CO-OPERATIVES AND PATNERSHIPS LAW

The law of partnerships

1. INTRODUCTION AND NATURE OF PATNERSHIPS

DEFINITION

Partnerships maybe defined as a business association that comes into existence when two or more persons come together in the form of a firm.

It has been defined under section 3 of the PARTNERSHIPS ACT to mean, the relation that/which subsists between persons carrying on a business in common with a view of profit.

s.4 & s.28

From that definition under s. 3, it may be said that partnerships comprises 5 components all of which must exist at the same time:

1. There must be a relationship- that relationship must be brought into existence through a process that is not unlawful, most commonly through the process of contract.

2. The relationship must involve two or more persons –

3. Those two or more persons must carry on a business i.e. there should be no other reason other than the carrying on of the business that makes those persons to enter into a relationship. Business is defined very broadly to include every profession, trade or occupation

4. That business must be carried on in common. That it must be carried on by all the partners or the section for the benefit of all the others.

5. The business must be carried on with a view to profit. The only reason why partners should carry on the business is so that they may make profit. The making of profit is so fundamental that if the partnership makes losses for a consecutive period of 12 months then it is liable to be dissolved even by an order of the court. The fundamental position that profit occupies is historically entrenched so that in the olden days any business whose profits were shared amongst or between two or more persons would be considered the partnership and all those who took a share of the profit could be considered partners. With time that position was found to be too strict because it could lead to an absurdity where a person could be considered a partner in business even without his knowledge or intention.

From the latter part of the 19th century there was witnessed change in the law. The change insisted that the determination of whether a person is a party in any business should depend not only on the sharing of the profits but mainly on the real intention of the parties. 

That change was expressed in the case cox v Hickman where the court explained as follows “although a right to participate in profit is enough indication of partnerships and though they are mainly cases where from such participation alone, partnership could be inferred yet whether that relation does or does not exist must depend on real intention of the parties not upon that one term which provides for participation in profits.

The changed law is what is enacted in section 4 of Kenya’s partnership Act cap 29. That section has been judicially interpreted in the case of Davis v Davis. The court explained that the real meaning of section 4 is that if the sharing of profits is the only factor to be considered in determining whether or not partnerships exist or whether or not a person is a partner in business then it may still be possible that the sharing of profits may constitute of profit. But if there exist other factors which may also be taken into consideration, then those factors too must be keenly taken take into consideration and the real intention of the parties must be given supremacy

Paragraph (c) of section 4 then proceeds to set out a list of persons who will not constitute partners even though they may take a share of the partners. The list is as follows;

1. Orphans or a widow of deceased persons who receives a share of the deceased person by way of annuity does not by that fact alone become partner.

2. An employee or a servant who receives a share of the partnership profit by way of his remuneration or wages does not become a partner in the business. It’s more of a compensation even though from the good will of the business does not become partner in the new business because the price of the good will have been paid out of the profits of the new business.

3. The person who is repaying his debt out of the profits of the business does not become a partner as long as the payment is done in installments.

4. The person who has advanced a loan to a business and who is being repaid his loan out of the profits of the business does not become a partner provided the loan agreement was reduced into writing. Case of Re Forte ex parte Schofield held that if the loan agreement is not reduced into writing then whoever who advanced the loan may be considered.

End

28th May 28, 2015

COMPARISON BETWEEN COMPANIES AND PARTNERSHIPS.

1.  The legal regimes that governs partnerships different from that that governs companies and partnerships vary in that….partners are governed by the partnerships act and the limited liabilities partnerships act of 2011

Those 3 regimes of law prescribe significantly different regulations to govern the different business associations.

As regards partnerships, the general outlook of the partnerships is that they are essentially contractual and they are to be governed by the terms of the contract the parties may have entered into. But the limited liability partnerships act has now introduced rather strict regulations to govern partnerships that are categorized as limited liability partnerships.

As regards companies, the companies act prescribes detailed rules which may lead to the dissolution of a non-compliant company.

2.  THE MODE OF FORMATION OF COMPANIES defers from that of partnerships. With regard to companies as well as limited liability partnership, both the companies act and the limited liability partnerships act requires that they must be formed formally in writing and the company must have issued to it a certificate of registration. (The two coincide in that they must be formal in writing)

Ordinary partnerships on the other hand do not have strict rules of formation; the partners are totally free to decide on how to form their partnerships, they may form it in writing in which case the agreement that they enter into becomes known as the partnership deed. 

Alternatively, they may form it informally through an oral agreement and it may even be inferred from their conduct. (May contain any terms that the partners may deem fit)

3.  Number of members differs. In partnerships the minimum number allowed is 2 and the maximum number allowed is 20. 

In companies on the other hand, if it is private company the minimum is 2 and a maximum of 50. If it’s a public company, the minimum is 7 and the maximum is unlimited.

4.  Once a company is incorporated, it acquires its distinct legal personality. As per the case of salmon v salmon. Company has its own personality distinct from that of partners. The same applies to the limited liability partners. S. 6 of the limited liability partnerships act.

On the other hand ordinary partnerships do not acquire separate legal personality, they remain one and the same thing with the partners (remain one thing with the owners)

5.   MANAGEMENT

In companies, the management is not placed in the hands of shareholders (in their capacity as shareholders)

On the contrary management is placed on the hands of a distinct body known as board of directors who do not have to necessarily be shareholders.

On the other hand, ordinary partnerships; management is vested as a matter of rights in the hands of partners themselves. If it is an ordinary partnership then the partners are deemed to be two things in one i.e. they are owners and manager, both, at the same time.

But if it is an LLP, the LLP act requires that the partners must appoint a manager under s. 27of the act; that must be a minimum age of 18.

6. LIABILITY 

In companies, liability of the shareholders (members) for 3rd party debts is always limited unless the company is registered with unlimited liability. But in partnerships, it depends on whether the partnership is an LLP or an ordinary partnership. If it is an LLP then the liability of members is limited but if it is an ordinary then there is no liability to members, meaning that the partner to an ordinary partnership is liable up to the last cent.

7. Agency

In partnerships which are not LLPs (ordinary partnerships), each partner is considered to be an agent of each of his co-partners in respect of any business relating to the partnership. And in that regard of that any transaction that he enters into will be binding to each of the partners and also binding on the partnership firm. 

But if it is an LLP then the transactions of the partners are binding on the partnership firm but not on the individual owners. 

In companies on the other hand, no member or shareholder has the right to bind other shareholders or the company with other shareholders of the companies with his own transactions.

8.  Transferability of shares

in companies the share that the shareholder possesses or own is fairly easily transferable, if it is a private company then all that is required is the consent of the board of directors but if it is a public company then no consent is required for sale of shares and those shares can be freely transferable to the market e.g. the Nairobi stoke exchange

On the other hand shares are not easily transferable. If it is an ordinary partnership, the transfer of shares operates only to give the transferee financial benefits that the transferor would have been entitled to but does not give him the full rights of the partner. It is required that all the other partners must give their consent to the transfer. 

A transfer in a partnership normally operates like an assignment.

9.  Winding up

For companies, the life of a company must be brought to an end formally in accordance with the provisions of the companies act either through the process of voluntarily winding up or compulsorily winding up.

In partnerships however, only LLPs are required to dissolve or wind up in accordance to rules of the LLPs act. But if it is an ordinary partnership, the rules of winding up are usually not vigorous so that if the partnership was formed informally then it may even be wound up by the conduct of one partner or through the expression of the will of only one partner. (Case of Mohammed v. Hussein; from company law)

1. PARTNERS

1. Who is a partner?

The partnerships act does not define the word partner. But a partner may be defined as any person who is a member of a partnership. For one to become a member of a partnership, there are no detailed rules, the only requirements is that he must have the capacity to enter into contract.

There are two categories of persons in respect of whom extreme caution must be exercised in respect to who deserves to enter into a partnership contract and those are infants/minors or person of unsound mind.

As regards infants, the following must be born in mind:

1. In the event of liability for 3rd party debts they cannot be held liable for business/trade debts. They may be liable only for debts arising out of supplies of necessaries of the infants.

2. That when the infant reaches the age of majority, he has the option of bringing the partnership to an end by reprieving the partnership agreement. But if he does not reprieve the partnership agreement then he becomes liable the same way as an adult partner from then henceforth. 

With regard to the same persons, the following should be noted:

1. They may enter into partnership agreement only when they are introducing comments

2. Once they enter into the partnerships agreement, then for as long as the partnerships exist, they will be considered to be partners of full capacity and the power to do everything that a company can do.

3. Any person who is in partnership with the person of unsound mind will not escape liabilities for debts and liabilities incurred by the same person unless he can prove that at the time he entered into partnership by the same person he did not know that the person was so insane as not to possess the mental capacity to contract.

4. In practice it is advisable that any person who enters into a partnership contract with a person of unsound mind should secure a provision that limits the contractual authority of that insane person.

2. TYPES OF PARTNERS

There are various types of partners who may co-exist in the same partnership especially if the partnership is an ordinary one. 

1. active or ostensive partners

These are full-fledged partners in the sense that they are involved in everything that the partnership undertakes. They have the right to participate in management. They have a right to vote; the right to actively engage in other business and to share the profits of the business. 

Because of that crucial decision that they occupy the law requires they must give public notice whenever they retire.

2. Dormant /sleeping partners

They merely invest their money into partnerships. They do not get involved actively in the business of the partners. They however have the right to vote in decision making and they have right to receive a share of the profits, but normally their nature of relationships to the other partner is not disclosed to the public.

3. Silent partners

These are partners who invest their capital into the business. They then become entitled to the profits of the business, but they do not have the right to vote to the management decisions.

4. Partners in profit only.

These are partners who invest their profits into the partnership and their after they play no role into the management and also they have no vote; they are entitled only to the profits only without being liable to 3rd parties.

3. NUMBER OF PARTNERS

By virtue of section 386 of the Companies act, if more than 20 persons purport to engage in a business inform of a partnership then the law will consider them to be an illegal entity. That position was expressed in forthhall bakery v wangoe; in that case 45 individuals purported to have engaged in a business and in that capacity as a partnership, they sought to recover a debt owing to them by a defendant. It was held that they were an illegal entity who could not enjoy any orders from the court except the court pointed out that such illegal entities will be given recognition only for purposes of punishment.

Case of smith v Anderson; gives an explanation as to why the law imposes limitation on the maximum number that may form a partnership. That justification is given in the following words “the act was intended to prevent the mischief arising from large trading undertakings being carried on by large fluctuating bodies so that persons dealing with them did not know with whom they were contracting and so might be put to great difficulty and expense which was a public mischief to be redressed.”

28th May 28, 2015

3. Formation of partnerships

Even though there are no strict rules regarding formation of partnerships particularly ordinary, every person seeking to form a partnership needs to bear in mind certain matters:

1. To avoid future complicated conflict as regards the rights and obligation of partners it is always advisable that the partners should conclude their contract in writing  in the form of a partnership deed

2. Partners should ensure that all the essential elements of the contract are present.

3. Parties must exercise caution to ensure that the business they seek to engage in is not illegal and also that there is not prohibition in law for such contracts to be carried on by a partnership. In the event that the business was originally lawful at the commencement of the partnership, if it becomes unlawful during the subsistence of the partnership as a result of the change in the law then the partnership must compulsorily come to an end. The risk of engaging in an illegal business is that the partners will not acquire any rights as against each other and no rights against third parties but 3rd parties acquire rights against the partners in so far as those rights are not tainted in the parties.

4. In selecting partners parties need to exercise caution and select partners with extreme care because partnerships are built on mutual trust and confidence.

5. If the partnership is to be registered as an LLP then section 17 (2) entitles the registrar to refuse to register the partnership if he does not meet the requirements of s. 17

 Under that same section as read together with s. 19 , once an LLP is registered and issued a certificate, that certificate of registration acts as conclusive evidence that the partnerships has complied with the requirements of the law.

4.  THE PARTNERSHIP AGREEMENT.

AIM: LOOK AT WHAT PARTNERSHIP AGREMENT IS SUPPPOSED TO LOOK LIKE

The partnership agreement may take the form of an oral agreement between the parties. It may also take the form of a written agreement in the form of a partnership deed or articles of partnership. 

In the case of an LLP, it must take the form of an LLP agreement. In the absence of an LLP agreement then an LLP may adopt the standard agreement that is contained in schedule 1 of the LLP act.

There are no statutes as regards what should be the exact contents of a partnership deed. The parties are free to agree on any term as they may deem fit.

In the case of an LLP there are basic terms that must be agreed upon and set out. Those terms are provided for under s. 17 (1).

In the absence of an express provision, on any specific issue in the LLP act/agreement then those gaps shall be filled by the provisions of schedule 1.

In addition to the requirements of s. 17, and in the case of any other partnership agreement the basic terms that a partnership agreement should contain include the following:

1. The firm name – is the name under which the partnership will carry on its business. S. 6 of the partnership act provides that once a partnership comes into existence it becomes known as a “firm” and the name under which it carries on the business is known as the ”firm name”. There are no strict rules regarding the choice of firm names. The only requirements are:

1. that the name must not be as identical to that of an existing business as to cause confusion to the public as to the real identity of the firm. 

2. It must also not be crafted in such a way as to fraudulently/deliberately mislead the public. Partners may settle on a name that is a combination of their own individual names or a name that describes the nature of the business. In the case of an ordinary partnership, if they settle on a name which is not a combination of their name then they should have that name registered in the REGISTRATION OF BUSINESS NAMES, CAP 499.

CASES OF ILLUSTRATION HOW CHOICE OF FIRM NAMES CAN AFFECT…

The mere fact that partners are carrying out a business under a firm name does not constitute a ..separate legal  perspective. 

The case of patel v. natural contractors whereby the court held that a firm name is not a name of a legal person. Partners may use it to enter into a contract and they may use it to institute and defame legal proceedings but the contract and the dual proceedings will be construed as though they were individual names of each of the partners. That rule does not however affect LLPs which are recognized as legal entities of their own names. The court pointed out further in that case that a sole trader has no right to enter into a contract or institute or defend legal proceedings in his own name. 

Cases:

Ewing v buttercup margarine co. ltd – in this case, the plaintiff by name Ewing had been carrying on business dealing with margarine under the firm name of buttercup margarine co. ltd. The defendant company got registered more than 50 years later after the firm had started carrying on the business. It was registered under the name buttercup margarine co. ltd. It was also carrying on the same business dealing with margarine. Plaintiff firm instituted an action in court arguing that the name of the defendant was so similar to the name of the firm and that it would mislead members of the public. 

The court agreed and issued an injunction stopping the defendant from using that name. The court pointed out that the continued use of that name would mislead the public into believing that the defendant was a branch or extension of the plaintiff.

Case:

North chesire & Manchester brewery co. ltd v the Manchester brewery co. ltd. In that case, the defendant company had been carrying on business under that name for a period of 8 years then the applicant got registered to carry on the same business their original name was North Chesire Brewery co. ltd. Later they extended their geographical area of operation  and to reflect their extension they changed their name to reflect North Chesire and Manchester brewery co. ltd. 

The court ruled out that north chesire and Manchester brewery co. ltd had selected that name in good faith without any intention to deceive the company but none the less there were high chances that the public would be occasionally be misled as to the real identity of the two companies and so the court issued an injunction stopping them from using that name.

Case of Parke Davis v opa pharmacy ;td …had been carrying on business for 8 years….under the name capsolin. The respondent started carrying on a similar business of marketing the business…on that for the …but it marketed its ointment and name as capsopa. The court held that because of the similarity of the first 4 ..of the tills in which the ointments were marketed happened to get confused and so the respondents were denied the use of that name.

Case of turton v turton: the court ruled… in that case, the plaintiff was called Thomas turton and the defendant was called … turton. The defendant had carried on his business for 9 years under the name “john turton” and later “John turton and co.” later on he admitted two of his sons to become partners of the business and renamed his business as john turton and sons”. Thomas turton who had been carrying on a similar business under the name “Thomas and sons co” moved to court to stop john turton from using that name. The court held that although there was similarity in names and that some members of the public would… be misled, an injunction was…issued to stop john turton from using his own name in business because he is using his name honestly and without any fraudulent intention.

In the case of croft v day…there were two gentlemen, one was known as Charles Bay and the other one was known as Prof…they formed a partnership under the firm name…their physical address was known as 97,Holborn Hill. Later martin transferred his shares to Bay. They continued to run business under Day and….ltd. he carried on the business until he died then the executor of his estate who happened to …who happened to be known as Day assigned to carry on business under the same firm name. he then went out to look for another man by the name martin and incorporated him into the business and so they became partners. They carried on the business under the name Day and martins, gave their physical address as 90 ½ high Holborn. The court held that the be not allowed to use that name because even though it was combination of two individual names, the firm name was mischievously crafted to mislead the public

3rd June 3, 2015

Content of the partnership agreement

2. Nature of the business. It is important that there should be no ambiguity in the nature of the business that the partnership sets to undertake. The nature of the business is important for two reasons:

1. It is important for that business that each partner has…to bind..with its act s or transactions

2. It is only in respect of that business that a partner in an ordinary business is considered to be an agent of both the firm and his properties.

The nature of the business is so important that section 28 of the partnership act requires that it should not be changed except with the unanimous consent of the other partners.

3. The capital of the partnership. That term should specify the amount of capital that the business is setting up with including the exact proportions contributed by each partners and the manner in which those proportions have been contributed. In the absence of an indication in the contribution of each partner then by virtue of section 28 of the partnership act each partner is presumed to be liable to contribute equally. In the event that partners agree to contribute at different proportions it must be specified further whether partners are required to earn interest of their capital, otherwise the general rule remains that partners are not entitled to interest of that business.

4. Division of profit. Under that term the partners should agree on the exact proportions of how they will share the profits of the business. If they will not agree then by virtue of s. 28 of the PA each partner is entitled to an equal share of the profits irrespective of the contribution. 

5. Place of carrying on business. That term should specify the physical address of the business. In the case of an LLP that physical address is known as the registered postal address in regard to s. 31 of the LLP act. It is important for 3 reasons:

1. If any partner is under obligation to keep partnership books/records … then he will be deemed to have discharged the obligation if he keeps those books at that office.

2. If any person desires to keep books or records of partnership, then he is entitled as a matter of right only to inspect them at that office. 

3. If any documents are required to be served against the partnership fund, then they are deemed properly served once they are served at that office. 

6. The duration commencement date and the duration of the business. That term should specify the exact date on which the business commences, the duration for which it will last and the date on which it will come to an end. Those are important because it is the date of commencement of the partnership that also marked the date of commencement of the agency relationship between the partners and the firm in an ordinary relationship and between the firm and the partner in an LLP. That relationship lasts only during the duration of the partnership. The date of end of the business or partnership, may be …by reference to a specific calendar date or by reference to the occurrence of an event or accomplishment of a task. In such cases a partnership will be deemed to have come to an end either on the specified date or upon the occurrence of the event or accomplishment of the task.  In the event in any reason the partnership commences without having fixed the duration or date to which it will come to an end, it becomes known as a partnership at will. Meaning, it remains in existence only for as long as the partners will. Partnerships at will may be brought to an end through the unilateral conduct of one partner or any partner.as in the case of Mohammed v. Hussein (1950) EACA. In that case, the partnership was carrying out business from premises that had been rented out to it by one of the partners. Due to a misunderstanding between the partners, the partner who was the owner of the premises unilaterally decided to throw out the partnership from the premises and as a result of that conduct the partnership was deemed to have terminated (because it was a partnership at will. 

Alternatively the partnership at will may be terminated by any of the partners giving notice to the other of his intention to terminate the partnership. If the partnership was concluded orally then that notice may take any form (oral or written). But if the partnership was concluded in writing then the notice must also be in writing.

In the case of an LLP, S.12 OF THE LLP act requires that the notice must be in writing and for a period not less than 90 days.

7. The account bank account. That term should specify the how the accounting of the business shall be kept including the person who will be responsible and the manner in which it shall be kept. It is important that if the partnership is an ordinary partnership, then the partnership records should indicate how each partner stands in relation to each of his co-partners and also in relation to the firm. In the case of an LLP the records should indicate how each partner stands in relation to the firm.  As regards the bank accounts, it is important that the bank agreement specifies the bank where the partnership agreement will be obtained including the type of account and who the signatories to the account shall be. In the absence of a specified signatory the law presumes each partner has the right to be signatory to the accounts. It is also important that the partnership agreement should specify that all payments to the partnership shall be made to the account and all payments out of the partnership shall be made out of the account. 

Equally important is the requirement of auditing of the books of account. For ordinary partnerships it is not mandatory to audit the accounts, but the partners may agree to have their account audited at specified intervals. 

In the case of LLPs however, the books of accounts must be audited at least once every year and they must have been kept in such a way to make it possible to extract the balance sheet and to prepare profit and loss account.

8. The management. The partners should specify who will be responsible for the management of the partnership firm. In the case of an LLP failure to specify the manager renders the partners guilty of an offence. In the case of ordinary partnerships, failure to specify the manager allows the general rule to set in that each every partner sets in as a manager.

9. The consequences of death and bankruptcy. That term should specify exactly what should happen to the life of the partnership in the event that any partner dies or becomes bankrupt. It is advisable that that term should provide that in the event that a partner dies or becomes bankrupt, the partnership will be deemed to have been constituted and will be continued by the remaining partners. Failure to make that provision will allow the general rule to sets into operation which is that upon the death or bankruptcy of any partner every ordinary partnership stands dissolved. 

And in the case of an LLP the death of any partner dissolves the partnership but the bankruptcy of any partner operates only to prevent the bankrupt partner to become the manager. In case the partners agreed that the partnership should continue reconstituted after the death of any of them, then it is also necessary that upon the death of the partner, the interest of the deceased partner should be ascertained and be paid out to his estate before the reconstituted partnership continues. If that does not happen, then at the time of dissolution of the partnership the interest of the deceased partner will be entitled to an interest at the rate of 8%p.a. 

10. Settlement of disputes. That term should indicate how disputes arising in the future under the partnership should be dissolved and by reference to what system of law. Commonly partnership agreement do provide that any dispute arising should be referred to the arbitrators agreed upon by the partners.   

4TH June 4, 2015

5. Partnerships relations

Relationship between partnerships & third parties.

1. Generally 

The nature of relationship that arises between partnerships and 3rd parties is governed by the law of the agency. The law of agency comes into play because once the partnerships come into existence every partner is considered to be an agent of their partnership firm. 

In the case of an LLP every partner is considered to be also an agent and principal of each of the other partners at the same time.

2. Legal status of partnerships

That nature of relationship is what defines the nature of third party liabilities in terms of section 7 of the partnerships act as well as section 11 of the limited liability partnerships act.

The two sections provide that if a partner in the ordinary course of business enters into a transaction with a third party then that transaction will bind the firm.

In the ordinary partnerships, the transactions will also bind his co-partners. That binding gives rise to liability that operates exactly the same way the liability of the principle operates in the ordinary law of agency. Accordingly the transaction of a partner will only be binding upon his co-partners and the firm if he acted within the scope of his authority. The firm and co-partners will not be bound if he acted either in excess or outside his authority. Also it will not be binding if the third party with whom he transacted had knowledge of the fact that he did not have authority to act. The authority of the partner may take the form of either actual or express authority or apparent or ostensible authority.

It is common to find partnership agreements where the actual authority of a partner has been restricted by for example prohibiting him from entering into certain transactions.

In such cases, the determination of whether the partnerships firm or his co-partners  are bound will depend on whether his transactions was within his ostensible authority. That means that ostensible authority is normally wider than actual authority and it may extend to cover situations where the actual authority has been restricted.

Case Watteau v. Fenwick (1893) 1 QB 346 

In that case the defendants had been a partnership in which they appointed one of them to be a manager. The manager had been given authority to do everything else but he was prohibited from purchasing certain items without involvement of other partners. In contravention of that obligation, he purchased those items from the plaintiff but the price was not paid. The plaintiff brought an action to recover the price. 

The court held that even though the prohibition had restricted actual authority, the items that he purchased were labored by his ostensible authority and so the firm was nonetheless bound to pay the price.

Under s.11 of the partnerships act, the nature of liability that arises in respect of ordinary debts and obligation owing from the partnerships to 3rd parties is categorized as joint liability.

Under s.14 of the partnerships act, if a partner commits or omits a tort then the liability for the tort also binds the partnership firm.

In the case of ordinary partnerships it also binds co-partners. The liability under that section is joint and several liability.

Under s.15 there is also liability categorized as joint and several which arises in the following instances:

1. If a partner in the ordinary course of the business receives property or funds from a 3rd party and then misappropriates it.

2. If the firm receives property or funds or property are misappropriated by either of the partners.

3. NOVATION

S.21 as read together with s.11 of the partnership act is to the effect that the liability of a partner to 3rd party debts and obligations arises from the moment he joins as a partner and ends either on the day he retires from the partnership or the day the partnership is finally wound up. There’s only one exception to that rule and it takes the form of novation. 

Novation is understood to be a tripartite agreement between either the retiring partner on the one hand and the remaining partners and the creditors of the firm on the other hand or between a newly incoming partner on the one hand and the existing partners and creditors of the firm on the other hand to the following effect:

1. That the retiring partner will not be held liable for the debts and obligations incurred while he was still a partner OR 

2. That the incoming partner will be held liable for debts and obligations incurred even before he joined the partnership.

Novation may take the form of either an express or implied form.

By virtue of s.40 of the partnerships act where there is no novation, a retiring partner is required to give notice of his retirement from the firm. Otherwise 3rd parties may be entitled to hold him liable for debts incurred after retirement.

In case of an LLP section 11(3) of the LLP act requires the retiring partner to give notice to the registrar unless the public already has notice of his retirement.

4. Holding out

 Refers to a situation where the person either makes himself to believe or allows others to cause him to believe to be a partner.

It is provided for under s. 18 of the partnerships act. to the effect that any person who represents himself either by written word or spoken word or allows himself or suffers himself knowingly to be represented as partner in a firm is guilty of holding out and if on the strength of such representation a third party gives credit to the firm then he will be held liable for that third party debt and will be held liable in the same way in which a partner will be held liable.

In determining whether a person has suffered/rendered himself to be partner it is mandatory that he must have had actual knowledge that he was being represented. Negligence and recklessness do not suffice.

It is immaterial that the person who was not given actual notice at the particular time he was being represented to a particular third party.

On the basis of holding out it is advisable that whenever one retires from partnership he should ensure that he does not leave behind evidence that may be used to represent him as a partner.

Case: Tower cabinet ltd v. Ingram

There were two partners carrying on the business of dealing with furniture under the business name “Merry’s”. The gentlemen were known as Christmas and Ingram. After some time Ingram retired from the business. Christmas continued to carry on the business under the same name “Merry’s”. About one year after Ingram’s retirement, Christmas wrote a letter to the plaintiffs requesting to be supplied with certain furniture. The furniture was supplied but the price was not paid. The plaintiff brought an action to recover the price and they joined only Ingram as the defendant. The reason they did that was because on the letterhead that Christmas used to request for the supplies the names of two partners had been….namely Christmas and Ingram. It turned out that that was one of the old letterheads that Ingram had forgotten to destroy before he retired. It was held that in the circumstances there was no evidence that Ingram had actual knowledge of the existence of those letterheads and so he had not suffered himself to be held out as a partner with Christmas.

5. Partnerships relations in respect of partners themselves.

The manner in which partners will relate to each other including the rights they acquire as against each other and the duties that they incur towards each other is governed principally by the law of contract. That is because partnerships are essentially considered to be products of contracts. Like every other contract, partnerships contracts are subject to the fundamental doctrine of freedom of contract. Accordingly partners are free to enter into their partnerships agreement on any terms that they may deem fit.

In the event that their agreement omits certain necessary matters the provisions of the partnerships are revoked to fill those gaps. 

In the case of LLPs the first schedule may be involved.

s. 23 of the partnerships reinforces the doctrine of freedom of contracts in so far as the partnerships contract are concerned by abiding that partners are free to modify whatever rights and obligations they have over the partnership agreement and even those that are being derived from the partnership act. 

There’s however one term that the law insists on and the law will read into every partnership agreement. As for that one term, if partners omit to provide on it the law will improve on it. If the partners purport to exclude it the law will consider the partnership agreement to be null and void to that extent. That term is the principle of utmost good faith.

Out of that principle, flows the following 5 duties that the law imposes on every partner:

1. It is the duty to resist from using or abusing the name or its association with the partnership for his own selfish-gain and to the detriment of the firm.

2. In the event that the partnership agreement recognizes that a partner may be expelled from the partnership for breaching their partnership agreement, that power must be used only in good faith but not to oppress the partner who is being sought of be expelled. It is for that REASON THAT section 29 of the partnerships act provides that a majority of the partners may expel another only if the power to do so is expressly provided for in their partnership agreement. 

Refer to the case of Clifford v. Timms(1907) 2 Ch 236.

The parties had been partners in a firm engaged in the practice of dentistry but the plaintiff also a director of another company which was also engaged in the practice of dentistry. In their partnership agreement, partners had agreed that should any one of them engage in an act that amounts to professional misconduct then the other partners would be free to expel him and to eliminate his partnership from him that company from which the plaintiff was a director published an advertisement in the magazine in which among other they made the following two allegations; 

1. That they were the only dentists who always sterilized the equipment before using them on the equipment.

2. That they were the only dentists who had employed a female nurse to be always present and a male nurse to be operating on female patients.

 The partners were aggrieved because of those advertisements and they issued a notice expelling the plaintiff from the partnerships. The court agreed and held that those had painted other dentists in negative manner…and amounted to professional misconduct to which the plaintiff was …by virtue of him having been the director of that company. The court concluded that the partners had properly exercised their power to expel the other.

3.  duty to account

The partner is required to disclose any information that comes to his knowledge and which may affect the partnership

Such information must be disclosed fully and truthfully. 

4.  Duty not to make secret profit at the expense of the firm.

That duty requires that if a partner earns any commission or receives any benefit by reason of association with the partnership and if such commission of benefit is not known to the other partners then he must disclose it to the other partners and where necessary he must surrender it. That duty operates even where a partner sells his own property to the firm. 

5. Although as a general partners are not prohibited from engaging in separate private business, they are under duty not to engage in any business that may compete the business of the firm or any business that may inaccurately suggest that it has a link with the firm. 

6. Partnerships relations in respect of partnerships property

Partnership property occupies a critical place in the life of a partnership. If not properly handled it may lead to the breakup of the …

It is therefore important that all the partners clearly understand what their partnership property is.

Partnership property is defined under s. 24 as comprising in three categories of property;

1. Property that was acquired into the original stock of the partnership

2. Property that has been acquired during the lifetime of the partnership and for the purposes of the partnership.

3. Property that has been acquired on account of the partnership. 

Under s.25 any property purchased under partnership funds is pursued to be partnership property. 

The partnership act at s. 24 implies that partnership property should be used or applied only for the purposes of partnership.

In the same way, s. 27 of the partnership acts provides that no decree may be executed against partnership property unless the decree arises out of the liability of the partnership. The section however also recognizes that if an individual partner incurs his separate liability which has nothing to do with the firm then if a decree accrues out of that liability, then that decree may nonetheless be executed against that individual partner’s share of interest in the partnership share property. But if that happens then under s. 37 of the partnerships act, the other partners have a right to give a notice terminating their partnership with that individual partner.

THE RELATIONSHIP BETWEEN PARTNERS THEMSELVES.

Under s. 28 of the partnership act partners acquire the following rights in their relationships to each other:

1. The right to access, inspect and to take copies in the partnerships book of accounts

2. Right to participate in resolving partnerships dispute.(right to vote)

3. Every partner has the right to be consulted and right of their consent be obtained. And in respect of those matters that require unanimity.

8th July 2015

6) DISSOLUTION OF PARTNERSHIPS

The dissolution of partnerships varies depending on whether it is an ordinary or LLP.

In the case of ordinary partnerships there are two forms of dissolutions:

1. Dissolution without an order of court

2. Dissolution through an order of court

Dissolution outside court

Under that procedure a partnership may stand dissolved upon the occurrence of any of the events that are specified under s. 36, 37 and 38 of the partnership act. 

In all those instances with the exception of s. 38 the occurrence of any of those events will lead to the dissolution of the partnership for as long as the partners do not have a contrary agreement

As regards s. 38, a partnership must stand dissolved without any option for the partners to extend its life.

What are these events or occurrences?

Under s. 36 the partnership will be dissolved in the following circumstances:

1. If it was formed for a particular adventure, it stands dissolution upon completion of that adventure.

2. If it was formed for a specified period of time, it stands dissolution upon expiry of that period of time. 

N/B-*examinable* - It is noted however that where a partnership is formed without a specified term and it is deemed to be a partnership at will, it may be dissolved by the notice of any of the partners on the others, unless in their partnership agreement the partners have indicated that their partnership will not be dissolved except by mutual agreement.  

Under s. 37 the partnership will dissolve upon the death or bankruptcy of the partners.

Also under the same section a partnership may be dissolved by the notice of many partners to any partner who has suffered his share of interest in the partnership property to be attached for his separate debt in terms of s. 27 (2) of the act.

N/b -Basis is s. 37(2)

Under s. 38 every partnership automatically must dissolve upon the occurrence of any event that renders its business unlawful. Essentially that will arise if there is a change in law.

Dissolution by an order of court

Under this procedure the law recognizes that a partner may file a petition in court seeking for an order dissolving their partnership. Such an order may be granted if the partner satisfies any of the grounds set out under s. 39 of the partnerships act.

These grounds are:

1. Any partner has become permanently of unsound mind. Under that ground an application may be made by any partner including the one who is of unsound mind in which case the application may only be made on his behalf by his next friend.

2. Where the partner has become permanently incapable of performing his obligations under the partnership agreement. Depending on the circumstances of partnership e.g. running low of reason for being a partner e.g. losing a land that kept him in the partnership.

3. On the ground that it is established that any of the partners has conducted himself in such a manner that is calculated to prejudicially affect the conduct of the business of the partnership. E.g. Stiff competition of partnership business in breach of utmost good faith

4. Where any partner persistently has breached the terms of partnership agreement and thereby rendered it impracticable for other partners to carry on the business. refer  to  case of Clifford v. Timmins

5. If the business of the partnership can only be carried on at a loss. If the loss continues consistently for 12 months then it has no effect. 

6. Partnership may be dissolved if any matter arises that in the opinion of the court makes it just unequitable that the partnership should be dissolved. 

DISSSOLUTION OF LLPs

The LLP act recognizes three ways in which an LLP may be dissolved;

1. By unanimous resolution by the partners themselves.

2. Dissolution by a resolution of the creditors. Under that procedure the creditors must work together with the partners and jointly reach the decision to dissolve their partnership.  (There would be only one ground that the partnership cannot repay its debts.)

3. Through an order court  under that,, or by a liquidator or by the minister or by a creditor and the court may order dissolution if any of the following grounds is proved:

1. If the partners themselves have resolved to dissolve the partnership.

2. If the partnership becomes unable to repay its debts.

3. If the court forms the opinion that it is impracticable for the partnership to be effected in accordance with the partnership agreement.

4. If the number of partners has reduced to less than two and that situation persists for more than two years.

5. A partnership may be dissolved wherever circumstances renders it just unequitable to do so.

6. It may be ordered dissolved if it is established that it is being carried out for an unlawful purpose or risk to national security, national interest, public peace or public welfare.

Consequences of dissolution 

Once a partnership has been dissolved if it is an LLP, then it must have a liquidator appointed to wind up its affairs.  

If it is an ordinary partnership then the law does not require a liquidator but the partners are free to dissolve the partnership

At the time of winding up the affairs of the partnerships, the following rules apply:

1. Every partners will have a right as against each other to have the assets of funds of the partnerships apply in the following manner:

1. To pay off any liabilities and debts owing to third parties.

2. To pay to any partner what owes from the partnership to that particular partner.

3. If any surplus is to remain then it is to be shared out between the partners

In settling the accounts between the partners, the following two rules are to be observed: 

1. If there are any losses then the losses must be taken care of first. The losses must first be paid out of the profits of the business. If the profits are not enough then they are paid out of the capital. If the capital is also not enough then every partner is liable to contribute towards the settlement if the losses in the proportions in which they were entitled to share the profits. 

2. That the assets or funds of the partnership will be distributed in the following manner and order:

1. To pay off third party debts and liabilities.

2. To pay off any advances that a partner may have made in the partnership.

3. If any assets or surplus will remain then they will be paid to any partner in respect of what a partnership fund is owing that partner.

4. If any surplus remained then it is to be divided among the remaining partners in the proportions in which they were to share their profits.

9th July 2015

PART II: THE LAW OF CO-OPERATIVES

GENESIS AND DEVELOPMENT OF CO-OPERATIVES AND MOVEMENT.

Cooperative as a concept is derived from the word cooperation which essentially contemplates a situation where persons cooperate with each other towards achieving shared goal. In that sense cooperatives are as old as a human civilization. In the traditional African setup they took the form of formal associations built around such units as the clan or the village. The most important point is that out of those traditional formal associations have been built the modern cooperative movements. The modern cooperative movement is now formal in the sense that it is …by clearly stipulated rules. In the modern sense the cooperative movement is said to have originated from Europe around the beginning of the 20th century.

 It is more of origin in Europe may have been described as a bottom up mode in the sense that it was originated by the poor members of the society who saw the need to unite to protect themselves against exploitation at the hands of the middle class.

In Kenya, however the modern cooperative movement had a different mode of origin because it was originated by the middle class white settlers who decided to unite in order to maximize benefits out of their agricultural activities.

In Kenya, the first modern type cooperative society is said to have been formed around the year 1908 by the white settlers. During that time the African population was not permitted to participate in the cooperative movement and the colonial government gave two reasons for that:

1. That the African population did not have well educated people who could properly maintain the books of accounts of cooperatives society

2. The government argued that it was too early to allow Africans to participate in the movement. 

The truth of the matter was that the colonial government feared that if Africans were allowed to participate in the movement they could use the sense of togetherness that cooperatives bring in order to stage a strong revolt against the colonialists. Even then the African population showed a lot of interest in the co-operative movement. 

 That interest forced the colonial government to form a commission of enquiry in 1930 known as the Campbell commission which was given the responsibility of investigating the desirability of allowing Africans to participate in the movement.  The commission reported that it was highly desirable to allow Africans to participate in part of its report it stated as follows “no government responsible for the welfare of people like those of Kenya can afford to omit to place at their disposal the advantages they derived from cooperative organizations with suitable guidelines”

Following those recommendations the first African cooperative was formed in the 1930 which was known as the Taita Vegetable society with the objective of producing, breeding and marketing vegetables at the coast. It was a large society with 239 members.

Following the commission’s recommendations, the first cooperative legislation was enacted namely the cooperatives ordinance of 1932 which for the first time required that cooperative societies be registered. It also made provision for rights and duties for members on the one hand and of the cooperative societies on the other hand.

That legislation remained in place until 1945 when the new legislation was enacted that repealed it namely the cooperatives ordinance of 1945. 

The main feature of the 1945 ordinance was that it introduced the department of cooperatives which was then given the mandate of coordinating cooperatives matters throughout the country, promoting the cooperative movement and educating the masses on its movement. It is reported that the department performed its functions very well because it was able to mobilize interest from both the African population and the white settlers. 

The interest on the part of the colonial government was manifested in the open support that the government officers gave to the cooperative movement. One such support was evidence by the then district officer who was then based in North Kinangop district in 1962 who said “I believe cooperative is what Africans want and is not far removed from their tribal concept of communal ownership of land. I think they would like to keep the economy going given a bit of encouragement and would do th eir best to make it work. 

The colonial government had therefore identified the coopearative movement as … through which the economic growth of the country could be advanced. That same interest was inherited by the defendant Kenya government and has been manifested in several ways:

1. In 1965: when the government promulgated its first major policy paper (sessional paper no. 10) the cooperative movement was identified a major vehicle through which the African socialism could be promoted and within that concept lay the concept of economic progress.

2. In 1963: a motion was introduced in parliament which received a unanimous vote to establish a specific ministry of cooperatives which was to manage the cooperatives. That ministry was established in 1974 by upgrading the dept. of cooperatives that was established in 1945 into a full ministry. And since then the successive government have had a ministry for cooperatives. 

Following the mention of the cooperative movement in sessional paper no. 10, player in the political sector in the country started seeing a cooperative movement as a tool which they could advance their personal political interest. Consequently many of them infiltrated the cooperative movement and hijacked the agenda as they used most cooperative societies for their own political advancement. 

Following that heavy political infiltration the government saw a need to change the law in order to protect cooperative societies from having their agenda hijacked. In 1969 the 1945 ordinance was repealed and replaced by the cooperatives societies’ act. The main feature of that act was that it created the office of the commissioner of creative development who was given the power to monitor the operation of cooperative societies and to disband management committees who were not faithful to the agenda of their cooperative societies and also the power to question the budgets of cooperative societies. 

Note: it is reported that the progress of cooperative movements during the colonial era was somehow interrupted between 1943 - 1945 following the declaration of state of emergency. The state of emergency caused many employees of the department of cooperatives who were mainly colonial officers to abandon their station of work. As a result the property of many cooperative societies was looted. The paradox however is that it is also reported that it is during that period that the largest number of cooperative societies were formed since the introduction of the cooperative movement. It has been suggested that the explanation for that the restrictions that the state of emergency imposed forced the African movement to appreciate the importance of cooperation ant togetherness. 

PRINCIPLES OF COOPERATION

They are also commonly referred as the cooperative principles. They are the principles around which the cooperative movement operates. Those principles have not been defined from by any law but have been accepted as governing the cooperative movement throughout the world. 

Under the 1997 cooperative societies act, this principle have been recognized by being mentioned and the act directs that for any cooperative society to be registered under the act it  must in its by-laws embrace the principle of cooperation. 

These principles are the following:

1. The principle of voluntary and open membership

This principle is to the effect that the membership must be open and based on the free choice of the person. The principle applies in two senses. The first sense it means that no person should be compelled or unduly influenced to join a cooperative society. On the contrary the decision to join should derive out of the person’s free volition. At the second sense, the principle means that the opportunity to join the membership of the cooperative society should be open to every person who has the will to join and for as long as a person possess the qualification to join, and remain a member he should not be compelled to leave or expelled from membership. A member may only be expelled from membership of either he has lost the qualification required for membership or the members at a general meeting have resolved to expel him because he has contravened the bylaws of the society. It is because of that principle that the cooperative societies’ rules particularly rule 9 of the 2004 rules provides that no cooperative society may fix a maximum limit to the number of its members.

2. Democratic member control. 

This principle is to the effect that coop societies should be governed or controlled by the members in accordance with acceptable democratic principles. The principle insists that coop societies are democratic organizations. The principle manifests itself in two ways:

1. In the management of cooperative societies, the management responsibilities are vested upon the members.  The members are considered to be a supreme decision making organ and they manage the society through general meetings. Every member has the right to attend the general meeting. The law recognizes that the general meeting may then delegate certain functions/obligations/powers to smaller units from within the membership. But those smaller units constantly remain answerable to the general meeting. 

2. The second level of that principle is that members are deemed to be equal. Consequently, at the general meeting each member has only one vote irrespective of the amount of capital he may have invested in the society. And also irrespective of the length of time for which he has been a member. 

3. The principle of autonomy and independence

That principle recognizes that cooperative societies are organizations in the economic sector. Consequently, they must remain players in the economic sector. They must shield themselves from influence from other sectors and not allow themselves to be dictated upon by other partisan interests. Accordingly they must not discriminate members on the basis of such partisan considerations as political, religious or social pacification. 

4. Principle of education, training and information.

That principle is to the effect that cooperative societies must educate, train and inform their members, employees as well as the general public. Such education training and information should cover subjects that would promote the cooperative movement as well as other matters of public interest. In practice, that principle is given effect to when cooperative societies organize seminars or workshops for the employees or members or they engage in public awareness campaigns. 

• Constitutional review process in the run up towards the new constitution…

5. Principle of economic participation by members

The principle is to the effect that economic goods of a coop belong to the members and the members should participate in them by receiving a share of those rules. Under the cooperative societies act it is recognized that if a coop society makes any saving or surplus then those savings or surplus belong to the members and should either be given to them or invested in them. In practice that response is given effect to by cooperative societies declaring and paying out to their member’s bonuses and dividends. 

6. Principle of limited interest on capital.

That principle is to the effect that in paying members a share of the economic goods of their society, they should not outrageously benefit from their capital investments in the society. That is to say the amount of interest or benefit that they derive must be limited and modest. It is for that reason that cooperatives societies pay dividends and bonuses at rates that are fairly low. Under the 1969 act, it was expressly provided that no society would pay dividends at the rate exceeding 10% of the members’ savings. 

Under the 1997 act there is no fixed percentage but it is required that the rate of dividends must be tabled and agreed upon at the general meeting. And it must be applied uniformly to all members. 

7. Principle of growth by mutual cooperation (cooperation among cooperatives)

It is to the effect that cooperative societies must understand themselves to be players in the worldwide movement. For that reason they must not work in isolation. Contrary, they must cooperate with each other particularly so that they may enhance their capacities to promote the welfare of their members. 

In practice, this principle is given effect to when cooperative societies engage in exchange visit with each other.

8. The principle of concern for the community in general.

It is to the effect that cooperative societies must be concerned about not only a promotion to the welfare of their members but also welfare to the community at large. They must show interest in the whelming of the public within which they operate. That principle may be given effect to in two ways:

1. The cooperative societies my resist from engaging in activities that may endanger the public good. That will depend in circumstances of each case e.g. pollution.

2. The society may engage in positive activities that promote the public good. Also depends on circumstances. 

It is in that spirit that rule 43 of cooperate society rule 2004, provides that if any assets or funds remain after the dissolution of a cooperative society, then they may be vested in any public project that the general meeting may determine. 

THE LEGAL REGIME RELATING TO COOPERATIVE SOCIETIES IN KENYA.

The law governing cooperatives in Kenya is now contained in the cooperatives society act of 1997 as amended by legal notice no. 2 of 2004. That act operates alongside the cooperative society rules published as legal notice no. 103 of 2004. The 1997 act repealed the 1969 act. The 1969 act had been criticized as having concentrated too much powers in the hands of the commissioner of cooperative development and the minister.   

The main feature of the 1997 act is that it took away certain powers from the minister and commissioner  and redistributed them with the bulk of the powers now being conferred upon the members.

Under the 1997 act, for a cooperative societies to be registered it must demonstrate its core objective is the promotion of the welfare of its members. Under the repealed act the commissioner had the power to evaluate the ability of the society to promote welfare of its members and had the discretion to decline the registration if he was of the opinion that the society had no such capacity.

No such power exist under the 1997 act but every society making an application of registration is required to also submit a statement explaining its capacity to promote the welfare of the members.

Under the 1997 act there are 4 types of societies

1. Primary societies - These are societies whose membership comprises exclusively of natural human persons.

2. Secondary societies – these are societies whose membership comprises of primary societies.

3. Cooperative unions – these are unions whose members comprises exclusively of primary societies. In Kenya the most prominent cooperative union is known as KENYA UNION OF SAVINGS & CREDITS COOPRATIVE UNIONS (KUSCCO).

4. Apex societies – these are societies whose sole purpose is to provide goods and services to the cooperative unit.  Kenya COOPERATIVE ALLIANCE(KCA)

The person vested with the power to register is the commissioner. The law requires that for purposes of registration, an application should be presented to the commissioner through a prescribed form. That app;liocation is required to supply certain information about the proposed society. The information required includes the following:

1. The name of the society – the choice of name of society is subject to certain legal requirements

1. The name must not be similar to that of another existing similar society

2. It must not be a name that is likely to mislead the public as to the real identity of the society.

3. If the society is proposed to be registered in limited liability then the word limited must form part of the name of the society as the last word.

4. The word cooperative must form part of the name of the society.

5. The word cooperative is a protected word in law. Accordingly no person/organization is permitted to use that word in its operation ...unless it is a registered cooperative society. The contravention of that constitutes an offence.

2. The society’s area of operation including the postal address and the physical address of the society’s office.

3. The type of society that is proposed to be registered. Whether primary, cooperate etc. in the event that it is a primary society or a secondary, then it should also be indicated if it is to be registered in a limited liability.

4. The language in which the society’s books of account will be kept. That indicates the books of accounts may indicate in any language in which the members are comfortable with.

5. The name if the person proposed to perform the function of the secretary. Following the 2004 amendment that person should be a qualified CPA. The application must also identify the persons who are proposed to be the members of the corporate society. For purposes of registration the society must raise the minimum number of members. If it is an apex society or a cooperate union then the minimum number of members required is two. If it is a…then the minimum number required are ten. All those members must meet the required qualification of membership under s. 14 of the act. The qualification are 

1. One must have attained the age of 18

2. You must be holding wither employment, profession, occupation or trained in the sector for which the co-operate society is being formed.

3. The person must be either resident or occupying land within the society’s geographical area of operation.

When the application for registration is submitted it should be accompanied by four copies of the proposed by law of the society which must be in the English language. Once the application is presented to the commissioner he ..it and if he is satisfied that the application meets the requirements of law, he will register the society.

The society may be registered with limited or unlimited liability. But if it is a co-operate union or apex society it may only be registered with limited liability.

If the commissioner is not satisfied with the application then the law allows him two options:

1. He may out rightly refuse to register the society in which case he must inform the society in writing about his reason for refusal. If any party is aggrieved by that refusal he has the right to appeal to the minister and a final right to appeal to the high court.

2. The commissioner may brand the society “provisional registration”. This may only be granted if the commissioner is of the view that the non-compliance is not very fundamental and that it may be rectified within reasonable time. Provisional registration is however only temporary, it will last only for the period specified by the commissioner and the maximum period allowed is 12 calendar months.  Every society with provisional registration is allowed to operate with the full powers of the cooperative society with the only exception being that it must prominently publish its official documents and bill board the fact that it is provisionally registered.

During the period of provisional registration it is expected that the society should take the necessary steps to rectify its non-compliances so that it may qualify for full registration. Once it qualifies the commissioner may grant it full registration which will be backdated to the date in which it was granted provisional registration. If it fails to attain compliance then the commissioner may at any time cancel the provisional registration and refuse full registration in which case any aggrieved person has right of appeal to the minister and final right of appeal to the high court.

Consequences of registration

Once society is register either fully or provisionally the following consequences ensue:

1. The society shall become body co-operate with cooperate powers and perpetual succession as well as the common seal. The corporate powers enable it to enter into contracts on its own name, enter into suits and institute on its own name and to acquire property on its own name.

2. Once the society is registered it is incumbent upon the commissioner providing the society free of charge with the following documents :

1. Certificate of registration or provisional registration as the case may be.

2. Copy of the corporate societies act and the rules.

3. The application form which the society presented for its registration.

4. The by-laws of the society as registered under the hands of the commissioner. 

3. The certificate if registration is deemed to be conclusive evidence that the society is registered as certified unless its registration is subsequently cancelled and the by-laws registered under the hands of the commissioner is prima facie evidence that the by-laws are duly registered.

4. Under s. 13 of the cooperative society’s act. Once the society is registered there comes into existence a contract as between the cooperate society on the one hand and each member on the other hand binding the member to comply with all the bylaws and decisions of the right organs of the cooperate society.

BY-LAWS

Every cooperative society must make and have by-laws. No cooperate society may be registered without by-laws.

The by-laws of the society must cover as many matters as possible that are capable of describing or regulating the societies operations at the minimum it must provide for all the matters prescribed under rule 18 of the cooperate societies rules.

The by-laws are considered to be amendable to amendments at any time as the society may deem fit. Any by law may be amended. An amendment may only be done by the society’s general meeting. That meeting must meet the required quorum in law. For a society with a limited required is at least half of the members and at least ¾ of them must vote in favor of the amendment.

In the case of society with limited liability is that which is prescribed in the by-laws and the majority of those present must vote in favor of the amendment. For an amendment to take effect it must be presented to and registered by the commissioner.

THE MANAGEMENT OF COOPERATIVE SOCIETIES

Cooperative societies are managed at four levels or at four different organs namely:

1. The general meeting

2. The management committee

3. The board of representatives 

4. The supervisory committee

GENERAL MEETING

This is the supreme organ of every co-operate society with the power ...in the society. It has the power to make decision on the most crucial matters in the society. That general meeting every member has the right to attend and vote. The law recognizes 3 types of general meeting namely

1. The first general meeting

That is the general meeting that every co-operate society must hold at least one month after it has received its certificate of registration. That meeting must pass resolutions on matters that are necessary to set off the operations of the society into the future including the following:

1. Appointing the society’s bankers, auditors and advocates

2. Deterring the society’s maximum borrowing powers

3. Electing the society’s officials

4. Considering the society’s budgets or estimates

2. Annual general meeting

Meeting that every co-operate society must hold. It is required to be convened four months after the end of the society’s financial year. 

The persons with the power to convene an AGM meeting are:

1. The management committee/ commissioner – the agenda for the AGM is prescribed under the act. It includes deliberating the most critical issues such as accounts of the society. If the meeting  deliberates but fails to approve the account that fact of failure must be notified to the commissioner shall be fined

2. Savings and surpluses to determine whether or not to pay the dividends and bonuses

3. Pointing the returning officers for the next elections

4. Deciding on the management structure of the society including whether there is need of establishing branches

5. Electing officials for the coming year of the society

3. Special general meeting

This is a meeting that a co-operate society may convene whenever special circumstances arise necessitating for it to be convened. The special circumstances will depend on the circumstances of the society’s in question. It may include something that has risen and is urgent and cannot wait for the next annual general meeting. It may be convened at any time during the lifetime of the cooperate society and it may discuss any agenda that may have necessitated its bbeing convened. The power to convene special general meeting is vested in the ..of the management committee but it may also be cpnvened by board of representatives or by the commissioner.

The members of the society have the power to demand for a special general meeting if the board and the management committee fail to hold the meeting then the law allows them to hold the meeting.

NOTE:

Every general meeting of a co-operate society requires to be convened by a notice of not less than 15 clear days.

MANAGEMENT COMMITTEE

It is required that every corporate society must have a committee must have a management committee whose membership must be a minimum of 5 and maximum of 9. Management committee is defined as the governing body of the corporate society which has the power to direct the operations of the society. Its powers include the powers to enter into contract on behalf of the society, the power to institute and defend legal proceedings in the name of society and the power to do anything necessary for the purposes of the achieving its objectives.

In performing its functions the management committee is required to discharge its conduct that is described as the prudence of diligent businessmen. In the consequence that if its performance falls below its standards then the members may be held personally liable for any losses that the societies may suffers as a result of their lack of diligence. 

The members of the management committee are elected by the general meeting of the society and they remain answerable to the general meeting. As a general rule it is only the general meeting that has the power to remove them. 

The law does not contemplate a situation where a cooperative society may exist without a management committee. It is therefore required that if a general meeting passes a resolution removing the entire management committee then that same meeting must elect a new committee or specify the date of the next general meeting in which the committee will be elected.

In exceptional situations a member may be removed by the majority of the members of the management committee in which case they must co-opt another member of the society to act.

Qualifications

For any member to be a member of the management committee will have to satisfy the following:

1. Be a member of the society

2. Be literate 

3. Must not be someone who has been adjudged bankrupt

4. Must not have been named adversely in an enquiry report that has been adopted at the society’s general meeting.

5. The person must not be a member of the management committee of more than two other corporate societies

6. He must not be a person who is engaged in business or activities that may be considered be running into competition with the business of the cooperative society. For example, if the society is trading in agricultural produce then he must not himself be trading in agricultural produce in his own right.

7. He must not be a person who has been convicted of fraud or mismanagement under the act

8. Must not owe any debt to the society other than ordinary loan.

9. 
   

 It is required that once a person is elected into the committee he must declare his wealth to the commissioner and he must also sign an indemnity form undertaking to indemnify the society for losses attributable to his fault. 

The management committee may subrogate its functions to any of the sub-committees but it remains collectively responsible for any proper management of the society’s affairs.

SUPERVISORY COMMITTEE

This is a small committee comprising of only three members. The law requires that every corporate society must have it. It is constituted as an oversight committee that oversees all the operations of the management committee. It is required to make its input in setting the agenda of the society’s annual general meeting. It so expressly prohibited from performing the functions that are persevered for the management committee. 

Board of representatives

This is required of only apex societies and cooperative unions.

The act does not define exactly what this board is to be made up of but it is constituted as a board that gives policy directions to the society and in the event that the management committee fails to perform its functions the board of representatives may intervene. 

THE RIGHTS, PRIVILEGES AND LIABILITIES OF MEMBERS OF CO-OPERATIVE SOCITIES

1. Once a person becomes a member of a corporate society he becomes entitled to rights and privileges and at the same time incurs certain liabilities. First every member must meet the prescribed requirements of membership including the prescribed minimum share subscription. Otherwise he will not be entitled to claim any rights of membership from the society. 

2. Members of societies are liable to observe the rule as to the maximum level of shareholding;  and the rule is that no member is allowed to hold more than 20% of the issued share capital of the society. 

3. A member is free to transfer his shares to any other member approved by the general meeting. he must assist the society by ensuring that his transferred shares does not enable the transferee to acquire more than 20% and he may not transfer shares of he owes any debt to the 

4. Every member is restricted in the number if societies he may belong particularly the member is prohibited rejoining more than one society with unlimited liability which has the same objectives as his original society. The exception however is that he may join subsequent society if he occupies land within that societal area of occupation. 

5. Once a member becomes a member of a corporate society he becomes entitled to be elected  to any organ of the management  

6. Every member is entitled to enjoy the services and facilities of his corporate society. 

7. Every member has the right to ... acquire information including the societies internal …the societies minute books, the societies registers and any reports held by the society.

8. Every member is under obligation to observe and comply with the society’s by-laws and decisions. 

9. In the event that the society’s register is a limited liability, then every member is liable to contribute the society’s liabilities in the event of insolvency.

THE RIGHTS, PRIVILEGES AND OBLIGATIONS OF COOP SOCIETIES

Every cooperative society once registered incurs the following obligations towards its members and also becomes entitled to certain privileges and rights from its members. In addition cooperative societies owe obligations to the public. 

1st : The obligations as to the registered office

Every society must have a registered office at which any notices or communication may be served upon. A change in that office must be notified to the commissioner within 7 days.

2nd: Duty to keep documents

Every society must keep certain basic documents within its registered office. Those documents must be open to inspection to the members of the society as a well as the auditor. The members also have right to make copies of those documents. These documents include;

1. The 5 documents that were supplied to the society by the commissioner upon registration.

2. The minute books;

1. Minutes of all general meeting in the society

2. Minutes of meeting of any other management organ of the society

3. Register of members

4. Register of loans and any security for loans the society may have given

5. Register of assets of the society

6. Ledgers including personal ledgers of members and the cash register etc. 

3rd: The accounting records and standards.

Every society is under obligation to keep and maintain proper books of accounts indicating any receipts or all receipts and payment by the society. Following the 2004 amendment the accounting record of the society are now required to be maintained according to the international accounting standards.  Those accounts must be audited at least once every financial year by an auditor approved by the commissioner, appointed at the general meeting of the society.

The auditor for purposes of auditing has very broad purposes of looking at … of any person who may deem necessary. In the event that the general meeting of the society fails to appoint an auditor, the commissioner shall have the power to do so. Once an auditor is appointed and becomes entitled to receive the 15 days’ notice …the society’s general meeting which he will be expected to present his audit report. Before an audit report is presented to the GM it must first be presented to the commissioner. (Introduced by the 2004 amendment) 

NOTE:

Once the auditor’s report is deliberated upon at the general meeting it must be filed with the commissioner but if for any unjustifiable reason it is not filed by the commissioner and all the members of the management committee shall automatically lose their office and will not be eligible for reelection until the expiry of 3 consecutive years.

5th August 5, 2015

4th RIGHT TO  CHARGE OVER MEMBERS PRODUCE

Available to all cooperative societies that engage in agricultural produce. Such society are permited under s. ...which the society may be given pledge as security for a loan.

Where that contract is entered into a member is under duty to market all his product...covered by the contract through the society. If he markets or disposes off the produce outside the framework of the society then it constitutes a wrong for which a member may be punished.

The law allows the society too make provisions within the contract entitling it to impose a liquidated sum of money as damages upon a member in breach.  Although a the contract appears to be void, for being in restraint of trade, the cooperative society’s act has expressly exempted it by providing that it shall not be construed to be a contract in restraint of trade. That contract may either be embodied in the society’s by-laws or in a separate contractual document between the society and the member.

5th Right to fast charge

That right is available to every society that may have given loan or lent money or even agricultural input to members which the members have used to produce certain agricultural produce or to invest in some other material value.

Such instances, for as long the loan is not repaid or the value of the equipment has not been recovered by the society, the society has the right of fast charge over whatever agricultural produce or material investment that the member may have acquired through the aid of the loan or the equipment of the input. 

That is to say that the societies claim or interest over such produce or material shall run first in priority.

6th the right to sue over a member’s contribution

That right applies ion situation where a member of a cooperative society has entered into an arrangement with his employer instructing the employer to effect deductions on the members monuments of salary then omit those deductions to the cooperate societies as members contribution or savings in the society.  

The law requires that such deductions must be emitted within 7 days after they have been deducted. if the employer fails to emit them then the society shall have the right to sue the employer to recover those deduction with compound interest.

7th right to charge the member’s pay/duce

In that light accrues to the cooperate society that is owed money by a member. In such situations a cooperative society has the right to charge any money payable from the society to the member. By reducing that money bay an amount equivalent to what the member owes the society. 

That essentially means that a members money that is held by the soceity is considered to be security that the society looks upon to recover money from the members...it is for that reason that the law protects members’ savings in cooperative societies. And scuh savings cannot be a tached even by a order of  court and they cannot be touched by a member’s trustee in bankruptcy. 

N/B - Order 22 of the civil procedure rules

8th right to impose fines

Every coperative society has the right to impose fines upon a member who contravenes any provision of the by-laws or who fails to observe the decision of the relevant organs of the society management.

Before the fine may be imposed the members in question must be given the notice of intention to do so and the opportunity to defend himself with or without a witness.

Once the fine is imposed it becomes a civil debt recoverable on …s. 13

AMULGAMATION AND DIVISION OF COOPERATIVE SOCIETIES

Acquisition and miles

The law gives cooperative societies the freedom to amalgamate or merge with each other or to subdivide themselves into two or more smaller societies.

By their very nature, amalgamation and division have the potential of either increasing or reducing the responsibility of the management organs of the societies.

They also have the potentiial of affecting the rights and iterestes of members,creditors and other interested third parties.

For those reasons, s. 29 and 30 of the cooperative societies act have put in place elaborate procedures that must be followed by any society seeking to reemerge or subdivide itself.

Procedures are signed to protect the interests and rights of members, creditors and other interested parties.

The procedures require that every society proposing to amalgamate or subdivide itself must hold at least two general meetings and the first general meeting must pass a special resolution that is known as preliminary resolution. 

The second general meeting must pass another special resolution that is known as secondary resolution.

In case of a decision the preliminary resolution must be sent out to the members as well as the creditors and other interested parties informing them of the proposed division and giving them an opportunity to make their representations or express their views on the proposed division.

Members who wish to not join any of the proposed new societies will express that intention, creditors who wish to demand payment of their monies before the division should also express that intention and other interested third parties who have objections should also express those objections 

The secondary resolution must then detail how the society proposes to address the representations that will have come from the members, creditors and the other third parties. 

That secondary resolution must then be filed with the commissioner. If the commissioner is satisfied that the law has been complied he will register the resolution and the following consequences shall follow:

1. The society that has dicided itself wil be deemed to hgavedissokved and its registration cancelled

2. The new smallers cosieties will be issued with their certificate of resgistartion 

3. The members who did nott express intention of joining the new societies will automatically become mebers of the new society in accordance with the provision of the secretary of resolution .

4. Any members or creditor or third party who is not satisfied in the manner on which the secondary resolution has dealt with the representation will be at liberty to elect any of the new societies against which he will be passively disclaim.

Amalgamation also follows the same procedures described above most importantly the preliminary resolution must avail an oopportunity to the members, creditors and third parties to make their represenatations and the secondary resolution must address those representations. 

If the commissioner is satisfied he will register the secondary resolution and the following consequences shall follow:

1. All the societies which will have merged will  stand dissolved and their registration cancelled

2. The members of the societies who will not express intention not to join the new society will automatically become members of the new society.

3. The new society will be issued with the certificate of registration in its new proposed name.

4. Any member or creditor or third party who is not satisfied without the secondary resolution as addressed to his representation may pursue his claim against the new society. 

ENQUIRY AND INSPECTION

These are two procedures through which the law allows the commissioner to get a view into the manner in which the operations of the cooperative societies are being run.

As regards enquiry the commissioner may conduct an enquiry either on his own motion or upon receiving a demand from ¾ of the members of the society. 

The enquiry will investigate how the society has been managed in light of its by-laws and the act. The commissioner will then prepare a report a report of his findings and he may make recommendations on how the society may be better managed and in the event he finds any member or officer guilty of mismanagement he may recommend that that member or officer be surcharged. 

The report will then be tabled before the society’s general meeting for the society to determine the necessary measures to address the outcome of the enquiry. If it recommends a surcharge and the enquiries are locked at the general meeting the amount of the surcharge becomes a civil debt recoverable at …

In practice enquiries are conducted when the commissioner receives an indication that the society is being mismanaged. 

s. 58

As regards inspection the commissioner has the power to inspect the society’s books of account determine whether it has the ability to repay its debts. For an inspection to be conducted the commissioner must have been mover by a creditor.

The creditor must satisfy the commissioner that his debt has become due for repayment, that he has demanded for the debt to be paid but the society has failed to repay the debt.

Disputes of coperatoves are sett;ed in accordance to sections 76-78 of the act.

Section 76 directs that all disputes concerning the dispute of a cooperative society shall be refered to the cooperative ttribunal. The section therefore gives the cooperate tribunal exclusive jurisdiction over all disputes that fall under that section. 

Section 77 then establishes the cooperative tribunal with 7 members including the chairman and the deputy chairman.

The tribunal is deemed to have quarum wjhen the chairman and deputy chairman sits with atleast two other mebers.

The decision I sbabsed on vote of he majority 

Any part  that disagrees with the tribunal has the right o appeal to the high court whose decision is final.

Under the cooperative societies act, the term dispute has not been defined just as ot was not defined under the tribunal act

That absence of the definition has triggered extensive litigation in the court as parties seek what exactly the term means.

Under the act s. 76 marely list two categories of disputes that may be reffered to the tribunal namely a claim bya member or a first member or indidst memberagainst a cooperative society or second claim by the society againsta a member, firsm member or a deceased member.

Thec oruts have howebver made it clear that the term dispute is not a technical terma dn it should not htrefore not be given a technical meaning

The case of gatanga coffee grwoers coop society v. gitau 

Lukenya ranching v. kavolotu

The courts held that the term should be given its ordinary meaning 

The court expanded the meaning in the case of ruakiro by explaining that the  term dispute should be under stood to include any matter that can form the matter of subject ltigation and which may give rise to some form of civil liability

Note

The foregoing procedure for settlement of disoutes is radicaly different from the procedure that existed under the old law where disputes wre to be refered to the commsioner who upon being satisfied that it was a dispute worth determining would then refer it to an arbitrator(s) appointed by himself.

That whole system made it possible  for cooperative societies disputes to benefit from the many adavantages that arbitration enjoys over litigation in the court.

The current system may be criticized for introducing the possibility that matters of ccoperative may end up being bocked doen the complex system of ltigation

DISOLUTION OF COP SOCIETIES

The coop soceities act recognoises only one way through wchich coop societies may be dissopved

s. 61(5) highlighst that coop societies may be disoolved only by a pursuant order of disoolution by which the commissioner cancels the registration of the society

if any party is aggrieved with that order the right of appeal lies to the minister and the final appeal lies to the high court

The grounds for dissolution are only 5 namely:

1. If the commissioner forms the opinion that the society should be disowned on the basis of defiance or enquiry or inspection under s. 58 and 59 

2. If the commissioner forms the opinion that the society should be disowned on the basisi of the representation made to him by at least ¾ of the members.

3. Where the number of members of the society has fallen below the prescribed minimum as 10 for primary societies and two for other societies.

4. If the society has failed to file its annual returns to the commissioner for a period in excess of three years.

5. If the society has been unable to achieve its objectives

This mode of dissolution does not leave room for the members if the society to directly bring to an end the life of their own association. They may only directly participate by petitioning the commissioner. 

After an order of dissolution the cooperative society must then go thorugh the process of liquidation which involves the winding up of the ….

During liquidation only the liquidator and the minster have direct roles to play

The liquidator is appointed by the commissioner normally at the time he makes his order of cancellation.

His power includes the folloing:

1. He tajes custody of all the societies record and assets

2. He has the powers to dispose the soceities’ assets either by public auction or private treaty

3. He has the power to institute and fefend legal oroceedings on behaklf iof the  society and appoint an advocate to assist him

4. He has the power to determine the amount of contribution that any member of the scoeity will contribute towards the societies debts and liabilities. 

5. He has the power to refer a question to the cooperative tribunal for determination.

the minister has the following powers among others:

1. To re3scind or bury the decision of the liquidator

2. The power t o determine the liquidators remuneration

3. The power to remove the liquidator and replace him with another one

4. The power to discharge the liquidator 

N/B 

During the period of litigation any orders or directives issued by either the minister or liqudator may be registerd ina court of alw and they will operate as though they were decrees issued by the court.