Kenya Law Resource Center

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What is a Company?

The word company ordinarily means an association of a number of individuals formed for some common
purpose. When such an association is registered under companies Act, it becomes an artificial person with
perpetual succession and a common seal.

According to Lord Justice Lindley, a company is an association of many persons who contribute money or
moneys worth to a common stock and employed for a common purpose. The common stock so contributed is
denoted in money and is capital of the company. The persons who contribute it are members. The proportion
of capital to which each member is entitled is his share. Shares are always transferable although the right to
transfer them is often more or less restricted.

Characteristics of a company

On being incorporated, a company enjoys certain advantages over other associations. Such advantages are
termed as characteristics of a company and are as follows:-

(1)

Separate Legal Entity

A company formed and registered under the companies Act is a distinct legal entity. It is regarded by law as a
person, just as a human being is a person. It is a creation of law also called artificial person being invisible and
intangible without physical existence. Though devoid of natural existence, it can own land and other property,
enter into contracts, sue and be sued, have a bank account in its own name, owe money to others and be a
creditor to other people and employ people to work for it.

The company is at law a different person altogether from the subscribers to the memorandum of association.
The companys money and property belong to the company and not to the members or shareholders, similarly,
the companys debts are the debts of the company and the shareholders cannot be compelled to pay them. A
company may contract with its members. This principle of legal separate entity is clearly illustrated in the
leading case of Saloman v. Saloman & Co. Ltd.

Case Law: Saloman vs. Saloman & Co. Ltd.

Saloman had a boot business. He sold the business to a company named Saloman & Co. Ltd which he
formed. There were seven members his wife, daughter and four sons who took 1 share each and Saloman

himself took 20,000 shares. The price paid by the company to Saloman was 30,000, but instead of paying
him cash, the company gave him 20,000 fully paid shares of 1 each and 10,000 debentures. Owing to strike
to the boot business the company could not service the interest on loans and an action was instituted to enforce
his security against the assets of the company. Thereafter, at the instance of unsecured creditors of the
company, a liquidation order was made and a liquidator appointed. The assets of the company amounted to
6,000 only. Debts amounted to 10,000 due to Saloman and secured by debentures and a further 7,000 due
to unsecured creditors. The unsecured creditors claimed that as Saloman & Co. Ltd was really the same
person as Saloman, he could not owe money to himself and that they should be paid their 7,000 first.

It was held by the House of Lords that Saloman was entitled to 6,000 as the company was an entirely
separate person from Saloman. The unsecured creditors got nothing.

Lord Macnaghten observed in this case that;

When the memorandum is duly signed and registered, the subscribers are a body corporate. The
company is at law a different person altogether from the subscribers to the memorandum and though it
may be that after incorporation the business is precisely the same as it was before and the same
persons are managers and the same hands receive the profits, the company is not in law the agent of
the subscribers or trustee for them.

Salomans case established beyond doubt, that in law a registered company is an entity distinct from its
members, even if one person holds all the shares in the company. There is no difference in principle between a
company consisting of only two shareholders and a company consisting of two hundred members. In each
case, a company is a separate legal entity.

Case Law: Lee vs. Lees Air Farming Co. Ltd (1960)
Of the 3000 shares in a company, L held 2,999. He voted himself as the managing director. L was killed in an
air crash while working for the company. His widow claimed compensation for personal injuries to her husband
while in the course of this employment. It was argued that no compensation was due because L and Lees Air
Farming Ltd were the same person.

The Privy Council applied Salomans case and said that L was a separate person from the company he formed
and compensation was payable.

Case Law: Peoples Pleasure Park vs. Rohleder 6 Southeast

The articles contained prohibition that title to land should never pass to a colored person. The land was sold to
a corporation all the members of which were Negroes. It was held that the corporation was distinct from its
members and that the transfer was valid.

Case Law: A.L Underwood Ltd vs. Bank of Liverpool

Mr. Underwood had carried on business as an engineering and machinery merchant. He converted the
business into a limited company and allotted one share to his wife.

Underwood as the sole director received 45 cheques of the aggregated value of 8,502 drawn in favor of the
company. He endorsed them ALU Ltd. ALU sole director and paid them into his personal account with the
bank of Liverpool instead of paying them into the companys account with another bank. The Bank of Liverpool,
the defendants, without inquiring whether the company had a separate banking account collected the cheques
and credited Underwood with the proceeds and honoured cheques drawn by him against them to pay his
private debts.

The court was of the opinion that when doing what they had done, the Bank of Liverpool had treated Mr.
Underwood as being identical with the company by virtue of his peculiar position as the beneficial owner of all
the companys shares and its sole director.
Consequently, the bank had overlooked the materiality of the cheques being drawn in the companys favor and
not Underwoods favor.

In an action for conversion brought by the company on behalf of a creditor to whom debentures had been
issued by the company it was held that the Bank of Liverpool was liable and that it was precluded upon the
following grounds from arguing that Underwood, when paying the cheques into his own account, was acting
within the scope of his apparent authority as agent of the company:
(i)

The act of an agent paying his principals cheque in his own account was so unusual as to put
them on inquiry and they ought to have inquired whether the company had a separate bank
account and if it had why the cheques were not paid into that account. The banks failure to make
an inquiry amounted to negligence.

(ii)

Underwood when paying the cheques did not purport to act as the companys agent but as being
himself the company and the bank so treated him.

In the course of his judgment, Atkins L. J said:The directors, whether collectively or singly, do not have actual authority to steal the companys goods.
Although he acted in capacity of a director he is a different person from the company.

Case Law: Macaura vs. Northern Assurance Co.

Macaura, who owned an estate, sold the whole of the timber on the estate to a company in consideration of the
allotment to him of 42,000 fully paid 1 shares. All the companys shares were held by him and his nominees,
and he was also unsecured creditor of the company for an amount of 19,000. Subsequent to the sale, he
effected insurance policies in his own name with the Northern Assurance company covering timber against fire.
Two weeks after, the policies were effected, almost all the timer was destroyed in a fire. A claim brought by him
on the policies was dismissed by the House of Lords on the ground that he had no insurable interest in the
timber.

In the course of his judgment Lord Summer said;It is clear that the appellant had no insurable interest in the timber described. It was not his rather it belonged
to the company. He owned almost all the shares in the company and the company owed him a good deal of
money, but neither as a creditor nor as shareholder could he insure the companys assets. The debt was not
exposed to fire, nor was the shares. His relation was to the company, not to its goods.

In this case, it is clear that the company is very different from the subscribers and its assets cannot be vested to
the members. A member does not have interest in the property of the company and should not be regarded as
an agent or as a trustee.

Macaura owned almost all the shares of the company, but the property of the company was not his and could
not insure it in his name.

(2)

Perpetual Succession

According to concise Oxford Dictionary, perpetual means inter alia, applicable, valid for ever or for indefinite
time while succession means a following in order.

Unlike a natural person, a company never dies. Its existence is not affected by death, lunacy and insolvency of
its members. A company is an immortal person. Members may come and go, but the company continues in its
operation unless it is wound up. The existence of the company is not affected by the death of all the
shareholders. Thus where all the members of a company were killed say by a bomb the company was deemed
to survive.
The perpetual succession occurs because a company and its members are separate persons and so the
companys legal life is not terminated by a members death.

(3)

Limited liability

The fact that a registered company is a different person altogether from the subscribers to its memorandum
means that the companys debts are not the debts of its members. If a company has borrowed money, it and it
alone is under an obligation to repay the loan. The members are under no such obligation and cannot be
asked to repay the loan. In case a company is unable to pay it debts the creditors may petition the High court
for an order to wind it up. During the winding up the members will be called upon to pay the amount, if any,
which is unpaid on the shares they hold incase of a company limited by shares or the amount prescribed by the
memorandum incase of a company limited by guarantee.

A point to note is that a companys creditor cannot institute legal proceedings against the companys member
inorder to recover from him what he owes the company. This is because the member does not, legally,
become his debtor merely because the company is his debtor.

(4)

Common Seal

As an artificial person it cannot sign its name on the contract. So it functions with the help of a seal. Common
seal is used as a substitute for its signature. Every company must have a seal with its name engraved on it.
Anything done under an agreement between the company and the third party requires recognition of the
company in the form of an official seal.

(5)

Capacity to sue and be sued

Because a company is at law a different person altogether from its members it follows that a wrong to, or by,
the company does not legally constitute a wrong to, or by, the companys members. Consequently;(a)

member cannot institute legal proceedings to redress a wrong to the company. The company
A
as the injured party is generally speaking, the proper plaintiff.

(b) A member cannot be sued to redress a wrong by the company. This is illustrated by Saloman v
Saloman Co. Ltd in which it was held that Saloman was not liable for the companys failure to
repay the loans as agreed with its creditors and should not therefore have been sued to recover
them.

(6)

Transferability of shares

The shares of a company are freely transferable and can be sold or purchased in the share market. The shares
or other interest of any member shall be movable property transferable in the manner provided for in the articles
of the company.
Labels: company law, law of business associations

LIFTING THE CORPORATE VEIL

The general rule is that a company is a legal person and is distinct from its members. The principle is regarded
as a curtain, a veil, or a shield between the company and its members, thus protecting the latter from the
liability of the former. The veil is impassable as an iron curtain. But when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud or defend crime the law will regard the company as an
association of persons. In these cases the law disregards the corporate entity and pays regards to the

economic realities behind the legal faade. The court may look behind the artificial person- the company and
take account of the personalities of natural persons- the cooperators.
These cases are exceptions to the principle in Saloman v. Saloman & Co. Ltd are two fold: (1) Lifting by courts
(2) L
ifting by statutes

(1)

Lifting by courts

Courts while experiencing their inherent jurisdiction to do justice and fairness may lift a companys veil so
as to meet the ends of justice. The court may lift the veil because of the following reasons:(i)

Determination of character

In times of war, the court will lift the veil to see whether a company is controlled by the enemy
aliens.

Case Law: Daimler Co Ltd vs. Continental Tyre & Rubber Co. Ltd (1916)
A company was incorporated in England with a capital of 25,000 in 1 shares for the purpose of selling in
England tyres made in Germany by a German company, which held the bulk of shares in the English company.
The holders of the remaining shares (except one) and all the directors were Germans resident in Germany.
The one share was registered in the name of the secretary, who was born in Germany, but resided in England
and had become a naturalized British subject. After the outbreak of the war between England and Germany,
an action was commenced in the name of the English company on the instructions of the secretary, for a
payment of trade debt. One of the defenses was that the company was an alien company and that payment of
the debt would be trading with the enemy.

In his judgment, Lord Parker stated:

My Lords, the truth is that considerations which govern civil liability and rights of property in time of peace differ
radically from those which govern enemy character in time of war. The law on the subject may be summarized
in the following propositions:
(a)

A company incorporated in the UK is a legal entity, a creation of law with the

status and capacity which the law confers. It is not a natural person with mind or
conscience.

(b)

Such a company can only act through agents properly authorized and as long as
it is carrying on business in this country through agents so authorized and
residing in this country, it is prima facie to be regarded as a friend.

(ii)

(c)

Such a company may, however, assume an enemy character. This will be the
case if its agents or the persons in defacto control of its affairs are resident in an
enemy country or taking instructions from or acting under the control of enemies.

(d)

The character of individual shareholders cannot itself affect the character of the
company in times of peace. The enemy character of individual shareholders and
their conduct may however, be very material on the question of whether the
companys agents in defacto control of its affairs are infact adhering to, taking
instructions from or acting under the control of enemies. This will vary with the
number of shareholders who are enemies and the value of their holdings. Given
in the case the fact that the secretary held one share only out of 25,000 shares
and was the only shareholder who was not an enemy might well suggest that he
was acting under the control of, taking his instructions from, or adhering to the
enemies.

Where

the company is a sham

The court will lift the veil where the device of incorporation is used for some illegal or improper
purpose. The courts have intervened on numerous occasions and lifted the veil inorder to
circumvent a fraudulent or improper design by a bunch of scheming promoters or shareholders.
Case Law: Jones vs. Lipman
Lipman agreed to sell freehold land with registered title to the plaintiff (Jones) for 5,250. Pending completion
he sold and transferred the land to the defendant company (having a capital 100, which he acquired and of
which he and a clerk were sole shareholders and directors), for 3000 of which 1,564 was borrowed by the
defendant company from a bank and the rest owing to him.

In an action by the plaintiff for specific performance, it was held that, the defendant company was a cloak for
Lipman.

The Lord Lawrence in his judgment stated that the defendant company is the creature of Lipman, a device and
a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity. The
proper order to make is an order on both the defendants specifically to perform the agreement between the
plaintiffs and Lipman.

(iii)

Where

the company is acting as the agent of the shareholders

One of the ratio decidendi in Salomans case was that the company is not in law an agent of the subscribers.
Under the ordinary rules of law, a parent company and a subsidiary company even 100% subsidiary company
are distinct legal entities, and in the absence of an agency contract between the two companies, one cannot be
said to be the agent of the other.

If a court held that a company acted in particular instance as an agent of its holding company the veil of
incorporation would have been lifted.

Case Law: Firestone Tyre & Rubber vs. Llewellin

An American company formed a wholly-owned subsidiary company in England to manufacture and sell its
brand of tyres in Europe. The distributors sent their orders to the subsidiary direct and the orders were met
without any consultation with the American company. The subsidiary received the money for the tyres sold to
the distributors and after deducting its manufacturing expenses pus 5 percent, it forwarded the balance of the
money to the American company. All the directors resided in England except one who was the president of
American company and they managed the subsidiaries affairs free from day-to-day control by the American
company.

It was held that the American company was carrying on business in England through its English subsidiary
acting as its agent and it was consequently liable to pay UK tax.

(iv)

Protection

of Revenue

The courts may disregard the corporate entity of a company where it is used for tax evasion or to circumvent
tax obligation. Further, where it is desired to establish for tax purposes in what country a company is resident
the court will lift the veil and find out where the control management is and that determines the residential
status.

(2)

Lifting by statutes

(i)

Membership fallen below statutory minimum (Section 33)

If at any time the number of members of a company is reduced below two in case of private company or below
seven incase of public company and it carries on business for more than six months while the number is so
reduced, every member who knows of this fact will become liable to unlimited extent for the payment of the
whole debts of the company contracted during that time. It should be noted that the section limits the members
liability to debts contracted after six months. It does not make the member liable for any debts incurred during
the six months which follow the reduction in membership.

(ii)

Non-publication of a Companys Name (Section 109 (4)

The Act requires a companys officers and other agents to write its name on its seal, letters, business
documents and negotiable instruments. This is done for the benefit of third parties who might contract with a
limited company without realizing that it is a limited company. Any officer or agent of the company who does
not comply with the aforesaid statutory requirement shall be liable to fine not exceeding sh 1,000 and shall

further be personally liable to the holder of the bill of exchange, promissory notes, cheque or for goods which
did not bear the companys correct name, unless the amount due thereon is duly paid by the company. The
imposition of personal liability on the companys agent is what is regarded in a somewhat loose sense as lifting
the veil of incorporation.

(iii)

Group Accounts (Section 150)

Section 150 requires a company which has subsidiaries to lay before the company in a general meeting
accounts or statements dealing with the state of affairs and profit and loss account of the company and the
subsidiaries at the time when the companys own balance sheet and profit and loss account are laid before the
companys general meeting. This is regarded in a loose sense as a case of lifting the veil because a holding
company is obliged to incorporate into its balance sheet the assets and liabilities of the subsidiary company as
if they were its own assets and liabilities. This is a modification of the general principle that a companys assets
and liabilities are not a members assets and liabilities and would not therefore be incorporated into the
members own balance sheet.

(iv)

Investigation of companys affairs

Section 167 gives an inspector appointed by the court to investigate companys affairs the power to investigate
the affairs of a companys subsidiary or holding company, if the inspector thinks it necessary to do so for the
purpose of his investigation.
An investigation instituted pursuant to this power would be regarded in a loose sense, as an instance of lifting
the veil because the order to investigate a company sufficed to investigate the companys member as if they
were one entity.
(v)

Investigation of companys membership

Section 173(1) empowers the registrar to appoint one or more competent inspectors to investigate and report
on the membership of any company for the purpose of determining the true persons who are or have been
financially interested in the success or failure of the company or able to control or materially to influence the
policy of the company.

For the purpose of that investigation, Subsection 5 of the same section confers on the inspector power to
investigate the membership of the companys subsidiary or holding company for the same purpose.

(vi)

Take over bids

Section 210 provides that where a scheme or contract involving the transfer of shares to another company has
been approved by the holders of not less that 9/10 in value of the shares whose transfer is involved, the
transferee company may at any time within two months after the making of the offer by the transferee company,
give a notice to the dissenting shareholder. The dissenting shareholder must then apply to the court within one

month from the date on which the notice was given to restrain compulsory acquisition of his shares. The court
may, in an appropriate situation, lift the veil of incorporation.

(vii)

Fraudulent trading

Section 323 provides that if the course of the winding up of a company, it appears that any business of the
company has been carried on with the intent to defraud creditors of the company or for any fraudulent purpose,
the court on application of the liquidator or any creditor or contributory, if it thinks proper so to do, declare that
any person who were knowingly parties to the carrying on of the business in manner aforesaid shall be
personally responsible without any limitation on liability for all or any of the debts or other liabilities as the court
may direct.

The personal liability of the person concerned is what constitutes an instance of lifting the veil of incorporation.
Labels: company law, law of business associations

CLASSIFICATION OF COMPANIES

Section 389 of the companies Act provides that no company, association or partnerships
consisting of more than 20 persons shall be formed unless it is registered as a company
under this Act.
There are three types of companies provided for under this section: (i)

Chartered

(ii)

Statutory

(iii)

Registered

(i)

companies

companies
companies

Chartered

companies

The crown in the exercise of the royal prerogative has power to create a corporation by the grant of a
charter to the person assenting to be incorporated. No such companies can be formed in Kenya after
independence and section 389 only serve as a reminder of English origin of our companies Act.

(ii)

Statutory

companies

A company may be incorporated by means of a special Act of parliament. A statutory company has no
shareholders and its initial capital is provided by the treasury. It is expected to operate according to
commercial principles and to make profit. If it makes losses and becomes unable to pay its debts, its

property can be attached by its creditors but it cannot be wound up on application of any creditor. However,
the government will come to its aid if it has no cash or other assets to pay its creditors. Examples includeKengen, KP&L.Co, Kenya Pipeline, Kenya Railways, KTDA, KVDA etc.

(iii)

Registered

companies

A registered company is formed by registration under the Companies Act. Section 2 of the Companies Act
defines a company as a company formed and registered under this Act.

Classification of registered companies section 4(I) classifies registered companies into:(a) P

ublic company A company formed by any seven or more persons.
(b) P
rivate company A company formed by any two or more persons.

A private company or a public company may be:(i)

imited by shares if the liability or its members is limited by its memorandum to the amount if
L
any unpaid on the shares held by them.

(ii)

Limited

by guarantee -- if the liability of its members is limited by its memorandum to an amount

which the members have undertaken to contribute to the assets of the company in the event of its
being wound up.

(iii)

Unlimited

-- if it does not have any limit on the liability of its members.

PRIVATE AND PUBLIC COMPANIES

Private Company

According to section 30(1) of the Act, a private company means a company which by its articles:(a) R
estricts the right to transfer its shares.
(b)

Limits

the number of its members to fifty not including persons who are in employment of the
company.

(c) P
rohibits any invitation to the public to subscribe for any shares or debentures of the company.

Section 30(2) provides that where two or more persons hold one or more shares in a company jointly, they
shall, for the purpose of this section, be treated as a single member.

Section 31 provides that if a private company fails to comply with any of the restrictions in the articles, it ceases
to be entitled to any privilege or exemption confessed on private companies and thereupon the provisions of
this Act shall apply as if it were not a private company.

Privileges of a Private Company

Certain provisions of the Companies Act do not apply to a private company but are applicable to public
companies. These may be regarded as the privileges or advantages of a private company, which are as
under:-

(i)

A private company may consist of only 2 members.

(ii)

A private company is entitled to commence business immediately on incorporation.

(iii)

A private company may allot shares without issuing a prospectus or delivering to a

statement in lieu of prospectus (Section 30 (1).

(vi)

A private company is not required to hold a statutory meeting or file a statutory report with the registrar.

registrar a

(v)

A private company need not have more than two directors.

(vi)

Copies of balance sheet and profit and loss account filed with the registrar cannot be inspected by the
public.

(vii)

A director of a private company need not hold the share qualification.

(viii)

Restrictions in regard to overall remuneration do not apply to a private company.

Public Company

This is a company which is not a private company. There must be at least seven persons to form a public
company. There is no restriction as to transfer of shares. The articles of a public company may however
contain restrictions on the issue and transfer of shares.

Distinction between a Public company and a Private company

1.

Minimum

2.

Maximum

number of members:- For public company is seven whereas private company is two.
number of members:-

There is no limit on the maximum number in case of public company, but a private company cannot
have more than fifty members.
3.

Commencement

of business:-

A private company can commence business as soon as it is incorporated, whereas a public company
shall not commence its business immediately unless it has been granted the certificate of
commencement of business.
4.

Invitation

to public:-

A public company by issuing a prospectus may invite public to subscribe to its shares whereas a private
company cannot extend such invitation to the public.
5.

Transferability

of shares:-

There is no restriction on the transfer of shares incase of a public company whereas private company
by its articles must restrict the right of members of transferring the shares.
6.

Number

of directors:-

A public company must have at least three directors whereas private company may
directors.

have two

7. Statutory meeting:A public company must hold a statutory meeting and file with the registrar a statutory report, but in case
of a private company there are no such obligations.
8.

Name:The name of a private company must include the words private ltd at the end of its name, but a public
company has to use the words ltd at the end of its name.

One Man Companies

These are the companies in which one man holds virtually the whole of the share capital with a few extra
members holding the remainder who may be his relatives or nominees. Being the largest shareholder such a
person is generally the sole or the managing director and enjoys complete control over the company. This is
done to fulfill the statutory requirements and such type of companies are perfectly valid and not illegal as
established by leading case of Saloman vs. Saloman & Co. Ltd.
Labels: company law, law of business associations

FORMATION OF A COMPANY
A company comes into existence when a number of persons come together with a view to exploit some
business opportunity. These persons are called promoters. The initial step that must be taken by promoters
who are desirous of forming a company is the preparation of a document called memorandum of association to
which at least seven of them will subscribe their names incase of a public company and two incase of private
company, as prescribed by Section 4 of the Act.

The next step is the delivery of the memorandum to the registrar of companies together with the following
documents:-

(i)

Articles

of Association:-

This document contains the regulations for management of a company.

(ii)

Consent

to act as a director:-

If any person is appointed director of the company by the articles which are to be delivered for
registration in lieu of Table A, Form No. 209 must be delivered for registration after being duly
completed and signed by him or by his agent authorized to do so. The form is the statutory
signification of the persons consent to act as a director.

(iii)

List

of persons who have consented to be directors. (Form No. 210).

(iv)

Statement

of the nominal share capital:-

This statement is delivered for taxation purposes pursuant to Section 39 of the Stamp Duty Act.

(v)

Declaration

of compliance. (Form No. 209):-

Form No. 208 when duly completed and signed, constitutes the statutory declaration by an
advocate engaged in the formation of the company that all the requirements of the Companies Act
in respect of matters precedent to the registration of the company and incidental thereto have
been complied with.

If the aforesaid documents are correctly prepared in accordance with the provisions of the
companies Act, the registrar grants a certificate of incorporation and the company is formed from
the date of incorporation written in the certificate.

Significance of Registration

Section 389 provides that No company, association or partnership consisting of more than twenty persons
shall be formed for the purpose of carrying on any business unless it is registered under this Act.
Registration is the condition precedent to the formation of a registered company and failure to register a
proposed company will mean that it does not legally exist.

Case Law: Fort Hall Bakery Supply Co. vs. Wangoe

A plaint bearing the name The Fort-Hall Bakery Supply Co. filed a case against a defendant for recovery of
certain amount of money. During the hearing it was established that the business called Fort-Hall Bakery
Supply Co. was being carried on by a group of 45 persons and had not been registered under Companies Act.
The defendant submitted that the action was not properly before the court since the business was illegal under
Section 338.

It was held that the plaintiff could not be recognized as having any legal existence and were incapable of
maintaining the action. The court terminated the proceedings without making any order as to costs because a
non-existent plaintiff can neither pay nor receive costs.

Effect of Registration

(a) The date mentioned in the certificate of incorporation is the date from which the companys legal
existence commences. Consequently, if an incorrect date is written in the certificate, that date would
be regarded as the actual date on which the company was registered.
(b) The companys registration constitutes it a body corporate. It becomes a legal person or corpora
corporata whose name is that appearing in the memorandum of association. The certificate of
incorporation is regarded as the companys birth certificate and the date written on it is the companys
birthday.
(c) Once the company is registered it must be treated like any other independent person with rights and
liabilities appropriate to itself.
Labels: company law, law of business associations

PROMOTION

Before a company can be formed there must be some persons who have an intention to form a company and
who take the necessary steps to carry that intention into operation. Such persons are called promoters. The
word promoter has not been defined in the Act; though some English judges have tried to define it as follows:-

A promoter is one who undertakes to form a company with reference to a given project and to set it going, and
who takes the necessary steps to accomplish that purpose.
Bowen simply put it as one who generally brings a company into existence.

Promotional Acts:(i)

Preparation

(ii)

The

of the memorandum and articles of the proposed company.

appointments of first directors.

(iii)

Preparation

of the prospectus.

(iv)

Negotiating

preliminary contracts.

(v)

Paying

the preliminary expenses.

Duties of a Promoter

Given that a promoter is in a judiciary relationship with the company, the promoter has the legal duty to disclose
to the company any profits which he makes from the promotion. He can make a profit but the profit must not be
a secret profit. If he makes a profit but does not disclose it, he must account to the company for it as follows:(a)

Where

the promoter purchased the property before he began to act as promoter his non-disclosure of
the fact that the property was his own would entitle the company to repudiate the contract of sale and
restore the original position, that is, return the property to the promoter and recover the purchase
price.

For example, if A acquired some piece of land in the year 2000 for Sh. 100,000 with the intention of
using it for farming but changed his mind in the year 2001 and promoted a company to which he sold
the land for Sh. 120,000 without disclosing his interest, the company may:-

(b)

Where

(i)

Rescind

(ii)

Keep

the contract.

the land. It cannot recover sh 20,000 profit which A made.

he purchased the property after he began to act as a promoter the company may:-

(i)

Rescind

the contract.

(ii)

Keep the property and recover the secret profit made by the promoter. In the above
case, it is deemed that the promoter had an intention of reselling it to the company and
As position would be regarded as an agent and the companys rights at common law
would be the same as those of the principal.

The remedy of rescission is subject to the general restrictions on its availability. If the company has resold the
property to a third party the remedy would not be available against the promoter since restitution integrum is not
possible and the only remedy would be limited to recovery of the profit made, or damages at common law if it
can be proved that the promoters conduct had been fraudulent.

Payment for Promotion

A promoter has no legal rights against the company he promotes. This is so because:(a)

The company did not ask him to promote. There is no contract between him and the company which
would entitle him to sue for his expenses or professional fees.

(b)

The company could not after its incorporation enter into a contract to pay him for his services
because no consideration to support such a contract would be furnished by him. This would be past
consideration.

Article 80 empowers the directors to pay promoters their promotion expenses. It is however a power given to
directors and confers no legal rights on the promoter. This situation has led Gross to state that the promoter is
the illegitimate child of the law actively known, and formally ignored.

Case Law: Erlanger vs. New Sombrero Phosphate Co. Ltd (1878)
A syndicate of which E was the head purchased an island containing mines of phosphate for 55,000. E then
formed a company to buy this island. A contract was made better X a nominee of the syndicate and the
company for its purchase at 110,000. The details of the sale were not disclosed to the shareholders or
independent Board of Directors. The company now sought to rescind the contract of sale. It was held that as
there had been no disclosure by the promoters of the profit they were making, the company was entitled to
rescind the contract.

A promoter who wishes to sell his own property to the company must make a full disclosure of his interest in the
transaction. The disclosure may be made:(i)

To

an independent Board of Directors.

(ii)

In

the Articles of Association.

(iii)

In

the prospectus.

(iv)

To

the shareholders.

Lord Cairns observed that:I do not say that an owner of property may not promote and form a joint stock company and then sell his
property to it but I do say that if he does, he is bond to take care that he sells it to the company through the
medium of board of directors who can exercise an independent and intelligent judgment on the transaction.

Pre-Incorporation Contracts

Pre-incorporation contract is an agreement which is entered into, usually by a promoter on behalf of a company
at a time when the companys formation has not been completed by its registration. Such contracts may relate
to property which the promoters wish to purchase for the company or they may be made with persons whose
know-how is vital to the success of the company. The promoters may perhaps have arranged for the company
to take over an existing business, and therefore need to make a contract with the vendor for its sale or
purchase.

Before its incorporation, a company has no capacity to contract. A contract entered into by promoters on behalf
of a proposed company is void in so far as the company is concerned. The promoters cannot be agents for a
principal which has not yet come into existence. In such cases the company cannot sue or be sued on it. The
company has no legal existence until it is incorporated. It therefore follows:(i)

That

when the company is registered, it is not bound by pre-incorporation contracts.

In a Case Law, it was stated that a solicitor prepared the memorandum and articles of association and
paid all the necessary registration fees on the instructions of persons who later became directors. He
claimed his fees and expenses on the liquidation of the company. The court of appeal held that the
company was not liable to pay the solicitor cost, though it had taken the benefit of its work.

(ii)

That the company when registered cannot ratify the agreement. The company was not a principal
with contractual capacity at the time when the contract was made. A contract can be ratified only
when it is made by an agent for a principal who is in existence and who is competent to contract
at the time when the contract is made.

Case Law: Natal Land Co. Ltd vs. Pauline Colliery Syndicate Ltd (1904)
N company agreed with Mrs. Carrey an agent of a syndicate before its incorporation that N company would
grant a mining lease to the syndicate. The syndicate was incorporated as Pauline Colliery. Pauline Company
discovered coal whereupon Natal Land Co. Ltd refused to grant the lease.

It was held that there was no binding contract between Natal Land Co. Ltd and Pauline Company as the latter
was not in existence when the contract was signed.

If the company were allowed to ratify the contract it would mean that it contracted on the date the contract was
formed. This in effect would mean that the company contracted before it was formed. If the company wishes to
revive the abortive contract it must make a fresh offer and if the offer is accepted by the other party, a contract
will come into existence from the moment of acceptance.

(iii)

That

if the agent undertook any liability under the agreement he would be personally liable
notwithstanding that he is described in the agreement as an agent and that the company may
have attempted to ratify the agreement.

Case Law: Kelner vs. Baxter (1866)

An agreement was made between K& B. B was acting on behalf of the proposed hotel company. Wine
supplied under the contract was used by the company which had ratified the agreement after incorporation.
The company went into liquidation before paying the debt.

It was held that B was personally liable and no ratification could release him from his liability.

The promoters of a company, before its incorporation entered into an agreement with P to buy a plot of land on
behalf of the company. After incorporation the company refused to buy the said land. Has P any remedy either
against the promoter or against the company?
Labels: company law, law of business associations

MEMORANDUM OF ASSOCIATION (The Companys Constitution)

Memorandum of association was judicially defined by Lord Cairns in Ashbury Railway

Carriage Co. Ltd vs. Riche as the charter which defines the limitations of the powers of a
company to be established under the Act.

It is a document which sets out the constitution of the company and is really the foundation on which the
structure of the company is based. It contains the fundamental conditions upon which alone the company is
allowed to be incorporated.

A company pursues only such objects and exercises only such powers as are conferred expressly in the
memorandum. A company cannot depart from the provisions contained in its memorandum, however great the
necessity may be. If it does, it would be ultra vires the company and therefore wholly void.
The purpose of the memorandum is to enable the shareholders, creditors and those who deal with the
company to know what the permitted range of the enterprise is. It defines as well as confines the powers of the
company.

Lord Cairns in Ashbury Railway Carriage Co. Ltd vs. Riche pointed out that, the memorandum as it were the
area beyond which the action of the company cannot go; inside that area the shareholders may make such
regulations for their own government as they may think fit.

Case Law: Ashbury Railway Carriage Co Ltd vs. Riche

A company was registered under Companies Act 1862 and the objects clause was defined as follows:
The objects for which the company is established are to make and sell, or lend on hire, railway carriages and
wagons, and all kinds of rail plant, fittings, machinery and rolling stock; to carry on the business of mechanical
engineering and general contractors; to purchase and sell, as merchants, timber, coal, metals and other
materials and to buy and sell any such materials on commission or as agents.

The directors agreed to purchase a concession for making railway in Belgium; and form a company in Belgium
called Societe Anonyme to work the concession and it was further agreed that Mr. Riche commence the work.
Later difficulties arose and the shareholders of Ashbury Co. disapproved of what had been done in the matter
of the railway, and required the directors to take over the companys interest therein and to indemnify the
shareholders. The directors, however on behalf of the shareholders repudiated the contract for the construction
of the railway, as being ultra vires the company and Mr. Riche sued the company for damages for breach of
contract.

It was held that the contract was ultra vires (beyond the powers of) the company and that accordingly the
company was not liable to Mr. Riche. Lord Cairns said that the contract was entirely beyond the objects in the
memorandum and was thereby placed beyond the powers of the company to make the contract. If so, it is not
a question whether the contract ever was ratified or was not ratified. If it was a contract void at its beginning, it
was void because the company could not make the contract.

If every shareholder of the company had been in the room and every shareholder of the company had said that
this contract which we desire to make, which we authorize the directors to make, to which we sanction the
placing of the seal of the company, the case would not have stood in any different position from that in which it
stands now. The shareholders would thereby by unanimous consent have been attempting to do the very thing
which, by the Act of parliament they were prohibited from doing.

Contents of Memorandum

Section 5 of the Act states the following six clauses of the memorandum of association:(a) N
ame clause
(b) R
egistered office clause
(c) O
bjects clause
(d) L
iability clause
(e) C
apital clause
(f) A
ssociation clause

(a)

The Name clause

The promoters of a proposed company have freedom to choose its name, but the freedom is limited by section
19(2) of the Act which provides that no name shall be reserved and no company shall be registered by a name
which consists of abbreviations, initials or which, in the opinion of the registrar is undesirable e.g. Malaya.

The registrar of companies has not issued any circular explaining the criteria likely to be used in deciding
whether a proposed name is undesirable under the section. However, corresponding to English Companies Act
1948 to which Kenyas companies Act was formed, regards a proposed name as undesirable if;-

(i)
(ii)

It is like the name of an existing company.

It is misleading for example, if the name of a company likely to have small resources suggests that it
is going to trade on a greet scale over a wide field.

(iii)
It suggests some connection with the crown or members of the royal family,
example, Queens and Princes.
(i)

It

for

includes words which might be trademarks, unless a trade mark clearance has been obtained.

No company shall be registered by a name which is identical or which resembles the name of an existing
company. Where a company is registered by a name so similar to that of another company that the public are
likely to be deceived, the court will grant an injunction restraining it from using that name.

Case Law: Ewing vs. Buttercup Margarine Co. Ltd

The plaintiff, who carried on business under the trade name of the Buttercup Dairy Company, was held entitled
to restrain a newly registered company from carrying on business under the name of the Buttercup Margarine
Company Ltd on the ground that the public might reasonable think that the registered company was connected
with his business.

However, if the companys business is different from that of the complaining party, confusion is not likely to
arise and an injunction will not be granted.

To avoid the risk of choosing a name that ultimately turns out to be desirable, the promoters should enquire
from the registrar whether the name they intend to give the company is too like that of a company already in
the register of companies. After obtaining confirmation that the name is a registerable one they should
immediately make a written application for its reservation under section 19(1) of the Act. Any such reservation
shall remain in force for a period of 30 days or such longer period, not exceeding 60 days as the Registrar, for
special reasons may allow.

Every public company must write the word limited after its name and every private limited must write the word
private limited after its name. Companies whose liabilities are not limited are prohibited from using the word
limited.

(b)

The Registered office clause

Section 5(1) (b) provides that the memorandum of association shall state that, The registered office for the
company is to be situated in Kenya

The registered office clause is important for two reasons:(i)

It

ascertains the domicile and nationality of a company.

(ii)

It is the place where various registers relating to the company must be kept and to which all
communications and notices must be sent. A company need not carry on its business at its
registered office.

The primary function of the registered office is to act as the companys official address. It provides a convenient
place where legal documents, notices, and other communications can be signed.

The following registers and documents are kept at the companys registered office;(i)

The

register of members.

(ii)

The

register of directors and secretaries.

(iii)

The

companys register of charges.

(iv)

The

register of debenture holders.

(v)

The

register of directors interests in shares.

(vi)

The

minute books of general meeting.

The above registers and documents are subject to inspection by the following:(a)

The companys members can access and inspect them free of charge during business hours
for at least two hours each day.

(b) D
ebenture holders of the company can inspect free of charge during business hours.
(c)

(c)

Any member of the public can inspect on payment of prescribed fee not exceeding Sh. 2 for
each inspection.

The Object clause:

Section 5(1) (c) requires the memorandum of association to state the objects of the company.

The object clause defines the sphere of the companys activities, the aims that its formation seeks to achieve
and the kind of activities. If anything is undertaken outside the objects stated in the memorandum then such
shall be considered ultra vires and hence not binding the company.
The objects clause is intended to serve the following purposes:(a)
(b)

To

protect subscribers who learn from it the purpose to which their money can be applied

To

protect persons who deal with the company and who can infer from it the extent of the companys
powers.

In choosing the companys objects, the following should be noted;

(i)

he objects should not be illegal or against the general law of the country, for example, gambling
T
is prohibited and therefore the objects should exclude such.

(ii) The object should not include anything in contravention of the Act.
(iii) They should not include anything against public policy e.g. trading with alien

enemies.

The statement Lord Cairns in 1875 in Ashbury Railway Co. Ltd vs. Riche to the effect that a contract beyond the
objects of the company in the memorandum of associations, is beyond the powers of the company give the
impression that a company has no legal power to do anything which is not written in the memorandum. That
would be a starting proposition because, in practice, companies have to do so many things in the course of
their business that if all those things were to be written down in the memorandum, the memorandum would be
such a gigantic document that nobody would read it. The judges will not regard a transaction undertaken by a
company as ultra vires merely because it is not written in the companys memorandum of association as one
of the companys objects.

They would infact regard the transaction as ultra vires by implication if:(a)

It was reasonably incidental to any of the objects which have been written in the companys
memorandum.

(b)

It

was undertaken for the sole purpose of effectuating, or achieving the written objects.

Doctrine of Constructive Notice

This rule regards that a person transacting business with a company is taken to be aware of the contents of the
companys public documents such as memorandum, articles, annual return and special resolutions.

Because the companys registry is a public office the documents kept therein are generally referred to as
public documents since members of the public are free to inspect them on payment of a prescribed fee.

A person transacting business with a company will be taken to have read the objects clause in the companys
memorandum. Consequently if he concludes a contract with the company and it turns out that the contract was
for a purpose which is neither expressly nor impliedly within the companys objects and hence ultra vires, he is

regarded as having entered into an ultra vires contract knowingly even though he was not actually aware of its
being ultra vires. He cannot successfully sue the company for breach of the contract.

The legal justification for this rule is that since the companys public documents in its file at the companys
Registry are available there for inspection by any interested member of the public he should have gone to the
registry asked for the companys file, inspected the contents and having found the memorandum of association
read the objects clause inorder to ascertain whether the proposed contract is consistent with the companys
objects. If he fails to do so, he will be regarded as having been aware that the contract was ultra vires. He
cannot therefore be allowed to enforce it.

The criticism that could be made against the constructive rule is its assumption that a potential contracting party
who read a companys objects will be able to make the correct legal conclusion regarding the vires of the
proposed transaction. The fact that a perusal of the companys object clause does not guarantee its correct
interpretation is amply demonstrated when senior judges differ over the vires of a particular transaction. Why
should an ordinary businessman be expected to decide the matter correctly? Reading the objects does not
guarantee correct interpretation.

Remedies of the ultra vires lender

No action or suit lies at law to recover money lent to a company which has borrowed for an ultra vires purpose.
This means that the ultra vires lender cannot sue, as lender, to recover the money he lent to the company.
However, he might avail himself of one or any of the following remedies:(a)

If the result of the transaction is that the indebtedness of the company is not
increased because the new loan was applied in discharging an old debt, the
invalid lender can be treated as standing in place of those whose debts have been
paid off.

In Sinclair vs. Brougham, it was stated that the ultra vires lender would be entitled to rank as creditor
only to the extent to which his money was applied in discharging the intra vires debt.

(b) If the lender can identify his money or the investment of his money in the hands
of the borrowing company, he can call for its return.

(c) If the lender cannot bring himself within any of the above
prepositions he
would have no remedy except to participate in the division of the companys surplus
assets if any which would be divisible among ultra vires creditors during companys
liquidation after all members have received back their capital in full.

(d)

The Liability Clause

This clause states that the liability of the members of the company is limited.
Section 5(2) provides that memorandum of a company limited by shares or guarantee shall state that the
liability of members is limited.
Companies may either be:(i)

Limited

by shares

(ii)

Limited

by guarantee

(iii)

Unlimited

Companies limited by shares

Section 4(2) (a) defines such a company as a company having the liability of its members limited by
memorandum to the amount, if any, unpaid on the shares held by them.

Companies limited by guarantee

Section 4(2)(b) defines such a company as a company having the liability of its members limited by the
memorandum to such an amount as the members may undertake to contribute to the assets of the company in
the event of its being wound up.

The members can only be called upon to pay the amount guaranteed if the company is in liquidation.

Unlimited Companies
Section 4(2) (c) defines it as a company not having any limit on the liability of its members.
Although the company is a separate legal entity, the members liability resembles that of partners.

(e)

The Capital Clause

Section 5(4) (a) provides that a company having a share capital, the memorandum shall state the amount of
share capital with which the company proposes to be registered and the division thereof into shares of a fixed
amount.

(f)

The Association Clause

This clause though not provided in Section 5 of the Act, provides that those who have agreed to subscribe to
the memorandum must signify their willingness to associate and form a company. Seven persons are required
to sign the memorandum in case of public company whereas two for private companies.
Alteration of the Memorandum

The memorandum of association of a company being its charter, the right of the company to alter its contents is
rigidly limited by the provisions of the Act. Section 7 of the Act provides that a company shall not alter the
conditions contained in its memorandum except in cases, in the mode and to the extent for which express
provisions is made in this Act.

(1) Change of Name

A companys name may be changed voluntarily or compulsorily.

(a) Voluntary change of name

A companys name may be changed voluntarily if:-

(i)

(ii)

Special resolution is passed by the company for that purpose after obtaining a written approval
A
of the registrar (Section 20(1).
The

company was inadvertently registered by a name which, in the opinion of the registrar, is too
like the name by which a company in existence is previously registered.

Although the section does not make it mandatory for the company to change its name it is
advisable for the company to take immediate steps to effect the change as soon as it becomes
aware of the situation. Any delay entails the risk of passing-off action being instituted against it.

(iii)

The

minister, by license, authorizes a company to make a change in its name.

(b) Compulsory change-

Section 20 (2) of the Act provides that within 6 months of registration with a particular name, the registrar may
direct a change in name if in his opinion the name is too like that of pre-existing company. A change of name
under this section may be made by ordinary resolution.

Failure to comply with the registrars directive is an offence punishable by a fine not exceeding Sh. 100 for
every day during which the default continues.

After a company changes its name, it shall give to the registrar notice thereof within fourteen days. Upon
receipt of the notice, the registrar shall:(i)

Enter

the name on the register in place of the former.

(ii)

Issue

to the company a certificate of change of name.

(iii)

Publish the change of name in the Kenya Gazette

(2) Change of Registered Office

A company may change the address of its registered office on giving proper notice to the registrar. The new
address takes effect on the entry of the address on the register but the company has 14 days after giving due
notice in which to use the new address and to transfer the registers etc, required to be kept there before it
commits any offences for using the wrong address.

The registrar must publish in the Gazette notice of the receipt by him of notice of change in the companys
registered office.

(3) Change of the Object Clause

Section 8 of the Act provides that a company may, by special resolution, alter the provisions of its memorandum
with respect to its objects if the alteration would enable the company: -

(a) T
o carry on its business more economically or more effectively.
(b) T
o attain its main purpose by new or improved means.
(c) T
o enlarge or change the local area of its operations.
(d)

To carry on some business which under existing circumstances may conveniently or

advantageously be combined with the business of the company.

(e) T
o restrict or abandon any of the objects specified in the memorandum.
(f) T
o sell or dispose of the undertaking of the company.

(g) T
o amalgamate with any other company or body of persons.

In order to effect the proposed alterations the companys directors would have to convene an extraordinary
general meeting of the company in order to consider and if approved, pass a resolution that the companys
objects be altered as proposed.

The resolution would be effective immediately it is passed if it was voted for by the holders of at least 86% in
nominal value of the companys issued share capital or any class thereof.

When the objects are altered, a printed copy of the special resolution must be delivered to the registrar within
14 days.

(4) Change of Capital Clause

Section 63 (1) provides that a company limited by shares or a company limited by guarantee and having a
share capital, if so authorized by its articles, may alter the conditions of its memorandum as follows: (a) I t may increase its share capital by new shares of such amount as it thinks expedient.
(b) I t may consolidate and divide its capital into shares of larger amount than the existing shares.
(c) I t may convert all or any of its paid up shares into stock and reconvert stock into paid up shares.
(d) I t may subdivide its shares into shares of smaller amount.
(e) It may cancel shares, which at the date of passing of the resolution have not been taken or agreed
to be taken by any person and diminish the amount of its share capital by the amount of shares
so cancelled.
Section 63 (2) provides that this shall be exercised by the company in a general meeting.