NEW REVISED KASNEB SYLLABUS

COMPANY LAW
STUDY NOTES
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MASOMO MSINGI PUBLISHERS

 COMPANY LAW STUDY NOTES

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COMPANY LAW
NOTES

REVISED SYLLABUS

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 COMPANY LAW STUDY NOTES

PAPER NO. 7 COMPANY LAW

UNIT DESCRIPTION
This paper is intended to equip the candidate with knowledge, skills and attitudes that
will enable him/her to apply and comply with the provisions of Company Law in relevant
circumstances and environments and further to demonstrate knowledge of the law and
regulations governing corporate entities and ensure compliance in practice.

LEARNING OUTCOMES
A candidate who passes this paper should be able to:
• Apply legal principles relating to formation of companies
• Evaluate the rights and obligations of members and shareholders
• Comply with the legal principles governing liquidation of corporates
• Comply with the legal principles governing restructuring of companies
• Comply with the legal principles relating to companies incorporated outside the
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• Comply with the legal requirements relating to the financing of companies.
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CONTENT
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1. Nature and classification of companies

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• Nature and characteristics of a company

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• Types of companies
• Principle of legal personality and veil of incorporation
• Distinction between companies and other forms of business associations sole
proprietorships, partnerships and cooperative societies.

2. Formation of companies
• Promoters and pre-incorporation contracts and deeds.
• Process and drafting documents required to form a company.
• Rules relating to company names
• Memorandum and articles of association
• Certificate of incorporation
• Effects of incorporation
• Execution of a company’s documents
• Alteration of status of companies

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 COMPANY LAW STUDY NOTES

3. Membership of a company
• Acquisition of membership
• Register of members
• Rights and liabilities of members
• Cessation of membership
• Register of a company’s beneficial owners
• Derivative actions.

4. Shares
• Classes of shares
• Variation of class rights
• Share certificates
• Issue and allotment
• Transfer and transmission
• Transfer of shares under central depository system
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• Mortgaging and charging of shares

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5. Share capital
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• Meaning and types of share capital

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• Raising of share capital

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• Prospectus/information memorandum
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• Maintenance of capital
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• Alteration and Consolidation of share capital

• Dividends

6. Debt capital
• Borrowing powers of a company
• Company assets that can secure a company’s borrowings
• Company debentures
• Company charges
• Meetings and resolutions in respect of debt capital
• Registration of charges
• Remedies for debenture holders

7. Company meetings
• Nature and classification of company meetings

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 COMPANY LAW STUDY NOTES

• Types of company meetings held to execute various functions of company

meetings
• Methods of holding company meetings
• Essentials of a valid physical, virtual and hybrid meeting Voting
• Resolutions
• Drafting resolutions
• Protection of minority shareholders

8. Company Directors
• Qualifications, appointment and disqualification
• Powers and duties of directors
• Removal and vacation of office
• Register of directors
• Remuneration of directors
• Loans to directors
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• Compensation for loss of office

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• Disclosure of director’s interest in contracts

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• The rule in Turquand’s case/Indoor Management rule

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• Insider dealing
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9. The Company Secretary

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• Qualification, appointment and removal

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• Powers and duties of the Company Secretary

• Liability of the Company Secretary
• Register of Secretaries

10. Auditors
• Qualification, appointment and removal
• Remuneration of auditors
• Powers and duties
• Rights and liabilities

11. Company accounts

• Books of accounts
• Form and content of accounts
• Group accounts

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 COMPANY LAW STUDY NOTES

• Director’s report

12. Audit of Company Accounts

• Auditor’s report
• Annual returns

13. Company Investigation

• Investigation of company affairs
• Appointment and powers of inspectors
• Inspector’s report

14. Corporate restructuring

• Need for restructuring
• Mergers
• Post - merger reorganisation of a company’s share capital
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• Takeovers and acquisitions

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• Mergers and divisions of public companies

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• Compromises, arrangements, reconstructions and amalgamations

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15. Receivership, Administration, Liquidation and Dissolution of companies

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• Meaning of receivership, administration and dissolution

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• Appointment and vacation of office by the Official Receiver

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• Powers and duties of a receiver

• Termination of receivership
• Appointment of an administrator
• Functions and powers of an administrator
• Process of administration
• Termination of appointment and replacement of administrators
• Company voluntary arrangements
• Meaning of liquidation
• Types of liquidation
• Appointment, powers and duties of liquidators
• Discharge of liquidators
• Distribution of assets and dissolution of companies

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 COMPANY LAW STUDY NOTES

16. Foreign Companies

• Process of registering a company
• Certificate of registration
• Power to hold land
• Registration of charges
• Accounts of foreign companies
• Service of process and notices on foreign companies
• Returns
• Penalties
• Cessation of business
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 COMPANY LAW STUDY NOTES

CONTENT PAGE NUMBER

Topic 1: Nature and classification of companies………………………….……..……..9

Topic 2: Formation of companies…………………………………………….…..……26
Topic 3: Membership of a company………………………………………….…..……64
Topic 4: Shares……………………………………………………….…………..…….86
Topic 5: Share capital………………………………………………………….….…..116
Topic 6: Debt capital…………………………………………………………….……148
Topic 7: Company meetings…………………………………………………….…….170
Topic 8: Company Directors……………………………………………………….....195
Topic 9: The company secretary………………………………………………………217
Topic 10: Auditors………………………………………………………….…………227
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Topic 11: Company accounts………………………..………………………...............242

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Topic 12: Audit of Company accounts………………………..……………………….251

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Topic 13: Company Investigation……………………………………………………...255

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Topic 14: Corporate restructuring………………………………………………...……264

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Topic 15: Receivership, Administration, Liquidation and Dissolution of companies…284

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Topic 16: Foreign Companies………………………….………………….……….…..307

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 COMPANY LAW STUDY NOTES

TOPIC 1

NATURE AND CLASSIFICATION OF COMPANIES

Introduction
A company can be defined as an association of people who contribute resources
into a business and in return acquire shares or ownership of the business and they
share out the profit that is generated by the business.
A company is considered to be a legal person and therefore the persons who have
created it are always considered to be separate from that company.
In Kenya majority of companies are registered governed by the Companies Act 2015.
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CHARACTERISTICS OF A COMPANY
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1. Legal personality: A registered company is considered to be a legal

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person that is separate from the person who formed it. The concept of
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legal personality was explained in the case of reference salomon vs

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salomon co lts 1897.

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In this case salomon had converted his sole trade business into a
company where he was a majority shareholder together with his family
members. He had also given the company a loan that was not secured by
the company’s assets making him a secured creditor. When the company
went into liquidation the other creditors argued that Salomon should not
be paid as a secured creditor before them because according to them he
and the company were the same. The court held that Salomon and the
company were separate and according to the court once a company is
registered it becomes a separate legal person different from its owners.
2. Limited liability: The liability of members of the company is limited up
to the extent of any amount that remains unpaid on the shares that are
taken by the members. Therefore, where the member has fully paid for
his shares he cannot be called upon to contribute to the debts of the
company if the company is unable to pay its debts.

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 COMPANY LAW STUDY NOTES

3. Ownership of the property: A registered company can acquire and own property
under its registered name .Such property does not belong to the members or
shareholders. This was explained in the case of Macaura vs Northern Assurance
Co Ltd 1925. In this case Macaura had converted his timber business into a
company. He took an insurance cover to protect the timber against fire. However,
the policy was registered in his own name. When the timber was destroyed by fire
Macaura made claim for compensation but the insurance company refused arguing
that Macaura had no insurable interest on the timber . When he sued the company
the court held that Macaura could not be compensated because the property he
insured belonged to the company. The court explained that companies’ properties
do not belong to the members
4. Capacity to Contract: A registered company can enter into legally binding
contracts with other parties in order to pursue its objectives.
5. Capacity to sue or be sued: a registered company can sue another party to protect
its interest and can also be sued if it fails to fulfill its obligations.
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6. Perpetual succession: The Company’s life is not affected by the death of its
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members. If a member dies the company continues to exist.

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7. Common Seal: A registered company can acquire a common seal that can be
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used as an official signature of the company.

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8. Borrowing Power: A registered company can borrow finances from lenders to

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finance its operations.

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9. Management: Registered companies are usually managed by trained personnel

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that are able to provide professional services to the company.

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10. Transfer of Shares: Shares of a registered company can be transferred from one
member to another.

Disadvantages of a company

1. It’s expensive: Registration of a company involves costs, including legal fees.

2. Complicated procedures: A lot of procedures are involved in formation and
running the company.
3. Publicity/lack of confidentiality: A company is subject to undue publicity i.e.
such documents must be delivered to the registrar and are open to public scrutiny.
4. High taxation: companies pay corporation tax at 30% for local companies and
37.5% for foreign companies which is relatively high compared to an income tax
paid by individual partners.

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 COMPANY LAW STUDY NOTES

5. Participation in the management: shareholders other than those who are

directors are not involved in the day to day management of the company
6. Doctrine of ultra vires: Any act done beyond articles of association is null and
void i.e. beyond powers.

TYPES OF COMPANIES

holding &
chartered statutory registered foreign
subsidiary
corporations cororpartions companies companies
companies

public private
companies companies
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unlimited limited unlimited limited

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compnies companies companies companies

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limited by limited by
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shares guarantee

1. Chartered corporations
- These are corporations created by a charter that is granted by the president.
- Only private universities are created through charter in Kenya.
- Under university’s act, the president is empowered to grant a charter to any private
university intending to be set up to benefit the country.
- The charter must set out the name, membership and also the powers and functions
of the universities e.g. mount Kenya University.

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 COMPANY LAW STUDY NOTES

2. Statutory corporations
- They are created by an Act of parliament or an order of the president in
accordance with the state corporations Act.
- These are government corporations especially parastatals.
- The Act creating the corporation gives it a name, management structure and also
prescribes the objects i.e. Kenya pipeline, Kasneb, NSSF, NHIF, Central Bank etc.

3. Registered corporations
- Are created in accordance with the provisions of companies Act.
- Certain documents must be delivered to the registrar of companies for registration
i.e. MOA and AOA. Examples include public and private companies.

Public company

This is a company with the following features:

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1. Must have a minimum of 7 members and no. maximum.

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2. Must have at least 2 directors.
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3. Its shares must be freely transferable.

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4. It must have a statutory meeting i.e. first AGM within 3 months of formation for
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companies that were created before 2015.

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5. Must publish annual accounts.

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6. After acquiring certificate of incorporation, it must go ahead and acquire

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certificate of trading to commence business.

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7. It must have a company secretary.

N/B: A public company is required to include at the end of its name the words-public
limited company (PLC) e.g. Safaricom PLC

Private company
A private company is a company with the following features.
1. Members are a minimum of 1 and max of 50 persons excluding employees.
2. It requires at least 1 director.
3. Restricts the right to transfer its shares.
4. It prohibits any invitation to the public to subscribe for its shares i.e. doesn’t issue
a prospectus.
5. Not mandatory to publish its accounts.
6. Required to have a Company secretary if it has a share capital of 5million.

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 COMPANY LAW STUDY NOTES

N/B: A private company must include the word limited or Ltd at the end of its name.

A public and private company may be classified under;

a) Companies Limited by shares

It refers to a company which the liability of members is limited to the amount unpaid on
the shares held by them.

b) Companies Ltd by guarantee

A company Limited by Guarantee if:

1. it does not have a share capital;

2. The liability of its members is limited by the company’s articles to the amount that
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the members undertake, by those articles, to contribute to the assets of the

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company in the event of its liquidation; and

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3. Its certificate of incorporation states that it is a company limited by guarantee.

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Companies Limited by Guarantee in Kenya are mainly registered for the purpose of
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operating non-profit organizations that require a legal personality.

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c) Unlimited companies
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These are companies where member’s liability is unlimited.

Such members may lose their private assets, in case the company is declared insolvent.

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 COMPANY LAW STUDY NOTES

DISTINCTION BETWEEN COMPANIES AND OTHER FORMS OF BUSINESS

ASSOCIATIONS SOLE PROPRIETORSHIPS, PARTNERSHIPS AND
COOPERATIVE SOCIETIES

Difference between Public Company and private company

Public company Private company

Membership Minimum of 7 and no Minimum of 1 and
maximum maximum of 50
Prospectus Can issue a prospectus Cannot issue a prospectus

Director At least 2 directors At least 1 director

Transfer of shares Shares are freely Restricts transfer of shares
transferable to members only
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Commencement of Can only commence Can commence business

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business business after certificate after certificate of
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of trading is issued Incorporation is issued

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Publication of accounts Must publish its account No requirement to

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publish accounts
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Difference between Registered Company and statutory company

Registered company Statutory company

Incorporated under the provisions of the Created by an Act of parliament
Company Act
Governed by directors Owned by the government

Can only engage in transactions stipulated in Can only engage in transactions set by
memorandum and articles of association the statute.

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 COMPANY LAW STUDY NOTES

Difference between Companies and private Partnership

COMPANIES PARTNERSHIP
LEGAL Is a legal person distinct from Is not a legal person in eyes of
PERSONALITY its members law

MEMBERSHIP 1-50 members for private Requires a min of 2-20 persons.

companies and minimum of
7 and no maximum for public
companies.
REGISTRATION Registered under Companies Registered under partnership Act
Act

CAPACITY TO Has capacity to own property Property is jointly owned by

OWN PROPERTY under its own name. partners
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MANAGEMENT Managed by directors. Managed by partners
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MEETINGS A legal requirement to hold It is not a legal requirement.

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AGM.
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PERPETUAL Has perpetual succession. Death, bankruptcy or insanity can

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SUCCESSION lead to dissolution of partnership

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DOCTRINES OF Ultra vires means beyond Not bound by doctrine of ultra

ULTRA VIRES power. A company is bound vires
by this doctrine since any act
beyond AOA is beyond
power.
Must appoint auditors to Is not a legal requirement.
AUDITORS audit books of accounts.

LIABILITY Limited by shares or Members liability is unlimited i.e.

guarantee partners may lose personal assets
in case of insolvency.

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