COMMERCIAL TRANSACTIONS I
Chrispine Odhiambo
29 February 2016
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
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.
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[E2] .
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
- Professional
advisors – auditors and company secretaries[E4] .
- 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:
- 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
7 March 2016
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[E6] .
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[E7] .
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[E8] .
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[E9] .
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[E10] .In default of such provision, the Act
provides that directors shall be appointed by ordinary resolution[E11] .
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[E12] .
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[E13] .
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[E14]
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[E15] . 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[E16] . 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[E17] . 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[E18] . 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
to exclude themselves from the decision
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[E21] .
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.[E22]
Any matter or cause
already in court by the company can also be converted into a derivative claim
on application by a member[E23] .
Derivative claims may not
be approved by the court if they are frivolous, vexatious, brought for improper
purposes or otherwise without merit.
Next: Share Capital. READ
14 March 2016
CORPORATE GOVERNANCE
Refers to the systems and
processes for effective control and management of companies or firms[E25] .
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[E26] .
3.
Awareness on the guidelines and principles
of good corporate governance[E27] .
4.
Enforcement mechanism – due to a weak
enforcement regime, corporate governance standards are not taken seriously.
.
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[E29] .
2.
Good corporate governance enhances company
profitability[E30] .
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[E31] .
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[E32] .
Responsibility of the
board – there must be effective board practices as the board is a single most
important organ in corporate governance[E33] .
Protection of minorities
– minority shareholders must have mechanisms for participating in decision
making process[E34] .
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.
21 March 2016
KEY: in commercial
practice, the best negotiation is where everybody wins; where both parties get
the best deal possible[E35] . 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[E36] .
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[E37] .
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[E39] ergo the risk appetites by the capital
providers of the company.
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[E41] . 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[E42] .
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[E43] .
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[E44] – 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
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[E46] .
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[E47] .
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[E48] , anything done under liquidation, and any
matter agreed under voluntary arrangement.
d)
Employee share purchase schemes
e)
Private companies where the articles do
not expressly prohibit financial assistance.
4 April 2016
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[E50] ?
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
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[E52] . 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[E53] .
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.
PREPARE: 18th
April 2016 – presentation on questions to be sent. Focuses on legal analysis-
target on legal problem, applicable legal principles and the solutions.
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.
Traditionally, takeover
regulation seeks to solve 3 issues;
- Ensure
equality of treatment of shareholders[E56] .
There are two main
regimes for takeover regulation globally:
a)
UK model – Non-Interference[E58] 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[E59] .
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[E60] . Ensures no information is concealed that
will impact on the success of the takeover.
b)
Equality in treatment of all shareholders[E61] .
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)
Next:
11 April 2016
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[E62] . 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[E63] .
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[E64] . 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[E65]
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 LiimitedLiablity 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.
6 June 2016
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 iss 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:
- 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.
- 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
9 June 2016
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?
27 June 2016
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:
- When
there are alternative remedies – eg voluntary arrangements and
administration.
- When
the application does not comply with the Act or the regulations
Effect
of a court liquidation order
- 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.
- Stay
of all proceedings against or by the company unless with leave of court.
- Management
and control passes to liquidator. Director powers are suspended, only to
be exercised following approval of the liquidator.
- No
transfer or dealing in the property of the company is valid except with
the sanction of the liquidator.
- Company
under liquidation does not hold GM unless convened by the liquidator.
- 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
- Trace
and secure the company assets by obtaining the statement of affairs.
- Convene
the first meeting of creditors where one has not already been held. From
there, the liquidation committee is sanctioned.
- Take
over control and management of company with dispatch.
- Prepare
regular updates on the conduct of his liquidation to the Official Receiver
and Court.
- 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.
- Prepare
a report on the reasons of the failure of the company
- Realize
the assets of the company
- Make
a distribution of the realized assets to creditors in the manner
prescribed by the Act and the Regulations
- 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
- Convene
a meeting of creditors or members where necessary
- Require
the production of company records or any document from the officers or
directors
- Make
any enquiry or conduct any investigation for liquidation purposes. He can
summon any creditor or member to give any required information
- Transfer,
assign, sell, alienate or otherwise deal in the assets of the company.
- 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.
- Direct
any director to exercise any powers as he determines.
- Enter
into any compromise or arrangement with any creditor for the purpose of
discharging any debt.
- 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
- Making
liquidation order
- Making
any such other orders deemed fit for proper liquidation e.g. conservatory
orders, injunctions
- Appointment
of a liquidator on recommendation of Official Receiver where creditors and
company is unable to agree
- Receive
reports of the liquidator and make any orders deemed fit
- Make
orders on application of liquidator for production of any record borne by
any person which may assist in liquidation
- Impose
sanctions for offences related to liquidation.
Persons
obligated to contribute to company assets during liquidation
- Current
members and contributories – liable to contribute any unpaid capital due
from them.
- Current
guarantors
- 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.
- 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:
- members
and contributories
- directors
of the company
- creditors
- official
receiver
- any
supervisor appointed under voluntary arrangement
Grounds
for court consideration before making administration order
- 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.
- When
the company reasons for failure is other than financial reasons.
- When
there has been fundamental shift in the business of the company, requiring
someone with expertise to restructure the company.
- 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
- All
proceedings against the company for recovery of any debt or decree is
stayed.
- No
suit can be instituted for or against the company without leave of court
and approval of administrator.
- The
company continues to operate, save that the directors mght not exercise
certain powers as provided in the regulations without approval of the
administrator.
- Every
company must have in their documents and correspondence UNDER
ADMINISTRATION
- Unlike
liquidation, the company may not enter into contracts beyond certain
thresholds without the approval of the administrator.
- 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.
4 July 2016
CHATTEL
TRANSFER SECURITY
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[O66] . 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[O67] .
3.
Protect borrowers from burdensome
provisions under loan agreements on strength of chattels[O68] .
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[O69] .
Types
of instruments
- Chattel
mortgage instrument
- Instrument
of pledge
- Instrument
of lien
- Letter
of hypothecation
- Power
of attorney
Essential
requirements of instruments under the Act
To be valid, every
instrument must comply with certain legal requirements:
- The
instrument must be written
- Must
be attested to by a person who saw the grantor execute the instrument – by
way of affidavit.
- Must
be assessed for Stamp Duty and duty paid.
- Must
contain an inventory/schedule of all assets, properly described[O70] , being secured.
The inventory must have a
current valuation report
- The
instrument must be executed – the borrower must sign. There is no
obligation for the lender to sign.
- The
instrument must be registered[O71] within 21 days of
execution. Where executed at different times, the date of execution is the
date of the last signature.
- Every
registration must be renewed once every five years[O72] .
- 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 chattel should be of a known and fixed
value at the time of executing the instrument.
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 3rd 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[O75] .
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.
[E1]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.
[E5]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
[E6]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.
[E7]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.
[E12]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.
[E13]Where the company has
no memorandum of association, ergo unlimited objects, the director may only
exercise the powers for the intended purpose.
[E15]If
a director has a contrary view to a board decision, the director must ensure
that his objection goes on record.
[E16]The
director must be properly informed before making such decisions. The company
pays for the advisory services.
[E17]Eg
duty to attend meetings, duty to peruse and acquaint himself with financial
statements, maintain confidentiality in company affairs.
[E19]A
director may give a general disclosure in respect of all business concerning a
singular client, or a special disclosure in respect of a specific transaction
[E20]READ:
CMC Motors cases on conflict of interest and breach of director duties.
Affordable Homes Africa Ltd v Henderson & 2 Others
(2004) eKLR
Second Savoy Hotel investigation 1946
[E21]The
remedies available to the company against directors include damages,
injunctions, restitution, etc.
[E25]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.
[E26]Eg
the Companies Act provide extensive shareholder rights. This promotes increased
attention to ensure the same are implemented.
The act provides that the CMA issues binding guidelines
for good corporate governance. See 2002 and 2015 and 2016 draft guidelines on
good corporate governance applying to publicly listed companies.
Licensed financial institutions under the CBK have
mandatory requirements under the Banking Act to comply with the CBK guidelines
on good corporate governance.
[E28]READ:
Seven Sins by Gandhi M.
-
Religion without sacrifice
-
Wealth without work
-
Politics without principle
-
Commerce without ethics
-
Pleasure without conscience
-
Science without humanity
-
Knowledge without character
The Famous Asian Values.
[E30]Good
corporate governance in companies creates higher ROI than those with poor
corporate structures. It enhances the resilience of the company to take good
advantage of business opportunities.
[E31]Eg
the companies must provide for participation of disabled shareholders, is the
meeting notice adequate to promote attendance, is the venue of the meeting
accessible to all shareholders?
[E32]This
principle includes:
-
Preparation of financial statements using
globally accepted accounting standards (Financial Reporting Accounting
Standards), as stipulated by the regulator.
-
Firms
must regularly prepare their reports and statements within prescribed time.
-
Firms should avail the reorts and statements to
persons entitled to receive them eg members, registrar, government stakeholders
such as CMA and CBK.
-
The statements should be publicized in the
manner prescribed.
-
The company should provide information and
updates on material changes affecting the company.
-
The reports and statements must have a
responsibility statement from the directors.
[E33]The
guidelines under this include:
-
The board must be properly constituted. It must
be appointed in the manner provided in the company constitution
-
The board must comply with the laws. Eg the CMA
regulations require boards of publicly listed members must comprise of at least
1/3 non-executive members.
-
The board must be the right size, based on the
business of the company and comparative peer companies. Not too large or too
small. CMA prescribes minimum and maximum numbers (ranging 7-15 members)
-
Board diversity. The board should focus on
bringing in people of specialized interests, regardless of silo-mentality. The
principle encourages companies to have a formal board nominations committee
which oversees formal appointment of new board members.
-
Board must have formal structures (committees)
for meeting its mandate and fit for the business of the company. Listed funds
are required by the CMA to have at least 3 committees, and licensed banks under
CBK should have certain mandatory committees. Look at the law or principle
which sets forth the mandatory committees. The committees must be adequately
resourced to carry out their duties. The members should be remunerated. The
board must have a formal process of receiving and acting on committee
recommendations.
-
Capacity of board members – members should have
expertise, skill, training, knowledge, aptitude and temperament required for
the office. Board members must be inducted into the values of the company and
the core businesses of the company. They should also be subject to continuous
capacity building training in keeping in touch with developments in the
business field and specialized committees receive specialized training. Board
members should have access to specialized advisors.
-
The board members should be independent of undue
influence and pressure. There should be mechanisms to shield board members from
undue influence from other persons. The board owes its primary responsibility
to the company and not the members. Eg the company may require members to only
communicate with the board members in writing. Members should be sensitized on
how to interact with the board.
[E34]Information
rights under the Companies act are due to all shareholders.
The Act requires companies to establish a formal
association to look after interests of minority shareholders.
At least one director is to be appointed to the board
to represent minority interests.
[E36]Chap
14-16 Act
Chap 23, 24, 25, 7, 9 Gower on Company Law
Chap 7-12 Charlesworth on Company Law 10th
Edition onwards
[E38]Sec
323 – the ownership of shares is personal to the named shareholder. There is no
right of automatic transfer or transmission of shares in case of death,
bankruptcy or mental incapacity. The shares can only be transferred or
transmitted in the manner provided for in the articles.
Successors only have a right to be compensated for the value of the shares if a shareholder dies.
[E39]Some
investors seek preservation of capital with no interest in the decision making
process. They may therefore favor preference shares. They would prefer the
minimum guaranteed returns accompanying reference shares.
[E40]The
return on preference shares may be lower than in ordinary shares, as their
return is usually set.
Return on Ordinary shares vary with the profits.
[E41]Give
notice to persons entitled to receive notice of availability of shares with
option to purchase them.
Preemptions rights apply to two cases – equity
securities (convertible debt) and treasury shares (authorized and issued shares
– shares not allotted and has become available to the company).
READ: Equity Securities in Trans Century case.
[E42]Exceptions
to preemption rights
-
Bonus shares
-
Non-cash offers
-
Employee share schemes
-
Private companies, provided the articles
expressly state that preemption rights do not apply.
[E45]The
reduction may be by reducing the value per share, or reducing the absolute
number of shares.
The company is required to publicise the application
for reduction in capital.
[E46]The
court application gives an opportunity to stakeholders such as creditors to
file objections for the reduction in capital.
[E48]One
can apply to court to be exempted while restructuring the business. This can be
ensured by using the assets of the company as collateral for the new investors.
[E51]Must
be presented and clarifications provided. Presentation is for information
purposes only. Members have no power to approve or reject audited accounts.
Members’ recourse is holding the directors to account
for the poor performance. This is because auditors have statutory duty to state
whether, in their view, their accounts have been prepared in accordance with
the accounting standards.
[E52]FIND: CASE LAW
Misconduct e.g. breach of confidentiality undertaking
to the company.
Failure to conduct audit within time entitles the
members to remove the auditor.
Conflict of interest between the auditors and the
company empowers the Registrar or Court to remove them. Grounds for removal are
specific are clear, to avoid interference with independence of the auditors.
[E53]Where
auditors feel uncomfortable with statements are presented, they can issue a
qualified opinion in their audit report.
The auditors coordinate with the directors in preparing
their report. They then sign them and hand them over to the directors, who then
present the audited accounts to the members.
[E54]Provisions
on takeovers have not been operationalized as they are complex. The Act
provides that CMA is to publish the detailed regulations on Takeovers.
CMA has had merger and takeover regulations to publicly
listed firms. The current Act seeks to extend takeover regulations to private
firms.
However, the regulations are meant to be a guide and
voluntary, with no sanctions for noncompliance.
-
However, the CMA has powers where it can apply
to the High Court on non-compliance for injunction or such other orders on a
takeover bid.
-
The CMA can also withhold assistance or
cooperation with non-compliant persons (cold-shoulder treatment)
-
The CMA can refer to other public agencies for
sanctions against the non-compliant companies.
We foresee two kinds of takeover regulations – public
listed firms, private and small firms, public and large unlisted firms.
This follows the structure of the UK City Code of Takeovers developed by
private stakeholders. It is voluntary, and is regulated by the City Panel made
up of lawyers, investment bankers etc.
[E55]Shareholders
are investors in the company seek a good return on capital. They may not oppose
a takeover bid where it is advantageous and makes financial sense.
Directors on the other hand are interested in control and governance of the company,
and may fear losing such control to a new entity and may resist a takeover.
[E56]An
offeror may be tempted to provide favorable terms to majority shareholders
compared to the minority in order to gain control of the company at a cheaper
price. Regulation thus seeks to protect interests of all shareholders.
[E58]The
board must facilitate all information to promote the processing of the offer.
Kenya follows the British model.
[E59]This
includes diluting the shareholding by issuing more shares, inflating the price
of shares by being active in the market, disposing of certain assets to reduce
attractiveness of the company, etc.
[E60]Obligations
are on the offeror, and on the directors of the target company.
-
Include shareholding structure
-
Liabilities
READ
Includes:
-
[E61]Takeover
bids must be circulated by all share and debenture holders
-
Bids must be approved by a resolution of members
-
Members must be given their right to excercise
their preemption rights during takeover.
[E62]Limited
partnerships have at least one general partner with unlimited liability, and
all the other partners have limited liability subject to the provisions in the
Partnership deed.
The limited partners have no control over the affiars
of the partnership.
The general partners has more effective control and
decision making powers over the partnership.
This business model encourages passive investors to
bring in capital and invest. It also spreads the risk in the business.
READ: points of preference while choosing between the
types of partnerships.
[E63]Where
there is a violation leading to loss, the other partners can sue the offending
partner, or the partnership can sue, or both of them.
[E64]A
partnership can be broken up under Sec 35, or dissolved under sec 54, 50, 51 or
55.
A partnership ends when the purpose of its formation
has ended. A partnership for term means members cease to be partners when the
term lapses.
[E65]Notice
of power is taken to be either within the actual knowledge of the third party,
or something that is discoverable upon due diligence.
[O66]The
Movable Properties Securities Bill 2016 is intended to update the law regarding
chattels provided as securities.
The Act will not cover asset financing and other financial
arrangements with the value exceeding 4m.
[O67]A
chattel registered as security has certain restrictions on transfer or
movement, giving lenders confidence to accept them as security.
[O68]Such
borrowers often are not savvy borrowers. Their alternative option was to rely
on shylocks for loans – high interests and penalties.
The Act provides implied terms and conditions for
borrowing on security under chattels.
The Act protects borrowers by providing what the lender
can or cannot do in terms of realizing security.
Historically, the Act served farmers from the 1930s who
were not allowed to hold land to enable them acquire credit using movable
property – machinery, equipment or household goods.
[O69]It
must not be a social obligation.
The Act does not specify the range of Chattels
instruments. Any asset can be subject of a chattels transfer instrument.
[O71]The
Act establishes the office of the Registrar of Chattels, which will become a
department in the Business Registration Services Authority.
The obligation to draw and register any instrument is
on the lender.
The Registrar is required to keep a register of all
registered chattels in Kenya and give all a serial number.
[O72]The
security is valid for only five years unless renewed.
Chattels depreciate or might have been destroyed.
[O75]For
non payment of refund due to no salary, this is fundamental breach. Possible
remedy is giving notice calling for payment within period (NOTICE CLAUSE), or
default interest, or provide for an escalation clause which entitles
termination and realization of security following systematic default.
For instance, for bodaboda, where borrower fails to take
insurance in breach of the instrument, possible remedy is that the lender can
either insure and claim refund, realize the security by taking possession and
selling, or requiring by notice that the borrower insures the asset within a
specified period.
FIND: SECURED CREDITORS AND INSURABLE INTERESTS
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