UNIVERSITY OF NAIROBI
THE LAW OF BUSINESS ASSOCIATIONS
Section 2 (1) of the Companies Act Cap 486 Laws of Kenya states what company
means as 'a company formed and registered under this Act or an existing company.
This is a very vague definition, in the statute the word company is not a legal term
hence the vagueness of the definition. The legal attributes of the word company will
depend upon a particular legal system.
In legal theory company denotes an association of a number of persons for some
common object or objects in ordinary usage it is associated with economic purposes
or gain. A company can be defined as an association of several persons who
contribute money or money’s worth into a common stock and who employ it for some
common purpose. Our legal system provides for three types of associations namely
1. Companies
2. Partnerships
3. Cooperative society.
COMPANY LAW
The law treats companies in company law distinctly from partnerships in partnership
law. Basically company law consists partly of ordinary rules of Common law and equity
and partly of statutory rules. The common law rules are embodied in cases. The
statutory rules are to be found in the Companies Act which is the current Cap 486
Laws of Kenya. It should denote that the Kenya Companies Act is not a self contained
Act of legal rules of company law because it was borrowed from the English
Law of Business Associations 1
,Companies Act of 1948 which was itself not a codifying Act but rather a consolidating
Act.
Exceptions to the Rules are stated in the Act but not the rules themselves. Therefore
fundamental principles have to be extracted from study of numerous decided cases
some of which are irreconcilable. The true meaning of company law can only be
understood against the background of the common law.
FUNDAMENTAL CONCEPTS OF COMPANY LAW
There are two fundamental legal concepts
1. The concept of legal personality; (corporate personality) by which a company
is treated in law as a separate entity from the members.
2. The concept of limited liability;
Concept of legal personality
A legal person is not always human, it can be described as any person human or
otherwise who has rights and duties at law; whereas all human persons are legal
persons not all legal persons are human persons. The non-human legal persons are
called corporations. The word corporation is derived from the Latin word Corpus which
interalia also means body. A corporation is therefore a legal person brought into
existence by a process of law and not by natural birth. Owing to these artificial
processes they are sometimes referred to as artificial persons not fictitious persons.
Concept Of Limited Liability
Basically liability means the extent to which a person can be made to account at law.
He can be made to be accountable either for the full amount of his debts or else pay
towards that debt only to a certain limit and not beyond it. In the context of company
law liability may be limited either by shares or by guarantee.
Under Section 4(2a) of the Companies Act, in a company limited by shares the
member’s liability to contribute to the companies assets is limited to the amount if any
paid on their shares.
Law of Business Associations 2
,Under Section 4 (2b) of the Companies Act in a company limited by guarantee the
members undertake to contribute a certain amount to the assets of the company in
the event of the company being wound up. Note that it is the members’ liability and
not the companies’ liability which is limited. As long as there are adequate assets, the
company is liable to pay all its debts without any limitation of liability. If the assets are
not adequate, then the company can only be wound up as a human being who fails
to pay his debts. Note that in England the Insolvency Act has consolidated the
relationships relating to …. That does not apply here.
Nearly all statutory rules in the Companies Act are intended for two objects namely
1. The protection of the company’s creditors;
2. The protection of the investors in this instance being the members.
FORMATION OF A LIMITED COMPANY
This is by registration under the Companies Act
In order to incorporate themselves into a company, those people wishing to trade
through the medium of a limited liability company must first prepare and register
certain documents. These are as follows
a. Memorandum of Association: This is the document in which they express
interalia their desire to be formed into a company with a specific name and
objects. The Memorandum of Association of a company is its primary
document which sets up its constitution and objects;
b. Articles of Association; whereas the memorandum of association of a
company sets out its objectives and constitution the articles of association
contain the rules and regulations by which its internal affairs are governed
dealing with such matters as shares, share capital, company’s meetings and
directors among others;
Both the Memorandum and Articles of Associations must each be signed by
seven persons in the case of a public company or two persons if it is intended to
form a private company. These signatures must be attested by a witness. If the
company has a share capital each subscriber to the share capital must write
opposite his name the number of shares he takes and he must not take less than
one share.
Law of Business Associations 3
, c. Statement of Nominal Capital: This is only required if the company has a
share capital. It simply states that the company’s nominal capital shall be xxx
amount of shillings. The fees that one pays on registration will be determined by
the share capital that the company has stated. The higher the share capital,
the more that the company will pay in terms of stamp duty.
d. Declaration of Compliance: This is a statutory declaration made either by
the advocates engaged in the formation of the company or by the person
named in the articles as the director or secretary to the effect that all the
requirements of the companies Act have been complied with. Where it is
intended to register a public company, Section 184 (4) of the Companies Act
also requires the registration of a list of persons who have agreed to become
directors and Section 182 (1) requires the written consents of the Directors.
These are the only documents which must be registered in order to secure the
incorporation of the company. In practice however two other documents which
would be filed within a short time of incorporation are also handed in at the same
time. These are:
(i) Notice of the situation of the Registered Office which under Section 108(1) of the
statute should be filed within 14 days of incorporation;
(ii) Particulars of Directors and Secretary which under Section 201 of the statute are
normally required within 14 days of the appointment of the directors and
secretary.
The documents are then lodged with the registrar of companies and if they are in
order then they are registered and the registrar thereupon grants a certificate of
incorporation and the company is thereby formed. Section 16(2) of the Act provides
that from the dates mentioned in a certificate of incorporation the subscribers to the
Memorandum of Association become a body corporate by the name mentioned in
the Memorandum capable of exercising all the functions of an incorporated
company. It should be noted that the registered company is the most important
corporation.
Law of Business Associations 4
THE LAW OF BUSINESS ASSOCIATIONS
Section 2 (1) of the Companies Act Cap 486 Laws of Kenya states what company
means as 'a company formed and registered under this Act or an existing company.
This is a very vague definition, in the statute the word company is not a legal term
hence the vagueness of the definition. The legal attributes of the word company will
depend upon a particular legal system.
In legal theory company denotes an association of a number of persons for some
common object or objects in ordinary usage it is associated with economic purposes
or gain. A company can be defined as an association of several persons who
contribute money or money’s worth into a common stock and who employ it for some
common purpose. Our legal system provides for three types of associations namely
1. Companies
2. Partnerships
3. Cooperative society.
COMPANY LAW
The law treats companies in company law distinctly from partnerships in partnership
law. Basically company law consists partly of ordinary rules of Common law and equity
and partly of statutory rules. The common law rules are embodied in cases. The
statutory rules are to be found in the Companies Act which is the current Cap 486
Laws of Kenya. It should denote that the Kenya Companies Act is not a self contained
Act of legal rules of company law because it was borrowed from the English
Law of Business Associations 1
,Companies Act of 1948 which was itself not a codifying Act but rather a consolidating
Act.
Exceptions to the Rules are stated in the Act but not the rules themselves. Therefore
fundamental principles have to be extracted from study of numerous decided cases
some of which are irreconcilable. The true meaning of company law can only be
understood against the background of the common law.
FUNDAMENTAL CONCEPTS OF COMPANY LAW
There are two fundamental legal concepts
1. The concept of legal personality; (corporate personality) by which a company
is treated in law as a separate entity from the members.
2. The concept of limited liability;
Concept of legal personality
A legal person is not always human, it can be described as any person human or
otherwise who has rights and duties at law; whereas all human persons are legal
persons not all legal persons are human persons. The non-human legal persons are
called corporations. The word corporation is derived from the Latin word Corpus which
interalia also means body. A corporation is therefore a legal person brought into
existence by a process of law and not by natural birth. Owing to these artificial
processes they are sometimes referred to as artificial persons not fictitious persons.
Concept Of Limited Liability
Basically liability means the extent to which a person can be made to account at law.
He can be made to be accountable either for the full amount of his debts or else pay
towards that debt only to a certain limit and not beyond it. In the context of company
law liability may be limited either by shares or by guarantee.
Under Section 4(2a) of the Companies Act, in a company limited by shares the
member’s liability to contribute to the companies assets is limited to the amount if any
paid on their shares.
Law of Business Associations 2
,Under Section 4 (2b) of the Companies Act in a company limited by guarantee the
members undertake to contribute a certain amount to the assets of the company in
the event of the company being wound up. Note that it is the members’ liability and
not the companies’ liability which is limited. As long as there are adequate assets, the
company is liable to pay all its debts without any limitation of liability. If the assets are
not adequate, then the company can only be wound up as a human being who fails
to pay his debts. Note that in England the Insolvency Act has consolidated the
relationships relating to …. That does not apply here.
Nearly all statutory rules in the Companies Act are intended for two objects namely
1. The protection of the company’s creditors;
2. The protection of the investors in this instance being the members.
FORMATION OF A LIMITED COMPANY
This is by registration under the Companies Act
In order to incorporate themselves into a company, those people wishing to trade
through the medium of a limited liability company must first prepare and register
certain documents. These are as follows
a. Memorandum of Association: This is the document in which they express
interalia their desire to be formed into a company with a specific name and
objects. The Memorandum of Association of a company is its primary
document which sets up its constitution and objects;
b. Articles of Association; whereas the memorandum of association of a
company sets out its objectives and constitution the articles of association
contain the rules and regulations by which its internal affairs are governed
dealing with such matters as shares, share capital, company’s meetings and
directors among others;
Both the Memorandum and Articles of Associations must each be signed by
seven persons in the case of a public company or two persons if it is intended to
form a private company. These signatures must be attested by a witness. If the
company has a share capital each subscriber to the share capital must write
opposite his name the number of shares he takes and he must not take less than
one share.
Law of Business Associations 3
, c. Statement of Nominal Capital: This is only required if the company has a
share capital. It simply states that the company’s nominal capital shall be xxx
amount of shillings. The fees that one pays on registration will be determined by
the share capital that the company has stated. The higher the share capital,
the more that the company will pay in terms of stamp duty.
d. Declaration of Compliance: This is a statutory declaration made either by
the advocates engaged in the formation of the company or by the person
named in the articles as the director or secretary to the effect that all the
requirements of the companies Act have been complied with. Where it is
intended to register a public company, Section 184 (4) of the Companies Act
also requires the registration of a list of persons who have agreed to become
directors and Section 182 (1) requires the written consents of the Directors.
These are the only documents which must be registered in order to secure the
incorporation of the company. In practice however two other documents which
would be filed within a short time of incorporation are also handed in at the same
time. These are:
(i) Notice of the situation of the Registered Office which under Section 108(1) of the
statute should be filed within 14 days of incorporation;
(ii) Particulars of Directors and Secretary which under Section 201 of the statute are
normally required within 14 days of the appointment of the directors and
secretary.
The documents are then lodged with the registrar of companies and if they are in
order then they are registered and the registrar thereupon grants a certificate of
incorporation and the company is thereby formed. Section 16(2) of the Act provides
that from the dates mentioned in a certificate of incorporation the subscribers to the
Memorandum of Association become a body corporate by the name mentioned in
the Memorandum capable of exercising all the functions of an incorporated
company. It should be noted that the registered company is the most important
corporation.
Law of Business Associations 4
