Formation and Incorporation

Formation and Incorporation

Syllabus tag: KASNEB CPA | Intermediate Level | CA21 Company Law | Topic 2 Formation and Incorporation

Lesson objectives

By the end of this topic, you will be able to:

• List the documents required to register a company
• Explain the effect of the certificate of incorporation
• Explain a promoter's position and duties
• State the effect of a pre-incorporation contract
• Describe the restrictions on company names

Why this matters

Incorporation is the moment a new legal person comes into existence. Contracts made before that moment, and duties owed by the people who made them, are a recurring examination topic precisely because the company did not yet exist.

Registering a company

An application to the Registrar must state:

• The proposed name
• Whether liability is limited by shares or by guarantee, or unlimited
• Whether the company is private or public
• The registered office address in Kenya
• The articles of association, or a statement adopting model articles

Accompanied by:

• A statement of capital and initial shareholdings, or a statement of guarantee
• A statement of proposed officers — directors and, where required, the secretary
• A statement of compliance with the registration requirements
• The prescribed fee

Where the Registrar is satisfied, a certificate of incorporation is issued.

Effect of the certificate

The certificate is conclusive evidence that the requirements of the Act have been complied with and that the company is duly registered.

That word matters. Once issued, the certificate cannot be challenged on the ground that some formality was defective. A third party dealing with the company need not investigate whether registration was properly carried out.

From the date of incorporation the company becomes a body corporate with the name stated, capable of exercising all the functions of an incorporated company.

Promoters

A promoter is a person who takes the steps necessary to bring a company into existence — finding subscribers, negotiating contracts, instructing professionals.

A person acting only in a professional capacity, such as an advocate drafting documents on instructions, is not thereby a promoter.

A promoter stands in a fiduciary position towards the company, which produces two duties:

• Not to make a secret profit from the promotion
• To disclose any interest in a transaction with the company, to an independent board or to the members

The classic breach is buying property and reselling it to the company at a profit without disclosure. The remedies are rescission of the contract, recovery of the profit, or damages.

Note that the profit itself is not the wrong. A promoter may make a profit, provided it is properly disclosed. The wrong is the concealment.

:::checkpoint A promoter buys land for KES 8 million and sells it to the company she is forming for KES 12 million, disclosing the transaction fully to a board of independent directors who approve it. Explain whether she has breached her duty, and what would change if she had appointed the board herself. :::

Pre-incorporation contracts

A contract made on behalf of a company before it exists cannot bind the company, because there is no principal to be bound.

Two consequences:

• The company is not liable, even after incorporation, and cannot sue on the contract
• The person who made it is personally liable, unless the parties agree otherwise

Ratification does not work. A company cannot ratify a contract made before it existed, because ratification requires that the principal was in existence and capable of contracting at the time.

The practical solution is novation: after incorporation the company enters a new contract on the same terms, and the original party is released. It is a fresh agreement rather than an adoption of the old one, which is why the distinction is examined.

Company names

Prohibited or restricted:

• A name identical to one already registered
• A name suggesting a connection with government or a public authority
• A name that is offensive or whose use would be an offence
• Names including sensitive words requiring approval

Required endings: a private limited company ends with "Limited"; a public one with "Public Limited Company".

A name may be reserved with the Registrar for a period before registration.

The Registrar may direct a change of name where a company is registered with a name too like an existing one, and a company may change its name voluntarily by special resolution.

Registered office and publicity

Every company must have a registered office in Kenya to which communications may be addressed, and must notify the Registrar of any change.

The company must display its name at its registered office and on its business letters, order forms, websites and other documents.

The requirement is not decorative. A person dealing with a limited company is entitled to know they are dealing with one, because it tells them their recourse is limited to the company's assets.

:::checkpoint A director signs a supply contract "for and on behalf of Tembo Ltd", a company that is not incorporated until three weeks later. The supplier delivers and is not paid. Advise the supplier on who they may sue and why. :::