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PAPER NO.11COMPANY LAWSTUDY TEXTDownload more at www.ebookskenya.co.ke
iiC O M PA N Y L A WCopy r i ghtALL RIGHTS RESERVED.No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording or otherwise without the prior written permission ofthe copyright owner. This publication may not be lent, resold, hired or otherwise disposed of in anyway of tradeS T U D YT E X Twithout the prior written consent of the copyright owner.ISBN NO: 9966-760-20-2 2009 STRATHMORE UNIVERSITY PRESSFirst Published 2009STRATHMORE UNIVERSITY PRESSP.O. Box 59857, 00200,Nairobi, Kenya.Tel: 254 (0) 20 606155Fax: 254 (0) 20 607498Design Concept & Layout - Simplicity Ltd - P.O Box 22586-00400 Nairobi. Email: info@simplicityltd.comDownload more at www.ebookskenya.co.ke
ACKNOWLEDGMENTiiiS T U D YWe gratefully acknowledge permission to quote from the past examination papers of KenyaAccountants and Secretaries National Examination Board (KASNEB).T E X TAcknowledgmentDownload more at www.ebookskenya.co.ke
C O M PA N Y L A WS T U D YT E X TivDownload more at www.ebookskenya.co.ke
CONTENTSvTable of ContentsAcknowledgment. iiiTable of Contents. vPART A . . ixCHAPTER ONE . 1NATURE AND CLASSIFICATION OF COMPANIES . . 3CHAPTER TWO . . 13REGISTRATION OF A COMPANY . 15SHARE CAPITAL . . 61CHAPTER FOUR . 93DEBT CAPITAL . 95CHAPTER FIVE . 109MEMBERSHIP OF A COMPANY . . 111CHAPTER SIX . 125SHARES . 127PART C . 147CHAPTER SEVEN . 149MEETINGS . . 151CHAPTER EIGHT . 170DIRECTORS . 173CHAPTER NINE . 195THE SECRETARY . 197CHAPTER TEN . 215AUDITORS . . 217Download more at www.ebookskenya.co.keS T U D YCHAPTER THREE . 59T E X TPART B . 57
viC O M PA N Y L A WPART D . 229CHAPTER ELEVEN . . 231COMPANY ACCOUNTS, AUDIT AND INSPECTION . . 233CHAPTER TWELVE . 245CORPORATE INSOLVENCY . . 247CHAPTER THIRTEEN . 279ALTERNATIVES TO WINDING UP . 281CHAPTER FOURTEEN . 295COMPANIES INCORPORATED OUTSIDE KENYA . 297PART E . 307CHAPTER FIFTEEN. 309S T U D YT E X TANSWER BANK . 311GLOSSARY . 379INDEX . 385REFERENCES . 389Download more at www.ebookskenya.co.ke
Download more at www.ebookskenya.co.keS T U D YPART AT E X Tvii
C O M PA N Y L A WS T U D YT E X TviiiDownload more at www.ebookskenya.co.ke
1STS TT SUU TDDUYYD YT EE TXX ETTX TCHAPTER ONENATURE ANDCLASSIFICATION OFCOMPANIESDownload more at www.ebookskenya.co.ke
C O M PA N Y L A WS T U D YT E X T2Download more at www.ebookskenya.co.ke
3CHAPTER ONENATURE AND CLASSIFICATION OF COMPANIESOBJECTIVESBy the end of this chapter, the student should be able to: Explain the various forms of business organisationsDistinguish the company from other forms of business organisationsExplain the law relating to other form of business organisations such as cooperativesKEY DEFINITIONS Sole proprietorship: Simplest form of business what is also called one man businessPartnership: A business owned by a minimum of two and a maximum of twentypeopleCooperative: An association in which people pool their resources for their commongoodIncorporated association: An artificial person that has a legal identityLimited liability: This is a company whereby any liability members in times of liquidationof the company is limited to the amounts if any unpaid on member’s sharesEXAM CONTEXTThis is one of the new chapters that the examiner has added to the revised curriculum. It isimportant that the student understands the various forms of business associations and how theydiffer from the company. This will enable the student to be in a position to respond to any questionin the form of differences or even similarities that exist among the various forms of business. Thestudent will also be able to identify what laws govern the other forms of business associationsDownload more at www.ebookskenya.co.keS T U D YThis chapter starts by appreciating that besides the company there are other forms of businessassociations, such as cooperatives, partnerships and sole proprietorships. It then distinguishesthese other forms of business associations from the company, which is our main focus. Thechapter then goes ahead to look at the law governing other forms of business associations withspecial attention to cooperative societies.T E X TINTRODUCTION
4C O M PA N Y L A WINDUSTRY CONTEXTThis is a very practical chapter as it recognises that there are other forms of business organisationsother than the company. These different forms of business associations are a part and parcel ofour daily lives. There are so many companies, sole traders, partnerships and even co-operativesin existence. The cooperative bank is a good example of a cooperative society, while mobileservices provider Safaricom is an example of a limited company.1.1FORMS OF BUSINESS ORGANISATIONS Fast forwardS T U D YT E X T Sole proprietorship also sole trader- one man businessPartnership - business consisting of between two to 20 people owned businessCompany- A legal person has duties and rightsCooperative – “Harambee” (Pooling resources)A business is any activity carried on for the purpose of making a profit. A business mayinclude the following activities: Commercial e.g. running a shop or kioskAgricultural e.g. farmingDirect services e.g. barber, tailorThere are four main forms of business associations in Kenya, though there may be othersin existences, which are beyond the scope of this book. These forms are: Sole proprietorship/sole traderPartnershipCompaniesCooperative1. SOLE TRADERThis business is owned and controlled by one person. The owner is in complete control and thusreceives all profits and suffers all losses. It’s very easy to start as all that one needs is capitaland a trading license obtained from the relevant local authority. This form of business is found inretail trade and service industries such as hair cutting, plumbing, painting, kiosks, and vegetablesamong others.Download more at www.ebookskenya.co.ke
NATURE AND CLASSIFICATION OF COMPANIES5ADVANTAGES1.2.3.Owner receives all profits and is in complete control of the businessIt has no major legal and administrative formalities in starting as all one requires is atrading licenseA sole trader is his own master and thus makes all decisions, he does not have to consultanother person, which tends to delay decision making in other business entities.DISADVANTAGES1.2.3.4.Owner has to provide all the capitalOwner bears and suffers all the lossesOwner has to work for long hours to increase profits and this in the long run affects hishealthThere is no scope in sharing ideas for the improvement of the businessUnder Kenyan law there are two types of Partnerships, namely General and Limited. The Generalpartnership operates quite similarly to a sole trader but in a Limited partnership the liability of thepartners is limited. A partnership deed regulates the relationships among the partners.ADVANTAGES1.2.3.Partners provide capital on terms agreed. They share the net profit or bear the lossesin proportions as set out in the partnership agreementMore capital is available and there is a scope of expanding businessSharing of ideas by the partners leads to growth and improvement of businessDISADVANTAGES1.2.Disagreement among partners sometimes can ruin the businessBusiness may stop temporarily after death of one of the partners.3. COOPERATIVE SOCIETIESThis is an association of people who come together with a common objective. It is a form ofself-help organisation. It’s formed by at least 10 people and there is no maximum membershipis open to any number of people required to start a cooperative society. Members hold shares inthe societyDownload more at www.ebookskenya.co.keS T U D YThis is a business is owned by at least two people or more but not more than 20 people. Section3 (1) of the Partnership Act defines a Partnership as the relationship, which subsists betweenpersons carrying on a business in common with a view to make a profit.T E X T2. PARTNERSHIP
6C O M PA N Y L A WSTRUCTUAL FRAMEWORK OF THE COOPERATIVEMOVEMENT IN KENYAThe 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 isrestricted to individual persons. Examples include1. Harambee Cooperative Savings and Credit Society Limited, formed by theemployees of the Office of the President2. Afya Cooperative Savings and Credit Society Limited, formed by employees of theMinistry of HealthThe secondary this is a cooperative whose membership comprises Primarysocieties.The National Cooperative Movement (NACOS) The NACCOS offer specialisedservices to their affiliates.S T U D YT E X TThe services include insurance and banking currently there are nine NACCOS, namely: Cooperative Bank of KenyaKenya Union of Savings and Credit Cooperative Limited (KUSCCO)National Housing cooperative union Limited (NACHU)Kenya Cooperative Creameries (KCC)Kenya Planters Cooperative Union Ltd. (KPCU)Kenya Farmers Cooperative Association Limited (KFA)Cooperative Data and Information Centre (CODIC)Cooperative Insurance Company Limited (CIC)The Apex organisation: The apex organisation in Kenya is the Kenya NationalFederation of Cooperatives. It is the mouthpiece for Kenyan cooperatives to preserveand propagate (both in the country and abroad) the cooperative principles and valueson which the movement was founded.The movement cuts across all sectors including finance, agriculture, livestock, housing, transport,construction and manufacturing and consumer industry. The concentration is however withinagriculture and finance sectors. In the agriculture sector cooperatives are largely involved inmarketing of Agricultural produce. The financial sub-sector provides savings and credit facilitiesto their members. Cooperatives also provide transportation, bookkeeping, stores for resale,education and training.BENEFITS OF COOPERATIVE ORGANISATIONSBasically cooperatives are vehicles for social economic development. They contribute toeconomic growth and development in many ways. The major benefits that come out of cooperativeorganisations can be summarised as follows:1.2.3.Collection, transportation, processing and marketing agricultural produce.Mobilisation of savings and channelling the income of individual members to specificdevelopment projectsSupport to agricultural production through distribution of farm inputsDownload more at www.ebookskenya.co.ke
NATURE AND CLASSIFICATION OF COMPANIES4.5.6.7.1.27Dissemination of applied technology to membersAssisting in income distribution by participation through enabling large sections of thepopulation to engage in various income generating economic activitiesProvision of credit to members for defraying urgent expenses at affordable rates andcostsCreating employment directly through hiring of various cadres of staff besides providingself-employment for farmers, artisans among others.DISTINCTION BETWEEN COMPANIES AND OTHER FORMS OFBUSINESS ORGANISATIONSFast ForwardThe main distinction between a company and other forms of business organisations is to befound in the two fundamental principles of company law as discussed below:1. Legal/Corporate personalityFast forward:ØØA company is a legal person distinct and separate from the subscribers to thememorandumA company thus has rights and duties similar to those of human beingsThis principle holds that when a company is incorporated it becomes a legal person distinct andseparate from its members and managers. It becomes a body corporate with an independentlegal existence with limited liability, perpetual succession, capacity to contract, own property andsue or be sued. The principle of legal personality was first formulated by the House of Lords inits famous case of Salomon v Salomon and Company limited where Lord Macnaghten wasemphatic that the company is at law a different person from the subscribers to the memorandum.This principle is now contained in section 16(1) of the Companies Act which provides inter aliathat from the date of incorporation, the subscribers to the memorandum together with such otherpersons that may become members of the company are a body corporate by the name containedin the memorandum capable of exercising the functions of an incorporated company with powerto hold and having perpetual succession and a common seal.The decision in Salomon’s case lay to rest certain principles:1.2.3.That even the so called one man companies were legal persons distinct and separatefrom the members and managersThat incorporation was available not only to large companies but to partnerships andsole proprietorships as wellThat in addition to membership, it was possible for a member to subscribe to thecompany’s debenturesDownload more at www.ebookskenya.co.keT E X TLegal/Corporate personalityTheory of limited liabilityS T U D Y
8C O M PA N Y L A W2. Theory of limited liabilityLiability means the extent to which a person may be called upon to contribute to the assets ofthe company in the event of winding up. In company law, the liability of members may be limitedor unlimited. If limited it may be limited by shares or by guarantee as shall be explained later inthis chapter.We then pay attention to the main differences between a company and a partnership. The basicdifferences between registered companies and partnerships are as follows:(a)FormationRegistration is the legal pre-requisite for the formation of a registered company: FortHall Bakery Supply Co v Wangoe (1).T E X T(b) Legal StatusA registered company enjoys the legal status of a body corporate, which is conferred onit by the Companies Act.S T U D YThe Partnership Act does not prescribe registration as a condition precedent topartnership formation. A partnership may therefore be formed informally or, if thepartners deem it prudent, in writing under a Partnership Deed or Articles.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 individualpartners.(c)Number of MembersA registered private company must have at least two members under section 4 ofthe Companies Act and a maximum of 50 members (excluding current and formeremployees of the company who are also its members), under section 30 of the Act. Apublic registered company must have at least seven members under section 4 of theCompanies Act but without a prescribed upper limit. A partnership cannot consist ofmore than 20 partners.(d) Transfer of SharesShares in a registered company are freely transferable unless the company’s articlesincorporate restrictive provisions.A partnership has no shares as such but a partner cannot transfer his interest in the firmto a third party unless all the partners have agreed to the proposed transfer.(e)ManagementA company’s members have no right to participate in the company’s day-to-daymanagement. Such management is vested in the board of directors.Partners have the right to participate in the firm’s day-to-day management since section3 of the Partnership Act requires the business to be carried on “in common”. The rightDownload more at www.ebookskenya.co.ke
NATURE AND CLASSIFICATION OF COMPANIES9of participation in the firm’s management is, however not given to a partner who haslimited his liability for the firm’s debts.(f) AgencyA member is not, per se, an agent of the company (Salomon v Salomon & Co Ltd(3). A partner is an agent of the firm
v STUDY TEXT Table of Contents Acknowledgment.iii .
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