NOTES OF COMPANY LAW-AMENDED TO REFLECT THE CHANGES BROUGHT BY THE COMPANIES ACT, 2015-KENYA

CORPORATE GOVERNANCE

Contents

Understanding the various corporate organs of a company

Rights and obligations of members of a company

Member decision making

Meetings of members

Protection of minority members

A company being a juridical person acts only through its duly authorized organs. A company will have five main persons – professional advisors (auditors and Company Secretaries), Registrar of Companies, courts of law; engaged in its governance and control; and two principal governance organs – members and Board of Directors.

Under the new act, it is important to distinguish the responsibility, powers and duties of the two principal organs in the management of the company. This is because the distinction between directors and shareholders is blurred in the new act, e.g. single member companies and small family companies. Decisions are made without clear dealienation as to whether they are made in capacity as member or in capacity as directors.

Members are owners of the company, whereas directors are agents of the company in law.

Acquisition of membership

Persons subscribed to the share capital of the company or signed the memorandum of guarantee of a company are deemed members under the old act.

Under the new act, any subscriber to the memorandum of a company becomes a member upon registration; and any person whose name is entered into the register of members of the company becomes a member. It is now mandatory for every company to maintain a register of members. The particulars in the register include names, address, types of shares held, any special interest against the shares, etc. new companies must prepare a register of members soon after registration, and must file a certificate that the register has been filed within 14 days. It is an offence for a company to fail to keep a register and the directors responsible will be liable.

For companies with more than 50 members, they must keep an index of the register to ease reference. Any changes to the register must be notified to the registrar within 14 days. The law thus states that the register is conclusive proof of membership to the company unless evidence can be led to prove that the entry was improper.

READ: modification of the companies’ register.

The register must be available for inspection by members upon reasonable notice. For public companies, the register must be open for inspection without charge during working hours to members and at reasonable charge by any other person who shows proper reason for inspection of the register. For private companies, the register is availed to members in the manner provided for in the articles.

Sec 104 – trust or arrangement of trustee ownership cannot be entered into the register. The person named in the register owns the shares. This is to prevent trust shareholding for illegal purposes, as well as avoiding disputes as to share ownership.

Members’ rights

1.    Right to receive a proposed written resolution

2.    Right to require circulation of a written resolution

3.    Right to require directors to call a General Meeting

4.    Right to receive notices of general meetings

5.    Right to require circulation of a statement

6.    Right to appoint proxy to act at a meeting

7.    Right to receive a copy of the annual financial statements and reports

8.    For public companies, the right to require circulation of a resolution for the AGM of the company.

9.    Right to receive a copy of all communications that the company sends to its members generally, or to any class of its members if the member is of that class.

10. The right to receive a hard copy version of a document or information provided in another form.

(7, 8, 9 and 10 are INFORMATION RIGHTS. The Act provides express protection of Shareholder rights, where previously the same were defined in Common law.With disclosure requirements under the act, members would exercise enhanced oversight over management and control of the companies.

Member decision- making

Two ways – written resolutions which are circulated, and general meetings.

The act provides only 2 types of resolutions- ordinary and special resolutions.

Ordinary are those requiring a simple majority to pass. Special resolutions require a supermajority to pass. The act prescribes 75%.

The act refers to total voting rights in determining majority, and not shareholding. Total voting rights depend on diverse criteria, e.g. what the articles provide.

Written resolutions

Companies can make a resolution if a resolution is circulated to members and they signify their acceptance or rejection in the manner provided. The act prescribes strict and mandatory procedural requirements for resolutions to pass:

-      At least a 21-day notice or any such higher period as prescribed in the articles, unless the prescribed majority of members agree to waive the notice period (90% of total voting rights in private companies)

-      Exact proposed resolution must be circulated to members, and no amendment are permitted unless they are minor and insubstantial, eg. Where it was proposed to hire 4 managers and the members approved with the condition that 6 managers be hired, it was declared that the resolution was not proper

-      The notice and resolution must be circulated near simultaneously to all members entitled to receive the notice. This obligation rests on directors

-      The resolution must indicate the manner in which the decision is to be conveyed, e.g. by return mail, by signing, by email, etc.

-      The resolution must be open for adoption within a period of 28 days. This allows persons to consider and vote on the resolution, as well as limiting the time period for conveying decisions on resolutions.

Written resolutions are deemed approved on the day the requisite majority is achieved, even if other members have not seen it nor conveyed their decision on it.

Upon receipt of a proposed resolution or a notice, any member has a right to require that the directors circulate a statement in support or opposition of the resolution within 14 days of receipt of the notice. The member can require the directors to circulate another resolution within 14 days. The member can proceed to circulate his input should the directors refuse and is entitled to recover the costs of circulation from directors. The directors are however not required in law, and they have discretion not to circulate a resolution that is vexatious, frivolous or in contravention to the constitution.

Written resolutions are only available for private companies. Public companies must take decisions at general meetings.

Private companies are barred from deciding these 2 matters by written resolution, and decisions must be made in general meetings:

-      Removal of a director whose term has not expired

-      Replacement and appointment of auditors.

Decision by general meeting

The act provides for an AGM, though it does not define types of meetings.

Sec 275 provides for holding general meetings. As a general rule, the directors have responsibility of convening general meetings under Sec 276 at any time and place subject to the articles and the mandatory requirements of the Act as to notice and circulation of resolutions.

Where the directors have failed to convene general meetings, the members have authority to require the directors to convene a meeting under Sec 277. A court can also require directors to convene a general meeting under Sec 280.

As with written resolutions, the 21-day notice period must be observed. Members may agree to a shorter period subject to the 91% waiver threshold.

Persons entitled to attend general meetings.

-      Any member or their proxies

-      Directors

-      Professional advisors – auditors and company secretaries. (Auditors are required to attend AGM, but not any other meeting.)

-      Registrar of Companies

-      Any person authorized by the court to attend

Quorum of meetings

Set by articles. For single member companies, the quorum is 1.

The quorum must be present at the beginning and throughout the meeting for there to be valid resolutions.

Under the previous act, quorum must also include at least one member and one director. Where shareholders remove all directors froma meeting, the meeting lacks quorum. There is no requirement under the current Act that the chairman be a director. A chairman can be a non-director, and still preside over the meeting.

Decision making at general meetings

Two ways, subject to provisions in articles

-      Show of hands

-      Poll

For special resolutions, it is doubtful whether show of hands would be sufficient.

Any member dissatisfied with a show of hands is entitled to demand that the voting be by poll. Poll is determined by the voting rights of the members present.

READ: can a member who was not present at inception of the meeting be allowed to vote?

Since the Act permits a member can attend meetings through electronic means, then inferentially they can also vote through the same means. However, this is subject to the articles. Further, the appointment of proxies is heavily regulated, and notice is often required before changing proxies.

Adjournment of meetings

Permitted for a number of reasons

-      Long agenda

-      Disruptions

Adjourned meetings do not have to meet the same notice period as the meeting called initially.

Presiding at meetings

Chairman of the Board of Directors preside over meetings, generally. In absence, the members can appoint a presiding officer. Appointment of a chairman of the meeting must be presided over by a director.

A meeting excluding all directors is not properly constituted. Members cannot purport to appoint one of their own to act.

Special resolutions circulated before

Case law guides that members should not make substantive changes to the circulated resolutions during the meetings. They can make small corrections. This is because members will have directed their proxies on the voting instructions in meetings.

Ordinary resolutions circulated earlier may however be amended during the meeting, and members may vote on the amended resolutions.

Protection of minority members

The previous act provided mininmum protection to minority members. The new act extends protection, in the following manner:

-      Rights due to members are enjoyed by all members, equally. (Minorities are given more oversight in management and control of the company, which is augmented by disclosure rights.They have more power to introduce statements for discussion and air their views in resolutions by the right to require directors to circulate their statements. If directors fail to do so, they may recover the cost of self-circulation)

-      Greater disclosure requirements

-      Increase of number of matters requiring a supermajority- eg appointment of directors, and auditors. Majority cannot influence important

-      All members are entitled to require circulation of a statement and propsed resolution. Minority have a chance to have their say.

-      Minorities are granted power to require directors to convene meetings, threshold at 10% only which is easily met

-      Increased protection of minority rights during takeover – opting in and out rights Sec 606, buying out minority right in takeover sec 615, and disclosure requirements

READ:

Directors – Part 9, 10, 12 Companies Act

DIRECTORS

Objectives – understanding the role of directors in corporate governance in a company, appointment and qualification of directors, director duties, remedies for breach of director duties (derivative actions), global principles of corporate governance.

Understanding the role of the board of directors

Traditionally, there is a contestation whether the Board of Directors is subordinate to the General Meeting in management and control. The traditional view has been that the general meeting is the supreme organ of the company, and the board was subject to its control as an agent.

Case: Eye of Wheat Railway Company v Touden Co.

Sanford Limited v Shaw (1935)

Scott v Scott

Under modern company law, the board of directors is the most important decision making organ in the company. The company being a separate legal person from its members should not have its rights and interest mixed up with those of its members. The company can only act through its recognized agents, which is the board of directors.

Therefore, the division of powers and responsibilities in a company first depends on what its Constitution (articles) provides and the provisions of the Act. The Act reserves certain matters to the directors, and others to the members. (Eg. Members have powers to appoint and replace directors. They also have power to approve certain contracts and agreements, as well as the appointment and replacement of auditors. Members also have a say in alteration in share capital. Beyond these, all other decisions in the company belong to the directors.)

The Court of Appeal held that the division of powers in a company between the directors and the general meeting depends entirely on its articles.

The import is that the members must be careful, when holding general meetings, which decisions is reserved for which organ, e.g. directors reserve the authority to contract and the authority to borrow. Members cannot then veto decisions taken by the directors in such subjects. (Members have recourse against the directors by amending the articles to provide for prior approvals in certain kinds of contracts. The Members can also replace the directors and appoint others in their place. In cases where injury has been caused by improper conduct by directors, members can maintain a derivative action against the directors. Where the director has been unlawfully terminated, the Act makes extensive provision to remedy this breach by the members.)

Appointment and qualification of directors

Every company must have at least one director (private) and two (public) – Sec 128. At least one director of the company must be a natural person.

A person must be at least eighteen years old to be appointed director – Sec 131, with no age cap.( The 2015 Act removed the limit of 70 years)

Every company must keep a register of its directors – Sec 134 which register complies with Sec 135 and Sec 136. The register contains details for directors – names, address, service address and personal details including passport numbers. These details are kept confidential by the Registrar.

Mode of appointment

As a general rule, the Constitution of the company provides for the mode of appointment as to number, how and when the appointment takes effect, removal, etc.In default of such provision, the Act provides that directors shall be appointed by ordinary resolution.

Under the Act, there are procedures for disqualifying a person from being a director for periods ranging from 5-15 years. A person is eligible to be appointed director if he is not subject to an order of disqualification under the Act. The Registrar on own motion or on application make a disqualification order in respect of a person found to have committed offences under the act.

Qualifications – should not be undischarged bankrupt, should not be insane, must be an adult, etc.

Removal of a director

The directors serve at the pleasure of the members. The members can remove a director from office any time in the manner provided in the Constitution of the company, or in default of that, by simple majority.

The current act recognizes a number of cases where directors have been removed from office for improper reason. It now provides that thee director can be removed from office subject to his right to seek compensation for unlawful loss of office, and to be reimbursed all expenses incurred on behalf of the company and any outstanding payments due. (The Act prescribes express remedy for wrongful termination of the director. This is because the position of the director is not of merely an employee, and the Employment and Labour Relations Court does not provide proper recourse under the Employment Act.)

Duties of directors

The duties are owed by the directors to the company and not to individual shareholders or other persons. The company is entitled to bring an action for breach.

The duties are based on common law rules and equitable principles, which the act has codified. All case law on director duties based on common law rules are valid, and which the act admits that it does not vacate but builds on them.

1.    Sec 142 – duty to act within powers. A director must act in line with the company Constitution. The director must also only exercise powers for the purpose for which they are conferred.

2.    Sec 143 – duty to promote the success of the company. The test is subjective, but the director must always act in good faith. The duty requires directors to carry out business sustainably. The director must consider stakeholder interest. The decisions must have environmental and community awareness. The director must be fair to different classes of members, between directors and members, and among the directors.

3.    Sec 144 – duty to exercise independent judgment. Individual directors are liable for decisions taken. This has 3 limbs – firstly, a director should make individual decisions on a matter before the board. Secondly, the director also has a duty to seek independent professional advice where the matter coming up before the board is not within his professional competency. Thirdly, the director must not exert unlawful influence on another director on a matter, or as a chairman, prevent other directors from making independent choice.

4.    Sec 145 - Duty to exercise reasonable care, skill and diligence. A director must take his office seriously. The standard of care depends on the type and nature of the business of the company, division of powers between the directors and other officers of the company, general usage of the business of the company.

City Equitable Fire Insurance Co. Ltd. Case.

There exists the objective and subjective tests. Objectively, the duty is to the standard that a reasonable person in his position would exercise. (Eg duty to attend meetings, duty to peruse and acquaint himself with financial statements, maintain confidentiality in company affairs.)The Subjective test would be used to determine the applicable standard based on the expertise, knowledge or experience of the director in question.

5.    Sec 146 – duty to avoid conflict of interest. The Act does not prohibit directors from dealing with the company. It has provided extensively from Sec 122 on connected persons. The act seeks to prevent directors taking advantage of the opportunity, property and information available to directors by virtue of their position for personal gain to the detriment of the company.

Directors have certain obligations in conflict of interest cases:

-      Duty of disclosure where there exists potential conflict of interest

-      Duty to exclude themselves from the decision

-      Approval of members on the contract must be obtained for the company to proceed

6.    Sec 147 - Duty not to accept benefits from third parties where the benefit can reasonably be regarded as likely to create a conflict of interest.

Sec 148 provides that the consequences of breach or threatened breach of director duties are the same as those which would arise under common law and equitable principles.

Derivative claims

These are claims brought by a member on behalf of the company- Sec 238. It may be brought only in respect of a cross over action arising from a proposed act or omission involving negligence, default, breach of duty, breach of trust by a director of the company.

Derivative claims can only be brought by a member when the directors have failed to act and there is risk of actual loss befalling the company. They cannot be brought if the loss is suffered by another person (such as individual members) other than the company. The claim may be instituted by any member, but permission must be sought from court to continue the derivative claim.

Any matter or cause already in court by the company can also be converted into a derivative claim on application by a member.

Derivative claims may not be approved by the court if they are frivolous, vexatious, brought for improper purposes or otherwise without merit.

Derivative claims are brought by Notice of Motion under the High Court (Companies) Rules.

CORPORATE GOVERNANCE

Refers to the systems and processes for effective control and management of companies or firms. (A company must be effectively managed and controlled to achieve its purposes. Corporate governance is based on laws, regulations and guidelines. However, these fall short of the standard, therefore ethical practices also apply to management and control of companies.)

Fundamental principles of good corporate governance

1.    Transparency/openness- the company must be controlled and managed in a transparent manner. There should be no under-the-table dealings.

2.    Integrity – the powers of management and control of companies should be exercised with integrity.

3.    Accountability – all the organs of management and control of the company must be accountable. The directors must be accountable to members, and members accountable to other stakeholders in the company.

Drivers of good corporate governance

1.    Enabling environment from the larger sociopolitical culture in the country. A country where corruption and impunity thrives has poor corporate governance. A strong culture of respecting the rule of law promotes proper corporate governance.

2.    Laws, regulations, guidelines – where specific laws prescribe ethical behavior, people may implement good practices and comply.

3.    Awareness on the guidelines and principles of good corporate governance.

4.    Enforcement mechanism – due to a weak enforcement regime, corporate governance standards are not taken seriously.

5.    Value system in a country

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Importance of corporate governance

1.    Good corporate governance ensures sustainability of the company by creating value and increasing long term profitability. Poor corporate governance may create profits in the short term, but which are not sustainable in the long term. An enduring business requires good corporate governance structures.

2.    Good corporate governance enhances company profitability.

3.    Compliance with good corporate governance avoids the risk of administrative and regulatory sanctions including fines or litigations.

4.    Good corporate governance enhances the overall competitiveness of an economy and ensures its growth.

5.    Good corporate governance is critical for firms to attract capital- whether equity or debt at competitive rates.

Global standards in corporate governance

In UK, Lord Turnbull was appointed the head of a task force which prepared the Turnbull report on Corporate Governance, which forms basis of the UK combined Code of Corporate Governance.

The King Report of South Africa was prepared in the 90s and it contains principles of corporate governance for firms.

The Commonwealth Association on Good Corporate Governance has developed guidelines for good corporate governance.

Globally, good corporate governance is emphasized as poor corporate governance has been identified as the single most-notorious cause of failure of corporations. Countries around the world have taken great interest in developing good corporate governance. There is also the interconnected financial and mercantile global system, which emphasizes the need for global cooperation in developing appropriate standards.

Organization of Economic Corporation (OECD) principles of corporate governance

Key principles:

1.    Rights and equitable treatment of all shareholders

2.    The role of stakeholders

3.    Effective disclosure and transparency

4.    The responsibilities of a board – the board must be effective

5.    Protection of minority shareholders.

The decision making role of shareholders must be recognized. The shareholders must be treated equitably (fair dealing). This is why our Companies Act now provides that information and reports (documents) of the company must be circulated to all the members. It also requires that shareholders be given opportunity to participate in its activities.

The role of stakeholders –the company must recognize its major stakeholders. It must provide mechanism for engaging with those stakeholders. It must facilitate means of receiving formal submissions and feedback from stakeholders, and a means of providing a feedback on those views.

Proper disclosure and transparency promotes accountability in management and control. This disclosure does not extend to confidential business secrets. The company should disclose the information necessary to enable stakeholders and members effectively carry out their duties.

Responsibility of the board – there must be effective board practices as the board is a single most important organ in corporate governance.

Protection of minorities – minority shareholders must have mechanisms for participating in decision making process.

The OECD global guidelines are permissive and not binding. They operate through voluntary compliance as good practice and not coercion. However, a number of the principles have been statutorily grounded in the Companies Act making them mandatory. Publicly listed companies and banks are required to comply with guidelines published by CMA and CBK respectively.

KEY: in commercial practice, the best negotiation is where everybody wins; where both parties get the best deal possible. Do not take an adversarial approach with your counterparts.

SHARE CAPITAL

Understand the nature and classification of shares; transfer of shares, allotment and transmission; share capital reorganization and arrangements; financial assistance.

Nature and classification of shares

1.    There is no distinction between shares and stock in the Act. The Act prohibits conversion of shares into stock.

2.    Shares are personal property and are not in the nature of real estates.

The Companies Act allows companies to have different classes of shares in the manner provided for in the articles. Traditionally, there have been ordinary and preference shares. Ordinary shares have voting rights and take full part in the decision making of the company, and share in the profits by way of dividends if declared. Preference shares unless otherwise specified do not have ordinary voting rights, but they are entitled to a high ranking priority to share in the profits of the company.

The classification of shares is solely the prerogative of members in the articles or their resolutions. The different classes of shares are informed by different investment objectives ergo the risk appetites by the capital providers of the company.

Preference shares are a crossbeam between traditional debt and equity.

Allotment, transfers and transmissions

Under the previous Act, shares were at the disposal of directors who were at liberty to allot them in such manner as prescribed in the articles and the Act.

The 2015 Act provides that allotment is done by directors, but such allotment must:

i)             Be in accordance with the articles

ii)            Be approved by members under sec 239 of the Act.

The authorizing resolution must conform to certain conditions under the Act. The resolution can only be valid for a maximum period of five years, unless extended by subsequent resolution of members.

Allotments must be registered within 2 months in the company’s register of members Sec 332. Further, the company must make a return to the registrar of the allotment within one month.

iii)           All allotments where so required must conform to the preemption rights of members. The act requires that the preemption rights of shareholders must be respected before allotment of equity securities and treasury shares. The offer period must not be less than 21 days for them to take up the shares or waive preemption rights. The offer must be pro rata the existing shareholding.

Allotment by public companies

Sec 354 – public companies shall only allot shares for public subscription if the offer has been subscribed for in full or the offer has specified otherwise.

Where an allotment is not possible due to undersubscription, the company is required to refund without interest any money paid by any person for subscription of shares within 40 days at the end of the offer.

Before any allotment is done by a public company, it must ensure that the shares have been independently valued by a qualified valuer within the last six months of the offer. Further, it must provide a copy of the valuation report to any person who wishes to subscribe to the shares. Where allotment is part of the transfer of the company itself or cancellation of shares, an independent valuation report is not required.

Commissions, discounts and allowances

There is a general prohibition for a company paying commissions, discounts and allowances for the subscription of its shares to any persons, except in the following circumstances:

a)   Where the same is permitted in the articles; and

b)   Where the discount or allowance does not exceed 10% of the price or the amount authorized in the articles.

A public company cannot however cannot allot its shares at a discount.

Payment for shares

The 2015 Act permits payment by:

-      Cash

-      Cheque

-      Future promise

-      Undertaking to pay at a future date

-      Release of company from an undertaking

-      Any other payment means giving rise to future entitlement.

SHARE PREMIUMS

A company is required by law to establish a share premium account if it issues shares at a premium – Sec 386.

In addition, a company must transfer the premium from any sale of shares to that account. Having done so, the company may use the account to pay for commissions and expenses or costs of the issue of those shares; and pay up new shares to be allotted to members as bonus shares.

The only exception is where there is a reorganisation among group companies – eg if a holding company is giving shares to one subsidiary, the holding company needs not maintain a share premium account.

SHARE CAPITAL REORGANISATION

Companies need share capital to raise funds to finance the business activities of the company. The activities are funded by equity (through share capital) and debt. The company may need to reorganize its share capital for strategic reasons.

Means of reorganisation

1.    Increasing share capital, mainly by allotment

2.    Reducing its capital

3.    Subdivision of shares

4.    Consolidation and division of share capital among shareholders

Conditions for reorganisation

1.    Reorganisation must be authorized by an ordinary resolution of members- Sec 405

2.    Lodging with the Registrar a notice of reorganisation at least one month prior thereto

When reorganizing by reducing its capital, the reorganisation must be authorized by a special resolution, it must lodge the notice as before, and the reduction in capital must be confirmed by filing an application in the High Court.

The company has the option of buying back the balance of the shares following reduction.

In the case of public companies, if the net assets of a public company fall to half or less of its called up share capital, the directors are required to, as soon as possible, convene a general meeting of the company to deliberate steps to take in that situation. This ensures the company does not continue operating while its net assets and called up share capital do not add up (suggests insolvency).

Company acquisition of own shares

Sec 424 – a company can acquire its own shares in two cases, as provided in articles:

-      Capital reduction duly made (above)

-      Forfeiture of shares

-      Accepting surrender of shares by members

This mainly occurs when a public company to a private company.

READ: Conversion of Rea Vipingo from public to private company.

FINANCIAL ASSISTANCE

Sec 440 defines financial assistance extensively. This is providing funds for a person acquiring shares of a company by that company. Sec 56 of the previous act prohibited this practice.

The new act permits financial assistance under certain conditions:

a)   Overall strategy/larger purpose exceptions – if a company provides financial assistance where the principal purpose of the assistance is not for the acquisition solely, but is part and incidental to a larger purpose.

b)   Exempt transactions (those not considered financial assistance) – include dividends or distributions in the course of liquidation, allotment of bonus shares, in cases of reduction of capital, redemption of shares (e.g. Where one has redeemable preference shares), anything sanctioned by the court, anything done under liquidation, and any matter agreed under voluntary arrangement.

c)   Companies who normally lend money in the course of its business

d)   Employee share purchase schemes

e)   Private companies where the articles do not expressly prohibit financial assistance.

Accounts

Company directors are required by law to prepare 4 types of reports and accounts:

-      Annual Financial statements

-      Directors reports

-      For publicly listed companies, directors remuneration reports

-      Audited accounts

The reports are mandatory and failure to prepare them is an offense under the Act.

Financial statements

Comprises:

-      Balance sheet

-      Profit and loss account/statement of profit and loss

-      Trading account – for companies that trade

-      Net asset statements

The statutory obligation is that the financial statements must present a true and accurate view of the status of the company. The financial statements are prepared by directors or authorized officers.

They must be prepared within the prescribed time, provided in the act.

The statements must be prepared in accordance with prescribed accounting standards – prescribed by the CS in the Regulations.

The statements must report on all material facts required to be reported on. They must not be incomplete, e.g. the balance sheet must be accompanied by notes explaining any extraordinary entries.

The accounts must be published. Publicly listed companies must publish abridged version of statements on their website and in newpapers with wide circulation. Private companies only publish on website.

Financial statements must be circulated to shareholders, debenture holders and other persons entitled to receive communication from the company within prescribed time.

Copies of the statements must be filed with the registrar within prescribed time. The same must be available at the registered office of the company for inspection by shareholders, debenture holders and other persons entitled to look at them.

Directors’ report

Directors have obligation to prepare within prescribed time a report showing a fair and accurate view of the matters that are reported on. Such matters include:

-      Whether, in their opinion, the business will be a going concern (solvency statement)

-      Fair and accurate view on the status of shareholding in the company – what are the classes of shares, who holds them, what are voting rights?

Directors’ remuneration report

The report details the remuneration, allowances, benefits and any other payments made to the directors within the reporting period. This enhances transparency in compensation schemes to directors and ensures the scheme is justifiable on account of the performance of the company within the reporting period.

Directors have a duty to conceal any payment. The Act is specific on what amounts to a ‘remuneration.’

Audited accounts

These are financial statements that have been audited by independent auditors appointed by members at a general meeting. The audited accounts must:

-      Be circulated to all members and debenture holders

-      Must be laid before the members at the Annual General Meeting.

Powers of auditors

Derived from provisions of Act. The auditors are not officers of the company, but are deemed independent advisors reporting on the financial statements of the company. The primary responsibility with preparing the financial statements is with the directors.

Powers include: asking for any information, inspect any document, and obtain any record that is necessary for them to make an opinion as to whether the accounts are properly prepared.

Auditors are appointed by members, and their tenure lasts for the financial reporting period, i.e. one year. Their powers are statutorily secured for that year.

Auditors cannot be replaced by members unless for limited reasons provided under the Act, e.g. gross misconduct or inability to conduct audit within required time. Where members have tried to replace auditors midstream, courts have held they cannot be replaced.

Reporting by auditors is fulfilling a statutory duty to give a professional opinion on the accounts of the company, and not merely an official responsibility. Members cannot therefore instruct auditors on how to conduct their audit, they are answerable to the statutory powers. Auditors are beyond mere agents of the company.

Account reference date

Every company is required to have an account reference date. For each company, the prescribed time is in relation to this reference date.

The Act provides that the members of the company may, in their articles or by resolution fix their account reference date (when the financial year starts and ends). Where no such date is fixed, the date will be the last day of the anniversary month of the date of incorporation of the company.

Group companies – all subsidiaries and the holding company must have the same reference date. This is because they are required to prepare group accounts, which would be a challenge where the reference dates are different.

TAKEOVERS

Previously, the companies act did not provide a regulatory regime for takeovers. It was a matter of private contract between shareholders and third parties wishing to acquire the company.

Currently, the 2015 Act has a takeover regulatory mechanism.

Traditionally, takeover regulation seeks to solve 3 issues;

-      Usual difference in interest between shareholders and directors/management of the company.

-      Ensure equality of treatment of shareholders.

-      Quest to minimize interruption of business of the company.

There are two main regimes for takeover regulation globally:

a)   UK model – Non-Interference Model. The regulations require the board of the target company to cooperate with an offeror. The offerror should not be unnecessarily impeded.

b)   American Model – Poison Pill model. The Board of the target company can take active measures to resist a takeover, where in their opinion, that offer is not advantageous to the company.

Terminologies

Offeror – person proposing to acquire shares or control of the company

Takeover – (under 2015 ACT) a proposal to acquire all the share capital or rights attached thereto in a company.

Target company – a company whose shares are target to be acquired.

READ

Controlling stake

Associate/Associated firm – subsidiaries in a holding company, spouse or children…

The takeover regulations under the Act has certain principles to identify the three problems identified:

a)   Disclosure of information – ensures that the merger is facilitated and not impeded. Ensures no information is concealed that will impact on the success of the takeover.

b)   Equality in treatment of all shareholders.

c)   The Act requires takeovers to be carried out within a strict and limited timeline to minimize disruption of business. The bid fails where the timelines are made. If it fails, there is provided a cool-off period before a subsequent bid can be made.

READ: duty of directors of Target Company during takeovers.

-      Duty to circulate offer to all shareholders

-      Duty to prepare and circulate to members their own report on the offer

-      Valuation and assessment of the offer, which

-      Duty to convene a meeting of members to consider the offer

-      Provide info to the offeror as required under the Act

-      Duty not to take any action so as to defeat the offer

READ: duties of the offeror during takeover

-      Disclosing shareholding of the target company and those of his associates

-      Disclosure of the purpose of the takeover – the offer must be made for a specific legitimatereason.

-      Make a precise offer – it must not be speculative.

READ: squeeze in and squeeze up provisions.

            Hostile takeovers.

Effect of takeover on corporate status of the target company – does it lead to automatic conversion from one form of company to another?

WATCH: Wall Street I (1987) and Wall Street II (2011)

PARTNERSHIPS

It is preferred business model as it is flexible. It also permits importation of expertise in to the business.

Governed by 2 laws: Partnerships Act and the Limited Liability Partnerships Act, both of 2012.

Definition - A business where two or more people carry out business jointly with a view to profit.

Elements – a partnership must have at least two people. There is no sole/individual partnership.

Element – the partnership must be engaged in joint business

Element – the business must be with a view to profit.

READ: Why areall investment groups (chamas) not considered as partnerships?

Entities excluded from the operation of the Partnership Act:

-      Body corporates

-      Limited liability partnerships

-      Forms of organisations where members are less than two eg sole traders

-      Bodies established by other Acts of Parliament egStatutory corporations.

Formation of partnerships

Express agreement – written or oral, or by inference.

Where partners decide to execute a partnership deed or sign a memorandum or some other document showing their intention to form a partnership.

Partnership by inference/implication arises where parties hold themselves out as having formed a partnership, the relationship will be inferred from their conduct.

The critical legal issues in partnership law include:

-      Types of partnerships

-      Mutual obligations and responsibilities between partners, as well as the collective obligations of partners to the partnerships?

-      Management and control of partnerships

-      Financial affairs of partnerships- accounts and financial records

-      Partnership contracts and powers of partners to bind each other

-      Partnership property – what amounts to partnership property, acquisition and disposal

-      Membership – acquisition and cessation of membership

-      Dissolution and winding up of partnerships.

-      Powers of courts in respect of partnerships.

Types of partnerships

Include ordinary/general partnership and limited partnerships. Extends to the limited liability partnership.

Previously there were Commonwealth partnerships and the East African Community Partnerships. However, both were repealed. Currently those partnerships not registered in Kenya have a window under foreign partnerships.

Duties and obligations of partners

They are of three types:

a)   Fiduciary duties

b)   Disclosure duties

c)   Diligence duties

Fiduciary duties

a)   Duty of good faith

Acting in bad faith includes:

-      keeping secret profits

-      maintaining parallel business to that of the partnership

-      taking septs to frustrate the business of the partnership

-      not acting in the best interest of the partnership

-      breaching confidentiality clauses

-      bringing the partnership into disrepute – includes criminal conduct

READ: case law on good faith

b)   duty of disclosure

-      Apply at formation or joining a partnership, as well as continuing duties.

-      The obligation is on material information, the standard being that the information must be likely to influence the partners at the time of forming the partnership or the continuance of the partnership.

-      Prospective partners have an obligation to disclose any information to each other which will influence the formation of the partnership.

-      Where a partnership exists, the partners must disclose any information to the prospective partners which may influence their decision to join the partnership.

-      The prospective partner also has an obligation to disclose to existing partners any information he believes will influence their decision to admit him as a partner.

-      Partners have an obligation to express any information which will impact the continuance of the partnership.

-      The three obligations on disclosure are: the obligation is discharged only if the disclosure is complete in all material respects; the obligation is discharged if disclosure is made as soon as reasonable; and further that the disclosure must be made to all partners.

c)   Duty of diligence

-      All partners are required to be engaged equally in the business of the partnership, unless a contrary provision is made under the partnership agreement.

-      Similarly, general partners in the limited partnership are required to engage in the management and control of the partnership.

-      First, every partner must be aware of the partnership business.

-      Second, the partner must show skills and expertise required of you, first as an ordinary partner objectively, and those required of a person of your skill and experience subjectively.

-      A partner must dedicate the required time in the business of the partnership.

-      A partner must not be negligent.

-      The obligations are owed between partners, as well as between the partner and the partnership.

Partnership membership

Initial persons proposing to form a partnership become members by executing a partnership agreement.A person can also be admitted into an existing partnership, subject to the unanimous agreement of all existing partners.Partnership by implication – holding yourself out as a partner in the presence of the partners.

 A person ceases to be a partner on death, when adjudged bankrupt and not discharged for three months, or on dissolution of a partnership. Other methods is by retirement or resignation of a partner. One can also be expelled by fellow partners. Incapacity such as mental infirmity can form a ground for expulsion. The court can also order the removal of a partner.

Capital of the partnership

Partners have an obligation to contribute to the capital for the partnership business. Where the agreement has not set the limits, the obligation is to contribute equally.

The Act requires approval for all partners where any additional contribution is required. A partner who has extra contribution must also get the consent of all other partners.

A partnership can also receive loans or additional funds from its parters. The decision on whether to borrow from partners is an ordinary business which can be approved by a simple majority. Any loan given to the partnership can only attract a 3% interest (hinders partners from taking advantage of the partnership or other partners to loan money at excessive rates).

Partnership Management and control

All partners are entitled to engage in the business of the partnership diligently at all times. Further, partners are deemed agents of the partnership, with powers to contract and give undertakings and enter into obligations binding the partnership.

Partners are at liberty to specify the manner and procedures of control in the agreement. For instance, the agreement can provide:

-      Who is the managing partner and their appointment

-      Role and powers of managing partner

-      Role and powers of other partners.

In absence of agreement, every partner is entitled to participate in the management and control of the company.

A number of matters require unanimous decision of all partners. They are not limited to:

-      Admission of a new partner

-      Decision to expel a partner except an exiting partner

-      Decision to change the business of the partnership

-      Decision to change partnership name.

In default, the rest of decisions are taken by majority. There is no provision in the Act to differentiate the voting rights on the basis of capital contribution – the principle is one vote per partner.

Partners therefore have powers to bind the partnership and other partners under the following conditions:

a)   They must have power to do so

b)   In the absence of powers, the person with whom they are contracting must have no notice that they lack the power

c)   The contract must be entered in the course of partnership business.

The partner who has entered into a contract without authority is personally liable. The third party is entitled to sue the partner who contracts without authority and recover the price and damages.

Limited liability partnerships

Is a hybrid between an ordinary partnership and a limited liability company.

Defined as any partnership registered under the Limited Liablity Partnership Act 2012.

Unique advantages of LLPs

1.    Flexible management and control provisions in LLPs is highly attractive – management is exercised by person known as General partner who makes decisions on the business of the partnership. This is essential in matters requiring expeditious decision making without undue formalities. It is the most preferred structure for investment vehicles such as private equity funds.

2.    The LLP has separate distinct legal personality with perpetual succession. It is fairly stable as a formal business structure.

3.    Tax efficient – in theory, an LLP is a tax-passthrough vehicle (partners do not suffer multiple tax regimes). Companies pay tax on profit as corporate tax, and members are in turn charged taxes on dividends. LLP partners are in turn taxed only once at individual level and not at the firm level.

4.    LLPs enable sophisticated investors to exploit unique investment opportunities through its structure.

5.    LLPs have lower compliance requirements – no need to file annual returns, circulate statements, callAGMs like private companies.

6.    It enables professional firms which require partnerships under their regulations to raise capital from outside sources(from silent partners).

Drawbacks to LLPs

1.    Fear of loss of control to the general partner

2.    Misconception that setting up an LLP is fairly complex

3.    The purported tax advantages are not

4.    Public bodies treat LLPs suspiciously – they tend to view the strength of the LLP based on the strength of the individual partners as opposed to as a separate legal entity.

5.    Limited capital raising abilities of the LLP – if the partners take out loans, the liability of the LLPs may exceed the capital contribution hence the business is often restricted to trading within its capital contribution limit.

6.    For certain professional firms, the government laws are hindrances, e.g. The legal profession has restriction of sharing profits with non-qualified persons under the Advocates Act.

Establishment and registration of LLPs

Can be established by an express agreement or an implied agreement (just like in ordinary partnerships). However, an LLP must be registered under the Act.

For registration, the partners or the persons involved with the registration must file with the Registrar a statement in the prescribed format. The statement must be accompanied by the required documentation as provided in the Act. Further, an LLP must be registerd by two or more persons.

Among the key requirements of the statements, the following details are required:

a)   The proposed name of the LLP – the Registrar must satisfy himself that the name has not been registered or is similar to those under the Companies Act, Registration of Business Names Act or to those of public bodies, or is generally undesirable.

b)   Proposed business of the LLP

c)   Particulars of the partners – names, addresses of the partners, ID no/REg. No of partners or coporate persons.

d)   Particulars of capital

e)   Proposed registered office of the business.

Where the registrar is satisfied, he registers the LLP and issues a Certificate of Incorporation. The certificate is conclusive proof that the LLP has been duly registered having complied with requirements of the Act.

Such LLP must use in its name, the words ‘LLP’.

Refusal of registrar

The registrar may refuse to register the LLP on own motion when:

a)   Proposed business is illegal

b)   Proposed name is similar to some other registered entity

c)   It is in the public interest that LLP be not registered

d)   The statement has not been filled with required information

e)   Required documentation not provided.

The Registrar may decline registration if given a notice my the Cabinet Secretary Interior that it is in the national interest that the LLP be not registered.

An appeal from the registrar’s decision lies to the High Court.

The registrar for LLPs is the Registrar of Companies, presently the Director of the Business Serivces Registration Agency (BSRA).

Nature of LLPs

LLPs are separate distinct legal personality from the partners. Liability of all partners is limited, unlike in Limited Partnerships under the Partnerships Act, where the liability of the general partner is unlimited.

LLPs have perpetual succession.

The LLP has capacity to own property in its own name.

LLPs can sue and be sued in own name.

In general partnership, the agency of the partnership is presumed unless the contrary is proved. However, in LLP, only the general partners have presumed agency as a matter of course (a partner cannot bind the partnership unless he proves he is a general partner or is authorized to bind the partnership). Any claim or defence of any right must be done in the name of the LLP.

Management and control of LLPs

All LLPs are required to have at least one General partner.

Further, every LLP must have at least one natural person among the general partners under the Act.

KEY: Trade unions cannot be partners in LLPs.

All general partners are to be engaged in the daily management of the LLP unless a contrary provision is made.

Management and control of LLPs are governed by the LLP agreement. In the absence of such LLP agreement, or in absence of provision of the specific act in management by the agreement, the provisions of the first Schedule of the LLP Act apply.

Provisions of the LLP agreement

The LLP must also be a party to the LLP agreement, alongside the other partners.

Other contents of the agreement include;

-      Parties

-      Business description clause

-      Capital clause

-      Dispute resolution clause and applicable governing law

-      Identification of the general partners

-      Duties and obligations clauses

-      Dissolution and winding up clauses

Conversion of other entities into LLPs

The Act identifies two kinds – ordinary partnership to LLP, and private limited liability company into LLP.

This is because the LLP merges the best features of both regimes.

Ordinary partenrships to LLPs

-      All partners must sign a resolution agreeing to the conversion (unanimously).

-      All existing partners must agree to be partners in the new LLP. A partnership going though a breakup, winding up or dissolution cannot thus be converted.

Conversion is by filing the statement and accompanied documents with the registrar. Upon registration, the LLP takes up the assets and liabilities of the partnership.

Limited liability companies to LLPs

Public companies cannot convert to LLPs, only private limited liability companies can convert.

The conversion must be supported by special resolution of the members of the company.

Where the assets of the company have been attached under a debt instrument or other encumbrance, the registrar will not agree to the conversion without prior consent of the creditors or any receiver manager. The assets must be without encumberance.

READ: documentation in conversion.

Partnership property and LLPs

There is no presumption of ownership. The property only becomes the LLP’s when it is formally acquired or registered in the name of the LLP. Unlike ordinary partnership where property can become partnership property when used by a partner in the ordinary course of partnership business, there is no presumption of property under LLP.

KEY: The LLP Act states that the Partnership Act applies to LLPs unless excluded or modified by the LLP Act itself. Therefore, the right and obligations of ordinary partners apply also to LLPs.

KEY: there is no corporate veil in LLPs. There is also no cap on the number of partners in LLPs.

READ: the LLP is not the bastion of good corporate governance. It is celebrated as an efficient investment vehicle – it has fewer regulatory requirements with the protection of limited liability and quick decision making by the fewer/single general partner(s). It allows investors to take advantage of urgent business opportunities.

LLP Membership and termination of membership

Acquisition of membership is governed by the agreement, or by signing the agreement as an initial partner.

Unlike general partnerships, membership to the LLP does not terminate automatically e.g. in cases of insanity, bankruptcy or death. Your representatives can take over your rights and obligations, until other partners apply to court for an order of termination of membership.

One ceases to be a partner by:

-      Resignation, subject to a 90-day notice (termination by notice).

-      By order of court – court can terminate membership in many instances, e.g. when a receiving order in bankruptcy is made against a partner and is not discharged within 3 months.

-      By agreement – the agreement may terminate membership under certain conditions, e.g. time, purpose and dissolution/winding up of the partnership.

General partner- obligations

a)   Daily management of the business of the partnership.

READ: distinction between management of the partnership itself, and management of the business of the partnership.

b)   Contract on behalf of the partnership

c)   Institute and defend suits by the partnership.

d)   Keep proper books of accounts of the partnership.

e)   Prepare and file an annual solvency report (minimum period between two reports must not be more than 15 months) – this protects the non-general partners and the creditors.

f)     File any returns in the changes of the particulars in the LLP within 14 days – e.g. where some partners enter and exit, change in the registered office, etc.

Winding up/dissolution of LLPs

Any partner/creditor can apply to court for winding up/dissolution.

Further, the partners may agree by resolution to wind up/dissolve the LLP.

The Registrar may apply for winding up where the LLP is insolvent or where he deems it desirable for the LLP to be dissolved.

Where an LLP is insolvent and faces liquidation, the Fifth Schedule apply.

KEY: Liquidation of an LLP must only be carried out by a licensed insolvency practitioner, licensed under the Insolvency Act 2015.

Bankruptcy

Incapacities of a person subject to an adjudication order.

Incapacities start when the order is made, and not when the bankruptcy act is committed. They are provided for in the act, and they include dealing with property, being a partner in a partnership or a director of a company. These incapacities are conditional as they are waivable with consent of the court.

Other common law incapacities include the barring of an undischarged bankrupt from running for public office under the elections Act. These common law incapacities may not be in statute, but their application persists. The incapacities are absolute.

Process of discharge and annulment

Discharge is where a bankrupt is released from the obligations of a bankruptcy order.

Annulment is where the court makes an order extinguishing the bankruptcy order from the record.

One can prefer an annulment over a discharge for the following reasons:

-      Where the court finds that the order should not have been made in the first place, e.g. where there was omission of some material fact which

-      Where there were procedural mistakes in making the order

-      Change of circumstances – the financial circumstance of the bankrupt can change significantly over time that it is proper that the order be annulled.

-      Any other ground which the court may find reasonable.

A court may annul a bankruptcy order to lift the protection given to the debtor against the creditors. Annulment enables creditors unfettered opportunity to recover their debts.

The court may also annul where it is of the view that it acted unjustly in putting the debtor under a bankruptcy order.

Discharge on the other hand is automatic after lapse of prescribed period. It may also be by application. The debtor/official receiver/trustee in bankruptcy makes the application sekeing discharge of the debtor from the bankruptcy order, on grounds including:

-      The debtor no longer has realizable assets which can be applied to discharge his debts

-      Where the debtor makes a deed of arrangement/scheme of arrangement for repayment of his debts.

Understand the order of priority for payment of bankrupt’s debts

Payment follows the following directions:

1. Debts to be paid in the order of priority listed in the Second Schedule of the Insolvency Act 2015. Between debts in any given priority, they are equally payable in the manner in which the bankrupt’s assets can meet them.
2. The subsequent orders of priority are paid off on a proportionate basis out of the residual bankrupt’s estate.

Understand bankruptcy offences

Bankruptcy offences backdate the bankruptcy order. The offences are deterrent to ensure people do not take advantage of the protection of the bankruptcy order. The sanctions are dependent on a case by case basis.

Application of insolvency laws is territorial in nature, and enforcement depends on the jurisdiction in which the act under determination occurred.

The actors in bankruptcy proceedings have enhanced roles. For instance, the powers of the official receiver have been enhanced, subject to authorization by the court.

Alternatives to bankruptcy

Include

-      individual voluntary arrangements,

-      expedited voluntary arrangement procedure,

-      no assets procedure and

-      summary installment order.

These procedures provide debtor with chance to rehabilitate his affairs.

The provisions of the Act protects the integrity of the alternatives process so that it is not taken advantage of by unscrupulous debtors. They are administratively handled by the Official Receiver with supervision of the court, unlike previously when the court was knee-deep.

The Act makes it mandatory that alternative procedures are done under the supervision of a professional insolvency practitioner known as supervisor. He guides the debtor. The court may only dispense with the supervisor under restrictive conditions. The Act mentions a provisional supervisor, who can then be confirmed.

The Act provides enhanced penalties and offences to persons abusing the alternatives to bankruptcy. It seeks to balance interests of the creditor and those of the debtors.

No asset procedure – meant to protect debtors having no realizable assets. The debtor has to prove that:

-      He has not previously been admitted to no asset procedure

-      He has not previously been adjudged bankrupt

-      That he has no debts of less than 100,000 and no more than 4m

-      That he has no means of payment.

The application is to the Official Receiver. Debtor must annex documents to assist the Receiver. The debtor cannot borrow an amount exceeding 100k pending the application. The debtor is admitted to a no-asset procedure on receiving a notice from the Receiver. The notice is served on the creditors

Following admission:

-      Debtor is barred from continuing or commencing legal proceedings

-      Debtor cannot borrow more than 100k unless he notifies the creditor of the application before the receiver.

a debtor can be terminated from the no-asset procedure:

-      When debtor was wrongly admitted to no-asset procedure

-      Improvement in financial position of debtor

-      Application of debtor/creditor to bankruptcy

-      When debtor borrows more than 100k.

No asset procedure automatically lapses after 1 year, subject to extension by the Receiver to 35 more days. It is a once-in a lifetime chance, and can only be used once.

A termination notice is issued by the Receiver and served on all creditors. The termination takes effect once sent, whether or not received by the debtor. All debts become enforceable on termination.

Summary installment order is issued by the official receiver directing debtor to pay his debt. It can be by installment, in full or in some other way predictable.

Either a debtor or creditor can apply for the summary installment order. The application must state that the debtor intends to pay the debt in full. It must propose a supervisor or give reasons why none is needed. A summary installment order is not effective unless a supervisor is appointed. The supervisor ensures the debtor’s compliance. The role of the supervisor can also be terminated by the Official Receiver where they fail to discharge their duties adequately. The installment period must be within 3 years, subject to an extension by the Official Receiver to a period not exceeding 5 years.

The terms of the summary installment orders can be varied on application to the Official Receiver who has discretion.

The Receiver can terminate the summary installment orders where the debtor fails to comply.

Offences in respect of summary installment order

-      When a debtor seeks a debt of over 100,000/-

-      When debtor enters into a credit transaction

Identify the effects of breach of any of the alternative procedures to bankruptcy. The Act empowers the Receiver to cancel the alternative procedure and apply to court for preservation of the assets of the debtor. The creditors and other persons are then at liberty to file bankruptcy proceedings.

The court seriously looks at the conduct of the debtor.

Identify the reasons why debtors may prefer alternatives to bankruptcy.

-      Helps debtors avoid bankruptcy

-      Gives debtor control over own affairs

-      Enables debtor to continue business/professional activity

-      Privacy and confidentiality – no need for public examination. Avoid stigma of bankruptcy

-      For creditors, it enhances chances of debt recovery or part thereof

Liquidation of Registered Companies.

Grounds

Failure to comply with provisions of returns and reporting under the act, and any other breaches of the act.

Persons who can commence liquidation

• Member/contributory
• Creditors
• Provisional liquidator
• Company Supervisor when there is voluntary arrangement
• Registrar
• Directors of the company where they are unable to file a solvency statement under S182.

Process

Liquidation commences either by resolution of members, resolution of contributories or creditors resolution.

Due notice of the resolution to liquidate must be issued to all members, contributors and creditors of the company.

Application – made to High Court which has jurisdiction over dissolution of companies. It is in the prescribed format under the High Court Company Rules.

Winding up is breaking apart the company and sharing of spoils between creditors, and whatever remains is given to members, whereas liquidation is the orderly realization of a company’s assets so as to pay its debts. A company can continue business after liquidation if the realization of the assets pays of all debts and surplus remains.

The process under the liquidation is asset realization, followed by the decision of whether to dissolve or continue trading.

READ:Jambo Biscuits case on winding up.

Duties and obligations of:

a)   Liquidators

b)   Directors and members of the company

Supervisory obligations of the court in liquidation process.

Liquidation of unregistered companies- part 7 (s512-519) insolvency act

Unregistered companies include Cooperative Societies, Building Societies and Limited Liability Partnership within meaning of Insolvency Act. Includes the corporation under the Sectional Properties Act.

Loophole is that the definition of the unregistered company is vague.

A company cannot be liquidated voluntarily, and only court can order liquidation (s512). Members can make resolution that the company be liquidated by court, court can order liquidation on expiration of moratorium.

The debt for unregistered company should be 75,000/-. Liquidation can be ordered when a company is notified of payment of debt, and it fails to pay or secure the debt within 21 days. The same happens when judgment is entered against the company and which the company does not settle within 21 days.

Foreign companies can be liquidated as unregistered companies when they cease to transact in Kenya even though they have been dissolved in the country of incorporation.

Contributory – persons liable to contribute to company assets in the event of liquidation.

No proceedings may be begun or continued against a contributory for the debts of the company. Court has power to stay proceedings against a contributory of unregistered company if the application for stay is made by a creditor. Further, no legal proceedings may begin or continued unless approved by court.

Administration of insolvent companies

Administration is a procedure used while reorganizing a company or the realization of its assets under the protection of a statutory moratorium which prevents creditors from taking action to enforce their claims against the company during the administration process thus preventing the implementation of a strategy for the company’s rescue or asset realization.

An administrator is appointed by way of an administration order –s530. He has a duty to perform is functions as quickly and reasonably practicable. He is considered an officer of the court, whether or not appointed by court. He is an authorized insolvency practitioner.

An administrator cannot be appointed if a company is already in liquidation. An administrator cannot be appointed for banking institutions and insurance corporations as there are different regimes.

The administration order is issued if court is satisfied that the company is or is likely to become unable to pay its debts, and that the administration order is reasonably likely to achieve the objective of administration.

Through an interim admin order, the court can restrict director’s powers or reserve the discretion of the court. The court can treat the application for administration order as a liquidation application and make such orders thereunder.

Any pending application for liquidation is suspended when an administration application is ongoing. Creditors can only realize security with court’s permission, and proceedings against the company are subject to court approval.

Duty of administrator

• Convene creditor’s meeting within 70 days
• Prepare a proposal and send it to creditors within 60 days.

The administrator can also undertake to do the above.

• Duty to appear before creditor’s committee on request, subject to 7 days notice
• Duty to control company assets
• Take control of all affairs of the company
• Duty to publish notice of his appointment within 7 days,
• Distribution of properties to creditors as provided by law

Appointment of administrator by debenture holder

Court can issue administrative order on application by debenture-holder.

Appointment of an administrator by a company or its directors

Notice of intention to appoint an administrator must be given within 7 days, and it must identify an administrator with his consent. It is lodged in court, together with a statutory declaration that the company is unable to pay its debt, it is not in liquidation and that the appointment of an administrator is not prevented by a moratorium.

Once prepared, the notice is to be lodged in court within 14 days. This notice is the application for appointment of an administrator.

KEY

2 OPTIONS TO COPORATE INSOLVENCY – liquidation and administration

3things – what (definition of the process), how (process and who does what when), who (role, obligations and duties of administrator/liquidator, company directors and members, court)?

Effect of administration order of a company – stay of proceedings and stay of liquidation.Director actions subject to approval of administrator. Admin assumes role of general meeting of members and directors?

Why would a company go into administration?

COMPANY LIQUIDATION

Members voluntary liquidation – grounds

When a company is formed for a specific ppurpose, which purpose has since been achieved.

When a company is formed for a specific duration, and the duration has since lapsed.

Members cannot voluntarily liquidate a company if it is unable to pay its debts. Instead, they are to inform the creditors, who must then agree to commence a voluntary creditors liquidation.

A resolution requiring a special majority as prescribed by the articles of the company, if not prescribed then 75%.

Grounds for creditor’s voluntary liquidation

When a notice of debt beyond the prescribed minimum has been served upon the company and the company is unable to pay within 21 days, the company is deemed unable to pay its debt.

The creditors can look at the solvency statement and is able to satisfy the court that the company is unable to pay its debt.

When a warrant/order/decree of judgment is issued against the company and the same is not varied or lifted within 21 days.

Process

Creditors commence by issuing a notice upon the company. The directors are then under obligation to appoint an insolvency practitioner as an interim liquidator of the company. The role of the interim liquidator is to convene the first meeting of creditors within 14 days of the notice for voluntary creditor’s liquidation.

The directors must also publish in widely circulating dailies the notice of voluntary liquidation as proposed by the creditors.

Where no interim liquidator is appointed after the notice, the creditors can apply to the court to compel the directors to appoint the interim liquidator, or apply to the Official Receiver.

The first creditor’s meeting is meant to confirm the interim liquidator or appoint another, and it is also meant to convene the liquidation committee.

Liquidation by court

The following persons may apply to court for liquidation of a company:

• Members and contributories
• Creditors
• Any administrator under Part XIII
• Any interim liquidator
• The Attorney General
• The Official Receiver

Grounds for application for liquidation

1.    If the company has not commenced operation in a period of not less than 12 months of incorporation (for public companies),

2.    Where the company has suspended operations for a period not less than 12 months.

3.    For a public company, when members fall below the statutory minimum.

4.    Where the company fails to comply with the provisions of the Act

5.    The AG may apply for liquidation if the company in its operations, business or its members have acted illegally, improperly or in any way against public policy. This is an application to safeguard public interest.

6.    If an application is made to the satisfaction of the court that it is insolvent and/or it has no reasonable prospect to pay its debt

7.    A secured creditor can apply for liquidation if the company is in material breach of its security obligations

8.    When the court is satisfied that it is just and equitable that the company be liquidated. The court must be satisfied that there is no less drastic alternative in the circumstances. The court regards the conduct of the parties – eg has the application been brought to coerce the company ito paying a debt? The court regards the record of company to look at the mode of management – is it well managed or is it salvageable?

For the purposes of the Act, the court with jurisdiction is the High Court. Any application to another curt is struck out for being incompetent.

Orders which the High Court can make in application for liquidation

a)   Allow the application

b)   Deny the application

c)   Adjourn the application upon such terms as it deems fit

d)   Make/give conservatory orders on the application

e)   Allow the application with modification.

The court can refuse orders for liquidation where it is satisfied that:

1. When there are alternative remedies – eg voluntary arrangements and administration.
2. When the application does not comply with the Act or the regulations

Effect of a court liquidation order

1. The Official Receiver must notify the Registrar to enter into the register the liquidation order against the name of the company. The company can only trade on including the name ‘UNDER LIQUIDATION’ on all documents and correspondence.
2. Stay of all proceedings against or by the company unless with leave of court.
3. Management and control passes to liquidator. Director powers are suspended, only to be exercised following approval of the liquidator.
4. No transfer or dealing in the property of the company is valid except with the sanction of the liquidator.
5. Company under liquidation does not hold GM unless convened by the liquidator.
6. No orders for attachment or recovery of debt can be made against the company, save with approval of the court.

KEY: liquidation does not terminate employment contracts or any other contract for that matter. Suppliers can still bring valid claims for unpaid goods to the liquidator. Parties would still be bound unless the liquidator expressly waives the right or varies the contract terms.

Rights and remedies of unpaid sellers in liquidation

Distinguish between ongoing contracts and new contracts. New contracts cannot be valid, save for leave of the liquidator.

KEY: when drafting contracts, it is good practice to provide for a ‘MATERIAL ADVERSE CHANGE CLAUSE’ which relieves parties from their contractual obligations if there are material adverse changes to the condition or business of either party, e.g. where the company enters administration or liquidation.

Key parties involved in company liquidation

·         The Official Receiver

·         The liquidator, interim or otherwise.

·         The members and the company

·         Court

·         The Attorney General

The Official Receiver

Established by the Act under the office of the Attorney General for administrative oversight over liquidation and administration of companies in distress.

The roles include:

a)   To act as liquidator for any company where no liquidator appointed, or vacancy arises due to resignation, death or incapacity of the appointed liquidator

b)   Convene the first meeting of creditors where court orders or no liquidator

c)   Propose for appointment a liquidator where members of the company cannot agree

d)   File in court upon investigation his report on what he considers to be causes of failure of the company

e)   Receive regular updates of liquidation from company liquidators.

The company (directors)

Directors’ duties include the statement of affairs of the company and provide it to the Official Receiver or liquidator, as provided by the Act. The obligation is discharged if the statement is true, accurate and up to date.

The company has an obligation to cooperate fully with the liquidator in the liquidation process. Full cooperation includes that the directors and officers must make themselves available – leaving the country without the permission of the liquidator or the court breaches this. It also means the company must provide any information required by the liquidator. The company must not take any action likely to impede the liquidation process.

Provide records, documents and any other material on activities on the company on demand as requested by the liquidator. The directors have an obligation to comply with all reasonable

Not to enter into any contract or obligation on behalf of the company once the liquidation order is made.

The liquidator

Duties

1. Trace and secure the company assets by obtaining the statement of affairs.
2. Convene the first meeting of creditors where one has not already been held. From there, the liquidation committee is sanctioned.
3. Take over control and management of company with dispatch.
4. Prepare regular updates on the conduct of his liquidation to the Official Receiver and Court.
5. If more than one year lapses since commencement of liquidation, the liquidator must convene a general meeting of members to update them on progress of liquidation and provide reasons why liquidation should be extended.
6. Prepare a report on the reasons of the failure of the company
7. Realize the assets of the company
8. Make a distribution of the realized assets to creditors in the manner prescribed by the Act and the Regulations
9. File a final report when, in his opinion, the liquidation comes to an end i.e. when there are no more assets to be realized.

KEY: the liquidator has no obligation to keep the business running. His purpose is to realize assets and pay off creditors, bringing the business to a close.

Powers

1. Convene a meeting of creditors or members where necessary
2. Require the production of company records or any document from the officers or directors
3. Make any enquiry or conduct any investigation for liquidation purposes. He can summon any creditor or member to give any required information
4. Transfer, assign, sell, alienate or otherwise deal in the assets of the company.
5. Enter into contracts on behalf of the company, and terminate any contract which the company has power to terminate including terminate any contract of employment or of director.
6. Direct any director to exercise any powers as he determines.
7. Enter into any compromise or arrangement with any creditor for the purpose of discharging any debt.
8. Institute and defend suits on company behalf.

All powers of the liquidator are subject to the oversight and control of the court. Any person entitled to a liquidation order can apply to the court where the liquidator applies his powers capriciously or illegally.

Office of the Attorney General

He can move the court to make liquidation order so as to defend public interest if he holds the view that the company in its business,, membership or directors is against public interest.

The AG can also move after ordering an investigation into the membership or the business of the company – e.g. after discovery that the company deals with enemy states. FIND: ENEMY STATES (3) or is owned by undesirable elements or where the company is being run as a fraud.

Court

KEY: Does not have duties, only has powers. Conducts oversight.

Powers

1. Making liquidation order
2. Making any such other orders deemed fit for proper liquidation e.g. conservatory orders, injunctions
3. Appointment of a liquidator on recommendation of Official Receiver where creditors and company is unable to agree
4. Receive reports of the liquidator and make any orders deemed fit
5. Make orders on application of liquidator for production of any record borne by any person which may assist in liquidation
6. Impose sanctions for offences related to liquidation.

Persons obligated to contribute to company assets during liquidation

1. Current members and contributories – liable to contribute any unpaid capital due from them.
2. Current guarantors
3. Past members and contributories, subject to the following conditions – the debt for purposes of liquidation must have been incurred when they were still members, they must have not ceased to be members for a period of not less than 12 months before the liquidation.
4. Any person that the court may find liable or as a cause of the failure of the company.

Realizable assets

The liquidator has recourse to all assets of the company except:

a)   Secured assets under a floating debenture which has become fixed

b)   Secured assets for which the creditor has already exercised his rights under the instrument.

READ: SECURITIES, DEBENTURES AND CRYSTALLISATION OF DEBENTURE in liquidation.

COMPANY ADMINISTRATION

Administration is the placement of a company under distress to an independent qualified expert – Insolvency Practitioner – for the purpose of reviving the company (also known as TURNAROUND ARTIST)

The objective of administration is revival of companies in distress. Administration is not to realize assets, but to keep the company as a going concern for the benefit of creditors and members.

Administration provides protection against suits, but does not suspend operations, management and control.

Process of administration

Persons who can apply to court for an administration order include:

1. members and contributories
2. directors of the company
3. creditors
4. official receiver
5. any supervisor appointed under voluntary arrangement

Grounds for court consideration before making administration order

1. When the company’s net assets are more than its liabilities, including contingent liabilities. In such cases, a company may have more long term assets eg high value land compared to short term assets eg receivables. This company has reasonable prospects of paying its debts, even if they demanded today.
2. When the company reasons for failure is other than financial reasons.
3. When there has been fundamental shift in the business of the company, requiring someone with expertise to restructure the company.
4. A company with little history of financial default will be candidate for administration.

KEY: The court when faced with an application for administration may order any other recourse, including liquidation.

Effect of administration order

1. All proceedings against the company for recovery of any debt or decree is stayed.
2. No suit can be instituted for or against the company without leave of court and approval of administrator.
3. The company continues to operate, save that the directors mght not exercise certain powers as provided in the regulations without approval of the administrator.
4. Every company must have in their documents and correspondence UNDER ADMINISTRATION
5. Unlike liquidation, the company may not enter into contracts beyond certain thresholds without the approval of the administrator.
6. The administrator must be notified every time members hold a general meeting, and he is entitled to attend and make representations.

READ: Duties and powers of administrators. How does administration terminate.

READ: voluntary arrangement – how is it done?

KEY; know the reasons of choosing either voluntary liquidation by members or creditors, administration and voluntary arrangements. Know the process and procedure. Know the effect of liquidation, administration and voluntary arrangements.

READ: insolvency provisions regarding companies.

READ: movable securities – formerly known as chattels. Chattels Mortgage Transfer Act – Chapter 28 laws of Kenya. Chattels mortgage, power of attorney, letter of lien, letter of pledge, and letter of hypothecation.

KEY: THE government is developed the movable assets security bill 2016 which will update the use of movable assets as securities.

CHATTEL TRANSFER SECURITY-(THIS TOPIC HAS SINCE BEEN AMENDED TO INCORPORATE THE CHANGES BROUGHT BY THE MOVABLE PROPERTY SECURITY RIGHTS ACT, 2017)

Assets are both movable and immovable.

Immovable – land, fixtures or anything attached to land that cannot be moved.

Movable property includes motor vehicle, furniture, appliances, equipment etc.

Choses in action – instruments by passage of consideration by money or equivalent forms egcheques, promissory notes, etc.

Chattels

A chattel is any asset or property capable of transfer by delivery. However, the definition exclude choses in action. Also excluded is security for shares, transfer stocks, bearer stocks, any instrument of warranty or any similar instrument.

The governing law is Cap 28 the Chattels Transfer Act. It governs any security offered, security of which is a chattel defined in the Act. The Act applies to securities of not more than Kshs. 4 million.

Included assets include: crops, provided they can be removed or delivered, timber, wool on sheep, etc. currently, intellectual pproperty is excluded under Cap 28. However, the new bill seeks to incorporate them as movables to which a security right can be registered.

Rationale for Chattel Transfer Act

1.    Provide opportunity for persons having no access to documents of title to fixed property to access credit facilities. Kenya demographic comprises mostly youth and women, who fall in this category.

2.    Provide confidence to lenders to avail credit on strength of movable assets. This vitiates the risk of unlawful transfer and movement.

3.    Protect borrowers from burdensome provisions under loan agreements on strength of chattels.

The instrument

The Act makes provision for a security document – the instrument – within it. The instrument has two characteristics:

a)   Any written document for which the borrower executes in favor of the lender to secure the repayment of money or performance of some other obligation. The obligation must be one of a legal and commercial nature, and related to repayment of money.

Types of instruments

1. Chattel mortgage instrument
2. Instrument of pledge
3. Instrument of lien
4. Letter of hypothecation
5. Power of attorney

Essential requirements of instruments under the Act

To be valid, every instrument must comply with certain legal requirements:

1. The instrument must be written
2. Must be attested to by a person who saw the grantor execute the instrument – by way of affidavit.
3. Must be assessed for Stamp Duty and duty paid.
4. Must contain an inventory/schedule of all assets, properly described, being secured.

The inventory must have a current valuation report

5. The instrument must be executed – the borrower must sign. There is no obligation for the lender to sign.
6. The instrument must be registeredwithin 21 days of execution. Where executed at different times, the date of execution is the date of the last signature.
7. Every registration must be renewed once every five years.
8. A copy of a duly stamped and registered instrument must be given to borrower. The borrower will not be liable if he was not provided with a copy of the registered instrument.

Effect of non-registration

1.    It is inadmissible in evidence of court proceedings, unless with approval of the court.

2.    It does not affect the obligations owed by the borrower to third parties.

Exception to invalidity of registerable instruments

a)   Any trustee in bankruptcy is not affected by non-registration

b)   Any creditors’ trustee in bankruptcy or liquidation is not affected

c)   Any person acting under authority of a court order is not affected.

Where an instrument is not registered, the court may:

a)   Extend time for registration for good cause shown, on application of lender

b)   Admit in evidence an unregistered instrument for good cause

c)   Reject the application.

The where court denies the above remedies, the lender cannot claim any remedy under Cap 28. The lender is at liberty to pursue other remedies for recovery of the debt.

Chattel mortgage instrument

It is an instrument under which the lender acquires an overriding interest in the title to the property under security.

Best assets include; cars

KEY: Know which security interest would be appropriate for each type of property. – all assets must be tangible. The assets should be free from prior encumbrances.

·         The asset should have a document of title.

·         The document of title must have an official register.

·         The chattel should be of a known and fixed value at the time of executing the instrument.

Instrument of pledge

Pledge is a possessory instrument under which the borrower executes in favor of the lender on condition that possession of the property will transfer back to the borrower on repayment of sum secured or fulfillment of obligation.

May be property of high and unique value

Assets: paintings, sculptures, jewelry.

Pawnbrokerage is distinct from instrument of pledge.

FIND: PAWNBROKER ACT

Instrument of lien

Only involves the promise to transfer possession in property upon default. It creates an encumbrance over the property that the borrower promises to transfer possession in case of default.

Property which does not depreciate fast – of steady value

Assets – furniture, equipment and machinery

Letter of hypothecation

Instrument under which the borrower authorizes the lender to deal with the secured property in the specified manner, in order to recover the sums outstanding and additionally on the understanding that possession of the property will be transferred back to the borrower once the debt is satisfied.

For example, giving out the car to the lender for use in the taxi business for some time, after which the borrower is to regard the debt as paid and the car is to be returned to the borrower.

KEY: a letter of hypothecation must have a term. The agreement will be strictly regulated by the letter.

Assets should be one with revenue-generating potential.

Assets – car, machinery and equipment.

Power of attorney

A security instrument under which the borrower gives power to the lender to deal with his property in the case of default and in the prescribed manner.

The difference is that the power is future-looking, as opposed to the letter of hypothecation. It only comes into operation after default.

The power can be general or specific. General gives unlimited power, specific restricts the kind of power given to the lender.

Assets should depreciate slowly.

Asset should be ascertained and identifiable

Implied covenants

Contained in the Third Schedule.

1.    The grantor has good title to the property for which the instrument is created. It is a fundamental breach actionable under the instrument itself and under the Act if it turns out the borrower does not have a clear and unencumbered good title.

2.    The grantor is under obligation to keep in good condition and maintain in good order any asset secured by an instrument under the Act.

3.    The grantor shall not pass with possession and remove the asset from the designated region without the approval of the lender.

4.    The grantor has an obligation to inform the lender within reasonable time if there has been material adverse change in the condition of the asset secured – damage, theft, destruction from the elements.

5.    The grantor is under obligation to allow the lender at any time upon reasonable notice to inspect/access the asset.

6.    Provide any document evidencing title/memorandum or receipt as may be required by the lender.

7.    Grantor is to cooperate with the lender in the recovery/securing of the asset upon default.

The implied covenants apply to every instrument. They can be excluded by express agreement in the instrument.

DRAFTING OF INSTRUMENTS

TITLE PAGE

PARTIES

NAME OF INSTRUMENT – INSTRUMENT OF MORTGAGE/LIEN/LETTER OF HYPOTHECATION/LETTER OF POWER OF ATTORNEY

NAME OF STATUTE – CHATTELS TRANSFER ACT CAP 28

Use Times, Calibri or Garamond font.

NEXT PAGE

Date- THIS INSTRUMENT made the …….day of…….Two Thousand and Sixteen ….

Description of parties – start with the borrower. Where XXX YYY of care of Post Office Box Number ….Nairobi (hereinafter called the “Borrower” which expression where the context so admits shall include her personal representatives and assigns) being the owner of … items

Recitals         – XXX YYY is the lawful and beneficial owner without any encumbrances of the property described in schedule one

Xxx yyy in consideration as security of the loan has agreed to excecute this mortgage in favor of mmmmm

MMMMis a financial institution incorporated with limited liability in the Republic of Kenya and carrying on business under the Banking Act Cap 488 agreed to grant a loan

IT IS HEREBY AGREED AND DECLARED as follows:-

FIRST ARTICLE

Definitions and interpretation – stick as much as possible to those under the Act

The loan – terms, interest, facility

Description of the instrument – identify the name of the document, state its purpose – the securing of a loan and with respect to property described in the First Schedule

Covenants/Obligations of the borrower/grantor – state whether the implied covenants –under Sec 42 and the 3^rd Schedule - apply. Specify the covenants which you want borrowers to be under. Remember to include the obligation to repay, rate and time of repayment, manner of repayment, otherwise they will be in default. Obligation to keep the asset in good order – clean and well maintained in good state of repair. Obligation not to transfer or part with possession of the asset, obligation to insure and keep updated the policy.

Obligations – pledge of jewelry – repay as agreed, give possession to lender in agreed packaging and agreed time, ensure that the goods are owned by borrower, not to transfer any interest in the goods as long as any loan remains outstanding, insure and renew and keep current any policy on the assets.

Interest clause – two types of interest – ordinary facility interest and default interest rate. Default is apart from ordinary interest, over and above the facility interest.

Default clause – identify the ‘event of default’ and the consequences of such default. Identify obligations which are warranties, and fundamental breaches (under the ordinary law of contract). Fundamental breach entitles lender to termination and enforcement of security. Other breaches entitle the lender to less drastic remedies. Classification depends on the type of instrument, case to case.

Lender obligations - commercial law is not a democracy. Always get a good deal, not a fair deal, for your client. Obligations include registering the instrument and providing copy to borrower, valuation of assets and update every calendar year.

STANDARD CLAUSES

Eg where to send notices

EXECUTION CLAUSE

Instrument must be signed by grantor in presence of at least one witness.

Optional for lender to sign, though good practice.No need for witness.

Instrument must be accompanied by affidavit in prescribed format. Sworn by person who attested the signature of the grantor. Always include the date, time and place of attestation in attestation clause where the witness signs.

Every instrument is incomplete unless there is a schedule showing the inventory of the assets, esp. the mortgage. Schedule provides description necessary particulars. Guiding format in the Act.

REGISTRATION PROCESS

1.    Assessment for stamp duty

2.    Payment of assessed duty

3.    Have the document registered as a document under the Registration of Documents Act, where necessary

4.    Book the document for registration as an instrument under the Chattels Transfer Act by filling prescribed form with the Registrar of Chattels.

5.    Pay the prescribed fees.

6.    Lodge the document for registration.

7.    If acting for lender, collect the registered copy once done and forward a copy to the borrower.