REFORM OF KENYAN COMPANY LAW

Monday, April 23, 2012
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The Companies Bill, 2010 (the “Bill”) is intended to repeal Cap 486 and is one of five pieces of legislation approved by the Cabinet over the past few months, which are aimed at modernising Kenya's business laws, making it easier for local and foreign investors to set up shop in Kenya.

The Bill aims to develop a modern company law to support a competitive economy in a coherent and simple form, taking into consideration the current trends on globalisation and regional integration with particular reference to the East Africa Community and aims to reflect the present day circumstances of carrying on business including modern patterns of regulation and ownership.

Although the Bill appears not to have succeeded in developing the law in a “simple form” since the Bill is almost twice the length of Cap 486, it is indeed a more detailed and structured piece of legislation with clearer divisions between the several aspects of a company law.  It codifies common law principles, in particular the indoor management rule and common law fiduciary duties of directors’. Along with this, it modernises company law by recognising electronic communication and the use of websites for a company’s communications.  The Bill also comes with a greater sting as penalties and fines for offences are significantly increased.

Other key highlights of the Bill include:

One Member Company

Cap 486 required that private companies have at least two shareholders.  By contrast, the Bill permits one-member companies and requires that the register of Members includes the name and address of that member and a statement that the company has only one member. There are no restrictions on increasing the number of members to more than one other than the company ensuring that the additional member/s details are entered in its register of members.

Directors

The Bill requires that private companies have at least one director whereas public companies must have at least two directors.

The Bill states that directors must be natural persons and must be over eighteen, raising questions as to whether it is intended that corporate entities should no longer be directors of companies as is the case under Cap 486.

Company Secretaries

Cap 486 requires that every company shall have a secretary who is qualified in accordance with section 20 of the Certified Public Secretaries Act, 1988.  The Bill alters this position, so that private companies with a nominal capital of less than Five Million Shillings (KES. 5,000,000) are not required to have a secretary.  Instead, a director or authorised person may fulfil the duties of a secretary.

Not surprisingly, this proposal has been met with opposition from the Institute of Certified Public Secretaries of Kenya (“ICPSK”), who are lobbying to have the Bill amended so that company secretaries are required for all public companies, all private companies with a nominal capital of at least One Hundred Thousand Shillings (KES 100,000) and all companies of a public nature registered as limited by guarantee.  In addition, ICPSK recommends that the Bill should be revised so that the position of Company Secretary may only be occupied by one registered with the ICPSK.

Resolutions and Meetings

Previously a matter not unusually contained in a company’s Articles of Association, the Bill permits members of a private company to pass a resolution either at a meeting or as a written resolution, which may be sent in hard copy or electronic form. Interestingly, an ordinary resolution can be passed by way of a written resolution that is, if it is passed by members representing a simple majority of the total voting rights of eligible members and a special resolution can be passed in writing if it is passed by members representing not less than 75% of the total voting rights of eligible members. However, written resolutions cannot be used to remove a director or auditor before expiration of their term.

Financial Assistance

Financial assistance includes a gift, guarantee, security, indemnity, release or waiver, loan, novation, assignment of rights under a loan. The Bill contains a prohibition against a limited company acquiring its own shares, or giving financial assistance directly or indirectly for that acquisition before or at the same time as the acquisition takes place.  However, the Bill does not prohibit a company from giving financial assistance for the acquisition of its shares if:

  • the acquisition is not the primary reason that the assistance is given; or
  • the assistance is incidental to some larger purpose of the company, and is given in good faith in the interests of the company.

This is likely to be a welcome development for transactional lawyers when addressing structuring issues.

Trading Certificates

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. There are severe consequences for doing business without a trading certificate. If a company enters into a transaction in contravention of this provision and fails to comply with its obligations within twenty one days, then the directors at the time the transaction was entered into would be jointly and severally liable to indemnify any other party to the transaction for any loss or damage suffered.

At the date of writing, the Bill had 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 nineteen pieces of legislation required for implementation of the new Constitution, the deadline for which falls at the end of August 2011.

Joyce Karanja is a Partner at Coulson Harney Advocates