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.
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 Kenya 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
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.
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.
Recognition of Information Technology (section 2).
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)!
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.
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. Documents may 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
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 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.
Codification of the Common Law
Section 1002 codifies the common law offence of fraudulent trading by providing 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.
Annual Statements
Under Part XXV of the Act, 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 (Sections 686, 687 and 688 of the Act).
At least one natural person
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.
Codification of Director’s Duties
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.
Disqualification of Directors
The Act introduces statutory provisions covering the disqualification of persons acting as directors under Part X of the Act as a result of involvement in fraudulent trading or other abuse of the office of director (section 214).
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 (section 139).
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.
Financial Assistance
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 (sections 440 through 446 of the Act).
Public Offers
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.
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 (section 527).
Incorporation Process
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 –Form CR8 and their particulars (see the Companies (General) Regulations, 2015.
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.
General comments
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.
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.
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 in terms of implementation and expediency in incorporation of companies and efficiency in the implementation of the services contemplated under the new Companies Act No. 17 of 2015.