general survey of the law relating to companies as contained in the. Companies Act Under the law a company incorporated under the Act is a distinct entity. COMPANY LAW: COURSE CONTENT INTRODUCTION The formation and winding up of a company in Kenya is governed by t h e Company's Act Cap of. to its very existence”. Another comprehensive and clear definition of a company is given by Lord . Saloman's case established beyond doubt that in law a registered company is an entity distinct from its .. Write notes on: a). Chartered .
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Companies and Partnerships Compared. (a) A company can be created only by certain prescribed methods - most commonly by registration under the. These are my lecture notes from our lectures on Company Law. They are based on Cases and Materials in Company Law, (Eighth Edition) L. Sealy and Sarah. week textbook notes: the nature of company: company/corporation, is collection of people who by law, have exist and have rights and duties separate/distinct.
The Lawyers' Arena. A Lawyer with a difference. Where Law Meets Practice. Find here anything and everything about Law. These are companies which are formed and registered under that Act.
The Multinational companies like Coca-Cola and, General Motors have their investors and customers spread throughout the world. This definition does not reveal the distinctive characteristics of a company. The common stock contributed is denoted in money and is the capital of the company. The persons who contribute it, or to whom it belongs, are members.
The proportion of capital to which each member is entitled is his share. From the above definitions, it can be concluded that a company is registered association which is an artificial legal person, having an independent legal, entity with a perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.
Incorporated association. A company is created when it is registered under the Companies Act. It comes into being from the date mentioned in the certificate of incorporation. It may be noted in this connection that Section 11 provides that an association of more than ten persons carrying on business in banking or an association or more than twenty persons carrying on any other type of business must be registered under the Companies Act and is deemed to be an illegal association, if it is not so registered.
For forming a public company at least seven persons and for a private company at least two persons are persons are required. These persons will subscribe their names to the Memorandum of association and also comply with other legal requirements of the Act in respect of registration to form and incorporate a company, with or without limited liability [Sec 12 1 ] 4 2.
Artificial legal person. A company is an artificial person. Negatively speaking, it is not a natural person. It exists in the eyes of the law and cannot act on its own. It has to act through a board of directors elected by shareholders. But for many purposes, a company is a legal person like a natural person. It has the right to acquire and dispose of the property, to enter into contract with third parties in its own name, and can sue and be sued in its own name.
However, it is not a citizen as it cannot enjoy the rights under the Constitution of India or Citizenship Act.
It should be noted that though a company does not possess fundamental rights, yet it is person in the eyes of law. It can enter into contracts with its Directors, its members, and outsiders. Justice Hidayatullah once remarked that if all the members are citizens of India, the company does not become a citizen of India.
Separate Legal Entity : A company has a legal distinct entity and is independent of its members. The creditors of the company can recover their money only from the company and the property of the company. They cannot sue individual members. Similarly, the company is not in any way liable for the individual debts of its members. The property of the company is to be used for the benefit of the company and nor for 5 the personal benefit of the shareholders.
On the same grounds, a member cannot claim any ownership rights in the assets of the company either individually or jointly during the existence of the company or in its winding up. At the same time the members of the company can enter into contracts with the company in the same manner as any other individual can. Separate legal entity of the company is also recognized by the Income Tax Act. Where a company is required to pay Income-tax on its profits and when these profits are distributed to shareholders in the form of dividend, the shareholders have to pay income-tax on their dividend of income.
This proves that a company that a company and its shareholders are two separate entities. The facts of the case are as follows : Mr. The debentures carried a floating charge on the assets of the company. Saloman and his two sons became the directors of this company. Saloman was the managing Director. After a short duration, the company went into liquidation. But the House of Lords held that the existence of a company is quite independent and distinct from its members and that the assets of the company must be utilized in payment of the debentures first in priority to unsecured creditors.
There is no difference in principle between a company consisting of only two shareholders and a company consisting of two hundred members.
In each case the company is a separate legal entity. He voted himself the managing Director and also became Chief Pilot of the company on a salary. He died in an aircrash while working for the company.
His wife was granted compensation for the husband in the course of employment. Court held that Lee was a separate person from the company he formed, and compensation was due to the widow. Thus, the rule of corporate personality enabled Lee to be the master and servant at the same time. Companies are thus better organ for doing business. Where an action is brought against a partnership, it is one against all the partners.
For this reason, where a sole trader carries or business in a name other than his own name he cannot commence action in that name in V. Patel v. National contractors 21 EAACA 39, National contractors took objection proceedings by originating summons in the name of national contractors as plaintiffs in respect of certain properties seized in execution by the appellant in respect of a decree against one Devrah Ramji, on the ground that National contractors was a partnership between Devraj Ramji and one J.
Patel, at the time of execution that the goods were partnership property and that they were not subject to attachment for the separate debt of Devraj Ramji. There was evidence that J. Patel had retired from the partnership and that Devrj Ramji had notice of the retirement.
It was held that an individual had no right to institute legal proceedings in his business name. The first choice is for the promoters to consider between limited and unlimited companies. If a company is limited it could be by shares or guarantee, if not limited it would be an unlimited company. Section 8 of the companies Act provides that for purposes of the Act, a company is an unlimited company if: a There is no limit on the liability of its members.
The promoters must also decide whether the company is to be private or public. Section 9 of the companies Act, defines a private company to mean a company which by its Articles i Restricts the right to transfer its shares. Any company which does not fall in this definition is a public company. In order to form a public company, there must be at least seven persons to sign the memorandum of Association. They declare their intention to be formed into a company. And a copy up the propsed b Articles of Association These documents must be signed by at least seven or two persons where it is a public or private company as the case may be.
The signatures must be attested by a witness. A person so signing the memorandum is referred to as a subscriber. If the company has a share capital each subscriber must state opposite his name the member of shares he takes and must not take less than one share. Section 5 4 b of the companies Act states that no subscriber to the memorandum shall take less than one share.
This is used to compute the stamp duty as per sections 13 4 a and 14 of the Companies Act. This is a statutory declaration made either by the Advocate engaged in the or by a person named in the Articles as a director or secretary to the effect that all the requirements of the companies Act have been complied with in the case of public companies only the other document is a list of persons who have agreed to become the directors and also the written consent of the directors to act.
These are the only documents which are to be lodged with the registrar of companies so as to have the company registered. There are other documents which the law requires to be filed on incorporation these include: Notice of the situation of the Registered office.
Under S. The statement of proposed officers as per section 16 of the Act "The company shall within a period of 14 days from the date of the appointment of the first directors, deliver to the registrar for registration a return in the prescribed, form containing the particulars specified in the register and a notification in the prescribed form of any change among its directors or in its secretary or in any of the particulars contained in the register specifying the date of the change".
These documents are lodged with the Registrar of companies who sensitizes them and on finding then in order he registers then and issues a certificate of incorporation and the company is thereby formed as per section 17 of the Companies Act. Under section 17 from the date of incorporation mentioned in the certificate the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum, capable of exercising all the form actions of an incorporated company with power to own land and having perpetual succession and a common seal under section A certificate of incorporation given by the registrar in respect of any association shall be conclusive merits of this Act, in respect of the registration and of matters precedent and incidental thereto have been complied with and that the association is a company authorised to be registered and duly registered under this Act.
This is intended to clear any doubts that may arise thereafter. Together with registered companies, we also have statutory corporations. The difference between the two is that a statutory corporation is created by an Act of Parliament. The companies Act does not create a company as such but merely lays down the process by which two or more persons may create such a corporation by complying with the rules set by the Act. It is therefore capable of enjoying rights and being subject to duties.
The company is a legal entity in its own right. The full implications of legal personality were never understood fully not even by the courts until the case of Solomon v.
The company had a membership of seven being Salomon, his wife, daughter and four sons. Later, there were industrial strikes which pushed the company into in solemnly and was finally wound up. The unsecured creditors sought legal action entitled to the assets of the company before Solomon, the debentures holder could be paid.
Ltd were really the same person with Solomon, and argued that Solomon could not owe money to himself. In the HighcourtUpjohn J. Ltd is a separate and distinct entity from Salomon and any other member.
Ltd before any unsecured creditors. Lord MCNanghten put it this: In order to form a company limited by shares the companies Act requires that a memorandum of Association should be signed by seven persons who are each to take one share at least. If those conditions are complied with, what can it matter whether the signatures are relatives or strangers?.
There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected or that they or any one of them should take a substantial interest in the undertaking or that they should have a mind of their own or that there should be anything like a balance of power in the constitution of the company when the memorandum is duly signed and registered, through there may be only 7 shares taken, the subscribes are a body corporate capable forthwith of exercising all the functions of an incorporated company.
These are strong words. The company attains maturity at its birth. There is no period of minority no interval of incapacity. A body corporate thus made capable by statute cannot loose its individuality by issuing the bank of its capital to one person, whether he be a subscriber or not. The company is at law a different person altogether from the subscribers, though it may be that after in corporation, the business is precisely the same as it was before and the same persons are managers and the same hands receiver the profit the company is not in law an agent or trustee for them.
Nor are the subscribers as member liable in any shape or from except to the extend and the manner provide by the Act". As is illustrated by the following case, the assets of the company belong to it and not to the members. Shareholders do not have an insurable interest in other assets nor do creditors unless they have a security.
Macaura v. Northern assurance co. Lts  a. Macaura owned a timber estate in Britain. The total was issued to Macaura and his nominees. He took out an insurance policy bearing his own name to secure the company. Later, most of the timber was gutted by fire and Macaura went to the insurance company and claimed compensation or against the fire in his own name.
It was held that Macaura as a person had no insurable interest in the estate either as a creditor or as a shareholder. In Ratate v. It was alleged that while he was a director and Deputy Chairman of the company the petitioner had collected various sums of money from debtors of the company and failed to pay them over to the company or to account for them.
The action was filed in the Native court. The relevant stature, the jurisdiction of the Native courts Act was limited to those cases in which all the parties were natives. In suing the petitioner the respondent admitted quite frankly that he was acting on behalf of Angole African Society Ltd as an agent. The problem was Angole African commercial society Ltd was or was not a native.
It was held that a limited liability company is a corporation and as such has an existence distinct from the shareholders who own it. The distinct legal entity is not capable of having racial attributes and was not therefore a native, even if all the shareholders were natives.
Another case explaining the concept of corporate personality is Lee v. Lee's Air farming Ltd. Lee formed the A. Lee owned of the shares and the remaining shares was held by a solicitor in trust for him. Lee was therefore the beneficial owner of all the shares. Lee was appointed the company's director and employed at a salary as the chief pilot. Ac was killed in an aircraft while working for the company. His widow claimed compensation under the workmens compensation Act.
The issue was whether Lee was entitled to any compensation and whether he was a worker. A worker was defined as a person who had entered into a contract of service with an employer as per the stature. Had Lee entered into a contract with the company or the company was another face of Lee?
It was held that it was a logical consequences of the decision of Salomon v. The deceased was a workman and his widow qualified for compensation. In the case of a company limited by shares a member will be liable only for the amount payable on his shares if the company is limited by guarantee, then the liability is limited to the amount quarantined to be paid.
Section of the companies Act provides; Under Section 5 of the Companies Act , a company is a company limited by shares if the liability of its members is limited by the Company's Articles to any amount unpaid on the shares held by the members.
How does this compare with unincorporated Associations? In the case of clubs and society's, there will be an implied term that the members are not personally liable for obligations on behalf of the clubs. In Bradley Egg farm Ltd. They contracted with a society was not incorporated. The society official who carried out the test was negligent and as a result some of the poultry died and the Plaintiff sought to recover damages from the society.
The issue was that since the society did not have a separate legal existence from the members who was liable for the negligence of the official was it the society or the executive committee? It was held that to make all the members liable will amount to giving the society the status of separate legal entity which they did not have. The society therefore was not liable only the Executive Committee was liable where such a committee of an unincorporated association is found liable it will be entitled to be indemnified from the funds of the Association.
Unincorporated associations can sue under a representative capacity, where one party represents the rest in a representative capacity. At commonlaw, a company is not allowed to appear otherwise than by an Advocate, and not by an official such as a manager. In East African Roofing Co. Dandit 27 JKR 86, the Plaintiff company filed an action for the recovery of money from the Defendant. The Defendant entered appearance and filed a defence admitting liability, but praying to be allowed to pay the money by instalments.
The Company secretary thereby took a hearing date exparte. On the hearing date no appearance was made by either party and the court dismissed the action.
The company opted to set aside the exparte dismissal. At the hearing the company was represented by an Advocate. The only ground for setting aside was that the company had hoped to be represented by their manager who had gone to court but was in the wrong court room at the first hearing. It was the first hearing. It was held that a corporation such as a limited liability company can only be represented by a Lawyer. This was the commonlaw position. To remove this commonlaw rule Order 3 Rule 4 of the civil procedure rules provides that appearance in respect of a corporation may be made by an officer of the corporation duly authorised under the corporate seal.
There must be a written message under seal, otherwise representation should be by Advocates. It can not die like a human person since it is born by a process of law it can only be destroyed by the same process.
Unless and until that process is brought into play, it cannot be brought to an end hence a company has perpetual succession and hives indefinitely. This however, is subject to section 30 of the companies Act shares in a company are freely transferable and the transferee steps into the shoes of the transferor as a member. Section 30 provides that private companies should restrict the right to the transfer of shares.
One must comply with conditions under the Articles in case of private companies. In a partnership one partner cannot assign his interest except with the consent of all the other parties. Even then, the outgoing partner continues to be liable for all the debts and obligations of the firm incurred while he was a partner. The only way he can escape liability for such debts is by entering a tripartite agreement between himself, the remaining partners and the creditors whereby he will be released from liability for the debts of the firm.
This agreement is referred to as a oration. This is facilitated by the device of a floating charge. A floating charge is "a charge which floats like a cloud over all the assets of the company from time to time falling within a generic description but without preventing company from disposing of those assets in the ordinary course of business until something causes it to crystallise and fasten on the assets".
A floating charge is an equitable security. It does not attach on any property at all as opposed to the legal charge which is attached to a particular property of the company.
The company is not limited from disposing such a charge. Sole traders and partnerships are not allowed to do so. Anything in the possession of the bankrupt can be attached but this provisions does not apply to companies.
Throughout its life a company is required to file certain documents like annual returns balance sheets and profit and loss Accounts. These are public Documents and may be examined by any member of the public on paying of an examination fee. Their preparation requires the payment of money. The company's affairs are therefore publicised and there is no more privacy, as there is a lot of interference in the company's affairs.
Even in liquidation, a company must follow a particular procedure this is a legal formality under the Act. Companies are also subject to the partnership doctrine to which partnership and sole proprietorships are not subject. In such situations, the law ignores the corporate entity of the company and instead pays regarded to the surrounding economical realities.
These situations must be referred to as exceptions to the instances under which the corporate personality is ignored are provided for under statue and by commonlaw. Under section of the companies Act a company is required to have at least one director who is a natural person.
This is complied with if the office of director is held by a natural person as cooperation sole. INDEMNITY Under section 3 provision by which a company provides directly or indirectly for an indemnity for a director of the company or an associated company against a liability attaching to the director in connection with any negligence, default or breach of duty or trust in relation to the company is void.
However under section 4 the company may download insurance against any such liability. ACCOUNTS Under section of the companies Act, every company shall keep its accounting records at its registered office and ensure that the records are open to inspection by the officers of the company for a period of not less than seven years.
Under section , of the company does not comply, then the company and each officer of the company who is in default commits an offence and is liable, in the case of the corporate body to a tune of Kshs. In the case of a natural person to a tune not exceeding Kshs. It is shown that any person has been carrying on business with intend defraud creditors or for any fraudulent purpose, the courts in the application of the official receiver or liquidator or creditor may declare that any person who were knowingly parties to the fraud shall be personally responsible for the debts or any others liabilities of the company incurred fraud however, us a difficult allegation to prove.
Within he first six months, the company was debited with the whole of that salary which was more than he should have got. Towards the end of to March the company was in serious financial troubles that it could not pay its dents as they dell due. Dividends, by law are not declared when the company is making losses. William continued doing this and ordered goods making the company to incur debts.
The liquidator applied for William to be held liable under section in that he knew that the company could not pay debts, he was doing so fraudulently and should be personaally liable. It was held that for the company to carry on business yet William knew, was fraudulently and William was personally liable to the credidors. In the words of Justice Mongham: "If a company continues to carry on business and incurs debts at a time when there is, to the knowledge of the directors, no reasonable prospects of the creditors receiving payments of the debt, it can generally be inferred that the company is carrying on business with intention to defraud.
The same judge ruled; "The word fraud and fraudulent purpose where they appear in the section are words which connote actual dishonesty involving, according to the correct notions of fair trading among commercial men real moral blame. No Judge has even been willing to define fraud and I am attempting no definition.
Because the creditor made the application he was entitled to payment. Loard Denning held that where the application is made by the official receiver or liquidator, then the money will from part of the general assets liable for distribution to the creditors.