Law II R. Kit Final as @ 3 July 2006.doc

8/10/2019 Law II R. Kit Final as @ 3 July 2006.doc

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Law II

SUBJECTNO. 7

Revision Kit

STRATHMORE

UNIVERSITY

DISTANCE

LEARNINGCENTRE

P.O. Box 59857,

00200, Nairobi,

KENYA.

Tel: +254 (02) 606155

Fax: +254 (02) 607498

Email:dlc@strat!or"."d#

Copyright$%% &'* &&-. No /art o tis /#blicatio !a b" r"/rod#c"d, stor"d i a r"tri"3al

sst"! or tras!itt"d i a or! or b a !"as, "l"ctroic, !"caical, /otoco/i, r"cordi

or ot"ris" ito#t t" /rior ritt" /"r!issio o t" co/rit o"r. *is /#blicatio !a ot b"

l"t, r"sold, ir"d or ot"ris" dis/os"d o b a a o trad" ito#t t" /rior ritt" cos"t o

t" co/rit o"r.

THE REGISTERED TRUSTEES STRATHMORE EDUCATION TRUST 1992
mailto:[email protected]:[email protected]


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Acknowledgement

Acknowledgment

" rat"#ll acol"d" /"r!issio to #ot" ro! t" /ast

"xa!iatio /a/"rs o t" olloi bodi"s Kenya Accountants and

Secretaries National Examination Board (KASNEB) !"artered

#nstitute o$ %anagement Accountants (!#%A) Association o$

!"artered !erti$ied Accountants (A!!A)&

" o#ld also li" to "xt"d o#r sic"r" ratit#d" ad d""/

a//r"ciatio to %r& 'aco akerior i3i is ti!", "x/"rtis" ad

3al#abl" cotrib#tio, ic "r" a it"ral /art i t" iitial

d"3"lo/!"t o tis &"3isio :it. " olds t" olloi acad"!ic

oo#rs, **% (+st!lass), **B, ,i-loma in *aw (K&S&*).!/S (K),

and is also an ad0ocate o$ t"e 1ig" !ourts o$ Kenya and a

%emer o$ t"e*aw Society o$ Kenya among ot"ers. " is a s"ior

l"ct#r"r at trat!or" ;i3"rsit, cool o $cco#tac, Bac"lor o


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Content! """

Contnt!Acknowledgment........................................................................................""

#$%t I& Int%od'ct"on................................................................................"(

Approach to Examinations.....................................................................................................................3i

Syllabus........................................................................................................................................................xi

Topical Guide to Past Paper Questions.............................................................................................x3

#$%t II& Re("!"on )'e!t"on! $nd An!we%!...............................................*

>#"stios ? Past Pa/"rs....................................................................................................................................1

$s"rs ? Past Pa/"rs....................................................................................................................................2#$%t III& Com+%e,en!"(e Mock E-$m"n$t"on!.....................................*/

>#"stios A =ocs.......................................................................................................................................124

$s"rs ? =ocs..........................................................................................................................................16

#$%t IV& Re("!"on )'e!t"on! $nd An!we%!............................................*01

>#"stios......................................................................................................................................................180

$s"rs........................................................................................................................................................186

Re2e%ence!..............................................................................................31


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Int%od'ct"on

/art #: #ntroduction

Revision is the process by which you remind yourself of the material you have studied

during your course, clarify any problem areas and bring your knowledge to a state

where you can retrieve it and present it in a way that will satisfy the examiners.

The paragraph herein- above captures the essence of revision. It isimplicit that revision is nothing short of ne tuning the knowledgeacquired in the course or making it more digestible for usage in anexamination.

evision is an integral part of examination preparation. It is not asubstitute for a sustained preparation earlier in the course. Thes!llabus for "aw II or #ompan! "aw is expansive and cannot behastil! crammed for purposes of the examination. $ deliberateattempt must be made to stud! and appreciate the basic principlesand concepts and their application. evision must therefore be seenas a nal stage in the stud! of an! topic. Its utilit! is thereforeundermined if earlier stages have not been completed.

$s an integral part of the course revision must be commenced shortl!after the commencement of the course. Initiall! this could take theform of a review of what has been covered in a week or two not a

month as this ma! be inordinatel! long. Ideall!% revision is necessar!after ever! topic. #overage of the topics must be incisive andindiscriminate.

The main purpose of this booklet is to help candidates preparing forthe "aw II &$'()* examination to make the best use of the last fewweeks before the examination.

The booklet consists of three parts+ part one consists of anintroduction% the various revision and examination techniques. ,arttwo consist of eight sets of past examination questions and answers.

The obect of this part is to demonstrate to the candidate the actualinformation required in responding to examination questions% thedetail required and the variet! of questions expected in theexamination. This section demonstrates be!ond question that aserious candidate must familiarie himself with the entire s!llabus.)ver! topic ought to be accorded the requisite attention.

,art three consists of three sets of examination questions andanswers. The twent!-four questions illustrate to the candidate thet!pe of questions likel! to appear in future examination papers. Thepurpose of this part is to expose the candidate to additional questionsfor better coverage of the s!llabus and preparation.

Re("!"on Tec,n"4'e!

"(


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Int%od'ct"on(

I dare state at the outset that I am not an expert in revisiontechniques. /owever% it is quite inorder to make a few suggestions. $candidates revision strateg! should consist of two facets namel!+

"ooking back to the work alread! covered. "ooking forward to the examination.

evision must not be boring. This demands application of numeroustechniques at di0erent times. $t this level it is assumed that acandidate has tested a number of techniques and should adopt themost e0ective one1s2. The basic revision techniques include+

/ighlighting ke! points and cases in lecture notes% textbooks andother materials used in the course.

3sing ke! terms% words or phrases so as to remember the essential

concepts and cases in a topic. educing lecture notes and other materials to ke! ideas denitions

and case law and committing them to memor!. ,racticing as man! examination standard questions as possible.

This is best accomplished b! working to time under examinationconditions if possible avoiding the temptation to look at the answerbefore completion.

,racticing the art of writing at speed. This is something ever! "awcandidate need.

In the course of revision candidates are encouraged to think ofsituations and circumstances which exemplif! concepts and ideas

likel! to arise in the examination. This enriches a candidatescapacit! to anal!se problem related questions in the realexamination.

#andidates are encouraged to practice planning answers and thencompare their notes with the answers provided. This is additionalpractice but must not substitute writing full answers.


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A++%o$c, to E-$m"n$t"on!

Approach to Examinations

ANS5ERIN6 )UESTIONS$s observed elsewhere:

Examinations are formidable even to the best prepared for thegreatest fool may ask more than the wisest man can answer.

$ candidate must spend the rst ten minutes of the examinationreading the question paper. This enables the candidate todiscriminate the questions. 4enerall!% the division of time shouldbe proportional to the marks on o0er.

#andidates are advised to resist the temptation to spend too muchtime on an! question. If a question has more than one part acandidate must complete each part.

5n ever! question the rst marks are the easiest to gain and evenif matters go wrong with the timing a candidate will probabl! gainsome marks b! making a start.

$ candidate is free to answer questions in an! order of preference.'ome candidates start with their best questions.

It is generall! agreed that the most frequent reason for failure inexaminations apart from basic lack of knowledge is the candidatesunwillingness to answer the question asked. #andidates often

include ever! scrap of knowledge the! have in a topic ust in caseit is relevant.

$ candidate must stick to the question and tailor the answer to thequestion.

$ candidate must be war! of questions which appear to be almostidentical to those practiced during revision. The! probabl! arenot6. 'eriousness demands that a candidate read a question atleast twice before it is responded to. &e! words on the questionpaper must be underlined to enable one focus on the question.

If a candidate is unable to decipher what a question is asking%

assumptions ma! be made. 'uch assumptions must be made onsound principles i.e. the! must be reasonable.

#RESENTATION

It is a good idea to make a rough plan of the answer before writingcommences. This ma! be done in the answer booklet and thencrossed out neatl! to guide the examiner.

If a question is divided into separate sub-sections% each of themmust be responded to separatel! and numbered or lettered as inthe question paper.

$lthough a candidates handwriting is not marked% it must belegible. This enables the examiner identif! the points made.

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Int%od'ct"on(""

To distinguish concepts and institutions candidates are required togive not onl! the di0erences in denition but also in legal e0ect.)0ort must be made to give reasons and authorities as well asillustrations even though the examiner does not expressl! ask for

them. *efore responding to an essa! question candidates are advised to

ot down the authorities. This enables a candidate to capture ideaslikel! to elude him when writing commences. )ssa! questionsmust have a clear structure% a brief introduction% the main sectionand a conclusion. It is advisable to break up essa!s intoparagraphs with sub-headings underlined.

#andidates are advised to be concise. It is better to write a littleabout di0erent points than a great deal about one or two points.

$s much details as possible must be given. The examiner will be looking for evidence that a candidate has

understood the s!llabus and can appl! his knowledge in newsituations. $ candidate is therefore expected to give opinion andmake udgments. These should be based on reasoned and logicalarguments.

$n ordinar! "aw II examination consists of three t!pes of questionsnamel!+

72 'ingle statement and a problem.82 'tructured92 ,roblem 1s2

$ single question ma! be a combination of all of them though this is arare occurrence.

In most instances% if part 1a2 or one of a question is a single statementpart 1b2 or two is a problem. The obect of such a question is to test acandidates abilit! to recall and appl! legal principles. $lmostinvariabl! the problem is based on the same subect which makes itdigestible. /owever its is not unusual for the problem to relate to aseparate subect. It is the candidates cardinal responsibilit! todiscern the legal issues involved. #are must be taken to ascertain thelegal principles correctl!.

If the entire question is a problem or a set of problems% extra caremust be exercised to conlextralise the principles and the udicial orstatutor! authorit! applicable. *revit! must be avoided.

72 SIN6E STATEMENT AN8 #ROBEM )UESTION

'uch questions are generall! bookwork and are based on thepremise that the candidate is familiar with the topic concerned.The question must be responded to comprehensivel! but must beavoided if the candidate is unsure of their purport.

:or example question 8 of ;ecember 8


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a2 5utline the rules that govern pre-incorporation contracts citerelevant case-law to support !our answer.

b2 &ioko an under 'ecretar! in the =inistr! of >iwandani wasentrusted with the responsibilit! of selling the ministr! bondedmotor vehicles. /e invited bids from members of the public to

bu! two lorries. /e also bid through a nominee% =wangangi%his brother. 'ubsequentl!% &ioko sold the lorries to =wangangiat &sh. ?. &elsal 17C@E2 as well as in (atalland #o. "td >. ,auline #ollier! '!ndicate. This is because the

(""


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Int%od'ct"on"-

compan! had no capacit! to enter into the transaction when thepromoter did so.

$t common lawAs the mere adoption or conrmation b! directors ofa contract purportedl! entered into on behalf of the compan!

before it is incorporated creates no contractual relationshipbetween the compan! and the other partl!. It was so held in (orth'!dne! Investments and $nother >. /iggins and $nother.

$ ,re-incorporation contract is enforceable b! or against thecompan! if after incorporation the compan! has entered into a newcontract similar to the previous agreement. It was so held in/oward >. ,atent Ivor! co. "td. The new contract ma! be expressor implied from the acts of the compan! when incorporated. It wasso held in ,rice >. &elsal. In =awagola :armers and 4rowers #o."td >. &a!ana and others. Fhere the appellant compan! enteredinto a similar agreement after incorporation% it was held that the,re-incorporation #ontract was enforceable.

,roblem questions are intended to test a candidates abilit! torelate legal principles to specic situations. It also tests thecandidates abilit! to recall udicial and statutor! authorit!. =ost ofthe problems are based on cases or scenarios the candidate hascome across in the course of preparation for the examination. Thelegal issues are in most instances easil! discernible. $s is the casein our problem. esponding to a problem question demands anelucidation of four issues namel!+

The principle of law being examined

The factual situation represented i.e. the legal problem at hand. The position in law i.e. the candidates advise or whether the

transaction is valid or not. The legal basis of the position taken. This is the ustication of

the conclusion arrived at. It is the point at which case law orstatutor! provision is used.

b2 This problem is based on breach of udiciar! duties b!promoters and the remedies available to the compan!. $s

udiciaries promoters are bound to avoid conGict of interest b!disclosing an! personal interest in contracts made before

incorporation. The disclosure must be made either to anindependent board of directors or to all members in theprospectus.

In this case &ioko put himself in a position of conGict of interestbut did not disclose% he is therefore guilt! of breach of dut! tothe compan! in formation and the compan! has certainremedies against &ioko.

=! advise to =usembi respecting the rights of the compan! isthat the compan! is entitled to+-

escind the contract of sale of the lorries. $s was the case in)mille )vlanger >. (ew 'ombrero ,hosphate


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'ue &ioko for the recover! of the prot made or for anaccount. The suit is an action for mone! had and received.

$s was the case in 4luckstein >. *arnes 17C


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Int%od'ct"on-"

In this case% the =emorandum of charge was dul! executed b!the #ompan! and registered thereafter and a certicate ofregistration issued b! the registrar.

The charge herein is valid in all respects since its registration

and issuance of the certicate cured all its defects. It istherefore enforceable against the compan!.

This legal position is consistent with the decision in re (!e "td17CED2 whose facts were substantiall! similar to those in thiscase. The principle herein was also applied in (ational,rovincial and 3nion *ank of )ngland >. #harnel!

2 STRUCTURE8 )UESTIONS

This is the most common examination technique and a candidatemust be prepared for questions of this nature. 'uch questions ma!take the form of three or four distinct questions as a singlequestions or a single statement question with di0erent parts. :orexample question ? ;ecember 8


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c2 $ secured creditor is one who holds some securit! for a debtdue to him from the compan! such as a mortgage% charge orlien. 'uch a creditor has certain courses+ /e ma!+

el! on his securit! and not prove at all.

'urrender his securit! and prove as an unsecuredcreditor for the whole debt.

ealie his securit! and prove as an unsecuredcreditor for an! balance due to him after deductingthe amount realied.

-al#" is s"c#rit ad /ro3" as a #s"c#r"d cr"ditor or a balac"

d#" at"r d"d#cti t" 3al#" o t" s"c#rit.

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S9ll$:'!-"""

Syllabus

C#A #ART II SECTION /

#A#ER NO. * A5 II

OBJECTIVE

To equip the candidate with knowledge on the law relating to theformation% registration and operations of corporations.

**.1 S#ECI;IC OBJECTIVES

$ candidate who passes this subect should be able to+

$ppreciate the legal principles relating to the nature andregistration of companies

;escribe the various classes of companies

;ene the nature and contents of the =emorandum and$rticles of $ssociation

$ppreciate the legal principles that govern the raising ofcapital for companies

3nderstand the general principles relating to accounts%auditors and pa!ment of dividends.

CONTENT

*.* N$t'%e $nd Cl$!!"


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-"(Int%od'ct"on

? ,romoters+ meaning of the term ,romoterJ position andduties of promotersJ pa!ment for promotion servicesJ pre-incorporation contracts


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S9ll$:'!-(

*.3 S,$%e C$+"t$l

? =eaning of capital

? T!pes of capital? aising of share capital? ,ublic o0er of shares 1;irect invitation% o0ers for sale%

placings2? =isrepresentation and omissions in listing particulars or

prospectus? #ommissions and discounts? 3nderwriting and brokerage? $llotment of shares? #ommencement of business? Issue of shares at ;iscount and at ,remium? 'hare ,remium $ccount and issue other than for cash

? $lteration of share capital? =aintenance and reduction of capital? The acquisition and redemption b! a compan! of its own

shares+ general rules relating to acquisitionsJ redemptionand purchases of sharesJ redemption or purchase of sharesout of capital

? :inancial assistance b! a compan! for purchase of its ownshares+ liabilit! of the compan!J exceptions to the ruleJ legalsignicance to the lender

*./ Mem:e%!,"+ S,$%e! $nd M$=o%"t9 R'le

? Fa!s of becoming a member? Fho can become a member? egister of members? ;isclosure of substantial holdings? #lasses of shares? 'hare certicate? Transfer and transmission of shares? =ortgage of shares? #alls and liens on shares? :orfeiture and surrender of shares? 'hare warrant

? >aluation of shares? =aorit! ule and =inorit! ,rotection+ The ule in :oss K vs

K /arbottleJ ,rotection of minorit!J Finding up b! the courton the ust and equitable groundJ Investigations andpowers to obtain informationJ

? Investor protection+ Insider dealing 1#apital =arkets$uthorit! $ct #ap.D?@ $2

? #entral ;epositor! '!stem

*.> Meet"ng!

? &inds of general meetings? (otices of meetings? ,roceedings at meetings


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-("Int%od'ct"on

? ,roxies? esolutions


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S9ll$:'!-(""

*.? 8"%ecto%!@ Sec%et$%"e! $nd A'd"to%!

? (umber and appointment of directors

? ,ersons who cannot become directors? 'hare qualication of directors? egister of directors and secretaries? ,articulars of directors and 'ecretaries? ;isclosure of directorAs shareholdings? ;irectorsA service contracts? ,owers and duties of directors? >acation of o0ice b! directors? emuneration of directors? "oans to directors? #ompensation to director for loss of o0ice? ;irectors and insolvenc!

? Transaction involving directorsJ the rule in TurquandAs case? ;irectorsA powers and shareholdersA control? Lualication+ #ertied ,ublic 'ecretaries $ct 1#ap. @9D2? $ppointment+ #ompanies $ct? ,owers and duties? $ccounts% $udit and $uditors+ *ooks of accountJ "a!ing the

$ccounts before the compan! in general meeting and lingthem with the egistrarJ The annual accountsJ 4roupaccountsJ ;irectors reportJ $uditors reportJ $ppointment of

$uditorsJ Lualication of $uditorsJ >acation of o0ice b!$uditorsJ emuneration of $uditorsJ ,owers and duties of

$uditors

*.7 8"("dend! $nd 8e:ent'%e!

? (ature of a dividend? ,rots available for dividends? The realised prots test? ,a!ment of dividends? #reation and capitalisation of eserves? ;ebentures+ $ compan!As power to borrow mone!J

;ebenture and debenture stockJ Issue of a debentureJegistered debenturesJ *earer redeemable and perpetual

debenturesJ #harges securing debenturesJ egistration ofchargesJ emedies of debenture holders

*.0 Co%+o%$te In!ol(enc9

" 5"nd"ng '+ :9 Co'%t? 4rounds for winding up b! #ourt? ,etition of a winding up order? #onsequences of a winding up order? ,roceedings after a winding up order? The liquidator as o0ice holder+ ,owers and duties

"" Vol'nt$%9 w"nd"ng '+? =embersA voluntar! winding up


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-("""Int%od'ct"on

? #reditorsA voluntar! winding up? #onsequences of voluntar! winding up? ;istribution of the propert! of the compan! in voluntar!

winding up? ,owers and duties of the "iquidator in a voluntar!

winding up? #ompulsor! liquidation after commencement of voluntar!liquidation

""" Cont%":'to%"e! $nd c%ed"to%!? #ontributories? #reditors? #ompletion of winding up b! the #ourt


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To+"c$l 6'"de to #$!t #$+e% )'e!t"on! -"-

Topical Guide to Past Paper Questions

:ormation of #ompan! and)0ects ,rocedure #onstitutive documents

=a! 8


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--Int%od'ct"on

;ec 8


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To+"c$l 6'"de to #$!t #$+e% )'e!t"on! --"

ule in 'alomons #ase and)xceptions

Hune 8


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Re("!"on )'e!t"on! $nd An!we%! *

/art ##: 2e0ision 3uestions and Answers

)UESTIONS #AST#A#ERS

ENYA ACCOUNTANTS AN8 SECRETARIES NATIONAEAMINATIONS BOAR8

C#A #ART II

A5 II

#"lot #$+e%J'l9 111T"me Allowed& 3 ,o'%!.

An!we% $n9 ;IVE 4'e!t"on!. A4'e!t"on! c$%%9 e4'$l m$%k!.

)UESTION ONE

In relation to compan! law+

a2 )xplain the meaning of the term ,romoter.

1D marks2b2 ;iscuss the rules that govern pre-incorporation contracts.

1B marks2c2 ;escribe the common law duties of a ,romoter.

17< marks2

DTot$l& 1 m$%k!

)UESTION T5O

a2 /opeful% a private limited compan! has adopted Table $ as its$rticles of $ssociation. The compan! now% wishes to alter the

$rticles of $ssociation.

5utline the procedure to be followed to e0ect the change17< marks2

b2 Fafula% one of the ;irectors of /opeful #o. "td is unsure of his dut!of care and skill as a director of the compan!. /e seeks !our adviceon this.

$dvise him.17< marks2

DTot$l& 1 m$%k!


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)'e!t"on! #$!t#$+e%!

)UESTION THREE

a2 )xplain the 'tatutor! and #ommon "aw ules that govern raisingand maintenance of share capital of a compan!.17< marks2

b2 ;ene the term NprospectusA and explain the circumstances underwhich a compan! ma! issue a prospectus.17< marks2

DTot$l& 1 m$%k!

)UESTION ;OUR

The rule in Foss v Harbottleestablishes the principle that where awrong is done to the compan!% the proper plainti0 is the compan!itself. /owever% where the wrong is done b! the compan! directors% itma! be impossible for the compan! to sue. In such a case% a derivate

action ma! be the onl! option.

a2 )xplain what is meant b! derivative action.17< marks2

b2 ;escribe the conditions that must be satised before a derivativesuit can be instituted

17< marks2

DTot$l& 1 m$%k!

)UESTION ;IVE

a2 /ighlight the requirements to be met before a notice of meetingserved on members can be held to be valid.17< marks2

b2 ;escribe the duties of an $uditor as set out under the #ompanies$ct. 17< marks2

DTot$l& 1 m$%k!

)UESTION SI

a2 ;istinguish a :ixed #harge from a :loating #harge.1B marks2

b2 The directors of $lumasi #o. "td borrowed 'hs.8< million from=aendeleo *ank. The *ank was informed that the mone! wasintended to be used to expand the compan!As horticulturalbusiness. The bank however% did not ask for the compan!As=emorandum of $ssociation and lent the mone!. The mone! wasspent for purposes not intended. These facts have come to lightand =aendeleo *ank seeks !our advice on whether the bank cansuccessfull! recover the mone!.


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Re("!"on )'e!t"on! $nd An!we%! 3

$dvise the bank.1? marks2

c2 5utline the legal rules that govern the appointment of an$dministrative eceiver b! a holder of a Goating charge.1B marks2

DTot$l& 1 m$%k!

)UESTION SEVEN

a2 ;escribe the circumstance under which a compan! ma! be woundup on the ground that it is Nust and equitableA to do so.178 marks2

b2 'tate the legal consequences of a winding up order made against acompan!. 1? marks2

DTot$l& 1 m$%k!

)UESTION EI6HT

a2 ;etail the statutor! provisions governing the investigation into thea0airs of a compan! b! the registrar.178 marks2

b2 'tate the powers of the inspection appointed to investigate thea0airs of the compan!.

1D marks2

c2 )xplain who is responsible for the expenses incurred whilecarr!ing out investigations into the compan!As a0airs.1D marks2

DTot$l& 1 m$%k!


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/ )'e!t"on! #$!t#$+e%!

;RI8AY& 0 8ecem:e% 111.T"me Allowed& 3 ,o'%!

An!we% $n9 ;IVE 4'e!t"on!. A4'e!t"on! c$%%9 e4'$l m$%k!

)UESTION ONE

Hanet and Hackson 5n!ango are forming a "imited "iabilit! #ompan!.The! are seeking !our legal advice on the issues listed below.espond to the enquiries b! Hanet and Hackson 5n!ango on+

a2 Fhat are the =emorandum and $rticles of $ssociation and isthere a di0erence between the two1@ marks2

b2 Fhat details would !ou expect them to contain and what other

information might !ou be able to give about these details17@ marks2

DTot$l& 1 m$%k!

)UESTION T5O

a2 5utline the rules that govern pre-incorporation contracts.#ite relevant case-law to support !our answer.178 marks2

b2 &ioko% an 3nder 'ecretar! in the =inistr! of >iwandani was

entrusted with the responsibilit! of selling the =inistr!As boardedmotor vehicles. /e invited bids from members of the public to bu!two lorries. /e also bid% through a nominee. =wangangi% his ownbrother.

'ubsequentl!% he sold the lorries to =wangangi% at 'h.?


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Re("!"on )'e!t"on! $nd An!we%! >

b2 )xplain ve circumstances when shares ma! be issued at adiscount. 17< marks2

c2 )xplain two terms implied in a contract of sale of shares betweena seller and purchaser.1D marks2

DTot$l& 1 m$%k!

)UESTION ;OUR

a2 5utline the contents of a register of members of a compan!.1B marks2

b2 (oroge% a member of Tusonge #ompan! "td.% inspected theregister of members of the compan! and noted that his name hadbeen omitted therein.

$dvise (oroge on how he should proceed to have his nameentered in the register.1D marks2

c2 It is a fundamental principle of compan! law that the share capitalof a compan! must be maintained.;iscuss the legal consequences of this principle.

17< marks2

DTot$l& 1 m$%k!

)UESTION ;IVE

a2 In relation to the provisions of the #ompanies $ct 1#ap.D?B2 of the"aws of &en!a% outline general provisions relating to meeting and

votes. 17< marks2b2 'tate the duties of an $uditor of a compan!.

1B marks2c2 ;escribe the categories of persons who do not qualif! to be

appointed auditors of a compan!.1D marks2

DTot$l& 1 m$%k!

)UESTION SI

a2 )xplain the reason wh! a third part dealing with the compan! ma!concern himself with the doctrine of ultra vires.1B marks2

b2 The #ompanies $ct 1#ap.D?B2 of the "aws of &en!a imposescertain statutor! limitations and obligations on directors.

"ist four of such limitations.1D marks2


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? )'e!t"on! #$!t#$+e%!

b2 )xplain the circumstances under which a compan! ma! issuebonus shares. 17< marks2

DTot$l& 1 m$%k!

)UESTION SEVENa2 "ast six t!pes of compan! charges that require registration as

outlined in the #ompanies $ct 1#ap.D?B2 of the "aws of &en!a.1B marks2

b2 4reen *ank gave a loan of 'h.9%


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THURS8AY& 7 J'ne 11*T"me Allowed& 3 ,o'%!

An!we% $n9 ;IVE 4'e!t"on!. A4'e!t"on! c$%%9 e4'$l m$%k!

)UESTION ONE

a2 To what extent does the doctrine of constructive notice operatenegativel! 1D marks2

b2 O "td whose articles are similar to Table $% publish a weekl!magaine. In one issue an article is critical of the policies of thecit! commission. $ number of #ommissioners who are alsomembers of the compan! requisition a general meeting andsecure the passing of an ordinar! resolution ordering the compan!to publish in the next issue a withdrawal of the criticism. Thedirectors of the compan! are adamant.

The angr! commissioners approach !ou for the purpose of lingan action to compel the directors to publish a withdrawal.

$dvise them.178 marks2

c2 In what circumstances ma! a compan! accept shares surrenderedb! a member

1D marks2

1Tot$l& 1 m$%k!

)UESTION T5O

a2 )xplain the remedies that are available to an investor who hasbeen indiced to take shares b! false statements made in aprospectus. 1D marks2

b2 )xplain how the capital of a compan! ma! be+i2 $lteredJ

1D marks2ii2 educedJ1D marks2iii2 IncreasedJ1? marks2

DTot$l& 1 m$%k!

)UESTION THREE

a2 Fhat are the salient duties and powers of the #hairman of ageneral meeting of a compan! Illustrate !our answer withreference to decided cases. 17< marks2


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b2 5utline the classes of persons who ma! e0ectivel! demand for apoll during a general meeting.1@ marks2

c2 'ection 7D9 172 of the #ompanies $ct #ap D?B provides that $

printed cop! of ever! resolution or agreement to which thissection applies shall% within 9< da!s after the passing or makingthereof% be delivered to the registrar for registration.

Identif! ve resolutions or agreements registrable under thissection. 1@ marks2

DTot$l& 1 m$%k!

)UESTION ;OUR

a2 Fhat books of account is a compan! required to keep and what

provisions regulategroup accounts1? marks2

b2 $nal!se the circumstances under which the group accounts of acompan! need not deal with a subsidiar! of the compan!. 1Bmarks2

c2 In what circumstances ma! a public compan! register a statementin lieu of prospectus with the registrar 1Bmarks2

DTot$l& 1 m$%k!

)UESTION ;IVE

a2 Fhat are advantages and disadvantages of a Goating charge to adebenture holder

1? marks2

b2 5utline the exceptions to the general prohibition on nancialassistance b! a compan! for the purchase of its own shares.1B marks2

c2 5utline the circumstances under which a Goating charge willcr!stallise. 1B marks2

DTot$l& 1 m$%k!

)UESTION SI

a. )xplain ve circumstances under which the veil of incorporatedma! be lifted b! the court.17< marks2


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b. (ame and brieG! explain four classes of persons who ma! incurcivil liabilit! in respect of a false statement in a prospectus.1D marks2

c.i2 )xplain the doctrine of ultra vireswith regard to the obects of

a compan!. 18 marks2ii2 'tate the e0ects of ultra vires transactions.

18 marks2iii2 Fhat are the purpose of the rule

18 marks2

DTot$l& 1 m$%k!

)UESTION SEVEN

In the context of voluntar! winding up% explain the statutor!provisions regarding the powers of the liquidator which ma! beexercisable+i2 Fith the court sanction.

17< marks2ii2 Fithout the court sanction.

17< marks2

DTot$l& 1 m$%k!

)UESTION EI6HT

a2 ;etail the conditions that have to be satised before an applicantcan bring an action successfull! under the exception to the rule in:oss v /arbottle. 17< marks2

b2 (aliaka owns 7


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;RI8AY& 7 8ecem:e% 11*T"me Allowed& 3 ,o'%!

An!we% $n9 ;IVE 4'e!t"on! A 4'e!t"on!c$%%9 e4'$l m$%k!

)UESTION ONE

a2 Identif! ve clauses contained in the =emorandum of $ssociation.1@ marks2

b2 To what extent and b! what methods ma! the various clauses inthe memorandum of association of a compan! be altered.17@ marks2

DTot$l& 1 m$%k!

)UESTION T5Oa2 'tate and brieG! discuss the conditions which must be fullled

before a compan! can either issue or redeem shares which arestated to be redeemable. 17< marks2

b2 'tate the requirements of the #ompanies $ct which relate to thecompan! giving nancial assistance for purchase of its ownshares. Fhat are the consequences of non-compliance with theserequirements 17< marks2

DTot$l& 1 m$%k!

)UESTION THREE

*irds "imited has three directors+ ,eacock% 'parrow and >ulture.)xplain the legal implication of each of the following situations+

a2 >ultureAs son has recentl! come of age and vulture wishes toappoint him a director of the compan!.1D marks2

b2 The compan! is considering the purchase of a substantial quantit!of goods from G! ltd.% in which sparrow has a large shareholdingthrough he is not a director peacock and vulture are unaware of

sparrowAs interest in G! ltd. 1D marks2

c2 *ecause of adverse publicit! about peacockAs private life% vultureand sparrow wish to remove him as a director% since he refuses toresign. 1D marks2

d2 In view of the adverse publicit!% vulture and sparrow decide toexclude peacock from participation in the compan!As a0airs.1D marks2

e2 The directors are advised b! wise M co.% the compan!As auditors%

that there is no possibilit! of the compan! trading at a prot in theforeseeable future and no reasonable prospect of its pa!ing itsdebts. 1D marks2


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DTot$l& 1 m$%k!

)UESTION ;OUR

Hoan has inherited one million shillings from the estate of her latemother. 'he has decided to invest it in a small private compan! ofwhich Hanet and He0re!% her old friends are directors. /owever% Hoanis not sure whether to lend the mone! to the compan! secured b! adebenture containing a xed and Goating charge or through purchaseof ordinar! preference shares.

Hoan now seeks !our advise on the following issues+a2 Fhat is the di0erence between ordinar! and preference shares%

and what rights accrue to the holders of each class shares1? marks2

b2i2 Fhat is the return on ordinar! and preference share capital

1D marks2ii2 Fhat are the restrictions that ma! be imposed on her abilit! to

transfer an! shares she ma! purchase in the #ompan!1? marks2

DTot$l& 1 m$%k!

)UESTION ;IVE

a2 "ist four t!pes of registers a compan! is required to keep andoutline the contents of each register stating who can access theregister. 178 marks2

b2 /ighlight the circumstances under which a person ma! cease tobe a member of a compan!.1? marks2

DTot$l& 1 m$%k!

)UESTION SI

In relation to corporate insolvenc!%a2i2 )xplain what is meant b! a contributor!.

1@ marks2

ii2 ;istinguish between fraudulent and wrongful trading. $gainstwhom ma! proceedings b! brought for breaches of provisionsagainst fraudulent trading and wrongful trading17< marks2

b2 /ighlight the powers of the court on hearing a petition.1@ marks2

DTot$l& 1 m$%k!


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)UESTION SEVEN

a2 ;escribe the various kinds of resolutions that ma! be passed atgeneral meetings. 'tate the di0erence between them and listmatters that require such resolutions to be passed before the! can

have e0ect. 17Dmarks2

b2 In order to frustrate a threatened take-over bid% the directors of&esho "td. issue to themselves and their nominees su0icientordinar! shares for cash so as to give themselves control of amaorit! of the shares which give the right to vote at a generalmeeting.

=wananchi% a minorit! shareholder who had hoped to benet b!selling to the bidder% is ver! anno!ed b! the action of the directors.

$dvise him as to his legal rights.1B marks2

DTot$l& 1 m$%k!

)UESTION EI6HT

a2 ;ividend is pa!able onl! in cash to shareholders out of protsavailable for distribution. 'tate the rules which determine theextent to which prots arising out of the disposal of xed assetsma! be used to pa! such dividends.17< marks2

b2 /app! co. "td was incorporated in Hanuar! 8


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TUES8AY& / J'ne 11T"me Allowed& 3 ,o'%!

An!we% $n9 ;IVE 4'e!t"on! A 4'e!t"on!c$%%9 e4'$l m$%k!

)UESTION ONE

a2 ;istinguish between a corporation sole and a corporationaggregate 1D marks2

b2 Tim and Tom wish to establish a business ointl!. /owever% the!are not sure whether to establish a limited liabilit! compan! or anunlimited liabilit! compan!J as the! know little about these t!pesof companies.

i2 )xplain to them the di0erences between a limited compan! andan unlimited compan!.1D marks2

ii2 'tate the provisions of the #ompanies $ct regarding the re-registration of unlimited compan! as limited.1B marks2

c2 5utline the documents that are normall! kept at the registeredo0ice of a compan!

1B marks2

DTot$l& 1 m$%k!

)UESTION T5O

The shares of ,romotion "imited% a private compan! are held b!members of three families% that is% the famil! of =r. &arana% =r.=utis!a and =r. 5tieno.

=r. &arana and =r. =utis!a hold C


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competing business with compan!As business to transfer his shares tothe nominee of the directors.

Re4'"%ed&i2 'tate the restrictions imposed both b! common law and statute

law upon a compan!As power to alter its articles of association.17D marks2

ii2 ;iscuss the validit! of the proposed alteration1B marks2

DTot$l& 1 m$%k!

)UESTION THREE

a2 Hames and 'hem proposed to form a compan! b! the name=icromine "imited. 5n behalf of the proposed compan!% 'hem

entered into contracts to purchase o0ice furniture and stationer!.

Re4'"%ed&i2 Fhat are the compan!As rights and liabilities under such

contracts after incorporation1B marks2

ii2 Fhat provisions for the protection of 'hem are found in suchcontracts 1D marks2

b2 ;iscuss the doctrine of ultra vires and state the exceptions to thedoctrine% 17< marks2

DTot$l& 1 m$%k!

)UESTION ;OUR

a2 The capital of ma! no doubt be diminished b! the expenditureupon and reasonabl! incidental to all the obects specied. $ partof it ma! be lost in carr!ing on the business operations authoried.5f this% all persons trusting the compan! are aware and take therisk. *ut creditors have the right to rel! and were intended b! thelegislature to have the right to rel! on the capital remainingundistributed b! an! expenditure outside these limits or b! thereturn of na! of it to the shareholders.

,er "ord /erchell ".H. in Trevor v Fhitworth 17?9E2 78 $pp. #apD


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)UESTION ;IVE

a2 'tate the circumstances under which a compan! would be

required to maintain an index of the register of members1D marks2

b2 &ai *ure borrowed 'hs.@


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undertaker is the chairperson of the compan!. 'ometime ago thedirectors meeting as a board decided to+

i2 "end Triple / 'hs.@


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NOVEMBER 11

)UESTION ONE

1a2 )xplain the statement that a compan! is a legal entit! quiteseparate from the persons who constitute it.

1b2 ;iscuss the circumstances under which a corporate veil orincorporation ma! be lifted.

1c2 $ngela is emplo!ed as a managing director of )clipse "td. Themain obect of )clipse "td. is to retail hair products. $ngelaAscontract of emplo!ment contains a clause which states that in theevent of her leaving the emplo!ment of )clipse "td% she would notsolicit )clipse "tdAs customers for a period of three !ears.

$ngela has resigned from her emplo!ment and together with )llinaformed another compan! $ngellina "td. whose main obective is tosell hair products.

$ngela has given =arie% a salesperson in $ngellina #ompan! a listof customers of )clipse "td. to immediatel! start soliciting thecustomers for $ngellina #ompan! "td.

)clipse "td. has learnt of these facts and intends to sue $ngela%)llina and $ngellina #ompan! "td.

$dvise )clipse "td.

)UESTION T5O1a2 1i2 )xplain the ule in o!al *ritish *ank >. Turquand. 1ii2 )numerate the various exceptions to the rule in 1i2 above.

1b2 The articles of 'hirika #ompan! "td. provided that the directorshad power to determine who should be entitled to sign contractsand documents of behalf of the compan!.

5ne director #hapu #hapu% describing himself as the #hairmanand without having been so authoried% executed and gaveguarantee to #hafua in the name of the compan!. 'hirika

#ompan! have found out about the guarantee executed and haverefused to honour it as demanded b! #hafua.

)xplain whether 'hirika #ompan! "td. is liable with regard to thedemands b! #hafua.

)UESTION THREE

1a2 )xplain the concept of capital of limited compan! as used incompan! law.

1b2 )numerate the various exceptions to the rule in 1i2 above.1c2 The #ompanies $ct restricts a compan! from issuing shares at

a discount. Identif! and explain the restrictions.

)UESTION ;OUR


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1a2 )xplain the proprietar! rights of a member in a compan!.1b2 ita applied for 8%


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)UESTION EI6HT

1a2 )numerate the circumstances under which the court ma! order thewinding up of a compan! on a ust and equitable ground.

1b2 'ection 879 of the #ompanies $ct qualies the liabilit! of past andpresent members as contributories. )xplain these qualications asprovided for in the #ompanies $ct.


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ENYA ACCOUNTANTS AN8 SECRETARIES NATIONAEAMINATIONS BOAR8

C#A #ART II

A5 II

5edne!d$9& ** J'ne 113 T"meAllowed& 3 ,o'%!.

An!we% $n9 ;IVE 4'e!t"on!. A 4'e!t"on!c$%%9 e4'$l m$%k!.

)UESTION ONE

=artha is engaged in the promotion of a compan!. 'he seeks !ouradvice on several matters relating to the promotion of a compan!. Oou

are required to advise her on the following matters+

1a2 The restrictions upon the choice of a corporate name withwhich a promoter must compl!.

1? marks2

1b2 The legal duties of a promoter with regard to her responsibilit!where she sells her own propert! to the compan! she ispromoting. 1B marks2

1c2 The promoterAs right to pa!ment for her services b! thecompan! after incorporation.

1B marks2DTot$l& 1 m$%k!

)UESTION T5O

$nna and *erita are directors of ,esa "imited and each holds fort! percent of the ordinar! shares. The remainder is held b! #harles.

In addition to the shares% $nna also holds debentures issued b! ,esa"imited% redeemable on ? $ugust 8


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for a private loan guaranteed b! ,esa "imited so that he ma!purchase $nnaAs shares. 1? marks2

1c2 $ new compan!% ,endo "imited% will be formed and eight! percent of its ordinar! shares will be held b! ,esa "imited. *eritaand #harles to hold ten per cent each. ,endo limited willborrow mone! to bu! $nnaAs shares and debentures. 1D marks2

DTot$l& 1 m$%k!

)UESTION THREE

;istinguish between the following classications and debentures+1a2 *earer debentures and registered debentures.

1@ marks2

1b2 edeemable debentures and irredeemable debentures.1@ marks2

1c2 ;ebentures and debenture stock1@ marks2

1d2 3nsecured debentures and secured debentures1@ marks2

DTot$l& 1 m$%k!

)UESTION ;OUR

1a2 ;istinguish a compan! limited b! shares from a compan!limited b! guarantee.

1D marks2

1b2 Fhat are the contents of the memorandum of association asstated in the #ompanies $ct

1B marks2

1c2 5utline the documents that must be delivered to the registrarof companies together with the memorandum of association.

17< marks2DTot$l& 1 m$%k!

)UESTION ;IVE

1a2 1i2 #iting decided cases% state and describe thecharacteristics of a derivative action.

1? marks21ii2 )xplain the disadvantages to a minorit! shareholder in

bringing a derivative action.1B marks2

1b2 Hane Fangokho is a minorit! shareholder of Tuo #ompan!"imited.

Hohn ;audi is the managing director and maorit! shareholderof Tuo #ompan! "imited.


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Hane Fangokho has discovered that Hohn ;audi has breachedhis duties as a director b! purchasing goods from the compan!at a gross undervalue. $ general meeting of the compan! atwhich Hohn ;audi attended and voted has ratied the sale.

$dvise Hane Fangokho on the courses of action she ma! take.1B marks2

DTot$l& 1 m$%k!

)UESTION SI

;iscuss the position of a compan! auditor with regard to thefollowing+

1a2 $ compan! wishes to remove its auditor from o0ice before thenext annual general meeting.

1? marks2

1b2 $n auditor considers that he has been intentionall! obstructedb! compan! o0icers from carr!ing out his professional andstatutor! duties. 1B marks2

1c2 ):4 #ompan! "imited purchased shares in ,L #ompan!"imited on the basis of ,L #ompan! "imitedAs auditedaccounts. 3nfortunatel!% ):4 #ompan! "imited has incurredlosses as a result of the purchase.

):4 #ompan! "imited considers that the auditor was negligent

in carr!ing out his audit.

):4 #ompan! "imited wishes to sue the auditor for the loss ithas incurred.

1B marks2DTot$l& 1 m$%k!

)UESTION SEVEN

1a2 ;escribe the following+1i2 The committee of creditors in liquidation.

1@ marks2

1ii2 The committee of creditors in administrationproceedings.1@ marks2

1b2 ;escribe the meaning and essence of an application for earl!dissolution. 17< marks2

DTot$l& 1 m$%k!

)UESTION EI6HT

1a2 In relation to special notice% state the following+1i2 5bects of a special notice. 1Dmarks2

1ii2 The number of da!s required. 18marks2


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1iii2 The ordinar! resolutions which require special notice.1B marks2

1b2 In relation to compan! meetings% explain the following+1i2 Issues that require special resolution. 1Bmarks21ii2 'upport required for a special resolution to be passed.

18 marks2DTot$l& 1 m$%k!


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8ECEMBER 113 T"me Allowed& 3,o'%!.

An!we% $n9 ;IVE 4'e!t"on!. All 4'e!t"on! c$%%9e4'$l m$%k!.

)UESTION ONE

1a2 #ompare and contrast a corporation created under the#ompanies $ct and a corporation created under an $ct of,arliament. 17< marks2

1b2 =r. and =rs. =atanguta intend to form a limited compan!known as = and = /ardware "imited. The! approach !ou andseek !ou advice.

$dvise them on the following issues+

1i2 Fhat is the meaning of a private limited compan!according to the #ompanies $ct19 marks2

1ii2 Fhat are the advantages of forming a private compan!as opposed to a public compan!

1D marks21iii2 $ssuming =r. and =rs. =atanguta wish to convert the

private compan! into a public compan!% what would the!be required to do 19 marks2

DTot$l& 1 m$%k!

)UESTION T5O

1a2 In what wa! does the decision in the case of =acaura >ersus(orthern $ssurance #ompan! "imited 17C8@2 illustrate thecorporate entit! theor! 1@ marks2

1b2 1i2 'tate the circumstances under which the obects clauseof a compan! ma!

be altered 1@ marks21ii2 )xplain the procedure to be followed in altering theobects clause.

17< marks2DTot$l& 1 m$%k!

)UESTION THREE

Tama Luin "td.% a compan! manufacturing pharmaceutical drugs isabout to make a new issue of D


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1b2 =werevu is one of the directors of &amalia "td. whose articlesof association are in the form of Table $. /e knows that hisfellow directors are interested in obtaining motor vehicles from=odern >ehicles "td. to increase the compan!As Geet of trucks.=werevu purchases controlling shares in =odern >ehicles "td.

=odern >ehicles "td. then sells the trucks to &amalia "td. at'h. 7


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1b2 Fithout the sanction of the court. 17 T"meAllowed& 3 ,o'%!

An!we% $n9 ;IVE 4'e!t"on!

)UESTION ONE

1a2 1i2 $ basic fundamental rule of compan! law is that a compan!ma! not purchase its own shares. )xplain the exceptions tothis rule. 1? marks2

1ii2 )xplain the advantages of a compan! purchasing its own

shares. 1B marks2

1b2 5utline the circumstances under which a compan! ma! givenancial assistance for purchase of% or subscription for its shares.

1B marks21Tot$l& 1 m$%k!2

)UESTION T5O

#iting relevant examples% state and explain the rule in :oss v/arbottle 17?D92 and the exceptions therefore.

11 m$%k!

)UESTION THREE

Fith reference to compan! law% discuss the proposition that acompan! has separate legal separate legal personalit! from itsmembers and the exceptions thereof. 11 m$%k!

)UESITON ;OUR

1a2 ;ene the term promoter.1D marks2

1b2 =r and =rs &arana% who intended to form a limited liabilit!

compan! known as #entral #onstruction #ompan! "td%approached Hienge *ank for a loan to purchase o0ice furnitureand stationer!. $ loan of 'h.7 million was given b! the bank.'ubsequentl!% the compan! was incorporated. /owever% thebusiness did not Gourish and the compan! was unable to pa! theloan as and when the installments fell due. Fhen the bank sent ademand notice to the compan!% =atata% a shareholder whoopposed the demand notice% said that he compan! was not liable torepa! the loan. =r and =rs &arana% now want to alter the obectsclause in the memorandum of association to include a clauseauthoriing the compan! to e0ect the pa!ment but =atata is stillopposed to the proposal.


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;iscuss the legal position of the bank and the validit! of theproposed alteration.

17B marks2

1Tot$l& 1 m$%k!2

)UESTION ;IVE

1a2 Fhat are the directorsA rights with regard to receivingremuneration and compensation for loss of o0ice

1B marks2

1b2 5utline the procedure that a compan! must follow if it wishes too0er a director a service contract for more than ve !ears.

1D marks2

1c2 $lthough the directors of a compan! are its agents% the! are alsoheld as trustees of the compan!As mone! and propert!. /owever%their position as trustees of the compan! di0ers from that ofordinar! trustees.

;iscuss. 17 /iggins and others

$ pre-incorporation contract is enforceable b! or against acompan! if after incorporation the compan! has entered into anew contract similar to the previous agreement.

=awogola :armers and 4rowers #o. "td v &a!ana and others

17CE72

c2 $ct bona de for the benet of the compan! information. ,roper accounting. ;isclose an! personal interest. ;etermine and settle the name of the compan!. ,repare or cause preparation of the constitutive and other

documents. egister or cause registration of the compan!. 'ecure the services of directors.

)nsure that the compan! has an independent board ofdirectors. ,repare the requisite prospectus if an!. $cquire assets for use b! the compan!. )nter into business contracts on behalf of the compan!. =eet all the preliminar! expenses of compan! formation.

)UESTION T5O

a2 3nder 'ection 79 172 of the #ompanies $ct% a compan! ma! b!

special resolution alter the provision of its articles.

The altered article is as valid as if originall! embodied in thearticles and is alterable b! special resolution.

$n extra ordinar! general meeting of the compan! must beconvened.

=embers must b! special resolution authorie the alteration. $ cop! of the resolution must be delivered to the registrar for

registration within 9< da!s of its passing. The alteration take e0ect on registration.

b2 ;irectorsA common law duties fall in to two broad categoriesnamel!+

? ;ut! of care% skill and diligence? ;ut! of lo!alt! and good faith


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;irectors owe their compan! a dut! to exercise some care% skilland diligence falling% which the! are liable in damages. The rulesgoverning directors dut! of care% skill and diligence were

formulated b! omer H. in e+ #it! )quitable :ire Insurance #o."td.

$ director need not exhibit in the performance of his dutiesa greater degree of skill than ma! reasonabl! be expected ofa person of his knowledge and experience. In re *railianubber ,lantations and )states "td. /e is not bound tobring an! special qualications to his o0ice.

$ director is not bound to give the a0airs of the compan!continuous attention. /is duties are of an intermittentnature to be performed at periodical board meetings andmeetings of committees of the board upon which he happens

to be placed. /e is however not bound to attend all suchmeetings% though% he ought to attend whenever in thecircumstances he is reasonabl! able to do so. In The=arquis of *utes #ase

In the absence of suspicion% a director is ustied in trustingthat o0icers of the compan! perform their duties honestl!./e is entitled to rel! on information provided b! trusted ortried servants of the compan!. ;ove! v #or!.

)UESTION THREE

a2 It is a fundamental principle of compan! law% that share capital be

maintained. #ompan! law has evolved principles and provisions toensure that companies raise and maintain their capital forexample+

$ public compan! ma! not commence business before theminimum subscription is raised.

#onsideration for shares must be in mone! or mone!As worth.

$ public compan! ma! not allot shares for non-cashconsideration.

Issuing of shares at a discount is in principal prohibited.'ection @C of the $ct.

If shares are issued at a premium% a share premium accountmust be created. 'ection @? of the $ct.

eduction of capital b! a compan! must strictl! compl! with theprovisions of the #ompanies $ct.

,reference shares should onl! be redeemed b! reserves orproceeds of a special issue for that purpose.

;ividend must not be paid out of capital. $rticle 7B of Table $.

The par value of shares must be maintained.

$ compan! must not purchase its shares.

$ compan! must not nance the purchase or acquisition of itsshares. Trevor >. Fhitworth. This rule is embodied in 'ection@B 172 of the #ompanies $ct.


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1b2 3nder 'ection 8 172 of the #ompanies $ct prospectus means+

$n! prospectus% notice% circular advertisement or otherinvitation o0ering to the public for subscription or purchase

an! shares or debentures of a compan!. $n! invitation intended to avail shares or debentures to the

public qualies as a prospectus. $ prospectus does not o0er securities but invites o0ers from

prospective investors. ,ublic is not restricted to the public at large% it includes a

section thereof. Its contents are prescribed b! law and a cop! thereof must be

delivered to the registrar for registration.

$ newl! formed compan! ma! issue a prospectus inviting

subscription for its shares. $n existing compan! ma! issue it when Goating new share to

the public. Fhen a private compan! goes public% pursuant to 'ec.98 172 of

the $ct% it ma! issue prospectus or statement in lieu.

)UESTION ;OUR

a2 This is a suit brought b! a person in the name of and on behalf

of the compan! to remed! a wrong done to the compan!. It isavailable onl! for the enforcement of duties owed to the

compan! and is unavailable to enforce the right of an individualshareholders e.g. actions against directors or o0icers forbreach of their duties to the corporation for an inunction topreclude a threatened inur! to the compan!.

This action is representative in character.

b2 #onditions necessar! for a derivative action to be institutedinclude+

The wrong complained of must involve fraud on the minorit!% forexample+

o

)xpropriation of corporate assets.o *reach of dut! b! directors.o 3nfair use of voting power.

The wrong doers must be in control of the compan!. Theircontrol ma! be legal or factual.

The compan! must be made a defendant in the action so as tobenet from an! court order arising.

The plainti0 shareholder should sue in a representativecapacit! on behalf of himself and all other members other thanthe real defendants.

The right to bring a derivative action is conferred upon

individual members of the compan! as a matter of grace.


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The plainti0 remains dominus litis until udgement. /owever%he can discontinue or settle it out of court at his pleasure.

)UESTION ;IVE

a2 The notice must be issued with the requisite authorit! of the

board% court% members or registrar. The requisite number of da!s must be given.

It must specif! the business of the meeting with clarit!.

=ust specif! all resolution proposed and passed% as a specialand notice of their intention to be passed as such must begiven.

=ust specif! the date% time and place of the meeting.

b2 $cquaint himself with his duties under the #ompanies $ct and

the articles of the compan! whose books and accounts he iscalled upon to examine.

)xamine the books% accounts% vouchers and other documents ofthe compan!

=ake a report for submission to members in general meeting.

$ct honestl! i.e. not certif! as true what he does believe to betrue.

)xercise reasonable care% skill and caution of a competentcareful and cautious auditor.

'atisf! himself that the companies securit! exist and are in safecustod!.

,rovide professional advise if called upon to do so.

$pproach his task with an inquiring mind and not withsuspicion of dishonest!.

)UESTION SI

$ ;"-ed C,$%geThis is a legal or specic charge. It is a charge securing adebenture on a xed asset. In )llingworth v Houldsworth it wasobserved that a xed charge is specic. The securit! is certain orcapable of being ascertained.

;lo$t"ng C,$%geThis is a charge securing a debenture b! the assets of a goingconcern. In )llingworth v Houldsworth% it was observed that aGoating charge is ambulator! and shifting in its nature. In re

Oorkshire wool #ombers $ssociation% omer H. set out thecharacteristics of a Goating charge+ It is a charge on a class of assets of the compan! both present

and future. The class of assets must be one that keep on changing from

time to time in the ordinar! course of business of the compan!. The charge remains dormant until cr!stalliation.


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b2 This is a case of abuse of power b! directors i.e. excesses of

directors. In this case% directors borrowed for a purpose other than that

for which it was intended. This borrowing is intra vires% the compan! and is enforceable%

since the bank was unaware of the misuse of the power toborrow.

=! advise to the =aendeleo *ank is that it can successfull!recover the amount borrowed as it is not part! to the abuse ofpower. =! advise is based on the decision in re+ ;avid ,a!ne M#o. where a compan! with a general power to borrow% borrowedfrom the plainti0 bank% but used the amount for an ultra virespurpose. The lending part! was unaware of the abuse of powerand it was held that the borrowing was enforceable.

c2i2 3nder 'ection 9@ 172 of the #ompanies $ct% where a receiver or

manager of the whole or substantiall! the whole of thepropert! of the compan! is appointed on behalf of the holdersof an! debentures of the compan! secured b! a Goatingcharge% then subect to the provisions of this section and ofsection 9@8. The receiver shall forthwith send notice to the compan! of

his appointmentJ and There shall% within fourteen da!s after receipt of the notice%

or such longer period as ma! be allowed b! the court or b!

the receiver% be made out and submitted to the receiver inaccordance with section 9@8 a statement in the prescribedform as to the a0airs of the compan!J and

The receiver shall within two months after receipt of thesaid statement send

To the registrar and to the court% a cop! of the statementand of an! comments he sees t to make thereon and in thecase of the registrar also a summar! of the statement and ofhis comments 1if an!2 thereonJ and

To the compan!% a cop! of an! such comments as aforesaidor% if he does not see t to make an! comment% a notice to

that e0ectJ and To an! trustees for the debenture holders on whose behalf

he was appointed and% so far as he is aware of theiraddresses% to all such debenture holders% a cop! of the saidsummar!.

ii2 3nder 'ection 9@7 182 of the #ompanies $ct% the receiver shallwithin two months% or such longer period as the court ma!allow after the expiration of the period of twelve months fromthe date of his appointment and of ever! subsequent period oftwelve months% and within two months or such longer periodas the court ma! allow after he ceases to act as receiver or

manager of the propert! of the compan!% send to the registrar%to an! trustees for the debenture holders of the compan! on


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whose behalf he was appointed% to the compan! and 1so far ashe is aware of their addresses2 to all such debenture holdersan abstract in the prescribed form showing his receipts andpa!ments during that period of twelve months or% where he

ceases to acts as aforesaid% during the period from the end ofthe period to which the last preceding abstract related up tothe date of his so ceasing% and the aggregate amounts of hisreceipts and of his pa!ments during all preceding periodssince his appointment.

)UESTION SEVEN

3nder 'ection 87C 1f2 of the #ompanies $ct% a compan! ma! bewound up b! the court% if the court is of the opinion that it is ust andequitable% that the compan! should be wound up. #ompanies havebeen wound up on this ground in the following circumstances+

a2 ;%$'d'lent o% "lleg$l +'%+o!e

Inte Thomas )dward *rinsmead M 'ons "td

;$"l'%e o2 t,e !':!t%$t'm Inre 4erman ;ate #o0ee. Inre *aku #onsolidated 5il :ields. Inre $malgamated '!ndicate.

o!! o2 con


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$n! attachment% distress or execution put in force againstthe estate or e0ects of the compan! is void.

$ctions or legal proceedings b! or against the compan! areautomaticall! stated.

*! virtue of his o0ice% the o0icial receiver becomes theprovisional liquidator.

;irectorAs powers become functus o0icio i.e. not exercisable. )mplo!ees of the compan! are ipso facto dismissed.

/owever% those who continue to render services and receivewages are deemed to have entered into a new contract ofservice with the liquidator.

)UESTION EI6HT

a2 The registrar of companies is empowered to investigate the a0airsof a compan! b! self or b! an inspector in certain circumstances.

The registrar is empowered to investigate the a0airs of a compan!where+

/e has reasonable cause to believe that the provisions ofthe companies act are not being complied with.

$ document submitted to him does not disclose a full andfair statement of the matters it relates to.

/e has good reason to investigate the ownership of an!shares in or debentures of a compan! b! demandinginformation from persons whom he has reasonable cause tobelieve are or have been interested in the shares ordebentures or has acted as an advocate or agent in relation

to the shares or debentures. There is good reason to investigate the membership of an!

compan! for the purpose of determining the true personswho+

$re or have been nanciall! interested in the successor failure of the compan! or

#ontrol the compan! or materiall! inGuence the polic!of the compan!.

b2 To investigate the holding or subsidiar! compan! if the same is

necessar! of the investigation. To administer oath.

To examine persons on oath.

To compel o0icers or agents of the compan! to produce booksor documents of the compan!.

To appl! to the court to have persons whom he has no power toexamine to be examined in court for purposes of theinvestigation.

c2 3nder 'ection 7E7 172 of the #ompanies $ct% the expenses of andincidental to an investigation b! an inspector appointed b! thecourt are defra!ed b! the registrar in the rst instance. /owever%

the following persons are liable to repa! the registrar+


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$n! person who is convicted on a prosecution instituted b!the attorne! general on the basis of the report.

$n! person who is ordered to pa! damages or restore an!propert! in proceedings instituted on the basis of the

report. $n! bod! corporate in whose name proceedings are

instituted. $n! bod! corporate dealt with b! the report.

The applicants for the investigation.


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8ECEMBER 111

)UESTION ONE

$ Memo%$nd'm o2 A!!oc"$t"on

This is one of the constitutive documents. It is the externalconstitution of the compan!. It provides for the relationshipbetween the compan! and third parties.

It is a mandator! document K ever! compan! must have it.

Its contents are prescribed b! 'ection @ and B of the#ompanies $ct e.g. name% obect% capital.

A%t"cle! o2 A!!oc"$t"on

This is one of the constitutive documents. It provides forthe internal constitution. It contains the rules for theinternal management of the compan!As a0airs. It regulates

the relations between the compan! and its members.

M$"n d"e%ence :etween t,e two

The =emorandum of $ssociation provides for therelationship between the compan! and the outside worldwhile the $rticles of $ssociation provides for the rules ofinternal management of the compan!As a0airs.

: 8et$"l! "n t,e memo%$nd'm o2 $!!oc"$t"on#ontains the following clause+

N$me cl$'!eK name of the compan! with limited as the

last word thereof. O:=ect cl$'!e K the purposes for which the co is

incorporated. Reg"!te%ed o"ce cl$'!e K this is the domicil of the

compan!. C$+"t$l cl$'!eK this is the authorised or nominal capital.

"$:"l"t9 cl$'!e K states that the compan! is limited b!shares or guarantee.

A!!oc"$t"on cl$'!edecl$%$t"on cl$'!eK states the desireof members to be incorporated.

#$%t"c'l$%! o2 !':!c%":e%! $nd !"gn$t'%e

8$te the memorandum must be dated.

;etails in the articles of association$ssuming the compan! adopts the model article in Table $ of therst schedule to the #ompanies $ct% the $rticles of $ssociationmust contain inter alia.

Transfer and transmission of shares.

#alls

=eetings generall!.

;eclaration and pa!ment of dividend.

,owers of directors

50ice of the =anaging ;irector *onus issues


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The shares must belong to a class alread! issued b! thecompan!.

5ne !ear must have elapsed from the date the compan! wasentitled to commence business.

It must be authorised b! a resolution of members in generalmeeting

The resolution must x the maximum rate of discount atwhich the shares are to be issued.

The issue must be approved b! the court.

The issue must be made within one month from the date ofapproval b! the court or such extended time as the courtma! permit.

The issue must be disclosed in the prospectus of thecompan!.

c2 Terms implied in a contract of sale of shares between a seller andpurchaser.

That the bu!er will pa! the price of the shares.

That the seller has the right to sell.

That the purchaser shall indemnit! the seller against an!calls made after the date of the contract.

The seller will give to the purchaser a genuine sharecerticate required to enable the purchaser to be registeredas member.

The seller will not do an!thing preventing the bu!er from

having the transfer registered or dela! the process. The seller will compensate the bu!er for an! calls or

liabilit! which ma! arise in respect of the shares sold.

)UESTION ;OUR

a2 #ontents of the egister of =embers (ame and address of ever! shareholder.

(umber of shares or stocks held.

;ate of entr! of the name.

;ate of removal of the name.

$mount paid on each share.

,ostal address of ever! member.

b2 =! advice to (oroge is that he should appl! to the /igh #ourt foran order of rectication of the register to include his name. =!advice is based on the ,rovisions of the #ompanies $ct.

c2 The principle has the following consequences+ $ compan! cannot purchase its own shares.

$ compan! must not give nancial assistance for thepurchase of its own shares.

;ividends must not be paid except out of distributableprots.


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Fhere a public compan! su0ers a serious loss of capital ameeting of the compan! must be called to discuss the issue.

'hares must not be issued at a discount.

eduction of capital must strictl! compl! with the

provisions of the #ompanies $ct.

)UESTION ;IVE

a2 The #ompanies $ct% recognises the following meetings + 'tatutor! =eeting.

$nnual 4eneral =eeting.

)xtra 5rdinar! 4eneral =eeting.

#lass =eetings.

;irectors meetings

#reditors meeting.

4enerall!% the following constitutes the requisites of a meeting+

(otice of the meeting.

,roper authorit! to convene the meeting.

Luorum for the meeting.

#hairman of the meeting.

Taking of minutes of the meeting.

>oting in a compan! meeting can either be on a poll or b! show ofhands. *! show of hands K one member has one vote. *! ,oll

depends on the number of shares a member holds. 3nder Table $one share is one vote.

The results of the voting are declared b! the #hairman.

=embers are free to appoint a prox! who can onl! vote b! a poll.

b2 ;uties of an auditor To acquaint himself with his duties under the #ompanies $ct

and the $rticles of $ssociation of the #ompan! who books he iscalled upon to audit)nre *homas +erald , -ons td.

To examine the accounts% books% vouchers% etc. Inre epublic of

*olivia )xploration '!ndicate "td. To make a report for submission to members in general

meeting. To be honest :omento >. 'elsdon :ountain ,en "td. To exercise care% skill and caution. Inre &ingston #otton =ills

"td. To satisf! himself that the compan!As securities exist are in safe

custod!. Inre #it! )quitable :ire Insurance #o "td. To provide professional advice if called upon to do so Inre

"ondon and 4eneral *ank "td $pproach his task with an inquiring mind.

c2 #ategories of persons disqualied to be auditors+


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$ bod! corporate. $n o0icer or servant of the compan!. $ person who is a partner or in emplo!ment of an o0icer or

servant of the compan!. $ person disqualied for appointment as an auditor of a

holding or subsidiar! compan!. #ommon law disqualication e.g. undischarged bankrupts%

persons of unsound mind.

)UESTION SI

a2 $ third part! ma! concern himself with the doctrine of ultra vireswhen dealing with the compan! as an! such contracts will beconsidered void and unenforceable. It is imperative that third parties examine the contents of the

memorandum of association. Third parties must be aware of the contents of the

memorandum. $n! transaction outside the obects clause will be ultra vires the

compan!. 'uch a contract is void and cannot be ratied and nothing can

be done to render it intra vires.

: St$t'to%9 "m"t$t"on! $ director cannot guarantee a loan. In a public compan! a director outside the age limit for

appointment is not qualied for appointment as director unlessa resolution upon a special notice has been passed. In a public compan!% a director must take and pa! for his

qualication shares% if an!. $ director must not be compensated for loss of o0ice unless

particulars are disclosed to the members who must approve ofit.

,rohibitions of tax free pa!ments to directors. ;isclosure of interests in contracts made on behalf of the

compan!.

c C"%c'm!t$nce! "n w,"c, $ com+$n9 m$9 "!!'e :on'! !,$%e!& There must be authorit! in the articles. It must be authorised b! an ordinar! resolution of members in

general meeting. It must be recommended b! the board and approved b! the

general meeting. *onus issues can be nanced b! reserves or b! share premium

account. Its nominal share capital must be su0icient. $ return of allotment must be delivered to the egistrar within

one month of allotment. =ust be issued in the proportion prescribed b! the articles.

)UESTION SEVEN


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JUNE 11*

)UESTION ONE

a2 This doctrine is to the e0ect that persons who deal with the

compan! are deemed to know the contents of its publicdocuments% namel! memorandum% articles special resolutionsetc.

The! are deemed to know the compan!As contractual capacit!i.e. whether a transaction is intraor ultra viresthe compan!.

This is because these documents are registrable with theregistrar and are open for inspection b! an! person who caresto inspect them.

This doctrine protects the compan! from persons who do notinquire.

It is a modication to the doctrine of indoor management. i.e.rule in Turquands #ase

This doctrine operates negativel! in that although parties aredeemed to know the contents of the public documents% a part!can onl! rel! on those contents if it has actual knowledge oftheir existence in the documents. It was so held in ama#orporation v ,roved Tins and 4eneral Investments where itwas held that the plainti0 could not rel! on the articlepermitting delegation since it had no notice of its existence.The compan! could not be held liable on the contract.

b2 This problem is based on the division of powers between the

general meeting and the board.

3nder this principle% each organ has its own sphere of inGuenceas dictated b! the articles. $n organ must as a general rule notinterfere with the exercise of a power vested in the other.

In this case% since the articles of O "td are similar to Table $%then under $rticle ?


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are not abusing% exceeding or exercising their powers incontravention of the articles.

=! advise is based on the decision in 'cott v 'cott where the

general meeting purported to compel the directors of thecompan! to pa! an interim dividend% which was a power vestedin the board. It was held that the resolution could not be givene0ect. $ similar holding was made in 'haw v 'haw where thegeneral meeting purported to interfere with the exercise of apower vested in the board of directors.

c2 $s a general rule% surrender of shares is not authorised b! law.This is a situation whereb! a member gives up his shares to thecompan!. It is generall! not provided for b! the articles. /owever%a compan! ma! accept such shares in two circumstances+

To avoid the formalities of forfeiture :ull! paid up shares ma! be accepted in return for shares of

the same nominal value.

)UESTION T5O

a2 The remedies available to a subscriber include+ Com+en!$t"onfor an! loss or damage occasioned b! the

untrue statements i.e. 'ec D@ of the $ct.

8$m$ge! for loss or liabilit! arising. This remed! isavailable to the investor in the false statements were

negligentl! or fraudulentl! misrepresented.

Re!c"!!"on o2 cont%$ct+ The innocent part! has the rightto rescind the contract if the false statements wereinnocentl!% fraudulentl! or negligentl! made. The right isexercisable at the earliest possible instance.

8$m$ge!against the compan! for breach of contract.

Indemn"t9+ This remed! which entails monetar!compensation is available if the false statements were

innocentl! made. /owever% it is onl! available where theinnocent misrepresentation occasion direct nancial loss.

b2 3nder 'ection B9 172 of the #ompanies $ct% the capital ofaccompan! can be altered in various wa!s namel!+

Increase of capital 'ub-division of shares #onversion of shares to stock e-conversion of stock to shares #onsolidation of shares ;iminution of capital

i2


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To alter the compan!As capital in the aforementioned wa!s%the following conditions are necessar!+

The articles of the compan! must authorise the alteration. The alterations must be authorised b! an ordinar!

resolution of members in general meeting The registrar must be notied of the alteration within 9

$t #ommon "aw a compan!As capacit! is restricted to%transactions et forth in the obects and those that arereasonabl! incidental to the attainment or pursuit of suchobects. The doctrine of ultra vires was developed to serve a

double purpose. #otman vs *rougham 17C7?2

To protect investors who learn from it where their mone!will be invested.

To protect third parties who deal with the compan! b!appreciating the compan!As capacit!.

The doctrine of ultra vires has been modied so much thatcompanies eno! almost unrestricted capacit!. #ompanies canengage in virtuall! an! transaction.

J'd"c"$l Cont%":'t"on#ourts ultra vires have been read! and willing to impl! powerse.g. a transaction reasonabl! incidental to the attainment orpursuit of the express obects is intra vires the compan!.

eg"!l$t"(e "nte%(ent"on*efore 7?C


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specied duration. 'uch words form part of the compan!Asname for the duration of the order.

v) Reg"!t%$t"on o2 t,e %ed'ct"on

3nder 'ection E7 172 of the $ct upon production of a certiedcourt order approving the reduction and the minute of thesame the registrar registers the reduction and issues acerticate of registration% which is conclusive evidence thatthe requirements of the act relating to reduction of capitalhave been complied with. $ reduction of capital b! a compan!take e0ect when registered and notice of registration must bepublished in accordance with the courts direction

Unde%w%"t"ng Comm"!!"onThis is the amount or sum paid b! the compan! to a person whoagrees to underwrite the compan!As shares i.e. take up all the

shares or a specied number of the shares not taken up b! thepublic. ItAs pa!able whether the person 13nderwriter2 takes upthe shares or not. It must be disclosed in the compan!Asprospectus.

B%oke%$geThis is an amount paid b! the compan! to a person or persons whoagrees to place the compan!As shares i.e. exhibits the compan!Asprospectus in their premises or send copies to their clients% butwithout incurring an! liabilit! on the shares.It is an amount onl! pa!able to brokers.It must be disclosed in the compan!As prospectus.

)UESTION ;IVE

a2 3nder the provisions of the #ompanies $ct ever! compan! withmore than ft! members must have an index of the names of themembers unless the register is in the form of an index. It ma! be in the form of a card. The index must contain a su0icient indication to facilitate

access to a members account. #hanges on the register must be incorporated in the indeed

within 7D da!s.

The index must be kept at the same place as the register ofmembers.

b2" B$nk

In law if a third part! advances mone! on the securit! ofshares and the third part! gives notice of his securit! to thecompan! before the compan!As lien arises the third part!will have priorit!.

In *radford *anking #o. v *riggs and #o. 17??B2 ashareholder created an equitable mortgage of his shares b!

depositing the share certicate with a blank as securit! foran overdraft and the bank gave notice of the notice of the


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deposit to the compan!. The shareholder subsequentl!became indebted to the compan! whereupon a lien arose infavour of the compan! t was held that the bank had priorit!as the compan!As lien arose after notice of the equitable

mortgage.

The bank is entitled to enforce the lien on the shares sinceits lien has priorit! over that of the compan!. This positionis consistent with the holding in *radford *anking #o. v*riggs and #o. 17??B2

""YL S'+e%m$%ket tdQOR 'upermarket "td cannot enforce its lien since the bankslien has priorit!.

c2 *ob and *abs have similar rights in relation to the shares e.g.

dividend pa!able thereon. The! are ointl! and severall! liable tomake good an! calls on the shares. In the case of voting ingeneral meetings the members decide who among them is to vote%failing which the member whose name appears on the registerrst votes.

)UESTION SI

a2i2

>oluntar! change of name% 'ec.87 $lteration of the obects clause% sec.?172 $lteration of the articles% sec.79172 #reation of reserve capital% sec.B8 #onversion of private to public compan!% sec.98172 #ompulsor! winding up sec.87C1a2 eduction of capital% sec.B? 172 ,a!ment of interest out of capital% sec.BE 172

b2$t common law a shareholder is entitled to attend a general

meeting of a compan! in person or b! prox!.

3nder section 79B 172 of the #ompanies $ct a member of acompan! entitled to attend and vote at a meeting of thecompan! is entitled to appoint another person whether amember or not as his prox! to attend and vote instead of him.

The appointment is e0ected b! completion and submission tothe compan! of the prox! form.

i2 To attend the general meeting instead of the member. To oin other members andSor proxies to demand voting b!

poll.

To vote

Law II R. Kit Final as @ 3 July 2006.doc

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Transcript of Law II R. Kit Final as @ 3 July 2006.doc