Kasneb Company law revision study notes

This revision study notes can be used for students pursuing the following Kasneb courses:

FORMS OF BUSINESS ORGANISATIONS

Sole proprietorship also sole trader- one man business
Partnership – business consisting of between two to 20 people owned business
Company- A legal person has duties and rights
Cooperative – “Harambee” (Pooling resources)

SOLE TRADER

This business is owned and controlled by one person. The owner is in complete control and thus receives all profits and suffers all losses. It’s very easy to start as all that one needs is capital and a trading license obtained from the relevant local authority. This form of business is found in retail trade and service industries such as hair cutting, plumbing, painting, kiosks, and vegetables
among others.

ADVANTAGES OF SOLE TRADER

1. Owner receives all profits and is in complete control of the business
2. It has no major legal and administrative formalities in starting as all one requires is a
trading license
3. A sole trader is his own master and thus makes all decisions, he does not have to consult
another person, which tends to delay decision making in other business entities.

DISADVANTAGES OF SOLE TRADER

1. Owner has to provide all the capital
2. Owner bears and suffers all the losses
3. Owner has to work for long hours to increase profits and this in the long run affects his health
4. There is no scope in sharing ideas for the improvement of the business

PARTNERSHIP

This is a business is owned by at least two people or more but not more than 20 people. Section 3 (1) of the Partnership Act defines a Partnership as the relationship, which subsists between persons carrying on a business in common with a view to make a profit.
Under Kenyan law there are two types of Partnerships, namely General and Limited. The General partnership operates quite similarly to a sole trader but in a Limited partnership the liability of the partners is limited. A partnership deed regulates the relationships among the partners.

ADVANTAGES OF PARTNERSHIP

1. Partners provide capital on terms agreed. They share the net profit or bear the losses
in proportions as set out in the partnership agreement
2. More capital is available and there is a scope of expanding business
3. Sharing of ideas by the partners leads to growth and improvement of business

DISADVANTAGES OF PARTNERSHIP

1. Disagreement among partners sometimes can ruin the business
2. Business may stop temporarily after death of one of the partners.

COOPERATIVE SOCIETIES

This is an association of people who come together with a common objective. It is a form of self-help organisation. It’s formed by at least 10 people and there is no maximum members. Membership is open to any number of people required to start a cooperative society. Members hold shares in the society.

STRUCTURAL FRAMEWORK OF THE COOPERATIVE MOVEMENT IN KENYA

The structural framework of the cooperative is organised in a four-tier system consisting of:

The Primary:this has been defined as a cooperative society whose membership is restricted to individual persons. Examples include
1. Harambee Cooperative Savings and Credit Society Limited, formed by the employees of the Office of the President
2. Afya Cooperative Savings and Credit Society Limited, formed by employees of the
Ministry of Health

The secondary: This is a cooperative whose membership comprises Primary societies.

The National Cooperative Movement (NACOS): The NACCOS offer specialized services to their affiliates.

BENEFITS OF COOPERATIVE ORGANISATIONS

Basically cooperatives are vehicles for social economic development. They contribute to economic growth and development in many ways. The major benefits that come out of cooperative organisations can be summarized as follows:

1. Collection, transportation, processing and marketing agricultural produce.
2. Mobilization of savings and channeling the income of individual members to specific development projects
3. Support to agricultural production through distribution of farm inputs

4. Dissemination of applied technology to members
5. Assisting in income distribution by participation through enabling large sections of the population to engage in various income generating economic activities
6. Provision of credit to members for defraying urgent expenses at affordable rates and costs
7. Creating employment directly through hiring of various cadres of staff besides providing self-employment for farmers, artisans among others.

Theory of limited liability

Liability means the extent to which a person may be called upon to contribute to the assets of the company in the event of winding up. In company law, the liability of members may be limited or unlimited. If limited it may be limited by shares or by guarantee.

Differences between registered companies

(a) Formation
Registration is the legal pre-requisite for the formation of a registered company: Fort Hall Bakery Supply Co v Wangoe (1).The Partnership Act does not prescribe registration as a condition precedent to partnership formation. A partnership may therefore be formed informally or, if the partners deem it prudent, in writing under a Partnership Deed or Articles.
(b) Legal Status
A registered company enjoys the legal status of a body corporate, which is conferred on it by the Companies Act.A partnership is not a body corporate and is non-existent in the contemplation of the law. Such business as appears to be carried on by it is, in fact, carried on by the individual partners.
(c) Number of Members
A registered private company must have at least two members under section 4 of the Companies Act and a maximum of 50 members (excluding current and former employees of the company who are also its members), under section 30 of the Act. A
public registered company must have at least seven members under section 4 of the Companies Act but without a prescribed upper limit. A partnership cannot consist of more than 20 partners.
(d) Transfer of Shares
Shares in a registered company are freely transferable unless the company’s articles incorporate restrictive provisions. A partnership has no shares as such but a partner cannot transfer his interest in the firm to a third party unless all the partners have agreed to the proposed transfer.
(e) Management
A company’s members have no right to participate in the company’s day-to-day management. Such management is vested in the board of directors. Partners have the right to participate in the firm’s day-to-day management since section
3 of the Partnership Act requires the business to be carried on “in common”. The right of participation in the firm’s management is, however not given to a partner who has limited his liability for the firm’s debts.

(f) Agency
A member is not, per se, an agent of the company (Salomon v Salomon & Co Ltd (3). A partner is an agent of the firm because the business is carried on “in common” by the partners themselves. The Partnership Act, section 7 also expressly provides that every partner is an agent of the firm and his other partners for the purpose of the partnership.
(g) Liability of members
A company’s member is not personally liable for the company’s debts because, legally, they are not his debts.A partner is personally liable for the firm’s debts. This rule has been codified by section 11 of the Partnership Act, which provides that “every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner”,
unless the partner is a limited partner.
(h) Powers
The ultra vires doctrine limits a company’s powers to the attainment of the company’s objects under its memorandum of association. Partnerships are not affected by the ultra vires doctrine and partners enjoy relative freedom to diversify the firm’s operations.
(i) Termination
A member’s death, bankruptcy or insanity does not terminate the company’s legal existence whereas a partner’s death, bankruptcy or insanity may terminate the partnership unless the partnership agreement provides otherwise.
(j) Borrowing money
A company can borrow on the security of a “floating charge”. A partnership cannot borrow on a “floating charge”.

(k) Ownership of property
A company’s property does not belong to the shareholders, either individually or collectively. Consequently, a member cannot insure the property since he has no insurable interest therein: Macaura v Northern Assurance Co (4). A firm’s property is the property of the partners who can, therefore, insure it and, in the case of cash, make drawings from it.

REGISTRATION OF A COMPANY

KEY DEFINITIONS

REGISTRATION PROCEDURES OF A COMPANY

Under section 4(1) of the Companies Act any seven or more persons, or where the company to be formed is Private any two or more persons, associated for any lawful purpose may by subscribing their names to the Memorandum of Association and by complying with the provisions of the Act form an incorporated company with or without limited liability.

REGISTRATION PROCEDURES OF A PRIVATE COMPANY

In order to secure the registration of a private company, the procedure described above is followed except that the Memorandum of Association will be signed by at least two of the company’s promoters.
(b) Form No 209 and 210 are not delivered for registration because section 182 (5) of the Act exempts promoters of a private company from the obligation to deliver them for registration.
(c) If Articles of Association are not delivered for registration, the provisions of Part I of Table A will become the company’s Articles, as modified by Part II thereof.

CHARACTERISTICS OF A PRIVATE COMPANY

Number of members is limited to 50 excluding current and former employees of the company who are members
Transfer of shares is restricted
Any invitation to the Public to subscribe for shares is prohibited
Must have at least one director
It’s entitled to start business operations on the date of incorporation
It’s empowered to give loans to its directors
It’s not entitled to publish annual accounts
It’s not obliged to hold statutory meetings

SIGNIFICANCE OF REGISTRATION PRIVATE COMPANIES

Section 389 provides that “no company, association or partnership consisting of more than 20 persons shall be formed… unless it is registered as a company under this Act”. The provision has been interpreted by the English and Kenyan courts to the effect that registration is the condition precedent to the formation of a registered company and failure to register a proposed company
will mean that it does not legally exist: Fort- Hall Bakery Supply Co v Wangoe (1).

EFFECT OF REGISTRATION OF PRIVATE COMPANIES

Section 16 (2) of the Act provides that “from the date of incorporation mentioned in the certificate of incorporation the subscribers to the Memorandum of Association… shall be a body corporate by the name contained in the Memorandum”. This section has been judicially explained as follows:
(a) The date mentioned (i.e. written) in the certificate of incorporation is the date from which the company’s legal existence commences. Consequently, if an incorrect date were written in the certificate, that date would be regarded as the actual date on which the company was registered. This legal position was explained by the House of Lords, under the English Companies Act whose provisions in this regard are identical to section 16(2) of the Kenya Companies Act, in the case of Jubilee Cotton Mills v Lewis (2)
(b) The company’s registration constitutes it as “a body corporate”. It becomes “a legal person”, or “corpora corporata”, whose name is the name chosen for it by its promoters and written in its Memorandum of Association. The certificate of incorporation may, therefore, be regarded as the company’s birth certificate and the date written therein as the company’s birthday.

THE COMPANY’S CONSTITUTION

The constitution of a registered company consists of two documents, namely, the Memorandum of Association and the Articles of Association. The contents of these documents will now be examined in detail.

THE MEMORANDUM OF ASSOCIATION

Definition of memorandum of association

In relation to companies registered under the Companies Act, a Memorandum of Association was judicially defined by Lord Cairns in Ashbury Railway Carriage Co Ltd v Riche as “the charter” which “defines the limitation of the powers of a company to be established under the Act”.

Contents of memorandum of association

The contents of a Memorandum of Association are prescribed by Section 5 of the Companies Act and comprise the following six clauses:
(a) Name clause
(b) Registered office clause
(c) Objects clause
(d) Limitation of liability clause
(e) Capital clause
(f) Association clause

SHARE CAPITAL

KEY DEFINITIONS

Capital – amount of money which a company raises from issuing shares
Premium – The money received in excess over the par value of shares
Discount – The difference between the nominal value and the issue price; its normally lower than the nominal value
Prospectus – Document issued by a public company which wants to raise capital CA – Companies Act chapter 486
Void – Means the contract cannot be enforced it confers no rights and imposes no obligations
Voidable – Can be enforced at the option of the innocent party

RAISING AND MAINTENANCE OF CAPITAL

MEANING OF CAPITAL

In commercial speech, the word `capital’ is generally used to denote the amount by which the assets of a business exceed its liabilities. However, in legal speech, the word “capital” is used to denote the amount of money which a company raises from a sale of its shares, or what represents that money.

TYPES OF CAPITAL

A company’s capital at any given moment may consist of:

NOMINAL OR AUTHORIZED CAPITAL

This is the capital that is stated in the Memorandum of Association pursuant to Section 5 (4) a) of the Act. It is called “nominal capital” because it is calculated on the basis of the “nominal” or book value of the shares into which it is divided. It is “authorized” in the sense that, once the Memorandum of Association is registered, the company can take immediate steps to raise the capital from the public without applying for a permit or license to collect the money.

ISSUED CAPITAL

The issued capital is that portion of the nominal capital which is constituted by the nominal value of the shares which have been issued by the company. It is also known as the “subscribed capital” or “allotted capital”. It may be less than, or equal to, the
nominal capital but cannot exceed it.

PAID-UP CAPITAL

The paid-up capital is constituted by the aggregate of the amount of money that is paid-up on each share issued by the company. It may be equal to or less than, the issued capital but cannot exceed it.

CALLED-UP CAPITAL

A company’s called-up capital is constituted by the amount due is respect of calls made by the directors on issued shares.

UNCALLED CAPITAL

The uncalled capital is the amount not called up on shares which a company has issued.It is the nominal capital minus the called up and the paid-up capital.

RESERVE CAPITAL

The reserve capital is defined by Section 62 of the Act as the portion of the issued but uncalled capital of a limited company which the company’s members, by special resolution, have resolved that the company shall not call up unless and until it is in
liquidation. It is to be called up only for purposes of the liquidation. As soon as the resolution is passed, the capital is, as it were, “put on reserve”. The directors’ power under the articles to make calls on shares will not be exercisable in respect of that capital, unless the company is being wound up. It is referred to in the marginal note to Section 62 as “the reserve liability” of a limited company.

WAYS I WHICH COMPANY’S CAPITAL CAN BE RAISED

PLACING

A `placing’ occurs if the company, instead of selling its shares directly to the public, arranges with a broker to sell them on its behalf.The shares are said to be “placed” with the broker. A placing may be “a private placing” if the shares are to be offered for sale to selected customers of the broker (usually institutional investors) rather than made available to the general public.

OFFER FOR SALE

An “offer for sale” is an arrangement whereby a company sells some of its shares to a financial institution called “Issuing House”. The issuing house will prepare and issue a prospectus then re-sell the shares to the public.The company normally issues renounce able allotment letters to the issuing house to facilitate the transfer of specific shares to designated purchasers. This obviates the necessity of having to register the name of the issuing house in the company’s register of members when shares are allotted to it and having its name removed from the register shortly afterwards when the public buy the shares.

PROSPECTUS ISSUE (DIRECT OFFER TO THE PUBLIC)

Under a prospectus issue the company sells the shares directly to the public rather than selling them through intermediaries.

PURPOSE OF THE STATUTORY PROVISIONS

A company’s shares are legally regarded as goods. Consequently, the common law rule known as “caveat emptor” applied to their sale. In particular, the company as a seller was not bound to say anything to potential buyers which would enable them to assess the risks involved. Buyers were therefore left without a legal remedy if they bought shares which they would not have bought if the relevant material facts had been disclosed by the company’s agents. In an attempt to remedy this situation the Companies Act incorporated a number of statutory provisions which must be complied with. The provisions are as follows:

THE STATUTORY PROVISIONS

Definition of “Prospectus”

A prospectus is defined by Section 2 of Companies Act as “any prospectus, notice, circular, advertisement or other invitation offering to the public for subscription or purchase any shares or debentures of a company” This particular definition was intended to prevent companies from evading the legal duties pertaining to the issue of a prospectus by issuing a prospectus under such name as “notice”, “circular” or “advertisement”. Whether a particular document is a prospectus will ultimately depend on the function it fulfils rather than the name given to it by its authors. Regarding the word “offering” in the definition it should be remembered that the issue of a prospectus by a company is not an offer as such but is a mere “invitation to treat”. It is the application made in response to the prospectus that will constitute the “offer”

Dating of the prospectus

Section 39 Companies Act provides that a prospectus shall be dated. The date shall, unless the contrary is proved, be taken as the date on which the prospectus was issued to the public.

Contents of the prospectus

The authors of a prospectus are legally free to state therein whatever they deem appropriate to state but the contents must include, where applicable, the eighteen matters specified in Part I of the Third Schedule to the Act and the three reports specified in Part II of the said Schedule. Section 40(3) provides that, except as provided therein, it shall not be lawful for a company 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 statutory requirements. However, a form of application for shares need not be issued with a prospectus if the form was issued either:

i) In connection with a bonafide invitation to a person to enter into an underwriting agreement with respect to the shares or debentures; or
ii) In relation to shares or debentures which were not offered to the public; or
iii) To existing members or debenture holders of the company (irrespective of whether the applicant had the right to renounce in favour of other persons); or
iv) In relation to shares or debentures which are or are to be in all respects uniform with shares or debenture previously issued.

Kasneb Company law revision study notes