Opinion of Changes in The Companies Act

The new Act has drawn heavily from the UK Companies Act of 2006 and because of its extensive nature, has brought about monumental changes to company Law in Kenya. While new Act doesn’t in a whole new code of corporate governance and doing business in Kenya, that revolutionalises the Law, what it does is to introduce much heavier regime requiring substantial compliance.

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The new Act has drawn heavily from the UK Companies Act of 2006 and because of its extensive nature, has brought about monumental changes to company Law in Kenya. While new Act doesn’t in a whole new code of corporate governance and doing business in Kenya, that revolutionalises the Law, what it does is to introduce much heavier regime requiring substantial compliance. Companies in Kenya, will need to devote greater resources to ensuring that there affairs are run in accordance with the new laws on Companies in Kenya and modernization of stature law on the subject.

With the new company regime, company law and general corporate governance has seen server changes but I’ll highlight 3 major changes:

  1. Incorporation of a private company under the new Companies Act 2015
  2. Directors statutory general duties in Kenya.
  3. Offences and penalties under the new Act.

Incorporation of a private company

A company is a private company if

  1. It restricts the right of members to transfer shares
  2. Limits the number of members to 50
  3. Prohibits invitation to the public to subscribe for shares or debentures. This definition is largely maintained from the definition as was in the 1968 Companies Act.

How to incorporate

The new Act has made attempts to simplify the incorporation process by providing that a person wishing to incorporate a company should lodge with the registrar the following:

  1. An application for registration containing the proposed company name, registered office, liability of members (whether limited by shares or guarantee), nature of the company (if private or public) and name and address of the agent if an agent is used to make the application.
  2. The Application for registration may contain/be accompanied by a statement of capital and initial shareholding and the Memorandum of Association and/or Articles of Association.

I am not quite certain if the form of application for registration has already been published, but it is likely that an investor will only require completing the application for registration and filing Memorandum of Association in order for the company to be incorporated.

Other new provision relating to incorporation of a private company include:

  1. The consent of the initial Director and secretary of a company will need to consent to their appointment to that office. Seems this consent will be contained in the application for registration.
  2. The proposed name of company may contain characters or symbols as the regulation to be publishes pursuant to the act will provide.
  3. The company’s registered office may be outside Kenya.
  4. Requirement for a statutory declared for an Advocate engaged in formation of the company has been done away with and replaced by a statement of the directors which will be contained or accompanied with the application for registration.
  5. The company will not be obligated to appoint a company secretary if its issued share capital is less than Kshs. 5 Million.
  6. Objects of the company can be unrestricted.
  7. Company does not need to have more than one directors and one shareholder.

Directors statutory general duties

Companies as generally understood are district legal personalities independent of those who own or manage it. As such, it can enter into legal relationships in the very same breath individuals can. However, companies can only act through agents and directors in this case are agents through which the company’s business and affaris are conducted and managed.

The Act defines a director is including any person occupying the position of a director, whatever his title. There is therefore no distinction between executive (management) and non-executive (supervision) and all directors have same duties and liabilities to the company.

A company’s articles establish a company Board of Directors and rest in the board the power an authority to run the company on behalf of the shareholder. The duties and liabilities of Directors to the company have until now been governed by common law rules and principles which have now been codifies in the Act.

The duties of a director are owed to the company of which he is a director. Nevertheless, in exercising his duties, the director must have regard to, amongst other, the interests of shareholders, employees, creditors and there general public.

The Act provides that the general duties of directors contained in the Act are based on common law rules and equitable principles that apply in relation to directors and have effect in place of those rules and principles with respect to the duties owed to a company by a director.

General duties of a director

Duty to act within power and to use powers for the right purpose

A director must act with the scope of the company’s constitution and only exercise powers for the purposes for which they are conferred. Every director must ensure that powers granted to him are only exercised for the purposes for which they are given.

Duty to promote the success of the company
  1. A director must act in the way in which he considers, in good faith, would promote the success of the company for the benefit of its members as a whole.
  2. The character in so doing shall have regard to:
  3. Long term consequences of such decisions.
  4. Need to foster business relationships with suppliers customers and others
  5. Interests of employees
  6. Impact of company on the community and environment
  7. Desirability of the company to maintain a reputation of high standards of business conduct.
  8. The need to act fairly as between directors an members of the company. (The list is not exhaustive – other relevant factors must be considered)
Duty to exercise independent judgment

A director must exercise independent judgment. He doesn’t infringe on this duty if he acts

  1. In accordance with the Agreement entered by company which restricts future exercise of tis directors’ discretion.
  2. In a way authorized by the company’s constitution.

Equally so, if for purposes of executing his mandate and exercising independent judgment, the subject matter under consideration is beyond the scope of skill and knowledge of the Director, he is within his right to seek professional advice on the account of the company. However, after receiving the professional advice, he is obligated to exercise independent knowledge from a point of knowledge.

Duty to exercise reasonable are, skill and diligence in performance of his duties.
Duty to avoid conflict of interest

A director must avoid a situation in which he has or can have direct/indirect interest/influence that conflicts of may conflict with the interests of the company. This duty applies particularly to taking undue advantage to privileged information in the position of a director.

Duty not to accept benefits from 3rd parties

This duty is not infringed if the acceptance can’t reasonably be regarded as likely to give rise to a conflict of interest.

Duty to declare interest in proposed or existing transactions or arrangement.

Offences to penalties under the new Act

The cat has introduced significant penalties for non-compliance with its provisions by a company and/or its directors. The average fine ranges between Kshs. 20,000 and 1 million. This represents a significant change from the amended Act.  

Offences and penalties

A company or each officer of the company who is in default is liable upon conviction to the following fines or imprisonment terms:-

A fine not exceeding Kshs. 200,000 when a company:

Fails to file its amended articles with the registrar not later than 14 days after resolution containing amendment is passed.

  1. Does not file within 14 days after the agreement is passed or made, the following resolutions and agreements with the registrar.
  2. Special resolution
  3. Resolution for voluntary liquidation
  4. Resolution regarding transfer of securities
  5. Resolution or agreement agreed to by all members or
  6. A resolution relating to the company’s market or off-market purchase of its own shares.
  7. Doesn’t comply with registrar’s direction to change its name where the registrar is of the opinion that the name has been registered on the basis of misleading information or where the name of the company gives an indication of the nature of its activities that is so misleading as to be likely to cause harm to the public.
  8. Fails to notify the registrar within 14 days after the appointment or resignation of a director or a change in a director’s particulars or residential address.
  9. Fails to keep available for inspection a copy of each director’s service contract with a company or its subsidiary.
  10. Fails to file with the registrar a return of allotment of share within one month after making the allotments of shares.
  11. Fails to file an annual return (or files one that does not comply with the prescribed particulars) with the registrar.

The company and each officer of the company that is convicted of the above offences and continues to default commits a further offence and is liable to a fine not exceeding Kshs. 200,000 for each such offence on each day on which the failure continues.

A fine not exceeding Kshs. 500,000 when a company:-
Fails to comply with a member’s request for copies of
  1. Articles of association of the Company.
  2. Any special resolution or arrangement filed with the company
  3. Current or past certificates of incorporation of the company
  4. Current statement of the company’s capital where it has share capital or a statement of guarantee where it is limited by guarantee.
  5. A court order altering the company’s constitution or sanctioning a compromise involving the company or facilitating reconstruction or amalgation.
Fails to have its name legible engraved on its common seal.
Fails to:
  1. Display its name and other prescribed information in specified places
  2. State prescribed information in prescribed kinds of the company’s documents and communication.
  3. Provide prescribed information on request to those with whom the company deals with in the course of its business.
Fails to keep a register of members, to enter in its register certain prescribed information and to file a copy of the register with the registrar within 14 days of its preparation or after making an amendment to the register.
Expunges an entry in its register relating to a member before the expiry of 10 years after the date on which the person ceased to be a member.
Fails to keep a register of director’s residential addresses that contains the usual residential address of each director.
Fails to issue notice of a general meeting in the manner and with the notice containing the prescribed particulars.
Fails to keep copies of all resolutions of members passed at all general meetings and to keep such records for at least 10 years from th date of the relevant resolution, meeting or decision.
Fails to issue a share certificate within 2 months after the allotment of or the transfer of any of its shares.

For most of the above offences, the company and each officer of the company that is convicted of the offences and continues to default commits a further offence and is liable to a fine not exceeding Kshs. 50,000 for each such offence on each day on which failure continues.

A fine not exceeding Kshs. 1,000,000 when;
  1. Company fails to keep a register of its directors which complies with the prescribed requirements and to keep such register open during ordinary hours for inspection by any member of the company or any other person.
  2. A director accepts a benefit from a 3rd party where the benefit is attributed to the fact that the person is a director of the company or to any act or omissions of the person as a director.
  3. A director fails to declare an interest in a proposed or existing transaction or arrangement.
  4. A person breaches a disqualification order of disqualification undertaking.
  5. A person knowingly or recklessly authorizes the inclusion of misleading, false or deceptive particulars in a register of secretaries. The person convicted of this offense is also liable to imprisonment for a term not exceeding 2 years.
  6. A public company fails to hold a general meeting as its AGM within months from and including the day following its accounting reference date in each year, whether or not it hold other meetings during that period.
  7. A company allots its shares at a discount.
  8. A company exercises its powers to subdivide or consolidate its shares without its members having passing an ordinary resolution authorizing it to do so.
  9. The directors of a company make a solvency statement, which is file with the registrar without having reasonable grounds for the opinions expressed in it.
  10. A company subject to a certain additional limitation in case of a public company makes a distribution other than out of profits available for that purpose.
  11. A public company conducts business or exercise a borrowing power without a trading certificate issued by the registrar.
  12. A person issues an offer document in relation to a takeover bid for a company whose securities are listed on a Kenyan securities exchange and the offer doesn’t comply with takeover rules. In the case of a corporate body the fine is Kenya Shillings Two Million (Kshs. 2,000,000/-)
  13. A company fails to keep proper accounting records and to keep those accounting records at its registered office. In the case of a body corporate, the fine is Kshs. 200,000 and Kshs. 1,000,000 or imprisonment not exceeding 2 years or both in the case of a natural person.
  14. The directors of a company fail to prepare an annual financial statement and where the financial statement does not comply with the requirements of the companies Act.
  15. The directors of equated company fail to prepare a director’s remuneration report for each financial year of the company and where the remuneration report does not comply with the requirements of the Company Act 2015 ( on conviction for failure to prepare the report, a director may also be liable to imprisonment from a term not exceeding 3 years or both.)
  16. A company fails to guard against falsification of its records or to facilitate the discovery of falsification of those records.

Some of the above offences, the company and each officer of the company that is convicted and continues to default commits a further offence and is liable to a fine not exceeding Kshs. 100,000 for each such offence on each day on which failure continues.

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