COMPANY LAW 3rd YEAR

LECTURE ONE

INTRODUCTION

Definition of a ‘company’

The companies with which this unit is concerned are called ‘registered companies’ because they
are brought into existence by registration of documents with the Registrar of companies under
the provisions of the Companies Act, No. 17 of 2015, Laws of Kenya.

The Companies Act 2015 of Kenya does not offer a comprehensive definition of the term
‘company’. Section 3(1) of the Act states that a company means “…a company formed and
registered under this Act (Companies Act 2015) or an existing company.” The definition is
vague due to the fact that the word ‘company’ is not a legal term. The definition and the legal
attributes of a company differ from one legal system to the other.

The most important legal characteristic of a registered company is that it is ‘incorporated’ and so
has what is known as ‘legal personality’. From a legal perspective, a company may be defined as
an independent legal entity that is capable of employing people; buying and selling
goods/services in its own name. A company is also capable of owning property for purposes of
conducting the business for which it is established. It can be bought, sold and inherited by its
successive owners. Therefore, a company is an artificial legal person with a legal personality
which is distinct from its members/shareholders.

In a modern capitalist market economy, companies are a familiar part of everyday life. A
company is a legal entity which is created by process of law and exists only by virtue of the law,
meaning that without the law companies cannot exist. Historically, non-corporate bodies such as
sole proprietorships and partnerships were not adequate for the development of modern
capitalism since, among other reasons, they did not provide any means for business people to
limit their liability, and more importantly, they did enable the investors and other business people
sufficient access to capital.
Later on, it was discovered that these aims could only be achieved through a legal framework
which enabled business organizations to have a separate legal personality from their members;
hence the introduction of company law. At the heart of company law is the ability of an
individual or a group of people to register a company and from the date of such registration, a
corporate person comes into being. The corporate person has a legal personality distinct/different
and independent from that of its creators or members/shareholders and possesses a wide range of
legal rights and duties.

Therefore, there are 2 fundamental legal concepts in company law;

(a) The concept of legal personality; also known as ‘corporate personality. It is the concept
by which a company is treated in law as a separate legal entity distinct from its
members/shareholders.

(b) The concept of limited liability.

Kenya’s legal system provides for three major types of associations;

(a)Companies

(b) Partnerships

(c)Cooperative societies

Partnerships

Persons carrying on a business with the common view of making a profit without being
incorporated are said to be in partnership business.

The fundamental difference between carrying on business in a partnership and being a member
of a registered company is that being a partner in a partnership imposes liability for all the debts
and obligations on the partner, regardless of any agreement to the contrary between the partners.
Whereas, a member of a registered company is not liable for all the debts of the company unless
such liability is imposed on the member by the company’s constitution or by statute.

Sole Proprietorship
An individual who carries on a business personally without partners is said to be the ‘sole
proprietor’ of the business.

In a sole proprietorship, there is no legal separation between the business and the personal affairs
of the sole proprietor, and he/she is directly responsible for all the debts incurred in carrying on
the business.

Sources of Company Law in Kenya

Kenya’s company law consists partly of ordinary rules of Common Law and equity and partly of
statutory rules.

1. Statutes and Regulations

a) The Companies Act, No. 17 of 2015, Laws of Kenya

The Companies Act, No. 17 of 2015, was assented to/signed into law by the President on 11 th
September, 2015 and borrows heavily from the UK Companies Act 2006. The Act repeals the
Companies Act, Cap. 486 which came into force on 1 st January, 1962 and was based on the
English companies Act of 1948.

The Companies Act 2015, is an Act of Parliament which provides for the incorporation,
registration, operation, management and regulation of companies, the appointment and functions
of auditors e.t.c.

The Act makes it possible to form a single-member company. Initially, a company had to have at
least 2 members. This means that an investor who would rather invest alone can do so without
having to look for partners.

Like its predecessor, the 2015 Act provides for several types of companies. However, the Act
now has clear guidelines on how a company that wishes to change its status may do so. A
company may alter its status from private to public, public to private, private limited company to
unlimited company, unlimited company to limited company, and public company to unlimited
liability company.
Like the old Act, the 2015 Act provides that a private company must have at least one director
and a public company must have at least two directors. For one to be appointed a director, they
need be at least 18 years.

All public companies are required to have at least one company secretary. However, a private
company is only required to have a company secretary if it has a paid-up capital of five million
shillings or more.

b) The Companies (General) Regulations, 2015

c) The Insolvency Act, No. 18 of 2015, Laws of Kenya

Section 3 of the Insolvency Act states that the one of the objectives of the Act is to establish and
provide for the operation of a framework for the efficient and equitable administration of the
estates of insolvent companies and other bodies corporate. This is with a view to maintaining a
fair balance between the interests of the companies and those of their creditors.

d) The Capital Markets Act, Cap. 485A, Laws of Kenya

2. Case Law, Common Law Rules and Equity

Legal principles drawn from judgments and rulings in court cases are of great significance in
company law.

Types/Classification of Registered Companies

There are three characteristics of a company which determine which type it is:

(a) Whether the members (shareholders) have limited or unlimited liability;

(b) Whether the company is private or public (Unlimited companies must be private
companies);
 (c) Whether the company does or does not have a share capital (A company without a share
capital must be private).

1. Limited Companies versus Unlimited Companies

Basically, the term ‘liability’ means the extent to which a person can be made accountable in
law. In the case of registered companies, a person may be made fully accountable for the
company’s debts or partially accountable, whereby they are only required to contribute capital
for the payment of the company’s debts to a certain limit and not beyond it.

Almost all registered companies are incorporated with limited liability. A registered company
with limited liability is called a ‘limited company’, whereas, a registered company without
limited liability is called an ‘unlimited company’.

Generally speaking, the principle of separate legal personality means that the
members/shareholders of a company are not responsible for its debts unless they are made
responsible by statute or the constitution of the corporation. Therefore, a creditor cannot sue the
members/shareholders of company directly.

In the case of Oakes v. Turquand and Harding (1867) LR 2 HL 325, p. 357 Lord Cranworth
said:

“There is no doubt that the direct remedy of a creditor is solely against the incorporated
company. He has no dealing with any individual shareholder, and if he is driven to bring any
action to enforce any right he may have acquired, he must sue the company, and not any
members of whom it is composed”.

Therefore, instead of being made directly liable to the creditors of the company, the members/
shareholders are made liable by statute only if the company is wound-up. Moreover, if the
company is wound-up, the members’/ shareholders’ liability is to the company as a separate
independent legal entity, and not to any individual creditors. The members’/ shareholders’
liability when the company is wound-up, is to contribute money for the payment of the
company’s debts and liabilities, and the expenses of winding-up. Thus, if a company is an
unlimited liability company, basically, it means that if the company is wound-up the members’/
shareholders’ liability to contribute money for the payment of the company’s debts and
liabilities, and the expenses of winding-up, is unlimited.

On the contrary, if a company is a limited liability company, the members’/ shareholders’

liability when the company is wound-up is limited to a fixed amount agreed with the company
when they became members/ shareholders. The fixed amount may be an amount payable on
shares or an amount payable by guarantee.

Invention of the Limited Liability Company

At the start of the 19th century, apart from corporations created by the crown or the state, there
were basically three ways in which people could engage in business in England. People could
engage in business as sole traders, as partners in a partnership or as an unincorporated body in
which some people managed the business while the rest provided capital. In each of these cases,
if the business became insolvent, the creditors could pursue their debts with any and all of those
involved until they became bankrupt. In those days, not paying your debts was a crime leading to
debtors’ imprisonment, followed by the possibility of your wife and children being sent to the
parish work-house. The situation was quite disincentive/discouraging to the spirit of investment
because people feared the harsh consequences that followed if the business went under. More
importantly, the situation became worse due to the fact that this was a period of great economic
growth, generated by the industrial revolution. Firms/businesses needed capital to expand faster
than the ploughed-back profits could allow, but none of the investors was willing to take the risk.

In an attempt to remedy the problem, the French were the first to create a form of corporate
incorporation which restricted shareholders’ liability. From 1807, France passed a law which
limited the liability of external investors, but executive directors still remained personally
exposed to their companies’ debts.

Meanwhile in Britain, the need for companies to access capital without exposing the external
investors to the threat of bankruptcy was debated in Parliament. Some members of Parliament
called for a form of incorporation that mirrored the French system. The British Companies Act of
1855 and 1862 which gave limited liability to all shareholders whether they were involved in the
management of the company or not was passed.
The Companies Act proved to be one of the finest systems ever designed. The concept was the
incorporation of a legal entity, separate from the owners, which possessed many of the legal
property rights of a real/natural person. For example, the right to contract, to sue and be sued, to
own property and to employ. This meant that the shareholders were no longer responsible for the
company’s debt. The company now had a life of its own, an attribute which gave it continuity
beyond the life of its members/shareholders. This also enabled the members to transfer their
shares in the company for continuity purposes.

The notion of the limited liability company was simple and successful, leading to huge industrial
growth around the world, and the creation of massive employment opportunities and wealth. The
concept spread throughout the British empire in the late 19 th century. The company laws of
Australia, Canada, some Caribbean islands, India, Malaysia, New Zealand, Singapore, South
Africa and other African countries reflect the British company law, although these countries’
laws have evolved with time, in order to reflect their changing situations.

(a) Limited Companies

Under Section 5 of the Companies Act 2015, Laws of Kenya, a company is a limited company if
it is a company limited by shares or by guarantee. The difference between a limited company by
guarantee and a limited company by shares is that, in a limited company by guarantee the limited
amount that the members/shareholders are liable to pay is payable only on the winding-up of the
company. On the other hand, in a limited company by shares it is expected that at least part of
the payment will be made while the company is a going concern or in existence prior to its being
wound-up. The contributed amount becomes the company’s ‘share capital’.

Therefore, in a limited company by shares, one of the risks that the creditors bear is that the
company’s share capital contributed by the members/shareholders while it is a going concern,
may be lost or completely used up before it is wound up.

ü Characteristics of Companies Limited by Shares

Under Section 6 of the Companies Act 2015 provides that a company is a company limited by
shares if;
 (i) it has a share capital;

(ii) the liability of its members is limited by the company’s articles to any amount
unpaid on the shares held by the members.

Moreover, a company is limited by shares if its certificate of incorporation states that it is a

company limited by shares.

ü Characteristics of Companies Limited by Guarantee

Section 7 of the Companies Act 2015 states that a company is a company limited by guarantee if;

(i) it does not have a share capital;

(ii) the liability of its members is limited by the company’s articles to the amount
that the members undertake, by those articles, to contribute to the assets of the
company in the event of its liquidation; and

(iii) its certificate of incorporation states that it is a company limited by

guarantee.

Companies limited by guarantee are not as popular as the companies limited by shares. However,
companies limited by guarantee are appropriate for certain activities.

(b) Unlimited Companies

Under Section 8 of the Companies Act 2015, a company is an unlimited company if;

(i) there is no limit on the liability of its members; and

(ii) its certificate of incorporation states that the liability of its members is
unlimited.

2. Private Companies versus Public Companies

The key distinction between public companies and private companies is that a public company
may invite members of the public to contribute to its share capital by buying the company shares,
whereas, a private company cannot make such invitation to the public.

(a) Private Companies

Under Section 9 of the Companies Act 2015, a company is private company if;

(i) its articles of association restricts a member’s right to transfer shares;

(ii) its articles of association limits the number of members to fifty;

(iii) its articles of association prohibits invitations to the public to subscribe for shares or
debentures of the company;

(iv) it is not a company limited by guarantee; and

(v) its certificate of incorporation states that it is a private company.

(b) Public Companies

Under Section 10 of the Companies Act 2015, a company is a public company if;

(i) its articles of association allows its members the right to transfer their shares in the
company;

(ii) its articles of association does not prohibit invitations to the public to subscribe for shares
or debentures of the company; and

(iii) its certificate of incorporation states that it is a public company.

In light of the above, the following companies can be registered in Kenya;

(a) Public limited company with share capital

(b) Private limited company with share capital (very popular in Kenya)

(c) Limited company without share capital, known as “company limited by guarantee”
(d) Private unlimited company with share capital

(e) Private unlimited company without share capital

Foreign Companies

The Companies Act 2015, also regulates the operations of foreign companies. Section 3 of the
Companies Act 2015 defines a foreign company as “…a company incorporated outside Kenya”.

Advantages of Incorporation

(a) Limited liability

Since a corporation is a separate person distinct from its members, its members are not liable for
its debts. In the absence of any provisions to the contrary, the members are completely free from
any personal liability.

(b) Holding/owning property

Corporate personality acquired through incorporation enables a corporation to own property that
is distinguishable from that of its members.

(c) Capacity to sue and be sued

As an artificial legal person, a corporation can take a legal action to enforce its legal rights in its
own name. Likewise, a corporation may be sued for breach of its legal duties.

(d) Perpetual succession

As an artificial legal person, a corporation has no soul or mind. It is invisible, immortal and
exists only by virtue of the law. A corporation can only cease to exist by a process of the law
(known as winding-up). It is not subject to the death of a natural body. Even though its members
may come and go, a corporation continues to exist.

(e) Transferability of shares

The shares of a company are transferable and upon the transfer the assignee steps into the shoes
of the assignor as a member of the company with full rights as a member. However, this
advantage can only be fully enjoyed by public companies and not private companies.

(f) Borrowing facilities/capabilities

Generally speaking, corporations can raise capital by borrowing much more easily than non-
corporate bodies such as sole proprietorships and partnerships.

Disadvantages of Incorporation

(a) Too many formalities required in the formation and registration of companies

(b) There is maximum publicity of the company’s affairs

(c) There are a lot of expenses incurred in the formation, registration and management of a
company.

In order to form and register a company, certain documents must be prepared and registered with
the Registrar of companies. Whereas, no such documents need to prepared in order to establish
business organizations such as sole proprietorships and partnerships. Throughout its life, a
company is required to file documents such as annual returns, profits and loss accounts and
financial statements because the Companies Act 2015 is based on the disclosure principle.

Summary
Introduction
Definition of A Company
● The Company Act No. 17 of 2015 does not offer any comprehensive definitions of the
term “Company “
● Section 3(1) states that a company means “ A company formed and registered under this
Act or an existing company”.this definition is vague due to the fact that the word is not a
legal term. The definition and the legal attributes of a company differ from one legal
system to another.
● The most important legal characteristics of a registered company is that it is incorporated
and so it has a legal personality therefore from a legal perspective a company may be
defined as an independent legal entity that is capable of employing people, buying and
selling goods /services in its own name.
 ● A company is also capable of owning property for purposes of conducting business for
which it is established.
● It can be bought, sold and inherited by its successive owners.
● Simply put; a company is an artificial legal person with a legal personality which is
distinct from its members /shareholders.
● There are two fundamental legal concepts in company law.
a) The concept of legal personality also known as corporate personality.
b) The concept of limited liability

Types /Classifications of Registered Companies in Kenya

● There are 3 characteristics which determine types of Registered companies which include
a) Whether the members /shareholders have limited or unlimited liability.
b) Whether the company is private or public.
c) Whether the company does /does not have a share capital.

Limited Companies vs Unlimited Companies

● The term liability means the extent to which a person can be made accountable in law.
● In the case of Registered companies a person may be made fully accountable/partially
accountable for the company's debt.
● In part, the person is only required to contribute capital for the company's debt to a
certain limit and not beyond it.
● A company registered with limited liability is known as limited company.
● A company registered without a limited liability is known as an unlimited company.

a) Limited Companies
● Under Section 5 of the Company's Act, a company is a limited company, if it is a
company limited by shares or guarantees.
● The difference between a limited company by guarantee and a limited company by shares
is that in limited company by guarantees the limited amount that the members are liable
to pay is payable only on the winding up of the company by shares it is expected that part
of payment will be made when the company is still existence prior to it being winded up.
The contributed amount becomes the company's share capital.

Characteristics of company's limited by shares

● Under Section 6; a company is limited by shares if;
a) It has a share capital.
b) If the liability of its members is limited by the companies articles of associations
to any amount unpaid on the shares to the members.
c) If its certificate of incorporation states that it is a company limited by shares.
Characteristics of Company's limited by guarantees
● Section 7 states that a company is a company limited by guarantee if;
a) It does not have a share capital
b) The liability of its members is limited by the company's articles to the amounts
the members.. to contribute to the assets of the company during liquidation.
c) If its certificate of incorporation states that it is a company limited by guarantee.

b) Unlimited Companies
● Under Section 8, a company is unlimited company if;
a) There is no limit of liability to its members.
b) Its certificate of incorporation states that its liability of its members is limited.

Private Companies vs Public Companies

Characteristics of Private Companies
● Under Section 9:a company is private if,
a) its articles restrict a member's right to transfer shares.
b) Its articles limit the number of members to 50.
c) It's articles prohibits invitations to the public to subscribe for shares/debentures of the
Company
d) It is not a company limited by guarantee.
e) Its certificate of incorporation states that it's a private company.

Characteristics of a Public Company

● Under section 10, a company is a public company if;
a) It's articles allows members the right to transfer its shares
b) Its articles do not limit its invitation to the public to subscribe to its
shares/debentures.
c) Its certificate of incorporation states it's a public company.

LECTURE TWO

THE CONCEPT OF LEGAL PERSONALITY/CORPORATE PERSONALITY

Legally, the most significant feature of a company is its dual nature. A company is both an
association of its members and a person separate from its members. As a person separate from its
members, a company can own property, enter into contracts, and be a party to legal proceedings.
On the other hand, as persons separate from the company, the members do not own the
company’s property, do not carry on its business, and do not owe its debts.
In summary, a company’s property is owned by the company as a separate person, not by the
members; the company’s business is conducted by the company as a separate person, not by the
members; it is the company as a separate person that enters into contracts in relation to the
company’s business and property, not the members. This is known as the concept of ‘legal
personality/corporate personality’.

The implications of corporate personality were not fully understood until 1897 in Salomon v. A
Salomon and Co. Ltd (1897) AC 22. In England it was common in the 19th century for
businesses previously conducted by sole proprietors or partnerships to be incorporated. To
achieve this goal, the business would be sold to a company whose only members were its
previous owner or owners and sufficient nominees to make up the then minimum number of 7
members.

Mr. Salomon had conducted his boot-making business as a sole trader. He sold it to a company
incorporated for the purpose (boot-making business) called “A Salomon and Co. Ltd”, whose
only members were himself, his wife, a daughter and four sons. These 7 individuals were the
subscribers of the company’s memorandum and took one £1 share each.

The business was sold to the company for over £39,000. Part of the purchase price was used by
Mr. Salomon to subscribe for 20,000 additional £1 shares each in the company (giving him a
total of 20,001 shares in the company), but £10,000 of the purchase price was not paid by the
company. Instead, the company issued Mr. Salomon with a series of debentures (written
acknowledgements of indebtedness) for £10,000 and gave him a floating charge on its assets as
security for the debt.

Unfortunately within one year of incorporation the company ran into financial problems, the
company’s business failed and the company went into liquidation. If Mr. Salomon had been able
to enforce his floating charge, the company’s other creditors would have gotten nothing.
Therefore, the company’s liquidator, took stand on behalf of the other creditors. He resisted Mr.
Salomon’s claim and suggested that rather than take money from his company, Mr. Salomon
should be made responsible for paying all its debts, just as he would have if he had continued to
conduct the business as a sole trader. The liquidator wanted somehow to ignore the fact that Mr.
Salomon had sold his business to a separate legal person known as “A Salomon and Co. Ltd”,
and that Mr. Salomon now had only limited liability to the company instead of the unlimited
liability he had when he conducted the business as a sole trader.

The court of first instance and the Court of Appeal held that the company was a sham, and an
agent and trustee of Salomon. Therefore, Salomon was liable to indemnify the company against
its trade loss.

The House of Lords reversed the decision of the Court of Appeal. In the words of Lord
Macnaghten;

“...the company is at law a different person altogether from the subscribers to the memorandum;
and though it may be that after incorporation the business is precisely the same as it was before,
and the same persons are managers, and the same hands receive the profits, the company is not in
law the agent of the subscribers or trustee for them...”

Lord Halbury LC on the other hand stated:

“...once the company is legally incorporated it must be treated like any other independent person
with its rights and liabilities appropriate to itself...”

The fact that a company’s property is the property of the company as a separate person, not of
the members was recognized in Macaura v. Northern Assurance Co. Ltd (1925) AC 619. The
facts of this case were that, Macaura, the owner of a timber estate sold all the timber to a
company known as ‘Irish Canadian Sawmills Co. Ltd’ in which he owned almost all the shares,
for a consideration of £42,000. Payment was effected by issuing him with 42,000 shares fully
paid up in £1 each. This made Macaura the only shareholder and the majority shareholder.

The company proceeded with the cutting of the timber. In the course of these operations,
Macaura lent the company £19,000 and this made him the company’s largest creditor. Being the
company’s majority shareholder and the largest creditor, Macaura insured the timber against fire
by insurance policies taken out in his own name. Unfortunately, the timber was destroyed by fire
and he sued the insurance company for compensation. However, the insurance company refused
to pay any indemnity to Macaura on the ground that he had no insurable interest in the timber at
the time of effecting the insurance policies.
The House of Lords held that in order to have an insurable interest in property a person must
have a legal or equitable interest in the property and not merely a moral certainty of profiting or
losing from the property.

Therefore, Macaura’s claim against the insurance company failed. It was clear that Macaura had
no insurable interest in the timber and although he owned all the shares in the company and the
company owed him a great deal of money, nevertheless, neither as a creditor nor a shareholder
could he insure the company’s assets.

In the words of Lord Wrenbury;

“...the corporator even if he holds all the shares, is not the corporation and that neither he nor any
creditor of the company has any property legal or equitable in the assets of the company”.

In Lee v. Lee Air Farming Ltd (1961) AC 12, Mr. Lee formed a company with a capital of
£3,000 divided into 3,000 shares of £1 each. Lee held 2,999 shares and the remaining share was
held by a 3rd party as his nominee. In his capacity as the majority and controlling shareholder,
Lee voted himself as the company director and chief pilot.

In the course of his duty as a pilot, Mr. Lee was involved in a crash in which he died. His widow
brought an action against the company for compensation under the Workman’s Compensation
Act. The Act defined a workman as “...a person employed under a contract of service”. The
issue before the court was whether Mr. Lee was a workman under the Act or not.

The House of Lords held;

“....it was the logical consequence of the decision in Salomon’s case that Lee and the company
were two separate entities capable of entering into contractual relations and the widow was
therefore entitled to compensation”.

Summary
The Concept of Legal Personality /Corporate Personality
● Legally, the most significant feature of a company is its dual nature, a company is both
an association of its members and a person separate from its members.
● A company can own property, enter into contracts and be a party to legal proceedings.
 ● As a person separate from its members, the property of the company belongs to the
company and not the members.
● The company's business is conducted by the company as a separate person and not by the
members, it's the company as a separate person that enters into contracts in relation to it's
business and properties and not the members. This is known as the concept of legal
personality /Corporate personality. Salomon VS A Salomon and Co. Limited.
● The legal implications of the concept of legal personality were never fully understood
until 1897 on the above case
● The fact that a company's property is the property of the company as a separate person ,
was recognized in the case of Makaora VS Northern Assurance Co. Ltd. After the
Makaora case came another case of Lee VS Lee Assurance Company

LIFTING/PIERCING THE CORPORATE VEIL (IGNORING THE CORPORATE

PERSONALITY)

As previously pointed out, the most important idea of company law is that a company is a
separate legal person capable of owning property, being a party to contracts and suing or being
sued, and has its own legal rights and obligations.

It is therefore, a basic principle of company law that the members/shareholders of a company

cannot claim its property or its legal rights. It is also a basic principle that the
members/shareholders of a company are not responsible for its liabilities and obligations. (REF;
Salomon v. A Salomon and Co. Ltd (1897) AC 22).

For many years following the court’s decision in the Salomon’s case, there was an extensive
discussion of whether a court can ignore the separate legal personality of a company, and treat
the company’s property, rights and obligations as belonging to a person who owns and controls
the company (shareholders and directors). This is known as ‘lifting or piercing the corporate
veil’.

Circumstances under which the Corporate Veil will be Lifted/Pierced

1. Where there is an Agency Relationship

If the legal relationship of agency exists between two people, called the principal and the agent,
then the principal is responsible for whatever the agent does within the scope of the agency. The
agent has the authority to create legal relations, such as contracts, between the principal and 3 rd
parties. Generally speaking, nothing in company law prevents a person from agreeing that a
company is to be his agent, making that person liable for whatever the company does within the
agency. Such liability arises under agency law but not company law.

In the absence of agreement to an agency relationship, the Salomon case clearly established that
the mere fact that a person is a member of a company does not in itself make the company an
agent of that person. In practice it is therefore, very unlikely that a company will be found to be
an agent of its members.

The characteristic feature of agency is that the agent has authority to create legal relations
between the principal and 3rd parties. In order to find that a company is not a separate legal entity
but the agent of one or more of its members, this authority or capacity must be present.

Again in practice, the whole object of creating a company to carry on a business is that the
business will be the company’s business and not its members’ business. It is very rare therefore,
to find that the members have set up a company to carry on a business of which they have
retained ownership.

In Smith, Stone & Knight Ltd v. Birmingham Corporation (1939) 4 ALL ER 116, Smith, Stone
and Knight Ltd carried on the business of manufacturing paper in Birmingham city. In the same
city there was a partnership which carried on business as merchants and dealers in waste paper.
The plaintiff company bought the partnership and the partnership business became part of the
company’s property. Subsequently, the plaintiff caused the partnership to be incorporated as its
wholly owned subsidiary company called ‘Birmingham Waste Co. Ltd’, with a share capital of
£502 divided into 502 shares of £1 each. Smith, Stone and Knight Ltd held 497 shares in
Birmingham Waste Co. Ltd and the remaining 5 shares were held by nominees of Smith, Stone
& Knight Ltd.

The subsidiary company nominally operated the waste-paper business, because the plaintiff
company never actually transferred ownership of the waste-paper business to the subsidiary
company and it retained ownership of the land on which the waste-paper business operated. The
subsidiary company had its name placed on the premises and on invoices, as though it was still
the old partnership carrying on business. A manager was appointed for the subsidiary company
but there were no other staff. The books and accounts of the subsidiary company were all kept by
the plaintiff company and the manager of the subsidiary company did not know what was
contained therein and had no access to them. There was therefore, no doubt that the plaintiff
company had complete control over the subsidiary company. There was no tenancy agreement
between the companies, and the waste company never paid any rent. Apart from having a
different name, it was if the manager of the subsidiary company was managing a department of
the plaintiff company.

Later on, a company called ‘Birmingham Corporation’ (the defendant company) compulsorily
acquired the land on which the subsidiary company was carrying on the waste-paper business as
a result of which, the plaintiff company sued Birmingham Corporation claiming compensation
for removal and disturbance. The defendant company argued that the proper claimant was the
subsidiary company but not the plaintiff company because in law, the subsidiary company was a
separate legal entity.

The court held that occupation of the land by a separate legal entity was not conclusive on the
question of a right to claim and as a subsidiary company, it was not operating on its own behalf,
but on behalf of the plaintiff company. The subsidiary company was an agent of the plaintiff
company and not a separate legal entity. Therefore, the plaintiff company which was the parent
company was entitled to compensation both for the value of the land and for disturbance of the
business because it owned both the land and the business.

Since Smith, Stone and Knight Ltd held 497 shares out of 502 in the subsidiary company and the
remaining 5 shares were held by its nominees, unlike in Salomon's case, Birmingham Waste Co.
Ltd was found to be carrying on business as agent of its principal member (Smith, Stone &
Knight Ltd). The crucial difference is that the business of A Salomon and Co. Ltd was formally
transferred to it by its principal member (Mr. Salomon) and so it had become the business of the
company, whereas, the business which Birmingham Waste Co. Ltd operated was never
transferred to it and thus remained the property of its principal member (Smith, Stone & Knight
Ltd).

Lord Atkinson had the following to say:

“It is well settled that the mere fact that a man holds all the shares in a company does not mean
that the business carried on by the company is his business nor does it make the company his
agent for the carrying on of that business. However, it is also well settled that there may be such
an arrangement between the shareholders and the company that constitutes the company as the
shareholders’ agent for the purpose of carrying on the business and make the business that of the
shareholders. It seems to be a question of fact in each case and the question is whether the
subsidiary is carrying on the business as the parent’s business or as its own. In other words, who
is really carrying on the business?”

Lord Atkinson then stated that in order to answer the question, 6 points must be taken into
account;

a) Are the profits treated as the profits of the parent company?

b) Are the persons conducting the business appointed by the parent company?

c) Is the parent company the head and brain of the trading venture?

d) Does the parent company govern the venture, decide what should be done and what
capital should be embarked on in the venture?

e) Does the company make the profits by its skill and direction?

f) Is the company in effectual and constant control?

If the answers are in the affirmative, then the subsidiary company is not a separate legal entity
but an agent of the parent company.

Atkinson J found that the waste-paper business was still the business of the parent company
(plaintiff) and that the business was operated by the subsidiary company as an agent of the parent
company.

In Re F.G. Films Ltd (1953) 1 WLR, a British company was formed with a capital of 100
pounds of which 90 pounds was contributed by the president of an American Film Company.
The company consisted of 3 directors; an American and 2 Britons. By arrangement of the British
company and the American Film Company, a film was shot in India nominally by the British
company but all the finances and other facilities were provided by the American Film Company.

The British Board of Trade refused to recognize the film as having been made by the British
company and therefore, refused to register it as a British film.

The court held that insofar as the British company had acted or carried out any activity, it had
done so as an agent or nominee of the American Film Company which was the true maker of the
film, but not as a separate legal entity. The Court therefore, refused to compel the Board to
register the film as an English film, since it was in fact produced by the powerful American film
company registered in England in order to avoid certain technical difficulties.

In Firestone Tyre & Rubber Co. v. Llewellin (1957) 1 WLR 464, an American company formed
a wholly-owned subsidiary in England to manufacture and sell its brand of tyres in Europe. The
distributors sent their orders to the subsidiary direct and the orders were met without any
consultation with the American company. The subsidiary received the money for the tyres sold
to the distributors and after deducting its manufacturing expenses plus 5%, it forwarded the
balance of the money to the American company. All the directors resided in England except one
who was the president of the American company and they managed the subsidiary’s affairs free
from the day-to-day control by the American company.

The court held that the substance of the arrangement was that the American company traded in
England through the subsidiary company as its agent and that the sales by the subsidiary
company were a means of furthering the interests of the American company. Therefore, the
American company was consequently liable to pay UK tax.

2. Fraud and Improper Conduct

Where there is fraud and improper conduct, the courts will immediately disregard the corporate
personality. For instance where a company is formed for a fraudulent purpose or to facilitate the
evasion of legal and contractual obligations.
The use of a company as a device to expropriate a minority shareholder was struck down by the
courts as a “hollow sham” in Re Bugle Press Ltd (1961) Ch. 270. In this case A, B and C were
the only shareholders of the company. A and B held 45% of the shares each and C held 10%. A
and B then made an offer to purchase C’s shares but he refused. A and B then formed a company
which made an offer to acquire all the shares of the first company which A and B accepted. The
new company purported to acquire C’s shares compulsorily pursuant to the then Section 210 of
the Companies Act. C applied to the Court to disallow the takeover bid. The lifted the veil of the
new company and disallowed the bid.

The Court held that this was a bare faced attempt to evade the fundamental principle of company
law which forbids the majority shareholders from expropriating the minority shareholders, unless
the company’s articles so provide.

In circumstances where the assenting 90% majority were unconnected with the offeror the
normal burden of proof rested on the dissenting minority to show grounds why the court should
order otherwise, but this did not apply where there was a connection between the assenting
majority and the offeror, in particular where, the acquiring company was simply the alter ego of
the assenting majority.

In the words of Harman J, “…the new company was nothing but a small hut built around the
majority shareholders and the whole scheme was nothing but a hollow sham. All the minority
shareholder had to do was shout and the walls of Jericho came tumbling down”

In Gilford Motor Co. v. Horne (1933) Ch. 935, the defendant, Mr. E B Horne, was a former
employee of the plaintiff company and had signed an agreement/covenant with the company to
the effect that he will not solicit its customers. Mr. E B Horne arranged for his wife, Mrs. J M
Horne, to form a company which would carry on a competing business and the company ended
up soliciting the plaintiff's customers. When sued by the plaintiff, the defendant argued that he
had not breached his agreement with the plaintiff, because the solicitation was undertaken by the
company which was a separate legal entity distinct from him.

The court held that the defendant’s company was a mere cloak or sham and that it was the
defendant himself through this device who was soliciting the plaintiff's customers. Thus the court
issued an injunctive order against the defendant and his company, prohibiting them from
soliciting the plaintiff’s customers.

In Jones v. Lipman (1962) 1 WLR 832, Lipman entered into a legally enforceable contract to
sell his land to Jones. Subsequently, Lipman changed his mind, and in an attempt to avoid having
to do so, he acquired a ready-made company, which had been incorporated with the object of
acquiring the land, and transferred the land to it. Lipman was the beneficiary owner of all the
shares of the company.

When the plaintiff brought an action against the defendant seeking specific performance of the
contract of sale, the defendant argued that he was not in a position to transfer the land to the
plaintiff, because the ownership of the land was already vested in a 3 rd party (the company). The
court rejected the defendant’s argument, stating that the company was a sham.

Rusell J, awarding specific performance to Jones and thereby compelling Lipman to sell the
house said the company was “…the creature of the defendant, a device and a sham, a mask
which he holds before his face in an attempt to avoid recognition by the eye of equity”.

NOTE: The fact that a company is a subsidiary of another company does not in itself or
automatically make the subsidiary an agent of its parent company. In Ebbw Vale Urban District
Council v. South Wales Traffic Area Licensing Authority (1951) 2 KB 366, Cohen LJ said;

“Under the ordinary rules of law, a parent company and a subsidiary company, even a 100%
subsidiary company, are distinct legal entities, and in the absence of an agency contract between
the two companies one cannot be said to be the agent of the other...”

Under Section 3(1) of the Companies Act, a holding company of a subsidiary company, has the
following characteristics;

(a) It controls the composition of the subsidiary company’s board of directors.

(b) It controls more than half of the voting rights in the subsidiary company.
 (c) It holds more than half of the subsidiary’s issued share capital.

In the absence of an agency relationship, fraud or improper conduct, the holding company as the
incorporator of the subsidiary company, is distinct or separate from the subsidiary company. It is
a legal person possessing its own interests, rights, assets and liabilities. Likewise the subsidiary
is also a separate legal person possessing its own interests, rights, assets and liabilities. The fact
the holding company is able to control the subsidiary company or hold all of its shares, it does
not make the subsidiary its agent.

A subsidiary company is therefore not regarded as the agent of its holding company merely
because of this relationship. Although the basis of the holding/subsidiary company relationship is
control, this fact alone does not make the subsidiary company an agent of the holding company,
even if it wholly-owned.

As a consequence of the separate legal personalities of the holding and subsidiary companies, the
each institute actions to enforce their rights. None can sue on behalf of the other.

Lifting/Piercing the Corporate Veil(Ignoring the Corporate Personality)

● As previously pointed out, the most important idea of company law is that a company is a
separate legal person capable of owning property, being a party to contracts and suing or
being sued and has its own legal rights and obligations.
● It is therefore a basic principle of company law, that the shareholders of a company
cannot claim its property or its legal rights.
● It is also a basic principle that the shareholders of a company are not responsible for its
liabilities and obligations as illustrated in the case of Salomon VS A Salomon and
Company Limited.
● For many years, following the court's decisions in the Salomon’s case there was an
extensive discussion on whether a court can ignore the legal personality of a company
and treat the company's property rights and obligations as belonging to a person who
owns and controls the company (Shareholders and Directors). This is known as lifting or
piercing the corporate bail.

Circumstances under which the corporate bail will be lifted

1. Where there is an agency [Link] the legal relationship of agents exists between
two people called the principal and the Agent, then the principal is responsible for
whatever the agent does within the scope of the agency. The agent in an agency
relationship has the authority to create legal relations such as contracts between the
 principal and 3rd parties. Nothing in company law prevents a person from agreeing that a
company is to be his agent, making that person liable for whatever the company does
within the agency. Such liability arises under agency law but not company law. In
practice, the objective of creating a company is to carry on business on its own whereby
the business belongs to the company and not to the shareholders. It is therefore very rare
to find that the members have set up a company to carry on business of which they have
retained ownership. An agency relationship between a company and its members was
illustrated in the case of Smith Stone and Knight limited vs Birmingham
Corporation. Another case is Re F. G Films Ltd. Another case Firestone Tire and
Rubber Co. Ltd vs Llewellyn.
2. Fraud and improper conduct. Where there is fraud and improper conduct the courts will
immediately disregard the corporate personality. For instance where a company is formed
for a fraudulent purpose or to facilitate the evasion of legal and contractual obligations.
The use of the company as a device to expropriate a minority shareholder was struck
down by the courts as a “hollow sham” in the case known As Re Bugle Press Ltd.
Another case is Gilford Motor Co. Horne. Another case is Jones vs Lipman.
NB. The fact that a company is a subsidiary of another company does not in itself or
automatically make the subsidiary company an agent of its holding company (Parent
Company).

FORMATION AND REGISTRATION OF COMPANIES

● Company Act 2015 provides that for the incorporation of companies by the process of
Registrations.
● In Kenya a company is incorporated by registering it with the Registrar of Companies.
● Section 11(1) of the Companies Act provides that a company can be formed by one or
more persons.

Name of the Company

● Since a company is an artificial legal system, it can be identified by its name.
● Section 48(1) of the Company's Act states that Registrar may on plan written application
reserve a name pending registration or change of name by a Company.
(CRI4-Application and reservation of Company name)
● The reservation of a name remains in force for a period of 30 days.
● The Company's Act prohibits the registration of a company by a particular name;
1. That the Registrar believes on grounds that it would involve the commission of a
criminal offense or constitute an offense.
2. This consists of abbreviations or initials not authorized by or under the
Company's Act.
3. That the Registrar believes on reasonable grounds that it is offensive or
undesirable or contrary to public interests.
 4. That contains words, expressions or other indications that are associated with a
particular type of a company or organization.
5. That contains words, expressions or other indications that are associated with a
particular type of company or organizations.
6. That contains words, expressions or other indications that are similar towards
expressions or other indications associated with a particular type of Company or
other organizations.
7. That is the same as another name appearing in the Registrar's index of Company
names, business name, limited liability partnerships or partnerships.
8. That differs from the name of another company, business name, limited liability
partnerships or partnerships that is already registered only by addition of the name
of a place, loyalty or region within Kenya.
9. That is identical or closely resembles a name that has been reserved by the
registrar for use in connection with a proposed Company business name limited
liability partnerships or partnership.
10. That is the same as the name of a body corporate established under a written law
(Statutory corporation)

Criteria for determining offensive or undesirable names

● The registrar is required to apply the following criteria in determining whether a
particular name is offensive or undesirable or contrary to public interests.
I. If the name includes “co-operative “, “society “or “trade Union “or any variant or
synonym of those words.
II. If the name suggests an association with the state or any of its agency unless there
are circumstances that state its use.
III. If the name suggests an association with the state or any of its agencies unless
there are circumstances that state its use.
IV. If the name suggests an association with a foreign government or an Embassy,
high commission or consulate representing such a government in Kenya.
V. If the name suggests an association with a County government.
VI. If the name comprises an acronym that will render its use vague or uncertain.
VII. If the name includes the name of a registered trademark unless a document signed
by the owner of the trademark indicating its consent to its use is provided.
VIII. If the name is such that Registered the registrar believes on reasonable grounds
that it would offend members of a particular community, ethnic or racial group.

Indications of a type of Company

A company is required to indicate its status or type in it's name; whether limited or unlimited,
whether public or private.
a) Public limited Companies
A company that is both a limited liability company and a public company may only be registered
with a name that ends with the words “public limited Company “ or the abbreviations “PLC”

b) Private limited Companies

A company that is both a limited liability company and a private Company may be registered
only with a name that ends with the words “limited “, “Ltd”

Characteristics (sub-topic) permitted to be used in a Company's name

Rule. The name of a company may not consist of more than 160 permitted characters.

Display of Registered name by Company.

A company is required by the Company's Act to display continuously its registered name in
legible characters at its;
1. It's registered office
2. Every business venue of the Company.

Registration Documents
● In order to incorporate a company, the following documents must be registered with the
Registrar of Companies.
1. Application for Registration (Form CRI)
2. Memorandum of Association Different types e.g Form CR2 (limited by shares),
Form CR3 (limited by guarantees), Form CR4(Unlimited Companies)
3. Articles of Associations.
4. Notice of Residential Address of Directors. (Form CR8)
5. Statement of nominal Capital.

a) Application for Registration (Form CR1)

Section 13(1) of the Companies Act, states that a person who wishes to register a company must
launch or file with the Registrar of Companies an application for registration of the Company.
The application for registration must state the following, the proposed name of the Company.
1. The proposed location of the registered office of the Company.
2. Whether the liability of the company is to be limited and if so, it is to be limited by shares
or guarantees.
3. Whether the Company is to be a private or a public Company.
The application for registration of a company must also be supported by the following.
1. A statement of capital and initial shareholding for Companies with a share Capital or a
statement of guarantees for companies with limited guarantees.
A statement of the Company's proposed officers.

b)Statement of Capital initial shareholding for Companies with a share - capital

If the Company is to have a share capital, the Application for registration must be supported by a
statement of Capital and initial shareholding contained in the Company's Memorandum of
Association.
However, the statement is not required if a company is not to have a share capital is either a
limited company by guarantee which must instead file a statement of guarantee or an unlimited
Company without a share capital.
The Statement of capital and initial shareholding gives the following details about the company's
share capital to be taken up upon formation by the subscribers (shareholders) to the company.
1. The total number of shares of the Company
2. The aggragate nominal value of the shares.
3. The class of shares and the rights attached if any.

c) Statement of Guarantee for limited Companies by Guarantee (Memorandum of

Association)
The application for registration of a company limited by guarantee must be supported by a
statement of guarantee.
This statement is contained in the memorandum of association of a company limited by
guarantee (Form CR3)
The applicant must ensure that the statement of guarantee states that each person who is a
member undertakes, if the company is liquidated while the person is a member or within 12
months after the person ceases to be a member to contribute to the assets of the Company, such
amounts as be required.

d) Statement of the Company's proposed Officers.

An application for registration of a company must contain a statement of the Company's
proposed Officer's contain the following;
1. The particulars of the person (s)
2. who are /is to be first director/directors of the Company and their contents. (Further
particulars of the proposed directors are contained in Form CR8)
3. In cases of a company that is to be a public Company, the particulars of the person who is
/are to be the first Secretary or joint Secretaries of the Company and their content.
4. The particulars of any person who is to be appointed as an authorized signatory of the
Company.

Additional documents to Company/the application for registration of a company

The following documents should be attached to the application for registration of a company.
1. A copy of the personal identification No. (Pin) (Certificate of each person proposed to be
a director.)
2. A copy of the identity card/Passport of each such persons.
3. A passport sized photograph of each such person.
 4. In case of a non-Kenyan citizen a copy of the persons passport and a passport sized
photograph.

LECTURE FIVE
Article of Associations
The Company's (general) regulations 2015, prescribes model articles of association . The
regulations prescribes different versions of articles of associations for different types of
companies. Therefore, a company may adopt all or any of the provisions of a prescribed versions
of model articles that best suits it's description or type.
Where a company does not adopt the prescribed model articles. The proposed articles to
accompany the application must comply with the following rules ;
1. It must be contained in a single document
2. It must be printed.
3. It must be divided into paragraphs numbered consecutively.
4. It must be dated.
5. It must be signed by each subscriber to the article and their signatures must be attested to
by(e.g an advocate)
NB:The article of association of any company whether or not they are the prescribed model
articles can be altered /amended after registration.

Conclusion.
Upon satisfaction that the application for registration, the memorandum of association, articles of
association and the accompanying documents are in order, the registrar of Companies registers
the company and allocates it a unique identifying number.

Certificate of Incorporation
Section 18 (1) of the Company's Act states that upon successful registration of a company the
registrar shall issue, the company with a certificate of incorporation. This is conclusive evidence
that the requirements of the Company's Act relating to registration have been complied with and
the company's duly registered under the Act.
A company's certificate of incorporation contains the following details ;
1. The name of the Company and its unique identifying number.
2. The date of the Company's incorporation.
3. Whether the Company's liability is limited or unlimited and if it is limited whether it is
limited by shares or by guarantees.
4. Whether the Company is private or public

The certificate of incorporation should bare the Registrar's signature and should be authenticated
with the Registrar's official seal.

THE DOCTRINE OF ULTRA-VIRES

Section 11(2) of the Company's Act provides that a company formed for an unlawful purpose
cannot be registered. Initially before the enactment of the Company's Act 2015,the constitution
of a company was made up of the memorandum of association and the articles of association.
The memorandum contained information such as the company name, its address, its share
capital, the objects clause (which highlighted the functions for which the company was
established). A statement of the members liability and whether the company was private or
public. The articles of association on the other hand contained the internal rules by which the
company and its members had agreed to abide by such as the procedures for general meetings or
board of directors meetings, the appointment and removal of directors, the payment of dividends,
transfer of shares e.t.c.
Under the repealed company's Act Cap. 486 it was compulsory for every company to state its
objects /functions in its memorandum and every company was restricted to pursuing its stated
objectives. Therefore, a company registered under the repealed Act could not effectively do
anything beyond the powers which were either expressly or by implications conferred upon it in
its memorandum of association. Any purported activity in excess of those powers was considered
ultra vires.
Under the Company's Act 2015, a company's constitutional documents have undergone a radical
change /transformation. A company's constitution now consists of its articles and any resolutions
and agreements affecting its constitution.
The memorandum of association is still required for registration under the Company's Act 2015
but it serves a more limited purpose of primarily stating that the subscribers wish to form a
company and become its members. Therefore, companies registered under the Company's Act,
2015 are no longer to have an object clause and are deemed to have unlimited capacity. Unless a
company's articles specifically restricts its objects, its objects are unrestricted (section 28(1) of
2015).

The doctrine of Ultra-vires

Ultra-vires is a Latin phrase which means beyond powers. The doctrine of Ultra-vires states that
a company does not have the capacity to enter into a transaction outside its objects /functions for
which it was established.
This doctrine was established by the courts in the 19th Century. The doctrine was basically a
mechanism which enabled shareholders to control the activities of the Company or directors by
preventing them from pursuing objects that fell outside a company's objects clause and enabled
them to obtain a remedy for the company in instances where the activity /transaction had already
taken place. The doctrine of Ultra-vires was 1st articulated in the case of Ashbury Railway
Carriage and Iron Co. Ltd vs Riche.
The doctrine of ultra vires protects the investors of the Company. Another case is Colman vs
Eastern Railway Company.
Another objective of the doctrine of ultra vires was to protect the creditors if the company went
into liquidation. Re Jon Beauforte(London) Ltd. It could protect the creditors knowing that the
assets will not be use for other purposes or punish the creditors for lack of information about the
constitutional purposes of the Company. The doctrine of constructive notice.

LECTURE SIX
BOARD OF DIRECTORS
Duties of Directors

[Link] to act within powers. A company is a legal person who must act not only in compliance
with the general law but also in accordance with the terms of the constitution. Therefore to
achieve this goal, the law constraints directors as the agents of the Company Section 142 of the
company's act states a director has duty to Act in accordance with the constitution of the
Company and can only exercise his/her powers for the purpose for which they are conferred.
This means that a director must use or exercise his/her powers within the terms of the company's
constitution and the director must not cause the company to Act outside the terms of it's
Constitution. Constitution of a company is the articles of Association. Directors powers must not
be used for wrong purposes as was illustrated in the case of Hogg vs Cramphorn. Also effects of
Directors Ultra vires.
[Link] to promote the success of the Company. Section 143 of the Company's Act, requires
the director of a company to act in the way in which he/she considers in good would promote the
success of the company for the benefit of it's shareholders as a whole.
[Link] to exercise independent judgment. A fiduciary is responsible for acts which he/she
performs and is also responsible for acts which he/she ought to have performed but did not
perform. Therefore, company directors as fiduciaries in performing their duties are required to
Act independently from the control of any person. The directors are required to exercise their
own judgements when discharging their duties judgements to exercise their own judgments when
discharging their duties and confronting issues in the board of directors of a company to exercise
independent judgment.
This duty is not only limited to influence, direction or control from third parties such as
shareholders but applies also to senior executives or shadow-directors in the company who
exercise powers and control over the directors. This was illustrated in the case of Re Neath
Rugby Club Ltd.
[Link] to avoid conflict of interests. One of the core tenets of the law and fiduciary duties is the
obligation to avoid conflict of which is a core principle of duty. In this case, the conflict of
interests is a conflict a conflict between a directors fiduciary duties and his personal interests.
Section 146(1) requires a director of a company to avoid a situation in which the director has, or
can have a direct or indirect interests that conflicts or may a director of a company to avoid a
situation in which the director has, or can have direct or indirects that conflicts or may conflict
with the interests of the company. The obligation to avoid conflict of interests is imposed on
each individual director separately. The duty to avoid conflict of interests is binding on both
current and former directors.
6. Duty not accept benefit from third parties. Section 147(1) of Company's Act, prohibits of a
person who is a director of a Company from accepting a benefit from a third-party particularly if
the benefit is attributable to the fact that the person is a director of the company or any act or
omission of a person as the director.
[Link] to declare interests in proposed transactions. Section 151 states that if a director of a
Company is in any way directly or indirectly interested in a proposed transaction with the
company or in a transaction that the company is already interested, the director should declare
the nature and the extent of the interest.

Ratification of Directors Act

Section 207,provides that a decision of a company to ratify the conduct of a director amounting
to negligence default, breach of duty or breach of trust in relation to the company can be taken
only by the members /shareholders.
However, unless the Company's articles requires the decision to be unanimous, such a decision
can be made by an ordinary resolution of the members.

Indemnity of Directors for Certain Liabilities

A director or a former director of a company may be indemnified out of the company's asset
against any liability incurred by the director to a person other than the company or an associated
company in connection with any negligence, default, breach of duty or breach of trust.
However, a directors indemnity does not liability of the directors to pay a fine imposed in
criminal proceedings or a sum payable by away of penalty in respect of non-compliance with any
requirement of a a regulatory nature.

Liability of the Company for Acts of its organs and Officers

A company's property is owned by the company as a separate person, not by the members ;the
company's business is conducted by the company as a separate person not by the members
therefore it is the company as a separate person that enters into contracts in relation to its
business and property. This is the concept of legal personality /corporate personality.
However, any physical act that has to be done in order to make a company a party to a
transaction has to be done by a human being acting on the company's behalf. It is necessary
therefore to establish rules which determine the circumstances in which the Acts of one or more
individuals are to be regarded as the Acts of the Company. In other words, which acts and of
which people will be regarded as the Acts of the Company, so that the company can be said to
have entered into a binding contract or to have committed a tort or a crime.
A case, in Meridian Global funds Management Asia Ltd vs Securities Commission,Lord
Hoffmann described this rules as “rules of attribution “. For each company what Lord Hoffman
called primary rules of attribution are established by its constitution(articles of associations)
which will state for example the rules governing general meetings at which members or
shareholders may make decisions which are the decisions of the company as a separate person
and the rules on appointment of directors who are given authority by a provision in the articles to
exercise all the powers of the company in the management of it's [Link] Hoffman also
included in the category of primary rules of attribution, general rules of company law such as
those on decision making (ordinary and special resolutions) or the execution of documents.
For purposes of making a company a party to legal relationships such as contracts the legal
concept of agency is used to establish whose acts are to be attributed to the company. In civil law
for example the law of torts, an agent is not liable for what the principal does but the principal is
usually vicariously liable for what an agent does, we use the doctrine of vicarious liability.
However there are circumstances in which it is necessary to apply to a company legal concepts
that are formulated in human terms involving for example knowledge, intention, criminality
opinion etc. This is only done by attributing the knowledge, intention, criminality or opinion of
one or more humans identifying with the company referred to as “ the directing will and mind of
the company. ‘’ This is called the Organic theory also known as the altar ego doctrine.

A company's common seal for authentication and execution of documents. As a body Corporate,
a company is entitled to a common seal for purposes of authenticating documents. The general
rule was that a contract was not binding at all or enforceable by a company unless it was
executed under the seal of the company. However, under the company's act 2015 it is not
mandatory for a company to have a common seal. Under section 37 a document is executed by a
company affixing its common seal if any and witnessed by a director. Further a document is
validly executed by a company if it is signed by the company by two authorized authorities or by
a director of the company in the presence of a witness who attest the signature.

Company's contracts. Under section 35 a contract may be made by a company in writing under
its common seal or on behalf of a company by a person acting under its authority expressed or
implied. Any formalities required by law for a contract made by a natural person also apply to
contracts made by companies. Therefore a company may become contractually bound to a third
party where a person who is acting under the express or implied authority of the company has
made a contract on behalf of the company. However the main challenge for the third party is
knowing whether the person who acted for the company did so with the company's authority.

As an artificial legal person a company cannot make contracts or enter into transactions by
itselfs. For example it has to act through agents for example, directors. The rule of agency law is
that an agent can only act within what is known as the agent authority. The authority under
which a contract made by an agent on behalf of a company is binding on the company may be
actual(express or implied authority) or ostensible(apparent authority as it applies to third-party).