INTRODUCTION

The formation of a company is a straightforward administrative process. It involves the delivery of the company�s memorandum and articles and an accompanying statement, in the prescribed form of the name and residential address of the person or persons who are to become the first directors and the first secretary of the company to the companies� registrar 

In addition, those persons named as the first directors will have to state their nationality, date of birth, business occupation and other current directorships held by them.

This statement has to be signed by or on behalf of the subscribers of the memorandum, who are the persons who have agreed to take a certain number of shares to become the first members of the company, and has to contain a consent signed by each of the persons named as director or secretary.

The registrar is required not to register a company�s memorandum unless he is satisfied that all the requirements of the Act have been complied with. If the registrar is so satisfied, he/she is under a duty to register the memorandum and articles. So, when the registrar receives an application for registration, although it has been said that he/she is exercising a quasi�judicial function, his discretion to refuse registration is severely limited.

It has been held, on an application for a writ of mandamus, the registrar is correct in refusing to register a company whose proposed object is unlawful.

It has been stated, obiter, that, if the objects of a proposed company are lawful, then the registrar might still have a discretion to refuse registration.

If the registrar is satisfied, then, on registration of the company�s memorandum, he shall issue a certificate of incorporation.

However, the granting of the certificate of incorporation is no guarantee by the registrar that the objects of the company are lawful.

On the date of incorporation (which is stated on the certificate), the company is �born� and is capable of exercising all the functions of an incorporated company, except that, if it is a public company, it cannot commence business or exercise any borrowing powers, unless the registrar has issued a certificate that he is satisfied that the nominal value of the company�s allotted share capital is not less than the authorized minimum.

PROMOTERS

A company comes into existence from the moment of its registration by the registrar of companies. However, the registration is preceded by what is called "promotion". The promotion consists in taking the necessary steps to incorporate the company and ensuring that it has sufficient capital to commence its operations.

"Promoter" is not defined in the Companies Act. This is so because the lawmakers in England as well as the English judges were of the view that a comprehensive definition of the word would be limiting, and might prevent the court from catching "the next ingenious rogue" who might be brought to the court to account for his actions as promoter. Kenya has adopted the applicable English law.

English judges have however described the word 'promoter' in varying terminology of which the following may be quoted:

(a)The Chief Justice in the Twycross v Grant case describes a promoter as  "one who undertakes to form a company  with reference to a given project a and to set it going and who takes the necessary steps to accomplish that purpose" 

Whether someone is acting as promoter of a company is a question of fact rather than a question of law.

Duties of Promoters

In the 19th century, it was common for promoters to sell their own property to a newly formed company at an inflated price, or to acquire assets for the company and receive a commission from the seller.

The courts then began to impose a fiduciary duty on promoters similar to that imposed on agents. A promoter must disclose any profit or potential conflict of interest to either:

a)  an independent board of directors, or

b)  existing or intended shareholders

Legal Status of a Promoter

A promoter is not an agent of the company he promotes.  However, the English courts have held that he stands in a fiduciary relationship to the company he promotes, just as an agent stands in a fiduciary relationship to his principal. In the case of Re Leeds & Hanley Theatre of Variety the Court ordered the promoter to pay damages to the company. The court held that the promoters had fraudulently omitted to disclose the profit made by them on the sale of the property to the company. The amount of damages was equivalent to the amount of profit made by the promoters.

Remedies for Breach of Promoters Duty

In case of a breach of promoters� duties the following remedies are available;

(i) Where promoter has sold his own property to the company, without disclosing this, the company can rescind the contract and recover the purchase price such as in the case of Erlanger v New Sombrero Phosphate Co. Emile Erlanger was a Parisian banker. He bought the lease of the Anguilla island of Sombrero for phosphate mining for �55,000. He then set up the New Sombrero Phosphate Co. Eight days after incorporation, he sold the island to the company for �110,000 through a nominee. One of the directors was the Lord Mayor of London, who himself was independent of the syndicate that formed the company. Two other directors were abroad, and the others were mere puppet directors of Erlanger. The board, which was effectively Erlanger, ratified the sale of the lease. Erlanger, through promotion and advertising, got many members of the public to invest in the company.

After eight months, the public investors found out the fact that Erlanger (and his syndicate) had bought the island at half the price the company (now with their money) had paid for it. The New Sombrero Phosphate Co sued for rescission based on non�disclosure, if they gave back the mine and an account of profits, or for the difference.

The House of Lords unanimously held that promoters of a company stand in a fiduciary relationship to investors, meaning that they have a duty of disclosure. Further, they held that the contract could be rescinded, and that rescission was not barred by laches.

As a general rule the right of recession is lost if restitution in integrum is not possible.

(ii)The promoter may have to account to the company for any profit he has made such as in the case of Gluckstein v Barnes . In this case, the defendants bought debentures cheaply in a company at a time when the company was faring very badly. Later, they bought over the company for 140,000 pounds. The debentures were redeemed at full value and they made a good profit.

Here they made a profit of 20,000 pounds. Later on, they formed another company and sold the company to a new company at a profit of 40,000 pounds. This profit was disclosed in the prospectus but not the amount of profit they made on the redemption of the debentures.(20,000 pounds)

The court held that there were in breach of their duties as promoters and the company was entitled to recover the profit from them.

Payment to Promoters

A promoter has no legal right against the company he promotes. The main reason is that the company did not ask him to promote it, and because the company could not make a valid contract with him before its incorporation.

In the case of companies which have adopted Table A, Article 80 empowers the directors to pay promoters their promotion expenses. It is however a power given to the directors and confers no legal rights on the promoter.

Pre-Incorporation Contracts

A company has no contractual capacity prior to incorporation � so contracts cannot be made on its behalf.

(a)  Effect of Pre-Incorporation Contract on the Company

Company cannot be bound to the contract because it had no contractual capacity

Company cannot ratify the contract because it was not in existence at the time the contract was made.

Company cannot sue or be sued on the contract.

(b)  Effect of Pre-Incorporation Contract on Person Purporting to Contract on Behalf of the Company

At Common Law:

� If third party knew company was not yet in existence, he could make the purported agent liable on the contract. In the Kelner v Baxter case; Baxter and two others agreed on behalf of a company yet to be formed to purchase trade stock for its business. Later the company was formed and accepted and used the trade stock, but failed to pay for the stock. The court held the company was not liable as it could not ratify a pre incorporation contract with retrospective effect to a date before the company existed. Baxter and friends were therefore unable to recover their money

� if it appeared that the contract was with a company already in existence, the court might hold there was no contract at all, and neither the company nor the purported agent could enforce it. In the Newborne v Sensolidcase, a company purported to sell goods at a time when it had not been incorporated. The company�s name was appended to the contract as �Leopold Newborne (London)Ltd� and underneath was the name of Leopold Newborne. When it was discovered that the company had not been formed, Leopold Newborne commenced proceedings for damages for breach of contract against the buyersin his own name. The Court of Appeal held that the plaintiff had never purported to contract to sell nor sold the goods either as principal or agent. The contract purported to be made by the company and Leopold Newborne had merely added his name to verify that the company was a party. In the circumstances, the contract was a nullity. In so deciding, the Court of Appeal distinguished the principle, applied in Schmaltz v Avery(1851) 16 QB 655 and other cases, that where a person purported to contract as agent he could nevertheless disclose himself as being in truth the principal and enforce the contract. The only person who had any contract with the defendants was the company and Mr. Newborn�s signature merely confirmed that of the company. At first instance, Parker J expressed the view that if the principle had applied the defendants could have escaped liability if they could have shown that they would not have contracted with the agent. The contract would have been voidable and the defendants could have claimed rescission. In the circumstances, however, it was not necessary for either Parker J or the Court of Appeal to determine the circumstances in which an agent could claim to be the principal and thus enforce a contract.

PROCESS OF REGISTERING A COMPANY

The procedures to be followed by persons who intend to form a registered company will depend on whether the proposed company is to be a public company or a private company.

Public Company

The initial step that must be taken by promoters who are desirous of forming a public company is the preparation of a document called the memorandum of association towhich at least seven of them will subscribe their names as prescribed in section 4 of the Companies Act. The memorandum must contain a declaration by the promoters that they are desirous of being formed into a company pursuant thereto and must state:

(a)       the name of the company, with "limited" as the last word of the name of the company in the case of a company limited by shares or by guarantee; and

(b)       that the registered office of the company is to be situated in Kenya; and

(c)       the objects of the company; and

(d)       the amount of capital with which the company is to be registered and the division of the capital into shares of a fixed amount.

The memorandum of a company limited by shares or by guarantee must state that the liability of the company's members is limited. The memorandum of a company limited by guarantee shall also state the amount "guaranteed" by each member of the company. 

The next step is the delivery of the memorandum to the registrar of companies together with some or all of the following documents:

(i)             Articles of association

This document contains the regulations for management of a company. If the proposed company is to be limited by shares the promoters need not deliver it for registration. The provisions of Part I of Table A in the First Schedule to the Act will be automatically applicable to the company under Section  II (2) of the Companies Act, if the promoters do not deliver it.

(ii)           Consent to act as director (Form No 209)

If any person is appointed director of the company by the articles which are to be delivered for registration in lieu of Table A, Form No 209 must be delivered for registration after being duly completed and signed by him or by his agent authorized in writing to do so. The form is the statutory signification of the person's consent to act as director. 

(iii)         List of persons who have consented to be directors (Form No 210)

This form, when duly completed and signed, constitutes the statutory list of persons who have given their individual consents in Form no 209. It is to be delivered for registration only if the prospective directors have been appointed by the articles delivered for registration in lieu of Table A, or as complementary thereto.

(iv)         Statement of the Nominal Share Capital

This statement is delivered for taxation purposes pursuant to Section 39 of the Stamp Duty Act.

(v)           Declaration of Compliance (Form No 208)

Form No 208, when duly completed and signed, constitutes the statutory declaration by the advocate engaged in the formation of the proposed company, or by the person named in the articles as a director or secretary of the company, that all the requirements of the Companies Act in respect of matters precedent to the registration of the company and incidental thereto have been complied with.

(vi)         Registration

If the aforesaid documents are correctly prepared in accordance with the provisions of the Companies Act they are registered. The registrar then grants a certificate of incorporation and the company is formed from the date of incorporation written in the certificate.

Private Company

In order to secure the registration of a private company the procedure described above is followed except that:

a)    The memorandum of association will be signed by at least two of the company's promoters.

b)    Form No 209 and 210 are not delivered for registration because Sec.182(5) of the Act exempts promoters of a private company from the obligation to deliver them for registration.

c)    If articles of association are not delivered for registration the provisions of Part I of Table A will become the company's articles, as modified by Part II thereof.

CONSTITUTIVE DOCUMENTS 

The constitution of a company consists of its memorandum of association and its articles of association.

MEMORANDUM OF ASSOCIATION

In relation to companies registered under the Companies Act, a Memorandum of Association was judicially defined by Lord Cairns in Ashbury Railway Carriage Co Ltd v Riche as "the charter" which "defines the limitation of the powers of a company to be established under the Act".

The memorandum of association is a document which contains the fundamental rules regarding the constitution and activities of a company. It is the basic document which lays down how the company is to be constituted and what work it shall undertake. 

The purpose of the memorandum of Association is to enable the members of the company, its creditors and the public to know what its powers are and what is the range of its activities. The memorandum contains rules regarding the capital structure, the liability of the members, the objects of the company, and all other important matters relating to the company. The memorandum is altered only after certain formalities are observed. 

The Importance of the Memorandum of Association

 The memorandum shows the range of the enterprise. The memorandum is the foundation on which the superstructure of the company has been built up. It enables the shareholders, creditors and outsiders to show the permitted activities of the company. 

The Form and Contents of the Memorandum 

The contents of a memorandum of association are prescribed by Section 5 of the Companies Act and comprise the following 6 clauses:

1.  Name Clause. 

The name of the company with the word "limited" at the end of the name of a public company and the words "private limited" at the end of the name of a private company. 

2.  Registered Office Clause

It must contain the name of the state in which the registered office of the company is to be situated. 

3.  Objects Clause, 

The Memo must state separately:�

 (i) The main objects and objects, incidental and ancillary to the main objects,  (ii) Other objects not included (i). 

4.  Limitation of Liability Clause

The nature of the liability of the members that is whether limited by shares or by guarantee or unlimited. 

5.  Capital Clause

In the case of a company having share capital, unless the company is an unlimited company, the memorandum shall state the amount of share capital and the division thereof into shares of a fixed amount. 

6.  The Association Clause

 No subscriber to the memorandum shall take less than one share; and each subscriber to the memorandum shall write opposite to his name the number of shares he takes.

Rules Regarding the Name of the Company 

A company cannot adopt a name by which another company is registered. If by inadvertence, mistake or otherwise, a name is selected which is the same as that of an existing company or closely resembles it, the name must be changed. 

If the name of company closely resembles the name of a previous company, the public may be misled and may be defrauded. In such a case the court will direct the change of the name of the company. 

In Sec.19(2) of the Act provides that a proposed name must not, in the opinion of the registrar, be undesirable. The name may be rejected if

i. It is too like the name of an existing company. ii. It is misleading, for example, if the name of a company likely to have small resources suggests that it is going to trade on a great scale over a wide field.

iii.             It suggests some connection with the crown or members of the Royal Family or royal patronage, including names containing such words as "Royal", "King", "Queen", "Princess" and "Crown".

iv.              It suggests connection with a government department or any municipality or other local authority or anybody incorporated by Royal Charter or by statute or with the government of any part of the Commonwealth or of any foreign country.

v.                It contains the words "British", unless the undertaking is British�controlled and entirely or almost entirely British�owned and is also of substantial size and importance in its particular field of business.

vi.              It includes "Imperial", "Commonwealth", "National", "International", "Corporation", "Cooperative", "Building Society", "Bank", "Bankers", "Banking", "Investment Trust", or "Trust", unless the circumstances justify the inclusion.

vii.            It includes a surname which is not that of a proposed director, unless the circumstances justify the inclusion.

viii.          It includes words which might be trademarks, unless a trade mark clearance has been obtained. 

The name and the address of the registered office of every company must be painted or affixed on the outside of its business premises in a conspicuous position and in letters easily legible in one or more of the languages used in the locality. The words "Limited" and "Private Limited" are parts of the names of public and private companies respectively and must be added at the end of the name of the company. 

The name and the address of the registered office of the company must be engraved in legible characters on the company's seal and mentioned in all business letters, bill heads, notices and other documents. But they need not be mentioned in advertisements.If a company does not paint or affix its name as prescribed, the company and every officer in default are liable to a fine not exceeding one hundred shillings and if the company does not keep its name painted or affixed as prescribed, the company and the officer in default shall be liable to a default fine.

The Act provides that the last word of the name of a limited company must be "limited" this would not be if the Central Government may by license, permit the omission of the words limited or private limited in the case of companies which are formed for promoting commerce, art, science, religion, charity or any other useful object, and which are non�profit and non�dividend� paying organisations (e.g., Chambers of Commerce). The license given may be withdrawn if the company ceases to fulfill the conditions mentioned above.

In case of change of business name the Registration of Business Names Act provides that if �

a)    any company is, through inadvertence or otherwise, registered under a business name under which registration under the Act ought to have been refused; or

b)    any change of ownership of a business occurs as a result of which a company carrying on a business under a business name which, on an application for registration under the Act, ought to have been refused, the registrar shall, by notice in writing, require the company to change such business name within a time specified in the notice.

The registrar is empowered to cancel the registered business name if the company fails to change it after he directed it to do so.

Limited Liability Clause

Section 5(2) provides that the memorandum of a company limited by shares or by guarantee shall also state that "the liability of its members is limited".

Companies limited by shares

Most registered companies, both public and private, are companies limited by shares. Such a company is defined by Sec. 4(2)(a) as "a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them". It should be noted that it is the liability of the company's members which is limited and not the company's own liability. To that extent the word "Ltd" at the end of the name of such a company is actually misleading.

In such a company the capital is divided into shares of a specified amount, for example, capital of 100,000 shillings divided into 10,000 shares of 10/� shillings each. Every member of the company is liable to pay 10/�for every share he holds and if, he has already paid the 10/�, he is not liable. If he has not paid the whole amount, he will be liable to pay the balance only.

Companies limited by guarantee

Sec. 4(2)(b) defines a company limited by guarantee as "a company having the liability of its members limited by the memorandum to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up". The memorandum of such a company would have a clause stating that "every member of the company undertakes to contribute to the assets of the company in the event of its being wound up while he is a member... such amount as may be required, not exceeding (so many) shillings". The member's liability is contingent and he can only be called upon to pay the amount "guaranteed" if the company is in liquidation.

A company limited by guarantee may also have a share capital. The model memorandum and articles of association of such a company is Table D in the First Schedule to the Companies Act.

The members of such a company have dual liability, that is, to pay the amount unpaid on their shares and the amount of the guarantee. The model memorandum and articles of association of a company limited by guarantee and not having a share capital is Table C in the First Schedule to the Companies Act.

Unlimited companies

S.4(2)(c) defines an "unlimited company" as a company not having any limit on the liability of its members". In such a case, although the company is a separate legal entity, the members' liability resembles that of partners except that, technically, their liability is to the company itself and not to the creditors.

An unlimited company may also have a share capital. The memorandum and articles of association of such a company would substantially correspond to Table E in the First Schedule to the Companies Act.

Capital Clause

Section 5(4)(a) provides that, in the case of a company having a share capital, the memorandum shall also (unless the company is an unlimited company) state "the amount of share capital with which the company proposes to be registered and the division thereof into shares of a fixed amount". Table B in the First Schedule to the Act, in pursuance of this provision, states that "The share capital of the company is two hundred thousand shillings divided into one thousand shares of two hundred shillings each". 

Reasons for Stating Capital

The Act does not expressly state the reasons why the capital of a company should be stated. However, there is a clue in the qualifying words "unless the company is an unlimited company". This means that if a company has a share capital but is registered as an unlimited company the amount of the capital need not be stated in the memorandum. This is so because the company's creditors would not rely on that capital as their primary security. They need not therefore be informed about its quantum. The creditors of such a company would rely primarily on the members' private assets and their personal liability as their security for any money they lend to the company. It may therefore be said that the proposed capital of a limited company is stated in its memorandum of association so that the company's potential creditors may read the memorandum in order to ascertain the amount of the capital as stated therein. Having ascertained the amount they could then decide on the amount to lend to the company. This is so because, legally, the capital is their primary security for any money they lend to the company. In Ooregum Gold Mining Co of India Ltd v Roper Lord Halsbury stated that "the capital is fixed and certain and every creditor of the company is entitled to look to that capital as his security".

The Association Clause

What has generally come to be known as "the association clause" is not provided for in Sec.5 of the Companies Act which prescribes the contents of the memorandum of association. It is however the popular or academic designation of the last paragraph of Table B which contains a declaration that the subscribers to the memorandum of association "are desirous of being formed into a company, in pursuance of this memorandum of association and ... agree to take the number of shares in the company" set opposite their respective names.

The declarants then sign the memorandum and their signatures are then witnessed by at least one person who is not a subscriber.

Other Clauses

The clauses enumerated and explained above form part of the memorandum of association pursuant to the provisions of s.5 of the Companies Act. However, other clauses may be included in the memorandum, such as a clause providing special rights for different classes of shares. Such a clause is usually placed in the articles of association but is occasionally incorporated into the memorandum if it is the intention of the promoters that it should, as it were, be "entrenched" (ie one which is more difficult to alter or is unalterable).

Alteration of the Memorandum Generally

Every clause of the memorandum may be altered except the registered office clause which constitutes Kenya the company's domicile. In addition to the methods of alteration of the name clause and the objects clause which have already been explained, Sec.25 allows a company to alter clauses that are included in its memorandum but could lawfully have been contained in the articles. Such clauses can be altered by special resolution except where the memorandum itself provides for or prohibits the alteration of all or any of the said conditions. Holders of 15% of the issued shares have thirty days to apply to the court to challenge the alteration. In the event of such application the alteration shall not have effect except in so far as it is confirmed by the court.

The Legal Effects of the Memorandum of Association

The memorandum of association has some legal effect on the operation of a company as discussed below;

The Contractual Powers of a Company

The Contractual Powers of a Company

 A Company or a Corporation is an artificial person created by law. It is a legal person capable suing and of being sued. But the contractual powers of a company are limited in two ways: i) natural possibility and ii) legal possibility. 

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