Law II R. Kit Final As at 3 July 2006

Law II
SUBJECT NO. 7
Revision Kit
STRATHMORE
UNIVERSITY
DISTANCE LEARNING
CENTRE
P.O. Box 59857,

00200, Nairobi,
KENYA.
Tel: +254 (02) 606155

Fax: +254 (02) 607498
Email: dlc@strathmore.edu
Copyright
ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording
or otherwise without the prior written permission of the copyright owner. This publication may not be
lent, resold, hired or otherwise disposed of by any way of trade without the prior written consent of the
copyright owner.
© THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992

ii Acknowledgement
Acknowledgment
We gratefully acknowledge permission to quote from the past

examination papers of the following bodies: Kenya Accountants and
Secretaries National Examination Board (KASNEB); Chartered
Institute of Management Accountants (CIMA); Association of
Chartered Certified Accountants (ACCA).
We would also like to extend our sincere gratitude and deep

appreciation to Mr. Jacob Gakeri for giving his time, expertise and
valuable contribution, which were an integral part in the initial
development of this Revision Kit. He holds the following academic
honours, LLM (1st Class), LLB, Diploma in Law (K.S.L), CPS (K),
and is also an advocate of the High Courts of Kenya and a
Member of the Law Society of Kenya among others. He is a senior
lecturer at Strathmore University, School of Accountancy, Bachelor of
Commerce (BCOM) and Bachelor of Information Technology
(BBIT).
STRATHMORE UNIVERSITY ● REVISION KIT

Contents iii
Contents
Acknowledgment ............................................................................................................................. ii
Part I: Introduction..................................................................................................................... iv
Approach to Examinations ................................................................................................................... vi
Syllabus ...................................................................................................................................................... xi
Topical Guide to Past Paper Questions ........................................................................................... xv
Part II: Revision Questions and Answers.....................................................................................1
Questions - Past Papers................................................................................................................................... 1
Answers - Past Papers................................................................................................................................... 32
Part III: Comprehensive Mock Examinations ......................................................................... 124
Questions – Mocks ..................................................................................................................................... 124
Answers - Mocks ........................................................................................................................................ 136
Part IV: Revision Questions and Answers ................................................................................ 180
Questions .................................................................................................................................................... 180
Answers ...................................................................................................................................................... 186
References ..................................................................................................................................... 230
LAW II
iv Introduction
Part I: Introduction
“Revision is the process by which you remind yourself of the material you have studied
during your course, clarify any problem areas and bring your knowledge to a state
where you can retrieve it and present it in a way that will satisfy the examiners.”
The paragraph herein- above captures the essence of revision. It is implicit that revision is
nothing short of “fine tuning” the knowledge acquired in the course or making it more
digestible for usage in an examination.
Revision is an integral part of examination preparation. It is not a substitute for a sustained

preparation earlier in the course. The syllabus for Law II or Company Law is expansive and
cannot be “hastily crammed” for purposes of the examination. A deliberate attempt must be
made to study and appreciate the basic principles and concepts and their application.
Revision must therefore be seen as a final stage in the study of any topic. Its utility is
therefore undermined if earlier stages have not been completed.
As an integral part of the course revision must be commenced shortly after the
commencement of the course. Initially this could take the form of a review of what has been
covered in a week or two not a month as this may be inordinately long. Ideally, revision is
necessary after every topic. Coverage of the topics must be incisive and indiscriminate.
The main purpose of this booklet is to help candidates preparing for the Law II KASNEB
examination to make the best use of the last few weeks before the examination.
The booklet consists of three parts: part one consists of an introduction, the various
revision and examination techniques. Part two consist of eight sets of past examination
questions and answers. The object of this part is to demonstrate to the candidate the actual
information required in responding to examination questions, the detail required and the
variety of questions expected in the examination. This section demonstrates beyond
question that a serious candidate must familiarize himself with the entire syllabus. Every
topic ought to be accorded the requisite attention.
Part three consists of three sets of examination questions and answers. The twenty-four
questions illustrate to the candidate the type of questions likely to appear in future
examination papers. The purpose of this part is to expose the candidate to additional
questions for better coverage of the syllabus and preparation.
Revision Techniques
I dare state at the outset that I am not an expert in revision techniques. However, it is quite
inorder to make a few suggestions. A candidates revision strategy should consist of two
facets namely:
• Looking back to the work already covered.

• Looking forward to the examination.
Revision must not be boring. This demands application of numerous techniques at different
times. At this level it is assumed that a candidate has tested a number of techniques and
should adopt the most effective one(s). The basic revision techniques include:

Introduction v
• Highlighting key points and cases in lecture notes, textbooks and other materials used in
the course.
• Using key terms, words or phrases so as to remember the essential concepts and cases in
a topic.
• Reducing lecture notes and other materials to key ideas definitions and case law and
committing them to memory.
• Practicing as many examination standard questions as possible. This is best
accomplished by working to time under examination conditions if possible avoiding the
temptation to look at the answer before completion.
• Practicing the art of writing at speed. This is something every Law candidate need.
• In the course of revision candidates are encouraged to think of situations and
circumstances which exemplify concepts and ideas likely to arise in the examination.
This enriches a candidates capacity to analyse problem related questions in the real
examination.
• Candidates are encouraged to practice planning answers and then compare their notes
with the answers provided. This is additional practice but must not substitute writing
full answers.
LAW II
vi Approach to Examinations
Approach to Examinations
ANSWERING QUESTIONS
As observed elsewhere:
“Examinations are formidable even to the best prepared for the greatest fool may ask more than the wisest
man can answer.”
• A candidate must spend the first ten minutes of the examination reading the question
paper. This enables the candidate to discriminate the questions. Generally, the division
of time should be proportional to the marks on offer.
• Candidates are advised to resist the temptation to spend too much time on any question.
If a question has more than one part a candidate must complete each part.
• On every question the first marks are the easiest to gain and even if matters go wrong
with the timing a candidate will probably gain some marks by making a start.
• A candidate is free to answer questions in any order of preference. Some candidates
start with their best questions.
• It is generally agreed that the most frequent reason for failure in examinations apart
from basic lack of knowledge is the candidates unwillingness to answer the question
asked. Candidates often include every scrap of knowledge they have in a topic just in
case it is relevant.
A candidate must stick to the question and tailor the answer to the question.
• A candidate must be wary of questions which appear to be almost identical to those

practiced during revision. They probably are not!. Seriousness demands that a
candidate read a question at least twice before it is responded to. Key words on the
question paper must be underlined to enable one focus on the question.
• If a candidate is unable to decipher what a question is asking, assumptions may be made.
Such assumptions must be made on sound principles i.e. they must be reasonable.
PRESENTATION
• It is a good idea to make a rough plan of the answer before writing commences. This
may be done in the answer booklet and then crossed out neatly to guide the examiner.
• If a question is divided into separate sub-sections, each of them must be responded to
separately and numbered or lettered as in the question paper.
• Although a candidates handwriting is not marked, it must be legible. This enables the
examiner identify the points made.
• To distinguish concepts and institutions candidates are required to give not only the
differences in definition but also in legal effect. Effort must be made to give reasons
and authorities as well as illustrations even though the examiner does not expressly ask
for them.
• Before responding to an essay question candidates are advised to jot down the
authorities. This enables a candidate to capture ideas likely to elude him when writing
commences. Essay questions must have a clear structure, a brief introduction, the main
section and a conclusion. It is advisable to break up essays into paragraphs with sub-
headings underlined.
• Candidates are advised to be concise. It is better to write a little about different points
than a great deal about one or two points. As much details as possible must be given.

Introduction vii
• The examiner will be looking for evidence that a candidate has understood the syllabus
and can apply his knowledge in new situations. A candidate is therefore expected to
give opinion and make judgments. These should be based on reasoned and logical
arguments.
An ordinary Law II examination consists of three types of questions namely:
1) Single statement and a problem.

2) Structured
3) Problem (s)
A single question may be a combination of all of them though this is a rare occurrence.
In most instances, if part (a) or one of a question is a single statement part (b) or two is a
problem. The object of such a question is to test a candidates ability to recall and apply legal
principles. Almost invariably the problem is based on the same subject which makes it
digestible. However its is not unusual for the problem to relate to a separate subject. It is
the candidates cardinal responsibility to discern the legal issues involved. Care must be taken
to ascertain the legal principles correctly.
If the entire question is a problem or a set of problems, extra care must be exercised to
conlextralise the principles and the judicial or statutory authority applicable. Brevity must be
avoided.
1) SINGLE STATEMENT AND PROBLEM QUESTION
Such questions are generally bookwork and are based on the premise that the candidate
is familiar with the topic concerned. The question must be responded to
comprehensively but must be avoided if the candidate is unsure of their purport.
For example question 2 of December 2000 reads:
a) Outline the rules that govern pre-incorporation contracts cite relevant case-law to
support your answer.
b) Kioko an under Secretary in the Ministry of Viwandani was entrusted with the
responsibility of selling the ministry bonded motor vehicles. He invited bids from
members of the public to buy two lorries. He also bid through a nominee,
Mwangangi, his brother. Subsequently, Kioko sold the lorries to Mwangangi at Ksh.
80,000 each, he then formed a company by the name Kima Company Limited and
instructed Mwangangi to sell the lorries to the company at Kshs. 350,000 each. A
prospectus was issued to the public to subscribe for shares in Kima Company
Limited. It gave Mwangangi as the vendor of the lorries and did not disclose the
profit made by Kioko. Musembi, a shareholder of the company has learnt of the
sale of the lorries to the company and the profit Kioko made and seeks your advise
on the company’s right in respect of the same. Advise Musembi.
a) A candidate familiar with the Law relating to Pre-incorporation contracts should

have no problem in responding to the question. The answer to the question
consists of an introduction highlighting what a Pre-incorporation contract is and its
legal status. The main part consists of the rules:
• A Pre-incorporation contract is a contract entered into by a person purporting to

act on behalf of a company before its incorporation.
• Contracts of this nature are entered into by promoters.
LAW II
viii Approach to Examinations
• As a general rule a Pre-incorporation contract is unenforceable by or against the

company after incorporation.
Rules
• At common law a person who purports to contract as an agent in circumstances in

which he has no principal existing at the time is personally liable on the contract. This is
necessary to give effect to the transaction. It was so held in Kelner V. Baxter (1866).
• Under Section 16(2) of the Companies Act a company comes into existence on the date
of incorporation mentioned in the certificate of incorporation. Before that date, the
company has no legal existence and cannot have agents. It was so held in Kelner V.
Baxter (1866).
• At common law, a contract purportedly entered into with a non-existent person is void.
It was so held in Newborne V. Sensolid (Great Britain) Ltd (1954). This is because a
contract cannot be entered into by one person.
• A company cannot after incorporation purport to ratify a Pre-incorporation contract.
Any purported ratification has no legal effect. It was so held in Price V. Kelsal (1957) as
well as in Natal land Co. Ltd V. Pauline Colliery Syndicate. This is because the company
had no capacity to enter into the transaction when the promoter did so.
• At common law’s the mere adoption or confirmation by directors of a contract
purportedly entered into on behalf of the company before it is incorporated creates no
contractual relationship between the company and the other partly. It was so held in
North Sydney Investments and Another V. Higgins and Another.
• A Pre-incorporation contract is enforceable by or against the company if after
incorporation the company has entered into a new contract similar to the previous
agreement. It was so held in Howard V. Patent Ivory co. Ltd. The new contract may be
express or implied from the acts of the company when incorporated. It was so held in
Price V. Kelsal. In Mawagola Farmers and Growers Co. Ltd V. Kayanja and others.
Where the appellant company entered into a similar agreement after incorporation, it
was held that the Pre-incorporation Contract was enforceable.
Problem questions are intended to test a candidates ability to relate legal principles to
specific situations. It also tests the candidates ability to recall judicial and statutory
authority. Most of the problems are based on cases or scenarios the candidate has come
across in the course of preparation for the examination. The legal issues are in most
instances easily discernible. As is the case in our problem. Responding to a problem
question demands an elucidation of four issues namely:
• The principle of law being examined

• The factual situation represented i.e. the legal problem at hand.
• The position in law i.e. the candidates advise or whether the transaction is valid or
not.
• The legal basis of the position taken. This is the justification of the conclusion
arrived at. It is the point at which case law or statutory provision is used.
b) This problem is based on breach of judiciary duties by promoters and the remedies
available to the company. As judiciaries promoters are bound to avoid conflict of
interest by disclosing any personal interest in contracts made before incorporation.
The disclosure must be made either to an independent board of directors or to all
members in the prospectus.
In this case Kioko put himself in a position of conflict of interest but did not
disclose, he is therefore guilty of breach of duty to the company in formation and
the company has certain remedies against Kioko.

Introduction ix
My advise to Musembi respecting the rights of the company is that the company is
entitled to:-
• Rescind the contract of sale of the lorries. As was the case in Emille Evlanger V.
New Sombrero Phosphate
• Sue Kioko for the recovery of the profit made or for an account. The suit is an
action for money had and received. As was the case in Gluckstein V. Barnes
(1900)
• Sue Kioko in damages for breach of his judiciary duties. As the case in re Leeds
and Harnley Theatres of Variety Ltd.
My advise is based on the judicial autority cited.
A second illustration is question 8 of June 2002, which reads:
a) Outline the information that is required when registering a charge.
b) In July 2001, Muungano Limited obtained an overdraft from a bank upon

deposit of title deeds and execution of a Memorandum of Charge. The
Memorandum was executed in due form by the company but left undated. The
overdraft continued and subsequently the manager of the bank filled in the date
in the Memorandum as 10th January 2002. The Memorandum was then
registered with the Registrar of Companies on 31st January 2002 and the
Registrars certificate to that effect was duly issued.
Discuss the validity of the charge.
a)
▪ Date and description of the instrument creating or evidencing the
charge.
▪ Amount secured by the mortgage or charge.
▪ A short description of the property mortgaged or charged.
▪ Names, postal addresses and descriptions of the mortgages or
persons entitled to the charge.
▪ Names of the chargor or mortgagor.
▪ Amount or rate of commission allowance or discount, if any, paid
or made either directly or indirectly by the company to any person
in consideration of his subscribing or agreeing to subscribe.
b) This problem is based on the effect of registration of a charge in accordance

with the provisions if the Companies Act.
Under Section 99 of the Act upon registration of the particulars of a charge the
registrar issues a certificate of registration which is conclusive evidence that the
provisions of the Companies Act relating to the preparation and registration of
charges have been complied with (inre Mechanisations Ltd)
• In this case, the Memorandum of charge was duly executed by the Company and
registered thereafter and a certificate of registration issued by the registrar.
• The charge herein is valid in all respects since its registration and issuance of the
certificate cured all its defects. It is therefore enforceable against the company.
LAW II
x Approach to Examinations
• This legal position is consistent with the decision in re Nye Ltd (1974) whose facts
were substantially similar to those in this case. The principle herein was also applied
in National Provincial and Union Bank of England V. Charnely
2) STRUCTURED QUESTIONS
This is the most common examination technique and a candidate must be prepared for
questions of this nature. Such questions may take the form of three or four distinct
questions as a single questions or a single statement question with different parts. For
example question 8 December 2000 reads:-
a) What are the different types of Liquidation and who may commence proceedings?
b) How does a creditor demonstrate that the company is unable to pay its debts?
c) What courses are open to a secured creditor in Liquidation?
a) Types of winding up Commencement
i) Compulsory: -
▪ The company
▪ Creditors
▪ Contributory
▪ Attorney General
▪ Official Receiver
▪ Shareholder other than contributory
ii) Members Voluntary winding up: - Members
iii) Creditors Voluntary winding up: - Members, Creditors
iv) Winding up subject to the supervision of the court: - Members, Creditors
b) Under Section 220 of the Companies Act a company is deemed insolvent or unable
to pay its debts if it is proved that:
• A debt of Kenya shillings 1000 or more remain paid 3 weeks after demand
thereof.
• Execution of other process issued in favour of a creditor is returned
unsatisfied in whole or in part.
• Having regard to the company’s contingent and prospective liabilities, it is
unable to pay its debts.
c) A secured creditor is one who holds some security for a debt due to him from the
company such as a mortgage, charge or lien. Such a creditor has certain courses:
He may:
• Rely on his security and not prove at all.

• Surrender his security and prove as an unsecured creditor for the whole
debt.
• Realize his security and prove as an unsecured creditor for any balance
due to him after deducting the amount realized.
• Value his security and prove as an unsecured creditor for any balance
due after deducting the value of the security.

Syllabus xi
Syllabus
CPA PART II SECTION 4
PAPER NO. 12 LAW II
OBJECTIVE
To equip the candidate with knowledge on the law relating to the formation, registration and
operations of corporations.
11.0 SPECIFIC OBJECTIVES
A candidate who passes this subject should be able to:
• Appreciate the legal principles relating to the nature and registration of

companies
• Describe the various classes of companies
• Define the nature and contents of the Memorandum and Articles of
Association
• Appreciate the legal principles that govern the raising of capital for companies
• Understand the general principles relating to accounts, auditors and payment of
dividends.
CONTENT
12.1 Nature and Classification of Registered Companies
- Definition of a company
- Procedure for registration of a company
- Certificate of Incorporation
- Effect of Registration
- Registered companies and partnerships contrasted
- Companies limited by shares
- Companies limited by guarantee
- Unlimited companies
- Public and Private companies
- Holding and subsidiary companies
12.2 Memorandum and Articles of Association and Promoters of Companies
- Clauses in the memorandum of association (name, registered office, objects,

liability, share capital and other clauses)
- Alteration of the memorandum of association
- Form of articles
- Adoption and application of Table A
- Effect of the registration of the articles
- Alteration of articles
- Promoters: meaning of the term “Promoter”; position and duties of promoters;
payment for promotion services; pre-incorporation contracts
LAW II
xii Introduction
12.3 Share Capital
- Meaning of “capital”
- Types of capital
- Raising of share capital
- Public offer of shares (Direct invitation, offers for sale, placings)
- Misrepresentation and omissions in listing particulars or prospectus
- Commissions and discounts
- Underwriting and brokerage
- Allotment of shares
- Commencement of business
- Issue of shares at Discount and at Premium
- Share Premium Account and issue other than for cash
- Alteration of share capital
- Maintenance and reduction of capital
- The acquisition and redemption by a company of its own shares: general rules
relating to acquisitions; redemption and purchases of shares; redemption or
purchase of shares out of capital
- Financial assistance by a company for purchase of its own shares: liability of
the company; exceptions to the rule; legal significance to the lender
12.4 Membership Shares and Majority Rule
- Ways of becoming a member

- Who can become a member
- Register of members
- Disclosure of substantial holdings
- Classes of shares
- Share certificate
- Transfer and transmission of shares
- Mortgage of shares
- Calls and liens on shares
- Forfeiture and surrender of shares
- Share warrant
- Valuation of shares
- Majority Rule and Minority Protection: The Rule in Foss – vs – Harbottle;
Protection of minority; Winding up by the court on the “just and equitable”
ground; Investigations and powers to obtain information;
- Investor protection: Insider dealing (Capital Markets Authority Act Cap.485 A)
- Central Depository System
12.5 Meetings
- Kinds of general meetings

- Notices of meetings
- Proceedings at meetings
- Proxies
- Resolutions

Syllabus xiii
12.6 Directors, Secretaries and Auditors
- Number and appointment of directors

- Persons who cannot become directors
- Share qualification of directors
- Register of directors and secretaries
- Particulars of directors and Secretaries
- Disclosure of director’s shareholdings
- Directors’ service contracts
- Powers and duties of directors
- Vacation of office by directors
- Remuneration of directors
- Loans to directors
- Compensation to director for loss of office
- Directors and insolvency
- Transaction involving directors; the rule in Turquand’s case
- Directors’ powers and shareholders’ control
- Qualification: Certified Public Secretaries Act (Cap. 534)
- Appointment: Companies Act
- Powers and duties
- Accounts, Audit and Auditors: Books of account; Laying the Accounts before
the company in general meeting and filing them with the Registrar; The annual
accounts; Group accounts; Directors report; Auditors report; Appointment of
Auditors; Qualification of Auditors; Vacation of office by Auditors;
Remuneration of Auditors; Powers and duties of Auditors
12.7 Dividends and Debentures
- Nature of a dividend
- Profits available for dividends
- The realised profits test
- Payment of dividends
- Creation and capitalisation of Reserves
- Debentures: A company’s power to borrow money; Debenture and debenture
stock; Issue of a debenture; Registered debentures; Bearer redeemable and
perpetual debentures; Charges securing debentures; Registration of charges;
Remedies of debenture holders
12.8 Corporate Insolvency
i) Winding up by Court
- Grounds for winding up by Court
- Petition of a winding up order
- Consequences of a winding up order
- Proceedings after a winding up order
- The liquidator as office holder: Powers and duties
ii) Voluntary winding up

- Members’ voluntary winding up
- Creditors’ voluntary winding up
- Consequences of voluntary winding up
- Distribution of the property of the company in voluntary winding up
- Powers and duties of the Liquidator in a voluntary winding up
LAW II
xiv Introduction
- Compulsory liquidation after commencement of voluntary liquidation
iii) Contributories and creditors

- Contributories
- Creditors
- Completion of winding up by the Court

Topical Guide to Past Paper Questions xv
Topical Guide to Past Paper Questions
Formation of Company and Effects May 2002 Q1b Dec 2001: Q1

▪ Procedure Q2 Dec 2000: Q1
▪ Constitutive documents Pilot Paper 2000 Q2a
June 2000 Q1b 3
Dec 1999 Q1 2a
Pre-incorporation Contracts May 2002 Q3a Pilot Paper 2000 Q1
▪ Duties Dec 2000 Q2 June 2000: Q1
▪ Remuneration June 1999: Q2
▪ Legal position
▪ Effects of Contracts
Doctrine of Ultra Vires May 2002 Q3b

June 2001 Q6c
Dec 2000 Q6a
Dec 1998 Q3
Capital May 2002 Q4a & b
▪ Reduction of Capital June 2001 Q2b
▪ Types Dec 2000 Q3a
▪ Raising and Maintenance of Pilot Paper Q4c
Capital 2000 Q4a
Register of Members May 2002 Q5a

Dec 2000 Q4a & b
Lien on Shares May 2002 Q5b
Resolutions May 2002 Q6a
Dec 2001 Q7a
June 2001 Q3c
Investigation and Inspection of Pilot Paper Q8
Company Affairs 2000
Commencement of Business June 2000 Q2b
Company Secretary June 2000 Q8a
Forfeiture of Shares Dec 1999 Q4
Proxies May 2002 Q6b
Winding up May 2002 Q6c
Dec 2001 Q6
June 2001 Q7
Dec 2000 Q8
Pilot Paper Q7
2000 Q8b
June 1999 Q8
Dec 1998 Q8a
Directors, Appointment Duties May 2002 Q7
Removal Dec 2001 Q3
Q7b
Dec 2000 Q6b
Pilot Paper Q2b
2000 Q6a
Dec 1999 Q7
June 1999 Q6
June 1998
Loans to directors May 2002 Q7b
LAW II
xvi Introduction
Dec 1999 Q6c

Borrowing and Registration of May 2002 Q8
Charges Dec 2000 Q7
Pilot Paper Q6
2000
Questions not in the Syllabus May 2002 Q1a
Redemption of Shares Dec 2001 Q2a
Financing Purchase of Shares Dec 2000 Q2b
June 1999 Q4b
June 1998 Q4b
Classes of Shares and Transfer Dec 2001 Q4 June 1998 Q5
▪ Share certificates Dec 2000 Q3c
▪ Estoppel June 2000 Q6
Dec 1998 Q6
Company Membership Dec 2001 Q5b
June 2000 Q4c
June 1998 Q4a
Registers Dec 2001 Q5a
Dividend Dec 2001 Q8
Dec 1999 Q7b
Constructive Notice and Indoor June 2000 Q1a
Management June 1998 Q3
▪ Rule in Turquands Case
Division of Powers between the June 2001 Q1b

General Meeting and the Board
Surrender of Shares June 2001 Q1c
Prospectuses June 2001 Q2a
Q6b
Pilot Paper Q3b
2000 Q4a & b
June 2000
Accounts and Books June 2001 Q4a & b
Borrowing and Remedies of
Debenture holders
▪ Powers and limitation June 2001 Q5a & b
▪ Types of debentures June 2000 Q7
▪ Fixed and Dec 1999 Q5 6b
▪ Floating Charges Dec 1998 Q7
▪ Remedies June 1998 Q5
Rule in Salomons Case and June 2001 Q6a

Exceptions June 2000 Q1a
Dec 1998 Q2
Bonus Shares Dec 2000 Q6c
Majority Rule in Minority Protection
▪ Rule in Foss V Harbottle June 2001 Q8
▪ Exception Pilot Paper Q4
▪ Alternative remedy 2000 Q5
▪ Fraud on Minority June 1999 Q5
Dec 1998
Issuing Shares at a discount Dec 2000 Q3b
Dec 1999 Q2b
Law of Meetings

Topical Guide to Past Paper Questions xvii
▪ Notice Dec 2000 Q5a

▪ Chairman Pilot Paper Q5a
▪ Quorum 2000 Q3
▪ Minutes Dec 1999 Q6
June 1999 Q8b & c
Dec 1998 Q7
June 1998
Auditors
▪ Appointment Dec 2000 Q5b & c
▪ Removal Pilot Paper Q5b
▪ Rights 2000 Q7a
▪ Duties Dec 1999
LAW II
Revision Questions and Answers 1
Part II: Revision Questions and Answers
QUESTIONS - PAST PAPERS
KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS

BOARD
CPA PART II
LAW II
Pilot Paper
July 2000 Time Allowed: 3 hours.
Answer any FIVE questions. ALL questions carry equal marks.
QUESTION ONE
In relation to company law:
a) Explain the meaning of the term “Promoter”. (4 marks)

b) Discuss the rules that govern pre-incorporation contracts. (6 marks)
c) Describe the common law duties of a Promoter. (10 marks)
(Total: 20 marks)
QUESTION TWO
a) Hopeful, a private limited company has adopted Table A as its Articles of Association.
The company now, wishes to alter the Articles of Association.
Outline the procedure to be followed to effect the change (10 marks)
b) Wafula, one of the Directors of Hopeful Co. Ltd is unsure of his duty of care and skill as
a director of the company. He seeks your advice on this.
Advise him. (10 marks)
(Total: 20 marks)
QUESTION THREE
a) Explain the Statutory and Common Law Rules that govern raising and maintenance of
share capital of a company. (10 marks)
b) Define the term ‘prospectus’ and explain the circumstances under which a company
may issue a prospectus. (10 marks)
(Total: 20 marks)
QUESTION FOUR
The rule in Foss v Harbottle establishes the principle that where a wrong is done to the
company, the proper plaintiff is the company itself. However, where the wrong is done by
the company directors, it may be impossible for the company to sue. In such a case, a
derivate action may be the only option.

2 Questions – Past Papers
a) Explain what is meant by “derivative action”. (10 marks)
b) Describe the conditions that must be satisfied before a derivative suit can be instituted
(10 marks)
(Total: 20 marks)
QUESTION FIVE
a) Highlight the requirements to be met before a notice of meeting served on members
can be held to be valid. (10 marks)
b) Describe the duties of an Auditor as set out under the Companies Act. (10 marks)
(Total: 20 marks)
QUESTION SIX
a) Distinguish a Fixed Charge from a Floating Charge. (6 marks)
b) The directors of Alumasi Co. Ltd borrowed Shs.20 million from Maendeleo Bank. The
Bank was informed that the money was intended to be used to expand the company’s
horticultural business. The bank however, did not ask for the company’s Memorandum
of Association and lent the money. The money was spent for purposes not intended.
These facts have come to light and Maendeleo Bank seeks your advice on whether the
bank can successfully recover the money.
Advise the bank. (8 marks)
c) Outline the legal rules that govern the appointment of an Administrative Receiver by a
holder of a floating charge. (6 marks)
(Total: 20 marks)
QUESTION SEVEN
a) Describe the circumstance under which a company may be wound up on the ground
that it is ‘just and equitable’ to do so. (12 marks)
b) State the legal consequences of a winding up order made against a company. (8 marks)
(Total: 20 marks)
QUESTION EIGHT
a) Detail the statutory provisions governing the investigation into the affairs of a company
by the registrar. (12 marks)
b) State the powers of the inspection appointed to investigate the affairs of the company.
(4 marks)
c) Explain who is responsible for the expenses incurred while carrying out investigations
into the company’s affairs. (4 marks)
(Total: 20 marks)
LAW II
FRIDAY: 8 December 2000. Time Allowed: 3 hours
Answer any FIVE questions. ALL questions carry equal marks
QUESTION ONE
Janet and Jackson Onyango are forming a Limited Liability Company. They are seeking your
legal advice on the issues listed below. Respond to the enquiries by Janet and Jackson
Onyango on:
a) What are the Memorandum and Articles of Association and is there a difference
between the two (5 marks)
b) What details would you expect them to contain and what other information might you
be able to give about these details? (15 marks)
(Total: 20 marks)
QUESTION TWO
a) Outline the rules that govern pre-incorporation contracts.
Cite relevant case-law to support your answer. (12 marks)
b) Kioko, an Under Secretary in the Ministry of Viwandani was entrusted with the
responsibility of selling the Ministry’s boarded motor vehicles. He invited bids from
members of the public to buy two lorries. He also bid, through a nominee.
Mwangangi, his own brother.
Subsequently, he sold the lorries to Mwangangi, at Sh.80,000 each. Kioko then formed
Kima Company Ltd and instructed Mwangangi to sell the lorries to the company at
Sh.350,000 each. A prospectus as issued to the public to subscribe for shares to Kima
Company Ltd. The prospectus gave Mwangangi as the vendor of the lorries and did
not disclose the profit Kioko was making. Musembi, a shareholder of the company has
learnt of the sale of the lorries to the company and the profit Kioko made and seeks
your advice on the company’s rights in respect of the same.
Advise Musembi. (8 marks)

(Total: 20 marks)
QUESTION THREE
a) Explain three ways in which a company may raise capital. (6 marks)
b) Explain five circumstances when shares may be issued at a discount. (10 marks)
c) Explain two terms implied in a contract of sale of shares between a seller and
purchaser. (4 marks)
(Total: 20 marks)
QUESTION FOUR
a) Outline the contents of a register of members of a company. (6 marks)
b) Njoroge, a member of Tusonge Company Ltd., inspected the register of members of

the company and noted that his name had been omitted therein.
Advise Njoroge on how he should proceed to have his name entered in the register.
(4 marks)

c) It is a fundamental principle of company law that the share capital of a company must
be maintained.
Discuss the legal consequences of this principle. (10 marks)
(Total: 20 marks)
QUESTION FIVE
a) In relation to the provisions of the Companies Act (Cap.486) of the Laws of Kenya,
outline general provisions relating to meeting and votes. (10 marks)
b) State the duties of an Auditor of a company. (6 marks)
c) Describe the categories of persons who do not qualify to be appointed auditors of a
company. (4 marks)
(Total: 20 marks)
QUESTION SIX
a) Explain the reason why a third part dealing with the company may concern himself
with the doctrine of ultra vires. (6 marks)
b) The Companies Act (Cap.486) of the Laws of Kenya imposes certain statutory
limitations and obligations on directors.
List four of such limitations. (4 marks)
b) Explain the circumstances under which a company may issue bonus shares. (10 marks)
(Total: 20 marks)
QUESTION SEVEN
a) Last six types of company charges that require registration as outlined in the Companies
Act (Cap.486) of the Laws of Kenya. (6 marks)
b) Green Bank gave a loan of Sh.3,0000,000 to Maendeleo Company Ltd. The bank took
a floating charge over all the company’s movable and immovable property. The
company has defaulted on repayment of the loan. However, the administrative receiver
appointed by the bank has noticed that the chattels of the company were not registered
and Ujenzi Company which is Maendeleo Company’s creditors are claiming the
chattels.
Advise the Official Administrative Receiver of his rights over the chattels. (8 marks)
c) Explain the remedies available to an aggrieved debenture holder. (6 marks)

(Total: 20 marks)
QUESTION EIGHT
a) What are the different types of Liquidation and who may commence proceedings?
(6 marks)
b) How does a creditor demonstrate that the company is unable to pay its debts?
(8 marks)
c) What courses are open to a secured creditor in liquidation? (6 marks)

(Total: 20 marks)
LAW II
THURSDAY: 7 June 2001 Time Allowed: 3 hours
Answer any FIVE questions. ALL questions carry equal marks
QUESTION ONE
a) To what extent does the doctrine of constructive notice operate negatively? (4 marks)
b) Y Ltd whose articles are similar to Table A, publish a weekly magazine. In one issue an
article is critical of the policies of the city commission. A number of Commissioners
who are also members of the company requisition a general meeting and secure the
passing of an ordinary resolution ordering the company to publish in the next issue a
withdrawal of the criticism. The directors of the company are adamant.
The angry commissioners approach you for the purpose of filing an action to compel
the directors to publish a withdrawal.
Advise them. (12 marks)
c) In what circumstances may a company accept shares surrendered by a member?

(4 marks)
(Total: 20 marks)
QUESTION TWO
a) Explain the remedies that are available to an investor who has been indiced to take
shares by false statements made in a prospectus. (4 marks)
b) Explain how the capital of a company may be:
i) Altered; (4 marks)
ii) Reduced; (4 marks)
iii) Increased; (8 marks)
(Total: 20 marks)
QUESTION THREE
a) What are the salient duties and powers of the Chairman of a general meeting of a
company? Illustrate your answer with reference to decided cases. (10 marks)
b) Outline the classes of persons who may effectively demand for a poll during a
general meeting. (5 marks)
c) Section 143 (1) of the Companies Act Cap 486 provides that “A printed copy of
every resolution or agreement to which this section applies shall, within 30 days
after the passing or making thereof, be delivered to the registrar for registration”.
Identify five resolutions or agreements registrable under this section. (5 marks)

(Total: 20 marks)
QUESTION FOUR
a) What books of account is a company required to keep and what provisions regulate
group accounts? (8 marks)
b) Analyse the circumstances under which the group accounts of a company need not deal
with a subsidiary of the company. (6 marks)

c) In what circumstances may a public company register a statement in lieu of prospectus

with the registrar? (6 marks)
(Total: 20 marks)
QUESTION FIVE
a) What are advantages and disadvantages of a floating charge to a debenture holder?
(8 marks)
b) Outline the exceptions to the general prohibition on financial assistance by a company

for the purchase of its own shares. (6 marks)
c) Outline the circumstances under which a floating charge will crystallise. (6 marks)
(Total: 20 marks)
QUESTION SIX
a. Explain five circumstances under which the veil of incorporated may be lifted by the
court. (10 marks)
b. Name and briefly explain four classes of persons who may incur civil liability in respect
of a false statement in a prospectus. (4 marks)
c.
i) Explain the doctrine of ultra vires with regard to the objects of a company. (2 marks)
ii) State the effects of ultra vires transactions. (2 marks)
iii) What are the purpose of the rule? (2 marks)
(Total: 20 marks)
QUESTION SEVEN
In the context of voluntary winding up, explain the statutory provisions regarding the
powers of the liquidator which may be exercisable:
i) With the court sanction. (10 marks)
ii) Without the court sanction. (10 marks)
(Total: 20 marks)
QUESTION EIGHT
a) Detail the conditions that have to be satisfied before an applicant can bring an action
successfully under the exception to the rule in Foss v Harbottle. (10 marks)
b) Naliaka owns 10% of the issued shares in Pendo Limited. There are two directors
Wanyonyi and Wafula who have an eccentric style of management. They own 45% of
the issued shares. Naliaka understands that Wanyonyi and Wafula want to merge
Pendo Ltd. with another more profitable company that the two directors wholly own.
If this plan goes ahead, Naliaka’s shareholding will be reduced to 3% of the merged
business. Naliaka is financially dependent on the dividends she gets from Pendo
Limited and that future dividends may be much less.
Advise Naliaka of her legal position and protection under the law if any. (10 marks)
(Total: 20 marks)
LAW II
FRIDAY: 7 December 2001 Time Allowed: 3 hours
Answer any FIVE questions ALL questions carry equal marks
QUESTION ONE
a) Identify five clauses contained in the Memorandum of Association. (5 marks)
b) To what extent and by what methods may the various clauses in the memorandum of
association of a company be altered. (15 marks)
(Total: 20 marks)
QUESTION TWO
a) State and briefly discuss the conditions which must be fulfilled before a company can
either issue or redeem shares which are stated to be redeemable. (10 marks)
b) State the requirements of the Companies Act which relate to the company giving
financial assistance for purchase of its own shares. What are the consequences of non-
compliance with these requirements? (10 marks)
(Total: 20 marks)
QUESTION THREE
Birds Limited has three directors: Peacock, Sparrow and Vulture. Explain the legal
implication of each of the following situations:
a) Vulture’s son has recently come of age and vulture wishes to appoint him a director of
the company. (4 marks)
b) The company is considering the purchase of a substantial quantity of goods from fly
ltd., in which sparrow has a large shareholding through he is not a director peacock and
vulture are unaware of sparrow’s interest in fly ltd. (4 marks)
c) Because of adverse publicity about peacock’s private life, vulture and sparrow wish to
remove him as a director, since he refuses to resign. (4 marks)
d) In view of the adverse publicity, vulture and sparrow decide to exclude peacock from
participation in the company’s affairs. (4 marks)
e) The directors are advised by wise & co., the company’s auditors, that there is no
possibility of the company trading at a profit in the foreseeable future and no
reasonable prospect of its paying its debts. (4 marks)
(Total: 20 marks)
QUESTION FOUR
Joan has inherited one million shillings from the estate of her late mother. She has decided
to invest it in a small private company of which Janet and Jeffrey, her old friends are
directors. However, Joan is not sure whether to lend the money to the company secured by
a debenture containing a fixed and floating charge or through purchase of ordinary
preference shares.
Joan now seeks your advise on the following issues:

a) What is the difference between ordinary and preference shares, and what rights accrue
to the holders of each class shares? (8 marks)

b)
i) What is the return on ordinary and preference share capital? (4 marks)
ii) What are the restrictions that may be imposed on her ability to transfer any shares
she may purchase in the Company? (8 marks)
(Total: 20 marks)
QUESTION FIVE
a) List four types of registers a company is required to keep and outline the contents of
each register stating who can access the register. (12 marks)
b) Highlight the circumstances under which a person may cease to be a member of a

company. (8 marks)
(Total: 20 marks)
QUESTION SIX
In relation to corporate insolvency,
a)
i) Explain what is meant by a contributory. (5 marks)
ii) Distinguish between fraudulent and wrongful trading. Against whom may
proceedings by brought for breaches of provisions against fraudulent trading and
wrongful trading? (10 marks)
b) Highlight the powers of the court on hearing a petition. (5 marks)

(Total: 20 marks)
QUESTION SEVEN
a) Describe the various kinds of resolutions that may be passed at general meetings. State
the difference between them and list matters that require such resolutions to be passed
before they can have effect. (14 marks)
b) In order to frustrate a threatened take-over bid, the directors of Kesho Ltd. issue to
themselves and their nominees sufficient ordinary shares for cash so as to give
themselves control of a majority of the shares which give the right to vote at a general
meeting.
Mwananchi, a minority shareholder who had hoped to benefit by selling to the bidder, is
very annoyed by the action of the directors.
Advise him as to his legal rights. (6 marks)

(Total: 20 marks)
QUESTION EIGHT
a) Dividend is payable only in cash to shareholders out of profits available for distribution.
State the rules which determine the extent to which profits arising out of the disposal of
fixed assets may be used to pay such dividends. (10 marks)
b) Happy co. Ltd was incorporated in January 2000 with an authorized share capital of
50,000,000 of one shilling per share which is fully issued and fully paid. The original
articles of association gave the directors authority to issue the initial authorized share
capital.
The directors are proposing to purchase a plot from Mr Karan for KShs.3,000,000 and
to finance the purchase by a fresh issue of 2,000,000 shares at one shilling per share to
LAW II
Mr. Karan. In order to develop the plot they propose to raise further capital by issuing
a further 2,000,000 shares of one shilling each. The directors propose that 1,000,000 of
the shares should be offered to existing shareholders and 1,000,000 to the general
public. The shares to Mr Karan, the existing shareholders and to the general public are
to be offered at one shilling and fifty cents each.
Explain the preliminary checks which the directors must make before proceeding with
these proposals. State the steps the directors must take to give them effect. (10 marks)
(Total: 20 marks)

TUESDAY: 4 June 2002 Time Allowed: 3 hours
QUESTION ONE
a) Distinguish between a corporation sole and a corporation aggregate (4 marks)
b) Tim and Tom wish to establish a business jointly. However, they are not sure whether
to establish a limited liability company or an unlimited liability company; as they know
little about these types of companies.
i) Explain to them the differences between a limited company and an unlimited

company. (4 marks)
ii) State the provisions of the Companies Act regarding the re-registration of unlimited
company as limited. (6 marks)
c) Outline the documents that are normally kept at the registered office of a company
(6 marks)
(Total: 20 marks)
QUESTION TWO
The shares of Promotion Limited, a private company are held by members of three families,
that is, the family of Mr. Karanja, Mr. Mutisya and Mr. Otieno.
Mr. Karanja and Mr. Mutisya hold 90% of the company’s shares. However, they feel that,
the company is in need of further capital but due to the squabbles among the families, Mr.
Otieno is not willing to inject additional funds so long as Mr. Karanja still holds any shares
in the company. Further, Mr. Karanja and Mr. Mutisya have reasonable cause to believe and
do in fact believe that the family of Mr. Otiengo is running their own business which is
competing with that of Promotion Limited. It is known as a fact that Mr. Otieno is
obtaining information as a member of Promotion Limited, which he is using to the benefit
of his competing business.
To resolve the problems, Mr. Karanja and Mr. Mutisya propose to alter the company’s
articles of association by adding two new articles. The first article will enable the
shareholders of 90% of the company’s shares to compulsorily acquire the shares of the
minority shareholder. The second one will require any shareholder who carries on competing
business with company’s business to transfer his shares to the nominee of the directors.
Required:
i) State the restrictions imposed both by common law and statute law upon a company’s
power to alter its articles of association. (14 marks)
ii) Discuss the validity of the proposed alteration (6 marks)

(Total: 20 marks)
QUESTION THREE
a) James and Shem proposed to form a company by the name “Micromine Limited”. On
behalf of the proposed company, Shem entered into contracts to purchase office
furniture and stationery.
Required:
i) What are the company’s rights and liabilities under such contracts after
incorporation? (6 marks)
ii) What provisions for the protection of Shem are found in such contracts? (4 marks)
LAW II
b) Discuss the doctrine of ultra vires and state the exceptions to the doctrine, (10 marks)
(Total: 20 marks)
QUESTION FOUR
a) ”The capital of may no doubt be diminished by the expenditure upon and reasonably
incidental to all the objects specified. A part of it may be lost in carrying on the
business operations authorized. Of this, all persons trusting the company are aware and
take the risk. But creditors have the right to rely and were intended by the legislature to
have the right to rely on the capital remaining undistributed by any expenditure outside
these limits or by the return of nay of it to the shareholders”.
Per Lord Herchell L.J. in Trevor v Whitworth (1837) 12 App. Cap 409 at 415.
Discuss this statement outlining the circumstances and conditions under which
companies may reduce their capital. (14 marks)
b) State what is meant by underwriting commission and distinguish it from brokerage

(6 marks)
(Total: 20 marks)
QUESTION FIVE
a) State the circumstances under which a company would be required to maintain an index
of the register of members (4 marks)
b) Kazi Bure borrowed Shs.50,000 from Tumaini Bank and deposited his XYZ
Supermarket Ltd’s share certificate with a blank transfer as a security. Subsequently he
bought goods from the supermarket on credit. The goods were worth Shs.15,000. The
articles of association of XYZ Supermarket Ltd claimed a first and paramount lien on
its members shares on debts due to the supermarket. However, before the supermarket
lien arose the bank gave the supermarket notice of Kazi Bure’s share certificate having
been lodged with the bank as a security for the loan. Kazi Bure is unable to pay for the
goods he obtained from the supermarket and has also defaulted on the loan. XYZ
Supermarket Ltd wants to exercise its lien and the bank wants to exercise its equitable
right to have the shares transferred to into its name.
In this situation discuss the rights of
i) The Bank
ii) XYZ Supermarket Ltd
c) Bob and Babs jointly own shares in Powerfoam Ltd. They are seeking your advice
regarding their legal position as joint holders of the shares. Advice them. (4 marks)
QUESTION SIX
a) Outline the various matters that require to be sanctioned by members through a special
resolution. (10 marks)
b) In a company with a share capital:
i) What is the members right to appoint a proxy (2 marks)
ii) What are the rights of the proxy so appointed? (2 marks)
c) Explain the classes of persons who may petition the court for the compulsory winding
up of a company. (Total: 20 marks)

QUESTION SEVEN
a) Discuss the rules relating to appointment and vacation of office of directors (10 marks)
b) Triple H, Undertaker Austin and Flair are directors of Mieleka Ltd a company regulated
by Table A. Fair is the managing director and undertaker is the chairperson of the
company. Sometime ago the directors meeting as a board decided to:
i) Lend Triple H Shs.500,000 to purchase a car for his wife Stephane for her personal
use;
ii) Advance Shs.500,000 to Austin to cover his expenses on a worldwide (promotional

tour on behalf of the company).
Booker T, the company secretary informs you that Stone Cold a shareholder claims that
this transaction should have been approved by the members and that he intends to raise
the matter during the next general meeting.
Required
i) Advise Booker T which of the transactions need approval by the members in
general meeting (4 marks)
ii) What are the consequences of the necessary approval not being obtained? (6 marks)
(Total: 20 marks)
QUESTION EIGHT
a) Outline the information that is required when registering a charge. (8 marks)
b) In July 2001, Muungano Ltd obtained an overdraft from a bank upon deposit of title
deeds and the execution of a memorandum of charge the memorandum was executed
in due form by the company but left undated. The overdraft continued and
subsequently the manager of the bank filled in the date as 10th January 2002. The
memorandum was then registered with the registrar of company’s on 31st January 2002
and the registrars certificate to that effect was duly issued.
Discuss the validity of the charge (12 marks)

(Total: 20 marks)
LAW II
NOVEMBER 2002
QUESTION ONE
(a) Explain the statement that “a company is a legal entity quite separate from the persons
who constitute it.”
(b) Discuss the circumstances under which a corporate veil or incorporation may be lifted.
(c) Angela is employed as a managing director of Eclipse Ltd. The main object of Eclipse
Ltd. is to retail hair products. Angela’s contract of employment contains a clause which
states that in the event of her leaving the employment of Eclipse Ltd, she would not
solicit Eclipse Ltd’s customers for a period of three years.
Angela has resigned from her employment and together with Ellina formed another
company Angellina Ltd. whose main objective is to sell hair products.
Angela has given Marie, a salesperson in Angellina Company a list of customers of

Eclipse Ltd. to immediately start soliciting the customers for Angellina Company Ltd.
Eclipse Ltd. has learnt of these facts and intends to sue Angela, Ellina and Angellina
Company Ltd.
Advise Eclipse Ltd.
QUESTION TWO
(a) (i) Explain the Rule in Royal British Bank V. Turquand.
(ii) Enumerate the various exceptions to the rule in (i) above.
(b) The articles of Shirika Company Ltd. provided that the directors had power to
determine who should be entitled to sign contracts and documents of behalf of the
company.
One director Chapu Chapu, describing himself as the Chairman and without having
been so authorized, executed and gave guarantee to Chafua in the name of the company.
Shirika Company have found out about the guarantee executed and have refused to
honour it as demanded by Chafua.
Explain whether Shirika Company Ltd. is liable with regard to the demands by Chafua.
QUESTION THREE
(a) Explain the concept of “capital of limited company” as used in company law.
(b) Enumerate the various exceptions to the rule in (i) above.
(c) The Companies Act restricts a company from issuing shares at a discount. Identify
and explain the restrictions.
QUESTION FOUR
(a) Explain the proprietary rights of a member in a company.
(b) Rita applied for 2,000 shares in Bidii Yako Company Ltd. following her application,
no allotment at the time was made. Later on without her application, 2,000 shares
were transferred to her and her name placed in the register of members.
Rita knowing that her name was in the register of members took no steps to have it
rectified. Later on, the company collapsed. Rita was called upon to pay up on her
shares and she has declined to do so arguing that she was not a member of Bidii
Yako Company Ltd. She seeks your advice on the matter. Advise Rita.

QUESTION FIVE
(a) A part from the appointment of a receiver, four other events will cause a floating charge
to crystallize. Describe these four events.
(b) What happens to a floating charge when it crystallizes?
(c) A person who lends to the security of a specific mortgage of a company’s property is
always entitled to repayment on his loan out of the proceeds of the sale of the
mortgaged property. This is done before any other creditor receives any payment. A
person who takes a floating charge is not in such a secure position.
Why is the holder of a floating charge in a less favourable position?
QUESTION SIX
(a) Identify the different types of meetings that may be held by police limited
companies.
(b) State the Rule in Sharp-vs-Dawes and explain the exceptions to this rule?
(c) (i) What is a special notice?
(ii) Give the circumstances under which a special notice would be required with
respect to company meetings.
QUESTION SEVEN
(a) Explain the circumstances under which directors of a company will be held personally
liable to acts committed on behalf of the company.
(b) Rush, Fast and Speed are directors of Modern Technology Company Ltd. The company
was formed with the main object of computer training. However, due to the power
rationing, the company business has fallen below the expected productivity and is
threatened with closure. In order to keep afloat, the three directors approached Money
Bank Ltd for an overdraft of Sh. 2 million to establish an off-licence bar and restaurant
within the city centre. The credit manager asked the company to provide its copy of the
memorandum of association and the company complied. Modern Technology was then
given the overdraft. However, it has run into financial difficulties and is unable to repay
the loan.
Can the bank successfully sue for recovery of the loan?
QUESTION EIGHT
(a) Enumerate the circumstances under which the court may order the winding up of a
company on a just and equitable ground.
(b) Section 213 of the Companies Act qualifies the liability of past and present members as
contributories. Explain these qualifications as provided for in the Companies Act.
LAW II

BOARD
CPA PART II
LAW II
Wednesday: 11 June 2003 Time Allowed: 3 hours.
QUESTION ONE
Martha is engaged in the promotion of a company. She seeks your advice on several matters
relating to the promotion of a company. You are required to advise her on the following
matters:
(a) The restrictions upon the choice of a corporate name with which a promoter must
comply. (8 marks)
(b) The legal duties of a promoter with regard to her responsibility where she sells her
own property to the company she is promoting. (6 marks)
(c) The promoter’s right to payment for her services by the company after
incorporation. (6 marks)
(Total: 20 marks)
QUESTION TWO
Anna and Berita are directors of Pesa Limited and each holds forty per cent of the ordinary
shares. The remainder is held by Charles.
In addition to the shares, Anna also holds debentures issued by Pesa Limited, redeemable on
8 August 2003. Anna wishes to dispose of her shares and debentures.
On the other hand, Berita and Charles do not wish Anna’s substantial interest in the
company to pass to other people upon the sale of the shares and debentures.
Advise Pesa Limited on the legality of each of the courses of action listed below:
(a) Pesa Limited will raise the necessary funds and purchase the shares and debentures.
(8 marks)
(b) Pesa Limited will raise funds and lend them to Charles so that he may purchase
Anna’s debentures. Charles will also arrange for a private loan guaranteed by Pesa
Limited so that he may purchase Anna’s shares. (8 marks)
(c) A new company, Pendo Limited, will be formed and eighty per cent of its ordinary
shares will be held by Pesa Limited. Berita and Charles to hold ten per cent each.
Pendo limited will borrow money to buy Anna’s shares and debentures. (4 marks)
(Total: 20 marks)
QUESTION THREE
Distinguish between the following classifications and debentures:
(a) Bearer debentures and registered debentures. (5 marks)

(b) Redeemable debentures and irredeemable debentures. (5 marks)
(c) Debentures and debenture stock (5 marks)
(d) Unsecured debentures and secured debentures (5 marks)

(Total: 20 marks)
QUESTION FOUR
(a) Distinguish a company limited by shares from a company limited by guarantee.
(4 marks)
(b) What are the contents of the memorandum of association as stated in the
Companies Act? (6 marks)
(c) Outline the documents that must be delivered to the registrar of companies together
with the memorandum of association. (10 marks)
(Total: 20 marks)
QUESTION FIVE
(a) (i) Citing decided cases, state and describe the characteristics of a “derivative
action.” (8 marks)
(ii) Explain the disadvantages to a minority shareholder in bringing a derivative
action. (6 marks)
(b) Jane Wangokho is a minority shareholder of Tuzo Company Limited.
John Daudi is the managing director and majority shareholder of Tuzo Company
Limited.
Jane Wangokho has discovered that John Daudi has breached his duties as a
director by purchasing goods from the company at a gross undervalue. A general
meeting of the company at which John Daudi attended and voted has ratified the
sale.
Advise Jane Wangokho on the courses of action she may take. (6 marks)
(Total: 20 marks)
QUESTION SIX
Discuss the position of a company auditor with regard to the following:
(a) A company wishes to remove its auditor from office before the next annual general
meeting. (8 marks)
(b) An auditor considers that he has been intentionally obstructed by company officers
from carrying out his professional and statutory duties. (6 marks)
(c) EFG Company Limited purchased shares in PQR Company Limited on the basis of
PQR Company Limited’s audited accounts. Unfortunately, EFG Company Limited
has incurred losses as a result of the purchase.
EFG Company Limited considers that the auditor was negligent in carrying out his
audit.
EFG Company Limited wishes to sue the auditor for the loss it has incurred.
(6 marks)
LAW II
(Total: 20 marks)
QUESTION SEVEN
(a) Describe the following:
(i) The committee of creditors in liquidation. (5 marks)
(ii) The committee of creditors in administration proceedings. (5 marks)
(b) Describe the meaning and essence of an application for early dissolution. (10 marks)
(Total: 20 marks)
QUESTION EIGHT
(a) In relation to special notice, state the following:
(i) Objects of a special notice. (4 marks)
(ii) The number of days required. (2 marks)
(iii) The ordinary resolutions which require special notice. (6 marks)
(b) In relation to company meetings, explain the following:

(i) Issues that require special resolution. (6 marks)
(ii) Support required for a special resolution to be passed. (2 marks)
(Total: 20 marks)

DECEMBER 2003 Time Allowed: 3 hours.
Answer any FIVE questions. All questions carry equal marks.
QUESTION ONE
(a) Compare and contrast a corporation created under the Companies Act and a
corporation created under an Act of Parliament. (10 marks)
(b) Mr. and Mrs. Matanguta intend to form a limited company known as M and M
Hardware Limited. They approach you and seek you advice.
Advise them on the following issues:

(i) What is the meaning of a private limited company according to the
Companies Act? (3 marks)
(ii) What are the advantages of forming a private company as opposed to a
public company? (4 marks)
(iii) Assuming Mr. and Mrs. Matanguta wish to convert the private company
into a public company, what would they be required to do? (3 marks)
(Total: 20 marks)
QUESTION TWO
(a) In what way does the decision in the case of Macaura Versus Northern Assurance
Company Limited (1925) illustrate the corporate entity theory? (5 marks)
(b) (i) State the circumstances under which the objects clause of a company may
be altered (5 marks)
(ii) Explain the procedure to be followed in altering the objects clause.
(10 marks)
(Total: 20 marks)
QUESTION THREE
Tama Quin Ltd., a company manufacturing pharmaceutical drugs is about to make a new
issue of 400,000 shares of Sh. 40 each at the current market price of Sh. 50 each.
The prospectus states: “The company has just patented the manufacture of a drug that cures
malaria.”
Jacob White, the managing director of the company is interviewed on television and he
states that the news to be released shortly will demonstrate a great break-through in the
control of malaria. He also stated that the company was the only one with modern technical
knowledge of this great invention. As a result there is over-subscription of the shares.
Allan, who has not read the prospectus, applied for shares and is allotted 2000 at the price of
Sh. 50 each.
Betty, who read the prospectus, is not allotted any shares but buys 3000 shares at the stock
exchange at Sh. 60 per share.
Charles, who read the report of the interview in the national newspaper, bought 5000 shares
at the stock exchange at Sh. 55 per share.
In the meantime, the patents are found not to be original and are revoked. The shares fall in
value to Sh. 10 per share.
LAW II
David who owned 10,000 shares in the company long before the new issue is disappointed
as he believes the publicity has caused the shares to fall in price (value).
Advise Allan, Betty, Charles and David. (20 marks)
QUESTION FOUR
(a) Joe owns 2000 shares in Lotto Limited and 1000 shares in Jolles Ltd. He sells all his
shares in Lotto Limited to Janet and 500 shares in Jolles Ltd. to Jeremy. All the
shares in Lotto Limited are partly paid up. Six months later, Lotto limited goes into
liquidation.
(i) In the absence of any express agreement, discuss the liability of Joe and
Janet in relation to the company’s debts. (8 marks)
(ii) State the steps to be taken to register the transfer of shareholding from Joe
and Jeremy. (4 marks)
(b) Outline the exceptional cases when a member may be held liable in excess of the
limited liability which he undertook when he became a member of the company.
(8 marks)
(Total: 20 marks)
QUESTION FIVE
(a) The law governing the directors’ duty of care and skill takes account of the fact that
the director may be a part-time counselor rather than a full-time professional
manager.
Discuss. (8 marks)
(b) Mwerevu is one of the directors of Kamaliza Ltd. whose articles of association are
in the form of Table A. He knows that his fellow directors are interested in
obtaining motor vehicles from Modern Vehicles Ltd. to increase the company’s fleet
of trucks. Mwerevu purchases controlling shares in Modern Vehicles Ltd.
Modern Vehicles Ltd. then sells the trucks to Kamaliza Ltd. at Sh. 100,000 over and
above the true market price. Mwerevu voted at the board meeting of Kamaliza Ltd.
which decided on the purchase price, without revealing that he controlled the
vendor company. When true facts are discovered, the company’s board of directors
does not protest against Mwerevu’s conduct.
Mpole, a minority shareholder is aggrieved.

(Total: 20 marks)
QUESTION SIX
(a) Enumerate the various types of charges that require registration as stated under the
Companies Act. (8 marks)
(b) Two years ago, Smart Limited issued a series of debentures in favour of Tumaini
Bank. The debentures were in the Standard Bank form described as a fixed and
floating charge over all the company’s assets. There was an express term of the
debenture that the company would not issue a subsequent fixed charge to rank in
priority to the floating charge. Six months later, Smart Limited issued a fixed charge
over its freehold property in favour of Mali Bank.

Mali Bank was unaware of the prohibition. Smart Limited has gone into liquidation
and both banks are proving their debts on priority basis.
Discuss the legal position of each bank. (6 marks)
(c) The most common method of securing debentures is to execute a trust deed.
Explain the meaning of a trust deed and outline its advantages. (6 marks)
(Total: 20 marks)
QUESTION SEVEN
Discuss the powers of the liquidator:
(a) With the sanction of the court. (10 marks)
(b) Without the sanction of the court. (10 marks)

(Total: 20 marks)
QUESTION EIGHT
(a) Explain the rules that govern quorum and the exceptions thereof (14 marks)
(b) In relation to proxies, write brief notes on:

(i) General proxies. (3 marks)
(ii) Special proxies. (3 marks)
(Total: 20 marks)
LAW II
JUNE 2004
QUESTION ONE
(a) The principle of corporate legal personality is an important and fundamental aspect
of company law.
Discuss this statement citing relevant decided cases. (6 marks)
(b) Ropoff Company Ltd., a private limited company, has been under inquiry on alleged
fraudulent financial transactions. The officers of the company under suspicion have
denied any association with the company.
At the inquiry it was suggested that the corporate veil be lifted and the realities of
the company in question be looked into.
Explain the instances when the veil of incorporation may be lifted. (14 marks)
QUESTION TWO
a) “The rule in the case of Ashbury Railway Carriage Vs. Riche (1875) stated that an act
has not been authorized by the objects clause of a company’s Memorandum of
Association in ultra vires to the company and the members cannot ratify it.”
Discuss. (8 marks)
b) Explain the various ways in which persons intending to form a company may avoid
personal liability on contracts they make on behalf of the proposed company.
(6 marks)
c) It has been held that the memorandum and Articles of Association of a company
shall, when registered, bind the company and the members to the same extent as if
the documents has been signed and sealed by each member and contained
covenants an the part of each member to observe all the provisions of the
memorandum and the articles.
Explain the effect of this provision on the relationship between shareholders and
their company and between shareholders themselves. (6 marks)
QUESTION THREE
(a) Outline the qualified minority rights of a member which can only be enforced by
the joint efforts of a membership group as defined under the Companies Act.
(10 marks)
(b) The Articles of X Company Ltd provide that every member is entitled to one vote
for each of the first ten shares and thereafter to one vote for each additional ten
shares. Jane owns one hundred shares. She transfers ten of her shares to her nine
nominees to increase her voting powering general meetings. Joseph, who is the
chairman at the general meeting, refuses to accept the votes of Jane’s nominees.
Advise Jane on the validity of the Chairman’s action and her right as a member.
QUESTION FOUR
(a) Explain the category of persons to whom an auditor owes a duty of care in the
preparation of his audit report.

(b) Enumerate the rights accorded to an auditor to enable him perform his duties as the
auditor of a company.
(c) In Hedley Byrne V. Heller (1964) the court held that provided that it could be
established that a special relationship existed between parties it was possible for a
person to sue for having suffered a financial loss even though no contractual
relationship existed between the parties.
Highlight the factors that should be established in order for a third party to
successfully sue an auditor for professional negligence. (8 marks)
QUESTION FIVE
(a) Explain the circumstances when a dividend may become payable and enforceable as
a debt against the company.
(b) Give reasons why a company may seek to control the funds from which dividends
are paid.
(c) Explain the effect of the failure by the company to register a charge of a debenture.
QUESTION SIX
(a) Outline the provisions of the Companies Act, relating to civil and criminal liability
in respect of non compliance with provisions relating to a prospectus on the
Company and the directors.
(b) Makanga, Kamore and Gatweku are directors of Wakwetu Co. Ltd. The company is
in dire need of capital to fund its expansion.
Advise them on the methods available for raising capital from the public.
(c) State the circumstances under which a Company can pay an underwriting
commission.
QUESTION SEVEN
The Board of Borrowers Company Ltd. has applied for a loan from Uchumi Commercial
Bank. The Bank has advised that any loan will be conditional upon the bank being granted
security in the form of a combination of fixed and floating charges on the companies assets.
The bank has also advised Borrowers Company Ltd. that the charges will be contained in the
bank’s standard form debenture document. This contains a “negative pledge clause” and a
term which enables the bank to place the company in administrative receivership in the
event of default by the company.
(a) (i) In numbered paragraphs distinguish between a fixed and a floating charge.
(6 marks)
(ii) What are the disadvantages of a floating charge to the bank? (4 marks)
(b) Explain the meaning of a “negative pledge” clause. (4 marks)

(c) Explain how administrative receivership differs from liquidation. (6 marks)
QUESTION EIGHT
Section 40 (1) of the Companies Act requires a prospectus to contain the matters and
reports specified in Part I and II of the Third Schedule.
Explain these matters as outlined in the Third Schedule.
LAW II
KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD
CPA PART II
LAW II
December 2004 Time Allowed: 3 hours
Answer any FIVE questions. All questions carry equal marks.
QUESTION ONE
(a) “The advantages of limited liability combined with the ease with which a member of a
family or a provider of capital or an adviser can be given a stake in the business without
the financial risk involved in being a partner, usually turns the scale in favour of
incorporation as opposed to a partnership.”
Discuss. (10 marks)
(b) Mr. John Miriti recently attended a court session during which he heard a cousel asking
a key witness about articles of association of a company. Mr. John Miriti does not
understand the meaning of articles of association.
Explain to him:
(i) The meaning and characteristics of the articles of association. (5 marks)
(ii) The legal significance of the articles of association. (5 marks)
(Total: 20 marks)
QUESTION TWO
Economy Departmental Store Limited was incorporated in December 1970 with an
authorized share capital of 5,000,000 shares of Sh. 10 each. The share capital is fully issued
and fully paid. The original articles of association gave the directors authority to issue the
initial authorized share capital.
The directors are proposing to purchase a small shop from Jijenge Holdings for Sh.
3,000,000 and to finance the purchase by a fresh issue of 2,000,000 shares of Sh. 10 each to
Jijenge Holdings. In order to re-equip the shop they propose to raise additional capital by
issuing a further 2,000,000 shares of Sh. 10 each. The directors propose that 1,000,000 of
these shares should be offered to existing shareholders and 1,000,000 to the general public.
All the additional shares are to be offered at Sh. 15 for each Sh. 10 par value share.
(a) What preliminary information must the directors check and what steps must they
follow in order to effect these proposals? (10 marks)
(b) What are the rights of the existing shareholders in respect of the proposed
additional issue of 4,000,000 share? (5 marks)
(c) What limitations are there on the uses to which the premium on the shares can be
put? (5 marks)
(Total: 20 marks)
QUESTION THREE
(a) In relation to company law, explain the powers and fiduciary duties of the board of
directors of a company. (10 marks)

(b) Hellen is the managing director of Artworks Ltd. and owns 60% of the shares in
the company which distributes and sells works of art. Charles and Martin are the
other directors holding between them 30% shares. Hellen is also a shareholder in
Oilprojects Ltd., a company which produces oil paintings. In her capacity as
managing director of Artworks Ltd., Hellen ordered Sh. 1 million worth of oil
paintings from Oilprojects Ltd. and she was paid a commission of Sh. 500,000 by
Oilprojects Ltd.
Evaluate whether Artworks Ltd. has any claim against Hellen and state the remedies
open to the company. (10 marks)
(Total: 20 marks)
QUESTION FOUR
(a) (i) State the rule in Foss-vs- Harbottle, making clear the purpose and the
rational underlying the rule. (6 marks)
(ii) State briefly the principal exception to the rule. (4 marks)
(b) Shadrack Ruto owns 500 shares of Sh. 20 each in Alpha and Omega Ltd. and 500
shares of Sh. 10 each in the Beginning and End Ltd. Both companies are regulated
by Table A – articles of association. Shadrack Ruto has agreed to sell all his shares
in Alpha and Omega to Albelnego Soi and 300 shares in Beginning and End to
Meshack Mamba. He has been informed that both companies use the form of
transfer that is generally used by brokers, who are members of national stock
exchange.
Advise Shadrack Ruto on:
(i) The information which is required on the share transfer form. (4 marks)
(ii) The procedure which should be followed to effect the transfer, and the
duration it will take to issue the new share certificates. (6 months)
(Total: 20 marks)
QUESTION FIVE
Advise the directors of Tangaza Company on the following issues:
(a) The provisions of the Companies Act that relate to the calling of the annual general
meeting and duties of the chairman during such a meeting. (10 marks)
(b) When a company is compelled to call an extra ordinary general meeting. (5 marks)
(c) The procedure to be followed to remove a director from office. (5 marks)

(Total: 20 marks)
QUESTION SIX
(a) State the provisions of the Companies Act relating to the qualification and
appointment of the company secretary, and explain the extent to which a company
secretary can contractually bind a company. (10 marks)
(b) In what circumstances can a court make a disqualification order against a director of
a company? (10 marks)
(Total: 20 marks)
LAW II
QUESTION SEVEN
(a) Explain the various types of securities that must be registered under the Companies
Act, Section 96, as registrable charges. (10 marks)
(b) Kazi Bure Company Ltd. brews alcohol. It obtains barley from Narok Farm
Produce Ltd. on terms stating that the company will not have ownership of the
consignment of barley until it has paid full purchase price for the consignment.
Kazi Bure Company Ltd. has an overdraft facility with Liquidity Bank but only pays
Narok Farm Produce Ltd. in full for a consignment of barley when the alcohol
made using the barley is sold to and paid for by the company’s wholesalers (who
receive title on payment).
Kazi Bure Company Ltd. has given Liquidity Bank a floating charge over all its
assets. The company has however, become insolvent and a receiver, appoint by the
bank under the floating charge, has taken over the brewery.
Explain how the receiver should handle each of the following items:
(i) Some bags of barley delivered by Narok Farm Produce Ltd. (6 marks)
(ii) Semi-processed alcohol in containers made of barley and yeast. (2 marks)
(iii) A consignment of brewed alcohol with a label marked “sold to wholesalers
and paid for.” (2 marks)
(Total: 20 marks)
QUESTION EIGHT
(a) Outline the circumstances under which a company may be wound up by the court
on just and equitable grounds. (12 marks)
(b) Highlight the types of debts which are treated as preferential in a winding up under
the Companies Act. (8 marks)
(Total: 20 marks)


BOARD
CPA PART II
LAW II
JUNE 2005 TIME ALLOWED: 3 HOURS
QUESTION ONE
(a) What are the legal restrictions imposed on the choice of a name of a proposed
company? (8 marks)
(b) “The doctrine of ultra vires was a nuisance to the company and a trap to unwary
third parties.” Explain the principles in the doctrine of ultra vires and the
exceptions thereof. (12 marks)
(Total: 20 marks)
QUESTION TWO
(a) Outline the distinctions between the memorandum and articles of association.
(12 marks)
(b) Explain the statutory provisions under which a company may alter its articles of
association. (8 marks)
(Total: 20 marks)
QUESTION THREE
(a) State and briefly explain the conditions which must be fulfilled before a company
limited to shares can issue redeemable preference shares. (10 marks)
(b) Outline the rules governing payment of dividends. (6 marks)
(c) It is a basic principle of company law that dividends must not be paid out of funds
raised by issue of shares or debentures.
Highlight the exceptions to this principle. (4 marks)

(Total: 20 marks)
QUESTION FOUR
A CPA Part II candidate taking the Law II paper has requested you for advice on the issues
listed below. Advise him.
(a) A company has established an employee share scheme and a number of employees
including two directors wish to borrow money from the company to enable them
purchase shares in the company. (6 marks)
(b) The same group of employees and the two directors have requested additional loans
from the company to enable them buy additional shares in the company. (6 marks)
(c) The company is proposing to offer shareholders the option of receiving shares in
the company in lieu of dividend. (4 marks)
(d) The company is proposing to co-opt John Omwami to the Board of Directors and
the board is proposing to lend him Sh. 100,000 to purchase qualification shares.
(4 marks)
(Total: 20 marks)
LAW II
QUESTION FIVE
(a) Explain the ways in which a person would:
i. Become a member of a registered company. (5 marks)
ii. Cease to be a member of a registered company. (5 marks)
(b) Henry, a sole trader carrying on a business in the printing industry has asked
Tumaini Bank Ltd. to advance him Sh. 500,000 as an additional working capital.
The bank is prepared to advance the money on condition that Henry offers a
security. Henry has a share certificate for 5,000 shares issued by Bright Star
Company Limited. Henry wants to know whether he can use the shares whose
value is Sh. 650,000 as a security for the loan. He further seeks to know whether he
would still receive dividends even after he has charged the shares to the bank.
(10 marks)
Advise Henry. (Total: 20 marks)
QUESTION SIX
(a) Compare the position of directors with that of auditors in respect to the standard
duty of skill and care expected of them. (10 marks)
(b) Explain the rules that govern the appointment and removal of an auditor of a
company. (10 marks)
(Total: 20 marks)
QUESTION SEVEN
(a) Highlight the contents of a statutory report. (10 marks)
(b) Outline the purposes for which a special resolution is required. (10 marks)
(Total: 20 marks)
QUESTION EIGHT
(a) A court of law has a right to compulsorily wind up a company.
Explain the grounds for a compulsory winding up of a company by the court.

(10 marks)
(b) Summarise the procedure to be followed in winding up a company by the high

court. (10 marks)
(Total: 20 marks)

CPA PART II
LAW II
December 2005 Time Allowed: 3 hours
Answer any FIVE questions
QUESTION ONE
(a) (i) A basic fundamental rule of company law is that a company may not purchase
its own shares. Explain the exceptions to this rule. (8 marks)
(ii) Explain the advantages of a company purchasing its own shares. (6 marks)
(b) Outline the circumstances under which a company may give financial assistance for
purchase of, or subscription for its shares. (6 marks)
(Total: 20 marks)
QUESTION TWO
Citing relevant examples, state and explain the rule in Foss v Harbottle (1843) and the
exceptions therefore. (20 marks)
QUESTION THREE
With reference to company law, discuss the proposition that a company has separate legal
separate legal personality from its members and the exceptions thereof. (20 marks)
QUESITON FOUR
(a) Define the term “promoter.” (4 marks)
(b) Mr and Mrs Karanja, who intended to form a limited liability company known as Central
Construction Company Ltd, approached Jijenge Bank for a loan to purchase office
furniture and stationery. A loan of Sh.1 million was given by the bank. Subsequently,
the company was incorporated. However, the business did not flourish and the
company was unable to pay the loan as and when the installments fell due. When the
bank sent a demand notice to the company, Matata, a shareholder who opposed the
demand notice, said that he company was not liable to repay the loan. Mr and Mrs
Karanja, now want to alter the objects clause in the memorandum of association to
include a clause authorizing the company to effect the payment but Matata is still
opposed to the proposal.
Discuss the legal position of the bank and the validity of the proposed alteration.
(16 marks)
(Total: 20 marks)
QUESTION FIVE
(a) What are the directors’ rights with regard to receiving remuneration and compensation
for loss of office? (6 marks)
(b) Outline the procedure that a company must follow if it wishes to offer a director a
service contract for more than five years. (4 marks)
LAW II
(c) Although the directors of a company are its agents, they are also held as trustees of the
company’s money and property. However, their position as trustees of the company
differs from that of ordinary trustees.
Discuss. (10 marks)

(Total: 20 marks)
QUESTION SIX
(a) Outline the resolutions which may be passed for voluntary winding up a company.
(6 marks)
(b) State the persons who may petition for the winding up of a company by the court.
(4 marks)
(c) Explain the consequences of a voluntary winding up a company limited by shares.
(10 marks)
(Total: 20 marks)
QUESTION SEVEN
(a) Advise the Board of Directors of Excellent Home Care Agencies Ltd. on the following
matters:
i) The length of notice to be given before an annual general meeting can be held.
(4 marks)
ii) The ordinary business transacted at such meetings. (4 marks)
(b) As you are leaving a meeting of the board of directors, you meet Mr Shida, a
shareholder, who is aggrieved that since the time the company was incorporated three
years ago, no annual general meeting has ever been held by the company. He seeks your
advice.

(Total: 20 marks)
QUESTION EIGHT
(a) Explain the similarities and differences between shares and debentures. (14 marks)
(b) Wheels Limited issued a debenture to East Bank years ago. The debenture was in the
standard bank form described as a fixed and floating charge over all the assets of the
company. However, due to inadvertence, the charge was not dated nor registered within
time. The company is now in liquidation and the loan is in arrears. The bank seeks your
legal advice as to whether it can rely on the charge to prove its claim in the winding up
proceedings of the company.
Advise the bank. (6 marks)

(Total: 20 marks)

KENYA ACCOUNTANTS AND SECRETARIES NATIONAL EXAMINATIONS BOARD
CPA PART II
LAW II
MONDAY: 5 June 2006 Time Allowed: 3 hours
QUESTION ONE
The law requires that certain statutory books must be kept in the registered offices of the
company.
Explain the contents and matters relating to inspection of the following statutory books:
(a) Register of members. (5 marks)
(b) Register of directors and secretaries. (5 marks)
(c) Register of directors’ interests. (5 marks)
(d) Register of charges. (5 marks)
(Total: 20 marks)
QUESTION TWO
Discuss the ways in which the traditional role of an auditor has been affected by recent
demands by regulatory authorities and shareholders. (20 marks)
QUESTION THREE
(a) Explain the preliminaries incidental to promotion of a company. (8 marks)
(b) Explain the ways in which promoters can be remunerated. (6 marks)
(c) Outline the reasons that may lead to suspension of promoters by a company.
(6 marks)
(Total: 20 marks)
QUESTION FOUR
In pursuit of good corporate governance practices by directors, enumerate the best practices
relating to directors which would promote and protect the shareholders rights. (20 marks)
QUESTION FIVE
Abel and Boaz have been carrying out business as a partnership. They have both been
employed on full time basis in the business and have shared profits and losses equally. Abel
wished to bring his son David into the business and Boaz accepts the proposal.
They wish to convert the partnership into a private limited company, ABD Company Ltd.,
in which Abel and Boaz will each hold 40 percent of the shares and David will hold 20 per
cent. All the three shareholders will be directors of the new private company.
(a) Advise the three shareholders of ABD Company Ltd. on the documents which they
are required to submit to the registrar of companies for approval in connection with
the formation of the private company. (8 marks)
(b) After ABD Company Ltd. was formed, there arose a disagreement between Boaz
and David regarding the day-to-day management of the business. Abel and David
decided to remove Boaz from the board of directors.
LAW II
Explain the procedure that Abel and David should follow to effect the removal of
Boaz as a director of the company. (6 marks)
(c) Discuss whether Boaz has grounds for petitioning for the compulsory winding up
of the company. (6 marks)
(Total: 20 marks)
QUESTION SIX
Explain to a new shareholder of a central depository account the circumstances in which a
central depository securities account may be suspended. (20 marks)
QUESTION SEVEN
(a) With regard to investor protection, explain the meaning of inside information.
(8 marks)
(b) In relation to allotment of shares in a company, discuss the legal position in each of
the following situations:
(i) Sarah applied for 4,000 shares in a public company known as ABC Ltd. She
was allotted only 2,000 shares. She intends to sue the company.
Advise Sarah. (6 marks)
(ii) Meshack was recently appointed an accountant of Economy Departmental

Store, a public limited company. The company intends to issue shares to
the public. Meshack seeks your advice on whether there are any restrictions
imposed by the Companies Act upon allotment of such shares.
Advise Meshack. (6 marks)

(Total: 20 marks)
QUESTION EIGHT
(a) Enumerate the sequence of events to be followed by a shareholder who intends to
transfer his shares to another person. (12 marks)
(b) Mwinzi, a holder of shares in Hewa Airways Company Limited deposited his share
certificate with a broker, Otieno. Otieno forged Mwinzi’s signature on the share
certificate and transferred the shares to Kuria. When the share certificate and the
transfer document were presented to the company for registration, the secretary
wrote to Mwinzi advising him of the transfer. Mwinzi did not reply to this letter
and Kuria was registered as the new shareholder. Kuria then transferred the shares
to Wafula who was registered as the shareholder and a new certificate was issued.
Explain the effect of the forgery. (8 marks)

(Total: 20 marks)

32 Answers – Past Papers
ANSWERS - PAST PAPERS
SUGGESTED SOLUTIONS TO THE PAST PAPER QUESTIONS
JULY 2000
QUESTION ONE
a)
▪ Under Section 45 (5) of the Companies Act, Promoter means “Promoter who was a
party to the preparation of the prospectus or of the portion thereof containing the
untrue statement but does not include a person by reason of his acting in a
professional capacity on behalf of the persons engaged in procuring the formation
of the company”.
▪ In Twycross v Grant, it was observed that “a promoter I apprehend is one who
undertakes to form a company with reference to a given project and set it going and
who takes the necessary steps to accomplish that purpose”.
▪ It has been observed that the term Promoter is not a term of law but of business
usefully summing up in a single word a number of business operations familiar to
the commercial world by which a company is generally brought into existence.
▪ Ordinarily a Promoter is a person who has taken some part in the formation of a
company or in procuring persons to join it as soon as it is technically formed.
▪ The role a Promoter plays may be active or passive.
▪ An advocate or accountant engaged by those interested in forming a company
becomes a Promoter if he agrees to become or provide a director.
▪ It therefore follows that the question as to who a promoter is one of fact and varies
from case to case.
b)
• This is a contract entered into by persons purporting to act on behalf of the
company before its incorporation (sec.16 (2) of the Companies Act.)
• A company comes into existence on the date of incorporation mentioned in the

certificate of incorporation.
• Before the date of incorporation, the company does not exist and has no capacity to
contract.
Kelner V Baxter
• The company is generally not liable on such contracts.
• A person who purports to contract as agent for a non-existent Principal is

personally liable on the contract. Kelner v Baxter (1866).
• A contract purportedly entered into by or with a non-existent person is void.

Newborne v Sensolid (GB) Ltd.
• The company cannot ratify a pre-incorporation contract after its incorporation.

Price v Kelsal (1957)
• Natal Land Co. Ltd v Pauline Collery Syndicate
• Nor can directors adopt or confirm a pre-incorporation contract after the

company’s incorporation.
• North Sydney Investments and others V Higgins and others
LAW II
• A pre-incorporation contract is enforceable by or against a company if after

agreement.
• Mawogola Farmers and Growers Co. Ltd v Kayanja and others (1971)
c)
▪ Act bona fide for the benefit of the company information.
▪ Proper accounting.
▪ Disclose any personal interest.
▪ Determine and settle the name of the company.
▪ Prepare or cause preparation of the constitutive and other documents.
▪ Register or cause registration of the company.
▪ Secure the services of directors.
▪ Ensure that the company has an independent board of directors.
▪ Prepare the requisite prospectus if any.
▪ Acquire assets for use by the company.
▪ Enter into business contracts on behalf of the company.
▪ Meet all the preliminary expenses of company formation.
QUESTION TWO
a)
▪ Under Section 13 (1) of the Companies Act, a company may by special resolution
alter the provision of its articles.
▪ The altered article is as valid as if originally embodied in the articles and is alterable
by special resolution.
▪ An extra ordinary general meeting of the company must be convened.
▪ Members must by special resolution authorize the alteration.
▪ A copy of the resolution must be delivered to the registrar for registration within 30
days of its passing.
▪ The alteration take effect on registration.
b) Directors’ common law duties fall in to two broad categories namely:

- Duty of care, skill and diligence
- Duty of loyalty and good faith
Directors owe their company a duty to exercise some care, skill and diligence falling,
which they are liable in damages. The rules governing directors duty of care, skill and
diligence were formulated by Romer J. in Re: City Equitable Fire Insurance Co. Ltd.
• A director need not exhibit in the performance of his duties a greater degree of
skill than may reasonably be expected of a person of his knowledge and
experience. In re Brazilian Rubber Plantations and Estates Ltd. He is not
bound to bring any special qualifications to his office.
• A director is not bound to give the affairs of the company continuous attention.
His duties are of an intermittent nature to be performed at periodical board
meetings and meetings of committees of the board upon which he happens to
be placed. He is however not bound to attend all such meetings, though, he
ought to attend whenever in the circumstances he is reasonably able to do so.
In The Marquis of Butes Case
• In the absence of suspicion, a director is justified in trusting that officers of the
company perform their duties honestly. He is entitled to rely on information
provided by trusted or tried servants of the company. Dovey v Cory.

QUESTION THREE
a) It is a fundamental principle of company law, that share capital be maintained.
Company law has evolved principles and provisions to ensure that companies raise and
maintain their capital for example:
• A public company may not commence business before the minimum subscription is
raised.
• Consideration for shares must be in money or money’s worth.
• A public company may not allot shares for non-cash consideration.
• Issuing of shares at a discount is in principal prohibited. Section 59 of the Act.
• If shares are issued at a premium, a share premium account must be created.
Section 58 of the Act.
• Reduction of capital by a company must strictly comply with the provisions of the
Companies Act.
• Preference shares should only be redeemed by reserves or proceeds of a special
issue for that purpose.
• Dividend must not be paid out of capital. Article 16 of Table A.
• The par value of shares must be maintained.
• A company must not purchase its shares.
• A company must not finance the purchase or acquisition of its shares. Trevor V.
Whitworth. This rule is embodied in Section 56 (1) of the Companies Act.
(b) Under Section 2 (1) of the Companies Act “prospectus” means:
• “Any prospectus, notice, circular advertisement or other invitation offering to the

public for subscription or purchase any shares or debentures of a company.”
• Any invitation intended to avail shares or debentures to the public qualifies as a
prospectus.
• A prospectus does not offer securities but invites offers from prospective investors.
• “Public” is not restricted to the public at large, it includes a section thereof.
• Its contents are prescribed by law and a copy thereof must be delivered to the
registrar for registration.
• A newly formed company may issue a prospectus inviting subscription for its
shares.
• An existing company may issue it when floating new share to the public.
• When a private company goes public, pursuant to Sec.32 (1) of the Act, it may issue
prospectus or statement in lieu.
QUESTION FOUR
a)
• This is a suit brought by a person in the name of and on behalf of the company to
remedy a wrong done to the company. It is available only for the enforcement of
duties owed to the company and is unavailable to enforce the right of an individual
shareholders e.g. actions against directors or officers for breach of their duties to the
corporation for an injunction to preclude a threatened injury to the company.
• This action is representative in character.
b) Conditions necessary for a derivative action to be instituted include:
• The wrong complained of must involve fraud on the minority, for example:
o Expropriation of corporate assets.
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o Breach of duty by directors.

o Unfair use of voting power.
• The wrong doers must be in control of the company. Their control may be legal or
factual.
• The company must be made a defendant in the action so as to benefit from any
court order arising.
• The plaintiff shareholder should sue in a representative capacity on behalf of
himself and all other members other than the real defendants.
• The right to bring a derivative action is conferred upon individual members of the
company as a matter of grace.
• The plaintiff remains dominus litis until judgement. However, he can discontinue
or settle it out of court at his pleasure.
QUESTION FIVE
a)
• The notice must be issued with the requisite authority of the board, court, members
or registrar.
• The requisite number of days must be given.
• It must specify the business of the meeting with clarity.
• Must specify all resolution proposed and passed, as a special and notice of their
intention to be passed as such must be given.
• Must specify the date, time and place of the meeting.
b)
• Acquaint himself with his duties under the Companies Act and the articles of the
company whose books and accounts he is called upon to examine.
• Examine the books, accounts, vouchers and other documents of the company
• Make a report for submission to members in general meeting.
• Act honestly i.e. not certify as true what he does believe to be true.
• Exercise reasonable care, skill and caution of a competent careful and cautious
auditor.
• Satisfy himself that the companies security exist and are in safe custody.
• Provide professional advise if called upon to do so.
• Approach his task with an inquiring mind and not with suspicion of dishonesty.
QUESTION SIX
a) Fixed Charge
This is a legal or specific charge. It is a charge securing a debenture on a fixed asset. In
Illingworth v Houldsworth it was observed that a fixed charge is specific. The security is
certain or capable of being ascertained.
Floating Charge
This is a charge securing a debenture by the assets of a going concern. In Illingworth v
Houldsworth, it was observed that a floating charge is ambulatory and shifting in its
nature. In re Yorkshire wool Combers Association, Romer J. set out the characteristics
of a floating charge:
• It is a charge on a class of assets of the company both present and future.
• The class of assets must be one that keep on changing from time to time in the
ordinary course of business of the company.
• The charge remains dormant until crystallization.
b)

• This is a case of abuse of power by directors i.e. excesses of directors.

• In this case, directors borrowed for a purpose other than that for which it was
intended.
• This borrowing is intra vires, the company and is enforceable, since the bank was
unaware of the misuse of the power to borrow.
• My advise to the Maendeleo Bank is that it can successfully recover the amount
borrowed as it is not party to the abuse of power. My advise is based on the
decision in re: David Payne & Co. where a company with a general power to
borrow, borrowed from the plaintiff bank, but used the amount for an ultra vires
purpose. The lending party was unaware of the abuse of power and it was held that
the borrowing was enforceable.
c)
i) Under Section 35 (1) of the Companies Act, where a receiver or manager of the
whole or substantially the whole of the property of the company is appointed on
behalf of the holders of any debentures of the company secured by a floating
charge, then subject to the provisions of this section and of section 352.
▪ The receiver shall forthwith send notice to the company of his appointment;
and
▪ There shall, within fourteen days after receipt of the notice, or such longer
period as may be allowed by the court or by the receiver, be made out and
submitted to the receiver in accordance with section 352 a statement in the
prescribed form as to the affairs of the company; and
▪ The receiver shall within two months after receipt of the said statement send
▪ To the registrar and to the court, a copy of the statement and of any comments
he sees fit to make thereon and in the case of the registrar also a summary of
the statement and of his comments (if any) thereon; and
▪ To the company, a copy of any such comments as aforesaid or, if he does not
see fit to make any comment, a notice to that effect; and
▪ To any trustees for the debenture holders on whose behalf he was appointed
and, so far as he is aware of their addresses, to all such debenture holders, a
copy of the said summary.
ii) Under Section 351 (2) of the Companies Act, the receiver shall within two months,
or such longer period as the court may allow after the expiration of the period of
twelve months from the date of his appointment and of every subsequent period
of twelve months, and within two months or such longer period as the court may
allow after he ceases to act as receiver or manager of the property of the company,
send to the registrar, to any trustees for the debenture holders of the company on
whose behalf he was appointed, to the company and (so far as he is aware of their
addresses) to all such debenture holders an abstract in the prescribed form
showing his receipts and payments during that period of twelve months or, where
he ceases to acts as aforesaid, during the period from the end of the period to
which the last preceding abstract related up to the date of his so ceasing, and the
aggregate amounts of his receipts and of his payments during all preceding periods
since his appointment.
QUESTION SEVEN
Under Section 219 (f) of the Companies Act, “a company may be wound up by the court, if
the court is of the opinion that it is just and equitable, that the company should be wound
up.” Companies have been wound up on this ground in the following circumstances:
a)
• Fraudulent or illegal purpose
▪ Inte Thomas Edward Brinsmead & Sons Ltd
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• Failure of the substratum

▪ Inre German Date Coffee.
▪ Inre Baku Consolidated Oil Fields.
▪ Inre Amalgamated Syndicate.
• Loss of confidence in the management

▪ Loch v John Blackwood
• Expulsion or exclusion from management

▪ Inre Westbourne Galleries Ltd
▪ Inre Lundie Brothers Ltd
• The company is ‘a bubble’

▪ Inre London and County Coal Ltd
• Oppression of Minority
• Deadlock in management and membership

▪ Inre Yenidje Tobacco Ltd
▪ Inre Modern Retreading Ltd
b)
▪ All floating charges created by the company crystallize and become fixed.
▪ The company ceases to carry on business except such as may be required for
the beneficial winding up of the company.
▪ Any disposition of the company’s property including choses in action, any
transfers of shares or alteration in the status of members of the company is
void.
▪ Any attachment, distress or execution put in force against the estate or effects
of the company is void.
▪ Actions or legal proceedings by or against the company are automatically stated.
▪ By virtue of his office, the official receiver becomes the provisional liquidator.
▪ Director’s powers become functus officio i.e. not exercisable.
▪ Employees of the company are ipso facto dismissed. However, those who
continue to render services and receive wages are deemed to have entered into a
new contract of service with the liquidator.
QUESTION EIGHT
a) The registrar of companies is empowered to investigate the affairs of a company by self
or by an inspector in certain circumstances. The registrar is empowered to investigate
the affairs of a company where:
• He has reasonable cause to believe that the provisions of the companies act are
not being complied with.
• A document submitted to him does not disclose a full and fair statement of the
matters it relates to.
• He has good reason to investigate the ownership of any shares in or debentures
of a company by demanding information from persons whom he has
reasonable cause to believe are or have been interested in the shares or
debentures or has acted as an advocate or agent in relation to the shares or
debentures.
• There is good reason to investigate 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
▪ Control the company or materially influence the policy of the company.
b)
• To investigate the holding or subsidiary company if the same is necessary of the
investigation.
• To administer oath.
• To examine persons on oath.
• To compel officers or agents of the company to produce books or documents of
the company.
• To apply to the court to have persons whom he has no power to examine to be
examined in court for purposes of the investigation.
c) Under Section 171 (1) of the Companies Act, the expenses of and incidental to an
investigation by an inspector appointed by the court are defrayed by the registrar in the
first instance. However, the following persons are liable to repay the registrar:
• Any person who is convicted on a prosecution instituted by the attorney
general on the basis of the report.
• Any person who is ordered to pay damages or restore any property in
proceedings instituted on the basis of the report.
• Any body corporate in whose name proceedings are instituted.
• Any body corporate dealt with by the report.
• The applicants for the investigation.
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DECEMBER 2000
QUESTION ONE
a) Memorandum of Association
• This is one of the constitutive documents. It is the external constitution of the
company. It provides for the relationship between the company and third
parties.
• It is a mandatory document – every company must have it.
• Its contents are prescribed by Section 5 and 6 of the Companies Act e.g. name,
object, capital.
Articles of Association
• This is one of the constitutive documents. It provides for the internal
constitution. It contains the rules for the internal management of the
company’s affairs. It regulates the relations between the company and its
members.
Main difference between the two

• The Memorandum of Association provides for the relationship between the
company and the outside world while the Articles of Association provides for
the rules of internal management of the company’s affairs.
b) Details in the memorandum of association

Contains the following clause:
• Name clause – name of the company with limited as the last word thereof.
• Object clause – the purposes for which the co is incorporated.
• Registered office clause – this is the domicil of the company.
• Capital clause – this is the authorised or nominal capital.
• Liability clause – states that the company is limited by shares or guarantee.
• Association clause/declaration clause – states the desire of members to be
incorporated.
• Particulars of subscribers and signature
• Date - the memorandum must be dated.
Details in the articles of association

Assuming the company adopts the model article in Table A of the first schedule to the
Companies Act, the Articles of Association must contain inter alia.
• Transfer and transmission of shares.
• Calls
• Meetings generally.
• Declaration and payment of dividend.
• Powers of directors
• Office of the Managing Director
• Bonus issues
• Winding up
• Voting
• Lien on shares
QUESTION TWO
a) A pre-incorporation contract is a contract entered into before a company is
incorporated.
Rules governing pre-incorporation contracts

• A pre-incorporation contract does not bind the company.

Kelner v Baxter
• A company cannot ratify a pre-incorporation contract

Natal Land Co. v Pauline Colliery Syndicate
Price v Kelsal
• A promoter is personally liable on a pre-incorporation contract

Kelner v Baxter
R V Kyslant
• The company may be bound by a pre-incorporation contract if it enters into a

new contract similar to the previous agreement.
Mawagola Farmers Co. v Kayanja and others
• Before incorporation the company lacks contractual capacity and cannot have
agents
b) Kioko was a promoter of the company and he stood in a fiduciary position towards the
company he was promoting. Therefore he was bound to disclose any secret profits
made in the course of the promotion which he did not.
Therefore my advice to Musembi as to the company’s rights are:

• The company can rescind the contract.
• To recover the secret profit made by Kioko.
• To sue for damages for breach of fiduciary duties.
My advice is based on the decisions in Erlanger v New Sombrero Phosphate Co., Gluckstein
V Barnes
QUESTION THREE
a) Ways of raising capital
• Offer of shares through the issue of a prospectus, offer for sale, placing etc.
• Borrowing.
• Bonus issues.
• Issues on take-overs.
b) Issue of shares at a discount

• The shares must belong to a class already issued by the company.
• One year must have elapsed from the date the company was entitled to
commence business.
• It must be authorised by a resolution of members in general meeting
• The resolution must fix the maximum rate of discount at which the shares are
to be issued.
• The issue must be approved by the court.
• The issue must be made within one month from the date of approval by the
court or such extended time as the court may permit.
• The issue must be disclosed in the prospectus of the company.
c) Terms implied in a contract of sale of shares between a seller and purchaser.
• That the buyer will pay the price of the shares.
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• That the seller has the right to sell.

• That the purchaser shall indemnity the seller against any calls made after the
date of the contract.
• The seller will give to the purchaser a genuine share certificate required to
enable the purchaser to be registered as member.
• The seller will not do anything preventing the buyer from having the transfer
registered or delay the process.
• The seller will compensate the buyer for any calls or liability which may arise in
respect of the shares sold.
QUESTION FOUR
a) Contents of the Register of Members
• Name and address of every shareholder.
• Number of shares or stocks held.
• Date of entry of the name.

• Date of removal of the name.
• Amount paid on each share.
• Postal address of every member.
b) My advice to Njoroge is that he should apply to the High Court for an order of
rectification of the register to include his name. My advice is based on the Provisions
of the Companies Act.
c) The principle has the following consequences:

• A company cannot purchase its own shares.
• A company must not give financial assistance for the purchase of its own
shares.
• Dividends must not be paid except out of distributable profits.
• Where a public company suffers a serious loss of capital a meeting of the
company must be called to discuss the issue.
• Shares must not be issued at a discount.
• Reduction of capital must strictly comply with the provisions of the Companies
Act.
QUESTION FIVE
a) The Companies Act, recognises the following meetings :
• Statutory Meeting.
• Annual General Meeting.
• Extra Ordinary General Meeting.
• Class Meetings.
• Directors meetings
• Creditors meeting.
Generally, the following constitutes the requisites of a meeting:
• Notice of the meeting.

• Proper authority to convene the meeting.
• Quorum for the meeting.
• Chairman of the meeting.
• Taking of minutes of the meeting.

▪ Voting in a company meeting can either be on a poll or by show of hands. By show of

hands – one member has one vote. By Poll depends on the number of shares a member
holds. Under Table A one share is one vote.
▪ The results of the voting are declared by the Chairman.
▪ Members are free to appoint a proxy who can only vote by a poll.
b) Duties of an auditor
▪ To acquaint himself with his duties under the Companies Act and the Articles of
Association of the Company who books he is called upon to audit Inre Thomas
Gerald & Sons Ltd.
▪ To examine the accounts, books, vouchers, etc. Inre Republic of Bolivia
Exploration Syndicate Ltd.
▪ To make a report for submission to members in general meeting.
▪ To be honest Fomento V. Selsdon Fountain Pen Ltd.
▪ To exercise care, skill and caution. Inre Kingston Cotton Mills Ltd.
▪ To satisfy himself that the company’s securities exist are in safe custody. Inre City
Equitable Fire Insurance Co Ltd.
▪ To provide professional advice if called upon to do so Inre London and General
Bank Ltd
▪ Approach his task with an inquiring mind.
c) Categories of persons disqualified to be auditors:
▪ A body corporate.
▪ An officer or servant of the company.
▪ A person who is a partner or in employment of an officer or servant of the
company.
▪ A person disqualified for appointment as an auditor of a holding or subsidiary
company.
▪ Common law disqualification e.g. undischarged bankrupts, persons of unsound
mind.
QUESTION SIX
a) A third party may concern himself with the doctrine of ultra vires when dealing with
the company as any such contracts will be considered void and unenforceable.
▪ It is imperative that third parties examine the contents of the memorandum of
association.
▪ Third parties must be aware of the contents of the memorandum.
▪ Any transaction outside the objects clause will be ultra vires the company.
▪ Such a contract is void and cannot be ratified and nothing can be done to render it
intra vires.
b) Statutory Limitations
▪ A director cannot guarantee a loan.
▪ In a public company a director outside the age limit for appointment is not qualified
for appointment as director unless a resolution upon a special notice has been
passed.
▪ In a public company, a director must take and pay for his qualification shares, if any.
▪ A director must not be compensated for loss of office unless particulars are
disclosed to the members who must approve of it.
▪ Prohibitions of tax free payments to directors.
▪ Disclosure of interests in contracts made on behalf of the company.
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c) Circumstances in which a company may issue bonus shares:

▪ There must be authority in the articles.
▪ It must be authorised by an ordinary resolution of members in general meeting.
▪ It must be recommended by the board and approved by the general meeting.
▪ Bonus issues can be financed by reserves or by share premium account.
▪ Its nominal share capital must be sufficient.
▪ A return of allotment must be delivered to the Registrar within one month of
allotment.
▪ Must be issued in the proportion prescribed by the articles.
QUESTION SEVEN
a) Types of charges requiring registration under the Companies Act
▪ Floating charges.
▪ Fixed charges.
▪ Charge on book debts.
▪ Charge on unpaid calls.
▪ Charge on an uncalled capital.
▪ Chattels mortgage.
▪ Charge on copyrights and patent goodwill etc.
▪ Charge on a ship or any part thereof.
b)
▪ This problem is based on registration of charges. Under the provisions of the
Companies Act, a floating charge is registrable. In this case, the charge was
duly registered and a certificate issued.
▪ Although the chattels were not registered they constitute the security and the
administrative receiver is entitled to the same. This is because the registration
of the charge cured this defect and the charge is deemed to be valid. As was
the case in Ve C. L. Nye Ltd
c) Remedies available to an aggrieved debenture holder:
▪ Appointment of receiver.
▪ Petition for winding up.
▪ Sue for the debt.
▪ Foreclosure.
▪ Exercise the statutory power of sale.
QUESTION EIGHT
a) Types of winding-up
i) Compulsory winding up or winding up by the court.
ii) Winding up subject to the supervision of the court.
iii) Voluntary winding up.
Who may commence proceedings?

Compulsory winding up
▪ The company
▪ Creditors
▪ Contributories
▪ The attorney general
▪ The official receiver
▪ Members other than contributories.
Winding up under the supervision of the court

▪ The creditors
▪ The official receiver
▪ Members
Voluntary winding-up
▪ Shareholders
▪ Creditors
b) How the creditor can prove insolvency:

• That a debt of KSh.1,000 or more remain unpaid three weeks after demand
• Execution or other process has been returned unsatisfied wholly or in part.
• That taking into account the prospective and contingent liabilities the court is
satisfied that the company is unable to pay its debts.
c) Course of action open to a secured creditor in liquidation

▪ Value the security and prove the balance, if any.
▪ Sell the security and prove the balance, if any.
▪ Surrender the security and prove the entire debt.
▪ Rely on the security and not prove at all.
LAW II
JUNE 2001
QUESTION ONE
a)
▪ This doctrine is to the effect that persons who deal with the company are deemed to
know the contents of its public documents, namely memorandum, articles special
resolutions etc.
▪ They are deemed to know the company’s contractual capacity i.e. whether a
transaction is intra or ultra vires the company.
▪ This is because these documents are registrable with the registrar and are open for
inspection by any person who cares to inspect them.
▪ This doctrine protects the company from persons who do not inquire.
▪ It is a modification to the doctrine of indoor management. i.e. rule in Turquands

Case
▪ This doctrine operates negatively in that although parties are deemed to know the
contents of the public documents, a party can only rely on those contents if it has
actual knowledge of their existence in the documents. It was so held in Rama
Corporation v Proved Tins and General Investments where it was held that the
plaintiff could not rely on the article permitting delegation since it had no notice of
its existence. The company could not be held liable on the contract.
b)
▪ This problem is based on the division of powers between the general meeting and
the board.
▪ Under this principle, each organ has its own sphere of influence as dictated by the
articles. An organ must as a general rule not interfere with the exercise of a power
vested in the other.
▪ In this case, since the articles of Y Ltd are similar to Table A, then under Article 80,
the management of the company affairs is vested in the board except in those
matters specifically allotted to the company at general meeting. Alexander Ward &
Co. Ltd v Samyang Navigation.
▪ The directors are in charge of the publication hence the general meeting must not
interfere. By passing the resolution, the general meeting is in fact interfering with
the exercise of a power vested by the articles in the board.
▪ My advice to the commissioners is that they have no actionable claim against the
directors. They cannot sue since the directors are not abusing, exceeding or
exercising their powers in contravention of the articles.
▪ My advise is based on the decision in Scott v Scott where the general meeting
purported to compel the directors of the company to pay an interim dividend,
which was a power vested in the board. It was held that the resolution could not be
given effect. A similar holding was made in Shaw v Shaw where the general meeting
purported to interfere with the exercise of a power vested in the board of directors.

c) As a general rule, surrender of shares is not authorised by law. This is a situation

whereby a member gives up his shares to the company. It is generally not provided for
by the articles. However, a company may accept such shares in two circumstances:
▪ To avoid the formalities of forfeiture

▪ Fully paid up shares may be accepted in return for shares of the same nominal
value.
QUESTION TWO
a) The remedies available to a subscriber include:
▪ Compensation for any loss or damage occasioned by the untrue statements
i.e. Sec 45 of the Act.
▪ Damages for loss or liability arising. This remedy is available to the investor
in the false statements were negligently or fraudulently misrepresented.
▪ Rescission of contract: The innocent party has the right to rescind the
contract if the false statements were innocently, fraudulently or negligently
made. The right is exercisable at the earliest possible instance.
▪ Damages against the company for breach of contract.
▪ Indemnity: This remedy which entails monetary compensation is available if

the false statements were innocently made. However, it is only available where
the innocent misrepresentation occasion direct financial loss.
b) Under Section 63 (1) of the Companies Act, the capital of accompany can be altered in
various ways namely:
▪ Increase of capital
▪ Sub-division of shares
▪ Conversion of shares to stock
▪ Re-conversion of stock to shares
▪ Consolidation of shares
▪ Diminution of capital
i)
▪ To alter the company’s capital in the aforementioned ways, the following
conditions are necessary:
▪ The articles of the company must authorise the alteration.
▪ The alterations must be authorised by an ordinary resolution of members in
general meeting
▪ The registrar must be notified of the alteration within 30 days of the resolution.
ii) The Companies Act prescribes the circumstances in which a company may reduce
its capital. The circumstances are prescribed in sections 68 to 71 of the Act. For a
company to reduce its capital the following conditions/steps are necessary:
• Authority of the Articles: Under section 68 (1) of the Companies Act, the
power to reduce a company’s capital must be embodied in the articles.
• Special Resolution: Under Section 68 (1) of the Act, a reduction of capital

must be authorised by a special resolution of members in the general meeting.
This resolution is referred to as resolution for reducing capital. A reduction of
capital may take the form of:
- Extinguishing or reducing liability of unpaid capital.
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- Cancellation of any paid up capital which is lost or unrepresented

by available assets.
- Paying of any paid up capital which is in excess of the wants of
the company.
• Application to Court for confirmation: Under Section 69 (1) of the Act, an

application must be made to the court for confirmation of the reduction. The
court must generally satisfy itself that the reduction is not unfairly prejudicial to
any class of members or creditors. In particular, it must satisfy itself that
creditors entitled to object have objected or consented to the alteration. In the
case of and objection, the courts must satisfy itself that the creditor’s claim has
been discharged, determined or secured. If satisfied that creditors’ interests
have been given the requisite attention, the court may confirm the reduction.
• Confirmation of the reduction: Under Section 70 (1) of the Act, if the court
is satisfied that all creditors have consented and/or their claims have been
discharged, determined or secure, it may make an order confirming the
reduction on such terms and conditions as it deems fit. The court may for any
special reason and for a specified duration order the company to add the words
“and reduced” to its name and for the duration of the order, the words and
reduced form part of the company’s name.
• Registration of the reduction: Under Section 71 (1) of the Act, upon

production of a certified copy of the court order and the mincite approving the
reduction of capital, the registrar of companies registers the same and publishes
the same in accordance with the direction of the court.
• Under Section 71 (2) of the Act, a reduction of capital take effect when
registered with the registrar.
iii) Under Section 63 (1) of the Companies Act, a company limited by shares may, if
authorised by its articles, increase its capital by new shares of any amount. The
increase must be authorised by an ordinary resolution of members in general
meeting.
Under Section 65 (1) of the Act, the registrar must be notified of the increase
within 30 days of the resolution whereupon he registers the same.
QUESTION THREE
a) Duties
▪ Satisfy himself that the meeting is duly constituted.
▪ Inform himself the business of the meeting.
▪ Satisfy himself that a quorum of members is present.
▪ Call the meeting to order.
▪ Frame issues for debate or discussion.
▪ Make decisions on points of order.
▪ Ensure that the sense of the meeting is kept and/ maintained by putting relevant
questions.
▪ Maintain order in the conduct of those present at the meeting.
▪ Ensure that minutes of the meeting are taken.
▪ Conduct voting and declare results.
National Dwellings Society v Sykes

Powers
▪ To adjourn the meeting at any time with consent of the members.

▪ To stop discussion of any matter after reasonable debate.

▪ To demand voting by poll.
▪ Close the meeting after its business is accomplished or in the event of disorder.
▪ Determine who to speak and for how long.
▪ To declare results of any voting.
▪ To cast a vote or a second vote in the event of a tie.
b)
▪ The chairman of the meeting.
▪ At least five members present in person or by proxy.
▪ A member or members representing not less than 1/10th of the issued shares,
present in person or by proxy.
▪ A member or members representing not less than 1/10th of the total voting rights
c)
▪ Resolutions which have been agreed to by all members of the company which if not
so agreed, would not be effective for their purpose unless passed as special
resolutions.
▪ Resolutions which agreed to by holders of a particular class of shares, which if not
so agreed, would not be effective for their purpose unless supported by a specified
majority or passed in a particular manner.
▪ Resolutions which effectively binds all the holders of a particular class of shares
whether or not agreed to by all.
▪ A resolution to wind up a company voluntarily on the ground of either lapse of time
or occurrence of an event contemplated by the articles.
▪ Special Resolution
QUESTION FOUR
a) Under Section 147(1) of the Act, every company must keep certain books in the
English language, namely:
▪ Assets and liabilities of the company.
▪ Sales and purchases of goods by the company.
▪ Receipts and expenses by the company.
Under Section 150(1) of the Act, if a company has subsidiaries, it must lay group
accounts before a general meeting of the holding company.
Under Section 151(1) of the Act, the group accounts laid before the general meeting
must comprise:
▪ A consolidated balance sheet of the company and the subsidiaries dealt with.
▪ A consolidated profit and loss account of the company and the subsidiaries.
b) These accounts must give a true and fair view of the state of affairs and profit or loss of
the company and its subsidiaries dealt with as a whole.
However, in certain circumstances the accounts of a subsidiary need not be

incorporated into the group accounts. If directors are of the opinion that:
• It would be impracticable.
• It would occasion delay or expense..
• It would be misleading
• It would be harmful to the business of the company or any subsidiary.
• It would be of no real value to members.
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• The business of the company and that of the subsidiary are so different that the
enterprise cannot be treated as one.
c)
▪ When a private company goes public in accordance with the provisions of Section32
(1) of the Companies Act, a copy of a statement in lieu, if any, must be delivered to
the registrar within 14 days of the resolution effecting the change.
▪ Under Section 50 (1) of the Act, if a public company having a share capital has not
issued a prospectus with reference to its formation or has issued one but has not
proceeded to allot any of the shares offered, no share should be allotted until at least
after 3 days, after delivery to the registrar for registration, a statement in lieu of
prospectus, signed by all persons who are named or proposed directors and
containing the particulars of Part 1 and II of the 4th Schedule.
▪ Under Section 111 (2) of the Act, if a public company has failed to raise the
minimum subscription, to facilitated the issue of a certificate of trading, these must
be delivered to the registrar for registration inter alia a statement in lieu of
prospectus.
QUESTION FIVE
a)
▪ Capacity to appoint receiver or manager in the event of default.
▪ It charges both existing and future assets of the company.
▪ Upon crystallization, the chargee becomes entitled to sell the security.
▪ Until crystallization value of security remain uncertain.
▪ Other interests e.g. landlord’s distress for rent have priority in the satisfaction of
claims.
▪ A fixed charge created subsequent to a floating charge has priority in the
satisfaction of claims
▪ A floating charge created within 6 months before the commencement of winding up
is deemed to be a fraudulent preference and is void.
▪ A floating charge created within 12 months before the commencement of winding
up is invalid unless it is proved, that the company was solvent immediately after its
creation.
b) The rule in Trevor v Whitworth prohibits the company from purchasing its shares.
This rules is now embodied in Section 56 (1) of the Companies Act. However, there
are several exceptions to this rule.
▪ If the lending of money is part of the ordinary business of the company and the
same is lent in the ordinary course of such business.
▪ If the company has in force a scheme to advance loans to trustees to enable them
purchase its fully paid up shares for the benefit of all employees including salaried
directors.
▪ If the company has in force a scheme to advance loans to all its bona fide
employees other than directors to enable them purchase its fully paid up shares by
way of beneficial ownership.
c)
▪ Default in payment of the principal or interest when due and payable provided the
chargee takes some step to enforce the security.
▪ Commencement of recovery proceedings against the company.
▪ Appointment of a receiver by a chargee or the court upon application.
▪ Commencement of winding up.

▪ Occurrence of an event contemplated by the debenture.

▪ If the company ceases to carry on business.
QUESTION SIX
a) In the words of Lord Denning in Littlewood Stores Ltd v Inland Revenue
Commissioner
“The courts can and often do draw aside the veil. They can and often do pull off the
mask. They look to see what really lies behind. The legislature has shown the way with
group accounts and the rest. And the courts should follow suit”. Courts have lifted the
veil in the following circumstances:
• Agency or trustee or nominee

In Re: F.G. Films Ltd
Firestone Tyre and Rubber Co. v Llewellin
Smith Stone and Knight v Burmingham Corporation
• Determination or ascertainment of residence

Deebers Consolidated Mines Ltd v Howe
• Ratification of corporate acts

In Re: Duomatic Ltd
Re: Express Engineering Co. Ltd
• Group Enterprises
Harold Holdsworth v Caddies
• Fraud or improper conduct

In Re: Buggle Press Ltd
Jones v Lipman and another
Gilford Motor Co. Ltd v Horne and another
• Determination of Character
Daimler Ltd v Continental Tyre and Rubber Co.
b)
▪ Every person who was a promoter of the company at the time of issue.
▪ Every person who was a director of the company at the time of issue.
▪ Every person who authorised himself to be named by the prospectus as director and
was so named.
▪ Every person who authorised the issue of the prospectus.
▪ Every person who had agreed to become a director of the company either
immediately or after an interval of time.
c)
• Ultra Vires literally means beyond the powers. It is a rule of capacity which
delimits the contractual capacity of a company.
• Under Section 5 (1) of the Act, a company’s memorandum must set out the objects
of the company. This delimits the doctrine of ultra vires.
• At common law, a company’s capacity is restricted to the objects in the

memorandum and those other transactions that are reasonably incidental to the
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pursuit or attainment of those objects. Other transactions are ultra vires the
company.
• The doctrine of ultra vires in relation to the company’s objects was formulated in
Ashbury Railway Carraige and Iron Co. v Riche and Attorney General v Great
Easter Railway Co.
• An ultra vires transaction is void since the company had no capacity to enter into it.
Such a transaction is generally unenforceable. It cannot rendered intra vires by
estoppel acquiescence, lapse of time, delay or ratification. It was sold held in the
Rolled Steel Products (Holdings) Ltd v British Steel Corporation and Others (1986).
• Once ultra vires always ultra vires. It was sold held in Brady v Brady (1987).
• In the words of Lord Parker of Waddington in Cotman v Broughman the doctrine

of ultra vires serves a double purpose.
▪ It protects subscribers who learn from it the purpose to which their investment
can be applied by the company.
▪ It protects persons who deal with the company’s who appreciate its contractual
capacity.
QUESTION SEVEN
i) In a compulsory winding up, the liquidator including a provisional liquidator exercises
the following powers with the sanction of the court or committee of inspection.
▪ To bring or defend actions and legal proceedings in the name and on behalf of the
company.
▪ To carry on the business of the company so far as may be necessary for beneficial
winding up.
▪ To appoint an advocate to assist him in the performance of his duties.
▪ To pay any classes of creditors in full.
▪ To make any compromise or arrangement with creditors.
▪ To compromise all calls and liabilities to calls, debts and other liabilities.
i) On his own responsibility and without obtaining any sanction the liquidator can:
▪ Sell the property of the company by public auction or private contract.
▪ Do all act as and execute, in the name and on behalf of the company all deeds and
documents and use the company’s seal therefore.
▪ Prove, rank and claim in the bankruptcy or insolvency or any contributory.
▪ Draw, accept, make and endorse any bill of exchange or promissory note in the
name and on behalf of the company.
▪ Raise money on the security of the company’s assets.
▪ Take out letters of administration to any deceased contributory and to do any other
act necessary for obtaining payment of money from a contributory or his estate.
▪ Appoint an agent to do any business which the liquidator cannot do himself.
▪ Do all such other things as are necessary for winding up the affairs of the company
and distribution its assets
QUESTION EIGHT
a)
▪ The conduct complained of most at the lowest involve some fraud.
▪ The fraudsters or wrong doers must be in control of the company in law or in fact.
▪ The company must be made one of the dependants in the action.
▪ The plaintiff shareholder must sue in a representative capacity on behalf of himself
and other members, other than the real defendants.

▪ The right to bring a derivative action is afforded to the individual member as a

matter of grace.
▪ The plaintiff remains dominus litis until judgement and can discontinue or settle
the action at his pleasure.
b) As a shareholder, Naliaka is protected by law in that at Common Law, though a

majority shareholder is free to vote selfishly, he must always do so in the best interest of
the company otherwise the decision is questionable in a court of law. As was the case
in Menier v Hooper Telegraph Wires.
In this case, since the proposed merger purports to benefit the majority shareholders at
the expense of the minority i.e. Naliaka, the decision to merge is challengeable in a
court of law.
My advise to Naliaka is therefore to sue the majority shareholders and the company for
disallowance of the merger. My advise is based on the decision in Menier v Hooper
Telegraph Wires where the majority shareholders purported to benefit at the expense of
the minority.
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DECEMBER 2001
QUESTION ONE
a) The various clauses of the memorandum of association are set forth in Sections 5 and 6
of the Companies Act and are:
• Name Clause: Contains the name of the company with limited as the last word of
the name where the company’s liability is limited by shares or guarantee.
• Registered Office Clause: This is the domicil clause which states that the
registered office of the company will be situated in Kenya.
• Objects Clause: Sets out the purposes for which the company is incorporated.
• Liability Clause: states that the liability of the company is limited by shares or
guarantee. If limited by guarantee it must state that each member has undertaken to
contribute to the assets of the company is wound up during the currency of his
membership or within one year of cessation of membership.
• Capital Clause: States the capital with which the company proposes to be
registered with and thereof.
• Association or declaration Clause: states the desire of the subscribers to be

formed into a body corporate.
• Particulars of the Subscribers:

This clause specifies:
▪ Name and postal address of every subscriber.
▪ Number of shares held which must be not less than one.
▪ Signature of the subscriber held which must be attested to by at least one
witness.
• Date: Under section 6 (1) of the Companies Act the memorandum must be dated.
• Various clauses of the memorandum are alterable as follows:
• The Name Clause is alterable by special resolution and written consent of the
registrar pursuant to Section 20 (1) of the Companies Act. The registrar must be
notified of the change within 14 days thereof.
• The Objects Clause is alterable by special resolution pursuant to Section 8 (1) of

the Act. The resolution is registerable within 30 days thereof.
• The Liability Clause is alterable pursuant to Section 18 (1) of the Act where an
unlimited company may be registered as limited.
• The Capital Clause is alterable pursuant to Section 63 (1), 65 (1) and 68 (1) of the
Companies Act. Whereas reduction of capital must be authorized by a special
resolution. Other forms of alteration e.g. increase of capital, consolidation of shares
or diminution of capital require an ordinary resolution.
• Particulars of Subscribers change when company membership changes by transfer

or transmission of shares.

Company law prescribe the extent to which a company may alter the various clauses of
the memorandum e.g.
i) A company may change its name to the extent that:

▪ It is not in the opinion of the registrar undesirable.
▪ It is not too similar to that of an existing company.
▪ It does not mislead the public.
▪ It does not suggest any patronage of the president government department or
local authority.
▪ It does not suggest a criminal or immoral intent or purpose.
▪ It contains the word limited as the last word where liability is limited by shares or
guarantee.
▪ It does not contain the term “center” or “co-operative” or any abbreviation
thereof.
▪ It does not contain the terms “bank”, “hotel” or “insurance” unless the company
carries on such business.
ii) A company may change its objects clause so far as may be necessary to enable it:
▪ Carry on its business more economically or more efficiently.
▪ Attain its purpose by new or improved means.
▪ Enlarge or change the local area of its operation.
▪ Sell or dispose of the whole or any part of its undertaking.
▪ Restrict or abandon any of the objects specified in the objects clause.
▪ Amalgamate with any other company or body of persons.
iii) A company may alter the capital clause of its memorandum to:
▪ Reduce its capital pursuant to section 68 (1) of the act.
▪ Increase its capital pursuant to sections 63 (1) and 65 of the act.
▪ Convert shares to stock.
▪ Reconvert any stock to shares.
▪ Consolidate shares.
▪ Sub-divide shares.
▪ Diminish capital.
QUESTION TWO
a) A company may issue redeemable preference shares pursuant to the following
conditions:
▪ The issue must be authorized by the articles.
▪ The company’s capital must be dividend into different classes of shares.
▪ The issue must be disclosed in the company’s prospectus or statement in lieu.
▪ The registrar must be notified of the issue.
A company may redeem any redeemable preference shares pursuant to the following
conditions:
▪ The redemption must be authorized by the articles.
▪ The shares must be fully paid.
▪ The share must be redeemed profit or proceeds of a special issue for that
purpose.
▪ Any premium payable must be provided out of the profit of the company or the
share premium account.
▪ If the shares are redeemed otherwise than out of the proceeds of a special issue,
the capital redemption reserve fund must be created.
▪ The registrar must be notified of the redemption within 30 days thereof.
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b) Under Section 56 (1) of the Companies Act, it is generally unlawful for a company
whether directly or indirectly and whether by means of a loan, guarantee or the
provision of security to give any financial for the subscription or purchase of its shares
or those of its holding subsidiary.
▪ This section exemplifies the rule in Trevor v Whitworth. However, a company may
lawfully finance the purchaser or acquisition of its shares in the following
circumstances:
▪ Where lending of money is part of the ordinary business of the company and the
same is lent in the ordinary course of business.
▪ Where the company enforces a scheme to advance loans to trustees to enable them
to purchase its fully paid shares for the benefit of its employees including salaried
directors.
▪ Where the company has in force a scheme to advance loans to all its bona fide
employees other than directors to enable them purchase its fully paid shares by way
of beneficial ownership.
Non-compliance with this section renders the company and every officer in default
liable to a fine not exceeding KShs.20, 000.
QUESTION THREE
Birds Limited has three directors: Peacock, Sparrow and Vulture. Explain the legal
implication of each of the following situations:
a)
▪ Appointment of directors is a power vested in the general meeting by the articles
and directors have no power to appoint other directors let alone their own sons.
▪ The appointment of a director is effected by the passage of an ordinary resolution in
a general meeting.
▪ Vultures wish to appoint his son a director is untenable since he has no power to do
so.
b)
▪ Since directors stand in a fiduciary position in relation to the company whose board
they form, they are bound to avoid conflict of interest.
▪ In this case sparrow is bound to disclose the nature of his interest at board meeting
failing which the contract is voidable at the option of the company. as was the case
in Aberdeen Railway Co. v Blaikie Brothers. additionally, it is a criminal offence for
which sparrow is liable to a fine not exceeding kshs.2,000.
c)
▪ Removal of a director from office is a power vested in the general meeting by the
companies act.
▪ Directors cannot remove one of their number from the office of director.
▪ In the case sparrow and vulture cannot remove peacock from directorship since
they have no power to do so.
d)
▪ Being a director of the company, peacock has the right to take part in the affairs of
the company.
▪ Vulture and sparrow cannot legally exclude peacock from participating in the affairs
of the company.
▪ Peacock has the right to sue the other directors for an order to restrain them from
excluding him from the affairs of the company.
▪ Additionally Peacock may petition for the winding up of the company on the
ground that it is just and equitable to do so. As was the case in Re: Lundie Brothers
Ltd.

e)
▪ Based on the advice of the auditor, the company is insolvent and should cease to
carry on business.
▪ The company may therefore be wound up compulsorily or voluntarily by creditors.
QUESTION FOUR
a) Ordinary Shares
▪ An ordinary share gives the holder the right to participate in the company’s surplus
profit and capital.
▪ There is no limit to the level of dividend payable; this is dependent of the level of
profit.
▪ Dividend is payable after preference dividend.
▪ In winding up the holder is entitled to capital.
▪ The shares counter unrestricted voting rights.
▪ Holders participate in surplus dividend.
Preference Shares
▪ Their essential characteristic is that they carry a prior right to dividend.
▪ Holders are entitled to a fixed rate of return.
▪ They carry a prior right to return of capital.
▪ The shares do not generally confer voting rights.
▪ Unless otherwise provided by the articles the shares are deemed to be cumulative i.e.
unpaid dividend is payable when a profit is made.
▪ If the shares are issued as participating they participate in surplus profit and capital.
b)
i)
▪ Income return and capital growth are both determined by the company’s
financial performance.
▪ If the company continuously or consistently under performs, capital is seriously
at risk.
▪ Since the income return is determined by dividend payment, the ordinary
shareholder is always at risk, if no dividend is declared.
▪ Preferential dividend is cumulative and has priority in the return of capital in
winding up.
ii)
▪ As a general rule shares are transferable in accordance with Section 75 of the
Companies Act subject to the restrictions prescribed by the articles.
▪ The articles association of private companies generally restrict the right of
members to transfer shares.
▪ Directors are empowered to refuse registration of a transfer.
▪ However, the power of directors to do so must be exercised properly and if
exercise improperly may precipitate a court action for validation of the transfer
and rectification of the register.
▪ The director must exercise the power bonafide in the interest of the company.
Such good faith is presumed unless the contrary is shown (in Re: Smith and
Fawcett)
▪ It must also be exercised within a reasonable time of receipt of the transfer (in
Re: Zinotty Properties Ltd)
▪ There must be a positive act of refusal on the part of the directors. If action is
ineffective. However there is no obligation to give reasons for the refusal
unless otherwise provided by the article (in Re: Bede SS Co. Ltd
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▪ As a general rule articles of private companies contain pre-emption clauses i.e.

that any shares to be transferred be offered to existing members in the first
instance (Curtis v Curtis & Co.)
▪ Under Section 77 of the Companies Act a transfer of shares can only be
effected by the delivery to the company of an executed proper instrument of
transfer.
QUESTION FIVE
a) Types of Registers
• Register of Members
Under Section 112 (1) of the Act every company must keep a register of members.
Its contents include:
▪ Name of the shareholders
▪ Postal addresses.
▪ Number of shares or stocks held.
▪ Date of entry of the name n the register.
The register of members is accessible to:

▪ Members of the company without charge.
▪ Others subject to payment of the prescribed charge.
• Register of Directors and Secretaries

Under Section 201 (1) of the Act every company, must keep a register of its
directors and secretaries at its registered office.
a) The register contains:
▪ Christian and surname of every director.
▪ His postal address.
▪ His nationality.
▪ Business occupation.
▪ Other directorships.
▪ In the case of a company its name, registered office and postal address.
The register is accessible to:

▪ Others on payment of the prescribed charge.
▪ Directors and secretaries of the company.
• Register of Charges
Under Section 105 (1) of the Act every limited company must keep a register of
charges at its registered office.
The register contains:

▪ Particulars of all fixed and floating charges created by the company.
▪ Description of the property charged.
▪ Amount of charge.
▪ Names of the persons entitled thereto.

▪ Creditors of the company without charge.
▪ Others on payment of the prescribed charge.

• Register of debenture-holders
Under Section 88 (1) of the Act, if a company issues a series of debentures, it must
keep a register of holders of such debentures at its registered office.
• Particulars of the debentures.
• Names of the persons entitled thereto
• Description of the security.

• Holder of any debenture without charge.
• Holder of shares in the company without charge.
• Others on payment of the prescribed charge.
• Register of directors Shareholding, etc

Under Section 196 (1) of the Act every company must keep a register showing as
respects each director of the company, the number, description and amount of
shares or debentures of the company or any other body corporate being the
company’s subsidiary or holding company.

• Number, description and amount of shares or debentures held.
• Nature and extent of the director’s interest in the shares or debentures.

• Any member of the company.
• Holders of debentures of the company.
• Any person acting on behalf of the registrar.
b) A person may cease to be a member of a company on the following circumstances:
• Transfer of shares
• Death
• Bankruptcy
• Forfeiture of shares
• Sale by the company in exercise of lieu.
• Valid surrender of shares
• Rescission of contract.
• Repudiation by an infant.
• Winding up or liquidation.
• Redemption of redeemable preference shares.
• Disclaimer by trustee in bankruptcy.
QUESTION SIX
a) i)
Under Section 214 of the Companies Act “contributory” means “every person liable to
contribute to the assets of a company in the event of its being wound up.”
• The liability of a contributory creates a debt from him to the company.
• These are persons who owe the company in respect of shares held.
• A contributory may be a present or past member of the company.
ii) Under Section 323 (1) (a) of the Act, if in the course of winding up a company, it
appears that any business of the company has been carried on,
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• With intent to defraud its creditors or creditors of any other person or

• For any fraudulent purpose.
the court may, on application of the official receiver or liquidator or creditor or

contributory of the company, declare that any person who was knowingly party to
the carrying on of the company’s business as such personally responsible without
any limitation of liability, for any debts or other liabilities of the company as the
curt may direct.
• All persons who are knowingly parties to the carrying on of the company’s
business are liable to an imprisonment for a term not exceeding 2 years or a
fine not exceeding Kshs.10,000 or both.
• If the person(s) is a creditor to the company, the court may order that he
ranks behind all other creditors in the satisfaction of claims.
• If the person(s) is a creditor to the company, his claim against the company is
offset against the amount due from him to the liquidator.
b) Under Section 222 of the Companies Act, on hearing a winding up petition the court
may:
• Dismiss it.
• Adjourn the hearing conditionally or unconditionally.
• Make an interim order.
• Make such other or further order as it may deem fit.
However, the court cannot refuse to make a winding up order on the ground only that
the assets of the company have been mortgaged to an amount equal to or in excess of
those assets or that the company has no assets.
QUESTION SEVEN
a) Company meetings make decisions by passing resolutions. Kenyan company law
recognizes three types of resolutions namely:
• Ordinary resolution
• Resolution requiring special notice.
• Special resolution.
• Ordinary Resolution: The Companies Act does not define it.

▪ This is a resolution that requires simple majority to pass.
▪ It need not be set out in the notice of the meeting and is generally not
registerable. Business of the company requiring an ordinary resolution include:
• Adoption of accounts
• Declaration of dividend
• Appointment of auditors
• Election of directors
• Increase of capital
• Special Resolution
▪ This is a resolution created by Section 141 of the Companies Act.

▪ It must be supported by a qualified majority of not less than 75% of all
members present and voting in person and proxy.
▪ Must be set out in the notice of the meeting.
▪ Notice of intention to pass it as a special resolution must be given.
▪ Generally passed by meetings convened by a 21-day notice.
▪ A copy thereof must be delivered to the registrar for registration within 30 days
thereof.

Business of the company that require such a resolution include:

▪ Alteration of the articles, Sec 13 (1)
▪ Change of name, Sec 20 (1)
▪ Alteration of the objects clause, Sec 8 (1)
▪ Reduction of capital, sec 68 (1)
▪ Creation of reserve capital, sec 62
• Resolution requiring special notice

▪ This is a resolution created by Section 142 of the Companies Act.
▪ Under Section 142 of the Act, a 28 day notice of intention to move, it must be
given to the company and the company must give a similar notice to its
members failing which a 21 day notice suffices provided it is published in some
newspaper circulating in Kenya or as prescribed by the articles.
▪ It must be supported by a simple majority of members.
Business of the company requiring such a resolution include:

▪ Removal of a director or auditor from office.
▪ Reappointment of a director who has attained the age of 70.
b)
▪ This problem is based on abuse of power by directors.
▪ By issuing shares to themselves and nominees, the directors are exercising the
power to issue shares for a purpose other than that for which the power is
conferred. As was the case in Piercy v Mills and Punt v Symons.
▪ The directors are therefore guilty of breach of duty to the company.
▪ Since directors owe their duty to the company as opposed to individual shareholders
(Percival V. Wright) Mwananchi has no action against them.
▪ My advise to him is to instigate the convention of an extra ordinary general meeting
of the company to resolve the matter. The meeting may resolve that the company
sue the directors for breach of duty or ratify the transaction, whereupon it becomes
a valid act of the company. As was the case in Bamford and Another v Bamford
and Others.
QUESTION EIGHT
a)
▪ The profits which may be distributed as dividend are accumulated realized profits so
far as not previously utilized by distribution or capitalization, less accumulated
realized losses so far as not previously written off in a reduction or re-organization.
▪ Profits are generally ascertained by reference to audited accounts prepared on a
proper basis.
▪ If a fixed asset has a limited useful economic life, provision must be made for
depreciation calculated to write off the value of that asset over the period of its
useful economic life.
▪ In so far as depreciation relates to the historical cost of the asset it must be treated
as a realized loss and debited against profit, in determining the amount of
distributable profit remaining. But if the asset has been revalued, any increase
depreciation provision related to the increase inv value of the asset may be treated as
profit.
▪ If on a general revaluation of all fixed assets it appears that there is a diminution in
value, any provision related to it need not be treated as realized loss.
▪ If a company shows development expenditure as an asset in its accounts it must
usually be treated as realized loss.
▪ A public company may only make a distribution of its net assets are at the time, not
less that the aggregate of its called up of its called up share capital and
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undistributable reserves the dividend which it may pay is limited to such amount as
will leave its net assets at not less than that aggregate amount.
▪ If fixed assets taken as a whole show a value below their aggregate book value there
is an unrealised loss and the company must retain out of profit otherwise available
for distribution an amount sufficient to make good the deficiency.
▪ If the value of the assets exceeds book value, the surplus since it is unrealised
cannot be added to the total of realized profit and it is not distributable as dividend.
▪ It should be taken as revaluation reserve.
▪ It is a well-established principle that in determining the net worth of company all
assets and not just selected items must be considered and the figures aggregated.
b)
▪ Since authorized or registered capital of Happy Company Ltd. is fully issued the
company must increase the same.
▪ The directors must satisfy themselves that the company’s articles authorize such
increase pursuant to Section 65 (1 ) of the Act.
▪ The increase of capital must be authorized by an ordinary resolution of members in
general meeting.
▪ Directors must therefore convene a general meeting to secure the resolution.
days of its passing so as to register the increase.
▪ For the purpose of allocating or issuing shares directors must satisfy themselves
they have the power to do so.
▪ Directors are generally authorized to allot shares, otherwise the same must be
authorized by an ordinary resolution of members in general meeting.
▪ The allotment in this case must be authorized by an ordinary resolution of members
in general meeting and copy thereof must be delivered to the registrar for
registration.
▪ In order to disapply pre-emption rights, so that some shares can be issued to
members of the public and not to existing members the same, must be authorized
by a special resolution of members in general meeting.
▪ In order to issue shares to Mr. Karan in return for the plot, the directors require an
independent valuation of the plot since consideration is non-cash.
▪ The report must be made or procured by a person qualified for appointment as
auditor of the company and must be submitted to the company within 6 months
before allotment.

JUNE 2002
QUESTION ONE
a)
▪ Corporation sole: This is legally constituted office distinct from the holder and can
only be held by one person at a time after which he is succeeded by another. The
office is a body corporate with perpetual succession, capacity to contract, sue or be
sued and own property e.g. Office of the Permanent Secretary to the Treasury,
Office of the Public Trustee.
▪ Corporation aggregate: This is a legal entity formed by two or more persons for a
lawful purpose and whose membership consists of at least two persons. It has
independent legal existence, capacity to contract, sue or be sued and perpetual
succession e.g. private and public companies.
b)
▪ Limited Company: This is a registered company whose liability is limited by
shares or guarantee. It means that member’s liability to contribute to the assets of
the company is limited either:
i) To the amount outstanding on their shares, if any, or
ii) To the amount they undertook to contribute if the company was wound up
during the currency of their membership or within one year of cessation of
membership beyond which they are not liable.
▪ Unlimited Company: This is a registered company whose liability is unlimited.

Under section 4 (2) (c) of the Companies Act members are liable for the debts of
the company without any limitation. Creditors may sue members for the debts of
the company if the company is unable to pay. Private assets of members may be
attached by creditors to the company.
Under the provisions of the Companies Act a company registered as unlimited may
be re-registered as limited upon application. Such registration does not affect the
rights or liabilities of the company in respect of any debt or obligation incurred or
any contract entered into by, to with or on behalf of the company before the
registration.
▪ Upon registration the registrar shall close the former registration of the company
and may dispense with the delivery to him of copies of any document copies of
which he was furnished on the occasion of the original registration of the
company.
▪ However, the registration shall take place in the same manner and shall have
effect as if it were the first registration of the company under the provisions of
the Act.
c) Documents ordinarily kept at a company’s registered office include:

• Copies of the memorandum and articles of association of the company.
• Register of members.
• Copies of charges
• Register of charges.
• Minute book of general meetings.
• Register of directors and secretaries.
• Register of directors interests in the company.
• Register of debenture holders.
LAW II
QUESTION TWO
Under Section 13 (1) of the Companies Act a registered company has statutory power to
alter add to its articles. Under Sec 13 (2) such alteration or addition is as valid as if originally
contained in the articles and is alterable. It was so held in Walker v London Tramways Co.
Ltd
i) However, this power is subject to both statutory and common law restrictions.
• Statutory Restrictions
• Under Section 13 (1) of the Act an alteration of the articles must be authorized by
a special resolution of members in general meeting.
• The alteration must not be inconsistent with any written law including the
Companies Act.
• It must not exceed the conditions contained in the Memorandum of Association
of the company.
• It must not increase the liability of members ore require them to take up more
shares without written consent.
• It must not amend the provisions of Section 30 of the Companies Act if the
company is to remain private.
• It must not be inconsistent with a court order made pursuant to Section 211 of
the Companies Act for purposes of minority protection in cases of oppression.
• It must not be contrary to the rights of dissentient shareholders affected by a
variation of class rights pursuant to Section 74(1) of the Act, to apply to the court
for the variation to be cancelled.
• Common law or judicial restriction

• The alteration must be bonafide for the benefit of the company as a whole i.e.
regard must be had to existing and future shareholders of the company. As
was the case in Sidebottom v Kershaw Leese & Co.. where the articles was
altered to enable the company get rid of competitors from among its
members. However, in Brown v British Abrassive Wheel where the articles
were altered to enable the majority acquire the shares of the minority it was
held that the alteration was not bonafide.
ii) This problem is based on the restrictions subject to which a company must alter its
articles. Under the provisions the Companies Act a company has statutory power to
alter its articles and it is on this basis that Karanja and Mutisya propose to alter the
articles.
• Firstly, the alteration to enable holders of 90% of the company shares to

compulsorily acquire the shares of the minority shareholder is not bona fide and
cannot withstand judicial scrutiny. It is therefore invalid. This position is consistent
with the decision in Brown v British Abrassive Wheel Co. Ltd whose facts were
substantially similar.
• Secondly the alteration to require competing shareholders to transfer their shares to
nominees of the directors is bona fide and valid since it is beneficial to get the
company get rid of competitors from among its members. This position is
consistent with the decision in Sidebottom v Kershaw Leese & Co whose facts were
substantially similar.

QUESTION THREE
a) (i)
• A company comes into existence on the date of incorporation. Before such
date it does not exist and hence has no capacity to contract and cannot have
agents. It was so held in Kelner v Baxter (1866).
• Whereas a company may benefit from contracts entered into before its
incorporation it cannot, as a general rule be held liable on them. Such a
contract cannot be ratified. It was so held in Natal Land Co. v Pauline Colliery
Syndicate as well as in Price v Kelsal, nor can directors of the company purport
to adopt or affirm the contract after the company’s incorporation. It was so
held in North Sydney Investments and another v Higgins and another. Such
contracts can only be entered by or against the company if the company after
incorporation enters into a new contract similar to the previous agreement. It
was so held in Howard v Patent Ivory Co. Ltd
• In this case “Micromine Limited” has no enforceable rights on the contracts
and cannot sue or be sued on them hence it is free from liability.
(ii)
The contract may expressly provide that any amount or sum spent by Shem s
recoverable from the company when incorporated. Problem however arises since
the company is not privy to the contract and Shem cannot contract as the agent of
the company. The articles of the company generally provide for the recovery of
such expenses e.g. Article 80 of Table A. However such an Article is
unenforceable by virtue of section 22 (1) of the Companies Act. Arguably
therefore no provision in the contract can adequately protect Shem.
b)
▪ Ultra Vires literally means beyond the powers. This is a rule of capacity of
registered companies now embodied in the provisions of the Companies Act Cap
486. The provisions are emphatic that the memorandum of association of the
company must state its objects. The objects clause of a company determines what is
intra and ultra vires. It therefore delimits the doctrine of ultra vires. The doctrine
of ultra vires was first incorporated into the statute books Iron Co. vs Riche where
the Court of Appeal was emphatic that a company could only engage in transactions
set forth in its objects clause other transactions being ultra vires the company.
▪ The capacity of registered companies was expanded by the court Attorney General
vs Great Eastern Railway Co (1880) where the court held that in addition to the
express objects a company had capacity to engage in transactions reasonably
incidental to or consequential upon these objects. These are transactions reasonably
incidental to the attainment or pursuit of the express objects.
▪ At Common Law a company’s capacity is restricted to, transactions et forth in the
objects and those that are reasonably incidental to the attainment or pursuit of such
objects. The doctrine of ultra vires was developed to serve a double purpose.
Cotman vs Brougham (1918)
• To protect investors who learn from it where their money will be invested.
• To protect third parties who deal with the company by appreciating the
company’s capacity.
The doctrine of ultra vires has been modified so much that companies enjoy almost
unrestricted capacity. Companies can engage in virtually any transaction.
Judicial Contribution
Courts ultra vires have been ready and willing to imply powers e.g. a transaction
reasonably incidental to the attainment or pursuit of the express objects is intra vires
the company.
LAW II
Legislative intervention
Before 1890, a registered company could not alter it’s objects clause. In 1890, the
English parliament amended the Companies Act to confer upon companies’ power
to alter their objects clause. The power is now contained in Section 8 (1) of the
Companies Act and the company may within the confines of Section 8 (1) enhance
it’s capacity.
Drafting techniques
These are techniques that have rendered the doctrine of ultra vires virtually useless
e.g.:
• Inflated objects clauses, which entails the listing down of every conceivable
object in the clause.
• Use of independent object clauses Cotman V. Brougham(1918)
• Use of subjective as was the case in Bell Houses Limited v City Wall Properties
Ltd(1966)
QUESTION FOUR
a)
▪ The issued capital of the company whether paid up or not must be maintained.
▪ It is in principal regarded as a permanent fund or a fund of last resort available to all
creditors in the event of default by the company.
▪ The capital of a registered company must remain certain. It acts as a guarantee that
creditors will be paid. Creditors are entitled to insist that no part of the company’s
capital is wasted or returned to members.
▪ Creditors and other persons who deal with companies are aware that the companies
have an amount of capital and are entitled that to insist no part thereof is returned
to members without due compliance with law.
▪ It is therefore a fundamental principle that of company law that capital be
maintained.
▪ Company Law has evolved both statutory provisions and prepositions of common
law to facilitate the raising and maintenance of capital. One of these provisions is
that the company should only reduce capital in accordance with the provisions of
the Companies Act. These provisions of the companies act prescribe the
circumstances and conditions under which a company may reduce capital.
i) Authority of the Articles

Under Section 68 (1) of the Companies Act a company limited by shares or
guarantee and having a share capital may reduce its capital of authorized by its
articles.
ii) Special Resolutions

Under Section 68(1) of the Act reduction of capital of capital by a company must
be authorized by a special, resolution of members in general meeting. This
resolution is referred to as “resolution for reducing share capital”. The reduction
of capital may take the form of:
Reducing or extinguishing liability on any unpaid up capital.
Cancellation of any paid up capital, which is lost or unrepresented by available

assets.
Paying off any paid up capital, which is in excess of the wants of the company.
iii) Application to court for confirmation

Under Section 69(1) of the Act after the special resolution is passed an application
must be made to the High Court for confirmation of the reduction. The essence

of the application is for the court to satisfy itself that the reduction does not
unfairly prejudice the position of any class of members or creditors. In particular
the court must settle a list of all creditors and must satisfy itself that any creditor
entitled to object to the reduction has either objected or consented to the same.
In the case of an objection the court must be satisfied that the creditors claim or
debt has been discharged, determined or secured. If the court is so satisfied it may
confirm the reduction.
iv) Confirmation of the reduction

Under Section 71 (1) of the Act, if the court is satisfied that creditors entitled to
object to have consented or in the case of an objection, the creditors claim or debt
has been discharged, determined or secured it may make an order confirming the
reduction on such terms and conditions as it deems fit. The court may for any
special reason if it deems fit order the company to add the words “and reduced” to
it’s name for a specified duration. Such words form part of the company’s name
for the duration of the order.
v) Registration of the reduction

Under Section 71 (1) of the Act upon production of a certified court order
approving the reduction and the minute of the same the registrar registers the
reduction and issues a certificate of registration, which is conclusive evidence that
the requirements of the act relating to reduction of capital have been complied
with. A reduction of capital by a company take effect when registered and notice
of registration must be published in accordance with the courts direction
Underwriting Commission
This is the amount or sum paid by the company to a person who agrees to underwrite
the company’s shares i.e. take up all the shares or a specified number of the shares not
taken up by the public. It’s payable whether the person (Underwriter) takes up the
shares or not. It must be disclosed in the company’s prospectus.
Brokerage
This is an amount paid by the company to a person or persons who agrees to place the
company’s shares i.e. exhibits the company’s prospectus in their premises or send
copies to their clients, but without incurring any liability on the shares.
It is an amount only payable to brokers.
It must be disclosed in the company’s prospectus.
QUESTION FIVE
a) Under the provisions of the Companies Act every company with more than fifty
members must have an index of the names of the members unless the register is in the
form of an index.
▪ It may be in the form of a card.
▪ The index must contain a sufficient indication to facilitate access to a members
account.
▪ Changes on the register must be incorporated in the indeed within 14 days.
▪ The index must be kept at the same place as the register of members.
b)
i) Bank
▪ In law if a third party advances money on the security of shares and the third
party gives notice of his security to the company before the company’s lien
arises the third party will have priority.
LAW II
In Bradford Banking Co. v Briggs and Co. (1886) a shareholder created an

equitable mortgage of his shares by depositing the share certificate with a blank
as security for an overdraft and the bank gave notice of the notice of the
deposit to the company. The shareholder subsequently became indebted to the
company whereupon a lien arose in favour of the company t was held that the
bank had priority as the company’s lien arose after notice of the equitable
mortgage.
▪ The bank is entitled to enforce the lien on the shares since its lien has priority
over that of the company. This position is consistent with the holding in
Bradford Banking Co. v Briggs and Co. (1886)
ii) XYZ Supermarket Ltd

XYZ Supermarket Ltd cannot enforce its lien since the banks lien has priority.
c) Bob and Babs have similar rights in relation to the shares e.g. dividend payable thereon.
They are jointly and severally liable to make good any calls on the shares. In the case of
voting in general meetings the members decide who among them is to vote, failing
which the member whose name appears on the register first votes.
QUESTION SIX
a)
i)
▪ Voluntary change of name, Sec.21
▪ Alteration of the objects clause, sec.8(1)
▪ Alteration of the articles, sec.13(1)
▪ Creation of reserve capital, sec.62
▪ Conversion of private to public company, sec.32(1)
▪ Compulsory winding up sec.219(a)
▪ Reduction of capital, sec.68 (1)
▪ Payment of interest out of capital, sec.67 (1)
b)
▪ At common law a shareholder is entitled to attend a general meeting of a company
in person or by proxy.
▪ Under section 136 (1) of the Companies Act a member of a company entitled to
attend and vote at a meeting of the company is entitled to appoint another person
whether a member or not as his proxy to attend and vote instead of him.
▪ The appointment is effected by completion and submission to the company of the
proxy form.
i)
▪ To attend the general meeting instead of the member.
▪ To join other members and/or proxies to demand voting by poll.
▪ To vote by poll.
▪ To speak at the meeting in the case of a private company meeting.
Under Section 221 of the Companies Act a petition for the compulsory winding up of a
company may be presented to the court by any of the following person(s)
▪ The company
▪ Members or shareholders other than contributories.
▪ Creditors of the company.
▪ Contributories.

▪ Attorney General
▪ Official receiver
QUESTION SEVEN
a)
Appointment
▪ The names of the first directors are determined in writing by the subscribers or a
majority of them failing which the signatories to the memorandum are the first
directors.
▪ Directors are elected by members in general meeting by an ordinary resolution.
▪ to qualify for appointment as a director one must:
- Be between the age of 21-70
- Be of sound mind.
- Not be an undischarged bankrupt or insolvent.
- Not have been disqualified by the court.
▪ A person appointed director must sign and deliver to the registrar for registration a
written memorandum.
▪ If the articles require a director to hold any share qualification a person must take
them up within two months of appointment or such shorter time as the articles
may prescribe.
▪ Under section 184 (1) in the case of a public company meeting a motion for the
appointment of two or more persons as directors by a single resolution must not
be made unless a resolution to that effect has been agreed to by the meeting
without any vote against it.
Vacation
The office of director must be vacated if the director:
▪ Is disqualified by the court pursuant to section 189 of the Act.
▪ Fails to acquire share qualification.
▪ Is declared bankrupt or makes an arrangement or composition with his creditors
generally.
▪ Becomes of unsound mind.
▪ Resigns his office by notice in writing to the company.
▪ Attains the age of 70 unless re-appointed.
▪ Is removed by an ordinary resolution of members in general meeting absents
himself from directors meeting held in over six months without permission of the
other directors.
▪ Dies
▪ If the company goes into liquidation.
b)
▪ The transaction to advance Shs.500,000 to Austin to cover his expenses on
worldwide promotional tour on behalf of the company required prior approval by
members in general meeting pursuant to the proviso to Sec.191(1) of the Act which
permits a company to provide funds to a director to meet expenditure incurred or
to be incurred by him for the purposes of the company or for the purpose of
enabling him properly to perform his duties as an office of the company.
▪ Under Sec.191 (3) of the Act if the requisite approval is not given by the company in
general meeting the directors authorizing the making of the loan are jointly and
severally liable to indemnify the company against any loss arising there from.
LAW II
QUESTION EIGHT
a) Under Section 97 (1) of the Companies Act, it is the duty of the company to deliver to
registrar for registration the particulars of every charge created by the company. These
particulars include:
▪ Date and description of the instrument creating or evidencing the charge;

▪ Amount secured by the mortgage of charge;
▪ A short description of the property mortgaged or charged;
▪ Names, postal addresses and descriptions of the mortgages or persons entitled to
the charge;
▪ Names of the chargor or mortgagor;
▪ Amount or rate % of the commission allowance or discount if any paid or made
either directly or indirectly by the company to any person in consideration of his
subscribing or agreeing to subscribe whether absolutely or conditionally or
procuring or agreeing to procure subscriptions whether absolutely or conditionally.
b)
▪ This problem is based on the effect of registration of a charge pursuant to the
provisions of the Companies Act. Under Section 99 of the Companies Act upon
registration of particulars of a charge the registrar issues a certificate of
registration, which is conclusive evidence that the provisions of the Act have been
complied with. This section has been interpreted to mean that the certificate of
registration is conclusive evidence that the provisions of the Act relating to the
preparation and registration of charges have been complied with (in re
Mechanizations Ltd).
▪ In this case since the memorandum of charge was duly executed by the company
and registered thereafter and a certificate of registration issued by the registrar, the
charge is valid in all respects and is therefore enforceable since its defects were
cured by its registration.
▪ This position is consistent with the decision In re C.L. Nye Ltd where a bank lent
money to C.L. Nye Ltd and obtained a charge on the company’s land as security.
The charge contract was undated and the bank solicitor forgot to register it with
the Registrar of Companies. Several months later the bank sought to realize its
security. The solicitor inserted that day’s date on the charge contract delivered it
to the registrar for registration and obtained a certificate. The company’s
liquidator argued that he could ignore the charge because it was not registered
within the requisite time. However, it was held that the certificate was conclusive
evidence that the provisions of the Act relating to registration had been complied
with i.e. it was registered within the requisite time hence the charge was valid.
This position was also upheld in National Provincial and Union Bank of England
v Charnley.

NOVEMBER 2002
QUESTION ONE
(a)
• It is a trite principal of law that when a company is incorporated or registered it becomes
a legal person distinct and separate from its members.
• It becomes a body corporate.
• It acquires an independent legal existence with rights and subject to obligations.
• This is the rule in Salomon V. Salomon and Co. Ltd (1897) where Lord MacNaghlen
was emphatic that “…..The company is at law a different person altogether from the
subscribers to the memorandum.”
• The principle of legal or corporate personality of a company is now contained in Sec
16(2) of the Companies Act.
• That the company is a legal entity separate from its members is illustrated by the
following arguments.
- Limited Liability: Liability of members for its debts and other liabilities is limited
by shares or guarantee. This principle is contained in Section 4 (2) (a) and (b) of the
Companies Act.
- Sue or be sued: a company has capacity to enforce its rights and may be sued on its
obligations. It was so held in Foss V. Harbottle (1843).
- Perpetual Succession: the life of a company lies in the intendment of law. This is
because it is a creation of law.
- Owning of Property: a registered company has capacity to own property (Sec 16
(2) “power to hold land.” The property of a company is vested in it. It was so held
in Macaura V. Northern Assuarance Co. (1925)
- Capacity to contract: a registered company has capacity to enter into contractual
relationships. It has capacity to hire and fire. It was so held in Lee V. Lee Air
Farming Co. Ltd. (1961).
- Common Sea: Under Sec 16 (2) of the Companies Act, a registered company has a
common seal to authenticate its transactions.
(b) These are qualifications or modifications to the rule in Salomon’s case often referred to
as “piercing the corporate shell.” The veil of incorporation may be lifted by the courts
or at common law and by the legislature.
• Statutory or Parliamentary exceptions

▪ Reduction of number of members
▪ Non-publication or misdescription of the company’s name
▪ Group accounts
▪ Investigation of company affairs
▪ Investigation of company membership
▪ Take over bids
▪ Fraudulent trading
• Judicial or Common Law exceptions

▪ Agency or nominee or trustee
▪ Group enterprises
▪ Ratification of corporate acts
▪ Determination of residence
▪ Determination of character
▪ Fraud or improper conduct.
(c)
• This problem is based on lifting of the veil of incorporation by courts of law to prevent
a person from using a company to evade an existing legal obligation.
LAW II
• It is evident that Angela entered into a contract in restraint of trade not to solicit the
customers of Eclipse Ltd within 3 years of leaving employment.
• By forming a company which is soliciting the customers Angela is in breach of her
contractual obligations and Eclipse Ltd has an action against her and Angellina Co. Ltd.
• My advise to Eclipse Ltd is to institute civil proceedings against Angela and Angellina
Co. Ltd for an injuction to restrain them from soliciting its customers. The fact that
Angellina Co. Ltd was not privy to the original contract not withstanding since Angela is
using the company to evade an existing legal obligation.
• My advise is based on the decision in Gilford Motor Co. Ltd V. Horne and Another
whose facts were substantially similar to those of the instant case.
QUESTION TWO
(a) (i)
• The rule in Royal British Bank V. Turquand often referred to as the “indoor
management rule” is to the effect that a 3rd party dealing with a company in good faith is
entitled to assume that it is acting within its constitutional powers.
• He is not bound to satisfy himself that all rules of internal management have been
complied with.
• He is entitled to assume that what appears regular is indeed regular (Mahony V. East
Holy Food Mining Co.)
• He is entitled to assume that officers of the company who purport to exercise certain
powers ordinarily exercised by those sort of officers, are the officers concerned.
(Freemans case).
• This rule protects 3rd parties against the company in cases of internal irregularities.
• It is based on the principles of equity and is intended to give business efficacy.
(ii)
• Public documents of the company.
• Knowledge of the irregularity or lack of authority.
• Suspicion i.e. 3rd part is put on inquiry.
• Excess of power by the officer dealt with
• Insiders e.g. directors in certain circumstances.
• Forged documents.
(b)
• This problem is based on the rule in Turquands Case.
• The articles of Shirika Company Limited are emphatic that directors have the power to
determine who should sign contracts and other documents of the company.
• Evidence shows that Chapu Chapu one of the directors purporting to be the chairman
executed a quaranted to Chafua and Shirika Ltd has after discovery of the state of
affairs refused to honour the quaratnee. Question is whether Shirika Company Limited
is liable.
• Shirika Company Ltd is liable for the following reasons:
- Chapu Chapu, a director represented himself as Chairman and purported to do what
a chairman ordinarily does.
- The company is estopped from denying the representation.
- Chafua was not obliged to satisfy himself that Chapu Chapu was the elected
chairman.
- This position is consistent with the decision in Freeman and Lockyer V. Backhurst
Park Properties Ltd. whose facts were substantially similar.

QUESTION THREE
(a)
• “Capital of Limited Company” means share capital.
• In simple legal parlance, capital means the various types of categories of capital which a
company may have for example.
- Registered or authorized capital.
- Allotted or subscribed capital.
- Called up capital.
- Paid up capital.
- Uncalled up capital
- Unpaid up capital
- Reserve capital.
(b)
Shares Stock
• These are units of capital. • This is a set of shares put together in a
bundle i.e. lumpsum holding.
• Are issued directly by the company.
• Cannot be issued directly.
• They need not be fully paid.
• The shares in question must be fully
• Are always numbered paid.
• Fractions thereof are not transferable. • Are not numbered.
• Fractions thereof are transferable.
(c)
• A company issues shares at a discount if the cash consideration which is receives for
them is less than the nominal amount of the issued shares. Issue of shares at a discount
is a principal prohibited. However, under Section 59 of the Companies Act shares may
be issued at a discount subject to the following restrictions:
- The shares must belong to a class already issued by the company.
- The issue must be authorized by a resolution of the general meeting.
- The resolution of the general meeting must specify the maximum rate of discount at
which the shares are to be issued.
- The issue must be sanctioned by the court.
- The shares must be issued within one month of sanction by the court of such other
time as the court may allow.
- At least one year must have elapsed from the date the company was entitled to
commence business.
- Particulars of the discount must be disclosed in the company prospectus.
QUESTION FOUR
(a)
• Proprietary rights of members fall two categories namely primary and secondary.
• Primary rights include:
- Right to vote in company’s general meetings.
- Right to capital in the event of winding up.
- Right to dividend if the same has been declared and become payable.
• Secondary rights include

- Right to received notices of all general meetings of the company.
LAW II
- Right to receive copies of the memorandum and articles.

- Right to receive copies of the balance sheet laid before the company in general
meeting.
- Right to inspect the various registers maintained by the company.
- Right to obtain copies of registers.
- Right to petition for the alternative remedy.
- Right to petition of the winding up of the company.
(b)
• This problem is based on the membership and the liability of members in the event of
winding up.
• Ritas application for 2000 shares in Bidii Yako Co. Ltd was not accepted within a
reasonable time and hence lapsed.
• However, subsequently, Bidii Yako Co. Ltd transferred shares to her and inserted her
name in the register of members a fact rita was aware of but failed to rectify the
situation.
• Rita is for all intents and purposes a member of Bidii Yako Co. Ltd an is therefore liable
to pay the amount outstanding on her shares.
• Rita is a member by estoppel and cannot deny her apparent membership.
• She is liable as a contributory.
• My advise to her is to pay up the amount due on the 2000 shares.
• My advise is based on the fact that she is a member of the company and the provisions
of Companies Act on the liability of contributories.
QUESTION FIVE
(a)
• Failure to pay the principal or interest when due and payable provided the charges takes
some step to realize the security.
• Commencement of recovery proceedings against the company.
• Commencement of winding up the company.
• Cessation to carry on business by the company.
• Occurrence of an event which under the terms of the debenture causes crystallization.
• It is a company has a number of floating charge, the crystallization of one causes the
crystallization of the others.
(b)
• When a floating charge crystallizes it fastens on the assets within its reach and grasp
(Illingworth V. Holdsworth) and becomes a fixed charge.
• It entitles the chargee to sell the security, if any.
(c)
• The value of security remain uncertain since the company continues to carry on business
in the ordinary manner.
• A fixed charge created subsequent to the floating charge has priority in the satisfaction
of claims.
• Other interests for example landlords distress for rent has priority in the satisfaction of
claims.
• Other interests for example landlords distress for rent has priority in the satisfaction of
claims.
• A floating charge created within 6 months before the commencement of winding up is
deemed to be a fraudulent preference and is void.
• A floating charge created within 12 months before the commencement of winding up is
invalid unless it is proved that the company was solvent immediately after its creation.

QUESTION SIX
(a)
• Statutory meeting
• Annual general meeting
• Extra ordinary general meeting
• Class meeting
• Creditors meeting
• Directors meeting
(b)
• This case is authority for the proposition that one person cannot constitute a meeting.
• However, in law one person can constitute a meeting. These are exceptions to the rule
in Sharp V. Dawes (1876)
• Directors meeting in the case of a private company with a single director.
• Class meeting in the case of a company with different classes of shares.
• Creditors meeting if only one creditor has proved his debt.
• Adjourned meeting.
• Annual general meeting convened by or in accordance with the registrars directions.
• Meeting convened pursuant to a court order.
(c) (i)
• This is notice whose intention to move it must be given to the company at least 28 days
before the date of the meeting.
(ii)
• Removal of an auditor from office
• Removal of a director from office
• Re-appointment of a director who has attained the age of 70.
QUESTION SEVEN
(a)
• Has bound himself personally
• Has acted on behalf of an illusory company
• Has signed a negotiable instrument in which the company’s name is not published or is
misdescribed.
• Breach of warranty of authority.
• Has acted fraudulently.
• Has engaged the company in an ultra vires transaction
• Has assumed a direct duty of care to 3rd parties.
(b)
• This problem is based on abuse of power by directors otherwise called excesses of
directors or “better still” transactions ultra vires the directors.
• In this case directors of Modern Technology Co. Ltd borrowed from Money Bank Ltd
for a purpose other than that for which the company was incorporated and the credit
manager of the bank had a copy of the company’s memorandum of association hence by
the doctrine of constructive notice, he was deemed to know that he company was
borrowing for a wrong purpose.
• The borrowing in this case intra vires the company but ultra vires the directors.
• The borrowing is voidable at the option of the company.
LAW II
• Money Bank Co. Ltd cannot recover the loan on account that:
- It is deemed to know the contents of the company’s public documents.
- It’s the creditor manager had a copy of the company’s memorandum of association
but failed to satisfy himself that the company was borrowing for its purposes.
- It is a party to the abuse of the power to borrow and cannot therefore recover the
loan.
• This position is consistent with the decision in re Introduction Ltd (1968) where a
company formed to entertain and accommodate visitors in the UK borrowed from the
plaintiff bank to promote Pig breeding which was not an objects clause. It was held that
since the bank had a copy of the company’s memorandum and hence aware of the abuse
of power, it was privy thereto and could not enforce the borrowing.
QUESTION EIGHT
(a)
• Under Section 219 (f) of the Companies Act, a company may be bound up by the court
if the court is of the opinion that it is just an equitable that the company should be
wound up.
• Courts of law have wound up companies on this ground in certain circumstances:
- Fraudulent or illegal purpose.
- Failure of substratum
- Loss of confidence in management.
- The company is a “bubble” or “sham.”
- Oppression of the minority.
- Expulsion or exclusion from management.
- Deadlock in management and membership.
(b)
• A member cannot be held liable to contribute after one year of cessation of
membership.
• A member can only be held liable to contribute if it appears to the court that existing
members are unable to satisfy the contributions required.
• A member can only be called upon to contribute the amount outstanding on his shares.
• A member can only be called upon to contribute to the assets of the company the
amount he undertook to contribute in the event of winding up.

JUNE 2003
QUESTION ONE
(a)
• The name chosen must have “Limited” or “Ltd” as the last word thereof for companies
limited by shares or guarantee.
• The name must be undesirable in the opinion of the registrar.
• It must not be too similar to that of an existing company.
• It must not contain the term co-operative, its equivalent or any abbreviation thereof.
• It must not suggest any patronage of the president, government ministry, department or
local authority.
• It must not suggest a criminal or moral intent or purpose.
• It must not contain the term “bank,” “insurance” or hotel unless the company proposes
to carry on such business.
• It must not mislead the public in any way.
• It must not contain the term “national” or “international”. However, the latter may be
used in certain circumstances.
(b)
• As a fiduciary Martha is bound to:
o Act bonafide for the benefit of the company in formation.
o Disclose her personal interest in the contract to an independent board of
directors or in the prospectus. She must disclose any secret profit made
failing which she is liable to account the same to the company.
• Render proper accounts on the application of monies or assets coming to her hands
during the promotion exercise.
(c)
A promoter is not entitled to any remuneration for incorporating a company. This is
because there is no contractual relationship between the promoter and the company. In any
event the company did not contract for her services. However a promoter may be rewarded
in other ways, for example; being offered deferred shares, freedom to sell assets to the
company at an over valuation, being appointed director or liberty to sell over-valued assets
to the company in return for fully paid shares.
QUESTION TWO
(a)
• Pesa Limited cannot raise funds to purchase Anna’s shares as if in contrary to the rule in
Trevor V. Whitworth.
• The rule in Trevor V. Whitworth is emphatic that a company must not purchase its
shares or finance their purchase. However, there are certain circumstances in which a
company may purchase its share e.g. redemption of redeemable preference shares.
• Pesa Limited is free to redeem redeemable debentures out of reserves or the share
premium account. The debenture must be redeemed in accordance with its provisions.
(b)
• It is unlawful for a company to finance the purchase or subscription of its shares. In
this case, the lending of money to Charles is unlawful and the purported guarantee by
Pesa Ltd is unlawful as well. This case does not fall within the exceptions prescribed by
the provisions prescribed by the proviso to section 56 of the Act in which a company
may finance the purchase of its shares.
LAW II
(c)
• The purported course of action cannot stand judicial scrutiny as Pesa Ltd is still
purchasing its own shares indirectly which is contrary to the law. The new company will
be nothing but a sham to enable Pesa Ltd purchases it share.
QUESTION THREE
(a)
Bearer debenture
• This is a debenture payable to the holder or bearer.
• It is a negotiable instrument transferable by mere delivery and free from equities.
• A bonafide transferee acquires a good title.
• Bearer can sue the company in his own name.
Registered debenture
• This is a debenture issued to a registered holder i.e. registered by the company.
• It is payable to the registered person.
• The company has particulars of a specific person.
• It is transferable by the execution of an instrument of transfer.
(b)
Redeemable debentures
• These are debentures which are redeemable within a specified duration.
• The redemption must be effected in accordance with its provision i.e. payment of
principal and interest.
Irredeemable debentures:
These are debentures that are only redeemable in the event of winding up or some serious
default by the company.
Debentures
It is a document evidencing indebtedness which is secured or unsecured.
This is acknowledgement of indebtedness it is evidenced that a company is indebted
Edmunds V. Blaing Co. Debenture includes:
Debenture Stock:
• It is transferable in whole.
• This is a loan fund created by a company. It is divisible among a class of lenders each of
whom is given a debenture stock certificate specifying the part a creditor is entitled to.
• It is the indebtedness itself and the certificate evidences the stockholders interest.
• Debenture stock can be divided and transferred in fractions.
• It is created by a trust deed.
Unsecured debentures
These are debentures that are naked i.e. They have no charge or security to secure the
amount borrowed. The creditor can only sue the debtor in the event of default.
Secured debenture
• This is a debenture which contain a charge over the assets of the company.
• May be secured by a fixed or floating charge or both.

QUESTION FOUR
(a)
Under section 4 (2) (a) of the Companies Act, a company limited by shares means that a
member thereof can only be called upon to contribute to the assets of the company the
amount if any outstanding on his shares beyond which he is not liable.
Under section 4 (2) (b) of the Companies Act, company limited by guarantee means that a
member can only be called upon to contribute to the assets of the company the amount he
undertook to contribute, if the company was wound up during his membership or within 1
year of cessation of membership, beyond which he is not liable.
(b)
Under the provisions of the Companies Act Cap 486, the contents of the memorandum of
association are:
• Name of the Company with “Limited” or “Ltd” as the last word thereof for
companies limited by shares or guarantee.
• Registered office clause: the registered office of the company will be situate in Kenya.
• Objects of the company: purposes for which the company is incorporated.
• Liability clause: the liability of members is limited or unlimited and if limited, whether
by shares or guarantee.
• Capital clause: the capital with which the company proposes to be registered and the
divisions thereof.
• Association of declaration clause: the desires of the subscribers to be incorporated.
• Particulars of subscribers: Name, postal address and occupation of subscribers.
Number of shares taken.
• Date: under section 6 (1) of the Companies Act, a memorandum must be dated.
(c)
• Articles of association: it is the internal constitution of the company. Contains the
rules of internal management. Regulates the relations between the company and its
members.
• Declaration of compliance: this is a sworn statement made by a director or the
secretary to the effect that the subscribers have complied with the provisions of the Act
and are desirous of being formed to a company.
• Statement of nominal capital: this document is a requirement of the Stamp Duty Act.
It specifies the capital with which the company proposes to be registered.
• List of directors: this list identifies the persons who have agreed to become directors
their date of birth occupation etc.
• Consent to act as director: this is a document to the effect that the signatory has
personally agreed to become a director of the company.
• Notice of location of registered office: this is a document which specifies the physical
and postal address of the company i.e. the city or town in which the registered office is
situate, plot number and building.
QUESTION FIVE
(a)
• This is an action instituted by a member in his name on behalf of the company to
remedy a wrong done to the company.
• It is representative in character.
• Involves the violation of corporate rights. Prudential Assurance Co. Ltd V. Newman
Industries Ltd.
• Right to institute a derivative action in a matter of grace.
• It is controlled by the plaintiff.
LAW II
• There must be a dispute between a member (s) of the company and those in control of
its affairs.
• The company must be joined as a co-defendant to enable it enforce its rights Estamco
Ltd. V. Greater London Council, Spokes V. The Grosvenor and Another.
(b)
• Can only be instituted in circumstances in which there is fraud on the minority.
• The minority must discharge the heavy burden of proof i.e. the company is entitled to
the remedy sought and that the company cannot itself sue.
• The minority shareholder has no legal right to bring a derivative action.
• The minority must not have participated in the wrongful act complained of
• Legal costs are only recoverable if the action is successful.
• The case may be struck off at the instance of the defendant.
(c)
• This problem is based on breach of duty by directors. In this case it is apparent that
Daudi is guilty of breach of duty to the company. His conduct is fraudulent in character
and the company is entitled to damages since the general meeting of the company has
ratified the abuse of power Jane Wangokho and other aggrieved members have the right
to institute a derivative action against Daudi for the misfeasance. The action is
representative in character. My advise is based on the exceptions to the rule in Foss V.
Harbottle which facilitate a derivative action against fraudsters if the company cannot
itself institute proceedings.
QUESTION SIX
(a)
• Special notice of the intended resolution must be given to the company.
• The company must send a copy thereof to the auditor.
• The auditor is entitled to make written representations as his defence.
• An extra-ordinary general meeting must be summoned. A special notice of the intended
resolution must be sent to all members. If the auditor has made representations
members must be notified and copies must be enclosed unless received too late.
• If copies are not enclosed due to lateness or default by the company the auditor is
entitled to have them read out at the meeting.
• An auditor can only be removed from office if a general meeting passes an ordinary
resolution to that effect.
(b)
Since an auditor has the statutory right of access to all the company’s books, accounts etc
and is entitled to demand explanation from officers of the company the obstruction by the
company officers is antithetical to his duty and is entitled to:
i) Demand that the officers forthwith desist from interfering with his duties failing
which he instigates their investigation with a view to prosecution.
ii) Write a protest note to the company.
iii) Make a report on the information availed to him and set out the circumstances in
which it was made highlighting the problems encountered.
(c)
• This problem is based on the question whether an auditor owes legal duty of care to a
third party. As a general rule, an auditor does not owe 3rd parties any legal duty of care
when making his report. However, a 3rd party who suffers loss or damage by relying on
an auditors report may recover from the auditor if it is established that:

i) There was a special relationship between the auditor and the 3rd
party and therefore the auditor owed that party a legal duty of care.
(Hedley Byrne and Co. Ltd V. Heller and Partners Ltd.
ii) The loss suffered was of a financial nature.
• It must be evident that the auditor knew or reasonably ought to have known that the 3rd
party would rely on the report. In this case it is not evident that there was any special
relationship between the auditor and EFG Company Ltd. The company is unlikely to
succeed against the auditor.
QUESTION SEVEN
THIS QUESTION IS BASED ON ENGLISH LAW. IT IS NOT IN THE
SYLLABUS: NO SOLUTION PROVIDED.
QUESTION EIGHT
(a) (i)
• This is a 28 day notice to the company of an intention to move a particular resolution at
the next meeting.
• It is not a notice by the company.
• It is required by law in certain circumstances.
(ii) 28 days
(iii)
• The removal of a director from office.
• Removal of an auditor from office.
• Re-appointment of a director who has attained the age of 70.
(b) (i) Matters or issues that require special resolution include:

• Alteration of the objects clause
• Alteration of the articles.
• Voluntary change of name
• Reduction of capital
• Conversion of private company to public.
• Voluntary winding up.
• Creation of reserve capital.
(ii)
It must be supported by not less than ¾ or 75% of all members present and voting in
person or by proxy.
LAW II
DECEMBER 2003
QUESTION ONE
(a)
Registered Companies Statutory Corporations
• This is a company incorporated • This is a corporation created by an Act
pursuant to the provisions of the of parliament e.g. Kenya Wildlife
Companies Act. Services or Agricultural Finance
Corporation, Capital Markets Authority.
• Owes its existence to registration.
• It is a legal person in its own right.
• It is a legal person distinct and separate
from its members. • Owes its existence to an Act of
Parliament.
• A private company consists of 2 – 50
excluding passed and current employees • The statute gives it a name and
who are members. A public company prescribes its objects.
must have a minimum of 7 members.
• It is “owned” by the government.
• May be public or private.
• Can only engage in transaction set forth
• Managed by directors elected by by the statute and those reasonably
members. incidental thereto. Other transactions
are ultra vires and therefore void.
• Canonly engage in transactions set forth
by the objects clause and those that are • Management is prescribed by the statute.
reasonably incidental to the attainment
or pursuit of such objects.
(b) (i)
Under section 30 (1) of the Companies Act, a private company means a company whose
articles of association:
• Limit the number of members to 50 excluding current and former employees who are
members.
• Restrict the right to transfer its shares.
• Prohibit any invitation to the public to subscribe for its shares or debentures.
(ii)
• Original members are able to control membership.
• Members retain control as shares are not freely transferable.
• It is entitled to commence business at anytime after incorporation.
• It is subject to less formalities e.g. need not publish accounts or hold the statutory
meeting.
(iii)
• Mr. and Mrs. Matanguta must comply with the provisions of the Companies Act. The
company must hold an extra ordinary general meeting to pass a special resolution to
amend or alter the provisions of section 30 (1) of the Act.
• The company ceases to be private on the date of the resolution and must within 14 days
thereof deliver to the registrar for registration either.
o A prospectus containing the particulars of Part I and II of 3rd schedule or
o A statement in lieu of prospectus containing the particulars of Part I and II
of the 2nd schedule.

QUESTION TWO
(a)
• This case is authority for the proposition that a company being a legal person has
capacity to own property. The property of a registered company is vested in it and the
company has an insurable interest in such property.
• In this case it was held that since the timber belonged to the company the company
alone had an insurable interest in it and the plaintiff was not entitled to indemnity.
• The principle enunciated in this case is embodied in section 16 (2) of the Companies
Act.
(b) (i) Under the provisions of the Companies Act a company may alter the objects clause
o its memorandum so far as may be necessary to enable it:
• Carry on its business more economically and more efficiently.
• Attain its main purpose by new or improved means.
• Sell or dispose off the whole or any part of its undertaking.
• Amalgamate with any other company or body of persons.
• Carry on sum business which under existing circumstances may conveniently or
advantageously be combined with the business of the company.
• Enlarge or change the local area of its operations.
• Restrict or abandon any of the objects specified in the memorandum.
(ii)
• An extra ordinary general meeting must be summoned. The notice of the meeting must
notify the members of the intended resolution and the resolution must be framed in the
notice in the manner in which it will be passed.
• The general meeting must pass a special resolution authorizing the change or alteration
of the objects clause. i.e. must inter alia be supported by at least 75% of the members
present and voting in person by proxy.
• A copy of the resolution must be delivered to the registrar for registration within 30 days
of its passing where upon the alteration becomes legally effective.
• However, a proposed alteration of the objects clause may be objected to by members or
creditors applying to the court for its cancellation. In such a case, the court may order
the alteration to be cancelled or dismiss the application.
QUESTION THREE
• This problem is based on civil liability in respect of prospectuses.
• In this case, the prospectus of Tamaquin Ltd contained a false statement in that the
patent had not been registered. However, for the company or its officers to be held
liable it must be proven that the statement:
o Was false in material particular
o Was more than mere sales talk or puff
o Was one of fact not opinion
o Was in fact made by the company or its officers
o Was intended to be acted upon by the investors e.g. Allan or Betty.
o Influenced the party’s decision to apply for the shares.
• It is important to note that the issue was over-subscribed which means that the
prospectus became exhausted and persons who bought the shares at the stock exchange
cannot purport to hold the company liable on the basis of the prospectus.
• My advise to Allan is that he has no action against the company or its officers in that he
did not rely on the prospectus to purchase the shares.
• Betty has no action against the company or its officers as she bought the shares at the
stock exchange by which time the prospectus had become exhausted. My advise is
LAW II
consistent with the decision in Peek V. Guvney where it was held that the plaintiff could
not base his action on the prospectus as it had been exhausted.
• Charles cannot sue the company or its officer in that he did not read the prospectus and
the report of the interview is not a prospectus. My advise is based on the decision in
Peek V. Guvney.
• David has no actionable claim against the company or its officers in that the company is
not liable to investors when the value of its shares fall due to speculators. In this case it
is evident that the drop in the value of the company’s shares is not based on any of the
fundamentals.
QUESTION FOUR
(a) (i)
• This problem is based on the liability of members for debts of the company. In this
case Joe sold all his shares to lotto ltd to Janet and the shares are partly paid up.
• By the time Lotto Ltd went into liquidation Joe is not a member of the company.
• Since Janet’s name is on the register of members of Lotto Ltd, she is a contributory and
is liable to make good the amount outstanding on the shares. This amount is a debt due
to the company from her.
• Joe is not liable for the debts of the company as he is not a member. However, since
Janet is bound to indemnify him in respect of the liability on the shares, Joe is liable to
repay Janet the amount paid to the liquidator. This argument is based on the fact that in
a contract of sale of shares, it is implied that the transferee will indemnify the transferor
in respect of all calls and other liabilities arising on the shares after the transfer.
(ii)
• Joe and Jeremy must execute the proper instrument of transfer.
• Joe must present the executed instrument of transfer and the share certificate to Joles
Ltd for certification. The share certificate is retained by Joles Ltd for cancellation.
• Jeremy must present the certified instrument of transfer for stamping i.e. payment of
stamp duty.
• Jeremy must present the stamped instrument of transfer to Joles Ltd for registration.
• On registration of the transfer, the share certificate is cancelled and two others issued,
one in the name of Joe for the 500 shares retained and the other in the name of Jeremy
for the 500 shares acquired.
(b)
• Reduction of number of members
Under section 33 of the Companies Act, if at any time, the number of members of a
company falls below the statutory minimum and the company continues to carry on
business for more than 6 months while the number is so reduced all persons who are
members after the 6 months and who are aware that the company has less than 2 or 7
members are personally liable for all the debts of the company incurred after the 6
months and may be sued for them.
• Non-publication or misdescription of the company’s name

Under section 109 (4) of the companies Act a member who is an officer of the company
may be held liable to make good any liability arising if he signed or authorized the
signing of a negotiable instrument on which the company’s name is not published or is
misdescribed.
• Fraudulent trading
Under section 323 (1) of the Companies Act if in the course of winding up it appears
that any business of the company has been carried on:
o For any fraudulent purpose or

o With intent to defraud its creditors or creditors of any other person,

• The court may on the application of a creditor, contributory, liquidator or official
receiver declare all persons who were knowingly parties to the carrying on of the
company’s business as such personally liable without limitation for all or any of the
debts of the company.
• This section renders members who are officers of the company personally liable for
debts and other liabilities of the company. As was the case in Re: William Leitch
Brothers Ltd.
QUESTION FIVE
(a)
• A director owes his company a duty of care, skill and diligence. The principles
governing this duty were enunciated by Romer J in re: City Equitable Fire Insurance Co.
Ltd (1925) and to a large extent the law takes into account the fact a director may be a
part-time counselor rather than a full-time Professioner Manager. This is principally
because of the tax nature of the standards expected of a director.
• Primo, a director need not exhibit in the performance of his duties a greater degree of
skill than may reasonably be expected from a person of his knowledge and experience.
This principle is exemplified by the decision in re: Brazillian Rubber Plantations and
Estates Ltd.
• Secudo: a director is not bound to give continuous attention to the affairs of his
company. His duties are of an intermittent nature to be performed at periodical board
meeting and meeting of committees of the board upon which he happens to be placed.
He is not however bound to attend all such meetings thought he ought to attend
whenever in the circumstances he is reasonably able to do so. In The Marquis of Butes
case where the president of the company had attended only one board meeting in 38
years. It was held that he was not liable for the wrongs committed by other directors at
board meeting as he was not bound to attend them.
• Thirdly, in the absence of suspicion a director is entitled to assume that officer of the
company performed their duties honestly. He is entitled to rely on information
provided by trusted servants of the company as was the case in Dovey V. Cory.
• These three principles demonstrate vividly that a director is not deemed to be a
professional Manager hence his standard of care, skill and diligence is that of a person of
his knowledge and experience. He is not bound to bring any qualifications to his office.
He is not bound to give his company’s affairs continuous attention and is entitled to
trust that officer of the company performed their duties honestly.
(b)
• As fiduciaries directors are bound to avoid conflict of interest by disclosing any personal
interest in contracts made by the company.
• In this case, it is clear that Mwerevu, a director of Kamaliza Ltd, had a personal interest
in the contract made with Modern Vehicle, Ltd, a fact he did not disclose to the board
as required by law. The vehicles are acquired at an exhorbitant price and Mwerevu
voted in its favour. The tragedy is that when the facts come to light, the board
acquiesces with Mwerevu’s conduct.
Firstly, Mwerevu has committed a criminal offence for which he is liable to prosecution
and second he has acted fraudulently and thereby breached his fiduciary duty to the
company. Since the duty is owed to the company Mpole cannot sue to remedy the
wrong.
My advise to Mpole is to have an extra ordinary general meeting of the company

summoned to consider the matter. The meeting may resolve that the director be sued in
damages for breach of duty or ratifies the abuse of power. However, since the
LAW II
mwerevu’s conduct amounts to frauded on the minority conduct amounts to fraud on

the minority if members ratify the transaction, Mpole may initiate a derivative action
against the directors for the contract to be rescinded. This advise is based on the
exceptions to the rule in Foss V. Harbottle (1843).
• I would also advice Mpole to instigate the arrest of Mwerevu by the police for
prosecution for the offence of non-disclosure of personal interest in contracts made by
the company for which he is liable to a fine not exceeding Kshs. 2000.
QUESTION SIX
(a)
• Fixed charge
• Floating charge
• Chattels mortgage
• Charge on unpaid calls.
• Charge on patent, trade mark etc
• Charge on a ship or part thereof.
• Charge on unpaid capital
• Charge on book debts.
(b)
• This problem is based on priority of charges created by the company. It is clear that the
first charge in favour of Tumaini Bank had a negative pledge clause which prohibited
Smart Ltd from creating a charge in priority thereof. But Smart Ltd created a fixed
charge thereafter in favour of Mali Bank which claims ignorance of the prohibition.
• Tumaini Bank’s charge has priority in that it was created first and had a negative pledge
clause and covers all the assets of the company.
• Mali Banks fixed charge ranks second in that it was created after Tumaini Banks Charge.
The contention that the bank was unaware of the prohibition is untenable as the bank as
a 3rd party is deemed to know the contents of the company’s public documents. This is
because charges are registrable with the registrar of companies. Arguably, therefore the
doctrine of constructive notice renders the banks argument unsustainable.
(c)
• This is a document issued by a company as security whenever series of debentures or
debenture stock are issued.
• It is an acknowledgment that the company is indebted to trustees on behalf of the
creditors.
• It confers upon the trustees a legal mortgage over all the company’s assets.
• It embodies an undertaking by the company to honour its obligations to all creditors.
• It describes the nature of the security given, methods of redemption, circumstances in
which the security may be realized meetings of creditors, powers of trustees etc.
• Facilitates protection of the company’s assets or security for the benefit of all creditors.
• Trustees acquire a legal charge over all assets of the company.
• Trustees have the right to take possession of the security.
• Trustees are entitled to sell the security in the event of default.
QUESTION SEVEN
(a)
Under section 241 (1) of the Companies Act, a liquidator is entitled to exercise the following
powers with sanction of court or committee of inspection:

• Bring or defend actions or other legal proceedings in the name of and on behalf of the
company.
• Carry on the business of the company so far as may be necessary for beneficial winding
up.
• Pay any classes of creditors in full.
• Make any compromise or arrangement with creditors.
• To compromise all calls and liabilities to calls and other debts and liabilities.
• Appoint an advocate to assist him in the performance of his duties.
(b)
Under section 241 (2) of the Companies Act, the following powers are exercisable by the
liquidator without sanction of the court or committee of inspection.
• Sell movable and immovable property and things in action of the company.
• Do all acts and execute all deeds, receipts and other documents in the name of and on
behalf of the company.
• Prove, rank and claim in the bankruptcy or insolvency of any contributory for any
balance.
• Draw, accept, make and endorse any bill of exchange or promissory note in the name of
and on behalf of the company.
• Raise money on the security of the assets of the company.
• Appoint an agent to do any business which is unable to do.
• To take out letter of administration to any deceased contributory in his official name.
• Do all such other things as may be necessary for winding up the affairs of the company
and distributing its assets.
QUESTION EIGHT
(a)
• Quorum is the minimum number of persons who must be present fro a company
meeting to transact business.
• The number is prescribed by the articles failing which the provisions of the Companies
Act apply where two members present in person form a quorum for a private company
meeting while three members present in person constitute quorum for a public company
meeting.
• It is the duty of the chairman of the meeting to satisfy himself that a quorum of
members in present within 15 minutes of the appointed time.
• Persons not entitled to attend are not counted in the ascertainment of quorum.
• If a quorum of members is not present, a meeting summoned by directors stands
adjourned to the following week, same day time and place unless the directors otherwise
resolve. In all other cases the meeting stands dissolved.
• Quorum is only essential at the commencement of the meeting.
• A meeting with no quorum is a legal nullity.
However, one person constitutes quorum in certain circumstances for example:

• Directors meeting: in the case of a private company.
• Class meeting: shares of a particular class are held by one member.
• Creditors meeting: in the course of winding up.
• Adjourned meeting:
• Annual general meeting convened by or at the instance of the registrar of
companies: sec 131 (3) of the Companies Act.
• Meeting convened pursuant to a court order: section 135 (1) of the Companies Act.
LAW II
(b)
(i) General Proxies
• This is an ordinary proxy.
• It is a proxy form which enables a member appoint another person to attend a
general meeting on his behalf such a proxy can vote as he wishes on the matters
before the meeting.
(ii) Special Proxies

• This is a two-way proxy.
• This is a proxy form which enable a member of a company to direct the proxy
whether to vote for or against a particular resolution before the meeting. If
there are no instructions, the proxy is free to vote as he wishes.
• Under English law, this form is used in the case of quoted companies.

JUNE 2004
QUESTION ONE
(a)
In the words of Lord MacNaghten in Salomon V. Salomon and Co. Ltd. (1897). “The company
is at law a different person altogether from the subscribers to the memorandum…….”
This is the ratio decidendi in Salomon’s case and constitutes one of the fundamental principles of
company law.
In simple legal parlance the principle of legal personality of the company is to the effect that
when a company is incorporated it becomes a legal person, distinct and separate from its
members and managers. It becomes a body corporate or a juristic person. It acquires an
independent legal existence with rights and subject to duties with certain capacities and
subject to incapacities.
The principle of corporate legal personality is now exemplified by the words that “From the
date of incorporation mentioned in the certificate of incorporation, the subscribers to the
memorandum together with such other persons as may from time to time become members
of the company shall be a body corporate……”
The most fundamental attribute of incorporation from which all other consequences flow is
that on incorporation a company becomes a body corporate – a different legal entity. This
principle manifests itself through the principle of:
i) Limited liability: Sec 4 (2) (a) and (b) of the Companies Act.
ii) Perpetual succession: Sec 16(2) of the companies Act.
iii) Sue or be sued: Foss V. Harbottle (1843)
iv) Owning of property: section 16(2) of the Act Macaura V. Northern Assurance Co.
(1925)
v) Capacity to contract: Lee V. Lee’s Air Farming Co. Ltd (1961)
vi) Common Seal: section 16 (2) of the Act.
A critical analysis of the Judicial and statutory authority demonstrates that the principle of
corporate legal personality is incontrovertibly an important and fundamental aspect of
company law.
(b)
This problem is based on the concept of piercing the corporate shell or simply put lifting the
veil of incorporation or modifying the rule in Salomon’s case. Both parliament and courts of
law have recognized circumstances in which the veil of incorporation may be lifted and
regard had to the individual members of the company and its subsidiaries are treated as one
of regard it had to the economic realities of the group. These circumstances are exceptions
to the rule in Salomon’s case.
• Legislative or parliamentary or statutory exceptions

o Reduction in number of members: section 33 of the Companies Act.
o Non-publication or misdescription of the Companies name: section 109 (4)
of the Act.
o Group accounts: section 150-152 of the Companies Act.
o Investigation of companies affairs: section 167 of the Act.
o Investigation of company membership: section 173 of the Act.
o Fraudulent trading: section 323 (1) (a) of the Act.
• Common law or judicial exceptions
o Agency trustee or nominee:
▪ Inre F. G. Films Ltd.
▪ Smith Stone and Knight V. Birmingham Corporation
▪ Firestone Tyre and Rubber Co V. Llewellin
o Group enterprises:
Harold Holdsworth and Co V. Caddies
LAW II
o Determination of residence:
Debeers Consolidated Mines Ltd V. Howe
o Ratification Corporate acts
Inre Express Engineering
Bamford and Another V. Bamford and Others
o Determination of Character:
Daimler Ltd V. Continental Tyre and Robber Co. Ltd.
o Fraud and Improper Conduct
Gilford Motor Co V. Horne & Another
Inre Buggle Press Ltd.
Jones V. Lipman and Another
QUESTION TWO
(a)
• This case is authorized for the proposition that a registered company’s capacity is
restricted to the transactions set forth in the objects clause of the memorandum other
transactions are ultra vires and therefore null and void.
• In this case the transaction in question i.e. purchase of concession and construction of
railways was not authorized by the objects and was therefore declared ultra vires.
• This case interpreted the doctrine of ultra vires very restrictively thereby limiting
corporate capacity.
• However, in Attorney General V. Great Eastern Railway Co. it was held that a
transaction reasonably incidental to the attainment or pursuit of the objects of the
company was Ultra Vires the company. In the words of Lord Selbourne “whatever may
be regarded as fairly incidental to or consequential upon”
• The second aspect of ruling relates to ratification of an ultra vires transaction. In
Ashburys case although members in general meeting purported to ratify the transaction
it was held that the ratification had no legal effect since the transaction was void. This
ruling is correct in that a void transaction is incapable of ratification. This principle was
upheld in Rolled Steel Products (Holdings) Ltd V. British Steel Corporation and Others
(1986) where Slade L. J. was emphatic that an ultra vires transaction cannot be rendered
intra vires by ratification, delay acquiescence estoppel or lapse of time.
(b)
• As a general rule a pre incorporation contract against the company did not exist and
cannot ratify the transaction when incorporated, nor can directors of the company adopt
or conform the contract (see Kelner V. Baxter) (Price V. Kelsal) (North Sydney
Investments and General Tramways V. Higgins & Another) (Natal Land Company V.
Pauline Colliery Syndicate)
• However a person can escape liability on per incorporation contracts by:
o The company entering into a new contract to the same effect as the
previous one (Mawagolas case).
o Entering into a contract which expressly provides that the promoters
liability shall cease when the company is formed.
o Entering into an agreement which expressly provides that it becomes legally
binding upon the company when incorporated.
(c)
• This provision is to the effect that when the Articles are registered there comes into
being a contract between the company on one hand and shareholders on the other to
observe the provisions of the articles.
• Either party is free to sue the other for non compliance with the provisions of the
articles. Welton V. Sattery.
• Hickman V. Kent or Romney Mash Sheep Breeders Association

• The company and its members have rights and subject to obligations.
• Rights conferred by the contract are only enforceable by members qua members Elley
V. Positive Government Life Assurance Co., Beattie V. Beattie.
• The contract is unenforceable by an outsider.
• The contract is subject to the memorandum and provisions of the Companies Act.
• The terms of the contract keep on changing from time to time as and when the
company alters the Articles.
• Courts have observes in Obiter that a second contract is created between each member
and every other i.e. members inter se.
• The decision in Wood V. Odessa Water Works and Quin and Axtens Ltd. V. Salmon are
cited for this argument.
QUESTION THREE
(a)
Under the provisions of the Companies Act the following rights are only enforceable by
joint effort:
I) Under section 8 (1) of the Companies Act, a company may by special resolution
alter the objects clause of the memorandum. However the proposed alteration may
be objected to by either.
Holders of not less than 15% in nominal value of the Company’s issued share
capital.
Holders of not less than 15% of any class of shares of the Company.
Holders of not less than 15% of the Company’s debenture entitling them to object.
Not less than 15% of the Company’s members.
II) Under section 74 (1) of the Company’s Act, proposed variation of class rights may
be objected to by holders of not less than 15% of that class of shares who did not
consent or vote in favour, by an application to court within 30 days of the
resolution or consent.
III) Under section 140 (1) of the Companies Act holders of not less than 1/20 of the
total voting rights of all members or not less than 100 members of the Company
may requisition notices of any resolution which may properly be moved at the next
general meeting. They are also entitled to requisition the Company to circulate to
members any statement of not more than 100 words with respect to the matter
referred to any proposed resolution or business to be dealt with at a meeting.
IV) Under section 132 (1) of the Companies Act holders of not less than 1/10 of the
paid up capital of the Company or the total voting rights of all members may
requisition an extra ordinary general meeting by depositing a requisition with the
Company at its registered office and if the directors do not within 21 days thereof
convene a meeting, the requisionists or not less than ½ of them may convene a
meeting. Such a meeting may be held within three months of the requisition.
V) Under section 137 (1) of the Companies Act, a poll can only be effectively
demanded by:
o Not less than five members present in person or by proxy.
o A member or members representing not less than 1/10 of the total voting rights
of all members having the right to vote.
o A member or members representing not less than 1/10 of the paid up capital.
VI) Under section 165 (1) of the Companies Act a Company’s affairs may be
investigated by an inspector or inspectors appointed by the court at the instigation
of either.
Not less than 200 members or members holding not less than 1/10 of the issued
shares.
Not less than 1/5 of the number of persons in the company’s register of members.
LAW II
(b)
• This problem is based on the right of a member to vote in Company general meetings.
It is a trite principle of law that the right to vote is one of the proprietary rights of a
member. It is one of the so-called individual membership rights of a member
exercisable by a member irrespective of the wishes of the majority and if the right is
violated the member has a personal action for redress.
• In this case the articles of X Company are very clear on voting and the Chairman has
declined to accept the votes of Jane nominees in violation of Jane’s right to vote in a
general meeting. Jane has a course of action to compel the Chairman to adept the votes
of her nominees.
• My advise to Jane is to institute legal proceedings against the chairman to “compel him”
to accept the votes, as was observed by Sir George Jessel MR in Pender V. Lushington.
• My advise is based on the decision in Pender V. Lushington whose facts were
substantially similar to those of this case.
QUESTION FOUR
(a)
In preparing his audit report the auditor owes a duty of care to:
• The company: since an auditor is a professional engaged by the company to render
certain services he owes the Company a legal duty of care in preparing his report.
• Third parties: an auditor owes a legal duty of care to third parties whom he knew or
reasonably ought to have known would rely upon his audit report. To that effect such
parties are his “neighbours” and the auditor may be
• Held liable for loss or liability arising by reason of reliance on his audit report.
• The auditor’s legal duty of care is founded on the premise that there is a special
relationship between him and the company as well as such third parties.
(b)
• Right to examine the company’s books, vouchers and other relevant documents.
• Right to access to the Company’s books vouchers, accounts etc.
• Right to demand an explanation from officers of the company.
• Right to seek professional advise whenever necessary.
• Right to attend all general meetings of the Company.
• Right to be heard in general meeting on any matter concerning him as an auditor.
• Right to all notices and other communication to members.
• Right to rely on information provided by trusted servants of the company (in absence of
suspicion)
• Right to remuneration for services rendered.
• Right to indemnity for any loss or liability arising in the course of discharging his
obligations as auditor.
(c)
For a third party to successfully sue an auditor in damages for professional negligence it
must be established that:
• The auditor was engaged on the premise that he professed to have certain skills.
• The auditor was at all material times aware that his report would be relied upon i.e. he
knew or reasonably ought to have known.
• The third party suffered loss of financial nature

QUESTION FIVE
(a)
• Under Article 114 of Table A directors recommend dividend and members declare the
same in general meeting.
• Under Article 115 directors may form time-to-time pay member such intern dividend as
is justified by profits of the Company.
• Under article 116, no dividend shall be paid otherwise than out of profits.
• Dividend is payable after payment of debts and other liabilities incurred during the year
dividend is only enforceable after its formal declaration.
(b)
A company may seek to control the funds from which dividend is payable for various
reasons:
• Facilitate maintenance of capital.
• Liability of members is generally limited.
• Maintain a certain level of reserves.
(c)
• The charge is void as against the liquidator.
• The amount secured becomes payable immediately.
• It is a criminal offence for which the company and every officer in default are liable to a
fine no exceeding Kshs. 1,000.
QUESTION SIX
(a)
Civil Liability
Under section 45 (1) of the Companies Act a third party who suffers loss or damage by
reason of subscribing for shares or debentures of a Company on the faith of prospectus
containing any untrue statement is entitled to compensation for the loss or damage by any
of the following persons:
• Every person who was a director of the Company at the time of issue.
• Every person who had authorized himself to be named as a director in the prospectus
and was so named.
• Every person who had agreed to become a director of the Company either immediately
or after an interval of time.
• Every person who was a promoter of the Company.
• Every person who authorized the issue of the prospectus.
However, sections 45 (2) and (3) of the Companies Act prescribe specific defences to
directors and experts sued under section 45 (1).
Criminal liability
• Under section 40(3) of the Act it is a criminal offence to issue any form of application
for shares or debentures of a company without a prospectus which complies the
provisions of the Companies Act. A person guilt of contravening such provision is
liable to a fine not exceeding Kshs. 10,000.
• Under section 42 (2) of the Act it is a criminal offence to issue a prospectus containing
a statement purporting to have been made by an expert without such expert’s written
consent. The company and every person knowingly a party to the issue liable to a fine
not exceeding Kshs. 10,000.
• Under section 43 (5) of the Act it is a criminal offence to issue a prospectus before a
copy thereof has been delivered to the registrar for registration. The company and
LAW II
every person who is knowingly a party to the issue are liable to a fine not exceeding
Kshs. 100 for every day until a copy thereof is delivered.
• Under section 43(5) of the Act is a criminal offence to deliver to the registrar for
registration a copy of a prospectus without the necessary annextures. The company and
every person who is knowingly a party to the issue are liable to a fine not exceeding
Kshs. 100 for every day until a copy with the necessary annextures is delivered.
• Under section 46 (1) of the Act, it is a criminal offence to authorize the issue of a
prospectus containing any untrue statement. A person guilty of contravening this
section is liable to a fine not exceeding Kshs. 10,000 or imprisonment for a term not
exceeding 2 years or both. However the accused escapes responsibility by providing
either that:
o The false statement was immaterial.
o He has reasonable grounds to believe and did believe up to the time of
issue that the statement was untrue.
(b)
A company may raise capital from the public in three ways. This process is often referred to
as “floatation” or “flotation” and securities are availed to the public for subscription. These
approaches are:
• Direct invitation to the public (public or prospectus issue)
• Offer for sale
• Placing
Direct invitation
By this method, the company prepares and issues a prospectus inviting the public to
subscribe for its securities. The prospectus must comply with the requirements of the
Companies Act and application forms must be enclosed. The company is responsible for
the administrative tasks of the issue and bears the risk if the issue is unsuccessful. To spread
such risk the company may arrange for the issue to be underwritten by an underwriter who
undertakes to take up all or a specified number of securities if not taken up by the public in
return for a commission. The prospectus ordinarily identifies the underwriter, if any.
Members of the public and corporations make offers for the securities by completing and
submitting to the Company an application form.
Offer for sale

By this method the company desirous of raising capital allots all the securities to an issuing
house which in turn prepares and issues a prospectus inviting the public to subscribe for the
securities. The securities are offered at a premium and the issuing house may arrange for the
issue to be underwritten so as to spread risk. Once an application for securities is made the
issuing house renounces its allotment in favour of the applicant. This approach has two
advantages:
• It relieves the company the administrative tasks of the issue.
• The company receives the entire consideration on the issue.
Placing
By this method the company arranges with an issuing house to purchase all the securities on
offer or take them up and then “place” them with its clients privately.
There is no direct or indirect invitation to the public. This approach ensures that the
securities are taken up by selected persons or institutions.
If the issuing house does not purchase the securities it acts as an agent for the company and
is paid brokerage for the services rendered.
(c)
Underwriting commission is a payment made by a company to a broker issuing house or a
bank in consideration for its undertaking to take up all or specified number of shares not

taken up by the public. The commission is payable whether or not the shares are taken up
by the public and may be in the form of shares and money.
• The payment is an integral part of an underwriting agreement.
• The provisions of the Companies Act enable Companies to pay a commission to any
person in a consideration of his
o Subscribing for its shares.
o Agreeing to subscribe
o Procuring a subscription
o Agreeing to procure subscription
The payment of such commission may be absolute or conditional provided:
o It is authorized by the articles
o It does not exceed 10% of the price at which the shares are issued or the
amount or rate authorized by the articles whichever is less.
o It is disclosed in the prospectus in the case of shares offered to the public.
QUESTION SEVEN
(a) (i)
The locus classicus distinction between the fixed and floating charge was enunciated by the
Lord MacNaghten in Illingworth V. Holdsworth.
Fixed charge:
• This is a legal or specific charge.
• It is a charge securing a debenture on a specific asset or an asset capable of being
ascertained or defined.
• The security is identifiable and its value is ascertainable.
Floating charge:
• This is an equitable charge
• In the words of the Learned Judge it is “ambulatory and shifting in its nature.”
• It is a charge securing a debenture on the assets of a going concern but which remain
dormant until crystallization.
• It secures a debenture on a class of assets of the company both present and future the
assets must belong to class which keep on changing from time to time in the ordinary
course of business of the Company.
• The value of the security remain uncertain as the Company is free to dispose off and
acquire new stock.
(ii)
• A fixed charge created after a floating charge has priority in the satisfaction of claims.
• Other interests for example landlords distress for rent have priority over floating
charges.
• Under section 312 of the Companies Act, a floating charge created within 6 months
before the commencement of winding up is deemed to be fraudulent preference and is
void.
• Under section 314 of the Companies Act, a floating charge created within 12 months
before the commencement of winding up is invalid unless it provided that the Company
was solvent immediately after its creation.
(b)
This is a clause or paragraph in a debenture to the effect that the Company shall not create a
charge in priority to the current one. It ensures that the charge retains priority in the
satisfaction of claims.
LAW II
(c)
Although administrative receivership and winding up are similar in certain many respects,
they differ in that:
• Whereas a receiver takes possession of the property of the company over which he is
appointed and realizes is for the benefit of the holder(s) a liquidator is appointed to wind
up the Company and terminate its existence.
• An administrative receiver may be appointed to enforce a charge given by a debenture
or trust deed under a power contained in the debenture or the trust deed or by the court.
A liquidator may be appointed by the court, members or creditors or both.
• A receiver may be appointed when the Company is being wound up.
• Administrative receivership permits the appointment of a receiver and manager to carry
on the business of the Company for the purposes of selling it as a going concern.
• A receiver appointed under a power in a debenture or a trust deed, the debenture usually
provides that he is the agent of the Company.
• A receiver appointed by the Court is personally liable on the contracts made by him in
the course of receivership while a liquidator is not.
• The terms of appointment may require a receiver to render accounts to debenture
holders.
QUESTION EIGHT
Section 40 (1) of the Companies Act provides that
“Every prospectus issued by or on behalf of a Company or by or on behalf of any person
who is or has been engaged or interested in the formation of the Company, shall state the
matters specified in Part I of the Third Schedule and set out the reports specified in Part II
of that Schedule…..”
Part I of the schedule contains the following matters

• Number of founders, management or deferred shares if any.
• Share qualification of directors if any
• Names, postal addresses and occupation of directors and proposed directors
• Minimum subscription.
• Time of opening of the subscription lists.
• Amount payable on application and allotment.
• Particulars of options on shares and debentures
• Particulars of shares and debentures payable otherwise than for cash.
• Particulars of persons who have sold assets to the company
• Amount paid to such persons for assets including any amount payable for purposes of
goodwill
• Commission paid by the company.
• Preliminary expenses or an estimate thereof.
• Amount if any paid to promoters
• Particulars of material contracts entered into by the company in the ordinary course of
business
• Names and postal address of auditors if any
• Directors interest, if any in the promotion of the company or its property.
• Voting and class rights
• Length of time the company has carried on the business if less than 3 years.
Part II of the schedule sets out the following reports

• An auditors report with respect to
• Profit or losses in each of the last 5 years.
• Rate of dividend in each of the last 5 years.

• Assets and liabilities as at the last date of accounts

• And similar information on the Company’s subsidiaries if any
• In the proceeds of the issue or any part thereof is to be applied directly or indirectly in
the purchase of any business, a report by named accountants on the profit or losses of
the business in each of the last 5 years.
• Assets and liabilities of the business as at the last date of accounts.
• If the proceeds of the issue or any part thereof is to be applied directly or indirectly in
the acquisition of share in a subsidiary, a report by named accountants on the profit or
loss of the Company in each of the last 5 years.
• Assets and liabilities as at the last date of accounts.
And similar information on the subsidiaries of the Company if any
LAW II
DECEMBER 2004
QUESTION ONE
(a)
This question is based on the advantages of partnerships and limited liability companies and
explicitly suggests that the scale generally turns in favour of incorporation by reason of the
advantage of limited liability and the wide spectrum of membership.
Generally, incorporation brings with it certain basic advantages unavailable to

unincorporated associations for example partnerships.
The most fundamental attribute of incorporation from which all other advantages flow, is
that, the company becomes a legal person distinct and separate e from its members. It
acquires an independent legal existence. It becomes a body corporate with rights and subject
to obligations. This is the rule in Salomon V. Salomon and Co. Ltd. 1897.
The salient advantages of incorporation include:

• Limited Liability: section 4 (2) (a) and (b) provides inter alia that liability of members
may be limited by shares or guarantee. In Salomons Case, Salomon was not liable to
contribute to the assets of the company as his shares were fully paid.
• Sue or be Sued: members cannot generally be sued for the wrongs of the company and
are not obliged to sue on its behalf. (Foss V. Harbottle (1843).
• Owing of property: under section 16 (2) of the Act a company has capacity to hold land
and other property. (Macaura V. Northern Assurance Co. Ltd 1925).
• Capacity to contract: registered companies have capacity to enter into contractual
relationships e.g. can hire and fire. They have capacity to invest to enhance profitability.
• Perpetual Succession: The fact that a company has capacity to exit in perpetuity
encourages investment on a long term basis.
• Wide Capital base: by reason of the wide spectrum of membership.
• Transferability of shares: shares in public and private companies and transferable
membership keep on changing from time to time.
• Qualified or specialized management: companies are managed by directors elected by
members in general meeting.
• Borrowing by floating charge: companies are free to use their movable assets as
collateral. This interalia enhances their borrowing capacity.
Partnerships, on the other hand enjoy certain advantages for example,

• Sharing of losses: this reduces the amount borne by a single partner thereby lessening
the burden.
• Shared management: partners shares ideas on various matter affecting the firm.
• Easy to form: there are no legal formalities to be complied with and expenses if any are
minimal.
• Flexibility: partners are free to change the nature of the firms business at any time.
The foregoing demonstrates that whereas limited liability companies enjoy certain
advantages.
Partnerships too have certain advantages and hence the balance may tilt on either side.
However, it is undeniable that the advantages of incorporation outweigh those of
partnerships by far.

(b)
(i) Section 2 (1) of the Companies Act provides that article means articles of
association of a company as originally framed or as altered by special resolution
including so far as they apply to the company, the regulation of Table A.
– Articles are one of the constitutive documents in company formation.

– All companies must have a set of regulations as their articles.
– It is the internal Constitution of the Company.
– It contains the rules of internal management.
– It regulates the relations between the company and its members.
– A company limited by shares may adopt Table A as its articles of association.
– It is alterable by a special resolution of members in general meeting.
– Must be signed by every subscriber to the memorandum.
(ii)
▪ The articles are a contract between each member and the company. It was so held
in Welton V. Saffery.
▪ It binds both the company and its members. Each party must observe its
provisions. Hickman V. Kent.
▪ It is a contract between the company and members only.
▪ It confers rights and imposes duties on the parties.
▪ The rights it confers can only be enjoyed by members in their capacity as members
Beattie V. Beattie.
▪ The articles cannot bind a third party.
QUESTION TWO
(a) This problem is based on raising of capital by companies and acquisition of assets in
this case directors:
• Must in the first instance ensure that the company has the necessary power
to increase its capital.
• Such power is embodied in the articles and requires an ordinary resolution
of members in general meeting.
• If the power exists they must convene an extra ordinary general meeting to
pass the requisite resolution to authorize the increase.
• Notice of the increase of capital must be submitted to the registrar in a
prescribed form. The notice must set out the particulars of the new shares.
• A copy of the ordinary resolution and the memorandum of association as
amended must accompany the notice.
• Must check and confirm if they are empowered to allot shares.
• This power is conferred by the articles or an ordinary resolution of
members in general meeting. If the authority required is conditional or
insufficient a special resolution is necessary to authorize the increase of
authorized share capital. A copy of the resolution must be delivered to the
• To dispense with pre-emption rights to issue shares to the public
shareholders must pass a special resolution. Notice of the meeting to pass
the resolution must be given.
• Must obtain an independent valuation of the business of Jijenge Holdings.
The report must be made by a qualified person to an auditor of the
company and submitted to the company within 6 months of allotment.
(b)
LAW II
• Allotment of shares for cash requires that they must in the first instance be
offered to existing members in proportion to their current holding.
• The shares may be offered on the same terms or more favourable than to non-
members.
• These pre-emption rights do not apply to equity security for non cash
consideration.
• Existing shareholders are entitled to a written offer of the shares.
• In the event of contravention of their rights they are entitled to compensation
for the resulting loss, damage, costs and expenses.
• These rights exist unless dispensed with by the afore-mentioned special
resolution.
(c)
• Reduction of the share premium account is subject to the same rules as they
relate to the reduction of capital.
• If a company issues shares at a premium for cash or otherwise it must create the
share premium account which consists of the aggregate amount of those
premiums.
• It cannot be distributed as dividend.
• It can only be applied to:
▪ Write off the preliminary expenses of the company
▪ Write off the expenses of or commission paid or discount allowed on
any issue of shares or debentures of the company
▪ Pay up unissued shares of the company to be issued to members as
fully paid bonus shares
▪ Provide for the premium payable on redemption of any redemptable
preference shares or debentures of the company.
Otherwise the share premium account is treated as part of the paid up share capital
of the company.
QUESTION THREE
(a)
• Directors are deemed to be agents when they contract on behalf of the
company and are therefore in a position to bind the company with 3rd parties
the company is liable as principal.
• This is the power to bind the company.
• The board is empowered to operate the company bank account.
• To hold company property in trust.
• Recommend dividend
• Recommend bonus shares.
• Pay an interim dividend from time to time.
• Summon general meetings.
• As fiduciaries directors duties include:
▪ Acting bonafide in what they consider to be in the best interest of the
company.
▪ Exercise unfettered discretion.
▪ Exercise all powers for the particular purposes for which they are
conferred.
▪ Avoid conflict of interest by
▪ Disclosure of personal interest in contracts made by the company.
▪ Disclose any secret profit to be made or account the same to the
company.

▪ Avoid being involved in the management of competing companies.
(b)
• This problem is based on the fiduciary duties of directors which principally
hinge on bonafide and avoiding conflict of interest.
• A fiduciary must not benefit by virtue of his position without the other party’s
consent.
• Any secret profit made by a fiduciary without disclosure must be accounted to
the company and this rule applies.
• Even in the absence of bad faith on the part of the director. It was so held in
Regal (Hastings) Ltd. V. Gulliver.
• A director can retain the profit made only if the company passes a resolution in
general meeting to that effect Cooks V. Deeks as long as it does not involve
fraud on the minority.
• In this case Hellen, the managing director made a secret profit in her position as
a fiduciary and is therefore liable to account to Artworks Ltd. As was the case
in Boston Deep Sea Fishing V. Ansell whose facts were substantially similar where a
director was held liable to account.
• The remedies open to the company include:
▪ Damages: for breach of her fiduciary duties.
▪ Account: for the secret profit.
▪ Rescission of contract.
▪ The company may seek a declaration that Hellen holds the
amount of Kshs. 500,000 in trust for it.
QUESTION FOUR
(a) (i)
• The rule in Foss V. Harbottle is the majority rule. It describes a policy of courts not
to interfere with internal affairs of companies acting within their powers.
• It was enunciated in Foss V. Harbottle (1843)
• The rule is constituted by three principles namely
▪ Proper plaintiff
▪ Internal management
▪ Irregularity principle
Edwards V. Halliwell
• The rule in Foss V. Harbottle
▪ Prevents multiplicity of actions.
▪ Promotes democracy in the management of company affairs.
▪ Discourages frivolous and incompetent actions
▪ Re-asserts the rule in Salomon V. Salomon and Co. Ltd.
(ii)
• Ultra vires or illegal acts.
• Special or qualified majorities Cotter V. National Union of Seamen.
• Infringement of individual membership rights Pender V. Lushington.
• Fraud on the minority: Prudential Assurance Co. Ltd V. Newman Industries Ltd.
• Oppression of minority: Section 211 of the companies act.
• Other exceptions: in the interest of Justice Pavlidesv Jensen.
(b) (i)
• Number of shares in question.
• Name of the company
• Name, postal address and occupation of the transferred.
LAW II
(ii)
• Transferor and transferee execute the instrument of transfer.
• The executed instrument of transfer is presented for stamping.
• The stamped instrument of transfer is delivered to the company for registration.
• The transfer is registered and a share certificate issued in favour of the
transferee.
• Unless the registration of a transfer is refused by the company, it must be
registered at the earliest possible opportunity and a share certificate must be
ready for delivery within 60 days of presentation of the transfer for registration.
This entails cancellation of the transferors share certificate and entry of the
transferees name on the register of members and issue of a new share certificate
in the transferee name.
My advise to the directors of Tangaza Company is as follows:
QUESTION FIVE
(a)
• Under section 131 (1) of the Companies Act every company much in each year hold a
general meeting as its annual general meeting.
• The notice convening the meeting must so specify.
• The first annual general meeting must be held within 18 months of incorporation and
thereafter 15 months must not elapse from the date of one annual general meeting to
that of the next.
• If the first annual general meeting is held, no other meeting need be held by the
company within two years of incorporation.
• If a company fails to hold an annual general meeting as required, any member may
petition the registrar to call or direct the convention of an annual general meeting. A
meeting so convened is duly constituted by one member present in person or by proxy.
• Such a meeting is deemed to be the annual general meeting of the previous year unless
the meeting otherwise resolves. Such a resolution is registrable within 14 days.
• It is ordinarily summoned by a 21 day notice.
• The annual general meeting considers ordinary business e.g. declaration of dividend,
election of directors appointment of auditors etc.
• Failure to hold the annual general meeting renders the company and every officer in
default liable to a fine not exceeding Kshs. 2,000.
• Call the meeting to order.
• Satisfy himself that the meeting is duly constituted.
• Satisfy himself that a quorum of members is present.
• Inform himself the business of the meeting.
• Conduct voting.
• Frame motions for discussion.
• Make decisions on points of order.
• Determine who to speak and for how long.
• Maintain order in the conduct of those present.
• Close discussion on any issue after reasonable debate.
• Ensure that the sense of the meeting is maintained.
(b)
• Under the provisions of section 132 (1) of the Companies Act, a company may be
compelled to call an extra-ordinary general meeting at the instigation of its members.

1 th
• Holders of not less than of the paid up capital of the company or total voting
10
rights of all members may request for a meeting by depositing a requisition with the
company at its registered office.
• The requisition must state the purpose of the meeting and must be signed by all the
requisitionists.
• If it consists of a number of documents, each must be signed by at least one of the
requisitionist.
• Directors must convene an extra ordinary general meeting of the company within 21
days of deposit of the requisition failing which the requisitionists or not less than one
half of them may convene the meeting.
• A meeting convened by requisitionist under this section must:
▪ Be held within three months of deposit of the requisition.
▪ Be summoned in a manner similar to a meeting convened by the
board.
(c)
• Under section 185 (1) of the Companies Act a company may by ordinary resolution
remove a director from office.
• A special notice of the intended resolution must be given to the company.
• Upon receipt of the company must send a copy thereof to the director concerned.
• The director is entitled to make representations not exceeding reasonable length as
his defence any may request the company to notify its members that he has made
them.
• The company must convene an extra ordinary general meeting and copies of the
notice of the intended resolution must be sent to all members.
• Members must be notified that the director has made representations, if any, and
copies must be enclosed unless received too late by the company.
• If the directors representations are received too late by the company or are not
enclosed due to default by the company the director is entitled to have them read
out at the meeting.
• However copies of the directors representations need not be sent to members or be
read out at the meeting if on application by the company or other aggrieved party,
the court is satisfied that the director is abusing his right to be heard to secure
needless publicity for defamatory matter.
• The removal of a director from office take effect when the meeting by ordinary
resolution so resolves.
• This section does not apply to directors of private companies appointed
before 1/1/1962.
QUESTION SIX
(a)
• Under section 178 (1) of the Companies Act, every company must have a secretary.
However, if the office is vacant its functions may be discharged by an assistant or
deputy secretary or a delegate of the board.
• The company secretary is appointed by the board for such duration and on such
other terms and conditions as the board may deem fit.
• The board is empowered to remove the appointee from office.
• To qualify for appointment one must be:
o An advocate of the high court or
o Hold the Certified Public Secretary of Kenya Certificate or
o Possess such other qualifications which qualify him for appointment.
LAW II
However, the following persons are disqualified from acting as company secretary.
• The sole director of the company
• A company whose sole director is a company.
• The company secretary is an officer of the company with extensive duties and
responsibilities. He is the chief administrative officer of the company with wide
powers to bind the company. As explained in Panorama Developments Ltd V.
Fidelis Furnishing Fabrics Ltd, a company secretary is entitled to sign contracts with
the administrative side of the company.
• He has implied authority to bind the company.
• The company is generally liable for wrongs committed by the secretary in the course
of his employment unless he has acted fraudulently. However, he may incur
personal liability on contracts entered into on behalf of the company if sufficient
care is not taken for example signing a negotiable instrument on behalf of the
company.
• He is liable to the company in damages occassioned by his negligence.
• Misfeasance proceedings may be instituted against him.
(b)
• If the director has failed to acquire the share qualification as prescribed by the
articles of association of the company.
• It the director has not attained the age of 21.
• If the director is insolvent or has been declared bankrupt.
• If the director has become of unsound mind.
• If the director has absented himself from directors meetings held on over 6 months.
• If the court is satisfied that the director:
▪ Has been convicted of any offence in connection with the
promotion formation or management of a company.
▪ In the course of winding up a company it appears that he has been
guilty of any offence for which he is liable (whether convicted or
not) or
▪ He has been guilty of fraud in relation to the company or breach of
duty to the company.
QUESTION SEVEN
(a) Under the provisions of the Companies Act, the following charges are registrable
• Fixed charge
• Floating charge
• Charge on unpaid share capital
• Charge on book debt
• Charge on unpaid calls
• Chattels mortgage
• Charge on a ship or part thereof.
• Charge on a patent, trade mark, copyright etc.
(b) (i)
• The bags of barley delivered by Narok Farm Produce Ltd are beyond the reach of
the receiver due to the “retention of title” clause in the contract of sale between
Kazi Bure Co. Ltd and Narok Farm Produce Co. Ltd. Simply put the bags belong
to Narok Farm Produce. This is because the retention of title clause operates for
the benefit of the supplier of the stock under the provisions of the Sale of Goods
Act.

• Parties to a contract of sale of goods are free to stipulate the time when title passes
to the buyer. (Aluminium Industrial Vaasen V. Romalpa Aluminium Ltd.)
(ii)
• As for the semi-processed alcohol in containers, the barley is not identifiable and
Narok Farm Produce Co. Ltd. cannot reclaim it. The receiver is entitled to treat it
as part of the assets of Kazi Bure Co. Ltd.
• This is because it is impossible to reclaim goods if they are mixed with others from
another supplier making it impossible to identify them. A right to trace the goods in
the finished produce is fraught with challenges.
(iii)
• The consignment of brewed alcohol with the label does not belong to the company
as it has already been sold and title has already passed to the company’s wholesalers.
It is therefore beyond the reach and grasp of the receiver.
QUESTION EIGHT
(a) Under section 219 (f) of the Companies Act, a company may be wound up by the
court if the court is of the opinion that it is just and equitable that the company
should be wound up.
Courts of law have ordered the winding up of companies on this ground in various
circumstance namely:
• Fraudulent or illegal purpose

Re Thomas Edward Brinsmead and Sons Ltd.
• Failure of substratum
Re German Date Coffee
• Loss of confidence in management
Loch V. John Blackwood
• Expulsion or exclusion from management
Re Westbourne Gallaries Ltd
• “Bubble” companies
Re London and County Coal
• Oppression of minority
• Deadlock in management and membership
Re Yenidje Tobacco Ltd.
(b)
• All taxes and local rates due from the company in arrears for not more than one year.
• All government rents in areas for not more than one year in arrear.
• All wages or salary of any clerk or servant other than a director in respect of services
rendered to the company during the four months before the commencement of winding
up.
• Any amount payable in respect of any compensation or liability for compensation under
the Workmen’s Compensation Act accruing before the date of commencement of
winding up.
Any amount due in respect of contributions payable during the 12 months before the
commencement of winding up, by the company as the employer of any person under the
NSSF
LAW II
JUNE 2005
QUESTION ONE
(a)
• Must not be too similar to that of an existing company.
• Must not in the opinion of the registrar be undesirable.
• Must not mislead the public in any manner.
• Must not suggest any patronage of the government, president, department or ministry.
• Must not support a criminal or immoral intent or purpose.
• Must contain the word Limited or Ltd as the last word thereof.
• Must not contain the term co-operative or its equivalent or any abbreviation thereof.
• Must not generally contain the terms “national” or “international.”
• Must not contain the terms “bank,” “insurance” or “hotel” unless the company
proposes to carry on such business.
• Must not contain the surname of a person who is not named or proposed directory of
the company.
• Must not contain the registered trademark of any person without his written consent.
(b)
• Ultra vires: literally means beyond the powers.
• This is a rule of capacity respecting registered companies.
• This rule means that a company’s contractual capacity is restricted to transactions set
forth in the objects clause of the memorandum and those that are reasonably incidental
to the attainment or pursuit of such objects.
• A transaction is deemed ultra vires if it is beyond the capacity of a company.
• Such a transaction is null and void and unenforceable.
• This doctrine was explained in Ashbury Railway Carriage and Iron Co. V. Riche (1875)
and Attorney General V. Great Eastern Railway Co. (1880).
• Since this doctrine restricts the company’s capacity to contract it is arguably a nuisance
to the company. In addition this doctrine may be pleaded by either the company or the
third party. Bell houses Ltd V. City wall properties Ltd (1966).
• It is a trap to unwary third parties in that a 3rd party who is unaware of the company’s
capacity cannot enforce a transaction which is ultra vires the company.
• However, such a party may where circumstances permit sue the company for tracing or
enforce subrogative rights.
• The party may also have a personal action against the directors of the company.
• However, this doctrine has been watered down and companies enjoy almost unrestricted
capacity and the probability of a transaction being ultra vires the company is
tremendously reduced for example:
o Inflating the objects clause.
o Use of subjective clauses.
o Use of independent objects clauses.
o Companies have capacity to alter the objects clause.
o Willingness of courts to imply powers where non is expressly provided for.
In my view, the doctrine is no longer a nuisance to the company.

QUESTION TWO
(a)
Memorandum of Association Articles of association
- This is the company’s charter of external - This is the internal constitution of the
constitution. company.
- It regulates the relations between the - It regulates the relations between the
company and third parties. company and its members.
- Its contents are prescribed by the - Its contents are agreed upon by
provisions of the Companies Act. members.
- It is the principal or primary document. - It is subordinate to the memorandum.
- Contents include name, domicil, objects - Contents include borrowing dividend,

capital, association date, particulars of voting, meetings, Lien on shares,
subscribers. forfeiture of shares, capital company
secretary.
(b)
• Under the provisions of the Companies Act, a company may by special resolution alter
or add to its articles.
• Any alteration or addition to the articles is as valid as if originally contained in the
articles and may be altered by special resolution.
• Any alteration to the articles must not increase the liability of members or require them
to take up more shares without written consent.
• The alteration must not exceed the conditions contained in the memorandum of
association of the company.
QUESTION THREE
(a)
• The issue must be authorized by the articles of association of the company.
• The company’s capital must have been divided into different classes of capital some of
which must be irredeemable.
• Consent of the Capital Markets Authority is necessary in the case of companies quoted
at the Nairobi Stock Exchange.
• Notice of the issue must be given to the registrar of companies.
(b)
• A company must not pay dividend otherwise than out of profit.
• Directors recommend dividend in board meeting.
• Dividend is declared by members in general meeting by ordinary resolution.
• Directors may from time to time pay to members such interim dividend as may be
justified by the profits of the company.
• Once dividend is declared it becomes a debt due from company to the member.
• Members cannot in general meeting declare dividend in excess of the rate recommended
by directors.
• A company must not pay dividend if it renders it incapable of paying debts as and when
they fall due.
• A company is not legally obliged to make provision for depreciation before paying
dividend.
• Losses of circulating assets of the current accounting period must be made good before
dividend is declared.
LAW II
• Losses of circulating assets of the previous accounting periods need not be made good
before dividend is declared.
• Profits realized on the sale of a fixed asset may be treated as profit available for
dividend.
(c)
• To this basic principle is the exception that where shares are issued at a premium,
proceeds of the share premium account may be used by the company to finance a
capitalization issue which must be fully paid.
QUESTION FOUR
(a)
• This problem is based on the provisions of section 56 (1) of the companies Act which
prohibit a company from financing the purchase of its shares. However, if it has an
employee share scheme in place, it is lawful for the company to advance loans to
trustees to enable them subscribe for fully paid shares of the company for the benefit o
its employees including salaried directors.
• In this case the proposed transaction is lawful.
• If the company’s scheme is to advance loans to all bonafide employees of the company
to enable them subscribe for fully paid shares of the company to hold by way of
beneficial ownership the two directors are excluded.
(b)
• In the absence of an employee share scheme, neither the directors nor the members are
entitled to the additional loans to purchase additional shares.
• This is because the scenario before us is not captured by any of the exceptions to section
56 (1) of the Companies Act.
(c)
• This is referred to as script dividend and may be resorted to in the distribution of the
final dividend by a company.
• It is perfectly in order for a company to do so if authorized by its articles.
(d)
• Any person who qualifies for appointment as a director may be appointed by members
if they so resolve by ordinary resolution.
• If the articles of a company require a person to take up qualification shares, for
appointment as director, the same must be taken within 2 months of appointment or
such shorter time as the articles may prescribe failing which the person ceases to be a
director.
• In this case, the board of directors of the company is proposing to lend John Omwami
Kshs. 100,000 to enable him purchase the shares.
• It is apparent that this is contrary to the provisions of the Companies Act as the lending
at hand is not covered by the exceptions outlined by section 191 (1) of the companies
Act.
• The proposed transaction is unlawful.

QUESTION FIVE
(a) (i)
• Subscribing to the memorandum of association of the company.
• Transfer i.e. purchase of shares from a willing seller.
• Allotment by the company pursuant to an application.
• Transmission by death.
• Transmission by bankruptcy.
• Qualification shares of direction.
• Estoppel: a person who holds himself out as a member of a company or knowingly
permits himself to be held out as a member by a company is estopped from denying the
apparent membership for the sake of third parties.
(ii)
• Transfer of shares to a third party.
• Valid surrender of the shares
• Forfeiture of the shares
• Sale by the company in exercise of alien.
• Death of the member.
• Bankruptcy of the member.
• Repudiation by an infant.
• Rescission of contract
• Redemption of redeemable preference shares
• Winding up of the company
(b)
• This problem is based on mortgage of shares and the consequences thereof.
• Henry is entitled to use his shares as a security to borrow from Tumaini Bank Ltd as
long as the bank is agreeable.
• This is because shares are items of property and can therefore be used as collateral.
• Whether or not Henry would still receive dividend depends on the type of contract
entered into. The mortgage transaction may be legal or equitable.
• In the case of a legal mortgage Henry would transfer his shares to Tumaini Bank Ltd
which would be the temporal owner with all the rights of a holder i.e. dividend,
attendance of general meetings of the company and voting. As a consequence Henry
would loose the right to dividend unless modified by the mortgage transaction.
• In the case of an equitable mortgage, Henry would only execute the transaction, hand
over the share certificate to Tumaini Bank Ltd but retain membership of the company.
He would thus be entitled to dividend.
QUESTION SIX
(a)
Directors Auditors
- Are elected by members in general - Are engaged by the company to
meeting discharge certain obligations prescribed
by law.
- Every company must have a board of
directors to manage its affairs. - Are professionals registered by the
relevant body and licenced to practice
- The law does not insist that a director accountancy.
profess any profession.
- There is a contractual relationship
- Directors stand in a fiduciary position in between an auditor and the company.
LAW II
relation to the company.

- One of the principal obligations of an
- Directors owe their company a duty of auditor is to exhibit a degree of care,
care, skill and diligence. The degree of skill and caution of a reasonably
care, skill and diligence expected of them competent careful and cautious auditor,
is that of a person of their knowledge as observed by Lopes L. J. in re:
and experience. A director is not bound Kingston cotton mills.
to bring any special qualifications to his
office, as observed by Neville J. in re: - An auditor is bound to approach his task
Brazilhan Rubber Plantations and with an inquiring mind and not with a
Estates Ltd. However, if a director foregone conclusion of wrong doing.
posses a particular skill he is bound to
exercise the same for the benefit of the - He must sensure that errors of
company. commission and omission and
downright untruths are ascertained.
- They are not bound to give continuous However, it is not his obligation to
attention to the affairs of the company discover all fraud as he is not an
and are entitled to rely on information investigator. “He is a watchdog but not
provided by trusted servants of the a blood hound”
company.
- His task is not to ensure that the
computation is correct. He is not a
stock taker. “He is not to be written off
as a professional adder-upper and
subtractor.” But must satisfy himself
that the company’s security exist and are
in safe custody.
(b)
• Under the provisions of the Companies Act, an auditor may be appointed by the board
of directors, the annual general meeting or the registrar of companies.
• Board of directors: the provisions of the Companies Act, confer upon the board of
director power to appoint the first auditor of the company before the first annual
general meeting. If no appointment is made before this meeting directors loose this
power. However, directors are empowered to fill a casual vacancy in the office of the
auditor.
• Annual general meeting: at every annual general meeting an auditor must be appointed
to hold office from the conclusion of the meeting to that of the next annual general
meeting. However, at every annual general meeting a retiring auditor is always deemed
to have been re-appointed without any resolution to that effect unless:
o He is not qualified for re-appointment.
o He has intimated to the company his unwillingness to be re-appointed.
o The meeting has expressly resolved that he shall not be re-appointed.
o The meeting has resolved to appoint some other person auditor.
• Registrar: if at an annual general meeting, no auditor is appointed is deemed to be re-
appointed, the company must notify the registrar within 7 days of the meeting. The
registrar may appoint an auditor or for the company.
• A special notice of the intended resolution to remove an auditor from office must be
given to the company by the person proposing to move it.
• The company must send a copy thereof to the auditor concerned. The auditor is
entitled to make written representations, not exceeding reasonable length as his defence
and may request the company to notify its members that he has made representations.
• The company must summon a meeting to deliberate the matter among other matters.
Notice of the meeting must be sent to all members and must embody the proposed

resolution. It must intimate to members that the auditor has made representations if
any, and copies must be enclosed unless received too late by the company.
• If the auditors representations are received too late or are not enclosed by reason of the
company’s default, the auditor is entitled to have them read out at the meeting.
• Copies of the auditors representations need not be enclosed in the notice or be read out
at the meeting if an application by the company or other aggrieved person, the court is
satisfied that the auditor is abusing his right to be heard to secure needless publicity for
defamatory matter.
• The removal of an auditor from office take effect when the meeting by ordinary
resolution so resolves.
QUESTION SEVEN
(a)
• Total number of shares allotted distinguishing the fully and the party paid.
• Total amount of cash received by the company in respect of the shares.
• An abstract of receipts and payments and the matters they relate to.
• Particulars of any contract submitted to the meeting for modification and the particulars
of the proposed modification.
• Particulars of directors and the secretary, auditors and manager, if any
• An auditors certificate on the shares allotted, amount received and abstract of receipts
and payments.
(b)
• Alteration of the objects clause of the memorandum.
• Alteration of the articles of association.
• Voluntary change of name by a company.
• Conversion of a private to a public company.
• Creation of reserve capital.
• Reduction of capital by a company.
• Compulsory or voluntary winding up of a company.
QUESTION EIGHT
(a) Under section 219 of the Companies Act, a company may be wound up by the court
if:
• Members have by special resolution so resolved.
• The number of members of the company have fallen below two in the case of a
private company or below seven in the case of a public company.
• The company has failed to commence business within one year of
incorporation.
• The company has suspend its business for a whole year.
• The company has failed to hold the statutory meeting in accordance with the
provisions of the Act.
• The company has failed to deliver a copy of the statutory report to the registrar
for registration as required by law.
• The company is unable to pay its debts (insolvency)
• The court is of the opinion that it is just and equitable that the company should
be wound up for example:
o The company’s’ substratum has failed.
o The company is a “bubble”
o Deadlock in management and membership
o Members have justifiably lost confidence in the manner in which the
company’s affairs are being managed.
LAW II
• Winding up proceedings have been commenced outside Kenya against a

company registered outside Kenya, but carrying on business in Kenya.
(b)
• Presentation of winding up petition to the Registrar: the petitioner or his advocate must
present the winding up petition to the Registrar who determines the time and place at
which the petition is to be heard. The petition must be advertised for at least 7 days
before the hearing.
• Presentation of the petition to court : This is the filling of the Winding up petition in
court as directed by the registrar. It is deemed to be the day of commencement of a
winding up by the court.
• Appointment of a provisional liquidator: before the hearing of the petition the court
may if the circumstances so justify appoint a provisional liquidator for the company.
• Hearing of the petition: the high court has jurisdiction to hear winding up petitions of
companies registered in Kenya. The petitioner urges the court to order the winding up
of the company on a particular ground(s).
• Making of the winding up order: Once the court has heard the petition it may if the
circumstances so justify order the winding up of the company. Once the order is made,
the official receiver becomes the interim liquidator and all servants of the company are
ipso facto dismissed. In the same vein directors powers become functus offio.
• Meetings of members and creditors: The official receiver summons separate meetings of
members and creditors to determine whether an application should be made to the court
for the appointment of some other person as liquidator and a committee of inspection
and who its members shall be. If the meetings so resolve, the application is made and
the appointments duly made. If no resolution is passed, no application is made and the
official receiver becomes the liquidator. His title changes to “Official Receiver and
Liquidator.”
• Winding up Process: the liquidator enters upon his obligations without undue delay and
commences the process of winding up making such returns to the official receiver as the
latter may require and in accordance with the Companies Act. The Companies Act
center upon the liquidator certain powers.
• Dissolution: When the company’s affairs are fully wound up, the liquidator must apply
to the court to order its dissolution and once the court so orders, a copy thereof must be
delivered to the registrar of companies who removes the company’s name from the
register of companies

LAW II SOLUTIONS
DEC 2005
QUESTION ONE
(a) (i)
• where it acquires its own fully paid shares otherwise than for valuable
consideration.
• redemption of redeemable preference shares in accordance with the articles and
the Companies Act
• acquisition of own shares pursuant to a court order
• where shares are forfeited for non-payment of a call or are surrendered in lieu
of forfeiture.
(ii)
• It facilitates retention of family control of a private company
• Increases the marketability of the company’s shares since the company itself is a
potential buyer
• enables companies to use surplus cash to the company’s advantage e.g.
redeeming shares when it is cheaper to the company
• it makes it easier for the company to raise venture capital from merchant banks
(b) The proviso to Section 56(1) of the Companies Act sets out the circumstances in which
a company finance the purchase of its shares.
• where the lending of money is part of the ordinary business of the company and the
same is lent in the ordinary course of such business
• where the company has in force a scheme to advance loans to trustees to purchase
or subscribe for fully paid shares of the company for the benefit of all employees
including salaried directors.
• where the company has in force a scheme to advance loan to all bona fide
employees other than directors to enable them purchase or subscribe for fully paid
shares of the company to hold by way of beneficial ownership.
QUESTION TWO
• In simple legal Parlance, the so-called rule in Foss v Harbottle (1843) is the majority rule.
• It describes the policy of courts of law not to interfere with internal affairs of companies
acting within their powers.
• The rule was formulated in Foss v Harbottle (1843) and consists of three principles
namely:
- proper plaintiff
- Irregularity
- Internal management
This rule serves certain purposes or functions:

• Promotes democracy in company management.
• Prevents multiplicity of actions on behalf of the company.
• Discourages frivolous and incompetent actions.
• Re-affirms the rule in Salomon v Salomon and Co Ltd that is the company is a legal
person and should thus be left alone to enforce its rights manage its internal affairs and
correct internal irregularities.
LAW II
Exceptions to the rule in Foss v Harbottle are circumstances in which the majority rule
does not apply. They are instances in which a person other than the company may sue
to remedy the wrong in questions. Such circumstances include;
- Ultravires or illegal acts

The majority rule does not apply if the company is acting or threatening to act in an
ultra vires or illegal manner.
- Special or qualified majorities

Where the majority purport use a simple majority to make a decision that can only
be made by a qualified majority, the rule cannot apply Bailie V. Oriental Telephone
and Electric Ltd.
- Infringement of individual membership rights

Where individual rights are violated or threatened with violation, a personal action
for redress is available.
- Fraud on the minority: This is an abuse of power or misuse of a fiduciary position

e.g. breach of duty or unfair use of majority voting power Cooks V. Deeks.
- Oppression of minority:
Under Section 211 of the Companies Act, any member of the company who
complains that the affairs of the company are being conducted in a manner
oppressive to some part of the members including himself may apply to the court
by petition for an order under this section. The petitioner must file a representative
action and discharge the onerous burden of proof under this section.
QUESTION THREE
• It is a principle of law that on incorporation, a company becomes a legal person, distinct
and separate from its members and managers. It becomes a body corporate with an
independent legal existence, with rights and subject to obligations.
• It is a juristic person whose existence is only in the contemplation of law. This is the
principle of legal personality which constitutes the foundation of company. It is often
referred to as the “veil of incorporation.”
• The conception of a company as a person separate and distinct from other persons who
are its members and directors was enunciated by the House of Lords in Salomon v
Salomon and Co Ltd (1897) where Lord MacNaghten opined that “The company is at law a
different person altogether from the subscribers to the memorandum”
• The principle is now contained in Section 16(2) of the Companies Act.

• As a legal personality a registered company has attributes that are peculiar to it for
example,
- Limited Liability: As provided by Section 4(2)(a) and (b) of the Companies

Act, members liability is limited by shares or guarantee.
- Perpetual Succession: Since a registered company is a legal person not

susceptible to natural shocks, it has capacity to exist in perpetuity as its life lies
in the intendment of law.
- Owning of property: a registered company has capacity to own property e.g.

land. Such property is vested in the company (Macauras case). It has an
insurable interest in it.

- Sue or be sued: It has capacity to enforce its rights and may be sued on its
obligations (Foss v Harbottle). It is Primafacie the proper plaintiff for
redress.
- Capacity to contract: a company has legal ability to enter into contractual

relationships (Lee v Lee Air Farming Co. Ltd)
- Common seal: Under Section 16(2) of the Companies Act, a registered

company has a common seal to authenticate its transactions.
The foregoing demonstrates undoubtedly that a company has a separate legal personality
from its members and managers.
However, this principle has been modified by courts of law and the Companies Act. These
exceptions are collectively referred to as “lifting the veil of incorporation” or “piercing the
corporate shell,” for example:
Statutory exceptions
• Reduction of number of members Section 33
• Non-publication or misdescription of the company’s name Section 109(4)
• Group accounts Section 150 - 152
• Investigation of company affairs Section 167
• Investigation of company membership Section 173 (1)
• Take over bid Section 210
• Fraudulent trading Section 323 (1)
Common law exceptions

• Agency, trustee or nominee.
• Ratification of corporate acts.
• Determination of residence.
• Fraud or improper conduct.
• Determination of character.
• Group enterprises.
QUESTION FOUR
a)
- The Companies Act does not define the term “promoter” generally. The
“definition” contained in Section 45(5) is specific to Section 45(1) of the Act.
- In the words of Cockburn C.J in Twycross v Grant (1877) “A promoter apprehend is

one who undertakes to form a company with reference to a given project and set it going and who
takes the necessary steps to accomplish that purpose.”
- This definition does not identify the role played by a promoter.
- A promoter is any person who has taken some part in bringing a company into
existence or in procuring persons to join it as soon as it is technically formed.
- The role of a promoter may be active or passive.
- The question who a promoter is, is one of fact and varies from circumstance to
circumstance.
LAW II
b)
- This problem is based on pre-incorporation contracts. In this case the borrowing
contract is between Mr and Mrs Karanja and Jijenge Bank. The proposed company,
Central Construction Co. Ltd is not involved, and cannot therefore be held liable on
the contract. At common law a pre-incorporation contract is generally
unenforceable by or against the company. Mr and Mrs Karanja are personally liable
on the contract. This position is consistent with the decision in Kelner v Baxter.
- Matatas contention is therefore sustainable since a pre-incorporation contract

cannot be ratified by the company after incorporation. It was so held in Natal Land
Company Ltd v Pauline Colliery Syndicate.
- Central Construction Co Ltd cannot be burdened with obligations contracted before

it was incorporated.
- Of equal importance is the fact that the company has not after incorporation
entered into a new contract similar to the previous agreement. The bank has an
action against Mr and Mrs Karanja for the amount due.
- The proposed alteration of the objects clause to provide for repayment of the
amount by the company is invalid and cannot withstand judicial scrutiny even if
passed by the majority.
QUESTION FIVE
a) - Prima facie directors are not entitled to remuneration unless the articles of
association expressly provide. However, in practice directors are paid an allowance
for attending meetings.
- With regard to compensation for loss of office, the operative principles are
prescribed by Section 192(1) of the Companies Act. It is unlawful for a company to
make to any director any payment by way of compensation for loss of, or as
consideration for or in connection with this retirement from office unless:
• particulars of the proposed payment including the amount has been disclosed
to members of the company
• the payment has been approved by the company in general meeting
Any payment made to a director in contravention of this provision is illegal and the
director receives the same in trust for the company.
b) - An extra ordinary general meeting of the company must be convened to discuss the
matter.
- The contract must be authorized by an ordinary resolution.
c) Directors are regarded as trustees in two respects namely:

- money in a company bank account which directors are authorized to operate is held
by them in trust for the company.
- Property that comes into the hands of directors or under their control is held in
trust for the company
As trustees directors are bound to;

• exercise all powers as such.
• account for any monies misapplied.
• avoid conflict of interest.

However, directors are not ordinary trustees in that;

• they have no proprietary rights in company property as it is vested in the
company.
• They are bound to invest trust property for the benefit of the company.
QUESTION SIX
(a) - Special resolution
- Ordinary resolution if the duration for which the company was to subsist has
lapsed.
- Ordinary resolution if an event contemplated by the articles has occurred.
(b) - Company
- Creditor or creditors
- Contributory or contributories
- Member or shareholder other than contributory
- Attorney General
- Official Receiver
- Commissioner of Insurance
(c)
• the company ceases to carry on business except such as may be required for
beneficial winding up
• any transfer of shares or alteration in the status of members is void
• directors powers become functus officio on appointment of the liquidator
• if the winding up is based on insolvency, servants of the company are dismissed.
• the company’s corporate status and powers remain until dissolution.
QUESTION SEVEN
a) (i) Under Section 133 (1) of the Companies Act, notices of all general meetings of the
company must be written and sent to all members of the company including the
auditor. Under Section 158(1) of the Companies Act, a 21 day notice is necessary
before an annual general meeting can be held. However, a shorter notice suffices if
all members of the company have previously agreed.
(ii) The ordinary business of an annual general meeting include;

• adoption or confirmation of accounts
• declaration of dividend
• election of directors
• appointment of auditors
b) Mr Shidas problem is based on the failure of a company to hold an annual general

meeting. Under the provisions of the Companies Act, every company much in each
year hold a general meeting as an annual general meeting. The first general meeting
must be held within 18 months of incorporation and subsequently 15 months must not
elapse from the date of one annual general meeting to that of the next. In this case
Excellent Home care Agencies Ltd has not held an annual general meeting as required
by law. A criminal offence has been committed for which the company and officers in
default are liable to a fine not exceeding Kshs. 2,000.
My advise to Shida is to:

• instigate the prosecution of the company and its directors for the default.
LAW II
• apply to the registrar to call or direct the calling of an annual general meeting. A
general meeting convened by or accordance with the directions of the registrar is
duly constituted by one member present in person or by proxy.
QUESTION EIGHT
(a) Similarities
• Both shares and debentures are transferable
• Both are capital raising mechanisms for the company
• Preference shares and debentures have a prior claim
• Preference shares like debentures earn a fixed rate of interest
• Preferential dividend like interest on debentures is generally cumulative
(b) Differences
• Whereas shares are a unit of capital constituting a holder a member of the company,
a debenture is a unit of a loan which constitute the holder a creditor to the company
• Whereas shares generally confer voting rights on members debentures do not
• Whereas shares are not secured, debentures generally are
• Whereas shares earn dividend, debenture holders are entitled interest
• Whereas dividend payable to shareholders generally vary with the company’s
profitability, interest does not
• Whereas companies are not obligated to pay dividend on shares they are required to
pay interest
• Shareholders rank after creditors in the satisfaction of claims
• Whereas shares participate in surplus profit, debentures do not.
• Whereas shares are generally irredeemable, debentures are generally redeemable.
b) This problem is based on the legal consequences of non-registration of a charge. In this

case the charge to East Bank Ltd by Wheels Limited was not registered and the
company is now in liquidation. It is evident that the unregistered charge cannot be
relied upon by the bank to prove its claim. This is because under Section 96(1) of the
Companies Act, if a charged is not registered within 42 days of its execution or such
other extended time as the court may permit on application, the charge is void as against
the liquidator and the amount secured becomes payable immediately.
• In this case the charge is invalid and the debenture to East Bank Ltd is therefore
unsecured.
• My advise to East Bank is to prove and rank the debt as an unsecured creditor. This
advise is based on the provisions of the Companies Act.

SUGGESTED SOLUTION
JUNE 2006 SITTING
QUESTION ONE
(a) Register of members:
Contents
- Name of the shareholder
- Postal address
- Number of shares or stocks held
- Date of entry of the name in the register
- Date of cessation of membership
Inspection
- by members of the company without charge.
- others subject to payment of the prescribed charge.
(b) Register of directors and secretaries
Contents
- Christian and surnames of every director and secretary
- Postal address
- Nationality
- Business or occupation
- Other directorship,
- In the case of a company, its name registered office and postal address.
Inspection
- Members of the company without charge
- Others on payment of the prescribed charge
- Directors and secretaries of the company
(c) Register of directors interests
Contents
- number, description and amount of shares or debentures held.
- nature and extent of the directors interest in the shares or debentures.
Inspection
- members of the company without charge
- debenture holders of the company.
- any person acting on behalf of the registrar.
(d) Register of charges
Contents
- Particulars of all fixed and floating charged created by the company.
- Description of the property charged.
- Amount of charge
- Names of persons entitled thereto.
LAW II
Inspection
- members of the company without charge
- creditors of the company without charge
- others on payment of the prescribed charge.
QUESTION TWO
Recent demands by regulatory authorities and shareholders have obviously affected the
traditional role of an auditor in various ways for example:
• Professional Competence and due care: an accountant must not only attain
professional competence but must maintain the same. General and specific education is
necessary. He must be continually aware of developments in the profession. He must
exhibit care, competence and diligence.
• Professional behaviour: must act in a manner consistent with the good reputation of
the profession and refrain from any conduct which might bring discredit to the
profession.
• Confidentiality: must respect confidentiality of information about a client acquired in
the course of rendering professional services and should not use or disclose the same
without proper and specific authority.
• Integrity: entails fair dealing and truthfulness i.e. must be straight forward and honest in
performing professional services.
• Technical standards: an accountant should carry out professional services in
accordance with the relevant technical and professional standards. Must carry out the
clients instructions with utmost care and skill.
• Objectivity: an accountant must be fair, intellectually honest and free from conflict of
interest. Objectivity must be demonstrated in all circumstances.
• Whistle blowing: since the accountant has a responsibility to the public he is bound to
blow the whistle whenever necessary to enable relevant bodies take the necessary action
to protect the public.
• Indoor/other information about the company e.g. products, markets processes.
• Investigation: though traditionally the auditor is not an investigator unless appointed as
such shareholder are demanding more and more information from them and this
compels the auditor to “dig deeper” for the information. It is apparent that the
traditional statements of auditors no longer appease members who have become more
inquisitive.
QUESTION THREE
(a)
• Ascertainment and determination of the company’s name. This is necessary before
the application or reservation of the name is made to the registrar.
• Determination whether the company is public or private. This is critical as it
affects the contents of the articles of association.
• Determination whether liability is limited by shares or guarantee. For trading
companies liability is limited by shares while non-trading companies are limited by
guarantee.
• Determination whether the company shall have a share capital. This depends on:
o Whether liability is limited by shares or guarantee.
o Intention of promoters.
(b) In law, promoters are not entitled to remuneration for incorporating a company for
the simple reason that the company did not engage their services. However,
promoters may be rewarded in other ways:
• acting as commission agents.

• being appointed the first directors of the company.

• being afforded the opportunity to take up extra shares at par value after market
value has risen.
• being offered deferred or founders or management shares.
• upon disclosure, a promoter is free to sell overvalued assets to the company for
a profit.
• upon, disclosure a promote is free to sell overvalued assets to the company is
return for fully paid shares of the company.
(c) This is a rather interesting question. By default or design, the examiner opines that
promoters exist even after incorporation. This proposition is not sustainable. A
company has no promoters after incorporation and the question of their suspension
does not arise. The purported reasons do not exist. (A figment in the imagination
of the examiner.)
QUESTION FOUR
Directors practices that would promote and protect shareholders rights include:
• Ensuring that members have equitable terms in all that they do.
• Availment of information on the performance of the company.
• Ensuring that there is a secure method of transfer and registration of securities.
• Ensuring that shareholders are aware of their rights to participate in company affairs and
vote in general meetings.
• Encouraging members to participate in deliberations at general meetings by way of
questions and making substantive contributions.
• Recommending dividend regularly.
• Put in place an effective communication policy between the company and its members,
creditors and other stakeholders.
• Ensuring that annual reports and accounts give a clear indication as to the company’s
financial performance and prospects.
• Encourage and facilitate the establishment of a shareholders association to promote
dialogue between the company and its members.
• Having a director’s charter in place.
• Distinguishing the roles of executive and non-executive directors and regular
appointment of directors.
QUESTION FIVE
(a) Documentation
• Memorandum of Association – this is the external constitution of the company.
• Articles of Association – this is the internal constitution of the company.
• Statement of Nominal Capital – specifies the capital with which the company is
to be registered.
• Declaration of Compliance – this is a requirement of Section 17(2) of the Act.
• List of directors and their particulars – names, postal address, date of birth,
other directorships.
• Consent to act as director which must be written.
• Notice of location of registered office – city or town, name of building, plot
number etc.
(b) Removal of Boaz for office

• Abel and David must give ABD Company Limited a special notice of the
intended resolution i.e. to remove Boaz from office.
• On receipt of the notice, ABD Co. Ltd. must send a copy of the notice to Boaz.
LAW II
• Boaz is entitled to make written representations as his defence and may request
the company to notify its members that he has done so.
• Abel and David must instigate the convention of an extra ordinary general
meeting of the ABD Co. Ltd to determine the issue.
• The removal of Boaz from the office of director will take effect when Abel and
David pass an ordinary resolution to that effect.
(c) The facts of this case encapsulates a situation whereby the majority shareholders
hatch a duplicity to remove one of their number from the office of director. These
facts raise the question whether expulsion from management is a sufficient ground
for compulsory winding up. It is our submission that if the expulsion is not based
on anything substantial as is the case in ABC Co. Ltd., it tends to be unfair and
borders malice and is thus sufficient to warrant a winding up of the company under
the just and equitable ground.
In our view, Boaz has been unfairly expelled from the management of the company
and can thus petition for the compulsory winding up of the company. Our position
is consistent with the decision in Re Lundie Brothers Ltd. whose facts were
substantially similar and the court decreed the winding up of the company under the
just and equitable ground.
QUESTION SIX
A securities account with the Central Depository and Settlement Corporation may be
suspended on various grounds or circumstances e.g.
• The entire issue has been suspended by the regulatory authorities e.g. Capital Markets
Authority.
• Notice of the investor’s death.
• Instigation of the investor.
• Its existence is contract to public policy e.g. contrary to national security.
• The account was created illegally or unlawfully.
• The shares have been pledged as a security.
• Pursuant to a court order.
• Instigation of the Capital Market Authority or the Nairobi Stock Exchange.
QUESTION SEVEN
(a) This is information which:
• Relates to particular securities or a particular issuer of securities and not to
securities generally or to issue of securities generally.
• Is specific or precise
• Has not been made public
• If it was made public would be likely to have a significant effect on the price of
any securities.
• The information is known to directors or servants of the company, public

servants employees of regulators or other persons who had some relation with
the company.
(b)
(i) This problem is based on allotment of shares. In this case Sarah had applied for
4000 shares but ABC Co. Ltd. allotted her 2000 only. Can Sarah sue the company?
The answer to this question is emphatically no for the following reasons:
• Sarah’s application for shares was an offer to the company which it was not
bound to accept but accepted by allotting her 2000 shares. If the allotment

letter was posted, the contract was concluded on postage (Household Five
Insurance Co. Ltd. V. Grant).
• Company prospectuses always provide that the company is not bound to allot
the quantum of shares applied for. Since ABC Co. Ltd. is a public company
there must have been a prospectus inviting prospective investors to apply for
the shares.
• Since an allotment is an appropriation of a number of shares Sarah is bound to
take up the number allotted to her.
• My advice to Sarah is to take up the shares allotted and drop the threat to sue
the company. In any event she can always dispose them off.
(ii) Restrictions on Allotment of Shares

• no allotment should take place before the minimum subscription as stipulated
in the company’s prospectus has been raised.
• no allotment must be effected before the delivery to the Registrar for
registration, a prospectus or a statement in lieu of prospectus signed as required
by law and containing the relevant particulars.
• no allotment of shares should be made to a state corporation without prior
written consent of the treasury.
• no allotment of shares should be made before the beginning of the third day
from that on which the prospectus was first issued.
QUESTION EIGHT
(a)
• The transferor and transferee enter into a legally binding agreement to sell and buy the
shares.
• The transferor completes the instrument of transfer by entering all the particulars and
signing the same.
• The transferor signs the relevant part of the document.
• In the case of a partial transfer of shares certification of the instrument of transfer by
the company is necessary.
• Stamp duty on the transfer must be paid.
• The instrument of transfer and the share certificate must be lodged with the company
for registration of the transfer.
• On registration of the transfer the share certificate is cancelled and another issued in the
name of the transferee.
(b)
• A forgery has no effect. It is a legal nullity. It was so held in Ruben V. Great Fingal
Consolidated.
• In this case Otieno’s forgery on Mwinzi’s share certificate and transfer has no legal
effect of the shares. Thus Kuria acquired no title in the shares as he had none to pass to
Wafula though the company issued a share certificate to Wafula.
• The legal position is that Mwinzi is still the legal and lawful owner of the shares as the
purported transfer to Kuria has no legal effect.
• The fact that Mwinzi did not respond to the company secretary’s letter on the transfer is
of no legal consequence. His conduct cannot be relied upon to legalize a nullity.
• With regard to Wafula’s case, the law is very clear, he is a bonafide purchaser for value
without notice. Since the company issued a share certificate to him it cannot be heard to
say that he is not the holder of that number of shares or their value. The company is
estopped from denying that fact. But since the transfer is void, Wafula has not title in
the shares. He is entitled to sue the company in damages for the loss and the company
is liable.
LAW II
• Mwinzi is entitled to have the shares re-registered in his name and a new share certificate
issued in his favour. This position is consistent with the decision in Balkis Consolidated
V. Tompkinson.

124 Questions – Mocks
Part III: Comprehensive Mock Examinations
QUESTIONS – MOCKS
MOCK ONE
QUESTION ONE
a) Outline a classification of registered companies on the basis of share capital.
b) What do you understand by the phrase “ultra vires” in the wider sense?
c) Section 22 (1) of the Companies Act has been interpreted to mean that when the articles
are registered two contracts come into existence. Enumerate the characteristics of the so
called “second contract”.
QUESTION TWO
a) To what extent may a company alter the objects clause of its memorandum of
association?
b) Josiah and Joachim and others incorporated a public company to carry on the business
of exporting flowers to Europe and the United States. The company’s shares attracted a
heavy subscription and the company has over 70 members whose shares are fully paid.
For the last 5 years, the company has made enormous profit and members are very
happy with their investment. However, recently, the European Union and the United
States excluded Kenyan flowers from the market on the ground that they contained
dangerous levels of poisonous chemicals. The company cannot now export flowers to
Europe or the United States and shareholders are at a loss. Oliver and Ben, who are
shareholders have approached you for advice on what action to take. Advise them.
QUESTION THREE
a) In what circumstances may a registered company pay a commission?
b) Under Section 45 (1) of the Companies Act persons who are party to the issue of a
prospectus containing any untrue statement may be held liable to compensate a third
party who has suffered loss or damage by reason of subscribing for shares or debentures
on the faith of such statements. However an expert may escape liability in certain
circumstances. Identify these circumstances.
c) In addition to the matters specified in Part I of the Third Schedule and the reports
specified in Part II of that schedule, a prospectus must state certain other matters.
Enumerate these matters.
QUESTION FOUR
a) “In considering an application for the reduction of capital of a company under the
Companies Act, Cap 486, the Courts while affording adequate safeguards for the
interests of creditors have ignored totally the interest of the shareholders and the public
at large”. Do you agree?
b) Distinguish between consolidation of shares and diminution of capital.
c) What do you understand by “corporate governance”?
LAW II
Comprehensive Mock Examinations 125
QUESTION FIVE
a) Maridadi Company Limited a private company limited by shares has adopted Table A
as its articles. In March 1997 the board of directors appointed Cook as managing
director at a salary of Kshs100,000 per month. Under the terms of the appointment,
Mr. Cook was to remain managing director for 5 years. Maridadi Company Limited has
not made any profit for the last 4 years and the directors are very unhappy with Cook’s
performance. At an acrimonious board meeting, Cook outrightly refuses the board’s
proposals for improving the company’s performance. The board of directors now seek
your advice as to whether it can lawfully take the following causes of action:
i) order Cook to confine his attention to the affairs of a subsidiary of Maridadi Co.
Ltd.
ii) dismiss Cook as managing director
iii) remove Cook from membership of the Board
iv) reduce his salary by reason of poor performance.
b) The Articles of Akim Ltd provide that Adam, one of the promoters and a lawyer be
appointed the company’s advocate for life. It also contains a provision to the effect
that any dispute between the company and a member be referred to arbitration. Adam
holds 80% shares in the company and acts as the company’s advocate for 8 years after
which the company begins to channel some of its legal work to a new form of
advocates. Adams protests to the company but in vain. After 8 months all the
company’s legal work is taken over by the new firm. Advise Adam.
QUESTION SIX
a) What are the principal functions of the managing director?
b) The directors of Unguja Farmers Co. Ltd a public company limited by shares have not
convened an annual general meeting of the company since it was incorporated two and a
half years ago. Makini, one of the shareholders is yearning for a meeting so as to
participate in the decision making of the company. Advise him.
c) What are the criminal penalties for non-compliance with the provisions of the
Companies Act in relation to the annual general meeting and the statutory meeting?
QUESTION SEVEN
a) Shareholders of Wakulima Co. Ltd. resolved by special resolution that the affairs of their
company be investigated by an inspector appointed by the Court. Recently, the Court
appointed two inspectors who investigated the company’s affairs in two weeks and a
report on the same has already been handed over to the Court. The report shows that:
i) some directors of the company have misappropriated the company’s funds and
property.
ii) some members of the company have committed fraudulent acts and misconduct
against the company.
iii) members have lost confidence in the management of the company.
A copy of the report has been delivered to the Attorney General for further action.
Advise the Attorney General.
b) In what circumstances:
i) may the High Court refrain a person from being directly or indirectly involved in the
management of a company’s affairs.
ii) may a company make a loan to its directors?

c) Tirop who owns 500 shares in Mbao Co. Limited, a public company limited by shares
contracted to sell them to Sironik. Neither of them has transferred shares before:
i) Advise them on the procedure of transfer of shares.
ii) What would the legal position be if Tirop transferred the shares to Joash before the
transfer to Sironik was registered?
QUESTION EIGHT
a) “They cannot themselves usurp the powers which by the articles are vested in the board
any more than the board can usurp the powers which are vested in the general body of
shareholders”. (Per Lord Greel in Shaw V Shaw (Sanford) and Sons Ltd) Do you agree?
b) Odipo and Associates, a firm of auditors has been in the business for the last 12 years.
Last year two of its senior partners were convicted for fraud and imprisoned for 2 years
and as a consequence were deregistered as practising accountants, leaving the firm with
no partner but three accountants. Recently the annual general meeting of Wavuvi Co.
Ltd. appointed Odipo and Associates as auditors.
What are the legal consequences of the appointment?
LAW II
MOCK TWO
QUESTION ONE
a) Distinguish between “lifting the veil” and “raising the curtain”.
b) Sometimes the corporate entity works like a boomerang and hits the man who was
trying to use it” (Kahn Freud - Some Reflections on Company Law).
What do you think the writer meant by this statement?
QUESTION TWO
Write explanatory notes on the following:
a) Peek V. Gurney (1873)
b) Andrews V. Mockford (1896)
c) misfeasances
d) identification theory.
QUESTION THREE
a) What do you understand by “allotment”?
b) The provisions of the Companies Act Cap 486, render certain irregular allotment of
shares and debentures valid, voidable or void. Set out the allotments in each category
and illustrate the criminal sanctions, if any, for contravention of law.
c) Define “underwritten firm”.
QUESTION FOUR
a) Who is liable to compensate a third party who has suffered loss or damage by reason of
subscribing for shares or debentures of a company on the faith of a prospectus
containing any untrue statement?
b) Examine the criminal liability in respect of prospectuses.
c) What do you understand by “overriding commission”?
QUESTION FIVE
a) Article 114 of Table A provides inter alia “The company in general meeting may declare
dividends…”. With reference to Table A and the common law state the rules that
govern payment of dividend by companies.
b) The Articles of Reconstructions Co. Ltd. is similar to Table A. Reconstructions Co.
Ltd. is a mining company with a registered office in Busia. It is anticipated that gold
mining in Busia will be exhausted by the year 2005. Since 1994, the Company had not
made any provision for depreciation in the value of its assets. During the 1999-2000
financial year Reconstructions Ltd made a trading profit of Kshs4 million. However, its
accounts for the financial year 2000-2001 show a loss of Kshs5 million. During the
same period the company sold a piece of land in Busia town realising a profit of Kshs3
million on the sale. Directors of Reconstruction Ltd would like to know whether they
can recommend dividend. Advise them.
QUESTION SIX
a) In what circumstances may a company:
i) Issue bonus shares?
ii) Pay interest out of capital?
iii) Redeem redeemable preference shares?
iv) Issue share warrants?
b) What are the criminal penalties for
i) Issuing and circulating an unsigned balance sheet?

ii) Failure to keep the company’s book of accounts?

iii) Appointing an unqualified person as auditor?
c) Explain the legal consequences of payment of a call in advance by a shareholder.
QUESTION SEVEN
a) Ponda Mali the principal shareholder of Mali Mingi Ltd would like the company to issue
share warrants to at least half of the members but is unsure of the prerequisites under
the provisions of the Companies Act. Two weeks ago, the company issued share
warrants to all interested shareholders. Mali Mingi Ltd is required to file its annual
return in the next few days. Ponda Mail now comes to you for legal advice on the
following matters:
i) Effect of issue of share warrants on the register of members.

ii) Contents of the annual return in relation to the share warrants.
Advise him.
b) The affairs of Ibiza Ltd were recently investigated by an inspector appointed by the
court and the report has already been handed over to the court. The court has
forwarded a copy of the report to the Attorney General for further action and the
Registrar of Companies has defrayed the costs of and other incidentals of the
investigation. Karim, one of the directors of Ibiza Ltd is a worried man and would like
to know:
i) The specific actions the Attorney General could take.

ii) Who is liable to pay the Registrar?
Advise him.
c) What are the annextures to the company’s balance sheet laid before the company in
general meeting?
QUESTION EIGHT
a) In what circumstances may a winding up petition be presented to the court by:
i) A contributory?
ii) Shareholder other than a contributory?
b) In what ways may a person cease to be a member of a committee of inspection?

c) On October 22nd 2002, the shareholders of Ruwenzori Co. Ltd. passed a resolution to
wind up the company which owed creditors Kshs10,000,000. A meeting of the
company’s creditors was summoned in accordance with the provisions of the
Companies Act and Kwishima, one of the directors of Ruwenzori Co. Ltd . presided
over the meeting.
Whereas the members’ meeting nominated Ogutu as liquidator, the creditors’ meeting
nominated Kato. Kwishima, has evidence that neither Ogutu nor Kato has undertaken
such an onerous task in the recent past and there are other qualified persons.
i) Identify:
a) the resolution passed by shareholders of Ruwenzori Co. Ltd
b) the category or type of winding up in question
c) the commencement date of the winding up
d) the matters laid before the meeting of creditors
ii) Advise Kwishima.
LAW II
MOCK THREE
QUESTION ONE
a. The House of Lords decision in Salomon V Salomon and Co. Ltd [1897] laid to rest
certain principles. Identify those principles.
b. In re Lee Behrens and Co. Ltd [1932] Eve. J. observed that the validity of gratuitous
payments is tested by the answers to “three pertinent questions”.
What propositions are these?
c. “The corporate form is the normal solution that the law and business practice have
evolved...” (Hahlo: Cases and Materials on Company Law, 1987, p.19) The limited
company is the most advanced form of business association today. What factors in
your opinion led to the emergence of the company?
QUESTION TWO
a) Under Section 40 (3) of the Companies Act, it is a criminal offence to issue any form of
application for shares in or debentures of a company unless the form is issued with a
prospectus which complies with the provisions of the Companies Act. In what
circumstances may an application form be issued unaccompanied by a prospectus?
b) Identify the principal contents of a debenture trust deed.
c) Mashariki Co. Ltd, a private company limited by shares has articles in the form of Table
A. Jesse and Jackson the only directors of the company own 2,000 shares out of a total
of 15,000. Magharibi Co. Ltd makes a take over bid for Mashariki Co. Ltd. Jessee and
Jackson are opposed to the bid since they know that they are likely to lose their
directorship if the bid is successful. Subsequently the directors of Mashariki Co. Ltd:
1. Allot 5,000 shares to Umoja Ltd., a company that has been supplying goods to
Mashariki Co. Ltd Umoja Ltd. believes that the allotment is intended to foster closer
business relations with Mashariki Co. Ltd.
2. Give options to their wives to subscribe for 5,000 shares of the company.
Recently the general meeting of Mashariki Co. Ltd. ratified the above transactions.
Solomon a minority shareholder who hoped to benefit from the take over bid wishes to
have the transactions set aside. Advise him.
QUESTION THREE
a) In Ferguson V Wilson (1866) Cairns L. J. observed that “the company itself cannot act
in its own person , for it has no person, it can only act through directors and the case is,
as regards those directors, merely the ordinary case of principal and agent. Wherever an
agent is liable those directors would be liable, where the liability would attach to the
principal and the principal only, the liability is the liability of the company.”
In what circumstances may a director be held personally liable in lieu of or in addition

to the company?
b) Olympic Co. Ltd passed a resolution to increase its capital by the issue of new shares.
Thereafter, directors entered into a contract with Mr. Peek under which he was to take
up all the shares not taken up by existing shareholders at a premium. However Mr.
Peek was unable to take up all the shares he was supposed to take. Consequently,
directors of Olympic Co. Ltd took over from Mr. Peek a considerable number of shares

at the agreed price and afterwards disposed of them at a profit. Olympic Co. Ltd.
insists that the profit made by the directors belong to it.
Advise the directors.
QUESTION FOUR
a) Identify the annextures to a company’s annual return to the registrar. What additional
information is necessary in the case of the annual return of a private company?
b) In what circumstances may the High Court order rectification of the register of
members? Who may apply for rectification and what orders may the court make?
c) What are the salient duties of the liquidator?
QUESTION FIVE
a) Under section 159 (1) of the Companies Act, “Every company shall...appoint an auditor
or auditors to hold office...” Identify the salient obligations of the auditor.
b) In the words of Lord Denning in Fomento Ltd V Selsdon fountain Pen Co. Ltd [1958]
“an auditor is not to be written off as a professional adder-upper and subtractor. His
vital task is to take care to see that errors are not made, be they errors of computation,
or errors of omission or commission, or downright untruths. To perform this task
properly he must come to it with an inquiring mind –not suspicion of dishonesty...”
In the light of the foregoing to what extent is an auditor an investigator?
c) How is the auditor’s remuneration fixed and in what circumstances may the registrar
appoint an auditor for a company?
QUESTION SIX
a) What do you understand by the term “debenture”?
b) Identify the principal characteristics which a bearer debenture must be endowed with so
as to make it negotiable?
c) In November 2000 Onyango a shareholder of Ujenzi Ltd. discovered that the

statements he had relied upon in the company’s prospectus were untrue. On
December 5th, he attempted unsuccessfully to sell the shares to Kajwang. On
December 9th, 1986 Onyango received a circular from the Company Secretary notifying
him that the statements were in fact untrue but had been made in good faith. On
December 10th he telephoned the company secretary requesting the removal of his
name from the register of members. On January 6th 2002 Onyango commenced
rescission proceedings against the company. On January 8th 2002 Onyango discovered
that the Company had gone into liquidation, a resolution to the effect having been
passed on January 4th 2002.
Advise Onyango.
QUESTION SEVEN
a) What books of account is a company required by the Companies Act to keep and what
provisions regulate group accounts?
b) Analyse the circumstances in which group accounts of a company need not deal with a
subsidiary?
c) What are the statutory penalties for failure to keep proper books of account?
LAW II
QUESTION EIGHT
a) In what circumstances may the official receiver petition for the winding up of the
company?
b) State the advantages of winding up subject to the supervision of the court.
c) Section 219 (f) of the Companies Act provides that “a company may be wound up by
the court, if the court is of the opinion that it is just and equitable that the company
should be wound up”.
Give a general account of the circumstances which will influence the court in exercising
its discretion under this section illustrating your answer with relevant judicial authority.

MOCK FOUR
QUESTION ONE
Discuss the circumstances under which a company will be round up voluntarily, outlining
how a member’s voluntary winding up is carried out.
QUESTION TWO
a) State the rule in Foss V. Harbottle.
b) What constitute the exceptions to this rule?
c) Maiko is a shareholder of Kakuma land Buying Co. Ltd. The Articles of Association of
the Company state that the voting will be done by a show of hands. At a meeting to
resolve a long standing disagreement between members over a land buying issue, Maiko
votes against the expectation of the chairman of the Board of Directors who loudly
decline to record his vote. Maiko is aggrieved by the decision of the chairman, but is
unsure of how to proceed. Advise him.
QUESTION THREE
Write short notes on the following:
a) The authorized capital
b) The issued capital
c) The unpaid capital
d) The reserve capital
QUESTION FOUR
a) Who are promoters and what are their duties to the company?
b) Prior to Incorporation, Mang’ea and Wanyoike, promoters of Maendeleo Co. Ltd

convened public meetings. Saidi and Mutuku requested to subscribe for shares in the
proposed company. They paid for shares both before and after incorporation, but when
the company was finally incorporated, it did not issue any shares to Saidi and Mutuku.
Advise Mutuku and Saidi
QUESTION FIVE
a) What are the requirements of the Companies Act (Cap486, Laws of Kenya) regarding
calling the annual general meeting of a registered company?
b) What is an extra ordinary general meeting? How may members requisition an extra
ordinary general meeting.
c) The director of Kusau Ltd, a company whose articles are similar to Table A, wish to give
effect to the following matters;
i) To change the name of the company to Mataa Ltd
ii) To increase the company’s share capital.
Advise them.
QUESTION SIX
a) Explain the remedies available against promoters for breach of duty.
b) Write explanatory notes on the following:
i) Newborn V. Sensolid (Great Britain) Ltd

ii) Natal Land Co. Ltd V. Pauline Coiliey Syndicate Ltd.
LAW II
QUESTION SEVEN
a) Explain the legal rules prescribing the circumstances in which a company may or may
not pay a dividend.
b) How effective are these rules in ensuring that the company’s capital is maintained?
QUESTION EIGHT
a) In what circumstances may an official receiver be appointed?
b) Examine the legal consequences of the appointment of an official receiver.
c) Examine the circumstances in which the affairs of a company may be investigated by the
registrar of companies.

MOCK FIVE
QUESTION ONE
a) Explain the circumstances in which a company may issue its shares at a discount.
b) How are the interests of the following persons protected when a reduction of a
company’s capital is being considered by the court.
i)The company’s Creditors

ii)The company’s members
iii)The general public
QUESTION TWO
a) What is meant by the term “Fraud on the minority”.
b) Gwanju Co. Ltd is in need of additional shares. The majority are willing to provide this
capital if they could purchase the 20% of the shares held by the minority. The minority
shareholders refuse to sell to the majority shareholders who then propose to alter the
Articles of Association to provide for compulsory acquisition on a specified basis.
Discuss the legality or otherwise of this proposal.
QUESTION THREE
Chapati and three of his friends recently retired from the civil service under the voluntary
retirement scheme. They intend taking advantage of the on-going Structural Adjustment
Programmes (SAPs) by going into business.
a) Advise them on the procedures they have to follow in order to register a public
company limited by shares.
b) Explain them how the procedure would differ from that for forming a private company
limited by shares.
QUESTION FOUR
a) In relation to company securities, what is meant by;
i) A floating charge;
ii) Crystallization of a floating charge;
iii) A negative pledge clause?
b) Explain the provisions of the Companies Act (Cap 486, Laws of Kenya) relating to
registration of charges.
QUESTION FIVE
Discuss in details the rule and exceptions in Royal British Bank V. Turguard.
QUESTION SIX
a) In what circumstances, if any, will a director be treated as an agent of the company.
b) The directors of Usafi Ltd. Diverted some funds meant for the extension of the
commercial wing of the company’s business premises to fund the expensive wedding of
a son of one of the directors. At that particular time Juma was eth secretary. Eventually
became a director. At Juma’s very first board meeting, the earlier breach was ratified.
To what extent, would Juma be liable for the earlier breach.
QUESTION SEVEN
a) What is a “Statement in lieu of Prospects”.
LAW II
b) Outline the procedure for delivery of such a statement to the Registrar of Companies
and indicate the information that must be disclosed by the statement.
QUESTION EIGHT
Distinguish a private company according to section 30 of the Companies Act (Cap.486)
from a partnership.

136 Comprehensive Mock Examinations
ANSWERS - MOCKS
MOCK ONE
QUESTION ONE
a) Share capital constitutes the divisions into which a company’s capital is divided. A
classification of Companies on the basis of share capital places companies into five
categories, namely:
▪ Company limited by shares ipso facto has a share capital
▪ Company limited by guarantee with a share capital.
▪ Company limited by guarantee without a share capital.
▪ Unlimited company with a share capital.
▪ Unlimited company without a share capital.
b) Ultra vires literally means beyond the powers. It is a rule of capacity.
The so-called ultra-vires in the wider sense is nothing but an abuse of powers of the
company by its officers often described as excesses of directors or transactions ultravires
the directors.
▪ E.g. borrowing for ultra vires purposes

▪ A transaction ultra vires in the wider sense is ultra vires the company. However, it
is voidable at the option of the company.
▪ Such a transaction may be ratified by members in general meeting whereupon it
ceases to be voidable.
▪ A transaction ultra vires in the wider sense is enforceable, if the other party was
unaware of the abuse of power. As was the case in David Payne and Co. Ltd. It is
unenforceable if the other party had notice of the abuse of power. As was the case
in re Introductions Ltd.
c) The so-called “second contract” has been acknowledged in obiter only in cases such as
Quin and Axtens Ltd. v. Salmon and in Wood V. Odessa Waterworks Ltd.
▪ It is a contract between each member and every other i.e. members inter se
▪ The contract is generally unenforceable since a member cannot sue another to
enforce the article. It can only be enforced by the liquidator in the course of
winding up or under the exceptions to the rule in Foss V. Harbottle.
QUESTION TWO
a)
▪ A company has statutory power to alter the objects clause of its memorandum.
▪ Under Section 8 (1) of the Companies Act a company may by special resolution
alter its objects clause.
days thereof. Whereupon the alteration becomes legally effective.
▪ However, under Section 8 (1) of the Act, a company can only alter the objects
clause so far as may be necessary to enable it::
- Carry on its business more economically or more efficiently.
- Attain its main purpose by new or improved means.
- Enlarge or change the local area of its operations
- Restrict or abandon any of the objects specified in the memorandum
- Sell or dispose off the whole or any part of its undertaking
- Amalgamate with any other company or body of persons.
LAW II
Answers – Mocks 137
- Carry on some other business which under existing circumstances may

conveniently or advantageously be combined with the business of the
company.
Under Section 8 (2) of the Act a proposed alteration of the objects clause may be objected to
by:
▪ Holders of not less than 15% in nominal value of the company’s issued capital
▪ Holders of not less than 15% of any class of shares of the company
▪ Holders of not less than 15% of the company’s debentures entitling them to object
▪ Not less than 15% of the company’s members.
Those objecting must be persons who did not consent or vote in favour of the
alteration. The court may:
▪ Make an order cancelling or confirming the alteration either wholly or in part and
on such terms and conditions as it deems fit
▪ Adjourn the proceedings for arrangements to be made to facilitate the purchase of
the interests of dissentient members.
b)
▪ This problem is based on the principles relating to failure of a company’s principal
or paramount object.
▪ In this case it is evident that the company’s substratum has disappeared since it can
no longer export flowers to the European union or the United States the sole object
it was incorporated to pursue.
▪ It is apparent that the company cannot embark on any other object as the same is
likely to be ultra vires.
▪ My advice to Oliver and Ben is to petition for the compulsory winding up of the
Company on the ground that it is just and equitable that the company be wound up.
This is because failure of the substratum is one of the circumstances in which a
company may be wound up under the just and equitable ground.
▪ My advice is based on the decision in re German Date Coffee Co. Ltd. where a
company was formed to acquire a German patent to manufacture coffee from dates
as a substitute. However it could not acquire a German patent. A shareholder
petitioned for the winding up of the company on the ground that it was just and
equitable. It was held that since the company’s substratum had disappeared
altogether it was just and equitable to have it wound up.
QUESTION THREE
a) Under Section 55 (1) of the Companies Act a registered company may pay a
commission to any person in consideration for his:
- Subscribing for the company’s shares
- Agreeing to subscribe
- Securing subscription for the company’s shares
- Agreeing to procure subscription for the shares.
The payment of such commission may be conditional or absolute.
However the commission is only payable if:

▪ It is authorised by the articles
▪ It does not exceed 10% of the price at which the shares are to be issued or the
amount or rate authorised by the articles whichever is less
▪ Particulars of the discount are disclosed in the company’s prospectus
b)
▪ If he withdraws his consent in writing before a copy of the prospectus is delivered
to the registrar for registration.

▪ If on becoming aware of the untrue statement after its delivery to the registrar for
registration but before allotment, he withdrew his consent in writing and gave
reasonable public notice of the withdrawal and reasons therefore.
▪ He was competent to make the statement in question and had reasonable ground to
believe and did believe up to the date of allotment that the statement was true.
c)
▪ Date: Under Section 39 of the Companies Act, “a prospectus is issued by or on
behalf of a company or in relation to an intended company shall be dated...”
▪ A statement to the effect that a copy of the document has been delivered to the
▪ Specify, or refer to statements included in the prospectus which specify, any

documents required by the Act to be endorsed on or attached to the copy so
delivered.
QUESTION FOUR
a) On the one hand it is quite true to argue that whereas courts of law afford adequate
safeguards for creditors, they have ignored the interests of shareholders and the public
at large. This argument is premised on the following realities:
▪ Primo, under section 69 (1) of the Act, once an application for the confirmation of
reduction of capital is made, the court settles the list of creditors and must satisfy
itself that all creditors have either objected or consented to the reduction.
▪ Secundo, if creditors have objected, the court must satisfy itself that such creditors’
claims have been secured, discharged or determined. However the court is
empowered to dispense with the consent of a creditor.
▪ Thirdly, under section 70 (1) of the Act a reduction of capital will only be
confirmed if the court is satisfied that objecting creditors claims have been secured,
discharged or determined.
However, on the other hand it is arguable that the interests of shareholders and the
public are also safeguarded. This assertion is justifiable on the following arguments:
▪ Primo, as a general rule a court of law will not confirm a reduction of capital if the
same is unfairly prejudicial to any class of members of the company.
▪ Secundo, the court may when confirming the reduction, for any special reason, but
for a specified duration order the company to add the words “and reduced” as the
last words to its name and for the duration of the order, the words “and reduced”
form part of the company’s name. This compulsory change of name is intended to
protect the public at large by putting it on inquiry when dealing with the company.
▪ Third, the court may order that notice of reduction of capital by a company be
published for all and sundry.
Arguably therefore, though courts of law accord more attention to creditors, the
interests of shareholders and the public at large are not totally ignored. In any event the
interest of shareholders and the public are generally safeguarded by the provisions of
the Companies Act relating to reduction of capital: e.g. members must by special
resolution authorise the reduction and the same is registrable in accordance with the
Provisions of Section 71 (1) of the Act, hence potential investors are deemed aware of
that fact courtesy of the doctrine of the constructive notice.
LAW II
b)
▪ This is the process of combining a number of shares to form one larger share whose
nominal amount is the aggregate of the shares so consolidated. Under Section 63
(1)(b) of the Act, a company having a share capital may if authorised by its articles
consolidate its share capital into shares of larger amount than its existing shares.
The consolidation must be authorised by an ordinary resolution and the registrar
must be notified within 30 days thereof.
▪ This is the cancellation of the whole or part of the unissued capital of a company.
▪ Under Section 63 (1)(e) of the Act a company having a share capital may if
authorised by the its articles diminish its capital.
▪ The articles must prescribe the attendant procedure.
▪ It must be authorised by an ordinary resolution and the registrar must be notified
within 30 days.
c)
▪ This is the system by which companies are directed and controlled. It is the way the
management of a firm is influenced by stakeholders e.g. owners, creditors,
managers, employees, suppliers, customers, local residents and the government.
The board of directors is responsible for governance of the company.
▪ The shareholders role in governance is to appoint directors and auditors and satisfy
themselves that an appropriate governance structure is in place.
▪ It is the responsibility of the board to set up the company’s strategic aims, provide
leadership to put them into effect, supervising the management of the business and
reporting to shareholders on their stewardship.
▪ Principles of corporate governance address five issues:
▪ Rights of shareholders
▪ The corporate governance framework must protect the rights of its members.
▪ Equitable treatment of shareholders
▪ The framework must ensure that all shareholders i.e. majority and minority are
treated equally.
▪ Role of stakeholders
▪ Disclosure and transparency
▪ Responsibility of the board
QUESTION FIVE
a)
▪ The board can legitimately instruct Cook to confine his attention to the affairs of
the subsidiary of Maridadi Co. Ltd. This is because:
- A company and its subsidiary are in essence one economic unit. It was so held
in Harold Holdsworth v. Caddies.
- Under Article 109 of Table A which is Maridadi’s Articles the board may
entrust and confer upon a managing director any of the powers excercisable by
it to exercise collaterally or to the exclusion of the board . It is also
empowered to revoke, vary or alter all or any of such powers.
▪ The board it appears cannot dismiss Cook from his position as Managing Director.
Since the terms of employment are explicit that he was to remain in office for 5
years. He can only be removed from office in accordance with the terms of the
contract failing which the company may be held liable in damages for wrongful
dismissal as was the case in Southern Foundaries Ltd. v. Shirlaw or in Shindler V.
Northern Rain Coat Co. Ltd. Where managing directors had been appointed under
contracts of service and the companies purported to remove them from office
otherwise, the companies were held liable in damages for breach of contract.

▪ The board of directors cannot remove Cook from his position as a director. This is
because directors are elected by members by ordinary resolution in general
meeting, hence the power of removal is vested in the general meeting and the
board cannot exercise this power. This position is exemplified by the principle of
division of powers between the general meeting and the board.
▪ The board of directors cannot unilaterally reduce the managing director’s salary by
reason of his poor performance. This is because the terms of employment ordain
that he be paid a specific sum per month. Any purported reduction may
precipitate an action in damages for breach of contract. The least the board can
do is to persuade him to accept a lesser sum failing which it has no recourse in law.
b)
▪ This problem is based on the characteristics of the contract created between the
company and its members when the articles are registered (Section 22 (1)).
▪ It is clear that Adam is a member of Akim Ltd and the articles provided that he be
appointed the Company solicitor for life.
▪ It is evident that there is a dispute between Adam and Akim Ltd in that the
company is now channelling its legal work to another firm of advocates contrary
to the articles.
▪ The issue boils down to the question whether the article in question is enforceable
by Adam.
▪ Since the contract created by the articles is between the company and its members
only (Welton V. Saffery) (Hickman V. Kent)and can only be enforced by members
in their capacity as members, ie, member qua member, it follows that the article is
unenforceable.
▪ My advice to Adam is that he has no actionable claim against the company for the
simple reason that he is an outsiders and hence cannot enforce the article.
Secondly, if he sued as a member his action would still be unsuccessful as the
rights conferred by the articles can only be enforced by members in their capacity
as members. Adam would be suing to enjoy rights accruing to him as a solicitor.
▪ My advice is based on the decision in Eley V. Positive Government Life Assurance
Co. Ltd whose facts were substantially similar to those of the instant case.
QUESTION SIX
a)
▪ The office of managing director is created by the articles for purposes of internal
management.
▪ Under Article 107 of Table A directors may appoint one or more of their body to
the office of managing director for such period and on such terms as they think fit
and subject to terms of any particular agreement, the board may revoke such
appointment.
▪ A managing director has two functions and capacities, those of director and
managing director. As managing director he is a party to a contract of
employment or service with the company (Anderson V. James Sultherland
(Peterhead) Ltd [1941])
▪ Subject to the articles the powers and duties of a managing director depend upon
his contract of service with the company.
▪ The managing director is a full-time employee to whom some or all of the powers
of management of the board are delegated.
▪ Under Article 109 of Table A directors may entrust to and confer upon a managing
director any of the powers exercisable by them on such terms and conditions and
subject to such restrictions as they may deem fit and either collaterally with or to
LAW II
the exclusion of their own powers and may withdraw, revoke after of vary all or
any of such powers as was the case in Harold Holdsworth and Co V. Caddies.
▪ A managing director may have implied power to enter into certain agreements on
behalf of the company even though there has been no express delegation of the
power.
b)
▪ This problem is based on the law applicable if a company has failed to hold an
annual general meeting.
▪ In the first instance it is a criminal offence for which the company and every officer
in default are liable to a fine not exceeding KShs2,000.
▪ In this case Unauja Co. Ltd. and its directors are liable to a default fine.
▪ Under Section 131 (2) of the Companies Act if a company falls to hold an annual
general meeting in accordance with Section 131 (1), any member of the company
may petition the registrar to call or direct the convention of an annual general
meeting. Such a meeting is duly constituted by one person present in person or by
proxy.
▪ My advice to Makini is to petition the Registrar of Companies to call or direct the
calling of a general meeting of the company. My advice is based on the Provisions
of the Companies Act quoted herein above.
c)
▪ Under Section 130 (9) of the Act, failure to hold a statutory meeting renders every
director of the company who is knowingly and wilfully guilty of the default or in the
case of default by the Company, every officer in default liable to a fine not
exceeding KShs1,000.
▪ Under Section 131 (5) of the Act failure to hold an annual general meeting in
accordance with Section 131 (1) of the Act renders the Company and every officer
in default liable to a default fine not exceeding KShs2,000.
QUESTION SEVEN
a)
▪ The Attorney General must institute criminal proceedings against the director for
the offence. Officers and agents of the company are bound to assist him in the
prosecution. My advice is based on the Provisions of the Companies Act.
▪ The Attorney General is advised to institute civil proceedings in the name of

Wakulima Co. Ltd for the recovery of the property misapplied by the directors.
This advice is based on the Provisions of the Act.
▪ The Attorney General is advised to institute civil proceedings in the name of

Wakulima Co. Ltd. against the members guilty of fraud and misconduct, for
damages in respect of the same.
▪ I would advise the Attorney General to petition for the winding up of the company
on the ground that it is just and equitable to do so. Winding up is available on this
ground if members have justifiably lost confidence in the manner and probity with
which the company’s affairs are being conducted. My advise is based on the
Provision of the Companies Act as well as the decision in Lock V. John Blackwood
where the company was wound up on the ground that members had justifiably lost
confidence in the management.

b)
i)
▪ If a person is convicted of any offence in connection with the promotion,
formation or management of a company.
▪ If in the course of winding up it appears that a person was knowingly a party to

the carrying on of the company’s business for any fraudulent purpose or with
intent to defraud its creditors or creditors of any other person
▪ If an officer of the company is guilty of any fraud in relation to the company or

of any breach of duty to the company.
ii)
▪ If the company is for the time being private
▪ A subsidiary of the company extending a loan to its holding company which is its
director
▪ A company whose ordinary business includes lending of money, which is lent by

the company in the ordinary course of business
▪ To enable a director meet expenditure incurred or to be incurred for purposes of

the company or to enable him properly perform his duties as an officer of the
company.
c)
▪ Both Tirop and Sironik must execute the proper instrument of transfer
▪ Sironik must thereafter present the executed instrument of transfer for stamping i.e.,
payment of duty
▪ Sironik must present the stamped instrument of transfer and Tirop’s share
certificate to the company for registration of the transfer
▪ On registration of the transfer, i.e., entry of Sirnoik’s name in the register, the share
certificate is cancelled and another issued in favour of Sironik.
d)
▪ Tirop’s conduct would be fraudulent in character. however, Joash would not
acquire title in the shares
▪ Both Sironik and Joash have an equitable interest in the shares Tirop retains the
legal interest.
▪ The equities are said to be equal and the first in time prevails.
▪ However, the first transferee to secure a valid registration acquires title.
QUESTION EIGHT
a)
▪ The words of Lord Greel in Shaw V. Shaw are an embodiment of the principle of
division of powers between the general meeting and the board in company law.
▪ Company law recognises the general meeting and the board as the principal organs
of the company and the articles of association vests powers in both.
▪ Some powers can only be exercised by the board while others are only exercisable
by members in general meeting, e.g. the general meeting is empowered to elect
directors, appoint auditors, remove directors or auditor from office, alter the articles
and memorandum, authorise bonus shares, adopt accounts. The board of directors
on the other hand is empowered to recommend dividend, borrow, appoint the
managing director and the secretary, etc.
LAW II
▪ The principle of division of powers ordains that each organ must exercise the power
vested in it and must not hijack those of the other unless the powers are being
abused, exceeded or exercised in bad faith or contrary to the articles.
▪ Courts of law have enthusiastically enforced the division of powers.
▪ The question as to which organ exercises which power is one of interpretation of
the Articles. It was so held in Automatic Self-cleansing Filter Syndicate
V.Cunninghame.
▪ Article 80 of Table A is emphatic that the business of the company shall be
managed by the directors and who may exercise all such powers as are not required
to be exercised by the company in general meeting. In Alexander Ward and Co V
Samyang Navigation it was observed that article 80 means that the directors and no
one else are responsible for the company’s management except in relation to
matters specifically alloted to the company in general meeting.
▪ In Scott V Scott it was held that since the power to pay interim dividend was vested
in the board the general meeting could not interfere. A similar holding was made in
Shaw V Shaw.
▪ The principle of division of powers extends to powers not vested in either organ.
If either organ purports to exercise such power, the other must not interfere with its
exercise.
▪ However, it is contended that the general meeting is more dominant in that it is
empowered to:
i) Alter the articles
ii) Remove directors from office, but before such a step is taken directors are free
to ignore instructions of the general meeting on how to exercise a power vested
in the board.
▪ The principle of division of powers is subject to three exceptions. These are
circumstances in which the general meeting exercises powers vested in the board.
▪ litigation
If directors refuse, fail or neglect to sue on behalf of the company or to defend an
action against the company, the power becomes exercisable by the general meeting.
Marshals Valve Gear Co. V. Manning Wardle
▪ Ratification of excesses by directors

Whenever the general meeting ratifies an abuse of power by the board, the
transaction becomes a valid act of the company.
▪ The general meeting by so doing exercises powers vested in the board.
▪ The transaction must have been intra vires the company. As was the case in
Bamford and Another V Bamford and others.
▪ Deadlock in management
If a company’s board of directors cannot function in any material respect by reason
of a deadlock, the powers of the board becomes exercisable by the general meeting .
As was the case in Barron V Porter. Evidently therefore the principle of division of
powers generally holds.
b)
▪ This problem is based on qualification of auditors for appointment.
▪ To qualify one must be registered accountant practising individually or as a partner
in a firm.
▪ In this case, the firm of Odipo and Associates is not qualified for appointment as
auditor as it has no partner.

▪ The partners are guilty of professional misconduct pursuant to the provisions of the
Accountants Act, Cap 531.
▪ The partners of Odipo and Associates, Wavuvi Co. Ltd. and every officer of the
company in default are liable to a fine not exceeding KShs4,000.
LAW II
MOCK TWO
QUESTION ONE
a) Lifting the veil
▪ It also referred to as “piercing the corporate shell” or ignoring the legal personality.
▪ These are modifications to the rule in Salomon V Salomon and Co. Ltd [1897]
▪ They are circumstances in which the law disregards the legal personality of the
company in favour of the individual members or the economic realities of a
company and its subsidiaries.
▪ These circumstances are recognised by the Companies Act as well as the Courts for
example
▪ When the number of members of a company falls below the statutory minimum,
group
▪ Accounts, investigation of company membership and fraudulent trading. Courts of
law on
▪ The other hand have lifted the veil:
- To prevent perpetration of fraud or misconduct
- To ascertain a company’s residence
- To ascertain a company’s character
- To facilitate commerce.
Raising the curtain:

▪ These are circumstances in which the law facilitates access to information about a
company, generally beyond the public eye e.g. employees of the company.
▪ It is accomplished by way of investigating the affairs of the company either by the
registrar or
▪ By an inspector or inspectors appointed by the court or by registrar.
b) The writes uses these words with reference to circumstances in which persons have
attempted to use the corporate personality for other purposes but failed. For example
using the company to perpetuate fraud or misconduct or to avoid a legal obligation.
• Fraud: In re Buggle Press Ltd where the majority shareholders of a company

desirous of acquiring minority interest formed another company which made an
offer to acquire all the shares in the first company which offer the majority
accepted and the new company purported to use Sec 210 of the Companies Act to
enable it acquire the shares of the minority who objected, the court lifted the veil
and disallowed the take over bid.
• Improper conduct: Courts of law have lifted the veil of incorporation to prevent
persons from using the company to evade existing legal obligations. As was the
case in Gilford Motor Co V Home and Another where the first defendant had
covenanted not to solicit the plaintiff’s customers after leaving employment. He
formed a company which solicited the customers. The court granted an injunction
to restrain the defendant and his company from soliciting since the company had
been formed to enable the first defendant evade an existing legal obligation.
• A similar holding was made in Jones V Lipman and Another. In Macaura V

Northern Assurance Co Ltd the appellant owned a forest. He formed a company
Irish Canadian Saw Mills Ltd to which he transferred the forest in return for 42,000
fully paid shares. He was the principal shareholder. He lent the company 19,000.
The company fell the trees and stored the timber. The appellant insured the timber
against fire with the respondent company but in his own name. Two weeks
thereafter the timber was destroyed by fire. Macaura’s claim for indemnity for the

loss was refused. He sued. It was held that he was not entitled to indemnity as he
had no insurable interest in the timber as it belonged to the company.
▪ These cases illustrate circumstances in which the corporate entity has worked like a
boomerang.
QUESTION TWO
a)
▪ This case is authority for the proposition that since the ordinary purpose of a
prospectus is to invite persons to subscribe for shares or debentures once this is
accomplished, the prospectus becomes exhausted and cannot be relied upon by
persons who deal with the shares thereafter.
▪ In this case, all the shares of the company were allotted between July and October.
The plaintiff bought 2,000 shares in December on the Stock Exchange. He sued the
directors of the company on the ground that he had bought the shares by reason of
misrepresentation and suppression of material and important facts. It was held that
the directors were not liable since the prospectus in question had already become
exhausted when the plaintiff bought shares. He could not rely on it.
b)
▪ This case is authority for the proposition that if a prospectus is intended to
influence both original and subsequent allotees, persons who deal with the shares
after the original allotment can rely on the prospectus to avoid the contract of
allotment of shares. Such a prospectus is not deemed to have outlived its
usefulness.
▪ The defendants had formed a sham company for the purpose of mining gold in
South Africa. Very few persons applied for shares. Subsequently the defendants
fraudulently caused to be published in the Financial News, a telegram to the effect
that the Company had struck gold. The plaintiff applied for and was allotted 50
shares. He sought to recover damages for fraudulent misrepresentation. It was held
that the defendants were liable since the prospectus had not become exhausted by
the time the plaintiff bought shares.
c)
▪ The Companies Act does not define the term “misfeasance” used in various
Sections e.g. 166 (b) and 324 (1).
▪ This is a wrongful act or omission committed or omitted by a person charged with a
specific
▪ Responsibility.
▪ It is neither a crime nor a tort and does not cover acts or omissions of negligence.
▪ It is a contravention of principles of law or equity.
▪ Misfeasance proceedings may be instituted against directors, promoters, liquidator
or officers of the company and Courts of Law are empowered to assess the damages
payable by such persons for the act or omission e.g. in the course of winding up.
Examples of misfeasances include:

▪ Making of secret profit by promoters or director
▪ Making of improper payments made by promoters or directors
▪ Application by directors of the company’s assets for an ultra vires or illegal object
▪ Payment of dividend out of capital
▪ Making of fraudulent preferences
▪ Sale of company assets at undervalue
LAW II
d)
▪ This is the organic theory or the alter ego doctrine.
▪ It is a principle of Company Law that attempts to connect the living to the non-
living.
▪ This principle imputes the state of mind of responsible officers of the company to
the company.
▪ Under the organic theory, the thoughts and deeds of responsible officers of the
company are deemed to be the thoughts and deeds of the company, i.e., the
company thinks and acts through these persons.
▪ This theory attributes to the company the knowledge of the responsible officers. In
Lennards Carrying Co Ltd V Asiatic Petroleum Co. Ltd, the managing director of
the company knew or ought to have known that the ship was unseaworthy but took
no steps and as a consequence the ship and its cargo were lost. It was held that the
company was liable for the loss as it was aware of the ship’s unseaworthiness. The
managing director’s knowledge was attributed to the company.
▪ The thoughts of responsible officers are deemed to be the thoughts of the company.
It was son held in Bolton Engineering Co Ltd V Graham and Sons.
▪ If responsible officers of the company delegate to junior officers the company
thinks and acts through the delegate.
▪ However, the thoughts and deeds of junior officers of the company are not
attributable to the company. It was so held in Tesco Supermarkets Ltd V Natrass
Ltd.
QUESTION THREE
a)
▪ An allotment is an appropriation of company shares to an applicant. It is an
acceptance by the company of an applicant’s offer to take up shares.
▪ It concludes a legally binding agreement between the company and the applicant.
▪ The applicant does not become a member until his name is entered in the register.
b) Voidable allotments:
▪ An allotment of shares made before the minimum subscription is raised is voidable
at the option of the applicant within one month of the statutory meeting or
allotment.
▪ An allotment made before expiration three days from the date of delivery to the
registrar for registration a statement in lieu of prospectus signed by every person
named or proposed director and containing the particulars of Part I and II of the 4 th
Schedule is voidable at the option of the applicant.
Void allotment:
▪ An allotment of shares to a state corporation without prior written consent of the
treasury is void. The company and every director who knowingly or wilfully
permits or authorises the contravention are liable to a fine not exceeding Kshs2,000.
Valid allotment:
▪ An allotment of shares before the beginning of the third day after that on which the
prospectus was first issued is irregular but valid. However the company and every
officer in default are liable to a fine not exceeding Kshs10,000.
c)
▪ These are shares which an underwriter undertakes in an underwriting agreement, to
take up as his own whether the issue is over-subscribed or under-subscribed.
▪ The underwriter earns no commission on the shares allotted.

QUESTION FOUR
a)
▪ Every person who was a director of the company at the time of the issue of the
prospectus.
▪ Every person who authorized himself to be named and was named in the
prospectus as a director.
▪ Every person who had agreed to become a director either immediately or after an
interval of time.
▪ Every person who was a promoter of the company.
▪ Every person who authorized the issue of the prospectus
b)
▪ It is a criminal offence to issue any form of application for shares or debentures of a
company unaccompanied by a prospectus. A person guilty of this offence is liable
to a fine not exceeding Kshs10,000.
▪ It is a criminal offence to issue a prospectus containing a statement purporting to
have been made by an expert without such expert’s written consent. A prospectus
issued in contravention thereof renders the company and every person who was
knowingly a party to the issue liable to a fine not exceeding Kshs10,000.
▪ It is a criminal offence to issue a prospectus before a copy thereof has been
delivered to the registrar for registration. A prospectus issued in contravention
thereof renders the company and every person who was knowingly party to the
issue liable to a fine not exceeding Kshs100 until a copy thereof is delivered.
▪ It is a criminal offence to deliver an unendorsed copy of a prospectus to the
registrar for registration. A prospectus delivered in contravention thereof renders
the company and every person who was knowingly a party to the delivery liable to a
fine not exceeding Kshs100.
▪ It is a criminal offence to deliver to the registrar for registration a copy of a
prospectus without the necessary annextures. A prospectus delivered in
contravention thereof renders the company and every person who was knowingly a
party to the delivery liable to a fine not exceeding Kshs100 for every day.
▪ It is a criminal offence to authorize the issue of a prospectus containing any untrue
statement. Any person guilty of so doing is liable to imprisonment for a term not
exceeding 2 years or a fine not exceeding Kshs10,000 or both. However, the
accused escapes liability by proving either that:
- The statement was immaterial

- He had reasonable ground to believe and did believe up to the time of issue of
the prospectus that the statement was true.
c)
▪ This is the difference between the underwriting commission paid by the company to
the principal underwriter and the commission paid by the principal underwriter to
the sub-underwriter.
▪ The underwriting commission paid by the company must be disclosed in the
prospectus.
QUESTION FIVE
a)
▪ Dividend is said to be the return on a member’s investment. Technically, it is the
member’s share of a company’s profit.
▪ Payment of dividend by companies is governed by various rules:
LAW II
▪ Under Article 116 of Table A “No dividend shall be paid otherwise than out of
profit.”
▪ Under Article 114 of Table A directors recommend dividend and the same is
declared by members in general meeting. However members cannot declare
dividend in excess of the amount recommended by the board.
▪ Under Article 115 of Table A directors may from time to time pay to members such
interim dividend as is justified by the profits of the company.
▪ Directors may before recommending dividend set aside out of the profits of the
company such sums as they deem proper as reserve.
▪ Directors may deduct from any dividend payable to any member all sums of money
payable by him to the company on account of calls or otherwise.
▪ Under Article 122 of Table A “No dividend shall bear interest against the
company”.
▪ Dividend is generally payable within 42 days of declaration.
▪ Dividend may be paid in cash or by cheque or warrant.
▪ Companies are not legally obliged to make provision for depreciation before
▪ Dividend cannot be paid if this would result in the company’s inability to pay debts
as they fall due.
▪ Losses of fixed assets need not be made good before treating a revenue profit as
available for dividend.
▪ Losses of circulating assets in the current accounting period must be made good
before dividend is paid.
▪ A realised profit on the sale of fixed assets may be treated as a profit available for
dividend.
▪ Unrealised profit may be treated as profit available for distribution.
▪ Losses on circulating assets made in previous accounting periods need not be made
good before dividend is paid.
b)
▪ This problem is based on the principles that govern payment of dividend.
▪ It is evident that Reconstructions Co. Ltd. has not made profit capable of being
distributed to members as dividend.
▪ My advise to directors of Reconstructions Co. Ltd is that it is unlawful to
recommend dividend. This advise is justified on the premise that dividend is
payable out of profit and Reconstructions Co. Ltd has not made any distributable
profit during the 2000-2001 financial year. In fact the company made a loss of
Kshs5 million. The profit of Kshs3 million realised from the sale of land cannot be
distributed since losses of circulating assets of the current accounting period must
be made good before dividend is paid.
▪ The underlying principle in the distribution of dividend is that each financial year is
considered on its own.
QUESTION SIX
a) Bonus Shares:
▪ Is recommended by the board.
▪ Is authorized by members in general meeting.
▪ Nominal share capital of the company must be sufficient.
▪ Payable in accordance with the articles.
▪ A return must be made to the registrar.
▪ Authorized by the articles.
Payment of Interest out of capital

▪ Must be authorized by the articles or special resolution.

▪ Previous sanction of the registrar must have been obtained.

▪ Circumstances of the payment have been inquired into by the registrars appointee.
▪ Payment is for such period as may be determined by the registrar.
▪ The interest does not exceed 5% p.a. or such other rate as the minister may
prescribe.
Redemption of Redeemable Preference Shares

▪ Must be authorized by the articles.
▪ Must be redeemed out of profit or proceeds of a fresh issue for that purpose.
▪ Must be fully paid.
▪ The premium payable must be provided out of profit or the share premium account.
▪ If redeemed otherwise than out of the proceeds of a special issue, the capital
redemption reserve fund must be created.
▪ The registrar must be notified within 30 days thereof.
Issue share warrants

▪ The company must be limited.
▪ Must be authorized by its articles.
▪ The shares in question must be fully paid.
b)
▪ The company and every officer in default are liable to a fine not exceeding 1,000.
▪ Every director is liable to imprisonment for a term not exceeding 12 months or a
fine not exceeding KSh.10,000. However, the accused escapes liability by proving
that he had reasonable ground to believe and did believe that a competent and
reliable person was charged with the duty and way in a position to discharge the
same.
▪ The person so appointed, the company and every officer of the company in fault are
liable to a fine not exceeding KSh.4,000.
c)
▪ The shareholders liability is reduced or extinguished.
▪ The shareholder becomes a creditor to the company to the extent of the payment.
▪ The company cannot be compelled to repay the amount.
QUESTION SEVEN
a) The members name is struck off the register and the following particulars entered:
▪ Fact of issue of the warrant.
▪ Date of issue.
▪ A statement of the shares included in the warrant.
▪ A total number of shares in respect of which warrants are outstanding.
▪ Number of shares comprising a warrant.
▪ Total number of warrants issued and surrendered.
b)
▪ Institute criminal proceedings against any person alleged to have committed an
offence.
▪ Institute civil proceedings in the name of the company for the recovery of damages
in respect of any fraud, misfeasance or other misconduct in connection with the
promotion or formation of the company or management of its affairs.
▪ Institute civil proceedings in the name of the company for the recovery of any
property of the company which has been misapplied or wrongfully retained by any
person.
LAW II
▪ Petition for the winding up of the company on the ground that it is just and
equitable to do so.
▪ Any person convicted on a prosecution instituted by the Attorney General on the

basis of the report.
▪ Any person who is ordered to pay damages or to restore any property in
▪ Any body corporate dealt by the report.
▪ Any body corporate in whose name proceedings are instituted.
▪ The applicants for the investigation
c)
▪ The profit and loss account.
▪ Any group accounts
▪ auditors report
▪ Directors report.
QUESTION EIGHT
a)
▪ If the number of members has fallen below the statutory minimum or
▪ The shares in respect of which he is a contributory either:
▪ Were originally allotted to him
▪ Have been held by him and registered in his name for at least 6 months, during the
18 months immediately proceeding the commencement of winding up.
▪ Devolved on him through the death of the former holder.
▪ As a general rule, a fully paid shareholder has no locus standi to petition for the
winding up of the company. However, in re Rica Gold Washing Co. Ltd it was held
that a fully paid member may sustain a petition by proving that:
▪ He has a tangible asset in the company.
▪ There will be a surplus for distribution to members.
b)
▪ If declared bankrupt by a Court of Law.
▪ If he enters into an arrangement with his creditors to compound his debts.
▪ If he absents himself from five consecutive meetings of the committee without
leave of the persons with whom he represents members or creditors.
▪ If he resigns office by a written notice to the liquidator.
▪ If removed from office by ordinary resolution of members or creditors.
c)
▪ A resolution for voluntary winding up.
▪ Creditors voluntary winding up.
▪ October 22nd 2002.
▪ A full statement of the position of the company’s affairs.
▪ A list of the creditors of the company and an estimate of their claims.
▪ This problem is based on the courses available to directors members or creditors if

the meetings of members and creditors nominate different persons as liquidator.
▪ The provisions of the Companies Act are emphatic that the creditors nominee
becomes the liquidator.
▪ However, within 7 days of the creditors nomination any director member or
creditor may apply to the court for an order that:
▪ The members nominee be liquidator.
▪ The appointee act as joint liquidators or

▪ Some other person be liquidator.

▪ My advise to Kwishima is to apply to the court for some other person to be
appointed liquidator. My advise is based on the provisions of the Companies Act.
LAW II
MOCK THREE
QUESTION ONE
a) Salomons Case is authority for the proposition that “a company is at law a different
person altogether from the subscribers to the memorandum”. Additionally, the
decision established that:
▪ Even the so-called one-man company was a legal person distinct and separate from
its members.
▪ Incorporation was available not only to large companies but to partnerships and
sole proprietorships as well.
▪ In addition to membership it was possible for a member to subscribe for the
company’s debentures.
b)
▪ Is the transaction reasonably incidental to the carrying on of the company’s
business?
▪ Is it a bona fide transaction?
▪ Is it done for the benefit and to promote the prosperity of the company?
c)
▪ The need for large scale investment for large scale production to satisfy surging
demands of the market
▪ The need to limit the liability of entrepreneurs with respect to debts and other
obligations of the company
QUESTION TWO
a) If the form of application was issued:
▪ In connection with a bona fide invitation to a person to enter into an underwriting
agreement with respect to the shares or debentures
▪ In relation to shares or debentures which were not offered to the public
▪ In relation to shares or debentures uniform with shares or debentures previously
issued by
▪ The company
b)
▪ The trustees have a legal mortgage over the company’s assets.
▪ A covenant by the company to pay debenture holders the principal and interest.
▪ A clause specifying the events in which the security is to become enforceable e.g.
default in payment of interest or principal, cessation of business etc.
▪ Covenant by the company to keep a register of debenture holders, and to insure the
security as well as keep the same in repair
▪ Provision for meetings of debenture holders
▪ Type of nature or security given
▪ Details of any sinking fund proposed by the company to provide for stock
redemption
Powers of trustees to:

▪ Take possession of the property charged when the security becomes enforceable
▪ Regulate dealings with the property charged
▪ Appoint a receiver when the security becomes enforceable
▪ Sell the security

c)
▪ This problem is based on fiduciary duties of directors. One of the basic equitable
duties of directors is to exercise powers for the particular purposes for which they
are conferred.
▪ In this case, it is apparent that Jessee and Jackson exercised the power to issue
shares for an improper purpose, i.e., abuse of power. As was the case in Punt V
Symons and Co. Ltd and Piercy V Mills and Co Ltd
▪ The two directors issued shares to Umoja Co. Ltd. and gave options to their wives
to take up company shares to retain their positions in the board.
▪ However, the general meeting of Mashariki Co. Ltd. ratified the transactions thereby
▪ Validating them, hence no action can be taken against Jessee and Jackson.
▪ My advise to Solomon is that he has no actionable claim against the directors of
Mashariki Co. Ltd. This advise is based on the reality that when the general meeting
of the Mashariki Co. Ltd. ratified the abuse of power by Jessee and Jackson the
directors “obtained absolution and forgiveness of their sins” since the transactions
were validated.
▪ My advise is based on the decision in Bamford and Another V Bamford and Others
(1908) whose facts were substantially similar to the facts of this case. A similar
holding was made in Hogg V Crampton.
QUESTION THREE
a)
▪ Breach of warranty of authority, i.e., where he has added beyond his powers
unknown to the other party. As was the case in West London Commercial Bank
Ltd. V. Kitson [1884] where a director had accepted bills on behalf of the company
without authority to do so.
▪ Where he has acted fraudulently as against the other party. As was the case in Orkin
Bros. Ltd V Bell [1921] where directors ordered goods on credit while aware that it
had no capacity to pay. It was held that they were personally liable for acting
fraudulently.
▪ Where a director assumes a direct duty of care to a 3rd party dealing with the
company. As was the case in Fairline Shipping Corporation V Adamson [1975].
▪ Where he has bound himself personally for the liability of the company e.g. as a
surety or as maker or endorser of a bill.
▪ Where the company’s name is not published or is misdescribed in a negotiable
instrument signed by a director.
▪ Where he has contracted on behalf of an illusory company. As was the case in
Harill V Davis.
▪ Where he has formed a company or used it for a wrong purpose. It was so
observed in Rainbow Chemical Works Ltd V Belvedere Fish Guano Co Ltd [1921].
b)
▪ This problem is based on fiduciary duties of directors. A fiduciary is obliged to
ensure that he does not place himself in circumstances in which his personal
interests and his duties to the other party conflict.
▪ In this case, directors of Olympic Co. Ltd. placed themselves in a position of
conflict of interest, i.e., by taking up shares without disclosure and selling the same
at a profit.
▪ These directors are in breach of their fiduciary duties of conflict interest and are
therefore liable to account to the company.
▪ My advise to the directors is to account for the secret profit to the company, i.e.,
Olympic Co. Ltd. This position is consistent with the decision in Parker V Mckenna
LAW II
whose facts were substantially similar to those in this case where it was held that the
directors were liable to account to the company.
QUESTION FOUR
a)
▪ A copy of the balance sheet laid before the company in general meeting.
▪ A copy of the directors report.
▪ A copy of the auditors report.
▪ These copies must be certified by a director and secretary of the company to be true
copies of the originals if any of these documents is in a foreign language a
translation to English must be annexed.
▪ A certificate signed by a director and Secretary of the Company to the effect that the
company has not from the date of incorporation invited the public to subscribe for
its shares or debentures.
▪ If the number of members exceed 50, a director and the company secretary must
sign a certificate to the effect that the excess members are or have been employees
of the company.
b)
▪ If a person’s name is without sufficient cause entered in the register of members.
▪ If a member’s name is without sufficient cause omitted from the register of
members.
▪ If default is made or unnecessary delay takes place in entering the fact that a person
has ceased to be a member of the company.
Application for rectification of the register of members may be made by:

▪ Any member of the company
▪ The company
▪ The aggrieved party
and the court may:

▪ Dismiss the application or
▪ Order rectification of the register and payment of damages by the company to the
aggrieved party
▪ Additionally the court is empowered to determine any question relating to the title
of any person who is privy to the application.
c) General duties
▪ Act in good faith and for proper purpose
▪ Not fetter his discretion
▪ Avoid conflict of interest
▪ Be impartial
▪ Exercise the degree of care and skill appropriate to the circumstances
▪ Exercise discretion personally unless appointed jointly
▪ Secure control of the company’s assets and papers
▪ Realise the assets
▪ Ascertain the company’s liabilities and discharge them in the proper order
▪ Distribute any surplus amongst the contributions and to adjust their rights
QUESTION FIVE
a)
▪ To examine the books, accounts and vouchers of the company and to consider
information and explanation provided during their tenure of office.

▪ To make a report to members on the accounts examined by them and on every

balance sheet, profit and loss account and on all group accounts laid before the
company in general meeting. This report must contain the statements mentioned in
the Seventh Schedule to the Act.
▪ To acquaint themselves with their duties under the Companies Act and the articles
of association of the company whose accounts they are appointed to audit. It was
so held in re Republic of Bolivia Exploration Syndicate [1914].
▪ To satisfy themselves that the companies securities exist and are in safe custody. If
not they must demand that urgent action be taken. It was so held in re City
Equitable Fire Insurance Co. Ltd [1925].
▪ To exercise the care and skill of a reasonably competent careful and cautious
auditor. It was so held in re Kingston Cotton Mills no 2 [1896].
▪ To approach his task with an inquiring mind and with a foregone conclusion that
something is wrong. It was so held in re Kingston Cotton Mills no 2 [1896].
▪ To provide professional advise if called upon to do so. It was so held in Fomento
Ltd V Selsdon Fountain Pen Co. Ltd.
▪ To act honestly, by not certifying as true what he does no believe to be true and
exercising care and skill before certifying something as true. It was so held in re
London and General Bank Co. Ltd [ [1895].
b)
▪ An auditor is not an investigator. His vital task is to approach his task with an
inquiring mind.
▪ “He is a watch dog but not a blood hound”
▪ He is bound to inquire into the substantial accuracy of the balance sheet and
ascertain that it is properly drawn up so as to contain a true and correct
representation of the state of the company’s affairs.
▪ As observed in re Kingston Cotton Mills “ an auditor is not bound to be a
detective”.
▪ An auditor is justified in believing tried servants of the company in whom
confidence is placed by the company. He is entitled to assume that they are honest.
▪ An auditor is bound to exhibit the care, skill and caution of a reasonably competent,
careful and cautious auditor. He is not bound to do more.
▪ An auditor does not guarantee the discovery of all fraud.
▪ He does not guarantee that the books do correctly show the true position of the
company’s affairs.
▪ It is not the auditor’s responsibility to ascertain whether the business of the
company is being conducted prudently or imprudently, profitably or unprofitably.
However the auditor may be deemed to be an investigator in certain circumstances:
i) If appointed to investigate the affairs of a company in relation to a particular
matter
ii) If there is anything calculated to excite suspicion he must probe it to the bottom
c)
Under Section 159 (7) (a) of the Companies Act the auditors remuneration may be
fixed:
▪ By the registrar if appointed by him.
▪ By directors if appointed by them
▪ By the company in general meeting
▪ In such manner as the company in general meeting may determine.
▪ Under Section 159 (3) of the Companies Act where at an annual general meeting no
auditors are appointed or are deemed to be reappointed, a vacancy arises.
LAW II
▪ The company must notify the registrar within 7 days thereof and the registrar may
appoint an auditor for the company. Failure to notify the registrar of the failure
renders the company and every officer in default liable to a default fine.
QUESTION SIX
a)
▪ It has been observed that the term debenture is not a technical term.
▪ Under Section 2 (1) of the Companies Act debenture includes “debenture stock,
bonds and any other securities of a company whether constituting a charge on any
assets of the company or not.”
▪ In the words of Lindley J. in British India Co. V. I.R.C. [1881] “I do not find
anywhere any precise definition of it. We know that these are various kinds of
instruments commonly called debentures. You may have mortgage debentures
which are charges of some kind on property. You may have debentures which are
bonds. You may have a debenture which is nothing more than an acknowledgment
of indebtedness...it is a statement by two directors that the company will pay a
certain sum of money and will also pay interest...”
▪ In the words of Chitty J. in Levy V Abercolis Slate and Slab [1887] “The term itself
imports a debt- an acknowledgment of a debt...”
▪ In modern commercial usage debenture denotes an instrument issued by the

company providing for the payment of or acknowledging the indebtedness of the
company.
▪ The term is also used to describe the instrument creating the transaction.
Debentures may be issued as:

▪ Secured and unsecured
▪ Redeemable and irredeemable
▪ Registered and bearer
▪ Convertible and non-convertible
b)
▪ Transferability by delivery
▪ Transferability free from equities
▪ The bearer’s right to sue the company in his own name if necessary
▪ A transferee in good faith for valuable consideration acquires a good title
▪ The delivery of the debenture and any interest coupon is a good discharge of the
company
c)
▪ This problem is based on the remedies for misrepresentation in prospectuses.
▪ In this case, it is clear that the prospectus of Ujenzi Ltd contained untrue statements
and Onyango is aggrieved by reason of having relied upon the statements.
▪ The secretary’s circular notifying Onyango that the statement was made in good
faith is immaterial and Onyango is entitled to a remedy.
▪ Onyango opted to rescind the contract and has even commenced proceedings.
▪ The essence of this remedy is to restore the parties to the position they were before
the contract. However, the remedy is not available in certain circumstances e.g. if
the innocent party sleeps on his rights for too long, or affirms the contract or 3rd
party rights accrue or restitutio in integrum is not possible.

▪ In this case, it is evident that Onyango cannot rescind the contract. This position is
premised on the following facts:
• Onyango slept on his rights for too long. He learnt of the untrue statements in
November 2001 but did not sue until Janaury 6th 2002.
• Onyango affirmed the contract. His attempt to sell the shares to Kajwang on
December 5th 2001 is a clear indication of this fact.
• Restitutio in integrum is not possible i.e. the parties cannot be restored to the
position they were before the contract since the company is already in
liquidation.
• My advise to Onyango is to discontinue rescission proceedings against the
company and sue the directors of Ujenzi Ltd for compensation pursuant to
section 45 (1) of the Companies Act.
• This advise is based on the reasoning that an action in damages does not lie for
innocent misrepresentation and the right to rescind the contract has been lost.
QUESTION SEVEN
a) The provision of the Companies Act require all companies to keep certain books of
accounts in the English language. These are books with respect to:
▪ All sums of money received and expended by the company and the matters in
respect of which the receipt and expenditure takes place.
▪ All sales and purchases of goods by the company
▪ The assets and liabilities of the company.
▪ These books must give a true and fair view of the state of the company’s affairs and
explain its transactions.
▪ If at the end of the financial year a company has subsidiaries there must be laid
before the company in general meeting group accounts of the company and its
subsidiaries.
▪ The group accounts shall be consolidated accounts comprising:
▪ A consolidated balance sheet dealing with the state of affairs of the company and all
subsidiaries dealt with.
▪ A consolidated profit and loss account dealing with the profit or loss of the
company and those subsidiaries.
▪ The group accounts may be wholly or partially incorporated in the company’s own
balance sheet and profit and loss account.
▪ The group accounts must give a true and fair view of the state of affairs and profit
or loss of the company and the subsidiaries dealt with as a whole.
b) The group accounts laid before the company in general meeting need not deal with a
subsidiary if directors of the company are of the opinion that:
▪ It is impracticable
▪ It would be of no real value to members of the company in view of the insignificant
amounts involved
▪ It would involve expense or delay out of proportion to the value to members of the
company
▪ The result would be misleading
LAW II
▪ The result would be harmful to the business of the company or any of its
subsidiaries
▪ The business of the holding company and that of the subsidiary are so different
that they cannot be reasonably be treated as a single undertaking.
▪ If directors are of such an opinion about each of the company’s subsidiaries, group
accounts shall not be required.
c)
▪ Every person who is a director of the company is liable to a fine not exceeding
Kshs10,000 or imprisonment for a term not exceeding 12 months or both.
However the accused may escape liability by proving that he had reasonable ground
to believe and did believe that a competent and reliable person was charged with the
duty and was in a position to discharge the same.
QUESTION EIGHT
a)
▪ If winding up proceedings have been commenced outside Kenya against a company
incorporated outside Kenya which carries on business in Kenya.
▪ For the continuation of a voluntary winding up or a winding up subject to the

supervision of the court as a compulsory winding up so as to safeguard the interests
of creditors and contributories.
b)
▪ The court may when making the order for a winding up subject to supervision or by
a subsequent order appoint an additional liquidator for effective winding up.
▪ An order for the continuation of winding up subject to the supervision of the court
gives creditors, contributories and others liberty to apply to the court for such
orders as are necessary for the beneficial winding up of the company.
c) Although it has been suggested that there is an exhaustive list of circumstances that
may fall within the scope of the “just and equitable” clause, judicial authority is
emphatic that no such list is feasible. Courts have ordered the winding up of
companies on the ground that it is just and equitable to do so in various circumstances
e.g.
▪ Failure of substratum:
This is the principal or paramount object of the company and it is deemed gone if it
is no longer attainable. In re German Date Coffee Co [1882] it was held that since it
was impossible to acquire a German patent, the main object of the company, it was
just and equitable to wind up the company. A similar holding was made in re Baku
Consolidated Oil Fields Co.
▪ Fraudulent or illegal purpose:
In re Thomas Edward Brinsmead and Sons [1897] it was just and equitable to wind
up a company if it was evident that it had been formed to pursue a fraudulent or
illegal purpose.

▪ Loss of confidence in management:
It is just and equitable to windup a company if members have justifiably lost

confidence in the manner and probity with which its affairs are being managed.
There must be a consistent course of conduct on the part of the management which
justifies the petitioners loss of confidence. As was the case in Loch V John
Blackwood.
▪ Expulsion or exclusion from management:
The inequitable exclusion or expulsion from the management of a company’s affairs

renders it liable to be wound up under the just and equitable ground. In Ebrahim V
Westbourne Gallaries Ltd [1973] the petitioner had been unfairly excluded from the
management of the company while in re Lundie Brothers Ltd [1965] the petitioner
had been unfairly expelled from the Company’s management.
▪ Company is a “bubble”:
These are circumstances in which there is no bona fide intention on the part of the
directors to pursue the declared objects of the company or pursue them lawfully. It
was so held in re London and County Coal [1867].
▪ Oppression of minority:
It is “just and equitable” to wind up a company if it is established that its affairs are
being conducted in a manner oppressive to the minority.
▪ Deadlock in management and membership:
If both organs of the company cannot function in any material respect by reason of
a deadlock or otherwise, it is just and equitable to wind up the company. This
generally arises where the company’s shares and voting rights are equally divided
between two persons or groups of persons with irreconcilable differences. As was
the case in re Yenidje Tobacco [1916] as well as in re Modern Retreading Co. Ltd.
▪ Facts would justify dissolution of partnership:
This circumstance can only be relied upon in cases of small private companies. It is
based on the premise that such companies are in substance partnerships and hence
grounds that justify the dissolution of a partnership may equally apply in the
winding up of the company. This argument was relied upon in Ebrahimi V
Westbourne Gallaries Ltd [1973].
LAW II
MOCK FOUR
QUESTION ONE
• Voluntary winding up is the winding up of a company by members or creditors without
judicial intervention. It is recognized by sec 272 (1) of the Act.
• A voluntary winding up may be members or creditors.
• Under section 271 (1) of the Act, a company may be wound up voluntarily in the
following circumstances.
1) Lapse of time:
If the duration if any prescribed by the articles has expired and members have resolved
to have the company wound up voluntarily.
2) Occurrence of an event:
If an event contemplated by t he articles has occurred and members have resolved that
the company be wound up voluntarily.
3) Special resolution:
If members by special resolution resolve that eh company be wound up voluntarily.
Under section 273 of the Act, a voluntary winding up commences at eh time of passing
the resolution for winding up. Under section 271 (2) of the Act, a resolution to winding
up a company voluntarily is referred to as a resolution for voluntary winding up and
within 14 days of its passage, notice must be given in the Kenya Gazette and in some
newspaper circulating in Kenya.
Members Voluntary Winding Up

This is the winding up of a solvent company at the option of the members. It is managed by
shareholders who appoint a liquidator answerable to them. No meetings of creditors are
held and there is no committee of inspectors.
It is characterized by declaration of solvency. Pursuant to section 276 (1) of the Companies

Act.
Conduct of a Members Voluntary Winding up;

Members in general meeting pass the resolution for voluntary winding up and must appoint
one or more liquidators to wind up the affairs and distribute the assets of the company.
Under sec 281 (1) if at any time the liquidator is of the opinion that the company cannot pay
its debts in full, within the stipulated duration he must;
1) Notify the registrar of companies

2) Convene a meeting of the creditors an lay before it a statement of the assets and liabilities
of the company failing which the liquidator is liable to a fine not exceeding Sh.1,000.
• Under section 282 (1) of the Act, if winding up continues for more than 1 year, the
liquidator must convene a general meeting of the members and must do so after every
other year and lay before it an account of his acts and dealings and of the conduct of
the winding up during the preceeding year.
• Under section 283 (1), when the affairs of the company are fully wound up, the
liquidator must prepare a winding up account shown how it has been conducted and
the property of the company disposed off.

• He must then, by a 30 day notice in the Kenya Gazette and in some newspaper
circulating in Kenya, summon a general meeting of the members and lay before it
account giving any explanations necessary.
• Within 14 days of the meeting, the liquidator must deliver a copy of the account to the
registrar and on expiration of 3 months, from the date of registration, the company is
deemed dissolved. However, the dissolution of a company may be deferred by the
court on the application of the liquidator or other interested party.
• The court order must be delivered to the registrar within 7 days of its making. If the
liquidator fails to convene the last general meeting of the company, he is liable to a
fine not exceeding Ksh.1,000.
QUESTION TWO
(a)
• This is the majority rule, which governs the enjoyment of corporate membership rights.
• The rule was laid down in Foss V. Harbottle (1873) where the plaintiffs purported to
enforce a wrong done to the company. The acton was struck out on the ground that
they had no Locus standi.
• The rule consists of three principles namely:
- Proper plaintiff principle.
- Internal management principle
- Irregularity principle.
(b) The exceptions to the rule in Foss V. Harbottle are circumstances in which the
majority rule does not apply. They are instances in which a representative action
may be instituted to remedy the wrong in question.
• Ultra Vires or illegal acts: a member is entitled to file a representative action to
restrain the company from engaging or proceeding with an ultra vires or illegal
transaction.
• Special or qualified majorities: if a transaction can only be effected by a qualified
majority, but members purport to use a simple majority, e.g. ordinary resolution, the
majority rule is inapplicable. It was so held in Cotter V. National Union of seamen.
• Fraud on minority: an act may amount to fraud on minority if it is an abuse of a
fiduciary position or unfair use of majority voting power. If the minority is being
defrauded the rule in Foss V. Harbottle is excepted to enable the complaint reach the
court. As was the case in Menier V. Hooper Telegraph wires.
• Violation of individual membership rights: if the rights violated are personal in
nature, the member has a personal right of action for redress. As was the case in Pender
V. Lushington.
• Oppression of minority: under the provisions of the Companies Act any member of a
company who complains that the affairs of the company are being conducted in a
manner oppressive to some part of the members including himself may apply to court
by way of a petition for a remedy. The member files are presentative action.
(c)
• This problem is based on the members right to vote in general meeting and have the
vote recorded.
• In this case it is evident that Maiko is a shareholder of Kakuma Land Buying Co. Ltd
and is thus entitled to vote and have his vote recorded.
LAW II
• The chairman of the board refused to record Maikos vote in toto violation of his
individual membership right. This entitle Maiko to an action against the chairman of the
board for breach of duty.
• My advise to Maiko is to file an action against the chairman of Kakuma Land Buying
Co. Ltd for an order compelling the chairman to record Maikos vote. This advise is
consistent with the decision in Pender V. Lushington whose facts were substantially
similar.
QUESTION THREE
(a)
• This is the nominal or registered capital.
• It is the maximum capital which a company is authorized to raise by the issue.
• It is the amount specified in the capital clause of the memorandum and statement of
nominal capital.
• It is the basis upon which stamp duty is paid for purposes of incorporation.
• A company is not bound to issue the entire amount.
• A company is free to reduce or increase the nominal capital.
(b)
• This is the subscribed or allotted capital.
• It is that portion, if any of the authorized capital that has been taken up by members for
which they are liable.
• It is in principle regarded as a permanent fund or fund of last resort available to
creditors.
• Creditors are entitled to insist that no part thereof is wasted or returned to members.
(c)
• It is that portion if any of the issued capital which members are yet to pay up.
• It is the subject matter of calls.
(d)
• This is reserve capital or liability.
• It is a portion of capital which a company may create by special resolution.
• Under the provisions of the companies Act, a company may resolve by special
resolution that the whole or any part of its uncalled up capital shall not be capable of
being called up except in the event of or for purposes of winding up. This is the reserve
capital. It cannot be dealt with otherwise.
• Cannot be reconverted to ordinary uncalled up capital.
• Cannot be used as a security for a loan.
• It is available to creditors in the event of winding up.
QUESTION FOUR
(a)
• According to one judge a promoter is one who undertakes to form a company with
reference to a given project and set it going and who takes the necessary steps to
accomplish that purpose.
• This definition does not postulate the role a person must play to be regarded as a
promoter.
• Is not a promoter the person who prepares the necessary documentation registers the
company, secures the services of directors and provides all the instrumentalities to
enable the company pursue its objects?

• A promoter is any person who has taken some part in bringing a company into existence
or in procuring persons to join it as soon as it is technically formed.
• The question who a promoter is one of fact. It all depends on the role the person
played may be active or passive.
• Act bona fide for the benefit of the company in formation.
• Render a proper account of his activities.
• Disclose any person interest in contracts made on behalf of the company.
• Determine and settle the company’s name.
• Prepare or cause preparation of the requisite documentation.
• Register or cause registration of the company.
• Secure the services of directors
• Meet all the preliminary expenses.
• Ensure that the company in formation has an independent board of directors.
• Prepare the requisite prospectus, if any
• Acquire assets for use by the company
• Enter into contracts on behalf of the company.
(b)
• This problem is based on pre-incorporation contracts.
• In this case Saidi and Mutuku bought shares before and after incorporation of the
company.
• The purchase of shares from Mangea and Wanyoike before incorporation is enforceable
since the company entered into a similar transaction after incorporation.
• My advise to Saidi and Mutuku is to apply to the high court for the rectification of the
register of Maendeleo Co. Ltd to include their names.
• This is because at common law, a pre-incorporation contract is enforceable if after
agreement.
• This advice is based on the decision in Mawogola Farmers and Growers Co. Ltd. V.
Kayanja and others.
QUESTION FIVE
(a)
• This is an ordinary general meeting.
• Under the provisions of the Companies Act every company must in each year hold a
general meeting on its annual general meeting.
• Notice of the meeting must state that it is the annual general meeting.
• The first annual general meeting must be held within 18 months of incorporation and
subsequently 15 months must not elapse from the date of one annual general meeting to
that of the next.
• If the first annual general meeting is held, no other meeting need be held within 2 years
of incorporation.
• The annual general meeting is ordinarily convened by a 21 day notice.
• Failure to hold the meeting renders the company and every office in default liable to a
fine not exceeding Kshs. 2,000.
(b)
• This is a general meeting of a company other than the statutory or annual general
meeting.
• Such a meeting may be held at anytime when need arises.
• It is ordinarily summoned by a 21 day notice.
LAW II
• It ordinarily considers special business e.g. alteration of the articles or memorandum

removal of auditor or directors.
• Under the provisions of the Companies Act, members may requisition an extra ordinary
general meeting of the company.
1
• Holders of not less than of the paid up capital or total voting rights of the company
10
may instigate the convention of a meeting by depositing a requisition with the company
at its registered office.
• The requisition must specify the objective of the proposed meeting and must be signed
by each of the requisitionists. It consists of more than one document each must be
signed by at least one of the requisitionists.
• Directors of the company must convene a meeting of the company within 21 days of
deposit of the requisition failing which the requisitionists or not less than one half of
them may convene the meeting.
• A meeting convened by requisitionists under this section must be held within 3 months
of deposit of the requisition.
• Such a meeting must be held in a manner similar to a meeting convened by directors.
• Any reasonable expenses incurred by the requisitionists is recoverable from the
company which in return recovers from the directors in default from the amounts due
to them by way of remuneration.
(c) (i)
• To effect the change of name from Kusau Ltd to Mataa Ltd, the following steps are
necessary:
• Reservation of name: a written application must be made to the registrar of companies
for reservation of the name “Mataa Ltd.”
• Extra ordinary general meeting: Directors of Kusau Ltd must summon an extra ordinary
general meeting of the members. Notice of the meeting must indicate that a special
resolution to change the name of the company from Kusau Ltd to Mataa Ltd is
proposed to be passed.
• Special resolution: members at the extra ordinary general meeting must by special
resolution authorize the company to change its name from Kusau Ltd to Mataa Ltd.
• Notification: the registrar of companies must be notified of the change of name within
14 days of the resolution so that he enters the new name in the register of companies,
issues a certificate of change of name and publishes the change in the Kenya Gazette.
(ii) To increase the companys’ share capital, the following conditions are necessary,
• Articles: the articles of Kusau Ltd must embody a provision authorizing the
company to increase its capital.
• Extra ordinary general meeting: Directors of Kusau Ltd must convene an extra
ordinary general meeting of members to authorize the increase.
• Ordinary resolution: the increase of capital must be sanctioned y an ordinary
resolution of members in general meeting.
• Notification: the registrar of companies must be notified of the increase within
30 days thereof.
QUESTION SIX
• Rescission of contract: a company may rescind a contract entered into by a promoter on
its “behalf” before incorporation. This remedy restores the parties to the position they
were before the contract. However, the remedy may be lost in various circumstances
e.g. delay or affirmation.

• Recovery of profit or account: a company is generally entitled to any secret profit made
by a promoter in breach of his fiduciary duties. The amount is recoverable under an
action for money had and received.
• Damages: a company has an action in damages against a promoter for breach of his
fiduciary duties. This action is sustainable even in the absence of fraud.
• Compensation: a promoter is liable to compensate any person who has suffered loss or
damage by reason on subscribing for company’s securities on the faith of a prospectus
containing any untrue statement.
• Public examination: under the provisions of the companies Act the High Court of law
has jurisdiction to subject a promoter to a public examination over his conduct during
the incorporation of the company.
(b) (i) Newbone V. Sensolid (Great Britain) Ltd (1954)

• This case is authority for the proposition that a contract purportedly entered into with
or by an non-existent person is void.
• In this case, Mr. Leopold Newborne, who was in the process of incorporating a
company entered into a contract to supply the defendant company with a quantity of
harm. He however, signed the contract in the company’s name. His signature showed
that he was a director of the company. In an action to enforce the contract it was held
that the purported contract was void as one of the parties did not exist.
(ii) Natal Land Co. Ltd. V. Pauline Colliery Syndicate.

• This case is authority for the proposition that a company cannot after
incorporation ratify a contract purportedly entered into on its behalf before
incorporation.
• In this case a company purported to ratify a contract entered into by a promoter
before incorporation. It was held that the purported ratification had no legal
effect.
QUESTION SEVEN
(a)
• No dividend shall be payable by a company otherwise than out of profit.
• Dividend does not earn interest against the company.
• Directors recommend dividend and members declare the same in general meeting.
• Members cannot declare dividend in excess of the rate recommended by the board.
• Once dividend is declared, it becomes a debt payable to members.
• Directors may from time to time pay to members such interim dividend as the profits of
the company may permit.
• A company must not pay dividend, it the same renders it unable to pay debts as and
when they fall due.
• Losses in circulating assets of the current accounting period must be made good before
• Losses in circulating assets of the previous accounting period need not be made good
before dividend is declared.
• A company is not legally obliged to make provision for depreciation before dividend is
declared.
• A profit made on the sale of a fixed asset may be treated as profit available for
distribution.
(b)
• These rules are effective in ensuring that the company’s capital is maintained in that:
i. They prohibit the payment of dividend from capital.
LAW II
ii. Dividend is only payable if a company is solvent and a going concern.

iii. The rate of dividend payable to determined by directors who are entrusted with the
management of the company.
However, these rules are not as effective as may be required in that members are free to alter
a good number of them to the detriment of the company’s capital.
QUESTION EIGHT
(a)
• If the company’s security is in jeopardy.
• If the company threatens to dispose of its undertaking in contravention of the rights of
debenture holders.
• If winding up is taking place or is imminent.
• If there are disputes between directors of the company.
• If the principal or interest or both are in arrears.
(b)
• All floating charges of the company crystallize and become fixed.
• If he is appointed for the undertaking of the company directors powers become functus
officio.
• If appointed by the court, servants of the company are automatically dismissed.
• Company receipts, invoices business letters and other documents must state that the
company is in receivership.
(c)
• If the registrar has reasonable cause to believe that the provisions of the Companies Act
are not being complied with by the company.
• If a document submitted to the registrar in compliance with the provisions of the
Companies Act, does not disclose a full and fair statement of the matters which it
purports to relate to.
• If the registrar has good reason to investigate the ownership of any shares or debentures
of a company.

MOCK FIVE
QUESTION ONE
a) Under section 59 (i) of the Companies Act, it shall be lawful for a company to issue at a
discount shares in the company of a class already issued provided that:
1. The issue of the shares of a discount shall be authorized by resolution passed in

general meeting for the company, and shall be sanctioned by the court; and
2. The resolution shall specify the maximum rate of discount at which the shares are to
be issued; and
3. Not less than one yea shall, at the date of the issue, have elapsed since the date on
which the company was entitled to commence business; and
4. The shares to be issued at a discount shall be issued within one month after the date
on which the issue is sanctioned by the court or within such extended time as the
court may allow.
b) The procedure for reduction of capital prescribed by the companies Act, safeguards the
interests of shareholders, creditors and future investors in the following ways;
Shareholders:
1. Special resolution of members – can refuse the resolution.

2. Confirmation of reduction by the courts. If unfairly prejudicial to the
shareholders the courts may not confirm it.
Creditors:
1. Confirmation of reduction by the courts.
2. Registration of the reduction.
3. Right to object the reduction .
Future Investors:
1. Registration of reduction which protects all but existing shareholders.
2. Special resolution of members.
3. Confirmation of reduction by the courts.
4. Publication of the reduction as directed by the court.
5. Change of name.
QUESTION TWO
a) Fraud on Minority
• It has been asserted that the term fraud denotes an abuse of power or misuse of
a fiduciary position.
• The majority rule cannot apply if the conduct complained for amounts for fraud
on minority e.g.
1. Expropriation of corporate assets.
2. Breach of duty by directors.
3. Unfair use of majority voting power.
LAW II
• A representative action may be instituted to remedy the wrong. The plaintiff

must establish Interalia that those perpetrating the fraud are in legal or factual
control of the company’s affairs and hence cannot permit the company to sue.
• A majority shareholder is deemed to be in legal control of the company.
• Factual control was explained by Vinelott. J. in Prudential Assurance Company

V. Newman Industries, “De facto control arises where members though not
holding a majority of the shares in the company, are able by manipulating their
position to ensure that the majority will not allow such a claim to be brought by
the company for the alleged wrong doers are in factual control of the company.
• This exception was developed to ensure that wrongs committed against the
minority found their way ,to the court where the majority are in control.
b) An alteration of articles must be bonafide for the benefit of the company as a

whole. Regard must be had to existing and future shareholders of the company.
• Whether the alteration is made in good faith or not is for the court to determine
on the basis of circumstances.
• In Sidebottom V. Kershow Leese and Co. the plaintiff who was a

shareholder of the private company was interested in a business which
competed with that of the company was interested in a business which
competed with that of the company.
• Members in the general meeting resolved to add to the articles a provision to

the effect that a member had to transfer his shares to nominees of directors if a
written request requiring him to do so was served upon him by the board.
• A request was served upon the plaintiff who filled action challenging the validity
of the new article. It was held that the alteration was valid since it was
beneficial to the company to get rid of competitors among its members.
However, in Brown V. British Abrassive Wheel, a public company required
further capital urgently on risk of being wound up. The majority holding 98%
of the shares were ready and willing to provide a capital on condition the
bought the minority. The minority refused to sell their shares. Subsequently,
the majority resolved to add to the articles, a provision to the effect that t
member was bound to transfer his shares. If a written request was served upon
him by holders of not less than 90% of the shares. The minority filed an action
challenging the validity of the new article. The alteration was disallowed on the
grounds that it was not made in good faith for the benefit of the company as a
whole but exclusively for the benefit of the majority.
• In the case of Gwanju Co. Ltd is not bonafide for the benefit of the company as
a whole.
• Therefore, minority should file an action in court for the alteration to be

disallowed

QUESTION THREE
a) Registration of a public company limited by shares.
• To obtain registration the following steps are followed;
1) Application for reservation of name.
Under Sec 19 (1) of Act, the registrar may on written application reserve the name
pending the registration or change of name by a company.
The name is reserved for 30 days in the first instance during which time it’s
unavailable to other persons. The registrar may on application extend the
reservation by any number of days not exceeding 30.
Under section 19 (2) of the Act, the registrar cannot resolve or register a company
by a name which I his opinion is undesirable.
Note: The parties is association to form a public company limited by shares have to
subscribe to the memorandum.
2) Preparation of constitutive and other documents
a) Memorandum of Association:
under section 2 (1) of the Act the memorandum means Memorandum of
Association of a company as originally formed or as altered: it is one of the
basic/constitutive documents.
b) Articles of Association:
Under section 2 (1) of the Companies Act, articles means articles of association
of a company as originally formed or as altered by special resolution. Including
so far as they apply to the company the regulations contained in Table A
c) Statement of normal capital:

This document is a requirement of the Stamp Duty Act Cap 490.
It contains the name of the company and the capital with which the company
pro0oes to be registered. It promotes assessment and payment of duty for
purposes of incorporation.
d) Declaration of Compliance
Under section 17 (2) of the Companies Act, this is a statutory declaration either
by the advocate engaged in the formation of the company or by a person named
by the articles as director or secretary to the effect that subscribers to the
memorandum have complied with the provisions of the Act and are desirous of
being formed to a company. It sworn evidence of compliance with the
provisions of the Act.
NB: In law the documents identified here in below ought to be delivered to the
registrar within 14 days of registration of the company. However, in practice all
the documents must be delivered to the registrar at eth same time.
e) List of directors and their consent;

The list of directors identifies the persons who have agreed to act as directors of
the company. It contains:
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i) The names of directors

ii) Their postal addresses
iii) Their date of birth
iv) Occupation
v) Other directorships if any.
The list must be a complied by a written consent of every director to act as

such. The consent must be signed by the director or his duty authorized agent.
f) Notice of Location of Business

It specifies
1) The physical address of the company i.e. the city or town in which the
registered office is situated, plot numbers and building.
2) The postal address of the company.
3) Stamping of documents;
The Memorandum, Articles of Association and the Statement of Nominal
Capital must be presented for stamping, i.e. payment of the duty payable for
purposes of Incorporation. Upon payment, the duty imprint is fixed on the
documents on the face of the documents.
4) Presentation of documents to the registrar;

Under section 15 of the Companies Act the Constitutive and other
documents must be lodged with the Registrar of Companies for registration
of the company.
5) Registration of the company and issue of Certificate of Incorporation;

Under section 16 (1) of the Act, if the registrar is satisfied that the
documents have been prepared in accordance with the provisions of the
Act, he registers the memorandum and articles and issue a Certificate of
Incorporation authenticated by his seal and signature. This Certificate
signifies Incorporation of a company.
b) A public company limited by shares has a memorandum stating that I has been
registered as such.
• The private company is the residual class of companies, without any special
requirements.
• There are three requirements for registration of a company as a public company

limited by guarantee: These are substantial differences in the capital requirements as
applied to public and private companies. They are:
1) It must state it is a public company limited by shares both in its

memorandum and by its name. There must be a clause to that effect in the
memorandum and its name must end with words “Public Limited
Company” (PLC). A private company uses the traditional “Limited” or
(Ltd) at eth end of its name.
2) The memorandum must be in the form specified in Table F of the

Companies regulations 1985
3) The company must have an authorized capital figure of at least the

authorized minimum.

• The particular, a Public Company Limited by shares cannot commence

business or exercise any borrowing powers unless it has actually allotted
shares up to the authorized minimum and has received at least one
guarantor of that amount.
• A public company must have at least two directors whereas a private

company need only one.
• A private company needs no minimum capital either for registration or

the commencement of business.
QUESTION FOUR
a) A Floating charge:
This is an equitable charge securing a debenture on the asset of a going concern. Its
essence is that it remains dormant until crystallization. In the words of Lord
MacMaghten in Illingworth V. Holds worth (1904), “A floating charge on the other
hand is ambulatory and shifting in its nature, hovering over and so to speak floating with
the property which its intended to affect until some event occurs or some act is done
which causes it to settle and fasten on the subject of the charge within its reach and
grasp.’
The characteristics of a floating charge were laid down by Romer J. in re Yorkshire

Wool Combers Association.
1) It is a charge on a class of assets of the company both present the future.

2) The asset belongs to a class that keeps on changing from time to time in the
ordinary course of business of the company.
3) The charge remains dormant until crystallization.
Advantages of the Floating Charge;

1) It enables companies with no fixed assets to borrow.
2) It enhances the borrowing capacity of companies with fixed assets.
3) It enables companies to use future asses as collateral.
4) The charge does not prevent the company from carrying on business. It is free to
dispose off and acquire new stock.
5) The charge is empowered to appoint a receiver in the event of default.
6) Upon crystallization, the chargee becomes entitled to sell any fixed asset within the
reach and grasp of the charge.
Disadvantages of the Floating Charge;

1) The value of the security remains unknown since the company continues to carry on
business.
2) A fixed charge created subsequent to the floating charge, has priority in the
satisfaction of claims.
3) Certain other interest e.g. landlords distress for rent has priority over floating
charges.
4) Under section 31 of the Act, a floating charge created within six months before the
commencement of winding up is deemed to be a fraudulent preference and is void.
5) Under section 314 of the Act, a floating charge created within twelve (12 ) months
before the commencement of winding up is invalid unless it is proved that the
company was solvent immediately after its creation.
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b) Crystallization of Floating Charges;

1) A floating charge crystallizes the following circumstances:
2) When the company ceases to be going concern.
3) Upon commencement of recovery proceedings against the company.
4) When a receiver is appointed by a debenture holder pursuant to the terms of a
debenture or by the court on application.
5) Failure to pay the principle or interest when due and payable provided the chargee
takes some steps to enforce the security.
6) Occurrence of an event which under the terms of the debenture causes
crystallization.
When a floating charge crystallizes it becomes a fixed charge.
A negative Pledge Clause

• This is a clause in a debenture to the effect that the company or borrower will not
create a charge in priority to the current one.
• It ensures that the chargee has priority in the satisfaction of claims.
c) Registration of Charges:
Under Section 96 (1) of the Act, a copy of every charge created by the company must be
delivered to the registrar for registration within 42 days of its creation. However, under
sections 10Z, the High court is empowered to extend the duration on application if its
satisfied that the non-presentation was accidental or due to in advertence or some other
sufficient cause or does not prejudice the position of the creditors or shareholders of the
company. Hence the charge must be delivered to the registrar within 42 days of its
creation or such extended time as the court may grant on application failing which;
i) The charge is void as against the liquidator and money becomes payable
immediately.
ii) The company and every offices in default are liable to a fine not exceeding sh.1,000.
Particulars to be registered;
Under section 97 (1) of the Act, it’s the duty of the company to deliver to the registrar
for registration particulars of every charge created by the company. However, where
registration is affected on the application of another person, the person is entitled to
recover from the company the amount of any fees properly paid to the registrar.
The registerable particulars include:

1) Date of transaction
2) A description of the instrument creating the charge.
3) The amount secured.
4) A short description of the property charged or mortgaged.
5) Names, postal addresses and descriptions of the parties etc.
Effect of Registration of Charge;
Under section 99 of the Act, upon registration of the charge, the registrar issues a
certificate of registration which is conclusive evidence that the requirements of the Act
relating to registration of charges have been complied with. The certificate cures all
defects. In the words of Buckley J in re Mechanizations Ltd 1966, “It shall be
conclusive evidence that the particulars delivered to the registrar are accurate particulars
…. The effect of sec 99 appears to me to be that when the registrar gives his certificate,
it is to be conclusive in fact not only that the registrar has entered the particulars in the
register of charges but also that the steps preliminary thereto have been carried out”.

In National Provincial and Union Bank of England V. Charnley the instrument

creating the debenture, omitted the security which was a motor vehicle. A third party
purported to attach the motor vehicle in the event of default. Question was whether the
motor vehicles in the event of default. Question was whether the motor vehicle could
be attached. It was held that since the charge had been registered and a certificate
issued, all the defects of the documents were used and the motor vehicle could be
attached.
A similar holding was made in re Nye Ltd. A bank lent money to a company and
obtained a charge over the company’s land as security. The charge instrument was
undated and the banks solicitor forgot to register it with the registrar of companies.
Several months later the bank sought to enforce the security. The banks solicitor
inserted a date on the charge, delivered it to the registrar where upon it was registered
and a certificate issued.
The company’s liquidator disclaimed liability on the ground that the charge was not
registered within the required time. However, it was held that the charge was
enforceable as it had been registered and a certificate issued curing all its defects.
QUESTION FIVE
Royal British Bank V. Turguant
• This is the indoor management rule. It is concerned with the liability of a company
for acts of its officers.
• It answers two questions;

1) Can a company escape liability by pleading an internal irregularity
2) Are third parties who deal with the company bound to satisfy themselves that
the rules of Internal Management have been complied with.
• These questions were answered in the negative in Royal British Bank V.
Turguand (1856).
The articles of the company provided that directors could borrow on board such monies
as were authorized by an ordinary resolution of members in general meeting. Directors
of the company borrowed from the plaintiff bank without any resolution. In liquidator
who denied liability on the ground that the borrowing was irregular. However, it was
held that eh company was liable. The court formulated the so called in door
management rule: that a person who contracts and deals with a company in good faith
is entitled to assume that it is acting within its constitutional powers. He is entitled to
assume that what appears regular is in fact regular. He is entitled to assume that officers
of the company who are held out by the company as particular sort of officers, are the
officers of the company concerned.
• In Mahony V. Easthlyford Mining Co. Lord Harthery says, “Where there are persons
conducting the affairs of the company in a manner which appears to be perfectly in
consonance with the articles of association, then those dealing with them externally are
not affected any irregularities which may take place in the internal management of the
company”.
• In Freeman and Lockyear V. Backhurst Parker Properties (Freeman’s case) the

company’s articles created the position of managing director.
At the material time, non had been appointed. However, one director with knowledge
of the others purported to act as managing director. He engaged the plaintiff a firm of
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architects to work for the company. The Plaintiff was not paid for services rendered
and sued the company. The company denied liability on the ground that the director
was not its managing director and hence had no authority. It was held that the company
was liable since it represented this director as its managing director who therefore had
apparent authority to bind it.
• The indoor management rule protects third parties against the company in case of
internal irregularities. It is justified on two grounds;
1) It is fair to third parties to prevent the company from denying liability by relying on
an Internal Irregularity.
2) It facilitates commercial transactions in that third parties are not bound to inquire
whether the rules of internal management have been complied with.
• However, the indoor management rule does not protect the third partying certain
circumstances and the company may escape liability. These are the exceptions to the
rule in Turguants case:
1) Public documents of the Company:

If the defect or irregularity would have been ascertained by an inspection, of the
company’s public documents which the third party did not do, he is not protected by the
rule. It was so held in Irvine V. Union Bank of Australia. This is because, the public
documents are registrable and open for inspection e.g. special resolutions.
2) Knowledge of the Irregularity:

If the third party is aware of the irregularity or lack of authority, on the part of the
officer dealt with, he is not deemed to be acting in good faith and cannot rely on the
indoor management rule. It was so held in B Liggetts (Liverpool) Ltd V. Barclays
Bank Ltd where the defendant was aware of the irregularity.
3) Suspicion:
If the circumstances are such that they put the third party on inquiry, but the party does
not inquire to ascertain the true position, he is not protected by the rule as a reasonable
third party would have enquired. It was so held in B. Liggetts (Liverpool) Ltd V.
Barclays Bank Ltd.
4) Abuse of power by an officer:

If the officer dealt with by the third party purports to exercise powers not ordinarily
exercised by that sort of officer and the third party does not inquire, it cannot rely on
this rule.
5) Forged Documents:
The indoor management rule cannot protect a third party or hold the company liable if
the document relied upon forgery. Such a document is a legal nullity. It was held in
Reuben V. Great Fingall Consolidated:
6) Insiders;
As a general rule, the Indoor Management rule cannot be relied upon by an Insider.
These are persons who by virtue of their positions regulations have been complied with
e.g. directors. It was so held in Howard V. Patent Ivory Manufacturing Company Ltd.
Where the third parties in question were directors. It was held that hey were deemed to
know of the irregularities and could not rely on the indoor management rule.

Question has arisen as to whether directors are insiders. It all depends on the nature of
character of the transaction. If it is so closely interwoven with the position of the
director as a director of the company, he is deemed to know the circumstances affecting
it and is therefore deemed to be an inside. If it is not closely intertwined with his
position as director, he may rely on the indoor management rule.
QUESTION SIX
a)
Directors are deemed to be agents of the company whenever they contract on its behalf.
The relationship is governed by principles of agency and the company is generally liable
as the principle.
In borrowing contract, employment, and in contracts entered in to promote the

purposes of the company directors act as agents and the company is liable. However, in
those circumstances in which the agent is personally liable, the directors are liable, the
directors are liable.
In the words of Cairns L.J in Ferguson V. Wilson, “The directors are more agents of the
company. It can only act through directors and the case as regards those directors is
merely the ordinary case of principal and agent. Whenever or agent is liable, those
directors could be liable. Whenever, the disability would attach to the principal and the
principal only, the liability is the liability of the company”
b)
The act of Usafi Ltd was ultravires in the wides sense which is nothing but an abuse of
power of the company by its officers often described as “Excess of directors’ or
transactions.
• Ultravires the directors or transactions the objects of the company and be ratified
by members in the general meeting where upon it becomes an enforceable
transactions.
• If directors exceed or improperly exercise their powers, their action can be ratified
by an ordinary resolution of the company in general meeting.
• If they act contrary to the company’s articles or memorandum, it must be ratified by

a special resolution.
• In Banford V. Banford (1970) by way of defense to a takeover bid, directors

allotted 500,000 shares at par for cash to a third company which was the principal
distributor of the products of the company to be taken over. The articles provided
that the unissued shares were to be at the director’s disposal. Two shareholders
brought an action against the three directors, the third company, and the company,
claiming a declaration that the allotment was invalid in that the directors had not
acted bonafide in the interests of the company.
• Add; assuming that the allotment was intravires the company and the directors but
not bonafide in the interests of the company and therefore voidable, it could after
full disclose be ratified by an ordinary resolution at a general meeting.
• In the case of Usafi Limited, Juma ratified the earlier breach therefore making the
transaction enforceable.
• He therefore cannot be held liable for the earlier breach.
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QUESTION SEVEN
a)
The companies Act do not define the phrase ‘Statement in lieu of prospects’. However,
this is a document prepared and issued by companies in certain circumstances either in
place of an ordinary prospectus or in addition to a prospectus. The Companies Act
prescribes the content of such document.
A statement in lie of prospectus may be prepared in the following circumstances.
1) When a private company goes public

Under section 32 (1) of the Act, if a private company by special resolution alters its
articles converting itself to public it ceases to be a private company on the date of the
alteration an must within 14 days thereof deliver to the registrar for registration either;
An ordinary prospectus
A statement in lie of prospectus containing the particulars of part 1 and 2 of the 2 nd
schedule to the Act. Contents of this schedule include:
a) Nominal share capital and the divisions thereof

b) Redeemable preference shares
c) Earliest date of redemption
d) Particulars of directors
e) Commission paid and discount allowed
f) Amount paid to promoters
g) Auditors of the company.
2) Restriction on allotment of shares:

Under section 50 (1) of the Companies Act, if a company having a share capital has not
issued a prospectus with reference to its formation or has issued one but has not
proceeded to allot any of the shares offered to the public for subscription no share out
to be allotted unit at least after 3 days from the date of delivery to the registrar for
registration, a statement in lie of prospectus signed by every person who is named or
proposed director of the company and containing the particulars of part 1 and 2 of the
fourth schedule to the Act. Contents of this schedule include:
a) Auditors of the company

b) Particular of material contracts
c) Rate of commission
d) An estate of the preliminary expenses
e) Particulars of directors
f) Nominal share capital and divisions thereof
g) Redeemable preference share if any
h) Earliest date of redemption.
3) Restriction on commencement of redemption:

Under section 111(2) of the Act if a company having a share capital has not issued a
prospectus inviting subscription for its shares or has issued one, but failed to raise the
minimum subscription, there must be delivered to the registrar for resignation inter alia
a statement in lieu of prospectus to facilitate the issue of a certificate of trading.
However, section 111 (2) does not prescribe the contents of the statements in lieu.
b)
Under section 50 (1) of the Act, a company having share capital which does not issue a
prospectus on or with reference to its formation, or which has issued such a prospectus

but has not proceeded to allot any of the shares offered to the public for subscription,
shall not allot any of the shares or debentures unless at least 3 days before the first
allotment of either shares or debentures there has been delivered to the registrar for
registration a statement in lieu of prospectus signed by every person who is named there
in as a director or proposed director of the company or by his agent authorized in
writing, in the form and containing the particulars set out in part 1 of the fourth
schedule and, in the cases mentioned in part II of that schedule, setting out the reports
specified therein, and said parts I and II shall have effect subject to the provision
contained in part III of that schedule.
Under Section 50 (2), every statement in lieu of prospectus delivered under subsection
(1), shall where the persons making any such report as aforesaid have made therein or
have, without giving reasons, indicated therein any such adjustments as are mentioned
in paragraph 5 of the fourth schedule have enclosed thereon or attached there to a
written statement signed by those persons setting out the adjustments and giving the
reasons therefore.
QUESTION EIGHT
• A private company has many advantages over partnership.
• Partnership is a relationship which subsists between persons carrying on business in

common with a view of profit.
• The difference between a private company and partnership are:
a) Limited Liability:
Members in private company are generally not liable for debts and other obligations of
the company since their liability is limited by shares or guarantee. This is not the case in
partnership.
b) Wide capital base:-

Compared to partnership private companies generally have more capital by reason of
wide spectrum of membership.
c) Perpetual succession.
A private company can exist in perpetuity unlike partnership which is affected by death
or bankruptcy of any of the members.
d) Qualified or specialized management

Under section 177 of the Act, every private company must have at least one director.
Directors are elected by members in general meeting. Members have an opportunity to
elect qualified persons as directors.
e) Owing property and Capacity to Contract

The fact that a private company can own or hold property or enter into contractual
relationship makes it different from a partnership.
f) Sue or be sued
Shareholders are not obliged to sue to remedy wrongs done to the company and
generally cannot be sued for the wrongs of the company. This attribute is not present in
partnerships.
g) Transferability of Shares
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Shares in private companies are not freely transferable. Under section 75 of the
Companies Act, the shares or other interest of any member shall be movable properly
transferable in the manner provided by the articles. The fact that shares are transferable
means that the company membership keeps on changing from time to time.
Under section 30 (1) (a) of the Companies Act, a private company is restricted to
transfer its shares.
However, a partnership cannot transfer its shares.
b) Borrowing by floating charge:
• Private companies can utilize the facility of floating charge to borrow. This is
an equitable charge securing a debenture on the assets of a going concern.
• A partnership cannot utilize this facility
Other differences include:

• Both partnerships an private companies are subject to different taxation rates.
• It is more expensive to form a private company than to form a partnership.

Formation expenses of companies include legal fees, registration fees, stump
duty etc.

180 Revision Questions and Answers
Part IV: Revision Questions and Answers

QUESTIONS
REVISION PAPER ONE
QUESTION ONE
“Both they (i.e. Directors) and the members in general meeting are primary organs of the
company between whom the company’s powers are divided”. Discuss.
QUESTION TWO
Cham, Luchi, Manga and Sibwor set up a company (Ndobolo Enterprises) whose objects
clause states that the company shall “carry out the business of promoting the Ndobolo
dance and all related types of dancing”. Recently, the company has been promoting the
benga dance. Thuruwa, a Kin follower of the benga dance thinks that the Ndobolo
enterprises have no right to promote the benga dance since it (benga dance) is not related to
the Ndobolo dance. Ndobolo Enterprises insist that they are empowered through their
objects clause to promote the benga dance. The two have come to you for advice. What
advice would you offer them?
QUESTION THREE
Define floatation and explain the different methods employed in floatation.
QUESTION FOUR
Konde lent Sh.1 million to Bahari Ltd, on the security of 100,000 shares of Sh.100 each. He
was given a certificate which showed that these were fully paid up shares and the payment
had been paid in full. But he was surprised to learn, during winding up that he had been
placed on a list of contributories, with regard to the shares were part of the shares. Evidence
is adduced in court that the shares were part of the company’s unissued shares and nothing
had been paid for them.
Discuss the relevant law and advise Konde.
QUESTION FIVE
State the ways in which a person can acquire membership of a company. How can such
membership be lost?
QUESTION SIX
What are the rules relating to keeping of company’s accounts? Explain the format of such
accounts.
QUESTION SEVEN
Odulla is a member of XYZ Ltd. he doest clearly understand the companies Act (cap 486)
provision in relation to company shares. He requests for your advice on the following
matters.
(i) Share warrants

(ii) Mortgage of shares
(iii) Lien on shares
Advice him accordingly
LAW II
Questions 181
QUESTION EIGHT
Discuss the provisions related to the making of calls and payment of calls in advance

REVISION PAPER TWO
QUESTION ONE
Joseph, a wealthy businessman comes to you for advice on the Act (cap 486) provision on
holding and subsidiary companies. Advise him accordingly.
QUESTION TWO
a) What is the significance of the procedures which are followed for the transfers of
shares in a company?
b) In what circumstances may the company deny the title in shares evidence by a share
certificate?
QUESTION THREE
a) Explain what is meant by the “constitutive documents of a company”. List any four
such documents.
b) Ancient Ltd was set up under articles which provided for the appointment of a
director to serve for five years. In 1986, when the company stated operations, Maina
was appointed Director; In 1989, the company amended the articles relating to the
appointment of a director and subsequently. Maina was removed as Director. He
has now come to you to seek legal advice.
Advice him as to his legal remedy under the law.
QUESTION FOUR
Usiku Holdings Ltd is a private company Limited by shares. A clause in its articles of
Association provides:
“If any member intends to transfer shares he shall inform the director who will take
the said shares equally between them at fair value”
Usiku holdings has made no profits for three years running, and one of its shareholders,
Kamau, now wants to get rid of his share. He request the company’s management to buy his
100 shares at the price of Sh. 10per share, which is double the original purchase price five
years earlier. The company rejects his proposition and argues that there is in any case no
obligation to take back the shares. Advise Kamau.
QUESTION FIVE
Discuss the companies Act (cap 486) provisions relating to the register of members.
QUESTION SIX
A liquidator is a person appointed for the purpose of collecting and realizing the company’s
assets, ascertaining and making good liabilities and distributing the remainders, if any, to
members.
Discuss the rules relating to the appointment, legal position and duties and obligations of
liquidator.
QUESTION SEVEN
Peter Kinuthia was recently appointed as a director of a company whose articles of
association correspond with Table A. Francis Mwangi, the chairman of the company has
told him that the companies Act (cap 486, laws of Kenya) will govern his dealings with the
company. Peter has come to you for advice regarding:
LAW II
Questions 183
(i) Restriction on appointment of directors

(ii) Disqualification of directors.
(iii) Removal of directors.
QUESTION EIGHT
What is the effect of a borrowing on behalf of the company by directors when borrowing is
(i) Ultra vires the directors; or

(ii) Ultra vires the company?

REVISION PAPER THREE
QUESTION ONE
After ego doctrine is the antithesis of the doctrine of separate corporate personality. Citing
relevant cases, explain the principle of after ego.
QUESTION TWO
(a) Define a quorum
(b) Are there any circumstances when one person may constitute a meeting?
QUESTION THREE
Companies are obliged to make a return to the registrar at least once every year. Discuss the
law relating to making of annual return.
QUESTION FOUR
The chairman is very essential in a general meeting. Clearly discuss the law relating to the
chairman, his powers and duties.
QUESTION FIVE
“When there are persons conducting the affairs of the company in a manner which appears
to be perfectly consonant with the Articles of Association, then those dealing with them
externally are not to be affected by any irregularities which may take place in the internal
management of the company.”
As per Lord Hatherby in Mahony v. East Holyford Mining Company (1875) L.R. 7
H.L. 869
You have been invited to give a short but elaborate, expensive and class bow tie lecture to
the Shares Excluding the Havenots Association at the Windsor Gold Club.
We are listening.
QUESTION SIX
Discuss how the affairs of the company may be invested.
QUESTION SEVEN
Section 22(1) of the Companies Act (Cap 486, laws of Kenya) provides as follows, “The
articles shall when registered, bind the company and the members there of …”
Explain this provision by reference to decided cases.
QUESTION EIGHT
In relation to Board of Directors, explain:
(a) Loans and other payments to directors
(b) Compensation to directors for loss of office.
(c) Appointment of directors.
LAW II
Questions 185
REVISION PAPER FOUR
QUESTION ONE
Discuss:
(i) Duties and powers of an inspector appointed by the court.

(ii) Causes of action or proceedings on an inspectors report.
(iii) Costs and expenses of investigation.
QUESTION TWO
Outline the ways in which minority shareholders are protected in company law.
QUESTION THREE
Discuss:
(a) Circumstances in which a company may be compulsorily wound by the court.
(b) Winding up subject to the supervision of the court.
QUESTION FOUR
Ann is about to attend her first ever general meeting of Borg plc. The documentation for
the meeting mentions various people, but Ann is not sure what their exact roles are within a
public limited company. Nor is she clear about the procedure for voting or how one
becomes, or ceases to be a director.
(a) Briefly explain to Ann the role and power of the following:
Chairman of the Board;

Managing director
(b) Briefly explain what is meant by:
A poll vote
A proxy vote.
QUESTION FIVE
Njuguna is a shareholder of Maji Maji Ltd. being a primary school leaver, he doesn’t know
the validity or otherwise of gratuitous payments. He comes to you for advice.
Advice him accordingly.
QUESTION SIX
(a) What do you understand by the term “body corporate”, as used in company law?
(b) What are the merits and shortcomings of a corporation as a business entity?
QUESTION SEVEN
Outline the rules according to which the assets of a company are to be distributed in the
winding up of an insolvent company?
What are secured creditors?
QUESTION EIGHT
Consider the position of secretary in a company, setting out the provisions for appointment,
the duties and liabilities.

ANSWERS
REVISION PAPER ONE
QUESTION ONE
During the 19th Century, it was generally believed that the general meeting was the company
and that the directors were agents of the general meeting and their function was to
implement resolutions of the general meeting. However, the position changed from the
beginning of the 20th century where upon company law recognized the general meeting and
the board f directors as the principal agents organs of the company. By 1948, the law had
crystallized by recognizing the two and Table A, vested powers in both.
Some company powers are only exercisable by the general meeting while others can only be
exercised by the board. The board is empowered to:
(i) Recommend dividend

(ii) Recommend a bonus issue
(iii) Pay interim dividend
(iv) Make calls
(v) Forfeit shares
(vi) Appoint managing director and secretary etc
The general meeting on the other hand is empowered to:
(i) Elect directors

(ii) Appoint auditors
(iii) Authorise a bonus issue
(iv) Declare dividend
(v) Alter the memorandum or articles
(vi) Remove directors or auditor from office
The law relating to division of powers is that if a power is vested in one organ, the other
must not interfere, with its exercise unless:
(i) It is being abused

(ii) It is being exceeded
(iii) Exercised contrary to the articles
Each organ is bound to exercise powers vested in it by the articles.
The question as to which organ exercises which power is one of interpretation of the article.
It was so held in Automatic self cleansing filter syndicate V. Cynninghome.
Under Table A, company management is vested in the board. Article 80 of Table A provides
‘the business of the company shall be managed by the directors… and may exercise all such
powers of the company, as are not by the Act or by these regulations required to be
exercised by the company in general meeting”. This Article has been interpreted to mean
that the directors and no one else are responsible for the company’s management except in
the matters allotted to the company in general meeting. It was so held in:
Alexander Ward & Co. V. Samyang Navigation
Courts of law have enforced the division of powers between the general meeting and the
board. In Scott V. Scott the articles empowered directors t pay to members from time to
time such interim dividend as was justified by the profits of the company. Shareholders in
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general meeting revolved that the directors pay an interim dividend. The directors declined
and were sued. It was held that they were not bound to implement the resolution since the
power to pay interim dividend was vested in the board and the general meeting was
interfering with its exercise.
In Shaw V. Shaw the articles of the company empowered the board to manage its monies.
The board had resolved to institute proceedings against a party to recover certain monies
owed to the company. The general meeting resolved that the action be discontinued. The
directors refused and were sued. It was held that they were not bound to discontinue the
action since the power to manage the company was vested in them and the general meeting
was interfering with its exercise. In the words of Lord Greel “If powers of management are
vested in directors, they and they alone can exercise those powers. The only way in which
the general body of shareholders can control the exercise of the powers vested by the articles
in the directors is by altering the articles, or if opportunity arises under the articles by
refusing to re-elect the directors whose actions the disapprove. They cannot themselves
usurp the powers which by the articles are vested in the directors any more than the
directors can usurp the powers vested by the articles in the general body of shareholders”.
The division of powers between the two organs goes beyond the powers vested in either
organ. If a power is vested in neither of them and either of them purports to exercise that
power the other must not interfere with its exercise. However the general meeting appears
more dominant in that:
(i) It is empowered to alter the articles

(ii) It is empowered to remove directors from office.
However, until such step is taken, directors are entitled to ignore instructions of the general
meeting on how to exercise a power vested on the board by the articles.
Exeptions;
These are circumstances in which the general meeting exercise powers vested by the articles
in the board.
(i) Litigation
If directors fail, refuse or neglect to sue on behalf of the company or to defend an action
against the company, the power becomes exercisable by the general meeting as was the case
in Marshalls Value Gear Company V.Manning Warlde.
(ii) Ratification of abuse of power by directors:
Whenever, the general meeting ratifies an abuse of power by directors, e.g. borrowing for an
ultra vires purpose, it in effect exercises power vested by the articles on the board. In
Bamford V. Bamford where directors were empowered to issue shares, but issued them for
an improper purpose, and the general meeting ratified the issue, it became a valid act of the
company, hence the general meeting was exercising a power vested in the board. A similar
holding was made in Hogg V. Cramptorn
(iii) Deadlock in the management
If a company’s B.O.D, cannot function in any material respect, by reason of a deadlock, its
powers become exercisable by the general meeting. It was so held in Barron V. Parter. The
company’s Articles created 10 positions for directors. 2 years after incorporation, the
company had only 2 directors, Barron and Porter who were not in talking terms. The power

to appoint additional directors was vested in the board and a quorum for board meeting was
two. The board could not meet since Barron and Porter could not sit on one table. The
company’s management came to a standstill. It was held that in the circumstances, the power
to appoint additional directors had become exercisable by the general meeting.
In conclusion, it may be argued that the old idea that the general meeting was the company
and the directors as agents always subservient to the general meeting is no longer the law as
it is certainly not the fact.
QUESTION TWO
Under section 5(1) (c), the memorandum of every company must state the objects of the
company. These are the purposes for which the company is incorporated. Since a company
is a legal person, its capacity is conferred by law and hence must be set forth in the
memorandum. The objects clause therefore defines the contractual capacity of the company.
It delimits the doctrine of ultra vires. The purpose of setting out the objects in the
memorandum was explained by Lord Parker in Cotman V. Bougham (1918) where he
observed; “The statement of a company’s objects in its memorandum is intended to serve a
double purpose. In the first place, it gives protection to subscribers who learn from it the
purpose to which their money can be applied. In the second place, it gives protection to
persons who deal with the company and who can infer from it the extend of the company’s
powers. The narrower the objects expressed in the memorandum, the less is the subscribers
risk; But the wider such objects, the greater is the security of those who transact business
with the company.
The doctrine of ultra vires
Ultra vires literally means beyond the powers. This is a rule of capacity contained in section
5(1) (c) of the Act. It was not until 1875 that it was accorded a judicial interpretation
In Ashbury Railway Carriage and Iron Co. Ltd V. Riche (1875) the objects of the
company were:
(i) To make, sell, lend on hire railway plant carriages and wagons
(ii) To carry on the business of mechanical engineers and general contractors.
(iii) To purchase and sell timber, coal, metal and other materials.
Directors of the company entered into a concession for the construction of a railway in
Belgium. Members subsequently ratified the contract and were sued. It pleaded that the
contract was ultra vires. The court was called upon to determine. It was held that since the
memorandum of the company had no provision for the purchase of concessions, or
construction of railways the contract was ultra vires and, therefore null and void. Lord
cairnes observed, “The contract was entirely beyond the objects in the memorandum of
association…If it was a contract void at its beginning, it was void because the company
would not make the contract: the court gave the doctrine of ultra vires a very rigid
interpretation thereby restricting a company’s capacity. Companies could only engage in
transactions set forth in the objects. However, the first in road into the doctrine came in
1880 in Attorney General V. Great Eastern Railway Company. A company was formed
to acquire the undertaking of 2 existing companies and to construct and operate other
railways. It entered into a contract to supply another company with locomotive power for 5
years and carriages and wagons for 2 years. Question was whether the contract was intra or
ultra vires the company. It was held that it was intra vires the company. Lord Selbourne
observed, “The doctrine of ultra vires as was explained in ashbury’s case should be
maintained… this doctrine ought to be reasonably and not unreasonably understood and
applied, and whatever may fairly be regarded as incidental to or consequential upon those
things that the legislature has authorized ought not unless expressly prohibited to be held by
judicial construction to be ultra vires”
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By this decision, the contractual capacity of a company was expanded to include:
(i) Transactions specified in the objects

(ii) Transactions reasonably incidental to the attainment or pursuit of the express
objects.
These two cases represent the common law doctrine of ultra vires in relation to registered
companies. This position was upheld by the House of Lords in London Country V. AG:
The doctrine of ultra vires has been wanted down and companies enjoy almost unrestricted
capacity.
In Bell Houses Ltd V. City Wall Properties Ltd (1966). The plaintiff company’s business
was property development. It acted as money brokers in a financial deal to enable the
defendant company obtain a loan of £ 100 000 at a commission of £ 20 000. Sub – clause
3(c) of the objects provided that the company could engage in any other trade or business
which can in the opinion of the B.O.D be advantageously carried on by the company. The
defendant company refused to pay the commission and was sued. Question was whether the
plaintiff company had capacity to act as money brokers. It was held that sub-clause 3(c) of
the objects enabled the company to engage in such a transaction as long as in the genuine
opinion of the board it could be carried on advantageously by the company
The object clause of Ndobolo enterprises state that, Ndobolo Enterprises could also carry
out all other related types of dancing.
If Benga dance can genuinely be carried out in pursuit of the primary object, then it is not
ultra vires;
Therefore, Ndobolo Enterprises are empowered through its objects to promote benga
dance.
QUESTION THREE
Floatation is the process by which companies make shares/debentures available for
subscription. It enables companies to raise capital from the public. Companies generally
employ any of the following methods;
1. Direct Invitation by the company/Public/Prospectus issue:
By this method, the company floating the shares prepares and issues a prospectus inviting
subscription. The prospectus must contain so far as applicable the matters and reports
specified in part 1 and 2 of the 3rd schedule to the Act. An application form must be
enclosed. The prospectus must set out the advantages of investing in the company and may
identify the underwriter if any. The company is responsible for the administrative tasks of
the issue and the risk if the issue is unsuccessful. To spread such risk, the company arranges
for the issue to be underwritten whereby an underwriter undertakes to take up all or a
specified number of shares as his own. These shares are often taken at a discount and are
called Underwritten firm. The underwriter undertakes to take up a specified number of
shares if not take up in return for commission. The difference between the underwriter and
the commission paid by the Principal underwriter to the sub-underwriter and is the
Overriding Commission
2. Offer for sale:
This is the method by which a company allots all the shares to an issuing house which in
turn prepares and issues a prospectus inviting subscription. The issuing house offers the
shares at a premium to recover its costs and make a profit upon application of the shares;

the issuing house renounces its allotment in favour of the applicant. This method has 2
advantages:
If relieves the company the administrative tasks of the issue.

The company receives the entire consideration on the shares since they are all taken up by
the issuing house.
For purposes of spreading risk, the issuing house may have the shares underwritten
3. Placing:
By this method, the company arranges with an issuing house to purchase all the shares or
take them up without a purchase and then place them with its clients privately. If the issuing
house does not purchase the shares, it acts as an agent in return for brokerage and incurs no
liability if the shares are not taken up. In a placing, there is no direct or indirect invitation to
the public and the shares are generally offered in blocks to clients of the issuing house. This
approach ensures that the shares on offer are taken up by the selected individuals or
institutions.
Invitation to Treat:
Whichever method a company employs to issue shares or debentures, invitations may be

made to prospective tenders to submit tenders for shares in large quantities. The company
or issuing house fixed the minimum number of shares and price and reserves the right to
accept any bid or accept bids in parts. The tender is generally awarded to the highest bidder.
An offer by tender has 2 advantages:
(i) It makes available to the company or issuing house any excess above the issuing
price.
(ii) It discourages stags who submit bids for speculative purposes.
A company may raise capital from existing members if authorized by its articles. This may
be effected by a rights or bonus issue. In a rights issue shares are offered to existing
members in proportion to their current holding. They are offered by way of renounceable
allotment letters. A member is free to renounce his rights in favour of another. The shares
are generally offered on favourable terms to encourage subscription. These shares prevent
the dilution of rights of existing members. In the case of bonus shares, shares are offered to
existing members at no direct consideration. The shares often referred to as capitalization
issue are generally financed by reserves or the share premium account. A company may only
issue bonus shares in the following circumstances:
(i) The issue must be authorized by the articles of the company

(ii) The issue must be issued in the proportion specified in the articles
(iii) The nominal share capital of the company must be sufficient
(iv) The issue must be recommended by the Board of Directors in board meeting
(v) The issue must be authorized by an ordinary resolution of members in the general
meeting.
(vi) A return of allotment must be delivered to the registrar for registration within 60
days thereof.
QUESTION FOUR
The contents of a share certificate with respect to the name of the registered holder, the
number of shares and the extend to which they are paid up, is a representation by the
company to third parties and a bonafide third party who suffers loss or damage by reason of
relying upon the representation may hold the company liable in damages. The company is
estopped from denying:
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(a) The fact of having made the representation

(b) The fact that the representation was true.
Hence it is argued that a company must take great care when issuing share certificates. This
is necessary as they could render the company liable.
However, for the company to be estopped and held liable, it must be proved that:
(a) The representation was contained in a genuine share certificate of the company
(b) The third party relied upon the representation in good faith.
(c) The third party had changed the legal position to its detriment as a result of the
reliance.
(d) It is fair to estoppel the company or hold it liable.
In Bloomenthal V. Foor, a company borrowed money from X and as security gave him a
share certificate describing the shares as fully paid and X believed so. However, it was not
the case. In liquidation, the liquidator sought to recover the amount due on the shares from
X. X pleaded estoppel by the share certificate. It was held that the company could not
claim the amount due since its share certificate described the shares as fully paid, a fact it
could not deny.
A similar holding was made in Burkinshaw V. Nicolls where a company issued shares to a
party under a share certificate describing the shares as fully paid which was not the case.
The party sought to recover the amount due from Nicolls who pleaded estoppel and the
company was estopped.
In Balkis Consolidated V. Tompkison X sold his shares to I. X had no title but had
fraudulently induced the company to issue a share certificate to U. I resold the shares to a
third party but the company refused to register on the ground that I had no title like X
before him. I was compelled to purchase other shares to fulfill third party claims. I sued the
company in damages for the loss. It was held since the company had issued a share
certificate o him describing him as the owner, it could not deny that fact and was liable.
A similar holding was made in re Oho Kopjes Diamond Mining company and in re
Bahia and San Fransisco Railway Company.
However, the doctrine of estoppel does not apply and the company can deny title evidenced
by a share certificate in two circumstances:
1. If the third party had notice of the falsity of the representation.

2. The representation relied upon was contained in a forged share certificate
since such a document is a legal nullity.
Bahari Limited cannot therefore claim the amount due since its share certificate described
the shares as fully paid; a fact it cannot deny.
QUESTION FIVE
A person may become a member of the company in the following ways:
1. Subscribing to the memorandum:

Under Section 28(1) of the Act, the subscribers to the memorandum of a company
shall be deemed to have agreed to become members of the company and on its
registration shall be entered as members in its register of members.
2. Allotment: A person to whom shares have been allotted by the company upon

application becomes a member of the company when his name is entered in the
register of members.
3. Transfer: This is the purchase of shares from a will seller. A transferee of shares
becomes a member when his name is entered in the register.
4. Transmission by death: The shares of deceased member are by operation of law,

transmitted to his personal representative who becomes a member when his name
is entered in the register.
5. Transmission by bankruptcy: The shares of a member declared bankrupt by a

court of law are by provisions of the bankruptcy Act transmitted to his trustee in
bankruptcy who becomes a member when his name is entered in the register.
6. Share qualification for directors: Under Section 182(2) of the Act, a person who
has signed and delivered to the registrar for registration, an undertaking to take up
and pay for his qualification shares is deemed to be in the same position as a
subscriber to the memorandum for that number of shares.
7. Estoppel: A person who is not a member may be deemed to be a member by the

equitable doctrine of estoppel if either:
(i) He knowingly permits himself to be held out by the company as a member

and third parties rely upon the representation to their detriment.
(ii) He with the company’s knowledge holds himself out as a member and third
parties rely upon the representation to their detriment.
In either case, a person is estopped from denying their parent membership as it would be
unfair to third parties.
Cessation of Membership:
A person may cease to be a member in the following ways:
1. Transfer: A transferor of shares ceases to be a member when the transfer is

registered and the transferee’s name entered in the register.
2. Forfeiture of shares: A shareholder whose shares have been forfeited for non-
payment of calls and in accordance with the articles, ceases to be a member in
respect of such shares.
3. Sale by Company in exercise of lien:

A shareholder whose shares are sold/or otherwise disposed of by the company to
enforce a lien conferred upon it by the articles, ceases to be a member of the
company.
4. Valid surrender: A shareholder whose shares are acquired by the company at his
option ceases to be a member of the company by reason of the surrender.
5. Death: The death of a shareholder terminates his membership since his shares are
transmitted to the personal representative.
6. Bankruptcy: A shareholder declared bankrupt by a court of competent jurisdiction

ceases to be a member and his shares are transmitted to his trustee in bankruptcy.
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7. Rescission of contract: If a shareholder rescinds a contract of allotment or

purchase of shares within a reasonable time, the register of members is rectified
and he ceases to be a member.
8. Repudiation by an infant: A contract for the purchase of shares by an infant is

viodable at its option during infancy or within a reasonable time after attaining the
age of majority. If the contract is avoided, the infact ceases to be a member of the
company.
9. Redemption of Redeemable preference shares:

A shareholder whose preference shares are redeemed, in accordance to the
provisions of the Act and the Articles, ceases to be a member of the company.
10. Winding up or liquidation:

It is contended that the winding up of a company terminates the membership of all
shareholders.
11. Disclaimer by Trustee in bankruptcy:

If a trustee in bankruptcy disclaims the shares of an undischarged bankrupt, he
ceases to be a member of the company.
QUESTION SIX
Under the provisions of the companies Act, companies are obliged to keep certain books of
accounts in the English language. Under Section 147(1) every company shall cause to be
kept proper books of accounts with respect to:
1. All sums of money received and expended by the company and the matters in
respect of which the receipt and expenditure takes place.
2. All sales and purchases of goods by the company.
3. The assets and liabilities of the company.
These books must give a true and fair view of the state of the company’s affairs and explain
its transactions.
Under Sec 147(3) these books of accounts must be kept at the registered office of the
company or at such other place as the directors may determine but must at all times be
accessible to directors for inspection. However, with the registrars consent, the books may
be kept at a place outside Kenya but at intervals not exceeding 6 months they must be
brought at some place in Kenya where they are open for inspection by directors.
Failure to keep books of accounts renders every director in default liable to a fine not
exceeding Sh.10,000 or imprisonment for a term not exceeding 12 months or both.
However, the director may escape liability by establishing he had reasonable ground to
believe and did believe that a competent and reliable person was charged with the
responsibility and was in a position to discharge the same.
Under Section 148(1) of the Act, directors of every company must lay before it in general
meeting a balance sheet and a profit and loss account or an income and expenditure account
within 18 months of incorporation and at least once every calender year subsequently.
However, the registrar may for any special reason permit a company to lay the accounts
before a general meeting held after 18 months or after the end of a calendar year.

It is the duty of directors to ensure that the necessary accounts are prepared and laid before
the general meeting failing which they are liable to a fine not exceeding Sh.10,000 or
imprisonment for a term not exceeding 12 months or both.
Format of the Accounts:
Under Section 149(2) of the Act, a company’s balance sheet and profit and loss account
must comply with the requirements of the 6th Schedule so far as applicable. Under Section
155(1), every balance sheet of a company must be signed by 2 directors on behalf of the
board or by the only director of the company.
In the case of a bank, it must additionally be signed by the secretary and manager if any: if
the bank has 3 directors, all must sign. If more than 3, at least 3 must sign.
However, if the number of directors of a company present in Kenya is less than that
required to sign the balance sheet, the only director present must sign but attaché a
statement explaining the reason for the non-compliance in the provisions of the Act. It is a
criminal offence to issue, circulate or publish unsigned copies of a balance sheet. The
company and every officer in default are liable to a fine not exceeding Sh.1,000.
Group Accounts
Under Section 153(1), unless there are good reasons against it, directors of the holding
company must ensure that its financial year, and those of its subsidiaries coincide. Under
Section 150(1), if at the end of the financial year, a company has subsidiaries, directors must
lay group accounts of the company and its subsidiaries before the general meeting of the
holding company.
Under Section 150(1), the group accounts laid before the holding company must be
consolidated accounts comprising:
1. A consolidated balance sheet dealing with the company and the subsidiaries.
2. A consolidated profit and loss account dealing with the profit or loss of the
company and its subsidiaries.
Under Section 152(1) of the Act, the group accounts laid before the company must give a
true and fair view of the state of affairs and profit or loss of the company and the
subsidiaries dealt with as a whole. However, under Section 150(2). The group accounts laid
before the general meeting need not deal with a subsidiary if directors are of the opinion:
1. That its impracticable.

2. That it will be of no real value to members of the company in view of the
insignificant amounts involved.
3. That it would involve expense or delay out of proportion to the value to the
members of the company.
4. That the result would be misleading
5. That it would be harmful to the business of the company or any of the subsidiaries.
6. That the business of the company and that of the subsidiary are so different that
they cannot reasonably be treated as a single undertaking.
If directors form such an opinion in respect of each of the subsidiaries; no group accounts
are required. However, the registrar’s approval is necessary if the boards opinion is based on
the group that the result would be harmful or that the business of the company and the
subsidiary are different.
Annextures to the Balance Sheet:
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Under the provisions to the Companies Act, certain documents must be attached to the
balance sheet:
1. The profit and loss account and any group account to be laid before the company in
general meeting.
2. The auditors report.
3. The directors report stating the boards opinion on the affairs of the company and
the amount, if any, recommended as dividend and proposed as reserves.
It is a criminal offence to issue, circulate or publish a balance sheet unaccompanied by the

profit and loss account or the auditors report.
The company and every officer in default are liable to a fine not exceeding Sh.10,000 or
imprisonment for a term not exceeding 12 months. However, the accused may escape
liability by proving that he had reasonable ground to believe and did believe that a
competent and reliable person was responsible and was in a position to discharge the duty.
Under Section 158(1) of the Act, a copy of the balance sheet and its annextures to be laid
before a company in general meeting must be sent to every member of the company, every
debenture holder and every other person so entitled at least 21 days before the date of the
meeting.
QUESTION SEVEN
(i) Share Warrants
This is a document issued by a company under its common seal stating that the bearer is
entitled to the shares therein specified. A warrant is a title dead entitling the bearer to the
shares there in specified and divided payable thereon.
Under section 85(1) of the Act, a company may issue share warrants in the following
circumstances:
1. It must be limited by shares

2. The issue must be authorized by the articles of the company
3. A warrant can only be issued with respect to fully paid shares of the company
Under section 85(1), a warrant may also provide a coupon to facilitate payment of dividend.
Effect of Issue of Share Warrants:
Under section 114(1) of the Act, whenever a company issues a share warrant, the members
name is struck off the register of members and the following particulars entered:-
1. The fact of issue of the warrant.

2. Date of issue
3. A statement of the shares included in the warrant
A share warrant holder is not in fact a member of the company. However, under section
114(5) of the Act, the articles of a company may deed a share warrant holder a member of
the company for all or certain purposes.
Under section 114(2), a share warrant holder may surrender a warrant where upon his name
entered in the register as holder of the shares and the warrant is thereby cancelled. If a
company has issued share warrants, its annual return to the register must show;
1. The number of shares comprised in each warrant.

2. The number of shares in respect of which warrants are outstanding

3. The total amount of share warrants issued and surrendered
A share warrant differs from a share certificate in the following respects;
1. It is a contractual document entitling the bearer to the shares and dividend payable
thereon.
2. It can only be issued in respect of fully paid shares
3. The bearers name struck off the register
4. It is a negotiable instrument transferable by mere delivery
5. The shares comprising a warrant are transferable by mere delivery.
(ii) Mortgage of Shares
As items of property, shares may be disposed off by way of transfer or as a security for a
loan. Mortgage of shares entails the use of shares as a security and the transaction may be
legal or equitable
Legal Mortgage
This is a mortgage transaction whereby the shareholder or borrower transfers his security
(i.e. the shares) to the lender subject to a retransfer upon repayment of the amount
borrowed. The lender becomes the temporal owner of the shares with all the rights of a
member. He is entitled to the dividend payable thereon and can attend and vote in general
meeting of the company. Other terms of the contract are contained in the mortgage
instrument. Upon repayment, the shares are retransferred to the shareholder. However, in
the event of default the transfer becomes absolute. A legal mortgage has 2 disadvantages:
1. Formalities of transfer and retransfer of shares
2. Payment of stamp duty on transfer
Equitable Mortgage
This is a mortgage transaction whereby the borrower deposits the executed mortgage
instrument and the share certificate with the company as security
The borrower remains the registered holder of the shares capable of exercising all the rights
of a member. The mortgage instrument sets out the terms of the contract. In the event of
default, the mortgages rights are enforced by court action. The share certificate may be
redeemed by paying the total amount due.
(iii) Lien on Shares
The articles may give the company alien on shares held by a member for his unpaid cal or
installment or for some other debt due from him to the company
A lien is essentially a right, a company or third party may have on a persons shares. It is a n
equitable change upon the shares and gives rise to the same rights as if the shares were
expressly charged by the member in favour of the company
Under Article 11 of Table A, “The company shall have a first and paramount lien on every
share (not being a fully paid share) for all monies (whether presently payable or not) called or
payable at a fixed time in respect of that share, and the company shall also have a first and
paramount lien on all shares (other than fully paid shares) standing registered in the name of
a single person, for all monies presently payable by him or his estate to the company, but the
directors may at any time declare any share to be wholly or in part exempt from the
provisions of this regulation.
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The company’s lien, if any, on a share shall extend to all dividends payable thereon.
The article may grant a lien on shares which are fully paid in rare circumstances. If the lien
given by the articles extends only to shares not fully paid, the company can alter its articles
so as to give a lien on all shares even if any one member will be affected by the alteration.
A shareholder against whom a lien is to be enforced, can compel the company to assign its
lien to his nominee who is willing to pay off the amount of the lien.
A lien is enforced like other equitable charges, by a seal. If the power is not conferred by the
articles, the company must apply to the court for an order. Additionally, the article may give
the company power to nominate a person to execute the transfer as embodied in article 13
of Table A
If a third party advances money on the security of shares, question has arisen as to whether
the third party’s lien has priority over the company’s. If the third party gives notice of his
security to the company before the company’s lien arises, the third party has priority. It was
so held in Bradford Banking Company V. Brigg & Co. 1886. The articles of the company
gave a first and paramount lien and change on the shares for debts due from a shareholder.
A shareholder, created an equitable mortgage of its shares by depositing the share certificate
with a bank as security for an overdraft and the bank gave notice of the deposit to the
company. The shareholder subsequently became indebted to the company whereupon a lien
arose in favour of the company. Issue was which lien had priority. It was held that the bank
had priority as the company’s lien arose after of the Banks equitable mortgage.
QUESTION EIGHT
A call is a demand by directors pursuant to a resolution of the board to shareholders with
amounts outstanding on their shares to pay the whole or any part of the balance. Calls are
necessary if the company’s issued capital is not fully paid up.
Rules Relating to Making of Calls
1. Calls are necessary if company’s issued capital is not fully paid up

2. A call may be made during the life of a company or by the liquidator in the course
of winding up. Under Article 15 of Table A, directors may from time to time make
calls upon the members in respect of any monies unpaid on their shares.
3. Under Table A, a call must not exceed a quarter of the nominal value of the shares
or be payable in less than one month from the date of the preceding call
4. A shareholder is entitled to at least a 14 day notice to make good the call
5. Under article 16 of Table A, a call is deemed to have been made when the
resolution of the board authorizing it is passed.
6. A call may be postponed or revoked in accordance with the wishes of the directors.
7. Under article 17 of table A, joint holders of a share are jointly and severally liable to
pay all calls
8. The liability of a call creates a debt due to the company enforceable by the
company or the liquidator in the course of winding up.
9. If a shareholder fails to pay a cal or installment thereof, his shares are liable to be
forfeited
Payment of Calla in Advance

If authorized by its articles a company may accept payment from a member of the whole or
part of the amount remaining unpaid on his shares though the same has not been called up.
Under Article 21 of table A, “directors” may receive from any member will to advance the
same or any part of the monies uncalled and unpaid upon his shares.

Payment of calls in advance has certain legal consequences:

1. The shareholders liability to the company is extinguished or reduced as the case may
be
2. The shareholders becomes a creditor to the company to the extend of the advance
3. The company cannot be compelled to repay the payment
4. The company cannot repay without the consent of the shareholder.
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Answers 199
REVISION PAPER TWO
QUESTION ONE
Under section 154(1) of the companies Act, A company is a subsidiary of another is either:
(i) The holding company is a member of it and controls the composition of its board
of directors.
(ii) The holding company holds more than half in nominal value of the subsidiaries
equity share capital.
(iii) The subsidiary is a subsidiary of another company which is a subsidiary of the
holding company.
- It is important to ascertain whether a company is a subsidiary of another since the

relationship is regulated by specific provisions of the companies Act.
(a) Under section 29 of Act, a body corporate cannot be a member of its holding
company and any allotment or transfer of shares of a company to its subsidiary is
void.
(b) Under section 150(1) of the Act, if at the end of the financial year a company has
subsidiaries, directors of the company must lay group accounts of the company and
its subsidiaries before the general meeting of the company
(c) Under section 161(3) of the Act, a person disqualified for appointment as auditor
for the holding company is likewise disqualified for the appointment as auditor for
the subsidiary and vice versa.
(d) Under section 167 of the Act, an inspector appointed by the court to investigate the
affairs of the holding or subsidiary and company is empowered to investigate the
affairs of the other company if such investigation is necessary.
(e) Under section 191(1) of the Act, as a general rule it is unlawful for a company to
make a loan to any person who is its director or a director of the holding company.
(f) Under section 201 of the Act, a company with subsidiaries must keep a register of
its directors and secretary and those of its subsidiaries.
- Under section 154(4) of the Act, a company shall be deemed to be another’s holding
company if, but only if, that other is its subsidiary
QUESTION TWO
(a) Transfer of shares is the voluntary conveyance of title in shares by a party to
another. Ownership changes hands at the option of the parties.
- Under section 75 of the Act, the shares or other interest of any members in a
company shall be movable property transferable in manner provided by the article
of the company.
Procedure of Transfer of Shares:
Total Transfer;
(i) Both parties must execute the proper instrument of transfer.

(ii) The executed instrument of transfer must be presented for stamping i.e. payment of
duty.
(iii) The stamped instrument of transfer and the share certificate must be presented to
the company for registration of the transfer.
(iv) Upon registration of the transfer, the share certificate is cancelled and a new one
issued in the name of the transferee.
Partial transfer;
(i) Both parties must execute the proper instrument of transfer.
(ii) The executed instrument of transfer and the share certificate must be presented to
the company for certification of the transfer. The share certificate is retained by the
company for cancellation.
(iii) The share certified instrument of transfer must be presented for stamping.
(iv) The stamped instrument of transfer must be presented to the company for
registration.
(v) Upon registration of the transfer the share certificate is cancelled and two others
issued. One in the name of the transferor for the shares retained and the other in
the name of the transferee of the shares acquired.
- A contract of transfer is a contract of sale whereby the transferor agrees to sell and
the transferee agrees to buy the shares.
Though the obligations of the contract may be embodied in the contract itself, the law
implies certain terms in the contract;
1. That the transferee will pay the price.
2. That the transferee will hand over a genuine instrument of transfer and the share
certificate.
3. That the share certificate carries the rights and interests which it purports to convey.
4. That the transferor will do nothing to prevent the transferee from having the
transfer registered or delay the process.
5. That the transferee will indemnify the transferor all calls or any liability arising in
respect of the shares after the transfer.
(b) A company may deny title in shares evidence by a share certificate in two
circumstances:
1) If the third party had notice of the falsity of the representation.
2) The representation relied upon was contained in a forged share certificate since such
a document is a legal nullity as was held Ruben V. Great Fingall Consolidate The
transferee does not acquire tithe in the shares.
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Answers 201
QUESTION THREE
(a) Constitutive documents are documents which must be prepared by a company to be
formed.
They are the basic documents for preparing formation of a company.
Constitutive documents include:

(1) Memorandum of Association;
Under section 2(1) of the Act, memorandum means memorandum of association of a

company as originally formed or as altered from time to time. I must be prepared by the
company to be formed. It is the external constitution of the company. It regulates the
relations between the company and third parties. Its contents include;
1. Name.
2. Registered office (Domicil)
3. Objects
4. Liability
5. Capital
6. Association/ declaration
7. Particulars of subscribers
8. Date
(2) Article of Association;
Under section of the companies Act, articles means articles of association of a company as
originally framed or as altered by special resolution including so far as they apply to the
company the regulations contained in Table A. It is the internal constitution of the company
contained the rules of internal management. It regulates the relations between the company
and its members. If a company adopts Table A, as its articles,
Its contents include:
Calls Winding up
Lien on shares Dividend
Forfeiture of shares Bonus shares
Transfer and transmission of shares Convention and conduct of meetings
Office of managing director Borrowing
Accounts. Division of powers between general meeting and
board
(3) Statement of Nominal Capital;
This document is a requirement of the stamp duty Act cap 490. It contains the name of the
company and the capital with which the company proposes to be registered. It facilitates
assessment and payment of duty for purposes of incorporation.
(4) Declaration of compliance;
Under section 17(2) of the companies Act, this is a statutory declaration either by the
Advocate engaged in formation of the company or by a person named by the article as
director or secretary to the effect that the subscribers to the memorandum have complied
with the company. It is sworn evidence of compliance with the provisions of the Act.
(b) A director appointed to office in accordance with the articles remains in office as
long as the article remain uncharged. If altered by the company in exercise of its

statutory power, in such a way in which a director loses office, he has no actionable
claim against the company.
In Shuttleworth V. Cox Brothers & Co. Ltd. The article of the defendant company
incorporated in 1926 provided that the plaintiff and four others would be appointed
directors of the company and hold office permanently unless removed on certain specified
grounds. The plaintiff had on several occasions (22) refused to account to the company
monies received on its behalf. Members in general meeting resolved to ad to the articles
another ground for disqualification of the director. A director had to resign office if a written
request requiring him to do so was served upon him by board members. 10 – 11 months
later, a written request was served upon the plaintiff who filed an action challenging the
validity of the new article. He sought a declaration that he was still a director of the
company. It was held that the alteration was valid and the plaintiff had ceased to hold office
as director of the company.
In the words of Atkin L. J., “ It is a contract made upon the terms of an alterable article, and
therefore neither of the contracting articles can complain if the article is altered.
Consequently, I cannot find that there has been any breach of contract making the
alteration”. Therefore, Maina has no actionable claim against the company.
QUESTION FOUR
The nature of contract created by section 22(1) of the companies Act in relation to the
articles has certain special characteristics.
The rights conferred by the contract can only be enforced by members in their capacity as
members.
In the words of the Judge,” No right merely purporting to be conferred by the articles to a
person in a capacity other than that of a member e.g. director, promoter can be enforced
against the company”.
In Eley V. Govt life Assurance Co Ltd. the articles of the defendant company provided that
Mr. Eley be employed as company solicitor to transfer all the company’s legal business at a
fee. He could only be removed from office for misconduct.
After incorporation, Eley was appointed solicitor and transacted the company’s legal
business for some time. He then bought shares and became a member of the company.
After some time the company ceased to employ him preferring other solicitors. He sued the
company to enforce the contract contained in the articles. It was held that the article was
unenforceable since Eley was an outsider.
Though he was a member, he was suing to enjoy rights accruing to him in a capacity other
than of a member.
A similar holding was made in Beattie V. Beattie Ltd (1938) where it was held that the article
in question would not be given effect since it referred to director in their capacity as
directors.
In Rayfields V. Hands (1960) article ii of the articles provided that any member wishing to
transfer shares had to inform the directors who were to take up the shares equally between
them at a fair value. Rayfields who held 725 shares informed the director of his intention to
transfer the shares. The directors who were also members refused to take up the shares.
Rayfields sued to enforce article ii. It was held that the article was enforceable since it
referred to the category of directors who are members of the company. In the words of
Vaise J.
“In my judgement the relationship here is between the plaintiff as a members and the
defendants not as directors but as members”
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Answers 203
In the case of Kamau, it would depend with whether the directors are members of the
company, in which case he would succeed in an action against them.
QUESTION FIVE
Under section 112(1) of the Act, every company must keep a register of its members. Under
section 112(2), the register must be kept at the registered office of the company. However;
1. If the work of making it up is being done in some other office of the company, it
may be kept in that office.
2. If the company has engaged some other person to make up the register it may be
kept in such person’s office but must not be kept outside Kenya.
- The register must be notified of the location or any change thereof within 14 days of
incorporation or change thereof failing which the company and every offices in
default are liable to a default fine
Index of members
Under section 113(1) of the Act, every company with more than 50 members, must have an
index of the names of the members unless the register is in the form of an index. The
register may be in the form of a card and must contain sufficient indication to facilitate
access to a members account in the register. The index must be kept at the same place as the
register. Changes on the register must be effected on the index within 14 days thereof.
Failure to keep an index renders the company and every office in default liable to a default
fine.
Contents of the Register;
1. Name of every shareholder

2. Postal address
3. Number of shares or stocks held
4. Date of entity of the name in the register
5. Date of cessation of membership
- Under section 114(1) if a company issues a share warrant, the members name is
struck off the register and the following particulars entered.
1. Fact of issue of the warrant

2. Date of issue
3. A statement of the shares included in the warrant
Closure of the Register;
Under section 117 of the Act, a company may be a notice in some newspaper circulating in
Kenya or in that part of Kenya in which the registered office is situate close the register of
members for any time or times not exceed 30 days in a year.
Inspection of the Register and Index:
Under section 115(1) of the Act, the register and index kept at registered office must be
open for inspection by members without charge for at least 2 hours every business day
subject to reasonable restrictions as may be imposed by the general meeting. Other persons
may pay the requisite fee. Members and others are free to apply for copies of the register and
the same must be furnished within 14 days of the request subject to payment of the requisite
charges.

It is a criminal offence for a company to deny any person the right to inspect the register or
refuse to furnish copies on request. The High court is empowered to compel a company to
facilitate immediate inspection of the register or to furnish copies as requested.
Legal Status of the Register:
Under section 120 of the Act, the register of members is prima facie evidence of the matters
there in stated.
Rectification of the Register:
Under section 118(1) of the Act, the High court has jurisdiction to order rectification of the
register of members in the following circumstances;
1. If a person’s name is without reasonable cause entered in the register

2. If a members name is without reasonable cause omitted on the register.
3. If there is default or unnecessary delay in removing a persons name from the
register.
The application for rectification may be made by:
1. The company
2. Any member of the company
3. The aggrieved party
Upon such application, the court may:
1. Order rectification of the register and damages to the aggrieved party.

2. Refuse to order rectification
The court has jurisdiction to determine the question of ownership of the shares in
question.
3. If rectification is ordered, a copy of the order, must be delivered to the registrar if
the court so directs
Branch register:
Under section 121(1) of the companies Act, a company may if authorized by its articles keep
a branch register in some part of the commonwealth in Kenya. The registrar must be
notified of its opening, change of location or discontinuation within 1 Month of the same
failing which the company and every officer in default are liable to default fine. A branch
register is deemed to be part of the principle register. A duplicate of such register must be
kept at the company’s registered office. A copy of every entry in the branch register must be
transmitted to the registered office as soon as it’s made. To close a branch register, notice
must be advertised in some newspaper circulating in that part of the country in which the
branch register is situate. The branch register must be kept in the same manner as the
principle register. A company may discontinue a branch register or transfer all entries to the
principle register. If a company has no power t keep a branch register it may alter the articles
to give itself such power. A transfer of shares registered in a branch register does not attract
stamp duty Payable in Kenya unless it is executed in Kenya.
QUESTION SIX
The company Act does not define the term liquidator nor his qualifications. However, a
body corporate cannot be appointed liquidator. A liquidator is a person appointed for the
purpose of collecting and realizing the company’s assets, ascertaining and making good
liabilities and distributing the remainder if any to members.
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Answers 205
Appointment
1. In a compulsory winding up, he is appointed by the court on application failing
which the official receiver becomes the liquidator
2. In a members voluntary winding up he is appointed by the members
3. In a creditors voluntary winding up, he may be appointed by the members or by the
creditors or both members and creditors or by the court.
In a winding up subject to the supervision of the court, he may be appointed:
1. By members
2. Creditors
3. Both members and Creditors
4. By the court
The appointment of a liquidator must be published in the Kenya Gazette
A liquidator other than the official receiver is bound to:
1. Furnish the official receiver with any information which he may require
2. Deliver to the official receiver any books or documents as the official receiver may
specify.
Legal Position of the Liquidator
Its exact legal position is difficult to define. However, if appointed by the court he is an
officer of the court and is answerable to it. He must act honestly and impartially
Liquidator as an Agent
He acts as an agent on behalf of the company hence the company is generally liable as
principle. In Knowles V. Scott Romer J. observed. “I think any rate, agency more nearly
defines his true position than trusteeship”.
In Stead Hosel V. Cooper Lawrence J. observed, “A liquidator is the agent of the company”.
Liquidator as Trustee
The liquidator is a trustee for the general body of creditors. He is not a trustee for individual
creditors or contributories. In the words of Romer J. in Knowles V. Scott, In my
judgement, the liquidator is not a trustee in the strict sense….no doubt in a sense and for
certain purposes, a liquidator may fairly enough be described as a trustee”.
The duties of a liquidator are equitable in character and he may be regarded as a fiduciary of
the company
Duties or obligations of the liquidator
1. He must act in good faith for the of the company

2. He is bound to exercise powers for the proper purposes
3. He must exercise unfettered discretion
4. He is bound to avoid conflict of interest
5. He must act impartially and honestly
6. He must exercise his discretion personally unless appointed with others
7. He must demonstrate a degree of care and skill appropriate to the circumstances
8. He must secure control of the company’s assets.
9. It is his duty to ascertain and pay the company’s debts

10. He must keep proper books of accounts

11. He must ensure that minutes of proceedings of meetings are kept.
12. He must pay monies received by him to a separate account for the credit of the
company’s winding up.
QUESTION SEVEN
(i) Restrictions on appointment of directors:
1. Number of directors: The Companies Act fixes the minimum number of

directors a company may have. Under Section 177, the maximum number
is fixed by the articles.
2. Consent: Under Section 182(1), a person appointed director, must deliver

to the registrar for registration his written consent to act as such. The
consent must be signed by the director in person or by his duly authorized
agent.
3. Share qualification: Under Article 77 of Table A the articles, may prescribe

the minimum number of shares a person must hold to quality for
appointment as director. If the articles so require, persons named as
directors, must hold this number of shares. However, a person is deemed
to have acquired the shares if:
He has signed the memorandum for a number of shares not less than his
qualification.
He has taken up and paid or agreed to pay for his share qualification.
He has delivered to the registrar for registration a written undertaking to
take and pay for his share qualification, or
He has delivered to the registrar for registration a statutory declaration to
the effect that a number of shares not less than his qualification are already
registered in his name.
Under Section 183(1), the share qualification must be taken up within 2

months of appointment or shorter time as may be fixed by the articles
failing which the appointee ceases to be a director.
4. Age: Under Section 186(1) of the Act, a person is not capable of being
appointed name or proposed director unless he has attained the age of 21
and has not attained the age of 70. It is the duty of persons proposed as
directors to disclose their age to the company. A director who attains the
age of 70 while in office, retires at the conclusion of the next AGM.
However, such a director may be reappointed if he offers himself provided
a special notice of the resolution to reappoint him has been given to the
members.
5. Soundness of mind: To qualify for appointment as director a person must

be of sound mind. Under Article 88 of Table A, the office of director
must be vacated if a director becomes of unsound mind.
6. Disqualification by the court: Under Section 189(1), the High Court is

empowered to disqualify a person from being directly or indirectly involved
in the management of comparing affairs for a duration not exceeding 5
years, if the person:
(i) Is convicted for an offence relating to the promotion, formation or

management of the company.
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Answers 207
(ii) Is in the course of winding up found guilty of an offence of being

involved in carrying on the company’s business for any fraudulent
purpose or with intent to defraud its creditors or creditors of any
other person.
(iii) Is in the course of winding up found guilty of fraud as an officer of

the company or in breach of duty to the company. If a disqualified
person is appointed director, he is liable to a fine not exceeding
Sh.10,000 or imprisonment for a term not exceeding 2 years or
both.
7. Undischarged Bankrupt or Insolvent Persons:

Under Section 188 of the Act, a person declared bankrupt or insolvent by a
court of law is not qualified for appointment as director without leave of
the court. If such a person is directly or indirectly involved in company
management, he is liable to a fine not exceeding Sh.10,000 or
imprisonment for a term not exceeding 2 years or both.
(ii) Disqualification of Directors:
Under Article 88 of Table A, the office of director shall be ……. if the director:
(i) Fails to acquire his share qualification within the stipulated time.
(ii) Attains the age of 70.
(iii) Is declared bankrupt or enters into an arrangement with his creditors to
compound his debt.
(iv) Is disqualified from holding office by a court order made pursuant to
Section 189 of the Act.
(v) Becomes of unsound mind.
(vi) Resigns office by a written notice to the company.
(vii) Absents himself from directors meetings held in over 6 months.
(viii) Is removed from office by an ordinary resolution of members in general
meeting.
(ix) Making up of a winding up order.
(iii) Removal of Directors:
Under Section 185(1) of the Act, a company may by ordinary resolution remove a director
from office before expiration of his period of office not withstanding anything in the articles
or in any agreement between the company and the director. The Companies Act prescribes
the circumstances in which a director may be removed from office:
1. Notice of the intended resolution to remove a director from office must be

delivered to the company.
2. Upon receipt of the notice, the company must send a copy thereof to the
director who is entitled to make written representations as his defence.
The director may request the company to notify its members that he has
made representations.
3. The company must convene an extra-ordinary general meeting of the

members. A special notice of the intended resolution must be sent to all
members. The notice of the meeting must state that the director has made
representations, if any, and copies must be enclosed unless received too
late by the company. If they are not enclosed by reason of lateness or

default by the company the director is entitled to have them reach out a the
meeting. However, copies of the directors representations need not be
sent to members or read out at the meeting if upon application by the
company, or any other aggrieved person, the court is satisfied that the
director is abusing his right to be heard to secure needless publicity for
defamatory matter.
4. The removal of a director from office takes effect when the meeting by
ordinary resolution so resolves.
QUESTION EIGHT
The doctrine of ultra vires in relation to Companies is often confused with abuse of power
by directors hence the distinction between ultra vires in the narrow and wider sense. This
distinction was formulated by the High Court in Rolled Steel Products Holdings Ltd v.
British Steel Corporation and others (1986). However, the distinction was disqualified by
the court of appeal.
Ultravires in the Narrow sense:
This is the common law doctrine of ultravires in company law. This is a rule of capacity
defined by the objects clause of the company. At common law, a company’s capacity is
restricted to transactions expressed in the objects and those that are reasonably incidental to
the attainment or pursuit of such objects. It was so held in Ashbury’s V. Attorney Generals
Case. Transactions beyond the powers of a company are ultravires since the company has
no capacity to enter into them. Whether a transaction is ultra vires or not, is a question of
interpretation of the object clause.
An ultra vires transaction is void and unenforceable and nothing can be done to render it
intra vires the company.
Ultra vires in the Wider sense:
This is nothing but an abuse of power of the company by its offices often described as
‘Excesses of Directors’ or ‘Transactions ultra vires’ the directors e.g borrowing for a purpose
outside the objects of the company. Such a transaction is intra vires the company and may
be ratified by members in the general meeting where upon it becomes an enforceable
transaction as was the case in Bamford V. Bamford.
However, a transaction ultra vires in the wider sense is voidable at the opinion of the
company i.e. the company may escape liability by avoiding it. However, such a transaction
may be enforceable. It is enforceable if the other party to the transaction was unaware of
the abuse of power as was the case in re David Pyne & Co. Ltd (1904). The defendant
company had a general power to borrow. It borrowed £6250 from the plaintiff company
but for a purpose outside its objects. The lending company was unaware of the purpose for
which the money was intended. In an action to enforce the borrowing, it was held that the
transaction was unenforceable since the bider was unaware of the abuse of power. Buckley
J. observes, ‘A corporation cannot do anything except for the purposes of its business,
borrowing or anything else, anything else beyond its powers is ultra vires … if you find a
power to borrow, which would arise only to the happening of a particular event, then think
it would lie upon the lender to say, ‘I cannot lend to you until you can satisfy me that the
condition has been complied with, but where the power is merely a general power to borrow
limited only as it must be for the purposes of the company’s business … I think the matter is
to be treated in this way, that the lender cannot investigate what the borrower is going to do
with the money”.
However, such a transaction is unenforceable if the other party is aware of the abuse of
power as was the case in re Introductions Ltd. A company was formed in Britain to
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Answers 209
accommodate and entertain visitors. It did so for 3 years after which it engaged in the
business of pig breeding. It borrowed from the plaintiff bank to promote the pig breeding
business which was not among its objects. The bank had a copy of the company’s
memorandum of association. In an action to enforce the borrowing, it was held that the
transaction was unenforceable since the lending bank was aware of the abuse of power. The
court of appeal observed “The borrowing was not for a legitimate purpose of the company,
the Bank knew it and therefore cannot rely on its debentures”.

REVISION PAPER THREE
QUESTION ONE
This is the organic theory or identification theory.
This is a principle of company law which attempts to connect the living to the non-living.
This principle attributes to the company the mind and will of the natural persons who
manage and control its affairs. Under the doctrine, the thoughts and deeds of the
responsible officers of the company are deemed to be the though and deeds of the company.
The company thinks and acts through them.
Under this theory, the knowledge of the responsible officers of the company is deemed to
be the company’s knowledge. It was so held in Lennards Carrying Company Ltd v.
Ascatic Petroleum Co. where under the Merchants Shipping Act a ship owner was only
liable for loss in certain circumstances. He let the ship set sail. As a consequence, there was
an explosion and the ship and its cargo were lost.
Held: The company was liable for the loss since it was aware of the faulty boilers. The
managing directors knowledge was imputed to the company. In the words of Haldane L.J
‘A corporation is an abstraction. It has no mind of its own any more than it has a body of
its own. Its acting and directing will most consequently be sought in the person of
somebody who for some purpose, may be called an agent but who is actually the directing
mind and will of the corporation’.
Under the organic theory, the thoughts of the responsible officers are deemed to be the
thoughts of the company. Their mind is the company’s state of mind and their intention is
that of the company.
In Bolton Engineering Co. v. Graham & Sons a company owned rental premises. The
tenant was entitled to a renewal of the tenancy unless the company intended to occupy the
premises. Directors of the company had thought of the company occupying its premises but
had not resolved in board meetings. The company refused to renew the lease and was sued.
It was held that the company was not liable since it had manifested its intention to occupy
the premises. The thoughts of the directors were imputed to the company. In the words of
Lord Benning, “a company may in many ways be likened to a human body. It has a brain
and a nerve center which controls what it does. It also has hands which hold the tools.
Some of the people in the company are mere servants and agents who are nothing more
than mere hands to do the work. Others are directors and control what it does. The state of
mind of these managers is the state of mind of the company and is treated by law as such”.
If the responsible officers of the company delegate powers to junior officers, the company
thinks and acts through the delegate. However, under the organic theory, the thoughts and
deeds of junior officers of the company, are not deemed to be those of the company. It was
so held in Tesco Supermarkets v. Natrass Ltd where it was held that the manager of a
supermarket was not a responsible officer for purposes of the organic theory hence his acts
would not be imputed to the company.
QUESTION TWO
(a) A quorum is the minimum number of persons who must be present for a company
meeting to transact business. The number is ordinarily fixed by the articles failing
which Section134(c) applies, where:
i) Two members present in person constitute quorum for a private company meeting.
ii) Three members present in person constitute quorum for a public company meeting.
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It is the duty of the chairman to determine whether a quorum of members is present. This
must be done within 30 minutes of the appointed time. If a quorum is not present, the
meeting, if convened by directors stands adjourned to the following week, same day, time
and place. But if convened by requisitionists, it stands dissolved.
Under Article 53 of Table A, no business shall be transacted at any general meeting unless a
quorum of members is present at the time the meeting proceeds to business. Quorum is
only essential at the commencement of the meeting. A fall in the number of members
present after the meeting has commenced has no effect.
In determining whether a quorum is present, persons not entitled to attend are not counted.
A meeting with no quorum is invalid and any purported proceedings are void.
(b) One person may constitute a meeting in the following circumstances:
(i) Directors meeting:

If a private company has one director pursuant to Section 177 of the Act,
that director constitutes a valid board meeting for purposes of the exercise
of the powers conferred upon the board by the articles.
(ii) Class meeting

If a company’s capital has been divided into different classes of ` shares,
e.g. ordinary, preference, deferred, employee etc and all the shares of a
particular class are held by 1 member, that member constitutes a meeting of
the holders of the class of shares. It was held in East v Bannet Brothers.
(iii) Adjourned meeting

This is a continuation of an earlier meeting. Under Article 54 of Table A, if
a meeting convened by directors has no quorum within 30 minutes of the
appointed time, it stands adjourned to the following week, same day, time
and place unless the directors otherwise decide.
Such a meeting is duly constituted by one member present in person or by

proxy.
(iv) Creditors meeting:

If in the course of winding up, only one creditor has proved his debt in
accordance with Section 307 of the Act, such a creditor constitutes a
creditors meeting for purposes of winding up.
(v) Annual general meeting convened by/at the instance of the registrar; under
Section 131(2) of the act, if a company fails to hold an AGM in accordance
with the provisions of Section 131(1) of the Act, any member may petition
the registrar to call or direct the convention of an AGM. Such an AGM is
duly constituted by 1 member present in person or by proxy.
(vi) Meeting convened pursuant to a court order:

Under Section 135(1) of the act, if for any reason, it is impracticable to call
a meeting of the company in the ordinary manner, or to conduct a meeting
in the manner prescribed by the articles and the Companies Act, the court
may either on its own motion or upon application by a director or any
member order the convention or conduct of a meeting. A meeting
convened pursuant to such an order in duly constituted by 1 member

QUESTION THREE
1. Companies with share capital
Under section 125(1) of the Act, every company with a share capital must at least once every
year, make a return to the registrar with respect to:
• The registered office of the company

• Registrar of members
• Registrar of debenture holders
• Registrar of shares and debentures
• The indebtness of the company
• Past and present members of the company
• Matters specified in Part I of the 5th schedule of summary of the shares.
2. Companies with no share capital:

Under Section 126(1) of the Act, every company without a share capital must at least once
every calendar year make a return to the registrar stating:
• The situation and postal address of the registered office

• The situation and postal address of:
o The registrar of members;

o The registrar of debenture holders if not kept in the registered office
o Particular of directors and the secretary
o A statement of total indebtedness of the company.
Annextures to the Annual returns:
Under Section 128(1) of the Companies Act, the following documents must be annexed to
the annual return.
• A copy of the balance sheet laid before the company in general meeting with its
annextures.
• A copy of the directors report
• A copy of the auditors report
These copies must be certified by a director and the secretary to be true copies of the
original and if any of the documents is in a foreign language, a certified translation in English
must be annexed. Failure to file returns renders the company and every officer in default
liable to a fine not exceeding Sh.1000.
Time of making the annual return:
Under Section 127 of the Act, annual returns must be completed and delivered to the
registrar within 42 days after the AGM for the year.
The copy delivered to the registrar must be signed by a director and the co. secretary failing
which the company and every officer in default are liable to a default fine.
Annual return of private companies
Under Section 129 of the Act, the annual return of a private company must be accompanied
by a certificate of a director and the secretary to the effect that the company has not from
the date of incorporation invited the public to subscribe for its shares or debentures.
LAW II
Answers 213
If a private company has more than 50 members, a director and the secretary must certify
that the excess members are or have been employees of the company.
Note that:
If a company has issued share warrants, its annual return must contain the following
additional information:
No. of shares comprising a warrant;

Number of shares in respect of which warrants are outstanding;
Total number of warrants issued and surrendered to the company.
QUESTION FOUR
General meetings are ordinarily conducted by the chairman of the board. If unavailable or
unwilling, one director must act as chairman. If none is available or willing, a member must
be elected as chairman. Under Table A, a company meeting must have a chairman within 15
minutes of the appointed time. The powers and functions of the chairman, resemble those
of a chairman of other assembling bodies.
In National Dwelling Society v. Sykes (1894) after a resolution proposed by the chairman
was defeated, he declared the meeting dissolved and left the venue with a few members.
The other shareholders elected another chairman and proceeded with the agenda of the
meeting. The other chairman and his supporters refused to recognize the validity of the
decisions arrived at. However, it was held that the decisions were valid since the chairman
had no power to declare the meeting dissolved as he had done. In the words of Chitly J, “It
is the duty of the chairman and his function to preserve order and to take care that the
proceedings are conducted in a proper manner and the sense of the meeting is properly
ascertained with regard to any question which is properly before the meetings:.
Powers and duties of the chairman
Functions/Duties:
1. To determine that the meeting is properly constituted;

2. To determine whether a quorum is present.
3. To inform himself the objects and business of the meeting.
4. To preserve order in the conduct of those present at the meeting.
5. To confine discussion within the scope of the meeting and reasonable limits of time.
6. To determine whether proposed motions and amendments are in order.
7. To formulate for discussion and decision questions moved for consideration of the
meeting.
8. To ascertain and ensure that the sense of the meeting is kept by putting relevant
questions to the meeting.
9. To make decisions on points of order and other incidental questions and his
decisions are prima facie correct.
10. To ensure that minutes of the meeting are kept.
Power of the chairman:
1. To call the meeting to order

2. To determine who to speak and for how long.
3. To adjourn the meeting with consent of members.
4. To close discussion on an issue after reasonable debate.
5. To demand voting by poll.
6. To declare results of any vote by show of hands or by poll.
7. To make decisions on points of order.

8. To close the meeting.

9. To vote again or have a casting vote in the case of a tie.
If the chairman is obstructive, incompetent or partial, he may be removed by a resolution

sponsored at the meeting and another person elected chairman.
QUESTION FIVE
The indoor management rule which is also called the rule in Turquands case, is concerned
with the liability of a company for acts of its officers.
This rule answers two questions:
(i) Can a company escape liability of pleading an internal irregularity?

(ii) Are third parties who deal with the company bound to satisfy themselves that the
rules of internal management have been complied with.
These questions are answered in the negative in Royal British Bank V. Turquand (1856).
The articles of the company provided that the directors could borrow on board such monies
as were authorized by an ordinary resolution of member in general meeting. Directors of
the company borrowed from the plaintiff bank without any resolution. In liquidation, the
bank sought to recover the amount from the liquidator who denied liability on the ground
that the borrowing was irregular. However, it was held that the company was liable. The
court formulated the so called indoor management rule that a person who contracts and
deals with a company in good faith is entitled to assume that it is acting within its
constitutional powers. He is entitled to assume that officers of the company who are held
out by the company as particular sort of officers, are the officers of the company concerned.
In Mahony V. East Holyford Mining Company Lord Hatherby says, “when there are
persons conducting the affairs of the company in a manner which appears to be perfectly in
consonance with the articles of association, then those dealing with them externally are not
to be affected by any irregularities which may take place in the internal management of the
company”.
In Freeman and Lockyear V. Backhurst Park Properties (Freemans case), the

company’s articles created the position of managing director. At the material time, none had
been appointed. However, one director with knowledge of the others purported to act as
managing director. He engage the plaintiff, a firm of architects to work for the company.
The plaintiff was not paid for the services rendered and sued the company. The company
denied liability on the ground that the director was not its managing director and hence had
no authority to bind. It was held that the company was liable since it represented this
director as its managing director who therefore had apparent authority to bind it.
The indoor management rule protects third parties against the company in case of internal
irregularities. It is justified on two grounds:
(i) It is fair to third parties to prevent the company from denying liability by relying on
an internal irregularity.
(ii) It facilitates commercial transactions in that third parties are not bound to inquire
whether the rules of internal management have been complied with.
However, the indoor management rule does not protect the third party in certain
circumstances and the company may escape liability. These are:
LAW II
Answers 215
The exceptions to the rule in Turquands case:
1. Public documents of the company:

If the defect or irregularity would have been ascertained by an inspection, of the
company’s public documents which the third party did not do, he is not protected
by the rule. It was so held in Irvine V. Union Bank of Australia. This is because,
the public documents are registerable and open for inspection e.g. special
resolutions.
2. Knowledge of the irregularity:

If the third party is aware of the irregularity or lack of authority, on the part of the
officer dealt with, he is not deemed to be acting in good faith and cannot rely on the
indoor management rule. It was so held in B. Liggets (Liverpool) Ltd. V.
Barclays Bank Ltd. where the defendant was aware of the irregularity.
3. Suspicion:
If circumstances are such that, they put the third party on inquiry, but the party does
not inquire to ascertain the true position, he is not protected by the rule as a
reasonable third party would have inquired. It was so held in B. Liggets
(Liverpool) Ltd. V Barclays Bank Ltd.
4. Abuse of power by an officer:

If the officer dealt with by the third party purports to exercise powers not ordinarily
exercised by that sort of officer, and the third party does not inquire, it cannot rely
on the indoor management rule.
5. Forged Documents
The indoor management rule cannot protect a third party or hold the company if
the document relied upon is a forgery. As such a document is a legal nullity as was
held in Ruben V. Great Fingall Consolidated.
6. Insiders
As a general rule, the indoor management rule cannot be relied upon by an insider.
These are persons who by virtue of their position in the company, are in a position
to know whether the internal regulations have been complied with e.g. directors. It
was so held in Howard V. Patent Ivory Manufacturing Co. Ltd where the 3rd
parties in question were directors. It was held that they were deemed to know of
the irregularities and would not rely on the indoor management rule.
Question has arisen as to whether directors are insiders in all cases for purposes of
the indoor management rule.
It has been observed that they are not always insiders. It all depends on the nature
or character of the transaction.
If it is so closely interwoven with the position of the director as a director of the
company, he is deemed to know the circumstances affecting it and therefore
deemed to be an insider. If it is not closely intertwined with his position as director,
he may rely on the indoor management rule.
QUESTION SIX
The affairs of the company may be investigated by the registrar or an inspector(s) appointed
by the registrar or by the court.
1. Investigation by the Registrar:

The affairs of a company may be investigated by the registrar in the following
circumstances:

(a) Non-compliance with the provisions of the Act:

Under Section 164(1) of the Act, if the registrar has reasonable cause to believe that
the provisions of the Act are not being complied with, he may investigate the
company’s affairs.
(b) Incomplete documents:

Under Section 164(1) of the Act, if on perusal of a document, submitted to him, in
accordance with the provisions of the Act, the registrar is of the opinion that it does
not disclose a full and fair statement of the matters it relates to.
In both cases the investigation is initiated by a written order calling upon the
company to produce the books or to furnish information or explanation as the
order may specify. The same must be produced or furnished within the duration
prescribed by the order. It is the duty of the officers of the company to produce the
books or furnish information or explanation. If after examining the books, and
considering the information, and explanation and unsatisfactory state of affairs is
disclosed, the registrar must make a written report to the court.
(c) Investigation of ownership of shares and debentures:

Under Section 174(1), if there is good, the registrar is empowered to investigate the
ownership of shares or debentures of a company by requiring persons who may
have been interested in the securities or who have acted as agents or advocates for
interested parties, to provide information in relation to them as they reasonably can.
Failure to provide such information renders, the person in default liable to
imprisonment for a term not exceeding 6 months or a fine not exceeding Sh.10,000
or both.
(II) Investigation by an inspector appointed by the registrar:

Under section 173(1) of the Act, if there is good reason, the registrar is empowered
to appoint one or more competent inspectors to investigate and report on the
membership of a company for purposes of determining the two persons who:
(a) Are or have been financially interested in the success or failure of the
company
(b) Control the company
(c) Materially influence the policy of the company.
The registrar is empowered to define the scope of the investigation. The registrar may
appoint an inspector or inspectors under this section upon application by members.
(III) Investigation by Inspector(s) appointed by the court:

The High Court may appoint an inspector or inspectors in the following
circumstances:
(i) Application by members:

Under Section 165(1) of the Act, the High Court may appoint an inspector(s) to
investigate a company’s affairs upon application by members. The application may
be made by:
• Not less than 200 members

• Holders of not less than 1/10 of the issued shares
• Not less than 1/5 of the number of members of the company
The application must be supported by sufficient evidence to justify an investigation.
(ii) Special resolution:
LAW II
Answers 217
Under Section 166(a) of the Act, the High Court must appoint one or more
competent inspectors to investigate a company’s affairs if the company has by
special resolution resolved that its affairs be so investigated.
(iii) Registrars report:

Under Section 166(b) of the Act, the court may appoint one or more competent
inspectors to investigate a company’s affairs if on the basis of the registrar’s report
made pursuant to Section 164, it appears to the court that:
It is desirable to do so.
Members have not been given all the information respecting the company’s affairs which
they reasonably expect.
Persons concerned with the formation or management of the company have been guilty of
fraud, misfeasance or misconduct towards the company or its members.
The company’s business has been conducted:
With intent to defraud its creditors or creditors of any other person.

For a fraudulent purpose
For an unlawful purpose
In a manner oppressive to any part of the members
The company was formed to pursue a fraudulent or unlawful purpose.
QUESTION SEVEN
Courts have interpreted Section 22(1) to mean that when he articles are registered, there
comes into being a contract between the company one on one hand and its members on the
other. This contract confers rights and imposed obligations on the parties therefore. The
company and its members are obliged to observe the provisions of the articles and either
party may sue the other for non compliance with the articles. The existence of this contract
was first acknowledged in WeltonV. Saferry (1892) where Lord Herschell observed, “It is
quite true that the articles constitute a contract between each member and the company”.
In Hickman V. Kent (1915) article 49 of the company’s articles provided that any dispute
between a company and any of its members be referred to arbitration. A dispute arose
between Mr. Hickman who was a member and the company secretary. Hickman sued the
company. The company applied for a stay of the proceedings for the dispute to be referred
to arbitration in accordance with the articles. The court granted a stay on the grounds that
the articles constituted a contract between the company and its members.
Nature of the Contract:

The contract created by Section 22(1) in relation to the articles has certain special
characteristics of which are laid down by Ashbury J in Hickman V. Kent.
1. It is a contract between the company and its members only. In the words of the
Judge, “no articles can constitute a contract between the company and third
persons”.
2. The contract confers rights and imposes obligations on the company and its
members.
3. The rights conferred by the contract can only be enforced by members in their
capacity as members. In the words of the judge, “No right merely purporting to the
conferred by the articles to a person in a capacity other than that of a member e.g.
director, promoter can be enforced against the company”.
In Eley V. Positive Govt. Life Assurance Co. Ltd. The articles of the defendant company
provided that Mr. Eley be employed as company solicitor to transact all the company’s legal

business at a fee. He could only be removed from office for misconduct. After
incorporation, Eley was appointed solicitor and transacted the company’s legal business for
some time. He then bought shares and became a member of the company. After some
time, the company ceased to employ him preferring other solicitors. It was held that the
article was unenforceable since Eley was an outsider. Though he was a member, he was
suing to enjoy rights accruing to him in a capacity other than that of a member.
A similar holding was made in Bealfie V. Bealfie Ltd. (1938) where it was held that the
article in question would not be given effect since it referred to directors in their capacity as
directors. In Rayfields V. Hands (1960) article 11 of the articles provided that any member
wishing to transfer the shares had to inform the directors who were to take up the shares
equally between them at a fair value. Rayfields who held 725 share sinformed the directors
of his intention to transfer the shares. The directors who were also members refused to take
up the shares. Rayfields sued to enforce article 11. It was held that the article was
enforceable since it referred to the category of directors who are members of the company.
In the words of Vaisey J., “In my judgement, the relationship here is between the plaintiff as
a member and the defendants not as directors but as members.
4. The contract created by the articles must be consistent with the provisions of the
memorandum and the Companies act.
5. The terms of the contract created by the articles keep on changing from time to
time whenever the company alters the articles in exercise of powers conferred upon
it by Section 13(1) of the Act.
Obiter
Courts have observed as a by the way that when the articles are registered another contract
comes into existence. The second contract is between members themselves i.e. members
interse. In the words of Starling J in Wood V. Odessa Works Co., “The articles of
association constitute a contract not merely between the shareholders and the company but
between each individual shareholder and every other. Words to that effect were expressed in
Quinn and Axtens Ltd. V. Salmon. The so called contract is generally unenforceable, a
member cannot use another to enforce the articles. However, the contract may be enforced:
(a) By the liquidator in the course of winding up

(b) By a shareholder under the exceptions to the rule in Foss V. Harbottle (1843).
QUESTION EIGHT
(a) Loans and other payments to directors:
Under Section 19(1) of the Act, it is generally unlawful for a company to make a loan to its
directors or a director of its holding company or enter into any guarantee or provide security
in connection with a loan made to such person. However, a company may make a loan to a
director or effect a payment in the following circumstances:
• If the company is for the time being private;

• If the lending company is a subsidiary and the director is its holding company
• If the lending company is part of the ordinary business of the company and the
same is lent in the ordinary course of such business
• If the funds are necessary to meet expenditure incurred or to be incurred by the
director for purposes of the company or to enable him properly perform his
duties as an officer of the company.
LAW II
Answers 219
The funds given to the director under this exception must be authorized by members in
general meeting. A payment without such authority renders the directors liable to indemnify
the company the amount.
(b) Compensation to directors for loss of office:
Under Section 192(1) of the Act, it is unlawful for a company to make to any director any
payment by way of compensation for loss of office or as consideration for or connection
with his retirement from office unless:
Particulars of the proposed payment including the amount ahs been disclosed to members of
the company.
The payment is approved by the company in general meeting.
Under Section 192(2), a payment made to a director in contravention of this provision is

illegal and the director receives the amount in trust for the company.
(c) Appointment of directors:
Under Article 75 of Table A, the number of directors and the first directors is determined in
writing by the subscribers to the memorandum or a majority of them failing which the
subscribers become the first directors. Directors are appointed by an ordinary resolution of
members in general meeting. Under Section 184(1), directors are appointed to office
individually. However, two or more directors may be voted in together if a motion to that
effect has been agreed to by the meeting without any vote against it.
However, in private companies, directors may be voted in together. A company may by its
articles adopt the retirement of directors by rotation. At the 1st AGM, all directors retire
from office. However, a retiring director is eligible for re-election. At subsequent AGM’s ⅓
of the longest serving directors retire. However, a serving managing director is not subject
to retirement by rotation. Under Article 95 of Table A, directors have the power to appoint
any person to be a director either to fill a casual vacancy or as an addition to existing
directors. Such a director holds office until the conclusion of the next AGM.

REVISION PAPER FOUR
QUESTION ONE
(i) Duties and powers of an inspector appointed by the court:
Duties
- Under Section 169(1) of the Act, once an inspector is appointed by the court, he
must enter upon his obligations/duties without undue delay.
- And if required by the terms of the appointment, make an interim report, on the
conclusion of the investigation, he must make a final report to the court which must
be written or printed if the court so directs. A copy of the report is forwarded to
the registrar by the court. It is deemed to be opinion evidence in legal proceedings.
The court may direct that the report be printed and published.
Powers:
1. Under Section 167 of the Act, he is empowered to investigate related

companies i.e. the holding or subsidiary if such investigation is necessary.
2. To administer oath.
3. To examine officers and agents of the company on oath.
4. To demand the production of books, documents and other information by

officers of the company.
5. To apply to the court for persons to give evidence there in for purposes of
their investigation.
(ii) Causes of action or proceedings on the inspectors report:
Under Section 170(1), if it appears from the inspectors report, that further action ought to
be taken in relation to persons or the company investigated, a copy of the report must be
delivered to the Attorney General who may take any of the following actions:
1. Initiate criminal proceedings against any person implicated in the report.

The Attorney General must be satisfied that there is sufficient evidence to
sustain the case. Officers and agents of the company are bound to assist
the Attorney General in the prosecution.
2. If the Attorney General is satisfied that proceedings ought to be instituted,

in the public interest by the company so as to recover damages in respect
of fraud misfeasance or misconduct in relation to the formation or
promotion of the company or its management or for the recovery of any
property of the company misapplied or retained by a person, the Attorney
General may institute the proceedings in the name of the company.
3. If the Attorney General is satisfied that the company ought to be wound

up, he may petition for winding up pursuant to Section 219(f) i.e the
company be wound up if the court is of the opinion that its just and
equitable that the company should be wound up.
(iii) Costs and expenses of investigation:
LAW II
Answers 221
Under Section 171(1) of the Companies Act, the expenses of and incidental to an
investigation by an inspector appointed by the court must in the first instance be made good
by the registrar. However, the following persons are liable to repay the registrar:
1. Any person convicted on a prosecution instituted by the Attorney General

on the basis of the report.
2. Any person held liable in damages or ordered to restore any property in

3. The body corporate in whose name proceedings are instituted.
4. The body corporate dealt with by the report.
5. Applicants for the investigation if an inspector was appointed pursuant to

Section 165(1).
QUESTION TWO
As a general rule, companies ought to be managed in a democratic manner in accordance
with the articles and the law. As a general rule, the majority will prevail and courts of law
only interfere by exception.
If for example, the decision is arrived at in contravention of the law or articles or in bad faith
company law attempts to safeguard minority interest through judicial propositions and
statutory provisions.
Minority Protection at Common Law:

Courts of law have not gone far enough to champion minority interest. However, they will
interfere with a majority decision in certain circumstances e.g.:
1. If a decision is arrived at in contravention of the articles or law.
2. If the majority decision is made in bad faith.
3. If the majority has exercised its voting power to:
Benefit at the expense of the minority

Expropriate corporate assets etc.
Minority Protection by Statute:

Minority protection has for the most part been realized through statutory provisions. The
Companies Act contains numerous provisions which expressly safeguard minority interest:
1. Alteration of the objects clause:
Under Section 8(1) of the Act, a company may by special resolution alter the objects clause
of its memorandum. However, the alteration may be objected to by:
(a) Holders of not less than 15% of nominal value of the company’s issued
share capital
(b) Holders of not less than 15% of any class of shares of the company.
(c) Not less than 15% of the number of members of a company.
The court may cancel the proposed alteration.
2. Variation of class rights:
Under Section 74(1) of the Act, a company whose share capital has been divided into
different classes of shares e.g. ordinary, preference, deferred etc may if authorized by its

articles or memorandum, vary the rights attached to any class of the shares either by a special
resolution or written consent of holders of not less than ¾ of that class of shares.
However, holders of not less than 15% may within 30 days of the consent or resolution,
apply to the court for the variation to be cancelled.
3. Convention of an AGM in cases of default:
Under Section 13(2) of the Act, if a company fails to hold an AGM, pursuant to Section
131(1), any members of the company may petition the registrar to convene or direct the
convention of an AGM. Such an AGM, is duly constituted by 1 member present in person
or by proxy.
4. Requisitioning of an Extraordinary General Meeting:
- Under Section 132(1) of the Act, holders of not less than 1/10 of the paid up capital
or total voting rights of the company, may requisition an extra-ordinary General
Meeting by depositing a requisition with the company.
- If directors do not convene a meeting, within 21 days of the deposit, the

requisitionists or not less than 1/12 of them may convene the meeting.
5. Convention of General Meeting:
Under Section 135(1) of the Act, if for any reason, it is impracticable to call a company
meeting or conduct a meeting in the manner prescribed by the articles or by the Act, the
court may either on its own motion or upon application, by a director or a member entitled
to attend and vote, direct convention or conduct of a meeting in accordance with the Act or
Articles. Such a meeting is duly constituted by 1 member present in person or by proxy.
6. Investigation of company affairs by inspectors:
Under Section 165(1) of the Act, shareholders may instigate the appointment of one or more
competent inspectors to investigate the affairs of the company. The investigation is made by
an application to the court by:
(a) Not less than 200 members

(b) Holders of not less than 1/10 of the issued shares.
(c) Not less than 1/5 of the number of members in the register.
The applicants must furnish the court with sufficient evidence to justify the appointment.
7. Take-over Bid:
Under Section 210(1) of the Act, if a scheme involving, the transfer of shares or any class of
shares in a company to another is proposed, and within 4 months of the offers, holders of
not less than 90% of the shares or class there of have accepted the offer, the offering
company may at any time within 2 months after the 4 months notify the dissentient
shareholders of the offering company its intention to acquire their shares compulsorily. The
dissentient shareholders may at any time within 1 month of the notice apply to the court
seeking cancellation of the takeover bid and the court may disallow the same as was the case
in re Buggle Press Ltd where the majority shareholders had formed a new company to
enable them acquire the minority interest in their other company by the use of Section 210.
The take over bid was disallowed.
8. Winding up under the Just and Equitable Ground:
LAW II
Answers 223
Under Section 219(f) of the Act, a company may be wound up by the court if the court is of
the opinion that it is just and equitable that the company should be wound up. The minority
may have a company wound up on this ground in case of oppression or where they have
justifiably lost confidence in the management of the company.
QUESTION THREE
(a) Section 218 of the Act confers upon the High court, jurisdiction to wind up
companies registered in Kenya. Winding up by the court is by petition.
- The petitioner must establish his case for a winding up order to be granted.
- A winding up petition must be based on certain grounds and Section 219 of
the Act sets out the circumstances in which a company may be wound up
by the courts.
These are the grounds under compulsory winding up.
Under Section 219 of the Act, a company may be wound up by the Court if:
1. Members have by special resolution resolved that the company be wound

up by the court.
2. Failure to hold the statutory meeting by the company pursuant to Section

130(1).
3. The company has failed to deliver the statutory report to the registrar for
registration.
4. The company has failed to commence business within a year of

incorporation.
5. The company has suspended its business for a whole year.
6. The number of members has fallen below the statutory minimum.
7. The company is unable to pay its debts i.e. insolvent.
8. The court is of the opinion that it is just and equitable that the company be
wound up.
9. Winding up proceedings have been commenced outside Kenya in respect

of a company incorporate outside Kenya but carrying on business in
Kenya.
(b) Winding up subject to the supervision of the court.
Under Section 304 of the Act, if a company has passed a resolution for voluntary winding
up, the court may on application of the official receiver or other person order that the
winding up continue, voluntary but subject to the courts supervision.
Under Section 305 a petition for the continuance of a voluntary winding up subject to the
supervision of the court is deemed to be a petition of winding up by the court. A winding
up subject to supervision by the court has 2 advantages:
(a) The court may while making the order or by a subsequent order appoint an
additional liquidator for the company. The liquidator so appointed has the same

powers and subject to the same obligations as one appointed in a voluntary winding
up and the court is empowered to remove him from office and fill any vacancy
occasioned by his death, removal or resignation.
(b) Creditors and contributories have the liberty to apply to the court for any orders
necessary for beneficial winding up. Under Section 308(1) of the Act, where an
order is made for winding up subject to the courts supervision, the liquidator may
subject to any restrictions imposed by the court exercise all the powers without the
sanction or intervention of the court in the same manner as if the company were
being wound up voluntarily.
QUESTION FOUR
(a) (i) Powers of the chairman of the Board;
• To call meetings to order

• To determine who to speak and for how long
• To adjourn the meeting with consent of members
• To close discussion on an issue after reasonable debate
• To demand voting by poll
• To declare results of any vote of show of hands or by poll.
• To make decisions on points of order.
• To close the meeting
• To vote again or have a casting vote in the case of a tie.
(ii) Functions of the Managing Director;
Under Section 109 of Table A, directors may entrust and confer upon a Managing Director
any or the powers exercisable by them on such terms and conditions and with such
restrictions as they deem fit.
Such powers are exercisable with the board or its exclusion.
However, the board may from time to time revoke, withdraw, after or vary all or any of the
powers conferred upon the managing director as was the case in Holdsworth v. Eaddies
where the managing director’s powers, were exercisable in relation to the company and its
subsidiaries as determined by the board.
After 1 year, the board resolved that he should confine his attention to one of the
subsidiaries only.
(b) (i) A poll vote:
This is voting on the basis of shares held. Under Article 62 of Table A, in a poll vote, one
share is one vote. Voting by poll is by demand and the demand may be made by:
The chairman of the meeting
Not less than 5 members present in person or by proxy
A member or members present in person or by proxy holding not less than 1/10 of the paid
up capital.
A member or members present in person or by proxy holding not less than 1/10 of the total
voting rights.
LAW II
Answers 225
The demand for a poll may be withdrawn before it is taken. However, voting by poll is
conducted in accordance with the wishes of the chairman and the outcome becomes the
decision of the meeting on the matter.
Under Section 138 of the Act, in a voting by poll, a member entitled to more than one vote
is not bound to use all his votes in the same way.
(ii) A proxy vote:
At common law, a shareholder has a right to attend general meetings of the company in
person or by proxy. A proxy is a person appointed by a shareholder to attend and vote in
general meeting on behalf of the member. A proxy need not be a member of the company.
Under Section 136(1) of the Act, any member of a company entitled to alter and vote at a
meeting of the company is entitled to appoint another person whether a member or not to
attend and vote instead of him. The appointment is affected by completion and submission
to the company of the proxy form.
A proxy form, conferred upon the proxy certain rights:
The right to attend the meeting

The right to vote by poll if any
The right to join other members or proxies to demand voting by poll
In the case of a private company meting, the right to speak at the meeting.
QUESTION FIVE
Gratuitous payments are gifts or donations and charities made by companies gratuitously.
At common law, gratuitous payments are invalid unless made for the benefit of the
company.
In Huton V. West Cork Railway Co. (1883), the company had disposed off its entire
undertaking and only existed for purposes of winding up. Shareholders in general meeting
solved to spend some of the purchase money to compensate salaried employees at the
company and to pay directors for past services. A dissatisfied shareholder challenged the
resolution and it was held that the proposed payments were invalid. Bawel L. J. observed,
“The law does not say that there are to be cakes and ale, but there to be no cakes and ale
except such as are required for ‘the benefit of the company’. Cases decided after this held
that all gratuitous payments were invalid even if provided for in the objects clause. The
courts were of the view that the payments are a wastage of the corporate assets.
For example in Parke V. Daily News Ltd and in Re Roith where the objects clause
empowered the companies to make gratuitous payments. It was held that the payments
were invalid since they were not made for the benefit of the company.
In re Behrens Co. Ltd (1932). It was held that the gratuitous payments. It was held that
the payments were invalid since they were not made for the benefit of the company.
In re Lee Behrens Co. Ltd. (1932). It was held that the gratuitous payments proposed by
the company was invalidity of gratuitous payments.
1. Is the transaction reasonably incidental to the carrying of the company’s business?

2. Is it a bonafide transaction?
3. Is it for the benefit and to promote prosperity of the company?

This test was disqualified by the court of Appeal in Rolled Steel case (1980). However,
English law has since changed and a company may be incorporated for the purpose of
making gratuitous payments.
In re Horsley and Weight Ltd the court of appeal observed, “The objects of a company
need not be commercial, they can be charitable or philanthropic, indeed they can be
whatever the original incorporators wish provided that they are legal”.
In the Horsley and Weight Ltd the court of appeal observed, “The objects of a company
need not be commercial, they can be charitable or philanthropic, indeed they can be
whatever the original incorporators wish provided that they are legal”.
The common law relating to gratuitous payments though made applicable by Section
3(11)(c) of the Judicature Act, does not apply in Kenya since the circumstances of Kenya
encourage donations by companies and individuals to worthy causes.
QUESTION SIX
(a) “Body Corporate”
Under Section 16(2) of the Companies Act, from the date of Incorporation mentioned in the
certificate of incorporation the subscribers to the memorandum together with such other
persons as may from time to time become members of the company shall be a BODY
CORPORATE.
The most fundamental attribute of incorporation is that the company becomes a legal
person distinct and separate from its members. Other consequences or effects of
incorporation are based on these facts. The Salomons Case Lord MacNaghten stated that
“the company is at law a different person altogether from the subscribers to the
memorandum”. The principle of legal or corporate personality manifests itself in various
ways. The legal personality created by incorporation has several characteristics or attributes:
• Limited liability
• Perpetual succession
• Sue or be sued
• Capacity to contract
• Owning of property
• Common seal
(b) Merits of a corporation as a business entity:
Upon incorporation a company becomes a legal person distinct and separate from its
members. The registered company is the most advanced form of business association. This
is because the merits of a company outweigh the shortcomings by far:
Limited liability: Members are generally not liable for debts and other obligations of the
company since their liability is limited by shares or guarantee.
Wide capital base: compared to other forms or business association, companies generally
have more capital by reason of wide spectrum of membership.
Perpetual succession: The fact that a registered company has capacity to exist in perpetuity
encourages longterm investment.
Qualified or specialized management: Under Section 177 of the Act, every public company
must have at least 2 directors and every private company must have at least one. Directors
LAW II
Answers 227
are elected by members in general meeting. Members have an opportunity to elect qualified
persons as directors.
Owning property and capacity to contract: The fact that a registered company can own or
hold property and enter into contractual relationships means that it has capacity to invest to
enhance profitability.
Sue or be sued: Shareholders are not obliged to sue to remedy wrongs done to the company
and generally cannot be sued for the wrongs of the company.
Transferability of shares: Shares in public and private companies are transferable, however,
they are really transferable in public companies.
Borrowing by floating charge: Registered companies can utilize the facility of floating charge
to borrow. This is an equitable charge securing a debenture on the assets of a going concern
but which remain dormant until crystalisation. A registered company may therefore use the
goods it deals with in the ordinary course of business as security for a loan.
Shortcomings of a corporation as a business entity:
Formalities: Companies are characterized by formalities from incorporation to winding up.

Formation of a registered company is subject to the provisions of the Companies Act.
During its existence, it must file annual returns with the registrar, hold general meetings etc.
Publicity: Companies are subject to undue publicity. Promoters must notify the registrar of
the name of the intended company. A company’s public documents e.g. memorandum,
articles, special resolutions etc are open to scrutiny by the public. A public company must
publish annual accounts and the winding up of a company is conducted in the public eye.
Expenses: The registered company is the most expensive form of business association to
form, maintain and wind up. Formation expenses include: legal fees, registration fees, stamp
duty. A company must have directors, auditors and board meetings. The winding up of a
company is an expensive exercise.
Corporation tax: This tax payable by registered companies is comparatively higher than
Income tax. It reduces the amount of profit distributable to members by way of dividend.
Ultra vires/inflexibility: They do not enjoy as wide contractual capacity as partnerships or

sole proprietorships. They cannot change the nature of business at will. A company’s
capacity is restricted to transactions set forth in the objects and those that are reasonably
incidental to the attainment or pursuit of the express/such object. Other transactions are
ultra vires the company and null and void.
Participation in management: Members other than directors do not participate in the day to
day management of a company’s affairs.
QUESTION SEVEN
Distribution of assets in the winding up of an insolvent company:
1. Under Section 302 of the Companies Act, all costs, charges and expenses property
incurred in the winding up including the liquidators remuneration are payable out of
the assets of the company in priority to other claims.
2. Under Section 311(1) of the Act, the following payments must be made in priority
to other debts.

All taxes and local rates due from the company is payable within 12 months before
the commencement of winding up.
All government rents not more than one year in arrears
All wages and salaries due to any clerk or servant other than directors for services
rendered during four months preceding commencement of winding up.
Any amounts payable under the NSSF and NHIF Act.
3. Secured creditors.
4. Unsecured creditors
5. Other creditors if any
6. The balance is distributed among members.
Secured Creditors:
A secured creditors may:
1. Realise his security and prove as an unsecured creditor for the balance if any of his
debt.
2. Value of the security and prove for any balance. In this case, the liquidator may
redeem the security at the creditors value or require it to be sold.
3. Relay on his security and not prove at all. The liquidator may then redeem by
payment in full.
4. Surrender his security and prove for the whole debt.
QUESTION EIGHT
Company secretary:
The office of the company secretary is created by the provision of the Companies Act.
Under Section 178(1) of the Act, every company must have a secretary. However, if the
office is vacant, its functions may be discharged by a deputy or assistant secretary if any or a
delegate of the board.
Appointment of the Secretary:
Under article 110 of Table A, the Secretary is appointed by the board for such term at such
remuneration and such conditions as the board may deem fit. The board is additionally
empowered to remove the secretary from office. To qualify for appointment, one must
either:
1. Be an advocate of the High court

2. Hold the Certified Public Secretaries certificate
3. Hold such other qualification which qualify him for appointment.
However, the following persons must not act as secretary:
1. The sole auditor of the company

2. A corporation which is the sole director of the company.
Under Section 180 of the Act, if a thing can only be done by or to a director and the
secretary, such a thing is not deemed to have been done if done by or to the same person
acting as director and the secretary.
LAW II
Answers 229
Legal position of the secretary:
He stands in a fiduciary position in relation to the company. He owes it the basic fiduciary
obligations.
Status of the Company Secretary:
During the 19th Century, the company secretary was regarded as a mere servant with no
authority to bind the company. In Haise and Bunnet V. South London Trumways Lord
Esther stated, ‘A secretary is a mere servant. His position is that he is to do what he is told
and no person can assume that he has any authority to represent anything at all”. The
secretary’s position has since changed and he is now regarded as the chief administrative
officer of the company with extensive powers.
In Panorama Developments V. Fidelis Furnishing Fabrics (1971) where a company

secretary hire vehicles for his own personal use but on the pretext that it was not necessary
for purposes of the company and failed to pay the hiring charges where upon the company
was sued. It was held that the company was liable for the hiring charges since the secretary
had authority to hire the motor vehicles. In the words of Lord Denning, “But the times
have changed, a company secretary is a much more important person than he was in 1887.
He is an officer of the company with extensive duties and responsibilities. He is no longer a
mere clerk”.
Duties/obligations of the secretary:
His duties generally depend on the size of the company and his contract with the company.
His principle obligation is to ensure that the affairs of the company are conduced in
accordance with the memorandum, articles, the Companies Act and the general law.
However, his specific obligations include:
(i) Filing the annual return.

(ii) Issuing share and debenture certificates
(iii) Registering charges
(iv) Publishing the company’s name as appropriate
(v) Taking minutes in general and board meetings
(vi) Issuing notices to members
(vii) Certifying transfers.
(viii) Maintaining the various registers of the company
(ix) Facilitating inspection of registers
(x) Custodian of the company’s common seal.
(xi) Makes the declaration necessary for commencement of business.
Liability of the Secretary:
1. As a fiduciary, he is liable for breach of his fiduciary obligations to the company.
2. His office is liable (at criminal law):
For failure to register charges or publish the company’s name

Refusal to facilitate inspection of registers
Failure to maintain registers
Failure to publish directors names in official documents.

References
Authored by:
GAKERI JACKOB K, LLB (Hons) LLM (NRB). Dip in Law (K.S.L) CPS, Advocate
LECTURER, STRATHMORE UNIVERSITY
LAW II

Law II R. Kit Final As at 3 July 2006

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Law II

P.O. Box 59857,

Tel: +254 (02) 606155

© THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992

We gratefully acknowledge permission to quote from the past

We would also like to extend our sincere gratitude and deep

STRATHMORE UNIVERSITY ● REVISION KIT

Revision is an integral part of examination preparation. It is not a substitute for a sustained

• Looking back to the work already covered.

STRATHMORE UNIVERSITY ● REVISION KIT

• A candidate must be wary of questions which appear to be almost identical to those

STRATHMORE UNIVERSITY ● REVISION KIT

An ordinary Law II examination consists of three types of questions namely:

1) Single statement and a problem.

1) SINGLE STATEMENT AND PROBLEM QUESTION

For example question 2 of December 2000 reads:

a) A candidate familiar with the Law relating to Pre-incorporation contracts should

• A Pre-incorporation contract is a contract entered into by a person purporting to

• Contracts of this nature are entered into by promoters.

• As a general rule a Pre-incorporation contract is unenforceable by or against the

• At common law a person who purports to contract as an agent in circumstances in

• The principle of law being examined

STRATHMORE UNIVERSITY ● REVISION KIT

My advise is based on the judicial autority cited.

A second illustration is question 8 of June 2002, which reads:

a) Outline the information that is required when registering a charge.

b) In July 2001, Muungano Limited obtained an overdraft from a bank upon

Discuss the validity of the charge.

b) This problem is based on the effect of registration of a charge in accordance

a) Types of winding up Commencement

iii) Creditors Voluntary winding up: - Members, Creditors

iv) Winding up subject to the supervision of the court: - Members, Creditors

• Rely on his security and not prove at all.

STRATHMORE UNIVERSITY ● REVISION KIT

11.0 SPECIFIC OBJECTIVES

A candidate who passes this subject should be able to:

• Appreciate the legal principles relating to the nature and registration of

12.1 Nature and Classification of Registered Companies

12.2 Memorandum and Articles of Association and Promoters of Companies

- Clauses in the memorandum of association (name, registered office, objects,

12.3 Share Capital

12.4 Membership Shares and Majority Rule

- Ways of becoming a member

- Kinds of general meetings

STRATHMORE UNIVERSITY ● REVISION KIT

12.6 Directors, Secretaries and Auditors

- Number and appointment of directors

12.7 Dividends and Debentures

12.8 Corporate Insolvency

ii) Voluntary winding up

- Compulsory liquidation after commencement of voluntary liquidation

iii) Contributories and creditors

STRATHMORE UNIVERSITY ● REVISION KIT

Topical Guide to Past Paper Questions

Formation of Company and Effects May 2002 Q1b Dec 2001: Q1

Doctrine of Ultra Vires May 2002 Q3b

Register of Members May 2002 Q5a

Dec 1999 Q6c

Division of Powers between the June 2001 Q1b

Rule in Salomons Case and June 2001 Q6a

STRATHMORE UNIVERSITY ● REVISION KIT

▪ Notice Dec 2000 Q5a

Part II: Revision Questions and Answers