Introduction
Kenya’s recently repealed Companies Act was adopted in 1948 during the colonial era. It is a replica of the United Kingdom’s Companies Act that was operational at the time. The Act was criticized for its archaic provisions which were faulted for being unsuitable in the modern business environment. Further, it was argued that the Act was modeled to cater for the needs of the colonial masters with little consideration and attention to our unique domestic business needs. Considering the foregoing, there have been several attempts over the last decades but especially since 2008 to overhaul company law in Kenya in order to facilitate contemporary business practices, and to simplify, rationalize and consolidate the law. In 2008, the Attorney General proposed the Companies Bill (2008). This Bill was eventually amended in 2010. The Companies Bill (2010) was published and tabled before parliament for debate. Unfortunately, the Bill was not passed into law. A similar attempt was made via the Companies Bill, 2012 which similarly was not adopted as law. Thereafter came the Companies Bill 2014 which was withdrawn from debate in parliament on 18th February 2015 for amendment in order to capture the suggested amendments thereto following intense parliament scrutiny and debate. These amendments bore the Companies Bill 2015 which was passed by parliament and forwarded to the president for assenting.
The Companies Act,2015 was assented by the president on 11th September 2015 repealing the Companies Act 1948(Cap 486). This has had great effect to the business sector. This development is significant as Kenya seeks to establish itself as the regional commercial hub of East Africa and the region. The New Companies Act is alive to the current business practices and realities It also introduces legal and commercial concepts that were previously not permitted or governed by the 1948 Companies Act. The New Companies Act takes cognizance of the role that technology currently plays in the society. Fines and penalties have also been updated to reflect prevailing economic conditions.
It is quite detailed as it borrows heavily from the UK Companies Act of 2006. Seeing as the UK is a more advanced financial and legal market, we can only hope that the new Act will spur growth and innovation in commercial transactions in Kenya. It goes without saying that with the excitement is also a fair amount of anxiety in relation to what will be expected of companies in Kenya and how the transition will happen from the old regime to the new one. The new legislation has 1,026 sections and runs into hundreds of pages, assimilating and understanding it will no doubts be a daunting task, we will highlight some of the key changes effected through the New Companies Act, that is directors, allotment of shares, incorporation and much more.
Under the new Company’s Act 2015, only section 2 of the Act has come into operation upon a gazette notice by the cabinet secretary responsible for company matters. In exercising such powers, the Attorney General has opted for a phased approach in operationalizing the laws.
The Summary below highlights the parts that are now operational under the Act: -
PART I (Sections 1-4) deals with preliminary matters. In addition to providing for the commencement of the section’s provisions, the Part specifies the objects of the Act and defines various terms used in it, including “subsidiary”, “holding company”, “undertaking”, “parent undertaking”, “subsidiary undertaking”, and “dormant company”.
PART II (Sections 5-19) outlines the types of companies that can be formed and deals with their formation and registration. Companies can either be limited by shares or by guarantee or have unlimited liability. Companies limited by shares can either be public companies (which are generally large corporations) or private companies (which are generally small proprietary companies including sole companies).
The Part also provides for the formation of companies. A company limited by shares is required to have a memorandum of association and articles of association, which together form the company’s constitution. Such a company is also required to have a statement of capital and initial shareholdings. A company limited by guarantee is required to register a statement of guarantee. A company may also be registered as an unlimited company, in which case the liability of its members on liquidation of the company is unlimited.
On registration of the required documents as provided under the Companies (General) Regulations, 2015, the Registrar of Companies is required to issue the company with certificate of incorporation.
Companies registered under the Companies Act (Cap 486) will continue under the Act. When registered, a company will have perpetual succession irrespective of its membership.
PART III (Sections 20-32) this part makes further provision for a company’s constitution (i.e. the memorandum and articles of association). Among other things it provides for application of model Articles as prescribed in the Regulations already published, procedures to enable amendment of the Articles of Association of a company;
Other provisions specify the requirements on the objects of a company and the effect of a constitution of a company. It should be noted that the memorandum of association for the existing companies shall be treated/construed as provisions of the Articles of Association.
PART IV (Sections 33-47) this part deals with the capacity of a company to do certain acts such as powers to enter into binding contracts and powers of directors binding on the company.
Provision is also made for a company to have a common seal (but a company is not obliged to have one) and provides for its use for the authentication of documents. A further provision is made that will now enable a company to have an official seal for use outside Kenya.
The Companies are also required to compulsorily have a registered office and would notify the Registrar of change of the registered office.
PART V (Sections 49 – 68) this part deals with the names of Companies. The provisions in this part restrict the use of names that suggest a connection with the Government, offensive names. The Companies (General) Regulations, 2015 prescribe under Regulations 8 – 12 which such names indicate connection with public authorities, characters now permitted to be used in Company’s name and the circumstances in which a company name will not be registered. A public company name must end with “public limited company’ or plc.
Other provisions in this part allow a company to change its name by a special resolution or by means provided for in the articles of association where after a new certificate of incorporation would be issued. The provisions also specify the effect of a change of company’s name and disclosure requirements on its documents and publications.
PART VI – (Sections 69 – 91) this part deals with alteration of company status enabling conversion to another kind of company. In particular: -
1. a private company will be able to convert itself into a public company;
2. a public company will be able to be convert itself into a private limited company;
1. an unlimited company will be able to convert itself into a limited company; and
2. a public company will be able to be able to convert itself into a company that is both private and unlimited.
Another provision will require the Registrar of Companies not to process an application for the registration of a conversion of a company into another kind of company unless the application complies with prescribed requirements. A further provision will require the Registrar to issue a certificate of incorporation to the company on registration of the conversion.
PART VII (sections 92-113) deals with the membership of a company. In particular, the Part relates to members of companies and, in particular, prescribes how persons become members of a company. Among other things, the Part will require a company to keep a register of members and to keep the register available for inspection at its registered office.
Other provisions will require certain companies to keep an index of its members; and specify the rights of persons to inspect a company’s register of members and require copies. Further provisions will enable the High Court to rectify company’s register of members and prohibit a company from entering notices of trusts on its register of members. The provisions under this Part also prohibit a subsidiary from being a member of its holding company: and prescribes other provisions relating to subsidiaries of a company. A provision of the Part also allows a private company to have only one member.
PART VIII (Sections 114-l2l) provides for the exercise of rights of the members of a company. In particular, the Part specifies the effect of provisions of articles on the enjoyment or exercise of rights of members. Other provisions enable certain persons to have information rights relating to traded companies (i.e. companies whose shares are traded on an authorized stock exchange) and confer other rights to information about companies and enable the rights of members to be exercised by others in certain circumstances.
PART IX (Sections 122-212) this part deals with Company Directors. It provides for the appointment and removal of directors of a company. In particular, the Part will require a company to have directors. Companies are required to have at least one natural person to hold office as a director. Other provisions prescribe the qualifications required for appointment as a director of a company; require a company to keep a register of its directors; and prescribe the particulars of directors that are to be recorded in the register. The minimum age for one to be a director is now eighteen (18) years.
Another provision requires a company to notify appointments of directors and of their addresses to the Registrar of Companies and also when directors cease to hold office as such or any changes relating to them occur. Another provision provides for directors to be removed from office by resolution of the members. Further provisions prescribe directors’ rights and duties of office. These include-.
1. a director’s right to protest against removal;
2. the duty of a director to act within power;
1. the duty of a director to exercise independent judgment;
2. the duty of a director to exercise reasonable care, skill and diligence;
3. the duty of a director to avoid conflicts of interest; and
A further provision specifies the civil consequences of a breach by a director of these duties. Yet other provisions require a director to declare an interest in a proposed or existing transaction or arrangement and provide that certain transactions involving directors require the approval of the members of the company. These transactions include: -directors’ long-term service contracts; substantial property transactions; loans and quasi-loans to directors and to persons connected with directors; and certain credit transactions. Further provisions deal with payments to directors for loss of office. Such payments will require approval by members of the company.
Further provisions provide for the ratification of acts of directors of a company and confer power to make provision for the employees of a company when it ceases business or its business is transferred. A company will be required to keep minutes of directors’ meetings for at least ten (10) years from the date of the meeting. Those minutes are to be evidence of proceedings at meeting of company until the contrary is proved.
Further provisions on directors are also contained in Part V of the Companies (General) Regulations, 2015
PART X (sections 213-237) specifies the circumstances under which directors of a company can be disqualified from holding office as such. In particular, a court is empowered to disqualify a person(s) being convicted for certain specified offences; for fraud or breach of duty committed while company in liquidation or under administration; or on being conviction of offence involving failure to lodge returns or other Registrar.
Courts are now required to disqualify unfit directors of insolvent companies from acting as company directors. In certain circumstances a person will now able to enter into a disqualification undertaking instead of being made subject to a disqualification order. Persons are also now liable to disqualification after a company has been investigated under Part XXX of the Act.
It is an offence for a person to act as a company director while they are undischarged bankrupts. A person disqualified will now be personally liable for a company’s debts if the person acts while disqualified.
The Part also requires a register of disqualification orders to be kept and provides for the disqualification of persons who are subject to foreign restrictions. Such persons will also be personally liable for a company’s debts if the person acts as a director while disqualified.
PART XI (sections 239-242) deals with derivative actions. In particular, it provides for proceedings by members of a company in respect of a cause of action vested in the company and will enable them to seek relief on behalf of the company.
PART XII (Sections 243-254) deals with Company Secretaries. Every public company will be required to have a company secretary, but a private company will not be required to have a secretary unless it has a paid up capital of Kshs. 5 million and above.
Other provisions in this part prescribe their qualifications, duties and the records to be kept by companies with respect to their secretaries.
PART XIII (Sections 255-321) deals with resolutions and meetings of members of companies. In particular, the part sets out requirements for passing ordinary resolutions and special resolutions. A provision is also made in relation to private companies for written resolutions. Members have a right to require directors to convene general meetings in some circumstances at the expense of the company.
Further, the provisions prescribe the procedure for the conduct of general meetings of companies.
The Part also applies the earlier provisions of the Part to meetings of holders of classes of shares and sets out additional requirement for general meetings of public companies. Members of a public company will have power to require the circulation of resolutions for an annual general meeting at the expense of the company.
PART XIV (Sections 322 – 403) this part deals with shares of a company and share capital of a company limited by shares. In particular, share capital will now no longer be possible to convert into stock. It also provides description of nature of shares and their transferability; allotment of shares; payment of allotment and registration of shares of a company.
Further provisions impose restrictions on public companies that wish to allot shares for non-cash consideration. Companies that issue shares at a premium are now required to establish a share premium account and provide for the application of share premiums.
PART XXIII (Sections 570 -582) deals with debentures issued by a company. In particular, the part makes provision for perpetual debentures, enforcement of contracts to subscribe for debentures; keeping company’s register of debentures and rights of debenture holders to inspect the register.
PART XXXI (sections 829-876) continues the offices of the Registrar of Companies, Deputy and Assistant Registrar of Companies and specifies the functions and powers of those officers under require the Registrar to have an official seal; provide for its use; provide for the recording in the Register of Companies of documents lodged with the Registrar for registration; empower the Registrar to impose requirements with respect to lodgment of documents; provide for fees to be paid to the Registrar for the registration of documents; require the Registrar to give public notice of the issue of certificates of incorporation; confer a right to obtain a certificate of incorporation in specified circumstances; will require the Registrar to allocate a unique identifying number to each company; provide for the recording of registered numbers of branches of foreign companies.
Normally documents will be required to be lodged in the English language, but in certain circumstances documents may be lodged with the Registrar in a language other than English subject to the lodgment of a version of the document translated into English.
Other provisions make it an offence to lodge false or misleading documents, or to make false or misleading statements to the Registrar; provide for the enforcement of a company’s lodgment obligations; provide for electronic communications and the publishing of notices by alternative means; and empower the Registrar to make “Registrar’s Rules”.
Part XXXII (sections 877-892) deals with charges created by a company; charges existing on property acquired by a company, and charges in a series of debentures. In particular, the Part imposes an additional registration requirement for commission, allowance or discount in relation to debentures will now require a certificate of registration to be endorsed on debentures; provides for charges created in, or over property located outside Kenya; requires the Registrar of Companies to keep a register of charges created by or in relation to companies; prescribes a deadline for lodging a charge with the Registrar for registration(30 days from the creation of the charge); will require the holder of a floating charge to lodge with Registrar notice of appointment and cessation of appointment of an administrator of the company to which the charge relates.
PART XXXVIII (Sections 996-1005) contains provisions that specifically relate to offences and legal proceedings involving companies. The Part includes-. a provision that prescribes and defines the liability of officers of companies who are “in default” under the various provisions that create offences under the Act; a provision applying that provision to apply to bodies other than companies; a provision enabling proceedings to be taken against unincorporated bodies; and a provision providing for legal professional privilege involving company communications.
Other provisions confer powers to require a company to produce documents for inspection if it is suspected of being involved in the commission of an offence and to obtain a warrant for the search of premises of such a company. Another provision creates the offence of fraudulent trading;
Other provisions will empower the High Court to prohibit payment or transfer of money, financial products or other property; and to grant injunctions in specified circumstances.
A further provision empowers a court to grant relief in certain specified circumstances (where, for example, a company or director acted innocently in relation to a particular matter).
PART XL (sections 1010-1016) provides for the service of documents on a company and on directors, secretaries and others and for addresses for the service of documents. In particular, the Part provides for the making of regulations relating to: -sending or supplying documents or information by a company; and sending or supplying documents or information to a company.
Members of companies and others who provided with an electronic version of a document by a company will be entitled to be provided with a hard copy version.
Other provisions of the Part provide for the authentication of documents sent or supplied by a company and determine when documents and information are taken to have been sent or supplied by a company.
Further provisions are made in Companies (General) Regulations 2015 regarding this part.
PART XLII (clauses 1023-1021) contains supplementary provisions. The Part empowers the Cabinet Secretary (in this case the Attorney General) to make regulations (already made) for purposes of the Act; provides for the repeal of the existing Companies Act and for the revocation of subsidiary legislation made under it; provides for the continuity of the law relating to companies; and empowers the Cabinet Secretary to make savings and transitional regulations consequent on the Act;
The First Schedule prescribes the rules that are to apply for the purpose of determining when a director is connected with a body corporate for purposes of Part IX of the Act.
The Second Schedule contains matters for determining whether a person is fit to be a director of a company.
The Sixth Schedule contains savings and transitional provisions consequent on the repeal of the Companies Act (Cap. 486).
Meetings and Resolutions
Part 13 (Sections 255 – 321) specifically dealings with resolutions and meetings of members of companies. In particular, the part sets out requirements for passing ordinary resolutions and special resolutions. Section 255(1) permits private companies to pass a resolution as a written resolution instead of passing it at a meeting of the members as is ordinarily the case. Members have a right to require directors to convene general meetings in some circumstances at the expense of the company. Further, the provisions of the part to meetings of holders of classes of shares and sets out additional requirement for general meetings of public companies. Members of a public company will have power to require the circulation of resolutions for an annual general meeting at the expense of the company.
Meetings
The requirement for a private company to hold a general meeting will be limited since the Companies Act 2015 has abolished the requirement for a private company to hold an annual general meeting. The Act also does away with the requirement for private companies to issue notice to meetings. Further, it negates the need of presence at the meetings. There will be lesser need for absentee members to appoint proxies to attend the general meetings and vote in their place because the voting can be undertaken anywhere.
Power to call meetings
The Companies Act 2015 like the Companies Act 1948 provides that a general meeting may be called by the directors on their own motion or where they are compelled to do so by members, subject to prescribed voting thresholds of the company. A new addition is that a company’s auditor will be able to requisition for a meeting in limited circumstances relating to his resignation or removal from office.
Length and form of notice
The length of notice calling for a general meeting for a private company is 21 days and members (subject to prescribed voting thresholds) can consent to a shorter notice under both statutes. In a departure from the Companies Act 1948, it will be possible to give notice of a general meeting-
in hard copy form,
in electronic form,
by means of a website, or
by combination of such means.
Quorum and Chair
In the case of a single member company, the Companies Act 2015 provides that the quorum required will be one member present at the meeting. For all other companies, the quorum will be two members present at the meeting unless the articles specify otherwise. This is unlike the Company’s Act 1948 that requires a quorum of two members for a private company and three members for all other companies, unless the articles specify otherwise. Subject to the provisions of the articles, the Company’s Act 2015, like the Company’s Act 1948 states that members present at the general meeting may elect one of the members to be chairman of the meeting. The rights to demand a poll and appoint proxies will be reserved (subject to certain variations) under the Company’s Act 2015.
Resolutions
Ordinary and Special Resolutions
The Companies Act 2015 only provides for ordinary resolutions and special resolutions. Extraordinary which exist under the Companies Act 1948 will be done away with.
The Companies Act 2015 also expressly states that an ordinary resolution is one that is passed by a simple majority (that is 50% plus one vote) whereas a special resolution is one that is passed by a majority of not less than 75%. The Companies Act 2015 introduces new instances in which a special resolution will be required and these relate primarily to aspects of company law and practice that are not covered by the Companies Act 1948. Some of these new instances in which a special resolution will be required include;
granting authority for the allotment of securities by the directors without or subject to modified restrictions;
approval of certain off-market purchases by a company of its own shares; and
an approval of payment out of capital for the redemption or purchase of its shares.
Written Resolutions
Unlike the Companies Act 1948, the Companies Act 2015 now expressly provides that anything that can be done by the resolution of a company in general meeting can instead be done by a written resolution of its members entitled to attend and vote at the meeting. Where a vote on a written resolution is put to members of the company, each member has one vote in respect to each share held. It should be noted that a resolution will not be passed as a written resolution in relation to the removal of a director or auditor from office before expiration of their term in office.
The Companies Act 2015 introduces detailed provisions relating to the form of the written resolution. Its circulation and receipt by the company. A company will need to ensure that its written resolution comply with those requirements in order to be valid. According to the Companies Act 2015, a proposed written resolution will lapse if it is not passed before the end of the period specified in the company’s articles or if none is specified, 28 days beginning with the circulation date.
Incorporation
Private Company
The New Companies Act 2015 restricts the rights of members to transfer shares in private companies and prohibits invitation of public to subscribe for shares and debentures. It also limits the number of members to 50.
Process of Incorporation
The New Act requires that private companies file the Memorandum of Association(MOA) and the Articles of Association(AOA) with the registrar. Also to be filed are 4 statutory forms containing details of the directors, secretaries registered officers, declaration by an advocate and nominal capital statement.
The process of Incorporation has been made simpler and easier as compared to the 1948 Companies Act.
Documents
Application for registration should contain company’s name, registered office, liability of members (limited by guarantee), nature of company (private or public), name and address of agent if used to make an application. The application may be accompanied by a statement of capital, initial shareholding, MOA and AOA.
Other Provisions
Consent of initial director and secretary of the company will need consent from the officer. Name proposed for the company, characteristics and symbols also to be published as part of regulations. Companies registered office may be outside Kenya as per the Act. There is a requirement for statutory declaration by an advocate engaged in formation of the company has been done away with and replaced by a statement of directors which is to be contained with application for registration. A company is also not obligated to appoint a company secretary if its issued share capital is less than Kshs 5 million. The objects of the company can be restricted. The company does not need more than one director and shareholder.
Companies Formation
Contained in Part 2 of the New Companies Act.
Types of Companies include;
Limited Companies
A limited company is limited either by shares or guarantee. It is limited by shares if liability of its members is limited by the Companies Articles, to any amount unpaid on shares held by its members. If it does not have a share capital, liabilities of its members is limited by the Company’s articles to the amount that members contribute to assets of the company in the event of liquidation. Normally its Certificate of Incorporation states that it is a company limited by guarantee. Under Section 9(1) (b) of the Companies Act 2015, a company limited by guarantee cannot be a private company. Further section 7(1) (a) of the Act such a company cannot have a share capital. This contrasts with the position under the repealed Companies Act which allowed a private company to be limited by guarantee and further to have a share capital. Note however, under the New Companies Act, a company registered before commencement thereof as a company limited by guarantee but not having a share capital is not prohibited.
Unlimited Company
There is no limit on liability of members in an unlimited company. Its Certificate of Incorporation states that liability of its members is unlimited.
Private Company
The articles of a private company restrict member right to transfer shares, limits members no to 50 and prohibits invitation to public to subscribe to its shares. The Certificate of Incorporation excludes a member who is an employee of the company as being a member if was previously a member.
Public Companies
Public companies allow members to transfer shares, does not prohibit the public to subscribe to the company’s shares. A public company is deemed to be so if its Certificate of Incorporation states it’s a public company.
Formation and Registration
Formation and Registration of Companies is discussed in detail in Division 2 of the New Companies Act 2015. The Act requires that one or more persons who wishes to form a company to subscribe their names to a MOA and comply with requirements in sec 13 and 16. Company with unlawful purpose may not be registered.
Registration of a company should be accompanied by a Memorandum stating that the subscribers;
Wish to form a company under this Act
Agree to become members
A company cannot be registered unless its MOA is in the form prescribed by regulation and is authenticated by each subscriber.
Registration of documents
The application of registration must comply with section 2 and accompanied by the MOA and a copy of the proposed AOA. The application should state;
Proposed name
Location of proposed office
Type of liability of members
If the company is a private or public company
And if the application for registration is submitted by an agent then it should state address and name of the agent.
The application for registration should be accompanied;
Statement of capital and initial shareholding as provided in section 14
Statement of guarantee in accordance with section 15
Companies proposed officers
Articles of Association
It can be in the form of a single document, printed, paragraphed, numbered, dated and signed by each subscriber. Subscribers signature should be attested by a witness; name, occupation and address are written and printed below the signature.
Share Capitals
A company limited by guarantee shall ensure that the statement of guarantee contains information to enable identification of subscribers. It shall also ensure that each person who is a member undertakes if a company is liquidated while the person is a member within 12 months after the person ceases to be a member and information containing contribution to assets of company required for debts and liquidation. Costs, charges and expenses of liquidation should also be included along with the adjusting rights of contributors among themselves.
Conversion of Shares to Stock
Under the repealed Companies Act, a company could by ordinary resolution convert any of its paid-up shares into stock and reconvert any stock into paid-up shares of any denomination. However, section 322 of the Companies Act 2015 prohibits conversion of the shares of a company into stock.
Prohibition of Issuance of Share Warrants
Under the repealed Companies Act, companies limited by shares whether public or private could issue share warrants. Share warrants are instruments that give right and option to the holder to acquire shares within a specified time and at a specified price. They entitle the bearer to the shares specified therein. Share warrants are transferable by delivery and thus negotiable instruments. Unfortunately, share warrants are highly susceptible to abuse. Further, the fact of transferability by mere delivery flouts the provision that restricts the transfer of shares in private companies.
Considering the foregoing section 504(1) of the Companies Act 2015 prohibits the issuance of share warrants. A share warrant issued in contravention with the Act shall be void.
Restrictions on non-cash payment for shares
Under section 361 (1) of the Companies Act 2015, a public company is prohibited from accepting an undertaking given by a person to work or perform services for the company as consideration for its shares or any premium on them. Further, a public company is prohibited from allotting shares as fully or partly paid up otherwise than in cash unless the consideration for the allotment has been independently valued.
Company acquisition of its own shares
Under section 56 of the repealed Companies Act, a company was prohibited from purchasing or subscribing for its own shares or those of its holding company. The Companies Act 2015 adopts a different approach. Under section 424 (1) thereof, a limited company is generally prohibited from acquiring its own shares, whether by purchase, subscription or otherwise. However, under sub-section 2 a limited company having a share capital is allowed to purchase its own shares in accordance with the provisions of the Act. Further section 449 allows a private limited company to purchase its own shares out of its capital. Shares that have been purchased or acquired by the company out of distributable profits and thus are part of its assets are known as treasury shares.
Statement of Proposed Officers
Application for registration should ensure it complies with section 16 subsection 2 and 4. It should contain;
Person(s) to be 1st director.
In case of a public company the person to be the 1st secretary or joint secretaries.
Any person to be appointed as authorized signatory of companies.
Company Secretary Amendments
Under Section 178 of the repealed Companies Act, every company was required to appoint a company secretary. In contrast, the Companies Act 2015 only makes it mandatory for the public companies to have a company secretary. Under section 243(1) thereof, a private company is not required to have a company secretary unless it has paid up capital of five million shillings or more. This provision has been met with protests by the Institute of Certified Public Secretaries of Kenya (ICPSK) which argues that exempting some companies from having a secretary would have a significant negative effect in the push to instill good corporate governance practice in our corporate entities. ICPSK recommends that all companies be required to have a Company Secretary. Whilst ACPSK’s arguments carry some legitimacy, the body has failed to consider the cost inefficiencies arising from the requirement which hinders growth of small businesses. The efficiency consideration is paramount to the ICPSK’s quest to sustain a market for its members. Further, small entities are unlikely to face any complex corporate governance challenges that cannot be resolved internally without the involvement of a professional secretary.
Exempt from Audit Requirements
Section 711(1) of the Companies Act 2015 exempts small companies from the audit requirements prescribed thereunder. Under section 624(3), a small company is one whose turnover is not more than Kshs 50 million; and the value of its assets is not more than Kshs. 20 million; and has less than 50 employees. Accordingly, under the provision, small companies will benefit from decreased operational costs incurred in appointing auditors, in the preparation of annual financial statements and in the lodging of the same with the Companies Registry. Note that however that despite this provision, other incidental laws will compel these small companies to prepare annual statements. For example, the Income Tax Act requires all companies to file an annual tax returns which must be accompanied by approved financial accounts. Accordingly, small companies must still incur expenditure in appointing auditors to prepare the necessary annual financial statements.
The exemption provision has been met with disgruntlement by the Institute of Certified Public Accountants of Kenya(ICPAK). ICPAK argues that the exemption will put small businesses at risk because these institutions will not access prudent financial advisory on the fiscal probity of their businesses. Accordingly, ICPAK Recommends that in order to reduce this risk, the turnover threshold for a small company be reduced to Kshs. 5 million as per the Value Added Tax Act instead of the prescribed Kshs. 50 million.
Stated Particulars
Section 16(3) Provides that the particulars of the director, register of directors and secretaries including their residential address be stated.
Section 17 provides that if satisfied, the registrar of companies shall register the company and allocate a unique identifying number.
Section 18 provides that the registrar is to issue a Certificate of Incorporation. Subsection 2 states that the Certificate of Incorporation should include the name and identification No., date of incorporation, indicate if company is limited or unlimited and if it is private or public. Subsection 3 requires that the registrar signs the Certificate of Incorporation.
Under the New Companies Act 2015, it is now possible for a single person to form a private and public company. Formerly it was necessary to have at least 2 members of a private company and 7 members for a public company. A private company is still restricted to 50 members.
Trading Certificates
Section 516 of the Companies Act 2015 introduces the concept of a trading certificate. A public company whose nominal value of the allotted share capital of the company is more than the authorized minimum is prohibited from conducting business or exercising borrowing powers unless the Registrar of Companies has issued it with a trading certificate. Under section 518, the authorized minimum is 6,750,000 /=
Incorporation Under the Old Act Cap 486
This is by registration under the Companies Act. In order to incorporate themselves into a company, those people wishing to trade through the medium of a limited liability company must first prepare and register certain documents. These are as follows;
Memorandum of Association: this is a document in which they express inter alia their desire to be formed into a company with a specific name and objects. The MOA of a company is its primary document which sets up its constitution and objects.
Articles of Association: Whereas the MOA sets out the objectives and constitution, the articles contain the rules and regulations by which its internal affairs are governed dealing with such matters as shares, share capital, company’s meetings and directors among others; Both the Memorandum and Articles of Associations must each be signed by seven persons in case of a public company and two persons in case of a private company. These signatures must be attested by a witness. If the company has a share capital each subscriber to the share must write opposite his name, his no of shares he takes and he must not take less than one share.
Statement of Nominal Capital – this is only required if the company has a share capital. It simply states that the company’s nominal capital shall be xxx amount of shillings. The fees that one pays on registration will be determined by the share capital that the company has stated. The higher the share capital, the more that the company will pay in terms of stamp duty.
Declaration of Compliance: this is statutory declaration made either by he advocates engaged in the formation of the company or by the person named in the articles as the director or the secretary to the effect that all the requirements of the Companies Act have been complied with. Where it is intended to register a public company, section 184(4) of the Companies Act also requires the registration of a list of persons who have agreed to become directors and section 182(1) requires the written consents of the directors.
These are the only documents which must be registered under the Old Act in order to secure the incorporation of the company. In practice however two other documents which would be filed within a short time of incorporation are also handed at the same time. These are:
Notice of the Situation of the Registered Office which under section 108(1) of the statute should be filed within 14 days of incorporation;
Particulars of directors and secretary which under section 201 of the statute are normally required within 14 days of appointment of the directors and secretary.
The documents are then lodged with the registrar of companies and if they are in order than they are registered and the registrar thereupon grants a certificate of incorporation and the company is thereby formed. Section 16(2) of the Act provides that the dates mentioned in a certificate of incorporation, the subscribers, the MOA, become a body corporate by the name mentioned in the Memorandum capable of exercising all the functions of an incorporated company. It should be noted that the registered company is the most important corporation.
The Memorandum of Association(MOA) and Articles of Association(AOA) Under the Old Companies Act cap 486
The Articles of Association may adopt any of the provisions which are set out in schedule 1 Table A of the Companies Act Cap 486. Section 9 of the Companies Act provides that a company limited by guarantee or an unlimited co must register with MOA and AOA describing regulations for the company.
Section 12 requires that the articles must be in the English language, printed, divided into paragraphs, numbered consecutively, dated and signed by each subscriber to the MOA in the presence of at least one attesting witness.
Articles regulate the manner in which the company’s affairs are to be managed, they deal with inter alia the issue of shares. An alteration of share capital, general meetings, voting rights, appointment of directors, powers of directors, payment of dividends, accounts, winding up of a company etc. They also provide a dividing line between the powers of shareholders to those of directors.
Legal Aspects of an A.O.A
Under section 22 of the Companies Act, it is provided that subject to the provisions of the Act, the M.O.A and the A.O.A are registered and they bind the company and the members as if they have been signed and sealed by each member and contained covenants for the part of each member to observe all their provisions. This section has been interpreted by the courts to mean that M.O.A gives rise to a contract between the company and each member. In Hickman v Kent the A.O.A of the company provided that any dispute between any member and the company should be referred to an arbitration. A dispute arose between Hickman and the company and instead of referring the same to arbitration, he filed an action against the company. The company applied for the action to be stayed pending reference to arbitration in accordance with the company’s A.O.A. It was held that the company was entitled to have the action stayed since the articles amount to a contract between the company and the plaintiff and one of the terms was to refer such matters to arbitration.
In Wood v Odesse waterworks Co. Here the plaintiff who was a member of the company petitioned the court to stay the implementation of a resolution not to pay dividends but issue debentures instead. The court held that a member was entitled to the stay of the implementation of the resolution since the articles of association constitutes a contract not merely between shareholders and the company but also between the individual shareholders but every other.
In Rayfield v Hands Here the company’s articles provided that every member who intends to transfer his shares shall inform the directors who will take those shares between them equally at a fair value. The plaintiff called upon the directors to take the shares but they refused. The issue was did the articles give rise to a contract between the plaintiff and the directors. It was held that an article related to the relationship between the plaintiff as a member and the defendants not as directors but as members of the company. Therefore, the defendants were bound to buy the plaintiff’s shares in accordance with the relevant article.
Alteration of Articles
Section 13 of the Companies Act Cap 486 gives a company the power to alter its articles by special resolution, this is a statutory power and the company cannot deprive itself of its exercise. In the case of Andrews v Gas Meter Co. The issue here was whether a company in the issue of preference shares could alter its articles so as to authorize the issue of preference shares by way of increased capital. It was held that as long as the constitution of the company depends on the articles, it is clearly alterable by special resolution under the powers conferred by this Act. Therefore, it was proper for the company to alter those articles and issue preference shares. Any registration or article which purports to deprive the company of this power is therefore invalid on the ground that such an article will be contrary to the statute. The only limitation on a company’s power to alter articles is that the alteration must be made in good faith and for the benefit of the company as a whole.
The Memorandum of Association (M.O.A) and the Articles of Association (A.O.A) Under the Companies Act No. 17 of 2015
The Memorandum of Association(MOA)
Section 12(1) provides that a M.O.A is a memorandum stating that the subscribers wish to form a company under this Act and agree to become members of the company and in the case of a company that is to have a share capital to take at least one share each. Section 12((2) goes ahead to state that a company may not be registered unless its M.O.A is in the form prescribed by the regulations and authenticated by each subscriber. The preparation of the M.O.A is the first step on the formation of a company. It is the main document of a company which defines the company’s objects and lay down the fundamental conditions upon which the company is allowed to be formed. It is the charter of the company and it governs the relationship between the company and the outside world and defines the scope of the company’s activities.
Its purpose is to enable the shareholders, creditors and those who deal with the company to know what exactly is its permitted range of activities. It enables these parties to know the purpose for which their money is going to be used and its nature and extend of risks they are undertaking in making investment in the company. It also enables the parties dealing with the company to know with certainty as to whether the contractual relation to which they intend to enter with the company is within its capacity.
Articles of Association
Articles of Association regulate the manner in which the company’s affairs are to be managed, they deal with inter-alia the issue of shares, the alteration of share capital, general meetings, voting rights, powers of directors, payment of dividends and also provide a dividing line between the powers of shareholders and those directors. The A.O.A is provided for in Part 3 of the Companies Act 2015. Section 20 provides that the regulations may prescribe model articles for companies, different revision of model articles may be prescribed for different descriptions of companies. A company may adopt all or any of the provisions of a prescribed version of model articles. Section 20(4) provides that an amendment to regulations prescribing a version of model articles does not affect a company registered before the amendments took effect.
Amendment of Articles
Section 22 of the Act confers the power of a company to amend its articles by a special resolution. Section 23(1) provides that a member of a company is not bound by an amendment of the articles of the company after the date on which the person becomes a member, if and so far as the amendment requires the person to subscribe for more shares than the number held by the person at the date on which the amendment is made in any way increases the person’s liability as at that date to contribute to the company’s share capital or otherwise to pay money to the company. Section 23(2) further provides that subsection 1 does not apply if the member agrees in writing either before or after the amendment is made, to be bound by the amendment.
Section 24(1) States that if a company amends its articles, the company shall lodge with the registrar for registration, a copy of the articles as amended not less than 14 days after resolution containing the amendment is passed. Section 24(3) provides that if a company fails to comply with the above requirements, the company and each officer of the company who is in default commits an offence and on conviction are each liable to a fine not exceeding 200,000 Kshs. Subsection 4 provides that if after a company or any of its officers is convicted of an offence under subsection 3, the company continues to fail to lodge an amended copy of its articles, the company and each officer of the company who is in default commits a further offence on each day on which the failure continues and on conviction are each liable to a fine not exceeding Ksh 20,000 for each such offense.
Directors under the Company Act 2015 v the repealed Act 1948
section 2 defines a director as including any person occupying the position of a director whatever his title. In the case of BATES v STANDARD LAND CORPORATION directors were defined as the brains of the company.
Number of directors
In section 177 a private company must have at least 1 director. A public company must have at least two directors. The same provision is provided for in the new company act and in addition the new act states in section 129 that a company is required to have one director on the board of company who is a natural person, although corporate directors are still permitted. Companies that do not have natural person as a director have 6 months after commencement date to comply with this requirement. The requirement does not arise where the director is a corporation sole.
Common law duties of directors
Under the former Act, the fiduciary duties of directors were solely prescribed under the common law of England as adopted in Kenya under Section 3(1) of the Judicature Act. However, with increasing corporate governance and awareness, the new act of 2015 has adopted these duties into its statutory provisions under sections 140 to 150. More so, section 140(3) states that the general duties of directors are based on common law rules and principles that apply in relation to directors. The Act therefore prescribes the duties as follows;
To promote the success of the company
To exercise independent judgment
To exercise reasonable care, skill and diligence
To avoid conflict of interest; and
Not to accept benefits from third parties.
These duties are enforceable in the same way as any other fiduciary duty owed to a company by its directors.
Age Limit and appointment of directors
According to the Company Act 1948, section 186 its states that the minimum age for appointment of directors is 21 years and the maximum age is 70 years. Under the New Act, section 131 the age limit is 18 years, it states that persons who have not attained 18 years are not eligible for appointment, with no prescribed age limit.
With regards to the appointment of directors, the new Act section 132 (1) states that at a general meeting of the company a motion for the appointment of two or more persons as directors of the company by a single resolution is moved only if a resolution that it should be so moved has been first agreed to by the meeting without any vote being cast against it. The former Act states, under section 184, that at a general meeting of a company other than a private company, a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be made, unless a resolution that it shall be so made has first been agreed to by the meeting without any vote being given against it.
Electronic lodging of documents
The Companies Act 2015 grants the Registrar of Companies to make regulations that allow documents or documents of a specified class to be lodged with the Registrar for registration by electronic means. These regulations will finally sanction the adoption of an electronic registry where registry business and payments can be efficiently conducted electronically.
Legislations
Companies Act No. 17 of 2015
Companies Act Cap 486 1948
REFERENCES
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