COMPANY LAW NOTES

  CHAPTER 1

DIRECTORS

A Company as an artificial person cannot manage its own affairs. It therefore needs someone to act on behalf of it. It is for this reason that in the articles of association of every registered company, there are provisions on the delegation of powers pertaining the company’s management. A company hence runs its affairs through natural persons known as directors. Section 2 0f The Company’s Act defines a director as any person occupying the position of director by whatever name called. 

In Aberdeen Railway Co. vs. Blaike Bros LordCrawnworth described directors described directors as a body to whom is delegated the duty of managing the general affairs of the company.

APPOINTMENT OF DIRECTORS

The Companies Act provides that every company other than a private company shall have at least two directors.  In the absence of any other provisions in a company’s articles of association, the directors of a company would be appointed in accordance with the provisions of Table A.

Board of Directors

The director’s main responsibility is to manage the company whereas the shareholders main control lies in the power to appoint directors. The division of powers between the board and the meeting of shareholders is determined by the articles and where these give the board powers, the meetings of shareholders cannot interfere with the boards exercise thereof save to the extent of a lack of quorum in the board.

     The board consists of a relatively small number of persons who have been appointed directors of the company. They are usually granted extensive powers under the Articles of Association including the control of day-to-day operations, which they often delegate in turn, to one of them; the managing director/ chief executive.

The First directors are usually named in the articles of association but such appointment is not valid until the director named has delivered to the registrar a written consent to act and a written undertaking to take qualification shares.

There also exist Subsequent directors who are appointed by members in general meeting beginning from the first annual general meeting at which all the first directors retire from office and the members are given the first opportunity to elect directors of their own choice. At the second annual general meeting one third of the directors are to retire from office, the ones to retire being the one who have been longest in office since their last election. As between persons who became directors on the same day, those to retire shall unless they otherwise agree among themselves be determined by lot. One third of the board shall thereafter retire annually.

Thirdly, a company may appoint one or some of its employees to its board of directors. Such appointment is primarily intended to provide employees with a forum where they can express their views on the company’s operations, programs or policies. Such employees are usually called Associate directors.

Section 201(2) requires the nationality of origin of a director to be entered or stated in every company’s register of directors and secretaries. It is however not obligatory for a director to be Kenyan or resident in Kenya.

Restriction on appointment of Directors.

Appointment by the articles

Section 182(1) provides that a person shall not be capable of being appointed director of a company by the article unless , before the registration of the articles he has by himself or by his agent authorized in writing, signed and delivered to the Registrar for registration a consent in writing to act as such director; and ether

Signed the memorandum for a number of shares not less than his qualification shares if any or

Taken from the company and paid or agreed to pay for his qualification shares if any

Signed and delivered to the Registrar for registration an undertaking in writing to take from the company and pay for hi qualification shares

These provisions do not apply to;

A company not having a share capital or

A private company

A company which was a private company before becoming a public company

Qualification shares

  Section 183(1) provides that it shall be the duty of every director who is by the articles of the company required to hold a specified share qualification and who is not already qualified to obtain his qualification within two months after his appointment or within the shorter time if any, fixed by the articles. For this purpose, holding of a share warrant payable to bearer would not be regarded as a holding of the shares specified in the warrant. In Holmes vs. Kayes it was explained that the two months period begins to run from the declaration of the result of the vote electing the director.

         Section 183(1) provides that the directors shall vacate his office if he fails to obtain his share qualification or ceases to hold the required number of shares.

Age limit

S. 186 provides that no person shall be capable of being appointed a director of a public company or a private company which is a subsidiary of a public company, if at the time of his appointment-

a) He has not attained the age of twenty one

b) He has attained the age of seventy.

This provision does not apply if; the company’s article provides otherwise or special notice of the resolution to appoint the director was given to the company.

Undischarged bankrupts

S...188 provides that if a person who has been declared bankrupt or insolvent by a competent court in Kenya or elsewhere and who has not received his discharge acts as director of any company without leave of the court shall be liable to imprisonment for a term not exceeding two years or to a fine not exceeding sh.10, 000 0r to both.

Fraudulent persons 

S.189 empowers the court to make an order restraining a person from being appointed or acting as a company’s director for a period not exceeding five years if the person is convicted of any offence in connection with the promotion, formation or management of a company or in the course of winding up it appears that the person has been guilty of fraudulent trading or has otherwise been guilty while an officer of the company of any fraud or breach of duty to the company.

Individual voting

 S.184 provides that the appointment of directors of a company which is not a private company is to be voted on individually unless a motion for the appointment of two or more persons as directors by a single resolution was agreed upon by the meeting without any vote being against it.

DUTIES AND POWERS OF DIRECTORS

The relationship between a company and its directors is that of a principal and agent. As agents, directors stand in a fiduciary relationship to their relationship. They are trustees to the company’s money and property. They also owe a duty of care at common law not to act negligently in managing the company affairs. They are required to carry their duties subject to the restrictions imposed by the articles of association.

         To start with, directors have a duty to act bonafide i.e. act honestly in good faith and what they honestly believe are the best interests of the company.

Secondly, the duty to act intra vires i.e. within the law-exercising powers for the purpose for which they were given.  The directors are not personally liable when they enter into contracts without exceeding their powers as liability will attach to the company. In Ferguson vs. Wilson, it was held that directors are agents and liability will attach to the principal.

       In addition, directors have a duty to avoid conflict of interest. Where a director has interest in the contract he is entering into on behalf of the company, whether the interest is direct or indirect, he must disclose.

Directors are trustees of the company’s property and money and have a duty over it. They also have a duty to engage and dismiss employees.

Further, they owe a duty to care to the company not to act negligently. The degree of care is that of an ordinary person. 

Moreover, the board and the members can exercise certain powers in a general meeting e.g. alteration of the memo of association. 

Directors also have a duty to fill casual vacancies. The number, appointment, term and removal of directors will be ordinarily be provided for in the articles. Initial directors will normally be subscriber and the articles may provide so.

POWERS

To enter into contracts on behalf of the company

To engage and dismiss employees

The powers may be restricted through the articles which may require that their actions be sanctioned by members in a general meeting.

They cannot delegate unless expressly permitted by the articles 

Keep a register of members

Call an annual general meeting with the statutory time

Ensure that proper books of account are maintained

Keep a register of directors and secretaries and notify any changes

DISQUALIFICATION OF DIRECTORS

Table A, Article 88 provides that the office of director shall be vacated if the director-

Ceases to be a director by virtue of S.183 or S.186 or

Becomes bankrupt or makes any arrangement or composition with his creditors generally or

Become prohibited from being a director by reason of any order made by the court under S.189 of the ACT OR

Becomes of unsound mind or

Resigns his office by notice in writing to the company or

Shall for more than six months have been absent without permission of the directors from meetings of the directors held during that period.

In Latchford Premier Cinema Co. vs. Ennion it was held that a verbal notice of resignation which is given to, and is accepted by the general meeting is effective and cannot be withdrawn.

This is so because the general meeting would be deemed to have amended the company’s articles by deleting the words in writing. By implication, a purported oral notice of resignation which is given to and purportedly accepted by the board of directors would be invalid since the directors cannot legally alter the company’s articles of association. 

A person may also cease to be a director for reasons such as death, retirement by rotation under the articles or by dissolution of the company. 

REMOVAL OF DIRECTORS

 By S.185(1) a company may by ordinary resolution remove a director before the expiration of his expiration of his period of office , notwithstanding anything in the articles or in any agreement between him and the company. Special notice must be given of any resolution to remove the director, or to appoint another direct in his place.

     On receipt of the special notice the company must send a copy to the director concerned who is entitled if he so wishes to make written representations to the company. If the director so requests, the company must send the representations to the members with notice of the meeting unless the representations are received by it too late for it to do so.  In such instances the representations would be read out at the meeting at which the director would also be entitled to be heard.

The removal will be effective if it is decided on by an ordinary resolution.

 In Bushel vs. Faith and Another

Harman L J defined an ordinary resolution as a resolution depending for its passing on a simple majority of votes validly cast in conformity with the articles. In this case, shares were held in a property company which owned a block of flats in Southgate, North London, by two sisters and a brother. The shares were held equally. The sisters wished to remove the brother from the board of directors. In normal circumstances, they would have had no problem as they had more than half of the shares. However, there was a provision in the articles of association that states that on a resolution to remove a director, his shares would carry three votes each. The House of Lords held by a majority of four to one that this provision was valid. The effect of this was sufficient to block the brother’s removal as a director. It was held that the effect of finding that weighted voting was permissible in such circumstances was to drive a coach and horses through the intention of the legislature. A weighted voting provision was valid in this context.

COMPENSATION FOR REMOVAL

   Section 185(6) provides that nothing in the section shall be taken as depriving a removed director of compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director. This provision would enable a managing director to sue the company for damages for wrongful dismissal if the effect of his removal as director was to prematurely terminate his appointment as managing director, and was inconsistent with the contract. The director must also, if he is a member of the company, be entitled to an order for the winding up of the company by the court on the just and equitable ground. This was the holding in Ebrahimi vs. Westbourne Galleries Ltd.

DIRECTORS RENUMERATION

         Directors are not regarded as servants or employees of the company of which they are directors. They therefore have no right to be paid for their services unless there is a provision for payment in the articles. In Article 76 of Table A, remuneration of the directors shall from time to time be determined by the company in general meeting. In RE; Duomatic Ltd, a director (who was also a shareholder) threatened to sue the company if he was dismissed as a director and he was subsequently paid £4,000 to leave the company. There was no resolution of the members of the company authorizing the payment. The company subsequently went into liquidation and the liquidator sought the repayment of the £4,000 paid to the director on the grounds, inter alia, that the sum was unauthorized. Buckley J. held that as the payment of £4,000 as compensation for loss of office had not been approved by the shareholders under Section 191 of the UK Companies Act 1948 (the then former equivalent section in the UK to Section 186), it was ultra vires . The Court held that the director who had received the payment and a fellow director were jointly and severally liable to repay the sum of £4,000 to the liquidator. In his judgment, Buckley J stated:

"It follows that the payment was an ultra vires payment, for it was a payment which the section says it was not lawful for the company to make. The directors responsible for making it are liable in respect of it on the grounds of misapplication of the Company's funds..." It was explained that a provision in the articles authorizing payment of directors’ remuneration does not, per se give the right to be paid any specific amount. There must be a resolution passed by the company in general meeting authorizing the payment.

Provide the resolution has been passed, the remuneration is payable whether profits are earned or not, this was the holding in Re; Lundy Granite Co. Remuneration shall be deemed to accrue from day to day. This means that a director who vacates office before completing a year or month in office is entitled to a proportionate part of his yearly or monthly salary as it was held in Moriarty vs. Regents Garage Co.

S.190 (1) provide that it shall not be lawful for a company to pay a director remuneration whether as a director or otherwise free of income tax or surtax.

COMPENSATION FOR LOSS OF OFFICE

Section 192(1) makes it unlawful for a company to make to any director of the company any payment by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, without particulars with respect to the proposed payment (including the amount thereof) being disclosed to members of the company and the proposal being approved by the company in general meeting.

(2) Where a payment which is hereby declared to be illegal is made to a director of the company, the amount received shall be deemed to have been received by him in trust for the company. As was the case in Re; Doumatic Ltd.

Section 193. (1)  It shall not be lawful in connection with the transfer of the whole or any part of the undertaking or property of a company for any payment to be made to any director of the company by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, unless particulars with respect to the proposed payment (including the amount thereof) have been disclosed to the members of the company and the proposal approved by the company in general meeting.

Section 195(2)   Where a payment which is hereby declared to be illegal is made to a director of the company, the amount received shall be deemed to have been received by him in trust for the company.

Or any of the shares in a company, being a transfer resulting from- 

(a) An offer made to the general body of shareholders;

(b) An offer made by or on behalf of some other body corporate with a view to the company becoming its subsidiary or a subsidiary of its holding company;

(c) an offer made by or on behalf of an individual with a view to his obtaining the right to exercise or control the exercise of not less than one-third of the voting power at any general meeting of the company; or

(d) Any other offer which is conditional on acceptance to a given extent, 

a payment is to be made to a director of the company by way of compensation for loss of office, or as consideration for or in connection with his retirement from office, it shall be the duty of that director to take all reasonable steps to secure that particulars with respect to the proposed payment (including the amount thereof) shall be included in or sent with any notice of the offer made for their shares which is given to any shareholders.

Section 195(3) provides that references under sections 192, 193, and 194 to payments made to any director by way of compensation for loss of office do not include any bona fide payment by way of damages for breach of contract or by way of pension in respect of past services.

In TaupoTotara Timber Co. Ltd vs. Rowe the respondent was a managing director of a company and had a service agreement which provided that he was to serve as managing director of the company for 5 years. The agreement further provided that if during that period the company was taken over, the respondent would be entitled at any time within 12 months after the takeover to resign his office and receive a lump sum payment of five times his annual salary tax free. The company was taken over and the respondent duly gave notice of his resignation. The company refused to pay the lump sum and the respondent brought an action for its recovery. The New Zealand Court of Appeal held that he was entitled to recover the sum due. The Privy Council upheld the decision of the Court of Appeal.

The Privy Council held that the Board of Directors of the company was entitled to appoint the managing director on such terms as it thought fit and, in those circumstances, there was no requirement on the Board to seek shareholder approval of the managing director's contract of employment in advance of it being entered into, notwithstanding that it contained provisions for compensation for loss of office. The Privy Council drew a distinction between payments that a company has a pre-existing legal obligation to make and payments which it does not. The Privy Council concluded that it is only the latter payments that require prior shareholder approval.

LOANS TO DIRECTORS

Section 191(1) renders unlawful any loan made by a company to a director of the company or its holding company. It is also unlawful for the company. It is also unlawful for the company to guarantee or secure a loan given to its directors by any other person. These restrictions do not apply to a private company or a subsidiary whose director is its holding company or payments made to a director to meet expenses incurred or to be incurred by him for purposes of the company or to enable him properly to perform his duties as an officer of the company or a loan given by a money lending company such as a bank in the ordinary course of business.

CHAPTER 3

LEGAL PROTECTION OF MINORITIES

INTRODUCTION

A company is a democratic organization whose affairs are to be managed by the Directors according to the provisions of the Companies Act, the Companies Memorandum and Articles of Association and, where a decision of the members is required according to the decision of the majority of the Companies members express as an ordinary or special resolution. The majority of members who have been outvoted during the passing of the relevant resolution must be prepared to abide by the decision of the majority of the company’s members. 

There are however, a few but significant instances in which the Companies Act and the general Law prescribe certain legal limits on the power of the majority to bind the minority of the Company’s members.  Like, a resolution passed by majority would not be allowed to prevail in certain circumstances if it is unfair and prejudicial to minority as a resolution which requires a member to take or subscribe for more shares than the number held by him at the date on which the resolution was passed as per Section 24 of the Companies Act,alters the Companies objectives as per section 8 Companies Act, reduces the company’s capital in a way which is not fair and equitable between the different classes of shareholders as was in British& American Trustees & Finance Corporations Ltd v Couper, it also empowers the Company to embark on or continue with a course of trading which was not contemplated by the minority at the time the company was being formed or it constitutes ‘a fraud on the minority’.

VARIATION OF CLASS RIGHTS

Class Right means that each class share has specific rights, mainly contained in the Article of Association. This relates to Dividend, Return of Capital, and Voting among others. Any variation of class rights must be approved by resolution at separate meetings of shareholders in that class.

Class Rights are rights that attach to a particular of share but not to another class or to shareholders generally. These rights are usually created by a Companies Memorandum of Association or Articles of Association. They relate to rights to Dividends, Rights to share in surplus assets if the Company is wound up, and the right to attend and vote in Company meetings. It also relates to occasions when the company in general meetings wants to alter its capital that will affect the right of particular classes of shareholders differently from others.

Variation, in Greenhalgh v Arderne Cinemas, a sub-division of one class of shares deprived the holder of one class of his power to block a special resolution. Lord Greene MR, “the preference shareholders in light of the wording of the Articles are affected is a matter of business. As a matter of Law, I am quite unable to hold that, a result of the transaction, the rights are varied, and they remain as what they always were.” He also conceded that if the right of one voter per share was changed this would constitute a variation. In White v Bristol Aeroplane, where an increase in one class of shares was held to fail the variance test. In respect of another class notwithstanding that the results alter the equilibrium of the class.

Default rules contained in the statute may be superseded by Variation contained in the Articles of Association.Further protection however by ensuring that any alteration of the variation procedure itself in the articles attracts the protection for class rights. Thus any concerns that the company would simply alter a high variation procedure to a much lower one by Section 21 procedure are defeated by the inclusion of the same section.

Gower and Davies argue that a simple alteration of the variation Procedure will not be possible as a result of Section 630(5), unless, presumably the articles themselves expressly provide a less demanding way of amending Variation procedure than the default rule in the statute. It’s possible for a company to escape many of the provision of section 630 but they must deal with the narrow interpretation given to variation regardless of the actual wording they choose.

In Northern Engineering Industries Plc., Re: a clause in the articles which stipulated that reduction in capital would require the consent of the company’s preference shareholders was upheld and enforced when a proposal to cancel their shares was tabled. A further safeguard that it enables a court review of the majority’s decision. Requiring that dissenting members of a class hold 15%of the shares of that class and they exercise this right to challenge within 21 days. Once the application is made, the variation doesn’t t have any effect until it is either confirmed or cancelled in light of the court’s decision on whether there has been unfair prejudice to the shareholder in question.

In as much as the interpretations of “variation” are narrow, any concerns which the section has exposed have been alleviated by the review procedure under section 633 and section 22 entrenchment mechanism.

Statutory Provisions on Variation of Class Rights

A company can vary the right attached to any class of shares if the proposed variation is consented to in writing by the holders of the three-fourths of the issued shares of that class at a separate general meeting of the holders of the shares of the class. This Article protects the minority members in a company against the majority members in the company by ensuring that they do not hold a joint meeting at which the majority class could pass a resolution for variation of the minority’s rights despite their opposition. Such a resolution would not be a fair one as it would effectively enable the majority forcibly to modify or appropriate to themselves some right of the minority.

However the fundamental flaw in the articles is its failure to make provisions for the protection of the minority members in the minority class. The omission has been compensated for by Section 74 of the act which empowers the holders of not less in the aggregate than 15% of the issued shares of the class being varied to apply to the court to have the variation cancelled, provided that they did not consent to or vote in favor of the resolution for the variation. Where any application is made pursuant to this provision, the variation shall not have effect unless and until it is confirmed by the court. 

An application under the section must be made by a petition within 30 days after the consent was given or the resolution was passed. It may be made on behalf of the applicants by such one or more of their number as they may appoint in writing for the purpose. On any such application the court, after hearing the applicant and any other persons who apply to the court to be heard and appear to the court to be interested in the application, may disallow the variation if it satisfied, having regard to all circumstances of the case, that the variation would unfairly prejudice the shareholder in the class represented by the applicant.

Re: Holders Investment Trust Ltdthe company proposed to reduce its share capital of the 5% 1 pound cumulative preference shares (which were entitled to repayment of capital in priority to ordinary shares) and to effect repayment by the allotment of the holders and equivalent amount of 6% unsecured loan stock, repayable 1985/1990. The trustees of trusts which held 90% of the issued preference share voted at a class meeting in favor of the scheme because they had been advised that as holders of 52% of the company’s ordinary stock and non-voting ordinary shares they would derive overall benefit from the change. Held: the resolution passed at the class meeting was invalid since the trustees who provided the majority of votes casts were not concerned with benefit to holders of the preference share as a class. They had instead considered what was best in their own interest based on their large holding of stock and ordinary share

Re: Carruth v I.C.I Ltd, a series of general and class meetings of the defendant’s company were held to approve the successful stages of capital reorganization. Out of 1600 members present only 565 were holders of preferred shares but only the holders of shares of each class were invited to vote (as class) at their class meeting. The others present took no part. Held: there was no regularity of procedure in conducting a class meeting in the presenceof non-members of the class. A class meeting is one which only members a particular class vote. It doesn’t matter that others who are not members of the class are present.

Variation Procedure

It is only necessary to follow the variation of class right procedure if what is proposed amounts to a variation of a class right to itself. It is not a variation of class rights:

To issue shares of the class to allottees who are not already of the class as earlier seen in White v Bristol Aeroplane Co. where the company made a bonus issue of new ordinary and preference shares to the existing ordinary shareholders who alone were entitled under the article to participate in bonus issues. The existing preference shareholders objected that by reducing their proportion of the class of preference shares the bonus issue was a variation of class rights to which they had not consented.

To subdivide shares of one class and thereby increase the voting strength of that class:

To return capital to the holders of preference shares which carry no right on a winding up to shares in surplus assets but merely a right to prior repayment in the case of Re: Saltdean Estate Co. Ltdin which the company which had ordinary shares and preference shares, the latter being entitled to a prior return of capital on a winding up but nothing more. The company proposed to reduce its capital by returning the amount paid by the preference shareholders. Held:it was not a variation of class rights of the preference shareholders.

To create an issue a new class of preference shares with priority over an existing class of preference shares as found in the case of Underwood v London Music Hall

Without a variation of a class right as defined by the memorandum of articles there is no alteration of rights to which the safeguards of variation of rights clause this was as seen above.

A class of shares may carry different rights in one respect but the same right as other classes in other respect. Because of the different it runs as a class to which the safeguards apply. This is so even when the class right to be varied is shared with other classes. Section 74(4) provides that the decision of the court on an application made under Section74 (1) shall be final. Section 74(5) states that the company must deliver certified copy of the court order to the registrar within 30das after the making of the order. If this provision is not complied with, the company and every officer of the company who is in default shall be liable to a default fine. It is hoped that such cases as may be decided by our courts in due course will shed much needed judicial light on the meaning of class rights and the instances when such rights may be regarded as having been varied or abrogated.

Oppression of Minorities

Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members including him may make an application to the court by a petition for an order . The court is empowered to make such order as it thinks fit with a view to bringing to an end the matters complained of if, on any such petition it is of the opinion that the companies affairs are being conducted as alleged by the applicant and to wind up the company would unfairly prejudice the applicants but the proved facts would have justified the company’s winding up on the just and equitable grounds.

The court is empowered to make an order which:

Regulates the conduct of the company’s affairs in the future as in Re: H.R. Harmer Ltd in which the father (Harmer) was restrained from managing the Company’s affairs in future;

Requires some members of the company to purchase the shares of other members, as was in Scottish Wholesale Co-operative Society v Meyer

Requires that the company itself to purchase the shares held by the oppressed members, and the consequent reduction of the company’s capital.

Meaning of Oppression

Examples of oppressive conduct envisaged by the Section:

Where controlling directors unreasonably refuse to register transfers of the minority holdings so as to force a sale to themselves at a low price. Where the controlling directors take excessive remuneration so as to leave virtually nothing for distribution by way of dividends.

Instances of potential aggression

The issue of shares to directors and others on advantageous terms

The passing of non-cumulative preference dividends on shares held by the minority

In Scottish Co-operative Wholesale Ltd v MeyerLord Dening observed that the section give a large discretion to the court which would be well exercised in making an oppressor make compensation to those who have suffered at his hands. Lord Jenkins, L.J. in Re H.R. Harmer Ltdstated, ‘prima facie, therefore, the word ‘oppressive’ must be given its ordinary sense.’

Conditions for Relief

Lord Jenkins made a summary in the case of Re H.R. Harmer Ltd, the conditions which must be met before relief under the section can be granted by the court when he said that

The oppression complained of must be complained of by a member of the company and must be oppression to some part of the members in their capacity as a member(s) of the company as such

The facts of the case must not only be those that would justify the making of a winding up order under the just and equitable rule but must also be of a character which have in them the requisite element of oppression.

The phrase ‘the affairs of the company are being conducted’ suggests prima facie a continuing process and is wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company whether de facto or de jure.

These applications by the English courts rendered the section largely ineffective as a minority protection section and culminated in its repeal by the English Companies Act 1989. The statutory provisions of minorities have been supplemented by judicial intervention.

Fraud on the Minority

The exact meaning of the expression ‘fraud on the minority’ is not easy to determine. But at least it is clear that both ‘fraud’ and ‘minority’ are used somewhat loosely. The need not be any actual deceit; if there were, those on whom it was practiced would have a common law remedy against those who willfully deceived them. Fraud connotes an abuse of power analogous to its meaning in a court of equity to describe a misuse of a fiduciary position.It’s neither necessary that those who were injured should be a minority; indeed, the injured party will normally be the company itself, though sometimes those who have really suffered will be a class or section of members, not necessarily a numerical minority, who are outvoted by the controllers. It covers certain acts of a fraudulent character in the wide.

Where the company is defrauded; the type of fraud on minority usually involves misappropriation of the company’s property

Where the minority as individuals are defrauded, this may involve expulsion of a minority shareholder or the inequitable use of voting power by the majority of the company’s members against the minority shareholder

Expulsion of Minority: an expulsion of a member from the company will amount to fraud unless it is done bona fide and for the benefit of the company as a whole

Inequitable use of majority power: Clemens v Clemens Bros Ltd wrongs that the minority shareholders complained of were unique cases of perceived wrong doing. What a judge can do in such instances is, at best, to reply on his own innate sense of right and wrong and then make a decision which he considers to be the correct one. 

THE RULE IN FOSS v HARBOTTLE

In legal theory corporation denotes an association of a number of persons for some common object or objects in ordinary usage it is associated with economic purposes or gain.  A corporation can be defined as an association of several persons who contribute money or money’s worth into a common stock and who employ it for some common purpose.  

In Foss-v- Harbottle two minority shareholders in a company alleged that its directors were guilty of buying their own land for the company’s use paying themselves a price greater than its value. This act of the directors resulted in a loss to a company. The minority shareholders therefore decided to take an action for damages against the directors. The shareholders in a general meeting, by majority resolved not to take any action against the directors alleging that they were not responsible for the loss which had incurred. The court dismissed the suit on the ground that the acts of directors were capable of confirmation by the majority of members and held that the proper plaintiff for wrongs done to the company is the company itself and not the minority shareholder, and the company can act only through its majority shareholders.

A rule of corporation’s law was espoused in Foss v. Harbottleand since then shareholders have no separate cause of action in law for any wrongs which may have been inflicted upon a corporation. In Hercules Management, it was stated that "The rule in Foss v. Harbottle provides that individual shareholders have No cause of action in law for any wrongs done to the corporation and that if an Action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action."

"If the corporation is a legal person separate from its members, it follows that for a wrong done to it the corporation itself is the only proper plaintiff.”

THE PRINCIPLE OF MAJORITY RULE

The principle of majority rule is the principle that was recognized in Foss-v- Harbottle. Thus the rule in Foss-v- Harbottle is known as the ‟Majority Rule” or “proper plaintiff principle.”

The rule provides that the proper plaintiff in an action to redress an alleged wrong to a company on the part of any one, whether director, member or outsider, or to recover money or damages alleged to be done to it, is prima facie the company and where the alleged wrong is any irregularity which might be made binding on the company by a simple majority of members, no individuals member can bring an action in respect of it.

The principle was also stated by Mellish L.J in Macdougall v Gardianer in these words.‟ If the thing complained is a thing which, in substance, the majority of the company are entitled to do legally, there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.” In this case the articles of the company empowered the chairman, with the consent of the members in a meeting to adjourn a meeting, and also provided for taking a poll if demanded by the shareholders. The adjournment was moved 147 and declared by the chairperson. A shareholder brought an action for declaration that the chairperson’s conduct was illegal. It was held that the shareholder could not bring the action, if the chairman was wrong the company could sue.

Similarly Lord Davey in BurlandvEalre observed as follows.‟ it is an elementary principle of Law relating to joint stock companies that the court will not interfere with the internal management of companies acting within their powers and has in fact no jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the company or to recover monies or damages due to the company, the action should prima facie be brought by the company itself.”

SEPARATE LEGAL PERSONALITY OF A CORPORATION

The rational of the above rules is that a company is a separate legal entity from the members who compose it. As such, if any right of the company is violated, it is the company which can bring an action.

." In Prudential Assurance Co. Ltd v Inland Revenue commissioner, the English Court of Appeal wrote: "The rule in Foss v. Harbottle is the consequence of the fact that a corporation is a separate legal entity… The company is liable for its contracts and torts; the shareholder has no such liability. The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed on them by the articles of association. If it is right that the law has conferred or should in certain restricted circumstances confer further rights on a shareholder the scope and consequences of such further rights require careful consideration."

In the landmark case of Salomon v. Salomonwhere the separate legal personality of a corporation was first elaborated, Lord Halsbury stated that “Either the limited company was a legal entity or it was not.  If it was, the business belonged to it and not to Salomon.  If it was not, there was no person and nothing at all and it is impossible to say at the same time that there is the company and there is not.”

This means that the separate legal personality of a company should cut across all edges even when it comes to suing and being sued in that a shareholder no matter how many shares one has in a corporation. As a legal person, a corporation can take action in its own name to enforce its legal rights.  Conversely it may be sued for breach of its legal duties.  The only restriction on a company’s right to sue is that it must always be represented by a lawyer in all its actions.  This was seen in East Africa Roofing Co. Ltd v Pandit.

EXCEPTIONS TO THE MAJORITY RULE

It has become clear from the Rule in Foss v Harbottle that it is the majority rule that prevail in company management. Such wide powers concentrated in their hands may be misused to exploit the minority shareholders and to serve their personal ends. The possibility of such domination will be even more in case of private companies where a few individuals may hold a majority of shares. It is, therefore, rightly pointed that a proper balance of the rights of the majority and minority shareholders is essential for the smooth functioning of the company. It is in this regard that various exceptions to this rule have been admitted which include;

Ultra vires or illegal acts

It may be noted that the majority rule will apply only when the act done by the majority is one, which the company is authorized by its memorandum to do. Any act done by the majority beyond the object clause is ultra vires and it cannot be ratified even if every shareholder is willing to do so. In the case of the ultra vires acts even a single shareholders can restrain the company from committing those acts by filing a suit of injunction .Similarly, the majority rule will not apply where the act in question is illegal. This was illustrated in Ooregum Gold Mining Co. v Roper which involved illegal issue of shares at a discount.

It has long been held that where the act is ultra vires or illegal by statute, the individual cannot be prevented from litigating the matter, merely by an ordinary resolution in general meeting. The standing given to the member by the case law in circumstances of ultra vires can be guided by the provisions of section 8.

Act supported by insufficient majority

For certain acts, the Act or the articles of the company require a special majority of three-fourths of the shareholders. The majority rule cannot be invoked to override, these requirement by a resolution passed by a simple majority. If the requirement of a special majority is not fulfilled, any shareholder can return the company from acting on the resolution. This was illustrated in the case of Edwards vHalliwellwhere it was held that the rule in Foss did not prevent a minority of a company to sue because the matter upon which they were suing was one which could only be done or validly sanctioned by a greater than simple majority.

Acts of majority constituting fraud on minority

The rule in Foss v Harbottle will not apply to such acts of majority which constitute a fraud on minority. Majority powers must be exercised bona fide for the benefit of the company as whole. A resolution would constitute a fraud on minority if it’s not bona fide for the benefit of the company as a whole. In such cases, the decisionof the majority can be challenged by the minority. Similarly, an action of the majority which discriminate between majority shareholders and minority shareholders would constitute a fraud of minority and a special resolution would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and minority shareholder, so as to give the former an advantage of which the latter were deprived as was in the case of Cook v Deeks. This was situation has been seen in various cases.

In Brown v. British Abrasive Wheel co, for example, the majority shareholders holding ninety-eight per cent of the shares were willing to subscribe further capital which the company badly needed, but only if they were able to acquire the shareholding of the minority. They passed a special resolution to alter the articles to enable them purchase the minority share compulsory on certain terms. The plaintiff refused to sell its shares and challenged the validity of the majority resolution. It was decided that the alteration was not for the benefit of the company but for the benefit of the majority and accordingly an injunction was granted against the company prohibiting it from carrying out the resolution. 

Infringement of personal rights

Sometimes the articles of association give the shareholders rights which they can enforce against the company. These cannot be taken.  Every shareholder has individuals membership rights against the company, conferred either by the companies Act or the articles of the company .Such individual membership rights include the right to attend meetings, the right to receive dividends, the right to insist on strict observance of the legal rules, statutory provisions in the memorandum and articles etc. If such a right is in question, a single shareholder can, on principle, defy a majority consisting of all other shareholders. The rule in Foss v. Harbottle has no application so far as these individual membership rights are concerned. If any individual membership right has been infringed, he can sue in his own name and this right of action is unaffected by any decision of the majority. Thus, where the chairman of a meeting at the time of taking a poll ruled out certain votes, which should have been included, a suit by the shareholder concerned was held to the validly filed. 

Where there is a breach of duty

The minority shareholders may bring an action against the company where there is a breach of duty by the director and majority shareholders to the detriment of the company. In this case, the action will be allowed even where there is no fraud. 

In Daniel v Daniels a company, on the instruction of the two directors (who were husband and wife) having majority shareholding sold the company’s lands to one of them (the wife) at gross undervalue. The minority shareholders brought an action against the directors and the company, it was held that the company and minority shareholder had valid cause of action as the director knew or ought to have known that the sale was at a gross undervalue.

ADVANTAGES OF RULE IN FOSS V HARBOTTLE TO A CORPORATION

Recognition of the separate legal personality of a company in that if a company has suffered some injuries, and not the individuals’ members, it is the company itself which can seek redress, 

Need to preserve the right of the majority to decide. The principle in Foss v Harbottle preserves the right of the majority to decide how the affairs of the company shall be conducted. It is but fair that the wish of the majority should prevail. 

Multiplicity of futile suits is avoided. Clearly, if every individual member were permitted to sue anyone who has injured the company through a breach of duty there could be enormous waste of time and money and a bulk of cases in our courts.

Litigation suit of a minority is futile if majority do not wish it. If the irregularity complained of is one which can be subsequently ratified by the majority. It is futile to have litigation about it except with the consent of the majority in a general meeting 

CONCLUSSION

Supremacy of the majority is the fundamental principle of corporate law. Generally, a majority of members of a company is entitled to exercise the powers of the company and generally to control its affair. There is no doubt that directors enjoys wide powers in respect of controlling, directing and managing the affairs of a company but one must not forget the fact that directors are elected by majority shareholders. The act lays down certain matters which can be decided by the shareholders at general meetings by simple majority, whereas certain more important matter can be decided by special majority of three –forth of the company, it is the wish of the majority share holders that prevails. The majority shareholders determine the fate of the company.

However it is clear that an unrestrained principle of majority rule or a total fetter on litigation by shareholders could often work injustice. For instance, the majority of the shareholders could vote to divide the assets of the company among themselves, leaving the minority with nothing and with no remedy. That would be absurd and so the courts have developed exceptions partly due to the influence of academic writers over the years.

CHAPTER 4

PROSPECTUSES

A prospectus is “Any prospectus, notice, circular, advertisement or other invitation offering to the public for subscription or purchase of any shares or debentured in the company” It is only in the case of a public company that a prospectus may be issued. A private company must always raise its capital privately as required by section 30 of the Company Act.

The word invitation and offering in that definition are loosely used because when a company issues a prospectus it doesn’t offer to sell any shares but rather invite offers from members of the public. A prospectus is therefore not an offer but an invitation to treat. The word prospectus is vague and uncertain when an invitation is made to the public it is a question of fact. The question of ‘public’ isn’t restricted to a certain section of the public but includes any member of the general public.

Re South of England Natural Gas Co.

A newly formed company issued 3,000 copies of a document, which offered for subscription shares in a company was headed “For private circulation only”

These copies were then circulated to the shareholders of a number of gas companies. So the question here was this a prospectus?

It was held that this was an offer to the public and therefore constituted a prospectus.

CONTENTS OF A PROSPECTUS

The object of a Company’s act is to compel a company to disclose in a prospectus all the necessary information which would enable a potential investor in deciding whether or not to subscribe for a company’s shares or debentures. Therefore section 40 requires that every prospectus shall state the matters specified in article 1 of the 3rd schedule to the Act and that it will also set out the report specified in part 2 of that schedule.

The provisions in that schedule are designed mainly to provide information about the following matters

1. Who the directors are, and what benefit they will get form directorship

2. In the case of a new company what profits are being made by the promoters

3. Amount of capital required by the company to be subscribed the amount actually received or to be received, the precise nature of consideration which is not paid in case

4. In the case of an existing company what the company’s financial record in the past.

5. The company’s obligations under any contract entered into.

6. The voting and dividend right of each class of shares.

If a prospectus includes any statement by an expert then the expert must have given written consent to the inclusion of the statement and the prospectus must take it like he has done so. Section 42.Contravention of these requirements renders the company and any person who knowingly a party to the issue of prospectus to a fine not exceeding Kshs. 10,000.

Section 42 defines expert “Including Engineer, Valuer, Accountant or any other person whose profession gives authority any statement made by him.”

In addition to the requirements it must be dated and the date stated therein is date of publication of the prospectus. However there are 2 instances when a prospectus need not contain matters set out in schedule 3 namely

1. When the prospectus is issued to existing members or shareholders of the company. 

2. When the prospectus relates to shares or debentures uniform to previous debentures or shares.

LIABILITY IN RESPECT OF PROSPECTUSES 

If a prospectus contains untrue statements the Act subscribes both a penalty at criminal law and also civil liability if payment of damages. As concerns criminal liability section 46 where a prospectus includes any untrue statements any person who authorized the issue of the prospectus is guilty of an offence and liable to imprisonment not exceeding 2 years or a fine not exceeding 10,000 or both. Such a fine and imprisonment unless he proves the statement was material or that he had reasonable grounds to believe or did at the time of issue of prospectus believe the statement true. A statement is deemed untrue and misleading in the form and context in which it is included. In the case R v. Kylsant, In this case the company sustained continuous losses for 6 years between 1921-1927.  The Company issued a prospectus, which in all material facts was correct. It further specified that the dividends paid were high. But the dividends were being made out of abnormal profits from 1st world war and the prospectus was misleading in its context.

CIVIL REMEDIES

There are 2 remedies for those who subscribe for shares as a result of misleading statements in a prospectus.

1. Damages

2. Rescission 

Section 45 provides for compensation to all persons who subscribe for shares or debentures on the faith of prospectus for loss or damage sustained for statements included therein. If the statement is false to the knowledge of those who made it, it amounts to fraud and damages recoverable from all those who made the statement intending on it to be referred upon.in the Case of Derry v. PeekHerein, a company had power to construct tramways to be moved by animal power and with the consent of the board of trade by steam or mechanical power.

The directors issued a prospectus stating that the company had power to use steam or mechanical power. On reliance of this misrepresentation the plaintiff bought shares. Subsequently the Board of Trade refused to give trade to use of steam and mechanical power and as a result the company was wound up.

The plaintiff brought an action for deceit alleging fraudulent misrepresentation. It was held that the defendant weren’t liable, as they had made the incorrect statement in the honest belief that it was true. Lord Herschel stated “The authorities established 2 major propositions

1. In order to sustain an action for deceit there must be proof of fraud and nothing short of that will suffice

2. Fraud is proved when it is shown a false representation is made either

1. Knowingly

2. Without belief in its truth

3. Recklessly not caring whether it be true or false

In order to succeed in an action for damages for fraud the plaintiff must show that the misrepresentation was made to him or that he was one of a class of persons who were intended to act upon it.

The ordinary cause of a prospectus is for the public to become allotees of shares to a company. Once shares have been allotted, the prospectus would’ve served its purpose and thereafter can’t be used as a ground for filing an action for fraud in respect of shares bought at a later date from another source. The case of Peek v. GurneyThe allotment of shares in the company began on July 24th and was completed on 28th July. In October the plaintiff bought some shares on the stock exchange. He later found that the prospectus for July contained untrue statements and this brought an action. The question therefore was whether he could he sue? It was held that the plaintiff couldn’t base this action on the prospectus intended to be based to the original subscribers. The directors aren’t liable after full allotment of original shares for all subsequent dealings, which may take place to those shares on the stock exchange. The rule in Peek v gurney won’t apply where a prospectus is intended to induce not only the original subscribers of a company’s shares but also to influence the subsequent purchase of those shares.

Another classic point is that of Andrews v. Mock Ford The plaintiff alleged that the defendant sent him a prospectus inviting him to buy shares in the company, which they knew would be a sham but the plaintiff, didn’t subscribe for the shares. The prospectus eventually produced a very scanty subscription and the defendant caused a telegram to be published in the local newspaper to the effect that they struck a vein of gold and this they alleged they confirmed the statistics in the prospectus. The plaintiff bought shares on this basis and eventually the company wound up.

The question here is had the prospectus served its purpose?

It was held that the prospectus intended to induce the plaintiff both to subscribe for shares initially and also to buy them in the market thereafter. The telegram was part of the prospectus.

Lord Justice Smith “There was proof against the defendant a continuous fraud on their part commencing with ascending of the prospectus to the plaintiff and culminating in the direct lie told in a telegram which was intended by a defendant to operate in the plaintiffs mind and on the mind of others and did operate to his prejudice and the advantage of the defendant. In this case the function of the prospectus wasn’t exhausted and the false telegram was brought into play by the defendant to reflect back upon and countenance the false statement in the prospectus the purchaser of shares induced to buy shares by the mis-statement in the prospectus has an action for damages in negligence. He has also an action for negligent mis-statement.

Under the case of Hedley Byrne & Co. v. Heller & Partners, All these actions are directed to the directors personally.

Rescission

As against the company a person induced to buy shares by a misrepresentation in the prospectus may rescind the contract. On buying shares one’s contract is with a company itself, the remedy is available only against the company. To be entitled to this remedy it is not necessary for the purchaser of the shares to show that the statement was fraudulent or negligent. Even if the misrepresentation was innocent rescission lies. The right to rescind is subject to two limitations.

1. The allotee loses the right to rescind if he shows any election to affirm the contract. For example by attending and voting at the company’s meetings or by accepting to sell the shares 

2. If the allotee doesn’t rescind the contract before the company is wound up he loses the right to do so as from the moment winding up proceedings are commenced.

CHAPTER 5

DEBENTURES

INTRODUCTION

A debenture is a type of debt instrument that is not secured by physical assets or collateral. They are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. However section 2 of the Companies Act cap 478 of the laws of Kenya defines a debenture as includes debenture stocks, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.

In the case of Levy v Abercorris Slate and Slab Co (1887) Judge Chitty defines a debenture as “a document which either creates a debt or acknowledges it, and any document which fulfills either of these conditions.”

A debenture has been said to be similar to a promissory note but with more elaborate conditions and generally in anticipation of a more longer term loan and optionally, with some form of security. In the case of Edmonds v Blaina Company  Justice Chitty adopted these words,” the term debenture has not so far a I am aware, ever received any precise legal definition. it is comparatively speaking, a new term…” the courts have struggled mightily to define debenture_-the law reports containing many references to the difficulty in a precise definition.

Debentures are therefore in form of a security which may be bought and sold in such a way as shares in order to give lenders some security against non-repayment of their loan, a charge is often made against the assets of the company.

Debentures are commonly issued through a prospectus. The amount might be payable by installments on application, allotment and calls. But usually the amount is payable in one lump sum

CHARACTERISTICS FEATURES OF A DEBENTURE

1. It is issued by the company in the from of a certificate of indebtedness

2. It generally specifies the date of redemption, repayment of principal and interest on specified dates

3. It may or may not create a charge on the assets of  the company

4. It has a common seal of the company

5. It is an instrument of loan

6. Debenture holders are the creditors of the company not  owners

7. Debenture  holders have no right to cast vote in a company’s general meeting

8. At the time of liquidation, first priority is given to debenture holders at the time of repayment

DEBENTURE STOCK

It is a loan contract issued by a company or public body specifying an obligation to return borrowed funds and pay interest, secured by all or part of the company’s property. Certificates specifying the amount of stock, with coupons for interest attached, are usually issued to the lenders. It is generally secured by a trust deed. Where there is no charge, debenture stock is normally called unsecured loan stock.

It is not necessary for an issue of debentures to be fully paid and then turned into stock; the issue can be made in the form of the stock, right from the beginning. But company cannot issue share stock directly, it can only convert shares into stock when fully paid.

DIFFERENCES BETWEEN DEBENTURES AND DEBENTURE STOCK

1. A debenture is usually for a fixed sum, e.g. for shs.500 which can be transferred in its entirety while a debenture stock can be transferred in fractional amounts e.g. 550 or shs.336

2. A debenture may be issued with or without security whereas a debenture stock is generally created by a trust deed

CLASSES OF DEBENTURES

Debentures have been classified into three broad categories. They include:

• Classification according to negotiability 

• Classification according to security

• Classification according to permanence

CLASSIFICATION ACCORDING TO NEGOTIABILITY

1. BEARER DEBENTURES

These are the debentures which are not recorded in a register of the company. Such debentures are transferable merely by delivery. Holder of bearer debentures is entitled to get the interest. A bona fide transferee for value is not affected by the defect in the title of the prior holder.

In Bechuanaland  Exploration Co. Vs London Trading Bank Ltd held debentures of an English company, payable to bearer. It kept them in safe of which the secretary had the key. The secretary pledged the debentures with a bank security for a loan taken by him. The bank took the debentures bona fide. It was held that the bank was entitled to the debentures as against the company.

2. REGISTERED  DEBENTURES

These are the debentures which are registered with the company. The amount of such debentures is payable only to those debenture holders whose name appears in the register of the company. It is issued under the seal of the company. It usually contains the following clauses:

• A covenant to pay the principal sum

• A covenant to pay interest

• A description of the charge on the company’s undertaking and property

• A statement that is issued subject to the conditions endorsed thereon

CLASSIFICATION ACCORDING TO SECURITY

1. SECURED DEBENTURES

These are the debentures that are secured by a charge on the assets of the company. These are also called mortgage debentures. The holders of secured debentures have the right to recover their principal amount with the unpaid amount of interest on such debentures out of the assets mortgaged by the company.

2. UNSECURED DEBENTURES

Also known as naked debentures. They do not carry any security with regard to the principal amount or unpaid interest. The holders of these debentures may sue the company for recovery of the debt.

CLASSIFICATION ACCORDING TO PERMANENCE

1. REDEEMABLE DEBENTURES

These are debentures which are issued for a fixed period. The principal amount of such debentures is paid off to the holders on the expiry of such period. These debentures can be redeemed by annual drawings or by purchasing from the open market.

2. NON-REDEEMABLE DEBENTURES

These are debentures which are not redeemed in the life time of the company. Such debentures are paid back only when the company goes to liquidation. A debenture will be treated as irredeemable where either there is no fixed period for repayment of the principal amount or repayment of it is made conditional on the happening of an event which may not happen for an indefinite period or may happen only in certain specified and contingent events e.g. winding up of the company. They are not invalid because of the condition that they are made irredeemable or redeemable only on the happening of some contingency or on the expiration of a period.

In Knightsbrigdge Estates Trust Ltd v Byrne a company mortgaged 75 houses and other properties to secure 310,000 dollars repayable by installments over 40 years. There was no right of redemption before the 40 years expired. It was held that the mortgage was a debenture and valid under the law.

3. DEBENTURES WITH ‘PARI PASSU’ CLAUSE

Debentures are usually issued in a series with a paripassu clause. In such a case, they are to be discharged rateably, though issued at different and varying times. In the event of a deficiency of assets to satisfy the whole debt secured by the issue of debentures, they will abate proportionately. If there is no ‘paripassu’ clause in their terms of issue, they are payable according to the date of issue. If they are issued on the same date and are serially numbered, they would rank in numerical order.

A company cannot, however, create a new series of debentures to rank ‘paripassu’ with an old series, unless the power to do so is expressly reserved and contained in the debentures of the prior series. This was explained in the case of Lister v Henry Lister and Son

CHAPTER 7

COMPANY SHARES

Introduction

Under the Companies Act a share is a “share in the share capital of a company” , according to Bryan A Garner “A share an allotment portion owned by, contributed by, or due to someone or its one of the definite number of equal parts into which the capital stock of a corporation or joint stock company is divided”

Farwell J in the case of Borlands Trustees v Steel Brothersgave the judicial definition of a share and stated that “A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all shareholders (inter se in accordance with Article 22 Companies Act Table A). A share is not a sum of money, but an interest measured by a sum of money and made up of various rights contained in the contract including the right to a sum of money of a more or less.”

A person who acquires a share in a company automatically becomes subject to the obligations imposed by the Company’s Act, the company’s memorandum of association and the company’s articles of association.  He also becomes entitled to the rights similarly conferred.

Shareholders obligations

The primary obligations of a shareholder is to observe the provisions of the Companies Act and as well as the provisions outlined in the Memorandum of Association and Articles of Associations. When the Company is limited by shares he is also under the obligation to pay when called upon to do so the amount if any unpaid on the shares he holds.

Shareholder rights

According to the Act, a shareholder has the following rights; a right to object to a proposed alteration of the company’s objects, to apply to the court for cancellation of a proposed variation of the rights attached to a particular class of shares, to inspect without fee copies of the instruments creating charges and the company’s register of charges, to require the directors to convene an extraordinary general meeting of the company, to appoint a proxy to attend a meeting, to apply for a court order in cases of oppression and to apply to the court for the winding up of the company

Transfer of shares

The Companies Act provides that the shares of any member in a company shall be movable property transferable in manner provided by the articles of the company this provision does not restrict a member’s right to transfer his shares which, prima facie, are freely transferable.

Restrictions on transferability

In Re; Smith & Fawcett ltd Lord Greene, M.R. stated that, “… One of the normal rights of shareholder is the right to deal freely with his property and to transfer it to whomsoever he pleases. When it is said. That regard must be  had to this last consideration, it means, I apprehend , nothing more than that the shareholder has such prima facie right, and that right is not to be cut down by  uncertain language or doubtful implications. The right, if it is to be cut down, must be cut down with satisfactory clarity. It certainly does not mean that articles, if appropriately framed, cannot be allowed to cut down the right to transfer to any extent which the articles on their true construction permit.”

This statement makes it clear that the restrictions on transferability of shares, if any, depends solely on the provisions of the company’s articles and may take any form.

Public companies.

In the case of public companies Article 24 of table A, Part I, provides that “the directors may decline to register the transfer of a share to a person of whom they shall not approve and they may also decline to register the transfer of a share on which the company has a lien”.

This provision maybe explained as follows;

In Re; Smith & Fawcett Ltd. Greene , M.R., stated that ‘’the principles to be applied  in cases where the articles  of a company  confer a discretion on directors work regard to acceptance  of transfers of shares are, for the present  purposes, free from doubt . They must exercise their discretion bona fide in what they consider – not what a court may consider – is in the interests of the company, and not for any collateral purpose. They must have regard to those considerations, and those considerations only, which the articles on their true construction permit them to take into consideration.’’ it is for the transferee who challenges the director’s refusal to prove that the directors have not acted bona fide.

Under   the article, the directors may only decline to register a transfer to ‘’a person of whom they shall not approve.’’ They cannot decline on other grounds. This is illustrated by Re Bede Steam Shipping Co. in which the directors were authorized to refuse transfers if in their opinion it was contrary to the interests of their company that the transferees should be members. The directors rejected transfers of small numbers of shares and of single transfers, on the grounds that it was prejudicial to the company that it issued share capital should be fragmented. It was held that the reason given was invalid. The power to refuse must, according to the articles, be confined to cases of objection to transferees on personal grounds and the directors had not done so. Their objection was not an objection to the transferees personally.

The other ground of refusal under the article to register a transfer would be that the company has a lien on the relevant shares. Registration cannot be refused on grounds other than those stated in the article. This was explained in Re; Smith & Fawcett Ltd when Greene, M.R. stated; ‘’Where articles are framed with some limitation on the discretionary power of refusal it follows on plain principle that if the directors go outside the matters which the articles say are to be the matters and the only matters to which they are to have regard, the directors will have exceeded their powers’’.

If the directors wrongfully fail to exercise their power of refusal, the transferee may apply to the court for rectification of the register and the entry of his name therein. This is illustrated by Re Hackney Pavilion Ltd in which a transfer of shares was lodged with the company by the executors of a deceased director and shareholder. The two existing directors held a board meeting to consider the transfer but disagreed as to whether it should be registered. The director who acted as the chairman at the board meeting had no casting votes. The company secretary wrote to the executors informing them that the directors had refused to register the transfer. In proceedings instituted by the executors it was held that the register of members must be rectified by registering the transfer. This was so because a positive act of refusal (i.e. a resolution passed by the board of directors to the effect that the registration be, and is hereby, refused) was necessary and there had been none. This decision was approved by the House of Lords in Moodie v Shepherd (Bookbinder) Ltd.

Private companies

In the case of private companies which have adopted table A, Article 24 has been excluded by Article I of part II and is replaced by the following provision;

‘’  The directors may , in their absolute discretion and without assigning any reason therefore, decline  to register any transfer of any share, whether or not it is a fully paid share.’’

The effects of this provision was fully explained in Re; Smith & Fawcett Ltd. provided the directors to exercise their discretion bona fide and cannot be ordered by the court to register a transfer of shares which they have declined to register. The director’s power of refusal must be exercised within a reasonable time from the receipt of the transfer. By section 80 (1) the reasonable time is limited to a period of sixty days after the date on which the transfer is lodged with the company. If within that period the company fails to send the transferee notice of the refusal the directors’ power of refusal lapses and cannot be exercised thereafter. This is illustrated by the facts of, and the decision in, Re: Swaladele Cleaners Ltd. For this purpose, there is no distinction between private and public companies.

Procedure of Transfer

The procedure to be followed by a shareholder who intends to transfer his shares depends on the provisions of the company’s articles. In the case of companies which have adopted Table A the procedure is governed by Articles 22-28.The following is the sequence of events.

The transferor completes the transfer form, or if a transfer form is not used, he prepares a document which corresponds to a transfer form. The form/document, states the name of the company, number and description of shares to be transferred, transferor’s name and address, unless the transfer is a blank transfer, a consideration paid for the shares and the transferee’s name and address.

The transferor signs for the transfer form or document. It is usual for the transferor to sign the transfer form in the presence of a witness who also signs it although this is not required by Table A, Article 22.

The transferor gives the transfer form or document and the relevant share certificate to the transferee.

The transferee signs the transfer form in the presence of a witness who also signs it. If the shares are fully paid the transferee’s signature would be largely superfluous. In the case of partly-paid shares the transferee’s signature would confirm his acceptance of the liability for the amount unpaid on the shares.

The transferee affixes the appropriate stamp duty to the transfer form or document and lodges it and the share certificate with the company for registration. Article 25 provides that the directors may decline to recognize any instrument of transfer if, inter alia: A fee of sh. 2/50 ,or the lesser sum payable, is not paid to the company, or the instrument of transfer is not in respect of one class of share

The transfer is considered and approved by the board of directors.

The company secretary makes out a new share certificate in the name of the transferee and affixes the company’s seal thereon after it is signed by one of the directors and countersigned by the secretary or another director. If the company has no lien on the shares and there is no prospect of the directors declining to register the transfer, the company secretary would first make out a new share certificate in the name of the transferee and then present it together with the transfer for the board’s consideration. The board would then direct that the new certificate be sealed and issued to the transferee.

The transferee’s name is entered on the company’s register of members in place of the transferor’s name.

The new certificate is delivered, or set-to the transferee. Under the Companies Act the company must complete the certificate and have it ready for the delivery within sixty days after the date on which the transfer was lodged with the company. If default is made in complying with this provision the company and every officer of the company who is in default shall be liable to a default fine. A person aggrieved by any unnecessary delay on the part of the company’s officers in registration the transfer may apply to the court for rectification of the register of members under Section 118 if the company goes into liquidation before registration of the transfer. The court would in such a case order registration nunctunc i.e. that the transferee’s name was registered at the time that registration ought to have taken place.

Certification of transfers.

A certification is necessary where the transferor is transferring only a part of his holding, all his shares to two or more transferees or where the transferor has not yet received as certificate from the company but has been issued with a document of title to the shares like an allotment letter and also if the transferee is not satisfied with the transferor’s title to the shares example because the name on the certificate does not correspond with the transferor’s name. In any of these circumstances, the transferor or his broker will forward the transfer form or document together with the certificate, unless the certificate has not yet been issued, to the company for certification. On receipt of the certificate the company secretary or person authorised to certificate transfers on the company’s behalf will compare the share certificate and the transfer form of or document with the register of members and if they correspond in their material particulars, will write in the margin of the transfer form or document, ‘certificate lodged’, or words to the like effect, and then sign it one behalf of the company.

The Companies Act provides that a certification shall be deemed to be signed by any person if it purports to be authenticated by his signature or initials or is not shown that the signature or initials was or were places there neither by himself nor by any person authorised to use the signature or initials for the purpose of certificating transfers on the company’s behalf

The certificated transfer form is then returned to the person who deposited it while the share certificate is retained by the company. The transferor will thereafter deliver the certificated transfer to the transferee who will then lodge it with the company for registration. The company will the issue a new certificate to the transferee for the shares transferred and, if applicable, a balance certificate to the transferor for shares which have not been transferees.

Effect of a certification

In Bishop v Balkis Consolidated Co Lindley, L.J, stated, ‘The certification...to be of any use at all, must amount to a representation that the transferor who has produced to the person certifying such documents as on the face of them show a prima facie title in the transferor to transfer the shares mentioned in the transfer :or, in other words, that the transferor has produced to the person certifying either what purports to be a certificate of the title of the transferor to the shares mentioned in the transfer or the equivalent of such a document, in other words, what purports to be a certificate of the title of someone else to those shares, and one or more documents purporting to transfer those shares from such a person to the transferor...But the certification means no more ,nor can it reasonably be supposed to mean more’. This principle was incorporated in s.81 (1) of the Act.

His Lordship’s statement that ‘the certification means no more ’means, under s.81 (1), that the certification shall be taken as a representation by the company, but not as a representation that the transferor has any title to the shares.

Liability for false certification

In Bishop vBalkis Consolidated Co, it was held that a company is not liable for negligent certification. This decision was over ruled by s.79 (2) of the English companies Act 1948 which became s.81 (2) of our Act which provides that “ where a person acts on the faith of a false certification by a company made negligently , the company shall be under the same liability to him as if the certification has been made fraudulently”.

This provision does not however deal with fraudulent certifications which will, as a consequence, continue to be governed by the common law, in Kleinwort v Associated Automatic Machine Corporation Ltd Lord Russell stated that if a company’s agent makes a fraudulent certification the company will be bound by it. The person who acted on the certification could recover damages as compensation for the loss which he has sustained. It should be noted that a company is not liable for a false certification either at common law or under the statutory provision if the person who made it was not authorized to certificate transfers on the company’s’ behalf.

Effect of transfer

Unless shares are being transferred as a gift, a transfer is a contract of sale which is effected through the agency of a stock broker who is a member of the Nairobi Stock Exchange, will be evidenced by a purchase contract note and sale contract note issued by the stock broker. The property in the shares is however not vested in the transferee unless and until his name is entered into the company’s register of members pursuant to section 28 (2) of the Act and, if the company has adopted Table A as its articles, Article 22 respectively.

In the interim period, the effect of the transfer is as follows;

If the shares are partly paid, and a call is made, the transferor is legally liable and must pay the amount required and then seek an indemnity from the transferee, if dividends are declared and paid the transferor is the person who, according to the company’s records, is entitled to them. He would however hold the dividends on trust for the transferee, unless the shares were brought ‘ex div or ex all’, If a meeting of the company is convened and the transferor decides to attend the meeting his right to vote or otherwise will depend on whether he has been fully paid for the shares. If he has been fully paid for the shares, he must vote as the transferee directs. In such a case he is regarded as the transferee’s trustee, and If he has not fully paid he would have a prima facie right to vote in respect of those shares. These propositions were considered and approved by Russell, J.in Musselwhite v C.H Musselwhite and Son Ltd.

Competing claims to shares

It may sometimes happen that two or more persons lay claim to the same shares. In such a case, the priorities as between the different claimants will be divided in accordance with the following rules;

Shropshire Union Railways and Canal Co v R.This may arise where the registered holder of shares gives a blank transfer and certificate as security for a loan and the subsequently, for the purpose of defrauding the creditor, obtains a duplicate certificate from the company and executes another transfer which is duly registered. The transferee’s legal title to the shares will prevail over the creditor’s earlier equitable title.

Where the equities as between successive transferees of shares are equal, the first in time prevails: Peat v Clayton in which Joyce J. Stated: “As I understand the law, where there are several claimants to shares registered in the name of the third person, the equitable title which is prior in time prevails, unless the claimant under subsequent equitable title proves that’s, as between him and the company, he had acquired an absolute and unconditional right to be registered as the owner of the shares before the company received notice of the other claim.” In Clayton’s case, Clayton, the registered holder, executed a transfer to trustees for the benefit of his creditors but failed to hand over the share certificates when requested to do under the pretext that they were abroad. The trustees gave notice of the assignment to the company, but did not attempt to secure registration since they were waiting for the certificates to be brought from abroad. Clayton later sold the shares to a third party through brokers to whom he handed over the certificates and transfers duly executed. The company registered the transfers but later on, having remembered the trustees notice, removed the transferor’s name from the register of members. The brokers bought other shares in the company for their client and then claimed a lien on the original shares to reimburse them for their expenditure.

It was held that the trustee’s interest prevailed since the brokers equitable lien arose after the trustees equity had arisen.

The company’s lien

The Company’s articles of association as stipulated under Table A, Article 11, may give the company “a first and paramount lien” on the shares of its members, either in the respect of amounts payable on the shares or any amounts due from the member to the company. The lien may be attached to fully paid shares or only to partly paid shares. The right of lien applies the power on part of a creditor to retain the property of his debtor which is in his possession as security for payment for the debt. The lien does not however, confer a power to sell property retained. Consequently, if the company wishes to be able to enforce its lien by selling the relevant shares, without a court order, it must insert a suitable clause in the article. Table A, article 12 give the company power to “sell, in such manner as the directors think fit, any shares which the company has lien “subject to specified conditions.

Nature of the lien

In sale of goods contract a seller of goods who has not been paid in full by the buyer has a right of lien over the goods sold until full payment is made by the buyer, the company, as an unpaid seller, should have a similar right. Although the company cannot’ retain ’the goods it can at list refuse to allow the registered holder to transfer them to a third party since the shares are not physically in possession of the company, it appears proper to regard the company’s lien as an ‘equitable lien ‘which does not arise until the registered shareholder incurs a debt to the company.

In Mackereth v Wigan Coal & Iron Co. Ltd it was explained that where a company has prior notice of the equitable interest of a third party and, despite the notice, deals with the shares for its own benefit, the third party’s equitable interest will take precedence over the company’s lien. The company will however, still have a prior lien on the shares in respect of amounts owing by the shareholders at the time of service of notice.

In Bradford Banking Co v Briggs & Co a member deposited his share certificate with the bank as an equitable mortgage of the shares to secure a loan for him by the bank. The bank gave notice to the company of its interest as, mortgage. Later, this member became in debted to the company. It was held that, as the company had prior notice of the bank’s mortgage, its lien was postponed to the mortgage since the company’s claim under the lien arose after the banks notice was received.

Oral transfer

The Companies Act provides that, notwithstanding anything in the articles of a company, it shall not be lawful for the company to register a transfer of shares unless a proper instrument of transfer has been delivered to the company. This means that an oral transfer of shares is illegal and void. In RE: Greenthe judge explained that the primary object of the section was to scorch and then prevalent practice of registering oral transfer of shares to the great detriment of the revenue. Its current effect is to enforce payment of the stamp duty that is payable on the transfer of shares. If the company registers an oral transfer of shares the transferee will not acquire title to those shares and the transferor will be deemed to remain the registered holder of the shares.

Void transfer

A transfer for shares may be void under the following sections: Section 76 (a) which provides that if shares are transferred to a body, corporate which is not a registered company before obtaining the written approval of the treasury thereto the transfer shall be void if it is disapproved by the treasury and Section 29 (1) providing that a body corporate cannot be a member of a company which is its holding company and renders any transfer of shares in a company to its subsidiary void. The object of this section maybe appreciated after reflecting on the possibility on a daughter becoming her mother’s mother.

Forged transfers

A transfer is usually forged after a person steals another person’s share certificate with the intention of having the relevant shares registered in his name so that he may thereafter transfer them to third party. Because the transferor’s forged signature on the transfer form is wholly inoperative, the position of the parties affected is as follows:

Firstly, where the true owner of the shares has been removed from the register then, on discovery of the forgery, the company must restore his name to the register and pay to him any dividends which have been declared during the time his name did not appear upon the register Secondly, the person who lodged the forged transfer for registration must indemnify the company against any loss it suffers as consequence of the registration. The fact that he may have been innocent on the matter and that the company may have issued to him a share certificate is irrelevant. This liability attaches with equal force to a broker who lodges a forges transfer. In Bank of England v Cutler it was held that the liability also attaches to a person who induces a company to a register a forged transfer by identifying an impersonator as the owner of the shares.

Thirdly, if the company issues a share certificate to the transferee under the forged transfer and the transferee sells or mortgages the shares to another person who, relying on the certificate, takes them bona fide for value, the company is stopped from denying the transferee’s title to the shares. Consequently, the company would be liable in damages to the purchaser or mortgages in respect of the loss arising out of the fact that he does not obtain registration. However, the company would not be stopped from denying the transferee’s title if the forgery was discovered before he sold or mortgaged the shares. It would be legally permissible for the company to buy shares in the open market and then transfer them to the purchaser or mortgage in replacement of the shares restored to the name of the true owner. This would be particularly desirable if the purchase price would be less than the damages that would be payable by the purchaser of mortgagee.

In Sheffield Corporation v Barclay It was held by the House of Lords that Barclay was liable to compensate the corporation since he had caused it to issue a false share certificate by delivering a forged transfer to himself for registration. Barclay could in turn sue the estate of Timbrell for whatever remedy available to him.

The rule in Barclay’s case does not apply in a situation where the registered holder of shares signs a transfer and then delivers it to another person for a specific purpose but the person uses the transfer for an unauthorized purpose. This is illustrated by the facts of, and the decision in, Fry v Smellie in which the registered holder of shares gave to an agent a blank transfer with a view to the agent borrowing a specified sum of money using the shares as security. The agent exceeded his authority by mortgaging the shares for a larger sum. The shareholder denied that the transfer was valid since it had been used in a transaction which exceeded the actual authority given to his agent but he was estopped from asserting that the agent had exceeded his actual authority. The private limitation of authority could not be pleaded against a third party who was not aware of it.

Transfer advice

In order to minimize instances of forged transfers, some companies in Kenya issue a ‘transfer notice’ or ‘transfer advice’ to the registered holder to the effect that a transfer of his shares has been presented for registration. However, if the registered holder ignores the ‘notice’ he is not estopped from later asserting that the transfer was not signed or, authorized by him. Hence the issue of a transfer notice is of no value to the company. It would however be advisable for public companies to insure against liability arising from accepting a forged transfer.

Mortgage of shares

A shareholder who intends to borrow money on the security of his shares may do so by way of a legal or equitable mortgage of his shares.

Legal mortgage

In order to effect a legal mortgage of shares the legal ownership of shares must be transferred to the lender by the registration of a form of transfer with the company concerned. The terms of the loan are usually incorporated in a loan agreement which will also contain a clause in which the lender undertakes to transfer the shares when the loan is repaid in full. Dividends paid to the lender during the currency of the loan as the registered holder of the shares are payable by him to the borrower unless the loan agreement provided that they will be applied towards reduction of the loan. The voting rights exercisable in respect of the shares will depend on the provisions of the loan agreement.

Equitable mortgage

There are no legal formalities for an equitable mortgage which can therefore be created quite informally. Anything done by the lender and the borrower which shows an intention to mortgage the shares will suffice.

The common options are:

To deposit the share certificate(s) with the lender without executing a transfer. If the borrower fails to repay the loan as agreed between him and the lender, the lender must apply to the court for an order for sale of the shares. If the sale realizes an amount of money that is in excess of the amount due and the cost of sale the lender must account to the borrower for the difference. The alternative course of action available to the lender as to apply for an order of for foreclosure which would vest the ownership of the shares in him absolutely. If he sold the shares thereafter he would not be obliged to account to the borrower for any excess. This is because he was, technically, selling his own shares.

To deposit the share certificates plus a blank transfer with the lender. A blank transfer is one which is signed by the named transferor but does not specify the transferee. On default by the borrower the lender has an implied authority to sale the shares and to enter the name of the purchaser in the transfer as the transferee. In Deverges v Sandeman Clark & Co it was explained that no court order is required in order to effect the sale. In Powell v London & Provincial Bank it was explained that a blank transfer must be accompanied by a power of attorney if the company’s articles require a transfer to be by deed.

Priorities

If a person who has borrowed money on the security of an equitable mortgage, by a fraudulent misrepresentation, induces the company to issue him with another share certificate and uses the certificate to sell the shares to a bona fide purchaser for value who then obtains registration, that purchaser will have priority over the mortgagee.

Share certificates

S 82 (1) provides that within sixty days after the date on which a transfer is lodged with a company, the company must have ready for delivery a certificate of the shares transferred. A transfer is defined by the section as “a transfer duly stamped and otherwise valid” but not one which “the company is for any reason entitled to refuse to register and does not register”. In the event of non-compliance with this provision, the company and every officer of the company who is in default shall be liable to a default fine.

S 82 (3) a person aggrieved by the company’s failure to issue a share certificate as provided by subsection (1) may serve the company with a notice requiring the company’s compliance with the section. If the company does not do so within fourteen days after the service of the notice he may apply to the court for an order directing the company and the officer responsible to issue the certificate within the time the court specifies. The costs of the application will be borne by the company its officer responsible for the default.

Table A, Article 8 provides that; one certificate is to be issued to the member for all shares without payment or is more than one certificate is issued then he shall pay Ksh 2/50 or less for every certificate after the first, every certificate is to be under the seal of the company, specify the shares to which it relates and amount paid up and the company is not bound to issue more than one certificate in respect of shares held jointly by several persons.

If one certificate is issued in respect of shares held jointly, the delivery of the certificate to one of the holders shall be sufficient delivery to all.

Form of certificate

The form and layout of share certificates vary as between different companies since it is not governed by any statutory provisions. All joint holders are named in the certificate but, usually, only the address of the senior holder, whose name mentioned first, is stated.

Neither the Act nor Table A specifies the company officers who are to sign the certificate. However, article 8 provides that the certificate shall be under the Company’s seal and Article 113 provides that “every instrument to which the seal shall be affixed shall be signed by a director and shall be countersigned by the secretary”.

Effect of certificate

The Companies Act provides that a certificate, under the common seal of the company, specifying any shares held by any member shall be prima facie evidence of the title of the member to the shares.  In Re: Bahia & San Francisco Railway Co. Cockburn, C.J. described the certificate as: “a declaration by the company to all the world that the person in whose name the certificate is made out, and to whom it is given, is a shareholder in the company, and it is given by the company with the intention that it shall be so used by the person to whom it is given, and acted upon in the sale and transfer of shares.”

Estoppel by share certificate

A company must take care when issuing a share certificate so as to avoid stating thereon what is incorrect. If the company negligently issues a certificate that is incorrect in some material particulars it may be estopped from denying the correctness of the stated facts if a third party changes his position in reliance on them. This was illustrated by Re: Bahia & San Francisco Railway Co. in which the company was estopped from denying that the named member was at the date of issue of the certificate the holder of the specified shares and ordered to compensate the purchasers. The same was observed in the case Burkinshaw v Nicholls in which the company was estopped by the certificate from denying that the shares were fully paid up. It was explained in Balkis Consolidated Co v Tomkinsonthat, in an appropriate case, the certificate holder may himself rely on an estoppel against the company. In this case, Tomkinson, who held a share certificate stating that he was the owner of one thousand shares in the company refused to register the transfers on the ground that Powter, who had transferred the shares to Tomkinson, had no title at the time, and that Powter had procured the issue of Tomkinson’s certificate by fraud. Tomkinson bought shares on market to honor the contracts with his transferees and then sued the company for damages to recoup this expenditure. The House of Lords, affirming the courts below, upheld his claim. Lord Herschell stated: “…. If the company must have known, as was said in the Bahia And San Francisco Railways case, that persons wanting to purchase shares might act upon the statement of fact contained in the certificate, it must equally have been within the contemplation of the company that a person receiving the certificate from them might on the faith of it enter into a contract to sell the shares.”

If the company becomes aware of an incorrect statement in a share certificate before the shareholder sells the shares it would be entitled to recall the certification for cancellation so as to issue another one. This is so because, under S 83, the certificate is prima facie evidence of the shareholder’s title. He may therefore be called upon to prove that what is stated is true and he will be unable to do so. The other reason is that, being a party to the original transaction, he would be presumed to have known what the true facts were and so could not say that he thought they were what the certificate stated them to be.

Forged certificates

The principle of estoppel does not apply when the certificate relied upon was issued fraudulently and without the authority of the board of directors. This may be so if the secretary wrongly affixed the company’s seal and forged the signature attesting it, or where although the signature was genuine, they were made as part of a fraudulent design of the signers. In Ruben v Great Fingall Consolidated the plaintiffs, stockbrokers, procured a loan for the secretary of the defendant company on the security of a share certificate for five thousand shares in the company to which, unknown to them, the secretary had affixed his own signature and the company seal after forging the signature of two directors. The plaintiffs paid off the loan and then sued the company for damages for failure to register them as owners of the shares. The House of Loads held that the company was not bound by the certificate.

Share warrants

The Companies Act provides that a company limited by shares, if so authorized by its articles, May, with respect to any fully paid shares, issue under its common seal a warrant stating that the bearer of the warrant is entitled to the shares therein specified. The warrant may provide for the payment, by coupons or otherwise, of the future dividends on the shares included in the warrant. Subsection (3) provides that a share warrant shall entitle the bearer thereof to the shares therein specified which may be transferred by delivery of the warrant.

S 114 (1) provides that on the issue of a share warrant the company shall strike out of its register of members the name of the member then entered therein as holding the share specified in the warrant as if he had ceases to be a member. The company shall then enter the in the register the fact of the issue of the warrant, a description of the shares included in the warrant and the date of issue.

S 114 (2) provides that the bearer of a share warrant shall be entitled, on surrendering it for cancellation, to have his name entered as a member in the register of members. By s 114 (5) the bearer of the warrant may, if the articles so provide, be deemed to be a member of the company to the full extent or for any purposes defined in the articles. 

Nature of share warrant

A share warrant is a warranty that the bearer is the holder of the shares therein specified. The company cannot therefore deny that the bearer is the holder of the relevant shares. Secondly, it is a negotiable instrument which is transferable by simple delivery and a bona fide transferee for value of the warrant is not affected by any defect in the title of the transferor.  

GROUP 8

ACCOUNTS 

The Companies Act makes it mandatory for a registered company to keep prescribed books of account and to prepare certain accounts which are to be presented from time to time to the company’s members for consideration.

BOOKS OF ACCOUNT

The companies Act provides except where the context otherwise requires- “accounts” includes a company’s group accounts, whether prepared in the form of accounts or not.

Every company shall cause to be kept in the English language proper books of account with respect to–

(a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;

(b) all sales and purchases of goods by the company;

(c) the assets and liabilities of the company:

provides that, proper books of account shall be deemed not to have been kept with respect to the matters aforesaid if there are not kept such books as are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions.

The books of account shall be kept at the registered office of the company or, subject to the provisions of paragraph (b), at such other place as the directors think fit, and shall at all times be open to inspection by the directors.

(b) The books of account shall only be kept at a place outside Kenya with the consent of the registrar and subject to such conditions as he may impose; and if the books of account are kept at a place outside Kenya there shall be sent to, and kept at a place in, Kenya, and be at all times open to inspection by the directors, such accounts and returns with respect to the business dealt with in the books of account so kept as will disclose with reasonable accuracy the financial position of that business at intervals not exceeding six months.

PROFIT AND LOSS ACCOUNT

the directors of every company shall, at some date not later than eighteen months after the incorporation of the company and subsequently once at least in every calendar year, lay before the company in general meeting a profit and loss account or, in the case of a company not trading for profit, an income and expenditure account for the period, in the case of the first account, since the incorporation of the company, and, in any other case, since the preceding account, made up to a date not earlier than the date of the meeting by more than nine months or, in the case of a company carrying on business or having interests abroad, by more than twelve months.

A company which does not trade for profits is required to lay an income and expenditure account instead of a profit and loss account. The period during which the accounts have to be laid before the general meeting may be extended by the Registrar for any special reason.

BALANCE SHEET

The directors shall cause to be made out in every calendar year, and to be laid before the company in general meeting, a balance sheet as at the date to which the profit and loss account or the income and expenditure account, as the case may be, is made up.

Every balance sheet of a company shall give a true and fair view of the state of affairs of the company as at the end of its financial year, and every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year.

(2) A company’s balance sheet and profit and loss account shall comply with the requirements of the Sixth Schedule, so far as applicable thereto.

(3) Save as expressly provided in the following provisions of this section or in Part III of the Sixth Schedule, the requirements of subsection (2) and the said Schedule shall be without prejudice either to the general requirements of subsection (1) or to any other requirements of this Act.

(4) The registrar may, on the application or with the consent of a company’s directors, modify in relation to that company any of the requirements of this Act as to the matters to be stated in a company’s balance sheet or profit and loss account (except the requirements of subsection (1)) for the purpose of adapting them to the circumstances of the company.

(5) Subsections (1) and (2) shall not apply to a company’s profit and loss account if–

 (a) The company has subsidiaries; and

     (b) the profit and loss account is framed as a consolidated profit and loss account dealing with all or any of the company’s subsidiaries as well as the company and- 

     (i) Complies with the requirements of this Act relating to consolidated profit and loss accounts; and

 (ii) Shows how much the consolidated profit or loss for the financial year is dealt with in the accounts of the company.

The detailed contents of the sixth schedule are dealt with during accountancy lectures and are therefore beyond the scope of company law.

GROUP ACCOUNTS

Where at the end of its financial year a company has subsidiaries, accounts or statements (in this Act referred to as group accounts) dealing as hereinafter mentioned with the state of affairs and profit or loss of the company and the subsidiaries shall, subject to subsection (2), be laid before the company in general meeting when the company’s own balance sheet and profit and loss account are so laid.

(2) Notwithstanding anything in subsection (1)–

(a) group accounts shall not be required where the company is at the end of its financial year the wholly owned subsidiary of another body corporate incorporated in Kenya; and

(b) Group accounts need not deal with a subsidiary of the company if the company’s directors are of opinion that– 

(i) it is impracticable, or would be of no real value to members of the company, in view of the insignificant amounts involved, or would involve expense or delay out of proportion to the value to members of the company; or

     (ii) The result would be misleading, or harmful to the business of the company or any of its subsidiaries; or

     (iii) The business of the holding company and that of the subsidiary are so different that they cannot reasonably be treated as a single undertaking; andif the directors are of such an opinion about each of the company’s subsidiaries, group accounts shall not be required.

a company is exempt from the obligation to prepare group accounts if it is a wholly owned subsidiary of another body corporate incorporated in Kenya.

Subject to subsection (2), the group accounts laid before a holding company shall be consolidated accounts comprising - 

    (a) a consolidated balance sheet dealing with the state of affairs of the company and all the subsidiaries to be dealt with in group accounts;

(b) a consolidated profit and loss account dealing with the profit or loss of the company and those subsidiaries.

However group accounts need not be prepared in this form if the directors are of the view that they could be prepared in another form.

The group accounts laid before a company shall give a true and fair view of the state of affairs and profit or loss of the company and the subsidiaries dealt with thereby as a whole, so far as concerns members of the company.

It is further provide that group accounts, if prepared as consolidated accounts, shall comply with the requirements of the sixth schedule to the Act, so far as applicable ther1o, and if not so prepared, shall give the same or equivalent information. 

FINANCIAL YEAR

A holding company’s directors shall ensure that except where in their opinion there are good reasons against it, the financial year of each of its subsidiaries shall coincide with the company’s own financial year.

Provides that the Registrar is empowered to postpone the submissions of a company’s accounts to a general meeting from one calendar year to the other for purposes of enabling the company’s financial year to end with that of the holding company.

BALANCE SHEET

The directors shall cause to be made out in every calendar year, and to be laid before the company in general meeting, a balance sheet as at the date to which the profit and loss account or the income and expenditure account, as the case may be, is made up.

Every balance sheet of a company shall be signed on behalf of the board by two of the directors of the company, or, if there is only one director, by that director.

(2) In the case of a banking company the balance sheet must be signed by the secretary or manager, if any, and, where there are more than three directors of the company, by at least three of those directors, and, where there are not more than three directors, by all the directors

(4) If any copy of a balance sheet which has not been signed as required by this section is issued, circulated or published, the company and every officer of the company who is in default shall be liable to a fine not exceeding one thousand shillings.

There shall be attached to every balance sheet laid before a company in general meeting a report by the directors with respect to the state of the company’s affairs, the amount, if any, which they recommend should be paid by way of dividend, and the amount, if any, which they propose to carry to reserves within the meaning of the Sixth Schedule.

ACCOUNTS TO BE ANNEXEXED

The profit and loss account, and, so far as not incorporated in the balance sheet or profit and loss account, any group accounts laid before the company in general meeting, shall be annexed to the balance sheet, and the auditors’ report shall be attached thereto.

(2) Any accounts so annexed shall be approved by the board of directors before the balance sheet is signed on their behalf.

(3) If any copy of a balance sheet is issued, circulated or published without having annexed thereto a copy of the profit and loss account or any group accounts required by this section to be so annexed, or without having attached thereto a copy of the auditors’ report, the company and every officer of the company who is in default shall be liable to a fine not exceeding one thousand shillings.

DIRECTOR’S REPORT

the directors of a company must prepare director’s report for each financial year. If the company is a parent company and the directors of the company prepare group accounts, the director’s report must be a consolidated report relating to the undertakings included in the consolidation.

the director’s report for the financial year must state the names of the persons who, during the financial year, were directors of the company, and the principal activities of the company in the course of the year.

unless the company is subject to the small companies’ regime, the directors’ report must contain a business review. The business review must contain a fair review of the company’s business and a description of the principal risks and uncertainties facing the company. The review requires a balanced and comprehensive analysis of:

1. The development and performance of the company’s business during the financial year

2. The position of the company’s business at the end of the yearconsistent with the size and complexity of the company.

In the case of a quoted company, the business review must, to the extent necessary for an undertaking of the development, performance or position of the company’s business include:

1. The main trends and factors likely to affect the future development, performance and position of the company’s business

2. Information about:

1. Environmental matters, including the impact of the company’s business on the environment

2. The company’s employees

3. Social and community issuesincluding information about any policies of the company in relation to those matters and the effectiveness of those policies.

S 418 director’s report must contain a statement to the effect that in the case of each of the persons who are directors at the time a report is approved:

1. So far as the director is aware there is no relevant audit information of which the company’s auditor is unaware 

2. He has taken all the steps that he ought to have taken as a director to establish for himself that any relevant audit information has been made known to the auditor.

S 419 provides for the approval and signing off of a director’s report by the board of directors on behalf of the board by a director or the secretary of the company. If the report is in accordance with the small companies’ regime it must contain a statement to that effect in a prominent position above the signature. If a director’s report is approved that does not comply with the requirements of the Act, every director of the company who:

1. Knew that it did not comply with the or was reckless as to whether it complied; and

2. Failed to take reasonable steps to secure compliance with those requirements, or as the case may be to prevent the report from being approved commits an offence.

Quoted companies – director’s remuneration report

the directors of quoted companies must prepare a director’s remuneration report for each financial year. Failure to which constitutes an offence. the secretary of state may make provisions by regulations as to the information that should be in the report and how it is to be set out, and what it is to be the auditable part of the report. the approval and signing off of a director’s remuneration report by the board of directors on behalf of the board by a director or the secretary of the company.

If a director’s report is approved that does not comply, every director of the company who knew that it did not comply with the or was reckless as to whether it complied; and failed to take reasonable steps to secure compliance with those requirements, or as the case may be to prevent the report from being approved commits an offence.

GRP 9…

CHAPTER 10

WINDING UP

Modes of winding up

There are three modes of winding up and they are as highlighted below:

Winding up by court

Voluntary winding up

Winding up subject to the supervision of the court

 The provision of the Companies Act cap 486 with respect to  winding up apply, unless the  contrary appears, to the winding up of a company in any of those modes.

The Insolvency Act of Britain, which Kenya has borrowed heavily, provides for two modes of winding up and these are winding up by court and voluntary winding up.

1. Contributories

The principal tasks in the winding up of a company are to collect its asset and use them to settle its liabilities, and to distribute any surplus to the persons entitled to it. These assets consist of property owned by the company, including debt owed to it, and the money which the members of the company and other persons are liable to contribute to the in the event of winding up.

The term contributories has been accorded with a definition in the Companies Act Cap 486 Laws of Kenya as  every person liable to contribute to the assets of a company in the event of its being wound up, and for the purposes of all proceeding for determining, and all proceedings prior to the final determination of, the person who are to be deemed contributories, any person alleged to be contributory.

The liability of a contributory shall create a debt accruing due from at the time when his liability is commenced, but payable at the time when calls are made for enforcing the liability.

Liability as Contributories of present and past Members

In the process of winding up, every present and past member shall be liable to contribute to the assets of the company to an amount sufficient for payment of its debts and liabilities, and the costs, charges and expenses of the winding up, and for the adjustments of the rights of contributories among themselves and as long as the qualifications below are considered;

1. A past member shall not be liable to contribute if he has ceased to be a member for one year or upwards before the commencement of the winding up.

2. A past member shall not be liable to contribute in respect of any debt or liability of the company contracted after he ceased to be a member.

The liability of past members is further restricted ,because they are liable only for such of the company’s  debts contracted before they ceased to be members as have not been satisfied by the distribution of the company’s other assets among the creditors generally.

The past members may therefore not be fully called upon although the creditors are not paid in full.

Has it has been stated in Webb V Whiffinthat past members contributions are part of the general assets of the company, and are not to be applied , preferentially or exclusively, to the payment of debts incurred before the B sharesholders ceased to be members

3. A past member shall  not be liable to contribute unless it appears to the court that the existing members are unable to satisfy the contributions required to be made by them pursuant to the Companies Act

4. In the case of a company limited by guarantee, no contribution shall, subject to the provisions of subsection (3), be required from any member exceeding the amount undertaken to be contributed by him to the assets of the company in the event of its being wound up

5. In the case of a company limited by shares, no contribution shall be required from any member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as a present or past member

6. That nothing in the Companies Act shall invalidate any provision contained in policy of insurance or contract whereby the liability of the individual members on the policy or contract is restricted, whereby the funds of the company are made liable in respect of the policy or contract.

7. A sum due to any member of a company, in his character of a member by way of dividends, profits or otherwise shall not be deemed to be a debt of the company payable to that member in a case of competition between himself and any other creditor not a member of the company, but any such sum may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves.

The sum is due if it arises under the statutory contract between the members and the company. 

Winding Up of A limited Company where the Directors or Managers’ liability is unlimited

In such a scenario, the director or manager shall, in addition to his liability (if any) to contribute as an ordinary member, be liable to make a further contribution as if he were at the commencement of winding up a member of unlimited company provided that:

1. A past director or manager shall not be liable to make such further contribution if he has ceased to hold office for a year or upwards before the commencement of the winding up

2. A past director or manager shall not be liable to make such further contribution in respect of any debt or liability of the company contracted after he ceased to hold office

3. subject to the articles of the company, a director or manager shall not be liable to make such further contribution unless the court deems it necessary to require that contribution in order to satisfy the debts and liabilities of the company and the costs, charges and expenses of thewinding up

Contributories in Special Circumstances

There are two additional instances or circumstances where contributories have been provided for. These cases are provided because of their nature and they are as follows;

1. Contributories incase of death of member

Where a contributory dies either before or after he has been placed in the list of contributories, his personal representatives shall be liable in a due course of administration to contribute to the assets of the company in discharge of his liability and shall be contributories accordingly.

Proceedings may be taken, if the personal representatives defaults in paying any money ordered to be paid by them, for administering the estate of the deceased contributory and for compelling payment thereout of the money due.

2. Contributories in case of Bankruptcy

Two steps or approach may be taken in instance where the contributory becomes bankrupt either before or after he has been placed in the list of contributories;

1. His trustee in bankruptcy shall represent him for all the purposes of the winding up, and shall be a contributory accordingly, and may be called on to admit to proof against the estate of the bankrupt, or otherwise to allow to be paid out of his assets in due course of law, any money due from the bankrupt in respect of his liability to contribute to the asset of the company.

2. There may be proved against the estate of the bankrupt the estimated

value of his liability to future calls as well as calls already made.

In the winding up of a company limited by guarantee which has a share capital, every member of the company shall be liable, in addition to the amount undertaken to be contributed by him to the assets of the company in the event of its being wound up, to contribute to the extent of any sums unpaid on any shares held by him.

The court will not, as a rule, make an order on a contributory’s petition unless the contributory alleges and proves a financial interest in the winding up. A member’s liability to contribute to the assets of the company on a winding up will suffice for this purpose.

WINDING UP BY THE COURT JURISDICTION

The High Court shall have jurisdiction to wind up a company in Kenya.

To obtain a winding up by the court in the UK, a petition must be presented to the court having the necessary jurisdiction and the courts having the necessary jurisdiction are;

1. The High Court, i.e. the Companies Court, in the case of all companies registered in England.

In Easter Holdings V Singer &Friedler LTD

2. Where the paid up share capital does not exceed £ 120,0000, the county court of the district in which the registered office is situated, provided that such county court  has winding up jurisdiction.

Cases in which A company may Wound UP by Court

Companies Act provides that a company may be wound by a court if

1. The company has by special resolution resolved that the company bewound up by the court

2. Default is made in delivering the statutory report to the registrar or inholding the statutory meeting

3. The company does not commence its business within a year from itsincorporation or suspends its business for a whole year

4. The number of members is reduced, in the case of a private company,below two, or, in the case of any other company, below seven

5. The company is unable to pay its debts

6. the court is of opinion that it is just and equitable that the companyshould be wound up;

Loch V John Blackwood ltd

The directors of the company had failed to hold general meetings, submit accounts or recommend a dividend, in order to keep the claimants ignorant and to acquire their shares at an undervalue. Where, as in the case, the directors display a lack of probity(i.e. honesty and decency), then it may be just and equitable to order the company to be wound up

The section gave five grounds upon which a company may be wound up and a ‘just and equitable’ ground. 

Held: the latter was not to be construed restrictively by ejusdem generis with the other grounds. A company could be wound up if a considerable proportion of the shareholders had a proper lack of confidence in the directors, and the directors had a preponderance of effective power.

7. In the case of a company incorporated outside Kenya and carrying on business in Kenya, winding-up proceedings have been commenced in respect of it in the country or territory of its incorporation or in any other country or territory in which it has established a place of business

A company not carrying on Business

A period  of a year is fixed so as to give the company a reasonable time in which to commence or resume business, as the case maybe.A winding up order will only be made on this ground if the company has no intention of carrying on business.

In Middlesborough Assembly RoomsbCo, Re

A shareholder had filed a petition for winding up. Majority of the shareholders opposed the winding-up. Lord Justice James said :

" But the Act directs the court to have regard to the wishes of the contributories. Here a great majority of the shareholders are opposed to a winding up, and desire to be left to manige their affairs for themselves. We ought not to disregard the wishes of so large a majority unless we see in their conduct something unreasonable, something like tyranny. Something amounting to an injury of which the minority have a right to complain."

It has been held in German Date Coffee Co, Re that there is no need to wait a year if it is apparent within the year that the company cannot carry out the objects for which it was formed.

Company Unable to Pay its Debts

A company will be deemed to be unable to pay its debts in the following scenarios:

1. If a creditor, by assignment or otherwise, to whom the company is  indebted in a sum exceeding one thousand shillings then due has served on the company, by leaving it at the registered office of the company, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected  to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor

The demand need not be served by an officer of the court,but, if it is not, the court must have evidence that the person who served the statutory demand was duly authorized by the creditor . The Security must be a marketable security covering the amount of the debt.

A company has not neglected to pay a debt, if it bona fide and upon substantial grounds disputes the debt. This is in reference to the case of London and Paris Banking Corporation, Rewhose facts are as follows;

2. If execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part

3. If it is proved to the satisfaction of the court that the company is unable to pay its debts, and in determining whether a company is unable to pay its debts the court shall take into account the contingent and prospective liabilities of the company.

It was held in Taylor’s Industrial Flooring Ltd V M.H. Plant Hire Manchester Ltdthat if a debt was due and unpaid and could not be disputed on some substantial ground, the presentation of a petition under ground for 4 (ground C above), was amply warranted even in the absence of a statutory  demand. The Court of Appeal commented that the practice of prevaricating in  the payments of due  debts  was to be discouraged, and this approach has been followed even where , in the past a creditor has consistently accepted late payments of due and undisputed debt but there evidence of a substantial surplus of assets over liabilities.

Winding Up On Just and Equitable Grounds

In a petitioning for a winding up on the just and equitable ground a member is not confined to such circumstances as affect him as shareholder, i.e he is not confined to cases where his position as a shareholder has been worsened by the action of which he complains; he is entitled to rely on any circumstances of justice or equity which affect him in his relations with the company or with the other shareholders,.

The court will not, as a rule , order a winding up on a contributory’s petition unless he alleges in the petition , and proves at the hearing, at least to the extent of a prima facie case, that there will be assets for distribution among the shareholders or that some disadvantages would accrue to him by virtue of his of his membership which could be avoided  or minimized, a purely private advantage will not suffice.

An order for winding up on the just and equitable ground may be made in a number of different circumstances. One of these ways is where the main object of the company has failed or the company is engaging in acts which are entirely outside what can fairly be regardedas  havingbeen within the general intention or common understanding of the members when they become members.

In Bleriot Aircraft Co, Re  a company was formed to acquire the English portion of the aircraft  business of M. Blériot , awell known airman. M. Blériot refused to carry out the contract. The court held that the company should be wound up because its substratum had gone.

COMMENCEMENT

Where, before the presentation of a petition for the winding up of a company by the court, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and unless the court, on proof of fraud or mistake, thinks fit otherwise to direct, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken. If it is the winding up of a company by the court the winding up shall deemed to commence at the time of the presentation of the petition for the winding up.

Petition For Winding Up and Effects Thereof

An application to the court for the winding up of a company shall be by petition presented, subject to the provisions of the Companies Act Cap 486 Laws of Kenya, either by the company or by any creditor or creditors (including any contingent or prospective creditor or creditors), contributory or contributories, or by all or any of those parties together or separately.

Effects of presentation of the Petition to court: Effect of Petition Thereof

The petition stands outs as the motivator of the court to exercise its jurisdiction. The petition confers the court with the power to dismiss the petition, or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order that it thinks fit. But the court will not dismiss or refuse to make a winding up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets or that the company has no assets.

Where the  petition is presented before the High court by members as contributories  on the ground that it is just and equitable that the company should be wound up, the court shall make a winding-up order if it is in the opinion that;

1. That the petitioners are entitled to relief either by winding up thecompany or by some other means.

2. That in the absence of any other remedy it would be just and equitablethat the company should be wound up

Further, the presentation of the petition before the High court gives the  company or creditor, after the presentation of a winding up petition and before a winding up order is given, power to apply to the High court or court of appeal (where an exists) for an order of stay of execution or restrain proceedings against the company.

In a winding up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void.

Where members have decided that the company should be wound up court and they have presented a petition to the court, then any attachment, distress or execution put in force against the estate or effects of the company after the commencement of the winding up shall be void.

PROCEDURE ON WINDING UP BY THE  HIGH

Presentation of A petition 

As mentioned earlier that an application to the court for the winding up of a company shall be by petition presented, subject to the provisions of the Companies Act Cap 486 Laws of Kenya, either by the company or by any creditor or creditors (including any contingent or prospective creditor or creditors), contributory or contributories, or by all or any of those parties together or separately.

Appointment of provisional liquidator

The court may appoint the official receiver to be the liquidator provisionallyat any time after the presentation of a winding-up petition and before the makingof a winding-up order. Where a liquidator (in this Companies Act Cap 486 referred to as an interim liquidator) is so appointed by the court, the court may limit and restrict his powers by the order appointing him.

Liquidator

For the purpose of conducting the proceedings in winding up a company and performing such duties in reference thereto as the court may impose, the court may appoint a liquidator or liquidators.

A liquidator appointed by the court may resign or, on cause shown, be removed by the court. Where a person other than the official receiver is appointed liquidator, he shall receive such salary or remuneration by way of percentage or otherwise as the court may direct, and, if more such persons than one are appointed liquidators, their remuneration shall be distributed among them in such proportions as the court directs. A vacancy in the office of a liquidator appointed by the court shall be filled by the court.

Where a winding-up order has been made or where an interim liquidator has been appointed, the liquidator or the interim liquidator, as the case may be, shall take into his custody or under his control all the property and things in action to which the company is or appears to be entitled.

Special Manager

Where the official receiver becomes the liquidator of a company, whetherprovisionally or otherwise, he may, if satisfied that the nature of the estate orbusiness of the company, or the interests of the creditors or contributories generally,require the appointment of a special manager of the estate or business of the company other than himself, apply to the court, and the court may on such application appoint a special manager of the said estate or business to act during such time as the court may direct, with such powers, including any of the powers of a receiver or manager, as may be entrusted to him by the court

The special manager shall give such security and account in such manner as the official receiver shall direct. The special manager shall receive such remuneration as may be fixed by the court.

Hearing of Petition 

On hearing a winding-up petition the court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order that it thinks fit, but the court shall not refuse to make a winding-up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets or that the company has no assets.

Winding-up Order

On the making of a winding-up order, a copy of the order shall forthwith be forwarded by the company, or otherwise as may be prescribed, to the registrar for registration. When a winding-up order has been made or an interim liquidator has been appointed under section 235, no action or proceeding shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose.

Effect of a winding-up order

An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if made on the joint petition of a creditor and of a contributory.

Statement of Affairs

When the court has made a winding-up order or appointed an interimliquidator under section 235, there shall, unless the court thinks fit to orderotherwise and so orders, be made out and submitted to the official receiver astatement as to the affairs of the company in the prescribed form, verified byaffidavit, and showing the particulars of its assets, debts and liabilities, the names,postal addresses and occupations of its creditors, the securities held by themrespectively, the dates when the securities were respectively given, and such further or other information as may be prescribed or as the official receiver  mayrequire.

CONSEQUENCES OF WINDING-UP ORDER (SECTION 229)

An order for winding up a company shall operate in favor of all the creditors and of all the contributories of the company as if made on the joint petition of a creditor and of a contributory.

Official Receiver in Winding Up

Official receiver in bankruptcy to be official receiver for winding-up purposes

1. For the purposes of this Act so far as it relates to the winding up of companies by the court, “official receiver” means the official receiver attached to the court for bankruptcy purposes.

2. Any such officer shall, for the purpose of his duties under this Act, be styled the official receiver.

Appointment of official receiver by court in certain cases

If, in the case of the winding up of any company by the court it appears to the court desirable, with a view to securing the more convenient and economical conduct of the winding up, that some officer other than the person who would by virtue of section 230 be the official receiver should be the official receiver for the purposes of that winding up, the court may appoint that other officer to act as official receiver in that winding up, and the person so appointed shall be deemed to be the official receiver in that winding up for all the purposes of this Act.

Statement of company’s affairs to be submitted to official receiver

(1) When the court has made a winding-up order or appointed an interim liquidator under section 235, there shall, unless the court thinks fit to order otherwise and so orders, be made out and submitted to the official receiver a statement as to the affairs of the company in the prescribed form, verified by affidavit, and showing the particulars of its assets, debts and liabilities, the names, postal addresses and occupations of its creditors, the securities held by them respectively, the dates when the securities were respectively given, and such further or other information as may be prescribed or as the official receiver may require.

(2) The statement shall be submitted and verified by one or more of the persons who are at the relevant date the directors and by the person who is at that date the secretary of the company, or by such of the persons hereinafter in this subsection mentioned as the official receiver, subject to the direction of the court, may require to submit and verify the statement, that is to say, persons—

(a) Who are or have been officers of the company;

(b) Who have taken part in the formation of the company at any time within one year before the relevant date;

(c) who are in the employment of the company, or have been in the employment of the company within the said year, and are in the opinion of the official receiver capable of giving the information required;

(d) who are or have been within the said year officers of or in the employment of a company which is, or within the said year was, an officer of the company to which the statement relates;

(e) who are at the relevant date the receivers or managers of the whole or substantially the whole of the company’s property.

(3) The statement shall be submitted within fourteen days from the relevant date or within such extended time as the official receiver or the court may for special reasons appoint.

(4) Any person making or concurring in making the statement and affidavit required by this section may be allowed, and if so allowed shall be paid by the official receiver or provisional liquidator, as the case may be, out of the assets of the company such costs and expenses incurred in and about the preparation and making of the statement and affidavit as the official receiver may consider reasonable, subject to an appeal to the court.

(5) If any person, without reasonable excuse, makes default in complying with the requirements of this section, he shall be liable to a fine not exceeding two hundred shillings for every day during which the default continues.

(6) Any person stating himself in writing to be a creditor or contributory of the company shall be entitled by himself or by his agent at all reasonable times, on payment of the prescribed fee, to inspect the statement submitted in pursuance of this section, and to a copy thereof or extract therefrom.

(7) Any person untruthfully so stating himself to be a creditor or contributory shall be liable to a fine not exceeding four hundred shillings.

(8) In this section, “the relevant date” means, in a case where an interim liquidator is appointed, the date of his appointment, and in a case where no such appointment is made, the date of the winding-up order.

Report by official receiver

(1) In a case where a winding-up order is made, the official receiver shall, as soon as practicable after receipt of the statement to be submitted under section 232 , or, in a case where the court orders that no statement shall be submitted, as soon as practicable after the date of the order, submit a preliminary report to the court—

(a) As to the amount of capital issued, subscribed and paid up, and the estimated amount of assets and liabilities; and

(b)If the company has failed, as to the causes of the failure; and

(c)Whether in his opinion further inquiry is desirable to any matter relating to the promotion, formation or failure of the company or the conduct of the business thereof.

(2)The official receiver may also, if he thinks fit, make a further report, or further reports, stating the manner in which the company was formed and whether in his opinion any fraud has been committed by any person in its promotion or formation or by any officer of the company in relation to the company since the formation thereof, and any other matters which in his opinion it is desirable to bring to the notice of the court.

(3) If the official receiver states in any such further report as aforesaid that in his opinion a fraud has been committed as aforesaid, the court shall have the further powers provided in section

LIQUIDATORS (SECTION 234)

Power of court to appoint liquidators

For the purpose of conducting the proceedings in winding up a company and performing such duties in reference thereto as the court may impose, the court may appoint a liquidator or liquidators.

Appointment and powers of interim liquidator

1. The court may appoint the official receiver to be the liquidator provisionally at any time after the presentation of a winding-up petition and before the making of a winding-up order.

2. Where a liquidator (in this Act referred to as an interim liquidator) is so appointed by the court, the court may limit and restrict his powers by the order appointing him.

POWERS OF LIQUIDATOR(SECTION 241)

(1)The liquidator in a winding up by the court shall have power, with the sanction either of the court or of the committee of inspection—

(a)  To bring or defend any action or other legal proceeding in the name and on behalf of the company;

(b)To carry on the business of the company so far as may be necessary for the beneficial winding up thereof;

(c)To appoint an advocate to assist him in the performance of his duties; (d) to pay any classes of creditors in full;

(e)To make any compromise, or arrangement with creditors, or persons claiming to be creditors, or having or alleging themselves to have any claim, present or future, certain or contingent, ascertained or sounding only in damages against the company, or whereby the company may be rendered liable;

(f)To compromise all calls and liabilities to calls, debts and liabilities capable of resulting in debts, and all claims, present or future, certain or contingent, ascertained or sounding only in damages, subsisting or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the assets or the winding up of the company, on such terms as may be agreed, and take any security for the discharge of any such call, debt, liability or claim and give a complete discharge in respect thereof.

The liquidator in a winding up by the court shall have power—

(a) To sell the movable and immovable property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company or to sell the same in parcels;

(b) To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents, and for that purpose to use, when necessary, the company’s seal;

(c) To prove, rank and claim in the bankruptcy, insolvency or sequestration of any contributory for any balance against his estate, and to receive dividends in the bankruptcy, insolvency or sequestration in respect of that balance, as a separate debt due from the bankrupt or insolvent, and ratably with the other separate creditors;

(d)To draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if the bill or note had been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business;

(e)To raise on the security of the assets of the company any money requisite;

(f)To take out in his official name letters of administration to any deceased contributory, and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company, and in all such cases the money due shall, for the purpose of enabling the liquidator to take out the letters of administration or recover the money, be deemed to be due to the liquidator himself:

Provided that nothing in this paragraph shall be deemed to affect the rights, duties and privileges of the Public Trustee;

(g) To appoint an agent to do any business which the liquidator is unable to do himself;

(h) where winding-up proceedings have been commenced in respect of the company in one or more of the prescribed territories as well as in Kenya, to make such payments to a liquidator or provisional liquidator of the company in any of the prescribed territories as may be necessary for the distribution of the company’s assets;

(i) To do all such other things as may be necessary for winding up the affairs of the company and distributing its assets.

COMMITTEES OF INSPECTION(SECTION 248)

Meetings of creditors and contributories to determine whether committee of inspection shall be appointed

(1) When a winding-up order has been made by the court it shall be the business of the separate meetings of creditors and contributories summoned for the purpose of determining whether or not an application should be made to the court for appointing a liquidator in place of the official receiver, to determine further whether or not an application is to be made to the court for the appointment of a committee of inspection to act with the liquidator and who are to be members of the committee if appointed.

(2) The court may make any appointment and order required to give effect to any such determination, and if there is a difference between the determinations of the meetings of the creditors and contributories in respect of the matters aforesaid the court shall decide the difference and make such order thereon as the court may think fit.

Constitution and proceedings of committee of inspection (section 249)

(1) A committee of inspection appointed in pursuance of this Act shall consist of creditors and contributories of the company or persons holding general powers of attorney from creditors or contributories in such proportions as may be agreed on by the meetings of creditors and contributories or as, in case of difference, may be determined by the court.

(2) The committee shall meet at such times as they from time to time appoint, and, failing such appointment, at least once a month, and the liquidator or any member of the committee may also call a meeting of the committee as and when he thinks necessary.

(3) The committee may act by a majority of their members present at a meeting but shall not act unless a majority of the committee are present.

(4) A member of the committee may resign by notice in writing signed by him and delivered to the liquidator.

(5) If a member of the committee becomes bankrupt or compounds or arranges with his creditors or is absent from five consecutive meetings of the committee without the leave of those members who together with himself represent the creditors or contributories, as the case may be, his office shall thereupon become vacant.

(6) A member of the committee may be removed by an ordinary resolution at a meeting of creditors, if he represents creditors, or of contributories, if he represents contributories, of which twenty-one days’ notice has been given, stating the object of the meeting.

(7) On a vacancy occurring in the committee the liquidator shall forthwith summon a meeting of creditors or of contributories, as the case may require, to fill the vacancy, and the meeting may, by resolution, reappoint the same or appoint another creditor or contributory to fill the vacancy:

Provided that if the liquidator, having regard to the position in the winding up, is of the opinion that it is unnecessary for the vacancy to be filled he may apply to the court and the court may make an order that the vacancy shall not be filled, or shall not be filled except in such circumstances as may be specified in the order.

(8) The continuing members of the committee, if not less than two, may act notwithstanding any vacancy in the committee

Power to stay winding up (section251.)

(1) The court may at any time after an order for winding up, on the application either of the liquidator or the official receiver or any creditor or contributory, and on proof to the satisfaction of the court that all proceedings in relation to the winding up ought to be stayed, make an order staying the proceedings, either altogether or for a limited time, on such terms and conditions as the court thinks fit.

(2) On any application under this section the court may, before making an order, require the official receiver to furnish to the court a report with respect to any facts or matters which are in his opinion relevant to the application.

(3) A copy of every order made under this section shall forthwith be forwarded by the company, or otherwise as may be prescribed, to the registrar for registration (iii) Voluntary Winding Up

RESOLUTIONS FOR, AND COMMENCEMENT OF, VOLUNTARY WINDING Up

Circumstances in which company may be wound up voluntarily (section 271)

(1) A company may be wound up voluntarily—

(a) when the period, if any, fixed for the duration of the company by the articles expires, or the event, if any, occurs, on the occurrence of which the articles provide that the company is to be dissolved, and the company in general meeting has passed a resolution requiring the company to be wound up voluntarily;

(b) if the company resolves by special resolution that the company be wound up voluntarily;

(2) In this Act, “a resolution for voluntary winding up” means a resolution passed under any of the provisions of subsection (1).

Notice of resolution to wind up voluntarily (section 272)

(1) When a company has passed a resolution for voluntary winding up, it shall, within fourteen days after the passing of the resolution, give notice of the resolution by advertisement in the Gazette, and also in some newspaper circulating in Kenya.

(2) If default is made in complying with this section, the company and every officer of the company who is in default shall be liable to a default fine, and for the purposes of this subsection the liquidator of the company shall be deemed to be an officer of the company.

COMMENCEMENT OF VOLUNTARY WINDING UP(S 273)

A voluntary winding up shall be deemed to commence at the time of the passing of the resolution for voluntary winding up.

CONSEQUENCES OF VOLUNTARY WINDING UP (S.274)

Effect of voluntary winding up on business and status of company

In case of a voluntary winding up, the company shall, from the commencement of the winding up, cease to carry on its business, except so far as may be required for the beneficial winding up thereof:

Provided that the corporate state and corporate powers of the company shall, notwithstanding anything to the contrary in its articles, continue until it is dissolved.

. Avoidance of transfers, etc., after commencement of voluntary winding up

Any transfer of shares, not being a transfer made to or with the sanction of the liquidator, and any alteration in the status of the members of the company, made after the commencement of a voluntary winding up, shall be void.

DECLARATION OF SOLVENCY

Statutory declaration of solvency in case of proposal to wind up voluntarily

(1) Where it is proposed to wind up a company voluntarily, the directors of the company or, in the case of a company having more than two directors, the majority of the directors, may, at a meeting of the directors make a declaration in the prescribed form to the effect that they have made a full inquiry into the affairs of the company, and that, having so done, they have formed the opinion that the company will be able to pay its debts in full within such period not exceeding twelve months from the commencement of the winding up as may be specified in the declaration.

(2) A declaration made as aforesaid shall have no effect for the purposes of this Act unless—

(a) it is made within the thirty days immediately preceding the date of the passing of the resolution for winding up the company and is delivered to the registrar for registration before that date; and

(b) it embodies a statement of the company’s assets and liabilities as at the latest practicable date before the making of the declaration.

(3) Any director of a company making a declaration under this section, without having reasonable grounds for the opinion that the company will be able to pay its debts in full within the period specified in the declaration, shall be liable to imprisonment for a period not exceeding twelve months or to a fine not exceeding twenty thousand shillings or to both, and if the company is wound up in pursuance of a resolution passed within the period of thirty days after the making of the declaration, but its debts are not paid or provided for in full within the period stated in the declaration, it shall be presumed until the contrary is shown that the director did not have reasonable grounds for his opinion.

(4) A winding up in the case of which a declaration has been made and delivered in accordance with this section or section 226 of the repealed Companies Act is in this Act referred to as a members’ voluntary winding up, and a winding up in the case of which a declaration has not been made and delivered as aforesaid is in this Act referred to as a creditors’ voluntary winding up.

(5) Subsections (1) to (3) shall not apply to a winding up commenced before the appointed day.

PROVISIONS APPLICABLE TO EVERY VOLUNTARY WINDING UP (S.295)

The provisions of sections 296 to 303 shall apply to every voluntary winding up whether a members’ or a creditors’ winding up.

Distribution of property of company ( S.296)

Subject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding up, be applied in satisfaction of its liabilities paripassu, and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.

POWERS AND DUTIES OF LIQUIDATOR IN VOLUNTARY WINDING UP(S.297)

(1) The liquidator may—

(a) in the case of a members’ voluntary winding up, with the sanction of a special resolution of the company, and, in the case of a creditors’ voluntary winding up, with the sanction of the court or the committee of inspection or (if there is no such committee) a meeting of the creditors, exercise any of the powers given by paragraphs (d), (e) and (f) of subsection (1) of section 241 to a liquidator in a winding up by the court;

(b) Without sanction, exercise any of the other powers by this Act given to the liquidator in a winding up by the court;

(c) exercise the power of the court under this Act of settling a list of contributories, and the list of contributories shall be prima facie evidence of the liability of the persons named therein to be contributories;

(d) Exercise the power of the court of making calls;

(e) Summon general meetings of the company for the purpose of obtaining the sanction of the company by special resolution or for any other purpose he may think fit.

(2) The liquidator shall pay the debts of the company and shall adjust the rights of the contributories among themselves.

(3) When several liquidators are appointed, any power given by this Act may be exercised by such one or more of them as may be determined at the time of their appointment, or, in default of such determination, by any number not less than two.

PROVISIONS APPLICABLE TO EVERY VOLUNTARY WINDING UP

The provisions of sections 296 to 303 shall apply to every voluntary winding up whether a members’ or a creditors’ winding up.

. Distribution of property of company

Subject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding up, be applied in satisfaction of its liabilities paripassu, and, subject to such application, shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company.

POWERS AND DUTIES OF LIQUIDATOR IN VOLUNTARY WINDING UP (SECTION 297)

(1) The liquidator may—

(a) in the case of a members’ voluntary winding up, with the sanction of a special resolution of the company, and, in the case of a creditors’ voluntary winding up, with the sanction of the court or the committee of inspection or (if there is no such committee) a meeting of the creditors, exercise any of the powers given by paragraphs (d), (e) and (f) of subsection (1) of section 241 to a liquidator in a winding up by the court;

(b) Without sanction, exercise any of the other powers by this Act given to the liquidator in a winding up by the court;

(c) exercise the power of the court under this Act of settling a list of contributories, and the list of contributories shall be prima facie evidence of the liability of the persons named therein to be contributories;

(d) Exercise the power of the court of making calls;

(e) Summon general meetings of the company for the purpose of obtaining the sanction of the company by special resolution or for any other purpose he may think fit.

(2) The liquidator shall pay the debts of the company and shall adjust the rights of the contributories among themselves.

(3) When several liquidators are appointed, any power given by this Act may be exercised by such one or more of them as may be determined at the time of their appointment, or, in default of such determination, by any number not less than two.

 WINDING UP SUBJECT TO SUPERVISION OF COURT

.Power to order winding up subject to supervision (S.304)

When a company has passed a resolution for voluntary winding up, the court may make an order that the voluntary winding up shall continue but subject to such supervision of the court, and with such liberty for creditors, contributories, or others to apply to the court, and generally on such terms and conditions, as the court thinks just.

Effect of petition for winding up subject to supervision

A petition for the continuance of a voluntary winding up subject to the supervision of the court shall, for the purpose of giving jurisdiction to the court over actions, be deemed to be a petition for winding up by the court.

EFFECT OF SUPERVISION ORDER (S.308)

(1) Where an order is made for a winding up subject to supervision, the liquidator may, subject to any restrictions imposed by the court, exercise all his powers, without the sanction or intervention of the court, in the same manner as if the company were being wound up voluntarily:

Provided that none of the powers specified in paragraphs (d), (e) and (f) of subsection (1) of section 241 shall be exercised by the liquidator except with the sanction of the court or, in a case where before the order the winding up was a creditors’ voluntary winding up, with the sanction of the court or the committee of inspection, or (if there is no such committee) a meeting of the creditors.

(2) A winding up subject to the supervision of the court is not a winding up by the court for the purpose of the provisions of this Act specified in the Eighth Schedule, but, subject as aforesaid, an order for a winding up subject to supervision shall for all purposes be deemed to be an order for winding up by the court:

Provided that, where the order for winding up subject to supervision was made in relation to a creditors’ voluntary winding up in which a committee of inspection had been appointed, the order shall be deemed to be an order for.

PROVISIONS APPLICABLE TO EVERY MODE OF WINDING UP PROOF AND RANKING OF CLAIMS

Debts of all descriptions may be proved(S 309)

In every winding up) all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value. 310.  Application of bankruptcy rules in winding up of insolvent companies

In the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of bankruptcy with respect to the estates of persons adjudged bankrupt, and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section.

PREFERENTIAL PAYMENTS (S.311)

(1) In the winding up of a company there shall be paid in priority to all other debts—

(a) all taxes and local rates due from the company at the relevant date and having become due and payable within twelve months next before that date not exceeding in the whole one year’s assessment;

(b) All Government rents not more than one year in arrear;

(c) All wages or salary (whether or not earned wholly or in part by way of commission) of any clerk or servant (not being a director) in respect of services rendered to the company during four months next before the relevant date and all wages (whether payable for time or for piece work) of any workman or laborer in respect of services so rendered;

(c) All retirement benefits contributions and vested benefits of any clerk or servant of the Company;

(d) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, or unless the company has, at the commencement of the winding up, under any contract with insurers, rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the Workmen’s Compensation Act (Cap. 236) (now repealed), being amounts which have accrued before the relevant dates;

(e) unless the company is being wound up voluntarily merely for the purposes of reconstruction or amalgamation with another company, all amounts due in respect of contributions payable during the period of twelve months immediately preceding the relevant date by the company as the employer of any person under the National Social Security Fund Act 

(2) Notwithstanding anything in paragraph (c) or (cA) of subsection (1), the sum to which priority is to be given under these paragraphs shall not, in the case of any one claimant, exceed twenty thousand shillings:

Provided that, where a claimant under the said paragraph (c) is a labourer in husbandry who has entered into a contract for the payment of a portion of his wages in a lump sum at the end of the year of hiring, he shall have priority in respect of the whole of such sum, or a part thereof, as the court may decide to be due under the contract, proportionate to the time of service up to the relevant date.

(3) Where any compensation under the Workmen’s Compensation Act (Cap. 236)(now repealed) is a weekly payment, the amount due in respect thereof shall, for the purposes of paragraph (d) of subsection (1), be taken to be amount of the lump sum for which the weekly payment could, if redeemable, be redeemed if the employer made an application for that purpose under the said Act.

(4) Where any payment has been made to any clerk, or servant (not being a director) or to any workman or laborer in the employment of a company, on account of wages or salary out of money advanced by some person for that purpose, the person by whom the money was advanced shall in a winding up have a right of priority in respect of the money so advanced and paid up to the amount by which the sum in respect of which the clerk, servant, workman or laborer would have been entitled to priority in the winding up has been diminished by reason of the payment having been made.

(5) The foregoing debts shall;

(a) Rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and

(b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge.

(6) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them.

(7) In the event of a landlord or other person distraining or having distrained on any goods or effects of the company within six months next before the date of a winding-up order, the debts to which priority is given by this section shall be a first charge on the goods or effects so distrained on, or the proceeds of the sale thereof:

Provided that, in respect of any money paid under any such charge, the landlord or other person shall have the same rights of priority as the person to whom the payment is made.

8(a) any remuneration in respect of a period of absence from work through sickness or other good cause shall be deemed to be wages in respect of services rendered to the company during that period;

(b) “The relevant date” means—

(i) in the case of a company ordered to be wound up compulsorily, the date of the appointment (or first appointment) of an interim liquidator, or, if no such appointment was made, the date of the winding-up order, unless in either case the company had commenced to be wound up voluntarily before that date; and

(ii) in any case where subparagraph (i) does not apply, the date of the passing of the resolution for the winding up of the company. 

(9)   This section shall not apply in the case of a winding up where the relevant date as defined in subsection (6) of section 259 of the repealed Companies Act occurred before the commencement of this Act, and in such a case the provisions relating to preferential payments which would have applied if this Act had not been enacted shall be deemed to remain in full force.

EFFECT OF WINDING UP ON ANTECEDENT AND OTHER TRANSACTION

Fraudulent preference (S 312)

(1) Any transfer, conveyance, mortgage, charge, delivery of goods, payment, execution or other act relating to property made or done by or against a company within six months before the commencement of its winding up which, had it been made or done by or against an individual within six months before the presentation of a bankruptcy petition on which he is adjudged bankrupt, would be deemed in his bankruptcy a fraudulent preference shall in the event of the company being wound up be deemed a fraudulent preference of its creditors and be void accordingly.

(2) Any transfer, conveyance or assignment by a company of all its property to trustees for the benefit of all its creditors shall be void to all intents.

Liabilities and rights of certain fraudulently preferred persons

(1) Where anything made or done after the appointed day is void under section 312  as a fraudulent preference of a person interested in property mortgaged or charged to secure the company’s debt, then (without prejudice to any rights or liabilities arising apart from this provision) the person preferred shall be subject to the same liabilities, and shall have the same rights, as if he had undertaken to be personally liable as surety for the debt to the extent of the mortgage or charge on the property or the value of his interest, whichever is the less.

(2) The value of the said person’s interest shall be determined as at the date of the transaction constituting the fraudulent preference, and shall be determined as if the interest were free of all encumbrances other than those to which the mortgage or charge for the company’s debt was then subject.

(3)(a) On any application made to the court with respect to any payment on the ground that the payment was a fraudulent preference of a surety or guarantor, the court shall have jurisdiction to determine any questions with respect to the payment arising between the person to whom the payment was made and the surety or guarantor and to grant relief in respect thereof, notwithstanding that it is not necessary so to do for the purposes of the winding up, and for that purpose may give leave to bring in the surety or guarantor as a third party as in the case of an action for the recovery of the sum paid.

(b) This subsection shall apply, with the necessary modifications, in relation to transactions other than the payment of money as it applies in relation to such payments.

Effect of floating charge (S.314)

Where a company is being wound up, a floating charge on the undertaking or property of the company created within twelve months of the commencement of the winding up shall, unless it is proved that the company immediately after the creation of the charge was solvent, be invalid, except to the amount of any cash paid to the company at the time of or subsequently to the creation of, and in consideration for, the charge, together with interest on that amount at the rate of six per cent per annum or such other rate as may for the time being be prescribed:

Provided that, in relation to a charge created more than six months before the appointed day, this section shall have effect with the substitution, for the words “twelve months”, of the words “six months”..

OFFENCES ANTECEDENT TO OR IN COURSE OF WINDING UP

Offences by officers of companies in liquidation

(1) If any person, being a past or present officer of a company which at the time of the commission of the alleged offence is being wound up, whether by or under the supervision of the court or voluntarily, or is subsequently ordered to be wound up by the court or subsequently passes a resolution for voluntary winding up—

(a) does not to the best of his knowledge and belief fully and truly discover to the liquidator all the property, movable and immovable of the company, and how and to whom and for what consideration and when the company disposed of any part thereof, except such part as has been disposed of in the ordinary way of the business of the company; or

(b) Does not deliver up to the liquidator, or as he directs, all such part of the movable and immovable property of the company as is in his custody or under his control, and which he is required by law to deliver up; or

(c) Does not deliver up to the liquidator, or as he directs, all books and papers belonging to the company and which he is required by law to deliver up; or

(d) Within twelve months next before the commencement of the winding up or at any time thereafter conceals any part of the property of the company to the value of two hundred shillings or upwards, or conceals any debt due to or from the company; or

(e) Within twelve months next before the commencement of the winding up or at any time thereafter fraudulently removes any part of the property of the company to the value of two hundred shillings or upwards; or

(f) Makes any material omission in any statement relating to the affairs of the company; or

(g) knowing or believing that a false debt has been proved by any person under the winding up, fails for the period of a month to inform the liquidator thereof; or

(h) After the commencement of the winding up prevents the production of any book or paper affecting or relating to the property or affairs of the company; or

(i)Within twelve months next before the commencement of the winding up or at any time thereafter, conceals, destroys, mutilates or falsifies, or is privy to the concealment, destruction, mutilation or falsification of, any book or paper affecting or relating to the property or affairs of the company; or

(j)Within twelve months next before the commencement of the winding up or at any time thereafter makes or is privy to the making of any false entry in any book or paper affecting or relating to the property or affairs of the company; or

(k) Within twelve months next before the commencement of the winding up or at any time thereafter fraudulently parts with, alters or makes any omission in, or is privy to the fraudulent parting with, alters or makes any omission in, any document affecting or relating to the property or affairs of the company; or

(l) After the commencement of the winding up or at any meeting of the creditors of the company within twelve months next before the commencement of the winding up attempts to account for any part of the property of the company by fictitious losses or expenses; or

(m) Has within twelve months next before the commencement of the winding up or at any time thereafter, by any false representation or other fraud, obtained any property for or on behalf of the company on credit which the company does not subsequently pay for; or

(n) Within twelve months next before the commencement of the winding up or at any time thereafter, under the false pretence that the company is carrying on its business, obtains on credit, for or on behalf of the company, any property which the company does not subsequently pay for; or

(o) Within twelve months next before the commencement of the winding up or at any time thereafter pawns, pledges or disposes of any property of the company which has been obtained on credit and has not been paid for, unless such pawning, pledging or disposing is in the ordinary way of the business of the company; or

(p) Is guilty of any false representation or other fraud for the purpose of obtaining the consent of the creditors of the company or any of them to an agreement with reference to the affairs of the company or to the winding up; or

(q) Has within twelve months next before the commencement of the winding up been privy to the carrying on of the business of the company knowing that the company was unable to pay its debts; or

(r) Has been privy to the contracting by the company of any debt provable in the liquidation without having at the time when the debt was contracted any reasonable or probable ground of expectation (proof whereof shall lie on him) that the company would be able to pay that debt,

he shall, in the case of the offences mentioned respectively in paragraphs (m), (n) and (o), be liable to imprisonment for a term not exceeding five years and in the case of any other offence shall be liable to imprisonment for a term not exceeding three years:

Provided that it shall be a good defense to a charge under any of paragraphs ( a), (b), (c), (d), (f), (n), (o), (q) and (r) if the accused proves that he had no intent to defraud, and to a charge under any of paragraphs (h), (i) and (j) if he proves that he had no intent to conceal the state of affairs of the company or to defeat the law.

(2) Where any person pawns, pledges or disposes of any property in circumstances which amount to an offence under paragraph (o) of subsection (1), every person who takes in pawn or pledge or otherwise receives the property knowing it to be pawned, pledged or disposed of in such circumstances as aforesaid shall be liable to be punished in the same way as if he had been convicted of an offence under subsection (1) of section 322 of the Penal Code (Cap. 63).

(3) For the purposes of this section, “officer” includes any person in accordance with whose directions or instructions the directors of a company have been accustomed to act.

REFERENCES

1. The companies Act Cap 486 laws of Kenya.

2. SaleemiN.A,Company Law Simplified (Kenya,Nairobi,N.A Saleemi Publishers Limited, 1997). 

3. J.J Ogola,Company Law, Third Edition ( Kenya, Nairobi ,Litho publishers 2010)  

4. Gower and Davies, Principles of Modern Company Law ( London, Sweet &Maxwell publishers,2008) 

5. D French,S Mayson and C Ryan,Company Law,27thedn (New York, Oxford University Press,2010)

6. Morse, G. Et al. Charlesworth& Morse Company law 15th Edition.

7. Katende, J.W The Law of Business Organization in East and Central Africa, E.A.L.B, Nairobi , Kampala, Dares-Salaam 1976

8. Charlesworth (1997): Company law (11th Edition) London :Butterworth’s

9. Underhill (1975) Principle of the Law of Partnership (10th Edition) Sweet &Maxwell

10. Hardy 1 (1982), Case Book on Partnership (2nd Edition) London: Butterworth

11.