PROSPECTS THE COMPANIES BILL (2010) HOLDS FOR THE DEVELOPMENT OF COMPANY LAW IN KENYA
February 26, 2012 5 Comments
Summary of the same in the March 2012 issue of the Nairobi Law Monthly p.84, vol. 3 issue no. 3
The UK Company Law Act of 1948 formed the substance of Kenyan Company Law which itself evolved from the 17th Century from regulation of trading companies, to the Bubble Act of 1720 and finally, the present day Companies Act of 2006 after having gone through numerous amendments to keep in stride with the changing modes of Corporate Law and Practice.
The 1948 Companies Act, that substantially followed in Kenya made far reaching changes in the law relating to company accounts. It was based on the Cohen Report of 1945 . As the Lord Cohen said, “The history of company legislation shows the increasing importance attached to publicity in connection with accounts.”
It also brought unique aspects of incorporation of Companies, directorship and company secretarial practice. In time, various aspects of Kenyan Company Law also developed in tandem with new legislation, examples being:
- Since the abolition of the Exchange controls in the mid 1990’s, Kenya does not require the directors of Companies to be Kenyan. Similarly, save for Companies in telecommunications, broadcasting, insurance, banking etc, there was no longer any requirement for the shareholders of the Company to be Kenyan
- The Ultra Vires doctrine with regard to the Memorandum of Association regarding Objects, in the Kenyan context, the essence of the doctrine remains largely undiluted. A point many would say relates from the lack of codification of common law principles into the Companies Act, Cap 486 Laws of Kenya.
UK Company law has since undergone tremendous developments to deal with the challenges of modern business and despite the various task forces set up in Kenya over the last 12 years to review and recommend a model law based on the requirements of modern business, we are still using the law that was in force in England almost 60 years ago and which has been discarded in most of the Commonwealth.
One difficulty with the current Companies Act Cap 486 is the lifting of the corporate veil as encapsulated by Salomon Vs Salomon. In Re William Letch Bros Ltd, the court gave the word fraud a very liberal definition and noted that, “where a Company continues to carry on business and incurs debts at a time when to the knowledge of the Directors, no reasonable prospects of the Creditors ever receiving payment of these debts, it is, in general a proper inference that the Company is carrying on business with the intent to defraud and in that case, the corporate veil can be lifted. Section 323 of the Companies Act recognizes that the shareholders and directors can be held liable for the debts and liabilities of the Company if it is proved that they were fraudulent in their dealings. However, the practical challenge that arises in attempting to lift the “corporate veil” is the difficulty of proving fraud. The degree of proof required is higher than in ordinary civil cases and often times there is never enough evidence to prove it. This has led to the development of Shareholders Agreements, although this development has to conclusively take effect to avoid the current loopholes in the “Corporate Veil Doctrine’ The Shareholders Agreement can practically make any provision for any conceivable eventuality in their relationship and thereby address in advance most of the issues which lead to disputes, litigation and even winding up of the Company. Examples of such matters include but are not limited to Shareholding Ratios, Appointment of Directors, Formulation of Business Plan, Working Capital, oppression of minority shareholders, deadlock provisions, transfer of shares, dividend policy, supremacy over the Articles of Association, arbitration etc.
The Attorney General proposed the Companies Bill in 2008 with the first and second drafts being made in 2010 and 2011. The Bill has only gone through two of three parliamentary reading stages; the first reading on 30th March 2011 and the second reading on 24th May 2011. It awaits the committee stage before the final, third reading following which it will need to receive Presidential assent and a commencement date. However, it is not clear when the Bill will come into force as presently, Parliament’s focus appears to be on enacting key pieces of legislation required for implementation of the new Constitution, the deadline for which falls at the end of February 2012. The bill aims to amend the Companies Act (Chapter 486) so as to bring the act into line with emerging trends in the formation and operation of companies and to simplify the formation and operation of such companies. The Bill is a more detailed and structured piece of legislation with clearer divisions between the several aspects of a company law. It attempts to codify common law principles (indoor management rule and common law fiduciary duties of directors) and it takes note of current trends in globalisation and technology changes and closer home, the process of integration of the East Africa Community.
Highlights of the Bill
Certain sections of the Bill recommend key amendments to the Act:
- Clause 5 allows for the formation of a one-person company. The existing act provides that a private company must have at least two members and a public company must have at most 50 members.
- Clause 6 provides a simplified memorandum of association and greatly reduces the information required to be provided therein. Under the existing law, members must set out all the objects of the company in the memorandum, with the result that such memoranda are usually lengthy.
- Clause 16 empowers the Minister responsible for companies to prescribe model articles of association which companies may adopt wholly or with amendments. A company to which model articles apply need not register the articles with the registrar. Under the existing law, members must register articles with the registrar of companies even when they adopt the prescribed model articles in full.
- Clause 24(1) provides that the objects of a company are unrestricted, unless its articles specifically impose restrictions. The existing law is based on the common law doctrine of ultra vires to the effect that a company’s objects are restricted to those specifically set out in its memorandum.
- Clause 85, 190 and 213 allow information to be disseminated among members in hard copy or electronically or posted on a website. The existing Companies Act requires such information to be disseminated as hard copy.
- Clause 165 and 172(4) provide that a resolution in writing is as effective as one passed at a meeting of company members. The existing law envisages meetings whenever a resolution is to be passed. Under existing rules, minutes of any meeting during which a resolution was passed must be filed whenever a resolution is to be filed with the registrar.
- The Bill introduces the requirement for trading certificates for public companies, which must be obtained prior to doing business or exercising any borrowing powers. The Registrar of Companies will issue a trading certificate if s/he is satisfied that the nominal value of the allotted share capital of the company is not less than the authorised minimum i.e. Six Million Seven Hundred Fifty Thousand Shillings (KES. 6,750,000). The trading certificate is effective from the date it is issued and is conclusive evidence that the company is entitled to do business and exercise any borrowing powers. Fine accruing on Company operating without a trading certificate is provided for in Section 299 of the Companies Bill (2010)
- Clause 604 empowers the Minister responsible for companies to establish regulations relating to foreign companies. Such regulations must stipulate that a foreign company must provide specified particulars to the registrar in the event that the company opens a branch in Kenya. The existing act specifies the particulars that a foreign company must provide, including:
- a certified copy of the instrument constituting or defining the constitution of the company;
- a list of the company’s directors and secretary;
- a statement of all subsisting charges created by the company;
- and the name and postal address of a person in Kenya authorized to receive notices on behalf of the company; and the full address of the company’s registered or principal office.
The proposed bill by all means should be made Law. Allowing communication of a company’s information in electronic form and through websites will ease communication and facilitate the efficient operation of companies. The elevation of written resolutions to the same status as resolutions passed in meetings of members will facilitate speedy decision making and improve efficiency in company operations. The simplification of the memorandum of association and the exemption from registering articles of association for companies to which model articles apply will make formation of a company easier and faster. As such, if passed into law the proposed amendments will simplify and demystify the formation and operation of companies.