Introduction
The formation and winding up of a company in Kenya has for a long time been governed by the Companies Act (Cap. 486). The company legislation in Kenya owes its origin to the English company law. It came into force on January 1, 1962 and is based on the English Companies Act of 1948. The Act provided the basic legal framework for the regulation of companies in Kenya. It made provision for the legal incorporation of companies and laid down rules for their constitution, management and winding up.
Apart from the Companies Act, we have also relied on case law which has been developed by the courts including the doctrines of ultra vires. The case law and practice have developed many rules which are useful for filling in the gaps which have not been provided by the Companies Act.
The Act required radical reforms and after many years of struggle on September 11, 2015, the President of Kenya assented to the Companies Act, 2015 (“the New Companies Act”) which repeals the 1948 Companies Act. It is cited as the Companies Act No. 17 of 2015.
The New Companies Act has borrowed heavily from jurisdictions such as the United Kingdom, Australia and Canada. The objects of this Act as set out in section 2 are to facilitate commerce, industry and other socio-economic activities by enabling one or more natural persons to incorporate as entities with perpetual succession, with or without limited liability, and to provide for the regulation of those entities in the public interest, and in Particular in the interests of their members and creditors.
The New Act is both a consolidation of laws on companies in Kenya and a modernisation of statute law on the subject in order to ease doing business in Kenya and to encourage the informal sector to formalise in order inter alia to access credit.
History of the Company Law Reform Efforts
The efforts to reform Kenya’s key business laws have been ongoing for almost 2 decades, aiming at reviewing, modernizing and simplifying the laws and the entire business environment. Renewed impetus for reform of business laws is anchored on the new Government of Kenya’s overarching policy objectives contained in the Economic Recovery Strategy for Wealth and Employment Creation (2003-7) and Vision 2030.
In 1992 for instance, the Attorney General established 15 reform task forces with a mandate to review and update Kenya’s laws in areas such as company law, laws relating to women, public order and security, auctioneers and court brokers and children.
The Attorney General proposed the Companies Bill in 2008 with the first and second drafts being made in 2010 and 2011. The Bill went through two of three parliamentary reading stages; the first reading on March 30, 2011 and the second reading on May 24, 2011. The Bill aimed to amend Cap. 486 so as to bring the Act into line with emerging trends in the formation and operation of companies and to simplify the formation and operation of such companies.
The Bill was a more detailed and structured piece of legislation with clearer divisions between the several aspects of a company law. It attempted to codify common law principles (indoor management rule and common law fiduciary duties of directors) and it took note of current trends in globalisation and technology changes and the process of integration of the East Africa Community.
This Bill never saw the light of the day because at the time Parliament’s focus appeared to be on enacting key pieces of legislation required for implementation of the Constitution of Kenya, 2010.
The Companies Bill, 2014 was introduced in the National Assembly. According to the Hansard record on February 11, 2014, the Report of the DePartmental Committee on Justice and Legal Affairs on the Companies Bill, 2014 and the Insolvency Bill, 2014 tabled in Parliament contained recommendations and it was quite voluminous.
The recommendation of the Committee was to withdraw the Bills as they had been tabled in the House with a view to republishing them. The amendments in the Companies Bill were about 963.
Finally in 2015 the reforms became a reality with the enactment of this extensive piece of legislation.
Since the enactment, the Office of the Attorney General in consultation with various stakeholders has developed an implementation matrix for operationalisation. Considering that this Act is a colossal piece of legislation, a phased approach was decided upon in order to allow Kenyans to benefit from the long awaited law in the immediate term and allow time for enough consultation on the new concepts under the law.
Commencement
Section 2 of the New Companies Act empowers the Cabinet Secretary (the Attorney General) to operationalise the Act at such various dates as he may appoint.
On 13th November, 2015 the Attorney General appointed the 6th November, 2015 as the date on which Parts 1 to 14, Part 23, Part 31, Part 32, Part 38, Part 40, Part 42 and the First, Second and Sixth Schedules of the Act shall come into operation.
On 18th November, 2015 the Cabinet Secretary published the Companies (General) Regulations, 2015 which came into operation on the fourteenth day after their publication in the Gazette.
The Registrar of Companies has prepared in accordance with Section 876, the Registrar’s Rules that prescribe the forms to be used under the Act which can be accessed from http://www.attorney-general.go.ke/index.php/company-forms/.
The remaining Parts of the Act will be commenced by notice in the Kenya Gazette.
Any documents prepared under Cap. 486 should be lodged with the Registrar on or before January 31, 2016. Such documents must be dated before the commencement of the Companies (General) Regulations, 2015. After that date (January 31, 2016), the incorporation and foreign company documents are required to be in the format prescribed under the New Companies Act.
Salient features of the Companies Act, 2015
Foreign Companies
Section 975(2) sets out the requirements that must be fulfilled before the registrar approves registration.
The application must contains the information prescribed by the regulations for the purposes of Section 975(2);
The applicant must demonstrate that at least thirty percent (30%) of the company's shareholding is held by Kenyan citizens by birth. The effect of this provision is that every branch that wishes to operate in Kenya will be required to effect a share transfer or share allotment to a Kenyan individual;
The application must be accompanied by the prescribed fees and documents; and
The requirements on the company's name (under Section 977 a foreign company can be registered under alternative name under which it will carry on business in Kenya) and the appointment of a local representative (under section 979 a foreign company must have a local representative) must be complied with.
The documents required to accompany the application under Section 975(3) are:
A certified copy of a current certificate of the foreign company's incorporation or registration in its place of origin, or a document of similar effect;
Certified copy of its constitution;
A list containing the names of its directors and shareholders and their personal details;
A memorandum that is duly executed by or on behalf of the foreign company and states the powers of any directors who reside in Kenya; and are members of a local board of directors;
Any documents that would be required to be lodged for registration with the Registrar under Part XXXI for each existing charge on property of the foreign company that would be a registrable charge if the foreign company were a company formed and registered under the Act,
Notice of the address of its place of origin or its principal place of business in its place of origin; and
Notice of the address of its registered office under section 983 (this is the registered office in Kenya).
The Company Secretary
Section 243 provides that Private Companies are not required to have a company secretary unless they have a paid up capital of five million shillings or more. Anything that should have been done by a company secretary may be done by a director or any other person authorised to do so by the directors. Every Public Company on the other hand is required to have a secretary.
Recognition of Information Technology
The Act under section 2 recognises e-mail address or any other electronic address for the purposes of sending or receiving documents or information by electronic means.
The Act also allows the giving of notice of the general meeting through electronic form or publication on websites.
Written resolutions may now be circulated in electronic form or by means of a website.
Memorandum of Association
Under the Companies Act 2015, the role of the memorandum of association is greatly reduced for both existing companies and new companies. In future it will contain only very limited information: the names of the subscribers; the fact that they wish to form a company; and that they agree to become members of the company and, if the company has share capital, take at least one share in the company each. Information that was previously provided in the memorandum on formation will in future be provided to the Registrar in the form of a series of statements made in the application for registration or in the articles. The doctrine of ultra vires in company law is abolished except as the objects are restricted by the articles of association (see section 28)!
One Man Company
The Act provides that a company can have one member (Salmon v Salmon!) Companies that have already been incorporated can also reduce the members to one member. This is a very useful development and will negate the need to have a second shareholder where one does not beneficially exist, especially for single entrepreneurs.
Document can now be validly executed if signed on behalf of the company by one Director in the presence of a witness who attests the signature.
Unrestricted objects of a company
Section 28 provides that unless the articles of a company specifically restrict the objects of the company, its objects are unrestricted (abolition of the doctrine of ultra vires in company law).
Fines and Penalties
The fines and penalties under this act have been enhanced to reflect the current economic times.
The fines range from KES100,000 to KES15 million. Most fines are in the KES500,000 to KES1 million range. Imprisonment terms for indictable offences run from between one and five years, and in exceptional cases (e.g. fraud) 10 years.
One of the features of the New Companies Act is that many provisions carry their own individual sanctions regime including the introduction of daily default fines.
An example is in the case of a company that acquires an already charged property and fails to lodge it before the deadline for registration. Each officer of the company who is in default, commits an offence and on conviction is each liable to a fine not exceeding KES1 million shillings.
Codification of the Common Law Offence of Fraudulent Trading
Section 1002 provides that where the business of a company is carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, each person who knowingly Participates in carrying on the business in that manner commits an offence.
This provision applies whether or not the company has been liquidated or is in liquidation.
A person found guilty of an offence under this section is liable on conviction to imprisonment for a term not exceeding ten years or a fine not exceeding ten million shillings, or to both.
Annual Financial Statements
This is provided for under Part XXV of the Act. Different provisions apply to different kinds of companies that are companies subject to the small company’s regime versus those that are not and quoted versus unquoted companies.
Private companies are now required to file financial statements within 9 months after their accounting period while public companies must file within 6 months after their accounting period. Previously, private companies were not required to register financial statements with the Registrar of Companies under Cap. 486.
The specific reports to be filed by companies in the Small Company Regime, Unquoted Companies and Quoted Companies are contained in Sections 686, 687 and 688 of the Act respectively.
At least one natural person as a director
All companies must now have at least one natural person as a director and cannot just have corporate directors. Previously, it was possible for all directors to be non-natural (corporate) persons.
Existing companies now have six months to comply.
Codification of Director’s Duties
Director’s Statutory Duties are now expressly provided for under division 3 of Part IX of the Act.
The general duties of directors as provided for under section 140 are based on common law rules and equitable principles that apply in relation to directors and have effect in place of those rules and principles with respect to the duties owed to a company by a director. These rules are to be interpreted and applied in the same way as common law rules or equitable principles.
The fiduciary duties of directors, previously derived from common law, are now provided in the Act as follows:
Duty to act within powers by acting in accordance with the constitution and to use his powers for the purposes for which they are conferred.
Duty to declare interest in proposed or existing transaction or arrangement.
Duty to exercise independent judgement.
Duty to avoid conflict of interest.
Duty not to accept benefits from third Parties.
Duty to exercise reasonable care, skill and diligence.
Duty to promote the success of the company. The director should, therefore, have regard to the long term consequences of their decisions; the interests of the employees of .the company; and the need to foster the company's business relationships with suppliers,
Disqualification of Directors
The Act introduces statutory provisions covering the disqualification of persons acting as directors under Part X of the Act.
A director’s disqualification order may be made under the Act or any other insolvency law provisions or any other enactment prescribed by regulations for the purposes of the section e.g. the Capital Markets Act.
Under section 214 the Act provides that a disqualification order prohibits the person from:
being or acting as a director or secretary of a company;
being or acting as a liquidator, provisional liquidator or administrator of a company;
being or acting as a supervisor of a voluntary arrangement approved by a company; and
being involved with the promotion, formation or management of a company, directly and indirectly.
Written Resolutions
Private Companies may now pass resolutions through the written means i.e. by circulation instead of holding a physical meaning. This provision did not apply previously unless the articles of association were crafted to allow for written circular resolutions. This is provided for under Part XIII of the Act.
A written resolution has the same effect as if passed by the company in a general meeting; or by a meeting of a class of members of the company. The elevation of written resolutions to the same status as resolutions passed in meetings of members will facilitate speedy decision making and improve efficiency in company operations.
A resolution under section 139 removing a director from office before the end of the director's period of office; or a resolution under section 739 removing an auditor before the end of the auditor's term of office may not be passed by a written resolution.
Share buy backs
A limited company having a share capital may now purchase its own shares including any redeemable shares in accordance with Part XVI of the Act.
The introduction of share buybacks is expected to benefit public companies whose shares are undervalued, with such purchases enhancing value for continuing shareholders.
Financial Assistance
This is provided for under sections 440 through 446 of the Act.
A private company will be permitted to provide financial assistance for the purchase of its own shares if the company’s principal purpose in providing the financial assistance is not to give it for the purpose of any such acquisition, or the giving of the assistance for that purpose is only an incidental Part of some larger purpose of the company and the assistance is given in good faith in the interests of the company.
Financial assistance for the acquisition of shares in a public company is still prohibited to be made by the company or it’s subsidiary company.
Public Offers of Securities
The Companies Act introduces the public offer of securities by a company under Part XIX. Section 510 defines a public offer for purposes of the Part to include an offer to any section of the public, however selected. The section goes further to define what is not to be considered a public offer and what is to be deemed a private concern of the person receiving an offer. Section 511 prohibits public offers by private companies, both those limited by shares and by guarantee.
According to section 512 a member of the company, a creditor of the company or the Attorney General may apply for an order restraining the company from contravening section 511. Section 513 provides for the orders to the court once contravention is proved requiring the company to convert itself into a public company and to apply to the Registrar for the registration of the conversion. Despite these provisions section 516 provides that an allotment or sale of securities or of an agreement to allot or sell securities in contravention of these provisions is valid.
A Public Company must be issued with trading certificate before conducting business or exercise a borrowing power. The Registrar will only issue a trading certificate to the company if satisfied that the nominal value of the allotted share capital of the company is not less than the authorised minimum. Section 517 outlines the procedure for applying for a trading certificate.
Treasury Shares
This provision applies is the purchase or acquisition of shares by a limited company of its own shares. The company can hold the shares as treasury shares or deal with the shares. If it holds them, it shall enter itself in its register of members/shareholders.
Notably, section 527 limits the amount of shares that a company may hold as treasury shares to not more than 10% of the nominal value of the shares or class of shares. Besides, the company cannot exercise any right in respect of the treasury shares, including any right to attend or vote at company meetings.
Incorporation Process under the Companies Act, 2015
According to the public guidelines by the Attorney General published in the State Law Office website, the following will apply with effect from January 31, 2016:
Application and reservation of name. The name search and reservation process can be done at any of the Huduma Centres countrywide, online using the E-Citizen platform and on a Safaricom mobile phone by dialling *271#.
Form CR 1- Application to register a company containing the proposed name (as reserved), the registered office, liability of members (whether limited by shares or by guarantee), the nature of the company (if private or public) and the name, consent of the initial director and secretary of the company and address of the agent if an agent is used to make the application.
Form CR 2: Model memorandum for a company limited by shares or Form CR 3: Model memorandum for a company limited by guarantee or Form CR 4: Model memorandum for a company whose liability is unlimited.
Statement of Nominal Share Capital duly stamped upon payment of stamp duty.
Notification of directors’ residential address (Form CR8).
Articles of association (if those provided in the Regulations have not been adopted).
Applicants should attach copies of identification documents (national identify card, Passport-size photograph and KRA PIN). For foreigners it is required to submit copies of the passport together with bio data and the passport-size photograph of the foreigner.
Comparisons with Cap 486
There are major differences between the new Act and the repealed Act:
Objects of the Company
Under the repealed Act a company could only pursue such objects and exercises only such powers as are conferred expressly in the memorandum. A company could not deviate from the provisions contained in its memorandum, however great the necessity in view of the doctrine of ultra vires in company law. If it deviated, the action would have been deemed to have been ultra vires the company and, therefore, wholly null and void ab initio.
The New Companies Act now provides that unless the articles of the companies expressly restrict the objects of the company, the objects are unrestricted.
Company Constitution Documents
Memorandum of the Company
Memorandum stating that the subscribers wish to form a company under this Act; and agree to become members of the company and, in the case of a company that is to have a share capital, to take at least one share each.
Articles of Association
The Act incorporates provision for model Articles of Association which are deemed to be a Part of a company’s Articles of Association as if they were duly registered by the company. Specifically, the Act provides for different versions of model articles that may be prescribed for different descriptions of companies and a company may adopt all or any of the provisions of a prescribed version of model articles. Consequently, a company which does not register distinct articles of association is deemed to have adopted the model Articles of Association as prescribed. It is permitted to develop detailed articles of association to meet the pertinent of peculiar requirements of any special project for a client.
Shareholders
The repealed Companies Act provided that a private company must have at least two shareholders. The New Companies Act provides that a company can have one member.
Company Charges
The deadline for registration of a charge is now 30 days from the day on which the charge is created, down from the current period of 42 days. This could pose a challenge if there are delays in stamping of company charges, mortgages and debentures (see Part XXXII). It is possible to obtain an extension from the Court by Court order in the circumstances and subject to the provisions contained in section 888.
Annual Returns
Under Cap. 486 annual returns had to be filed within 42 days. This period has been reduced to 28 days under section 705(3)(b) the Companies Act, 2015 and in default the daily default provisions for penalties apply.
Cap. 486 required annual returns to be filed 18 months after incorporation while the Companies Act, 2015 requires that they should be filed on the anniversary of the companies’ incorporation (reduction by 6 months to 12 months from 18 months).
Execution of Company Documents
According to section 37 of the New Companies Act a document is executed by a company by the affixing of its common seal (if any) and witnessed by a director; or if it is signed on behalf of the company by two authorised signatories; or by a director of the company in the presence of a witness who attests the signature.
Under the repealed Act it was mandatory for companies to have a common seal while section 38 of the Companies Act, 2015 provides that a Company may have a common seal for the execution of documents. The requirement for a company seal is no longer mandatory. Previously, it was necessary for a company to have a seal and certain documents could not be executed by a company except through its common seal e.g. company charges, mortgages, debentures, transfers, etc.
Section 40 provides that a company may, in writing, authorise a person, either generally or in respect of specified matters as its attorney to execute deeds or other documents on its behalf.
A company that has a common seal may have an official seal for use outside Kenya which has the same effect as the common seal..
Company Names
The main change on naming of companies (name approval and reservation with the Registrar will still be applicable) is on the distinction between private and public companies.
Previously, it was required that a company name ended with “ltd”.
Now, public limited companies may only be registered with a name that ends with the words “public limited company” or the abbreviation “plc” while the name of a private limited company must end with the word “limited” or the abbreviation “ltd.”
Changes of name must be registered within 14 days and such changes become effective only when the Registrar issues the new certificate.
Directors
The repealed Act provided that every company must have at least two directors.
Others
Removal of the bureaucracy for holding annual general meetings (AGMs) for private companies.
Greater privacy for directors and shareholders: shareholders’ addresses have been removed from annual returns; directors’ personal addresses no longer need to be provided, and the ability to restrict access to register of members.
Greater engagement with shareholders: easier e-Communications as the default communication means; greater rights for proxies; greater rights for members at meetings (calling, agendas, raising issues); greater possibilities for enfranchising the indirect investor and a greater focus on enhancing shareholder value.
Case Studies: The 2006 English Companies Act
The English Companies Act 2006 is the most significant companies’ legislation in the UK since 1948. It contains a massive 1300 sections and 16 schedules. It was brought into effect in stages, starting in January 2007 with the final, and main, provisions becoming operative on 1st October 2009. It took almost 2 years for the English equivalent to our Act to be made fully operational.
ORC International was commissioned by the Department for Business, Innovation and Skills (BIS) in November 2009 to conduct an evaluation of the Companies Act 2006, to assess awareness of and compliance with or the adoption of key measures implemented through the Companies Act 2006; thus in turn allowing the impact of the Act to be evaluated. This study was the first large scale evaluation of the Companies Act 2006, The research programme was challenging given the scope of the Act, the need to cover all types of businesses, the technicality of the subject matter and sampling complexities to ensure a robust approach.
Whilst some stakeholders said the Act’s ambitions had been watered down, others acknowledged a number of positive changes resulting from the Act:
bureaucracy has been reduced for private companies: the removal of the requirement to hold AGMs, the facilitation of the use of written resolutions; the removal of the requirement to have a company secretary; the removal of the elaborate procedure for the giving of financial assistance; the implementation of an easier procedure to reduce capital, and the introduction of more modern articles of association for those companies which choose to use them;
greater privacy for directors and shareholders: shareholders’ addresses have been removed from annual returns; directors’ personal addresses no longer need to be provided, and the ability to restrict access to register of members;
greater clarity on directors’ duties now expressly stated in the Act and statutory statement, with greater flexibility on conflicts of interests;
greater freedom to negotiate liability agreements with auditors;
greater engagement with shareholders: easier e-Communications as the default communication means; greater rights for proxies; greater rights for members at meetings (calling, agendas, raising issues); greater possibilities for enfranchising the indirect investor and a greater focus on enhancing shareholder value (Section 143).
These positives were noted throughout and the general consensus from stakeholders was that BIS had done a good job in the ten-year consultation and subsequent three-year implementation phases; no mean feat given the complexity of changes introduced during a time of economic disruption in the world economy.
Minimum and maximum number of directors
The minimum age of a director is now 18 years, down from the previous 21 years, with no prescribed maximum age.
Conclusion
The New Companies Act is certainly a step in the right direction and should assist us in streamlining the business environment for economic growth and creation of employment opportunities.
Provisions such as the 30% shareholding by a local investor in a foreign company must be amended as this will discourage foreigners from investing in Kenya.
The provisions on offers to the public introduced in the Act need to be reconciled with the extensive provisions of the Capital Markets Act on ‘public offers’ as contained in the Capital Markets Public Offers Listing and Disclosures Regulations.
The introduction of share buybacks will benefit public companies whose shares are undervalued, with such purchases enhancing value for continuing shareholders.
The implementation timeline (9 months) is certainly over-ambitious considering that the 2006 English Act took almost 2 years to implement. It is likely that there will be chaos in effecting the tight implementation timetable as our early observations are that quite a number of the Registrar’s staff are not aware of the actual requirements of the impeding changes.
Nevertheless, we look forward to the best.