Understanding Company Law Basics

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1.0 INTRODUCTION
By your final year you might be required and expected to join and work for a
company, or as an entrepreneur, form a company and as such, one needs to grasp the basics of
company law.
Many of the business students end up or hope to become managers there is a need to appreciate
the fabric he company and the legal issues there are. For those that embrace entrepreneurship
they will be clear of the requirements and all the legal implications on the issues outlined in the
module
The module is divided into various sections each addressing different aspects of the module.
Welcome and enjoy your journey of discovery.
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LECTURE ONE
1.1 OBJECTIVES
By the end of the lecture, the student should appreciate;

 The unique form of business organization.
 The various forms of companies available
 The difference between company and other forms of associations.
Topic 1
1.2 INTRODUCTION
This lecture appreciates the uniqueness in the invention of the form of organization called the
company and the fact that it brings freedom to the investor to understand and appreciate the
part of his wealth he would like to invest in the venture.
1.3 REGISTRATION
Appreciate; legal principles relating to the nature and registration of companies.

Describe the effect of legal personality.
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DEFINITION
Lord Justice Lindley
It is an association of many persons who contribute money or monies worth to a common stock
and employ it to some trade/business and who share the profit and loss there from.
Common stock =Money =Capital.
People who contribute = Members
Proportions of capital = Share (Transferable though the right to transfer maybe restricted)
Lord Justice Marshal

A corporation is an artificial being invisible, intangible, existing only in contemplation of law. It
possesses only the properties which the charter of its creation confers upon it either expressly or
incidental to its existence.
Haney
Observes that it is an incorporated association which as an artificial person created by law,
having separate entity with a perpetual success and a common seal.
1.4 NATURE AND CLASSIFICATION OF COMPANIES
1.4.1 Introduction to corporate personality
Personality
There are many ways in which persons may associate for purpose of business. The more
important ones are referred below.
This module deals with one, important type, the registered company with liability limited by
shares.
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Company law is to be found in judicial decision despite the enormous value of statutory rules.
Company law is very much a case law subject.
The cases are complemented by a number of statutes, which contain a mass of detailed rules. The
student should read through the sections to which he is referred.
Corporate Personality
1.4.2 Separate legal personality

In this module the term „company‟ is used to mean company formed by registration under the
companies Act (Cap 486).
A company is one type of corporate body or corporation which has the essential characteristic in
contrast to partnerships and other unincorporated associations such as clubs or societies, that it is
a legal person or entity distinct from its members.
Since a company is a separate legal entity it has rights and obligations of its own.
Company properties belong to the company. It may employ people to work in its business, enter
into contracts and incur debts.
The members of the company own shares in the company and control it.
But they are not parties to the legal transactions nor are they agents of the company.
1.4.3 Characteristics of a company
(i) Artificial Legal Person

It is an artificial person since it is a creation of law. It exists in the eyes of law and cannot act on
its own so it has to act through a board of directors.
It enjoys all the rights of a natural person and has a right to acquire and dispose of properties, to
enter into contract with third parties in its own name and can sue or be sued in its own name.
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(ii) Separate Legal Entity
As stated in the certificate of incorporation, a body corporate by the name contained in the
memorandum is formed, with the power of perpetual succession, power to hold land, with a
common seal with liabilities of its members as per the provisions of the Act.
(iii) Perpetual succession

The company has a continuous existence. Old shareholders may go with new ones joining.
Change in membership does not affect its continuity.
(iv)Common seal
A company being an artificial person can‟t sign documents. The law provides for a common seal
which bears the company name engraved on it, to act as the signature. The common seal must be
accompanied by at least two signatures from existing directors for it to be binding.
(v) Limited liability

Shareholders shall be liable to contribute towards the company debts during its life or winding
up only up to the balance of the shares taken or guarantee given by him or both.
Personal property of the share holder cannot be attached for the debts of the company if he holds
a fully paid up share.
(vi)Transferability of shares
Members of the public limited company can transfer their share freely.
The shares can also be traded in the stock exchange. However, in private company transfer may
be restricted by the articles.
(vii) Capacity to sue and be sued

Company suits belong to the company and not for shareholders. Incase of a suit the company is
the plaintiff and where sued it will be the proper defendant. The head obligations of the company
belong to it only the company can be sued in the event of breach.
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(viii) Separation of ownership and management
Shareholders are many and management of a company is entrusted to a board of directors elected
by members in the General meeting to govern the company affairs as provided by the law.
(ix)Separate property
Being a legal person, the company can own, enjoy and dispose of property in its own name. its
property is used for the company‟s business. Shareholders do not have direct proprietary rights to
the company property. A shareholder does not have even an insurable interest in the company‟s
property-Maccauro V Northern Assurance Co. Ltd.
REVISION QUESTIONS
1. “A company is an artificial person created by law with a perpetual succession and a

common seal”. Explain this statement pointing out the basic features of a company?.
2. Elucidate the statement that a company is totally different person altogether from its
members?
3. Distinguish a company from a partnership?
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2.0 Topic 2
2.1 CLASSIFICATION OF COMPANIES
Three types of companies are provided for under section 389 of the Company‟s Act.
These are;-
i) Chartered companies.
ii) Statutory companies
iii) Registered companies
2.1.1. Chartered companies
A chartered company is formed when the Queen or King of England issues a charter, to people
who intend to carry on a business as a chartered company.
It is an old model of company that is of little relevance today. No such a company can be formed
in Kenya after 1963.does not exist therefore such company can be formed in Kenya after 1963.
Example of a chartered company was Imperial British East Africa Company.
Characteristics of chartered companies
- Company was created under a mere grant of a charter by the crown.

- The charter operated just like a patent which gives the owner the exclusive right to
exploit specified business in area with a monopoly.
2.1.2. Statutory companies
A statutory company is formed by a specific Act passed by parliament as a means of conferring

on it some powers which would not be available if it were registered under the companies Act.
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At formation statutory companies have no shareholder and their initial capital is provided by the
treasury.
A statutory company is generally formed to meet social or economic needs it is expected to
operate according to commercial principles and to make profits.
If it makes loses and becomes unable to pay its debts, its property can be attached by its creditors
but it cannot be wound up on the application of any creditor Examples of statutory companies in
Kenya include K.B.C, K.P.L.C.,A.F.C. etc.
Statutory companies do not have any memorandum or articles of association but derive their
powers from the Acts constituting them.
2.1.3. Registered companies
A registered company is formed by registration under the Companies Act.

Section 2 of the Companies Act defines registered company as “a company formed and
registered under this Act”.
2.2. Classification of registered companies.
Companies are formed for different purposes.

The statutory requirements imposed on companies are elaborate and demanding.
To provide reasonable degree of feasibility and freedom to choose what suits the user best the
law provides for the formation of different kinds of companies with features adapted to the
circumstances of the case.
It also provides for the conversion of an existing company so as to make it a company of a
different type.
This conversion is effected by making changes in the company‟s structure under the prescribed
procedure and then applying to the registrar for the validation of the change by the issue of a
certificate of re-registration of the company in its new category.
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The various types are;-
i) Limited Liability Company.
ii) Unlimited Liability Company.
2.2.1. Limited liability
A member‟s liability is to the company, but it may be a liability which is limited. Unless it is so
limited, he is liable, if the company becomes insolvent, to contribute whatever amount is
required to enable it to pay its debt in full.
A limited company may be limited either by shares or by guarantee. What this means is that the
members‟ liability for the company‟s debts is limited to the amount which is unpaid on the
shares or to the guarantee given by the member.
It is always possible to discover whether a company is limited, and if so, by what means by
inspecting its memorandum of association.
2.2.2. Companies limited by shares

The memorandum of a company limited by shares includes a clause which states simply that „the
liability of the members is limited‟.
The effect is that a holder of shares is liable to contribute to the company‟s assets the amount of
the issue price of the shares which is fixed at the time of issue.
If that amount has been paid by him or by a previous holder the liability attached to the shares
has been discharged and they are „fully paid‟,
The present holder of fully paid shares has no further liability to the company.
If the company fails, the shares will be worthless. But that is the entire loss of the holder.
2.2.3. Company limited by guarantee

In this case the memorandum contains the same basic statement of limited liability but also has a
clause, whereby every member agrees to contribute to the company‟s assets, if it is in liquidation
and unable to pay its debt in full.
The maximum amount which the member is to contribute is stated and it is not usually large.
That is the limit of his liability in respect of his guarantee.
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2.2.4. Unlimited companies
There is no statement of limited liability in the memorandum and the members are liable to
contribute, without limit, whatever is required for the payment of the debts of the company, in
liquidation.
The most important advantage of an unlimited company is that it need not usually deliver to the
registrar a copy of its annual accounts for filing.
2.3 Public and Private Companies.
Registered companies can also be classified either as public companies or private companies.
2.3.1. Private company
A private company is that which, by its articles of association

Restricts the right to transfer its shares
The number of its shareholders is limited to 50
Does not invite members of public to subscribe for its shares.
2.3.2. Public company
A public company is one which:

- Is limited by shares or guarantee
- Includes in its memorandum a clause stating that it is a public company.
- Has been registered at the registry of companies as a public company.
- The name of the company must end with the word „limited‟.
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Revision Questions;
1. Explain what is meant by;
(a) Companies limited by shares
(b) Companies limited by guarantee
(c) Unlimited companies
2. Differentiate between a private and public company?
3. Discuss the statutory and registered companies.
Further reading
Compare companies with other forms of associations available in Kenya.
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LECTURE TWO
3.0. OBJECTIVES
By the end of the lecture, the student should demonstrate an appreciation of;
The legal principles relating to the nature of registration of companies.
 The different documents necessary in company registration.
 The effects of legislation of a company.
3.1. INTRODUCTION
This lecture mainly deals with the procedure that promoters should follow for a company to be
registered .The formalities and documents required to register a company are well elaborated.
The lecture further describes the legal effects of the registration of companies.
3.1.1. REGISTRATION AND FORMATION OF COMPANY

Registration of company
Registration is the condition precedent to the formation of a registered company.

Section 389 provides that “no company, association or partnership consisting of more than 20
persons shall be formed unless it is registered as a company under this Act”.
Failure to register a proposed company will mean that it does not legally exist.
Certain documents must be filed with the registrar before a company can be registered.
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These documents are;-
1. The Memorandum of Association
The memorandum of association must specify

a) The objects and the powers of the company.
b) The company‟s name, with „limited‟ as the last word.
c) That the registered office of the company is to be situated in Kenya.
d) In case of a company having a share capital, the amount of the capital with which the
company is to be registered and the division of the capital into shares of a fixed amount.
e) That the liability of the company‟s members is limited. If limitation is by guarantee, then
the amount guaranteed must be stated.
f) Each subscriber must write opposite his name the number of shares he takes and sign the
memorandum
The memorandum must then be delivered to the registrar of companies together with the
following documents
2. Articles of Association
This document contains the rules for the management of a company.
If this document is not delivered then the provisions of part I of Table A in the First
schedule to the Act will automatically be applicable to the company.
3. Consent to act as directors
If a person is appointed director of the company, he must fill and deliver for registration
form No. 209 being duly completed and signed by him or by his authorized agent.
4. List of persons who have consented to act as directors.
5. A statement of the nominal share capital.
6. A declaration of compliance Form No.208-
This form when duly completed and signed, constitutes the statutory declaration by the
advocate engaged in the formation of the proposed company or by the person named in
the articles as a director or secretary of the company, that all the requirements of the
Companies Act in respect of the matters which ought to be adhered to before registration
of the company have been complied with.
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If the documents are in order and the company‟s objects are lawful, the registrar is required, and
may in case of need be ordered by Mandamus, to register the company;
RV. Registrar of companies, exparte Bowen (1914)
On registering a new company the registrar issues a certificate of incorporation which states that
the company has been registered, gives its name in the correct form which it should always use,
and states, if that is the case, that it is registered with limited liability.
The registrar‟s certificate is conclusive evidence that the company has been incorporated even if
it later emerges that it should not have been – Princess Bos Vs Revs 1871 HL.
3.1.2. Registration of Private Company
In order to secure registration of a private company the procedure described above is followed
except that;
i) The memorandum of association will be signed by at least two of the company‟s
prospective shareholders.
ii) Section 182(5) of the companies Act exempts promoters of private companies from
the duty to deliver Form Nos 209 and 210 for registration.
iii) If articles of association are not delivered for registration the provisions of part 1 of
table A will become the company‟s Article.
The effect of registration

i) Separate legal personality
The distinction between the company and its members is called the „veil of incorporation‟. The
expression is not really appropriate since the identity of the members of the company is not
veiled from the public view but is ascertainable from the register of members which is open to
the public inspection. The concept of veil of incorporation means that the affairs of the company
are declined to be distinct from those of its shareholders.
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Solomon’s case
The principle of the veil of incorporation was tested and finally established by the decision of the
house of lords, the highest court in England, in Salomon Vs Salomon & co. (1897) Ac 22.
In the study of company Law it is essential to understand the facts and issues of this case, which
is the most fundamental decision of the courts in this field.
Facts of the case;

S had for many years carried on a successful business as a leather merchant and a boot
manufacturer. He decided to reorganize his business by transferring it to a new company which
he formed for the purpose.
At the time the law acquired every company to have a minimum of seven members. So S
took one share and arranged for his wife, four sons and a daughter to take one share each as his
nominees.
In this may he became the sole beneficial owner of the company.

Solomon sold his business to the company at a rather optimistic price but this did not
matter since he was the sole beneficial owner of the company.
The price was satisfied partly by the allotment to Solomon of 20,000 £ shares issued as fully
paid and partly by the issue to him of 10,000 £ debenture bond, which was secured by charge
on the company‟s property.
The company later ran into financial difficulties leading to winding up. To raise money S
sold his debenture to an outsider Brown. But B could only have such rights as the debenture,
when issued, had conferred on S. When the company failed its nominal assets were worth less
than 10,000 £ and it also owed money to unsecured creditors.
The question which arose was whether the holder of the debenture had a better claim on the
assets of the company over other unsecured creditors.
The house of lords held that the company is at Law a different person all together from the
subscribers to the memorandum, and though it may be that after incorporation the business is
precisely as was before, and the same persons are managers, and the same hands receive the
profits, the company is not in law the agent of the subscribers or trustees for them.
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In Salomon Vs Salmon & Co. Ltd
It was held that Salomon was not liable for the company‟s failure to repay debts as agreed with
its creditors.
3.2. Incorporation
3.2.1. Ownership of property
In Macaura Vs. Northern Assurance Co.Ltd (1925) AC 619 M had transferred to a company of
which he was sole beneficial owner, valuable Timber then lying on his Land. He had insured the
timber in his own name. The timber was later destroyed by fine. M claimed under the insurance
policy but it was held to be invalid since M lacked any insurable interests in the timber.
This point was forcefully made when the court stated that no shareholder has any right to any
item of property owned by the company, for he has no legal or equitable interest therein.
3.2.2. Limited liability

The members of the company are never directly liable for its debts, since those are debts owed
by the company. The members‟ liability to contribute to the assets of the company in liquidation
is limited to the amount which is unpaid on the share bought from the company.
If the shares are fully paid up then there will be no further liability. Solomon Vs Solomon & co.
The company‟s liability for its debts is, however, unlimited. This means that the company is
bound to pay all its debts in full. Whether it has the capacity to do so is a different matter.
3.2.3. Perpetual succession

The phrase denotes a process whereby a company‟s membership changes in a definite order
prescribed by the company‟s articles and goes on changing for an indefinite period of time until
the company‟s liquidation.
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The perpetual succession occurs because the company and its members are separate persons and
so the company‟s legal life is not terminated by a member‟s death, insolvency or state of mind-
Lee Vs Lee Air Farming Co. Ltd 1961.
3.2.4. Suing and being sued.

Because a company is at Law a different person altogether from its members, it follows that a
wrong to, or by, the company does not legally constitute a wrong to, or by the company‟s
members.
Hence;-
(i) A member or members cannot institute legal proceedings to redress a wrong to the
company.
The company as the injured party is, generally speaking, the proper plaintiff or defendant
Foss Vs. Harbottle 1957
Facts;- the plaintiffs were shareholders in a company. They alleged that the defendants had
defrauded the company in various ways and in particular that certain of the defendants had sold
land belonging to themselves to the company at an exorbitant price.
The plaintiffs asked the court to order that the defendants indemnify the company for the losses.
The court held that since the company‟s board of directors was still in existence, and since it was
possible to call a general meeting of the company, there was nothing to prevent the company
from obtaining redress in its corporate name, and the action by the plaintiffs could not be
sustained.
(ii) A member cannot be sued to redress a wrong by the company.
3.2.5. Lifting of the veil of incorporation
Not withstanding the principle of Salomon & Co. Ltd, there are certain situations where the
courts have shown themselves willing to „lift the veil of incorporation‟, and set aside the separate
legal personality of the company.
The lifting of the veil may also arise under statutory provisions. This can happen in two ways.
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(i) Case law
Where company identity used to evade obligations.
The court will intervene to prevent the misuse of the separate identity of a company to enable
members to evade legal or contractual obligations or restrictions binding on them personally.
In Jones Vs. Lipman (1962) WLR 832,

The defendant contracted to sell his house but later sought to avoid his legal obligations to
complete by conveying the property to a company in which his nominee were the sole
shareholders and directors.
The court granting specific performance, described the company as a device a sham and a mask.
Here, the veil was lifted otherwise the defendant could have made a mockery of his contractual
obligations.
Gilford Motor Co. Vs. Horne 1933 ch.935

Horne had contracted with the appellant company not to solicit its own customers when he left
their employment.
In breach of this promise and on ceasing employment Horne formed a new company to carry on
a competing business and solicited the appellant company‟s customers.
The court granted the appellant an injunction against both Horne and his company. The veil was
lifted to stop an attempt to avoid a restrictive covenant by winding behind what was described as
a „cloak or sham‟.
In Creasey Vs. Breachwood Motors Ltd 1992 BCC 638 the court held that
Where a company with a contingent liability to the plaintiff (here, by way of an award of
damages for the wrongful dismissal) transfers its assets to another company which continues its
business in the same trade name the court will lift the veil of incorporation in order to allow the
plaintiff to proceed against the second company.
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3.3. Agency and groups
In Solomon Vs. Solomon The court said ”the company is not in law the agent for its subscribers
or trustees for them”.
Nevertheless the courts have tended to overlook this part of the judgment where convenient. In
some cases the courts have found on the particular evidence before them that a holding company
was in fact carrying on a business through the agency of its subsidiary company.
It is important to note, however, that the mere fact that one company is the subsidiary of another
is not by itself sufficient to make the subsidiary an agent of the holding company.
The activities of the subsidiary must be so closely controlled and directed by the parent company
that the former can be regarded as merely an agent conducting the business of the parent
company.
In smith stone & Knight Ltd Vs Birmingham Corporation 1939

The court held that a holding company was in occupation of the subsidiary premises and was
consequently entitled for compensation for the disturbance of its business on the compulsory
purchase of the premises by the local authority, even though the business was carried on at the
premises in the name of the subsidiary.
Six points are deemed relevant for the court to consider when determining whether a subsidiary
is carrying on its business as an agent of the holding company;-
(i) are the profits treated as the profits of the parent company?
(ii) are the persons conducting the business appointed by the parent company?
(iii) is the parent company the head and the brain of the trading adventure?
(iv) does the subsidiary company govern the adventure?
(v) is the parent company make the profits by its skill and direction.
(vi) Was the parent company in effectual and constant control?
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Enemy character
A company may be regarded as an enemy if, among other things all, or substantially all of its
shares are held by alien enemies
In Daimler Co Ltd Vs Continental Tyre and Rubber Co. Ltd.
(ii) Statutory lifting of the incorporation

There are a number of situations when the veil of incorporation will be effectively lifted by
statute. The result is usually to make someone other than the company liable for the debts, or to
make a person liable to contribute to the assets of the company in the event of liquidation.
Some of the most important examples include;-
i) Section 33;
Where membership has fallen below the statutory minimum.
The section provide, that a company‟s member is personally liable for the company‟s debts
incurred after the 6months during which the companies membership had fallen below the
statutory minimum -7 for public company and 2 for private companies, provided he was
aware of the fact.
ii) Non publication of a company‟s name;-
S.109 (1) requires the officer‟s of the company to write the company name on its seal letters,
business documents and negotiable instruments.
Any officer or agent of the company who does not comply is liable to the holder of any bill
of exchange, promissory note, cheque or order for goods which did not bear the company‟s
seal unless the amount is duly paid by the company.
3.4. Group accounts

Section 150- requires a company which has subsidiaries to lay before the company in general
meeting accounts or statements dealing with the state of affairs and profit or loss of the
company and the subsidiaries at the same time when the company‟s own balance sheet and
profit and loss are laid before the company‟s general meeting.
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S.167- Investigation of the Company‟s affairs;-
The section gives an inspector appointed by the court to investigate a company‟s affairs the
power to investigate the affairs of that company‟s subsidiary, or holding company if the
inspector thinks it necessary to do so.
S. 173 -investigation of company‟s membership

The section empowers the registrar to appoint inspectors to investigate and report on the
membership of any company for the purpose of determining true persons who control or
influence the policy of the company.
Section 323- fraudulent trading

If in the course of winding up of a company, it appears that any business of the company has
been carried on with intent to defraud creditors of the company, the court, on application of
the official receiver or the liquidator or contributory of the company may declare that any
persons who were knowingly parties to the fraud be personally responsible, without any
limitation of liability for the debts of the company.
Revision Questions;
1. Explain the procedure for the formation of a company.

2. Discuss the effects of registration
3. What are the merits and demerits of a corporation as a business entity?.
4. Discuss the advantages of incorporation.
5. Explain the main disadvantages of incorporation
Further reading
Relate the effects of registration of company versus those of other business associations in
Kenya.
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LECTURE THREE
4.0 PROMOTION
4.1 OBJECTIVES
By the end of the lecture, the student should be able;

 Appreciate the act of forming legal entities and the difficulties encountered..
 Explain the fundamental role and duties of a promoters.
 Explain liabilities of promoters.
Topic 1
4.2 INTRODUCTION
This lecture mainly deals with the promotional acts, the duties of the promoters, remedies for
breach of contract of promoters‟ duties, the legal position of the promoter against the company,
remuneration of promoters and pre-incorporation contracts .
Definition of promoter
The term promoter is a term of business not of law useful in summing up in a single word a
number of business operations familiar to the commercial world by which a company is brought
into existence.
Cockburn CJ has defined a promoter as one who undertakes to form a company with reference
to a given project and to set it going. The definition is very wide and practically anyone who
performs various functions with a view to incorporating a company will be a promoter.
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Promotional acts
In seeking to find out who are the promoters of a company, it may be helpful to ask the following
questions;-
(i) Who had the idea of forming the company for the purpose in question.
(ii) Who drafted the memorandum and articles or gave instructions to an advocate to
prepare them.
(iii) Who paid for the registration of the company and cost of preparing the documents
(iv) Who arranged for persons to become the first directors.
Statutory definition
Section 45(a) states that promoter means a „ a promoter who was a party to the preparation of the
prospectus or the promotion thereof.
The definition excludes persons who give professional services in connection with the formation
of companies.
Status of promoters;-
Not withstanding the above definition the promoter is not an agent of the company. This is
mainly as a result of the common law principle which holds that a non-existent person –i.e. the
company yet to be formed- cannot be a principal.
However the courts have held that a promoter stands in a fiduciary relation with the company he
promotes.
A fiduciary relationship is one in the nature of a trust. A promoter is therefore viewed by the law
as a trustee.
The duties of the promoter;-

The promoter owes fiduciary duties to the company which are similar to the obligations imposed
on a trustee.
But professor Pennington considered that the closer analogy is with the relationship between
agent and principal.
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Arising from their fiducially relationship with the company is the legal duty to disclose to the
company any profits which he makes from the promotion. If a promoter makes a profit but does
not disclose it, he must account to the company for it.
The courts have variously held that the disclosure should be to an independent board of directors.
In Erlanger Vs. New Sombrero Phosphate Company, the appellant acquired the lease of an island
for £55,000, a company was formed and the lease was sold to the company for £110,000.
The appellant was the director of the company, the house of lords held that the company was
entitled to set aside the contract and to recover the purchase money from the appellant as there
was no disclosure by the promoter of the profit made.
NB/ disclosure to the directors who are were nominees of the promoter will not be sufficient to
relieve the promoter of liability.
Remedies for the breach of promoters duties;-(i)

Rescission (setting the contract aside)
The equitable remedy of rescission is available to the company in respect of any
contract entered into as a result of non-disclosure or misrepresentation.
This remedy is however, not available if the company is in liquidation.
Other circumstances which may exclude rescission are;-
a) Lapse of time.
b) Intervention of a third party right.(rights of others who are not parties to the
intial contract)
c) Liability to make nestitatic in integrum –ie substantial restoring both parties to
the original position.
d) The courts discretion to declare the contract as subsisting and award damages
in lieu of rescission.
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Damages
Promoters may be liable for damages for misrepresentation inducing a contract.
In Re-Jubilee cotton Mills, the promoter was held liable in damages for taking an allotment
of shares in consideration for the sale of his property which was over valued.
A promoter could be held liable in damages for negligent mis-statement on the principles laid
down in Hedley Byrne Vs Helver C Partner Ltd.
Remuneration of promoters.
A promoter has no legal rights against the company he promotes.
This is so because;-
a) The company, being non-existence at the time of the promotion could not have requested
for the promoter‟s service. There is therefore no contract between him and the company
which would entitle him to sue for his expenses or professional service.
b) The company could not after its incorporation, enter into contract to pay him for his
services because no consideration would be furnished to it. The services rendered would
be past consideration. In case of companies which have adopted Table A, Article 80
empowers the directors to pay promoters their promotion expenses.
It is however a power given to the directors and confers no legal claims on the promoter.
Pre- incorporation contract

A pre-incorporation contract is an agreement which is entered into usually by a promoter on
behalf of a company at a time when a company‟s formation has not been completed by
registration.
Rules applicable to these contracts;-

a) If the agreement is written and it is apparent that the promoter was contracting as
individual, he will be held personally liable under the contract.
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b) If the agreement is a written and it shows that the proposed company was the contracting
party the promoters will not be allowed to enforce it in the event of its breach by the other
party.
c) A pre-incorporation contract cannot be ratified by the company after its registration.
Natal Land company Ltd Vs. Pauline Colliery Syndicate Ltd

If the company were to be able to ratify such a contract it would mean that if it contracted on
the date before it was formed. This would in effect mean that the company contracted before
it had been registered.
If the company wishes to revive the abortive contract it must make a fresh offer and if the
offer is accepted by the other party a contract will come into existence from the moment of
the acceptance.
Revision questions;
1. Describe the promoters and their functions and duties towards formation of a company.
2. Describe the legal position of the promoters of a company.
3. “A promoter is not a trustee or an agent of the company but he stands in a fiduciary
position towards it”. Comment.
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LECTURE FOUR
5.0. The Memorandum of Association and The Articles of Association
OBJECTIVES

 Describe the constitution of a registered company.
 Explain the content and nature of a memorandum and articles of association.
 Explain the contractual effects of the memorandum and the articles of association
Topic 1
INTRODUCTION
This lecture deals with the constitution of a registered company which consists of two
documents.
These are;-
- The memorandum of association
- The Articles of association.
It will also deal with the doctrine of ultra vires .
THE MEMORANDUM OF ASSOCIATION
The memorandum of association was defined by lord Cairns in Ashbury Railway Carriage Co.
Ltd Vs Riche as the charter which defines the limitation of powers of a company.
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Contents of the memorandum of association
Section. 5 of the companies Act prescribes the following clauses in the memorandum
i) The Name Clause
ii) Registered office clause
(iii)The objects clause
(iv)Limitation of liability clause
(v) The capital clause
(vi)The association clause.
The name clause

The promoters of a proposed company have freedom to choose its name subject to the provisions
of S. 19(2) of the companies Act which prohibits the reservation of names which consist of
abbreviations, initials or which, in the opinion of the registrar are undesirable.
Reservation
To avoid the risk of choosing a name that may turn out to be undesirable the promoters should
enquire from the registrar whether the name they intend to give the company is appropriate.
If this is confirmed the promoter should write to the registrar of companies for reservation. Any
such reservation shall remain in force for a period of 30 days or such longer period not exceeding
60 days as the registrar may, for special reasons allow.
The statutory provisions regarding the choice of company‟s name are intended to confer on the
company a legal monopoly of its name.
The name must end with the word limited or its abbreviation if the liability of the members is
limited.
Display of company name

A company is required to display its registered name in its correct form in the following planes;-
i) On its letter heads and other business stationary.
ii) On its cheques.
iii) Outside every office and place of business.
iv) On its common seal.
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The objects clause.
Every company is required in its memorandum to state the objects for which it is registered.
The Ultra Vires doctrine

The doctrine of ultra vires is a legal rule which states that where a contract made by the company
is beyond the objects of the company as stated in its memorandum of association the contract if
beyond the powers of the company to make. This principle, expounded
In Ashbury Railways Carriage Co. Ltd Vs. Riche it gives the impression that the company
ought not to do that which is not written in the memorandum of association.
Capital clause;-
S.5 (4) provides that, in case of a company having a share capital, the memo shall also, unless the
company is unlimited company state the amount of capital with which the company proposed to
be registered and the division thereof into shares of a fixed amount.
Association clause
This is a declaration that the subscribers to the memo of Association do desire to be formed into
a company. The decelerants are required to append their signatures on the memo which are then
witnessed by at least one person who is not a subscriber.
Contractual effects of the memorandum of Association
The section 22 contract;

Section 22 provides that the memorandum and articles shall, when registered, bind the company
and its members to the same extent as if they respectively had been signed and seeded by each
member, and contained(covenants) on the part of each member to observe all their provisions.
Section 22 expressly provides that it is “subject to the provisions of this Act”. These provisions
include sections which permit the alterations of the memorandum and articles of association by a
special resolution. Thus, a member enters into a contract on terms which are alterable by the
other party.
The contract is enforceable among the members in- Borland‟s Trustees. A direct action between
the shareholders concerned is here possible.
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5.2. ARTICLES OF ASSOCIATION
Every company must have articles of association. The articles must be printed and divided into
numbered paragraphs.
A company limited by shares may either adopt its own articles or the statutory model- the Table
A Articles- instead.
Statutory requirements
Section 12 provides that the articles shall be
a) In the English language
b) Printed
c) Divided into paragraphs numbered consecutively.
d) Dated
e) Signed by each subscriber to the memo of association in the presence of at least one witness,
who shall attest the signature and add his occupation and postal address.
Contractual Effects of the Articles of Association.

The memorandum and Articles, when registered, bind the company and its members to the same
extent as if they respectively had been signed and sealed by each member and contained
covenants on the part of each member to observe provisions of the memorandum of Association
and the Articles. of Association
Once registered under company‟s Act the memorandum constitutes a contract between the
members and the company and between the members inter-se.i.e between themselves
Wood Vs Odessa Water works Co. 1889

The articles of association constitute a contract not merely between the shareholders and the
company but between each individual shareholder and each other..
If there is in the articles a contract between the shareholder as to division of profit, and that
division has not been followed then a majority of shareholders cannot bind the minority who
descent. Therefore the articles of association are enforceable by a shareholder against the
company and other shareholders.
Hickman Vs Kent or Romney Marsh sheep-Breeders association;
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The contract between the company and its members.
Facts: Under Articles 49 of the association, any dispute between the association and its members
was to be referred for arbitration.
The plaintiff brought the case in breach of article 49. The court granted the association a stay of
proceedings on the ground that Article 49 was binding as between the company and its members
under what is now Article
Held: An outsider to whom rights purport to be given by the articles in his capacity as such:-
outsider whether he is or subsequently becomes a member, cannot sue on those articles treating
them as contracts between himself and the company to enforce those rights.
Those rights are not part of the general regulations of the company applicable alike to all
shareholders and can only exist by virtue of some contract between each person and the company
and the subsequent allotment of shares to an outsider in whose favour such articles are inserted
does not enable him to sue the company on such articles to enforce rights which are not part of
the general rights of the corporators as such.
The company should be regarded as a party to its own memorandum and articles.
No right merely purporting to be given by an article to a person, whether a member or not in a
capacity other than that of a member, as for instance, as a solicitor, promoter, director can be
enforced against the company. Elly Vs. Government Assurance co. ltd
Articles regulating the rights and obligations of the members generally as such do create rights
and obligations between them and the company respectively-Re Borland’s case.
Obligation between the company and members

On the basis that the company is to be regarded as a party to its own memorandum and articles
(Hickman‟s case), the member is under contractual obligations to the company to observe all the
terms of the constitution. In Hickman‟s case the decision was that the company could compel a
member to submit a membership‟s dispute to arbitration. in accordance with the provisions of the
company‟s articles.
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NB section 22 provides that the members shall be bound as if the memo and the articles has been
signed and sealed by each member and contained covenants on the part of the member to observe
their provisions.
Alteration of articles
Section 9(1) subject to the provisions of this Act and to the conditions contained in its
memorandum a company may by special resolution alter its articles
Bona fide to the company as a whole

The power to alter the companies articles must be exercised in good faith and for the benefit of
the company as a whole.
Allen Vs Gold Reefs of Africa Ltd.
Allen A member could not challenge an alteration which was carried out bona fide for the
benefit of the company as a whole, even if such an alteration affected the members personal
rights as long a the altered article was intended to apply indiscriminately to all members-
Sidebottom Vs Kershaw V. lease & Company Ltd CA.
An alteration which was made to require any shareholder who competed with the company‟s
business to transfer his shares at their fair value to nominees of directors, was held to be bona
fide for the benefit of the company as a whole.
Held
Under the powers of the section, a company can introduce into altered articles anything that
could have been in the original articles provided it is done bona fide for the benefit of the
company. If the articles are altered bona fide for the benefit of the company, they are valid.
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Topic 2
Memorandum of Association and Ultra Vires Rule
When a company is incorporated it requires a constitution which basically records the purpose or
purposes for which the company is incorporated, and which regulates the distribution of power in
the company and its internal procedural matters.
Articles of association.
The memorandum of association states the company‟s name, domicile, objects, capital structure,
and whether it is limited or unlimited, public or private.
The articles of association on the other hand deal with matters of internal management of the
company, such as the procedures for general meeting on board of directors meeting, the
appointment and record of directors, the payment of dividends etc.
The objects clause and ultra-vires rule;
The objects clause in the memorandum of association-MA raises particular typical difficulties.
The companies Act requires that the objects of the company be stated in the memorandum. The
primary purpose of this is to protect investors in a company.
The other purpose is to protect the outside public:– those who might be creditors of the company
The rationale being that a shareholder who invests money in a company is entitled to know the
objects of the company for which the money will be used. An investor in a company whose
object is to build railway carriages want to be sure that the directors will not risk company
money in a more speculative new venture not covered by the company‟s objects clause, such as
financing the construction of a railway.
Thus the company should not carry out acts or enter into transactions which are beyond the
company‟s capacity.- Ashbury Railway Vs Riche
A shareholder may therefore obtain an injunction to prevent the company from entering into an
ultra vires transaction. If the transaction has been carried out, any shareholder may obtain
damage for the company against the wrong-doing directors.
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At common law any act which is ultra-vires the company‟s memorandum is beyond its capacity
and void. Thus it was held by the HL in Ashbury Railway Vs Riche that such an act could not
be authorized or ratified even by a unanimous decision of the shareholders.
Resolution to alter objects

Section 4(1) A company may by special resolution alter its memorandum with respect to the
statement of the company‟s objects.
Section 5(1) application to the court –where a company memorandum has been altered by special
resolution under section 4 application many be made to the court for the alteration to be
cancelled.
Section 5(2) Applicants –such applications may be made-
a)By the holders of not less in the aggregate than 15% in nominal value of the company‟s issued
share capital or any class if it or, if the company is not limited by shares, not less than 15% of the
amount guaranteed
b) By holders of not less than 15% of the company‟s debentures entitling the holders to object to
an alteration of its objects.
c) Section 5(3)-Time not more than 21 days after the date which the resolution altering the
company objectives was passed.
d) Section 5(4)-The court may on such application make an order confirming the alteration either
wholly or in part and on such terms and conditions as it thinks fit and may
If it thinks fit, adjourns the proceedings in order that an arrangement may be made to its
satisfaction for the purchase of the interests of dissentient members.
e) Section 5(5) order for the purchase of shares- the courts order may (If the court thinks fit)
provide for the purchase by the company of the shares of any members of the company, and for
the reduction accordingly of the capital, and way make such alterations in the reductions in the
company‟s memorandum and articles as may be required in consequence of that provision
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The objects clause of the company
Section 2(3) the memorandum of the company limited by shares or guarantee must also state that
the liability of its members is limited.
Section 2(5)- in the case of the company having a share capital.
(i) The memorandum must also (unless it is unlimited company) state the amount of the
share capital with which the company proposes to be registered and the division of the share
capital into shares of a fixed amount.
a) No subscriber of the memo may take more than one share.
Section 3A- statement of the company‟s objects general commercial company)
where the company memorandum states that the object of the company is to carry
on business as a general commercial company.
(ii) The object of the company is to carry out any trade or business whatsoever, and
(iii) The company has power to do all such things as are incidental or conducive to the
carrying on of any trade or business by it.
Take note
(i) An alteration that contains a clause which contravenes a provision in the Act is null
and void.
(ii) Section 24 provides that no member of a company shall be bound by an alteration
made in the articles after the date on which he became a member if and so far as the
alteration requires him to take or subscribe for more shares than the number held by
him at the date on which the alteration is made.
(iii) An alteration that varies the rights attached to any class of shares is invalid unless the
variation of rights clause if any, in the company‟s articles has been complied with.
Section 74 further permits the holder ofmore than 15% of shares and who did not vote
in favour of the resolution for the variation to apply to the court to have the variation
cancelled.
(iv) To be valid, a proposed alteration of articles of the company must be bona fide i.e. in
good faith and for the benefit of the company as a whole.
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An alteration so made is valid and binding on the members and may affect their existing rights as
members.
Limitation on the powers to alter articles
(i) Section 13(i) provides that the alteration is subject to the conditions contained in the
company‟s memorandum of association
Revision Questions;
1. Describe the procedures involved in the preparation of memorandum of association.

2 Define memorandum of association and discuss its importance.
3. Explain the doctrine of „ultra-vires‟ in relation to the companies.
4. Name and explain the main purposes of the objects clause in the memorandum of a
company.
5. Define the articles of association their principle purpose in a company and contents
6. Distinguish between the Articles and Memorandum of association.
Further reading
Review the given cases
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LECTURE FIVE
6.0. MEMBERSHIP
OBJECTIVES

 To outline the similarities of member and shareholder
 Explain the different modes of acquiring membership.
 Describe the rights and liabilities of members.
INTRODUCTION
This lecture distinguishes between a „member‟ and a „shareholder‟ describing ways of acquires
membership of a company and how membership can come to an end.
The companies Act assumes that in the case of a company with the share capital becoming a
shareholder is synonymous with becoming a member.
Methods of acquiring membership
The basic principle which the Act lays down is that to become a member, and thereby a
shareholder there must be an agreement and entry on the register of members.
A person may become a member of a company by;-
(i) Subscription to the memorandum of Association of the company

(ii) By agreeing to become a member of the company.
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Subscription of memorandum
Section 28 (i) provides that the subscribers to the memorandum shall be deemed to have agreed
to become members of the company and, on registration, shall be entered as members in its
register of members.
Agreement to become a member;-
Section 28 provides that every person other than a subscriber who agrees to become a member of
a company and whose name is entered in the register of members, shall be a member of the
company.
The agreement may arise in one of the following ways;-

i) Allotment;-
An allotment occurs when the name of the person to whom shares have been allotted is
entered into a companies register of members.
Here shares are bought from the company itself
ii) Transfer
A transfer occurs if the shares are bought from a company‟s shareholder rather than the
company.
The purchase of shares constitutes the agreement to become a member.

The membership commences from the moment the transfer has been entered in the
register of members.
iii) Transmission
Transmission is a legal process by which ownership of shares in a company changes
automatically when the registered holder dies or becomes bankrupt.
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A bankrupt member‟s shares in a company are transmitted to his trustee in bankruptcy
according to the rules of bankruptcy law.
iv) Membership in compliance with section 182(2)

An agreement to become a member may occur if a person who has consented to be a
director on the registration of a company gives a statutory undertaking to take and pay for
his qualification shares.
iv) Estoppel
A person who without having agreed to be a company‟s member, is aware that his
name is wrongly entered in its register of members but takes no steps to have it
removed, may be estoppels (prevented) from denying his apparent membership to a
person who relied on it and extended credit to the company.
Register of members
Section 112(1) requires every company to keep a register of it members The law requires that the
register be kept at the registered office of the company. The Contents of a register are;
i) The names and postal addresses of its members
ii) A statement of shares held by each member
iii) The amount paid or agreed to be considered as paid on shares of each members.
Inspection of the register

The Act provides that the register and index of members shall, during business hours be open for
inspection by any members without charge.
Any person may require a copy of the register or any part of it , on the payment reasonable fee to
be copied and supplied to win within a period of 14 days.
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Rights and liabilities of members
A shareholders rights are conferred by the companies‟ Act , the company‟s memorandum and the
Articles of Association.
These rights include:
(i) S.8 (2) the right to object to a proposed alteration of a company‟s objects
(ii) S.74(3) the right to apply to court for a cancellation of proposed variation of the rights
attached to a particular class of shares
(iii) The right to inspect without fee the register of holders of debentures of the company.
S.106(3) copies of instruments creating charges and the company‟s register of the
members of the company.
(iv) The right to require the directors to convene an extra ordinary general meeting (EGM)
and to convene such a meeting if the directors fail to do so.
(v) The right to appoint a proxy to attend a meeting on his behalf.
(vi) The right to receive a copy of every balance sheet together with a copy of the auditors
report
(vii) S.211(1) the right to apply to the court in cases of oppression of the minority by the
majority
(vii) The right coffered by s.221 to apply to the court for the winding up Of the company
These rights cannot be altered by the company in a general meeting

Rights conferred by the memorandum and the articles of Association
These are rights which relate to the following matters:
i) The right to a dividend once declared
ii) The right to have the capital returned to the shareholders on a winding up of the
company or authorized reduction of capital
iii) The right on the attendance of meetings and voting
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These rights may be altered by the company in a general meeting
Members Obligations
The primary obligations of a member
i) To observe the provisions of the companies Act
ii) To abide by the provisions of the company‟s memorandum and the articles of
Association
iii) In case of a company limited by shares, to pay when called upon to do so, the amount if
any, unpaid on the shares he holds.
Termination of Membership
A transfer of shares occurs if an existing member sells the shares to a third party
NB A member is not bound to sell all his shares.
Table A article 23 permits members to transfer all or any of their shares
Forfeiture of shares
A company may compel a member to forfeit his shares if its Articles of Association authorizes it
to do so. In such case the power must be exercised within the strict provisions of the articles.
Where a company‟s articles authorize to forfeit the members‟ shares and the directors forfeit all
of the shares by such a member, the membership ceases from the date specified in the articles as
the effective date for forfeiture.
Surrender of Shares
If a persons surrenders his shares to the company, his membership will come to an end. The
surrender must be with the approval of the directors.
Transimission by death of a member

When a person dies his ownership of a company‟s shares will come to an automatic end by
virtue of the provisions of the law of succession. The shares held by him legally become the
property of his personal representative.
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Transmission on bankruptcy of a member
When a person becomes bankrupt his ownership of company‟s shares will come to an end under
the provisions of the bankruptcy Act which vests a bankrupt‟s property in his trustee in
bankruptcy
Sale by a company under it, lien

A company has a right of lien on its shares as security for the balance of their price. If the
company sells all the shares held by a member, the membership will come to an end from the
moment the buyer‟s name is entered in the register.
Redemption of redeemable preference shares

If a member‟s shares consist exclusively of redeemable preference shares and all these shares are
redeemed by the company under the provisions of s.60 of the companies Act, he ceases to be a
member from the date on which his name is removed from the register of members
Repudiation by an infant
An infant member has a common law right to repudiate his membership of a company if there
has been a total failure of consideration because the shares have become worthless. Steinberg Vs
Saala
Liquidation
A company‟s liquidation terminates membership of all members from the moment it becomes
effective.
Revision Questions
1. Describe the ways of acquiring membership in a company.

2. Describe the rights and liabilities of members.
3. Distinguish between a member and a shareholder.
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LECTURE SIX
7.0. CAPITAL
OBJECTIVES

 Explain the concept of share and share capital.
 Describe the various classes of shares
 Outline the issue and allotment of shares.
 Explain the difference between, transfer and transmission of shares.
INTRODUCTION
A share is the main security of the company; this lecture focuses on all the formalities relating to
the issue and allotment of share, the share capital, various classes of shares and transfer and
transmission of shares.
The word capital is used to denote the amount of money which a company raises from a sale of
its shares. The capital of the company may be defined as the total fund of resources at the
company‟s disposal. It differs from other forms of resource obtained from outside the company
because the share capital is not a liability.
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Types of capital
Nominal capital (Authorized capital) This is the capital that is stated in the memorandum of
association.
It is referred to as the nominal capital because it is calculated on the basis of the „nominal‟ or
book value of the shares into which it is divided.
- Paid up capital
This is constituted by the aggregate of the amount of money that is paid up on each share
of the company.
- Called up capital
A company‟s called up capital is constituted by the amount due in respect of calls made
by the directors on issued shares.
Uncalled capital
The uncalled capital is the amount not called up on shares which a company has issued.
Reserve capital;-
The reserve capital is defined by S. 62 of the Act as the position of the issued but
uncalled capital of a limited company which the company‟s members, by special
resolution, have resolved that the company shall not call up unless it is liquidation.
Authorized Capital;-
This is the amount of capital a company is entitled by its memorandum to raise.It
represents the amount of capital that may prima facie be raised by issuing shares.
Issued share capital
This represents in principle liability of the members to the company. They are liable to
the extent of the nominal (Par) Value of their shares.
This means that the company is entitled to use the full amount of the sum received for the
shares in order to satisfy claims against it.
It may also mean the amount of the nominal capital which is constituted by the nominal
value of the shares which have been issued by the company.
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Shares issued at a premium
These are shares issued for a price or other consideration which in excess of their
nominal value.
If so a sum equal to the aggregate amount value of the premiums must be transferred to a
separate share premium account.
Per value-Nominal Value
This is used in relation to shares to indicate the nominal value. It sets a minimum level of
actual value of consideration (price) to be provided for the share.
Market Value;-
This is the price a shareholder can get on selling of the share to someone else.
Classes of shares
The classes or types of shares which can be created and issued by a company are not prescribed
in the companies Act.
They depend on the provisions of the company‟s constitution, usually the articles of association.
Legally;-the company may create any number of classes of shares. The following classes of
shares are normally issued:-
(i) Ordinary shares.
(ii) Preference shares
(iii) Participating preference shares
(iv) Redeemable preference shares
(v) Deferred shares.
Ordinary shares;-
Unless the memorandum and the articles or the documents describing the shares otherwise
provide, ordinary shareholders are entitled to receive dividends when they are declared and to be
paid a portion of the company‟s assets after the payment of the creditors when the company is
wound up.
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An ordinary shareholder will also be entitled to exercise are vote for each share he holds at the
general meeting of the company.
Preference Shares;-
The holders of preference shares are entitled to receive payment out of the company paid to then
before the ordinary shareholders are paid.
Rights of preference shares

(i) If preference shares are given a cumulative preferential dividend that is the whole of
what time holders took to from the company.
This is because of any right in expressly stated the statement is presumed to be
exhaustive.
(ii) If preference shares are given preferential right to a return of capital on a winding up,
they are assumed to be non-participating in surplus assets.
(iii) If a preferential dividend is provided for, it is presumed to be cumulative.
Participating preference shares
These are participating shares which have a right to participate with the ordinary shares in a
further dividend after the company has paid on equal rate of dividend on the ordinary shares.
Redeemable preference shares

Section 6.0 provides a company limited by shares may if so authorized by the articles issue
preference shares which are liable to be redeemed.
Deferred shares;-
When issued they usually confer special voting rights and rights to share in surplus on winding
up.
Resolutions to expropriate members’ shares
Section 125(5) –if the rights are attached to a class of shares by the memorandum, and the
memorandum and articles, do not contain provision with respect to the variation of those rights,
those rights may be varied if all the members of the company agree to the variation.
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Revision Questions
1. Define share capital and explain various types of capital.

2. Describe various classes of shares.
3. Explain the different ways in which a company can alter its capital.
4. Explain various classes of preferential shares.
5. Define the following;-
(a) Cumulative preferential shares
(b) Participating preferential shares
Further reading
Compare the various categories of shares
Page 51 of 98

LECTURE SEVEN
8.0. DEBENTURES
OBJECTIVES

 Name the different classes of debentures.
 Discuss the borrowing power of a company.
 Distinguish between ultra and intra vires borrowing
 Give a comprehensive view of priority of charges.
INTRODUCTION
The main focus of this lecture is the capital that is obtained from other sources (loan). They are
the current and the long term liabilities obtained from non members. It is a capital in the sense
that is used in expansion of the business of the company. The main focus based on debentures
and charges and later the borrowing powers of the company.
Debenture-
This is a document issue by a registered company to acknowledge or as evidence of
indebtedness. A debenture is usually a formal document in printed form.
Debentures and shares
Similarity;
Debentures are similar to preference shares.
Debentures like shares are long term investments in the company and both are transferable.
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Differences
(i) A shareholder is a member whereas a debenture holder is a creditor.
(ii) A shareholder has an interest in the company but not in the company‟s property. A
debenture holder has no interest in the company but has an interest in the company‟s
property which constitutes his security.
(iii) Interest in the debenture must be paid even if the company does not make profit and
can therefore be paid out of capital.
Dividends on shares are payable only if profits are made and cannot be paid out of
capital.
(iv) A company can on principle purchase its own debentures but it cannot purchase its
own shares.
(v) As a general rules shares cannot be issued at a discount whereas debentures can.
A debenture stock
It is a borrowed capital consolidated into one mass for the sake of convenience.
Difference debenture and debenture stock

1. A debenture is usually for a fixed sum while a debenture stock can be transferred in
fractional amounts.
2. A debenture may be issue with or without security but debenture stock is generally
created by a trust deed.
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Charges securing debentures
A charge on the assets of the company given by a debenture may be either fixed or a floating
charge.
Fixed Charge;-
A charge is a fixed charge if it‟s a mortgage of ascertained or specific property such as plant and
machinery, land etc.
Floating Charge;-
A charge is a floating charge if it has the following three characteristics.
7. It is a charge on a class of assets of a company present and future.
ii) The class is one which changes from time to time in the ordinary course of the „company‟s
business and
7. It is contemplated by the charge that until some event occurs which causes the charge to
crystallize the company may use the property charged in the ordinary course of business.
Rules pertaining to the alteration of capital;

The issued share capital of a company limited by shares is the primary security of the company‟s
creditors.
The Companies Act incorporated various provisions which are intended to ensure that a
company‟s capital is neither adulterated nor taken out of the company.
Issue of shares at a discount;-
In Ooregum Gold-mining Co. of India Vs. Roper

It was held illegal for a company to issue its shares at a discount as the nominal value of a share
is fixed by the memorandum of a company.
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Section 59 of the Act however allows a company to issue shares ar a discounts if;-
(i) The shares are of the class already issued.
If the shares are of a class already issued they will most likely have a market value.
The market value would provide basis upon which the company‟s directors would
recommend the amount of the discount.
(ii) The issue is authorized by a resolution passed in a general meeting.
(iii) The resolution specifies the maximum rate of discount.
(iv) Not less then one year has eloped since the company‟s was entitled to commence
business.
(v) The issue is sanctioned by the court. In exercising its discretion in accepting or
rejecting an application for a proposed issue the court would primarily be acting as a
watch dog for the creditors.
(vi) The issue must be made within one month after the courts sanction.
Issue of shares of a premium

The company may at times issue its shares at a price above their nominal value i.e premium.
This may be necessitated by the fact that the company‟s share which have already been issued
are being sold in the open market at a price which is above their norminal value.
Since such an issue does not jeopardize the position of the company‟s creditors there is no legal
requirement that the issue be confirmed by the court.
However section 58 provides that where a company issues shares at a premium a sum equal to
the aggregate amount or value of the premium on those shares shall be transferred to an account
called „share premium account‟.
The section further provides that the share premium account shall be governed by the provisions
of Companies Act relating to the reduction of share capital of the company as if the share
premium account were paid share capital of the company.
This means that in effect the funds credited to the share premium account are not paid out by the
company except in the legitimate course of the company‟s business.
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Purchase of own shares
It was held in Trevor Vs. whiteworth (1887) that it is illegal for a limited company to purchase
its own shares.
The reason was that such a purchase, if permitted would constitute an indirect reduction of the
paid up capital.
Exception
Despite the rule in Trevor Vs. Whiteworth a company may purchase or acquire its own shares in
the following circumstances;-
(i) Where it acquires its own fully paid shares otherwise than for valuable consideration.
(ii) Where it is a purchase of redeemable shares under section 60 of the Act.
(iii) Where the shares are acquired pursuant to a petition for reducing the company‟s
capital under section 68 of the Act.
Under the Act, the court in sanctioning the reduction ensures the protection of the
company‟s creditors.
(iv) Where the shares are purchased in pursuance of a court order under section 2 (1) (2)
on an application by oppressed members.
The shares so purchased would be cancelled and the company‟s capital reduced
accordingly.
(v) Whereas the shares are forfeited for non-payment of a call.
Financial Assistance for purchase of own shares;

section 56(1) of the company‟s Act makes it unlawful for a company to give, whether directly or
indirectly and whether by means of a loan, guarantee, the provision of security or otherwise, any
financial assistance for the purchase of or in connection with a purchase or subscription made by
any person for any share in the company.
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Consequences of contravention of the section
(i) The contract for financial assistance is void and illegal and cannot be enforced against
a party thereto-Standard Chattered Vs. Mihotoro Farm.
(ii) The company and every officer of the company who is in default shall be liable to a
fine not exceeding Ksh. 20,000.
(iii) Every director who is a party to the contravention is guilty of breach of trust and
liable to compensate the company for any losses it suffer-Wallesteinor Vs Moir.
Exceptions
Section 56(1) permits a company to give financial assistance in the purchase of its own shares in
the following circumstances;-
(i) Where the lending of money is part of the ordinary business of the company and the
money is lent by the company in ordinary course of business.
(ii) Where the loan is to trustees to enable them to purchase fully paid shares in the
company to be held under an employee ”share scheme”.
(iii) Where the loan is to employees-other than directors- to enable them to purchase or
subscribe fully paid shares in the company or its holding company to be held by
themselves by way of beneficial ownership.
The test of financial assistance is whether after the transaction the company can be said to have
been impoverished(made poorer).
Alteration of capital
A company is empowered by section 63 to alter the provision of its memorandum of association
which relates to its registered or authorized capital.
Conditions Applicable.
(i) The articles must confer the authority to alter the capital. If they do not they may be
altered by special resolution and authority incorporated there in.
(ii) The company must hold general meeting for the purpose of altering the capital.
(iii) The alteration must be authorized by special resolution.
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Reduction of Capital
The general rule is that it is illegal for a company to reduce its capital.
The rationale is that such a reduction would be total amount to reducing the security available to
the company creditors- Trevor Vs. Whitworth.
Section 68(1) However, authorizes a company to reduce its capital if;-

(i) The company‟s articles authorize it to do so. If the articles do not confer the authority
they may be amended.
(ii) The company passes a special resolution to that effect.
(iii) The court confirms the proposed reduction.
Redemption of shares
Section 60 provides that a company limited by shares may issue preference share which are, or at
the option of the company are liable to be redeemed.
Note however
(i) The articles must allow such an issue.

(ii) No such shares shall be redeemed except out of profits of the company which
otherwise be available for dividend or out of fresh issue of shares made for the
purposes of the redemption.
(iii) No such shares should be redeemed unless they are fully paid up shares.
(iv) The premium, if any payable on redemption must have been provided for out of
profits of company or out of the company‟s share premium account before the shares
are redeemed.
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Revision question
1. What are the different kinds of debentures? How do the debentures differ from shares?
2. Describe the types of debentures?
3. Distinguish between ultra vires borrowing and intra vires borrowing?
4. Define (a) Share certificate

(b) Share warrant
© Application and allotment of shares.
(d) Share transmission.
5. State the main features of ordinary shares.
6. Explain different ways in which a company can alter its capital
7. What do you understand by fixed and floating charges
Further reading
Differentiate the various types of debentures.
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LECTURE EIGHT
9.0. COMPANYS’ ORGANS AND OFFICERS

OBJECTIVES

 State the qualifications and disqualifications of a director.
 Discuss the legal position of the directors and their powers.
 Give a comprehensive view of jurisdiction of the Board of Directors.
INTRODUCTION
In this lecture the company is well featured with a comprehensive illustration of the jurisdiction
of the board of directors who acts on behalf of the organization.
A company is a legal person with an existence independent of that of its members. Yet, it
remains an artificial person. Its policy can be formulated and decided upon only by individual
human beings.
The question then is who is to be regarded as acting on behalf of the company and in what
circumstances may they so act?
The law of agency is at the root of Company Law.
How a company’ organs are appointed

The board of directors
All registered companies must have directors and normally there must be at least two though one
suffices for a private company.
On initial registration the Company must send to the Registrar of Companies; Particulars of the
first directors with their signed, written consents to act.
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Thereafter he must be sent particulars of any changes with signed consent to act by any new
directors.
Division of power between the general meeting and the board
In Automatic Self Cleansing Filter Syndicate Co. Vs Cunningham

The court was for the view that the division of powers between the board and the company in
general meeting depended entirely on the interpretation of the articles of association and, where
powers have been vested in the board the general meeting could not interfere with their exercise.
The articles were held to constitute a contract by which the members had agreed that the
directors and the directors alone shall manage the company.
Hence the directors were entitled to refuse to carry out a sale agreement adopted by ordinary
resolution in general meeting
In Shaw & Sons (Salford) Ltd Vs Shaw (1935) 2 KB 113, CA

The court held that the general meeting cannot interfere with a decision of the directors unless
they were acting contrary to the provisions of the articles or the association.
In Scott Vs. Scott 1943. All ER582

It was held that resolutions of a general meeting which might be interpreted either as direction to
pay an interim dividend or as instructions to make loans were invalid.
Default power of the general meeting

If for some reason the board cannot or will not exercise powers vested in it, the general meeting
may exercise such powers. Hence action by the general meeting has been held effective where
there was a deadlock on the board Baron vs. Porter 1914
Note: if directors have purported to exercise powers reserved to the company in general meeting
their action can be nullified (notified ) by the company in general meeting.
For the purpose of the past actions of the board, as opposed to the powers on the board for the
future, it is not necessary to pass a special resolution to the articles.
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Removal of directors by the general meeting
One way in which the members can exercise ultimate control is by getting rid of the directors
and by appointing others more compliant with their will.
Under S. 185 a company may by ordinary resolution remove a director before the expiration of
his period in office, notwithstanding anything in its articles or in any agreement between it and
the director.
Powers of the directors to bind the company

Constitutional limits of the powers of the Board
The articles of association may limit the powers of the Board by e.g. putting an upper limit on
the amount it can borrow without the approval of the general meeting.
The question is whether a 3rd party acting in good faith can rely on a transaction with the
company where the directors have not complied with the provisions of the articles.
Royal British Bank Vs Torguard.

The Court held that a 3rd party need not inquire whether an ordinary resolution had been obtained
as this was a matter of internal management.
Transactions by individual directors or employees

The courts have held that if the company has found that a person as acting as its agent e.g as a
director or enabled the person to appear to be authorised the company would be bound by the
actions of the person.
Freeman & Lockyrer Vs Buckhurt Hark Properties Ltd

Facts: The 2nd defendant was never appointed into any position in the company but he acted as
the Managing Director. He ran the day to day affairs of the company.
Held: An actual authority is a legal relationship between the principal and the agent created by
consensual agreement to which they alone are parties.
An ostensible authority is a legal relationship between the principal the contractor (3rd party)
created by a representation made by the principal to the contractor intended to be and is in fact
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acted upon by the contractor that the agent has the authority to act on behalf of the principal into
a contract of a kind within the scope of the appointing authority.
The representation when acted on by contractor by entering into the contract with the agent
operates as an estoppel, preventing the power holder from asserting that he is not bound by the
contract.
Note: in order to create an estoppel between the company and the contractor the representation as
to authority of the agent which creates his apparent authority must be made by some person who
has actual authority from the company to make the representation.
Appointment and removal of directors
There are no restrictions on who may be appointed a director of a company. Members are free to
appoint „amiable lunatics if they so wish‟ it is even possible to appoint companies as directors of
another company.
First directors
Section 177 provides that every company other than a private company shall have at least two
directors and private companies shall have at least one director. Under table A Article 75 the
actual number of directors on the formation of the company is decided upon by the subscribers to
the memorandum or a majority of them.
Until so determined all subscribers are deemed to be directors of the company.
Subsequent directors
These are elected by the members in general meeting beginning with the first general meeting at
which all the 1st directors retire from office and the members elect new ones.
The retiring directors are however eligible for re-election.
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Casual appointments
Under Article as the board of directors may fill a vacancy in the board on for practical reasons
get an additional director to join the board provided that the number of directors so appointed
does not exceed the limit imposed by the articles.
Restrictions on appointment
Under Section 18 (2)4 a person is incapable of being appointed a director of a company unless
before the negotiation of the articles he has consented in writing to being so appointed and either;
a) Has signed the memorandum of association for a number of shares
b) Has taken or agreed to take his qualification shares ( if any) Note that the provisions do
not apply to private companies
Age limit
Section 186 provides that no person shall be capable of being appointed a director of a public
company or a private company which is a subsidiary of a public company if at the time of the
appointment
(a) He has not attained the age of 21 years or
(b) Has attained the age of 70 years.
Note: The provision does not apply if the company‟s‟ articles provide otherwise or if a special
notice of the resolution to appoint the director was given to the company.
Un-discharged bankrupts
Under section 188 a person who has been declared bankrupt by a competent court and who has
not received his discharged is incapable without the authority of the court of acting as a director
of a company.
If he so acts he is liable to imprisonment for a term not exceeding two years or to a fine not
exceeding Ksh 10,000 or both.
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Remuneration of directors
Directors are not regarded as servants or employees of the company of which they are directors.
They therefore have no right to be paid for their services unless there is a provision for payment
in the articles.
In Re Duomatic Ltd
The court held that a provision in the articles authorizing payment of director‟s remuneration
does not give the right to pay any specific amount.
There must also be a resolution passed by the company in general meeting authorizing the
payment. Provided the resolution has been passed the remuneration is payable whether profits
are earned or not.
In Re: Hundy Granite Co.

The problem stated simply is that directors may pay themselves too much at the expense of
shareholders and ultimately of creditors.
Excessive salary prejudices minority shareholders and may even cause the company to go into
insolvent liquidation.
As to minority shareholders, their opportunity to complain is limited by the rule in Foss v
Harbottle which holds that only the Company and ultimately majority shareholders may bring
an action against the directors.
The exercise of the power to determine remuneration must however be exercised in good faith
and for the benefit of the company.
Re Halt Garage 1964
Held: those who deal with a limited company do so on the basis that its affairs will be conducted
in accordance with its construction which indicate that the directors may be paid a remuneration.
Subject to that they are entitled to have the capital kept intact.
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They have to accept the shareholders or the Board of Directors assessment of the scale of the
remuneration but they are entitled to assume that what is paid is genuine remuneration and that
the power is not used as a cloak for making payment out of capital to the shareholders as such.
NB/ directors are also shareholders.

Directors’ duties
The duties of directors are usually considered under two broad headings, namely;
I) Duties of care and skill under common law
II) Fiduciary duties as set out by the courts of equity
Duty of care and skill

Historically directors were usually armatures who had no professional executive skills. It was
therefore thought important to impose standards of care and skill on them.
The courts have also been reluctant to interfere in and with benefit of hindsight substitute its own
view of how a commercial decision should have been made.
Where the directors have some specialist professional skills the court is more willing to expect
them to demonstrate a higher standard of skill.
The duty is therefore a subjective one.
In Re: Brazilian Rubber Plantations & Estates Ltd

The court held a director‟s duty requires him to act with such care as is reasonably to be expected
from him having regard to his knowledge and experience.
RE City equitable Fire Insurance Co Ltd reveals a degree of objectivity in the standards: a
basic objective standard of reasonable care such as might be expected of an ordinary person
acting on his own behalf plus a subjective standard that a director need not exhibit greater skill
than can be expected of a person of his knowledge and experience.
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In Norman v Theodore Goddard
Hoffman J propounded an objective requirement that directors must possess the skill that may
reasonably be expected from a person undertaking the duties in question.
In RE: City Equitable Fire Insurance Co Ltd

The court was of the view that;
i) A director need not exhibit in the performance of his duties a greater degree of skill than
may reasonable be expected from a person of his knowledge and experience.
ii) A director is not bound to give continuous attention to the affairs of his company.
iii) In respect of all duties that having regard to exigencies of the business and the articles of
association may properly be left to some other official a director is in the absence of
grounds for suspicion justified in trusting that official to perform such duties
honestly.
Revision Questions
1. State the qualification and disqualifications of a direct.

2. Discuss the legal position of the directors and their powers.
3. Describe how a director is appointed and explain his duties.
4. Give a comprehensive view of the jurisdiction of the board of directors.
5. Describe the different modes of appointing directors of a public company
6. Write short notes as regards the remuneration of directors.
Further reading
Relate the various company organs and how they work.
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LECTURE NINE
10.0. COMPANY MEETINGS
OBJECTIVES

 Demonstrate knowledge of the importance of company meetings
 Classify company meetings.
 Distinguish between the various types Chairman of meetings.
 Define resolutions.
INTRODUCTION
This lecture we visit the company‟s assemblies and how to go about them. This is where the
important matters relating to the business of the company are decided. Company meetings are
classified according to the purposes and also their importance. The chairman is elected to chair
the meeting and the secretary writes down the minutes of the meetings accordingly.
The board of directors and the shareholders in general meeting are referred to as the organs of
the company.
In most cases an article delegates the management of the business of the company to the board of
directors.
The ultimate control of the company however resides in the general meeting, based on the power
of the general meeting to elect and remove directors.
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The policy of the law is to reserve to the members of a company the right and opportunity to
consider and resolve upon matters touching the welfare and interests of the company.
The expression “general meeting” is not defined in the companies Act but it is used to describe
any meeting which all the members of a company who have a right to vote are entitled to attend.
Classification of meeting
Meetings which must or may be held in relation to the administration of a company‟s affairs are;-
(i) General meetings of members which include.
a. The statutory meeting
b. Annual general meeting
c. Extraordinary general meetings.
(ii) Meetings of a class or classes of shareholders.
(iii) Directors‟ or board meetings.
(iv) Meetings of creditors and contributors.
Statutory Meeting
Except in the case of a private company section 130 of the companies Act requires every
company limited by shares or guarantee, within a period of not less than one month nor more
than three months from the date on which it was entitled to commence business to, hold a
meeting of the members of the company called statutory meeting.
The purpose of this meeting is to afford the shareholders an early opportunity of obtaining
information as to the circumstances of the company‟s promotion and floatation.
The meeting will be summoned in accordance with the provisions of the articles of association
pertaining to the convening of the meetings of the company.
The report must be certified by at least two directors of the company and must state;-
(i) The total number of shares allocated.
(ii) The total amount of cash received for the shares allocated.
(iii) Particulars of directors and auditors
(iv) Particulars of any contract entered into by the company.
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Objectives of statutory meetings
1. Inform members on the company prospectus.
2. Give members opportunity to discuss management methods and companies prospectus.
3. to approve the modification of the terms of any contract named in the prospectus.
Annual General Meeting;-
Under section (3) every company must in each year hold a general meeting as it annual general
meeting (AGM), and shall specify the meeting as such in the notices calling it.
No more than 15 months shall elapse between the date of the next provided that so long as the
company holds its first AGM within 18 months of its incorporation, it need not hold it in the year
of incorporation or in the following year.
Ordinary business of AGM.

a) The declaration of dividend;
b) Considerations of accounts
c) Election of directors in place of those retiring.
d) Appointment of and fixing of the remuneration of auditors.
Meetings
Class meetings
The articles of a company may provide that certain matters affecting the interests of the holders
of a particular class of shares shall be subject to the consideration and decision of a meeting of
those holders only.
A meeting of a class of shareholders may consist of one person if all the shares of the class are
held by him.
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Extraordinary general meeting
This is a meeting other than AGM or statutory meeting. It is convened to deliberate on issues of
the company which members feel cannot be put on hold until the convening of the AGM.
Notice of the meetings

If due notice of a meeting is not given to all the members, the meeting and resolutions will be
invalidated, though table A which states that this will not be so if the omission was accidental.
At common law a notice must state that the nature of the business to be conducted including
sufficient information to enable a member to decide whether to attend.
Chairman of a general meeting

He is the presiding officer of the meeting
Importance of chairman
He is responsible for keeping order and conducting the meeting.
He is the proper person to put motions to the meeting, count votes, declare the results and
authenticate the minutes by his signature.
Duties of the chairman
1. Must act at all times bona fide and in the interests of the company as a whole
2. Must ensure that the meeting is properly convened and constituted.
3. Ensure the proceedings are properly and regularly conducted maintaining order.
4. Ensure the provisions of the Act and the Articles are observed.
5. Should see business transacted is within the scope of the meeting
6. Must allow reasonable discussion and care that the minority rights are not ignored.
Proxies
A proxy is an authority to represent and vote for another person at a meeting
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Voting
Voting may be by show of hands, or on request to the chairman, by poll, in which case each
member receives one vote per share.
Voting is by ordinary resolution when a resolution is passed by a simple majority i.e. An
affirmative vote of at least 50 plus one vote of those voting and those constitute a quorum.
In the case of a special resolution it is passed by an affirmative vote of at least 75 per cent of
persons attending or their proxies and who constitute a quorum.
Shareholders may vote in their own interests and do not owe fiduciary obligations.
When directors vote in the company‟s, general meeting they are exercising a private property
right, and therefore do not owe the company any fiduciary duty.
Revision Question
1. Discuss the meaning and importance of the company meetings.

2. Discuss the legal provisions for holding annual general meeting of a company and business
transacted during the meeting.
3. Describe the various types of company meetings.
4. What are the requisites of a valid general meeting.
5. What are the duties of a chairman of a general meeting.
6. State the consequences of not holding a statutory meeting.
Further reading;
Relate and discuss the various meetings allowed in a companies.
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LECTURE TEN
11.0. PROTECTION OF MINORITY INTERESTS
OBJECTIVES

 State the principle of majority rule.
 Show how the interest of minority shareholders are protected.
INTRODUCTION
Supremacy of the majority is fundamental principle of the company law .In this lecture the
student is able to know the principle of majority rule. It is, therefore, obvious that in the
administration of the affairs of the company, it is the wish of the majority shareholders that
prevails. Majority shareholders determine the fate of the company.
Company Law is based on the principle of majority rule. This means that the affairs of a
company are decided upon by the majority of votes in that company.
The minority is bound to subject itself to the wishes of the majority.
As long as the majority acts lawfully, the court will refuse to interfere in the management of the
company‟s affairs of the instance of the minority even if the rights of the minority are infringed.
A further principle on which company law is based is that if an act is not a lawful exercise of
powers, the aggrieved person must act.
Therefore if a company has been wronged it must itself act to have the wrong redressed; a
member or a group of members cannot normally redress a wrong done to the company.
This principle exists in conjunction with the company having a separate existence with its own
rights which it consequently has to enforce itself and in its own name.
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Rule of Foss Vs. Harbottle
The rule states that when a wrong is done to the company, it is the company that must institute
action.
If the company fails to do so, a member may, in certain circumstances, institute action on behalf
of the company if the wrong concerned is one which the members cannot notify by a simple
majority.
The rule of Foss Vs. Herbottle confirms the majority rule principle.
Impediment of the principle of Foss Vs. Herbottle.

A member of a company in his capacity as a member acquires certain rights based on the
constitution of a company, the Companies Act and the law in general which he can enforce
against the majority acting as the company the one hand, this principle is based on the concept of
the corporate constitution as an enforceable contract between the company and every member
and between members interse and, on the other hand it is based on the fact that a member can
enforce rights which are conferred on him by legislation and the common law.
A majority cannot take these rights away from him. These rights are known as individual
members rights.
Choice of Action
When the conduct of the majority exceeds the permissible limits, a member has the choice of
instituting a personal action against the company under certain circumstances.
Alternatively a member may institute a derivative action.
Grounds for personal action

Majority conduct can give rise to personal action where the following classes of unratifiable
wrongs occur;-
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i) Breaches of rights of a member which he derives from the memorandum or articles in
his capacity as a member e.g his right to exercise his vote at a general meeting. (See
PenderbVs. Hushington)
ii) Illegal conduct in breach of company law which affect to his membership rights
which cannot be ratified by an ordinary resolution. This includes conduct in
contravention of the Companies Act.
iii) Where fraud on the minority is committed.
Fraud on the minority
Fraud in this context denotes an abuse of power.

Examples include where alteration of the articles is adopted to enable a majority to compel a
minority to sell their shares to an approved purchaser.
Fraud on the minority exception to the rule of Foss Vs. Harbottle is essentially a procedural
device created by the courts to allow complaining share holders to bring a claim in their own
names on behalf of the company. The procedure is available where the directors against whom
the relief is sought are themselves hold and control the majority of the shares in the company and
will not permit a claim to be brought in the name of the company.
Fraud on the minority includes
i) Misappropriation of corporate property
ii) Mal fides abuse of power.
iii) Discrimination against a section of the membership
iv) Errors of judgment from which the directors themselves benefit.
NB;
The plaintiff must show that there was sufficient control exercised by the alleged wrong
doers to enable them to stifle any attempt to institute proceedings in the name of the
company.
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Defenses available to the majority
There is an absolute defense available to the majority where fraud on the minority is averred – i.e
where the majority can show that they acted bonafide in the best interests of the company.
If the majority can prove this, it is irrelevant that the minority had suffered.
The member who then wants to use the personal action must prove that he was prejudiced
directly by the conduct.
Derivative action;-
The common law derivative action refers to;

i) Unratifiable wrong done to the company.
ii) The company cannot or will not act against those who wronged it.
In such circumstances a derivative action on behalf of the company may be instituted.
Such an action will have to be instituted against the wrongdoers by somebody acting on behalf of
himself and all the shareholders other than the wrongdoers.
The company, being unable to act as plaintiff, must be joined as nominal defendant so that it is
party to the proceedings and any order of the court can be made applicable to it.
Classes of unratifiable wrong against the company
I) Acts in breach of the Articles of the company as set out in the memorandum and
articles of association e.g ultra vires act or act which according to the articles of
association are beyond the authority of the agents-e.g directors.
II) Unlawful conduct and conduct in of common law which is not notifiable by ordinary
resolution and which amounts to a wrong to the company e.g theft of company funds.
III) Fraud on the minority.
Defects on the common law derivative action;-

A member has to conduct the case at personal risk especially as regards costs should he succeed,
the benefits accrue to the company whilst he cannot recover his costs and if he fails he is liable
for all costs.
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Further more such a plaintiff finds it difficult to acquire information relating to his action as it
may be in the hands of the controllers of the company who are usually the wrongdoers.
Section 211 of the companies Act.

The Act provides for a statutory derivative action. The statutory derivative action is only
available in respect of a tort or a breach of trust or faith against the company.
The statutory derivative action applies even in respect of ratifiable wrongs thereby making it
unnecessary to distinguish between wrongs that can be ratified and those that cannot be ratified.
Availability of section 211 statutory derivative action;

In terms of section 211(1) a statutory derivative action may be instituted;-
(i) if the company has suffered damages or loss or has been deprived of any benefit as a
result of a wrong, breach of trust or breach of faith that has been committed.
(ii) If the company has not instituted proceedings to address the wrong.
(iii) If the wrong, breach of trust or breach of faith has been committed by a director or
officer of that company or a past director or officer
(iv) It matters not whether or not the wrong was ratified.
Revision question
1 Explain the rule of supremacy of the majority of shareholders with all its exceptions?
2. Describe the concept of protection of the minority shareholders.
3. State the rule in Foss V Harbottle?
Further reading;-
Discuss the effects of the rules in toss Vs Harbottle and see if it applies in Kenya.
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LECTURE ELEVEN
12.0. WINDING UP OR LIQUIDIFICATION
OBJECTIVES

To explain the different types of winding up.
 Explain the appointment of liquidators, their duties and release from their duties and
powers.
 Discuss the offences related to liquidation.
INTRODUCTION
This lecture deals with the so called „death‟ of a company. The procedure that results to a
company, ceasing to exist, this process is called winding up. There is compulsory winding up
and also voluntary winding up. Then shall take our studies on liquidators and their appointments,
duties and release from their duties.
Winding Up
Meaning of winding up
The companies Act, cap 486 does not define the term winding up or liquidation‟. However , it
uses them interchangeably hence we may assume they are synonymous. It represents the last
stage in the company‟s life.
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It means a procedure by which a company is dissolved, the assets of the company are disposed
of, the debts are paid out of the realized assets (or from contributions from its members), and the
surplus, if any, is then distributed among the members in proportion of their holdings in the
company.
A company comes into existence by a legal process and when , for any reason, it is desired to
end its existence, it must again go through the legal process of winding up its affairs. Winding up
or liquidation is the process by which the management of a company‟s affairs is taken out of its
directors‟ hands, Its assets are realized by a liquidator, and its debts are paid out in a proceeds of
realization.
Professor Gower has defined winding up in the following words:

“Winding up of a company is a process whereby its life is ended and its property administered
for the benefit of its creditors and members. An administrator called liquidator, is appointed and
he takes control of the company, collects its assets, pays its debts and finally distributes any
surplus among the members in accordance with their rights” (modern company Law, 4th ed p
789).
Pennington has defined winding up thus :–
Winding up is the process by which the management of a company‟s affair is taken out of its
directors‟ hands, its assets are realized by liquidator and its debts are paid out of the proceeds of
realization and any balance remaining is returned to its members. At the end of the winding up,
the company will have no asset or liabilities, and will therefore be simply a formal step for it to
dissolution, that is for its legal personality as a corporation to be brought to an end “(company
law, 2nd ed p 628)
WINDING UP AND DISSOLUTION

One must understand here that winding up and dissolution of the company are, not one and the
same thing. A company is said to be dissolved when it ceases to exist as a corporate entity.
Winding up precedes dissolution. It is the process by which the dissolution of a company is
brought about.
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At the end of the winding up, the company will have no assets or liabilities, and will therefore be
simply a formal step for it to be dissolved, that is for its legal personality as a corporation to be
destroyed. In between winding up and dissolution the legal entity of the company remains, and it
can be sued in court of law.
WINDING UP AND INSOLVENCY

It should be noted that winding up a company is not the same thing as bankruptcy of a company.
It is explained under;-
a) A winding up order can be made, even when the company is solvent. In other words,
winding up is not confined to cases where a company is insolvent, but it may be adopted
as means of enabling the company or members to reincorporate with more extended
objects or further powers or more efficient means of management.
b) On winding up, the company as such does not cease to exist; only its administration is
carried on through the medium of a liquidator. The property of a company still belongs to
the company, which can carry on business (for a limited purpose) and file suits in its own
name. It is otherwise in the case of insolvency.
c) Even when the company is wound up because it is in insolvent circumstances, all the
provisions of the insolvency law do not apply to it. The principal of ”Reputed ownership”
does not apply to companies in winding up.
MODES OF WINDING UP
There are three modes of winding up,

1. Winding up by court.
2. Voluntary winding up. This may be; (i) A members‟ voluntary winding up; or
(ii) Creditors voluntary winding up.
3. Winding up subject to the supervision of the court.
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WINDING UP BY THE COURT (SECTION 219)
Winding up of a company under the order of a court is known as compulsory winding up. The
following reasons will lead to a company being wound up by the courts:
a) If the company has, by special resolution, resolved that it be wound up by court.
b) Default is made in delivering the statutory report to the registrar or in holding the
statutory meeting. Only a shareholder may present a petition on this ground and where
the reason is failure to hold the statutory meeting, at least 14 days must have elapsed
between the last date on which the meeting ought to have been held and the date of the
presentation of the petition. In such a case the courts may, instead of making a winding
up order, direct that the statutory report shall be delivered or that the meeting shall be
held and order the costs to be paid by any persons who are responsible for the default.
section 211.
c) Where there is failure to commence business within a year or where the business is
suspended for a whole year by the company. The court exercises power in this case only
if the company has no intention of carrying on its business or if it is not possible for it to
carry on its business.
Orissa Trunks & Enamel works Ltd; Re (1973). A company‟s business remained
suspended for ten years, its capital had been embezzled and its major contributor, the
Orissa Government, refused further help. It was held that the company should be wound
up.
If the company has not begun to carry on business within a year from its incorporation or
suspends its business for a whole year .The court will not wind it up if:-
(i) There are reasonable prospects of the company starting business within a reasonable
time; and
ii) There are good reasons for the delay i.e the suspension of business is satisfactorily
accounted for and appears to be due temporary causes.
Middleborough Assembly Rooms Co.Re (1880) 14ch D 104: A company suspended its
business for more than three years due to depression in trade.
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A shareholder presented a petition for the winding up of the company a year later. Four
fifths in value of the shareholders opposed the petition. The company intended to
continue its operations when trade prospects improved. The petition was dismissed;
A company will not be wound up because it had ceased to carry on one of the several
businesses authorized by its memorandum unless, upon a fair construction of the
memorandum, that business is the main business or the object of the company
(Thellusion Vs Valentia (1906)2 ch 1.
d) The number of members is reduced, in the case of a private company below two, or in the
case of any other company below seven i.e. section 33 of the Act. In the event, the court
may order the company to be wound up.
If the company carries on business for the more than six months while the number is so
reduce, every member who is cognizant of the fact that it is carrying on business with
membes fewer than the statutory minimum, will be severally liable for the payment of the
whole of the debts of the company contracted after six months.
Note :- this is one of the several situations under the Act where the veil of corporation is
lifted.
e) Where the company is unable to pay its debts, ie

i) a creditor or creditors to whom the company owes more than one thousand shillings
has left at the company‟s registered office a demand under his hand for the payment of
the sum due and company has for three weeks thereafter neglected to pay the sum or
secure or compound it to the reasonable satisfaction of the creditor, or
ii) Execution or other process in favour of creditors of the company is returned
unsatisfied in whole or in part; or
iii) It is proven to the satisfaction of the court that the company is unable to pay its debts;
taking to account the contingent and prospective liabilities of the company.
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When a creditor establishes that the debt owed by the company is clear, valid in law,
unimpeachable, and indisputable, he will be entitled to a winding up order „ex debitor
justitae‟ i.e from what is due justice.
But, what is debt? A debt is a sum of money which is presently payable or will become
payable in future by reason of a present obligation. A sum payable upon a contingency
has happened. It is only when a debt becomes absolutely due in the sense that the creditor
is entitled to claim its payment presently; that it is a „debt‟.
f) Just and equitable. The words „just and equitable‟ are of the widest significance and do
not limit the jurisdiction of the court to any particular case.
The principal of just and equitable clause baffles a precise definition; it must rest upon
the judicial discretion of the court depending upon the facts and circumstances of each
case.
What Is ‘Just And Equitable’

It depends upon the facts of each particular case. The court may order winding up order on „just
and equitable „clause in the following cases;-
The Substratum of a Company Disappears:
1. When the substratum of the company is gone. The substratum of a company can be said
to have disappeared only when the object for which it was incorporated has substantially
failed or when, it is impossible to carry on business except at a loss, or the existing and
possible assets are insufficient to meet the existing liabilities.
In making the order for winding up on this ground that is just and equitable that a
company should be wound up, the court should consider the interest of the shareholders
as well as creditors.
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i) When the subject-matter of the company is gone.-Pirie Vs Stewart, (1904) 6f. 847.
A shipping company lost its only ship, the remaining assets being a paltry sum of ₤ 363.
A majority in number and value of shareholders petitioned for its compulsory winding up
but a minority shareholder opposed this and desired to carry on the business as charterer.
Held:it was „just and equitable that the company should be wound up.
ii) When the main object of the company has substantially failed or become impracticable;
where a company‟s main object fails; its substratum is gone and it may be wound up
even though it is carrying on its business in pursuit of a subsidiary object.
German Date Coffee Co. Re (1882) 20 ch.D 169. In this case, the object clause of the
German Date Coffee Co. stated that it was formed for the working of a German patent
which would be granted for making a partial substitute for coffee from dates and for the
accusation of inventions incidental there and also other inventions for similar purposes.
The German patent was never granted but the company did acquire and work a sweddish
patent and carried on business at Hamburg where substitute for coffee was made from
dates; but not under the protection of patent. It was held, on petition by two shareholders,
that the main object could not achieve and, therefore, it was „just and equitable‟ that the
company should wound up.
iii) When the company is carrying on its business at a loss and there is no reasonable
hope that the object of trading can be attained. However where the majority shareholders
are against it, the court will not order a company to be wound up merely because it is
making loss.
Surburban Hotel Co; Re(1967) 2 ch. App 737. A shareholder of 200 shares in a hotel
company applied for winding up of the company on the ground that it had made a
considerable loss. The uncalled capital was sufficient to pay off all business creditors and
to leave a working surplus. N, who held fully paid-up shares, appealed against the order
and at the meeting of shareholders; 2,934 votes were in favour of the company continuing
and only 300 votes for the winding up. In the view of the fact that capital was available to
develop the hotel to acquire other sites within the scope of the objects clause, the petition
for winding up was dismissed.
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iv) Where the existence and probable assets of the company are insufficient to meet the
existing liabilities. Where the company is totally unable to pay off creditors and there is
ever increasing burden of interest and deteriorating state of management and control of
business owing to sharp differences between shareholders, the court will order winding
up.
2. When the management is carried on such a way that the minority is disregarded or
oppressed. Oppression of minority shareholders will be „a just and equitable‟ ground
where those who control the company abuse their power to such an extent as to seriously
prejudice the interest of minority shareholders.
But the court will not make an order for winding up unless it is proved that wrong has been done
to the company by abuse of the majority voting power, and it is impossible for the business of
the company to be carried on for the benefit of the company as a whole, owing to the which
voting power is held and used. (Anglo Continental produce Co. Ltd Re (1939)1
ALL ER99). Re Garnets Mining Co. Ltd W.C(winding up cause no 12 of 1977).
The petitioner Mrs. Beth Wambui Mugo and she wanted the company to be wound up on the
„just and equitable‟ ground. Her reasons were as follows;-
i) That the affairs of the company were being conducted in a manner which was
oppressive to her. The evidence was that despite her 50% shareholding in the company,
she was treated at most times as only a decorating figure because she was excluded
from both the company and the board meetings, but nevertheless expected to sign or
approve most of the resolutions. When she suggested to have her shareholding
transferred, she was always outvoted.
She received minutes of meetings months after those meetings and despite all these
mistreatments the other directors continued to use her name in the company‟s
correspondences just to give the image that they were co-operating with the locals.
i) That the substratum of the company had gone and that the company had no alternative
business to engage in. The company had been incorporated to mine rubbis. This business
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went because it became impossible to undertake as the petitioner influenced the
Government to withdraw the mining licence as a way of revenging against the Greek
directors.
ii) Because of the difference between her and the rest of the Greek members, the
management of the company had broken down completely and consequently there was
loss of confidence and probity in each other to the extent that the company could no
longer be managed at all.
On these grounds, it was held that though the petitioner was partly to blame for
sabotaging the business, she was entitled to this order under section 215(f).
3. Where there is a deadlock in the management of the company.

When shareholding is more or less equal and there is a case of incomplete deadlock in the
company on account of lack of probity in the management of the company and there is no
hope or possibility of smooth and efficient continuance of the company as commercial
concern; there may arise a case for winding up on the just and equitable ground.
American Pioneer Leather Co. Re (1981) ich 556.

There were only three directors and shareholders in the company. One of them left the
country and the remaining two quarreled among themselves and as a result there was
complete deadlock. It was held that it was just and equitable that the company should
wound up.
4. When the company was formed to carry out fraudulent or illegal business or when the
business of the company becomes illegal.
Brinsmead (Thomas Edward) & sons ;Re (1897) 1 ch. 45.
In this case T.E and two of his sons were employed by John Brinsmead & sons limited
for carrying on similar business. They were restrained by an injunction from using the
name Brinsmead on the ground of fraud. A petition for the compulsory winding up of the
company was presented. It was held that the company was formed to carry out a fraud,
and therefore, it was „just and equitable‟ that it should be wound up.
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5. In the case of a company incorporated outside Kenya and carrying on business in Kenya,
winding up proceedings have been commenced in respect of it either;-
i ) In the country of its incorporation; or

ii) In any country in which it has established a place of business; section 219.
Who May petition for compulsory Winding up?

Section 221,An application to the court for winding up is by petition, which may be presented:-
(a) By the company i.e a company itself may present a petition to the court for winding up
after it has passed a special resolution. A company does not often present a petition to
have itself wound up by the court as it can achieve this object more conveniently by
passing a special resolution to wind up voluntarily. If a company in a general meeting
resolves that it shall, however, be wound up by the court; it may present a petition for
winding up order. Where an application for the winding up of a company was made by its
managing director, it was rejected on the ground that the managing director or directors
do not constitute the company for the purpose of winding up and the “petition by the
company must have been made behind the decision of the general meeting”.
(b) By any creditor or creditors (including any contingent or prospective creditor or

creditors). The term creditor is not limited to one to whom a debt is due at the date of the
petition and who can demand an immediate payment. Every person having a pecuniary
claim against the company whether actual or contingent is a creditor and such a person is
competent to file a petition for the winding up of the company.
Where a company is unable to pay its debts and after the filling of a petition for its
winding up, the company pays the principal amount due to the creditor during the
pendancy of the petition but does not pay the interest on the principal amount, the
company can still be ordered to be wound up
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Commencement of Winding Up
Where, before the presentation of a petition for winding up of a company by the court, a
resolution has been passed by the company for voluntary winding up, the winding up shall be
deemed to have commenced from the date of the resolution. In all other cases (ie where the
company has previously passed a resolution for voluntary winding up) the winding up of the
company by the court shall be deemed to commence at the time of the presentation of the
petition for the winding up. When an order is made for winding up, it dates back to the date of
the presentation of the petition. If no order for winding up is made and the winding up petition is
dismissed, the date of the presentation of the winding up petition has no relevance. As such until
winding up order is made, the company has to comply with the requirements of the Act as
required of a company not wound up.
Powers of Court (Section 218,221 and 222)

The courts have the jurisdiction to receive winding up petition, hear it and make determination.
The words „on hearing a winding up petition‟ occurring in the sections above cover the entire
period from the date of entertainment of the petition and issuing of notice till an actual order of
winding up is made or the winding up is made or the winding up petition is dismissed. Hearing
does not mean just hearing the respondent. Hearing of the petition for the purpose of admitting
the petition for the purpose of admitting the petition and issuing notice is also part of the hearing
of the winding up petition.
In determining the petition, the court has the power to accept or reject the petition. They can stay
their order or suspend it or order to facilitate the determination of various matters connected with
it. In all the cases, a „prima facie‟ case has to be made out before the court can take any action in
the matter. Even admission of a petition which will lead to advertisement of the winding up
proceedings is likely to cause immense injury to the company if ultimately the application has to
be dismissed. The interest of the applicant alone is not of predominant consideration. The
interests of the shareholders of the company as a whole must be taken into account
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Procedure of winding up by the court
In section 218, a petition for winding up order against a company may be presented to High
Court of Kenya, such a petition must be supported by an affidavit of the petitioner
Consequences of Winding up Order

Once the court makes an order for winding up of a company its consequences date back to the
commencement of winding up. By virtue of section 229, an order of winding up a company
operates in favour of all creditors and contributories as if made on the joint petition of a creditor
and a contributory. In case of compulsory winding up by the courts, the winding up dates from
the date of presentation of the petition, unless before that date a resolution was passed to wind up
the company voluntarily, in which case the commencement is the time of the resolution:. section
226.
In the case of voluntary winding up of the company, winding up is deemed to commence the
time of the passing of the resolution to wind up voluntarily. A winding up under supervision is
also deemed to have commenced at such a time.
Any subsequent disposition of the property and any transfer of shares or alteration in the status of
members is void unless the court otherwise orders (section 224). And any attachment, distress or
execution put in force against the estate or effect of the company is void (section 225).
When winding up order has been granted or an interim liquidator has been appointed, no action
may be proceeded with or commenced against the company except by the leave (permission) of
the courts and subject to such terms as the courts may impose (section 228).
The powers of directors are terminated, and the company‟s servant are „Ipso facto‟ dismissed.
The official Receiver (of the court in question) becomes the principal liquidator of the company
until he or another person becomes liquidator.. section 236.
A Receiver is not under personal obligation to discharge debts even though incurred after date of
his appointment, unless he exceeded his authority or expressly agreed to accept personal liability.
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Special Manager
Upon an application by the official Receiver, a special manager may be appointed, acting as
liquidator, whether provisional or not, by courts. Such an application may be if the official
receiver is satisfied that the nature of the company‟s business or interests of the creditors or
contributories generally require the appointment of special manager other than himself.
The courts usually appoint the manager for a fixed period, with such powers (including any of
the powers of a receiver and manager) as they think fit. The special manager must give such
security as the official receiver. As per section258, the remuneration of the special manager is
fixed by the courts.
Official Receiver as Liquidator
Anybody may be a liquidator except a body corporate. The court is empowered by section 235 to
appoint a provisional liquidator at any time after presentation of a petition and before winding up
order is made.
Once the winding up order is granted, the official receiver by virtue of his office becomes „ipso
facto‟ a provision liquidator until a liquidator is appointed i.e. Section 236.
Duties of Official Receiver
It is provided under section 232 that an official receiver as provisional liquidator can call on the
directors to furnish him with statement of the company‟s affairs, which has to be made out in
accordance with a statutory form and verified by affidavit. This report must be submitted within
fourteen days after the appointment of a provision liquidator; unless the courts otherwise order.
A director refusing to make out a statement may be liable to a fine.
This statement must show;-

a) The particulars of assets, debts, and liabilities of the company.
b) The names, residence and occupation of its creditors;
c) The security held by them and the dates when they were given; and such other
information as may be required.
The above statement must be submitted and verified by affidavit;
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a) By one or more directors and the secretary of failing that;
b) By persons who are or have been officers, or were engaged in the formation of the
company within the past years, or in its employment during such time.
Report By Official Receiver
It is provided under section 233(1) that where a winding up order is made, the official receiver
must, as soon as practicable after the receipt of the statement of affairs, submit a preliminary
report to the courts.
a) As to the amount of capital issued, subscribed and paid up, and the estimated amount of
assets and liabilities;
b) If the company has failed, as to the cause of its failure; and
c) Whether in his opinion, any further inquiry is desirable as to any other matter relating to
the promotion, formation of failure of the company or the conduct to its business.
First Meeting of Creditors and Contributories;
An obligation is imposed on the official receiver by section 236(1) to convene separate meetings
of the;-
a) Creditors; and
b) Contributories of the company to find out whether they would like to appoint a liquidator
in the place of the official receiver.
Unless otherwise directed by the courts, the meetings of creditors and contributories (referred to
as the first meeting) must be held within sixty days after the winding up order (i.e. Rule 109 of
the Companies Winding up Rules).
In convening such meetings, the official receiver must give at least seven days notice of the time
and place appointed for such meeting to each office of the company who in his opinion ought to
attend such meetings. The notice may however, be delivered personally or sent by post as may be
expedient (Rule 113).
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Rule 114 requires that the official receiver must send to the creditors and contributories a
summary of the company‟s statement of affairs, including causes of its failure, and any
observation thereon he may think fit to make. But the meetings are not invalidated by reason of
any summary or notice not having been sent or received beforehand.
Rule 121 provides that where a meeting is summoned by the official receiver (or the liquidator)
he or his nominee is chairman at the meeting.
The objects of these meetings are to find out-
a) Whether they (creditors and contributories) desire a liquidator of their choice to be

appointed in place of the official receiver as liquidator.
b) Whether there shall be a committee of inspection, if so of whom it shall consist i.e.
section 248. if there is divergence of opinion, the courts are to decide where a person
other than official receiver is appointed as liquidator, the court fix his remuneration i.e.
section 238. He is required to notify his appointment to the registrar and give security to
the satisfaction of the official receiver.
Powers of the Liquidator
As soon as a winding up order is granted, or a provisional liquidator is appointed, he will take

into his custody or under his control all the property of the company and the things in action i.e
the rights of the company enforceable by courts as per section 239. on the authority of section
241, the liquidator may with the leave of the court or committee;-
a) To institute or defend suits and other legal proceedings, civil or criminal, in the name of
the company.
b) To carry on the business of the company so far may be necessary for the beneficial
winding up of the company.
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Dissolution of the Company
When affairs of the company have been completely wound up, the courts will, if the liquidator
makes a application on that behalf, make an order dissolving a company, and the company is
dissolved from the date of such order.
The liquidator must within 14 days deliver a copy of the order to the registrar for registration.
Contraventions may render the liquidator liable to a fine of up to 100 shillings for every day
during which he is in default.
VOLUNTARY WINDING UP
Voluntary winding up means, winding by members or creditors of a company without

interference by the court, a company can be voluntarily wound up when its members resolve by
special resolution that it cannot, by reason of its liabilities, continue its business and that it is
advisable to wind up.
If the director after a full investigations believes that the company will be able to pay its debts in
full with interest within 12 months from the commencement of the winding-up the liquidation is
a „members‟ winding up.
If no declaration of insolvency is made, the liquidation becomes a creditors voluntary winding

up. In this case a creditors‟ meeting must be summoned and the liquidator must attend the
creditors meeting and give a report on any exercise of its powers.
In a voluntary winding up, the property of the company is to be applied first in paying the
preferential debts, then satisfaction of liabilities and lastly, it is distributed amongst the members
according to their rights and interests as determined by the articles.
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The object of voluntary winding up is the company, i.e. members as well as the creditors are left
free to settle their affairs without going to the court. They may, however, apply to the court for
any directions, if and when necessary.
Accordingly, section 271 provides the circumstances in which a company may be wound up
voluntarily:-
When the period fixed for the duration of the company has. come to an end, or an event upon
which a company is to be wound up has happened
When the company has in a general meeting passed a resolution which may be an ordinary
resolutions unless the articles provides otherwise.
a) If the company (for any reason whatever passes a special resolution to winding up
voluntarily.
Types of voluntary winding up

There are two kinds of voluntary winding up.
These are;-
a) Members‟ voluntary winding up.
b) Creditors‟ voluntary winding up.
Members Voluntary Winding up

In a voluntary winding up of a company, if a declaration of its solvency is made, it is a members‟
voluntary winding up. The declaration shall be made by a majority of the directors at a meeting
of the Board that they have made a full inquiry into the affairs of the company and that having
done so, they are of the opinion;-
a) that the company has no debts; or
b) that it will be able to pay debts in full within twelve months from the commencement of
winding up.
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Such declaration is ineffective unless;-
a) it is made within thirty days immediately preceding the date of passing of the resolution
and is delivered to the registrar for registration before that date;
b) it is embodies a statement of the company‟s assets and liabilities at the latest practicable
date before the making of the declaration.
Therefore, it is very necessary that the declaration of solvency is made before the general
meeting passing the resolution for winding up, such declaration cannot be made after the general
meeting.
Declaration of solvency
Declaration of solvency is solemn declaration made by a director declaring that the company is
solvent and able to pay all its debt in full within a period of twelve months. The shareholders
may then appoint a liquidator to proceed with the liquidation of the company.
If a subsequent date appears that a director has made the declaration of solvency without
reasonable grounds for this opinion he may be liable to imprisonment up to 12 months or to a
fine up to twenty thousands shillings or both.
Appointment of Liquidator
Section 287 empowers the creditors and the company at their respective meetings to nominate a
liquidator for the purpose of winding up the affairs and distributing the assets of the company.
If the creditors and the company nominate different person, the nomination of the creditors will
prevail, subject to an application to the courts. But if the creditors do not appoint any person as a
liquidator, the person as a nominated by the company will be the liquidator.
The liquidator must within 14 days of his appointment publish in the gazette and deliver to the
registrar of companies notice of his appointment in the form prescribed by the registrar, section
299.
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When a liquidator is appointed, he must dispose off the companies business and all its assets to
the best advantage, and out of the money which he receives he must pay the debts of the
company.
WINDING UP SUBJECT TO SUPERVISION OF COURT
Many companies end their activities in voluntary winding up by one of the two forms of
liquidation outlined above.
But in addition to those two forms, the winding up of a company may take place under the
supervision of the courts.
Section 304 provides that when a company has passed a resolution to wind up voluntarily, the
courts may order the continuation of voluntary winding up subject to their supervision on any
terms or conditions.
The liquidator will continue to exercise all powers subject to any restrictions laid down by the
courts.
A petition for the winding up of the company subject to the supervision of the courts may be
presented by any person entitled to petition for the compulsory winding up. But before the courts
make or refuse a supervision order, they must call a meeting for ascertaining the wishes of
creditors and contributories i.e. section 336.
Note: the courts will usually be invited to supervise a voluntary winding up if there is a
substantial dispute between the company and the creditors, especially where they disagree over
the appointment of a liquidator.
Effect of Supervision Order.

If an order for winding up under courts supervision is made, the liquidator proceeds to winding
up the company in the same manner as if the liquidation were an ordinary voluntary liquidation,
exercising without sanction those powers which an ordinary liquidator in a voluntary winding up
Page 96 of 98

may ordinarily exercise without sanction but the powers for the exercise of which such
liquidation would require sanction may be exercised only with the sanction of the courts or the
committee of inspections, section 308
In all types of winding up discussed above, the ultimate result is that the assets of the company
are sold, the proceeds distributed to the creditors and if any is left, then the same is given back to
the members as a return of their capital.
Finally, the company‟s name is removed from the register of companies kept by the Registrar.
Preferential Payment
Section 302 provides that the company‟s assets must be used to pay all costs.
Charges and expenses properly incurred in the winding up including the liquidation.
This applies to all types of winding up.
The above charges and expenses ranks in priority to all other claims.
If the assets are insufficient to satisfy all the liabilities, the courts may make any order as to the
payment of those costs, charges and expenses in such order as they deem fit.
Then the preferential creditors must be paid.
Under section 311, the following preferential payments are required to be made in priority to all
other debts, and such debts rank „pari passu‟ i.e. equally amongst themselves and are required to
be paid as full unless the assets are not enough to meet them, in which case they abate in equal
proportions;-
a) All government and local rates payable within 12 months before the date of winding up
order.
b) All government rents not more than one year in arrear.
c) Wages or salary of any clerk or servant for services rendered during four months
preceding the relevant date not exceeding four thousand shillings; and similarly for wages
of any workman not exceeding the said amount.
d) All amounts due in respect of any compensation under the workmen‟s compensation Act,
which have accrued before the relevant date.
Page 97 of 98

Finally, any proceeds left may be given to the shareholders and if any portion remains
unclaimed, it goes to the Public Trustee as „Bona Vacantia‟ i.e. ownerless property.
Revision question
1. Distinguish between (a) Winding up and dissolution.

(b) Winding up and insolvency
(c) Member‟s and creditor‟s voluntary winding up.
(d) Voluntary and compulsory winding up.
2. Explain under what circumstances a company be wound up voluntarily and by the court.
3. Who is an official liquidator?
4. Discuss the term “declaration of solvency”
Further reading;
Compare the various types of winding up and see if they are relevant in Kenyan courts.
Page 98 of 98

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Understanding Company Law Basics

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www.elab.co.ke www.elab.co.

Welcome and enjoy your journey of discovery.

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By the end of the lecture, the student should appreciate;

Appreciate; legal principles relating to the nature and registration of companies.

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Lord Justice Marshal

1.4 NATURE AND CLASSIFICATION OF COMPANIES

1.4.1 Introduction to corporate personality

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1.4.2 Separate legal personality

1.4.3 Characteristics of a company

(i) Artificial Legal Person

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(iii) Perpetual succession

(v) Limited liability

(vii) Capacity to sue and be sued

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1. “A company is an artificial person created by law with a perpetual succession and a

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2.1.1. Chartered companies

Characteristics of chartered companies

- Company was created under a mere grant of a charter by the crown.

2.1.2. Statutory companies

A statutory company is formed by a specific Act passed by parliament as a means of conferring

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2.1.3. Registered companies

A registered company is formed by registration under the Companies Act.

2.2. Classification of registered companies.

Companies are formed for different purposes.

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2.2.2. Companies limited by shares

2.2.3. Company limited by guarantee

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2.3 Public and Private Companies.

2.3.1. Private company

A private company is that which, by its articles of association

2.3.2. Public company

A public company is one which:

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1. Explain what is meant by;

(a) Companies limited by shares

(b) Companies limited by guarantee

(c) Unlimited companies

2. Differentiate between a private and public company?

3. Discuss the statutory and registered companies.

Compare companies with other forms of associations available in Kenya.

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3.1.1. REGISTRATION AND FORMATION OF COMPANY

Registration is the condition precedent to the formation of a registered company.

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1. The Memorandum of Association

The memorandum of association must specify

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3.1.2. Registration of Private Company

The effect of registration

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Facts of the case;

In this may he became the sole beneficial owner of the company.

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3.2.2. Limited liability

3.2.3. Perpetual succession

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