company or of subsidiaries during the
year.
(f) The name of the auditors and whether they have expressed it willingness to continue as
auditors of the company under section 159(1) cap 486.
(g) Name of the company secretary and the date of the report.
(h) Names of the auditors who resigned during the year and any other new appointments
during the year.

COMPANY MEETING

General Meeting
1. Annual Meeting
A meeting of a company held once a year to discuss the ordinary business of the company.
Section 131 (1) of cap 486 requires every company to hold an Annual General Meeting
within 18 months from the date of incorporation. It further states that the subsequent
meetings must be held within 15 months i.e. 15 months must not elapse before holding the
annual general meeting.

105
Notice period required for an annual general meeting is 21 clear days i.e. excluding the date
of dispatching the notice and the date of holding the annual general meeting.

The agenda of an Annual General Meeting is usually:

(a) To read the notice convening the meeting which may be taken as read by the consent of
the members.
(b) Approval of the minutes of the previous meeting.
(c) Approval and adoption of the financial struts.
(d) Approval of a final dividend or to note that directors do not recommend the payment of a
dividend.
(e) Remuneration of directors – this is an annual general meeting agenda which must be
approved by the shareholders.
(f) Re-election of directors if any.
(g) Re-election of the auditor – the auditor is usually appointed by the shareholders therefore
the power in their re-appointment is vested in shareholders.
(h) Any other business for which due notice has been received.
2. Extraordinary General Meeting
An Annual General Meeting is any general meeting of a company other than the annual
general meeting. The directors can convene an Executive General Meeting at any time they
deem fit provided *****notice is given to those members entitled to attend.
The notice required for an executive general meeting is 14 days or 28 days when a special
resolution is to be passed.
The purpose of an executive general meeting is to transact an urgent business which cannot
conveniently be held or wait until the next annual general meeting.
Two or more members holding not less than 1/10 of share capital may call an executive
general meeting.
An executive general meeting have 1 or more agendas.
3. Class Meeting
These are meetings held by members holding certain of share in the company. A company
may be incorporated with various classes of shares i.e ordinary share, preference shares,
management shares e.t.c.

If only one person is holding such a class of shares then that of a person can hold a valid
meeting.
4. ********
Meetings of the directors can be fixed by the directors as they deem fit.

Once directors have held their first meeting which is usually the date of incorporation of the
company, the subsequent meeting may be fixed by the directors in accordance with the

106
 provisions of the articles of association. However, most companies do hold their meetings
quarterly.

The notice of the director‟s meeting is required to be given within ***days but a company
can still hold its board meeting in less than 7 days.

Requisites of a valid meeting

These are the factors to be considered whenever a meeting is to be called. Lack of proper
notice to those entitled to attend can render the meeting invalid. For a valid meeting to be
held, the following factors must be taken into account:
(a) Meeting must be properly convened i.e. the notice and agenda the meeting must be
dispatched to those entitled to attend in accordance with the provisions of the articles of
association.
The notice for an annual general meeting requires 21 clear days and notice for board
meeting requires to be dispatched within 7 days.
An inadequate or ambiguous notice will not be allowed Kay vs. ****** (1898)
(b) Meeting must be properly constituted. There must be a quorum necessary to allow the
meeting to proceed. Failure to *****and and maintain quorum must be invalidate the
proceedings of the meeting depending on the standing order or rules of the organization.
(c) The chairman – the meeting must be presided over by duly elected chairman whose
appointment must be in accordance with the rules governing the meeting.
(d) The meeting must be properly held in accordance with any relevant rules. If there are
rules /regulations governing conduct a meeting then they must be observed.
(e) Those entitled to attend – in a company meetings, only those who are entitled to receive
the notice and vote at a meeting are allowed to attend the meeting.
However, a meeting may also be attended by people who are members through invitation.

MINUTES
Are a written record of business transacted at a meeting. The minutes must be of an annual
general meeting, Boars of Directors‟ meeting or a committee meeting. The company secretary
must ensure that the minutes of a meeting are prepared and approved by the chairman after
which they have to be pasted in the minute book meant for that purpose. The company secretary
must ensure that the minutes of the previous meetings are approved at the next meeting.

Contents of the Minutes

Although the contents will vary according to the kind of meeting, the following are usually the
contents of the minutes:

1. Headlines: This includes name of the company which held the meeting, kind of meeting
e.g. annual general meeting or board of directors meeting, place of meeting, day and date
of the meeting.
2. Time: The minutes must also contain the time when the meeting started and ended.

107
 3. Names of those present: These are the people who are entitled to receive the notice and
vote at the meeting. In an annual general meeting scernario ***are the shareholders of
the company. In a board of directors meeting those present will be the board members of
that particular ***
4. Those in attendance: These are persons who are not member of the company but are
attending the meeting through invitation i.e the company secretary, financial controller or
Human Resource Management.
5. Minutes of resolutions: Are records of directors taken and resolutions passed at the
meeting. These resolutions are always written in past tense i.e. it was resolved that………
6. Names of proposers and seconders: These are the members who proposed and seconded
the resolutions of the meeting before being carried/passed.
7. Serial numbers: Each item of the agenda is usually serialized for identification purposes.
Serializing of the minutes may depend to the company i.e. serialization may be in the
form of min1/1/09.
8. Minutes of narration: These are usually brief discussions which took place at the meeting.
The company secretary is not required to minute all discussions which took place at the
meeting he only puts ***the points and resolutions passed at the meeting.
9. The chairman‟ signature: The chairman is usually required to append his signature at the
next succeeding meeting after the minutes have been reviewed, discussed and approved.
10. Date: The date on which the chairman appended his signature on minutes should also be
neglected.

Essentials of good minutes writing

(a) Authentic: As the minutes may subsequently be required as evidence in a court of
law, they must give a precise account of proceedings of a meeting and nothing more.
(b) The minutes must be complete: The minutes of the meeting must be complete and in
sufficient detail to enable a person who will not be present at the meeting to
understand fully what business will be conducted/transacted.
(c) Concise: Be as concise as possible: However, completeness must not be sacrificed for
the sake of conciseness.
(d) Past tense Minutes of the meeting: Being a record of what was done must always be
written in past tense i.e it was decided, it was resolved, it was agreed e.t.c.
(e) Free from ambiguity: The dates, numbering, amounts, quantities e.t.c must be clearly
stated. Officials and persons concerned with giving or receiving instructions and
making decisions must be named, ***As appropriate.

STATUTORY REGISTERS AND RETURNS

Statutory registers are the books required under the Companies Act to be kept by the company
secretary at the registered office of the company or any other place authorized by the company.

The Registrar of the company must be notified where the statutory register kept and any other
change thereon.
The company secretary must also ensure that any changes affecting the place where the registers
are are updated accordingly e.g if their charges in directorships, the company secretary must
notify the Registrar.

108
By completing form 203A and filing the same within 14 days. The Companies Act recognizes
the following as statutory register:

1. Register of members: This register contains names of shareholders. It indicates the name,
address, number of shares and any other additional shares purchased by the shareholder.
It also contains details of the number of shares transferred, date and the name of the
shareholder to whom the shares are transferred (folio number).
2. Register of directors and secretaries: This is where the names of the directors are entered
stating the name, address, dates and appointment and date of resignation if any.
It also contains the details of other directorship i.e. companies in which director.
It is also a requirement to indicate the date of birth of a director of a company is of public
concern.
The register of secretaries states the name of the company secretary, address and the
registered office if the company secretary is not an individual.
3. Minute Book of the Annual General Meeting should be kept at the registered office at the
company and made available for inspection by any member who would wish to know the
details contained therein.
4. The register of mortgages and charges: This is the register where details of borrowing by
the company are kept. It contains the debt of the amount borrowed, lending bank and the
details of any charged to secure the loan.
5. Register of directors‟ interest: Contains the details and the extent to which a director may
be interested in a particular contract cap 486 at section 200 requires a director to state his
interest in any account in which the company is involved.
6. Books of Accounts: Are the details of the transactions in which company is involved in.

Types of statutory returns

The statutory returns are returns required to be filled with the registered company either on
annual basis or whenever any change requiring submission of a return occurs.

Each return should be submitted with the registered company as state under cap 486.
The following are some of the statutory returns:
(i) Annual return – this is a return requiring under section 125 (1) of 48 to be submitted with
the Registrar of company after holding the date of the general meeting. It should be
dated 14 days from the date of the annual general meeting signed by the director,
secretary and filed with the Registrar within 42 days.

Contents of the annual return

(a) Company number – is the number given to the company when it was incorporated and
appears of the certificate of incorporation.
Any communication with the Registrar of company regarding such company must bear
the company number as it is the number with the company is identified.
(b) Date – usually the date entered from the 14th day of the annual general meeting.
(c) Registered office – this indicates the place where the statutory record of the company are
kept if not kept at any other place. The registered office of a company is also a place
where the summons or any other legal communication can be served.

109
(d) Place where the register of members are kept if not kept at the registered office.
(e) Nominal capital of the company i.e a company may be registered with authorized share
capital of 10m dividend into a number of shares.
(f) Issued share capital – are the number of shares already taken by shareholders.
(g) Name of the person submitting the annual return whether the company secretary or any
other person.
(h) Signature of the director and the company secretary if a company is private. If the
company director or secretary need not sign page 14 of the return if a company is public
since it is required to attach a copy of the financial state.
(i) Names of shareholders, address, number of shares held by each share together with any
transferred indicating the date of transfer.
(j) Copy of shares transfer which took place within the year.
(k) Names of directors stating the address any other directorship and date of birth if the
company is a public concern.
(l) Names of alternate directors if any.
(m) Particulars of indebtness – refers to any borrowing of the company of which a change has
been created and registered with the Registrar of companies (or nil if the company has no
indebtness).
(n) Name of the company secretary stating the address or the registered office if the secretary
is not an individual.
(i) Return of Allotment
A return completed on Form 213 and filed with Registrar of company within 60 days.
It is a return completed by the company whenever shares are allotted to the shareholders.
(ii) Form 203A a return completed whenever there charges in directorship and filed within 14
days.
(iii)Annual report and accounts – audited annual financial struts which is usually approved
by the directors and tabled at the annual general meeting adoption by the
shareholders.
(iv) Form 201 – this is required under section 108 cap 486 to be filed with the Registrar
whenever there are changes in the registered office of the company.
(v) Prospecus – documents prepared whenever a company intends to float the shares to the
public.

Inspection and Ratification of Register

The register of members must be kept at the registered office or any other place authorized
by the company. It is a public document and must remain open for inspection by any member
of the company or by non member but at under certain conditions.
According to section 115 of cap 486, the register must remain open for inspection for not less
than 2 hours daily by any member who would wish to do so and at no charge.
The registered of members may also be inspected by non member payment of sh.2 or such
less amount as the company may prescribe copies of the register of members may be taken

110
 by any person inspecting it. The company is bound to provide copies free of charge to any
member who wishes to have the whole or part of the register.

Any non-member who wishes to take a copy may do so by paying sh.1 or less every 100
words or part thereof as the company prescribe.

Ratification of the register

The register of members is prime facie evidence of any matter directed by the companies act
to be inserted in it as provided under section 120 of the Company Act.
Section 118 of cap 486, court may order the rectification of the register of members on the
application of the aggrieved person or any member the following cases:
(a) If a person who has not agreed to take the shares is induced to have his name entered in
the register i.e. where has been induced to take shares by misrepresentation.
(b) If the name of a member is omitted or wrongfully forfeiture or forged transfer.
(c) If there has been default or unnecessary delay in recording the fact that a person has cease
to be a member.
(d) Where the name of a member is entered in the register after expiry of the date of
allotment.
(e) Where the directors decide to unduly delay the registration a transfer where they have no
power to reject it.

Penalties of failure to file statutory return

Cap 486 requires that every company to file the annual return in other statutory returns
whether the company is trading or dormant.
There are several returns required to be submitted with the Registrar of company whenever
necessary. However, the annual return (Form A) must be filed with the Registrar within 15
months from the date of the annual return.
The following are the consequences for failure to file statutory returns:
1. Failure may force the Registrar of company to strike off the name of the company from
the Registrar of company register.
2. The directors of the company and the officers involved may be taken to court by the
Registrar of companies.
3. Penalties in terms of filing fees will be charged for the subsequent months in which the
statutory returns remain unfiled.
4. The shareholders and the directors of the company may petition the court to have the
company wound up for failure to file statutory*****************

WINDING UP OF COMPANIES
The winding up or liquidation of a company is the legal process where a company is dissolved
and its property administered for the benefit of directors and members.

111
The birth of a company starts when a certificate of incorporation is issued by the Registrar of
company and the date of birth will be the date reflected on the certificate of incorporation.

A company dies when it is dissolved and eventually struck off from register of the Registrar of
company.

Methods of winding up
Section 212 of cap 486, provides the following three ways through which a company be wound
up:
(a) By the court i.e. compulsory winding up.
(b) Voluntary winding up either by the members or creditors.
(c) Subject to the supervision by the court.

Compulsory winding up
Under section 210 cap 486, a company may be wound up by the court under the following
circumstances
1. Special resolution – where a company has by special resolution resolved the company be
wound up by the court. It is where the shareholders in an annual general meeting resolve
that the company be wound up by the shareholder.
2. Failure to file statutory report or held a statutory meeting. When there has been default in
delivering the statutory report to the Registrar of companyor holding the statutory
meeting, the court may wind up the company. This process only applies on petition of a
shareholder which ***can only be done after 14 days elapse since the last date ***which
the meeting ought to have been held.
3. Failure to commence business – this will apply where a company ***not commence
business within a year of its incorporation or suspend the business for one year.
4. Number of members – court may also order the winding up of a company where the
number of members is reduced below the statutory minimum ****below 2 members for a
privae company and 7 members for a public company.
5. Inability to pay debts – courts may order the winding up of a company if it is unable to
meet its financial obligations. Under section 220 cap 486, company is deemed to be
unable to pay its debts when:
- If a creditor whom a company owes more than ksh.1000 leaves a demand notice at the
company registered office and the debt is not paid within 3 weeks.
- If the court is satisfied that the company cannot pay its debts.
- If the execution in favour of a creditor of the company is returned unsatisfied in whole or
part.
- Court‟s decision – where the court is of the opinion that it is just and equitable that the
company should be wound up. The doctrine of just and equitable applies:
(a) Where the substratum or the object of the company has ceased to exist.
(b) Where there is a deadlock in the management of the company i.e. the directors do not see
eye to eye or talk to one another.
(c) Where the company has been formed to carry out a fraud **illegal business.

Voluntary winding up

112
This enables the company concerned and its creditors to settle their affairs without many of the
formalities involved in the winding up by the court. The shareholders of the company may
decide to pass a resolution under section 339 stating that the company has no assets or liabilities
therefore it is desirable to wind it up.

On the same note, the creditors of the company may agree with the director to have the company
wound up after amicably setting their debts.

Ways of voluntary winding up

The directors and shareholders may decide to wind up the company where period if any fixed for
the duration of the company by the articles expires.
A company may also be wound up on the occurence of an event may be provided in the articles
of association.
If the company resolves by a special resolution that the company be wound up voluntarily.
If the company resolves by an extraordinary resolution that it cannot ***by reason of its
liabilities continue on business and that it is advisable to wind it up.

Who may petition for a compulsory winding up?

Section 221 cap 486, an application to the court to wind up a company be presented by:
1. The company itself – a company may be by special resolution. Petition the court to have
the company wound up.
2. Any creditor whom the company is not liable to pay the loan owed to him may petition
the court for a winding up order.
3. The official receiver – after realizing the assets of the company and paying off the
creditors and the members may petition the court for a winding up order.
4. The Attorney General may in consequence of a report of the committee of inspectors on
the company affairs ask the court to wind up the company.

Consequences of winding up
From commencement of the winding up, the company ceases to carry on its ordinary business
except that business which is necessary for its official winding up.
Other consequences of the winding up order of a company are as following:

(a) A copy of the winding up order must be filed with the Registrar of companies.
(b) No action can be commenced or proceeded with against the company without leave of the
court.
(c) Any disposition of the company‟s property, transfer of shares or alteration, the status of
its members made after commencement of the winding up are unless the court order void.
(d) The official receiver becomes provisional liquidation and continues to act until another
liquidator is appointed.
(e) Servants of the company may be dismissed however this will depend upon the
circumstances of each case.

113
 (f) The official receiver takes control of all books and papers of the company immediately
the winding order is made.
(g) A strut of affairs of the company must be submitted to the official receiver. Important for
the ***to establish the status of the company the point of takeover.
(h) If business is to be carried on, court may on the application the ***appoint a special
manager until a liquidator is appointed.
(i) The ****serves notice on the directors and the secretary are at the date of the winding up
up order requesting them to submit to him a copy of the strut of affairs of the company.

THE RECEIVER MANAGER AND LIQUIDATOR

A receiver manager must not be confused with a liquidator. A liquidator is appointed with the
object of winding up a company and terminating existence.
A receiver manager may be appointed by court or debenture holder (or any other financial
institution) under a fixed or a floating charge in failure of the debenture holder to repay back the
loan owed to the debenture holder.
The receiver manager is usually appointed either to continue with normal trading of the company
pay back the loan to the debenture holder and hand over back the company to its owners to
continue with business of the company.
He may also be appointed for purposes of realizing the assets of pay back the debenture holders
and hand over the company to the liquidator for purposes of winding up.

Duties of a Receiver Manager

- To examine the deed of appointment and a copy of the debenture and consider the
validity of the debenture and his appointment.
- To notify the Registrar of company on his appointment by filing form 220.
- Notify the company of his appointment and take possession of the assets charged.
- Consider whether employees should be dismissed or retained.
- Ensure that company books are written up on the commencement of the receivership.
- Take charge of the records, books of account and any other relevant returns regarding the
receivership.
- Notify all creditors and customer of his appointment.
- All communication regarding the company including invoices, struts and orders should
be endorsed receiver and manager.
*******************************
- To wind up the company affairs and distribute its assets.
- To lay before the meeting an account of his acts, dealings and the conduct of winding up.
- To exercise the power of the court to make calls.

114
 - He may pay the debts of the company and adjust the rights of the contributors amongst
themselves.
- He may exercise any of the other powers given by the Act to the liquidator in a winding
up by the court.

DIVIDENDS
This can be defined as that part of the company net profit which is distributed to its shareholders
in proportion to their respective shareholding.
When a company trades and makes profit, it will pay 30% of the net profit to Kenya Revenue
Authority and the remaining profit will be either distributed to the shareholders in terms of
dividends or transferred to the revenue reserves depending on the needs of the company.

Trading company have an implied power to distribute profit to the members subject to any
limitation in the memorandum of association and articles of association. The payment of
dividend is usually provided in the profits of the company and not from the share capital.
Article 114 Table A – articles 122, usually provides the manner in which dividend should be
declared and paid.

Interim dividend
This is one approved and paid to the shareholders between general meetings of a company and
usually paid out of the profits for the first ½ year results.
Some ACA give powers to directors to declare interim dividend with the approval of the
shareholders. An interim dividend when paid must be ratified at the company annual general
meeting.

Final dividend
Is that dividend paid to the shareholders when the financial struts of the company have been
finalized. Usually paid at the financial year on a company. In the final dividend, payment will
require a board of directors meeting which will recommend to the shareholders to approve the
final dividend. It must be approved by the shareholders of the company at the annual general
meeting.
Revision of Table a regarding declaration and payment of dividend. The following are the
provisions of Table A regarding declaration payment of dividends:
Article 114 The company in general meeting may declare dividends but dividend shall exceed
the amount recommended by the dividend.
Article 115 Directors may from time to time pay to the members such interim dividend as
appear to them to be justified by the profits of the company.
Article 116 No dividend shall be paid otherwise than out of profits.

115
Article 117 the directors may before recommending any dividend set out of the profits of the
company such sums as they think proper as a reserve (s) which shall at the discretion of the
director applicable for any purpose to which the profit may be applied.
Article 118 Subject to the rights of persons if any entitled to shares with special rights as to
dividends, all dividends shall be declared and paid according to the amounts paid or credited as
paid on the shares but no amount paid or credited paid on advance of shares calls shall be treated
for the purposes of this regulation as paid on shares.
Article 119 Directors may deduct from any dividend payable to any member all sums of
money presently payable by him the company on account of calls or otherwise in relation to the
shares of the company.
Article 120 Any general meeting declaring a dividend may direct payment of such dividend,
wholly or partly by the distribution of specific assets and in particular of paid shares or
debentures.
Article 121 Any dividend, interest or other monies payable in cash in respect of shares may
be paid by cheque or warrant sent through the post directed to the registered address of the share
holder. In case of joint shareholders, to the registered address of that shareholder whose name
appears first.
Article 122 No dividend shall bear interest against the company.

Tax on dividends
According to Income Tax Act, every company whether private or public, has to deduct 5% of the
dividend due to the local shareholder and 10% due to the foreign shareholder and to remit the
same i.e. the withholding tax to Kenya Revenue Authority on the 20th day of the next month
following the payment of withholding tax has to be submitted to Kenya Revenue Authority on
form *** together with a banker‟s cheque of the total amount deducted.
A limited company holding 12 ½% or more of the share capital the company is exempted from
withholding tax on dividend i.e. the dividends is paid gross.

Unclaimed dividends
Dividend issued to the shareholder which he has not presented to the bank for encashment. It
arises due to failure on the part of the shareholder to notify the next of kin about his investment.
One of the advantages of having a dividend mandate instruction is that the dividend should not
go stray and should be credited direct to the shareholder‟s bank account.
Dividend mandate instruction is the directive from the shareholder advising the share Registrar
or company secretary to pay directly to the bank account whenever a dividend is declared by the
company.

MERGERS AND ACQUISITION OR TAKEOVER

Mergers and acquisition refer to an act of corporate strategy, corporate finance and management
dealing with the buying, selling and combining different companies less than one management.

116
The aim for a merger or acquisition is to aid, finance or help a growing company is a given
industry to grow rapidly without having to create another business entity.

Two or more companies with the same objectives may decide to come together to enjoy
economies of scale. Schemes involving reconstruction amalgamations, takeovers, arrangements
and other forms of reorganization are carried out for the following purposes:
(a) To reorganize the company capital structure.
(b) To overcome the company financial difficulties.
(c) To increase revenue and market share.
(d) Economy of scale – this refers to the fact that the combined companies can often reduce
its fixed cost by removing duplicate departments, the cost of the company ***and
increasing profit margin.
(e) Gross selling e.g. where a bank buying stock broker ***then its products to the broker‟s
customers.
(f) Make arrangements with the creditor.
(g) To control the make and drive away the competitors.
This is the acquisition of one company (bidder) of sufficient shares in another company (target)
to give the purchaser control over that company.

Merger
This occurs when two or more companies combine together into one company. The merger of
two or more companies usually occurs through mutual agreement between the combining
companies.
Scheme of agreements – is suitable for making a change in the rights of shareholders or creditors
of an existing company and the continuing company. It may involve capitalization of the loan
owed to creditors by converting the loan into equity.

It can also be used to effect a takeover or to carry out construction involving changes of a
company capital structure.

Procedure for a scheme of arrangement

The following is the sequence for a scheme of arrangement involving either a takeover or an
arrangement with creditors.
1. Application is made to the court for an order that one or more meetings of members shall
be held attaching explanatory notes on terms of arrangement.
2. If the court of satisfied that the scheme is generally suitable and is for the benefit of both
majority of members to be held.
3. A meeting or several meetings are held as the court has ordered.
4. A copy of the court order approving the scheme of arrangement is then delivered to the
Registrar of companies.
5. A special resolution approving the scheme of arrangement is passed by the shareholders,
a copy of which must be delivered to the Registrar of companies.

117
Compulsory Acquisition – is where a company which is holding 90% or more of the issued
shares in another company can compulsory acquire the remaining 10% of the shares as provided
under section 210 cap 486.
It is a standard procedure is making a takeover bid where 90% acceptance is allowed, then
compulsory acquisition under section 210 will follow.
The procedure is available if company A already owns shares of company B and offers to
acquire those shares which it does not already own. This method also be referred to as the
takeover to the minority shareholders.
It is important to note that this method of takeover is not available for an individual who controls
90% of the issued share capital.

The non-accepting minority may however apply to the court to prevent company A from
acquiring their shares.

Procedure to acquire the minority shares

(a) The Board of Director of the company which intends to acquire the shares of the minority
will hold a board meeting recommending to the shareholders the takeover minority
shares.
(b) An Annual General Meeting or Executive depending on the provisions of the Articles of
Association will be held to enable the shareholders to approve the takeover bid.
(c) The offer must be made by the bidding company to acquire the shares of the minority.
(d) Offer letters must be sent to all shareholders stating the offer price and the terms of the
offer.
(e) The offer letter must state the date which the offer comes to an end.
(f) The offer letter must state the manner of rejecting or removal of the offer.

Distinction between merger and acquisition

Although the two are often uttered in the same breath and used as though they were same, the
term mergers and acquisition slightly mean different things.
When one company takes over and clearly establishes itself as the new owner, the purchase is
called an acquisition.

From a legal point of view, the target company ceases to exist is the buyer swallows the
***********be tracted.
In the pure sense of the term, a merger happens when two firms agree to go forward as a single
new company rather than remain separately owned and created.
This kind of action is more often referred to as a merger of equals. The firms are often of about
the same size e.g. in ***the merger of Glaxo welcome & Smithkline Beacham saw the firms
ceasing to exist and a new company Glaxo Smithkline was created.

118
In practice, actual mergers of equals do not happen often. Usually one company will buy another
and as part of the deals term simply allow the acquired firm to claim that it is a merger of equals
even though technically it was an acquisition.

119