The law of partnerships
1.
INTRODUCTION AND NATURE OF
PATNERSHIPS
DEFINITION
Partnerships maybe defined as a business association that comes into
existence when two or more persons come together in the form of a firm.
It has
been defined under section 3 of the PARTNERSHIPS ACT to mean, the
relation that/which subsists between persons carrying on a business in
common with a view of profit.
s.4
& s.28
From
that definition under s. 3, it may be said that partnerships comprises 5
components all of which must exist at the same time:
a.
There must be a relationship- that
relationship must be brought into existence through a process that is not
unlawful, most commonly through the process of contract.
b.
The relationship must involve two or more
persons –
c.
Those two or more persons must carry on a
business i.e. there should be no other reason other than the carrying on of
the business that makes those persons to enter into a relationship. Business is
defined very broadly to include every profession, trade or occupation
d.
That business must be carried on in common. That
it must be carried on by all the partners or the section for the benefit of all
the others.
e.
The business must be carried on with a view
to profit. The only reason why partners should carry on the business is so that
they may make profit. The making of profit is so fundamental that if the
partnership makes losses for a consecutive period of 12 months then it is
liable to be dissolved even by an order of the court. The fundamental position
that profit occupies is historically entrenched so that in the olden days any
business whose profits were shared amongst or between two or more persons would
be considered the partnership and all those who took a share of the profit
could be considered partners. With time that position was found to be too
strict because it could lead to an absurdity where a person could be considered
a partner in business even without his knowledge or intention.
From the latter part of the 19th century there was witnessed
change in the law. The change insisted that the determination of whether a
person is a party in any business should depend not only on the sharing of the
profits but mainly on the real intention of the parties.
That change was expressed in the case cox v Hickman where
the court explained as follows “although a right to participate in profit is
enough indication of partnerships and though they are mainly cases where from
such participation alone, partnership could be inferred yet whether that
relation does or does not exist must depend on real intention of the parties
not upon that one term which provides for participation in profits.
The
changed law is what is enacted in section 4 of Kenya’s
partnership Act cap 29. That section has been judicially interpreted in the
case of Davis v Davis. The court explained that the real meaning of
section 4 is that if the sharing of profits is the only factor to be
considered in determining whether or not partnerships exist or whether or not a
person is a partner in business then it may still be possible that the sharing
of profits may constitute of profit. But if there exist other factors which
may also be taken into consideration, then those factors too must be keenly
taken take into consideration and the real intention of the parties must be
given supremacy
Paragraph
(c) of section 4 then proceeds to set out a list of persons who will not constitute
partners even though they may take a share of the partners. The list is as
follows;
1.
Orphans or a widow of deceased persons who receives a share of the
deceased person by way of annuity does not by that fact alone become partner.
2.
An employee or a servant who receives a share of the partnership profit
by way of his remuneration or wages does not become a partner in the business.
It’s more of a compensation even though from the good will of the business does
not become partner in the new business because the price of the good will have
been paid out of the profits of the new business.
3.
The person who is repaying his debt out of the profits of the business
does not become a partner as long as the payment is done in installments.
4.
The person who has advanced a loan to a business and who is being repaid
his loan out of the profits of the business does not become a partner provided
the loan agreement was reduced into writing. Case of Re Forte ex parte
Schofield held that if the loan agreement is not reduced into writing
then whoever who advanced the loan may be considered.
End
28th
May 28, 2015
COMPARISON BETWEEN COMPANIES AND PARTNERSHIPS.
1.
The legal regimes that
governs partnerships different from that that governs companies and
partnerships vary in that….partners are governed by the partnerships act and
the limited liabilities partnerships act of 2011
Those 3
regimes of law prescribe significantly different regulations to govern the
different business associations.
As
regards partnerships, the general outlook of the partnerships is that they are
essentially contractual and they are to be governed by the terms of the
contract the parties may have entered into. But the limited liability
partnerships act has now introduced rather strict regulations to govern
partnerships that are categorized as limited liability partnerships.
As
regards companies, the companies act prescribes detailed rules which may lead
to the dissolution of a non-compliant company.
2.
THE MODE OF FORMATION
OF COMPANIES defers from that of partnerships. With regard to companies as well as
limited liability partnership, both the companies act and the limited liability
partnerships act requires that they must be formed formally in writing and the
company must have issued to it a certificate of registration. (The two coincide
in that they must be formal in writing)
Ordinary
partnerships on the other hand do not have strict rules of formation; the
partners are totally free to decide on how to form their partnerships, they may
form it in writing in which case the agreement that they enter into becomes
known as the partnership deed.
Alternatively,
they may form it informally through an oral agreement and it may even be
inferred from their conduct. (May contain any terms that the partners may deem
fit)
3.
Number of members
differs. In partnerships the minimum number allowed is 2 and the maximum number
allowed is 20.
In
companies on the other hand, if it is private company the minimum is 2 and a
maximum of 50. If it’s a public company, the minimum is 7 and the maximum is
unlimited.
4.
Once a company is
incorporated, it acquires its distinct legal personality. As per
the case of salmon v salmon. Company has its own personality distinct from that
of partners. The same applies to the limited liability partners. S. 6 of the
limited liability partnerships act.
On the
other hand ordinary partnerships do not acquire separate legal
personality, they remain one and the same thing with the partners (remain one
thing with the owners)
5.
MANAGEMENT
In companies, the management is not placed in the hands
of shareholders (in their capacity as shareholders)
On the
contrary management is placed on the hands of a distinct body known as board of
directors who do not have to necessarily be shareholders.
On the
other hand, ordinary partnerships; management is vested as a matter of rights
in the hands of partners themselves. If it is an ordinary partnership then the
partners are deemed to be two things in one i.e. they are owners and manager,
both, at the same time.
But if
it is an LLP, the LLP act requires that the partners must appoint a manager
under s. 27of the act; that must be a minimum age of 18.
6.
LIABILITY
In companies, liability of the shareholders
(members) for 3rd party debts is always limited unless the company
is registered with unlimited liability. But in partnerships, it depends on
whether the partnership is an LLP or an ordinary partnership. If it is an LLP
then the liability of members is limited but if it is an ordinary then there is
no liability to members, meaning that the partner to an ordinary partnership is
liable up to the last cent.
7.
Agency
In
partnerships which are not LLPs (ordinary partnerships), each partner is
considered to be an agent of each of his co-partners in respect of any business
relating to the partnership. And in that regard of that any transaction that he
enters into will be binding to each of the partners and also binding on the
partnership firm.
But if
it is an LLP then the transactions of the partners are binding on the
partnership firm but not on the individual owners.
In
companies on the other hand, no member or shareholder has the right to bind
other shareholders or the company with other shareholders of the companies with
his own transactions.
8.
Transferability of
shares
in companies
the share that the shareholder possesses or own is fairly easily transferable,
if it is a private company then all that is required is the consent of
the board of directors but if it is a public company then no consent is
required for sale of shares and those shares can be freely transferable to the
market e.g. the Nairobi stoke exchange
On the
other hand shares are not easily transferable. If it is an ordinary
partnership, the transfer of shares operates only to give the transferee
financial benefits that the transferor would have been entitled to but does not
give him the full rights of the partner. It is required that all the other
partners must give their consent to the transfer.
A
transfer in a partnership normally operates like an assignment.
9.
Winding up
For companies,
the life of a company must be brought to an end formally in accordance with the
provisions of the companies act either through the process of voluntarily
winding up or compulsorily winding up.
In partnerships
however, only LLPs are required to dissolve or wind up in accordance to rules
of the LLPs act. But if it is an ordinary partnership, the rules of
winding up are usually not vigorous so that if the partnership was formed
informally then it may even be wound up by the conduct of one partner or
through the expression of the will of only one partner. (Case of Mohammed v.
Hussein; from company law)
1.
PARTNERS
a.
Who is a partner?
The
partnerships act does not define the word partner. But a partner may be defined
as any person who is a member of a partnership. For one to become a member of a
partnership, there are no detailed rules, the only requirements is that he must
have the capacity to enter into contract.
There
are two categories of persons in respect of whom extreme caution must be
exercised in respect to who deserves to enter into a partnership contract and
those are infants/minors or person of unsound mind.
As
regards infants, the following must be born in mind:
1.
In the event of liability for 3rd party debts they cannot
be held liable for business/trade debts. They may be liable only for debts
arising out of supplies of necessaries of the infants.
2.
That when the infant reaches the age of majority, he has the option of
bringing the partnership to an end by reprieving the partnership
agreement. But if he does not reprieve the partnership agreement then he
becomes liable the same way as an adult partner from then henceforth.
With regard to the same persons, the
following should be noted:
a.
They may enter into partnership agreement
only when they are introducing comments
b.
Once they enter into the partnerships agreement, then for as long as the
partnerships exist, they will be considered to be partners of full
capacity and the power to do everything that a company can do.
c.
Any person who is in partnership with the person of unsound mind will
not escape liabilities for debts and liabilities incurred by the same
person unless he can prove that at the time he entered into partnership by the
same person he did not know that the person was so insane as not to possess the
mental capacity to contract.
d.
In practice it is advisable that any person who enters into a
partnership contract with a person of unsound mind should secure a
provision that limits the contractual authority of that insane person.
b.
TYPES OF PARTNERS
There
are various types of partners who may co-exist in the same partnership
especially if the partnership is an ordinary one.
1.
active or ostensive partners
These
are full-fledged partners in the sense that they are involved in everything
that the partnership undertakes. They have the right to participate in
management. They have a right to vote; the right to actively engage in other
business and to share the profits of the business.
Because
of that crucial decision that they occupy the law requires they must give
public notice whenever they retire.
2.
Dormant /sleeping partners
They merely invest their money into
partnerships. They do not get involved actively in the business of the
partners. They however have the right to vote in decision making and they have
right to receive a share of the profits, but normally their nature of
relationships to the other partner is not disclosed to the public.
3.
Silent partners
These
are partners who invest their capital into the business. They then become
entitled to the profits of the business, but they do not have the right to vote
to the management decisions.
4.
Partners in profit only.
These
are partners who invest their profits into the partnership and their after they
play no role into the management and also they have no vote; they are entitled
only to the profits only without being liable to 3rd parties.
c.
NUMBER OF PARTNERS
By
virtue of section 386 of the Companies act, if more than 20 persons purport to
engage in a business inform of a partnership then the law will consider them to
be an illegal entity. That position was expressed in forthhall bakery v
wangoe; in that case 45 individuals purported to have engaged in a
business and in that capacity as a partnership, they sought to recover a debt
owing to them by a defendant. It was held that they were an illegal entity who
could not enjoy any orders from the court except the court pointed out that
such illegal entities will be given recognition only for purposes of
punishment.
Case of smith
v Anderson; gives an explanation as to why the law imposes limitation
on the maximum number that may form a partnership. That justification is given
in the following words “the act was intended to prevent the mischief arising
from large trading undertakings being carried on by large fluctuating bodies so
that persons dealing with them did not know with whom they were contracting and
so might be put to great difficulty and expense which was a public mischief to
be redressed.”
28th
May 28, 2015
3.
Formation of partnerships
Even
though there are no strict rules regarding formation of partnerships
particularly ordinary, every person seeking to form a partnership needs to bear
in mind certain matters:
i.To avoid
future complicated conflict as regards the rights and obligation of partners it
is always advisable that the partners should conclude their contract in
writing in the form of a partnership deed
ii.Partners should ensure
that all the essential elements of the contract are present.
iii.Parties must exercise
caution to ensure that the business they seek to engage in is not
illegal and also that there is not prohibition in law for such contracts to be
carried on by a partnership. In the event that the business was originally
lawful at the commencement of the partnership, if it becomes unlawful during
the subsistence of the partnership as a result of the change in the law then
the partnership must compulsorily come to an end. The risk of engaging in an
illegal business is that the partners will not acquire any rights as against
each other and no rights against third parties but 3rd parties
acquire rights against the partners in so far as those rights are not tainted
in the parties.
iv.In selecting partners
parties need to exercise caution and select partners with extreme care because
partnerships are built on mutual trust and confidence.
v.If the partnership is to be
registered as an LLP then section 17 (2) entitles the registrar to
refuse to register the partnership if he does not meet the requirements of s.
17
Under that same section as read
together with s. 19 , once an LLP is registered and issued a certificate, that
certificate of registration acts as conclusive evidence that the partnerships
has complied with the requirements of the law.
4.
THE PARTNERSHIP
AGREEMENT.
AIM: LOOK AT WHAT PARTNERSHIP AGREMENT IS
SUPPPOSED TO LOOK LIKE
The partnership agreement may take the form
of an oral agreement between the parties. It may also take the form of a
written agreement in the form of a partnership deed or articles of
partnership.
In the case of an LLP, it must take the form
of an LLP agreement. In the absence of an LLP agreement then an LLP may adopt
the standard agreement that is contained in schedule 1 of the LLP act.
There are no statutes as regards what should
be the exact contents of a partnership deed. The parties are free to agree on
any term as they may deem fit.
In the case of an LLP there are basic terms
that must be agreed upon and set out. Those terms are provided for under s. 17
(1).
In the absence of an express provision, on
any specific issue in the LLP act/agreement then those gaps shall be filled by
the provisions of schedule 1.
In addition to the requirements of s. 17, and
in the case of any other partnership agreement the basic terms that a
partnership agreement should contain include the following:
i.The firm name – is
the name under which the partnership will carry on its business. S. 6 of the
partnership act provides that once a partnership comes into existence it
becomes known as a “firm” and the name under which it carries on the
business is known as the ”firm name”. There are no strict rules
regarding the choice of firm names. The only requirements are:
a.
that the name must not be as identical to that of an existing
business as to cause confusion to the public as to the real identity of the
firm.
b.
It must also not be crafted in such a way as to
fraudulently/deliberately mislead the public. Partners may settle on a name
that is a combination of their own individual names or a name that describes
the nature of the business. In the case of an ordinary partnership, if they
settle on a name which is not a combination of their name then they should have
that name registered in the REGISTRATION OF BUSINESS NAMES, CAP 499.
CASES OF ILLUSTRATION HOW
CHOICE OF FIRM NAMES CAN AFFECT…
The mere fact that partners are carrying out
a business under a firm name does not constitute a ..separate legal
perspective.
The case
of patel v. natural contractors whereby the court held that
a firm name is not a name of a legal person. Partners may use it to enter
into a contract and they may use it to institute and defame legal proceedings
but the contract and the dual proceedings will be construed as though they were
individual names of each of the partners. That rule does not however affect
LLPs which are recognized as legal entities of their own names. The court
pointed out further in that case that a sole trader has no right to enter into
a contract or institute or defend legal proceedings in his own name.
Cases:
Ewing v buttercup margarine
co. ltd – in this case, the plaintiff by name Ewing had been carrying on
business dealing with margarine under the firm name of buttercup margarine co.
ltd. The defendant company got registered more than 50 years later after the
firm had started carrying on the business. It was registered under the name
buttercup margarine co. ltd. It was also carrying on the same business dealing
with margarine. Plaintiff firm instituted an action in court arguing that the
name of the defendant was so similar to the name of the firm and that it would
mislead members of the public.
The court agreed and issued an injunction
stopping the defendant from using that name. The court pointed out that the
continued use of that name would mislead the public into believing that the
defendant was a branch or extension of the plaintiff.
Case:
North chesire &
Manchester brewery co. ltd v the Manchester brewery co. ltd. In
that case, the defendant company had been carrying on business under that name
for a period of 8 years then the applicant got registered to carry on the same
business their original name was North Chesire Brewery co. ltd. Later they
extended their geographical area of operation and to reflect their
extension they changed their name to reflect North Chesire and Manchester
brewery co. ltd.
The court ruled out that north chesire and
Manchester brewery co. ltd had selected that name in good faith without any
intention to deceive the company but none the less there were high chances that
the public would be occasionally be misled as to the real identity of the two
companies and so the court issued an injunction stopping them from using that
name.
Case of Parke Davis v opa
pharmacy ;td …had been carrying on business for 8 years….under the name capsolin.
The respondent started carrying on a similar business of marketing the
business…on that for the …but it marketed its ointment and name as capsopa. The
court held that because of the similarity of the first 4 ..of the tills in
which the ointments were marketed happened to get confused and so the
respondents were denied the use of that name.
Case of turton v turton: the
court ruled… in that case, the plaintiff was called Thomas turton and the
defendant was called … turton. The defendant had carried on his business for 9
years under the name “john turton” and later “John turton and co.” later on he
admitted two of his sons to become partners of the business and renamed his
business as john turton and sons”. Thomas turton who had been carrying on a
similar business under the name “Thomas and sons co” moved to court to stop
john turton from using that name. The court held that although there was
similarity in names and that some members of the public would… be misled, an
injunction was…issued to stop john turton from using his own name in business
because he is using his name honestly and without any fraudulent intention.
In the case of croft v day…there
were two gentlemen, one was known as Charles Bay and the other one was known as
Prof…they formed a partnership under the firm name…their physical address was
known as 97,Holborn Hill. Later martin transferred his shares to Bay. They
continued to run business under Day and….ltd. he carried on the business until
he died then the executor of his estate who happened to …who happened to be
known as Day assigned to carry on business under the same firm name. he then
went out to look for another man by the name martin and incorporated him into
the business and so they became partners. They carried on the business under
the name Day and martins, gave their physical address as 90 ½ high Holborn. The
court held that the be not allowed to use that name because even though it was
combination of two individual names, the firm name was mischievously crafted to
mislead the public
3rd
June 3, 2015
Content of the partnership agreement
ii.
Nature of the business. It is
important that there should be no ambiguity in the nature of the business that
the partnership sets to undertake. The nature of the business is important for
two reasons:
a.
It is important for that business that each partner has…to bind..with
its act s or transactions
b.
It is only in respect of that business that a partner in an ordinary
business is considered to be an agent of both the firm and his properties.
The nature of the business is so important
that section 28 of the partnership act requires that it should not be changed
except with the unanimous consent of the other partners.
iii.
The capital of the partnership. That
term should specify the amount of capital that the business is setting up with
including the exact proportions contributed by each partners and the manner in
which those proportions have been contributed. In the absence of an indication
in the contribution of each partner then by virtue of section 28 of the
partnership act each partner is presumed to be liable to contribute equally. In
the event that partners agree to contribute at different proportions it must be
specified further whether partners are required to earn interest of their
capital, otherwise the general rule remains that partners are not entitled to
interest of that business.
iii.
Division of profit. Under
that term the partners should agree on the exact proportions of how they will
share the profits of the business. If they will not agree then by virtue of s.
28 of the PA each partner is entitled to an equal share of the profits
irrespective of the contribution.
iii.
Place of carrying on business. That
term should specify the physical address of the business. In the case of an LLP
that physical address is known as the registered postal address in regard to s.
31 of the LLP act. It is important for 3 reasons:
a.
If any partner is under obligation to keep
partnership books/records … then he will be deemed to have discharged the
obligation if he keeps those books at that office.
b.
If any person desires to keep books or
records of partnership, then he is entitled as a matter of right only to
inspect them at that office.
c.
If any documents are required to be served
against the partnership fund, then they are deemed properly served once they
are served at that office.
iii.
The duration commencement date and the
duration of the business. That term should specify the exact date on
which the business commences, the duration for which it will last and the date
on which it will come to an end. Those are important because it is the date of
commencement of the partnership that also marked the date of commencement of
the agency relationship between the partners and the firm in an ordinary
relationship and between the firm and the partner in an LLP. That relationship
lasts only during the duration of the partnership. The date of end of the business
or partnership, may be …by reference to a specific calendar date or by
reference to the occurrence of an event or accomplishment of a task. In such
cases a partnership will be deemed to have come to an end either on the
specified date or upon the occurrence of the event or accomplishment of the
task. In the event in any reason the partnership commences without having
fixed the duration or date to which it will come to an end, it becomes known as
a partnership at will. Meaning, it remains in existence only for as long as the
partners will. Partnerships at will may be brought to an end through the
unilateral conduct of one partner or any partner.as in the case of Mohammed v.
Hussein (1950) EACA. In that case, the partnership was carrying out business
from premises that had been rented out to it by one of the partners. Due to a
misunderstanding between the partners, the partner who was the owner of the
premises unilaterally decided to throw out the partnership from the premises
and as a result of that conduct the partnership was deemed to have terminated
(because it was a partnership at will.
Alternatively the partnership at will may be
terminated by any of the partners giving notice to the other of his intention
to terminate the partnership. If the partnership was concluded orally then that
notice may take any form (oral or written). But if the partnership was
concluded in writing then the notice must also be in writing.
In the case of an LLP, S.12 OF THE LLP act
requires that the notice must be in writing and for a period not less than 90
days.
vii.
The account bank account. That
term should specify the how the accounting of the business shall be kept
including the person who will be responsible and the manner in which it shall
be kept. It is important that if the partnership is an ordinary partnership,
then the partnership records should indicate how each partner stands in
relation to each of his co-partners and also in relation to the firm. In the
case of an LLP the records should indicate how each partner stands in relation
to the firm. As regards the bank accounts, it is important that the bank
agreement specifies the bank where the partnership agreement will be obtained
including the type of account and who the signatories to the account shall be.
In the absence of a specified signatory the law presumes each partner has the
right to be signatory to the accounts. It is also important that the
partnership agreement should specify that all payments to the partnership shall
be made to the account and all payments out of the partnership shall be made
out of the account.
Equally
important is the requirement of auditing of the books of account. For ordinary
partnerships it is not mandatory to audit the accounts, but the partners may
agree to have their account audited at specified intervals.
In the
case of LLPs however, the books of accounts must be audited at least once every
year and they must have been kept in such a way to make it possible to extract
the balance sheet and to prepare profit and loss account.
viii.
The management. The
partners should specify who will be responsible for the management of the
partnership firm. In the case of an LLP failure to specify the manager renders
the partners guilty of an offence. In the case of ordinary partnerships,
failure to specify the manager allows the general rule to set in that each
every partner sets in as a manager.
viii.
The consequences of death and bankruptcy. That
term should specify exactly what should happen to the life of the partnership
in the event that any partner dies or becomes bankrupt. It is advisable that
that term should provide that in the event that a partner dies or becomes
bankrupt, the partnership will be deemed to have been constituted and will be
continued by the remaining partners. Failure to make that provision will allow
the general rule to sets into operation which is that upon the death or
bankruptcy of any partner every ordinary partnership stands dissolved.
And in
the case of an LLP the death of any partner dissolves the partnership but the
bankruptcy of any partner operates only to prevent the bankrupt partner to
become the manager. In case the partners agreed that the partnership should
continue reconstituted after the death of any of them, then it is also
necessary that upon the death of the partner, the interest of the deceased
partner should be ascertained and be paid out to his estate before the
reconstituted partnership continues. If that does not happen, then at the time
of dissolution of the partnership the interest of the deceased partner will be
entitled to an interest at the rate of 8%p.a.
x.
Settlement of disputes. That
term should indicate how disputes arising in the future under the partnership
should be dissolved and by reference to what system of law. Commonly
partnership agreement do provide that any dispute arising should be referred to
the arbitrators agreed upon by the partners.
4TH June 4, 2015
5.
Partnerships relations
Relationship
between partnerships & third parties.
a.
Generally
The nature of relationship that arises between partnerships and 3rd
parties is governed by the law of the agency. The law of agency comes into play
because once the partnerships come into existence every partner is considered
to be an agent of their partnership firm.
In the case of an LLP every partner is considered to be also an agent
and principal of each of the other partners at the same time.
b.
Legal status of
partnerships
That
nature of relationship is what defines the nature of third party liabilities in
terms of section 7 of the partnerships act as well as section 11 of the limited
liability partnerships act.
The two
sections provide that if a partner in the ordinary course of business enters
into a transaction with a third party then that transaction will bind the firm.
In the
ordinary partnerships, the transactions will also bind his co-partners. That
binding gives rise to liability that operates exactly the same way the
liability of the principle operates in the ordinary law of agency. Accordingly
the transaction of a partner will only be binding upon his co-partners and the
firm if he acted within the scope of his authority. The firm and co-partners
will not be bound if he acted either in excess or outside his authority. Also
it will not be binding if the third party with whom he transacted had knowledge
of the fact that he did not have authority to act. The authority of the partner
may take the form of either actual or express authority or apparent or
ostensible authority.
It is
common to find partnership agreements where the actual authority of a partner
has been restricted by for example prohibiting him from entering into certain
transactions.
In such
cases, the determination of whether the partnerships firm or his
co-partners are bound will depend on whether his transactions was within
his ostensible authority. That means that ostensible authority is normally
wider than actual authority and it may extend to cover situations where the
actual authority has been restricted.
Case Watteau
v. Fenwick (1893) 1 QB 346
In that case the defendants had been a partnership in which they
appointed one of them to be a manager. The manager had been given authority to
do everything else but he was prohibited from purchasing certain items without
involvement of other partners. In contravention of that obligation, he
purchased those items from the plaintiff but the price was not paid. The
plaintiff brought an action to recover the price.
The court held that even though the prohibition had restricted
actual authority, the items that he purchased were labored by his ostensible
authority and so the firm was nonetheless bound to pay the price.
Under
s.11 of the partnerships act, the nature of liability that arises in respect of
ordinary debts and obligation owing from the partnerships to 3rd
parties is categorized as joint liability.
Under
s.14 of the partnerships act, if a partner commits or omits a tort then the
liability for the tort also binds the partnership firm.
In the
case of ordinary partnerships it also binds co-partners. The liability under
that section is joint and several liability.
Under
s.15 there is also liability categorized as joint and several which arises in
the following instances:
i.If a partner in the
ordinary course of the business receives property or funds from a 3rd
party and then misappropriates it.
ii.If the firm receives
property or funds or property are misappropriated by either of the partners.
c.
NOVATION
S.21 as
read together with s.11 of the partnership act is to the effect that the
liability of a partner to 3rd party debts and obligations arises
from the moment he joins as a partner and ends either on the day he retires
from the partnership or the day the partnership is finally wound up. There’s
only one exception to that rule and it takes the form of novation.
Novation
is understood to be a tripartite agreement between either the retiring partner
on the one hand and the remaining partners and the creditors of the firm on the
other hand or between a newly incoming partner on the one hand and the existing
partners and creditors of the firm on the other hand to the following effect:
I.That the retiring partner will not be held liable for the debts and
obligations incurred while he was still a partner OR
II.That the incoming partner will be held liable
for debts and obligations incurred even before he joined the partnership.
Novation
may take the form of either an express or implied form.
By
virtue of s.40 of the partnerships act where there is no novation, a retiring
partner is required to give notice of his retirement from the firm. Otherwise 3rd
parties may be entitled to hold him liable for debts incurred after retirement.
In case
of an LLP section 11(3) of the LLP act requires the retiring partner to give
notice to the registrar unless the public already has notice of his retirement.
d.
Holding out
Refers
to a situation where the person either makes himself to believe or allows
others to cause him to believe to be a partner.
It is
provided for under s. 18 of the partnerships act. to the effect that any person
who represents himself either by written word or spoken word or allows himself
or suffers himself knowingly to be represented as partner in a firm is guilty
of holding out and if on the strength of such representation a third party
gives credit to the firm then he will be held liable for that third party debt
and will be held liable in the same way in which a partner will be held liable.
In
determining whether a person has suffered/rendered himself to be partner it is
mandatory that he must have had actual knowledge that he was being represented.
Negligence and recklessness do not suffice.
It is
immaterial that the person who was not given actual notice at the particular
time he was being represented to a particular third party.
On the
basis of holding out it is advisable that whenever one retires from partnership
he should ensure that he does not leave behind evidence that may be used to
represent him as a partner.
Case: Tower
cabinet ltd v. Ingram
There
were two partners carrying on the business of dealing with furniture under the
business name “Merry’s”. The gentlemen were known as Christmas and Ingram.
After some time Ingram retired from the business. Christmas continued to carry
on the business under the same name “Merry’s”. About one year after Ingram’s
retirement, Christmas wrote a letter to the plaintiffs requesting to be
supplied with certain furniture. The furniture was supplied but the price was
not paid. The plaintiff brought an action to recover the price and they joined
only Ingram as the defendant. The reason they did that was because on the
letterhead that Christmas used to request for the supplies the names of two
partners had been….namely Christmas and Ingram. It turned out that that was one
of the old letterheads that Ingram had forgotten to destroy before he retired.
It was held that in the circumstances there was no evidence that Ingram had
actual knowledge of the existence of those letterheads and so he had not
suffered himself to be held out as a partner with Christmas.
e.
Partnerships relations in
respect of partners themselves.
The
manner in which partners will relate to each other including the rights they
acquire as against each other and the duties that they incur towards each other
is governed principally by the law of contract. That is because partnerships
are essentially considered to be products of contracts. Like every other
contract, partnerships contracts are subject to the fundamental doctrine of
freedom of contract. Accordingly partners are free to enter into their
partnerships agreement on any terms that they may deem fit.
In the
event that their agreement omits certain necessary matters the provisions of
the partnerships are revoked to fill those gaps.
In the
case of LLPs the first schedule may be involved.
s. 23 of
the partnerships reinforces the doctrine of freedom of contracts in so far as
the partnerships contract are concerned by abiding that partners are free to
modify whatever rights and obligations they have over the partnership agreement
and even those that are being derived from the partnership act.
There’s
however one term that the law insists on and the law will read into every
partnership agreement. As for that one term, if partners omit to provide on it
the law will improve on it. If the partners purport to exclude it the law will
consider the partnership agreement to be null and void to that extent. That
term is the principle of utmost good faith.
Out of
that principle, flows the following 5 duties that the law imposes on every
partner:
1.
It is the duty to resist from using or abusing the name or its
association with the partnership for his own selfish-gain and to the
detriment of the firm.
2.
In the event that the partnership agreement recognizes that a partner
may be expelled from the partnership for breaching their partnership agreement,
that power must be used only in good faith but not to oppress the partner
who is being sought of be expelled. It is for that REASON THAT section 29 of
the partnerships act provides that a majority of the partners may expel another
only if the power to do so is expressly provided for in their partnership
agreement.
Refer to
the case of Clifford v. Timms(1907) 2 Ch 236.
The
parties had been partners in a firm engaged in the practice of dentistry but
the plaintiff also a director of another company which was also engaged in the
practice of dentistry. In their partnership agreement, partners had agreed that
should any one of them engage in an act that amounts to professional misconduct
then the other partners would be free to expel him and to eliminate his
partnership from him that company from which the plaintiff was a director
published an advertisement in the magazine in which among other they made the
following two allegations;
i.That they were the only
dentists who always sterilized the equipment before using them on the
equipment.
ii.That they were the only
dentists who had employed a female nurse to be always present and a male nurse
to be operating on female patients.
The
partners were aggrieved because of those advertisements and they issued a
notice expelling the plaintiff from the partnerships. The court agreed and held
that those had painted other dentists in negative manner…and amounted to
professional misconduct to which the plaintiff was …by virtue of him having
been the director of that company. The court concluded that the partners had
properly exercised their power to expel the other.
3.
duty to account
The
partner is required to disclose any information that comes to his knowledge and
which may affect the partnership
Such
information must be disclosed fully and truthfully.
4.
Duty not to make secret profit at the
expense of the firm.
That
duty requires that if a partner earns any commission or receives any benefit by
reason of association with the partnership and if such commission of benefit is
not known to the other partners then he must disclose it to the other partners
and where necessary he must surrender it. That duty operates even where a
partner sells his own property to the firm.
5.
Although as a general partners are not prohibited from engaging in
separate private business, they are under duty not to engage in any business
that may compete the business of the firm or any business that may
inaccurately suggest that it has a link with the firm.
f.
Partnerships relations in
respect of partnerships property
Partnership
property occupies a critical place in the life of a partnership. If not
properly handled it may lead to the breakup of the …
It is
therefore important that all the partners clearly understand what their
partnership property is.
Partnership
property is defined under s. 24 as comprising in three categories of property;
a.
Property that was acquired into the original stock of the partnership
b.
Property that has been acquired during the lifetime of the partnership
and for the purposes of the partnership.
c.
Property that has been acquired on account of the partnership.
Under
s.25 any property purchased under partnership funds is pursued to be
partnership property.
The
partnership act at s. 24 implies that partnership property should be used or
applied only for the purposes of partnership.
In the
same way, s. 27 of the partnership acts provides that no decree may be executed
against partnership property unless the decree arises out of the liability of
the partnership. The section however also recognizes that if an individual
partner incurs his separate liability which has nothing to do with the firm
then if a decree accrues out of that liability, then that decree may
nonetheless be executed against that individual partner’s share of interest in
the partnership share property. But if that happens then under s. 37 of the
partnerships act, the other partners have a right to give a notice terminating
their partnership with that individual partner.
THE RELATIONSHIP BETWEEN PARTNERS THEMSELVES.
Under s.
28 of the partnership act partners acquire the following rights in their
relationships to each other:
i.The right to access,
inspect and to take copies in the partnerships book of accounts
ii.Right to participate in resolving
partnerships dispute.(right to vote)
iii.Every partner has the right
to be consulted and right of their consent be obtained. And in respect of those
matters that require unanimity.
8th
July 2015
6) DISSOLUTION OF PARTNERSHIPS
The
dissolution of partnerships varies depending on whether it is an ordinary or
LLP.
In the
case of ordinary partnerships there are two forms of dissolutions:
i.Dissolution without an
order of court
ii.Dissolution through an
order of court
Dissolution outside court
Under
that procedure a partnership may stand dissolved upon the occurrence of any of
the events that are specified under s. 36, 37 and 38 of the partnership
act.
In all
those instances with the exception of s. 38 the occurrence of any of those
events will lead to the dissolution of the partnership for as long as the
partners do not have a contrary agreement
As
regards s. 38, a partnership must stand dissolved without any option for the
partners to extend its life.
What are these events or occurrences?
Under s.
36 the partnership will be dissolved in the following circumstances:
a.
If it was formed for a particular adventure, it stands dissolution upon
completion of that adventure.
b.
If it was formed for a specified period of time, it stands dissolution
upon expiry of that period of time.
N/B-*examinable*
- It is noted however that where a partnership is formed without a specified
term and it is deemed to be a partnership at will, it may be dissolved by the
notice of any of the partners on the others, unless in their partnership
agreement the partners have indicated that their partnership will not be
dissolved except by mutual agreement.
Under s.
37 the partnership will dissolve upon the death or bankruptcy of the partners.
Also
under the same section a partnership may be dissolved by the notice of many
partners to any partner who has suffered his share of interest in the
partnership property to be attached for his separate debt in terms of s. 27 (2)
of the act.
N/b
-Basis is s. 37(2)
Under s.
38 every partnership automatically must dissolve upon the occurrence of any
event that renders its business unlawful. Essentially that will arise if there
is a change in law.
Dissolution by an order of court
Under this procedure the law recognizes that
a partner may file a petition in court seeking for an order dissolving their
partnership. Such an order may be granted if the partner satisfies any of the
grounds set out under s. 39 of the partnerships act.
These grounds are:
a.
Any partner has become permanently of unsound mind. Under that ground an
application may be made by any partner including the one who is of unsound mind
in which case the application may only be made on his behalf by his next
friend.
b.
Where the partner has become permanently incapable of performing his
obligations under the partnership agreement. Depending on the circumstances of
partnership e.g. running low of reason for being a partner e.g. losing a land
that kept him in the partnership.
c.
On the ground that it is established that any of the partners has
conducted himself in such a manner that is calculated to prejudicially affect
the conduct of the business of the partnership. E.g. Stiff competition of
partnership business in breach of utmost good faith
d.
Where any partner persistently has breached the terms of partnership
agreement and thereby rendered it impracticable for other partners to carry on
the business. refer to case of Clifford v. Timmins
e.
If the business of the partnership can only be carried on at a loss. If
the loss continues consistently for 12 months then it has no effect.
f.
Partnership may be dissolved if any matter arises that in the opinion of
the court makes it just unequitable that the partnership should be
dissolved.
DISSSOLUTION OF LLPs
The LLP
act recognizes three ways in which an LLP may be dissolved;
a.
By unanimous resolution by the partners themselves.
b.
Dissolution by a resolution of the creditors. Under that procedure the
creditors must work together with the partners and jointly reach the decision
to dissolve their partnership. (There would be only one ground that the
partnership cannot repay its debts.)
c.
Through an order court under that,, or by a liquidator or by the
minister or by a creditor and the court may order dissolution if any of the
following grounds is proved:
i.If the partners themselves
have resolved to dissolve the partnership.
ii.If the partnership becomes
unable to repay its debts.
iii.If the court forms the opinion that it is
impracticable for the partnership to be effected in accordance with the
partnership agreement.
iv.If the number of partners has reduced to less
than two and that situation persists for more than two years.
v.A partnership may be dissolved wherever circumstances renders it just
unequitable to do so.
vi.It may be ordered dissolved if it is
established that it is being carried out for an unlawful purpose or risk to
national security, national interest, public peace or public welfare.
Consequences of dissolution
Once a
partnership has been dissolved if it is an LLP, then it must have a liquidator
appointed to wind up its affairs.
If it is
an ordinary partnership then the law does not require a liquidator but the
partners are free to dissolve the partnership
At the
time of winding up the affairs of the partnerships, the following rules apply:
I.Every partners will have a right as against each other to have the
assets of funds of the partnerships apply in the following manner:
a.
To pay off any liabilities and debts owing to third parties.
b.
To pay to any partner what owes from the partnership to that particular
partner.
c.
If any surplus is to remain then it is to be shared out between the
partners
In
settling the accounts between the partners, the following two rules are to be
observed:
a.
If there are any losses then the losses must be taken care of first. The
losses must first be paid out of the profits of the business. If the profits
are not enough then they are paid out of the capital. If the capital is also
not enough then every partner is liable to contribute towards the settlement if
the losses in the proportions in which they were entitled to share the
profits.
b.
That the assets or funds of the partnership will be distributed in the
following manner and order:
i.To pay off third party debts and liabilities.
ii.To pay off any advances that a partner may
have made in the partnership.
iii.If any assets or surplus will remain then
they will be paid to any partner in respect of what a partnership fund is owing
that partner.
iv.If any surplus remained then it is to be
divided among the remaining partners in the proportions in which they were to
share their profits.
9th
July 2015
PART II: THE LAW OF CO-OPERATIVES
GENESIS AND DEVELOPMENT OF CO-OPERATIVES AND MOVEMENT.
Cooperative as a concept is derived from the word cooperation which
essentially contemplates a situation where persons cooperate with each other
towards achieving shared goal. In that sense cooperatives are as old as a human
civilization. In the traditional African setup they took the form of formal
associations built around such units as the clan or the village. The most
important point is that out of those traditional formal associations have been
built the modern cooperative movements. The modern cooperative movement is now
formal in the sense that it is …by clearly stipulated rules. In the modern
sense the cooperative movement is said to have originated from Europe around
the beginning of the 20th century.
It is more of origin in Europe may have been described as a bottom
up mode in the sense that it was originated by the poor members of the society
who saw the need to unite to protect themselves against exploitation at the
hands of the middle class.
In Kenya, however the modern cooperative movement had a different mode
of origin because it was originated by the middle class white settlers who
decided to unite in order to maximize benefits out of their agricultural
activities.
In Kenya, the first modern type cooperative society is said to have been
formed around the year 1908 by the white settlers. During that time the African
population was not permitted to participate in the cooperative movement and the
colonial government gave two reasons for that:
a.
That the African population did not have well educated people who could
properly maintain the books of accounts of cooperatives society
b.
The government argued that it was too early to allow Africans to
participate in the movement.
The truth of the matter was that the colonial government feared that if
Africans were allowed to participate in the movement they could use the sense
of togetherness that cooperatives bring in order to stage a strong revolt
against the colonialists. Even then the African population showed a lot of
interest in the co-operative movement.
That
interest forced the colonial government to form a commission of enquiry in 1930
known as the Campbell commission which was given the responsibility of
investigating the desirability of allowing Africans to participate in the
movement. The commission reported that it was highly desirable to allow
Africans to participate in part of its report it stated as follows “no
government responsible for the welfare of people like those of Kenya can afford
to omit to place at their disposal the advantages they derived from cooperative
organizations with suitable guidelines”
Following
those recommendations the first African cooperative was formed in the 1930
which was known as the Taita Vegetable society with the objective of producing,
breeding and marketing vegetables at the coast. It was a large society with 239
members.
Following
the commission’s recommendations, the first cooperative legislation was enacted
namely the cooperatives ordinance of 1932 which for the first time required
that cooperative societies be registered. It also made provision for rights and
duties for members on the one hand and of the cooperative societies on the
other hand.
That
legislation remained in place until 1945 when the new legislation was enacted
that repealed it namely the cooperatives ordinance of 1945.
The main
feature of the 1945 ordinance was that it introduced the department of
cooperatives which was then given the mandate of coordinating cooperatives
matters throughout the country, promoting the cooperative movement and
educating the masses on its movement. It is reported that the department
performed its functions very well because it was able to mobilize interest from
both the African population and the white settlers.
The
interest on the part of the colonial government was manifested in the open
support that the government officers gave to the cooperative movement. One such
support was evidence by the then district officer who was then based in North
Kinangop district in 1962 who said “I believe cooperative is what Africans want
and is not far removed from their tribal concept of communal ownership of land.
I think they would like to keep the economy going given a bit of encouragement
and would do th eir best to make it work.
The
colonial government had therefore identified the coopearative movement as …
through which the economic growth of the country could be advanced. That same
interest was inherited by the defendant Kenya government and has been
manifested in several ways:
a.
In 1965: when the government promulgated its first major policy paper
(sessional paper no. 10) the cooperative movement was identified a major
vehicle through which the African socialism could be promoted and within that
concept lay the concept of economic progress.
b.
In 1963: a motion was introduced in parliament which received a
unanimous vote to establish a specific ministry of cooperatives which was to
manage the cooperatives. That ministry was established in 1974 by upgrading the
dept. of cooperatives that was established in 1945 into a full ministry. And
since then the successive government have had a ministry for
cooperatives.
Following the mention of the cooperative movement in sessional paper no.
10, player in the political sector in the country started seeing a cooperative
movement as a tool which they could advance their personal political interest.
Consequently many of them infiltrated the cooperative movement and hijacked the
agenda as they used most cooperative societies for their own political
advancement.
Following that heavy political infiltration the government saw a need to
change the law in order to protect cooperative societies from having their
agenda hijacked. In 1969 the 1945 ordinance was repealed and replaced by the
cooperatives societies’ act. The main feature of that act was that it created
the office of the commissioner of creative development who was given the power
to monitor the operation of cooperative societies and to disband management
committees who were not faithful to the agenda of their cooperative societies
and also the power to question the budgets of cooperative societies.
Note: it is reported that the progress of cooperative movements during
the colonial era was somehow interrupted between 1943 - 1945 following the
declaration of state of emergency. The state of emergency caused many employees
of the department of cooperatives who were mainly colonial officers to abandon
their station of work. As a result the property of many cooperative societies
was looted. The paradox however is that it is also reported that it is during
that period that the largest number of cooperative societies were formed since
the introduction of the cooperative movement. It has been suggested that the
explanation for that the restrictions that the state of emergency imposed
forced the African movement to appreciate the importance of cooperation ant
togetherness.
PRINCIPLES OF COOPERATION
They are also commonly referred as the cooperative principles. They are
the principles around which the cooperative movement operates. Those principles
have not been defined from by any law but have been accepted as governing the
cooperative movement throughout the world.
Under the 1997 cooperative societies act, this principle have been
recognized by being mentioned and the act directs that for any cooperative
society to be registered under the act it must in its by-laws embrace the
principle of cooperation.
These principles are the following:
1.
The principle of voluntary and open
membership
This
principle is to the effect that the membership must be open and based on the
free choice of the person. The principle applies in two senses. The first sense
it means that no person should be compelled or unduly influenced to join a
cooperative society. On the contrary the decision to join should derive out of
the person’s free volition. At the second sense, the principle means that the
opportunity to join the membership of the cooperative society should be open to
every person who has the will to join and for as long as a person possess the
qualification to join, and remain a member he should not be compelled to leave
or expelled from membership. A member may only be expelled from membership of
either he has lost the qualification required for membership or the members at
a general meeting have resolved to expel him because he has contravened the
bylaws of the society. It is because of that principle that the cooperative
societies’ rules particularly rule 9 of the 2004 rules provides that no
cooperative society may fix a maximum limit to the number of its members.
2.
Democratic member control.
This
principle is to the effect that coop societies should be governed or controlled
by the members in accordance with acceptable democratic principles. The
principle insists that coop societies are democratic organizations. The
principle manifests itself in two ways:
1.
In the management of cooperative societies, the management
responsibilities are vested upon the members. The members are considered
to be a supreme decision making organ and they manage the society through
general meetings. Every member has the right to attend the general meeting. The
law recognizes that the general meeting may then delegate certain
functions/obligations/powers to smaller units from within the membership. But
those smaller units constantly remain answerable to the general meeting.
2.
The second level of that principle is that members are deemed to be
equal. Consequently, at the general meeting each member has only one vote
irrespective of the amount of capital he may have invested in the society. And
also irrespective of the length of time for which he has been a member.
3.
The principle of autonomy and independence
That
principle recognizes that cooperative societies are organizations in the
economic sector. Consequently, they must remain players in the economic sector.
They must shield themselves from influence from other sectors and not allow
themselves to be dictated upon by other partisan interests. Accordingly they
must not discriminate members on the basis of such partisan considerations as
political, religious or social pacification.
4.
Principle of education, training and information.
That
principle is to the effect that cooperative societies must educate, train and
inform their members, employees as well as the general public. Such education
training and information should cover subjects that would promote the
cooperative movement as well as other matters of public interest. In practice,
that principle is given effect to when cooperative societies organize seminars
or workshops for the employees or members or they engage in public awareness
campaigns.
- Constitutional
review process in the run up towards the new constitution…
5.
Principle of economic participation by members
The
principle is to the effect that economic goods of a coop belong to the members
and the members should participate in them by receiving a share of those rules.
Under the cooperative societies act it is recognized that if a coop society
makes any saving or surplus then those savings or surplus belong to the members
and should either be given to them or invested in them. In practice that
response is given effect to by cooperative societies declaring and paying out
to their member’s bonuses and dividends.
6.
Principle of limited interest on capital.
That
principle is to the effect that in paying members a share of the economic goods
of their society, they should not outrageously benefit from their capital
investments in the society. That is to say the amount of interest or benefit
that they derive must be limited and modest. It is for that reason that
cooperatives societies pay dividends and bonuses at rates that are fairly low.
Under the 1969 act, it was expressly provided that no society would pay
dividends at the rate exceeding 10% of the members’ savings.
Under
the 1997 act there is no fixed percentage but it is required that the rate of
dividends must be tabled and agreed upon at the general meeting. And it must be
applied uniformly to all members.
7.
Principle of growth by mutual cooperation (cooperation among
cooperatives)
It is to
the effect that cooperative societies must understand themselves to be players
in the worldwide movement. For that reason they must not work in isolation.
Contrary, they must cooperate with each other particularly so that they may
enhance their capacities to promote the welfare of their members.
In
practice, this principle is given effect to when cooperative societies engage
in exchange visit with each other.
8. The
principle of concern for the community in general.
It is to
the effect that cooperative societies must be concerned about not only a
promotion to the welfare of their members but also welfare to the community at
large. They must show interest in the whelming of the public within which they
operate. That principle may be given effect to in two ways:
a.
The cooperative societies my resist from engaging in activities that may
endanger the public good. That will depend in circumstances of each case e.g.
pollution.
b.
The society may engage in positive activities that promote the public
good. Also depends on circumstances.
It is in
that spirit that rule 43 of cooperate society rule 2004, provides that if any
assets or funds remain after the dissolution of a cooperative society, then
they may be vested in any public project that the general meeting may
determine.
THE
LEGAL REGIME RELATING TO COOPERATIVE SOCIETIES IN KENYA.
The law
governing cooperatives in Kenya is now contained in the cooperatives society
act of 1997 as amended by legal notice no. 2 of 2004. That act operates
alongside the cooperative society rules published as legal notice no. 103 of
2004. The 1997 act repealed the 1969 act. The 1969 act had been criticized as
having concentrated too much powers in the hands of the commissioner of
cooperative development and the minister.
The main
feature of the 1997 act is that it took away certain powers from the minister
and commissioner and redistributed them with the bulk of the powers now
being conferred upon the members.
Under
the 1997 act, for a cooperative societies to be registered it must demonstrate
its core objective is the promotion of the welfare of its members. Under the
repealed act the commissioner had the power to evaluate the ability of the
society to promote welfare of its members and had the discretion to decline the
registration if he was of the opinion that the society had no such capacity.
No such
power exist under the 1997 act but every society making an application of
registration is required to also submit a statement explaining its capacity to
promote the welfare of the members.
Under
the 1997 act there are 4 types of societies
1.
Primary societies - These are societies whose membership comprises
exclusively of natural human persons.
2.
Secondary societies – these are societies whose membership comprises of
primary societies.
3.
Cooperative unions – these are unions whose members comprises
exclusively of primary societies. In Kenya the most prominent cooperative union
is known as KENYA UNION OF SAVINGS & CREDITS COOPRATIVE UNIONS (KUSCCO).
4.
Apex societies – these are societies whose sole purpose is to provide
goods and services to the cooperative unit. Kenya COOPERATIVE
ALLIANCE(KCA)
The
person vested with the power to register is the commissioner. The law requires
that for purposes of registration, an application should be presented to the
commissioner through a prescribed form. That app;liocation is required to
supply certain information about the proposed society. The information required
includes the following:
a.
The name of the society – the choice of name of society is subject to
certain legal requirements
a.
The name must not be similar to that of another existing similar society
b.
It must not be a name that is likely to mislead the public as to the
real identity of the society.
c.
If the society is proposed to be registered in limited liability then
the word limited must form part of the name of the society as the last word.
d.
The word cooperative must form part of the name of the society.
e.
The word cooperative is a protected word in law. Accordingly no
person/organization is permitted to use that word in its operation ...unless it
is a registered cooperative society. The contravention of that constitutes an
offence.
b.
The society’s area of operation including the postal address and the
physical address of the society’s office.
c.
The type of society that is proposed to be registered. Whether primary,
cooperate etc. in the event that it is a primary society or a secondary, then
it should also be indicated if it is to be registered in a limited liability.
d.
The language in which the society’s books of account will be kept. That
indicates the books of accounts may indicate in any language in which the
members are comfortable with.
e.
The name if the person proposed to perform the function of the
secretary. Following the 2004 amendment that person should be a qualified CPA.
The application must also identify the persons who are proposed to be the
members of the corporate society. For purposes of registration the society must
raise the minimum number of members. If it is an apex society or a cooperate
union then the minimum number of members required is two. If it is a…then the
minimum number required are ten. All those members must meet the required
qualification of membership under s. 14 of the act. The qualification are
a.
One must have attained the age of 18
b.
You must be holding wither employment, profession, occupation or trained
in the sector for which the co-operate society is being formed.
c.
The person must be either resident or occupying land within the
society’s geographical area of operation.
When the
application for registration is submitted it should be accompanied by four
copies of the proposed by law of the society which must be in the English
language. Once the application is presented to the commissioner he ..it and if
he is satisfied that the application meets the requirements of law, he will
register the society.
The
society may be registered with limited or unlimited liability. But if it is a
co-operate union or apex society it may only be registered with limited
liability.
If the
commissioner is not satisfied with the application then the law allows him two
options:
a.
He may out rightly refuse to register the society in which case he must
inform the society in writing about his reason for refusal. If any party is
aggrieved by that refusal he has the right to appeal to the minister and a
final right to appeal to the high court.
b.
The commissioner may brand the society “provisional registration”. This
may only be granted if the commissioner is of the view that the non-compliance
is not very fundamental and that it may be rectified within reasonable time.
Provisional registration is however only temporary, it will last only for the
period specified by the commissioner and the maximum period allowed is 12
calendar months. Every society with provisional registration is allowed
to operate with the full powers of the cooperative society with the only
exception being that it must prominently publish its official documents and
bill board the fact that it is provisionally registered.
During the period of provisional registration
it is expected that the society should take the necessary steps to rectify its
non-compliances so that it may qualify for full registration. Once it qualifies
the commissioner may grant it full registration which will be backdated to the
date in which it was granted provisional registration. If it fails to attain
compliance then the commissioner may at any time cancel the provisional
registration and refuse full registration in which case any aggrieved person has
right of appeal to the minister and final right of appeal to the high court.
Consequences of registration
Once society is register either fully or
provisionally the following consequences ensue:
a.
The society shall become body co-operate with cooperate powers
and perpetual succession as well as the common seal. The
corporate powers enable it to enter into contracts on its own name, enter into
suits and institute on its own name and to acquire property on its own name.
b.
Once the society is registered it is incumbent upon the commissioner
providing the society free of charge with the following documents :
a.
Certificate of registration or provisional registration as the case may
be.
b.
Copy of the corporate societies act and the rules.
c.
The application form which the society presented for its registration.
d.
The by-laws of the society as registered under the hands of the
commissioner.
c.
The certificate if registration is deemed to be conclusive evidence that
the society is registered as certified unless its registration is subsequently
cancelled and the by-laws registered under the hands of the commissioner is
prima facie evidence that the by-laws are duly registered.
d.
Under s. 13 of the cooperative society’s act. Once the society is
registered there comes into existence a contract as between the cooperate
society on the one hand and each member on the other hand binding the member to
comply with all the bylaws and decisions of the right organs of the cooperate
society.
BY-LAWS
Every
cooperative society must make and have by-laws. No cooperate society may be
registered without by-laws.
The
by-laws of the society must cover as many matters as possible that are capable
of describing or regulating the societies operations at the minimum it must
provide for all the matters prescribed under rule 18 of the cooperate societies
rules.
The
by-laws are considered to be amendable to amendments at any time as the society
may deem fit. Any by law may be amended. An amendment may only be done by the
society’s general meeting. That meeting must meet the required quorum in law.
For a society with a limited required is at least half of the members and at
least ¾ of them must vote in favor of the amendment.
In the
case of society with limited liability is that which is prescribed in the
by-laws and the majority of those present must vote in favor of the amendment.
For an amendment to take effect it must be presented to and registered by
the commissioner.
THE
MANAGEMENT OF COOPERATIVE SOCIETIES
Cooperative
societies are managed at four levels or at four different organs namely:
a.
The general meeting
b.
The management committee
c.
The board of representatives
d.
The supervisory committee
GENERAL MEETING
This is
the supreme organ of every co-operate society with the power ...in the society.
It has the power to make decision on the most crucial matters in the society.
That general meeting every member has the right to attend and vote. The law
recognizes 3 types of general meeting namely
i.The first general meeting
That is the general meeting that every
co-operate society must hold at least one month after it has received its
certificate of registration. That meeting must pass resolutions on matters that
are necessary to set off the operations of the society into the future
including the following:
a.
Appointing the society’s bankers, auditors and advocates
b.
Deterring the society’s maximum borrowing powers
c.
Electing the society’s officials
d.
Considering the society’s budgets or estimates
ii.Annual general meeting
Meeting that every co-operate society must
hold. It is required to be convened four months after the end of the society’s
financial year.
The persons with the power to convene an AGM
meeting are:
a.
The management committee/ commissioner – the agenda for the AGM is
prescribed under the act. It includes deliberating the most critical issues
such as accounts of the society. If the meeting deliberates but fails to
approve the account that fact of failure must be notified to the commissioner
shall be fined
b.
Savings and surpluses to determine whether or not to pay the dividends
and bonuses
c.
Pointing the returning officers for the next elections
d.
Deciding on the management structure of the society including whether
there is need of establishing branches
e.
Electing officials for the coming year of the society
iii.Special general meeting
This is a meeting that a co-operate society
may convene whenever special circumstances arise necessitating for it to be
convened. The special circumstances will depend on the circumstances of the
society’s in question. It may include something that has risen and is urgent
and cannot wait for the next annual general meeting. It may be convened at any
time during the lifetime of the cooperate society and it may discuss any agenda
that may have necessitated its bbeing convened. The power to convene special
general meeting is vested in the ..of the management committee but it may also
be cpnvened by board of representatives or by the commissioner.
The members of the society have the power to
demand for a special general meeting if the board and the management committee
fail to hold the meeting then the law allows them to hold the meeting.
NOTE:
Every general meeting of a co-operate society
requires to be convened by a notice of not less than 15 clear days.
MANAGEMENT COMMITTEE
It is
required that every corporate society must have a committee must have a
management committee whose membership must be a minimum of 5 and maximum of 9.
Management committee is defined as the governing body of the corporate society
which has the power to direct the operations of the society. Its powers include
the powers to enter into contract on behalf of the society, the power to
institute and defend legal proceedings in the name of society and the power to
do anything necessary for the purposes of the achieving its objectives.
In
performing its functions the management committee is required to discharge its
conduct that is described as the prudence of diligent businessmen. In the
consequence that if its performance falls below its standards then the members
may be held personally liable for any losses that the societies may suffers as
a result of their lack of diligence.
The
members of the management committee are elected by the general meeting of the
society and they remain answerable to the general meeting. As a general rule it
is only the general meeting that has the power to remove them.
The law
does not contemplate a situation where a cooperative society may exist without
a management committee. It is therefore required that if a general meeting
passes a resolution removing the entire management committee then that same
meeting must elect a new committee or specify the date of the next general
meeting in which the committee will be elected.
In
exceptional situations a member may be removed by the majority of the members
of the management committee in which case they must co-opt another member of
the society to act.
Qualifications
For any
member to be a member of the management committee will have to satisfy the
following:
a.
Be a member of the society
b.
Be literate
c.
Must not be someone who has been adjudged bankrupt
d.
Must not have been named adversely in an enquiry report that has been
adopted at the society’s general meeting.
e.
The person must not be a member of the management committee of more than
two other corporate societies
f.
He must not be a person who is engaged in business or activities that
may be considered be running into competition with the business of the
cooperative society. For example, if the society is trading in agricultural
produce then he must not himself be trading in agricultural produce in his own
right.
g.
He must not be a person who has been convicted of fraud or mismanagement
under the act
h.
Must not owe any debt to the society other than ordinary loan.
i.
It
is required that once a person is elected into the committee he must declare
his wealth to the commissioner and he must also sign an indemnity form
undertaking to indemnify the society for losses attributable to his
fault.
The
management committee may subrogate its functions to any of the sub-committees
but it remains collectively responsible for any proper management of the
society’s affairs.
SUPERVISORY COMMITTEE
This is
a small committee comprising of only three members. The law requires that every
corporate society must have it. It is constituted as an oversight committee
that oversees all the operations of the management committee. It is required to
make its input in setting the agenda of the society’s annual general meeting.
It so expressly prohibited from performing the functions that are persevered
for the management committee.
Board of
representatives
This is
required of only apex societies and cooperative unions.
The act
does not define exactly what this board is to be made up of but it is
constituted as a board that gives policy directions to the society and in the
event that the management committee fails to perform its functions the board of
representatives may intervene.
THE RIGHTS, PRIVILEGES AND LIABILITIES OF MEMBERS OF CO-OPERATIVE
SOCITIES
1.
Once a person becomes a member of a corporate society he becomes
entitled to rights and privileges and at the same time incurs certain
liabilities. First every member must meet the prescribed requirements of
membership including the prescribed minimum share subscription. Otherwise he
will not be entitled to claim any rights of membership from the society.
2.
Members of societies are liable to observe the rule as to the maximum
level of shareholding; and the rule is that no member is allowed to hold
more than 20% of the issued share capital of the society.
3.
A member is free to transfer his shares to any other member approved by
the general meeting. he must assist the society by ensuring that his
transferred shares does not enable the transferee to acquire more than 20% and
he may not transfer shares of he owes any debt to the
4.
Every member is restricted in the number if societies he may belong
particularly the member is prohibited rejoining more than one society with
unlimited liability which has the same objectives as his original society. The
exception however is that he may join subsequent society if he occupies land
within that societal area of occupation.
5.
Once a member becomes a member of a corporate society he becomes
entitled to be elected to any organ of the management
6.
Every member is entitled to enjoy the services and facilities of his
corporate society.
7.
Every member has the right to ... acquire information including the
societies internal …the societies minute books, the societies registers and any
reports held by the society.
8.
Every member is under obligation to observe and comply with the
society’s by-laws and decisions.
9.
In the event that the society’s register is a limited liability, then
every member is liable to contribute the society’s liabilities in the event of
insolvency.
THE RIGHTS, PRIVILEGES AND OBLIGATIONS OF COOP SOCIETIES
Every
cooperative society once registered incurs the following obligations towards
its members and also becomes entitled to certain privileges and rights from its
members. In addition cooperative societies owe obligations to the public.
1st
: The obligations as to the registered office
Every
society must have a registered office at which any notices or communication may
be served upon. A change in that office must be notified to the commissioner
within 7 days.
2nd:
Duty to keep documents
Every
society must keep certain basic documents within its registered office. Those
documents must be open to inspection to the members of the society as a well as
the auditor. The members also have right to make copies of those documents.
These documents include;
a.
The 5 documents that were supplied to the society by the commissioner
upon registration.
b.
The minute books;
a.
Minutes of all general meeting in the society
b.
Minutes of meeting of any other management organ of the society
c.
Register of members
d.
Register of loans and any security for loans the society may have given
e.
Register of assets of the society
f.
Ledgers including personal ledgers of members and the cash register
etc.
3rd: The accounting records and standards.
Every
society is under obligation to keep and maintain proper books of accounts
indicating any receipts or all receipts and payment by the society. Following
the 2004 amendment the accounting record of the society are now required to be
maintained according to the international accounting standards. Those
accounts must be audited at least once every financial year by an auditor
approved by the commissioner, appointed at the general meeting of the society.
The
auditor for purposes of auditing has very broad purposes of looking at … of any
person who may deem necessary. In the event that the general meeting of the
society fails to appoint an auditor, the commissioner shall have the power to
do so. Once an auditor is appointed and becomes entitled to receive the 15
days’ notice …the society’s general meeting which he will be expected to
present his audit report. Before an audit report is presented to the GM it must
first be presented to the commissioner. (Introduced by the 2004
amendment)
NOTE:
Once the
auditor’s report is deliberated upon at the general meeting it must be filed
with the commissioner but if for any unjustifiable reason it is not filed by
the commissioner and all the members of the management committee shall
automatically lose their office and will not be eligible for reelection until
the expiry of 3 consecutive years.
5th
August 5, 2015
4th
RIGHT TO CHARGE OVER MEMBERS PRODUCE
Available
to all cooperative societies that engage in agricultural produce. Such society
are permited under s. ...which the society may be given pledge as security for
a loan.
Where
that contract is entered into a member is under duty to market all his
product...covered by the contract through the society. If he markets or
disposes off the produce outside the framework of the society then it
constitutes a wrong for which a member may be punished.
The law
allows the society too make provisions within the contract entitling it to
impose a liquidated sum of money as damages upon a member in breach.
Although a the contract appears to be void, for being in restraint of trade,
the cooperative society’s act has expressly exempted it by providing that it
shall not be construed to be a contract in restraint of trade. That contract
may either be embodied in the society’s by-laws or in a separate contractual
document between the society and the member.
5th
Right to fast charge
That
right is available to every society that may have given loan or lent money or
even agricultural input to members which the members have used to produce
certain agricultural produce or to invest in some other material value.
Such
instances, for as long the loan is not repaid or the value of the equipment has
not been recovered by the society, the society has the right of fast charge
over whatever agricultural produce or material investment that the member may
have acquired through the aid of the loan or the equipment of the input.
That is
to say that the societies claim or interest over such produce or material shall
run first in priority.
6th
the right to sue over a member’s contribution
That
right applies ion situation where a member of a cooperative society has entered
into an arrangement with his employer instructing the employer to effect
deductions on the members monuments of salary then omit those deductions to the
cooperate societies as members contribution or savings in the
society.
The law
requires that such deductions must be emitted within 7 days after they have
been deducted. if the employer fails to emit them then the society shall have
the right to sue the employer to recover those deduction with compound
interest.
7th
right to charge the member’s pay/duce
In that
light accrues to the cooperate society that is owed money by a member. In such
situations a cooperative society has the right to charge any money payable from
the society to the member. By reducing that money bay an amount equivalent to
what the member owes the society.
That
essentially means that a members money that is held by the soceity is
considered to be security that the society looks upon to recover money from the
members...it is for that reason that the law protects members’ savings in
cooperative societies. And scuh savings cannot be a tached even by a order
of court and they cannot be touched by a member’s trustee in
bankruptcy.
N/B -
Order 22 of the civil procedure rules
8th
right to impose fines
Every
coperative society has the right to impose fines upon a member who contravenes
any provision of the by-laws or who fails to observe the decision of the
relevant organs of the society management.
Before
the fine may be imposed the members in question must be given the notice of
intention to do so and the opportunity to defend himself with or without a
witness.
Once the
fine is imposed it becomes a civil debt recoverable on …s. 13
AMULGAMATION
AND DIVISION OF COOPERATIVE SOCIETIES
Acquisition
and miles
The law
gives cooperative societies the freedom to amalgamate or merge with each other
or to subdivide themselves into two or more smaller societies.
By their
very nature, amalgamation and division have the potential of either increasing
or reducing the responsibility of the management organs of the societies.
They
also have the potentiial of affecting the rights and iterestes of
members,creditors and other interested third parties.
For
those reasons, s. 29 and 30 of the cooperative societies act have put in place
elaborate procedures that must be followed by any society seeking to reemerge
or subdivide itself.
Procedures
are signed to protect the interests and rights of members, creditors and other
interested parties.
The
procedures require that every society proposing to amalgamate or subdivide
itself must hold at least two general meetings and the first general meeting
must pass a special resolution that is known as preliminary resolution.
The
second general meeting must pass another special resolution that is known as
secondary resolution.
In case
of a decision the preliminary resolution must be sent out to the members as
well as the creditors and other interested parties informing them of the
proposed division and giving them an opportunity to make their representations
or express their views on the proposed division.
Members
who wish to not join any of the proposed new societies will express that
intention, creditors who wish to demand payment of their monies before the
division should also express that intention and other interested third parties
who have objections should also express those objections
The
secondary resolution must then detail how the society proposes to address the
representations that will have come from the members, creditors and the other
third parties.
That
secondary resolution must then be filed with the commissioner. If the
commissioner is satisfied that the law has been complied he will register the
resolution and the following consequences shall follow:
i.The society that has
dicided itself wil be deemed to hgavedissokved and its registration cancelled
ii.The new smallers cosieties
will be issued with their certificate of resgistartion
iii.The members who did nott
express intention of joining the new societies will automatically become mebers
of the new society in accordance with the provision of the secretary of
resolution .
iv.Any members or creditor or
third party who is not satisfied in the manner on which the secondary
resolution has dealt with the representation will be at liberty to elect any of
the new societies against which he will be passively disclaim.
Amalgamation
also follows the same procedures described above most importantly the
preliminary resolution must avail an oopportunity to the members, creditors and
third parties to make their represenatations and the secondary resolution must
address those representations.
If the
commissioner is satisfied he will register the secondary resolution and the
following consequences shall follow:
a.
All the societies which will have merged will stand dissolved and
their registration cancelled
b.
The members of the societies who will not express intention not to join
the new society will automatically become members of the new society.
c.
The new society will be issued with the certificate of registration in
its new proposed name.
d.
Any member or creditor or third party who is not satisfied without the
secondary resolution as addressed to his representation may pursue his claim
against the new society.
ENQUIRY
AND INSPECTION
These
are two procedures through which the law allows the commissioner to get a view
into the manner in which the operations of the cooperative societies are being
run.
As
regards enquiry the commissioner may conduct an enquiry either on his own
motion or upon receiving a demand from ¾ of the members of the society.
The
enquiry will investigate how the society has been managed in light of its
by-laws and the act. The commissioner will then prepare a report a report of
his findings and he may make recommendations on how the society may be better
managed and in the event he finds any member or officer guilty of mismanagement
he may recommend that that member or officer be surcharged.
The
report will then be tabled before the society’s general meeting for the society
to determine the necessary measures to address the outcome of the enquiry. If
it recommends a surcharge and the enquiries are locked at the general meeting
the amount of the surcharge becomes a civil debt recoverable at …
In
practice enquiries are conducted when the commissioner receives an indication
that the society is being mismanaged.
s. 58
As
regards inspection the commissioner has the power to inspect the society’s
books of account determine whether it has the ability to repay its debts. For
an inspection to be conducted the commissioner must have been mover by a
creditor.
The
creditor must satisfy the commissioner that his debt has become due for
repayment, that he has demanded for the debt to be paid but the society has
failed to repay the debt.
Disputes
of coperatoves are sett;ed in accordance to sections 76-78 of the act.
Section
76 directs that all disputes concerning the dispute of a cooperative society
shall be refered to the cooperative ttribunal. The section therefore gives the
cooperate tribunal exclusive jurisdiction over all disputes that fall under
that section.
Section
77 then establishes the cooperative tribunal with 7 members including the
chairman and the deputy chairman.
The
tribunal is deemed to have quarum wjhen the chairman and deputy chairman sits
with atleast two other mebers.
The
decision I sbabsed on vote of he majority
Any
part that disagrees with the tribunal has the right o appeal to the high
court whose decision is final.
Under
the cooperative societies act, the term dispute has not been defined just as ot
was not defined under the tribunal act
That
absence of the definition has triggered extensive litigation in the court as
parties seek what exactly the term means.
Under
the act s. 76 marely list two categories of disputes that may be reffered to
the tribunal namely a claim bya member or a first member or indidst
memberagainst a cooperative society or second claim by the society againsta a
member, firsm member or a deceased member.
Thec
oruts have howebver made it clear that the term dispute is not a technical
terma dn it should not htrefore not be given a technical meaning
The case
of gatanga coffee grwoers coop society v. gitau
Lukenya
ranching v. kavolotu
The
courts held that the term should be given its ordinary meaning
The
court expanded the meaning in the case of ruakiro by explaining that the
term dispute should be under stood to include any matter that can form the
matter of subject ltigation and which may give rise to some form of civil
liability
Note
The
foregoing procedure for settlement of disoutes is radicaly different from the
procedure that existed under the old law where disputes wre to be refered to
the commsioner who upon being satisfied that it was a dispute worth determining
would then refer it to an arbitrator(s) appointed by himself.
That
whole system made it possible for cooperative societies disputes to
benefit from the many adavantages that arbitration enjoys over litigation in
the court.
The
current system may be criticized for introducing the possibility that matters
of ccoperative may end up being bocked doen the complex system of ltigation
DISOLUTION
OF COP SOCIETIES
The coop
soceities act recognoises only one way through wchich coop societies may be
dissopved
s. 61(5)
highlighst that coop societies may be disoolved only by a pursuant order of
disoolution by which the commissioner cancels the registration of the society
if any
party is aggrieved with that order the right of appeal lies to the minister and
the final appeal lies to the high court
The
grounds for dissolution are only 5 namely:
a.
If the commissioner forms the opinion that the society should be
disowned on the basis of defiance or enquiry or inspection under s. 58 and
59
b.
If the commissioner forms the opinion that the society should be
disowned on the basisi of the representation made to him by at least ¾ of the
members.
c.
Where the number of members of the society has fallen below the
prescribed minimum as 10 for primary societies and two for other societies.
d.
If the society has failed to file its annual returns to the commissioner
for a period in excess of three years.
e.
If the society has been unable to achieve its objectives
This
mode of dissolution does not leave room for the members if the society to
directly bring to an end the life of their own association. They may only
directly participate by petitioning the commissioner.
After an
order of dissolution the cooperative society must then go thorugh the process
of liquidation which involves the winding up of the ….
During
liquidation only the liquidator and the minster have direct roles to play
The
liquidator is appointed by the commissioner normally at the time he makes his
order of cancellation.
His
power includes the folloing:
a.
He tajes custody of all the societies record and assets
b.
He has the powers to dispose the soceities’ assets either by public
auction or private treaty
c.
He has the power to institute and fefend legal oroceedings on behaklf
iof the society and appoint an advocate to assist him
d.
He has the power to determine the amount of contribution that any member
of the scoeity will contribute towards the societies debts and
liabilities.
e.
He has the power to refer a question to the cooperative tribunal for
determination.
the minister has the following powers among
others:
a.
To re3scind or bury the decision of the liquidator
b.
The power t o determine the liquidators remuneration
c.
The power to remove the liquidator and replace him with another one
d.
The power to discharge the liquidator
N/B
During
the period of litigation any orders or directives issued by either the minister
or liqudator may be registerd ina court of alw and they will operate as though
they were decrees issued by the court.
