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Unformatted text preview: COMPANY LAW PART II CPA SECTION 3 CCP SECTION 3 CS SECTION 3 STUDY TEXT COMPANY LAW KASNEB SYLLABUS CONTENT PAGE 1. NATURE AND CLASSIFICATION OF COMPANIES………….…….……………….…… 5 ­ Types of companies ­ Nature and characteristics of a company ­ Classification of companies ­ Principle of legal personality and veil of incorporation ­ Distinction between companies and other forms of business associations 2. FORMATION OF COMPANIES…………………………………………………..…..……….31 ­ Promoters and pre­incorporation contracts ­ Process of forming a company ­ Memorandum and articles of association ­ Certificate of incorporations ­ Legal consequences of incorporation 3. MEMBERSHIP OF A COMPANY…………………………………………..………………….62 ­ Acquisition of membership ­ Register of members ­ Rights and liabilities of members ­ Cessation of membership 4. SHARES……………………………………………………….…………………….……………..80 ­ Classes of shares ­ Variation of class rights ­ Share warrants and certificates ­ Issue and allotment ­ Transfer and transmission ­ Mortgaging and charging of shares 5. SHARE CAPITAL………………………………………………………………..………………122 ­ Meaning and types of share capital ­ Raising of share capital ­ Prospectus / Information memorandum ­ Maintenance and Alteration of capital ­ The purchase by a company of its own shares ­ Financial assistance by a company for purchase of its shares ­ Dividends 6. DEBT CAPITAL………………………………………………………………………………...152 ­ Borrowing powers of a company ­ Debentures ­ Charges ­ Registration of charges ­ Remedies for debenture holders Contact: 0707 737 890 Page 2 COMPANY LAW 7. COMPANY MEETINGS…………………………………………………………..…….………..173 ­ Nature and classification of company meetings ­ Essentials of meetings ­ Proceedings at meetings ­ Voting ­ Resolutions ­ Minutes 8. DIRECTORS…………………………………………………………………..…….…………….197 ­ Qualification and disqualification ­ Appointment of directors ­ Powers and duties of directors ­ Removal and vacation of office ­ Register of directors ­ Loans to directors ­ Compensation for loss of office ­ Disclosure of director's interest in contracts ­ The rule in Turquand's case/ lndoor Managernent rule ­ Insider dealing 9. COMPANY SECRETARY……………………………………………………….………………226 ­ Qualification, appointment and removal ­ Powers and duties of the company secretary ­ Liability of the company secretary ­ Register of secretaries 10. AUDITORS………………………………………………………………………..….…………..230 ­ Qualification, appointment and removal ­ Remuneration of auditors ­ Powers and duties ­ Rights and liabilities 11. COMPANY ACCOUNTS,AUDIT AND INSPECTION……………………..……..……….238 ­ Books of accounts ­ Form and content of accounts ­ Group accounts ­ Director's report ­ Auditor's report ­ Investigation of company affairs ­ Appointment and powers of inspectors ­ Inspector's report ­ Annual returns 12. CORPORATE RESTRUCTURING………………………………………….……………..248 ­ Need for restructuring ­ Mergers, Take­overs and Acquisition ­ Post Merger Reorganisation ­ Schemes of Arrangement and Compromises Contact: 0707 737 890 Page 3 COMPANY LAW ­ Reconstruction 13. CORPORATE INSOLVENCY………………………………………………………………254 ­ Meaning of Insolvency ­ Types of winding up ­ Appointment, powers and duties of liquidators ­ Release of liquidators ­ Rights of parties in winding up ­ Distribution of assets ­ Offences relating to liquidation 14. COMPANIES INCORPORATED OUTSIDE KENYA………………………..………....270 ­ Process of registering a company in Kenya ­ Certificate of registration ­ Power to hold land ­ Registration of charges ­ Accounts of foreign companies ­ Service of process and notices on foreign companies ­ Returns ­ Cessation of business ­ Penalties 15. EMERGING ISSUES AND TRENDS Revised on: November 2016 Contact: 0707 737 890 Page 4 COMPANY LAW TOPIC 1 NATURE AND CLASSIFICATION OF COMPANIES Introduction This chapter starts by appreciating that besides the company there are other forms of business associations, such as cooperatives, partnerships and sole proprietorships. It then distinguishes these other forms of business associations from the company, which is our main focus. The chapter then goes ahead to look at the law governing other forms of business associations with special attention to cooperative societies Key definitions Sole proprietorship: Simplest form of business what is also called one man business Partnership: A business owned by a minimum of two and a maximum of twenty people Cooperative: An association in which people pool their resources for their common good Incorporated association: An artificial person that has a legal identity Limited liability: This is a company whereby any liability members in times of liquidation of the company is limited to the amounts if any unpaid on member’s shares TYPES OF COMPANIES There are different types of companies which are based on the basis of formation, liability ownership, domicile and control. 1. Types based on the basis of formation or incorporation. a ) Chartered companies. Companies which are incorporated under special charter issued by the head of state e.g. Chartered Bank. b) Statutory companies. Are Companies which are incorporated by a special act of parliament. The activities of such companies are governed by their respective acts and are not required to have any memorandum or articles of association. c) Registered companies Are those companies incorporated through registration under the companies act. Contact: 0707 737 890 Page 5 COMPANY LAW 2. Types of companies based on the basis of liability a) companies with limited liability Are companies where capital is divided into shares and liability of members is a company limited by shares. Others are limited by guarantee where shareholders promise to pay a fixed amount to meet the liabilities of the company in the case of liquidation. b ) Companies having unlimited liability. They do not have any limit on the liability of members as in the case of partnership. 3) Types of companies based on ownership. a) Government companies. Are companies where at least 51% of the paid up capital has been subscribed by the government. b )Non-governmental companies. If the government does not subscribe a minimum of 51% of the paid up capital, the company will be a non­governmental company. 4.Types of companies on the basis of domicile a ) National companies It’s a company which is registered in a country by restricting its area of operations within the national boundary of that country. b) Foreign companies. Are Companies having business in a country but not registered in that country. c) Multinational companies They have their presence and business in two or more countries 5. Types of companies on the basis of control. a) Holding companies These hold all or majority of the share capital in one or more companies so as to have a controlling interest in such companies. b) Subsidiary company Is a company which operates its business under the control of another company i.e. holding company. Contact: 0707 737 890 Page 6 COMPANY LAW NATURE AND FORMATION OF A COMPANY The term company is used to describe an association of a number of persons, formed for some common purpose and registered according to the law relating to companies. Lord Justice Lindley defines a company as follows: "A company is means an association of many persons who contribute money or money's worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share." Justice Marshall defines a company as an artificial being, invisible, intangible, existing only in contemplation of the law. Being a mere creation of law, it possesses only the properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. Section 2 (1) of the Companies Act (cap 486) provides that “a company means a company formed and registered under this Act or an existing company”. Existing company only means a company formed and registered under any of the repealed ordinances. For the purposes of Companies Act of Kenya, a company: ­ a) b) c) d) e) A registered company under the Companies Act. An existing company. An unregistered company covered under section 357­364of the Companies Act. A produce company covered under section 388of the Companies Act.. A foreign company covered under section 365­381of the Companies Act.. The main objects and purpose, of statutes relating to companies are as follows: 1. Encourage investments in companies by providing certain facilities, such as limitation of liability, transferability of shares. 2. Ensure due and proper administration of the funds and assets of companies in the interest of the investing public. 3. Prevent malpractices by directors and managers. 4. Arrange for investigation into the affairs of companies and provide for effective audit in dealing with cases of dishonesty and fraud in the corporate sector. The formation, management and winding up of a company in Kenya is governed by the Company’s Act Cap 486 of the Laws of Kenya. The company legislation in Kenya owes its origin to the English company law. The Companies Act of Kenya which came into force on 1st January 1962 is based on English Companies Act of 1948.This Act is still applicable together with later amendments. The Act provides a basic legal framework for the regulation of companies in Kenya. It makes provision for the legal incorporation of companies and lays down rules for their constitution, management and winding up. Apart from the Companies Act, there is also case law which has been developed by the courts such doctrines of ultra vires. The case law and companies practice have developed so many rules which are useful for filling in the gaps which have not been provided by the Companies Act. Contact: 0707 737 890 Page 7 COMPANY LAW Features of a Company The principal characteristics of an incorporated company can be summarised as follows: 1. Registration A company comes into existence only after registration under the Companies Act. However, a statutory corporation is formed and commences business as notified or stated in the Act as passed in the legislature. In case of partnership, registration is not compulsory. 2. Voluntary Association A company is an. association of many persons on a voluntary basis. Therefore a company is formed by the choice and consent of the members. 3. Legal personality A company is regarded by law as a single person. It has a legal personality. This rule applies even in the case of “one­man company” such as in the case of Salomon v. Salomon & Co. Ltd. Salomon had a business in boot manufacture. He formed a company called Salomon & Co. (with himself, his, wife daughter and 4 sons as shareholders) and transferred to it his business. As consideration for the transfer he received the major portion of the shares of the company and debentures for £ 10,000. Later on, the company went into liquidation. Salomon, as a debenture holder, claimed to be a secured creditor and demanded priority in the payment of £ 10,000, out of the assets of the company. The unsecured creditors of the company objected on the ground that the business really belonged to Salomon and he should not be allowed to claim as a secured creditor. It was held that Solomon as an individual, was quite distinct from Salomon & Co. and he could therefore be a secured creditor of the company, even though he happened to hold the majority of the shares. 4. Contractual capacity A shareholder of a company, in its individual capacity, cannot bind the company in any way. The shareholder of a company can enter into contract with the company and can be an employee of the company. 5. Management A company is managed by the board of directors, whole time directors, managing director or manager. These persons are selected in the manner provided by the Act and the Articles of Association of the company. A shareholder, as such, cannot participate in the management. 6. Permanent Existence A company has a continuous existence. Old shareholders may go and new ones may join; the death, bankruptcy or insanity of a shareholder does not affect the existence of the company. This means that its life is independent of the life of its members. The change in the membership of the company does not affect its continuity. The company continues its operations so long as it fulfills the requirements of the law under which it has been formed. Contact: 0707 737 890 Page 8 COMPANY LAW 7.Registered Office A company must have a registered office where it carries out its day to day business dealings 8.Common Seal A company being an artificial person cannot sign documents. The law has provided for the use of a common seal, with the name of company engraved on it, as a substitute for its signature. No document issued by the company shall be binding on it unless it bears the common seal, which is duly witnessed by at least two directors of the company. 10.Limited Liability A shareholder shall be liable to contribute towards the debts of the company during its life or during winding up only at the extent of shares taken by him and only to the balance of shares taken by him or up to the guarantee given by him or both. Members cannot be asked to pay more than what is unpaid on the shares of the company held by them even though the assets of the company are not sufficient to satisfy the claims of creditors in the event of winding up. The personal property of a shareholder cannot be attached for the debts of the company if he holds a fully paid up share. 11. Transferability Members of public limited company are free to transfer their shares to anybody. Shares can be sold and purchased through the stock exchange. However, in a private company the articles may restrict such transfer. 12. Statutory Obligations A company is required to comply with various statutory obligations regarding management such as filing balance sheets, maintaining proper account books and registers etc. 13. Artificial Legal Person A company is an artificial person because it is a creation of law. It does not take birth like a natural person but it comes into existence through law. It exists in the eyes of the law and cannot act on its own. It has to act through a board of directors elected by shareholders. It was rightly pointed out in Bates v. Standard Land Co. that: “The board of directors is the brains of the company, which is the body and the company can and does act only through them.” Although a company is an artificial legal person, it enjoys all the rights of a natural person. It has the right to acquire and dispose of the property, to enter into contract with third parties in its own name, and can sue and is sued in its own name. 14. Residence A company has a residence (for taxation and other purpose). A company does not possess any fundamental rights. 15. No Fundamental Rights: Though a company has no fundamental rights, it can challenge a law as void if the law happens to violate fundamental rights of citizens. In order to succeed, the company must prove that the impugned law is expropriatory of a citizen’s property. Contact: 0707 737 890 Page 9 COMPANY LAW 16. Separate Legal Entity Companies Act provides for a separate legal existence from its shareholders. From the date of incorporation as mentioned in the certificate of incorporation, a body corporate by the name contained in the memorandum is formed. Such a body corporate is capable of having perpetual succession, power to hold land, has a common seal with liabilities of its members limited as per the provisions of the Act. 17. Capacity to Sue and be Sued The suits of the company are suits of the company, and not of the shareholders. Therefore in case of suits for the company, the company is the proper plaintiff and where the company is sued, it is the proper defendant. CLASSIFICATION OF COMPANIES The various types of companies that the law recognizes in Kenya are covered under the Companies Act which allows the formation of the three types companies. These are;­ A company formed and registered under the companies Act Cap 486. These are referred to as registered Companies. A company formed under any other Act of parliament that is called Statutory Company. A company formed by the grant of letters patent or a charter. These are called Chartered Companies. It means that the companies may be classified as under: 1. Corporations aggregate. 2. Corporations sole 3. Statutory corporation 4. Registered company or incorporated companies 5. Unregistered company 6. Charted companies 7. Private companies 8. Public companies 9. Foreign companies 10. Subsidiary company 11. Holding company Companies are classified into the following categories 1. Corporations Aggregate Corporations aggregate consist of two or more persons united in a society, which is preserved by a succession of members, either forever or till the corporation is dissolved by the power that formed it. Corporation aggregate can be dissolved by the death of all its members, by surrender of its charter or franchises, or by forfeiture. Such corporations are the mayor and aldermen of Contact: 0707 737 890 Page 10 COMPANY LAW cities, the head and fellows of a college, the dean and chapter of a cathedral church, the stockholders of a bank or insurance company. 2. Corporations Sole Corporations sole, consist of only one member at a time, with the corporate character being kept up by a succession of solitary members over time. Corporation sole are always holders of a particular office. For example the office of the presidency, the office of public trustee, the office of the bishop, the attorney general’s office the chief justice office. 3. Statutory Corporation These companies are incorporated by a special Act passed by the parliament. The constitution and functions of such companies are laid down by the Act of Parliament or any state legislature of Kenya Such companies are generally formed to carry out some special undertakings. The government owns these companies and the main objective of these companies is to provide some necessary services for the benefit of the entire country. These companies are generally formed to meet social needs and not for the purpose of earning profits.Such companies can only carry our functions for which it was created. Statutory companies do not have any memorandum or articles of association. They don’t use the word ‘limited’ as part of their name .They derive their powers from the Acts constituting them. Alterations in the powers of such companies can be brought by legislative amendments. The capital of statutory corporation is raised through borrowing of grants from treasury. Its profits are injected back to the corporation or paid to treasury as dividends. A statutory corporation cannot be dissolved. It is only dissolved on the repeal or revocation of the parent statute. Some examples if statutory companies in Kenya include: 1. Kenya Railways. 2. Kenya Post and Telecommunications Corporations. 3. Kenya Power 4. Kenya Ports Authority 4. Registered Company or Incorporated Companies A company must be registered under the Companies Act. After registration, the registrar of the companies issues a certificate of incorporation. Such companies come into existence only when they are registered under the Act and the registrar has issued a certificate of incorporation. Such companies derive their powers from the Companies Act and the memorandum of association. Private persons usually form these companies. Registered companies may be further classified as under: a) A company limited by shares. b) A company limited by guarantee. c) An unlimited company. Contact: 0707 737 890 Page 11 COMPANY LAW a) Company Limited by Shares A company having the liability of its members limited to the value of shares held by them is called a company by limited shares. If a member...
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