The Companies Bill 2010, was passed into law on 12th September 2015 by the President. The new Act repeals the Companies Act Cap 486 which is a pre-colonial law made in 1948.
Over the years there have been various attempts to change the repealed company act. This was because ways and modes of doing business have tremendously changed in the last 6 decades. Technology has become integrated in our businesses, there is a culture change where more people have entrepreneurial ambitions and in time Kenya has been named the best emerging economy to invest in due to accelerated infrastructure development and a stable political and macroeconomic environment. There was therefore need to modernise Kenya’s business sector so as to make it easier for local and foreign entities to invest in Kenya.
The new Act is therefore aimed at revolutionising business in the country by removing various pre-existing legislative stumbling blocks to doing business in Kenya. It is intended to reflect the prevailing circumstances of carrying on business – including modern patterns of regulation and ownership.
It codifies common law principles – in particular, the indoor management rule and common law fiduciary duties of directors. Along with this, it modernises company law by recognising electronic communication and the use of websites and other electronic avenues for a company’s communications. The new Act has also increased the penalties and fines for offences relating to companies.
It is key to note that the new Act is not yet operational. Its provisions only become operational on the date which the Act is published in the Kenyan Gazette. We shall send you piecemeal articles noting that the Act has over 1,000 sections and is incredibly detailed (bulky) and comprehensive.
Key highlights of the new Act:
A. Types of Companies; Part II
The Act maintains the types of companies as was described in the repealed Act;
- Companies Limited by Shares
- Companies Limited by guarantees- this company does not have a share capital but by undertakings on contributions that will be made upon liquidation
- Unlimited Companies- there is no limit on the liability of its members
- Private company- Can be any of (a), (b) or (c) with a limit of 50 members and shares are not freely transferable
- Public company-there is no limit as to membership and the public is invited to purchase its (subscribe for) shares
B. Formation of A Company
Previously, Section 4 (1) of the Companies Act Cap 486 of the Laws of Kenya required a minimum of seven persons and two persons for the formation of a public and private company, respectively. With the new Act, private companies should have at least one director, whereas public companies must have at least two directors, who must be natural persons and over the age of 18 (and not 21 as was set out in the repealed Act).
The focus of this volume will be on the introduction of sole member companies which is the most drastic change in the Act. However before I delve into that it is key to differentiate between a member and a director for ease of understanding this article.
Difference between members and Directors
In Kenya, members of a company are commonly referred to as directors of a company. However in law there is a difference between members and directors of a company. Members of a company are the persons who subscribe to the memorandum and articles (memarts) of a company for purposes of its registration. (Reference is made to the last page of the “mem-arts” which states the name, address and shares allocated to each member). A director is one who is elected or appointed by the members to run the affairs of a company. We shall however look at the law on directors in the latter volumes.
C. The Single Member Company
i. Features of a sole member company
The new Act, has introduced an exciting concept referred to as the single/sole member company for private companies. This means a single entrepreneur can now incorporate a private company as a sole member and director, and gain the benefits that come with a company.
Initially, sole entrepreneurs were sentenced to operate as a sole proprietorship or look for family members or friends to gain the minimum number of two members for purposes of incorporating a company! It explains why a lot of indigenous successful companies are family run.
Interestingly, the sole member/director will constitute quorum in the general meetings. The sole member will be required to provide the company with details of the decisions from a general meeting, unless they are written resolutions.
iii. Capacity to contract
A sole member/director also has capacity to enter into a contract under Section 194 of the Act. However such contract is only valid if the terms of the contract are
- Set out in writing in a memorandum (agreement)
- Recorded in the first meeting of the directors following the making of the contract (even if the terms of a contract are not in writing, the directors can adopt and ratify it
iv. Validity of unprocedural decisions made by sole members
If a sole member/director makes a decision that ought to have been taken at a general meeting and should have been part of a written resolution, the decision shall not be invalidated because of the skip on procedure. The decision shall remain valid and binding.
This is meant to cure the mischief of sole member/directors making decision on behalf of the company and the company directors reneging on it on the basis of process yet a third party has relied on the decision relayed by the sole member/director.
v. Perpetual succession of sole member company
The question that will obviously form the subject to a lot of debate will be the issue of perpetual succession in the sole member company. The question is, does perpetual succession apply to single member companies? Yes it does!
Section 2 of the new Act states that one or more persons are enabled to incorporate a company with perpetual succession. This means that even upon the death of the sole member, the company will remain as a going concern and the death of the member will not affect the life of the company.
This is a great advantage to sole entrepreneurs whose business would cease to operate or exist upon their death in sole proprietorship. Further, while initially upon the death of the sole proprietor, creditors would pursue the estate of the deceased for the debt, in this case it is the company that will be responsible for the debt or liability, which liability is limited by shares or guarantee.
vi. Change of number of members
There are no restrictions on increasing the number of members to more than one or reducing the number of members to one, other than the company ensuring that the additional member/s details are entered in its register of members.
vii. Passing of resolutions
A sole member company can only pass an ordinary or special resolution as a written resolution. This is different from companies with two or more members which have the option of passing resolutions in writing or at a meeting of the members. While initially resolutions had to be witnessed or executed by the company secretary that is not a mandatory requirement considering that a company is only required to have a company secretary if it has a paid up capital of Kshs. 5,000,000.00 or more.
As stated earlier sole entrepreneurs will be the biggest gainers from the Act as they will gain the benefits accruing from a limited liability company with the freedom of sole proprietorship.
While the law protects parties that contract with single member companies under Section 319 by validating decisions made without due procedure by sole member/director companies, there is still need for subsidiary legislation.
Businesses may be apprehensive in dealing with sole member companies particularly because of the issue of perpetuity of the business upon the death of the sole member/director. While the law states that a single member company has the benefit of perpetual succession, there may be apparent risks upon the death of a sole member/director such as;
- Where the sole member is the sole director, who will run the company upon his death?
- In the event that the sole member/director dies while the company is in debt, whose responsibility is it to ensure that the debt is paid up?
Therefore while this concept is exciting to sole entrepreneurs and the estate of the deceased, as the law protects it through limited liability, the law has not endeavoured to protect parties such as banks, debtors, suppliers etc that would transact with the single member company.
To tread on caution, I would be recommend that parties transacting with single member companies, ensure that such companies have other directors as opposed to where the sole member is the sole director. This ensures that upon the death of the sole member, the directors of the company can still run the business.