Explain the differences between a corporation created under the Companies Act and a corporation created under an Act of parli

a. Explain the differences between a corporation created under the Companies Act and a corporation created under an Act of parliament.

In Kenya, Companies are regulated and registered under the Companies Act Cap 486 of the Laws of Kenya. This Act is based upon the English Companies Act of 1948, and therefore there is a lot of similarity between Kenyan law and English law in relation to companies. Under the Companies Act in Kenya, there are four types of company that exists in Kenya and they include:

Companies limited by shares- A company is limited by shares where the liability of a member to contribute to the company’s assets is limited to the amount, if any, unpaid on his shares. Such companies must have a share capital.

Companies limited by guarantee

Unlimited companies

Representative Offices (Foreign companies)

On the other hand, a company can be registered under the Act of parliament. This is a situation where legislation is enacted by the national assembly to establish a parastatal that is considered to important in offering products or services or regulating operations that are vital to the general public. Some companies in Kenya have been registered by Act of parliament; for instance Pest Control Products Board was established under an Act of parliament, the Pest Control Products Act, Cap 346, Laws of Kenya of 1982 to regulate the importation and exportation, manufacture, distribution and use of pest control products.

b. The rule in Royal British bank vs. Turquand (1856)

With regard to the ruling in the case of Royal British bank vs. Turquand (1856), it was established that a person dealing with a company is bound to read the relevant provisions of the company Act, company’s memorandum of association as well as articles of association. If he/she does not do so, he/she will be deemed to have read them and as a consequence, to have been aware of their provisions.

In addition, although the articles provide that a transaction may be affected by some internal procedure, the person dealing with the company may assume that the procedure has been complied with. For instance, in that case, a company was ordered to repay a loan which was borrowed by its directors on its behalf without the authority of an ordinary resolution prescribed by the Articles of Association.

c. Remedies to debenture holders who wish to reclaim his investment when company is in default

The remedies of debenture holders are generally conferred by the trust deed but will usually include the power:

To appoint a receiver to carry on the business or sell the charged property

To sue as creditors for arrears of interest or principal, or both

To petition the High Court for a winding up order (on grounds of the company’s inability to pay its debts), and

To apply to the court for the appointment of a receiver or for an order for sale if there is no power in the trust deed.

d. Advice on the proposed name of the company and restrictions on choice of company name

The promoters of a proposed company have freedom to choose its name but the freedom is limited by section 19 (2) of the Act, which provides that a proposed name must not, in the opinion of the registrar, be undesirable. Therefore, I would advice Mr. Tanui to ensure that the company name he selects is desirable by ensuring that the following:

The name is not similar to the name of existing company

Ensuring the name is not misleading; for instance, if the name of the company likely to have small resources suggests that it is going to trade on a great scale over a wide field.

Make sure that the company name does not suggest some connection with a powerful person such as president.

Ensure that the name does not suggest connection with government department or any municipality or local authority.

Ensuring the name does not include a surname, which is not that of a proposed director, unless the circumstances justify the inclusion.

Ensuring the name does not include words, which might be trademarks, unless a trade mark clearance has been obtained.

Ensure the company name ends with the word “Limited”

QUESTION 2

Alteration of Company Memorandum of Association

My advice to the directors of Kaleche Company will be pursuant to section 7 & section 8. Section 7 of the Act provides that a company shall not alter the content of its memorandum except in the cases, in the mode and to the extent for which express provision is made in the Act. This provision confers a special status on the Memorandum of Association as the basic document of the company whose contents are statutorily prescribed and protected.

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

To carry on its business more economically or more efficiently.

To attain its main purpose by new or improved means.

To enlarge or change the local area of its operations.

To carry on some business, which under existing circumstances may conveniently or advantageously be combined with the business of the company.

To sell or dispose of the whole, or any part, of the undertaking of the company.

To amalgamate with any other company or body of persons.

In addition I would advise the directors of Kaleche Company that in order to effect a proposed alteration, they would have to convene an extraordinary general meeting of the company to consider and, if approved, pass a special resolution that the company’s objects be altered as proposed.

The general meeting may however change the text of the resolution so as to conform to its wishes provided that it falls within one or other of the specified clauses. The resolution would be effective immediately it is passed if it was voted for by the holders of at least 86% in nominal value of the company’s issued share capital or any class thereof or, if the company is not limited by shares, at least 86% of the members (assuming that the company does not have debenture holders who are entitled to object to alterations of its objects). This would be so even if the purpose of the alteration does not fall within the restrictions prescribed by the Act since no application could be made to the court to cancel the alteration.

The rights of minority shareholders who oppose (dissenting) diversification

The right to ask the court to call a general meeting and to receive notice of any general meeting and vote at the meeting.

The right to inspect minutes of general meetings and the register of members and the right not to be unfairly prejudiced.

Right to call a general meeting and to require the circulation of a written statement in this respect.

Right to have the company’s annual accounts audited, at the company’s expense.

Minority shareholders have the right to block a special resolution

The doctrine of Ultra Vires

This is a Latin term which means beyond the contracting powers of a company. In other words, The doctrine of Ultra Vires is a legal rule that was articulated by the House of Lords in the case of Ashbury Railway, Carriage and Iron Co Ltd v Riche to the effect that, where a contract made by a company (usually by the directors on its behalf) is beyond the objects of the company as written in the company’s Memorandum of Association, it is beyond the powers of the company to make the contract. The contract is void, illegal and unenforceable. Lord Cairns stated that such a contract cannot be ratified even by the unanimous consent of all the shareholders of the company. His Lordship observed that any purported ratification would mean that “the shareholders would thereby, by unanimous consent, have been attempting to do the very thing which, by Act of Parliament, they were prohibited from doing”.

A company’s objects are stated pursuant to the provisions of an Act of Parliament. It must therefore be deduced, for example, that a company whose object has been stated to be “gold mining” cannot engage in “fried fish” business. This is because: –

Prospective investors who read the objects clause realized that the company was formed to mine gold. If they bought the company’s shares they did so because they intended their money to be used in pursuance of the gold mining business.

The statutory requirement that a company must state its objects in its Memorandum of Association would be rendered purposeless if, despite having stated the objects, the company was legally entitled to embark on any other activity. To prevent this happening, the courts concluded that the statement of objects would be taken to mean that what is not stated as an object cannot be pursued, or undertaken, by the company.

The ultra vires doctrine limits a company’s powers to the attainment of the company’s objects under its memorandum of association.

QUESTION 3

Removing Bella from the Board of Directors

With regard to the removal of Bella as a director of the company, I would refer the directors to Section 185(1). This section states that a company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in the articles or in any agreement between him and the company. Special notice must be given of any resolution to remove the director, or to appoint another director in his place.

On receipt of the special notice, the company must send a copy to the director concerned who is entitled, if he so wishes, to make written representations (not exceeding a reasonable length) to the company. If the director so requests, the company must send the representations to the members with notice of the meeting unless the representations are received by it too late for it to do so.

In such a case, the representations would be read out at the meeting at which the director would also be entitled to be heard. The representations need not be sent out by the company or read out at the general meeting if, on the application, either of the company or of any other person who claims to be aggrieved, the court is satisfied that they have been made in order to secure needless publicity for defamatory matter.

Compensation for removal

I would refer the directors to Subsection (6), which provides that nothing in Section 185 shall be taken as depriving a removed director of compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director. This provision which restates the common law rule, would enable a managing director to sue the company for damages for wrongful dismissal if the effect of his removal as director was to prematurely terminate his appointment as managing director, and was inconsistent with the contract. The director might also, if he is a member of the company, be entitled to an order for the winding up of the company by the court on the “just and equitable” ground as witnessed in the case of Ebrahimi v Westbourne Galleries Ltd. Therefore, it would be prudent for the company to ensure that the dismissal is lawful by ensuring that Bella is paid the amount due to her as per the time of termination.

Alteration of articles of association to force Bella to sell her shares to them

With regard to alteration of articles of association, in order to force her to sell her shares to them, I would advise the directors to refer to section 13. Section 13 (1) provides that a company may by special resolution alter or add to its articles. Section 13 (2) provides that any alteration or addition so made in the articles shall be as valid as if originally contained therein and subject to alteration in like manner by special resolution.

Breach of fiduciary duties

The following are the fiduciary duties:

Bona fide – Promoters are bound to act in good faith for the benefit of the company in formation. Their acts must be guided by the principle of utmost fairness.

Proper accounting: – A promoter is bound to explain the application of money or assets coming to his hands from the date he becomes a promoter. The account must be complete and honest.

Disclosure: – As a fiduciary promoter must avoid conflict of interest by disclosing any personal interest in contracts made on behalf of the company in formation. The disclosure may be made to an independent board of directors or to all members in the prospectus. Any secret profit made without disclosure must be accounted to the company. If a promoter makes a secret profit without disclosure the company is entitled to rescind the contract or sue for the recovery of the profit.

In this regard, I would advise Juma and Jerry to go ahead with the legal action against Bella because as a promoter, she has violated her fiduciary duty with regard to disclosure of information by revealing company’s confidential information to rivals.

QUESTION 4

A person who do not qualify to be appointed as an auditor

Under Section 161 (2) none of the following persons shall be qualified for appointment as auditor of a company

An officer or servant of the company.

A person who is a partner of or in the employment of an officer or servant of the company (unless the company is a private company).

A body corporate.

Persons who are disqualified for appointment as auditor of the company’s subsidiary or holding company or subsidiary of the company’s holding company.

Duties and liabilities of a promoter during incorporation of a company

Fiduciary duties

Bona fide – Promoters are bound to act in good faith for the benefit of the company in formation. Their acts must be guided by the principle of utmost fairness.

Proper accounting: – A promoter is bound to explain the application of money or assets coming to his hands from the date he becomes a promoter. The account must be complete and honest.

Disclosure: – As a fiduciary promoter must avoid conflict of interest by disclosing any personal interest in contracts made on behalf of the company in formation. The disclosure may be made to an independent board of directors or to all members in the prospectus.

General/common duties

To determine and settle the company’s name

To prepare the constitutive and other documents necessary for incorporation

To cause registration of the company

To secure the services of directors

To meet the preliminary expenses

There is no general statutory or judicial definition of the word “promoter”. English judges have, however, described the word ‘promoter’ in varying terminology of which the following may be quoted:

A promoter is “one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose” (per Cockburn, J): Twycross v Grant.

“The term ‘promoter’ is a term not 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”, (per Bowen, J): Whaley Bridge Calico Printing Co v Green.

Similarities and differences between shares and debentures

Similarities

Both are legal documents indicating ownership of a company.

Both entitle the owner (the shareholder) to receive a share of profits in the form of dividends.

Both ordinary shareholders and debenture holders entitle the owner to attend the annual general meeting of shareholders.

Both pay defined cash flows except for embedded options and default/failure to pay.

Both have durations, convexity, and all the usual bond measures of interest rate sensitive.

Both are dependent on liquidity and cash flow of the company and not its long term growth.

Differences

The following are the main difference between a debenture and a share:

Ownership

The share of a company provides ownership to the shareholders. Debenture-holders are creditors of a company who provide loan to the company.

2. Identity

Person holding share is known as shareholder. Person holding debenture is known as debenture-holder.3. Certainty of Return

No certainty of return in case of loss for the shareholder. Debenture-holder receives the interest even if

there is no profit.

Convertibility

Shares cannot be converted into debentures. Debentures can be converted into shares.5. Control

Shareholders have the right to participate and vote in company’s meeting. Debenture holders do not possess any voting right and cannot participate in meeting.

Security

Shares are not secured. Debentures are normally secured.

Priority of refund

In case of termination of the corporation, shareholders funds are refunded after every claim is settled. Debenture-holders have a priority of the refund of their loan prior to shareholders.

Restriction on issue

There are certain restriction on issue of shares at discount. There is no restriction as to issue of debentures at discount.

Repayment

Share capital is not returned except in case of redeemable preference shares. Debentures being loan is repaid by the company.

Right to attend meeting

Shareholders are invited to attend the annual general meeting of the company. Debenture-holders are not invited, unless any decision affecting their interest is taken.

There can be mortgage debentures i.e. assets of the company can be mortgaged in favor of debenture holders. But there can be no mortgage shares.

QUESTION 5

The rule in Sharp Vs. Dawes

Meetings are very important in an industry. This can be shown from case study like Sharp v

Dawes, which emphasized that one man cannot constitute a meeting. For a meeting to take place it must be constituted as prescribed by the Act. Meetings also result in passing of resolution, which is used as a tool for making decisions.

winding up by court/compulsory liquidation

Winding up is the process by which a company is dissolved and ceases to exist

A petition is presented to the High Court under Section 218 of the Companies Act.

There are numerous circumstances under which a company can be wound up by the court and they include the following: The company has by, special resolution, resolved that it should be wound up by the Court

(b) The company does not deliver the statutory report to the registrar or defaults in holding D Y the statutory meeting. U S T (c) The company has not commenced its business within a year from its incorporation or has suspended its business for a whole year. (d) The company is unable to pay its debts. (e) The number of members of the company has reduced, in the case of a private company, below two, or, in the case of a public company, below seven. The court considers that it is just and equitable to wind up the company.

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

The company has failed to hold the statutory meeting in accordance with Section 130

(5)

The company has suspended its business for a whole year.

C. Statement in lieu of prospectus

If a company does not want to issue a prospectus to the public for subscription of the shares, this statement is required to be issued to the public for necessary information. It must be signed by every person named in it as director or by his agent authorized in writing: The nature of the information of this document is more or less similar to that given in the prospectus. A copy of this statement must be filed with registrar within prescribed time. This provision does not apply to private company.

forfeiture of shares

This is the process by which the directors of a company cancel the power of shareholder if he does not pay his call money when the company demands for it. In other words, means to cancel the power of share holder if he does not pay his call money when company demands for this. Company will give 14 days notice, after 14 days if shareholder did not pay the company will forfeit his shares and cut off his name from the register of shareholder. Company will not pay his received fund from shareholder.

Types of meeting

TYPES OF GENERAL MEETINGS

The statutory meeting

According to section 130 every public company limited by shares and every public company limited by guarantee and having a share capital shall, within a period of not less than one month nor more than three months from the date when the company is entitled to commence business, hold a general meeting of the members of the company, which shall be called the statutory meeting. The statutory meeting is held for the specific purpose of enabling the members of the company to consider the statutory report. However, Section 130(7) provides that “the members of the company present at the meeting shall be at liberty to discuss any matter relating to the formation of the company, or arising out of the statutory report, whether previous notice has been given or not.” But no resolution of which notice has not been given in accordance with the articles may be passed at the meeting.

The annual general meeting

Section 131(1) provides that “every company shall in each year hold a general meeting as its annual general meeting in addition to any other meetings in that year, and shall specify the meeting as such in the notices calling it”. usual business at an annual general meeting include:

Declaring a dividend;

The consideration of the accounts, balance sheets and the reports of the directors and auditors;

The election of directors in the place of those retiring, and

The appointment of, and the fixing of the remuneration of, the auditors.

Extraordinary general meeting

Extraordinary General Meetings

Section132 (1) provides for the convening of “extraordinary” general meeting but does not define it. Neither is the word “extraordinary” defined in any other section of the Act. However, Article 48 provides that all general meetings other than annual general meetings shall be called extraordinary general meetings. Article 49 further provides that the directors may, whenever they think fit, convene an extraordinary general meeting.

QUESTION 6

Restriction upon Selection of Name

To obviate the risk of choosing a name that ultimately turns out to be undesirable, the promoters should enquire from the registrar whether the name they intend to give the company is “too like” that of a company already in the register of companies. After obtaining confirmation that the name is a registerable one they should immediately make a written application for its reservation under section 19 (1) (a) of the Act. Any such reservation shall remain in force for a period of 30 days or such longer period, not exceeding 60 days, as the registrar may, for special reasons, allow. No other company shall be entitled to be registered with the reserved name.

These statutory provisions regarding the choice of a company’s name are intended to confer, on the company, legal monopoly of its name. Because it lacks physical attributes, which could assist its customers to differentiate it from another company with a similar name, a company can only rely on the legal monopoly of its name as its ultimate protection against what might constitute unfair instances of passing-off. They also avoid a situation in which two or more companies use one name with the resultant problem of identifying the company that is the contracting party in a commercial transaction.

B.

Company limited by shares

Most registered companies, both public and private, are companies limited by shares. Such a company is defined by Section 4 (2) (a) as “a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them”. It should be noted that it is the liability of the company’s members which is limited and not the company’s own liability. To that extent, the word “Ltd” at the end of the name of such a company is actually misleading.

Company limited by guarantee by guarantee

Section 4(2)(b) defines a company limited by guarantee as “a company having the liability of its members limited by the memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up”. The memorandum of such a company would have a clause stating that “every member of the company undertakes to contribute to the assets of the company in the event of its being wound up while he is a member… such amount as may be required, not exceeding (so many) shillings”. The member’s liability is contingent and he can only be called upon to pay the

Sequence of Events n Transfer Of Shares

The basic transfer procedure is that the transferor and transferee complete and sign the transfer form and have it stamped before delivering it to the company (with the transferor’s share certificate) for registration. The transferee becomes a member and legal owner of the shares only when his name is entered in the register of members. The company issues to the transferee a new share certificate and cancels the old one.

The transfer procedure in summary is:

1.     The seller of the shares completes and signs the stock transfer form2.     Where necessary, the buyer signs the stock transfer form3.     If required, the stock transfer form is sent for stamping and stamp duty is paid4.     The company receives and checks the transfer documents5.     The board of directors decide whether to approve the transfer6.     The company updates its statutory registers, cancels share certificate(s) and issues new certificate(s) required

d. appointment and disqualification of directors

First directors

The names of the first directors shall be decided in writing by the subscribers of the Memorandum of Association or a majority of them. If there is a deadlock, all the signatories to the Memorandum of Association shall be the company’s first director

Subsequent directors

The subsequent directors are appointed by the members at a general meeting beginning from the first annual general meeting at which all the first directors retire from office and the members are given the first opportunity to elect directors of their own choice. The retiring directors are, however, eligible for election under Article 89. At the second annual general meeting, one-third of members.

Casual appointment

Article 95 permits the board of directors to fill a vacancy in the board or to get an additional director to join the board for practical reasons provided that the appointment does not cause the number of directors to exceed the limit imposed by the articles. The person appointed director in this way shall hold office until the next annual general meeting. He will then be eligible for re-election, but his appointment will not be taken into account when deciding on the directors who shall retire from office.

DISQUALIFICATION OF DIRECTORS

Article 88 provides, under the heading “disqualification of directors”, that the office of director shall be vacated if the director:

Ceases to be a director by virtue of s.183 (i.e. failure to obtain a share qualification) or Section 186 (i.e. age limit

Becomes prohibited from being a director by reason of any order made under Section189 of the Act

Becomes of unsound mind

Resigns his office by notice in writing to the company

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

Is removed from office by an ordinary resolution of members.

QUESTION 7

7a. characteristics of floating charges

Floating Charges

According to the decision of Romer, L J in Re: Yorkshire Wool combers Association Ltd a charge is a “floating charge” if it has the following three characteristics:

It is a charge on a class of assets of a company, present and future;

The class is one which changes from time to time in the ordinary course of the company’s business;

It is contemplated by the charge that, until some event occurs, which causes the charge to crystallize, the company may use the assets charged in the ordinary course of its business.

b. crystallization of floating charges

A floating charge is a charge on a class of assets of a company. The actual assets in that class owned by the company change from time to time. The assets that the chargee is entitled to utilize for payment of the secured debt are the assets in the class that the company owns at the time when the charge crystallizes. On crystallization, a floating charge becomes a fixed or specific c equitable charge.

When the chargee appoints an administrative receiver. The power to do so exists only by virtue of the charge contract, which must, therefore, specify the circumstances in which the power is exercisable. e.g.

Liquidation or winding up

Appointment of a receiver

Levy of execution or distress

Insolvency

When the company goes into liquidation.

When the company ceases to carry on business.

If the charge contract so provides, when the chargee gives notice that the charge is converted into a fixed charge on whatever assets of the charged class are owned by the company at the time the notice is given.

When another floating charge on the company’s assets crystallizes it causes the company to cease business.

When there is Commencement of recovery proceedings against the company.

Occurrence of an event, which under the terms of the debenture causes crystallization.

Question 8

Dividend payable as a debt against the company

A dividend is treated as a debt owing by the company at the time that a dividend is declared against the company, whereas merely fixing the time for payment of a dividend (that is, where the directors determine to pay a dividend at a future date) does not create a debt until the time fixed for payment arises, and the decision to pay the dividend can be revoked at any time before then. Accordingly directors need to assess the company’s ability to pay the dividend both a